CHAPTER 8. LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSIS

TABLE OF CONTENTS

8.1 INTRODUCTION ........................................................................................................... 8-1

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis ................ 8-1

8.1.2 Overview of Life -Cycle Cost and Payback Period Analysis Inputs .................... 8-2

8.1.3 Use of Whole- Building Simulations in LCC and PBP Analysis ......................... 8-5

8.2 LIFE

- CYCLE COST ANALYSIS INPUTS .................................................................... 8-6

8.2.1 Total Installed Cost Inputs ................................................................................... 8-6

8.2.1.1 Manufacturer Costs .................................................................................... 8-7

8.2.1.2 Markups ...................................................................................................... 8-7

8.2.1.3 Total Customer Price .................................................................................. 8-9

8.2.1.4 Future Equipment Prices .......................................................................... 8-10

8.2.1.5 Installation Cost ........................................................................................ 8-11

8.2.1.6 Total Installed Cost .................................................................................. 8-15

8.2.2 Operating Cost Inputs ........................................................................................ 8-15

8.2.2.1 Annual Energy Use Savings ..................................................................... 8-16

8.2.2.2 Energy Prices ............................................................................................ 8-16

8.2.2.3 Energy Price Trends ................................................................................. 8-17

8.2.2.4 Repair Cost ............................................................................................... 8-19

8.2.2.5 Maintenance Cost ..................................................................................... 8-19

8.2.2.6 Lifetime .................................................................................................... 8-20

8.2.2.7 Discount Rates .......................................................................................... 8-21

8.2.2.8 Compliance Date of Standard .................................................................. 8-24

8.2.2.9 Base Case Distribution of Efficiency Levels ........................................... 8-24

8.3 PAYBACK PERIOD INPUT S ...................................................................................... 8-25

8.4 LCC AND PBP RESULTS ............................................................................................ 8-26

8.4.1 Small Air -Cooled Commercial Unitary Air Conditioners ................................. 8-26

8.4.2 Large Air

- Cooled Commercial Unitary Air Conditioners ................................. 8-29

8.4.3 Very Large Air

- Cooled Commercial Unitary Air Conditioners ........................ 8-32

8.4.4 Rebuttable Payback Periods ............................................................................... 8-35

REFERENCES .......................................................................................................................... 8-36

LIST OF TABLES

Table 8 .1.1 Summary of Inputs and Key Assumptions Used in the LCC and PBP Analysis

................................ ................................ .......................................... 8-4

Table 8.2.1 Manufacturer Production Cost for CUAC by Efficiency Level ($2013) ...... 8-7

Table 8.2.2 Manufacturer Shipping Cost for CUAC by Efficiency Level ($2013) ......... 8-7

Table 8.2.3 Summary of Average Markups ...................................................................... 8-8

Table 8.2.4 Summary of National Account Markups ....................................................... 8-8

Table 8.2.5 Overall Markup for CUAC by Equipment Class ........................................... 8-9

Table 8.2.6 Average Customer Price for CUAC (2013$) ............................................... 8-10

Table 8.2.7 Installation Costs for Baseline CUACs ........................................................ 8-12

8-iTable 8.2.8 National Average Installation Cost for CUACs........................................... 8-13

Table 8.2.9 Installation Cost Indices by State (National Value = 100.0) ....................... 8-14

Table 8.2.10 Installation Cost Indices by Region (National Value = 100.0) .................... 8-14

Table 8.2.11 Average Total Installed Cost for CUACs (2013$) ...................................... 8-15

Table 8.2.12 Average and marginal tariff -based prices by region (2012 dollars) ............ 8-17

Table 8.2.13 Commercial Electricity Price s (2013 cents/kWh) ........................................ 8-18

Table 8.2.14 Annualized Maintenance Costs for CUACs ................................................ 8-20

Table 8.2.15 Risk free rate and equity risk premium, 2011-2013 .................................... 8-23

Table 8.2.16 Weighted Average Cost of Capital for Sectors that Purchase CUAC ......... 8-24

Table 8.2.17 Base Case Efficiency Market Shares in 2019 for CUACs ........................... 8-25

Table 8.4.1 Small Air

- Cooled Commercial Unitary Air Conditioners: Life

- Cy cle Cost and Payback Period Results ................................................................. 8-27

Table 8.4.2 Large Air

- Cooled Commercial Unitary Air Conditioners : Life

- Cycle Cost and Payback Period Results ................................................................. 8-30

Table 8.4.3 Very Large Air

- Cooled Commercial Unitary Air Conditioners: Life

Cycle Cost and Payback Period Results ...................................................... 8-33

Table 8.4.4 Rebuttable-Presumption Payback Periods (years) for Small, Large, and Very Large A ir

- Cooled Commercial Unitary Air Conditioners .................. 8-35

LIST OF FIGURES

Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP ................. 8-4 Figure 8.2.1 Historical Nominal and Deflated Producer Price Indexes for Unitary Air Conditioners Except Heat Pumps .......................................................... 8-11 Figure 8.2.2 AEO2013 electricity price projections by region (2013$) ........................... 8-19 Figure 8.4.1 Range of Life

- Cycle Cost Savings for Small Air

- Cooled Commercial Unitary Air Conditioners ............................................................................. 8-28 Figure 8.4.2 Range of Payback Periods for Small Air

- Cooled Commercial Unitary

Air Conditioners........................................................................................... 8-29 Figure 8.4.3 Range of Life -Cycle Cost Savings for Large Air

- Cooled Commercial Unitary Air Conditioners ............................................................................. 8-31 Figure 8.4.4 Range of Payback Periods for Large Air -Cooled Commercial Uni tary
Air Conditioners........................................................................................... 8-32 Figure 8.4.5 Range of Life

- Cycle Cost Savings for Very Large Air -Cooled Commercial Unitary Air Conditione rs ......................................................... 8-34 Figure 8.4.6 Range of Payback Periods for Very Large Air

- Cooled Commercial Unitary Air Conditioners ............................................................................. 8-35

8- iiCHAPTER 8. LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSIS

8.1 INTRODUCTION

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

.

• Life

- cycle cost (LCC) is the total customer cost over the life of an appliance or product, 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 product.

• Payback period (PBP) measures the amount of time it takes customers to recover the assumed higher purchase price of more energy-efficient products through reduced operating costs.

The U. S. Department of Energy (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 t o perform the analysis by incorporating uncertainty and variability considerations in certain of the key parameters as discussed further in section 8.1.1

.

Inputs to the LCC and PBP analysis of CUACs are discusse d in sections 8.2 and 8.3 respectively. Results for each metric are presented in section 8.4 . Key variables and calculations are presented for each metric. The calculations discussed here were performed with a series of

Microsoft Excel spreadsheets that are accessible over the Internet (http://www1.eere.energy.gov/buildings/appliance_standards/buildings/appliance_standards/prod uct.aspx/productid/77 ).

8.1.1 General Approach for Life -Cycle Cost and Payback Period Analysis

In recognition of the fact that each building using CUACs is unique, variability and uncertainty are analyzed by performing the LCC and PBP calculations detailed here for a

repres entative sample of individual commercial buildings. The results are expressed as the number of buildings experiencing economic impacts of different magnitudes. The LCC and PBP model was developed using Microsoft Excel spreadsheets combined with Crystal Ball. The LCC and PBP analysis explicitly model both the uncertainty and the variability in the model’s inputs using Monte Carlo simulation and probability distributions (see appendix 8

- B)

.

The LCC analysis used the estimated energy use for each CUAC unit as described in the energy use analysis in chapter 7. Energy use of CUACs is sensitive to climate and therefore varies by location within the United States. Aside from energy use, other important factors influencing the LCC and PBP analysis include energy pri ces, installation costs, equipment distribution markups, and sales tax es . The LCC spreadsheets explicitly modeled both the uncertainty and the variability in the model’s inputs.

