5-i CHAPTER 5. LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSIS

TABLE OF CONTENTS

5.1 INTRODUCTION ............................................................................................................... 5-1 5.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis ................ 5-1

5.1.2 Overview of Life -Cycle Cost and Payback Period Inputs ................................... 5-2

5.2 LIFE

- CYCLE COST INPUTS ............................................................................................ 5-4

5.2.1 Definition ............................................................................................................. 5-4

5.2.2 Total Installed Cost Inputs ................................................................................... 5-5

5.2.2.1 Baseline Contractor Cost ...................................................................... 5-6

5.2.2.2 Standards- Level Contractor Cost Increases .......................................... 5-7 5.2.2.3 Markups ................................................................................................ 5-8

5.2.2.4 Baseline Markup ................................................................................... 5-9

5.2.2.5 Incremental Markup ............................................................................ 5-10

5.2.2.6 Overall Markup ................................................................................... 5-10 5.2.2.7 Assumptions Used to Estimate Wholesaler and Contractor Markups 5-11

5.3 ES TIMATION OF MECHANICAL CONTRACTOR MARKUPS ................................ 5-12 5.3.1 Markups for Mechanical Contractors in the Replacement and New

Construction Markets......................................................................................... 5-13

5.4 ESTIMATION OF GENERAL CONTRACTOR MARKUPS ........................................ 5-15

5.5 SALES TAX ...................................................................................................................... 5-16

5.6 OVERALL MARKUPS .................................................................................................... 5-16

5.6.1.1 Installation Cost .................................................................................. 5-18

5.6.1.2 Weighted

- Average Total Installed Cost .............................................. 5-21 5.6.2 Operating Cost Inputs ........................................................................................ 5-24

5.6.2.1 Fuel Price Analysis ............................................................................. 5-25

5.6.2.2 Fuel Price Trends ................................................................................ 5-29

5.6.2.3 Maintenance and Repair Costs ............................................................ 5-31

5.6.2.4 Lifetime ............................................................................................... 5-32

5.6.2.5 Discount Rate ...................................................................................... 5-32

5.6.2.6 Effective Date of Standard .................................................................. 5-34

5.7 PAYBACK PERIOD INPUTS .......................................................................................... 5-36

5.7.1 Definition ........................................................................................................... 5-36 5.7.2 Inputs ................................................................................................................. 5-36

5.8 LIFE

- CYCLE COST AND PAYBACK PERIOD RESULTS ......................................... 5-37

5.8.1 Life

- Cycle Cost Results ..................................................................................... 5-37

5.8.1.1 Differences in Life

- Cycle Cost Between Baseline and Standard

Level Equipment ................................................................................. 5-37 5.8.2 Payback Period Results...................................................................................... 5-38

5.9 ESTIMATES OF IMPACTED CUSTOMERS ................................................................. 5-39

5.9.1 Sensitivity to Fuel Escalation Rate .................................................................... 5-40

5.10 DETAILED RESULTS ..................................................................................................... 5-42

REFERENCES .......................................................................................................................... 5-435- ii L IST OF TABLES

Table 5.1.1 Summary Information of Inputs for the Determination of Life- Cycle Cost and Payback Period ..................................................................................................... 5-4

Table 5.2.1 Inputs for Total Installed Costs ................................................................................. 5-6

Table 5.2.2 Equipment Classes for the Commercial Packaged Boiler Life-Cycle Cost and Payback Period Analysis ...................................................................................... 5-6

Table 5.2.3 Baseline Contractor Costs per Unit by Equipment Class ......................................... 5-7

Table 5.2.4 Standard- Level Contractor Cost Increases (Cost Increases Relative to the Cost of Baseline Equipment) ............................................................................... 5-7

Table 5.2.5 Distribution Channels for Commercial Packaged Boiler Equipment ....................... 5-8

Table 5.3.1 Baseline Markup, All Mechanical Contractors ....................................................... 5-12

Table 5.3.2 Baseline Markups for the Replacement and New Construction Markets,

All Mechanical Contractors ............................................................................... 5-13

Table 5.3.3 Mechanical Contractor Expenses and Baseline Markup, Residential and Light

Commercial ........................................................................................................ 5-14

Table 5.3.4 Mechanical Contractor Expenses and Markups Based on U.S. Census Bureau

Data .................................................................................................................... 5-14

Table 5.4.1 General Contractor Expenses and Markups ............................................................ 5-15

Table 5.5.1 State Sales Tax Rates .............................................................................................. 5-16

Table 5.6.1 Overall Baseline Markups ...................................................................................... 5-17

Table 5.6.2 Overall Incremental Markups ................................................................................. 5-17

Table 5.6.3 Baseline Installation Cost Equation Parameters ..................................................... 5-18

Table 5.6.4 Estimated Efficiency Difference ( ∆) Between Thermal and Combustion

Efficiencies ........................................................................................................ 5-19

Table 5.6.5 Combustion Efficiency (E

c ) Level Assumed for Onset of Incremental

Installation Costs ................................................................................................ 5-20

Table 5.6.6 Comparison Between Residential and Commercial Incremental Installation

Co st for Higher

- Efficiency Boilers .................................................................... 5-21

Table 5.6.7 Installation Cost Indices (National Value = 100.0) ................................................ 5-225- iii Table 5.6.8 Costs and Markups for 800- kBtu/h Commercial Gas

- Fired Hot

- Water Boiler at Efficiency Level 2 at National Average Conditions * ..................................... 5-23

Table 5.6.9 Weighted-Average Equipment Price, Installation Cost, and Tot al Installed Costs for the 800-kBtu/h Commercial Packaged Hot- Water Boiler at U.S. Average Prices (2008$) ...................................................................................... 5-24

Table 5.6.10 Inputs for Operating Costs .................................................................................... 5-25

Table 5.6.11 Estimated Commercial Natural Gas Prices by State (2007 $/MBtu) .................... 5-27

Table 5.6.12 Estimated Commercial Oil Prices by State (2007 $/MBtu) .................................. 5-27

Table 5.6.13 Derived Average Commercial Fuel Price Ratios by Building Type .................... 5-28

Table 5.6.14 Average Annual Repair Cost per Unit (2008$) ................................................. 5-31

Table 5.6.15 Average Discount Rates by Building Type .......................................................... 5-34

Table 5.8.1 Distribution of Life- Cycle Cost Savings from Baseline Level for Small Gas

Fired Commercial Packaged Boilers* ............................................................... 5-37

Table 5.8.2 Average Life- Cycle Cost Savings from Baseline Level (Level 0) by Efficiency Level and Equipment Class* ............................................................ 5-38

Table 5.8.3 Summary of Payback Period Results by Efficiency Level for Small Gas

- Fired Commercial Packaged Boilers ........................................................................... 5-39

Table 5.8.4 National Average Payback Periods by Efficiency Level and Equipment

Class* ................................................................................................................. 5-39

Table 5.9.1 Fraction of Customers Impacted by Efficiency Level and Equipment Class ......... 5-40

Table 5.9.2 Average Life- Cycle Cost Savings from a Baseline Level (Level 1) by Efficiency Level and Equipment Class

– EIA Low Price Scenario* ................. 5-41

Table 5.9.3 Ave rage Life

- Cycle Cost Savings from a Baseline Level (Level 0) by Efficiency Level and Equipment Class

– EIA High Price Scenario* ................ 5-42

LIST OF FIGURES

Figure 5.1.1 Flow Diagram of Inputs for the Determination of Life-Cycle Cost and Payback Period ..................................................................................................... 5-4

Figure 5.6.1 AEO 2009 Commercial Natural Gas Price Trends ................................................ 5-30

Figure 5.6.2 AEO 2009 Commercial Fuel Oil Price Trends ...................................................... 5-305-1 CHAPTER 5 . LIFE

- CYCLE COST AND PAYBACK PERIOD ANALYSIS

5.1 INTRODUCTION

This chapter describes the analysis the U.S. Department of Energy (DOE) ca rried out to

assess the life

- cycle cost benefits and the payback for adoption of potential energy efficiency

standards for commercial packaged boilers that would exceed the voluntary efficiency standards

set out in American Society of Heating, Refrigeratin g and Air-Conditioning Standard 90.1-

2007. 1

**•** Life

- cycle cost (LCC) . The total customer cost over the life of an appliance or equipment, including purchase costs and operating costs (which in turn include maintenance, repair, and energy costs). Future operating costs are discounted to the time of purchase, and summed over the lifetime of the appliance or equipment. The effect of higher standards on individual custo mers includes a change in operating cost (usually decreased) and a change in purchase cost (usually increased). This chapter

describes two metrics used in the cus tomer analysis to determine the economic viability of higher efficiency standards on individual commercial customers:

**•** Payback period (PBP) . The amount of time it takes customers to recover t he assumed higher purchase price of more energy -efficient equipment through lower operating costs.

