CHAPTER 2. ANALYTICAL FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION ............................................................................................... 2-1

2.2 BACKGROUND ................................................................................................. 2-3

2.3 MARKET AND TECHNOLOGY ASSESSMENT ............................................ 2-4

2.3.1 Market Assessment .................................................................................... 2-4

2.3.2 Technology Assessment ............................................................................. 2-4

2.4 SCREENING ANALYSIS .................................................................................. 2-4

2.5 ENGINEERING ANALYSIS .............................................................................. 2-5

2.6 MARKUPS ANALYSIS ..................................................................................... 2-5

2.7 ENERGY USE ANALYSIS ................................................................................ 2-6

2.8 LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSIS ......................... 2-6

2.9 SHIPMENTS ANALYSIS .................................................................................. 2-8

2.10 NATIONAL IMPACT ANALYSIS .................................................................... 2-8

2.10.1 National Energy Savings Analysis ............................................................. 2-9

2.10.2 Net Present Value Analysis ........................................................................ 2-9

2.11 CONSUMER SUBGROUP ANALYSIS .......................................................... 2-10

2.12 MANUFACTURER IMP ACT ANALYSIS ...................................................... 2-10

2.13 EMISSIONS IMPACT ANALYSIS ................................................................. 2-10

2.14 MONETIZATION OF EMISSION REDUCTION BENEFITS ....................... 2-12

2.15 UTILITY IMPACT ANALYSIS ....................................................................... 2-13

2.16 EMPLOYMENT IMPACT AN ALYSIS ........................................................... 2-14

2.17 REGULATORY IMPACT ANALYSIS ........................................................... 2-14

2-iCHAPTER 2. ANALYTICAL FR AMEWORK

2.1 INTRODUCTION

The Energy Policy and Conservation Act (EPCA), as amended (42 USC 6291 et. seq. ), requires that when prescribing new or amended energy conservation standards for covered products, the U.S. Department of Energy (DOE) must promulgate standards that achieve the maximum improvements in energy efficiency that are technologically feasible and economically justified . (42 U.S.C. 6295(o)(2)(A)) This chapter provides a description of the analytical framework that DOE is using to evaluate new energy conservation standards for SPVUs

. Th is chapter sets forth the methodology, analytical tools, and relationships among the various analyses that are part of this rulemaking. For example, the methodology that addresses the statutory requirement for economic justification includes analyses of life

- cycle cost (LCC); economic impact on manufacturers and users; national benefits; impacts, if any, on utility companies; and impacts, if any, from lessening competition among manufacturers.

Prior to the notice of proposed rulemaking (NOPR) stage, DOE published the April 2014 notice of data availability (NODA) technical support document (TSD), which included the following analys e s:

• A m arket a ssessment which characterize d the market for SPVACs and SPVHPs.

• An e nergy u se c haracterization which d iscusse d the process used for gen erating energy

use estimates for SPVACs and SPVHPs at the current standard levels and at potential

amended standard levels.

• A n ational e nergy savings a nalysis which d iscusse d the methodology and inputs for estimating the potential energy savings of variou s potential amended standard levels.

79 FR 20114 (April 11, 2014).

For the notice of proposed rulemaking ( NOPR ) , DOE used the results of the above analyses as a starting point, incorporating revisions to the analyses based on comments and new

information received in response to the April 2014 NODA . In this TSD, DOE presents results of the following analyses that were performed for this NOPR :

• A market and technology assessment to characterize the relevant product markets and existing technology options, including prototype designs.

• A screening analysis to review each technology option to decide whether it is technologically feasible and to determine if the options are practicable to manufacture, install, and service, would adversely affect equipment utility or availability, or would have adverse impacts on health and safety.

2-1• An engineering analysis to develop cost- efficiency relationships, which indicate the manufacturer’s cost of achieving increased efficiency.

• A markups analysis to develop distribution channel markups that relate the manufacturer production cost (MPC) to the final cost to the customer.

• An analysis of the annual energy consumption of SPVU as a function of efficiency.

• A Life

- Cycle Cost and P ayb ack P eriod ( LCC& PBP) analys i s to calculate, at the c ustomer level, the discounted savings in operating costs (minus maintenance and repair costs) throughout the estimated average lifetime of the covered products, compared to any increase in purchase and installation cost likely to result directly from imposition o f a given standard.

• A shipments analysis to project shipments of SPVU , which are then used to calculate the national impacts of standards on energy, net present value (NPV), and future

manufacturer cash flows.

• A national impact analysis (NIA) to assess aggregate impacts at the national level of potential energy conservation standards for the considered products, as measured by the NPV of total consumer economic impacts and the national energy savings (NES).

• An LCC subgroup analysis to evaluate variati ons in customer characteristics that might

cause a standa rd to disproportionately affect particular customer subpopulations.