8-1As mentioned previously, 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 single-point 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 a base

case . T he base case efficiency level is for 2019 and is defined as a mix of CUAC efficiency levels reflecting the expected distribution of efficiency levels by equipmen t class.

8.1.2 Overview of Life -Cycle Cost and Payback Period Analysi s Inputs

The LCC is the total customer cost over the life of the equipment, including purchase price (including retail markups, sales taxes, and installation costs) and operating cost (including repair costs, maintenance costs, and energy cost). Future operating costs are discounted to the time of purchase and summed over t he lifetime of the equipment . The PBP is the increase in purchase cost of a higher efficiency unit divided by the change in annual operating cost of the

uni t. It represents the number of years that 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 analysis are categorized as: (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 a wholesaler for equipment meeting existing minimum efficiency (or baseline) standards. The MSP includes a markup that converts the cost of production ( i.e. , the manufacturer cost) to a MSP.

• Standard

- level manufacturer selling pr ice increase : The standard

- level 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 wholesaler and contractor margins and state and local retail sales taxes associated with converting the MSP to a customer price.

• Installation cost : Installation cost is the cost to the customer of installing the equipment. The installation cost represents all costs required to install the equipment but does not

include the marked -up customer equipment price. The installation cost includes labor, overhead, and any miscellaneous materials and parts.

The primary inputs for calculating the operating cost are:

8-2• Equipmen t energy consumption and power demand : The equipment energy consumption is the site energy use associated with providing space conditioning to the building. The power demand is the maximum power requirement of the equipment (more commonly known as the peak demand) for a specific period of time. Typical ly, electric utilities measure the peak demand for each month. DOE calculated both the energy consumption and peak demand based on hourly whole- building simulations.

• Electricity Prices : Average and marginal electricity prices for commercial buildings are

d etermined using a tariff

- based analysis. The average electricity price is used to estimate operating costs for the baseline, and marginal prices are used to value the operating cost savings at higher efficiency levels

.

• Electricity price trends : The Energy Information Administration’s (EIA’s) Annual Energy Outlook 201 3 ( AEO 201 3 ) 1 is used to project electricity prices into the future.

• Maintenance costs : The labor and material costs associated with maintaining the operation of the equipment.

• Repair costs : Th e labor and material costs associated with repairing or replacing components that have failed.

• Lifetime : The age at which the CUAC equipment is retired from service.

• Discount rate : The rate at which future costs and savings are discounted to establish thei r 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.

8-3Figure 8.1.1 Flo w Diagram of Inputs for the Determination of LCC and PBP

Table 8.1.1 provides descriptions of 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.

Table 8.1.1 Summary of Inputs and Key Assumptions Used in the LCC and PBP Analysis
Inputs Description Affecting Installed Costs

Equipmen t Price Deriv ed MSP for CUAC equipment at different input capacities (from the engineering analysis) and multiplied by wholesaler markups and contractor markups plus sales tax (from markups analysis). Used the probability distribution for the different markups to descr ibe their variability.

Installation Cost Includes installation labor derived from RS Means Online

. 2 Overhead and materials costs and profits are assumed to be included in the contractor’s markup. Thus, the total installed cost equals the customer equipment price (manufacturer cost multiplied by the various markups plus sales tax) plus the

installation cost. Affecting Operating Costs Annual Energy Use See chapter 7.

Energy Efficiency The integrated energy efficiency ratio ( IE ER) is the efficiency desc riptor for

CUAC . Whole-building simulations are used to determine the annual energy consumption associated with a particular standard level.

E lectricit y Prices C osts were calculated for generalized buildings from summer and winter marginal and average electricity prices using tariff data and CBECS 1992 and 1995 monthly electricity consumption and demand. P rices were escalated by the

AEO 201 3 forecasts to update tariff prices to 2013 and to estimate future Manufacturer Selling Price (Base)

Manufacturer Selling

Price (Standard i=1...n)

Wholesaler/Distributor Markup

Contractor Markups

Sales Tax Installation Costs Equipment Prices

Total Installed Cost (Std i

– Base)

Electricity Consumption

Electricity Prices Annual Energy Costs

Annual Maintenance

Costs

Repair Costs Annual Operating Cost (Std i

–- Base)

Discount Rate

Lifetimes Payback

Period Lifecycle

Cost

Lifetime Operating Cost (Std I

– Base)

8-4Inputs Description electricity prices. Escalation was performed at the censu s division level

.

Maintenance Cost The cost associated with maintaining the operation of the equipment ( e.g. , cleaning heat exchanger coils). Annual maintenance cost does not change as a

function of MSP. Repair Cost Not included in the LCC.

Affect ing Present Value of Annual Operating Cost Savings

Equipment Lifetime Adjusted the probability distributions developed for the 2004 ANOPR based on the ASHRAE service life database, resulting in higher mean and median

lifetimes.

Discount Rate Mean real d iscount rate s ranging from 3.74 percent to 5.57 percent for various

classes of commercial customers , calculated using financial data from

Damodaran Online . Probability distributions are used for the discount rates. Compliance Date 201 9 ( 3 years after exp ected publication of the final rule)

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

sections 8.2 and 8.3

.

8.1.3 Use of Whole- Building Simulations in LCC and PBP Analysis

As detailed in Chapter 7

, the energy use for current analysis was derived from whole building simulations performed for the 2004 CUAC standard. The whole- building simulation analysis generates building energy consumption data for each hour of a typical meteorological year. For each of the 1,033 records in the building sample, the hourly building energy consumption is separated into the air-conditioning energy consumption (i.e., the consumption due to the compressor and condenser fan), the supply or ventilation fan energy consumption, and the energy consumption due to all other electric end uses in the building. Because the supply fan is integral to the CUAC equipment, energy consumption for ventilation, even during periods where mechanical cooling is not required, is included as part of the total air-conditioning energy consumption.

Because the simulation data reflects the building stock in 1995 that uses air-cooled CUAC equipment, DOE developed a “generalized building sample” to represent the current

installation conditions and distribution of total floor space for the equipment covered in this rulemaking. This part involved making adjustments to update the building simulation data to

reflect the building stock that uses air-cooled CUAC equipment in 2011. Conceptually, the main

difference between the “ generalized building sample ” (GBS) and the sample of specific commercial buildings compiled in CBECS is that the GBS aggregates all building floor s pace associated with a particular set of building characteristics into a single category. The building characteristics addressed in the GBS included: region, building activity, building size, and vintage. The combination of 10 regions, 7 building types, 3 sizes and 3 vintages leads to a set of 630 independent categories in the GBS. DOE developed a separate GBS for the each of the representative cooling capacity sizes (7.5 -ton, 15-ton, and 30-ton) addressed in the LCC and PBP analysis.

8-58.2 L IFE

- CYCLE COST ANALYSIS INPUTS

Life

- cycle cost is the total customer cost over the life of a piece of equipment, including purchase cost and operating costs (which are composed 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 . Life -cycle cost is defined by the following equation:

Where:

LCC = life

- cycle 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.

DOE expresses all the costs in 2013$. 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 2019, the effective date of the energy conservation standards for

CUAC

.

8.2.1 Total Installed Cost Inputs

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

Where:

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

INST = installation cost ($) ( 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, DOE defined one major distribution channel for new units to describe how the equipment passes from the manufacturer to the customer: t he

manufacturer sells the equipment to a wholesaler or distributor, who sells to a mechanical contractor hired by a general contractor. The general contractor purchases and installs the equipment on behalf of the customer and adds its markup to the mechani cal contractor’s price. Replacement equipment follows the same distribution channel, except that there is no general contractor. Instead, the mechanical contractor takes on the general contractor’s function.

