CHAPTER 17. REGULATORY IMPACT ANALYSIS

TABLE OF CONTENTS

17.1 INTRODUCTION

......................................................................................................... 17-1 17.2 METHODOLOGY

........................................................................................................ 17-1 17.2.1 Policy Considerations

........................................................................................ 17-2 17.2.1.1 Policy Assumptions

......................................................................... 17-2 17.2.1.2 Policy Interactions

........................................................................... 17-3 17.2.2 Non-Regulatory Policy Assumptions

................................................................ 17-3 17.2.2.1 No New Regulatory Action

............................................................. 17-3 17.2.2.2 Financial Incentives Policies

............................................................ 17-4 17.2.2.3 Commercial Customer Tax Credits

................................................. 17-4 17.2.2.4 Commercial Customer Rebates

........................................................ 17-5 17.2.2.5 Early Replacement Incentives

.......................................................... 17-8 17.2.2.6 Bulk Government Purchases

............................................................ 17-8 17.2.2.7 Regional Energy Conservation Standards

....................................... 17-9 17.2.3 Results Summary

............................................................................................... 17-9

LIST OF TABLES

Table 17.2.1 Cumulative National Energy Savings in Quads for Commercial Refrigeration Equipment, 2012-2042

................................................................ 17-3 Table 17.2.2 Tax Credit Energy Savings and NPV

.................................................................. 17-5 Table 17.2.3 Average Percentage Price Reduction due to Rebate Program

............................. 17-7 Table 17.2.4 Rebate Ener gy Savings and NPV

........................................................................ 17-8 Table 17.2.5 Non-Regulatory Alte rnatives to Standards

........................................................ 17-10

17-i17-iiCHAPTER 17. REGULATORY IMPACT ANALYSIS

17.1 INTRODUCTION

Under the Process Rule, the U.S. Department of Energy (DOE) is committed to exploring non-regulatory alternatives to energy conserva tion standards. DOE will prepare a draft regulatory analysis under Execu tive Order 12866, “Regulatory Planning and Review,” which will be subject to review by the Office of Information and Regulatory Affairs. 58 FR 51735 (September 30, 1993).

DOE identified five major alternatives to ener gy conservation standards as feasible policy options to achieve product energy efficiency. It will evaluate each altern ative in terms of its ability to achieve significant energy savings at a reasonable cost, and will compare the effectiveness of each altern ative to the effectiveness of the proposed standard.

The non-regulatory means of achieving energy savings that DOE proposes to analyze are listed below. The Technical Support Document (TSD) in support of DOE’s Notice of Proposed Rulemaking will include a quantitative analysis of each alternative, the methodology for which is discussed briefly below.

• no new regulatory action

• commercial customer tax credits

• commercial customer rebates

• early replacement

• bulk government purchases

17.2 METHODOLOGY

DOE used the national energy savings (NES) sp readsheet model to calculate the NES and the net present value (NPV) corresponding to each alternative of the proposed standards. The NES spreadsheet model is discussed extensively in Chapter 11 of the TSD. To compare each alternative quantitatively to pr oposed energy conservation standard s, it was first necessary to quantify the effect of each alte rnative on the purchase and use of energy-efficient commercial equipment. Once each alternative is properly qu antified, DOE made the appropriate revisions to the inputs in the NES spreadsheet model. Key inputs that DOE revised in the NES spreadsheet model are:

• energy prices and escalation factors;

• implicit market discount rates for tradi ng off purchase price against operating expense when choosing equipment efficiency;

• customer purchase price, operating cost, and income elasticities;

• customer price versus effi ciency relationships; and

• equipment stock data (purchase of ne w equipment or turnover rates for inventories).

The key measures of the impact of each alternative will be as listed below.

17-1• Commercial energy use in Quads (10 15 Btu); the cumulative energy use of the equipment from 2012 to 2042. DOE reports el ectricity consumption in terms of primary energy.

• National energy savings is the cumulative national energy use from the base case projection less the alternative polic y case projection.

