CHAPTER 8. LIFE­CYCLE COST AND PAYBACK PERIOD ANALYSES

TABLE OF CONTENTS

8.1 INTRODUCTION

.............................................................................................................. 8­1

8.1.1 General Approach for Life­Cycle Cost and Payback Period Analyses

............... 8­1

8.1.2 Overview of Life­Cycle Cost and Payback Period Analyses Inputs

................... 8­2

8.2 LIFE­CYCLE COST ANALYSIS INPUTS....................................................................... 8­6

8.2.1 Definition

............................................................................................................. 8­6

8.2.2 Total Installed Cost Inputs................................................................................... 8­6

8.2.2.1 Baseline Manufacturer Selling Price................................................... 8­7

8.2.2.2 Standard­Compliant Manufacturer Selling Price Increases

................ 8­8

8.2.2.3 Overall Markup

................................................................................... 8­8

8.2.2.4 Installation Cost................................................................................... 8­9

8.2.2.5 Weighted­Average Total Installed Cost

............................................ 8­11

8.2.3 Operating Cost Inputs

........................................................................................ 8­13

8.2.3.1 Electricity Price Analysis

.................................................................. 8­14

8.2.3.2 Electricity Price Trend....................................................................... 8­16

8.2.3.3 Repair Cost........................................................................................ 8­17

8.2.3.4 Maintenance Cost

.............................................................................. 8­18

8.2.3.5 Equipment Lifetime........................................................................... 8­18

8.2.3.6 Discount Rate

.................................................................................... 8­19

8.2.3.7 Effective Date of Amended Energy Conservation Standard............. 8­23

8.3 PAYBACK PERIOD INPUTS......................................................................................... 8­23

8.3.1 Definition

........................................................................................................... 8­23

8.3.2 Inputs.................................................................................................................. 8­24

8.4 RESULTS USING AVERAGE ELECTRICITY PRICES............................................... 8­24

8.4.1 Life­Cycle Cost Results

..................................................................................... 8­24

8.4.1.1 Life­Cycle Cost Breakdown Based on Average Input Values

.......... 8­25

8.4.1.2 Differences in LCC between Baseline and Standard­compliant

Equipment

......................................................................................... 8­26

8.4.2 Payback Period Results...................................................................................... 8­28

8.5 LCC SENSITIVY STUDIES............................................................................................ 8­31

8.5.1 Sensitivity to Electricity Price Escalation Rate

................................................. 8­31

8.5.2 Sensitivity to Refrigerant Assumptions

............................................................. 8­33

8.5.3 Sensitivity to Materials Prices

........................................................................... 8­35

8.6 DETAILED RESULTS

.................................................................................................... 8­36

8­iLIST OF TABLES

Table 8.1.1 Summary of Inputs and Key Assumptions used in the LCC and PBP

Analyses............................................................................................................... 8­5

Table 8.2.1 Representative PTAC and PTHP Equipment Evaluated for the Life­Cycle

Cost and Payback Analyses

................................................................................. 8­7

Table 8.2.2 Baseline Manufacturer Selling Prices per Unit.................................................... 8­8

Table 8.2.3 Standard­compliant Manufacturer Selling Price Increases per Unit (Price

Increases Relative to the Price of Baseline Efficiency Equipment)

.................... 8­8

Table 8.2.4 Overall Baseline Markups by Equipment Type................................................... 8­9

Table 8.2.5 Overall Incremental Markups by Equipment Type

............................................. 8­9

Table 8.2.6 Installation Costs for Baseline PTAC and PTHP Equipment............................ 8­10

Table 8.2.7 Installation Cost Indices (National Average Value

= 100.0)............................. 8­10

Table 8.2.8 Costs and Markups for Determination of Weighted­Average Total

Installed Costs (PTAC 9,000)*.......................................................................... 8­11

Table 8.2.9 Manufacturer Price, Equipment Price, Installation Cost, and Total

Installed Costs for PTAC 9000, at U.S. Average Prices (2006$)*

.................... 8­13

Table 8.2.10 Estimated Commercial Electricity Prices by State (2006 cents/kWh)............... 8­14

Table 8.2.11 Derived Average Commercial Electricity Price Ratios by Business Type........ 8­15

Table 8.2.12 Real Discount Rates by Company and Ownership Category

............................ 8­21

Table 8.4.1 Distribution of Life­Cycle Cost Savings from Baseline Level for PTAC

9000 by Efficiency Level................................................................................... 8­27

Table 8.4.2 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency

Level and Equipment Class

............................................................................... 8­28

Table 8.4.3 Summary of Payback Periods Results for Standard Size PTAC 9000

Equipment.......................................................................................................... 8­30

Table 8.4.4 National Average Payback Periods by Efficiency Level and Equipment

Class................................................................................................................... 8­31

Table 8.5.1 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency

Level and Equipment Class

– EIA Low Growth Scenario

................................ 8­32

Table 8.5.2 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency

Level and Equipment Class

– EIA High Growth Scenario................................ 8­32

Table 8.5.3 Average Payback Period by Efficiency Level and Equipment Class

– EIA

Low Growth Scenario........................................................................................ 8­33

Table 8.5.4 Average Payback Period by Efficiency Level and Equipment Class

– EIA

High Growth Scenario

....................................................................................... 8­33

Table 8.5.5 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency

Level and Equipment Class for R­22 Refrigerant.............................................. 8­34

Table 8.5.6 National Average Payback Periods by Efficiency Level and Equipment

Class for R­22 Refrigerant................................................................................. 8­34

Table 8.5.7 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency

Level and Equipment Class for 2006 Materials Price Levels............................ 8­35

Table 8.5.8 National Average Payback Periods by Efficiency Level and Equipment

Class for 2006 Materials Price Levels

............................................................... 8­36

8­iiLIST OF FIGURES

Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP

....................... 8­4

Figure 8.2.1 Cumulative Probability Distribution Showing the Estimated Electricity

Prices Paid by PTAC and PTHP Customers (2006$)

........................................ 8­16

Figure 8.2.2 Electricity Price Trends for Commercial Rates to 2042

.................................... 8­17

Figure 8.4.1 Effect of the Change in Efficiency Level on Life­Cycle Cost for Standard

Size PTAC with a Cooling Capacity of 9,000 Btu/h in Large Chain Hotels

(2006$) at Average U.S. Conditions (Level 0 is the Baseline Efficiency

Level)

................................................................................................................. 8­25

Figure 8.4.2 Cumulative Chart of LCC Savings for Standard Size PTAC, Cooling

Capacity of 9,000 Btu/h, at Efficiency Level 4

................................................. 8­27

Figure 8.4.3 Effect of the Change in Efficiency Level on Payback Period for Standard

Size PTAC 9000 in Large Chain Hotels at Average U.S. Conditions

(Level 0 is the Baseline Level).

......................................................................... 8­29

Figure 8.4.4 Cumulative Chart of Payback Period of PTAC 9000 at Efficiency Level 4

..... 8­30

8­iiiCHAPTER 8. LIFE­CYCLE COST AND PAYBACK PERIOD ANALYSES

8.1 INTRODUCTION

This chapter describes the methodology for analyzing the economic impacts of possible

energy conservation standards being developed for packaged terminal air conditioners (PTACs)

and packaged terminal heat pumps (PTHPs) equipment on individual customers. The effect of

amended standards on individual customers usually includes a reduction in operating cost and an

increase in purchase cost. This chapter describes two metrics used in the analysis to determine

the economic impact of standards on individual commercial customers:

• Life­cycle cost (LCC) is the total customer cost over the life of an appliance or equipment,

including purchase costs and operating costs (which in turn include maintenance, repair, and

energy costs). Future operating costs are discounted to the time of purchase, and summed

over the lifetime of the appliance or equipment.

• Payback period (PBP) measures the amount of time it takes customers to recover the

assumed higher purchase price of more energy­efficient equipment through reduced

operating costs.

DOE conducted the LCC and PBP analysis using a spreadsheet model developed in

Microsoft Excel. When combined with Crystal Ball (a commercially available software

program), the LCC and PBP model generates a Monte Carlo simulation to perform the analysis

by incorporating uncertainty and variability considerations in certain of the key parameters as

discussed below.

Inputs to the LCC and PBP analyses of PTAC and PTHP equipment are discussed in

sections 8.2 and 8.3, respectively. Results for each metric are presented in sections 8.4 and 8.5,

respectively. Key variables and calculations are presented for each metric. The calculations

discussed here were performed with a series of Microsoft Excel spreadsheets which are

accessible over the Internet

(http://www.eere.energy.gov/buildings/appliance_standards/commercial/packaged_ac_hp.html).

Details of and instructions for using the spreadsheets are discussed in appendix D. A

more complete set of results of the analyses are presented in appendix E.

8.1.1 General Approach for Life­Cycle Cost and Payback Period Analyses

Recognizing that each business that uses PTAC and PTHP equipment is unique, DOE

analyzed variability and uncertainty by performing the LCC and PBP calculations detailed here

for four types of commercial businesses, each of which tends to have different costs of financing

because of the nature of the business. DOE identified these four types of businesses, which

represent over 95 percent of the end user sectors of PTAC and PTHP equipment. The first type

of business is a “large chain” hotel or motel, which, DOE believes, has access to a wide range of

financing options and thus a relative low financing costs. The second type is an “independent”

hotel or motel, which is not affiliated with a national chain, which has fewer financing options

and thus a relative high financing costs. A third type of business is called “health care” and

includes nursing homes, as well as assisted living and long­term care facilities, which, similar to

8­1the large chain hotel, has a relative low financing costs. The fourth type is called “office” and

applies to small office buildings that are occupied by offices of non­hospital medical

professionals such as physicians and dentists which, DOE believes, has the fewest financing

options, and as a result, the highest costs. DOE derived the financing costs based on data from

the Damodaran Online site. 1

The LCC analysis used the estimated energy use for each PTAC or PTHP unit as

described in the energy use characterization analysis in Chapter 7 of the TSD. Energy use of

PTACs and PTHPs is sensitive to climate, so it varies by State within the United States. Aside

from energy use, other important factors influencing the LCC and PBP analyses include energy

prices, installation costs, equipment distribution markups, and sales tax. At the National level,

the LCC spreadsheets explicitly modeled both the uncertainty and the variability in the model’s

inputs, using probability distributions based on the shipment of PTAC and PTHP equipment to

different States and business types.

As mentioned above, DOE generated LCC and PBP results as probability distributions

using a simulation based on Monte Carlo analysis methods, in which certain key inputs to the

analysis consist of probability distributions rather than single­point values. Therefore, the

outcomes of the Monte Carlo analysis can also be expressed as probability distributions. As a

result, the Monte Carlo analysis produces a range of LCC and PBP results. A distinct advantage

of this type of approach is that DOE can identify the percentage of customers achieving LCC

savings or attaining certain PBP values due to an increased efficiency level, in addition to the

average LCC savings or average PBP for that efficiency level.