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

calculate the total installed cost for CUAC

. 

# ∑

= 

### + += N

t t

t 

### r OC ICLCC

1 

### )1 /(

INST EQP IC +=

8-68.2.1.1 Manufacturer Costs

DOE developed the manufacturer costs for CUAC as described in chapter 5, Engineering Analysis. The manufacturer costs at each efficiency level for the representative units in each equipment class are shown in Table 8.2.1 . DOE also considered shipping costs from the manufacturer for these units, which are shown in Table 8.2.2

.

Table 8.2.1 Manufacturer Production Cost for CUAC by Efficiency Level ($2013)

Eff.

Level Small CommercialPackaged AC (AirCooled) - ≥65,000 Btu/h and < 135,000

Btu/h Large CommercialPackaged AC (AirCooled) - ≥135,000 Btu/h and < 240,000

Btu/h Very Large Commercial Packaged AC (Air -Cooled) - ≥240,000 Btu/h and < 760,000 Btu/h

Total

Cost Incremen tal

Cost Total

Cost Incrementa

l Cos t Total

Cost Incremental

Cost

0 $1,920

- $3,552

- $7,148

-

1 $2,036 $116 $3,971 $419 $7,690 $543

2 $2,504 $583 $4,345 $793 $8,444 $1,296

3 $2,709 $789 $4,789 $1,237 $8,982 $1,835

4 $3,197 $1,277 $5,106 $1,554 $9,901 $2,753

Table 8.2.2 Manufacturer Shipping Cost for CUAC by Efficiency Level ($2013)

Eff.

Level Small CommercialPackaged AC (AirCooled) - ≥65,000 Btu/h and < 135,000

Btu/h Large CommercialPackaged AC (AirCooled) - ≥135,000 Btu/h and < 240,000

Btu/h Very Large Commercial Packaged AC (Air -Cooled) - ≥240,000 Btu/h and < 760,000 Btu/h

Total

Cost Incremen tal

Cost Total

Cost Incrementa

l Cost Total

Cost Incremental

Cost

0 $257

- $257

- $600

-

1 $257 $0 $257 $0 $600 $0

2 $257 $0 $450 $193 $600 $0

3 $257 $0 $450 $193 $600 $0

4 $360 $103 $450 $193 $1,044 $444

8.2.1.2 Markup s

For a given distribution channel, the overall markup is the value determined by multiplying all the associated markups a nd the applicable sales tax together to arrive at a single overall distribution chain markup value. The overall markup is multiplied times the baseline or

8-7standard

- compliant manufacturer cost to arrive at the price paid by the customer. Because there are baseline and incremental markups associated with the wholesaler and mechanical and general

contractor s, the overall markup is also divided into a baseline markup ( i.e. , a mark up used to convert the baseline manufacturer price into a customer price) and an incremental markup ( i.e. , a markup used to convert a standard -compliant manufacturer cost increase due to an efficiency increase into an incremental customer price). Markups can differ depending on whether the equipment is being purchased for a new construction installation or is being purchased to replace existing equipment. DOE developed the overall baseline markups and incremental markups for both new construction and replac ement applications as a part of the markups analysis (chapter 6 of the TSD).

Table 8.2.3 and Table 8.2.4 display baseline and incremental markups used to calculate customer price from manufacturer cost; Table 8.2.3 presents the values used for the distribution channels involving wholesalers and contractors, while Table 8.2.4 presents the values used for

the national accounts distribution channels. Because the relative importance of new construction and replacements in total shipments varies among the equipment classes, the total markup varies as well ( Table 8.2.5 ).

Table 8.2.3 Summary of Average Markups
Baseline Markup Incremental Markup

Manufacturer 1. 3 to 1.41 (see Table 6. 6 .1 in c hapter 6)

Wholesaler 1.36 1.10

Mechanical Contractor (new construction/replacement) 1.42/1.50 1.14/1.20

General Contractor (new construction only) 1.31 1.19

Sales Tax (replacement only) 1.0 7 1.0 7

Table 8.2.4 Summary of National Account Markups

Market Baseline Markup Incremental Markup

New Construction 2.14 to 2.28 1.47 to 1.56

Replacement 1.92 to 2.04 1.42 to 1.50

8-8Table 8.2.5 Overall Markup for CUAC by Equipment Class Equipment Class Baseline Markup Incremental Markup Small Commercial Packaged AC (Air -Cooled) - ≥65,000 Btu/h and < 135,000 Btu/h 2.76 1.79

Large Commercial Packaged AC (Air -Cooled) - ≥135,000 Btu/h and < 240,000 Btu/h 2.84 1.84

Very Large Commercial Packaged AC (Air -Cooled) - ≥240,000 Btu/h and < 760,000 Btu/h 2.99 1.93

8.2.1.3 Total C usto mer Price

DOE derived the customer equipment price for the efficiency levels above the baseline by taking the product of the baseline manufacturer cost and the baseline overall markup (including the sales tax) and adding to it the product of the incremental manufacturer cost and the

incremental overall ma rkup (including the sales tax). DOE followed the same process for shipping costs but in this case the manufacturer markup was not included in the overall markup.

DOE then added the marked -up shipping cost to the customer equipment price. Markups and the

sa les tax all can take on a variety of values, depending on location, so the resulting total installed cost for a particular efficiency level is represented by a distribution of values.

Table 8.2.6 present s the average customer equipment price for each CUAC equipment class at each efficiency level examined.

8-9Table 8.2.6 Average Customer Price for CUAC (2013$)

Equipment Class Efficiency Level

Baseline 1 2 3 4

Small Commercial Packaged AC (Air

Cooled) - ≥65,000 Btu/h and < 135,000

Btu/h $5,849 $6,056 $6,893 $7,261 $8,279

Large Commercial Packaged AC (Air

Cooled) - ≥135,000 Btu/h and < 240,000

Btu/h $10,643 $11,415 $12,373 $13,192 $13,777

Very Large Commercial Packaged AC (Ai r-Cooled) - ≥240,000 Btu/h and < 760,000 Btu/h $22,623 $23,673 $25,131 $26,172 $28,570

8.2.1.4 Future Equipmen t Prices

DOE obtained historical PPI data for “unitary air -conditioners, except heat pumps” spanning the time period 1978-2013 from the Bureau of La bor Statistics’ (BLS). 3 The PPI data reflect nominal prices, adjusted for product quality changes. An inflation- adjusted (deflated) price index was calculated by dividing the PPI series by the Gross Domestic Product Chained

Price Inde x (see Figure 8.2.1 ). 4

8-10Figure 8.2.1 Historical Nominal and Deflated Producer Price Indexes for Unitary Air Conditioners Except Heat Pumps

From 1978 to 2004, the PPI index shows a long- term declining trend. Since then, the

index has been flat

. Because it is not evident that the historical declining trend will re

- establish itself, DOE chose to ap ply a constant price trend (2013 levels) for the NOPR. Thus, projected prices for the LCC and PBP analysis are equal to the 2013 values for each efficiency level in

each equipmen t class. For the NIA, DOE also analyzed the sensitivity of results to alternative price forecasts.

8.2.1.5 Installation Cost

The installation cost is the price to the customer of labor and mate rials (other than the actual equipment) needed to install CUAC equipment. DOE derived installation costs for commercial air conditioners from current RS Means data. RS Means provides estimates on the person-hours required to install CUAC equipment and the labor rates associated with the type of crew required to install the equipment. DOE calculated the installation cost by multiplying thenumber of person-hours by the corresponding labor rate. RS Means provides specific personhour and labor rate data for the installation of 7.5-ton, 15-ton, and 30-ton roof top air conditioners. DOE decided that data for 7.5-ton, 15-ton, and 30-ton rooftop air conditioners are representative of installation costs for the small

, large , and very large air -conditioning equipment classes, respectively.