• Net present value is the value of future operating cost savings from commercial refrigeration equipment bought in the period from 2012 to 2062. DOE calculates the NPV as the difference between the pr esent value of equipment and operating expenditures (including energy) in the base case, and the present value of expenditures in each alternative policy case for the life of the equipment. DOE discounts future operating and equipmen t expenditures to 2008 using seven and three percent real discount rates.

17.2.1 Policy Considerations

17.2.1.1 Policy Assumptions

The impacts of non-regulatory programs are un certain by nature, since they depend on program implementation and marketing efforts, and the subsequent response in customer behavior. The projected impacts depend on the a ssumptions for the customer participation rate, and are therefore subject to great er uncertainty than the impacts of mandatory standards, which DOE assumed would have full compliance.

DOE assumed that each alternative polic y would induce commercial customers to voluntarily purchase at least some additional more energy efficient units as opposed to mandatory purchases of more efficient equipmen t that would result from the proposed energy conservation standards at any of the candidate standard levels (TSLs). Table 17.2.1 shows the energy savings associated with standards at each of the considered TSLs (see Chapter 11 of the TSD for additional information). In contrast to a standard at one of the TSLs, however, the adoption rate of the alternative non-regulatory po licy cases may not be 100 percent, which would result in lower energy sa vings than a standard.

DOE assumed that the non-regulatory policy eff ects last from the assumed start date for the mandatory amended energy conservation sta ndards, 2012, through the end of the analysis period, 2042 for energy savings and 2062 for NPV. This simplifying assumption means that the policy affects the market for the entire analysis period, whether or not the incentives actually continue. DOE did not consider administrative co sts for any of the non-re gulatory policies in its analysis. Inclusion of such costs wo uld decrease the NPV by a small amount.

17-2Table 17.2.1 Cumulative National Energy Savi ngs in Quads for Commercial Refrigeration Equipment, 2012-2042

Equipment Class National Energy Savings (quads*) by Trial Standard Level TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 VOP.RC.M 0.057 0.082 0.157 0.157 0.294 VOP.RC.L 0.006 0.011 0.012 0.018 0.018 VOP.SC.M 0.006 0.016 0.031 0.031 0.041 VCT.RC.M 0.001 0.002 0.024 0.025 0.025 VCT.RC.L 0.035 0.392 0.561 0.574 0.574 VCT.SC.I 0.009 0.023 0.027 0.028 0.028 VCS.SC.I 0.000 0.001 0.002 0.002 0.002 SVO.RC.M 0.029 0.043 0.085 0.085 0.157 SVO.SC.M 0.005 0.015 0.033 0.033 0.043 SOC.RC.M 0.002 0.007 0.014 0.014 0.048 HZO.RC.M 0.001 0.005 0.008 0.008 0.008 HZO.RC.L 0.013 0.028 0.032 0.032 0.032 HZO.SC.M 0.000 0.001 0.002 0.002 0.002 HZO.SC.L 0.001 0.003 0.007 0.007 0.007 HCT.SC.I 0.002 0.016 0.017 0.019 0.019 Total 0.168 0.645 1.013 1.035 1.298 *0.000 indicates savings are le ss than 0.0005 quadrillion Btu.

17.2.1.2 Policy Interactions

DOE calculated the impacts of each regulatory policy separately from those of the other policies. In actual practice, certain policies are often most effective when implemented in combination to provide incentives, such as earl y replacement and customer rebates, or early replacement and bulk government purchases. DOE attempted to make conservative assumptions to avoid double-counting policy impacts. Theref ore, the policy impacts reported below are not additive (i.e. the combined impact of several orall of the policies may not be inferred by adding the results together).

17.2.2 Non-Regulatory Policy Assumptions

17.2.2.1 No New Regulatory Action

The case in which no regulatory action is taken constitutes the base case scenario described in the CRE TSD, (See Chapter 11, Nationa l Impact Analysis). From its assessment of current market shares and equipment and opera ting costs, DOE estimated forecasted shipments and the distribution of efficiencies of the st ock, from 2012 through 2042. This defines the basis of comparison for all other scen arios, including the policy cases and the standard cases. By

17-3definition, no new regulatory acti on yields zero energy savings a nd a net present value of zero dollars.

