CHAPTER 13. MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

13.1 INTRODUCTION ......................................................................................................... 13­1
 

13.2 METHODOLOGY ........................................................................................................ 13­1
 

13.2.1 Phase I: Industry Profile.................................................................................... 13­2
 

13.2.2 Phase II: Industry Cash­Flow Analysis and Interview Guide........................... 13­2
 

13.2.2.1 Industry Cash­Flow Analysis............................................................... 13­2
 

13.2.2.2 Interview Guide ................................................................................... 13­3
 

13.2.3 Phase III: Sub­Group Analysis ......................................................................... 13­3
 

13.2.3.1 Manufacturer Interviews...................................................................... 13­3
 

13.2.3.2 Revised Industry Cash­Flow Analysis................................................. 13­4
 

13.2.3.3 Manufacturer Sub­Group Analysis...................................................... 13­4
 

13.2.3.4 Small­Business Manufacturer Subgroup ............................................. 13­4
 

13.2.3.5 Competitive Impact Assessment.......................................................... 13­5
 

13.2.3.6 Manufacturing Capacity Impact .......................................................... 13­6
 

13.2.3.7 Employment Impact............................................................................. 13­6
 

13.2.3.8 Cumulative Regulatory Burden ........................................................... 13­6
 

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES.......................................... 13­6
 

13.3.1 R­410A............................................................................................................... 13­7
 

13.3.2 Equipment Classes Definitions.......................................................................... 13­8
 

13.3.3 ENERGY STAR Program ................................................................................. 13­9
 

13.3.4 Timing................................................................................................................ 13­9
 

13.4 GRIM INPUTS AND ASSUMPTIONS...................................................................... 13­10
 

13.4.1 Overview of the GRIM .................................................................................... 13­10
 

13.4.2 Sources GRIM Inputs ...................................................................................... 13­11
 

13.4.2.1 Corporate Annual Reports ................................................................. 13­11
 

13.4.2.2 Standard and Poor Credit Ratings...................................................... 13­12
 

13.4.2.3 Dun and Bradstreet Reports............................................................... 13­12
 

13.4.2.4 Shipment Model................................................................................. 13­12
 

13.4.2.5 Engineering Analysis......................................................................... 13­12
 

13.4.2.6 Manufacturer Interviews.................................................................... 13­12
 

13.4.3 Financial Parameters........................................................................................ 13­13
 

13.4.4 Corporate Discount Rate.................................................................................. 13­14
 

13.4.5 Trial Standard Levels....................................................................................... 13­16
 

13.4.6 NES­Shipments Forecast ................................................................................. 13­17
 

13.4.7 Standards Case................................................................................................. 13­18
 

13.4.8 Production Costs.............................................................................................. 13­21
 

13.4.9 Conversion Costs............................................................................................. 13­25
 

13.4.9.1 Conversion Capital Expenditures ...................................................... 13­25
 

13.4.9.2 R­410A Conversion ........................................................................... 13­25
 

13.4.9.3 Energy Conservation Standards......................................................... 13­27
 

13.4.9.4 Equipment Conversion Expenses ...................................................... 13­28
 

13.4.9.5 R­410A Conversion ........................................................................... 13­29
 

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13.4.9.6 Energy Conservation Standards......................................................... 13­29
 

13.4.10 Markups ................................................................................................... 13­31
 

13.4.10.1 Full Cost Recovery Markup............................................................. 13­31
 

13.4.10.2 Partial Cost Recovery Markup......................................................... 13­32
 

13.5	 MANUFACTURING IMPACTS TO THE BASE CASE AS A RESULT OF THE
 

REFRIGERANT PHASEOUT.................................................................................... 13­32
 

13.5.1 PTAC and PTHP Industry Financial Impacts as a result of the Refrigerant
 

Phaseout on the Base Case............................................................................... 13­35
 

13.6	 ENERGY CONSERVATION STANDARDS IMPACT SCENARIOS..................... 13­37
 

13.6.1 Markup Scenarios ............................................................................................ 13­37
 

13.6.1.1 R­410A Base Case With Full Cost Recovery and Amended Energy
 

Conservation Standards With Full Cost Recovery .......................................... 13­37
 

13.6.1.2 R­410A Base Case With 50­Percent Cost Recovery and Amended
 

Energy Conservation Standards With Full Cost Recovery.............................. 13­37
 

13.6.1.3 R­410A Base Case With Full Cost Recovery and Amended Energy
 

Conservation Standards With 50­Percent Cost Recovery ............................... 13­40
 

13.6.1.4 R­410A Base Case With 50­Percent Cost Recovery and Amended
 

Energy Conservation Standards With 50­Percent Cost Recovery................... 13­42
 

13.7	 STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS ........ 13­44
 

13.7.1 Impacts on Industry Net Present Value ........................................................... 13­45
 

13.7.2 Impacts on Annual Cash Flow......................................................................... 13­47
 

13.8	 NON­STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS........
 

...................................................................................................................................... 13­50
 

13.8.1 Impacts on Industry Net Present Value ........................................................... 13­50
 

13.8.2 Impacts on Annual Cash Flow......................................................................... 13­52
 

13.9	 SMALL BUSINESS IMPACTS.................................................................................. 13­56
 

13.9.1 Introduction...................................................................................................... 13­56
 

13.9.2 Equipment Development Requirements for Small Manufacturers of PTAC and
 

PTHP................................................................................................................ 13­57
 

13.9.3 Equipment Development Impacts on Small Manufacturers............................ 13­57
 

13.9.4 Volume Impacts on Small Manufacturers ....................................................... 13­59
 

13.9.5 Additional Impacts on Small Manufacturers................................................... 13­60
 

13.9.6 Conclusions...................................................................................................... 13­62
 

13.9.7 Direct Employment.......................................................................................... 13­62
 

13.9.7.1 Methodology...................................................................................... 13­62
 

13.9.7.2 Standard Size PTAC and PTHP Industry Results.............................. 13­64
 

13.9.7.3 Non­Standard Size PTAC and PTHP Industry Results ..................... 13­66
 

13.9.8 Manufacturing Capacity................................................................................... 13­68
 

13.9.9 Cumulative Regulatory Burden ....................................................................... 13­68
 

13.9.9.1 Federal Regulations on PTACs and PTHPs and Other Equipment
 

Produced by the Same Manufacturers ............................................................. 13­69
 

13.9.9.2 Restriction of Hazardous Substances Directive................................. 13­71
 

13.10	 CONCLUSIONS.......................................................................................................... 13­72
 

13.10.1.1 Standard Size PTAC and PTHP Industry ........................................ 13­72
 

13.10.1.2 Non­Standard Size PTAC and PTHP Industry ................................ 13­75
 

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LIST OF TABLES
 

Table 13.4.1 GRIM Financial Parameters Based on 2002­2006 Weighted Company Financial

Data.............................................................................................................................. 13­13

Table 13.4.2 Cost of Equity Calculation................................................................................. 13­15

Table 13.4.3 Cost of Debt Calculation.................................................................................... 13­16

Table 13.4.4 Standard Size PTACs and PTHPs Baseline Efficiency Levels and TSLs......... 13­16

Table 13.4.5 Non­Standard Size PTACs and PTHPs Baseline Efficiency Levels and TSLs. 13­17

Table 13.4.6 Total NES­Shipments Forecast in 2012............................................................. 13­17

Table 13.4.7 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments with a

Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES............................................. 13­17

Table 13.4.8 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments with a

Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES............................................. 13­18

Table 13.4.9 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments with a

Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES........................................... 13­18

Table 13.4.10 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments with a

Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES........................................... 13­18

Table 13.4.11 Base Case Distribution of Efficiencies for Non­Standard Size PTAC Shipments

with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES................................ 13­18

Table 13.4.12 Base Case Distribution of Efficiencies for Non­Standard Size PTHP Shipments

with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES................................ 13­18

Table 13.4.13 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 9,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­19

Table 13.4.14 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 9,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­19

Table 13.4.15 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 12,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­20

Table 13.4.16 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 12,000 Btu/h in 2012 – Rollup

Scenario.................................................................................................................................... 13­20

Table 13.4.17 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTACs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario........................................................................................................................ 13­20

Table 13.4.18 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTHPs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario........................................................................................................................ 13­21

Table 13.4.19 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard Size

PTAC 9,000 Btu/h Cooling Capacity ...................................................................................... 13­21

Table 13.4.20 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard Size

PTHP 9,000 Btu/h Cooling Capacity....................................................................................... 13­22

Table 13.4.21 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard Size

PTAC 12,000 Btu/h Cooling Capacity .................................................................................... 13­22

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Table 13.4.22 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard Size

PTHP 12,000 Btu/h Cooling Capacity..................................................................................... 13­22

Table 13.4.23 Base Case Production Costs (2007$) used in the GRIM for R­22 Non­Standard

Size PTAC 11,000 Btu/h Cooling Capacity ............................................................................ 13­23

Table 13.4.24 Base Case Production Costs (2007$) used in the GRIM for R­22 Non­Standard

Size PTHP 11,000 Btu/h Cooling Capacity............................................................................. 13­23

Table 13.4.25 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard Size

PTAC 9,000 Btu/h Cooling Capacity ...................................................................................... 13­23

Table 13.4.26 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard Size

PTHP 9,000 Btu/h Cooling Capacity....................................................................................... 13­24

Table 13.4.27 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard Size

PTAC 12,000 Btu/h Cooling Capacity .................................................................................... 13­24

Table 13.4.28 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard Size

PTHP 12,000 Btu/h Cooling Capacity..................................................................................... 13­24

Table 13.4.29 Base Case Production Costs (2007$) used in the GRIM for R­410A Non­Standard

Size PTAC 11,000 Btu/h Cooling Capacity ............................................................................ 13­25

Table 13.4.30 Base Case Production Costs (2007$) used in the GRIM for R­410A Non­Standard

Size PTHP 11,000 Btu/h Cooling Capacity............................................................................. 13­25

Table 13.4.31 Conversion Capital Expenditure for Standard Size PTACs and PTHPs by TSL.....

.................................................................................................................................................. 13­28

Table 13.4.32 Conversion Capital Expenditure for Non­Standard PTACs and PTHPs by TSL.....

.................................................................................................................................................. 13­28

Table 13.4.33 Equipment Conversion Expenses for Standard Size PTACs and PTHPs by TSL

.................................................................................................................................................. 13­30

Table 13.4.34 Equipment Conversion Expenses for Non­Standard PTACs and PTHPs by TSL

.................................................................................................................................................. 13­31

Table 13.5.1 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTAC with a 9,000 Btu/h Cooling Capacity.................................................................... 13­34

Table 13.5.2 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTHP with a 9,000 Btu/h Cooling Capacity.................................................................... 13­34

Table 13.5.3 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTAC with a 12,000 Btu/h Cooling Capacity.................................................................. 13­34

Table 13.5.4 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for Standard

Size PTHP with a 12,000 Btu/h Cooling Capacity.................................................................. 13­35

Table 13.5.5 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTAC with a 11,000 Btu/h Cooling Capacity .................................................. 13­35

Table 13.5.6 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity................................................... 13­35

Table 13.5.7 Changes in Base Case Industry Net Present Value from R­410A Conversion for

Standard Size PTACs and PTHPs............................................................................................ 13­36

Table 13.5.8 Changes in Base Case Industry Net Present Value from R­410A Conversion for

Non­Standard Size PTACs and PTHPs................................................................................... 13­36

Table 13.6.1 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTAC

with a 9,000 Btu/h Cooling Capacity....................................................................................... 13­38

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Table 13.6.2 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTHP with

a 9,000 Btu/h Cooling Capacity............................................................................................... 13­38

Table 13.6.3 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTAC

with a 12,000 Btu/h Cooling Capacity..................................................................................... 13­39

Table 13.6.4 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Standard Size PTHP with

a 12,000 Btu/h Cooling Capacity............................................................................................. 13­39

Table 13.6.5 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With Full Cost Recovery for Non­Standard Size

PTAC with a 11,000 Btu/h Cooling Capacity ......................................................................... 13­39

Table 13.6.6 13.6.7 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Non­Standard Size

PTHP with a 11,000 Btu/h Cooling Capacity.......................................................................... 13­40

Table 13.6.8 Markups Reflecting the R­410A Base Case With Full Cost Recovery and Amended

Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size PTAC with a

9,000 Btu/h Cooling Capacity.................................................................................................. 13­40

Table 13.6.9 Markups Reflecting the R­410A Base Case With Full Cost Recovery and Amended

Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size PTHP with a

9,000 Btu/h Cooling Capacity.................................................................................................. 13­41

Table 13.6.10 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 12,000 Btu/h Cooling Capacity ......................................................................... 13­41

Table 13.6.11 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 12,000 Btu/h Cooling Capacity.......................................................................... 13­41

Table 13.6.12 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Non­Standard

Size PTAC with a 11,000 Btu/h Cooling Capacity.................................................................. 13­42

Table 13.6.13 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Non­Standard

Size PTHP with a 11,000 Btu/h Cooling Capacity.................................................................. 13­42

Table 13.6.14 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 9,000 Btu/h Cooling Capacity ........................................................................... 13­43

Table 13.6.15 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 9,000 Btu/h Cooling Capacity............................................................................ 13­43

Table 13.6.16 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 12,000 Btu/h Cooling Capacity ......................................................................... 13­43

Table 13.6.17 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 12,000 Btu/h Cooling Capacity.......................................................................... 13­44

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Table 13.6.18 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTAC with a 11,000 Btu/h Cooling Capacity ......................................................................... 13­44

Table 13.6.19 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard Size

PTHP with a 11,000 Btu/h Cooling Capacity.......................................................................... 13­44

Table 13.7.1 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case Full Cost Recovery with Amended Energy Conservation Standards Full Cost

Recovery)................................................................................................................................. 13­45

Table 13.7.2 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case Full Cost Recovery with Amended Energy Conservation Standards 50­Percent

Cost Recovery)......................................................................................................................... 13­46

Table 13.7.3 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation Standards Full

Cost Recovery)......................................................................................................................... 13­46

Table 13.7.4 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs (R410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation Standards 50­

Percent Cost Recovery)............................................................................................................ 13­47

Table 13.8.1 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery with Amended Energy Conservation Standard Full Cost

Recovery)................................................................................................................................. 13­51

Table 13.8.2 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery with Amended Energy Conservation Standard 50­

Percent Cost Recovery)............................................................................................................ 13­51

Table 13.8.3 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation Standard

Full Cost Recovery)................................................................................................................. 13­52

Table 13.8.4 Changes in Industry Net Present Value for Non­Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation Standard 50­

Percent Cost Recovery)............................................................................................................ 13­52

Table 13.9.1 Cumulative Equipment Development Cost Estimates for non­standard PTAC and

PTHP Industry ......................................................................................................................... 13­58

Table 13.9.2 Impact of Manufacturing Scale on Per Unit Equipment Development Cost..... 13­60

Table 13.9.3 LCC Savings After Per Unit R&D costs for Non­Standard Size PTACs with a

Cooling Capacity of 11,000 Btu/h ........................................................................................... 13­61

Table 13.9.4 LCC Savings After Per Unit R&D costs for Non­Standard Size PTHPs with a

Cooling Capacity of 11,000 Btu/h ........................................................................................... 13­61

Table 13.9.5 Estimates from the Engineering Analysis Used to Calculate the Change in Direct

Employment, Standard Size PTAC and PTHP........................................................................ 13­63

Table 13.9.6 Estimates from the Engineering Analysis Used to Calculate the Change in Direct

Employment, Non­Standard Size PTAC and PTHP................................................................ 13­64

Table 13.9.7 Direct Employment Summary for Standard Size PTAC and PTHP Industry ... 13­64

Table 13.9.8 Direct Employment Summary Results for Non­Standard Size PTAC and PTHP

Industry .................................................................................................................................... 13­67

Table 13.9.9 Other DOE and Federal Actions Affecting the Standard Size PTAC and PTHP

Industry .................................................................................................................................... 13­70

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Table 13.9.10 Other DOE and Federal Actions Affecting the Non­Standard Size PTAC and

PTHP Industry ......................................................................................................................... 13­71

LIST OF FIGURES

Figure 13.4.1 Using the GRIM to Calculate Cash Flow.......................................................... 13­11

Figure 13.7.1 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case with Full Cost Recovery and Amended Energy Conservation Standards with Full Cost

Recovery)................................................................................................................................. 13­48

Figure 13.7.2 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case with Full Cost Recovery and Amended Energy Conservation Standards with 50­

Percent Cost Recovery)............................................................................................................ 13­48

Figure 13.7.3 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case with 50­Percent Cost Recovery and Amended Energy Conservation Standards with

Full Cost Recovery)................................................................................................................. 13­49

Figure 13.7.4 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R­410A

Base Case with 50­Percent Cost Recovery and Amended Energy Conservation Standards with

50­Percent Cost Recovery) ...................................................................................................... 13­49

Figure 13.8.1 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case with Full Cost Recovery and Amended Energy Conservation Standards with

Full Cost Recovery)................................................................................................................. 13­53

Figure 13.8.2 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case with Full Cost Recovery and Amended Energy Conservation Standards with

50­Percent Cost Recovery) ...................................................................................................... 13­54

Figure 13.8.3 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case with 50­Percent Cost Recovery and Amended Energy Conservation Standards

with Full Cost Recovery)......................................................................................................... 13­54

Figure 13.8.4 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry (R410A Base Case with 50­Percent Cost Recovery and Amended Energy Conservation Standards

with 50­Percent Cost Recovery).............................................................................................. 13­55

Figure 13.9.1 Total Standard Size PTAC and PTHP Industry Domestic Employment by Year.....

.................................................................................................................................................. 13­65

Figure 13.9.2 Total Non­Standard Size PTAC and PTHP Industry Domestic Employment by

Year.......................................................................................................................................... 13­67

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CHAPTER 13. MANUFACTURER IMPACT ANALYSIS
 

13.1 INTRODUCTION
 

In determining whether a standard is economically justified, the U.S Department of

Energy (DOE) is required to consider “the economic impact of the standard on the manufacturers

and on the consumers of the products subject to such a standard.” (42 U.S.C. 6313(a)(6)(B)(i))

The statute also calls for an assessment of the impact of any lessening of competition as

determined in writing by the Attorney General. Id. DOE conducted a manufacturer impact

analysis (MIA) to estimate the financial impact of amended energy conservation standards on

manufacturers of packaged terminal air conditioners (PTACs) and packaged terminal heat pumps

(PTHPs), and to assess the impact of such standards on employment and manufacturing capacity.

The MIA has both quantitative and qualitative aspects.

The quantitative part of the MIA primarily relies on the Government Regulatory Impact

Model (GRIM), an industry­cash­flow model adapted for this rulemaking. The GRIM inputs

include information on the standard and non­standard PTAC and PTHP industries’ cost structure,

shipments, and pricing strategies. The GRIM’s key output is the industry net present value

(INPV) for the standard and non­standard PTAC and PTHP industries. The model estimates the

financial impact of amended energy conservation standards by comparing changes in INPV

between a base case and the various trial standard levels (TSLs) (standards cases).

The qualitative part of the MIA addresses factors such as equipment characteristics,

manufacturing statistics, and market and equipment trends. It also assesses the impact of

amended energy conservation standards on subgroups of manufacturers.

13.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of the

preparation of characterizations of the standard and non­standard size PTAC and PTHP

industries, including data on market share, sales volumes and trends, pricing, employment, and

financial structure. Phase II, “Industry Cash Flow,” focused on the standard and non­standard

size industries. In this phase, DOE used the GRIM to prepare an industry cash flow analysis for

both industries. Using publicly available information developed in Phase 1, DOE adapted the

GRIM’s generic structure to facilitate analysis of amended PTAC and PTHP standards. In Phase

III, “Sub­Group Impact Analysis,” DOE interviewed manufacturers representing over 90 percent

of domestic PTAC and PTHP sales. This group included both large and small manufacturers,

providing a representative cross­section of the industries. During these interviews, DOE

discussed financial topics specific to each manufacturer and obtained each manufacturer’s view

of their industry as a whole. The interviews provided valuable information that DOE used to

evaluate the impacts of a new standard on manufacturers’ cash flows, manufacturing capacities,

and employment levels.

In addition to characterizing the impact of amended energy conservation standards on

manufacturers’ cash flows, DOE also considered the impacts of the Environmental Protection

Agency (EPA) mandated R­22 refrigerant phaseout. As part of the MIA, DOE estimated inputs

for the GRIM characterizing the impact of the refrigerant phaseout on manufacturer’s shipments,

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conversion costs, profitability, and ultimately, cash flows. Between 2006 and 2009, the GRIM

uses inputs from the engineering and shipments analysis for R­22 refrigerant equipment.

Beginning with 2010, the GRIM uses inputs developed in the engineering analysis and in the

MIA for R­410A equipment. For further details about the refrigerant phaseout and alternative

refrigerant analysis, see Chapter 5 of this technical support document (TSD). The following

subsections describe more specifically the steps DOE took in developing the information on

which it based the MIA.

13.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the standard and non­standard size

PTAC and PTHP industries that build upon the market and technology assessment prepared for

this rulemaking (see Chapter 3 of this TSD). Before initiating the detailed impact studies, DOE

collected qualitative and quantitative financial information and past and present market data.

This included estimated market shares of both standard and non­standard size PTAC and PTHP

manufacturers, corporate operating ratios, wages, employment, and production cost ratios. The

industry profile included a topdown cost analysis of PTAC and PTHP manufacturers that DOE

used to derive cost and preliminary financial inputs for the GRIM (e.g., revenues; material;

labor; overhead; depreciation; selling, general and administrative expenses (SG&A); and

research and development (R&D) expenses). DOE also used public information to further

calibrate its initial characterization of the industries, including Securities and Exchange

Commission (SEC) 10–K reports, Dun and Bradstreet (D&B), Standard & Poor’s (S&P) stock

reports, and corporate annual reports. In addition, DOE relied on information from its

engineering analysis, life­cycle cost analysis, and analysis of markups to determine equipment

price to characterize both standard and non­standard size PTAC and PTHP manufacturing

industries.

13.2.2 Phase II: Industry Cash­Flow Analysis and Interview Guide

In Phase II, DOE performed an industry cash­flow analysis for both standard and nonstandard industries and prepared written guidelines for interviewing manufacturers. Phase II

focused on the financial impacts of amended standards on the standard and non­standard PTAC

and PTHP industries. Amended energy conservation standards can affect PTAC and PTHP

manufacturers in three distinct ways: (1) require additional investment, (2) raise production

costs, and (3) impact revenues through higher prices and, possibly, lower shipments. The

analytical tool DOE uses for calculating the financial impacts of amended energy conservation

standards on manufacturers is the GRIM. DOE performed a cash flow analysis using the GRIM

on the PTAC and PTHP industries to quantify these impacts.

13.2.2.1 Industry Cash­Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows for the year

standards become effective and several years after implementation. These factors include annual

expected revenues; costs of sales; SG&A costs; taxes; and capital expenditures related to

depreciation, new standards, and maintenance. Inputs to the GRIM included manufacturing

costs, shipments forecasts, and price forecasts developed in other analyses. DOE derived the

manufacturing costs from the engineering analysis cost­efficiency curves and estimated typical

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manufacturer markups from public financial reports and interviews with manufacturers. DOE

developed alternative markup scenarios based on discussions with manufacturers during the

rulemaking. DOE’s shipments analysis, presented in Chapter 10 of this TSD, provided the basis

for the shipments projection under each TSLs in the GRIM. Another input, financial

information, was developed based on publicly available data and confidentially submitted

manufacturer information. The results of the GRIM are compared against base case projections

assuming the American Society of Heating, Refrigerating, and Air­Conditioning Engineers, Inc.