• A manufacturer impact analysis to assess the potential impacts of energy conservation standards on manufacturers’ capital conversion expenditures, marketing costs, shipments, and research and development costs.

• An emissions analysis to assess the impacts of amended energy conservation standards on the environment.

• An emissions m onetization to assess the benefits associated with e missions reductions.

• A utility impact analysis to estimate the effects of potential standards on electric, gas, or

oil utilities.

• An employment impact analysis to assess the aggregate impacts on national employment.

• A regulatory impact analysis (RIA) to examine major alternatives to amended energy conservation standards that potentially could achieve substantially the same regulatory goal at a lower cost.

2-22.2 BACKGROUND

As Chapter 1 of this TSD describes, the Energy Independence and Security Act of 2007 (E ISA 2007) amended the Energy Policy and Conservation Act of 1975 (EPCA) to establish separate equipment classes and minimum standards for single package vertical air conditioners (SPVACs) and single package vertical heat pumps (SPVHPs) , and to establish a process by which DOE must review those standards. (42 U.S.C. 6313(a)(10))

In accordance with EPCA’s requirements, o n May 5, 2011, DOE published a notice of data availability (May 2011 NODA) and request for public comment in the Federal Register as a preli minary step pursuant to EPCA’s requirements for DOE to consider amended energy conservation standards for certain types of commercial equipment covered by ASHRAE Standard 90.1, including single package vertical units ( SPVU ). 76 FR 25622. The May 2011

NODA presented for public comment DOE’s analysis of the potential energy savings estimates for amended national energy conservation standards for types of commercial equipment based on: (1) the efficiency levels contained within ASHRAE Standard 90.1-2010; and ( 2) more

stringent efficiency levels. DOE has described these analyses and preliminary conclusions and sought input from interested parties, including the submission of data and other relevant

information.

As part of the ASHRAE products rulemaking, o n Jan uary 17, 2012, DOE published a Notice of Proposed Rulemaking (January 2012 NOPR) in which it stated that as a result of the potential for high energy savings at efficiency levels above the ASHRAE Standard 90.1 efficiency levels for SPVU , DOE is conducting additional analysis for these products for morestringent standards, as allowed by EPCA. 77 FR 2356, 2371.

However, during the course of the rulemaking, ASHRAE acted on October 9, 2013, to adopt ASHRAE Standard 90.1-2013, and this revision contained amended standard levels for SPVUs, thereby triggering DOE’s statutory obligation to promulgate an amended uniform national standard at those levels, unless DOE determines that there is clear and convincing evidence supporting the adoption of more- stringent energ y conservation standards than the ASHRAE levels. Once triggered by ASHRAE action, DOE became subject to certain new statutory requirements and deadlines. For example, the statute required DOE to publish in the Federal Register for comment an analysis of the energy savings potential of amended energy conservation standards at the ASHRAE Standard 90.1-2013 levels, not later than 180 days after amendment of the ASHRAE standard. DOE published this energy savings analysis as a Notice of Data Availability (NOD A) in the Federal Register on April 11, 2014. 79 FR 20114.

This NOPR TSD contains these additional analyses of more- stringent standards

.

The following sections provide a general description of the different analytical components of the rulemaking analytical framework. DOE has used the most reliable and accurate data available at the time of each analysis in this rulemaking. All data will be available for public review. DOE welcomes and will consider any submissions of additional data during the

rul emaking process.

2-32.3 MARKET AND TECHNOLOGY ASSESSMENT

The market and technology assessment characterizes the relevant product markets and existing technology options, including prototype designs, for the SPVU under

consideration. Market Assessment

When initiating a standards rulemaking, DOE gathers information on the present and past industry structure and market characteristics for the equipment concerned. This activity assesses the industry and equipment both quantitatively and qualitatively based on publicly available information and encompasses the following: (1) manufacturer market share and characteristics, (2) existing regulatory and non-regulatory equipment efficiency improvement initiatives, and (3) trends in equipment characteristics and re tail markets. This information serves as resource material throughout the rulemaking.

DOE reviewed existing literature and interviewed manufacturers to get an overall picture of the industry serving the United States SPVU market. Industry publications and trade journals, government agencies, trade organizations, manufacturers’ websites, and equipment literature provided the bulk of the information, including: (1) manufacturers and their approximate market shares, (2) equipment characteristics, and (3) ind ustry trends. Supporting documentation on the

market assessment is provided in chapter 3 of this TSD.

2.3.2 Technology Assessment

DOE typically uses information relating to existing and past technology options and prototype designs as inputs to determine what technologies manufacturers use to attain higher performance levels. In consultation with stakeholders, DOE develops a list of technologies for consideration. Initially, these technologies encompass all those DOE believes are technologically feasible.