17.2.2.2 Financial Incentives Policies

DOE considered several scenarios in which the Federal government would provide some form of financial incentive. It analyzed in detail two types of incentives: commercial customer tax credits and commercial customer rebates. Tax credits could be granted to commercial customers who purchase high efficiency CRE equi pment. Alternativel y, the government could issue tax credits to manufacturers to offset co sts associated with producing high-efficiency equipment. For this analysis, only a commercial customer tax credit, patterned after provisions in the EPACT of 2005, was considered. The se cond incentive program involved a commercial customer rebate program that was nominally patt erned after existing reba te programs currently offered by several utilities.

17.2.2.3 Commercial Customer Tax Credits DOE assumed a (commercial or industrial) cust omer tax credit that is patterned after the tax credits that were created in EPACT 2005. EPACT 2005 provided tax credits to customers who purchase and install specific products su ch energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment. For many of these equipment types, the tax credit is equal to the 10 percent of the retail cost, up to specific dollar limits.

For the CRE tax credits analysis, DOE presumed the presence of a certification or other program that could be used to identify high e fficiency CRE products by energy consumption. ARI is currently working to develop such a ce rtification program. DOE proposed TSL 3 and TSL 5 as likely candidate levels for a tax credit incentive. TSL 3 was chosen given that DOE had already identified it as the minimum life-cy cle cost level and maximum-NPV level for CRE customers. TSL 5 is the max-tech efficiency level and provides the maximum energy savings for each customer incentivized to purchase TSL 5 equipment.

DOE reviewed the incremental customer price increase to reach each efficiency level across all 15 equipment classes. For 12 of the equipment classes (VOP.RC.M, VOP.RC.L, VOP.SC.M, VCT.RC.M, VCT.RC.L, VCT.SC .I, VCS.SC.I, SVO.RC.M, SVO.SC.M, HZO.SC.M, HZO.SC.L, and HCT.SC.I), the incr emental price at TSL 3 was between 6.8 and 22.5 percent higher than for baseline equipment. For three equipment classes (SOC.RC.M, HZO.RC.M, and HZO.RC.L), the incremental cost wa s less than six percent. For the TSL 3 tax credit scenario analysis, DOE assumed a tax credit equal to five percent of the customer prices could be applied to the 12 product classes, but did not provide a credit for the three product classes for which the incremental cost was less than six percent. The credits were assumed to apply only to the retail cost of the equipment and not to any additional costs related to installation.

The cost increments from the baseline to reach TSL 5 is wider than to reach TSL 3, ranging from a 4.0 percent to a 83.1 percent cost increase. Three products at TSL 5 had a total incremental cost increase of less than 10 pe rcent (HZO.RC.M , HZO.RC.L, and VCS.SC.I). Three additional equipment classes had an increm ental cost of less than 20 percent (HZO.SC.M, HCT.SC.I, HZO.SC.L). The remaining nine equipm ent classes had incremental cost increases of

17-421 to 83 percent. DOE opted to analyze a scen ario DOE where a tax credit equal to 10 percent of the customer prices would be available for purchase of TSL 5 efficiency level equipment for 12 product classes (HZO.SC.M, HCT.SC.I, HZ O.SC.L, VOP.RC.L, SOC.RC.M, VCT.RC.M, VCT.RC.L, VCT.SC.I, SVO.RC.M, SVO.SC.M, VOP.SC.M, VOP.RC.M). It assumed no tax credit incentive for the three product classes fo r which the incremental cost was less than 10 percent at TSL 5.

The presence of a commercial customer tax cr edit in either the TSL 3 or TSL 5 tax credit scenario elicits greater purchase s of equipment with efficiencies above the baseline, which leads to higher average aggregate efficiency and lo wer average aggregate en ergy consumption. The change in market shares that may result from a five-percent tax credit scenario or the 10-percent tax credit scenario was estimated per the method described in Chapter 11, and was similarly done for the analysis for commercial customer reba tes. No change in total equipment sales was presumed.

From a societal point of view, tax credits, like rebates, do not change the installed cost of the commercial refrigeration equipment; they si mply transfer a portion of the cost from the customer to taxpayers as a whole. Thus, for calculation of total cost of equipment in the modified NIA study, the increase in sales by efficiency level du e to tax credits estimates are multiplied by the pre-rebate costs identical to th ose used in the base NIA discussed in Chapter 11.