Inputs to and calculations used in the LCC and PBP analys i s of commercial packaged

boilers are discussed in s ections 5.2 through 5.7 . Results for each metric are presented in s ections

5.8.1 and 5.8.2 respectively. Key variables and calculations are presented for each metric. The

calculations disc ussed here were performed with a series of Microsoft Excel spreadsheets that are accessible on the DOE web site at ( http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ashrae_products_docs _meeting.html ).

Appendix 5-A contains additional results from the LCC analysis

.

5.1.1 General Approach for L ife -C ycle Cost and P ayback Period Analysis

Recognizing that each commercial buildi ng that uses the commercial packaged boiler equipment is unique, DOE analyzed variability and uncertainty by performing the LCC and PBP

calculations detailed here for seven types of commercial buildings for which energy consumption

data were developed in T SD chapter 4—public a ssembly , education, food service, lodging, office, retail, and warehouse buildings across the United States —and aggregat ed the results based on estimated shipments of commercial boilers to these building types. The LCC and PBP model was developed using Microsoft Excel spreadsheets.

Aside from the relationship between increasing selling price and increasing energy efficiency , and the type of building in which a boiler is used , the most important factors influencing the LCC and PBP analy sis are related to the S tate to which each commercial packaged boiler is shipped. These factors include energy prices, installation cost, markup, and sales tax. In addition, estimated discount rates for different classes of commercial customer are

used in the LCC analysis

. The LCC analysis presented here used the predicted energy consumption for commercial boilers based on the energy analysis and reviewed in chapter 4 of the TSD, Energy Use Characterization.5-2 The e nergy consumption of commercial packaged bo ilers is sensitive to climat ic conditions and building type, thus energy consumption in the LCC analysis varies by geographical location and building type. At the national level, the spreadsheets explicitly accounted for variability in the model inputs for fuel price and markups using distributions based on the shipment of units to different States and building types.

The LCC and PBP results are displayed as distributions of impacts compared to the baseline conditions, which for purposes of the Notice of P roposed Rulemaking ( NOPR ) are the

ASHRAE Standard 90.1- 2007 efficiency levels specified for each class of commercial packaged

boiler . Results are presented at the end of this chapter

.

5.1.2 Overview of L ife -C ycle Cost and P ayback Period Inputs

The LCC is the total customer cost over the life of the equipment, including purchase cost and operating cost ( i.e., energy, maintenance and repair cost). F uture operating costs are discounted to the time of purchase and summed over the lifetime of the equipment. The PBP is the change in purchase cost due to an increased efficiency divided by the change in annual operating cost that results from the energy conservation standard. It represents the number of years it will take the customer to recover the increased purchase cos t 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

total installed cost ; and (2) inputs for calculating the operating cost.

The inputs for establishing the total installed cost are as follows:

**•** Baseline contractor cost : T he cost paid by a contractor to purchase a commercial packaged boiler of the size and equipment classes analyzed in this analysis. Baselin e contractor costs fo r equipment are discussed in TSD chapter 3.

**•** Standard- level contractor cost increase : T he incremental change in contractor cost associated with producing equipment at each of the higher standard levels.

**•** Markups and sales tax : T he markups and sales tax assoc iated with converting the

contractor costs to a customer price.

**•** Installation price : Th e cost to the customer of installing the equipment. The installation price represents the cost required to install the equipment but does not include the

marked

- up cust omer equipment price. The installation price includes labor, overhead, and any miscellaneous materials and parts. Thus, the total installed cost equals the customer equipment price plus the installation price.

The inputs for calculating the operating cost are as follows:

**•** Equipment energy consumption : The site energy use associated with the use of the

commercial packaged boilers. Although there are potentially some electrical energy consumption impacts for different efficiency levels within certain commercia l packaged boiler equipment classes, the LCC analysis includes only the estimates of primary fuel (either gas or oil) by the equipment itself as calculated in TSD chapter 4. Underlying this5-3 assumption is that any changes in electrical energy consumption , f or instance caused by changes in blower design or controls for equipment meeting the standards, are small.

**•** Fuel prices : Natural Gas and f uel o il prices used in the analysis are the price in dollars per million British thermal units ( MBtu ) paid by each cus tomer. Fuel prices are determined using average commercial f uel prices in each State, as determined from

available State

- by

- State Energy Information Administration (EIA) data for 2007. The

2007 average commercial prices were modified to reflect the fact that the seven types of businesses analyzed pay prices that , on average, are either slightly higher or lower than the average commercial prices. Details about the development of fuel prices and the data

sources used are found in Section 5.6.2.1

.

**•** Fuel price trends : The EIA’s Annual Energy Outlook 2009 2 ( DOE/EIA 2009 ; hereafter

referred to as AEO 200 9) is used to forecast fuel prices. For the results presented in this chapter, DOE used the AEO 2009 April 2009 reference case includin g American Recovery and Reinvestment Act (ARRA) to forecast future fuel prices.

**•** Maintenance costs : The labor and materials costs associated with maintaining the operation of the equipment (e.g., cleaning boiler tubes ).

**•** Repair costs : The labor and materials costs associated with repairing or replacing boiler components that have failed.

**•** Lifetime : The age at which the commercial packaged boiler equipment is retired from

service. DOE assumed a 30- year life for commercial boilers

.

**•** Discount rate : The rate at whi ch future costs are discounted to establish their present

value.

Figure 5.1.1 depicts the relationships between the installed cost and operating cost inputs

for the calculation of the LCC and PBP. Table 5.1.1 summarizes the values for the various inputs to the calculation of the LCC and PBP. As noted earlier, most of the inputs are characterized by distributions that capture variability in the input. The values provided in Table 5.1.1 are the weighted -average values from the distribution that is being used to characterize the input. Also

listed in Table 5.1.1 are chapters in the TSD where more detailed information about the inputs

can be found.5-4 Baseline

Manufacturer

Price

Std-Level

Manufacturer

Price

Total Installed

Cost From Engineering

Analysis (Price is a

Function of Efficiency)

From Markups for Equipment

Price

Determination Analysis

Annual Energy Expense

Repair Cost

Maintenance

Cost Annual Operating Expense Lifetime Operating Expense Life-Cycle

Cost

From Energy

Use

Characterization Analysis (Energy Use as a

Function of Efficiency) Payback

Period

Energy Consumption Distributor

Markup

Sales Tax Mechanical

Contractor

Markups Customer

Price

Installation

Cost & General

Lifetime

Discount Rate

Fuel

Price Trend Fuel

Prices Baseline

Manufacturer

Price

Std-Level

Manufacturer

Price

Total Installed

Cost From Engineering

Analysis (Price is a

Function of Efficiency)

From Markups for Equipment

Price

Determination Analysis

Annual Energy Expense

Repair Cost

Maintenance

Cost Annual Operating Expense Lifetime Operating Expense Life-Cycle

Cost

From Energy

Use

Characterization Analysis (Energy Use as a

Function of Efficiency) Payback

Period

Energy Consumption Distributor

Markup

Sales Tax Mechanical

Contractor

Markups Customer

Price

Installation

Cost & General

Lifetime

Discount Rate

Fuel

Price Trend Fuel

Prices

Figure 5.1.1 Flow Diagram of Inputs for the Determination of L ife -C ycle Cost and Payback

Period

Table 5.1.1 Summary Information of Inputs for the Determination of L ife -C ycle Cost and Payback Period

Factor Weighted

- Average Value TSD Chapter Total Installed Cost Primary Inputs

Baseline contractor cost Varies with equipment class Chapter 3

Standard

- level contractor cost increases Var y with equipment class and e fficiency l evel Chapter 5 Markups and sales tax Var y with equipment class

, distribution channel

, and

location Chapter 5

Installation price Varies with equipment class Chapter 5 Operating Cost Primary Inputs Equipment energy consumption Varies with equipment clas s Chapter 4

Fuel prices Vary with location, building type Chapter 5
Fuel price trends Vary with price scenario Chapter 5

Maintenance costs Var y with equipment class Chapter 5 Repair costs Var y with equipment class Chapter 5

Lifetime Varies with type o f business Chapter s 3, 5

Discount rate Varies with type of business Chapter 5

All of the inputs depicted in Figure 5.1.1 and summarized in Table 5.1.1 are discussed in

s ections 5.2 through 5.7

.

5.2 LIFE

- CYCLE COST INPUTS

5.2.1 Definition

Life

- cycle cost is defined by the following equation:5-5 

## ∑

**= +**  **+=** N

t t

t r OC ICLCC

1 )1 /( Eq. 5.1

w here

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,

t = year for which operating cost is being determined.