DOE developed its list of technologically feasible design options for the considered products through consultation with manufacturers of components and systems and from trade publications and technical papers. Since many options for improving product efficiency are available in existing units, product literature and direct examination of equipment provided

additional information

. The technologies examined in the technology assessment are described in

d etail in chapter 3 of this TSD.

2.4 SCREENING ANALYSIS

The screening analysis (chapter 4 of the TSD) examines various technologies as to whether they: (1) are technologically feasible; (2) are practicable to manufacture, install, and service; (3) h ave an adverse impact on equipment utility or availability; and (4) have adverse impacts on health and safety. As described in section 2.3.2 above, DOE develops an initial list of efficiency -enhancement options from the technologies identified as technologically feasible. Then DOE, in consultation with interested parties, reviews the list to determine if these options are practicable to manufacture, install, and service, would adverse ly affect product utility or availability, or would have adverse impacts on health and safety. In addition, DOE removed

from the list any technology options that lack energy consumption data as well as any technology

2-4options whose energy consumption could not be adequately measured by existing DOE test procedures. DOE passes on any technology options that were not eliminated at this step to the engineering analysis.

2.5 ENGINEERING ANALYSIS

The engineering analysis (chapter 5 of the TSD) establishes the relat ionship between the manufacturing production cost (MPC) and the efficiency for SPVU . This relationship serves as the basis for cost/benefit calculations in terms of individual customers, manufacturers, and the nation. Chapter 5 of this TSD discusses the eq uipment classes DOE analyzed, the representative baseline units, the incremental efficiency levels, the methodology DOE used to develop the

MPCs , manufacturer markups, and cost -efficiency curves, and the methodology DOE used to extend the analysis to equip ment classes with few or no models on the market.

In the engineering analysis, DOE evaluates a range of equipment efficiency levels and

their associated MPCs . The purpose of the analysis is to estimate the incremental MPCs for equipment that would result from increasing efficiency levels above the level of the baseline

model in each equipment class. The engineering analysis considers technologies that were not eliminated in the screening analysis. DOE considers the se technologies in developing the costefficiency curves, which are subsequently used for the LCC & PBP analysis

.

DOE typically structures its engineering analysis around one of three methodologies: (1) the design -option approach, which calculates the incremental costs of adding specific design options to a baseline model; (2) the efficiency- level approach, which calculates the relative costs of achieving increases in energy efficiency levels without regard to the particular design options used to achieve such increases; and/or (3) the reverse

- engineering or cost -assessment approach, which involves a “bottom-up” manufacturing cost assessment based on a detailed bill of

materials derived from tear -downs of the equipment being analyzed.

DOE conducted the engineering analysis for SPV U using a combination of the efficiency

- level and cost

- assessment approaches for analysis of various energy efficiency ratio ( EER ) efficiency levels. More specifically, DOE identified the efficiency levels for analysis and

then used the cost- assessment approach to determine the MPCs at those levels. This approach involved physic ally disassembling commercially available equipment, reviewing publicly available cost and performance information, and modeling equipment cost. The efficiency levels

that DOE consi dered in the engineering analysis are attainable using technologies currently available on the market, or have been demonstrated in working prototypes. Chapter 5 of this TSD describes the methodology and results of the engineering analysis used to derive t he cost

efficiency relationships.

2.6 MARKUPS ANALYSIS

DOE used manufacturer

- to -customer markups to convert the manufacturer selling price (MSP) estimates from the engineering analysis to customer prices, which are then used in the

LCC & PBP and manufacturer impact analyses. Because retail prices are required for the baseline performance level and all other performance levels under consideration, DOE obtained these

2-5retail prices by applying manufacturer

- to -customer markups to the manufacturer se lling price

est imates.

Before it can develop markups, DOE must identify distribution channels (i.e., how the equipment is distributed from the manufacturer to the customer). Once it established proper distribution channels for each of the product classes, DOE relied on economic data from the U.S. Census Bureau and input from the industry to determine how much product prices are increased as they pass from the manufacturer to the customer (see chapter 6 of the TSD).

2.7 ENERGY USE ANALYSIS

The energy use analysis assesses the energy savings potential from adopting higher efficiency standards for SPVU equipment. The analysis provides the basis for the energy savings

values DOE uses in the LCC &PBP and subsequent analyses. DOE estimated the annual energy consumption of single package vertical air conditioners and single package vertical heat pumps at specified energy efficiency levels for a representative set of commercial users of these products as defined by building type and location. The energy consumption estima tes for SPVHP equipment includes the cooling, blower, and heating energy use by the equipment. The energy consumption for SPVAC equipment includes the cooling and fan energy use. DOE also estimated and included the impact that higher efficiency SPVAC equip ment using more efficient supply blowers has on the heating energy consumed by the same equipment during the year.