Table 17.2.2 compares the cumulative energy savings and calculated NPV for the national rebate program envi sioned with those of th e proposed standards action.

Table 17.2.2 Tax Credit Energy Savings and NPV

Policy alternatives Cumulative Energy Savings * (quads), 2012-2042 Net Present Value** (billion 2006$), 2012-2062

7% Discount Rate 3% Discount Rate No New Regulatory Action 0 0 0 Commercial Customer Tax Credits (5% Scenario) 0.111 0.231 0.489 Commercial Customer Tax Credits (10% Scenario) 0.082 0.140 0.303 Today's Standards at TSL 4 1.035 1.414 3.930

* Energy savings are in source quads.

** Net present value is the value in the present of a time series of costs and savings.

17.2.2.4 Commercial Customer Rebates

DOE modeled the impact of the customer rebate policy by determining the increased customer participation rate due to the rebate s (i.e., the percentage increase in customers purchasing high-efficiency equipmen t). It then applied the resul ting increase in market share of efficient units to the NES Spreadsheet Model to estimate the resulting NES and NPV with respect to the base case.

17-5After reviewing several utility rebate program s currently in place (see Chapter 3 of the TSD), DOE decided to pattern th e analysis of a national rebate program after the EnergySmart Grocer program offered by the California Publ ic Utilities Commission, which provides rebates for the use of specific component technologies. Several other utility programs identified in Chapter 3 also appear to provide rebates for similar CRE component te chnologies. None of the programs base rebates on an energy consumption threshold, as that data is largely unavailable from either manufacturers or a central source such as a cert ification program. Eligible participants in the EnergySmar t Grocer program include grocer y and convenience stores, food processors, and refrigerated ware houses operating in Pacific Gas & Electric, Southern California Edison, or San Diego Gas & Elec tric service te rritories.

Rebates were not considered in two cases. In the first case, for the rebate programs identified in Chapter 3 provide rebates based on improved components, rebates are generally available for both new equipment purchases and for retrofits to existing commercial refrigeration equipment, although often at different rebated leve ls and with qualifiers. For the RIA, DOE only considered rebates on newly purchased commercial refrigeration equipment and not for retrofit of existing equipment, as the standards action for which a non regulatory approach is being compared with only addresses ne wly purchased equipment. In the second case, other utility rebate or incentive programs available to CRE customers provide general rebates based on the calculated annual kWh or kW reduction estimates, however such programs were not considered by DOE in the RIA as these programs do not sp ecifically target commercial refrigeration equipment.

Under the EnergySmart Grocer programs, co mmercial and industr ial businesses that purchase commercial refrigeration equipment can receive payments for the incorporation of specific technologies and/or for specific performa nce characteristics achieved in various classes of commercial refrigeration equipment such as display cases, walk in coolers, and equipment with remote condensers. Other rebate programs an alyzed did not necessarily define the same set of minimum conditions for eligibility.

DOE reviewed and incorporated, in the RI A, the rebates offered for energy saving technologies considered applicab le to the commercial refrigerat ion equipment product classes analyzed in the engineering analysis. The t echnologies examined and rebates applied were: Low-heat doors, $50/door; ECM motors, $20 pe r display case evaporator fan motor; LED Lamps, $56 for each fluorescent lamp replaced. These values are currently used in the EnergySmart Grocer program and represent valu es roughly in the middle of the ranges found for other rebate programs. Where these technolog ies are employed in each class of commercial refrigeration equipment, the average first cost reduction to all customer s was calculated for each of the efficiency levels analyzed in the LCC. The average percentage cost reduction was calculated for each efficiency level in turn taking the rebates into account.

The rebates were then entered into the L CC analysis spreadsheet for each equipment class as percentage reductions in equipment pri ce. When compared agains t the incremental retail price of higher efficiency commercial refrigeration equipment, as developed in Chapter 8 of the TSD, the rebates range between 0 percent to up to 18 percent of the cust omer price depending on TSL level and equipment class. Table 17.2.3 show s the calculated rebates by equipment class at each TSL Level. For example, under the provisions of the national rebate program constructed

17-6for this analysis, a vertical closed transparen t, remote condensing, low temperature display case (VCT.RC.L) would receive a rebate equivalent to 4.92 percent of the aver age purchase price, not including installation, at TSL 3. At TSL 5, the total rebate for incorporation of the set of technologies would be 4.87 percent of the purchase price.