(ASHRAE) and the Illuminating Engineering Society of North America (IESNA) Standard 90.1­

1999 (ASHRAE Standard 90.1­1999)1 efficiency levels are adopted by DOE. The financial

impact of amended energy conservation standards is the difference between the two sets of

discounted annual cash flows.

13.2.2.2 Interview Guide

During Phase III of the MIA, DOE conducted interviews with manufacturers to gather

information on the effects of amended energy conservation standards on revenues and finances,

direct employment, capital assets, and on industry competitiveness. Prior to the interviews, DOE

distributed an interview guide that provided a starting point to identify relevant issues and help

identify the impacts of amended energy conservation standards on individual manufacturers or

sub­groups of manufacturers. The interview guide covered current organizational characteristics,

industry infrastructure, manufacturer cash­flow analysis, a competitive impacts assessment, an

employment impacts assessment, and a manufacturing capacity impacts assessment. The

interview guides used to conduct the manufacturer interviews are found in Appendix K of this

TSD.

13.2.3 Phase III: Sub­Group Analysis

During the course of the MIA, DOE interviewed manufacturers representing close to 90

percent of domestic PTAC and PTHP sales. Many of these same companies also participated in

interviews for the engineering analysis. However, the MIA interviews broadened the discussion

from primarily technology­related issues to include business related topics. One objective was to

obtain feedback from industry on the assumptions used in the GRIM and to isolate key issues

and concerns. DOE defined three distinctive subgroups that could be impacted by the amended

energy conservation standards: major manufacturers, small businesses, and manufacturers of

niche equipment. The following sections summarize the methodology and findings of this

assessment.

13.2.3.1 Manufacturer Interviews

The information gathered in Phase I and the cash­flow analysis performed in Phase II are

supplemented with information gathered during interviews with manufacturers during Phase III.

The interview process has a key role in the manufacturer impact analyses, since it provides an

opportunity for interested parties to express their views privately on important issues, allowing

confidential or sensitive information to be considered in the rulemaking process.

DOE established two subgroups for the MIA corresponding to the two types of PTAC

and PTHP equipment and manufacturers found within the industry including, standard and non13­3

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standard size equipment. Based on this decision, DOE prepared two different interview guides –

one for standard size PTACs and PTHPs and one for non­standard size PTACs and PTHPs.

These interview guides were used to tailor the GRIM to incorporate unique financial

characteristics from each equipment size. Within each of these subgroups, DOE contacted

companies from its database of manufacturers, which provided a representation of each

subgroup. Small and large companies, subsidiaries and independent firms, and public and

private corporations were interviewed. Interviews were scheduled well in advance in order to

provide every opportunity for key individuals to be available for comment. Although a written

response to the questionnaire was acceptable, DOE preferred an interactive interview process

because it helped clarify responses and provide the opportunity to identify additional issues.

DOE conducted detailed interviews with all manufacturers, which agreed to participate to

gain insight into the range of potential impacts and how this range varies with each TSL. During

the interviews, DOE solicited information on the possible impacts of energy conservation

standards on sales, direct employment, capital assets, and industry competitiveness. Both

qualitative and quantitative information are valuable to the interview process. Finally, a GRIM

was developed for both of the subgroups. The industry­wide cash flow analysis is an

aggregation of these two subgroups.

13.2.3.2 Revised Industry Cash­Flow Analysis

In Phase II of the MIA, DOE provided manufacturers with preliminary GRIM input

financial figures for review and evaluation. During the interviews, DOE requested comment and

suggestions regarding the values selected for the parameters. Upon completion of the interviews,

DOE revised its industry cash flow model based on the feedback provided through the

interviews.

13.2.3.3 Manufacturer Sub­Group Analysis

Using average cost assumptions to develop an industry cash flow estimate is not adequate

for assessing differential impacts among sub­groups of manufacturers. Smaller manufacturers,

niche players, or manufacturers exhibiting a cost structure that differs significantly from the

industry average could be more negatively affected. Ideally, DOE would consider the impact on

every manufacturer individually; however, it typically uses the results of the industry

characterization to group manufacturers exhibiting similar characteristics. During the interview

process, DOE discussed the potential sub­groups and sub­group members that have been

identified for the analysis. DOE looked to the manufacturers and other stakeholders to suggest

what sub­groups or characteristics are the most appropriate for the analysis.

13.2.3.4 Small­Business Manufacturer Subgroup

DOE used the small business size standards published on March 11, 2008, as amended,

by the Small Business Administration (SBA) to determine whether any small entities would be

required to comply with the rule. 61 FR 3286 and codified at 13 CFR Part 121. The size

standards are listed by North American Industry Classification System (NAICS) code and

industry description. PTAC and PTHP manufacturing is classified under NAICS 333415. To be

categorized as a small business, a manufacturer of PTACs and PTHPs and its affiliates may

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employ a maximum of 750 employees. Both the standard and non­standard size PTAC and

PTHP industries are characterized by a small number of domestic manufacturers. However,

consolidation has reduced the number of parent companies that manufacture similar equipment

under different affiliates and labels.

DOE surveyed the Air­Conditioning, Heating, and Refrigeration Institute’s (AHRI)

Applied Directory of Certified Product Performance (2008) and created a list of every

manufacturer that had certified equipment ratings in the directory. DOE also asked stakeholders,

AHRI representatives, and manufacturers within the standard and non­standard PTAC and PTHP

industries if they were aware of any other small business manufacturers. DOE then looked at

publicly available data and contacted manufacturers, where needed, to determine if they meet the

SBA’s definition of a small business manufacturing facility and have their manufacturing

facilities located within the U.S.

DOE estimated that there are six small business manufacturers of PTACs and PTHPs.

These small business manufacturers can further sub­categorized by their manufacturing scale: 1)

one small business competes successfully making standard size PTACs and PTHPs in high

volumes; and 2) the remaining five small businesses make PTACs and PTHPs at much lower

volumes. While three of these five low­volume small businesses make PTACs and PTHPs that

fit into standard­size sleeves, the customization options offered by these manufacturers suggests

that these units have more in common with the non­standard equipment that these manufacturers

also offer than with high­volume standardized PTACs and PTHPs on the market. Of the six

small business identified, DOE interviewed two during the NOPR MIA. Both manufacturers

agreed to on­site interviews to determine if there are differential impacts on these companies that

may result from the standard.

DOE found that, in general, small business manufacturers have the same concerns as

large manufacturers regarding energy conservation standards. However, through its review DOE

found that there are significant differences in the R&D emphasis or marketing strategies between

small business manufacturers and large manufacturers. Therefore, for the equipment classes

comprised primarily of small business manufacturers, DOE further investigated possible impacts

to small business using the GRIM analysis and publicly available market information. Further

details of the small business analysis can be found in section 13.9 of this Chapter.

13.2.3.5 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to

consider any lessening of competition that is likely to result from imposition of standards. It

further directs the U. S. Attorney General to determine the impacts, if any, of any decrease in

competition. To assist the Attorney General in making such a determination, DOE provided the

U.S. Department of Justice (DOJ) with copies of the notice of proposed rule (NOPR) and the

accompanied TSD for review. In the NOPR, DOE made a determined effort to gather and report

firm­specific financial information and impacts. DOJ’s competitive analysis focused on

assessing the impacts on smaller, yet significant, manufacturers. The assessment was based on

manufacturing cost data and on information collected from interviews with manufacturers.

DOE’s manufacturer interviews also focused on gathering information that would help in

assessing asymmetrical cost increases to some manufacturers, the potential increase in business

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risks from an increased proportion of fixed costs, and potential barriers to market entry (e.g.,

proprietary technologies). DOJ’s comments on the NOPR and DOE’s responses are summarized

in the final rule notice.

13.2.3.6 Manufacturing Capacity Impact

One of the significant outcomes of amended energy conservation standards could be the

consequential obsolescence of existing manufacturing assets, including tooling and investment.

The manufacturer interview guide has a series of questions to help identify impacts on

manufacturing capacity, specifically capacity utilization and plant location decisions in the

United States and North America with and without energy conservation standards; the ability of

manufacturers to upgrade or remodel existing facilities to accommodate the new requirements

due to amended energy conservation standards; the nature and value of stranded assets, if any;

and estimates for any one­time restructuring and other charges, where applicable.

13.2.3.7 Employment Impact

The impact of amended energy conservation standards on employment is an important

consideration in the rulemaking process. To assess how domestic employment patterns might be

affected, the interview explored current employment trends in the standard and non­standard size

PTAC and PTHP industries. In addition, the interview solicited manufacture views on changes

in employment patterns that may result from amended energy conservation standards. The

employment impacts section of the interview guide focused on current employment levels

associated with manufacturers at each of their production facilities, expected future employment

levels with and without amended energy conservation standards, and differences in workforce

skills and issues related to the retraining of employees.

13.2.3.8 Cumulative Regulatory Burden

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers of

amended energy conservation standards and other regulatory actions affecting the same

equipment. DOE analyzed and considered the impact on manufacturers of multiple, equipmentspecific regulatory actions that take effect within three years of the effective dates of this

rulemaking.

Based on its own research and discussions with manufacturers, DOE identified several

regulations relevant to PTACs and PTHPs, including: hydrochlorofluorocarbon (HCFC)

phaseout, Federal energy conservation standards for other equipment manufactured by PTAC

and PTHP manufacturers, and other environmental regulations. For further discussion on

cumulative regulatory burden, see section 13.9.9 of this Chapter.

13.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES

The first question in each of the MIA interview guides asks: “What are the key issues for

your company regarding the PTAC and PTHP energy conservation standard rulemaking?” This

open question initiated dialogue with the manufacturers, enabling them to identify key points that

DOE would explore and discuss during the interview. This section describes the key issues

manufacturers felt were of the highest importance in relation to the PTAC and PTHP energy

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conservation standards rulemaking and that would have the most significant impact on the

standard and non­standard industries. Manufacturers indicated that, for the most part, the risks

associated with these issues increase with more stringent TSLs. The issues are overall concerns

that many manufacturers expressed and in some cases, are dependent upon standard and nonstandard size equipment.

13.3.1 R­410A

According to all manufacturers interviewed, the most concerning issue facing the PTAC

and PTHP industries is the EPA mandated phaseout of HCFC­based refrigerants that are used in

current PTAC and PTHP equipment. Every manufacturer interviewed stated that it intends to

switch from the current R­22 refrigerant to R­410A refrigerant in the PTAC and PTHP

equipment, regardless of equipment class. All manufacturers interviewed expect to be affected

by the refrigerant phaseout for the further discussed reasons:

•	 Availability of R­410A rotary compressors – All of the manufacturers interviewed stated

their concern that only a small number of compressors utilizing R­410A refrigerant are or

will be available before the R­22 refrigerant must be replaced in 2010. Furthermore, not

all current cooling capacities available in R­22 refrigerant compressors are or will be

available in R­410A refrigerant versions. In addition, not all voltages currently offered

by some manufacturers of PTAC and PTHP equipment are or will be available in R­410A

refrigerant compressor versions. All manufacturers noted that the small size of the

industries gives them little to no leverage to encourage compressor manufacturers to

develop R­410A refrigerant compressors for them.

•	 Compressor performance degradation ­ According to all manufacturers of both standard

and non­standard size PTAC and PTHP equipment, R­410A refrigerant compressors

currently on the market have at least a 0.8 to 1.0 EER compressor performance

degradation relative to the R­22 refrigerant compressors that they are intended to replace.

The degradation in compressor performance can be attributed to several factors including

higher system pressures, a reduction in displacement, increase in complexity, and use of

non­mineral oils. As a result, some manufacturers anticipate difficulty initially meeting

even the ASHRAE Standard 90.1­1999 efficiency levels with R­410A­based units.

•	 Increase in manufacturing costs ­ All manufacturers expect their PTAC and PTHP

equipment manufacturing costs to increase with the refrigerant phaseout. According to

manufacturers, compressors, heat exchangers, oils, and other components necessary for

handling the higher pressures associated with R­410A refrigeration systems have higher

costs than comparable components used in R­22 refrigeration systems. In addition,

manufacturers are concerned about the anticipated drop in compressor efficiency, which

would cause them to incorporate some level of redesign into their R­410A refrigerant

equipment to help offset this degradation and would further increase manufacturing cost.

All manufacturers noted that cost­recovery is very difficult in the PTAC and PTHP

industries due to intense price competition, due to, among other factors, the entry of

foreign­based competitors.

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•	 Combination of regulations ­ All manufacturers anticipate that the combination of the R22 refrigerant phaseout and possible amendment of Federal energy conservation

standards will lead the industries to reduce the scope of equipment offered. In addition,

several manufacturers anticipate as a result of the three factors just discussed, shifts in

market share, consolidation, and/or the departure of marginal manufacturers from the

business.

13.3.2 Equipment Classes Definitions

Under the existing Federal energy conservation standards as shown in Table 1 and Table

2 of 10 CFR Part 431.97, PTACs and PTHPs are divided into two equipment classes. Current

equipment classes include PTACs and PTHPs at various cooling capacities. When ASHRAE

amended the efficiency levels for PTACs and PTHPs, it acknowledged the physical size

constraints between the varying sleeve sizes on the market. Consequently, ASHRAE Standard

90.1­1999 used the existing equipment classes, which are distinguished by equipment type (i.e.,

air conditioner or heat pump) and cooling capacity, and further separated these equipment classes

by wall sleeve dimensions.

ASHRAE Standard 90.1­1999 refers to wall sleeve dimensions in two categories: “New

Construction” and “Replacement.” ASHRAE Standard 90.1­1999 does not describe “New

Construction,” but Table 6.21D, footnote b of ASHRAE Standard 90.1­1999 states that

replacement efficiencies apply only to units: (1) “factory labeled as follows: Manufactured for

Replacement Applications Only; Not to be Installed in New Construction Projects”; and (2)

“with existing wall sleeves less than 16 in. high and less than 42 in. wide.” DOE understands

that the “New Construction” category under ASHRAE Standard 90.1­1999 is residual, and

covers all other PTAC and PTHPs. Hence, this category consists of equipment with wall sleeve

dimensions greater than or equal to 16 inches high and greater than or equal to 42 inches wide, or

lacking the requisite label.

Manufacturers of non­standard size PTACs and PTHPs anticipate that, if the ASHRAE

Standard 90.1­1999 equipment class definition (i.e., equipment with wall sleeve dimensions less

than 16 inches high and less than 42 inches wide) is adopted by DOE, a significant portion of the

equipment they currently offer will be misclassified as standard size equipment. For example, a

PTAC or PTHP unit with wall sleeve dimensions of 16.5 inches high and 27 inches wide would

be classified as standard size equipment under ASHRAE’s classification and DOE’s proposed

equipment classes. Non­standard size manufacturers stated that they manufacture these units on

demand in lower volumes and sell them to replace existing equipment with the same wall sleeve

dimensions. They assert that DOE establishment of equipment classes that correspond to

ASHRAE’s classifications would force a small volume of non­standard sleeve size equipment to

meet higher efficiency levels intended for standard size equipment. As a result, manufacturers

believe this could impact the availability of these non­standard equipment on the market because

non­standard equipment is physically constrained leaving manufacturers with limited options for

increasing the efficiency of this type of equipment. Multiple manufacturers estimated that up to

half of their equipment lines could be eliminated if DOE chooses to adopt ASHRAE’s

delineations of equipment classes.

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13.3.3 ENERGY STAR Program

Many manufacturers of standard size PTACs and PTHPs pointed out that the ENERGY

STAR program for PTACs and PTHPs is currently under development by DOE. According to

manufacturers, the key to maintaining ENERGY STAR levels is setting minimum energy

conservation standards for PTACs and PTHPs that are similar and low enough to allow costeffective premium­efficiency PTHPs to be developed. To that end, all manufacturers with

knowledge of the ENERGY STAR development program expressed support for the ENERGY

STAR and minimum energy conservation standards programs to collaborate in setting standards

as a means of reducing manufacturer uncertainty and development expenses.

All manufacturers advocated a greater use of heat pumps as a means to increasing energy

efficiency, stating that their internal life­cycle cost calculations justify a market mix of about 20

percent PTACs and 80 percent PTHPs. According to manufacturers, the higher initial cost of

PTHPs discourages higher PTHP adoption since many buyers have fixed capital budgets and buy

solely on the basis of initial cost. Key to adopting a greater proportion of PTHPs would be an

ENERGY STAR program in conjunction with utility rebates, so the initial purchase cost of a

PTHP can be more competitive with that of a PTAC. State energy efficiency mandates such as

the possible ban on the use of PTACs in new construction in California would also boost PTHP

adoption rates.

13.3.4 Timing

The anticipated timing of the unveiling of a new ENERGY STAR program for PTACs

and PTHPs (late 2008), the EPA mandated R­22 refrigerant phaseout (Jan. 2010), and the

effective date of the DOE amended energy conservation standards rulemaking (late 2012) are a

concern for all manufacturers. All manufacturers stated that each of the programs would require

a separate development effort (though efforts related to ENERGY STAR are voluntary).

Most manufacturers stated they could see some potential gains from being able to

combine the redesign and testing efforts (i.e. the conversion to R­410A and amended energy

conservation standards). For example, the sealed system portion could require upgrades to

handle the higher system pressures of R­410A. This transition could present a good opportunity

for a manufacturer to redesign a heat exchanger or make other modifications that would

ultimately require less testing when efforts are combined than if they were run serially.

However, most manufacturers were uncertain of the magnitude of the benefit that combining

multiple research and development tasks would entail.

Available budgets for research and development vary by manufacturer and some do not

have the shipment volumes to justify very large development programs. Consequently, one

redesign effort for any of the three new regulations facing the PTAC and PTHP industries could

consume some manufacturers’ entire research and development effort for several years.

All manufacturers noted the intense price competition in the standard and non­standard

size PTAC and PTHP industries. Most manufacturers worried about the efficiency levels they

would be able to obtain with available R­410A rotary compressors. Even if PTAC and PTHP

manufacturers were able to make high efficiency R­410A PTACs and PTHPs, multiple

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manufacturers doubted they would be able to command a price premium unless rebates usually

associated with ENERGY STAR programs lowered acquisition costs for customers. Many of

their customers purchase PTACs and PTHPs for their respective buildings on fixed budgets,

which will remain unchanged regardless of the increasing manufacturing costs to accommodate

R­410A and amended energy conservation standards. In the absence of rebates, the majority of

manufacturers do not anticipate making high efficiency R­410A units.

All manufacturers requested greater transparency and shorter lead times regarding

amended energy conservation standards. All manufacturers also stated that they anticipate three

major transitions in the coming years (R­22 refrigerant phaseout, energy conservation standards,

ENERGY STAR voluntary standards). All of these programs currently have significant

uncertainty associated with them, making an orderly industry transition to new PTACs/PTHPs

more difficult. All manufacturers noted that they cannot plan and execute their respective

strategies with a high degree of confidence as long as some component equipment is not

available and amended energy conservation standards remain unknown. By the time energy

conservation standards become known most manufacturers are unlikely to have enough time to

start and finish their research and development before the refrigerant phaseout becomes effective

causing manufacturers to undertake two separate design efforts.

With longer lead times, planning, research, and development could occur more easily and

reduce the business risk for industry participants. Some manufacturers noted that similar

transition points have caused participants in related heating, ventilating, and air­conditioning

(HVAC) industries to go out of business. The failed companies had allegedly made the wrong

assumptions about amended energy conservation standards. Once higher­than­anticipated

energy conservation standards became public knowledge, these companies had to restart their

development programs, at significant cost and under intense time pressure. Hence, all PTAC and

PTHP manufacturers repeatedly asked for greater clarity and extended lead times regarding

amended energy conservation standards and ENERGY STAR specifications.

13.4 GRIM INPUTS AND ASSUMPTIONS

The GRIM serves as the main tool for assessing the impact on industries due to the

imposition of amended energy conservation standards. DOE relied on several sources to obtain

inputs for the GRIM in the form of data and assumptions. The GRIM’s accounting methods then

produced the results used to estimate impacts on manufacturers.

13.4.1 Overview of the GRIM

The basic structure of the GRIM, illustrated in Figure 13.4.1, is a standard annual cash

flow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry

financial information as inputs, and accepts a set of regulatory conditions as changes in costs,

investments, and associated margins. The GRIM spreadsheet uses a number of inputs to arrive at

a series of annual cash flows, beginning with the base year of the analysis, 2006, and continuing

explicitly to 2042. The model calculates the INPV by summing the stream of annual discounted

cash flows during this period.2

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Figure 13.4.1 Using the GRIM to Calculate Cash Flow

The GRIM projected cash flows using standard accounting principles and compared

changes in INPV between the adoption of ASHRAE Standard 90.1­1999 (the base case scenario)

and different TSLs for the amended energy conservation standards (the standard case scenario).

The difference in INPV between the base case and the standard case(s) represents the estimated

financial impact of the amended energy conservation standard on manufacturers. Appendix I

provides more technical details and user information for the GRIM.

13.4.2 Sources GRIM Inputs

The GRIM uses several different sources for data inputs in determining the cash flows for

the industries, including corporate annual reports, credit ratings, the shipments model, the

engineering analysis, and the manufacturer interviews.

13.4.2.1 Corporate Annual Reports

Corporate annual reports to the Securities and Exchange Commission (SEC 10­Ks)

provided many of the financial inputs to the GRIM.3 These reports exist for publicly held

companies and are freely available to the general public. The SEC 10­Ks provide consistent

financial data for the consolidated corporation, but do not provide detailed financial information

for the company’s PTACs or PTHPs lines. Some SEC 10­Ks are therefore more relevant than

others are to the analysis of the PTAC and PTHP industries, depending on the prominence that

business has in the company’s overall operations. In determining financial parameters for the

industry, DOE weighted corporate financial information contained in the SEC 10­Ks by each

company’s market share of PTAC and PTHP sales to arrive at industry­weighted averages.

DOE used corporate annual reports to derive the following GRIM inputs:

• Tax rate,

• Working capital,

• Sales, general, and administration expenses (SG&A),

• Research and development (R&D) expenses,

• Depreciation,

• Capital expenditures, and

• Net property, plant, and equipment (PPE).

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DOE also used information from company SEC 10­K reports to calibrate the GRIM’s

operating profit margin against the industry’s weighted average.

13.4.2.2 Standard and Poor Credit Ratings

Standard and Poor (S&P) provides independent credit ratings, research, and financial

information. S&P reports are available for a nominal fee. DOE relied on S&P reports to

determine the industry’s average cost of debt for the cost of capital calculation.

13.4.2.3 Dun and Bradstreet Reports

Dun and Bradstreet (D&B) provides independent research regarding company cash

flows, revenues, employees, and credit­worthiness. Besides conducting manufacturer interviews,

DOE used D&B reports to profile several manufacturers, which had the potential to be small

businesses.

13.4.2.4 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in the

national impact analysis. The model relied on historical shipments data for PTAC and PTHP

from AHRI. Chapter 10 of the TSD describes the methodology and analytical model DOE used

to forecast shipments.