The LCC and PBP results are displayed as distributions of impacts compared to the

baseline conditions. As described in Chapter 7, the baseline efficiency level is defined as the

PTAC and PTHP efficiency level specified by the American Society of Heating, Refrigerating,

and Air­Conditioning Engineers, Inc. (ASHRAE) and the Illuminating Engineering Society of

North America (IESNA) Standard 90.1­1999, “ Energy Standard for Buildings Except Low­Rise

Residential Buildings” (ASHRAE/IESNA Standard 90.1­1999). Results are presented at the end

of this chapter. A variety of graphic displays can be created to illustrate the implications of the

analysis. Examples of graphic displays are (1) a cumulative probability distribution showing the

percentage of PTAC and PTHP equipment in U.S. commercial buildings that would experience a

net LCC savings, and (2) a cumulative frequency chart depicting variation in PBP for each

PTAC and PTHP efficiency level considered.

All analyses were performed under the assumption that the current R­22 refrigerant

would have been displaced by an alternative refrigerant in 2010 due to the Clean Air Act. The

analysis methodology and results presented in this chapter assume that all equipment

manufactured after 2010 will use R­410A. Sensitivity studies were conducted using PTAC and

PTHP equipment with R­22 and the results of the sensitivity analysis are summarized in the

chapter and appear in appendix E.

8.1.2 Overview of Life­Cycle Cost and Payback Period Analyses Inputs

The LCC is the total customer cost over the life of the equipment, including purchase cost

and operating cost (including energy cost). Future operating costs are discounted to the time of

8­2purchase and summed over the lifetime of the equipment. The PBP is the increase in purchase

cost of higher efficiency equipment divided by the change in annual operating cost (as a result of

lower energy consumption) of the equipment. It represents the number of years it will take the

customer to recover the increased purchase cost through decreased operating costs. In the

calculation of PBP, future costs are not discounted.

Inputs to the LCC and PBP analyses are categorized as follows: (1) inputs for

establishing the purchase cost, otherwise known as the total installed cost, and (2) inputs for

calculating the operating cost (i.e., energy, maintenance, and repair costs).

The primary inputs for establishing the total installed cost are:

• Baseline manufacturer selling price : The baseline manufacturer selling price (MSP) is

the price charged by the manufacturer to either a wholesaler or customer for equipment

meeting existing minimum efficiency (or baseline) standards. The manufacturer selling

price includes a markup that converts the cost of production (i.e., the manufacturer cost)

to a manufacturer selling price.

• Standard­level manufacturer selling price increase : The standard­level MSP is the

incremental change in MSP associated with producing equipment at each of the higher

standard levels.

• Markups and sales tax : Markups and sales tax are the markups and sales tax associated

with converting the MSP to a customer price. The markups and sales tax are described in

detail in Chapter 6, Markups for Equipment Price Determination.

• Installation price : Installation price is the cost to the customer of installing the

equipment. The installation price represents all costs required to install the equipment

but does not include the marked­up customer equipment price. The installation price

includes labor, overhead, and any miscellaneous materials and parts. Thus, the total

installed cost equals the customer equipment price plus the installation price.

The primary inputs for calculating the operating cost are:

• Equipment energy consumption : The equipment energy consumption is the site energy

use associated with the use of the PTAC and PTHP equipment to provide spaceconditioning to the building. Chapter 7, Building Energy Use Characterization, provides

complete details on the PTAC and PTHP equipment energy use simulations and their

results.

• Electricity prices : Electricity prices used in the analysis are the price per kilowatt­hour in

cents or dollars ($/kWh) paid by each customer for electricity. Electricity prices are

determined using average commercial electricity prices in each State, as determined from

Energy Information Administration (EIA) data for 2006 2

. The 2006 average commercial

prices were then modified to reflect the fact that the four types of businesses that use the

PTAC and PTHP equipment pay prices that, on average, are either slightly higher or

lower than the 2006 average commercial prices, based on the 2003 Commercial Building

Energy Consumption Survey (CBECS) data. 3

8­3Installation Costs Installation Costs

Repair Costs Repair Costs Lifetimes Lifetimes Annual Maintenance Electricity

Consumption

Electricity

Consumption

Manufacturer Base

Price

Total Installed Cost

(Std i Base) Manufacturer Base

Price

Contractor Markups

Markups Wholesaler/

Distributor Markup

Electricity Prices National Account

Markup Equipment Prices

Sales Tax

Manufacturer Base

Price

Installation Costs Manufacturer Std 1

Base Price Manufacturer Std 1

Base Price

Manufacturer Price

Standard i 1...n

Electricity

Consumption Annual Energy Costs

Annual Maintenance

Repair Costs Annual Operating

Cost (Std i Base) Payback

Period

Discount Rate

Lifetimes Lifetime

Operating

Cost (Std

i Base) Lifecycle

Cost

Annual Maintenance

Costs Installation Costs Installation Costs

Repair Costs Repair Costs Lifetimes Lifetimes Annual Maintenance Electricity

Consumption

ec r c y

onsumption Manufacturer Base

Price Manufacturer Base

Price

Markups Manufacturer Std 1

Base Price Manufacturer Std 1

Base Price

Annual Maintenance • Electricity price trends : The EIA’s Annual Energy Outlook 2007 ( AEO 2007 ) is used to

forecast electricity prices into the future 4

. For the results presented in this chapter, DOE

used the AEO 2007 reference case to forecast future electricity prices.

• Maintenance costs : The labor and material costs associated with maintaining the

operation of the equipment (e.g., cleaning heat exchanger coils and drain pans, changing

air filters, etc.).

• Repair costs : The labor and material costs associated with repairing or replacing

components that have failed.

• Lifetime : The age at which the PTAC or PTHP equipment is retired from service.

• Discount rate : The rate at which future costs are discounted to establish their present

value.

Figure 8.1.1 graphically depicts the relationships between the installed cost and operating

cost inputs for the calculation of the LCC and PBP. Table 8.1.1 summarizes the values for the

various inputs to the calculation of the LCC and PBP. As noted earlier, most of the inputs are

characterized by probability distributions that capture variability in the input variables. Also

listed in Table 8.1.1 are chapters in the TSD, where more detailed information on the input

variables can be found.

– =

Contractor Markups Wholesaler/

Distributor Markup

National Account

Markup

Sales Tax

­

– El t i it

C Total Installed Cost

(Std i Base)

Electricity Prices Equipment Prices

Manufacturer Base

Price

Installation Costs Manufacturer Price

Standard i= 1...n

Electricity

Consumption Annual Energy Costs

Repair Costs Annual Operating

Cost (Std i ­ Base) Payback

Period

Discount Rate

Lifetimes Lifetime

Operating

Cost (Std

i – Base) Lifecycle

Cost

Annual Maintenance

Costs

Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP

8­4Table 8.1.1 Summary of Inputs and Key Assumptions used in the LCC and PBP

Analyses

Inputs Description

Affecting Installed Costs

Equipment Price Derived by multiplying MSP (from the engineering analysis) by

wholesaler markups and contractor markups plus sales tax (from

markups analysis). Used the probability distribution for the different

markups to describe their variability.

Installation Cost Includes installation labor, installer overhead, and any miscellaneous

materials and parts, derived from RS Means CostWorks 2007

. Affecting Operating Costs

Annual Energy Use Derived from whole­building hourly energy use simulation for

PTACs or PTHPs in a representative hotel/motel building in various

climate locations (from energy use characterization analysis). Used

annual electricity use per unit. Used the probability distribution to

account for which State a unit will be shipped to, which in turn

affects the annual energy use.

Electricity Price Calculated average commercial electricity price in each State, as

determined from EIA data for 2006. Used the AEO2007 forecasts to

estimate the future electricity prices. Used the probability

distribution for the electricity price.

Maintenance Cost Annual maintenance cost did not vary as a function of efficiency.

Repair Cost Estimated the annualized repair cost for baseline efficiency PTAC

and PTHP equipment as $15, based on costs of extended warranty

contracts for PTACs and PTHPs and further discussed in Chapter 8

of the TSD. Assumed that repair costs would vary in direct

proportion with the MSP at higher efficiency levels because it

generally costs more to replace components that are more efficient.

Affecting Present Value of Annual Operating Cost Savings

Equipment Lifetime Used the probability distribution of lifetimes, with mean lifetime for

each of four equipment classes assumed to be 10 years based on

literature reviews and consultation with industry experts.

Discount Rate Mean real discount rates ranging from 5.7 percent for owners of

health care facilities to 8.2 percent for independent hotel/motel

owners. Used the probability distribution for the discount rate.

Date Standards Become Effective September 30, 2012 (four years after the publication of the final

rule)

Analyzed Efficiency Levels

Analyzed Efficiency Levels Baseline efficiency levels (ASHRAE/IESNA Standard 90.1­1999)

and five higher efficiency levels for six equipment classes (DOE

also considered levels that were combinations of efficiency levels

for PTACs and PTHPs).

All of the inputs depicted in Figure 8.1.1 and summarized in Table 8.1.1 are discussed in

sections 8.2 and 8.3.

8­58.2 LIFE­CYCLE COST ANALYSIS INPUTS

8.2.1 Definition

Life­cycle cost is the total customer cost over the life of a piece of equipment, including

purchase cost and operating costs (which are comprised of energy costs, maintenance costs, and

repair costs). Future operating costs are discounted to the time of purchase and summed over the

lifetime of the equipment. Life­cycle cost is defined by the following equation:

N

LCC

= IC + 

# ∑ OC

t /(1 + r ) t Eq. 8.1

t = 1

where:

LCC

= life­cycle cost ($),

IC

= total installed cost ($),

∑

= sum over the lifetime, from year 1 to year N,

where N

= lifetime of equipment (years),

OC

= operating cost ($),

r = discount rate, and

t = year for which operating cost is being determined.

Because DOE gathered most of its data for the LCC analysis in 2006, DOE expresses all

the costs in 2006$. Total installed cost, operating cost, lifetime, and discount rate are discussed

in the following sections. In the LCC analysis, the year of equipment purchase is assumed to be

2012, the effective date of the amended energy conservation standards for PTACs and PTHPs.

8.2.2 Total Installed Cost Inputs

The total installed cost to the customer is defined by the following equation:

IC

= EQP + INST Eq. 8.2

where:

EQP

= equipment price ($) (i.e., customer price for the equipment only),

INST

= installation cost or the customer price to install equipment ($) (i.e., the cost for

labor and materials).

The equipment price is based on the distribution channel through which the customer

purchases the equipment. As discussed in Chapter 6, Markups for Equipment Price

Determination, DOE defined four types of distribution channels to describe how the equipment

passes from the manufacturer to the customer: (1) the manufacturer sells directly to the customer

through a national account, (2) the manufacturer sells the equipment to a wholesaler, who in turn,

sells it directly to the customer; (3) the manufacturer sells the equipment to a wholesaler, who

sells to a mechanical contractor, who makes the purchase on behalf of the customer, (4) the

manufacturer sells the equipment to a wholesaler, who sells to a mechanical contractor hired by a

general contractor. The general contractor purchases and install the equipment on behalf of the

customer and adds its markup to the mechanical contractor’s price.