DOE used energy use and equipment sizing data developed from building energy use simulations of modular office, education, and telecommunication buildings in 237 different U.S. climates. Simulation energy use results were normalized to the representative equipment capacity selections developed in the engineering analysis, and these normalized energy use estimates in turn were weighted using population data to provide State- by

- State energy use estimates by building type for four classes of SPVU equipment.

As part of the energy use analysis, DOE made certain assessments about building design and building operation including building operating hours, ventilation, internal gains and schedules, and the use of air side economizers, which impact the energy use results for each equipment class. Th e se assessments, along with the methods used in the energy use analysis, are documented in chapter 7 of t he TSD.

2.8 LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSIS

New energy conservation standards on equipment usually reduce operating expenses and increase customer prices. DOE analyzed the net effect of new standards on customers by evaluating the net LCC using t he cost

- efficiency relationship derived in the engineering analysis, as well as the energy costs derived from the energy use characterization analysis. Inputs to the LCC calculation include the installed cost to the customer (customer price plus installati on cost), operating expenses (energy expenses and repair and maintenance costs), the lifetime of the equipment, and a discount rate. These inputs are described in detail in chapter 8 of the TSD.

The installed cost typically increases and operating cost typically decreases in response to new standards. Thus, there is a specific time in the life of higher- than

- baseline efficiency

2-6equipment when the net operating- cost benefit (in dollars) from the time of purchase is equal to the incremental first cost of pu rchasing the more efficient equipment. The length of time required for equipment to reach this cost-equivalence point is known as the payback period.

DOE conducted the LCC& PBP analys is using distributions of values to reflect the conditions in the field for SPVU equipment life, SPVU equipment retail price, national or regional energy costs, energy consumption, and discount rates. The life- cycle cost (LCC) subgroup analysis includes an assessment of impacts on customer subgroups.

For SPVU equipment, it was necessary to determine several of the input values for the LCC estimation, including retail prices; electricity prices; discount rate; maintenance, service, and installation costs; and equipment lifetimes.

DOE developed discount rates by estimating th e cost of capital to companies that manufacture single package vertical air conditioners and heat pumps covered under this rulemaking. DOE commonly uses the cost of capital to estimate the present value of cash flows to be derived from a typical company project or investment. Most companies use both debt and equity capital to fund investments, so the cost of capital is the weighted- average cost to the firm of equity and debt financing. This corporate finance approach is referred to as the weighted

average c ost of capital.

DOE considered expected changes to maintenance, repair, and installation costs for the equipment covered in this rulemaking. Typically, small incremental changes in air conditioner or heat pump efficiency incur no, or only very small, cha nges in repair and maintenance costs over baseline efficiency products. There is a greater probability that single package air conditioners and heat pumps with efficiencies that are significantly greater than the baseline will incur increased repair and maintenance costs since such units are more likely to be larger and require more material or to incorporate technologies that are new to the industry and not widely

available. These factors would tend to increase both the initial cost of the unit and the cos t of repair parts, and possibly the cost of repair labor. On the other hand, most maintenance activities are preventative in nature and do not require replacement of expensive parts or significant special effort. Therefore, they are not likely to increase with the efficiency of the equipment. DOE relied on input from manufacturers and other interested parties, past experience with air conditioning and heat pump equipment in previous rulemakings, and industry literature to develop appropriate repair and mai ntenance costs for baseline units. DOE concluded that while repair costs are likely to increase in proportion to the initial size and cost of SPVU equipment, maintenance costs for more efficient equipment were not likely to be significantly higher than those for baseline units. Installation costs for air conditioning and heat pump units mainly vary with the overall size of the equipment rather than their efficiency, so DOE estimated different baseline installation costs for small and large equipment classe s, but did not vary the installation costs for units with higher efficiency within an equipment class.

Based on a wide search of industry studies and literature, DOE concluded that SPVU equipment typically has a lifetime ranging from 10 to 25 years, with 15 years being the approximate average lifetime.

2-72.9 SHIPMENTS ANALYSIS

DOE uses projections of equipment shipments to calculate the national impacts of standards on energy use, customer NPV, and future manufacturer cash flows. The shipments analysis projects the total number of SPVU shipped each year over a 30 year period, beginning in 2019 and ending in 2048.

This projection is driven by the two market segments of new construction and replacements. DOE started with manufacturer -provided shipments from 2005, the most recent year available. DOE estimated historical shipments, from which to develop a stock model and determine replacement shipments, using historical mod ular building floor space production values. DOE tied projections for new construction shipments to new construction trends for the office and education sectors and economic trends for the telecom industry. DOE disaggregated total shipments into equipment classes using the market share distribution from the 2005 shipment data.

Chapter 9 of the TSD provides additional details on the shipments analysis.