DOE expresses all of the costs in 2008$ for the LCC analysis . Total installed cost, operating cost, lifetime, and discount rate are discussed in the following sections.

Because the purpose of the NOPR analysis is to examine the potential impact of DOE setting energy conservation stand ards at levels higher than those established in ASHRAE

Standard 90.1-2007 for commer cial packaged boilers, DOE assumes the start date for the LCC analysis is determined as the earliest date that standards higher than ASHRAE Standard 90.1- 2007 levels could go into effect. Under current legislation, this is 2014, 4 years after a rule could be put into effect setting standards for commercial boilers at levels higher than those shown in

ASHRAE Standard 90.1-2007. In the LCC analysis, the year of equipment purch ase is assumed

to be 2014.

5.2.2 Total Installed Cost Inputs

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

INST EQP IC **+=** Eq. 5.2

w here

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

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

.

The equipment price is based on the distribution channel through which the customer purchases the equipment. Because the available cost data were developed based on contractor

costs as discussed in TSD chapter 3, DOE de veloped a simplified distribution channel starting

with the mechanical contractor . The remainder of this section provides information about the

variables DOE used to calculate the total installed cost for commercial packaged boiler equipment. Table 5.2.1 lists the inputs for the determination of total instal led cost

.5-6 Table 5.2.1 Inputs for Total Installed Costs

Baseline contractor c ost ($)

Standard

- level contractor cost increases ($) Mechanical contractor markup

General contractor markup Sales tax ( % )

Installation price ($)

5.2.2.1 Baseline Contractor C ost

The baseline contractor cost is the cost paid by mechanical contractors purchasing commercial packaged boilers that meet the existing minimum efficiency (or baseline) standards

as defined under ASHRAE Standard 90.1-2007 in 2014. DOE developed the baseline contractor

costs through an efficiency level analysis that estimated contractor costs by efficiency level for each class of commercial packaged boiler analyzed, but without reference to boiler design

features . Refer to TSD chapter 3, E ngineering A nalys is, for discussion of the development of

contractor costs data

. DOE developed contractor costs for 10 equipment classes and using two sizes of commercial packaged boilers typical boiler capacities (800 kBtu per hour [kBtu/h] and 3,000 kBtu/h output rating s for small and large commercial packaged boilers

, respectively) . The LCC

and PBP analys i s has been carried out for the typical boiler sizes i dentified within each equipment class

. Table 5.2.2 shows the 10 equipment classes that D OE evaluated . Table 5.2.3 lists baseline contractor costs per unit.

Table 5.2.2 Equipment Classes for the Commercial Packaged Boiler Life -Cycle Cost and
Payback Period Analysis

Equipment Class Output Capacity (kBtu/h)

Small Gas

- Fired Hot Water 800

Small Gas

- Fired Steam All Except Natural Draft 800

Small Gas

- Fired Steam Natural Draft 800

Small Oil

- Fired Hot Water 800

Small Oil

- Fired Steam 800 Large Gas

- Fired Hot Water 3

, 000 Large Gas

- Fired Steam All Exce pt Natural Draft 3

, 000 Large Gas

- Fired Steam Natural Draft 3

, 000 Large Oil

- Fired Hot Water 3

, 000 Large Oil

- Fired Steam 3

, 0005-7 Table 5.2.3 Baseline Contractor Cost s per Unit by Equipment Class

Equipment Clas s Baseline Contractor Cost (2008$)

Small Gas

- Fired Hot Water 6,294

Small Gas

- Fired Steam All Except Natural Draft 10,717

Small Gas

- Fired Steam Natural Draft 11,190

Small Oil

- Fired Hot Water 10,168

Small Oil

- Fired Steam 9,261 Large Gas

- Fired Hot Wate r 14,567 Large Gas

- Fired Steam All Except Natural Draft 30,441 Large Gas

- Fired Steam Natural Draft 31,966 Large Oil

- Fired Hot Water 23,533 Large Oil

- Fired Steam 28,870

5.2.2.2 Standard s- Level Contractor Cost Increases

The standard s- level contractor cost increase is the change in contractor cost associated

with contractor purchase of equipment at higher efficiency levels associated with higher energy conservation standards. DOE developed contractor costs for higher efficiency levels through analysis of data pro vided directly from mechanical contractors or equipment distributors . Refer to

TSD chapter 3, Engineering Analysis, for details. Contractor cost increases as a function of equipment efficiency were developed for each of the 10 equipment classes. Up to four selected efficiency level s higher than those in ASHRAE Standard 90.1-2007 were used in the LCC and PBP analysis. T he selection of these higher efficiency level s for the LCC and PBP analysis are discussed in TSD chapter 3.

The e ngineering analysis establis hed a distribution of contractor cost increases for each

standard level. Table 5.2.4 summarizes the estimated contractor cost increases for commercial packaged boiler standard levels considered in the LCC and PBP analysis.

Table 5.2.4 Standard

- Level Contractor Cost Increases ( Cost Increases Relative to the Cost

of Baseline Equipment)

Equipment Class Increase in Contractor Cost by Efficiency Level * (2008$)

Level 1 Level 2 Level 3 Le vel 4

Small Gas

- Fired Hot Water 1,044 3,305 6,985 12,329

Small Gas

- Fired Steam All Except Natural Draft 873 2,695 5,548 7,627

Small Gas

- Fired Steam Natural Draft 529 1,628 3,339 na Small Oil

- Fired Hot Water 1,189 3,706 7,707 na Small Oil

- Fired Steam 803 2,480 6,137 na Large Gas

- Fired Hot Water 1,797 5,614 11,699 36,345 Large Gas

- Fired Steam All Except Natural Draft 1,656 3,402 5,243 7,184 Large Gas

- Fired Steam Natural Draft 1,071 3,240 6,536 10,987 Large Oil

- Fired Hot Water 4,459 10,131 16,060 na Large Oil

- Fired Steam 1,570 4,796 9,768 18,522

* na indicates that no analysis was undertaken at this efficiency level for this equipment class

.5-8 5.2.2.3 Markup s For a given distribution channel, the overall markup is the value determined by multiplying all of t he associated retail markups and the applicable sales tax markup s together to arrive at a single overall distribution channel markup value. The overall markup in turn is multiplied by the baseline or standard s- level contractor cost to arrive at the price paid by the customer. The overall markup is composed of a baseline markup (i.e., a mark up used to convert

the baseline contractor cost to a customer price) and an incremental markup (i.e., a markup used

to convert a standard

- level contractor cost increase c aused by a n increase in efficiency standards into an incremental customer price). These markups are necessary for mechanical contractors and in some case general contractors to cover their costs

.

DOE recognizes that the price of commercial boilers depends on the distribution channel the customer uses to purchase the equipment. Typical distribution channels for commercial heating, ventilation, and air- conditioning ( HVAC ) equipment include manufacturers’ national accounts, wholesalers, mechanical contractors , and/or general contractors. DOE developed costs for mechanical contractors directly in the engineering analysis and estimated cost to customers using a distribution channel beginning with the mechanical contractor cost. DOE did not develop

an estimate fo r manufacturer selling prices in the engineering analysis and consequently, did not develop an estimate of markups for national account distribution channels with sales directly from manufacturers to customers. Because of the complexity of installation and based on few shipments to mercantile/retail building types (where national accounts are prevalent) , DOE assumed that sales of commercial packaged boilers involved mechanical contractors. Consequently, DOE did not develop separate markups for costs through a national account

distribution channel or directly from wholesalers.

DOE developed distribution channel markups in the form of multipliers that represent increases above the mechanical contractor cost. DOE applied these markups (or multipliers) to

the me chanical contractor costs it developed in the engineering analysis. DOE then added sales taxes and installation costs to arrive at the final installed equipment prices for baseline and higher efficiency equipment. DOE identified two separate distribution c hannels for commercial

boilers that describe how the equipment passes from the mechanical contractor to the custome r ( Table 5.2.5 ). D OE assumed that in the case where an existing boiler is replaced, mechanical

contractors would se ll the boiler, along with services necessary to replace the existing boiler, directly to the customer. DOE assumed that replacement of existing boilers would not involve general contractors. For new construction, however, DOE assumed that general contracto rs would be involved whenever the installation of commercial boiler is involved, resulting in a further markup on new boilers in addition to the mechanical contractor markup.

Table 5.2.5 Distribution Channels for Commercial Packaged Boiler Equipment

Channel 1 (Replacements) Channel 2 (New Construction)

Mechanical Contractor Mechanical Contractor

General Contractor

Customer Customer

DOE estimated percentages for both the new construction and replacement ma rkets based on data developed for the shipments model and based on growth in new construction and5-9 replacement of existing stock as determined in the shipments analysis (see TSD chapter 6)

. Based on these results, DOE assume d that approxim ately 33 percent of commercial boilers purchased will be installed in new construction, and the remaining 67 percent will replace existing commercial boilers.