Labor rates vary significantly among regions, and the RS Means data provide the necessary information to capture this regional variability. RS Means provides cost indices that 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

0 20 40 60 80 100 120 140 160 180197819801982198419861988199019921994199619982000200220042006200820102012Deflated PPI (2013=1)Nominal PPI (1982=100)

Year

Nominal PPI: Unitary Air Conditioners Except Heat Pumps

Deflated PPI: Unitary Air Conditioners Except Heat Pumps

8-11reflect the labor rates for 656 cities in the United States. Several cities in all 50 states of the

United States and the District of Columbia are identified in the RS Means data. DOE incorporated these cost indices into the analysis to vary the installation cost depending on the

location of the CUAC custom er.

Within a given capacity (equipment class), DOE chose to vary installation costs in direct proportion to the weight of the equipment. The weight of the equipment in each equipment class and efficiency level was determined through the engineering analysi s.

Table 8.2.7 summarizes the nationally representative person -hours and labor rates associated with the installation of 7.5-ton, 15-ton, and 30-ton roof top air conditioners as presented in RS Means Online

. Table 8.2.7 provides both bare installation costs (i.e., costs before overhead and profit (O&P)) and installation costs including O&P. DOE decided that the 7.5-ton, 15-ton, and 30- ton installation costs that include O&P represent the installation costs for baseline efficient systems (i.e., 11.4 IEER for 7.5-ton systems, 11.2 IEER for 15 -ton systems, and 10.1

IEER for 30

- ton systems).

Table 8.2.7 Installation Costs for Baseline CUACs

System Type* Person

- hou rs 2013 Bare Costs Labor w/ O&P Cost per

Person

hour ( 2013 $) Total

Labor

Cost ( 2013 $) Cost per

Person

hour ( 2013 $) Total

Labor

Cost ( 2013 $)

7.5

- ton cooling, 170 kBtu/h heating 32.258 $ 50.98 $ 1

, 645 $ 76.75 $ 2

, 476

15

- ton cooling, 270 kBtu/h heating 42.03 2 $ 52.87 $ 2

, 222 $ 79.6 0 $ 3

, 346

30

- ton cooling, 540 kBtu/h heating 68.376 $ 53.94 $ 3

, 688 $ 81.21 $ 5

, 553

*Description as in RS Means for roof top air conditioners with standard controls, curb, economizer, and a single

- zone, electric cooling, gas heating unit.

Table 8.2.8 shows the national average total installation costs by equipment class and efficiency level. The total includes overhead and profit (O&P), which is calculated using labor markups from RS Means. For efficiency levels above the baseline, the installation costs vary in direct proportion to equipment weight.

8-12Table 8.2.8 National Average Installation Cost for CUACs

Equipment Class Efficiency Level

0 1 2 3 4

Small

Commercial Packaged AC (Air -Cooled) - ≥65,000 Btu/h and < 135,000

Btu/h Weight (lbs) 732 786 960 970 1,231

Install Cost (2013$) $2,476 $2,659 $3,248 $3,283 $4,166

Large

Commercial Packaged AC (Air -Cooled) - ≥135,000 Btu/h and < 240,000

Btu/h Weight (lbs) 1,295 1,463 1,862 1,894 2,158

Install Cost (2013$) $3,346 $3,779 $4,812 $4,893 $5,575

Very Large

Commercial Packaged AC (Air -Cooled) - ≥240,000 Btu/h and < 760,000

Btu/h Weight (lbs) 3,808 4,212 4,869 4,905 5,620

Install Cost (2013$) $5,553 $6,141 $7,099 $7,152 $8,194

Table 8.2.9 summarizes the cost indices for installations in each of the 50 States of the U.S., plus the District of Columbia, used to vary the nationally representative installation costs in

Table 8.2.8 . To arrive at an average index for each state, DOE weighted the city indices in each state by their population. It used population estimates for the year 2010 from the U.S. Census Bureau to calculate a weighted

- average index for each state. DOE then assigned each state to a census division (with Pacific divided into north and south) , and calculated a weighted

- average index for each region in the same manner ( Table 8.2.10 ).

8-13Table 8.2.9 Installation Cost Indices by State (National Value = 100.0)

State Index State Index State Index

Alabama 50.1 Kentucky 83.6 North Dakota 58.6

Alaska 107.4 Louisiana 62.5 Ohio 93.2

Arizona 79.5 Maine 75.9 Oklahoma 66.4

Arka nsas 58.9 Maryland 83.8 Oregon 99.6

California 124.9 Massachusetts 120.6 Pennsylvania 116.4

Colorado 78.8 Michigan 101.4 Rhode Island 112.0

Connecticut 119.8 Minnesota 112.9 South Carolina 52.3

D.C 95.3 Mississippi 52.4 South Dakota 41.4

Delaware 119. 5 Missouri 99.2 Tennessee 73.2

Florida 68.0 Montana 73.2 Texas 56.8

Georgia 68.9 Nebraska 80.5 Utah 70.8

Hawaii 112.9 Nevada 100.3 Vermont 75.1

Idaho 75.6 New Hampshire 83.0 Virginia 73.1

Illinois 130.6 New Jersey 126.5 Washington 107.2

Indiana 81.9 New Mexico 70.5 West Virginia 88.6

Iowa 80.5 New York 163.8 Wisconsin 97.7

Kansas 73.9 North Carolina 55.7 Wyoming 67.2

Table 8.2.10 Installation Cost Indices by Region (National Value = 100.0)

Region Ind ex
New England 110.3

Mid Atlantic 141.0

East North Central 104.3

West North Central 91.2

South Atlantic 68.7

East South Central 66.3

West South Central 58.7

Mountain 79.1

Pacific (North) 104.4

Pacific (South) 124.9

8-148.2.1.6 Total Installed Cost

The tota l installed cost is the sum of the equipmen t price and the installation cost. MSPs, markups, and sales tax es all can take on a variety of values, depending on location, so the resulting total installed cost for a particular efficiency level will not be a s ingle -point value, but

rather a distribution of values. Table 8.2.11 present s the average total installed cost for each equipment class at each efficiency level examined.

Table 8.2.11 Average Total Installed Cost for CUACs (2013$)

Equipment Class Efficiency Level

0 1 2 3 4

Small Commercial Packaged AC (Air

Cooled) - ≥65,000 Btu/h and < 135,000

Btu/h $8,156 $8,535 $9,923 $10,323 $12,166

Large Commercial Packaged AC (Air

Cooled) - ≥135,000 Btu/h and < 240,000

Btu/h $13,758 $14,935 $16,858 $17,753 $18,975

Very Large

Commercial Packaged AC (Air

Cooled) - ≥240,000 Btu/h and < 760,000

Btu/h $27,785 $29,385 $31,738 $32,828 $36,200

8.2.2 Operating Cost Inputs

DOE defined the operating cost by the following equation:

OC = EC+ MC

Where:

OC = operating cost ($)

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

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 CUACs

. The annual energy costs of the equipment are computed from energy consumption per unit for the baseline and standard- compliant cases (efficiency level 2, 3, and so on), combined with the energy prices. Equipment lifetime, discount rate, and compliance date of the standard are required for determining the operating cost and for establishing the operating cost present value.

8-158.2.2.1 Annual Energy Use Savings

For each equipment class, DOE calculated the annual energy use savings for each sample building at each efficiency level as described in chapter 7.