Table 17.2.3 Average Percentage Price Reduction due to Rebate Program
Equipment Class * Calculated Average Percentage Price Reduction due to Rebate Program TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 VOP.RC.M VOP.RC.L VOP.SC.M VCT.RC.M VCT.RC.L VCT.SC.I VCS.SC.I SVO.RC.M SVO.SC.M SOC.RC.M HZO.RC.M HZO.RC.L HZO.SC.M HZO.SC.L HCT.SC.I 1.96% 1.93% 1.84% 1.84% 17.94% 2.97% 2.86% 2.83% 7.11% 7.11% 1.26% 2.98% 2.72% 2.72% 13.80% 0.00% 1.04% 5.45% 5.41% 5.41% 0.95% 2.90% 4.92% 4.87% 4.87% 2.84% 4.23% 4.09% 4.66% 4.66% 0.00% 1.31% 2.45% 2.45% 2.45% 1.46% 1.44% 1.39% 1.39% 15.77% 0.78% 1.49% 1.36% 1.36% 12.04% 0.00% 0.75% 0.74% 0.74% 7.99% 0.00% 1.30% 1.28% 1.27% 1.27% 1.29% 1.26% 1.25% 1.25% 1.25% 0.00% 0.86% 1.61% 1.57% 1.57% 0.00% 0.73% 1.34% 1.31% 1.31% 0.00% 0.00% 1.23% 1.18% 1.18%

* Equipment class designations consist of a combination (in seque ntial order separated by periods ) of a equipment family code (VOP=vertical open, SVO=semivertical open, HZO=horizontal open, VCT=vertical tran sparent doors, VCS=vertical solid doors, HCT=horizontal transparent doors, HCS=horizontal solid doors, or SOC=service over counter), an ope rating mode code (RC=remote condensing or SC=self-contained), and a rati ng temperature code (M=medium temperature (38°F), L=low temperature (0°F), or I=ice

cream temperature (-15°F)). For example, "VOP.RC.M refers to th e "vertical open, remote condensing, medium temperature" equipm ent class. See Chapter 3, Market and Technol ogy Assessment, of the TSD for a more detailed explanation of the equipment class term inology
The rebates elicit increased purchases of hi gher efficiency equipment that lower the overall average annual energy consumption per un it. Using the method described in Chapter 11 of the TSD to estimate market shares, a ne w distribution of sales by efficiency level (corresponding to the various TSLs) was compute d. The resulting increase in sales of higher efficiency level equipment results in ener gy savings compared with the base case.

Although the rebate program lowers the retail cost to the customer, it must be financed by tax revenues. So, from a societal point of view , the installed cost at any efficiency level does not change with the rebate policy, it simply transfers pa rt of the cost from the customer to taxpayers as a whole. Thus, the calculation of equipment total cost in the re bate case is calculated as the revised estimated sales by efficiency level due to the rebates multiplied by the pre-rebate equipment prices (identical to those in the base NIA discu ssed in Chapter 11). Table 17.2.4 compares the cumulative energy savings and calc ulated NPV for the national rebate program envisioned with those of the proposed standards action.

17-7Table 17.2.4 Rebate Energy Savings and NPV

Policy alternatives Cumulative Energy Savings * (quads), 2012-2042 Net Present Value** (billion 2006$), 2012-2062

7% Discount Rate 3% Discount Rate No New Regulatory Action 0 0 0 Commercial Customer Rebates 0.107 0.157 0.345

Today's Standards at TSL 4 1.035 1.414 3.930

* Energy savings are in source quads.

** Net present value is the value in the present of a time series of costs and savings.

17.2.2.5 Early Replacement Incentives

Early replacement refers to the replacemen t of commercial refrigeration equipment before the end of their useful lives. The purpos e of this policy is to retrofit or replace old, inefficient equipment with high efficiency units . DOE studied the feasibility of a Federal program to promote early replacement of applia nces and equipment under EPACT 1992. In this study, DOE identified Federal policy options for ea rly replacement that include a direct national program, replacement of Federally-owned equipment, promotion through equipment manufacturers, customer incentives, incentives to utilities, market behavior research, and building regulations.

