10C

- i

APPENDIX 10C. NATIONAL NET PRESENT VALUE OF CONSUMER BENEFITS

USING ALTERNATIVE PRODUCT PRICE FORECASTS

TABLE OF CONTENTS

10C

- 1 INTRODUCTION

................................ ................................ ................................ . 10C

- 1 10C

- 2 ALTERNATIVE PRICE TR END SCNEARIOS

................................ .................. 10C

- 1 10C

- 2.1 Low Price Decline Scenario

................................ ................................ .................. 10C

- 1
10C

- 2.2 High Price Decline Scenario

................................ ................................ ................. 10C

- 3
10C

- 3 SUMMARY

................................ ................................ ................................ ........... 10C

- 3 10C

- 4 NET PRESENT VALUE US ING ALTERNATIVE PRIC E TRENDS

................ 10C

- 4

LIST OF TABLES

Table 10C

- 3

- 1 Price Trend Scenarios

................................ ................................ ................ 10C

- 4 Table 10C

- 4

- 1 NPV of Impacts for Residential and Commercial Purchases Under

Alternative Product Price Forecasts (3

- Percent Discount Rate)

................ 10C

- 5 Table 10C

- 4

- 2 NPV of Impacts for Residential and Commercial Purchases Under

Alternative Product Price Forecasts (7

- Percent Discount Rate)

................ 10C

- 5

LIST OF FIGURES

Figure 10C

- 2.1 Nominal and Deflated PPI Series for Small Electric Household

Appliances, 1998

– 2013

................................ ................................ .............. 10C

- 2 Figure 10C

- 2.2 Deflated PPI with Exponential Fit for Small Electric Household

Appliances, 1998

– 2013

................................ ................................ .............. 10C

- 3 Figure 10C

- 3.1 Price Factor Indexes for the Default and Sensitivity Cases for Portable

ACs

................................ ................................ ................................ ............ 10C

- 410C

- 1

APPENDIX 10C. NATIONAL NET PRESENT VALUE OF CONSUMER BENEFITS

USING ALTERNATIVE PRODUCT PRICE FORECASTS

10C

- 1 INTRODUCTION

The net present value (NPV) results presented in chapter 10 are based on projections of future price s derived from historical Producer Price Index ( PPI ) data obtained from the Bureau of Labor Statistics (BLS). DOE collected PPI data on “small electric household appliances, except fans” for 1983

– 2013 to project future price s of portable air conditioners (ACs)

. To investigate the effect of different product price trend s on the consumer NPV for the energy efficiency standards considered for porta ble ACs , DOE evaluated two alternative s , a low and a high price decline scenario. The following sections describe the method s DOE used to derive the two alternative price trends and the NPV results for all t hree scenarios.

10C

- 2 ALTERNATIVE PRICE TR END SCNEARIOS

DOE obtained historical PPI data for “ small electric household appliances, except fans ”
as a proxy for portable ACs. DOE understands that th e PPI series encompasses a range of products unconnected to portable ACs , but it is the most disaggregated pric e series that includes portable ACs

. DOE obtained the PPI data for 1983

– 2013 from the BLS. a D OE assumed that price s of all portable AC product classe s will continue to show the same trend as for 1983

– 201 3

. DOE developed the low price decline scenario based on an exponential fit to the PPI data from the more limited period of 1998

– 2013. The high price decline scenario is based on the project ion for the “furniture and appliances” industry series in the Energy Information Administration's Annual Energy Ou tlook 2014 (AEO 2014)

.

10C

- 2.1 Low Price Decline Scenario
For the low price decline scenario, DOE used the BLS' inflation

- adjusted PPI for small electric household appliances spanning 1998

– 2013 to fit an exponential model having year as the explanatory variable. The PPI during that period show s a shallower downward trend than does the longer PPI series starting in 1983 and ending in 2013 . T he exponential fit based on the shorter period of historical PPI represents the low price declin e scenario for projecting future price s

. In this case , the exponential function takes the form of:

Y = a ∙ e bX

where Y is the PPI for small electric household appliances

, X is the time variable, a is the constant, and b is the slope parameter of the time variable.