13.4.2.5 Engineering Analysis

During the engineering analysis, DOE used a reverse­engineering methodology

supplemented by a design option approach to develop manufacturing cost estimates for standard

size PTACs and PTHPs with 9,000 Btu/h and 12,000 Btu/h cooling capacity, and non­standard

size PTACs and PTHPs with 11,000 Btu/h cooling capacity. The analysis provided labor,

materials, and overhead production costs, which are representative of PTAC and PTHP industry.

DOE calibrated the reverse­engineering cost model with individual manufacturers’ cost data, and

aggregated the costs for individual manufacturers to create cost­efficiency curves for the

industry. DOE then used the cost­efficiency relationship developed in the Engineering Analysis

for R­22 and R­410A as the production costs inputs to the GRIM.

13.4.2.6 Manufacturer Interviews

During the course of the MIA, DOE conducted interviews with manufacturers

representing over 90 percent of the market. During these discussions, DOE obtained

information, which it used to determine and verify GRIM input assumptions. Key topics

discussed during the interviews and reflected in the GRIM include:

•	 Conversion capital expenditures (one­time investments in property, plant, and

equipment.)

•	 Equipment conversion expenses (one­time investments in research, equipment

development, testing, and marketing).

•	 The portion of the conversion capital expenditures that companies use to replace

stranded assets.

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•	 R­410A conversion.

•	 Equipment cost structure:

•	 The portion of the manufacturer production costs related to materials,

labor, overhead, and depreciation costs.

•	 Projected total shipment and shipment distribution mix (both R­22 and R­410A

equipment).

•	 Engineering analysis estimated manufacturer production costs for PTACs and

PTHPs.

13.4.3 Financial Parameters

Table 13.4.1 provides financial parameters for five public companies engaged in

manufacturing and selling standard and non­standard size PTACs and PTHPs. The values listed

are averages over a five­year period (2002­2006).

Table 13.4.1 GRIM Financial Parameters Based on 2002­2006 Weighted Company
 

Financial Data
 

Parameter

IndustryWeighted

Average

Manufacturer

A B C D E

Tax Rate

(% of Taxable Income) 35.5 26.9 36.8 32.9 47.7 44.6

Working Capital

(% of Revenue) 3.5 7.6 1.0 6.5 N/A* 4.4

SG&A

(% of Revenue) 14.1 11.9 12.2 17.5 18.5 21.4

R&D

(% of Revenues) 1.6 3.4 0.6 1.8 2.1 1.1

Depreciation

(% of Revenues) 1.7 1.6 1.3 1.6 3.1 3.3

Capital Expenditures

(% of Revenues) 1.8 1.4 1.8 2.3 1.9 1.7

Net Property, Plant,

and Equipment

(% of Revenues)

12.8 14.0 10.2 16.7 15.0 14.5

* Data was not available from the SEC 10K reports

These five companies constitute approximately 75 percent of domestic PTAC and PTHP

sales. For other companies in the industries, the public data is not available or the HVAC

business figures could not be adequately disaggregated from other businesses segments and were

not used for the analysis. The values used in the GRIM, therefore, represent the combined

standard and non­standard industry weighted average estimated with financial data from five

publicly traded manufacturers weighted by their respective market shares. During manufacturer

interviews, manufacturers stated that the financial parameters listed in Table 13.4.1 would not be

significantly different between standard and non­standard size PTAC and PTHP industries.

Therefore, for the GRIM, DOE assumed all the financial parameters would be the same for both

standard and non­standard size PTAC and PTHP industries.

13­13

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13.4.4 Corporate Discount Rate

DOE used the weighted­average cost of capital (WACC) for the industries as the discount

rate to calculate the INPV. A company’s assets are financed by a combination of debt and

equity. The WACC is the total cost of debt and equity weighted by their respective proportions

in the capital structure of the industry.4 DOE estimated the WACC for the standard and nonstandard PTACs and PTHPs industries based on several representative companies, using the

following formula:

WACC = After­Tax Cost of Debt x (Debt Ratio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return that equity investors (including, potentially, the

company) expect to earn on a company’s stock. These expectations are reflected in the market

price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used

means to estimate the cost of equity. According to the CAPM, the cost of equity (expected

return) is:

Cost of Equity = Riskless Rate of Return + β x Risk Premium

where:

Riskless rate of return is the rate of return on a “safe” benchmark investment, typically

considered the short­term Treasury Bill (T­Bill) yield.

Risk premium is the difference between the expected return on stocks and the riskless

rate.

Beta (β) is the correlation between the movement in the price of the stock and that of the

broader market. In this case, Beta equals one if the stock is perfectly correlated with the

S&P 500 market index. A Beta lower than one means the stock is less volatile than the

market index.

DOE determined that the industry average cost of equity for both standard and nonstandard size PTAC and PTHP industries is 12.7 percent as calculated in Table 13.4.2.

13­14

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Table 13.4.2 Cost of Equity Calculation
 

Parameter

IndustryWeighted

Average

(%)

Manufacturer

A B C D E

(1) Average Beta

(2002 – 2006 year) 0.74 0.65 0.80 0.84 0.51 0.80

(2) Yield on 10 Year TBill (1990­2006) 5.9 ­ ­ ­ ­ ­

(3) Market Risk

Premium (1926­1999) 9.2 ­ ­ ­ ­ ­

Cost of Equity

(2)+((1)*(3)) 12.7 ­ ­ ­ ­ ­

Equity/Total Capital 24.4 71.1 33.6 36.6 ­207.1 95.2

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond

rating is associated with a particular spread. One way of estimating a company’s cost of debt is

to treat it as a spread (usually expressed in basis points) over the risk­free rate. DOE used this

method to calculate the cost of debt for all five manufacturers. S&P had bond ratings for most

manufacturers, so DOE used these ratings to estimate the manufacturers’ cost of debt by adding

the relevant spread to the risk­free rate. There was one manufacturer with no S&P bond rating

available. In this case, DOE used the company’s size and interest coverage ratio to arrive at the

spread of corporate debt over risk­free securities. The interest coverage ratio measures a

company’s ability to service its debt­financing obligation through its earnings.5

In practice, investors use a variety of different maturity Treasury bonds to estimate the

risk­free rate. DOE used a long­term Treasury bond return (10­year bond return) because it

captures long­term inflation expectations and is less volatile than short­term rates in the GRIM.

The risk free rate is estimated as approximately six percent, which is the average 10­year

Treasury bond return over the period of 1990 to 2006.

For the cost of debt, S&P’s Credit Services provided the average spread of corporate

bonds for four of the five public manufacturers over the period 2002­2006. To this, DOE added

the industry­weighted average spread to the average T­Bill yield over the same period. Since

proceeds from debt issuance are tax deductible, DOE adjusted the gross cost of debt by the

industry average tax rate to determine the net cost of debt for the industries. Table 13.4.3

presents the derivation of the cost of debt. Also shown is the capital structure of the industries,

i.e. the debt ratio (debt/total capital).

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Table 13.4.3 Cost of Debt Calculation
 

Parameter

IndustryWeighted

Average

(%)

Manufacturer

A B C D E

S&P Bond Rating ­­ A B+ BBB CC A­*

(1) Yield on 10 year TBill (1990­2002) 5.9 ­ ­ ­ ­ ­

(2) Gross Cost of Debt 10 7.7 10.6 8.1 17.4 7.9

(3) Tax Rate 35.5 26.9 36.8 32.9 47.7 44.6

Net Cost of Debt

(2)x((1)­(3)) 6.5 ­ ­ ­ ­ ­

Debt/Total Capital 75.6 28.9 66.4 63.4 307.1 4.8

* Bond Rating was calculated

DOE estimated the standard and non­standard size PTAC and PTHP industries’ WACC

to be approximately 8.0 percent. Subtracting an inflation rate of 2.9 percent between 1990 and

2006, the inflation adjusted WACC, and the corporate discount rate used in the GRIM, is 5.0

percent.

13.4.5 Trial Standard Levels

DOE developed seven TSLs that include combinations of energy efficiency levels

representing comparable stringency for standard and non­standard size PTACs and PTHPs

equipment classes. Chapter 9 of the TSD describes the methodology DOE used to determine

each TSL. The EER levels used in the GRIM are presented in Table 13.4.4. The reference case

or baseline is the ASHRAE Standard 90.1­1999 efficiency levels for each equipment class.

Table 13.4.4 Standard Size PTACs and PTHPs Baseline Efficiency Levels and TSLs

Equipment TSL

Class Efficiency Baseline (ASHRAE TSL TSL TSL TSL TSL TSL 6

(cooling Metric Standard 90.1­1999) 1 2 3 A 4 5 Maxcapacity) Tech

Standard Size

PTAC EER 10.6 10.9 10.9 11.1 11.1 10.9 11.3 11.5

9,000 Btu/h

Standard Size

PTAC EER 9.9 10.2 10.2 10.4 10.2 10.2 10.6 10.8

12,000 Btu/h

Standard Size

PTHP

9,000 Btu/h

EER

COP

10.4

3.0

10.9

3.1

11.1

3.2

11.1

3.2

11.3

3.3

11.3

3.3

11.3

3.3

11.5

3.3

Standard Size

PTHP

12,000 Btu/h

EER

COP

9.7

2.9

10.2

3.0

10.4

3.1

10.4

3.1

10.4

3.1

10.6

3.1

10.6

3.1

10.8

3.1

13­16

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Table 13.4.5 Non­Standard Size PTACs and PTHPs Baseline Efficiency Levels and TSLs
 

Equipment Class Efficiency Baseline (ASHRAE TSL TSL TSL TSL TSL

(cooling capacity) Metric Standard 90.1­1999) 1 2 3 4 5

Non­Standard Size PTAC

11,000 Btu/h EER 8.6 9.4 9.4 9.7 9.4 10.0

Non­Standard PTHP EER 8.5 9.4 9.7 9.7 10.0 10.0

11,000 Btu/h COP 2.6 2.8 2.8 2.8 2.9 2.9

13.4.6 NES­Shipments Forecast

The GRIM estimates manufacturer revenues based on total­unit­shipment forecasts and

the distribution of these values by EER. Changes in the efficiency mix at each standard level are

a key driver of manufacturer finances. For this analysis, the GRIM used the national energy

savings (NES) shipments forecasts for both standard size and non­standard size PTACs and

PTHPs from 2007 to 2042. The total shipments forecasted by the NES in the base case for each

equipment class were distributed to the closest representative cooling capacity. For example, the

total PTAC or PTHP shipments with a cooling capacity less than 10,000 Btu/h for standard size

equipment are represented by the 9,000 Btu/h representative cooling capacity. Further

explanation of assumptions and calculations of total shipments can be found in the shipment

analysis section of this TSD (Chapter 9). Total shipments forecasted in the shipment analysis for

all efficiency levels in 2012 are shown in Table 13.4.6 and are further detailed below.

Table 13.4.6 Total NES­Shipments Forecast in 2012

Equipment Class (cooling capacities) Total Industry Shipments*

Standard Size PTACs (9,000 Btu/h) 109,600

Standard Size PTHPs (9,000 Btu/h) 85,700

Standard Size PTACs (12,000 Btu/h) 161,300

Standard Size PTHPs (12,000 Btu/h) 116,800

Non­Standard Size PTACs (11,000 Btu/h) 17,100

Non­Standard Size PTHPs (11,000 Btu/h) 12,900

* Estimates rounded to the nearest hundred

As part of the shipment analysis, DOE estimated the shipment distribution for PTACs

and PTHPs by efficiency. Table 13.4.7 through Table 13.4.12 show the distributions of

shipments by TSL estimated in the NES for various equipment classes for 2012.

Table 13.4.7 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments

with a Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

10.6

TSL 1, 2, 4

10.9

TSL 3, A

11.1

TSL 5

11.3

TSL 6

11.5

Baseline

10.6 22.6% 21.0% 19.9% 18.8% 17.7%

13­17

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Table 13.4.8 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments

with a Cooling Capacity of 9,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

10.4

TSL 1

10.9

TSL 2, 3

11.1

TSL A, 4, 5

11.3

TSL 6

11.5

Baseline

10.4 22.5% 20.5% 19.8% 19.1% 18.1%

Table 13.4.9 Base Case Distribution of Efficiencies for Standard Size PTAC Shipments

with a Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

9.9

TSL 1, 2,

A, 4

10.2

TSL 3

10.4

TSL 5

10.6

TSL 6

10.8

Baseline

9.9 22.8% 21.1% 19.9% 18.7% 17.5%

Table 13.4.10 Base Case Distribution of Efficiencies for Standard Size PTHP Shipments

with a Cooling Capacity of 12,000 Btu/h in 2012 Estimated in the NES

Shipments

Efficiency

Level (EER)

Baseline

9.7

TSL 1

10.2

TSL 2, 3, A

10.4

TSL 4, 5

10.6

TSL 6

10.8

Baseline

9.7 22.8% 20.7% 19.9% 18.8% 17.8%

Table 13.4.11 Base Case Distribution of Efficiencies for Non­Standard Size PTAC
 

Shipments with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES
 

Shipments

Efficiency

Level (EER)

Baseline

8.6

TSL 1, 2, 4

9.4

TSL 3

9.7

TSL 5

10.0

Baseline

8.6 27.4% 25.4% 24.3% 22.9%

Table 13.4.12 Base Case Distribution of Efficiencies for Non­Standard Size PTHP
 

Shipments with a Cooling Capacity of 11,000 Btu/h in 2012 Estimated in the NES
 

Shipments

Efficiency

Level (EER)

Baseline

8.5

TSL 1

9.4

TSL 2, 3

9.7

TSL 4, 5

10.0

Baseline

8.5 27.4% 25.4% 24.3% 22.9%

13.4.7 Standards Case

To exam the effects of amended energy conservation standards on shipments, which

affects the INPV, DOE utilized the NES­shipment forecast base case shipments described in

section 13.4.6 as the base case shipments. In other words, in the absence of amended energy

conservation standards, the base case shipments are assumed to be the NES­shipment forecast

base case shipments.

13­18

 EERE-2007-BT-STD-0012 COMMENT 32
                       

                             

                              

                               

                            

                           

   

                            

                             

   

                     

       

     

   

   

                            

                             

   

                     

  

   

     

       

    

For the standards case utilizing the NES­shipment forecast base case shipments, DOE

assumed shipments at lower efficiencies were most likely to roll up into higher efficiency levels

in response to an increase in energy conservation standards. This is a pessimistic scenario that

assumes that demand for high efficiency equipment is a function of its price without regards for

the standard level. Table 13.4.13 through Table 13.4.18 show the distributions of efficiencies for

the various equipment classes in 2012 using an NES­shipment forecast base case under the rollup scenario.

Table 13.4.13 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 9,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

10.6

TSL 1, 2, 4

10.9

TSL 3, A

11.1

TSL 5

11.3

TSL 6

11.5

Baseline

10.6 22.6% 21.0% 19.9% 18.8% 17.7%

TSL 1, 2, 4

10.9 ­ 43.6% 19.9% 18.8% 17.7%

TSL 3, A

11.1 ­ ­ 63.5% 18.8% 17.7%

TSL 5

11.3 ­ ­ ­ 82.3% 17.7%

TSL 6

11.5 ­ ­ ­ ­ 100%

Table 13.4.14 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 9,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

10.4

TSL 1

10.9

TSL 2, 3

11.1

TSL A, 4, 5

11.3

TSL 6

11.5

Baseline

10.4 22.5% 20.5% 19.8% 19.1% 18.1%

TSL 1

10.9 ­ 43.0% 19.8% 19.1% 18.1%

TSL 2, 3

11.1 ­ ­ 62.8% 19.1% 18.1%

TSL A, 4, 5

11.3 ­ ­ ­ 81.9% 18.1%

TSL 6

11.5 ­ ­ ­ ­ 100%

13­19

 EERE-2007-BT-STD-0012 COMMENT 32
                            

                             

   

                   

         

   

   

   

                            

                             

   

                     

   

       

     

   

                            

                           

   

               

       

   

   

Table 13.4.15 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTACs with a Cooling Capacity of 12,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

9.9

TSL 1, 2, 4,

A

10.2

TSL 3

10.4

TSL 5

10.6

TSL 6

10.8

Baseline

9.9 22.8% 21.1% 19.9% 18.7% 17.5%

TSL 1, 2, 4, A

10.2 ­ 43.9% 19.9% 18.7% 17.5%

TSL 3

10.4 ­ ­ 63.8% 18.7% 17.5%

TSL 5

10.6 ­ ­ ­ 82.5.5% 17.5%

TSL 6

10.8 ­ ­ ­ ­ 100%

Table 13.4.16 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Standard Size PTHPs with a Cooling Capacity of 12,000 Btu/h in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

9.7

TSL 1

10.2

TSL 2, 3, A

10.4

TSL 4, 5

10.6

TSL 6

10.8

Baseline

9.7 22.8% 20.7% 19.9% 18.8% 17.8%

TSL 1

10.2 ­ 43.5% 19.9% 18.8% 17.8%

TSL 2, 3, A

10.4 ­ ­ 63.4% 18.8% 17.8%

TSL 4, 5

10.6 ­ ­ ­ 82.2% 17.8%

TSL 6

10.8 ­ ­ ­ ­ 100%

Table 13.4.17 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTACs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

8.6

TSL 1, 2, 4

9.4

TSL 3

9.7

TSL 5

10.0

Baseline

8.6 27.4% 25.4% 24.3% 22.9%

TSL 1, 2, 4

9.4 ­ 52.9% 24.3% 22.9%

TSL 3

9.7 ­ ­ 77.1% 22.9%

TSL 5

10.0 ­ ­ ­ 100%

13­20

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Table 13.4.18 Distribution of Shipments in the Standards Case using an R­410A Base Case

Distribution for Non­Standard Size PTHPs with a 11,000 Btu/h Cooling Capacity in 2012 –

Rollup Scenario

TSL

(EER)

Baseline

8.5

TSL 1

9.4

TSL 2, 3

9.7

TSL 4, 5

10.0

Baseline

8.5 27.4% 25.4% 24.3% 22.9%

TSL 1

9.4 ­ 52.9% 24.3% 22.9%

TSL 2, 3

9.7 ­ ­ 77.1% 22.9%

TSL 4, 5

10.0 ­ ­ ­ 100%

13.4.8 Production Costs

Changes in equipment costs impact revenues and gross profits. As shown in the

engineering analysis (Chapter 5), equipment that is more efficient costs more to produce than

baseline equipment for a given capacity. For the MIA, DOE used the production costs derived in

the engineering analysis, with appropriate production volume assumptions. For instance, more

efficient equipment sold under existing energy conservation standards are manufactured at lower

production volumes than standard efficiency equipment. Enacting more stringent energy

conservation standards will increase production volumes for more efficient units.

The GRIM included the proportion of costs devoted to labor, materials, freight,

depreciation, and non­depreciation overhead that make up the full cost of the equipment. Using

the same industry calibrated reverse engineering methodology as in the engineering analysis,

DOE estimated the proportion of costs associated with each cost category. Table 13.4.19

through Table 13.4.24 provide the production cost assumptions used in the GRIM for R­22

standard and non­standard size PTAC and PTHP equipment as detailed in the engineering

analysis.

Table 13.4.19 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard

Size PTAC 9,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (10.6) $13.94 $285.69 $37.79 $337.42

TSL 1 (10.9) $14.16 $290.29 $38.40 $342.84

TSL 2 (10.9) $14.16 $290.29 $38.40 $342.84

TSL 3 (11.1) $14.32 $293.61 $38.84 $346.77

TSL A (11.1) $14.32 $293.61 $38.84 $346.77

TSL 4 (10.9) $14.16 $290.29 $38.40 $342.84

TSL 5 (11.3) $14.49 $297.15 $39.31 $350.95

TSL 6 (11.5) $14.68 $300.90 $39.80 $355.38

*Includes Shipping and Depreciation

13­21

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Table 13.4.20 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard

Size PTHP 9,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (10.4) $15.86 $325.23 $43.02 $384.12

TSL 1 (10.9) $16.22 $332.62 $44.00 $392.84

TSL 2 (11.1) $16.39 $335.95 $44.44 $396.77

TSL 3 (11.1) $16.39 $335.95 $44.44 $396.77

TSL A (11.3) $16.56 $339.48 $44.91 $400.95

TSL 4 (11.3) $16.56 $339.48 $44.91 $400.95

TSL 5 (11.3) $16.56 $339.48 $44.91 $400.95

TSL 6 (11.5) $16.74 $343.23 $45.40 $405.38

*Includes Shipping and Depreciation

Table 13.4.21 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard

Size PTAC 12,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (9.9) $15.89 $325.86 $43.10 $384.86

TSL 1 (10.2) $16.16 $331.35 $43.83 $391.35

TSL 2 (10.2) $16.16 $331.35 $43.83 $391.35

TSL 3 (10.4) $16.36 $335.49 $44.38 $396.23

TSL A (10.2) $16.16 $331.35 $43.83 $391.35

TSL 4 (10.2) $16.16 $331.35 $43.83 $391.35

TSL 5 (10.6) $16.58 $340.00 $44.97 $401.56

TSL 6 (10.8) $16.82 $344.88 $45.62 $407.33

*Includes Shipping and Depreciation

Table 13.4.22 Base Case Production Costs (2007$) used in the GRIM for R­22 Standard

Size PTHP 12,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (9.7) $17.80 $365.00 $48.28 $431.09

TSL 1 (10.2) $18.23 $373.69 $49.43 $441.35

TSL 2 (10.4) $18.43 $377.82 $49.98 $446.23

TSL 3 (10.4) $18.43 $377.82 $49.98 $446.23

TSL A (10.4) $18.43 $377.82 $49.98 $446.23

TSL 4 (10.6) $18.65 $382.33 $50.57 $451.56

TSL 5 (10.6) $18.65 $382.33 $50.57 $451.56

TSL 6 (10.8) $18.89 $387.22 $51.22 $457.33

*Includes Shipping and Depreciation

13­22

 EERE-2007-BT-STD-0012 COMMENT 32
                          

             

   

   

     

     

     

     

     

     

                          

             

   

   

     

     

     

     

     

     

                         

                              

         

                         

                             

             

                            

           

   

   

     

     

     

     

     

     

     

     

Table 13.4.23 Base Case Production Costs (2007$) used in the GRIM for R­22 NonStandard Size PTAC 11,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (8.6) $54.42 $299.82 $104.98 $459.21

TSL 1 (9.4) $55.22 $304.23 $106.52 $465.97

TSL 2 (9.4) $55.22 $304.23 $106.52 $465.97

TSL 3 (9.7) $55.74 $307.12 $107.53 $470.39

TSL 4 (9.4) $55.22 $304.23 $106.52 $465.97

TSL 5 (10.0) $56.39 $310.68 $108.78 $475.84

*Includes Shipping and Depreciation

Table 13.4.24 Base Case Production Costs (2007$) used in the GRIM for R­22 NonStandard Size PTHP 11,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (8.5) $60.30 $332.25 $116.33 $508.88

TSL 1 (9.4) $61.14 $336.88 $117.95 $515.97

TSL 2 (9.7) $61.67 $339.77 $118.96 $520.39

TSL 3 (9.7) $61.67 $339.77 $118.96 $520.39

TSL 4 (10.0) $62.31 $343.32 $120.21 $525.84

TSL 5 (10.0) $62.31 $343.32 $120.21 $525.84

*Includes Shipping and Depreciation

DOE assumed that in 2010, manufacturers would sell PTACs and PTHPs priced as R410A equipment. Therefore, for 2010 and beyond, DOE used the production costs derived in the

engineering analysis for R­410A equipment.