8.2.2.2 Energy Prices

Tariff data were used to develop marginal and average prices for each member of the generalized building sample. The app roach uses tariff data that have been processed into commercial building marginal and average electricity prices. 5 Tariff data provide a means to calculate the monthly customer bill given the monthly electricity consumption (kWh) and peak demand (kW). The CBECS 1992 and CBECS 1995 commercial building surveys provide monthly baseline electricity consumption and demand for a large sample of buildings, approximately 5300 in total. 6 7 These monthly values were used to (1) calculate monthly bills and (2) calculate monthly marginal consumption and demand prices. The average electricity price is defined as the total electricity bill divided by total electricity consumption. Two marginal prices are defined, one for electricity demand (in $/kW) and one for electricity consumption (in $/kWh). These marginal prices are calculated by applying a 5% decrement to the baseline demand or consumption and recalculating the electricity bill.

This procedure provides an average electricity price, and marginal consumption and

deman d prices, for each building and for each month. The monthly variation was reduced to seasonal variation by taking a simple average of the monthly data for the summer months (defined as May through September) and for the winter months. The average and margi nal prices for each building were converted to prices for the generalized building sample using a weighted average across all individual buildings with the appropriate region, vintage, building activity and building size. The prices defined in this way were converted to 2013 prices and 2013 dollars using scaling factors taken from the AEO as described in the next section.

The marginal consumption and demand prices for 2012 in 2012 dollars are shown in

Table 8.2.12 . The prices in Table 8.2.12 are somewhat higher than the EIA published national average prices. This is because the tariff -based prices are calculated for only those building which use the covered equipment, and weighted according to the CBECS bui lding sample weights, which tends to give relatively higher weight to smaller buildings which have higher prices. The EIA data cover all commercial establishments.

8-16Table 8.2.12 Average and marginal tariff -base d prices by region ( 2012 dollars)

Region Average Electricity Price ¢/kwh Marginal Demand
Price $/kW Marginal Consumption Price ¢/kwh

annual summer winter annual summer winter annual summer winter

New England 14.91 15.56 14.22 12.14 13.96 10.85 9.64 9.75 9.47

Mid

- Atlantic 15.27 15.92 14.59 12.69 13.77 11.87 9.27 9.58 9.00

ESC 12.36 12.59 12.00 12.54 13.25 12.00 6.28 6.36 6.18

WSC 7.80 8.30 7.41 5.55 6.33 4.98 5.53 5.86 5.28

South Atlantic 10.16 10.10 10.12 7.94 8.17 7.79 7.03 7.00 7.02

ESC 8.46 8.11 8.73 6.90 7.25 6.67 5.72 5.58 5.80

WSC 7.65 8.25 6.97 3.92 4.38 3.57 5.87 6.44 5.20

Mountain 10.35 10.35 10.25 7.87 8.04 7.72 7.12 7.12 7.11

Pacific

– W A,OR 6.93 7.01 6.84 2.59 2.59 2.58 5.51 5.50 5.51

Pacific

– CA 16.41 17.50 15.28 6.80 9.36 4.49 12.1 5 12.35 11.77

US Average 11.17 11.52 10.75 8.33 9.11 7.71 7.34 7.53 7.12

The average summer or winter electricity price multiplied by the baseline summer or winter electricity consumption for equipment of a given capacity defines the baseline LCC. For

e ach efficiency level, the operating cost savings are calculated by multiplying the electricity consumption savings (relative to the baseline) times the marginal consumption price, and the electricity demand reduction by the marginal demand price.

The cons umer’s electricity bill is only affected by the electricity demand reduction that is coincident with the building’s monthly peak load. Air-conditioning loads are strongly, but not perfectly, peak -coincident. Diversity between the building peak and the air-conditioning peak was accounted for by multiplying the electricity demand reduction by a random factor drawn from a triangular distribution centered at 0.9 +/- 0.1.

8.2.2.3 Energy Price Trends

The tariff

- based prices were updated to 2013 using the commercial elec tricity price series published in the Energy Information Administration’s (EIA) Annual Energy Outlook (AEO) as an index. AEO prices for commercial electricity are presented by region in Table 8.2.13 . The table also shows the scaling factor used to convert the tariff data year (2004) to current prices. The national average price increase in constant dollars since the tariff data year is 3.3%.

8-17Table 8.2.13 Commercial Electricity Price s ( 2013 cents/kWh)

Year Region 2009 2010 2011 2012 Scaling Factor

New England 16.50 15.86 15.12 14.50 1.033

Middle Atlantic 14.50 15.01 14.43 14.08 0.964

East North Central 9.97 10.06 10.01 10.16 1.086

West North Central 8.05 8.47 8.70 8.20 1.101

Sou th Atlantic 10.41 10.01 10.01 9.57 1.105

East South Central 10.04 10.06 10.35 8.85 1.046

West South Central 9.68 9.46 9.04 7.66 0.772

Mountain 9.25 9.43 9.37 8.85 1.029

Pacific (North) 12.68 12.48 12.28 12.04 0.957

U.S. 10.99 10.93 10.75 10.21 1.033

Source: AEO 2009

- 2012

The AEO provides a scaling factor that is appropriate for average prices by sector. It is possible that marginal prices may increase at a different rate than average prices. To test for this possibility, the Typical Bills and Rates data published by the Edison Electric Institute (EEI) were examined in detail. These publications provide winter (January) and summer (July) customer bills for a sample of approximate 120 independently owned utilities in the U. S. for typical

values of el ectricity consumption and demand. These typical consumption and demand values include two or three values of consumption for a single value of demand, so it is possible to estimate marginal consumption prices as the ratio of the difference in the bill divi ded by the difference in consumption. EEI data from 2007 to 2012 were used in this analysis. At the level of individual utilities there is significant variation, but on a national average basis there is no indication of a systematic difference between the rates of change of marginal vs . average prices. 8
Regional and national averages were computed from the EEI utility -level using customer counts for each utility. The EEI data cannot be used to estimate a marginal demand price. Based on this analysis, DOE concluded that the same scaling factors may be applied to average and marginal prices.

DOE projected future electricity prices using trends in average commercial electricity price from EIA's AEO 2013 , as shown in Figure 8.2.2

. 9 The chart shows constant dollar prices by region for the AEO forecast period, 2011 to 2040. The US average trend is shown as a heavy

dashed line. DOE used AEO 2013 Reference Case scenarios a for the nine census divisions. DOE applied the projected energy price for each of the nine census divisions to each building in the sample based on the building’s location.

a The reference case is a business

- as

- usual estimate, given known market, demographic, and technological trends.

8-18Figure 8.2.2 AEO2013 electricity price projections by region ( 2013$)

8.2.2.4 Repair Cost

Repair costs ar e associated with repairing or replacing components that have failed. DOE assumed that any routine or minor repairs are included in the annualized maintenance costs. As a result, repair costs are not explicitly modeled in the LCC and PBP analysis. Instead, DOE incorporated a one- time cost for major repair (compressor replacement) as a primary input to the repair/replace customer choice model in the shipments analysis, which models the decision between repairing a broken unit and replacing it (see Chapter 9 ) . In the repair/replace customer choice model, DOE used repair costs that vary in direct proportion with the price of the equipment.

8.2.2.5 Maintenance Cost

The maintenance cost is the routine cost to the customer of maintaining equipment operation. DOE took ann ualized maintenance costs for CUACs from data in RS Means Onlin e , which provides estimates on the person-hours, labor rates, and materials required to maintain CUAC equipment. RS Means specifies the following 11 actions that constitute required annual

main tenance:

• Check with operating or area personnel for deficiencies.

• Check tensions, condition, and alignment of belts; adjust as necessary.

• Lubricate shaft and motor bearings.

• Replace air filters.

• Clean electrical wiring and connections; tighten loose connections.

• Clean coils, evaporator drain pan, blowers, fan motors, and drain piping as required.

• Perform operational check of unit; make adjustments on controls and other components as required.

• During operation of unit, check refrigerant pressure; add refrige rant as necessary.

• Check compressor oil level; add oil as required.

8-19• Clean area around unit.