2.10 NATIONAL IMPACT ANALYSIS

The NIA assesses the NES and the NPV from a national perspective of total customer costs and savings expected to result from new or amended energy conservation standards at specific efficiency levels

. To make the analysis more accessible and transparent to all interested parties, DOE prepared a Microsoft Excel spreadsheet that uses t ypical values (as opposed to probability distributions) as inputs. To assess the effect of input uncertainty on NES and NPV results, DOE has developed its spreadsheet model to conduct sensitivity analyses by running scenarios on specific input variables.

Analyzing impacts of potential en ergy conservation standards requires compari ng project ions of energy consumption with new or amended energy conservation standards against projections of energy consumption without the standards (the base case). The analysis includes projections of annual shipments, the annual energy consumption of new equipment, and the purchase price of new equipment.

A key component of DOE’s NIA analysis is the energy efficiencies forecasted over time

for the base case and each of the standards cases

. The forecasted efficiencies represent the annual shipment-weighted energy efficiency of the products under consideration during the forecast period ( i.e. , from the assumed compliance date of a new standard to 30 years after compliance is required). To develop its efficiency forecast for SPVU , DOE first assessed current (2012) efficiency and then considered how the efficiency of new units might change by the first year of the analysis period (2019) and throughout the analysis period in the absence of new or amended

standards.

To estimate the impact that standards may have in the year compliance is required, DOE

used a “roll -up” scenario. Under the “roll- up” scenario, DOE assumes: (1) equipment

efficiencies in the base case that do not m eet the standard level under consideration would “rollup” to meet the new standard level; and (2) equipment efficiencies above the standard level

2-8under consideration would not be affected. DOE assumed that the shipment- weighted energy efficiency will grow in each standards case at the same rate as in the base case.

2.10.1 National Energy Savings Analysis

The inputs for determining the national energy savings for each equipment class analyzed are: (1) annual energy consumption per unit; (2) shipments; (3) equipment stock; (4) national

annual energy savings ; and (5) site- to -power plant conversion factors . DOE calculated the national annual site energy savings (AES) by multiplying the number or stock of each equipment

class (by vintage) by the delta unit ener gy consumption between a base case and a standards case (UEC; also by vintage). DOE estimated energy consumption and savings based on site energy and converted the electricity consumption and savings to source (primary) energy using annual

conversion facto rs derived from the most recent version of the National Energy Modeling System (NEMS ). Cumulative energy savings are the sum of the NES for each year over the timeframe of the analysis

.

DOE has historically presented NES in terms of primary energy savings. Per DOE’s 2011 Statement of Policy for Adopting Full Fuel Cycle (FFC) Analyses, DOE now uses FFC measures of energy use and emissions in its energy conservation standards analyses. DOE calculate d FFC energy and emission impacts by applying conversion factors generated by DOE’s developed

model to the NEMS-based results used by DOE. For this final rule analysis, DOE calculated FFC energy savings using a NEMS -based methodology described in Appendix 10B. Chapter 10 of this TSD presents both the primary NES and the FFC energy savings for the considered standard

levels.

2.10.2 Net Present Value Analysis

The inputs for determining NPV are: (1) total annual installed cost; (2) total annual savings in operating costs; (3) a discount factor to calculate the present value of costs and savings; (4) present value of costs; and (5) present value of savings. DOE calculated net savings each year as the difference between the base case and each standards case i n terms of total savings in operating costs versus total increases in installed costs

. DOE calculated savings over

the lifetime of products shipped in the forecast period . DOE calculated NPV as the difference between the present value of operating cost sav ings and the present value of total installed costs

. DOE used a discount factor based on real discount rates of 3 and 7 percent to discount future

cost s and savings to present values, in accordance with guidance provided by the Office of Management and Budget (OMB) to Federal agencies on the development of regulatory analysis.

For the NPV analysis, DOE calculate s increases in total installed costs as the difference in total installed cost between the base case and standards case ( i.e. , once the standards take effect)

. Because the more -efficient products bought in the standards case usually cost more than products bought in the base case, cost increases appear as negative values in the NPV.

DOE calculated the total annual consumer savings in operating cost as a sum of: (1) the annual site electric savings multiplied by an electric price (for the given year); (2) the annual additional gas use multiplied by a gas price (for the given year); and (3) the sum over all vintages

2-9of the product of the number or stock of a given equipment class (by vintage) and its per -unit repair and maintenance cost savings (also by vintage).

2.11 CONSUMER SUBGROUP ANALYSIS

In the LCC subgroup analysis, DOE evaluates the potential impact of new or amended standards on identifiable groups of consumers (i.e., subgroups), such as small businesses, that may not be equally affected by a national standard level. In this rulemaking, this analysis examined the economic impacts on different groups of consumers by estimating the average change i n LCC and the payback period and the proportion of consumers who benefit from the efficiency standard. DOE analyzed the potential effect of standards for education consumers, who as public entities experience both relatively low electricity prices and low discount rates; businesses in the construction and mining industries, who experience relatively high prices for electricity and higher than average costs of capital; and small businesses and others who do not have the same access to capital as larger or le ss risky businesses. For small businesses and high risk businesses, DOE analyzed the potential impacts of standards by conducting the analysis with

different discount rates.