8­6The remainder of this section provides information about the variables DOE used to

calculate the total installed cost for PTAC and PTHP. Inputs to determine total installed cost are

shown below:

• Baseline manufacturer selling prices ($) (section 8.2.2.1)

• Standard­level manufacturer selling price increases ($) (section 8.2.2.2)

• Overall markups (section 8.2.2.3)

• Installation costs ($) (section 8.2.2.4)

• Weighted­average total installed costs ($) (section 8.2.2.5)

8.2.2.1 Baseline Manufacturer Selling Price

The baseline MSP is the price charged by manufacturers to either a wholesaler or very

large customer for equipment meeting existing minimum efficiency (or baseline) standards. The

MSP includes a markup that converts the cost to manufacture (i.e., the manufacturing cost) to a

MSP. DOE developed the baseline MSP through an efficiency level analysis supplemented by

certain design­option considerations. Refer to Chapter 5, Engineering Analysis, for details.

DOE developed MSP for six representative equipment categories within the four equipment

classes identified in market and technology assessment analysis, Chapter 3 of the TSD. The

LCC and PBP were calculated based on the same set of six representative equipment categories

as given in Table 8.2.1.

Table 8.2.1 Representative PTAC and PTHP Equipment Evaluated for the Life­Cycle

Cost and Payback Analyses

Equipment

Class Representative

Equipment

Category Description

PTAC

(Standard Size) PTAC 9000 Packaged Terminal Air Conditioner, Standard Size,

9,000 Btu/h Cooling Capacity

PTAC

(Standard Size) PTAC 12000 Packaged Terminal Air Conditioner, Standard Size,

12,000 Btu/h Cooling Capacity

PTHP

(Standard Size) PTHP 9000 Packaged Terminal Heat Pump, Standard Size,

9,000 Btu/h Cooling Capacity

PTHP

(Standard Size) PTHP 12000 Packaged Terminal Heat Pump, Standard Size

, 12,000 Btu/h Cooling Capacity

PTAC

(Non­Standard

Size) PTAC 11000 Packaged Terminal Air Conditioner, Non­Standard

Size, 11,000 Btu/h Cooling Capacity

PTHP

(Non­Standard

Size) PTHP 11000 Packaged Terminal Heat Pump, Non­Standard Size,

11,000 Btu/h Cooling Capacity

DOE determined the minimum efficiency levels listed in ASHRAE/IESNA Standard

90.1­1999 as the baseline efficiency levels for PTACs and PTHPs. The minimum efficiency

levels specified by ASHRAE/IESNA Standard 90.1­1999 are detailed in Chapter 5, Engineering

Analysis. DOE developed the MSP for the baseline efficiency equipment as a part of the

engineering analysis (see Chapter 5 of the TSD), which are shown in Table 8.2.2.

8­7Table 8.2.2 Baseline Manufacturer Selling Prices per Unit

Representative

Equipment ASHRAE/ IESNA

Standard 90.1­1999 5

(Baseline Efficiency) Baseline

Manufacturer

Selling Price*

(2006$)

PTAC 9000 EER 10.6 $469.73

PTAC 12000 EER 9.9 $550.95

PTHP 9000 EER 10.4, COP 3.0 $529.12

PTHP 12000 EER 9.7, COP 2.9 $608.76

PTAC 11000 EER 8.6 $619.52

PTHP 11000 EER 8.5, COP 2.6 $682.73

* Baseline MSP is based upon the PTAC and PTHP equipping using R­410A refrigerant.

8.2.2.2 Standard­Compliant Manufacturer Selling Price Increases

The standard­compliant MSP increase is the change in MSP associated with producing

equipment at higher efficiency levels. DOE developed MSP increases associated with increases

in equipment efficiency levels through a combination of efficiency level and design­option

analyses in the engineering analysis (see Chapter 5 of the TSD). MSP increases as a function of

equipment efficiency were developed for each of the six representative equipment categories in

the engineering analysis as well. Table 8.2.3 summarizes the estimated MSP increases for PTAC

and PTHP efficiency levels considered in the LCC and PBP analyses.

Table 8.2.3 Standard­compliant Manufacturer Selling Price Increases per Unit (Price

Increases Relative to the Price of Baseline Efficiency Equipment)

Representative Standard­Compliant MSP

(2006$)

Equipment Efficiency

Level 1 Efficiency

Level 2 Efficiency

Level 3 Efficiency

Level 4 Efficiency

Level 5

PTAC 9000 $8.28 $14.19 $20.42 $26.96 $44.70

PTAC 12000 $11.08 $19.17 $27.82 $37.02 $73.64

PTHP 9000 $13.40 $19.31 $25.54 $32.08 $49.82

PTHP 12000 $17.77 $25.86 $34.51 $43.71 $92.05

PTAC 11000 $15.48 $23.65 $33.12 $60.23 $83.91

PTHP 11000 $16.77 $24.94 $34.41 $61.52 $95.67

8.2.2.3 Overall Markup

For a given distribution channel, the overall markup is the value determined by

multiplying all the associated markups and the applicable sales tax together to arrive at a single

overall distribution chain markup value. The overall markup is multiplied by the baseline or

standard­compliant manufacturing selling price to arrive at the price paid by the customer.

Because there are baseline and incremental markups associated with the wholesaler and

mechanical contractor, the overall markup is also divided into a baseline markup (i.e., a markup

used to convert the baseline manufacturer price into a customer price) and an incremental

markup (i.e., a markup used to convert a standard­compliant MSP increase due to an efficiency

increase into an incremental customer price). Further, the overall markups are based on

8­8distribution channels, as well as whether the equipment is being purchased for a new

construction installation or for an existing equipment replacement. As a result, DOE developed

the overall baseline markups and incremental markups for both the new construction and

replacement applications as a part of the markups analysis (Chapter 6 of the TSD).

Based on the percentages of the market attributed to each of the four distribution channels

and whether the equipment goes into replacement applications or new construction applications,

the weighted­average overall markups and their associated components are presented in Table

8.2.4 and Table 8.2.5 for the baseline and incremental markups, respectively. The differences

between national average incremental markups for standard size and non­standard size units are

small enough that the last columns in Table 8.2.5 are identical.

Table 8.2.4 Overall Baseline Markups by Equipment Type

New Overall

Replacement Construction Weighted

Equipment Type Application Application Average

PTACs and PTHPS

(Standard Size) 1.93 2.08 1.96

PTACs and PTHPS

(Non­Standard Size) 1.93 2.08 1.93

Table 8.2.5 Overall Incremental Markups by Equipment Type

New Overall

Replacement Construction Weighted

Equipment Type Application Application Average

PTACs and PTHPS

(Standard Size) 1.28 1.29 1.28

PTACs and PTHPS

(Non­Standard Size) 1.28 1.29 1.28

8.2.2.4 Installation Cost

The installation cost is the price to the customer of labor and materials (other than the

actual equipment) needed to install the PTAC and PTHP equipment. DOE derived installation

cost for PTAC and PTHP equipment from data in the RS Means: Cost Works 2007. RS Means

provides estimates on the person­hours required to install PTAC and PTHP equipment and the

labor rates associated with the type of crew required to install the equipment 6

. Generally

speaking, installation involves movement into the building, installation or setting of equipment

(including sleeve), connecting to power supply, filling/flushing/cleaning/touchup, startup and

running adjustments, training the owner’s representative, and warranty and call­back service.

The installation cost was calculated by multiplying the number of person­hours by the

corresponding labor rate. RS Means provides specific person­hour and labor rate data for the

installation of “Unitary Air Conditioning Equipment” (equipment category 15730), a

subcategory of which is PTAC and PTHP equipment. Labor rates vary significantly from region

to region of the country and the RS Means data provide the necessary information to capture this

regional variability. RS Means provides cost indices that reflect the labor rates for 295 cities in

the United States. Several cities in all 50 States and the District of Columbia are identified in the

8­9RS Means data. DOE incorporated these cost indices into the analysis to capture variation in

installation cost, depending on the location of the customer.

Table 8.2.6 summarizes the nationally representative person­hours and labor rates

associated with the installation of PTAC and PTHP equipment as presented in RS Means

. In

Table 8.2.6, both bare installation costs (i.e., costs before overhead and profit [O&P]) and

installation costs including O&P are provided. DOE assumed that the installation costs that

include O&P represent the installation costs for baseline equipment. These installation costs are

assumed to remain fixed regardless of efficiency level (a “flat” installation cost scenario).

However, the LCC spreadsheet allows for an alternative scenario ­ that the installation cost

increases with higher efficiency levels ­ and this alternative was implemented in the LCC

spreadsheet by providing for an installation price that varies in proportion to increased

manufacturer cost above the baseline efficiency level. DOE did not, however, find a basis for

the latter assumption.

Table 8.2.6 Installation Costs for Baseline PTAC and PTHP Equipment

Equipment Type Person­Hours Labor Plus O&P (2006$)

Rate Cost

PTAC and PTHP

9000 3.2 $61.20 $195.84

PTAC and PTHP

11000 and 12000 4.0 $61.20 $244.80

Table 8.2.7 summarizes the cost indices for installations in each of the 50 states, plus the

District of Columbia, used to vary the nationally representative installation costs in Table 8.2.6.

To arrive at an average index for each state, DOE weighted the city indices in each state by their

population within the state. DOE used population weights for the year 2000 from the U.S.

Census Bureau to calculate a weighted­average index for each state from the R.S. Means data.

Table 8.2.7 Installation Cost Indices (National Average Value = 100.0)

State Index State Index State Index

Alabama 60.1 Kentucky 85.6 North Dakota 65.8

Alaska 116.8 Louisiana 65.0 Ohio 102.7

Arizona 78.9 Maine 79.5 Oklahoma 64.7

Arkansas 65.5 Maryland 90.1 Oregon 114.5

California 124.1 Massachusetts 125.0 Pennsylvania 132.3

Colorado 87.3 Michigan 110.3 Rhode Island 113.2

Connecticut 121.0 Minnesota 128.7 South Carolina 42.5

Delaware 117.2 Mississippi 38.5 South Dakota 37.1

Dist. of Columbia 98.1 Missouri 108.7 Tennessee 75.1

Florida 62.1 Montana 78.1 Texas 65.3

Georgia 76.9 Nebraska 86.0 Utah 73.4

Hawaii 123.3 Nevada 107.0 Vermont 68.3

Idaho 78.5 New Hampshire 93.3 Virginia 75.9

Illinois 134.6 New Jersey 132.5 Washington 109.9

Indiana 90.8 New Mexico 75.4 West Virginia 93.5

Iowa 84.0 New York 168.3 Wisconsin 103.3

Kansas 75.7 North Carolina 47.9 Wyoming 67.0

8­108.2.2.5 Weighted­Average Total Installed Cost

As presented in Eq.8.2, the total installed cost is the sum of the equipment price and the

installation cost. DOE derived the customer equipment price for any given efficiency level by

multiplying the baseline MSP by the baseline markup and adding to it the product of the

incremental MSP and the incremental markup. Because MSPs, markups, and the sales tax all

can take on a variety of values, depending on location, the resulting total installed cost for a

particular efficiency level will not be a single­point value, but rather a distribution of values.