For each step in the distribution channels presented above, DOE estimated a baseline markup and an incremental markup. DOE defined a baseline markup as a multiplier that converts the mechanical contractor cost of equipment with baseline efficiency to the customer purchase price for the equipment at the same baseline efficiency level. An incremental markup is defined as the multiplier to convert the incremental increase in mechanical contractor cost of higher efficiency equipment to the customer purchase price for the same equipment. Both baseline and incremental markups only depend on the distribution channel and are independent of the boiler efficiency levels.

DOE developed the markups for each distribution channel based on available financial data. DOE based the mechanical contractor markups on data from the Air Conditioning Contractors of America (ACCA) 3 and on the 2 002 U.S. Census Bureau financial data for the plumbing, heating, and air conditioning industry. DOE derived the general contractor markups from U.S. Census Bureau financial data for the commercial and institutional building

construction sector. 4

The overall markup is the product of all the markups (baseline or incremental) for the different steps within a distribution channel plus sales tax. DOE calculated sales taxes based on

2008 State- by

- State sales tax data reported by the Sales Tax Clearinghouse. Beca use both contractor costs and sales tax vary by State, DOE developed distributions of markups within each distribution channel by State.

5.2.2.4 Baseline Markup
DOE defined baseline markups as cost multipliers that convert the contractor cost of equipment with ba seline efficiency to the customer purchase price for the equipment at the same baseline efficiency level.

If sold to a customer directly by a mechanical contractor the following equation defines the equipment price:

EQP MECH CONT BASE = MCC BASE x MU MECH CONT BASE x (1+ST) Eq. 5.3

w here

EQP MECH CONT BASE = mechanical contractor price to the customer of baseline equipment ($),

M CC BASE = m echanical contractor cost of baseline equipment ($),

MU MECH CONT BASE = mechanical contractor markup on baseline equipment,

ST = sales tax ( % ).

If sold to a customer by a mechanical contractor through a general -contractor distributor:

EQP GEN CONT BASE = M CC BASE x MU MECH CONT BASE x MU GEN CONT BASE x (1+ST) Eq. 5.45- 10 w here

EQP GEN CONT BASE = general contractor price of baseline equipment ($),

MU GEN CONT BASE = general contractor markup on baseline equipment.

5.2.2.5 Incremental Markup

I ncremental markup s are defined as the co st multiplier s to convert the incremental increase in mechanical contractor cost ( M CC ) of higher efficiency equipment to the incremental increase in customer purchase price for the same equipment , as shown in the following equations.

If equipment is sold t o a customer directly by a mechanical contractor

, the following equation defines the equipment price:

EQP MECH CONT INC = MCC INC x MU MECH CONT INC x (1+ST) Eq. 5.5

w here

EQP MECH CONT INC = incremental increase in mechanical contractor price to the customer of higher efficiency equipment ($),

M CC INC = incremental increase in mechanical contractor cost of higher efficiency equipment ($),

MU MECH CONT INC = mechanical contractor incremental markup on high er efficiency equipment,

ST = sales tax ( % ).

If equipment is sold to a customer by a mechanical contractor through a general

contractor distributor, the following equation defines the equipment price:

EQP GEN CONT INC = MCC INC x MU MECH CONT INC x MU GEN CONT INC x (1+ST) Eq. 5.6

w here

EQP GEN CONT INC = incremental increase in general contractor price of higher efficiency equipment ($),

MU GEN CONT INC = general contractor markup on higher efficiency equip ment.

5.2.2.6 Overall Markup
The overall markup is the product of all of the markups, including both overall baseline

and overall increme ntal markups , for the different steps within a distribution channel plus sales

tax , as indicated by the following equations:

EQ P CUST BASE = MSP BASE x ( WT MECH CONT x MU MECH CONT BASE + WT GEN CONT x MU MECH CONT BASE

x MU GEN CONT BASE ) x (1+ ST )

= MSP BASE x MU OVERALL BASE Eq. 5.7

EQP CUST INC = MSP INC x ( WT MECH CONT x MU MECH CON T INC + WT GEN CONT x MU MECH CONT INC

x MU GEN CONT INC ) x (1+ ST )

= MSP INCR x MU OVERALL INCR Eq. 5.85- 11 EQP CUST = EQP CUST BASE + EQP CUST INCR Eq. 5.9

w here

EQ P CUST BASE = baseline customer price ($), EQP CUST INCR = incremental customer price ($), EQP CUST = total customer price ($)

, MU OVERALL BASE = overall weighted baseline markup that is the product of all the weights and baseline markups for each step of the distribution channel,

MU OVERALL INCR = overall weighted incremental markup that is the product of all the weights and incremental markups for each step of the distribution channel,

WT MECH CONT = weight (percent) of equipment sales through mechanical contractors only,

WT GEN CONT = weight (percent) of equipment sales through general contractors,

The use of the overall baseline and overall incremental markups results in the baseline customer price ( EQP CUST BASE ) and the incremental customer price ( EQP CUST INCR ). For a particular higher efficiency level that increases MCC , the total equipment price ( EQP CUST ) to the customer is the sum of the baseline customer price ( EQP CUST BASE ) and the incremental customer price ( EQP CUST INCR ).

5.2.2.7 Assumptions Used to Es timate Wholesaler a nd Contractor Markups
DOE based the mechanical contractor markups on firm balance- sheet data, while it based the general contractor markups on U.S. Census Bureau data for the commercial and institutional building construction industry. D OE obtained the firm balance sheet data from the Air Conditioning Contractors of America ( ACCA ) 5,6 for development of mechanical contractor markups. ( ACCA ) is a trade association representing mechanical contractors and

, while it is not specific to mechanic al contractors installing commercial package boilers, it was used under the assumption that it would provide markups characteristic of mechanical contractors providing HVAC equipment in general . DOE used the financial data from the 2002 U.S. Bureau for developing general contractor markups in the same form as the balance sheet data for

wholesalers and mechanical contractors. 7 These balance sheets break out the components of all costs incurred by firms that supply and install commercial packaged boilers

. a

1. The firm balance sheets accurately represent the various average costs incurred by firms distributing and installing commercial packaged boilers

. Th ree key assumptions used to estimate markups using these financial data are as follows:

2. These costs can be div ided into two categories: (1) costs th at vary in proportion to the

MCC of commercial packaged boilers (variable costs); and (2) costs do not vary with the

M CC of commercial packaged boilers (fixed costs).

3. Contractor prices vary in proportion to contractor costs included in the balance sheets.

In support of the first assumption, the balance sheets itemize firm costs into a number of expense categories, including direct costs to purchase or install the equipment, operating labor

a Wholesalers and mechanical contractors to which these reports refer handle multiple commodity lines, including

residential and commer cial air

- conditioners and warm

- air furnaces.5- 12 and occupancy costs, and other operating costs and profit. Although contractors tend to handle multiple commodity lines (including air conditioners, furnaces, and boilers ), the data provide the most accurate available indication of expenses associated with the mechanical and general

co ntracting industry as a whole.

Information obtained from the trade literature and selected HVAC wholesalers, contractors, and consultants support the second assumption. This information indicated that wholesaler and contractor markups vary according to the quantity of labor and materials used to distribute and install appliances, with markups on labor tending to be much higher than markups

on materials . The obtained information described markups as varying much more in relation to

sales volume than in relat ion to other factors, including appliance efficiency. This last finding strongly suggested that labor inputs vary more with sales volume than with equipment cost or efficiency . DOE assumed a division of costs between the costs that do not scale with the MCC (labor and occupancy expenses), and those that do (operating expenses and profit). This division of costs led to the estimate of contractor markups described below.

In support of the third assumption, the HVAC wholesaler and contractor industry is
compet itive and customer demand for commercial heating and air -conditioning is generally inelastic, i.e., the demand is not expected to decrease significantly with an increase in price of equipment. The large number of HVAC firms listed in the 2002 U.S. Census reports indicates the competitive nature of the market. For example, there are more than 293 Power Boiler

Manufacturers

, 8 over 2,800 wholesalers of boilers, radiators, and convector equipment, 9 more than 37,000 general contractors, 10 and 87,000 HVAC contra ctors 11 listed in the U.S. Census for

2002. Following standard economic theory, competitive firms facing inelastic demand either set prices in line with costs or quickly go out of business. 12

5.3 ESTIMATION OF MECHAN ICAL CONTRACTOR MARK UPS

The HVAC contractors, defined here as mechanical contractors, reported median cost data in an ACCA financial analysis of the HVAC industry. 4 These data are shown in Table 5.3.1

.