2.12 MANUFACTURER IMPACT ANALYSIS

The manufacturer impact analysis ( MIA ) assesses the impacts of new or amended energy conservation standards on manufacturers of the considered equipment . Potential impacts include financial effects, both quantitative and qualitative, that might lead to changes in the manufacturing practices for these products. DOE identified these potential impacts through interviews with manufacturers and other interested parties.

DOE conducted the MIA in three phases. In Phase I, an industry profile was created to characterize the industry, and a preliminary MIA was conducted to identify important issues that required consideration. In Phase II, an industry cash flow model and an interview questionnaire were prepared to guide subsequent discussions. In Phase III, manufacturers were interviewed, and the impacts of standards were assessed both quantitatively and qualitatively. Industry and subgroup cash flow and NPV were assessed thro ugh use of the Government Regulatory Impact Model (GRIM). Then impacts on competition, manufacturing capacity, employment, and cumulative regulatory burden were assessed based on manufacturer interview feedback and discussions. DOE discusses its findings from the MIA in chapter 12 of this TSD.

2.13 EMISSIONS IMPACT AN ALYSIS

In the emissions analysis, DOE estimate s the reduction in power sector emissions of carbon dioxide (CO 2 ), nitrogen oxides (NO X ), sulfur dioxide (SO 2 ) and mercury (Hg) from potential energy conservation standards for the considered products. In addition, DOE will estimate emissions impacts in production activities (extracting, processing, and transporting fuels) that provide the energy inputs to power plants. These are referred to as “upstream” emissions. Together, these emissions account for the full- fuel

- cycle (FFC). In accordance with DOE’s FFC Statement of Policy (76 FR 51282 (Aug. 18, 2011)), the FFC analysis includes impacts on emissions of me thane and nitrous oxide, both of which are recognized as greenhouse

gases.

2-10DOE conduct ed the emissions analysis using emissions factors derived from data in

EIA’s Annual Energy Outlook 2013 , supplemen ted by data from other sources. a EIA prepares the

Ann ual Energy Outlook using NEMS. Each annual version of NEMS incorporates the projected impacts of existing air quality regulations on emissions.

SO 2 emissions from affected electric generating units (EGUs) are subject to nationwide and regional emissions cap and trading programs. Title IV of the Clean Air Act sets an annual emissions cap on SO 2 for affected EGUs in the 48 contiguous states and the District of Columbia (D.C.). SO 2 emissions from 28 eastern states and D.C. were also limited under the Clean Air Interstate Rule (CAIR), which created an allowance -based trading program that operates along with the Title IV program in those States and D.C. 70 FR 25162 (May 12, 2005). CAIR was remanded to EPA by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit), but it remains in effect. See North Carolina v. EPA , 550 F.3d 1176 (D.C. Cir. 2008);

North Carolina v. EPA , 531 F.3d 896 (D.C. Cir. 2008). On July 6, 2011 EPA issued a replacement for CAIR, the Cross

- State Air Pollution Rule (CSAPR ; also known as the Transport Rule). 76 FR 48208 (August 8, 2011). The AEO 201 3 NEMS assumes the implementation of

the CSAPR. b

The attainment of emissions caps is typically flexible among EGUs and is enforced through the use of emissions allowances and tradable permits. Under existing EPA regulations, any excess SO 2 emissions allowances resulting from the lower electricity demand caused by the adoption of an efficiency standard could be used to permit offsetting increases in SO 2 emissions by any regulate d EGU. In past rulemakings, DOE recognized that there was uncertainty about the effects of efficiency standards on SO 2 emissions covered by the existing cap

- and

- trade system, but it concluded that no reductions in power sector emissions would occur for SO 2 as a result of standards.

Beginning in 2015, however, SO 2 emissions will fall as a result of the Mercury and Air Toxics Standards (MATS) for power plants, which were announced by EPA on December 21, 2011. 77 FR 9304 (Feb. 16, 2012). In the final MATS rule, EPA established a standard for HCl as a surrogate for acid gas hazardous air pollutants (HAP), and also established a standard for

SO 2 (a non- HAP acid gas) as an alternative equivalent surrogate standard for acid gas HAP. The

a Use of emissions factors in AEO 2014

, which was not available at the time of this analysis, would result in a significant change in cumulative emissions reductions for CO2 and most other pollutants. For example, the estimated change for CO 2 emissions reductions is a decrease of 33%, while the estima ted change for NO

x emissions

reductions is an increase of 13%. In the next phase of this rulemaking, DOE plans to use emissions factors based on

the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

b On December 30, 2011, the D.C. Circuit stayed the new rules while a panel of judges reviews them, and told EPA

to continue administering CAIR (see EME Homer City Generation v. EPA , No. 11

- 1302, Slip Op. at *2 (D.C. Cir.