• Fill out maintenance checklist and report deficiencies.

DOE calculated the annualized maintenance cost by multiplying the number of personhours by the correspondin g labor rate and adding to it the associated materials costs. RS Means provides specific cost data for the maintenance of rooftop air conditioners ranging in cooling capacity from 3 through 24 tons, as well as from 25 through 50 tons. DOE took the 3 through 24 ton rooftop air conditioner data to be representative of maintenance costs both for the ≥65,000 Btu/h to <135,000 Btu/h equipment class and the ≥135,000 Btu/h to <240,000 Btu/h equipment class. DOE took the 25 through 50 ton rooftop air conditioner da ta to be representative of maintenance costs for the ≥240,000 Btu/h to <2760,000 Btu/h equipment class.

Because data were not available to indicate how maintenance costs vary with equipment efficiency, the Department decided to use costs that stay constant as equipment efficiency

increases.

Table 8.2.14 summarizes the nationally representative annualized maintenance costs for 3-ton through 24-ton and 25-ton through 50-ton air rooftop air conditioners as presented in RS

Means Online. Table 8.2.14 provides both bare maintenance costs (i.e., costs before O&P) and maintenance costs including O&P. DOE uses maintenance costs including O&P in its analysis.

Table 8.2.14 Annualized Maintenance Costs for CUACs

System Type Annual

Person

hours Bare Costs Labor and Materials w/O&P

Mat’l ($ 2013 ) Cost

per
Person

- hour * ($ 2013 ) Annual

Labor

Cost ($ 2013 ) Annual

Total

Cost ($ 2013 ) Mat’l ($ 2013 ) Cost

per
Person

- hour ($ 2013 ) An nual

Labor

Cost ($ 2013 ) Annual

Total

Cost ($ 2013 ) Packaged unit, air

cooled, 3

- tons through 24

- tons 2.402 $ 74 $ 56.7 $ 136.1 $ 210.1 $ 92.5 $ 85.3 $ 204.9 $ 297.4

Packaged unit, air

cooled, 25

- tons through 50

- tons 3.254 $ 104 $ 56.7 $ 184.3 $ 288.3 $ 130.0 $ 85.3 $ 27 7.6 $ 407.6

*Labor rates from RS Means Online for steamfitter or pipefitter.

8.2.2.6 Lifetime

DOE defines lifetime as the age when equipment is retired from service. In previous CUAC rulemakings, DOE based the median lifetime of CUAC’s on data from the 1999

ASHRAE HVAC Applications Handbook, which gives a median lifetime of 15 years for rooftop air conditioners. Because “survival function” more accurately represents equipment lifetime than a single -point value, DOE created a survival function for CUACs based on dat a for residential heat pump systems.

The Weibull distribution is a probability distribution function commonly used to measure

failure rates. 4 Its form is similar to an exponential distribution, which would model a fixed

8-20failure rate, except that it allows for a failure rate that changes over time in a particular fashion.

The cumulative distribution takes the fo rm:

for x > θ and P(x) = 1 for x ≤ θ

, Where:

P(x) = probability that the appliance is still in use at age x ,

x = appliance age,

α = the scale parameter, which is the decay length in an exponential distribution, β = the shape parameter, which determines the way in which the failure rate changes in time, and

θ = the delay parameter, which allows for a delay before any failures occur.

For the ANOPR, DOE developed a Weibull distribution with an alpha of 4.00 and a beta of 16.44, resulting in a median value of 15 and a mean of 15.4 years.

For this rulemaking, DOE reviewed an ASHRAE database and determined that the data support an increase in lifetime relative to what was used for the ANOPR. In the category "Packaged DX unit, rooftop" (which corresponds to CUAC), of the 215 units in service, the mean age is 15.6 years and the median is 16 years. The five units that had been replaced had a median age of 22 years. These data strongly suggest that the median lifetime of 15 years used in the ANOPR is too short. Based on calibration of the shipments model (see Chapter 9), DOE used an updated CUAC lifetime with a median of 18.7 years and a mean of 18.4 years. The Weibull

parameters were 19.35 (alpha) and 10 (beta). DOE used the same lifetime distribution for each

CUA C equipment class. DOE assumed that the lifetime of CUAC equipment is the same at different efficiency levels.

8.2.2.7 Discount Rate s

The discount rate is the rate at which future expenditures and savings are discounted to establish their present value. 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. Following financial theory, the finance cost of raising funds for expenditure can be interpreted as: (1) the financial

cost o f any debt incurred to maintain equipment, or (2) the opportunity cost of any equity used to

maintain equipment. Similarly, the value of cost savings can be interpreted as: (1) the cost avoided by decreasing debt, or (2) the return earned from increasing equity holdings. 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 firm of equity and debt financing. 10 DOE defines the discount rate as the weighted average cost of capital (WACC), calculated as the weighted average of the cost of equity financing and the cost of debt financing, as estimated from financial data for publicly traded firms in the sectors that purchase commercial air conditioners.

Damodaran Online is a widely used source of information about company debt and equity financing for most types of firms, and was the primary source of data for this analysis. 11
Companies included in the Damondaran Online database were assigned to the aggregate categories listed below: 

# e x 

### xP β

α

θ 

    

−

−



### = )(

8-21• Retail

• Property owners

• Medical services

• Industrial

• Lodging

• Food Service

• Offices

• Public

DOE estimated the cost of equity using the capital asset pricing model (CAPM). 12 The CAPM assumes that the cost of equity ( k

e ) for a particular company is proportiona l to the systematic risk faced by that company, where high risk is associated with a high cost of equity and low risk is associated with a low cost of equity. The systematic risk facing a firm is determined by several variables: the risk coefficient of the firm (β), the expected return on riskfree assets ( R

f ), and the equity risk premium ( ERP ). The risk coefficient of the firm indicates the risk associated with that firm relative to the price variability in the stock market. The expected

return on risk- fre e assets is defined by the yield on long-term government bonds. The ERP represents the difference between the expected stock market return and the risk

- free rate. The cost of equity financing is estimated using the following equation, where the variables a re defined as above:


## ( ) ERP Rk

f

e 

### ×+= β

Where:

k

e = cost of equity,

R

f = expected return on risk- free assets, β = risk coefficient of the firm, and

ERP = equity risk premium.

Several parameters of the cost of capital equations can vary substantially over time, and therefore the estimates can vary with the time period over which data is selected and the

technica l details of the data averaging method. For guidance on the time period for selecting and averaging data for key parameters and the averaging method, DOE used Federal Reserve methodologies for calculating these parameters. In its use of the CAPM, the Federal Reserve uses a forty -year period for calculating discount rate averages, utilizes the gross domestic product price deflator for estimating inflation, and considers the best method for determining the

risk free rate as one where “the time horizon of the investor is matched with the term of the risk

free security. ” 13

By taking a forty

- year geometric average of Federal Reserve data on annual nominal

returns for 10

- year Treasury bills , DOE found for this analysis the fo llowing risk free rates for 2011-2013 ( Table 8.2.15 ). 5 DOE also estimated the ERP by calculating the difference between

risk free rate and stock market return for the sa me time period. 14

8-22Table 8.2.15 Risk free ra te and equity risk premium, 2011-2013

Year Risk free rate (%) ERP (%)

2011 6.61% 2.94%

2012 6.41% 3.99%

2013 6.24% 5.30%

The cost of debt financing ( k d

) is the interest rate paid on money borrowed by a company. The cost of debt is estimated by adding a risk adjustment factor ( R

a ) to the risk

- free rate. This risk adjustment factor depends on the variability of stock returns represented by standard deviations in stock prices. So for firm i , the cost of debt financing is:

aifdi RRk +=

Where:

k

d = cost of debt financing for firm, i

, R

f = expected return on risk- free assets, and

R ai = risk adjustment factor to risk

- free rate for firm, i

.