Table 13.4.25 through Table 13.4.30 provide the production cost assumptions used in the

GRIM for R­410A standard and non­standard size PTAC and PTHP equipment as detailed in the

engineering analysis (Chapter 5 of the TSD).

Table 13.4.25 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard

Size PTAC 9,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (10.6) $16.32 $334.59 $44.26 $395.17

TSL 1 (10.9) $16.64 $341.21 $45.14 $402.99

TSL 2 (10.9) $16.64 $341.21 $45.14 $402.99

TSL 3 (11.1) $16.87 $345.94 $45.76 $408.57

TSL A (11.1) $16.87 $345.94 $45.76 $408.57

TSL 4 (10.9) $16.64 $341.21 $45.14 $402.99

TSL 5 (11.3) $17.12 $350.90 $46.42 $414.43

TSL 6 (11.5) $17.37 $356.11 $47.11 $420.59

*Includes Shipping and Depreciation

13­23

 EERE-2007-BT-STD-0012 COMMENT 32
                            

           

   

   

     

     

     

     

     

     

     

     

                            

           

   

   

     

     

     

     

     

     

     

     

                            

           

   

   

     

     

     

     

     

     

     

     

Table 13.4.26 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard

Size PTHP 9,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (10.4) $18.18 $372.81 $49.31 $440.31

TSL 1 (10.9) $18.71 $383.55 $50.74 $452.99

TSL 2 (11.1) $18.94 $388.27 $51.36 $458.57

TSL 3 (11.1) $18.94 $388.27 $51.36 $458.57

TSL A (11.3) $19.18 $393.24 $52.02 $464.43

TSL 4 (11.3) $19.18 $393.24 $52.02 $464.43

TSL 5 (11.3) $19.18 $393.24 $52.02 $464.43

TSL 6 (11.5) $19.44 $398.45 $52.71 $470.59

*Includes Shipping and Depreciation

Table 13.4.27 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard

Size PTAC 12,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (9.9) $19.50 $399.72 $52.87 $472.09

TSL 1 (10.2) $19.90 $408.05 $53.98 $481.93

TSL 2 (10.2) $19.90 $408.05 $53.98 $481.93

TSL 3 (10.4) $20.20 $414.12 $54.78 $489.10

TSL A (10.2) $19.90 $408.05 $53.98 $481.93

TSL 4 (10.2) $19.90 $408.05 $53.98 $481.93

TSL 5 (10.6) $20.52 $420.60 $55.64 $496.75

TSL 6 (10.8) $20.85 $427.48 $56.55 $504.87

*Includes Shipping and Depreciation

Table 13.4.28 Base Case Production Costs (2007$) used in the GRIM for R­410A Standard

Size PTHP 12,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (9.7) $21.32 $437.00 $57.81 $516.13

TSL 1 (10.2) $21.97 $450.39 $59.58 $531.93

TSL 2 (10.4) $22.26 $456.46 $60.38 $539.10

TSL 3 (10.4) $22.26 $456.46 $60.38 $539.10

TSL A (10.4) $22.26 $456.46 $60.38 $539.10

TSL 4 (10.6) $22.58 $462.93 $61.24 $546.75

TSL 5 (10.6) $22.58 $462.93 $61.24 $546.75

TSL 6 (10.8) $22.92 $469.81 $62.15 $554.87

*Includes Shipping and Depreciation

13­24

 EERE-2007-BT-STD-0012 COMMENT 32
                          

             

   

   

     

     

     

     

     

     

                          

             

   

   

     

     

     

     

     

     

   

                   

                         

                              

                       

                       

                           

                      

                     

                            

                    

                           

                     

   

                           

                            

                       

   

                         

                            

                                  

Table 13.4.29 Base Case Production Costs (2007$) used in the GRIM for R­410A NonStandard Size PTAC 11,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (8.6) $62.38 $343.69 $120.34 $526.40

TSL 1 (9.4) $64.04 $352.81 $123.53 $540.38

TSL 2 (9.4) $64.04 $352.81 $123.53 $540.38

TSL 3 (9.7) $64.91 $357.63 $125.22 $547.75

TSL 4 (9.4) $64.04 $352.81 $123.53 $540.38

TSL 5 (10.0) $65.92 $363.20 $127.17 $556.29

*Includes Shipping and Depreciation

Table 13.4.30 Base Case Production Costs (2007$) used in the GRIM for R­410A NonStandard Size PTHP 11,000 Btu/h Cooling Capacity

TSL

(EER)

Labor Material Overhead* MPC

Baseline (8.5) $68.17 $375.57 $131.50 $575.24

TSL 1 (9.4) $69.96 $385.46 $134.96 $590.38

TSL 2 (9.7) $70.83 $390.27 $136.65 $597.75

TSL 3 (9.7) $70.83 $390.27 $136.65 $597.75

TSL 4 (10.0) $71.85 $395.85 $138.60 $606.29

TSL 5 (10.0) $71.85 $395.85 $138.60 $606.29

*Includes Shipping and Depreciation

13.4.9 Conversion Costs

Amended energy conservation standards typically cause manufacturers to incur one­time

conversion costs to bring their production facilities and equipment designs into compliance with

the new regulation. For the purpose of the MIA, DOE classified these one­time conversion costs

into two major groups: conversion capital expenditures and equipment conversion expenses.

Conversion capital expenditures are one­time investments in property, plant, and equipment to

adapt or change existing production facilities so that new equipment designs can be fabricated

and assembled under the new regulation. Equipment conversion expenses are one­time

investments in research, development, testing, and marketing focused on making equipment

designs comply with amended energy conservation standards. As part of the analysis, DOE also

assumed manufacturers will have additional conversion costs to manufacture R­410A equipment.

The following sections describe in more detail DOE’s assumptions and inputs to the GRIM

related to amended energy conservation standards and refrigerant phaseout conversion costs.

13.4.9.1 Conversion Capital Expenditures

DOE evaluated the level of capital investment needed to comply with both the impending

refrigerant phaseout and the amended conservation standards at each TSL. The time required to

fabricate and assemble the equipment can potentially increase as efficiency increases.

13.4.9.2 R­410A Conversion

Currently, the PTAC and PTHP industries are standardized around the use of R­22

refrigerant in all its equipment. All manufacturers expressed the intent to transition to R­410A

once the use of R­22 is prohibited in 2010. The total investments required for this PTAC and

13­25

 EERE-2007-BT-STD-0012 COMMENT 32
                      

                         

                       

                          

                         

                              

                 

                             

                          

                         

                         

                    

                           

                        

                             

                       

                        

                         

                       

                          

                

                 

                  

                       

                     

                            

                      

                       

                        

                               

                       

                      

                       

       

                        

                           

                          

                           

                         

                 

                           

                        

PTHP rulemaking include components that are difficult to disaggregate. These required

investments are the biggest external burden on manufacturers of PTAC and PTHP equipment

since the conversion to R­410A refrigerants will impact every PTAC and PTHP manufacturers

produce. To quantify the magnitude of investments needed to comply with the refrigerant

phaseout, DOE first examined what would be required to convert equipment from R­22

refrigerant to R­410A refrigerant. The level of investment needed is a trade off between higher

fixed costs (investments) and higher variable (equipment) costs.

For most units using R­22 refrigerants it is possible to convert to R­410A refrigerants by

performing a “drop­in” conversion. At minimum, manufacturers would have to replace the R­22

compressor with a comparable R­410A compressor, change the refrigerant, ensure that the sealed

system can withstand the higher system pressures, and change some other sealed system

components such as expansion valves and lubricating oils. Alternatively, manufacturers could

elect to perform a complete equipment redesign that takes advantage of R­410A properties and

available R­410A components to optimize their units for alternative refrigerant operation. In

order for PTAC and PTHP manufacturers to convert all of the existing equipment to R­410A,

manufacturers would redesign, re­certify, and test their existing equipment, alter the production

process, and conduct some level of re­tooling. Several manufacturers stated during the

manufacturer interviews that they would need to extend their knowledge base of R­410A

commercial systems and utilize engineering resources from other areas within their company

before carrying out complete redesigns. In addition, manufacturing facilities will need to be

retooled and/or expanded to include the necessary infrastructure.

All manufacturers anticipate testing their existing equipment with R­410A refrigerants

and compressors. Should their equipment still meet baseline minimum energy conservation

standards, capital expenditures at minimum will be largely limited to evacuation and refrigerantfilling machines, which may require modification or replacement in order to accommodate R410A refrigerant adoption. Manufacturers may also recircuit their coils to optimize the units for

R­410A, but this will not result in a significant capital expense.

Equipment that does not meet baseline energy conservation standards with a simple

compressor “drop­in,” will require redesigns that are more extensive. Such redesigns could

result in coil changes that may require a manufacturer to invest in new heat exchanger tooling,

heat exchanger line expansions (to accommodate larger heat exchangers), and/or fixed tooling

investments (to accommodate bulkhead redesigns, for example). Few manufacturers have even

started their R­410A conversion efforts, making capital expenditure estimates (and their timing)

difficult to predict.

Presently, DOE anticipates a minimum system performance degradation of six to eight

percent due to R­410A conversion, and industry capital expenditures are being estimated on the

basis of market share and current equipment EER ratings. That is, manufacturers whose

equipment is not expected to meet minimum energy conservation standards due to the R­410A

conversion are expected to incur capital expenditures in excess of the simple line modifications

outlined above before the R­22 refrigerant phaseout in 2010.

For the GRIM, DOE estimated the capital expenditures on the basis of statements made

by manufacturers during interviews. Based on these interviews, the entire standard size PTAC

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 EERE-2007-BT-STD-0012 COMMENT 32
                               

                              

                         

                           

   

                       

                            

                                

                               

                            

                       

                                

                               

                             

   

                   

                         

                          

                       

       

                     

                            

                               

                   

and PTHP industry is estimated to incur a one­time capital expenditure of $7.2 million for the

conversion of its units from R­22 to R­410A. For the non­standard size PTAC and PTHP

industry, DOE estimated that the entire industry would incur a one­time conversion capital

expenditure of $0.6 million for the conversion of its units from R­22 to R­410A.

13.4.9.3 Energy Conservation Standards

For each TSL, DOE estimated the conversion capital expenditures necessary to redesign

equipment to meet the amended energy conservation standards. DOE assumed for each TSL that

a proportion of the equipment on the market will have to be redesigned. The higher the

efficiency of the equipment at each TSL, the greater the proportion of the equipment on the

market that will require a redesign and possible capital expenditures. DOE first estimated capital

conversion expenditures for manufacturers to redesign and retool to meet the highest efficiency

level on the market. DOE then lowered the capital conversion expenditures at each TSL by the

proportion of the industry that did not meet that TSL because it assumed the equipment would

not be as greatly redesigned and would not require as substantial changes to its existing

manufacturing equipment.

Multiple manufacturers noted fierce price competition in the both industries, which

encourages them to only introduce more efficient units as higher energy conservation standards

become effective. Thus, DOE projects that the capital expenditures required to meet amended

energy conservation standards will occur principally in the year before the amended energy

conservation standards become effective.

Table 13.4.31 and Table 13.4.32 summarizes the breakdown of conversion capital

expenditure by TSL for the standard and non­standard size PTAC and PTHP industries. The

expenditures listed in these two tables do not track the TSLs linearly, since some TSLs represent

combinations of different efficiency levels for PTACs and PTHPs.

13­27

 EERE-2007-BT-STD-0012 COMMENT 32
                        

           

     

   

     

   

             

                 

                 

                 

                 

                 

                 

                 

                      

     

        

      

       

   

   

   

       

       

       

       

       

     

                       

                          

                       

                              

               

Table 13.4.31 Conversion Capital Expenditure for Standard Size PTACs and PTHPs by

TSL

Trial

Standard

Level

Efficiency Level at

9kBTU/h

Efficiency Level at

12kBTU/h

Standard Size Equipment

Industry

Conversion Capital

Expenditure (2007$ million)

(TSL) PTAC

(EER)

PTHP

(EER)

PTAC

(EER)

PTHP

(EER) PTAC PTHP IndustryTotal

Baseline 10.6 10.4 9.9 9.7 0.0 0.0 0.0

TSL 1 10.9 10.9 10.2 10.2 1.7 1.7 3.5

TSL 2 10.9 11.1 10.2 10.4 0.9 4.9 5.7

TSL 3 11.1 11.1 10.4 10.4 2.4 2.4 4.9

TSL A 11.1 11.3 10.2 10.4 2.6 5.6 8.2

TSL 4 10.9 11.3 10.2 10.6 2.6 5.6 8.2

TSL 5 11.3 11.3 10.6 10.6 2.8 2.8 5.6

TSL 6 11.5 11.5 10.8 10.8 5.2 5.2 10.4

Table 13.4.32 Conversion Capital Expenditure for Non­Standard PTACs and PTHPs by

TSL

Trial Standard

Level (TSL)

Efficiency Level at

11kBTU/h

Non­Standard Size Equipment Industry

Conversion Capital Expenditure

(2007$ million)

PTAC

(EER)

PTHP

(EER) PTAC PTHP Industry Total

Baseline 8.6 8.5 0.0 0.0 0.0

TSL 1 9.4 9.4 0.6 0.6 1.3

TSL 2 9.4 9.7 0.3 2.0 2.3

TSL 3 9.7 9.7 1.0 1.0 2.0

TSL 4 9.4 10 1.0 2.6 3.6

TSL 5 10 10 1.3 1.3 2.6

13.4.9.4 Equipment Conversion Expenses

DOE conducted interviews with manufacturers to better understand the many steps that

manufacturers have to take before they can release new or improved equipment. All

manufacturers expect significant equipment conversion expenses as a result of the refrigerant

transition to R­410A as well as any TSLs beyond baseline. The magnitude of the required

investments varies by manufacturer and the analyzed TSL.

13­28

 EERE-2007-BT-STD-0012 COMMENT 32
   

                         

                         

                      

                           

                               

                 

                         

                                

                   

                       

                         

     

                     

                           

                                

                               

   

                       

                         

                          

                             

                         

                            

                       

               

                         

                           

                    

                           

                       

   

                   

                        

                         

                       

                     

                         

                          

13.4.9.5 R­410A Conversion

All manufacturers who wish to compete in the standard and non­standard size PTAC and

PTHP industries beyond the 2010 R­22 refrigerant phaseout will incur a R­410A equipment

conversion expense since none of them currently manufacture R­410A­based PTACs or PTHPs.

The cost of converting equipment from R­22 to R­410A refrigerants depends on many factors,

such as the current heat exchanger configuration, the burst strength of the sealed system, etc.

Some manufacturers have already started preliminary unit testing with R­410A

refrigerants based on existing R­22 units whose sole changes were the refrigerant, compressor,

and lubricating oils used in them. If such units can reach the efficiency levels in ASHRAE

Standard 90.1­1999 (i.e., the baseline efficiency levels), the necessary equipment modification

can be limited to qualifying more R­410A compressors, updated equipment literature, updated

training for technicians, some testing, and minor modifications to take advantage of higher

system pressures.

Manufacturers whose units do not manage to exceed the baseline energy conservation

standards using R­410A are likely to require much more substantial investments to make their

units legal for sale. Manufacturers also have the option to increase the energy efficiency of their

units beyond baseline (to hit an ENERGY STAR target, for example), which could also result in

substantial investment requirements.

Due to the inherently higher costs of R­410A­based units and intense market competition,

DOE does not expect most manufacturers to release R­410A­based units until R­22­based unit

stocks have been depleted. Based on the observed compressor degradation, market shares, and

the energy efficiencies of current R­22 units, DOE estimates that the entire standard size PTAC

and PTHP industry would spend approximately $14.4 million in equipment conversion costs to

convert all its equipment to R­410A. For non­standard size PTAC and PTHP industry, DOE

estimates that the entire industry would spend approximately $7.2 million in equipment

conversion costs to make the switch to R­410A.

Among other things, any new components scheduled for use require lengthy testing and

qualification trials to ensure that the manufacturer will not incur higher than expected warranty

expenses. Despite such testing, multiple manufacturers noted that they expected higher­thannormal initial failure rates for R­410A­based equipment due to higher system pressures and the

hydroscopic nature of the polyolester oil (POE) that lubricate R­410A­based systems.

13.4.9.6 Energy Conservation Standards

All manufacturers interviewed by DOE expect to start focusing on energy conservation

standards once their units have made the R­410A transition in 2010. Multiple manufacturers

expressed an interest in developing equipment platforms by 2010, which would only require

minor additional changes in order to accommodate amended energy conservation standards.

Multiple manufacturers also stated that they expected the currently wide distribution of

energy efficiencies to be reduced to clusters that just meet the minimum energy conservation

standards or any new ENERGY STAR standards. Thus, more manufacturers may start offering

13­29

 EERE-2007-BT-STD-0012 COMMENT 32
                       

                

                       

                         

                          

                       

                          

                       

                            

                         

                          

                         

           

                        

        

         

  

   

   

   

   

   

   

   

                                                

                                   

                          

                               

     

two­tiered efficiency equipment in the marketplace, particularly if they expect rebates to

subsidize (and hence stimulate demand for) high­efficiency units.

For the standard size PTAC and PTHP industry equipment conversion expenses, DOE

combined figures provided by each manufacturer using a corresponding market share at each

TSL. For the non­standard size PTAC and PTHP industry equipment conversion expenses, DOE

first reviewed manufacturers’ catalogs to determine the number of equipment familiesa that

would need redesigning at each TSL due to amended standards. Using equipment conversion

expenses provided by manufacturer for equipment family redesign, DOE calculated the industry

average cost for a given equipment family redesign. By multiplying total number of equipment

family redesigns at each TSL and the calculated average equipment conversion expenses, total

equipment conversion expenses at each TSL was calculated. Table 13.4.33 and Table 13.4.34

summarizes the breakdown of equipment conversion by efficiency level for the standard and

non­standard size PTAC and PTHP industries.

Table 13.4.33 Equipment Conversion Expenses for Standard Size PTACs and PTHPs by

TSL

TSL

Standard Size Equipment Industry

Equipment Conversion Expense (2007$ million)

PTAC PTHP Industry Total

Baseline 0 0 0

TSL 1 2.2 2.2 4.5

TSL 2 1.1 6.3 7.4

TSL 3 3.1 3.1 6.3

TSL A 3.4 5.8 9.1

TSL 4 3.4 7.2 10.6

TSL 5 3.6 3.6 7.2

TSL 6 6.7 6.7 13.5

a An equipment family is a set of equipment characterized by a specific wall sleeve size and efficiency

characteristics (e.g., premium equipment with higher efficiency and baseline equipment with lower efficiency).

Equipment within a equipment family includes PTACs and PTHPs, the different cooling capacities, and any other

optional models within.

13­30

 EERE-2007-BT-STD-0012 COMMENT 32
                      

        

         

   

   

   

   

   

   

                           

                        

                          

                       

                            

                       

               

                       

                                  

                                

                               

                            

                     

                     

                             

                   

       

                           

                              

                      

                     

           

                         

Table 13.4.34 Equipment Conversion Expenses for Non­Standard PTACs and PTHPs by

TSL

TSL

Non­Standard Size Equipment Industry

Equipment Conversion Expense (2007$ million)

PTAC PTHP Industry Total

Baseline 0.0 0.0 0.0

TSL 1 10.3 10.3 20.5

TSL 2 10.5 10.5 21.0

TSL 3 10.5 10.5 21.0

TSL 4 11.9 11.9 23.8

TSL 5 11.9 11.9 23.8

13.4.10 Markups

To estimate the manufacturer price of the equipment sold, DOE applied markups to the

production costs. For the analysis, DOE considered different markup scenarios based on

manufacturer input for both standard and non­standard size PTACs and PTHPs. Scenarios were

used to bound the range of expected equipment prices following amended energy conservation

standards. For each equipment class, DOE used the markup scenarios that best characterized the

prevailing markup conditions and described the range of market responses manufacturers expect

as a result of amended energy conservation standards.

DOE learned from interviews with manufacturers that the majority of manufactures only

offer one product line. A single product line means that there is no markup used to differentiate

a baseline piece of equipment from a premium piece of equipment. Through its analysis of the

PTAC and PTHP industries, DOE also learned that profit margins associated with a PTAC and a

PTHP of the same manufacturer at the same cooling capacity do not vary significantly.

Therefore, DOE used the same markup for both PTACs and PTHPs.

After discussions with manufacturers, DOE believes there are two distinct markup

scenarios including flat markup and a markup where only part of the increased production costs

are able to be recovered, i.e., partial cost recovery.

13.4.10.1 Full Cost Recovery Markup

Under a full cost recovery markup strategy a single uniform “flat markup” is applied

across all equipment classes and for equipment at all TSLs. To derive these values, DOE

evaluated publicly available financial information on manufacturers of PTACs and PTHPs.

Individual markups for each company were calculated using the following formula:

Markup = 1 / (1­Gross Margin)

Where:

Gross Margin = (Revenues – Costs of Goods Sold) / Revenues

13­31

 EERE-2007-BT-STD-0012 COMMENT 32
                             

                            

                           

       

                     

                               

                          

                       

                   

                    

                           

                           

                    

                         

                         

                                       

                              

                         

                              

                             

                           

                    

                       

                             

                         

                      

                                   

                       

                                

                                

                             

     

                     

                     

                        

                       

                          

            

DOE arrived at an industry average markup of 1.29, where each company’s markup was

weighted by its market share. Further explanation and specific calculations for the full cost

recovery markup can be found in the engineering analysis (Chapter 5 of the TSD).

13.4.10.2 Partial Cost Recovery Markup

During interviews, several manufacturers stated that most customers buying PTACs and

PTHPs are on a fixed budget and therefore any significant price increase would be detrimental to

the manufacturer’s unit sales and profits. In its GRIM analysis, DOE put together several

scenarios regarding how well manufacturers could recover the increased unit costs stemming

from R­410A conversion costs and costs associated with amended energy conservation

standards, which it called the 50­percent cost recovery markup.

Several manufacturers stated that they would not be able to transfer the entire increase in

manufacturing cost to customers as a result of the refrigerant phaseout or amended energy

conservation standards. During interviews, some manufacturers stated that they have

experienced similar trends in conforming to the ground fault circuit interrupter (GFCI) power

cord requirements in 1997, where they experienced an increase in manufacturing cost per unit

due to the addition of a GFCI power cord, but were not able to fully recoup the costs of these

cords from the customer. Similarly, manufacturers state that they have struggled to pass on any

incremental manufacturing costs due to the rapid increase in raw material prices for their

equipment, such as copper, aluminum, and steel. One manufacturer stated they were not able to

transfer any of the increases in costs associated with the material price increases, while the

majority of the manufacturers stated they were able to recover approximately 50­percent of the

increases in manufacturing production costs. According to multiple manufacturers, transferring

all the incremental costs to the customers due to efficiency improvement requirements will

increase the unit’s price such that customers might opt for other types of equipment.

Therefore, for both the refrigerant phaseout and the standards case, DOE modeled a 50­

percent cost recovery markup strategy. Under this markup, DOE assumed that manufacturers

would only be able to recover half the manufacturing costs they incur as a result of changing the

equipment to comply with either the refrigerant phaseout or the amended energy conservation

standards. More details of the markup scenarios used to bound the range of impacts from the

refrigerant phaseout can be found in section 13.5. More details of the markup scenarios used to

bound the range of impacts from the amended energy conservation standards can be found in

section 13.6.