Dec. 30, 2011)). On August 21, 2012, the D.C. Circuit issued a decision to vacate CSAPR. See EME Homer City
Generation, LP v. EPA

, No. 11

- 1302

, 2012 WL 3570721 at *24 (D.C. Cir. Aug. 21, 2012). The court again ordered EPA to continue administering CAIR. AEO 2012 had been finalized prior to this decision, however. DOE understands that CAIR and CSAPR are similar with respect to their effect on emissions impacts of energy efficiency

standards.

2-11same controls are used to reduce HAP and non-HAP acid gas; thus, SO 2 emissions will be reduced as a result of the control technologies installed on coal-fired power plants to comply with the MATS requirements for acid gas. AEO 201 3 assumes that, in order to continue operating, coa l plants must have either flue gas desulfurization or dry sorbent injection systems installed by 2015. Both technologies, which are used to reduce acid gas emissions, also reduce

SO 2 emissions. Under the MATS, NEMS shows a reduction in SO 2 emissions when e lectricity demand decreases (e.g., as a result of energy efficiency standards). Emissions will be far below the cap that would be established by CSAPR, so it is unlikely that excess SO 2 emissions allowances resulting from the lower electricity demand would be needed or used to permit offsetting increases in SO 2 emissions by any regulated EGU. Therefore, DOE believes that efficiency standards will reduce SO 2 emissions in 2015 and beyond.

CSAPR established a cap on NO X emissions in eastern States and the Dis trict of Columbia. Energy conservation standards are expected to have little or no physical effect on these emissions in those States covered by CSAPR because excess NO X emissions allowances resulting from the lower electricity demand could be used to permit offsetting increases in NO X emissions. However, standards would be expected to reduce NO X emissions in the States not affected by CSAPR. Therefore, DOE estimates NO X emissions reductions from potential

standards in the States where emissions are no t capped.

The MATS limit mercury emissions from power plants, but they do not include emissions caps and, as such, DOE’s energy conservation standards would likely reduce Hg emissions. For this rulemaking, DOE estimated mercury emissions reductions using emissions factors based on

AEO 201 3 , which incorporates the MATS.

With regard to the impact of standards on particulate matter (PM) , the great majority of

ambient PM associated with power plants is in the form of secondary sulfates, which are produced at a significant distance from power plants by complex atmospheric chemical reactions that often involve the gaseous emissions of power plants, mainly SO 2 and NO X . The monetary

benefits that DOE estima tes for reductions in SO 2 and NO X emissions resulting from standards are in fact primarily related to the health benefits of reduced indirect PM. Power plants may also

emit particulates from the smoke stack. These dir ect, or primary, PM emissions can be di fficult to quantify, and DOE is not able to quantify them at this time.

2.14 MONETIZATION OF EMISSION REDUCTION BENEFITS

DOE estimate s the monetary benefits likely to result from the reduced emissions of CO 2 and NO X that are expected to result from each of the standard levels considered

.

In order to estimate the monetary value of benefits resulting from reduced emissions of

CO 2 emissions, DOE uses the most current Social Cost of Carbon (SCC) values developed by an interagency process. The SCC is intended to be a monetary measure of the incremental damage resulting from greenhouse gas (GHG) emissions, including, but not limited to, net agricultural productivity loss, human health effects, property damage from sea level rise, and changes in ecosystem services

. Any effort to quantify and to monetize the harms associated with climate change will raise serious questions of science, economics, and ethics . But with full regard for the

2-12limits of both quantification and monetization, the SCC can be used to provide estimates of the

social benefits of reductions in GHG emissions.

At the time of this analysis , the most recent interagency estimates of the potential global benefits resulting from reduced CO 2 emissions in 2015, expressed in 2013 $, were $12.0, $40.5, $62.4, and $119 per metric ton avoided. c The first three estimates use the averages of social carbon cost distributions calculated using 5%, 3%, and 2.5% discount rates, respectively. The

fourth estimate corresponds the 95th percentile of the social carbon cost distribution calculated using a 3% discount rate. For emission reductions that occur in later years, these values grow

over time . Additionally, the interagency group determined that a range of values from 7 percent to 23 percent should be used to adjus t the global SCC to calculate domestic effects, although DOE give s preference to consideration of the global benefits of reducing CO 2 emissions

. To calculate a present value of the stream of monetary values, DOE discount s the values in each of the four cases using the discount rates that had been used to obtain the SCC values in each case.

DOE recognizes that scientific and economic knowledge continues to evolve rapidly as to

the contribution of CO 2 and other GHG to changes in the future global climate and the potential resulting damages to the world economy. Thus, these values are subject to change.