The baseline MSP and the standard­compliant MSP increases are the starting points for

determining the total installed cost (values are taken directly from Table 8.2.2 and Table 8.2.3).

DOE used the baseline and incremental markups and installation costs to convert the MSPs into

total installed costs for a case where the incremental installation costs are held flat. As an

example, the weighted average costs for the PTAC 9,000 equipment category are presented for

the baseline level. Table 8.2.8 summarizes the weighted­average costs and markups necessary

for determining the weighted­average baseline and standard­compliant total installed costs.

Table 8.2.8 Costs and Markups for Determination of Weighted­Average Total Installed

Costs (PTAC 9,000)*

Variable Weighted Average or Mean Value

Baseline Manufacturer selling price $469.73

Standard­compliant Manufacturer selling price Increase

(Efficiency Level 4) $26.96

Overall Baseline Markup ­ Standard Size 1.96

Overall Incremental Markup

– Standard Size 1.28

Installation Cost–Baseline $195.84

Installation Cost Factor –Incremental 1.00 **

* Incremental installation costs held flat

** National incremental cost index on a population­weighted national basis is equal to 1.00.

To illustrate the derivation of the weighted­average total installed cost shown in

Table 8.2.8, DOE presents the calculation below for the baseline efficiency and a higher

efficiency (efficiency level 4) standard size PTAC with cooling capacity of 9,000 Btu/h unit

(PTAC 9000). For baseline equipment, the calculation of the total installed cost at national

average conditions is as follows:

IC BASE PTAC 9000 = EQP BASE­ PTAC 9000 +INST BASE­ PTAC 9000 X INSTNDEX Eq. 8.3

= MSP BASE­ PTAC 9000 X MU BASE­ PTAC 9000 + INST BASE­PTAC 9000 X INSTNDEX

= $469.73 x 1.96 + $195.84 x 1.00

= $921 + $196

= $1117

where

IC

= total installed cost ($),

EQP

= equipment price ($),

8­11MSP

= manufacturer selling price ($),

MU

= overall baseline markup,

INST

= installation cost or the customer price to install equipment ($),

INSTINDEX

= location dependent installation cost index, approximately 1.0 at a

national average.

In this specific example, MSP is the national average baseline MSP for the PTAC 9000

equipment class and MU is the overall baseline markup factor. The calculation of the higher

efficiency (efficiency level 4) total installed cost includes the use of a MSP adder. In addition,

DOE derived an incremental markup.

Based on incremental equipment price changes, the derivation of the efficiency level 4

total installed cost is based on determining the change in equipment price over the baseline

equipment price. The manufacturer price increment for higher efficiency equipment is

multiplied by the incremental markup.

DOE calculated the efficiency level 4 total installed cost ( IC PTAC 9000 TSL4 ) as follows:

IC PTAC 9000 TSL4 = ( EQP BASE­PTAC 9000 + �EQP PTAC 9000 TSL4 ) + INST PTAC 9000 TSL4

X INSTINDEX Eq. 8.4

= ( MSP BASE­PTAC 9000 X MU BASE PTAC 9000 ) + ( �MSP PTAC 9000 TSL4

X MU PTAC 9000 TSL4 ) + INST PTAC 9000 TSL4 X ISTINDEX

= $469.73 X 1.96 + $26.96 X 1.28 + $196 X 1.00

= $1151

where

�EQP

= increase in equipment price ($),

�MFG

= increase in manufacturer price ($)

, MU

= markup factor (base or incremental, as shown in Table 8.2.4 and

Table 8.2.5, respectively)

Table 8.2.9 presents the average equipment price, installation costs, and total installed

costs for the representative equipment PTAC 9000 at the baseline level and each efficiency level

examined.

8­12Table 8.2.9 Manufacturer Price, Equipment Price, Installation Cost, and Total Installed

Costs for PTAC 9000, at U.S. Average Prices (2006$)*

Efficiency Level Manufacturer

Selling

Price Equipment

Price (Including

Markups) Installation

Cost Total Installed

Cost

Baseline

(ASHRAE 90.1­

1999) $470 $922 $196 $1,118

Level 1 $478 $932 $196 $1,128

Level 2 $484 $940 $196 $1,136

Level 3 $490 $948 $196 $1,144

Level 4 $497 $956 $196 $1,152

Level 5 $514 $979 $196 $1,175

* Details may not add to total due to rounding.

8.2.3 Operating Cost Inputs

DOE based the operating cost for the LCC analysis on energy consumption data

developed from whole­building simulations on a representative hotel and model building

prototype. After the LCC analysis was performed, DOE generated a distribution of LCC

differences (i.e., the LCC difference between the baseline equipment and equipment with a

higher efficiency level) to determine the mean LCC difference, as well as the percentage of

customers analyzed that had LCC savings associated with more energy­efficient equipment.

DOE defined the operating cost by the following equation:

OC

= EC+ RC+ MC Eq. 8.5

where

OC

= operating cost ($),

EC

= energy cost associated with operating the equipment ($),

RC

= repair cost associated with component failure ($),

MC

= annual maintenance cost for maintaining equipment operation ($).

The remainder of this section provides information about the variables that DOE used to

calculate the operating cost for PTAC and PTHP equipment. Equipment lifetime, discount rate,

and effective date of the amended energy conservation standard are required for determining the

operating cost and for establishing the operating cost present value. The energy consumption per

unit for the baseline efficiency and standard­compliant cases (efficiency level 1, 2, etc.),

combined with the electricity prices, are used to determine the annual energy costs of the

equipment. Chapter 7, Building Energy Use Characterization Analysis, provides complete

details on the PTAC and PTHP equipment energy consumption results for all 50 states and the

District of Columbia. The key inputs for the determination of operating costs are shown below:

• Baseline and standard­compliant annual energy consumption (kWh) (Chapter 7)

• Electricity price (cents/kWh) (section 8.2.3.1)

• Electricity price trend (section 8.2.3.2)

8­13• Repair cost ($) (section 8.2.3.3)

• Maintenance cost ($) (section 8.2.3.4)

• Equipment lifetime (years) (section 8.2.3.5)

• Discount rate (percentage) (section 8.2.3.6)

• Effective date of amended energy conservation standard (section 8.2.3.7)

8.2.3.1 Electricity Price Analysis

Introduction to the analysis of electricity prices

. This section describes the electricity

price (cents/kWh) analysis used to develop the energy portion of the annual operating costs (i.e.,

electricity price times electricity consumption) for PTACs and PTHPs in the four types of

businesses analyzed.

Subdivision of the Country

. Because of the wide variation in electricity consumption

patterns, wholesale costs, and retail rates across the country, it is important to consider regional

differences in electricity prices. For this reason, DOE divided the continental U.S. into the

50 states and the District of Columbia. DOE used reported average effective commercial

electricity prices at the state level from Energy Information Administration (EIA) data for 2006. 1

The latest available prices from this source were for the calendar year 2006. Table 8.2.10

provides data on the adjusted electricity prices.

Table 8.2.10 Estimated Commercial Electricity Prices by State (2006 cents/kWh)

State Commercial

Electricity

Price State Commercial

Electricity

Price State Commercial

Electricity

Price

Alabama 8.12 Kentucky 6.48 North Dakota 6.30

Alaska 11.75 Louisiana 8.97 Ohio 8.48

Arizona 7.89 Maine 12.39 Oklahoma 7.25

Arkansas 6.80 Maryland 10.29 Oregon 6.99

California 13.13 Massachusetts 15.82 Pennsylvania 8.86

Colorado 7.48 Michigan 8.75 Rhode Island 13.52

Connecticut 13.82 Minnesota 7.03 South Carolina 7.65

Delaware 10.89 Mississippi 9.05 South Dakota 6.44

Dist. of Col. 10.97 Missouri 6.11 Tennessee 8.00

Florida 9.86 Montana 7.51 Texas 9.73

Georgia 7.90 Nebraska 6.20 Utah 6.15

Hawaii 21.43 Nevada 10.11 Vermont 11.70

Idaho 5.12 New Hampshire 13.79 Virginia 6.18

Illinois 7.99 New Jersey 11.84 Washington 6.55

Indiana 7.22 New Mexico 7.65 West Virginia 5.58

Iowa 7.32 New York 13.59 Wisconsin 8.41

Kansas 6.89 North Carolina 7.17 Wyoming 6.25

Furthermore, DOE recognized that different kinds of businesses typically use electricity

in different amounts at different times of the day, week, and year, and therefore face different

effective prices. To make this adjustment, DOE used EIA’s 2003 CBECS data set to identify the

average prices paid by the four kinds of businesses in this analysis compared with the average

prices paid by all commercial customers 2

. Equation 8.7 shows the ratio of prices paid by the four

8­14types of businesses used to increase or decrease the average electricity prices for commercial

buildings.

EPRICE

COM BLD I STATE 2006 = EPRICE

COM STATE 2006 x (EPRICE

BLDG I US 2003 / EPRICE

COM US 2003 ) Eq. 8.7

where

EPRICE

COM BLD I STATE 2006 = average commercial sector electricity price in building type I

(large chain hotel/motel) in a specific state in 2006,

EPRICE

COM STATE 2006 = average commercial sector electricity price in a specific state in

2006,

EPRICE

BLDG I US 2003 = national average commercial sector electricity price in building

type I in 2003 CBECS,

EPRICE

COM US 2003 = national average commercial sector electricity price in 2003 CBECS.

Table 8.2.11 shows the derivation of the EPRICE ratios from 2003 CBECS data set.

Table 8.2.11 Derived Average Commercial Electricity Price Ratios by Business Type

Business Type Large Chain

Hotel/Motel Independent

Hotel Health Care

(Assisted Living

and Nursing

Homes) Office All

Commercial

Buildings

Electricity Price (cents/kWh) 8.4 8.4 Insufficient data 9.9 7.8

Ratio of Electricity Price to

Average Price for all

Commercial Buildings 1.08 1.08 1.00 1.28 1.00

Source: CBECS 2003

Once the electricity prices for the four types of building businesses were adjusted, DOE

used the resulting prices in the analysis to represent 2006 electricity prices. To obtain a

weighted­average national price, DOE weighted the prices paid by each business in each state by

the estimated sales of PTAC and PTHP units in each state to each type of business. The

state/building type weights are the probabilities that a given PTAC or PTHP unit shipped will be

operated with a given price. For evaluation purposes, the prices and weights can be depicted as a

cumulative probability distribution. The effective prices (2006$) range from approximately 5.5

cents per kWh to approximately 23.2cents per kWh. Figure 8.2.1 illustrates the results for

PTACs and PTHPs in all four business types and all states. (The display range on the chart

reaches only to 19 cents/kWh although the true maximum is 23.2 cents.)