13.5	 MANUFACTURING IMPACTS TO THE BASE CASE AS A RESULT OF THE

REFRIGERANT PHASEOUT

In 1987, the United Nations Environment Programme (UNEP) adopted the Montreal

Protocol on Substances that Deplete the Ozone Layer (Montreal Protocol). The Montreal

Protocol was designed to regulate and phase out ozone­depleting substances through a

collaborative and international effort. In 1988, the United States ratified the Montreal Protocol

and thus committed to the phaseout.

13­32

 EERE-2007-BT-STD-0012 COMMENT 32
                           

                             

                       

                           

                             

                                 

                               

                            

                       

         

                         

                         

                          

                           

                               

                      

                     

                    

                                 

                            

                           

                   

                       

                     

                        

                           

                          

                           

In 1990, the Clean Air Act was amended to include Title VI, "Stratospheric Ozone

Protection," to implement the Montreal Protocol. (42 U.S.C. 7671, et seq.) Title VI mandated

the phaseout by 2020 of hydrochlorofluorocarbon (HCFC) refrigerants for use in new airconditioning systems. (42 U.S.C. 7671d) Title VI, however, also authorized the EPA to

accelerate this date if certain criteria were met, (42 U.S.C. 7671e) and EPA subsequently adopted

a rule on December 10, 1993 to require the phaseout of HCFC refrigerants for use in new

equipment by 2010. 58 FR 65018. R­22, the only refrigerant currently used by PTACs and

PTHPs, is an HCFC refrigerant and subject to the phaseout requirement. Phaseout of this

refrigerant could have a significant impact on the manufacturing, performance, and cost of

PTAC and PTHP equipment.

As part of the engineering analysis, DOE performed an alternative refrigerant analysis to

characterize the performance and cost implications of using an alternative refrigerant in PTACs

and PTHPs. To characterize the impacts of conversion from R­22 refrigerant to R­410A

refrigerant on manufacturers’ cash flows, DOE used the production costs as described in Chapter

5 of the engineering analysis, the NES shipments distribution for the base case as described in

section 13.4.6 and the markup assumptions described in section 13.6.1.

As previously stated, all manufacturers voiced their concerns about the refrigerant

phaseout and possible impacts during manufacturer interviews. Several manufacturers stated

that they would not be able to fully recover the increase in manufacturing costs of PTACs and

PTHPs due to the conversion to R­410A refrigerant. From a customer utility viewpoint, the R22 refrigerant phaseout will only result in lower energy efficiency, so manufacturers will likely

have great difficulty selling these units at higher prices.

To take manufacturers concerns into consideration, DOE examined a markup that would

translate to manufacturers recuperating half of the increased production costs associated with R410A equipment. Therefore, DOE modeled a 50­percent cost recovery markup scenario, which

assumes manufacturers would only be able to recover half the manufacturing costs they incur to

convert their equipment from R­22 into R­410A. Table 13.5.1 through Table 13.5.6 demonstrate

the 50­percent cost recovery mark­up scenarios of R­410A costs for the R­410A base case.

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Table 13.5.1 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.6) 1.20

TSL 1 (10.9) 1.19

TSL 2 (10.9) 1.19

TSL 3 (11.1) 1.19

TSL A (11.1) 1.19

TSL 4 (10.9) 1.19

TSL 5 (11.3) 1.19

TSL 6 (11.5) 1.19

Table 13.5.2 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.4) 1.21

TSL 1 (10.9) 1.20

TSL 2 (11.1) 1.20

TSL 3 (11.1) 1.20

TSL A (11.3) 1.20

TSL 4 (11.3) 1.20

TSL 5 (11.3) 1.20

TSL 6 (11.5) 1.20

Table 13.5.3 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.9) 1.17

TSL 1 (10.2) 1.17

TSL 2 (10.2) 1.17

TSL 3 (10.4) 1.17

TSL A (10.2) 1.17

TSL 4 (10.2) 1.17

TSL 5 (10.6) 1.17

TSL 6 (10.8) 1.17

13­34

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Table 13.5.4 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for

Standard Size PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.7) 1.18

TSL 1 (10.2) 1.18

TSL 2 (10.4) 1.18

TSL 3 (10.4) 1.18

TSL A (10.4) 1.18

TSL 4 (10.6) 1.18

TSL 5 (10.6) 1.18

TSL 6 (10.8) 1.18

Table 13.5.5 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.6) 1.21

TSL 1 (9.4) 1.20

TSL 2 (9.4) 1.20

TSL 3 (9.7) 1.20

TSL 4 (9.4) 1.20

TSL 5 (10.0) 1.20

Table 13.5.6 Markups Reflecting R­410A Base Case 50­Percent Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.5) 1.22

TSL 1 (9.4) 1.21

TSL 2 (9.7) 1.21

TSL 3 (9.7) 1.21

TSL 4 (10.0) 1.20

TSL 5 (10.0) 1.20

13.5.1 PTAC and PTHP Industry Financial Impacts as a result of the Refrigerant

Phaseout on the Base Case

Using the inputs and assumptions described in the previous section, the GRIM produced

indicators of financial impacts on the standard and non­standard size PTAC and PTHP industries

as a result of the refrigerant phaseout in 2010. The results are bound between the two mark­up

scenarios and are solely dependent upon manufacturers’ ability to pass on increased equipment

costs resulting from the refrigerant phaseout to the customer. The results are presented as

impacts on INPV.

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The INPV measures industry value and is used in the MIA to compare the economic

impacts of the refrigerant phaseout on the base case. For the refrigerant phaseout, DOE is

interested in characterizing the impact on INPV in 2010. Using the GRIM, DOE compared the

base case INPV first if there was no conversion to R­410A refrigerant and then if the conversion

took place. DOE also examined the impacts on the base case INPV if manufacturers were not

able to fully recuperate all of the costs associated with R­410A conversion. Table 13.5.7 and

Table 13.5.8 provide the INPV estimates for the standard and non­standard size PTAC and

PTHP industries, respectively, under the different cost recovery scenarios.

Table 13.5.7 Changes in Base Case Industry Net Present Value from R­410A Conversion

for Standard Size PTACs and PTHPs

TSL

R­410A Base Case With

Full Cost Recovery

TSL

R­410A Base Case With

50­Percent Cost Recovery

INPV Change in INPV INPV Change in INPV

2007$

million

2007$

million

% Change 2007$

million

2007$

million*

% Change

R­22

Base Case 375 ­ ­ R­22Base Case 375 ­ ­

R­410A

Base Case 427 52 14% R­410Base Case 83 (292) ­78%

* Values in parenthesis are negative.

Table 13.5.8 Changes in Base Case Industry Net Present Value from R­410A Conversion

for Non­Standard Size PTACs and PTHPs

TSL

R­410A Base Case With

Full Cost Recovery

TSL

R­410A Base Case With

50­Percent Cost Recovery

INPV Change in INPV INPV Change in INPV

2007$

million

2007$

Million*

% Change 2007$

million

2007$

Million*

% Change

R­22

Base Case 32 ­ ­ R­22Base Case 32 ­ ­

R­410A

Base Case 30 (2) ­6% R­410

Base Case 19 (13) ­41%

* Values in parenthesis are negative.

The results from the GRIM show that if DOE assumes standard size PTAC and PTHP

manufacturers will fully recover all costs associated with the R­410A refrigerant conversion, the

INPV would increase by approximately 14 percent. In this optimistic scenario, manufacturers

receive the benefits from equipment price increase by transferring costs to the customers.

Assuming that the standards size PTAC and PTHP manufacturers can only recover half of the R410A conversion expenses, the base case INPV will decrease approximately 78 percent. In this

pessimistic scenario, the INPV of the industry already decreases significantly even before

amended energy conservation standards are taken into account.

For non­standard size PTAC and PTHP industry, the R­410A conversion expenses

decrease the INPV by approximately six percent if manufacturers fully recover increases in

manufacturing production costs. In this optimistic scenario, the industry experiences a decrease

13­36

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in INPV even before amended energy conservation standards are taken into account. Assuming

that the non­standards size PTAC and PTHP industry can only recover half of the increases in

manufacturing production costs associated with the R­410A conversion, the INPV decreases by

approximately 41 percent. In this pessimistic scenario, the industry experiences a decrease in

INPV prior to amended energy conservation standards. It is important to note, irrespective of

mark­up scenario, the non­standard size PTAC and PTHP industry will experience a decline in

INPV in the base case as a result of the refrigerant phaseout. Because of the lower volumes

associated with non­standard size equipment, manufacturers of non­standard size equipment can

not spread the R­410A conversion costs over the same scale as the larger manufacturers of

standard size equipment causing a decrease in base case INPV even under the full cost recovery

scenario..

13.6 ENERGY CONSERVATION STANDARDS IMPACT SCENARIOS

13.6.1 Markup Scenarios

DOE used the markup strategies described previously to create markup scenarios at each

TSL. DOE applied a flat markup and a partial cost recovery markup to both R­410A base case

scenarios to bound the range of impacts the standard and non­standard size PTAC and PTHP

industries could experience over the years as a result of amended energy conservation standards.

Four distinct scenarios emerge: (1) full cost recovery for the R­410A base case with a full cost

recovery for amended energy conservation standards; (2) 50­percent cost recovery for the R410A base case with full cost recovery for amended energy conservation standards; (3) full cost

recovery for the R­410A base case with a 50­percent cost recovery for the amended energy

conservation standards; and (4) 50­percent cost recovery for the R­410A base case with a 50­

percent cost recovery for amended energy conservation standards.

13.6.1.1 R­410A Base Case With Full Cost Recovery and Amended Energy

Conservation Standards With Full Cost Recovery

DOE modeled an optimistic scenario by assuming that manufacturing would be able to

fully recover increases in manufacturing production costs as a result of the refrigerant phaseout

and amended energy conservation standards. In this optimistic scenario, DOE multiplied the flat

markup of 1.29 to all engineering analysis derived manufacturer production costs (MPCs) of R22 and R­410A equipment to calculate the manufacturer selling price (MSPs) necessary for the

GRIM.

13.6.1.2 R­410A Base Case With 50­Percent Cost Recovery and Amended Energy

Conservation Standards With Full Cost Recovery

DOE modeled a scenario in which manufacturers would only be able to recover half of

the increased manufacturing production costs from PTAC and PTHP customers as a result of the

refrigerant phaseout. Consequently, the base case INPV will be negatively impacted prior to the

effective date of the amended energy conservation standards in 2012. This scenario assumes that

increases in manufacturer production costs relating to changes to the equipment, which increase

the energy efficiency of the PTAC or PTHP and for which the customer will see a benefit, will

be able to be recovered fully by the manufacturers. DOE scaled the energy conservation

13­37

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standards flat markup by factors that would account for a 50­percent cost recovery of the R410A conversion. Table 13.6.1 through Table 13.6.6 summarizes the energy conservation

standards full cost recovery markup with R­410A conversion 50­percent cost recovery markups

for both standard and non­standard size equipment analyzed.

Table 13.6.1 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.6) 1.20

TSL 1 (10.9) 1.19

TSL 2 (10.9) 1.19

TSL 3 (11.1) 1.19

TSL A (11.1) 1.19

TSL 4 (10.9) 1.19

TSL 5 (11.3) 1.19

TSL 6 (11.5) 1.19

Table 13.6.2 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (10.4) 1.21

TSL 1 (10.9) 1.20

TSL 2 (11.1) 1.20

TSL 3 (11.1) 1.20

TSL A (11.3) 1.20

TSL 4 (11.3) 1.20

TSL 5 (11.3) 1.20

TSL 6 (11.5) 1.20

13­38

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Table 13.6.3 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.9) 1.17

TSL 1 (10.2) 1.17

TSL 2 (10.2) 1.17

TSL 3 (10.4) 1.17

TSL A (10.2) 1.17

TSL 4 (10.2) 1.17

TSL 5 (10.6) 1.17

TSL 6 (10.8) 1.17

Table 13.6.4 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Standard Size

PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (9.7) 1.18

TSL 1 (10.2) 1.18

TSL 2 (10.4) 1.18

TSL 3 (10.4) 1.18

TSL A (10.4) 1.18

TSL 4 (10.6) 1.18

TSL 5 (10.6) 1.18

TSL 6 (10.8) 1.18

Table 13.6.5 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With Full Cost Recovery for Non­Standard

Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.6) 1.21

TSL 1 (9.4) 1.20

TSL 2 (9.4) 1.20

TSL 3 (9.7) 1.20

TSL 4 (9.4) 1.20

TSL 5 (10.0) 1.20

13­39

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Table 13.6.6 13.6.7 Markups Reflecting the R­410A Base Case With 50­Percent Cost

Recovery and Amended Energy Conservation Standards With Full Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markup

(EER)

Baseline (8.5) 1.22

TSL 1 (9.4) 1.21

TSL 2 (9.7) 1.21

TSL 3 (9.7) 1.21

TSL 4 (10.0) 1.20

TSL 5 (10.0) 1.20

13.6.1.3 R­410A Base Case With Full Cost Recovery and Amended Energy

Conservation Standards With 50­Percent Cost Recovery

This scenario models the expectations of a few manufacturers who believe they will be

able to fully pass on any associated increases in manufacturer production costs to the customer as

a result of the refrigerant phaseout. Consequently, the base case will not change when R­410A

equipment comes into the market in 2010. However, these manufacturers also believe the

increases in manufacturer production costs will be too much for the customers to further

encompass, thus their profit margins will begin to be pinched. The implementation of the

refrigerant phaseout and the amended energy conservation standards are within three years of

one another. Consequently, some manufacturers do not believe they will be able to fully pass on

two increases in manufacturer production costs on to the customer. Instead, they believe it is

likely that only half of the costs associated with the increases in production costs for conforming

to the amended energy conservation standards will be recovered. This scenario is modeled using

a flat markup in the base case and a variable markup in the standards case. Table 13.6.8 through

Table 13.6.13 show the associated markups under a scenario where manufactures experience a

full cost recovery for the refrigerant phaseout and only a 50­percent cost recovery for the

amended energy conservation standards.

Table 13.6.8 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(10.6) 1.29 ­ ­ ­ ­ ­ ­ ­

TSL 1,2, 4

(10.9) 1.29 1.27 1.27 ­ ­ 1.27 ­ ­

TSL 3, A

(11.1) 1.29 1.29 1.29 1.26 1.26 1.29 ­ ­

TSL 5

(11.3) 1.29 1.29 1.29 1.29 1.29 1.29 1.25 ­

TSL 6

(11.5) 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.24

13­40

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Table 13.6.9 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(10.4) 1.29 ­ ­ ­ ­ ­ ­ ­

TSL 1

(10.9) 1.29 1.27 ­ ­ ­ ­ ­ ­

TSL 2, 3

(11.1) 1.29 1.29 1.26 1.26 ­ ­ ­ ­

TSL A, 4, 5

(11.3) 1.29 1.29 1.29 1.29 1.25 1.25 1.25 ­

TSL 6

(11.5) 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.24

Table 13.6.10 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(9.9) 1.29 ­ ­ ­ ­ ­ ­ ­

TSL 1, 2, A, 4

(10.2) 1.29 1.27 1.27 ­ 1.27 1.27 ­ ­

TSL 3

(10.4) 1.29 1.29 1.29 1.26 1.29 1.29 ­ ­

TSL 5

(10.6) 1.29 1.29 1.29 1.29 1.29 1.29 1.25 ­

TSL 6

(10.8) 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.24

Table 13.6.11 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for Standard

Size PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(9.7) 1.29 ­ ­ ­ ­ ­ ­ ­

TSL 1

(10.2) 1.29 1.27 ­ ­ ­ ­ ­ ­

TSL 2, 3, A

(10.4) 1.29 1.29 1.26 1.26 1.26 ­ ­ ­

TSL 4, 5

(10.6) 1.29 1.29 1.29 1.29 1.29 1.25 1.25 ­

TSL 6

(10.8) 1.29 1.29 1.29 1.29 1.29 1.29 1.29 1.23

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Table 13.6.12 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for NonStandard Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline

(8.6) 1.29 ­ ­ ­ ­ ­

TSL 1, 2, 4

(9.4) 1.29 1.27 1.27 ­ 1.27 ­

TSL 3

(9.7) 1.29 1.29 1.29 1.26 1.29 ­

TSL 5

(10.0) 1.29 1.29 1.29 1.29 1.29 1.25

Table 13.6.13 Markups Reflecting the R­410A Base Case With Full Cost Recovery and

Amended Energy Conservation Standards With 50­Percent Cost Recovery for NonStandard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline

(8.5) 1.29 ­ ­ ­ ­ ­

TSL 1

(9.4) 1.29 1.27 ­ ­ ­ ­

TSL 2, 3

(9.7) 1.29 1.29 1.26 1.26 ­ ­

TSL 4, 5

(10.0) 1.29 1.29 1.29 1.29 1.25 1.25

13.6.1.4 R­410A Base Case With 50­Percent Cost Recovery and Amended Energy

Conservation Standards With 50­Percent Cost Recovery

This scenario models the expectations of the majority of manufacturers who believe they

will never be able to fully pass on increases in manufacturer production costs to customers in a

price driven market. Their previous experiences with the increases in material costs over the past

several years and the implementation of GFCI power cords have led them to the conclusion they

were never fully able to pass on these increased production costs to the customer. On average,

manufacturers believe they have been able to recover approximately 50 percent of the increased

in manufacturer production costs from customers.

As a result, DOE estimated the impacts on the standard and non­standard size PTAC and

PTHP industries by modeling a scenario where manufacturers cannot fully recover costs from

the refrigerant phaseout or the amended energy conservation standards. In this pessimistic

scenario, DOE applied a reduction in the markup to the R­410A base case in 2010. Then, DOE

further reduced the markup to reflect a 50­percent cost recovery scenario as a result of energy

conservation standards for each equipment class. Table 13.6.14 through Table 13.6.19

summarizes the energy conservation standards 50­percent cost recovery with R­410A conversion

50­percent cost recovery markups for both standard and non­standard size equipment analyzed.

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Table 13.6.14 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTAC with a 9,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(10.6) 1.20 ­ ­ ­ ­ ­ ­ ­

TSL 1,2, 4

(10.9) 1.19 1.18 1.18 ­ ­ 1.18 ­ ­

TSL 3, A

(11.1) 1.19 1.19 1.19 1.17 1.17 1.19 ­ ­

TSL 5

(11.3) 1.19 1.19 1.19 1.19 1.19 1.19 1.16 ­

TSL 6

(11.5) 1.19 1.19 1.19 1.19 1.19 1.19 1.19 1.15

Table 13.6.15 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTHP with a 9,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(10.4) 1.21 ­ ­ ­ ­ ­ ­ ­

TSL 1

(10.9) 1.20 1.18 ­ ­ ­ ­ ­ ­

TSL 2, 3

(11.1) 1.20 1.20 1.17 1.17 ­ ­ ­ ­

TSL A, 4, 5

(11.3) 1.20 1.20 1.20 1.20 1.16 1.16 1.16 ­

TSL 6

(11.5) 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.15

Table 13.6.16 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTAC with a 12,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(9.9) 1.17 ­ ­ ­ ­ ­ ­ ­

TSL 1, 2, A, 4

(10.2) 1.17 1.15 1.15 ­ 1.15 1.15 ­ ­

TSL 3

(10.4) 1.17 1.17 1.17 1.14 1.17 1.17 ­ ­

TSL 5

(10.6) 1.17 1.17 1.17 1.17 1.17 1.17 1.13 ­

TSL 6

(10.8) 1.17 1.17 1.17 1.17 1.17 1.17 1.17 1.12

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Table 13.6.17 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTHP with a 12,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Baseline

(9.7) 1.18 ­ ­ ­ ­ ­ ­ ­

TSL 1

(10.2) 1.18 1.16 ­ ­ ­ ­ ­ ­

TSL 2, 3, A

(10.4) 1.18 1.18 1.15 1.15 1.15 ­ ­ ­

TSL 4, 5

(10.6) 1.18 1.18 1.18 1.18 1.18 1.14 1.14 ­

TSL 6

(10.8) 1.18 1.18 1.18 1.18 1.18 1.18 1.18 1.13

Table 13.6.18 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTAC with a 11,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline

(8.6) 1.21 ­ ­ ­ ­ ­

TSL 1, 2, 4

(9.4) 1.20 1.18 1.18 ­ 1.18 ­

TSL 3

(9.7) 1.20 1.20 1.20 1.17 1.20 ­

TSL 5

(10.0) 1.20 1.20 1.20 1.20 1.20 1.16

Table 13.6.19 Markups Reflecting the R­410A Base Case With 50­Percent Cost Recovery

and Amended Energy Conservation Standards With 50­Percent Cost Recovery for

Standard Size PTHP with a 11,000 Btu/h Cooling Capacity

TSL Markups by TSL Analyzed

(EER) Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Baseline

(8.5) 1.22 ­ ­ ­ ­ ­

TSL 1

(9.4) 1.21 1.19 ­ ­ ­ ­

TSL 2, 3

(9.7) 1.21 1.21 1.18 1.18 ­ ­

TSL 4, 5

(10.0) 1.20 1.20 1.20 1.20 1.17 1.17

13.7 STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS

Using the inputs and scenarios described in the previous sections, the GRIM estimated

indicators of financial impacts on the standard size PTAC and PTHP industry. The following

sections detail additional inputs and assumptions related only to standard size PTACs and

13­44

 EERE-2007-BT-STD-0012 COMMENT 32
                                  

            

              

                               

                                

                                    

                            

                       

                             

                                

                            

                           

                              

                     

                            

                     

     

                           

     

             

                          

                                         

   

                       

                       

   

   

                       

   

                       

                           

PTHPs. The main results of the MIA also reported in this section are for two key financial

metrics: INPV and annual cash flows.

13.7.1 Impacts on Industry Net Present Value

The INPV measures the industry value and is used in the MIA to compare the economic

impacts of different TSLs. The INPV is different from the DOE’s NPV applied to the whole

U.S. economy. The INPV is the sum of all net cash flows discounted at the industry’s cost of

capital or discount rate. The GRIM estimated cash flows between 2007 and 2042, consistent

with the forecast period used in the national impact analysis (Chapter 10).

In the MIA, DOE compares the INPV of the R­410A base case (no amended energy

conservation standards) to that of each TSL. The difference in INPV is an estimate of the

economic impacts that implementing that particular TSL would have on the entire industry. For

the standard size PTAC and PTHP industry, DOE examined four markup scenarios as described

in the mark­up section above. Table 13.7.1 through Table 13.7.4 provide the INPV estimates for

the standard size PTAC and PTHP industry under the different scenarios.

Table 13.7.1 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery with Amended Energy Conservation Standards

Full Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards Full Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 A 4 5 6

INPV (2007$ millions) 427 424 421 424 419 419 426 423

Change in INPV (2007$ millions) ­ ­3 ­6 ­3 ­8 ­8 ­1 ­4

(%) ­ ­0.8 ­1.4 ­0.8 ­1.9 ­1.9 ­0.2 ­0.9

R­410A Equipment

Conversion Expenses* (2007$ millions) 14.4 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2007$ millions) 7.2 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2007$ millions) ­ 4.5 7.4 6.3 9.1 10.6 7.2 13.5

Amended Energy

Conservation Standards

Capital Investments

(2007$ millions) ­ 3.5 5.7 4.9 8.2 8.2 5.6 10.4

* R­410A conversion investments are made in 2009 and accounted in the base case.