While cost-effective opportunitie s to install units that are more efficient exist, DOE determined that a Federal early replacement program is not economically justified because the market for CRE is relatively sma ll and distributed across abroad se t of customers, the savings are not expected to be significant. In addition, a temporary surge in CRE sales in the early 2000s effectively reduces the size of the market that wo uld be subject to early replacement, thus further reducing the potential for an effective early replacement program.

17.2.2.6 Bulk Government Purchases

In this policy alternative, bulk government pur chases refers to Federal, State, and local governments being encouraged to purchase equipment meeting the energy conservation standards. The motivations for this policy are that (1) aggregating pub lic sector demand could provide a market signal to manufacturers and vendor s that some of their largest customers seek suppliers with equipment that meet an efficiency target at good prices, and (2) this could induce “market pull” impacts through the effects of ma nufacturers and vendors ac hieving economies of scale for high efficiency equipment.

As with the early replacement, bulk governme nt purchases may provide cost effective opportunities to install more efficient equipment on a limited basis, however it was concluded that a widespread bulk purchase program was no t economically justified. This is because the segment/share of the market that would be a ffected by a bulk government purchase program is a small portion of an already relatively small market, as the vast majority of the shipments/sales are to non-governmental customers.

17-817.2.2.7 Regional Energy Conservation Standards

DOE lacks authority to adopt regional standard s, so it must reject this alternative. However, DOE does have authority to grant St ate petitions for an exemption from Federal preemption of higher standards, if the Stat e filing the petition demonstrates unusual and compelling State or local energy interests (42 U. S.C. 6297(d) and 6316(b)(2)(D)). The State has a heavy burden in making such a showing, and DOE must reject the petition if “interested persons” establish that the State regulation would “significantly burden manufacturing, marketing, distribution, sale or servicing” of the covered equipment on a national basis. (42 U.S.C. 6297(d))

Because of the potential variability of st andards by State and the widely differing economic and climate situations, DOE did not un dertake a quantitative analysis of regional standards.

17.2.3 Results Summary

Table 17.2.5 shows the national energy savi ngs (NES) and NPV for the non-regulatory alternatives analyzed. The case in which no regula tory action is taken with regard to commercial refrigeration equipment constitutes the base case (or "No Action") scenario. Since this is the base case, energy savings and NPV are zero by definition. For comparison, the table includes the results of the NES and NPV for TSL 4 a ssociated with a possible energy conservation standard. Energy savings expressed in quadrilli on Btu (Quads) in terms of primary or source energy, which includes generation and transmission losses from electricity utility sector (the estimation of source energy is explained in Chapte r 10. The NPVs shown in the table refer to the NPV for commercial customers based on real discount rates of 7 and 3 percent.

As indicated in Table 17.2.5, none of the polic y alternatives DOE examined would save as much energy as and have a lower NPV than several of the TSLs for energy conservation standards. Also, several of th e alternatives would require ne w enabling legislation, such as commercial customer or Federal tax credits, sinc e authority to carry out those alternatives does not presently exist.

17-9Table 17.2.5 Non-Regulatory Alternatives to Standards

Policy alternatives Cumulative Energy Savings * (quads), 2012-2042 Net Present Value** (billion 2006$), 2012-2062

7% Discount Rate 3% Discount Rate No New Regulatory Action 0 0 0 Commercial Customer Tax Credits: 5% 0.111 0.231 0.489 Commercial Customer Tax Credits: 10% 0.082 0.140 0.303 Commercial Customer Rebates 0.107 0.157 0.345

Today's Standards at TSL 4 0.715 1.20 3.25

* Energy savings are in source quads.

** Net present value is the value in the present of a time series of costs and savings.

17-10REFERENCES

1. U.S. Department of Energy. Energy Info rmation Administration. Commercial Sector Demand Model of the National Energy Mode ling System: Model Documentation 2007. DOE/EIA-M066(2007).

17-11