DOE also estimates the potential monetary benefit of reduced NO X emissions resulting

from the standard levels it considers. For NO X emissions, available estimates suggest a very wide range of monetary values, ranging from $476 to $4,893 per ton in 2013 $). d In accordance with U.S. Office of Management and Budget (OMB) guidance, DOE conducts two calculations of the monetary benefits derived using each of the economic values used for NO X , one using a real discount rate of 3 percent and another using a real discount rate of 7 percent. e

DOE did not monetize estimates of SO 2 and Hg reduction in this rulemaking

.

2.15 UTILITY IMPACT ANALYSIS

To estimate the impacts of potential energy conservation standards for SPVUs on the electric utility industry, DOE use s a variant of the EIA’s National Energy Modeling System

c Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866, Technical Model Update for the Social Cost of Carbon (SCC) . Interagency Working Group on Social Cost of Carbon, United States Government, Internal EPA Draft, February 13, 2013.

d F or additional information , refer to U.S. Office of Management and Budget , Office of Information and Regulatory
Affairs, 2006 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on
State, Local, and Tribal Entities , Washington, DC

.

e OMB, Circular A

- 4: Regulatory Analysis ( Sept. 17, 2003).

2-13called NEMS

- BT. f NEMS is a large, m ulti

- sectoral, partial -equilibrium model of the U.S. energy sector that EIA has developed over several years, primarily for the purpose of preparing

the AEO . NEMS produces a widely recognized forecast for the United States through 2035 and is

available to the public.

The utility impact analysis is a comparison between the NEMS -BT model results for the

base case and standard cases

. The utility impact analysis reports the changes in installed capacity and generation that result from each standard level by plant type. DOE models the anticipated energy savings impacts from potential amended energy conservation standards using NEMS- BT to generate forecasts that deviate from the AEO R eference C ase.

2.16 EMPLOYMENT IMPACT ANALYSIS

The adoption of energy conservation standards can affect employment both directly and indirectly

. Direct employment impacts are changes in the number of employees at the plants that produce the covered products. DOE evaluate s direct employment impacts in the MIA.

Indirect employment impacts may result from expenditures shifting between goods (the substitution effect) and changes in income and overall expenditure levels (the income effect) that

occur due to standards. DOE defines indirect employment impacts from standards a s net jobs eliminated or created in the general economy as a result of increased spending driven by increased product prices and reduced spending on energy.

I ndirect employment impacts are investigated in the employment impact analysis using the Pacific Northwest National Laboratory’s “Impact of Sector Energy Technologies” (ImSET)

model. g The ImSET model was developed for DOE’s Office of Planning, Budget, and Analysis to estimate the employment and income effects of energy -saving technologies in buildings, industry, and transportation. Compared with simple economic multiplier approaches, ImSET allows for more complete and automated analysis of the economic impacts of energy conservation investments. Further detail is provided in chapter 16 of the TSD.

2.17 REGULATORY IMPACT ANALYSIS

In the NOPR stage, DOE prepared a regulatory impact analysis (RIA) pursuant to Executive Order 12866, Regulatory Planning and Review, 58 FR 51735, October 4, 1993, which

f For more information on NEMS, please refer to the U.S. Department of Energy, Energy Information Administration documentation. A useful summary is National Energy Modeling System: An Overview 200 9

, DOE/EIA

- 0581 ( O ctober 2009 ), available at: http://www.eia.gov/oiaf/aeo/overview/index.html . EIA approves use of the name NEMS to describe only an official version of the model without any modification to code or data.

Be cause this analysis entails some minor code modifications and the model is run under various policy scenarios that are variations on EIA assumptions, DOE refers to the model by the name NEMS

- BT. (“BT” refers to DOE’s Building Technologies Program, under wh ose aegis this work is performed.)

g M.J. Scott, O.V. Livingston, P.J. Balducci, J.M. Roop, and R.W. Schultz, ImSET 3.1: Impact of Sector Energy Technologies , PNNL

- 18412, Pacific Northwest National Laboratory (2009) (Available at: www.pnl.gov/main/publications/external/technical_reports/PNNL

- 18412.pdf ).

2-14is subject to review by the Office of Information and Regulato ry Affairs at the Office of Management and Budget. The RIA addresses the potential for non-regulatory approaches to supplant or augment energy conservation standards in order to improve the energy efficiency or reduce the energy consumption of the equipment covered under this rulemaking.

DOE recognizes that voluntary or other non- regulatory efforts by manufacturers, utilities, and other interested parties can substantially affect energy efficiency or reduce energy consumption. DOE bases its assessment on the actual impacts of any such initiatives to date, but also considers information presented by interested parties regarding the impacts existing initiatives might have in the future. Further detail is provided in chapter 17 of the TSD.

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