13­45

 EERE-2007-BT-STD-0012 COMMENT 32
                            

                     

     

                         

     

             

                          

                                         

   

                       

                       

   

   

                       

   

                       

                           

                            

                 

     

                         

     

             

                          

                                         

   

                       

                       

   

   

                       

   

                       

                           

Table 13.7.2 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case Full Cost Recovery with Amended Energy Conservation Standards 50­

Percent Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards 50­Percent Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 A 4 5 6

INPV (2007$ millions) 427 399 382 367 366 359 325 263

Change in INPV (2007$ millions) ­ ­28 ­45 ­60 ­61 ­68 ­103 ­164

(%) ­ ­6.6 ­10.7 ­14.0 ­14.3 ­16.0 ­24.0 ­38.3

R­410A Equipment

Conversion Expenses* (2007$ millions) 14.4 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2007$ millions) 7.2 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2007$ millions) ­ 4.5 7.4 6.3 9.1 10.6 7.2 13.5

Amended Energy

Conservation Standards

Capital Investments

(2007$ millions) ­ 3.5 5.7 4.9 8.2 8.2 5.6 10.4

* R­410A conversion investments are made in 2009 and accounted in the base case.

Table 13.7.3 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation

Standards Full Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards Full Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 A 4 5 6

INPV (2007$ millions) 83 76 72 72 68 67 69 59

Change in INPV (2007$ millions) ­ ­7 ­11 ­10 ­14 ­16 ­13 ­24

(%) ­ ­8.3 ­13.3 ­12.6 ­17.5 ­18.9 ­16.1 ­28.7

R­410A Equipment

Conversion Expenses* (2007$ millions) 14.4 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments* (2007$ millions) 7.2 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2007$ millions) ­ 4.5 7.4 6.3 9.1 10.6 7.2 13.5

Amended Energy

Conservation Standards

Capital Investments

(2007$ millions) ­ 3.5 5.7 4.9 8.2 8.2 5.6 10.4

* R­410A conversion investments are made in 2009 and accounted in the base case.

13­46

 EERE-2007-BT-STD-0012 COMMENT 32
                            

                 

     

                         

     

             

                    

                     

                 

   

                   

                   

   

   

   

               

   

                   

                           

         

                       

                         

                                

                        

                              

                                  

                                   

                              

                                   

               

Table 13.7.4 Changes in Industry Net Present Value for Standard Size PTACs and PTHPs

(R­410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation

Standards 50­Percent Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards 50­Percent Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 A 4 5 6

INPV (2007$

millions) 83 53 36 21 20 12 ­37 ­131

Change in INPV

(2007$

millions) ­ ­30 ­47 ­62 ­63 ­71 ­120 ­214

(%) ­ ­35.6 ­57.1 ­75.1 ­76.3 ­85.5 ­144.6 ­258.2

R­410A Equipment

Conversion Expenses*

(2007$

millions) 14.4 ­ ­ ­ ­ ­ ­ ­

R­410A Capital

Investments*

(2007$

millions) 7.2 ­ ­ ­ ­ ­ ­ ­

Amended Energy

Conservation

Standards Equipment

Conversion Expenses

(2007$

millions) ­ 4.5 7.4 6.3 9.1 10.6 7.2 13.5

Amended Energy

Conservation

Standards Capital

Investments

(2007$

millions) ­ 3.5 5.7 4.9 8.2 8.2 5.6 10.4

* R­410A conversion investments are made in 2009 and accounted in the base case.

13.7.2 Impacts on Annual Cash Flow

While NPV is useful for evaluating the long­term effects of amended energy conservation

standards, short­term changes in cash flow are also important indicators of the industry’s

financial situation. For example, a large investment over a period of one to two years could

strain the industry’s access to capital. Consequently, the sharp drop in financial performance

could cause investors to flee, even though recovery may be near. Thus, a short­term disturbance

can have long­term effects that the INPV cannot capture. To get an idea of the behavior of

annual net cash flows, DOE reports the annual net or free cash flows from 2007 through 2042 for

the different TSL levels. Figure 13.7.1 through Figure 13.7.4 present the annual net cash flows

for the base case and each of the seven TSLs for the standard size PTAC and PTHP industry

assuming the different markups and cost recovery scenarios.

13­47

 EERE-2007-BT-STD-0012 COMMENT 32
   

   

                          

                       

        

   

   

                          

                       

       

$(20)

$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows ($ Millions)

Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.7.1 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case with Full Cost Recovery and Amended Energy Conservation Standards

with Full Cost Recovery)

$25

Free Cash Flows ($ Millions)

$20

$15

$10

$5

$­

$(5)

$(10)

$(15)

$(20)

2006 2008 2010 2012 2014 2016 2018 2020

Year

Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.7.2 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case with Full Cost Recovery and Amended Energy Conservation Standards

with 50­Percent Cost Recovery)

13­48

 EERE-2007-BT-STD-0012 COMMENT 32
   

   

                          

                   

         

   

   

                          

                   

         

$(20)

$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows ($ Millions)

Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.7.3 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case with 50­Percent Cost Recovery and Amended Energy Conservation

Standards with Full Cost Recovery)

$25

Free Cash Flows ($ Millions)

$20

$15

$10

$5

$­

$(5)

$(10)

$(15)

$(20)

2006 2008 2010 2012 2014 2016 2018 2020

Year

Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.7.4 Annual Net Cash Flows for Standard Size PTAC and PTHP Industry (R410A Base Case with 50­Percent Cost Recovery and Amended Energy Conservation

Standards with 50­Percent Cost Recovery)

13­49

 EERE-2007-BT-STD-0012 COMMENT 32
                             

                           

                          

                             

                            

                            

                               

                          

                               

                            

                               

               

                           

                              

                               

                                

                           

                               

                          

                                 

                           

                          

                           

             

                         

                          

                       

                                

       

           

                               

                            

                           

                 

                           

                                  

                        

                        

                           

                 

Prior to the effective date of the amended energy conservation standards, cash flows are

driven by the level of capital investments and equipment conversion expenses and the proportion

of these investments spent every year. With the implementation of R­410A conversion related

investments, the cash flows show a sharp decline in 2009 as companies use their financial

resources to convert their equipment to use R­410A refrigerant. After the conversion, as higher

equipment prices become effective by 2010, the industry cash flows begin to increase. The

magnitude of the increase will depend on the ability of the industry to recover the additional

costs due to the refrigerant phaseout. After the amended standards announcement date, industry

cash flows begin to decline as companies use their financial resources to prepare for the amended

standards. The more stringent the energy conservation standards, the greater the impact on net

industry cash flows in the years running up to the effective date, as capital expenditures and

equipment development costs use up cash flows from operations.

For standard size PTACs and PTHPs, impacts on net cash flow will vary significantly

depending on the ability of manufacturers to recover any cost increase. In the years following

the effective date of the amended standards, the impact on cash flow depends on the operating

revenue. Higher TSLs have a positive impact on cash flows relative to the base case if

manufacturers are able to fully pass along costs to consumers (full cost recovery markup

scenarios) and lower cash flow relative to the base case if manufacturers can only recover a

portion of their increased costs (the 50­percent cost recovery markup scenarios). The magnitude

of the positive cash flow impact under the full cost recovery scenarios and the negative cash flow

impact under the 50­percent cost recovery scenario depends on the incremental cost of standards

compliant equipment. The higher the incremental cost, the larger the impact on operating

revenue and cash flow in the years following the effective date of the standards.

13.8 NON­STANDARD SIZE PTAC AND PTHP INDUSTRY FINANCIAL IMPACTS

Using the inputs and assumptions described in the previous sections, the GRIM produced

indicators of financial impacts on the non­standard size PTAC and PTHP industry. The

following sections detail additional inputs and assumptions related only to non­standard size

PTACs and PTHPs including the main results of the MIA for two key financial metrics: INPV

and annual cash flows.

13.8.1 Impacts on Industry Net Present Value

As previously stated, the INPV measures the industry value and is used in the MIA to

compare the economic impacts of different TSLs. For the non­standard size PTAC and PTHP

industry, the GRIM estimated cash flows between 2007 and 2042, consistent with the forecast

period used in the national impact analysis (Chapter 10).

In the MIA, DOE compares the INPV of the base case (no new energy conservation

standards) to that of each TSL. The difference in INPV is an estimate of the economic impacts

that implementing that particular TSL would have on the entire industry. For the non­standard

size PTAC and PTHP industry, DOE examined all previously discussed markup scenarios.

Table 13.8.1 through Table 13.8.4 provide the NPV estimates for the non­standard size PTAC

and PTHP industry under the different cost recovery scenarios.

13­50

 EERE-2007-BT-STD-0012 COMMENT 32
                          

                   

       

                         

     

         

                    

                                   

   

                   

   

   

   

                   

   

                   

                           

                          

                   

       

                       

   

     

         

                    

                                 

   

                   

                   

   

   

                   

   

                   

                           

Table 13.8.1 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case Full Cost Recovery with Amended Energy Conservation

Standard Full Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards Full Cost

Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5

INPV (2007$ millions) 30 14 13 13 9 11

Change in INPV (2007$ millions) ­ ­16 ­17 ­17 ­21 ­20

(%) ­ ­53.6 ­57.6 ­56.3 ­68.5 ­64.8

R­410A Equipment

Conversion Expenses* (2007$ millions) 7.2 ­ ­ ­ ­ ­

R­410A Capital

Investments* (2007$ millions) 0.6 ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2007$ millions) ­ 20.5 21.0 21.0 23.8 23.8

Amended Energy

Conservation Standards

Capital Investments

(2007$ millions) ­ 1.3 2.3 2.0 3.6 2.6

* R­410A conversion investments are made in 2009 and accounted in the base case.

Table 13.8.2 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case Full Cost Recovery with Amended Energy Conservation

Standard 50­Percent Cost Recovery)

R­410A Base Case Full Cost Recovery With Amended Energy Conservation Standards 50­Percent

Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5

INPV (2007$ millions) 30 13 11 10 7 6

Change in INPV (2007$ millions) ­ ­17 ­19 ­20 ­23 ­24

(%) ­ ­57.8 ­63.8 ­65.4 ­78.0 ­81.2

R­410A Equipment

Conversion Expenses* (2007$ millions) 7.2 ­ ­ ­ ­ ­

R­410A Capital

Investments* (2007$ millions) 0.6 ­ ­ ­ ­ ­

Amended Energy

Conservation Standards

Equipment Conversion

Expenses

(2007$ millions) ­ 20.5 21.0 21.0 23.8 23.8

Amended Energy

Conservation Standards

Capital Investments

(2007$ millions) ­ 1.3 2.3 2.0 3.6 2.6

* R­410A conversion investments are made in 2009 and accounted in the base case.

13­51

 EERE-2007-BT-STD-0012 COMMENT 32
                          

                   

     

                        

   

     

         

                  

                                   

   

                   

   

   

   

   

               

   

                   

                           

                          

                   

     

                       

   

     

         

            

                 

             

   

               

   

   

   

   

           

   

               

                           

         

Table 13.8.3 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation

Standard Full Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards Full

Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5

INPV (2007$ millions) 19 2 1 1 ­3 ­2

Change in INPV (2007$ millions) ­ ­17 ­18 ­18 ­22 ­21

(%) ­ ­90.2 ­97.0 ­95.6 ­115.0 ­110.7

R­410A Equipment

Conversion Expenses* (2007$ millions) 7.2 ­ ­ ­ ­ ­

R­410A Capital

Investments* (2007$ millions) 0.6 ­ ­ ­ ­ ­

Amended Energy

Conservation

Standards Equipment

Conversion Expenses

(2007$ millions) ­ 20.5 21.0 21.0 23.8 23.8

Amended Energy

Conservation

Standards Capital

Investments

(2007$ millions) ­ 1.3 2.3 2.0 3.6 2.6

* R­410A conversion investments are made in 2009 and accounted in the base case.

Table 13.8.4 Changes in Industry Net Present Value for Non­Standard Size PTACs and

PTHPs (R­410A Base Case 50­Percent Cost Recovery with Amended Energy Conservation

Standard 50­Percent Cost Recovery)

R­410A Base Case 50­Percent Cost Recovery With Amended Energy Conservation Standards 50­Percent

Cost Recovery

Units Base

Case

Trial Standard Level

1 2 3 4 5

INPV (2007$

millions) 19 1 ­1 ­2 ­6 ­7

Change in INPV

(2007$

millions) ­ ­18 ­20 ­21 ­25 ­26

(%) ­ ­96.3 ­106.2 ­109.0 ­129.0 ­134.8

R­410A Equipment

Conversion Expenses*

(2007$

millions) 7.2 ­ ­ ­ ­ ­

R­410A Capital

Investments*

(2007$

millions) 0.6 ­ ­ ­ ­ ­

Amended Energy

Conservation

Standards Equipment

Conversion Expenses

(2007$

millions) ­ 20.5 21.0 21.0 23.8 23.8

Amended Energy

Conservation

Standards Capital

Investments

(2007$

millions) ­ 1.3 2.3 2.0 3.6 2.6

* R­410A conversion investments are made in 2009 and accounted in the base case.

13.8.2 Impacts on Annual Cash Flow

13­52

 EERE-2007-BT-STD-0012 COMMENT 32
                       

                         

                                  

                                  

                                   

                           

   

   

                         

                       

       

While NPV is useful for evaluating the long­term effects of amended energy conservation

standards, short­term changes in cash flow are also important indicators of the industry’s

financial situation. To get an idea of the behavior of annual net cash flows, DOE reports the

annual net or free cash flows from 2007 through 2042 for the different TSL levels. Figure 13.8.1

through Figure 13.8.4 present the annual net cash flows for the base case and each of the five

TSLs for the non­standard size PTAC and PTHP industry assuming the different cost recovery

scenarios.

Year

Figure 13.8.1 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case with Full Cost Recovery and Amended Energy Conservation Standards

with Full Cost Recovery)

$(20)

$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Free Cash Flows ($ Millions)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

13­53

 EERE-2007-BT-STD-0012 COMMENT 32
   

   

                         

                       

       

   

   

                         

                   

         

$(20)

$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Year

Free Cash Flows ($ Millions)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.8.2 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case with Full Cost Recovery and Amended Energy Conservation Standards

with 50­Percent Cost Recovery)

$25

Free Cash Flows ($ Millions)

$20

$15

$10

$5

$­

$(5)

$(10)

$(15)

$(20)

2006 2008 2010 2012 2014 2016 2018 2020

Year

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.8.3 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case with 50­Percent Cost Recovery and Amended Energy Conservation

Standards with Full Cost Recovery)

13­54

 EERE-2007-BT-STD-0012 COMMENT 32
   

   

                         

                   

         

                             

                           

                          

                             

                            

                                

                               

                          

                     

                          

                               

             

                             

                              

                                

                                 

                               

                                 

                          

                             

                       

$(20)

$(15)

$(10)

$(5)

$­

$5

$10

$15

$20

$25

2006 2008 2010 2012 2014 2016 2018 2020

Free Cash Flows ($ Millions)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Year

Figure 13.8.4 Annual Net Cash Flows for Non­Standard Size PTAC and PTHP Industry

(R­410A Base Case with 50­Percent Cost Recovery and Amended Energy Conservation

Standards with 50­Percent Cost Recovery)

Prior to the effective date of the amended energy conservation standards, cash flows are

driven by the level of capital investments and equipment conversion expenses and the proportion

of these investments spent every year. With the implementation of R­410A conversion related

investments, the cash flows show a sharp decline in 2009 as companies use their financial

resources to convert to the new refrigerant. As new increased equipment prices become effective

by 2010, the industry cash flows begin to increase. The magnitude of the increase will depend

on the ability of the industry to recover the additional equipment costs due to the refrigerant

phaseout. After the standards announcement date, industry cash flows begin to decline as

companies use their financial resources to prepare for the amended energy conservation

standards. The more stringent the energy conservation standards, the greater the impact on

industry cash flows in the years running up to the effective date, as capital expenditures and

equipment development costs depress cash flows from operations.

For non­standard size PTACs and PTHPs, impacts on cash flow will vary depending on

the ability of manufacturers to recover any equipment cost increase. In the years following the

effective date of the standards, the impacts on net cash flows depend on the operating revenue.

Higher TSLs have a positive impact on cash flows relative to the base case if manufacturers are

able to fully pass along costs to consumers (full cost recovery markup scenarios) and lower cash

flow relative to the base case if manufacturers can only recover a portion of their increased costs

(the 50­percent cost recovery markup scenarios). The magnitude of the positive cash flow

impact under the full cost recovery scenarios and the negative cash flow impact under the 50­

percent cost recovery scenario depends on the incremental cost of standards compliant

13­55

 EERE-2007-BT-STD-0012 COMMENT 32
                              

                      

     

                       

                           

                              

                     

                          

                      

                         

                          

                           

           

                             

                          

                       

                        

                           

                              

                         

                          

                           

                    

                         

               

                     

                         

                                

                             

                     

                          

                         

                           

                        

                     

                            

                       

                   

equipment. The higher the relative cost, the larger the impact on operating revenue and cash

flow in the years following the effective date of the standards.

13.9 SMALL BUSINESS IMPACTS

13.9.1 Introduction

As established in the market and technology assessment, PTACs and PTHPs are

manufactured and sold to two separate markets, standard size and non­standard size PTAC and

PTHP. The U.S. standard size PTAC and PTHP industry is characterized by both domestic and

international manufacturers of equipment with a single wall sleeve dimension that is

manufactured in high volume. Most standard PTACs and PTHPs are manufactured abroad, with

only one sizeable domestic manufacturing facility remaining. Typically, standard sized PTAC

and PTHP imports are sourced either from wholly­owned foreign subsidiaries, or contracted out

for the benefit of traditional U.S. manufacturers. Out of the manufacturers that solely

manufacture standard size PTACs and PTHPs, DOE has identified one manufacturer as a small

business under the SBA definition.

The U.S. non­standard PTAC and PTHP industry is characterized by a wide scope of

equipment manufactured at low production rates for a variety of wall sleeve dimensions. Most

non­standard units are built­to­order and are commonly customized by the manufacturer to

accommodate specific building requirements. DOE’s review of the non­standard size PTAC and

PTHP market suggests that the non­standard size PTAC and PTHP industry supports nearly one

hundred different legacy models that were formerly made under at least thirty brand names. In

total, the six remaining manufacturers of non­standard size PTACs and PTHPs manufacture units

fitting into approximately 40 different sleeve sizes. The number of equipment families offered

by a particular company ranges from 7 to 40 units, though customization subsequently leads to

thousands of stock­keeping­units (SKUs). Out of the manufacturers that solely manufacture

non­standard size PTACs and PTHPs, DOE has identified two manufacturers as small businesses

under the March 11, 2008 SBA definition.

Besides the small business that manufacture exclusively standard or non­standard size

PTAC and PTHP, DOE has also identified three manufactures of both standard and non­standard

size PTACs and PTHPs that are small businesses under the SBA definition. DOE found that all

the small businesses in the PTAC and PTHP industries (except the small business that only

manufactures standard size PTAC and PTHP) focus primarily on manufacturing customized

and/or non­standard size PTACs and PTHPs. For example, even the standard size PTAC and

PTHP units offered by three manufacturers of both standard and non­standard size equipment

can contain customized features, such as hydronic coil heating which differentiate them from the

units made by higher­volume competitors. The higher value that customers associate with

customized standard size and non­standard­sized equipment allow small businesses to charge

higher prices, making their (higher cost) low­volume operations viable. Thus, the impacts on all

five small business that manufacture non­standard size PTAC and PTHP will be similar,

regardless if they also manufacture some standard size units.

13­56

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13.9.2 Equipment Development Requirements for Small Manufacturers of PTAC and

PTHP

The phaseout of R­22 refrigerant use in 2010 adds a two­fold fixed­cost burden on all

manufacturers: 1) equipment, manufacturing lines, and fabrication centers have to be converted

to R­410A refrigerant use; and 2) all equipment platforms will have to undergo equipment

development, testing, and certification. These steps will be necessary for manufacturers

regardless of equipment scope or manufacturing scale. Achieving even baseline ASHRAE

Standard 90.1­1999 efficiency levels for all extant equipment is likely to be beyond the reach of

some manufacturers since they lack the manufacturing scale to justify maintaining engineering

departments with the time, equipment, and budget to tackle multiple equipment platform

conversions.

Since the small businesses that manufacture non­standard PTAC and PTHP have lower

production volumes and higher numbers of equipment families, this issue is a great risk for them.

These five companies must first convert all platforms they intend to sell after the R­22

refrigerant phaseout and then covert these platforms again before the energy conservation

standards come into effect. The small business that solely manufactures standard size PTAC and

PTHP will also be concurrently burdened by the R­22 refrigerant and conversion costs to

conform to energy conversation standards, but it will only have to complete the transition on one

equipment platform (like its larger competitors). Thus, whereas standard size PTACs and

PTHPs manufacturers only have to modify one equipment platform to meet regulatory standards,

the small businesses that manufacture non­standard size PTACs and PTHPs have up to 40

different equipment platforms in their portfolio.

Many equipment development costs (such as testing, certification, etc.) are somewhat

fixed, making manufacturing scale an important consideration to determine whether the

equipment development investments are economically justified. Similarly, any capital

expenditures, such as upgrading manufacturing and fabrication lines can be spread across much

higher unit volumes by high­volume manufacturers. Lower production volume is an important

differentiating characteristic for the one small manufacturer of standard PTACs and PTHPs.

However, unlike the small businesses that manufacturer non­standard equipment, this

manufacturer only has one platform that will have to be redeveloped in response to standards.

In order to assess the probable impacts due to PTAC and PTHP equipment family

redesigns, DOE reviewed current efficiency ratings of all non­standard and standard equipment

on the market combined with expected efficiency reductions as a result of the refrigerant

conversion to identify which TSLs each equipment could be expected to attain. Equipment that

would have to be redesigned to meet higher standards were identified and the conversion costs

were assigned to each manufacturer by TSL. As expected, manufacturers with a wide scope of

low­efficiency equipment were estimated to be impacted more and at lower TSLs than

manufacturers with a narrow scope of high­efficiency equipment.

13.9.3 Equipment Development Impacts on Small Manufacturers

In order to quantify the redesign costs for the small businesses that manufacture nonstandard equipment, DOE estimated the number of platforms that will need significant

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equipment redevelopment. DOE used published EERs, equipment capacities, and an anticipated

de­rating factor of approximately 7 percent from adopting R­410A refrigerants to determine if an

equipment family needed to be redesigned to meet a specific energy efficiency level (Please see

Chapter 5 of the TSD for an explanation of R­410A de­rating factors). If one or more capacities

within an equipment platform fell below the EER levels prescribed by a TSL (either for PTACs

or PTHPs), then the equipment platform was marked for redesign. Non­standard platforms that

currently claim very high EERs thus only require extensive redesign at very high TSLs.

DOE estimated the investment requirements to upgrade an existing equipment platform

for optimal R­410A operation using the responses of standard­size manufacturers and its own

estimates. Based on manufacturer interviews and discussion with experts, DOE estimated that

one non­standard equipment family redesign would optimistically require approximately

$250,000 of equipment conversion and development costs. To estimate total equipment

development costs for the non­standard size PTAC and PTHP industry, DOE multiplied the total

number of equipment families that would require redesign at each TSL by the estimated

equipment development cost for one equipment family.

Table 13.9.1 shows the total necessary investment for the non­standard size PTAC and

PTHP industry at each TSL. Figures in the table also include equipment conversion expenses for

standard size PTAC and PTHP units made by small manufacturers that primarily focus on

building non­standard size equipment. These units are included because they share more

characteristics with non­standard equipment (such as very low production volumes, extensive

customization, etc.) than with the mass­market standard size PTACs and PTHPs manufactured

by high­volume manufacturers. Table 13.9.1 also illustrates the various nominal EERs that nonstandard size PTACs and PTHPs have to achieve and the percentage of the current models that

DOE estimates achieve that level after efficiency losses due to R­410A conversion.