Table 5.3.1 Baseline Mar kup , All Mechanical Contractors

Description Contractor Expenses or Revenue

Per Dollar

Sales Revenue Per Dollar

Cost of Goods

Direct Cost of Equipment Sales: Cost of goods sold $0.73 $1.00

Gross Margin: Labor, occupancy, operating expenses, and profit $ 0.27 $0.37

Revenue: Baseline revenue earned per dollar cost of goods $1.37

Baseline Markup ( MU MECH CONT BASE ) 1.37

Source: Air Conditioning Contractors of America

, Financial Analysis for the HVACR Contracting Industry, 2005.

Data reported in this analysis are not as detailed as those provided by the other sources, containing only cost of goods sold and gross margin. Becaus e the gross margin is the sum of labor, occupancy expenses, operating expenses, and profit, the gross margin allows for the

determina tion of the baseline markup. The first data column in Table 5.3.1 provides the cost of goods sold and gross margin as expenses per dollar of sales revenue. The only important5- 13 difference is that the direct cost of equipment sales in this table includes installation costs as well as the cost of goods sold. As shown in the table, the direct cost of sales represents about $0.73 per dollar of sales revenue to the contractor and the gross margin is $0.27 per dollar of

sales revenue.

DO E converted these expenses per dollar sales into revenue per dollar cost of goods sold by dividing each figure in the first data column by $0.73. For every $1.00 the mechanical contractor spends on equipment costs, the mechanical contractor earns $1.00 in sales revenue to cover the equipment cost, and $0.37 to cover the other costs. This totals $1.37 in sales revenue earned for every $1.00 spent on equipment costs, for a baseline markup ( MU MECH CONT BASE ) of

1.37 for mechanical contractors, because the contractor earns $1.37 in sales revenue for every $1.00 spent to purchase the equipment.

5.3.1 Markups for Mechanical Contractors in the Replacement and New Construction

Markets

The baseline markup derived above for mechanical contractors is the average value for

al l contractors including the replacement and new construction markets. This section describes how DOE further derived the baseline and incremental markups for these latter two markets. As above, the ACCA financial data provided gross margin data, which allows for the determination of only the baseline markup for the two markets, because the gross margin is the sum of all contractor labor and operating expenses plus profit. Calculation of the incremental markup uses

U.S. Census Bureau data . ACCA data were not used here for the calculation of the incremental markup as the variable costs are not provided separately.

Table 5.3.2 summarizes the gross margin and resulting baseline markup data for all mechanical contractors that serve the replacement and new construction markets

.

Table 5.3.2 Baseline Markups for the Replacement and New Construction Markets,

All Mechanical Contractors

Description Contractor Expenses or Revenue by Market Type *
Replacement New Construction

Per Dollar

Sales Revenue Per D ollar

Cost of Goods Per Dollar

Sales Revenue Per Dollar

Cost of Goods Direct Cost of Equipment Sales:

Cost of goods sold $0.70 $1.00 $0.75 $1.00

Gross Margin: Labor, occupanc y, operating expenses, and profit $0.30 $0.43 $0.25 $0.33

Baseline Markup ( MU MECH CONT BASE ): Revenue per dollar cost of goods na 1.43 na 1.33

Source: Air Conditioning Contractors of America

, Financial Analysis for the HVACR Contracting Industry

, 2005

. * na means not applicable in this context.

Using the baseline markup data from Table 5.3.2 and results of a financial analysis

, 4
DOE calculated that the baseline markups for the replacement and new markets are 4.4 percent higher and 2.9 percent lower, respectively, than that for all mechanical contractors serving all

m arkets. DOE then used the ACCA data to calculate the baseline markup of 1.32 for the commercial building construction section as shown in Table 5.3.3

.5- 14 Table 5.3.3 Mechanical Contractor Expenses and Baseline Markup , Residential and Light

Commercial

Description Contractor Expenses or Revenue

Per Dollar

Sales Revenue Per Dollar

Cos t of Goods

Direct Cost of Equipment Sales: Cost of goods sold $0.76 $1.00

Gross Margin: Labor, occupancy, operating expenses, and profit $0.24 $0.32

Baseline Markup ( MU MECH CONT BASE ): Revenue per dollar cost of goods 1.32

Source: Air Conditioning Con tractors of America

, Financial Analysis for the HVACR Contracting Industry

, 2005

.

The markup deviations derived above (i.e., 4.4 percent higher and 2.9 percent lower for the replacement and new construction markets, respectively) were then applied to the b aseline markup of 1.32 for the residential and light commercial building construction section. This resulted in baseline markups of 1.38 and 1.28, respectively, for the replacement and new construction markets served by mechanical contractors for commerci al building construction.

Calculation of the incremental markups for each market type required separation of the

fixed and variable costs. Because this was not possible using the ACCA data, DOE used more

detailed U.S. Census Bureau data for 2002 for all plumbing, heating, and air-conditioning

contractors. 8 The U.S. Census Bureau data were used to calculate the baseline and incremental markups as shown in Table 5.3.4

.

Table 5.3.4 M echanical Contractor Expenses and Markups Based on U.S. Census Bureau

Data

Description Contractor E xpenses or Revenue

Per Dollar

Sales Revenue Per Dollar Cost

of Goods

Direct Cost of Equipment Sales: Cost of goods sold $0.66 $1.00

Labor Expenses: Salar ies (indirect) and benefits $0.17 $0.26

Occupancy Expense: Rent, maintenance, and utilities $0.02 $0.03

Other Operating Expenses: Depreciation, advertising, and insurance. $0.03 $0.05

Net Profit Before Taxes $0.12 $0.18

Baseline Markup ( MU MECH BASE ): R evenue per dollar cost of goods 1.52

Incremental Markup ( MU MECH INCR ): Increased revenue per dollar increase cost of goods sold 1.23

Source: U.S. Census Bureau

, Plumbing, Heating, and Air

- Conditioning Contractors: 2002

, Table 4

, Detailed Statistics for

Establishments

, 2002.

Using the data in Table 5.3.4 , the incremental markup is 19.1 percent lower than the baseline markup. DOE assumed that this deviation applies equally to the baseline markups for replacement s of 1.38 and new construction of 1.28. This yields incremental markups of 1.12 and 1.04, respectively, for the replacement and new construction markets served by mechanical

contractors.5- 15 5.4 ESTIMATION OF GENERA L CONTRACTOR MARKUPS

DOE derived markups for general contractors from U.S. Census Bureau data for the commercial and institutional building construction sector. 5 This sector includes establishments primarily engaged in construction work, including new construction work, additions, alterations, and repairs. The U.S. Census Bureau data for the construction sector include detailed statistics for establishments with payrolls, similar to the data reported by ACCA for wholesalers. The primary difference is that the U.S. Census Bureau reports itemized revenues and expenses for the construction industry as a whole in total dollars rather than in typical values for an average or representative business. Because of this, DOE assumed that the total dollar values that the

U.S. Census Bureau reported, once converted to a percentage basis, represented revenues and expenses for an average or typical contracting business. Similar to the data for wholesalers,

Table 5.4.1 summarizes the expenses for general contractors as expenses per dollar of sales

revenue in the first data column.

In Table 5.4.1 , the direct cost of sales represents about $0.78 per dollar of sales revenue to the general contractor. Labor expenses represent $0.08 per dollar of sales revenue, occupancy expenses represent $0 .02 per dollar of sales revenue, other operating expenses represent $0.01, and profit makes up $0.12 per dollar of sales revenue.

Table 5.4.1 General Contractor Expenses and Markups

Description Wholesale Firm Expenses or

Revenue

Per Dollar

Sales Revenue Per Dollar

Cost of Goods

Direct Cost of Equipment Sales: Cost of goods sold $0.78 $1.00

Labor Expenses: Salaries (indirect) and benefits $0.08 $0.10

Occupancy Expense: Rent, maintenance, and utilities $0.02 $0.03

Other Operating Expenses: Depreciation, advertising, and insurance. $0.01 $0.01

Net Profit Before Taxes $0.12 $0.15

Baseline Markup ( MU GEN CONT BASE ): Revenue per dollar cost of goods 1.29

Incremental Markup ( MU GEN CONT INCR ): Increased revenue per dollar increase cost of goods sold 1.16

Source: U.S. Census Bureau

, Commercial and Institutional Building Construction: 2002, Table 4

, Detailed Statistics for

Establishments

, 2002.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold, by dividing each figure in the first data column by $0.78. The data in column two in Table 5.4.1 show that, for every $1.00 the general contractor spends on equipment costs, the general contractor earns $1.00 in sales revenue to cover the equipment cost, $0.10 to cover labor costs, $0.03 to cover occupancy expenses, $0.01 for other operating expenses, and $0.15 in profits. This totals $1.29 in sales revenue earned for every $1.00 spent on equipment costs. Thus, the general contractor baseline markup ( MU GEN CONT BASE ) is 1.29.