8­15Figure 8.2.1 Cumulative Probability Distribution Showing the Estimated Electricity

Prices Paid by PTAC and PTHP Customers (2006$)

8.2.3.2 Electricity Price Trend

The electricity price trend provides the relative change in electricity prices for future

years out to the year 2042. Estimating future electricity prices is difficult, especially considering

that there are efforts in many states throughout the country to restructure the electricity supply

industry.

DOE applies a projected trend in national average electricity prices to each customer’s

energy prices. The discussion in this chapter uses the AEO 2007 reference price scenario. In the

LCC analysis, the following four scenarios can be analyzed:

1. Constant energy prices at 2006 values (Constant index of 1.0 in Figure 8.2.2)

2. AEO 2007

, High Economic Growth (“High” in Figure 8.2.2)

3. AEO 2007

, Reference Case (“AEO 2007” in Figure 8.2.2)

4. AEO 2007

, Low Economic Growth (“Low” in Figure 8.2.2)

Figure 8.2.2 shows the trends for the three AEO 2007 price projections where prices are

assumed to change. DOE extrapolated the values in later years (i.e., after 2030) from their

relative sources because AEO 2007 does not forecast beyond 2030. To arrive at values for these

later years, DOE used the price trend from 2020 to 2030 of the forecast to establish prices in the

years 2030 to 2042. This method of extrapolation is in line with methods currently used by the

EIA to forecast fuel prices for the Federal Energy Management Program.

8­16Electricity Price ProjectionsIndex(2006=1.00) 1.05

1.00

0.95

0.90

0.85

0.80 High Growth

AEO 2007

Low Growth

2000 2010 2020 2030 2040

Year

Figure 8.2.2 Electricity Price Trends for Commercial Rates to 2042

The default electricity price trend scenario used in the LCC analysis is the trend from the

AEO 2007 Reference Case, which is the middle line in Figure 8.2.2. Spreadsheets used in

calculating the LCC have the capability to analyze the other electricity price trend scenarios,

namely, the AEO 2007 High Growth and the AEO 2007 Low Growth price trends and constant

energy prices.

8.2.3.3 Repair Cost

The repair cost is the cost to the customer for replacing or repairing components in the

PTAC and PTHP equipment that have failed. DOE based the annualized repair cost for baseline

efficiency equipment (i.e., the cost the customer pays annually for repairing the equipment) on

the following expression:

RC

= W X ANNFAC Eq. 8.8

where

RC

= repair cost ($),

W

= purchase cost for a warranty contract ($),

ANNFAC

= annualization factor.

DOE estimated annualized maintenance costs for PTACs and PTHPs from data in a

Carrier corporate website, which provides costs to purchase an extended warranty agreement. 7

The warranty covers for either 5 years ($55) or 7 years ($99). The equivalent annualized cost of

8­17these contracts varied slightly, depending on the discount rate used in the annualization factor,

but the average cost was $12.95 for the 5­year contact and $17.55 for the 7­year contract at the

discount rate of 5.81 percent, the average discount rate for the dominant group of purchasers.

The average of these two values is $15.25, the value used in the analysis.

Because data were not available to indicate how repair costs vary with equipment

efficiency level, DOE considered two scenarios: (1) repair costs vary in direct proportion with

the MSP of the equipment and (2) repair costs remain constant (i.e., did not increase due to a

higher efficiency).

DOE used repair costs that increase with MSP (the first scenario above) as the default

annualized repair cost scenario in the LCC and PBP analysis. Spreadsheets used to calculate the

LCC and PBP are able to calculate LCC and PBP based on the second scenario as well.

8.2.3.4 Maintenance Cost

The maintenance cost is the cost to the customer of maintaining equipment operation.

The maintenance cost is not the cost associated with the replacement or repair of components

that have failed (as discussed above). Rather, it is the cost associated with general maintenance

(e.g., cleaning coils and drain pan, changing air filters, etc.).

Virtually no data are available on annual maintenance cost per unit. DOE estimated

annual routine maintenance costs for PTAC and PTHP equipment at $50 per year per unit. Some

manufacturers interviewed for the manufacturer impact analysis (Chapter 13 of the TSD)

indicated verbally that this assumption was reasonable.

Because data were not available to indicate how maintenance costs vary with equipment

efficiency, DOE decided to use preventative maintenance costs that remain constant as

equipment efficiency is increased.

8.2.3.5 Equipment Lifetime

DOE defines equipment lifetime as the age when a PTAC or PTHP unit is retired from

service. DOE reviewed available literature and consulted with manufacturers in order to

establish typical equipment lifetimes. The literature and experts consulted offered a wide range

of typical equipment lifetimes. Individuals with previous experience in manufacturing or

distribution of PTACs and PTHPs suggested a typical lifetime of 5 to 15 years. Some experts

suggested that the lifetime could be even lower because of the daily or continuous use of the

equipment and neglect of maintenance such as cleaning the heat exchangers or replacing the air

filters. Previously, DOE used a 15­year lifetime for PTACs and PTHPs in the 2000 Screening

Analysis a based on data from ASHRAE’s 1995 Handbook of HVAC Applications. Stakeholders

commented on the 2000 Screening Analysis and suggested DOE use the 10­year lifetime

assumption rather than 15­year lifetime to more accurately reflect the life and usage

a U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy. “Energy Conservation Program

for Consumer Products: Screening Analysis for EPACT­Covered Commercial HVAC and Water­Heating

Equipment Screening Analysis.” April 2000.

8­18characteristics of this equipment. Therefore, based on the information it gathered, DOE

concluded that a typical lifetime of 10 years is appropriate for PTAC and PTHP equipment.

Furthermore, DOE modeled the lifetime of PTAC and PTHP equipment as a Weibull statistical

distribution with an average lifetime of 10 years and a maximum lifetime of 20 years. Chapter 3

of the TSD contains a discussion of equipment lifetime,

8.2.3.6 Discount Rate

The discount rate is the rate at which future expenditures are discounted to establish their

present value. DOE derived the discount rates for the LCC analysis by estimating the cost of

capital for companies that purchase PTAC and PTHP equipment. The cost of capital is

commonly used to estimate the present value of cash flows to be derived from a typical company

project or investment. Most companies use both debt and equity capital to fund investments, so

their cost of capital is the weighted average of the cost to the company of equity and debt

financing.

DOE estimated the cost of equity financing by using the Capital Asset Pricing Model

(CAPM). 8 The CAPM, among the most widely used models to estimate the cost of equity

financing, assumes that the cost of equity is proportional to the amount of systematic risk

associated with a company. The cost of equity financing tends to be high when a company faces

a large degree of systematic risk and it tends to be low when the company faces a small degree of

systematic risk.

DOE determined the cost of equity financing by using several variables, including the

risk coefficient of a company, 

### β ( beta), the expected return on “risk free” assets ( R

f ), and the

additional return expected on assets facing average market risk, also known as the equity risk

premium or ERP

. The risk coefficient of a company, 

### β

, indicates the degree of risk associated

with a given firm relative to the level of risk (or price variability) in the overall stock market.

Risk coefficients usually vary between 0.5 and 2.0. A company with a risk coefficient of

0.5 faces half the risk of other stocks in the market; a company with a risk coefficient of 2.0

faces twice the overall stock market risk.

The following equation gives the cost of equity financing for a particular company:

k

e = R f + (β • ERP) Eq. 8.9

where

k

e = the cost of equity for a company (%),

R

f = the expected return of the risk free asset (%),



### β = the risk coefficient,

ERP

= the expected equity risk premium (%).

DOE defined the risk free rate ( R

f ) as the yield in January 2006 on long­term government

bonds. DOE used a rate ( k

e ) that varies with the ERP

, based on data from the Damodaran

Online site. 1

8­19The cost of debt financing is the yield or interest rate paid on money borrowed by a

company (for example, by selling bonds). As defined here, the cost of debt includes

compensation for default risk (the risk that a firm will go bankrupt) and excludes deductions for

taxes. DOE estimated the cost of debt for companies by adding a risk adjustment factor to the

current yield on long term corporate bonds (the risk free rate). It used this procedure to estimate

current (and future) company costs to obtain debt financing. It based the adjustment factor on

indicators of company risk, such as credit rating or variability of stock returns.

The weighted­average cost of capital (WACC) of a company is the weighted­average cost

of debt and equity financing:

k

r = ( k

e • w e + k d • w d )/(1+r) Eq. 8.10

where

k

r = the (real) weighted­average cost of capital (%),

k

e = the expected rate of return on equity (%),

k

d = the expected rate of return on debt (%),

w e = the proportion of equity financing in total annual financing,

w d = the proportion of debt financing in total annual financing,

r = the expected inflation rate (%).

The weighted­average cost of capital is a real rate, because it excludes anticipated future

inflation in the expected returns from stocks and bonds. DOE calculated expected inflation (2.2

percent) from the average of the projected change in gross domestic product (GDP) prices in the

Economic Report of the President (February 2006). 9

To estimate the WACC of PTAC and PTHP equipment purchasers, DOE used a sample

of companies involved in large hotel/motel chains drawn from a database of 7,319 U.S.

companies given on the Damodaran Online website. This database includes most of the

publicly­traded companies in the United States.

DOE divided the companies into the four ownership categories shown in Table 8.2.12

according to their type of activity. DOE sought financial information for all of the firms in the

full sample involved in the two lines of business, i.e., the large hotel chain and health care. In

cases where one or more of the variables needed to estimate the discount rate was missing or

could not be obtained, or where in the hotel/gaming business a firm was clearly engaged only in

gaming, DOE discarded the firm from the analysis. This resulted in a sample of 39 firms, 36 in

the hotel/gaming business and three in the assisted living business.

Table 8.2.12 describes the economic sectors represented in each of the ownership

categories as well as the number of companies used for determining discount rates.