Table 13.9.1 Cumulative Equipment Development Cost Estimates for non­standard PTAC

and PTHP Industry

Equipment Class Baseline TSL

1

TSL

2

TSL

3

TSL

4

TSL

5

Minimum EER for Non­Standard Size PTACs 8.6 9.4 9.4 9.7 9.4 10.0

Minimum EER for Non­Standard Size PTHPs 8.5 9.4 9.7 9.7 10.0 10.0

Percentage of Equipment Families to at or

above TSL Efficiency Levels 73% 25% 23% 23% 13% 13%

Number of equipment families requiring

significant equipment development to meet

standards

29 82 84 84 95 95

Optimistic Aggregated Industry Burden ($

millions) 7.25 20.50 21.00 21.00 23.75 23.75

Even on a best­case scenario basis ($250,000 per equipment platform, regardless of

efficiency level), the non­standard PTAC and PTHP industry would have great difficulty

meeting any standards level above baseline. As Table 13.9.1 illustrates, the industry burden to

upgrade its equipment families to meet TSL 1 would exceed $20 million or approximately 40

percent of total industry revenue. Higher TSL levels would impose even greater economic

burdens.

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However unsustainable this impact is in aggregate, the impact on individual small

businesses can be even greater. For example, one small business that manufacturers nonstandard PTACs and PTHPs is estimated to have sales of less than $5 million per year and

currently ships approximately 12 different non­standard equipment platforms. Based on the

above projections, DOE estimates that the company would have to spend approximately $3

million to meet any efficiency level (including baseline) with R­410A refrigerants. A $3 million

equipment development expense translates into more than 60 percent of annual revenues or

about 35 years worth of the manufacturer’s equipment development budget, assuming it spends

the industry average of 1.6 percent of revenues on research and development.

On average, small businesses that manufacturer non­standard PTAC and PTHPs are

estimated to require 25 years worth of equipment development budget to reach any efficiency

level above baseline (which in itself will require about 14 years worth of equipment development

budget). Any energy conservation standards above baseline is hence likely to cause some small

businesses to exit the market since they lack the manufacturing scale to afford investments for R410A conversion, certification requirements, and the equipment development required for energy

conservation standards simultaneously. This suggests that the non­standard industry would

reduce the number of equipment families and capacities even at baseline efficiency levels to keep

equipment development expenses within manageable limits.

13.9.4 Volume Impacts on Small Manufacturers

To estimate total PTAC and PTHP shipments for each manufacturer, DOE divided the

manufacturer’s total PTAC and PTHP sales revenues for by an average equipment price. For

standard size equipment manufacturers, DOE used a $500 average price for a PTAC and PTHP.

For non­standard size equipment manufacturers, DOE used an average price of $1,200 for PTAC

and PTHP. Total PTAC and PTHP revenues per year for each manufacturer were estimated

based on publicly available information such as annual reports and D&B reports. By dividing

the estimated total revenues by the average prices, DOE estimated total equipment shipments for

each manufacturer. DOE calculated the per unit equipment development cost for each

manufacturer by dividing the calculated total equipment conversion expense by the estimated

total equipment shipments. Each per unit equipment development cost for each manufacturer

was divided by a set of examined lifetimes. DOE then averaged each set of results for

manufacturers based on equipment type (standard versus non­standard). Manufacturing scale

was roughly defined as small versus large businesses whereas equipment lifetime defines the

number of years that a specific equipment platform will stay in production without major

changes or revisions.

Table 13.9.2 shows the estimates DOE calculated for the average equipment

development cost per unit by manufacturing scale and equipment lifetime.

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Table 13.9.2 Impact of Manufacturing Scale on Per Unit Equipment Development Cost
 

Per Unit Equipment Development Cost by

Industry Segment versus Equipment Lifetime (years) 5 7 10 20

Standard PTAC and PTHP Small Business

Large Business Average

$6

$7

$4

$5

$3

$3

$1

$2

Non­Standard PTAC and PTHP Small Business Average

Large Business

$136

$45

$97

$32

$68

$22

$34

$11

In the standard PTAC and PTHP industry, the per­unit impact of development costs on

the major manufacturers is relatively minor, regardless of whether they are small businesses or

not, due to the scale at which they manufacture and because they only have one equipment

platform to upgrade. However, in the non­standard industry the impact of scale and the number

of equipment platforms is quite evident: The one large business operating in the non­standard

industry segment features fewer equipment platforms than any of its small business competitors,

yet operates at a higher overall production volume than most of them. As a result, the per­unit

conversion costs for the large business are estimated to be five times lower than those of the

smaller businesses it competes against.

13.9.5 Additional Impacts on Small Manufacturers

Markup Impacts

In the engineering analysis, DOE derived cost efficiency curves to determine costs of

goods sold (COGS) of equipment at each TSL. DOE applied markups to COGS to derive the

manufacturing selling prices. These markups were derived from publicly available information

for companies that are primarily large manufacturers. As described in the engineering analysis

(See Chapter 5 of this TSD.), manufacturing markups are applied to MPCs (i.e., COGS) to cover

additional costs such as typical R&D and SG&A.

In the MIA, DOE applied the same manufacturing markup to both the standard and nonstandard size PTAC and PTHP industries. If manufacturers are required to convert existing

equipment in addition to normal R&D expenses, a similar markup for both large and small

manufacturers would imply a greater impact on profitability and a greater difficulty in

recuperating costs for small businesses that manufacturer non­standard equipment. As seen in

Table 13.9.2, equipment conversion expenses add only $7 per unit for a large manufacturer of

standard size PTAC and PTHP while adding $136 per unit for a small businesses that

manufactures non­standard equipment at a 5 year equipment lifetime. Due to the large cost

difference, it is unlikely that all additional costs for a small manufacturer of non­standard

equipment could be covered by the estimated manufacturing markup or be completely passed on

to customers.

As shown in Table 13.9.2, manufacturing scale, not the size of a business, is the

determining factor for per­unit development cost impacts. Consequently, the small manufacturer

that solely makes standard PTAC and PTHP should face the same impacts on profitability as the

large manufacturers. In the non­standard industry, small businesses generally have much lower

volumes than their one large competitor and hence can be expected to have higher per­unit

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conversion expenses. Assuming a 5 year equipment lifetime, the small businesses that

manufacture non­standard equipment face a $91 disadvantage per unit compared to their large

competitor. Thus, due to manufacturing scale and the wider scope of equipment offered, small

businesses that manufacture non­standard PTAC and PTHP can be expected to be

disproportionately impacted by any energy conservation standards relative to their highervolume competitor.

Comparison with LCC Results

DOE reviewed the LCC analysis results to compare it with the per unit R&D expenses.

As detailed in the LCC analysis, the LCC savings for all non­standard size PTACs and PTHPs

are positive, based on equipment costs calculated in the engineering analysis (See Chapter 8 of

this TSD). Table 13.9.3 shows the LCC savings after the per unit R&D expenses for nonstandard manufacturers.

Table 13.9.3 LCC Savings After Per Unit R&D costs for Non­Standard Size PTACs with a

Cooling Capacity of 11,000 Btu/h

TSL

(EER)

TSL 1, 2, 4

(9.4)

TSL 3

(9.7)

TSL 5

(10)

Mean LCC Savings (2007$) $26 $30 $31

LCC Savings after R&D per unit

Cost (5 year equipment lifecycle) ­$110 ­$106 ­$105

LCC Savings after R&D per unit

Cost (10 year equipment lifecycle) ­$42 ­$38 ­$37

Table 13.9.4 LCC Savings After Per Unit R&D costs for Non­Standard Size PTHPs with a

Cooling Capacity of 11,000 Btu/h

EER TSL 1

(9.4)

TSL 2, 3

(9.7)

TSL 4, 5

(10)

Mean LCC Savings (2007$) $62 $66 $80

LCC Savings after R&D per unit

Cost (5 year equipment lifecycle) ­$74 ­$70 ­$56

LCC Savings after R&D per unit

Cost (10 year equipment lifecycle) ­$6 ­$2 $12

DOE estimates that if manufacturers of non­standard PTAC and PTHP bear all of the cost

of the equipment development, manufacturers’ profits will be significantly eroded. If

manufacturers can pass all increase in costs due to the R&D to the consumers, the LCC savings

will be eliminated or greatly impacted. Comparing the per unit R&D expense disadvantage of

small manufacturers with the results from the LCC analysis shows that energy conservation

standards for non­standard size equipment completely eliminates the LCC savings for PTACs

and PTHPs with a 5 year lifecycle. In comparison, if a large manufacturer passes on all

additional equipment development expenses to the customer, the LCC savings would remain

positive and could at most be impacted by $7.

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13.9.6 Conclusions

The substantial equipment development costs differentially harm the small manufacturers

of non­standard PTAC and PTHP. On a relative basis, these manufactures face substantially

greater conversion costs than large manufacturers of standard size equipment and the one large

manufacturer of non­standard size equipment. In addition, only the small manufacturers of nonstandard size equipment face an equipment development disadvantage on a per unit basis. Due

to the large equipment conversion costs, the current wide scope of equipment families offered by

small businesses in the non­standard industry is likely to shrink dramatically in response to

amended energy conservation standards by DOE. In particular, higher capacity units will be

vulnerable for elimination since cabinet constraints may make required improvements to units

that already operate at the margin uneconomical to implement.

DOE estimates that equipment manufacturers will cut their least popular equipment

classes first, potentially eliminating multiple extant equipment platforms that fit specific sleeve

sizes from the market altogether. However, cutting equipment classes by itself is difficult, since

every equipment class (and its resultant enhancement and diversification of the revenue stream)

adds some necessary manufacturing scale to the manufacturer. Once enough equipment classes

are removed from its equipment offering, the manufacturer may lack the scale to operate at all.

A likely result of these market dynamics is that some manufacturers of non­standard

PTACs and PTHPs will exit the market or consolidate with other small business manufacturers

to make equipment that meets even baseline efficiency requirements. At least for several years

following the effective date, DOE estimates that most small, non­standard PTAC and PTHP

manufacturers will reduce their scope of equipment platforms by 50 percent or more in order

bring the required equipment development expenses down to more sustainable levels. Consumer

choice is likely to be impacted in the interim.

13.9.7 Direct Employment

13.9.7.1 Methodology

In order to determine possible impacts on the direct employment of standard and nonstandard size PTAC and PTHP industries, DOE converted annual labor expenditures calculated

in the GRIM into employment levels using estimates from the engineering analysis. In the

engineering analysis, DOE developed cost­efficiency curves that incorporate the production

labor for manufacturing each type of equipment (standard or non­standard, and PTAC or PTHP).

The engineering analysis also provided labor content as a percentage of the MPCs. First, the

labor expenditure per unit shipped was calculated in the GRIM by multiplying the labor

percentage estimated in the engineering analysis by the MPCs calculated from the cost­efficiency

curves To convert to total industry labor expenditures, the per unit labor expenditures were

multiplied by the equipment annual shipments at each TSL. The annual labor expenditures are a

function of the labor intensity of the equipment, the sales volume, and an implicit wage

assumption that remains fixed in real terms over time. By dividing total annual labor

expenditures by labor rates and annual production worker hours for each industry (standard and

non­standard size), DOE translated the total labor expenditures for the industry to the total

number of production jobs. Finally, DOE multiplied the total number of jobs by the domestic

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market share to calculate the domestic production employmentb levels for the base case and each

TSL. For standard size industry, DOE estimated that 35 percent of the market is domestically

manufactured. For non­standard size industry, DOE assumed that all of the market is

domestically manufactured.

In addition to calculating total domestic production workers at each TSL for each

industry, DOE also calculated the total number of domestic non­production workersc

. The total

domestic employment for each industry was calculated by multiplying the total number of

production jobs calculated in the GRIM by a non­production workers­to­production workers

ratio for each industry and summing the results with total production jobs.

Table 13.9.5 and Table 13.9.6 provides a summary of estimates from the engineering cost

model used to calculate direct employment for the standard and non­standard size PTACs and

PTHPs industries.

Table 13.9.5 Estimates from the Engineering Analysis Used to Calculate the Change in

Direct Employment, Standard Size PTAC and PTHP

Production Worker Hourly Wage

($/hr)

$7.00

Production Worker Hours Per Year 1,688

Estimated Percentage of Industry

Domestically Manufactured

35%

Non­Production Worker to

Production Worker Ratio

0.30

b As defined in the Census Bureau’s 2006 Annual Survey of Manufacturers (2006 ASM), production workers

number include “workers (up through the line­supervisor level) engaged in fabricating, processing, assembling,

inspecting, receiving, storing, handling, packing, warehousing, shipping (but not delivering), maintenance, repair,

janitorial and guard services, product development, auxiliary production for plant's own use (e.g., power plant),

recordkeeping, and other services closely associated with these production operations at the establishment covered

by the report. Employees above the working­supervisor level are excluded from this item.” This data can be found

at http://www.census.gov/mcd/asmhome.html. c Non­production workers are defined in the 2006 ASM as “employees of the manufacturing establishment including

those engaged in factory supervision above the line­supervisor level. It includes sales (including driversalespersons), sales delivery (highway truck drivers and their helpers), advertising, credit, collection, installation and

servicing of own products, clerical and routine office functions, executive, purchasing, financing, legal, personnel

(including cafeteria, medical, etc.), professional, and technical employees. Also included are employees on the

payroll of the manufacturing establishment engaged in the construction of major additions or alterations utilized as a

separate work force.” This data can be found at http://www.census.gov/mcd/asmhome.html.

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Table 13.9.6 Estimates from the Engineering Analysis Used to Calculate the Change in

Direct Employment, Non­Standard Size PTAC and PTHP

Production Worker Hourly Wage

($/hr)

$14.64

Production Worker Hours Per Year 1,688

Estimated Percentage of Industry

Domestically Manufactured

100%

Non­Production Worker to

Production Worker Ratio

0.30

The domestic annual labor expenditures and employment levels were calculated for the

base case and at each TSL. The impacts on domestic employment due to standards can be

assessed by comparing the domestic employment results in the base case to the results at each

TSL. In the GRIM, the employment results represent U.S. production workers that are impacted

by this rulemaking. U.S. workers involved in manufacturing or supporting products for exports

would not be impacted and are not included as part of the labor impacts.

13.9.7.2 Standard Size PTAC and PTHP Industry Results

The GRIM calculates that the standard size PTAC and PTHP industry labor expenditure

for production labor in 2012 is approximately $9 million. Using the $7 wage rate and 1,688

production hours per year per employee found in the engineering analysis and the 35 percent

domestic production market share, the GRIM estimates there are approximately 276 U.S.

production employees involved in manufacturing standard size PTACs and PTHPs covered by

this rulemaking. In addition, DOE estimates that there are 83 non­production employees in the

U.S. The employment spreadsheet of the GRIM shows the annual domestic employment

impacts in further detail. Table 13.9.7 shows a summary of the possible impacts on direct

employment due to standards for the standard size PTAC and PTHP industry in 2012, the date

the amended energy conservation become effective, compared to the base case.

Table 13.9.7 Direct Employment Summary for Standard Size PTAC and PTHP Industry

Units Base

Case

Trial Standard Level

1 2 3 A 4 5 6

Production Labor

Expenditures (PLE) in 2012 2007$ Millions 9 9 9 9 9 9 9 10

Change in PLE from Base

Case 2007$ Millions ­ 0.1 0.1 0.1 0.1 0.1 0.2 0.3

Conversion of change in

PLE to Number of Domestic

Production Employees

# of workers ­ 1 2 3 3 3 6 9

Domestic Production

Employment in 2012 # of workers 276 277 278 279 278 279 281 285

Non­production

employment in 2012 # of workers 83 83 83 83 83 84 84 85

Total Employment # of workers 358 360 361 362 362 362 365 370

Change in Domestic

Employment in 2012 % ­ 0.5 0.8 1.1 1.1 1.2 2.1 3.3

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Figure 13.9.1 shows the standard size PTAC and PTHP industry total annual domestic

employment levels for each TSL calculated by the GRIM.

0

100

200

300

400

500

600

700

800

200620082010201220142016

2018202020222024

20262028

2030

2032203420362038

20402042

Year

Total Domestic Employment (# of Jobs)

Baseline TSL 1 TSL 2 TSL 3 TSL A TSL 4 TSL 5 TSL 6

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.9.1 Total Standard Size PTAC and PTHP Industry Domestic Employment by

Year

Currently, DOE estimates approximately 35 percent of the standard size PTACs and

PTHPs sold in the U.S. are manufactured in the U.S. Because most standard size PTACs and

PTHPs are produced abroad, any amended standards have a larger impact on labor in other

countries. U.S. companies are all still impacted by the equipment conversion and capital

conversion expenses, and higher MPCs. However, the impacts of standards on domestic

employment would be small. DOE expects that there would be positive employment impacts

among domestic standard size PTAC and PTHP manufacturers for TSL 1 through TSL 6.

Because production employment expenditures are assumed to be a fixed percentage of cost of

goods sold and the MPCs increase with more efficient equipment, labor tracks the increased

prices in the GRIM. The incremental costs for more efficient components or redesigned heat

exchangers at all TSLs are relatively small. In response to standards, domestic manufacturers

would most likely not alter employment levels much because inserting a more efficient

component or fabrication of redesigned coils does not necessarily require more labor. The minor

increases in employment are thus reasonable.

The employment conclusions for the standard size PTAC and PTHP ignore the possible

relocation of domestic jobs to lower­labor­cost countries, which may occur independently of new

standards or which may be influenced by the level of investments required by amended

standards. Since most standard size PTACs and PTHPs are imported and the employment

impacts in the GRIM are small, the actual impacts on domestic employment would be mostly

impacted if any domestic manufacturer decided to shift remaining domestic production to lower13­65

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cost­countries. Any standard that requires a substantial investment or adds a per unit cost could

force domestic manufacturers to consider relocation. Because the incremental cost increases and

necessary conversion investments are relatively low, it is less likely that the remaining domestic

manufacturing jobs will be eliminated in response to amended energy conservation standards for

standard size PTACs and PTHPs.

13.9.7.3 Non­Standard Size PTAC and PTHP Industry Results

The GRIM calculates that the non­standard size PTAC and PTHP industry labor

expenditure for production labor in 2012 is approximately $2 million. Using the $14.64 wage

rate and 1,688 production hours per year per employee found in the engineering analysis and the

100 percent domestic production market share, the GRIM estimates there are approximately 81

U.S. production employees involved in manufacturing non­standard size PTACs and PTHPs

covered by this rulemaking. In addition, DOE estimates that there are 24 non­production

employees in the U.S. The employment spreadsheet of the GRIM shows the annual domestic

employment impacts in further detail.

Due to a possible drop in shipments in response to standards and the uncertainties of

manufacturers’ business decisions in response to standards, DOE bounded the range of potential

impacts of amended energy conservation standards on domestic production employment for the

non­standard size PTAC and PTHP industry. For the upper bound, the direct employment

impact analysis estimates the U.S. production workers that are impacted by this rulemaking

assuming shipment levels and equipment availability remains at the levels experienced in the

current market (i.e., base case). To calculate the lower bound of the range of potential impacts,

DOE developed a scenario where either shipments drop in response to standards or

manufacturers respond to higher labor requirements by shifting production to lower­labor­cost

countries.

Table 13.9.7 shows the possible impacts on direct employment due to standards for the

non­standard size PTAC and PTHP industry.

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Table 13.9.8 Direct Employment Summary Results for Non­Standard Size PTAC and

PTHP Industry

Units Base

Case

Trial Standard Level

1 2 3 4 5

Production Labor

Expenditures (PLE) in

2012

2007$ Millions 2 2 2 2 2 2

Change in PLE from

Base Case 2007$ Millions ­ 0.01 0.02 0.03 0.03 0.05

Conversion of change in

PLE to Number of

Domestic Production

Employees

# of workers ­ 1 1 1 1 2

Domestic Production

Employment in 2012

# of workers 81 82 82 82 82 83

Non production

employment in 2012 # of workers 24 24 25 25 25 25

Total Employment # of workers 105 106 106 107 107 108

Range of Total

Employment # of workers ­ (106) ­ 1 (106) ­ 1 (107) ­ 1 (107) ­ 1 (108) ­ 2

Change in Domestic

Employment in 2012 % ­ 0.7 1.0 1.4 1.5 2.6

Figure 13.9.2 shows the non­standard size PTAC and PTHP industry total annual

domestic employment levels for each TSL calculated by the GRIM.

0

20

40

60

80

100

120

20062008201020122014201620182020202220242026202820302032

20342036

2038

20402042

Year

Total Domestic Employment (# of Jobs)

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5

Energy Conservation

Standards Effective Date

January 2012

R­22 Refrigerant

Phaseout Date

January 2010

Figure 13.9.2 Total Non­Standard Size PTAC and PTHP Industry Domestic Employment

by Year

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According to DOE research, all of the non­standard size PTACs and PTHPs sold in the

U.S. are manufactured domestically. Thus, the equipment conversion costs, conversion capital

expenses, and likely higher MPCs for non­standard size PTACs and PTHPs have direct impacts

on domestic manufacturing labor. Assuming shipments and equipment availability do not

change from current levels (i.e., do not vary from the base case scenario), the impacts of

standards on domestic employment would be small. DOE expects that there would be positive

employment impacts among domestic non­standard size PTAC and PTHP manufacturers for

TSL 1 through TSL 5 even with the base case projected shipment decreases. Because production

employment expenditures are assumed to be a fixed percentage of COGS and the MPCs increase

with more efficient equipment, higher efficiency levels result in higher labor requirements. The

base case estimates that domestic employment levels will continues to track the decreasing

revenue trend in this industry. In response to standards, domestic manufacturers would most

likely not alter employment levels much as the adoption of more efficient components or

fabrication of redesigned coils does not necessarily require more labor. The minor increases in

employment are reasonable.

In the pessimistic scenario or lower bound, DOE estimated that the greater labor

requirements could displace all U.S. production workers in the non­standard industry due to

plant relocations or their employers’ exiting the market. The wide scope of non­standard

equipment platforms (about 40) and low production volumes combined result in high per­unit

fixed conversion­costs impacts. The many small businesses operating in the non­standard size

PTAC and PTHP industry would be hit especially hard due to their focus on just this industry

and low capitalization. As a result, such small businesses may not be capable or willing to make

the necessary investments to remain in the industry on their own after the energy conservation

standards rulemaking takes effect. Manufacturers could also choose to merge and consolidate

multiple operations, relocate plants abroad, or exit the business altogether. Thus, the likely

impacts on domestic employment range from employment reductions to a net total loss of

domestic jobs in this pessimistic scenario.

13.9.8 Manufacturing Capacity

According to the majority of standard and non­standard size PTAC and PTHP

manufacturers, amended energy conservation standards will not significantly impact the

manufacturer’s production capacity, as any necessary redesign of PTACs and PTHPs will not

change the fundamental assembly of the equipment. However, manufacturers anticipate some

changes to the way they assemble PTACs and PTHPs as they convert to R­410A refrigerant and

different lubricating oils inside the refrigerant. Additional assembly may also be needed if the

number of fan motors increases. Thus, DOE believes manufacturers will be able to maintain

production capacity levels and continue to meet market demand under amended energy

conservation standards.