DOE was also able to use the data in column two in the table above to estimate the incremental markups by being able to separate the fixed and variable costs. At one extreme, if all

of the other costs scale with the equipment price (i.e., all costs are variable), the increase in general contractor price will be $1.29, resulting in an incremental markup of 1.29, or the same as5- 16 the baseline markup. At the other extreme, if none of the other costs are variable, then a $1.00 increase in the equipment price will lead to a $1.00 increase in the general contractor price, for an incremental markup of 1.0. DOE assumed the labor and occupancy costs to be fixed and the other operating costs and profit to scale with the equipment price (i.e., be variable). In this case, for a $1.00 increase in the equipment price, the general contractor price will increase by $1.16,

g iving a general contractor incremental markup ( MU GEN CONT INCR ) of 1.16.

5.5 SALES TAX

The sales tax represents State and local sales taxes that are applied to the customer price for commercial packaged boilers. The sales tax is a multiplicative factor that increases the

customer equipment price. DOE derived sales taxes representative of both State and local sales taxes from The Sales Tax Clearinghouse

, 13 shown in Table 5.5.1

.

Table 5.5.1 State Sales Tax Rates

State Combined

State and

Local Tax

Rate State Combined

State and

L ocal Tax

Rate State Combined

State and

Local Tax

Rate

Alabama 8.10% Kentucky 6.00% North Dakota 5.70%

Alaska 1.45% Louisiana 8.70% Ohio 6.75%

Arizona 7.15% Maine 5.00% Oklahoma 8.05%

Arkansas 8.15% Maryland 6.00% Oregon 0.00%

California 8 .00 % Massachu setts 5.00% Pennsylvania 6.25%

Colorado 6.35% Michigan 6.00% Rhode Island 7.00%

Connecticut 6.00% Minnesota 6.70% South Carolina 6.90%

Delaware 0.00% Mississippi 7.00% South Dakota 5.45%

Dist. of Columbia 5.75% Missouri 6.60% Tennessee 9.40%

Florida 6 .70% Montana 0.00% Texas 8.00% Georgia 6.95% Nebraska 6.60% Utah 6.55%

Hawaii 4.40% Nevada 7.50% Vermont 6.05%

Idaho 6.05% New Hampshire 0.00% Virginia 5.00%

Illinois 7.70% New Jersey 6.95% Washington 8.55%

Indiana 7.00% New Mexico 6.35% West Virginia 6.00%

Iowa 6.75% New York 8.25% Wisconsin 5.40%

Kansas 6.90% North Carolina 6.80% Wyoming 5.25%

The State

- level combined tax rates are applied to the total purchase cost to the customer located in any State . DOE applied sales taxes to the customer equi pment price irrespective of the

distribution channel and the market in which the customer is located.

5.6 OVERALL MARKUPS

DOE multiplied the mechanical and general contractor markups describ ed above by the

sales tax to obtain the overall baseline and increment al markups shown in Table 5.6.1 and

Table 5.6.2 , respectively.5- 17 Table 5.6.1 Overall Baseline Markups

Replacement Market * New Construction Market

Mechanica l Contractor 1.38 1.28

General Contractor na 1.29

Sales Tax 1.0 7 1.0 7

Overall 1.48 1.77

Overall Weighted Average 1.56

*na means no general contractor markup assumed for this market

Table 5.6.2 Overall Inc remental Markups

Replacement Market * New Construction Market

Mechanical Contractor 1.12 1.04

General Contractor na 1.16

Sales Tax 1.0 7 1.0 7

Overall 1.20 1.29

Overall Weighted Average 1.22

*na means no general contractor markup assumed for this marke t

DOE calculated overall markups through each distribution channel depending on whether the equipment is being purchased for the new construction or replacement market. DOE based the

distribution channel on whether the final equipment purchase is directly through a mechanical

contractor or a general contractor.5- 18 Table 5.6.1 and Table 5.6.2 present overall markups, including sales tax , for both the baseline and incremental markups. The overall baseline mar kups are 1. 48 and 1.77 for replacement and new markets, respectively . As shown in Table 5.6.2 , the overall incremental markups are 1.20

and 1.29 for the replacement and new markets, respectively . The weighted- average overall

basel ine markup equals 1.57 , while the weighted

- average overall incremental markup equals

1.22.

DOE used the overall markups to estimate the customer price of baseline equipment, given the manufacturer selling price of baseline equipment. For example, if the manufacturer selling price of a commercial packaged boiler is $10,000, DOE can multiply this by the weighted

- average overall baseline markup (1. 57) to arrive at a baseline customer price of the boiler unit of $15,700. Similarly, DOE used the overall incremental markup to estimate changes

in the customer price, given changes in the manufacturer selling price above the baseline price resulting from a standard to raise equipment efficiency. For example, if a standard increases the

contractor cost for a commerci al packaged boiler by $100, DOE can multiply this by the weighted

- average overall incremental markup (1.22) to determine the customer price increase of $122.

5.6.1.1 Installation Cost
DOE derived national average installation costs for commercial boilers from da ta provided in RS Means CostWorks 2008 (RS Means) for commercial boiler equipment with

efficiencies at or below the ASHRAE Standard 90.1-2007 efficiency levels. RS Means provides estimates for installation costs for hot water and steam boilers by equipment capacity and fuel type, as well as cost indices that reflect the variation in installation costs for 295 cities in the

United States. The RS Means data identify several cities in all 50 States and the District of Columbia. DOE incorporated location- based cost indices into the analysis to capture variation in installation cost, depending on the location of the customer.

RS Means provided unit installation costs for 20 sizes of natural

- gas

- fired hot- water
boilers between 360- and 6,970-kBtu/h output capacit y and 21 sizes of natural

- gas

- fired steam

boilers between 360- and 6 ,970-kBtu/h output capacity. RS Means lists these as cast -iron boilers

and the installation costs include standard controls and insulated jacket , as well as additional overhead and profit markup factor for the installing contractors and general requ i rement fees including design fees for engineers of approximately 1.37. DOE developed l inear regressions to provide estimates of baseline installation costs for natural gas boilers with the resul ting parameters shown in Table 5.6.3

Table 5.6.3 Baseline Installation Cost Equation Parameters

Boiler Type Installation Cost Equation Parameters Slope ($/kBtu/h) Intercept ($) R 2

Natural

- Gas

- Fired Hot

- Water 2.688 2

, 672 0.972

Natural

- Gas

- Fired Steam 2.372 3

, 215 0.975

RS Means also provided costs for oil- fired boilers described as packaged water tube boilers, steam or hot-water, #2 oil. However, examination of the costs for these b oilers indicated

that the overall installation costs were over twice the cost of the natural gas boilers described5- 19 above across the range of oil boilers, with hot-water boilers shown as significantly higher in installation costs compared with steam boilers . Other installation costs for oil boilers did not

exist in the unit cost section. In a separate section of the Costworks data, RS Means also provided what are referred to as “ Assembly ” installation costs for commercial packaged boilers, which include additional features that may be included in the installation of the boiler tied to the hydronic system. However, in this section, there were limited data on installation costs. T wo costs provided for cast -iron oil- fired hot- water boilers at 1 ,084 and 3,550 kBtu/h, appear to be

consistent with the unit cost data and were within 3 percent of the regressed cost for the same size natural gas hot-water boilers developed by DOE. In addition, RS Means provides separately in the Assembly installation costs, installatio n costs for cast -iron, gas and oil, packaged boilers. These costs appear to be for systems with dual- fire capability. Based on the available data, DOE assumed that the costs calculated from Table 5.6.3 would also reasonably represent installation

costs fo r oil

- fired hot-water and steam output commercial packaged boilers

Additional installation cost adders were developed for certain higher efficiency levels.

For certain higher efficiency levels, DOE presumed that additional costs for venting would be required when compared to installation of boilers just meeting the ASHRAE Standard 90.1-2007 requirements. DOE first estimated the combustion efficiency of all boilers examined . DOE developed combustion efficiency estimates for boilers at specific thermal efficiency levels using data from the DOE commercial packaged boiler data set discussed in TSD chapter 2

. DOE developed the estimated difference factors ( between thermal and combustion efficiencies ) for

converti ng the thermal efficiency at specific levels to co mbustion, as listed in Table 5.6.4.