DOE estimates the WACC using the following equation:

d dee 

### wkwkWACC ×+×=

Where:

WACC = weighted average cost of capital,

w e = proportion of equity financing, and

w d = proportion of debt financing.

By adjusting for the influence of inflation, DOE estimates the real weighted average cost of capital, or discount rate, for each company . DOE then aggregates the company real weighted average costs of capital to estimate the discount rate for each of the eight broader ownership types in the commercial air conditioner analysis. An overall average is estimated by weighting

each ownership type’s discount rate by its estimated share of the commercial air conditioner

market

. These values are presented in Table 8.2. 16 . While WACC values for any category may trend higher or lower over substantial periods of time, these values represent a private sector cost of capital that is averaged over major business cycles.

8-23Table 8.2.16 Weighted Average Cost of Capital for Sectors that Purchase CUAC

Sector Discount Rate Standard Deviation Market Share

Retail 4.93% 1.98% 17% Property owners 5.15% 1.20% 21%

Medical services 4.73% 1.66% 7%

Industrial 5.17% 1.85% 5% Lodging 5.57% 1.87% 4%

Food Service 4.67% 2.00% 5%

Offices 4.58% 2.05% 19%

Public 3.74% 1.43% 22%
Average Discount Rate: 4.66%

Source : Damodaran Online Data Page: Costs of Capital by Industry Sector, 201 1 ,201 2 ,201 3.

8.2.2.8 Compliance Date of Standard

DOE calculated the LCC and PBP for all customers as if each would purchase a new piece of equipment in the year that compliance with amended standards is required. EPCA directs DOE to publish a final rule amending the standard for the equipment covered by t his NOPR not later than 2 years after a notice of proposed rulemaking is issued. (42 U.S.C. 6313(a)(6)(C) (iii)) At the time of preparation of the NOPR analysis, the expected issuance date was December 2013, leading to a final rule publication in December 2015. EPCA also states that amended standards prescribed under this subsection shall apply to products manufactured after a

date that is the later of

— (I) the date that is 3 years after publication of the final rule establishing a new standard; or (II) the date that is 6 years after the effective date of the current standard for a covered product. (42 U.S.C. 6313(a)(6)(C)(iv)) The date under clause (I), estimated to be December 2018, is later than the date under clause (II). For purposes of analysis, DOE used 2019 as the first year of compliance with amended standards.

8.2.2.9 Base Case Distribution of Efficiency Levels

The only data available that show air -cooled commercial package air conditioning and heating equipment efficiency market shares are for 1999−2001. It is unlikely that these shares are representative of current market shares or shares expected in the near future. Therefore, DOE

used the customer choice model in the shipments analysis to estimate efficiency market shares in the expected compliance year (assumed to be 2019, as discussed previously). DOE used the market share data (by EER) for 1999−2001 to develop the parameters of the customer choice model in the shipments analysis, as discussed in chapter 8 . Using the parameters, the model estimates the shipments at each IEER level based on the installed cost and operating cost at each efficiency level. Table 8.2.17 presents the estimated base case efficiency market shares for each CUAC equipment class.

8-24Table 8.2.17 Base Case Efficiency Market Shares in 2019 for CUACs

Small Commercial Packaged

AC (Air -Cooled) - ≥65,000 Btu/h and < 135,000 Btu/h Large Commercial Packaged AC (Air-Cooled) - ≥135,000 Btu/h and < 240,000 Btu/h Very Large Commercial Packaged AC (Air-Cooled) - ≥240,000 Btu/h and < 760,000 Btu/h

IEER Market Share IE ER Market Share IEER Market Share

11.4 61% 11.2 78% 10.1 63%

12.9 39% 12.2 20% 11.6 24%

14.0 0% 13.2 2% 12.5 7%

14.8 1% 14.2 0% 13.5 4%

19.9 0% 18.4 0% 15.5 1%

8.3 PAYBACK PERIOD INPUTS

Th e PBP is the amount of time it takes the customer to recover the assumed higher purchase cost of more energy -efficient 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 efficient design to a more efficient design) to the decrease in firs t year annual operating expenditures.

The equation for PBP is:

PBP =∆ IC/ ∆ O C

Eq. 8.1

W here:

PBP = payback period in years,

∆ IC = difference in the total installed cost between the more efficient standard

- level equipment (efficiency levels 2, 3, etc.) and the baseline efficiency equipment,

and

∆OC = difference in first year annual operating costs.

Payback periods are expressed in years. Payback periods can be greater than the life of the equipment if the increas ed total installed cost of the more efficient equipment is not recovered fast enough in reduced operating costs.

DOE also calculates a rebuttable PBP, which is the time it takes the customer to recover the assumed higher purchase cost of more energy- efficient equipment as a result of lower energy costs. Numerically, the rebuttable PBP is the ratio of the increase in purchase cost (i.e., from a less efficient design to a more efficient design) to the decrease in annual energy expenditures; that is, the diffe rence in first year annual energy cost as calculated based on the DOE test procedure. The calculation excludes maintenance costs.

8-25The data inputs to PBP are the total installed cost of the equipment to the customer for each efficiency level and the annua l (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 and the annual maintenance cost (or

, in the case of rebuttable PBP, only the annual energy cost) . The PBP uses the same inputs as the LCC analysis, except that electricity price trends and discount rates are not required. Since the PBP is a “simple” payback, the required electricity cost is only for th e year in which a new efficient

standard is to take effect

— in this case, 2019.

8.4 LCC AND PBP RESULTS

As discussed previously, DOE’s approach for conducting the LCC and PBP analysis relied on developing samples of commercial buildings that use each of the equipment types. DOE used a Monte Carlo simulation technique to perform the LCC and PBP calculations on the buildings in the sample. For each set of sample buildings using the equipment in each equipmen t class, DOE calculated the average LCC and LCC savings and the median and average PBP for each of the efficiency levels.

DOE calculated LCC savings and PBPs relative to the base case equipment that it assigned to the buildings . In some cases, DOE assigned base case equipment that is more

efficient than the b aseline and some of the efficiency levels . For that reason, in those cases the average LCC impacts are not equal to the difference between the LCC of a specific efficiency

level and the LCC of the base line equipment. DOE calculated the average LCC savings and the median PBP values by excluding the building s that are not impacted by a standard at a given efficiency level.

LCC and PBP calculations were performed 10,000 times on the sample of buildings established for each equipment class . Each LCC and PBP ca lculation was performed on a single building that was selected from the sample. The selection of a building was based on its sample weight ( i.e. , how representative a particular building is of other buildings in the distribution— either regionally or nation ally) , as described in chapter 7 of the TSD. Each LCC and PBP calculation also sampled from the probability distributions that DOE developed to characterize many of the inputs to the analysis.

Based on the Monte Carlo simulations that DOE performed, for each standard level, DOE

calculated the share of buildings receiving a net LCC benefit, a net LCC cost, and no impact.

DOE considered a building to receive no impact at a given standard level if DOE assigned it base case equipment whose efficiency is the sam e as, or is more than, the efficiency level

.

8.4.1 Small Air

- Cooled Commercial Unitary Air Conditioners

Table 8.4.1 summarizes the LCC and PBP results for small air -cooled CUAC

.