13.9.9 Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the

combined effects of several impending regulations may have serious consequences for some

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single

regulation may overlook this cumulative regulatory burden. For the cumulative regulatory

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burden analysis, DOE describes other product­specific regulations that could affect PTAC and

PTHP manufactures that will take effect three years before or three years after the effective date

of the amended energy conservation standards for PTACs and PTHPs.d

Companies that produce a wider range of regulated equipment may be faced with more

capital and equipment development expenditures than their competitors. This can prompt those

companies to exit the market or reduce their equipment offerings, potentially reducing

competition. Smaller companies can be especially impacted since they have lower sales volumes

over which to amortize the costs of meeting new regulations. DOE considers that a proposed

standard is not economically justified if it contributes to an unacceptable level of cumulative

regulatory burden.

As previously mentioned, all PTAC and PTHP manufacturers believe that the refrigerant

phaseout will be the biggest external burden on manufacturers. DOE took all comments and

concerns into consideration and examined different impacts the refrigerant phaseout would have

on standard and non­standard size PTAC and PTHP industries. DOE first examined the possible

impacts on INPV from converting current production of R­22 equipment into R­410A equipment

(see section 13.5.1). DOE then examined the possible impacts of amended energy conservation

standards on the R­410A base case. In other words, DOE examined the cumulative impacts of

both R­410A conversion and conformation to amended energy conservation standards (see

sections 13.5.10).

13.9.9.1 Federal Regulations on PTACs and PTHPs and Other Equipment

Produced by the Same Manufacturers

Besides the conversion to R­410A and the energy conservation regulations on PTACs

and PTHPs, several other Federal regulations and pending regulations apply to other equipment

produced by the same manufacturers. DOE recognizes that each regulation can significantly

impact manufacturers’ financial operations. Multiple regulations affecting the same

manufacturer can quickly strain manufacturers’ profits and possibly cause an exit from the

market. The most significant of these additional regulations are the EPA­mandated phaseout of

HCFCs. Table 13.9.9 and Table 13.9.10 lists the Federal regulations that could also affect

manufacturers of the standard size industry and the non­standard size industry in the three years

leading up to and the three years preceding the effective date of the amended energy

conservation standards for this equipment. It must be noted that while the list of products is

long, the amount of cumulative burden on any particular firm is extremely variable since the

product scope of each company is different.

d The effective date for non­standard size PTAC and PTHP is two years from the date of publication of this final rule

(approximately September 2010). The effective date for standard size PTAC and PTHP is four years from the date

of publication of this final rule (approximately September 2012).

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Table 13.9.9 Other DOE and Federal Actions Affecting the Standard Size PTAC and

PTHP Industry

Regulation Approximate

Effective Date*

Number of

Impacted

Companies

from the

MTA

Estimated

Industry Total

Conversion

Expenses**

(millions)

EPA Phaseout of HCFC refrigerant

on new equipment Regulation Effective

Date of January 2010 10

$22 (2007$)e

Room Air Conditioners 2014* 6 N/A†

Residential Furnaces 2015* 5 $97 (2006$)f

Battery Chargers 2014* 3 N/A†

External Power Supplies 2014* 3 N/A†

Residential Clothes Washers 2014* 3 N/A†

Residential Refrigerators and

Freezers 2010* 3 N/A†

Commercial Unitary Air

Conditioners and Heat Pumps 2010 3

N/A†

Cooking Products 2012* 3 N/A†

Dehumidifiers 2012 3 N/A†

Dishwashers 2012 3 N/A†

Ceiling Fans and Ceiling Fan Light

Kits 2010 2 N/A†

Residential Water Heaters 2015* 1 N/A†

Residential Fluorescent and

Incandescent Lamps 2012* 1

N/A†

Commercial Clothes Washers 2012* 1 N/A†

Commercial Refrigeration

Equipment 2012* 1 $112 (2007$)g

*The dates listed are an approximation. The exact dates are pending final DOE action.
 

** Total conversion expenses include both capital and equipment conversion expenses for the rulemaking specific
 

industries.
 

† For energy conservation standards for ongoing rulemakings that are awaiting DOE final action, DOE does not

have finalized estimated total industry conversion expense. For minimum performance requirements prescribed by

EPACT 2005, DOE did not estimate total industry conversion expenses because a MIA was not completed as part of

a rulemaking. Pub. L. 109­58. For minimum performance requirements prescribed by EISA 2007, DOE did not

estimate total industry conversion expenses because a MIA was not completed as part of a rulemaking. Pub. L. 110­

140.

e For further explanation of estimated R­410A conversion expenses for the standard size PTAC and PTHP industry
 

see sections 13.4.9.2 and 13.4.9.5 of this TSD.
 f Estimated industry conversion expenses were published in the TSD for the November 2007 residential furnace
 

final rule. 72 FR 65136. The TSD for the 2007 residential furnace final rule can be found at:
 

http://www1.eere.energy.gov/buildings/appliance_standards/residential/furnace_boiler_fr.html.
 g Estimated industry conversion expenses were published in the TSD for the August 2008 commercial refrigeration
 

equipment NOPR. 73 FR 50119. The TSD for the 2008 commercial refrigeration equipment NOPR can be found at:
 

http://www1.eere.energy.gov/buildings/appliance_standards/commercial/refrig_equip_nopr.html.
 

13­70

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Table 13.9.10 Other DOE and Federal Actions Affecting the Non­Standard Size PTAC and

PTHP Industry

Regulation Approximate Effective

Date*

Number of Impacted

Companies from the

MTA

Estimated Total

Conversion

Expenses**

EPA phaseout of HCFC

refrigerant on new

equipment

Regulation Effective Date of

January 2010 7

$7.8 (2007$)h

Room Air Conditioners 2014* 1 N/A†

Residential Boilers 2012 1 $16 (2006$)i

Commercial Unitary Air

Conditioners and Heat

Pumps

2010* 1

N/A†

*The dates listed are an approximation. The exact dates are pending final DOE action

** Total conversion expenses include both capital and equipment conversion expenses.

† For energy conservation standards for ongoing rulemakings that are awaiting DOE final action, DOE does not

have finalized estimated total industry conversion expense. For minimum performance requirements prescribed by

EPACT 2005, DOE did not estimate total industry conversion expenses because a MIA was not completed as part of

a rulemaking. Pub. L. 109­58. For minimum performance requirements prescribed by EISA 2007, DOE did not

estimate total industry conversion expenses because a MIA was not completed as part of a rulemaking. Pub. L. 110­

140.

Additional investments necessary to meet these potential standards could have significant

impacts on manufacturers of standard size and non­standard size PTACs and PTHPs. However,

DOE has limited data on the importance of these other regulated products for manufacturers of

PTAC and PTHP. Differences in market shares and manufacturing processes of other regulated

products for each manufacture could cause varying degrees of burdens on these manufactures.

Therefore, DOE did not estimate the cost of compliance for other regulations other than the

refrigerant phaseout on the PTAC and PTHP manufacturer industries.

13.9.9.2 Restriction of Hazardous Substances Directive

According to manufacturers, the Restriction of Hazardous Substance Directivej

(RoHS)

will have some global impact on electrical and electronic equipment manufacturing. Under the

directive, all manufacturers are banned from placing on the European Union market new

electrical and electronic equipment containing more than agreed­to levels of lead, cadmium,

mercury, hexavalent chromium, polybrominated biphenyl and polybrominated diphenyl ether

flame retardants. Although there is no Federal regulation on RoHS, California has passed SB 20:

Electronic Waste Recycling Act of 2003. Under this law, California limits the amount of

hazards substances included in the RoHS directive that can be sold in California. Manufacturers

of PTACs and PTHPs have said that RoHS will have some impacts in the way the electronic

h For further explanation of estimated R­410A conversion expenses for the non­standard size PTAC and PTHP
 

industry see sections 13.4.9.2 and 13.4.9.5 of this TSD.
 i

Estimated industry conversion expenses were published in the TSD for the November 2007 residential boilers final
 

rule. 72 FR 65136. The TSD for the 2007 residential boilers final rule can be found at:
 

http://www1.eere.energy.gov/buildings/appliance_standards/residential/furnace_boiler_fr.html.
 j

Further information about RoHS can be found at

http://eur­lex.europa.eu/LexUriServ/site/en/oj/2003/l_037/l_03720030213en00190023.pdf.

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components in the PTACs and PTHPs are incorporated into the design. Currently, PTAC and

PTHP manufacturers have electronic components in the PTAC and PTHP design that contains

substances banned by the RoHS. However, manufacturers do not anticipate RoHS will

significantly impact the PTAC and PTHP industries.

13.10 CONCLUSIONS

The following sections summarize the different impacts for the two scenarios DOE

believes are most likely to capture the range of impacts on standard­size and non­standard size

manufacturers as a result of both amended energy conservation standards and refrigerant

phaseout. DOE also notes that while these two scenarios bound the range of most plausible

impacts on manufacturers, there potentially could be circumstances, which would cause

manufacturers to experience impacts outside of this range and more closely inline with the two

other scenarios analyzed.

To assess the higher end of the range of potential impacts for both standard and nonstandard size PTAC and PTHP industries, DOE considered the scenario reflecting R­410A base

case with full cost recovery and amended energy conservation standards with full cost recovery.

This scenario assumes that manufactures will fully recover costs associated with both conversion

of equipment to R­410A refrigerant and to conform to new amended energy conservation

standards.

To assess the lower end of the range of potential impacts for both standard and nonstandard size PTAC and PTHP manufacturers, DOE considered the scenario reflecting R­410A

base case with full cost recovery and amended energy conservation standards with 50­percent

cost recovery. This scenario assumes that manufacturers would fully recover costs associated

with conversion of the equipment to R­410A refrigerant, but only recover half of the costs

necessary for equipment to conform to new amended energy conservation standards.

13.10.1.1 Standard Size PTAC and PTHP Industry

At TSL 1, the impact on INPV and cash flow varies greatly depending on the

manufacturers and their ability to pass on increases in MPCs to the customer. DOE estimated

the impacts in INPV at TSL 1 to range from less than ­$3 million up to ­$28 million, or a change

in INPV of negative 0.8 percent up to negative 6.6 percent. At this level, the industry cash flow

decreases by approximately 18.9 percent, to $12 million, compared to the base case value of $15

million in the year leading up to the standards. Since more than 75 percent of the equipment

being sold is already at or above this level using R­22 refrigerant, those manufacturers that do

not fall below the efficiency levels specified by TSL 1 after the refrigerant phaseout will not

have to make additional modifications to their product lines to conform to the amended energy

conservation standards. DOE expects the lower end of the impacts to be reached, which

indicates that industry revenues and costs are not significantly negatively impacted as long as

manufacturers are able to fully recover the increase in manufacturer production cost from the

customer.

TSL 2 is a combination TSL, which requires PTACs to be manufactured at TSL 1

efficiency levels and PTHPs to be manufacturers at TSL 3 efficiency levels. At TSL 2, the

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impact on INPV and cash flow would be similar to TSL 1 and dependent on whether

manufacturers are able to fully recover the increases in MPCs from the customer. DOE

estimated the impacts in INPV at TSL 2 to range from ­$6 million up to ­$45 million, or a

change in INPV of ­1.4 percent up to ­10.7 percent. At this level, the industry cash flow

decreases by approximately 31.2 percent, to $10 million, compared to the base case value of $15

million in the year leading up to the standards. Up to 75 percent of PTACs and up to 50 percent

of PTHPs being sold are already at or above this level using R­22 refrigerant. Similar to TSL 1

for PTACs, manufacturers that do not fall below TSL 1 after the refrigerant phaseout will not

have to make additional modifications to their product lines to conform to TSL 2. For PTHPs,

the required higher level of efficiency will cause some manufactures to make additional

modifications to their product lines to conform to the amended energy conservation standards.

Even though TSL 2 requires efficiency levels that are different for PTACs and PTHPs, there are

small differences between the EER values for a given capacity in sleeve size, which will

minimize the amount of redesign manufacturers will have to undertake to modify their product

lines. DOE expects the impacts of TSL 2 on manufacturers of standard size PTACs will be

greater than TSL 1, but the magnitude of impacts largely depends on the ability of manufacturers

to fully recover the increase in MPC from the customer and minimize the level of redesign

between the two efficiency levels.

At TSL 3, the impact on INPV and cash flow continues to vary depending on the

manufacturers and their ability to pass on increases in MPCs to the customer. DOE estimated

the impacts in INPV at TSL 3 to range from approximately ­$3 million up to ­$60 million, or a

change in INPV of ­0.8 percent up to ­14.0 percent. At this level, the industry cash flow

decreases by approximately 26.4 percent, to $11 million, compared to the base case value of $15

million in the year leading up to the standards. Currently the bulk of the equipment being sold is

already at or above this level using R­22 refrigerant. DOE does not expect industry revenues and

costs to be impacted significantly as long as standard size PTAC and PTHP manufacturers are

able to fully recover the increase in manufacturer production cost from the customer.

TSL A is a modified version of TSL 3 and TSL 4, which requires lower cooling

capacities to meet more stringent efficiency levels and higher cooling capacities to meet less

stringent efficiency levels. There is a 0.2 EER difference between the efficiency levels for

PTHPs as compared to PTACs. At TSL A, DOE estimated the impacts in INPV to range from

approximately ­$8 million to ­$61 million, or a change in INPV of ­1.9 percent up to ­14.3

percent. At this level, the industry cash flow decreases by approximately 41.6 percent, to $9

million, compared to the base case value of $15 million in the year leading up to the standards.

At higher TSLs, manufacturers have a harder time fully passing on larger increases in MPCs to

the customer. At TSL A, manufacturers are concerned about whether they will be able to

produce PTHPs, by the effective date of the standards that use R­410A refrigerant. Based on

information submitted by industry, manufacturers would be required to completely redesign their

PTHP equipment lines. Most equipment on the market is based on an equipment platform that is

shared between the air conditioning and heat pump models. Thus, any requirement to redesign

either air conditioning or heat pump models would likely result in manufacturers electing to

redesign their entire equipment line. Similar to TSL 1, for PTACs with higher cooling

capacities, manufacturers that do not fall below TSL 1 after the refrigerant phaseout will not

have to make additional modifications to their PTAC equipment lines to conform to TSL A. Due

to the disparity between efficiency levels of standard size PTACs and PTHPs specified by TSL

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A, DOE initially believes it is more likely that the higher end of the range of impacts could be

reached (i.e., a drop of 14.3 percent in INPV).

TSL 4 is a combination TSL, which requires PTACs to be manufactured at TSL 1

efficiency levels and PTHPs to be manufactured at TSL 5 efficiency levels. There is a 0.4 EER

difference between the efficiency levels for PTHPs as compared to PTACs. At TSL 4, DOE

estimated the impacts in INPV to range from approximately ­$8 million to ­$68 million, or a

change in INPV of ­1.9 percent up to ­16.0 percent. At this level, the industry cash flow

decreases by approximately 44.4 percent, to $8 million, compared to the base case value of $15

million in the year leading up to the standards. At higher TSLs, manufacturers have a harder

time fully passing on larger increases in MPCs to the customer. At TSL 4, manufacturers

expressed concern whether they would be able to produce PTHPs, by the effective date of the

standards, that use R­410A refrigerant. Based on information submitted by industry,

manufacturers would be required to completely redesign their PTHP equipment lines. Most

equipment on the market is based on an equipment platform that is shared between the air

conditioning and heat pump models. Thus, any requirement to redesign either air conditioning or

heat pump models would likely result in manufacturers electing to redesign their entire

equipment line. Similar to TSL 1, for PTACs of all cooling capacities, manufacturers that do not

fall below TSL 1 after the refrigerant phaseout will not have to make additional modifications to

their PTAC equipment lines to conform to TSL 4. Due to the disparity between efficiency levels

of standard size PTACs and PTHPs specified by TSL 4, DOE initially believes it is more likely

that the higher end of the range of impacts could be reached (i.e., a drop of 16.0 percent in

INPV).

At TSL 5, DOE estimated the impacts in INPV to range from approximately ­$1 million

up to ­$103 million, or a change in INPV of approximately ­0.2 percent up to ­24.0 percent. At

this level, the industry cash flow decreases by approximately 30.2 percent, to $11 million,

compared to the base case value of $15 million in the year leading up to the standards. As with

TSL 4, standard size PTAC and PTHP manufacturers continue to have a hard time fully passing

on larger increases in MPCs to the customer. At TSL 5, manufacturers stated their concerns over

the ability to be able to produce both PTACs and PTHPs by the effective date of the standard

utilizing R­410A refrigerant. Using the performance degradations from the engineering analysis,

TSL 5 would correspond to much higher efficiencies for both PTACs and PTHPs using R­410A,

unless higher efficiency compressors enter the market prior to the effective date of amended

energy conservation standards. Based on information submitted by industry, the majority of

manufacturers would require a complete redesign of their equipment. Thus, DOE believes it is

likely impacts on manufacturers would trend towards the pessimistic scenario at this TSL.

At TSL 6 (max tech), DOE estimated the impacts in INPV to range from ­$4 million up

to ­$164 million, or a change in INPV of approximately ­0.9 percent up to ­38.3 percent. At this

level, the industry cash flow decreases by approximately 56.6 percent, to $7 million, compared to

the base case value of $15 million in the year leading up to the standards. At this TSL,

manufacturers have a harder time fully passing on larger increases in MPCs to the customer, and

therefore manufacturers expect the higher end of the range of impacts to be reached (i.e., a drop

of 38.3 percent in INPV). Currently, there are only a few models being manufactured at these

efficiency levels, which use R­22 refrigerant. Most manufacturers did not provide DOE with

projected equipment conversion costs or capital conversion costs at this level, since they could

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not conceive of what designs using R­410A might achieve this efficiency level. The industry

would experience a slight decrease in net present value if it were able to fully pass through to

customers the increase in production costs associated with meeting new amended energy

conservation standards. However, there is a risk of very large negative impacts if manufacturers’

expectations are realized about reducing profit margins. During the interviews, manufacturers

expressed disbelief at the possibility of manufacturing an entire equipment line at the max­tech

levels using R­410A refrigerant.

13.10.1.2 Non­Standard Size PTAC and PTHP Industry

At TSL 1, DOE estimated the impacts in INPV to range from ­$16 million up to ­$17

million, or a change in INPV of ­53.6 percent up to ­57.8 percent. At this level, the industry cash

flow decreases by approximately 397 percent, ­$6 million, compared to the base case value of $2

million in the year leading up to the standards. Since more than half of the equipment being sold

is already at or above this level using R­22 refrigerant, those manufacturers that do not fall below

TSL 1 using R­410A refrigerant will not have to make additional modifications to their product

lines to conform to the amended energy conservation standards. However, equipment

conversion expenses for non­standard size manufacturers are significantly higher than those of

standard size manufacturers. At any efficiency level above baseline, the industry incurs total

equipment expenditures of more than $20 million, or the equivalent to more than half the

baseline INPV. Manufacturers in general need to convert multiple equipment families without

the same access to capital or engineering resources as larger and more established standard size

equipment manufacturers. If some small, non­standard manufactures cannot invest the

equipment and capital conversion costs necessary to comply with TSL 1 they would be forced to

abandon their equipment lines and exit the business. Others could be forced to reduce their

equipment offering in order to reduce the magnitude of the investments required to meet TSL 1

efficiency levels for non­standard levels. In addition, the lower volume shipments of nonstandard manufacturers prohibit spreading costs into higher number of units. The necessary

equipment conversion expenses significantly impacts non­standard size equipment

manufacturer’s profits and cash flow, causing the INPV to decrease by more than half.

At any TSL above 1, manufacturers stated their concerns about their ability to produce

this equipment by the effective date of the standard utilizing R­410A. Based on information

submitted by industry, manufacturers would require a complete redesign of their non­standard

PTAC and PTHP platforms. Many manufacturers stated they would be unwilling to completely

redesign non­standard size equipment because of the small size of the market and the declining

sales. Manufacturers also commented non­standard size PTACs and PTHPs are manufactured to

order based on unique building designs for replacement applications. Therefore, manufacturers

did not see the advantage to completely redesigning non­standard size PTACs and PTHPs for a

small and declining market.

At TSL 2, DOE estimated the impacts in INPV to range from ­$17 million up to ­$19

million, or a change in INPV of ­57.6 percent up to ­63.8 percent. At this level, the industry cash

flow decreases by approximately 429 percent, ­$7 million, compared to the base case value of $2

million in the year leading up to the standards. At this level, the majority of the industry is

impacted. At higher TSLs, manufacturers expect greater difficulty fully passing on larger

increases in MPCs to the customer, thus manufacturers expect the higher end of the range of

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impacts to be reached (i.e., a drop of 63.8 percent in INPV). As with any level above baseline,

manufacturers are further significantly impacted by the equipment conversion expenditures. At

TSL 2, the industry incurs total equipment expenditures of approximately $21 million. With low

volumes and less access to capital, the non­standard size PTAC and PTHP INPV decreases by

more than half.

At TSL 3, DOE estimated the impacts in INPV to range from ­$17 million up to ­$20

million, or a change in INPV of ­56.3 percent up to ­65.4 percent. At this level, the industry cash

flow decreases by approximately 421 percent, ­$7 million, compared to the base case value of $2

million in the year leading up to the standards. At higher TSLs, manufacturers expect greater

difficulty fully passing on larger increases in MPCs to the customer, thus manufacturers expect

the higher end of the range of impacts to be reached (i.e., a drop of 65.4 percent in INPV).

Manufacturers stated the level of re­design required to manufacturer all the equipment lines and

cooling capacity ranges would be so extensive that they would consider not investing the time,

research, or development efforts necessary to make equipment utilizing R­410A at TSL 3.

At TSL 4, DOE estimated the impacts in INPV to range from ­$21 million up to ­$23

million, or a change in INPV of ­68.5 percent up to ­78.0 percent. At this level, the industry cash

flow decreases by approximately 513 percent, ­$9 million, compared to the base case value of $2

million in the year leading up to the standards. At TSL 4, manufacturers stated their concerns

over the ability to be able to produce PTHPs by the effective date of the standards utilizing R410A refrigerant. Using the performance degradations from the engineering analysis, TSL 4

would correspond to significantly higher efficiency levels for the equipment unless higher

efficiency compressors enter the market prior to the effective date of amended energy

conservation standards. Based on information submitted by industry, manufacturers would be

required to completely redesign their PTHP equipment lines.

At TSL 5, DOE estimated the impacts in INPV to range from ­$20 million up to ­$24

million, or a change in INPV of ­64.8 percent up to ­81.2 percent. At this level, the industry cash

flow decreases by approximately 493 percent, ­$8 million, compared to the base case value of $2

million in the year leading up to the standards. Currently, there are very few equipment lines

being manufactured that have efficiency level at or above TSL 5 utilizing R­22 refrigerant. All

manufacturers stated that this level could not be achieved with current technologies after the

refrigerant phaseout.

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REFERENCES
 

1	 The American Society of Heating, Refrigerating, and Air­Conditioning Engineers

(ASHRAE). ANSI/ASHRAE/IESNA Standard 90.1 1999, “Energy Standard for

Buildings Except Low­Rise Residential Buildings.” 1999. See www.ashrae.org for more

information.

2	 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of

Companies, 3rdEdition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 2000.

3	 Securities and Exchange Commission (SEC), Annual 10­K Reports, Various Years,

Washington D.C., <www.sec.gov>.

4	 McKinsey & Company, Inc. 2000. Op. cit.

5	 SEC. Op. cit.

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