Table 5.6.4 Estimated Efficiency Difference ( ∆ ) B etween Thermal and Combustion

Efficiencies

Equipment Class ∆E (%)

Small Gas

- Fired Hot Water 1.5

Small Gas

- Fired Steam All Except Natural Draft 2.0

Small Gas

- Fired Steam Natural Draft 3.5

Small Oil

- Fired Hot Water 2.5

Small Oil

- Fired Steam 2.5 Large Gas

- Fired Steam All Except Natural Draft 1.5 Large Gas

- Fired Steam Natural Draft 2.0 Large Oil

- Fired Steam 2.5

Based on t he resulting combustion efficiencies , DOE determined that additional venting

req uirements would be required at or above the efficiency levels shown in Table 5.6.5

. This is compared with the combustion efficiencies determined for ASHRAE Standard 90.1-2007 baseline efficiency levels. For large gas

- fired and oil

- fired hot- water boilers, the efficiency descriptor proposed by ASHRAE is a combustion efficiency descriptor at the ASHRAE Standard 90.1-2007 level, also shown. For gas

- fired b oiler combustion efficiencies a t or a bove 82.5
percent, DOE assumed that a stainless steel vent ( e.g. , Type L vent) would typically be required

for installation . For the ASHRAE Standard .90.1-2007 levels, DOE assumed that Type B venting or venting into a ma sonry chimney would suffice in the boiler installation.5- 20 Table 5.6.5 Combustion Efficiency (E
c ) Level Assumed for Onset of Incremental

Installation Costs

Equipment Class Efficiency

Level First Experiencing

Increased Venting C osts Estimated

E

c % E

c ASHRAE

Standard 90.1

- 2007 Baseline (for

comparison) %

Small Gas

- Fired Hot Water 1 83.5 81.5

Small Gas

- Fired Steam All Except Natural Draft 2 83.0 81 .0

Small Gas

- Fired Steam Natural Draft 2 82.5 80.5

Small Oil

- Fi red Hot Water 1 86.5 84.5

Small Oil

- Fired Steam 2 85.5 83.5 Large Gas

- Fired Hot Water 1 83.0 82 .0 Large Gas

- Fired Steam All Except Natural Draft 2 82.5 80.5 Large Gas

- Fired Steam Natural Draft n a * n a * 79 .0 Large Oil

- Fired Hot Water 1 86.0 84 .0 Large Oil

- Fired Steam 2 85.5 83.5

*na means that no efficiency level for this equipment class had a calculated combustion efficiency high enough to require increased installation costs

DOE assumed that when compared with installation of ASHRAE Standard 90.1-2007 efficiency level boilers, installation of new gas boiler installations with efficiency levels at or

above those shown in Table 5.6.5 would experience increased combustion gas venting costs. For

new install ations, the net increas e in venting costs could be estimated as the differential in material price of a Type L vent over a Type B vent with a typical installed length of 35 f ee t of straight pipe plus elbows, cap, and flashing. F or 3 ,000- kBtu /h boilers, a 10- in ch (in.)- diameter

v ent stack was assumed . For 800-kBtu/h boilers a 6- in
.- diameter vent stack was assumed. To
these material prices was added an additional installation cost for the labor for replacement of the venting in a boiler replacement application ( two -thirds of all installations), equivalent to $460.

An additional $250 for controls modifications and $200 for installation of condensate

drain lines was used . DOE assumed that for near condensing boilers, where some condensate may be generated in the flue, a condensate dr ain would need to be added to the flue. For fully condensing boilers where condensate is present at the boiler itself, a condensate pump was also included at a cost of $200 to $300 for 800-kBtu/h and 3000-kBtu/h boilers repectively. Finally,

an additiona l $500 for installation costs specific to replacement of existing boilers with high

efficiency boilers was included. This would include other unspecified costs for replacement, such as additional costs for boilers vented through masonry chimneys. Average i ncremental installation costs for these higher efficiency boilers were calculated to be approximately $4 ,718 and $2,987 for 3 ,000- and 800-kBtu/h fully condensing natural gas boilers, respectively

. Average incremental installation costs for near condensin g boilers were calculated to be approximately $4,518 and $2,787 for 3,000- and 800-kBtu/h near condensing natural gas boilers, respectively. Separate costs were not calculated for the higher efficiency oil -fired boilers, but

were estimated to be similar i n magnitude to those calculated above for gas -fired equipment.

DOE recognizes that costs for installation of higher efficiency boilers and replacement of existing baseline efficiency boilers with higher efficiency boilers are highly uncertain in

commerci al buildings and may vary with individual installations and the different efficiency5- 21 level s between higher efficiency boilers. By contrast with the above estimates, DOE notes that

the installation costs developed in the recent residential furnace and boile r rulemaking 14 were estimated at $1,208 for an 86- percent Annual Fuel Utilization Efficiency ( AFUE ), 105-kBtu/h input capacity gas boiler , and $664 and $629 for an 85- percent AFUE and 90- percent AFUE gas boiler, respectively. Costs for a 140-kBtu/h input ca pacity oil- fired residential boiler were $615

for an 85- percent AFUE boiler, $923 for an 86- percent AFUE boiler, and $1,230 for an 87-
percent AFUE boiler. Table 5.6.6 compares the se incremental cost estimates and the commercial

co st estimates for near -condensing boilers developed for this rulemaking.

Table 5.6.6 Comparison Between Residential and Commercial Incremental Installation Cost for Higher- Efficiency Boilers

Equipment

Class Com mercial Incremental Cost

Estimate (Fixed Amount for

Efficiencies Shown Below) (2008$) Residential Incremental

Cost Estimate (Average of Efficiencies Shown Below) (2008$)

Gas -F ired

Hot-W ater

B oiler 800

- kBtu/h o utput boiler (82% ≤ Et ≤ 86%) 3

, 000

- kBtu/h o utput boiler (81.5% ≤ Et≤ 83.5%) 105

- kBtu/h i nput * b oiler average of AFUE = 85%

and 86%

$ 2,787 or $ 3.48 per kBtu/h output capacity $4

, 518 or $1. 51 per kBtu/h output capacity $936 or $10.43 per kBtu/h output capacity

Oil -F ired HotW ater B oiler 800

- kBtu/h o utput boiler (84% ≤ Et ≤
88% ) 3

, 000

- kBtu/h o utput boiler (84% ≤ Et ≤
86% ) 140

- kBtu/h i nput * * b oiler average of AFUE = 85%

and 86%

$ 2,787 or $3.48 per kBtu/h output capacity $ 4,518 or $1.51 per kBtu/h output capacity $769 or $6. 42 per kBtu/h output capacity

* A pproximately 90

- kBtu/h output capacity

** A pproximately 120

- Btu/h output capacity

DOE notes that these commercial incremental installation cost estimates assume a boiler with a baseline efficiency equivalent to that in AS HRAE Standard 90.1-2007. Where a distribution of boiler efficiencies exists in the market as assumed in the national net present value (NPV) analysis (see chapter 7 ), no incremental installation costs result from moving between an existing high

- efficiency boiler and a replacement existing high

- efficiency boiler.

5.6.1.2 Weighted -Average Total Installed Cost
As presented in Eq. 5.2, the total installed cost is the sum of the equipment price and the

installation price including any incremental installation costs f or higher higher- efficiency equipment. DOE derived the customer equipment price for any given standard level by multiplying the baseline contractor cost by the baseline markup and adding to it the product of

the incremental contractor cost and the incremen tal markup. Because contractor costs, markups, and the sales tax all can take on a variety of values, depending on location, the resulting total5- 22 installed cost for a particular standard level will not be a single -point value, but ra ther a

distribution of v alues.

DOE used t he baseline and incremental markups, the sales tax, the installation costs and

S tate

- by -S tate installation cost indices, shown in Table 5.6.7 , to convert the contractor costs to

total installed costs for a case where the incremental installation costs are held flat. The installation cost indices are factors used to vary the installation costs on a S tate

- by -S tate basis to reflect regional variation in labor and other costs involved in installation. To arriv e at an average
index for each S tate, DOE first weighted city indices from RS Means Costworks in each S tate by their population within the S tate

. DOE used p opulation weights for the year 2000 from the U.S. Census Bureau to calculate a weighted

- average index for eac h S tate from the RS Means data.

Table 5.6.8 summarizes the weighted average or mean costs and markups necessary for determining the weighted

- average baseline and standard

- level 2 total installed costs for the

800- kBtu/h gas

- fire d hot- water boiler as an example . T he weighted -average costs for the 800- kBtu/h gas-fired hot- water boiler equipment class are presented for the baseline level at national average markup rates and national average installation costs. The example presented also applies the corresponding incremental contractor costs and the baseline and incremental markups to provide an indication of the increase in the customer cost due to an increase in rated energy efficiency

. The baseline contractor cost and the standard- level contractor cost increases are the starting points for determining the total installed cost (values are taken directly from Table 5.2.3

and Table 5.2.4 ).