8­20Table8.2.12RealDiscountRatesbyCompanyandOwnershipCategory

8­21CompanyCompanyValue(million$)ValueLineBetaCostofEquity(E)E/(D+E)StdDevinStockCostofDebt(D)EffectiveTaxRateAfterTaxCostofDebtMarketDebttoCapital(D/(D+E)CostofCapitalA364.10.04.39%65.50%04.64%04.64%0.344964.48%B369.10.04.39%31.75%04.64%04.64%0.6824714.56%C840.46.31%44.05%0.37155.39%0.384463.32%0.5595244.64%D59.20.657.51%0.17%04.64%04.64%0.9983114.64%E120.70.14.87%8.29%04.64%04.64%0.917154.66%F33.40.25.35%92.81%04.64%0.520242.23%0.0718565.13%G1887.71.159.91%38.76%0.37545.39%0.481112.80%0.6124385.55%H44.20.356.07%56.56%0.37175.39%05.39%0.4343895.77%I301.90.67.27%40.15%0.3685.39%05.39%0.5985436.14%J59.40.155.11%0.84%0.61286.39%06.39%0.9915826.38%K324.70.757.99%39.08%0.47295.64%05.64%0.6091786.56%L169.40.56.79%58.80%1.21266.39%06.39%0.4120436.63%M2033.40.858.47%62.31%0.52895.89%0.38563.62%0.3768566.64%N419.20.557.03%48.38%0.71616.39%06.39%0.5162216.70%O18191.059.43%59.73%0.29725.14%0.415713.00%0.4027496.84%P416.20.858.47%51.95%0.27255.14%05.14%0.4805386.87%Q5.80.67.27%56.90%1.30336.39%06.39%0.4310346.89%R1175.10.958.95%62.63%0.23184.89%04.89%0.373677.43%S420.60.958.95%63.15%0.22834.89%04.89%0.3685217.45%T1757.81.09.19%70.32%0.33635.39%0.378893.35%0.2967917.46%U912.50.98.71%78.26%0.21924.89%0.374583.06%0.2174257.48%V2941.90.958.95%59.57%0.30915.39%05.39%0.4043317.51%W153.90.757.99%86.68%0.48655.64%0.134114.88%0.1332037.58%X12150.91.159.91%54.55%0.24614.89%04.89%0.4545347.63%Y15784.51.159.91%65.42%0.32235.39%0.363573.43%0.3458337.67%Z412.91.19.67%67.23%0.40555.64%0.36363.59%0.3276827.68%AA5961.50.958.95%77.55%0.30645.39%0.350343.50%0.2244747.73%AB180961.19.67%71.52%0.24254.89%0.364533.11%0.2847547.80%AC12153.41.159.91%69.99%0.22024.89%0.340483.23%0.3000817.90%AD1648.91.059.43%61.16%0.51935.89%05.89%0.3884418.05%AE94.41.059.43%78.92%0.72626.39%0.336064.24%0.2108058.34%Table8.2.12(cont’d)

8­22MarketStdDevAfterDebttoCompanyCompanyValueValueLineBetaCostofEquity(E)E/(D+E)inStockCostofDebt(D)EffectiveTaxRateTaxCostofDebtCapital(D/(D+E)CostofCapitalAF3054.40.958.95%89.24%0.25885.14%0.350833.34%0.1076158.35%AG463.50.98.71%93.01%0.48155.64%0.330633.78%0.0699038.37%AH7061.81.19.67%77.33%04.64%04.64%0.2267138.53%AI15289.91.059.43%91.33%0.21694.89%0.152914.14%0.0866598.97%AJ18280.31.310.63%75.70%0.2154.89%0.109144.36%0.2429949.11%LargeHotelChainAverage126,325.61.099.67%71.21%25.15%5.04%22.03%3.92%28.79%8.04%Inflation­Adjusted5.71%U1848.41.3510.87%69.81%0.81196.39%0.151755.42%0.301936819.22%V3694.80.88.23%84.90%0.24764.89%0.339993.23%0.150968937.47%W1685.20.88.23%88.62%0.35795.39%0.373.40%0.113755047.68%HealthCare(NursingHomesandAssistedLiving)WeightedAverage7228.40.948.91%81.91%41.76%5.39%29.89%3.83%18.09%7.97%Inflation­Adjusted5.65%IndependentHotels,InflationAdjusted8.21%Office,InflationAdjusted8.15%E=equity;D=debtSource:PacificNorthwestNationalLaboratory(PNNL)calculationsappliedtofirmssampledfromtheDamodaranOnlinewebsite.Ultimately, DOE used a sample of 39 companies to represent the purchasers of PTAC

and PTHP equipment in the large chain component of the hotel industry and the nursing

home/assisted living industry. For each company in the sample, DOE derived the cost of debt,

percent debt financing, and systematic company risk from information provided at the

Damodaran Online website. It estimated the cost of debt financing from the long­term

government bond rate (4.39 percent) and the standard deviation of the stock price. Table 8.2.12

shows the weighted­average values for the cost of debt, percent debt financing and systematic

firm risk for each category of the sample companies. The cost of capital for independent

hoteliers, and small office companies with more limited access to capital is more difficult to

determine. Individual credit­worthiness varies considerably, and some franchisees have access

to the financial resources of the franchising corporation. However, personal contacts with a

sample of commercial bankers yielded an estimate for the small operator weighted cost of capital

of about 200 to 300 basis points (2 percent to 3 percent) above the rates for larger hotel chains.

A central value equal to the weighted average of large hotel chains (8.04 percent), plus 2.5

percent, was used for independent hotel/motels and the same multiplier was applied to large

nursing home/assisted care companies (7.97 percent) to derive an estimate for small health care

practitioners occupying small office buildings.

Deducting expected inflation from the cost of capital provides the estimates of the real

discount rate by ownership category shown in Table 8.2.12. DOE modeled the cost of capital as

statistical distributions. Large chain hotels and independent hotels were modeled as normal

distributions. Health care facilities and offices costs of capital were modeled as triangular

distributions due to small sample size. The average after­tax discount rate, weighted by the

percentage shares of total PTAC and PTHP purchases, is 5.71 percent for large hotel chains, 8.21

percent for independent hotels, 5.65 percent for health care (nursing homes and assisted care

facilities) and 8.15 percent for offices (medical and dental offices).

8.2.3.7 Effective Date of Amended Energy Conservation Standard

The effective date is the future date when a new or an amended energy conservation

standard becomes operative. Under 42 U.S.C. 6313(a)(6)(c), the effective date of any amended

energy conservation standard for PTACs and PTHPs will be four years after the final rule is

published. DOE calculated the LCC for all customers as if they each would purchase a new

PTAC or PTHP unit in the year the amended standard takes effect. Consistent with its published

regulatory agenda, DOE assumed that the final rule would be issued in September 2008 and that,

therefore, the amended standards would take effect in 2012 and used these dates in the Notice of

Proposed Rule (NOPR) analyses. It based the cost of the equipment in 2012; however, all dollar

values are expressed in 2006$. DOE considered annual energy prices for the life of the PTAC

and PTHP equipment.

8.3 PAYBACK PERIOD INPUTS

8.3.1 Definition

The payback period (PBP) is the amount of time it takes the customer to recover the

assumed higher purchase cost of more energy­efficient equipment as a result of lower operating

costs. Numerically, the PBP is the ratio of the increase in purchase cost (i.e., from a less

8­23efficient design to a more efficient design) to the decrease in annual operating expenditures.

This type of calculation is known as a “simple” payback period, because is does not take into

account changes in operating cost over time or the time value of money—that is, the calculation

is done at an effective discount rate of zero percent.

The equation for PBP is:

PBP =� IC/ �O C Eq. 8.11

Where

PBP

= payback period (years),



### � IC

= difference in the total installed cost between each efficiency level and the

baseline efficiency level ($),



### � OC

= difference in annual operating costs between each efficiency level and the

baseline efficiency level ($).

Payback periods are expressed in years. Payback periods greater than the life of the

equipment mean that the increased total installed cost of the more efficient equipment is not

recovered in reduced operating costs over the life of the equipment.

8.3.2 Inputs

The data inputs to PBP are the total installed cost of the equipment to the customer for

each efficiency level and the annual (first year) operating costs for each efficiency level. The

inputs to the total installed cost are the equipment price and the installation cost. The inputs to

the operating costs are the annual energy cost, the annual repair cost, and the annual maintenance

cost. The PBP uses the same inputs as the LCC analysis described in section 8.2, except that

electricity price trends and discount rates are not required. Since the PBP is a “simple”

(undiscounted) payback, the required electricity cost is only for the year in which a new or an

amended energy conservation standard is to take effect—in this case, the year 2012. The

electricity price used in the PBP calculation was the price projected for 2012. The electricity

price used in the PBP calculation of energy cost was the price projected for 2012, expressed in

2006 dollars, but not discounted to 2006. Discount rates are not used in the PBP calculation.

8.4 RESULTS USING AVERAGE ELECTRICITY PRICES

8.4.1 Life­Cycle Cost Results

This section presents LCC results for the higher efficiency levels and also presented in

section 8.2.2.2, Standard­Compliant Manufacturer Selling Price Increases. The results presented

here are based on annual operating costs calculated from average annual electricity prices

developed for each business type. Section 8.2 presents the electricity price inputs as well as all

other LCC inputs.

Because the values of most inputs are variable in this analysis, DOE represents them as a

distribution of values rather than a single point­value. Thus, DOE represents the LCC results as

a distribution of values. Before proceeding with the presentation of the distribution of LCC

results, DOE presents average values for total installed costs, annual operating costs, and LCC to

8­24show how these costs vary with efficiency level for each of the PTAC and PTHP equipment

classes.

8.4.1.1 Life­Cycle Cost Breakdown Based on Average Input Values

Figure 8.4.1 shows how, on an average basis, the total installed costs, annual operating

costs, and LCC vary with efficiency level for the standard size PTAC with a cooling capacity of

9,000 Btu/h for large chain hotels. Level 0 in Figure 8.4.1 refers to the baseline efficiency level.

Similar figures for other equipment classes are provided in appendix E.

Efficiency Level ­ LCC Tradeoff

Equipment= PTAC Standard Size ­ 9,000 Btu/h R­410A, Fuel Price=AEO 2007 ­ Reference Case, Start Year= 2012LifeCycleCost $2,342

$2,340

$2,338

$2,336

$2,334

$2,332

$2,330

$2,328 $ 2

, 3 4 1

$ 2

, 3 3 0

$ 2

, 3 3 0 $ 2

, 3 3 3

$ 2

, 3 3 1

$ 2

, 3 3 0

0 1 2 3 4 5

E f

f i c e n c y L e v e l Efficiency Level ­ LCC Tradeoff

Figure 8.4.1 Effect of the Change in Efficiency Level on Life­Cycle Cost for Standard Size

PTAC with a Cooling Capacity of 9,000 Btu/h in Large Chain Hotels (2006$)

at Average U.S. Conditions (Level 0 is the Baseline Efficiency Level)

Annual energy cost is the largest contributor to the overall operating cost at any

efficiency level. As efficiency level is increased, annual energy cost decreases.

The LCC results reveal that as efficiency is increased, the lifetime operating cost has less

of an impact on the LCC than the total installed cost. In other words, the increase in total

installed cost offsets the decrease in lifetime operating costs that occurs with an increase in

equipment efficiency. As a result, the LCC at all trial standard levels is higher than that for the

baseline level (Level 0).

Again, the results shown in Figure 8.4.1 are based on average input values rather than

input distributions and are depicted for only one building type. Thus, one can observe how the

various inputs impact LCC and, in turn, how the resulting LCC changes with an increase in

8­25efficiency level in this example. Conclusions, however, should also take into account the

distribution of LCC results presented in section 8.4.1.2.

8.4.1.2 Differences in LCC between Baseline and Standard­compliant Equipment

DOE’s first step in developing LCC results was to establish the baseline LCC for each of

the PTAC and PTHP equipment classes. As discussed in section 8.2.2.1, the baseline efficiency

level for the NOPR analysis is the minimum efficiency level specified by ASHRAE/IESNA

Standard 90.1­1999 for a given equipment class of PTAC and PTHP equipment.