The PPI data reflect nominal prices, adjusted for changes in product quality. DOE develop ed a n inflation

- adjusted (deflated) price index for small electric household appliances by

a PPI series ID: PCU33521033521014 http://www.bls.gov/ppi/10C

- 2

dividing the PPI ser ies by the chained price index for the gross domestic product

. Figure 10C

- 2

. 1 presents the nominal and inflation

- adjusted PPI trends for small electric house hold appliances from 1998

— 2013

. The deflated price index is presented in 2013 $

.

Figure 10C

- 2

. 1 Nominal and Deflated PPI Series for Small Electric

Household Appliances , 1998

– 2013

To estimate the exponential parameters, a least

- square fit was performed on the inflation

adjusted (deflated) price index versus year from 1998 to 2013

. Figure 10C

- 2

. 2 shows the results

.10C

- 3 Figure 10C

- 2

. 2 Deflated PPI with Exponential Fit for Small Electric

Household Appliances , 1998

– 2013

The regression performed as an exponential trend line fit results in an R

- square o f 0. 97

, which indicates a n excellent fit to the data. The final estimated exponential function is:

Y = 2

. 384 × 10 13

∙ e (

− 0

. 0153 ) X

DOE then derived a price factor index for the low price decline scenario, renormalized with 201 3 equal to 1, to project product prices in each future year in the analysis period. The index value in a given year is a function of the exponential parameter and year

.

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- 2.2 High Price Decline Scenario

DOE also examined a forecast based on the " deflat or

— furniture and appliances” t hat the AEO 2014 included out to 2040

. AEO 2014 offers the most current price trend projection s DOE could acquire. The index also represent s the most disaggregated category that includes portable ACs . To develop an inflation

- adjusted index, DOE normalized the index using the AEO 2014

" chained price index

— gross domestic product

, ” with 2013 equal to 1. To extend the price index beyond 2040, DOE used the average annual price growth rate for 2031

– 2040.

10C

- 3 SUMMARY

Table 10C

- 3

- 1 presents the average annual rates of change for the product price index under the default, high, and low price scenarios

. Figure 10C

- 3

. 1 shows the resulting price factor indexes (price trends ) for portable ACs

.10C

- 4

Table 10C

- 3

- 1 Price Trend Scenarios

Scenario Price Trend Average Annual Rate of Change %

Default Exponential fit using PPI for small electric

household appliances (1983

– 2013 ) - 1.99 High price decline AEO 2014 “chained price index

— furniture

and appliances” - 2. 59

Low price decline Exponential fit using PPI for small electric

household appliances ( 1998

– 2013 ) - 1. 52

Figure 10C

- 3

. 1 Price Factor Indexes for the Default and Sensitivity

Cases for Portable ACs

10C

- 4 NET PRESENT VALUE USING ALTERNATIVE PRICE TRENDS

Table 10C

- 4

- 1 present s the NPV of financial impacts under the three alternative product price trends for all four CSLs for purchases in both the resident ial and commercial sectors at a 3

- percent dis c ount rate. Table 10C

- 4

- p resents similar results for a 7

- percent discount rate.10C

- 5

Table 10C

- 4

- 1 NPV of Impacts for Residential and Commercial Purchases Under

Alternative Product Price Forecasts ( 3

- Percent Discount Rate)

Price Trend CSL Residential Billion 2013$ Commercial

Billion 2013$ Total

Billion 2013$

Default 1 3.972 0.060 4.031

2 5.099 0.079 5.178
3 6.022 0.092 6.114
4 6.023 0.113 6.137

Decreasing 1 3.972 0.060 4.031

2 5.100 0.078 5.178
3 6.024 0.092 6.116
4 6.088 0.114 6.202

Increasing 1 3.971 0.060 4.031

2 5.098 0.079 5.176
3 6.018 0.093 6.111
4 5.942 0.113 6.054

Table 10C

- 4

- 2 NPV of Impacts for Residential and Commercial Purchases Under

Alternative Product Price Forecasts ( 7

- Percent Discount Rate)

Price Trend CSL Residential Billion 2013$ Commercial

Billion 2013$ Total

Billion 2013$

Default 1 1.703 0.026 1.728

2 2.187 0.034 2.221
3 2.581 0.040 2.621
4 2.482 0.048 2.529

Decreasing 1 1.704 0.025 1.729

2 2.188 0.034 2.221
3 2.583 0.039 2.623
4 2.510 0.048 2.558

Increasing 1 1.702 0.026 1.727

2 2.185 0.034 2.219
3 2.579 0.040 2.618
4 2.443 0.047 2.490