8-26Table 8.4.1 Small Air

- Cooled Commercial Unitary Air Conditioners : Life

- Cycle Cost and Payback Period Results

Trial Standard Level 1 2 3 4
Efficiency Level 1 2 3 4

IEER 12.9 14.0 14.8 19.9

Total Installed Cost $8, 535 $9, 923 $ 10,323 $ 12,166
Average Lifetime Opera ting Cost * $ 19,223 $17, 993 $13, 0 735 $9, 959 Average Lifecycle Cost $ 27,759 $ 27,916 $ 24,058 $ 22,125 Mean LCC Savings $1, 0 94 $ 937 $4, 779 $6, 711
Customers with LCC Increase (Cost) (%) 0% 2 7 % 0% 0%
Customers with LCC Decrease (Benefit) (%) 61% 72% 99% 1 00%
Customers with No Change in LCC (%) 39% 1% 0% 0%
Median PBP (Years) 2.0 8.0 3. 9 4. 7

* Discounted

Figure 8.4.1 shows the range of LCC savings by efficiency level for s mall air -cooled

CUAC

. For each efficiency level , the top and the bottom of the box in a figure indicate the 75 th

and 25 th percentiles, respectively. The bar in the middle of the box indicates the median: under

that efficiency level , 50 percent of the households have LCC savings that exceed that value. The

“whis kers” at the bottom and the top of the box indicate the 5 th and 95 th percentiles. The small box shows the average LCC savings for each efficiency level

.

8-27Figure 8.4.1 Range of Life

- Cycle Cost Savings for Small Air

- Cooled Commercial Unitary

Air Conditioners

Figure 8.4.2 summarizes the range of PBPs for all efficiency level s for s mall air -cooled

CUAC

. -2000 0 2000 4000 6000 8000 10000 12000 14000 16000

Level 1 Level 2 Level 3 Level 4LCC Savings (2013$)

Efficiency Level 7.5 Ton Range of LCC Sav ings Average; Median; Box 25%- 75%; Whisker 5% -95% median

average

8-28Figure 8.4.2 Range of Payba ck Periods for Small Air -Cooled Commercial Unitary Air

Conditioners

8.4.2 Large Air

- Cooled Commercial Unitary Air Conditioners

Table 8.4.2 summarizes the LCC and PBP results for l arge air -cooled CUAC. 0 5 10 15 20 25

Level 1 Level 2 Level 3 Level 4Years

Efficiency Level 7.5 Ton Range of PBP Values Average; Median; Box 25%- 75%; Whisker 5% -95% median

average

8-29Table 8.4.2 Large Air

- Cooled Commercial Unitary Air Conditioners : Life

- Cycle Cost and Payback Period Results

Trial Standard Level 1 2 3 4
Efficiency Level 1 2 3 4

IEER 12.2 13.2 14.2 18.4

Total Installed Cost $14,935 $16,858 $17,753 $1 8,975
Average Lifetime Operating Cost $32,143 $29,021 $26,866 $21,599 Average Lifecycle Cost $47,078 $45,880 $44,619 $40,575 Mean LCC Savings $1,038 $2,214 $3,469 $7,508

Customers with LCC Increase (Cost) (%)* 3 % 8 % 6 % 2%

Customers with LCC De crease (Benefit) (%)* 74 % 90 % 93 % 98%
Customers with No Change in LCC (%)* 22% 2% 0% 0%
Median PBP (Years) 6.0 7.2 6.6 5.1

* Discounted

Figure 8.4.3 shows the range of LCC savings for all efficiency level s for l arge air

- cooled

CUAC

. For each efficiency level , the top and the bottom of the box in a figure indicate the 75 th

and 25 th percentiles, respectively. The bar in the middle of the box indicates the median: under

that efficiency level , 50 percent of the households have LCC savings that exceed that value. The “whiskers” at the bottom and the top of the box indicate the 5 th and 95 th percentiles. The small box shows the average LCC savings for each efficiency level

.

8-30Figure 8.4.3 Range of Life

- Cycle Cost Savings for Large Air -Cooled Commercial Unitary

Air Conditioners

Figure 8.4.4 shows the range of PBPs for all efficiency level s for l arge air -cooled CUAC

.

-2000 0 2000 4000 6000 8000 10000 12000 14000 16000 18000

Level 1 Level 2 Level 3 Level 4LCC Savings (2013$)

Efficiency Level 15 Ton Range of LCC Sav ings Average; Median; Box 25%- 75%; Whisker 5% -95% median

average

8-31Figure 8.4.4 Range of Payback Periods for Large Air

- Cooled Commercial Unitary Air

Conditioners

8.4.3 Very Large Air

- Cooled Commercial Unitary Air Conditioners

Table 8.4.3 summarizes the LCC and PBP results for very l arge ai r-cooled CUAC

. 0 2 4 6 8 10 12 14 16

Level 1 Level 2 Level 3 Level 4Years

Efficiency Level 15 Ton Range of PBP Values Average; Median; Box 25%- 75%; Whisker 5% -95% median

average

8-32Table 8.4.3 Very Large Air

- Cooled Commercial Unitary Air Conditioners : Life

- Cycle Cost and Payback Period Results

Trial Standard Level 1 2 3 4
Efficiency Level 1 2 3 4

IEER 11.6 12.5 13.5 15.5

Total Installed Cost $29,385 $31,738 $32,828 $36,200

Average Lifetime Operating Cost* $69,369 $66,221 $52,762 $45,975
Average Lifecycle Cost $98,754 $97,960 $85,590 $82,175
Mean LCC Savings ($) $4,103 $4,801 $16,477 $19,842

Customers with LCC Increase (Cost) (%) 2% 12 % 3 % 5 %
Customers with LCC Decrease (Benefit) (%) 62% 76 % 92% 9 4 %
Customers with No Change in LCC (%) 36% 13% 6% 1%
Median PBP (Years) 2. 6 5.5 2. 5 3.5

* Discounted

Figure 8.4.5 shows the range of LCC savings for all efficiency level s for very l arge air

cooled CUAC

. For each efficiency level , the top and the bottom of the box in a figure indicate

the 75 th and 25 th percentiles, respectively. The bar in the middle of the box indicates the median:

und er that efficiency level , 50 percent of the households have LCC savings that exceed that value. The “whiskers” at the bottom and the top of the box indicate the 5 th and 95 th percentiles. The small box shows the average LCC savings for each efficiency level

.

8-33Figure 8.4.5 Range of Life

- Cycle Cost Savings for Very Large Air -Cooled Commercial Unitary Air Conditioners

Figure 8.4.6 shows the range of PBPs for all efficiency level s for very l arge air -cooled

CUAC

. -10000 0 10000 20000 30000 40000 50000

Level 1 Level 2 Level 3 Level 4LCC Savings (2013$)

Efficiency Level 30 Ton Range of LCC Sav ings Average; Median; Box 25%- 75%; Whisker 5% -95% median

average

8-34Figure 8.4.6 Range of Payback Periods for Very Large Air -Cooled Commercial Unitary

Air Conditioners

8.4.4 Rebuttable Payback Periods

Table 8.4.4 shows the rebuttable-presumption PBPs for the considered TSLs. The rebuttable presumption is fulfilled in those cases where the PBP is three years or less.

Table 8.4.4 Rebuttable

- Presumption Payback Periods (years) for Small, Large, and Very Large Air

- Cooled Commercial Unitary Air Conditioners

Trial Standard Level 1 2 3 4
Efficiency Level 1 2 3 4

Small Commercial Packaged Air Conditioners

– ≥65,000
Btu/h and <135,000 Btu/h Cooling Capacity 2.2 8.0 3.9 4.7

Larg e Commercial Packaged Air Conditioners

– ≥135,000
Btu/h and <240,000 Btu/h Cooling Capacity 6.0 7.2 6.6 5.1

Very Large Commercial Packaged Air Conditioners

– ≥240,000 Btu/h and <760,000 Btu/h Cooling Capacity 2.6 5.5 2.5 3.5 0 5 10 15 20 25

Level 1 Level 2 Level 3 Level 4Years

Efficiency Level 30 Ton Range of PBP Values Average; Median; Box 25%- 75%; Whisker 5% -95% median

average

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