This section presents the differences in the LCC of standard­compliant equipment

relative to the baseline efficiency equipment. The LCC differences are depicted as a distribution

of values. DOE presents the results in a chart showing the cumulative distribution of LCC

differences along with the corresponding probability of occurrence for each efficiency level. In

each chart, DOE provides the mean LCC difference along with the percent of the installations for

which the LCC will decrease (the percent of the population installing a given PTAC or PTHP

unit which would experience life­cycle cost savings). In this analysis, the population is the

number of PTAC and PTHP units in commercial building that utilize PTACs or PTHPs,

including hotels and motels, assisted living and nursing homes, and small offices (mainly

medical and dental).

Figure 8.4.2 presents the LCC results for the case of efficiency level 4 for the standard

size PTAC with a cooling capacity of 9,000 Btu/h using R­410A refrigerant. Similar figures for

other efficiency levels are found in appendix E for all equipment classes. In Figure 8.4.2, the

50­percent line shows the median change in LCC (a loss of $9.86 in this example). Half of the

purchasers of this PTAC unit would lose more than $9.86 while half would lose less than $9.86.

The “0” horizontal line is the minimum savings value, which in this example is a loss of $40 due

to the increased efficiency at efficiency level 4 costing more than the baseline efficiency. The

maximum LCC savings is $158, which is not displayed in Figure 8.4.2.

8­26Figure 8.4.2 Cumulative Chart of LCC Savings for Standard Size PTAC, Cooling

Capacity of 9,000 Btu/h, at Efficiency Level 4

Appendix E contains the cumulative charts for all the efficiency levels considered for all

PTAC and PTHP equipment classes that use R­410A and R­22 refrigerants. These charts

provide more complete information, but DOE provides a summary of the change in LCC for

standard size PTAC 9000 R­410A from the baseline by percentile groupings (i.e., of the

distribution of results) for each of the equipment classes in Table 8.4.1. Table 8.4.1 also shows

the mean LCC savings and the percent of equipment with LCC savings from baseline for each

efficiency level.

Table 8.4.1 Distribution of Life­Cycle Cost Savings from Baseline Level for PTAC 9000

by Efficiency Level

Efficiency Decrease in LCC from Baseline Efficiency (Level 0) Shown by Percentiles of

the Distribution of Results (2006$)* Mean

Savings Percent

of

Units

with

LCC

Savings

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Level 1 ­$12 ­$8 ­$6 ­$5 ­$3 ­$2 $0 $2 $5 $10 $57 $0 39%

Level 2 ­$21 ­$13 ­$11 ­$9 ­$6 ­$4 ­$1 $3 $7 $15 $93 $0 37%

Level 3 ­$30 ­$20 ­$16 ­$13 ­$10 ­$6 ­$2 $3 $8 $20 $127 ­$2 35%

Level 4 ­$40 ­$27 ­$23 ­$18 ­$14 ­$10 ­$5 $2 $9 $23 $158 ­$4 33%

Level 5 ­$68 ­$47 ­$40 ­$34 ­$28 ­$22 ­$14 ­$5 $6 $27 $229 ­$13 25%

* Negative values refer to LCC increases compared to the baseline efficiency levels.

An example of standard size PTAC 9,000 Btu/h cooling capacity at efficiency level 4 can

provide an interpretation of the data in Table 8.4.1. Level 4 efficiency in Table 8.4.1 (row 5)

shows that at the zero­percentile (second column), the LCC savings is ­$40. This means that at

the zero­percentile point, the LCC for a PTAC unit at efficiency level 4 is higher than for a

8­27PTAC unit at the baseline efficiency level, thus LCC savings are negative. This also means that

the remainder of the market (the effectively 100 percent of the market above the zero­percentile

point) are estimated to either have an LCC loss of less than $40, or show a positive LCC savings.

For 90 percent of the cases studied (all columns between the zero­percentile and the 90 th percentile column), the change in LCC at efficiency level 4 is a LCC savings of $23 or less

compared with the base case (i.e., a savings of $23 or less shown in the table). The largest

positive LCC savings is $158 occurring for the 100 th percentile of the distribution. The mean

change in LCC is a loss of $4 compared with the baseline. The rightmost column shows that 33

percent of the customers show LCC savings compared with the baseline.

Table 8.4.2 provides the national average life­cycle cost savings calculated for each

efficiency level when compared to the baseline (Level 0) for all equipment classes. Review of

Table 8.4.2 shows that every efficiency level analyzed generated both positive and negative

national average life cycle cost savings compared with the baseline.

Table 8.4.2 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency Level

and Equipment Class

Equipment National Average LCC Savings (2006$)*

Class Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 $0 $0 ­$2 ­$4 ­$13

PTAC 12000 ­$1 ­$3 ­$7 ­$11 ­$36

PTHP 9000 $13 $23 $32 $30 $40

PTHP 12000 $14 $26 $22 $18 $8

PTAC 11000 $27 $31 $33 $26 $12

PTHP 11000 $61 $66 $80 $74 $53

Percent of Units with Positive LCC Savings from Baseline

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 39% 37% 35% 33% 25%

PTAC 12000 35% 33% 27% 25% 15%

PTHP 9000 79% 83% 85% 79% 77%

PTHP 12000 75% 81% 73% 63% 49%

PTAC 11000 83% 77% 71% 55% 45%

PTHP 11000 99% 95% 95% 81% 67%

* Negative values refer to LCC increases compared to the baseline efficiency levels.

Appendix E contains similar tables for all the efficiency levels considered for all PTAC

and PTHP equipment classes using R­22 and R­410A refrigerants that correspond to the groups

of figures contained in the same appendix.

8.4.2 Payback Period Results

This section presents PBP results for each efficiency level defined in section 8.3. The

results presented here are based on annual operating costs calculated from state average

commercial electricity prices. Section 8.2 describes the electricity price inputs as well as all

other PBP inputs.

8­28Similar to LCC, the PBP analysis provides an estimate of the simple payback period at

different ranges of energy prices, sales taxes, and installation costs that prevail across the country

for each efficiency level and each building (building) type. Figure 8.4.3 shows the effect on

payback period as the level of efficiency changes from Level 0 (the baseline), for PTAC 9000

R­410A equipment class in large chain hotels at U.S. national average energy prices, sales taxes,

and installation costs.

Efficiency Level ­ Payback Tradeoff

Equipment= PTAC Standard Size ­ 9,000 Btu/h R­410A, Fuel Price=AEO 2007 ­ Reference Case, Start Year= 2012PaybackPeriod(Years) 10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0 7.2 7.6 8.0 9.1

6.9

0 1 2 3 4 5

Efficiency Level Efficiency Level ­ Payback Period Tradeoff

Figure 8.4.3 Effect of the Change in Efficiency Level on Payback Period for Standard Size

PTAC 9000 in Large Chain Hotels at Average U.S. Conditions (Level 0 is the

Baseline Level).

Similar to the LCC differences, DOE depicted PBP results as a distribution of values

(appendix E). Thus, it presents the results as a cumulative probability chart showing the

distribution of PBPs with the corresponding cumulative probability of occurrence. Each chart

provides the mean PBP. Figure 8.4.4 is an example of a cumulative probability chart showing

the distribution of payback periods at efficiency level 4 for the standard size PTAC 9000 R­410A

equipment class. Appendix E contains the frequency charts for all the efficiency levels

considered for all PTACs and PTHPs equipment in this analysis. In Figure 8.4.4, the y­axis

shows cumulative percent of all PTAC 9000 units (“Probability” at left y­axis). The x­axis is the

PBP of a higher efficiency level (in this example, Level 4) relative to the baseline efficiency

level (Level 0). In Figure 8.4.4, an efficiency level 4 provides standard size PTAC 9000

equipment with a median PBP of about 8.6 years, a mean payback period of 14.0 years, and a

payback period range from about 1.1 years to over 100 years. (Note that these cannot be read

8­29with precision from the chart; rather, the analysis output data provides these values in a statistical

summary.)

Figure 8.4.4 Cumulative Chart of Payback Period of PTAC 9000 at Efficiency Level 4

Table 8.4.3 summarizes the PBP results for the standard size PTAC 9000 R­410A

equipment class. The results are summarized for PBP by percentile groupings (i.e., percentile of

the distribution of results). The table also shows the mean PBP for each efficiency level.

Table 8.4.3 Summary of Payback Periods Results for Standard Size PTAC 9000

Equipment

Efficiency

Level Payback Period in Years Shown by Percentiles of the Distribution of Results Mean

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Level 1 1.0 3.5 5.4 6.3 6.8 7.3 8.5 11.2 13.8 19.8 100.0 11.6

Level 2 1.0 3.6 5.7 6.7 7.2 7.7 9.0 11.8 14.7 21.2 100.0 12.5

Level 3 1.1 3.8 6.0 7.1 7.6 8.1 9.5 12.6 15.7 22.7 100.0 13.2

Level 4 1.1 4.0 6.3 7.5 8.0 8.6 10.0 13.3 16.7 24.2 100.0 14.0

Level 5 1.3 4.5 7.2 8.5 9.1 9.8 11.5 15.3 19.5 29.0 100.0 16.0

Table 8.4.4 provides the national average payback calculated for each efficiency level

when compared with the baseline efficiency level for each of six equipment classes analyzed.

Table 8.4.4 also shows the percentage of units reporting payback periods of less than 3 years.

The results of the analysis shown that payback period for purchases of higher efficiency levels

(with respect to purchase of baseline units) was rarely less than 3 years for any of the efficiency

levels considered for any equipment class. Table 8.4.4 shows that only non­standard size PTHPs

8­30contains certain efficiency levels (i.e., efficiency level 1, 2 and 3) that provides a payback of less

than 3 years to at least 50 percent of units shipped.

Table 8.4.4 National Average Payback Periods by Efficiency Level and Equipment Class

Equipment

Class National Average Payback Period (Years)

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 11.6 12.5 13.2 14.0 16.0

PTAC 12000 13.0 13.9 14.8 15.9 19.8

PTHP 9000 4.5 4.0 3.9 4.5 4.8

PTHP 12000 4.9 4.4 5.3 6.1 7.5

PTAC 11000 4.2 4.9 5.7 7.8 9.6

PTHP 11000 2.0 2.6 2.8 4.2 5.8

Percent of Units with Payback Period less than 3 Years

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 5% 5% 3% 1% 1%

PTAC 12000 3% 1% 1% 1% 1%

PTHP 9000 21% 29% 29% 17% 9%

PTHP 12000 13% 19% 7% 1% 1%

PTAC 11000 41% 25% 19% 13% 5%

PTHP 11000 91% 73% 65% 25% 7%

8.5 LCC SENSITIVY STUDIES

Sensitivity analyses were conducted to evaluate how the LCC and PBP results change

with changes in electricity price escalation rates. The results of these are discussed in section

8.5.1, 8.5.2 and 8.5.3.

8.5.1 Sensitivity to Electricity Price Escalation Rate

Sensitivity to electricity price escalation rate was examined using the escalation rates

provided in the AEO 2007 high growth and low growth scenarios. Table 8.5.1 and Table 8.5.2

examine the national average LCC savings for the AEO 2007 low growth scenario and AEO

2007 high growth scenarios respectively. For the low growth scenario, while the average LCC

savings is reduced for all efficiency levels above the baseline when compared with the reference

case, there are no changes in the level showing the highest LCC savings when compared with the

results using AEO 2007 reference case (see Table 8.4.2). For the high growth scenario the

average LCC savings is increased for all efficiency levels above the baseline when compared

with the reference case.

8­31Table 8.5.1 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency Level

and Equipment Class

– EIA Low Growth Scenario

Equipment National Average LCC Savings (2006$)*

Class Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 $0 ­$2 ­$4 ­$6 ­$16

PTAC 12000 ­$2 ­$5 ­$9 ­$14 ­$41

PTHP 9000 $11 $20 $28 $25 $33

PTHP 12000 $12 $22 $18 $13 $0

PTAC 11000 $24 $27 $28 $19 $4

PTHP 11000 $56 $60 $73 $64 $42

Percent of Units with Positive LCC Savings from Baseline

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 37% 35% 31% 27% 21%

PTAC 12000 31% 27% 23% 21% 13%

PTHP 9000 77% 81% 83% 75% 73%

PTHP 12000 73% 77% 69% 57% 43%

PTAC 11000 81% 75% 67% 53% 41%

PTHP 11000 97% 95% 93% 79% 61%

* Negative values refer to LCC increases compared to the baseline efficiency levels.

Table 8.5.2 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency Level

and Equipment Class

– EIA High Growth Scenario

Equipment National Average LCC Savings (2006$)*

Class Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 $1 $1 ­$1 ­$2 ­$11

PTAC 12000 $0 ­$2 ­$5 ­$9 ­$33

PTHP 9000 $15 $26 $35 $34 $45

PTHP 12000 $16 $29 $26 $22 $15

PTAC 11000 $29 $34 $37 $31 $18

PTHP 11000 $65 $70 $87 $82 $62

Percent of Units with Positive LCC Savings from Baseline

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 43% 41% 37% 35% 29%

PTAC 12000 37% 35% 31% 27% 17%

PTHP 9000 81% 87% 87% 81% 79%

PTHP 12000 77% 83% 75% 67% 51%

PTAC 11000 83% 79% 73% 59% 49%

PTHP 11000 99% 95% 95% 85% 69%

* Negative values refer to LCC increases compared to the baseline efficiency levels.

Payback period is calculated based on first year energy savings and thus is insensitive to

fuel escalation rate scenarios after the first year of operations. However, since the first year of

operations is 2012, fuel price forecasts for 2012 do affect the payback forecast. As shown in

Table 8.5.3 and Table 8.5.4, the payback periods are longer by approximately a year than in the

reference case for the EIA Low Growth Forecast and shorter by approximately a year than in the

reference case for the EIA High Growth Forecast, respectively.

8­32Table 8.5.3 Average Payback Period by Efficiency Level and Equipment Class

– EIA

Low Growth Scenario

Equipment

Class National Average Payback Period (Years)

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 12.6 13.3 14.1 14.9 17.2

PTAC 12000 13.8 14.8 15.8 17.0 21.1

PTHP 9000 4.8 4.3 4.2 4.8 5.1

PTHP 12000 5.2 4.7 5.6 6.5 8.0

PTAC 11000 4.5 5.2 6.1 8.3 10.3

PTHP 11000 2.2 2.8 2.9 4.4 6.1

Percent of Units with Payback Period less than 3 Years

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 5% 3% 1% 1% 1%

PTAC 12000 1% 1% 1% 1% 1%

PTHP 9000 15% 25% 25% 11% 5%

PTHP 12000 7% 13% 3% 1% 1%

PTAC 11000 33% 21% 17% 11% 5%

PTHP 11000 89% 67% 59% 21% 5%

Table 8.5.4 Average Payback Period by Efficiency Level and Equipment Class

– EIA

High Growth Scenario

Equipment

Class National Average Payback Period (Years)

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 10.7 11.5 12.4 13.1 15.0

PTAC 12000 12.0 13.0 13.9 14.9 18.6

PTHP 9000 4.3 3.8 3.7 4.3 4.6

PTHP 12000 4.6 4.2 5.0 5.8 7.1

PTAC 11000 4.0 4.6 5.4 7.4 9.0

PTHP 11000 1.9 2.5 2.6 4.0 5.5

Percent of Units with Payback Period less than 3 Years

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 7% 5% 5% 3% 1%

PTAC 12000 5% 3% 1% 1% 1%

PTHP 9000 25% 31% 31% 23% 15%

PTHP 12000 19% 27% 9% 3% 1%

PTAC 11000 49% 29% 19% 15% 7%

PTHP 11000 91% 77% 73% 31% 11%

8.5.2 Sensitivity to Refrigerant Assumptions

As discussed in Chapter 5, Engineering Analysis, all PTAC and PTHP equipment

manufactured as of in 2012 will comply with the directive to phase out R­22 refrigerant in favor

of R­410A. This will happen regardless of whether the proposed energy conservation standard

for PTACs and PTHPs in this analysis results in higher efficiency standards than the baseline

8­33efficiency level. The use of R­410A increases the price of the PTAC and PTHP equipment

compared with the use of the current refrigerant, R­22. This section summarizes the sensitivity

of LCC and PBP to the assumed phase­out of R­22. Table 8.5.5 summarizes the life­cycle costs

and percent of units with life­cycle cost savings that would result from the efficiency levels if R22 remained as the refrigerant used in PTAC and PTHP units. Table 8.5.6 shows the comparable

results for payback period. These two tables may be compared with Table 8.4.2 and Table 8.4.4

respectively. Detailed impacts are shown in appendix E.

Table 8.5.5 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency Level

and Equipment Class for R­22 Refrigerant

Equipment Class National Average LCC Savings (2006$)*

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 $2 $3 $3 $2 ­$4

PTAC 12000 $3 $4 $3 $1 ­$15

PTHP 9000 $17 $28 $38 $37 $50

PTHP 12000 $21 $35 $35 $33 $35

PTAC 11000 $37 $45 $50 $52 $44

PTHP 11000 $72 $80 $99 $101 $89

Percent of Units with Positive LCC Savings from Baseline

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 53% 49% 47% 41% 35%

PTAC 12000 53% 49% 45% 39% 25%

PTHP 9000 87% 91% 91% 87% 83%

PTHP 12000 89% 93% 87% 79% 67%

PTAC 11000 95% 93% 87% 75% 65%

PTHP 11000 100% 99% 99% 93% 81%

Table 8.5.6 National Average Payback Periods by Efficiency Level and Equipment Class

for R­22 Refrigerant

Equipment National Average Payback Period (Years)

Class Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 9.1 9.8 10.7 11.6 13.6

PTAC 12000 8.8 9.7 10.7 11.9 15.5

PTHP 9000 3.7 3.3 3.2 3.8 4.0

PTHP 12000 3.5 3.2 3.9 4.5 5.8

PTAC 11000 2.2 2.8 3.4 5.1 6.6

PTHP 11000 1.1 1.5 1.7 2.8 4.2

Percent of Units with Payback Period less than 3 Years

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 13% 11% 7% 5% 3%

PTAC 12000 13% 11% 7% 5% 1%

PTHP 9000 33% 37% 39% 31% 29%

PTHP 12000 35% 39% 31% 21% 3%

PTAC 11000 81% 69% 61% 21% 17%

PTHP 11000 100% 99% 95% 65% 25%

8­348.5.3 Sensitivity to Materials Prices

In discussions with industry experts it appeared that some of the uncertainty concerning

costs of new PTAC and PTHP units is a result of the rising costs of components due to escalation

of industrial materials, especially copper. The main analysis with R­410A assumes the average

prices for materials prevailing during the last five years (i.e., from 2002 to 2006). This section

summarizes the sensitivity of LCC and PBP if 2006 materials prices prevailed. See Chapter 5 of

the TSD for a detailed discussion of materials prices and their effects on costs of manufacturing

PTACs and PTHPs. Table 8.5.7 summarizes the life cycle costs and percent of units with life

cycle cost savings that would result from the efficiency levels if 2006 prices prevailed for

components of new PTAC and PTHP units. Table 8.5.8 shows the comparable results for

payback period. Because the price sensitivity analysis was actually conducted with the R­22

refrigerant, these two tables show conditions that most closely resemble those depicted in Table

8.5.5 and Table 8.5.6. The cost savings are lower in Table 8.5.7 than in Table 8.5.5, and the

payback periods are longer in Table 8.5.8 than in Table 8.5.6. However, because the R­410A

refrigerant increases costs of achieving a given efficiency level, cost savings are higher than in

Table 8.4.2 and payback periods are shorter than in Table 8.4.4.

Table 8.5.7 Average Life­Cycle Cost Savings from a Baseline Level by Efficiency Level

and Equipment Class for 2006 Materials Price Levels

Equipment Class National Average LCC Savings (2006$)*

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 $0 $0 ­$2 ­$5 ­$15

PTAC 12000 $1 ­$1 ­$3 ­$7 ­$31

PTHP 9000 $14 $24 $32 $30 $38

PTHP 12000 $17 $30 $27 $23 $15

PTAC 11000 $25 $29 $31 $24 $10

PTHP 11000 $59 $64 $78 $72 $51

Percent of Units with Positive LCC Savings from Baseline

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 41% 37% 35% 31% 23%

PTAC 12000 41% 37% 35% 29% 17%

PTHP 9000 81% 85% 87% 79% 75%

PTHP 12000 81% 85% 77% 69% 51%

PTAC 11000 81% 75% 69% 53% 45%

PTHP 11000 97% 95% 93% 81% 67%

8­35Table 8.5.8 National Average Payback Periods by Efficiency Level and Equipment Class

for 2006 Materials Price Levels

Equipment National Average Payback Period (Years)

Class Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 11.7 12.6 13.5 14.5 17.1

PTAC 12000 11.3 12.4 13.5 14.6 18.9

PTHP 9000 4.4 3.9 3.9 4.6 4.9

PTHP 12000 4.3 3.9 4.7 5.5 7.1

PTAC 11000 4.5 5.2 6.0 8.1 9.9

PTHP 11000 2.2 2.7 2.9 4.3 5.9

Percent of Units with Payback Period less than 3 Years

Level 1 Level 2 Level 3 Level 4 Level 5

PTAC 9000 5% 5% 3% 1% 1%

PTAC 12000 5% 5% 1% 1% 1%

PTHP 9000 23% 29% 29% 17% 7%

PTHP 12000 25% 31% 17% 5% 1%

PTAC 11000 33% 21% 17% 13% 5%

PTHP 11000 89% 69% 61% 23% 7%

8.6 DETAILED RESULTS

DOE presents more detailed results and supporting data for the LCC analysis in appendix

E.

8­36REFERENCES

1 Damodaran Online. Leonard N. Stern School of Business, New York University:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html. January, 2006.

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Administration, Washington D.C. Monthly Electricity Database (EIA form 826) Annual 1991

through 2006, Jan­Feb 2007. http://www.eia.doe.gov/cneaf/electricity/page/data.html

. Accessed

May 29, 2007.

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. Accessed March 30, 2007.

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.

8­37