Table 5.6.7 Installation Cost Indices (National Value = 100.0)

State Index State Index State Index

Alabama 0.631 Kentucky 0.842 North Dakota 0.642
Alaska 1.072 Louisiana 0.627 Ohio 1.014
Arizona 0.791 Maine 0.753 Oklahoma 0.615
Arkansas 0.620 Mary land 0.939 Oregon 1.140
California 1.265 Massachusetts 1.235 Pennsylvania 1.229
Colorado 0.860 Michigan 1.070 Rhode Island 1.182
Connecticut 1.266 Minnesota 1.224 South Carolina 0.452
Delaware 1.253 Mississippi 0.600 South Dakota 0.399
Dist. of Columb ia 0.996 Missouri 1.056 Tennessee 0.712
Florida 0.679 Montana 0.774 Texas 0.636 Georgia 0.739 Nebraska 0.881 Utah 1.446
Hawaii 1.195 Nevada 1.425 Vermont 0.700
Idaho 0.768 New Hampshire 0.919 Virginia 0.744
Illinois 1.376 New Jersey 1.327 Washington 1 .080
Indiana 0.889 New Mexico 0.749 West Virginia 0.913

Iowa 0.813 New York 1.719 Wisconsin 1.039

Kansas 0.724 North Carolina 0.453 Wyoming 0.6445- 23 Table 5.6.8 Costs and Markups for 800- kBtu/h Commercial Gas

- Fired Hot- Water Boiler at Efficiency Level 2 at National Average Conditions *

Variable Weighted Average or Mean Value

Baseline Contractor Cost $ 6,294

Standard

- Level Contractor Cost Increase ( Efficiency Level 2 ) $ 3,305 Overall Markup Factor

– Baseline 1. 55 7 Overall Markup Factor

– Incremental 1. 216

Installation Cost

– Baseline $ 6

, 595

Installation Cost

– Incremental $ 2,787

Installation Cost Factor 1.0 **

* Incremental installation costs held flat

. ** National Average Installation Cost Factor defined as 1.0.

T o illustrate the derivation of the weighted -average total installed cost shown in

Table 5.6.8

, DOE presents the calculation below for the baseline ( l evel 0 ) and for a higher efficiency level (l evel 2 ) 800-kBtu/h c ommercial g as -fi red hot-w ater b oiler . For the baseline product, the calculation of the total installed cost at national average conditions is as

follows:

IC BASE = EQP BASE +INST BASE x ISTINDEX Eq. 5.10

= MFG BASE x MU BA SE + INST BASE x ISTINDEX = $ 6,294 x (1. 557 ) + $ 6,595 x ( 1.0) = $9,800 + $ 6,595 x ( 1.0) = $ 16,395

w here

IC = total installed cost ($)

, EQP = equipment price ($)

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

, MFG = contractor cost ($)

,

MU = markup.

The calculation of the higher efficiency level 2 total insta lled cost includes the use of a

contractor cost adder (incremental contractor cost) to which DOE applied an incremental markup.

In view of incremental equipment price changes, DOE based the derivation of the l evel 2 total installed cost on determining the change in equipment price over the baseline equipment price. The contractor cost increment for a higher efficiency level is multiplied by the incremental markup.

DOE calculated the level 2 total installed cost ( IC LEVEL 2 ) as follows:

IC LEVEL2 = EQP LEVEL0 + ∆EQP LEVEL2 + INST LEVEL 2 + ∆INST LEVEL2 Eq. 5.11

= CONT BASE x MU BASE + ∆ CONT LEVEL2

x MU LEVEL2 + (INST LEVEL 0 + ∆INST LEVEL2 ) x ISTINDEX5- 24 = $6,294 x (1.557) + $ 3,305 x (1. 216 ) + ($6,595 + $2,787) x (1.0) = $ 23,201

w here

IC = total installed cost ($)

, EQP = equipment price ($)

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

, MFG = contractor cost ($)

, MU = markup,

ISTINDEX = location dependent multiplier on installation costs , but approximately 1.0 at a national average

.

Table 5.6.9 presents the weighted -average equipment price, installation costs, and total

installed costs for the 800-kBtu/h commercial packaged gas

- fired hot water boiler equipment

class at the baseline level and each higher efficiency level examined

.

Table 5.6.9 Weighted -Average Equipment Price, Installation Cost, and Total Installed

Costs for the 800- kBtu/h Commercial Pa ckaged Hot- Water B oiler a t U.S. Average Prices
(2008$)

Efficiency Level Equipment

Price Installation

Cost Total Installed

Cost * 0 (Baseline) $9,798 $6,596 $16,393
1 $11,068 $9,383 $20,450
2 $13,817 $9,383 $23,200
3 $18,293 $9,383 $27,675
4 $24,792 $9,583 $34,375

* Equip ment price + installation cost may not add to total because of rounding error

. Total is exact.

5.6.2 Operating Cost Inputs

DOE based the operating cost for the LCC analysis on full load -equivalent operating hour

data discussed in TSD chapter 4, the fuel cost estimates for commercial building s, and repair and

maintenance cost data. After the LCC analysis was performed, DOE generated a distrib ution of LCC differences (i.e., the LCC difference between the baseline equipment and equipment with a higher efficiency level) to determine the mean LCC difference, as well as the percentage of buildings analyzed that had LCC savings associated with more efficient equipment.

DOE defined the operating cost by the following equation:

OC = EC+ RC+ MC Eq. 5.12

w here

OC = operating cost ($)

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

, RC = repair cost associated with component failure ($)

,5- 25 MC = service cost for maintaining equipment operation ($).

The remainder of this section provides information about the variables that DOE used to calculate the operating cost for commercial packaged boiler equipment

.

Table 5.6.10 shows the inputs for the determination of operating costs. The lifetim e, discount rate, and effective date of the standard are required for determining the operating cost and for establishing the operating cost present value. The fuel consumption for the baseline (which by definition is efficiency level 0 for the Final Rule) and the other efficiency level s examined ( efficiency level s 1, 2, etc.) determine the principle variable of interest for comparing the lifetime operating costs at different standard levels.

Table 5.6.10 Inpu ts for Operating Costs

Fuel price ($)

Fuel price trend Repair cost ($) Maintenance cost ($)

Lifetime (years)

Discount rate (percent)

Effective date of standard

Baseline annual fuel consumption ( kBtu/yr )

Standard s case annual fuel consumption ( kBtu/ yr )

5.6.2.1 Fuel Price Analysis
Fuel prices are needed to convert the gas or oil energy savings from higher

- efficiency equipment into energy cost savings. Because of the variation in annual fuel consumption savings and equipment costs across the country, DOE cons idered regional differences in fuel prices. This

section describes the development of fuel prices and fuel price forecasts used in the analysis of commercial packaged boilers.

DOE divided the continental United S tates into the 50 S tates and the District of

Columbia. DOE used average effective commercial natural gas and commercial fuel oil prices at

the State level for 2007. These data were initially reported in 2007$. DOE converted these values to 2008$ using the gross domestic product ( GDP ) price de flator 15 . DOE then further adjusted these by the ratio of the national- average commercial natural gas and oil fuel price s in 2007 to that predicted in the AEO 2009. This latter step was used to obtain consistency between the fuel prices used in this analysis and those projected by EIA in the AEO 2009. The effective average state fuel prices (200 8 $) range d from $ 7.71 per thousand (M) Btu to $27.96 per MBtu for natural gas, and from $15.21 per MBtu to $18.04 per MBtu for commercial fuel oil.

DOE weighted the prices each building type paid in each State by the estimated sales of commercial boilers to each building type to obtain a weighted- average national average natural

gas and national average fuel oil price for 2007. The State and building type weights reflect the probabilities that a given boiler unit shipped will operate with a given fuel price.

The natural gas and fuel price trends provide the relative change in fuel costs for future

years to the year 2042. DOE applied the AEO 2009 reference case as the defa ult scenario and5- 26 extrapolated the trend in values from 2020 to 2030 of the forecast to establish prices from 2030 to 2042. This method of extrapolation is in line with methods the EIA uses to forecast fuel prices for the Federal Energy Management Program.

DOE used reported average effective commercial fuel prices at the S tate level from EIA’s State Energy Price Data. 16

, 17 The latest available prices from this source are for the calendar year

2007.

F

PRICE COM STATE 200 7 = F PRICE COM EIA STATE 200 7 x ( GDP DEF,2008 / GDP DEF,2007 ) / ( F

PRICE COM AEO FORECAST

2007 /F PRICE COM NAT 2007 ) Eq. 5.13

w here

F

PRICE COM STATE 2007 = c ommercial sector average fuel price in a State in 2007 (2008$/M Btu ),

GDP DEF , Year = Gros s Dom estic Product Deflator for given year

F

PRICE COM AEO FORCAST 2007 = commercial sector reference case national average forecasted fuel price for 2007 from the 2009 Annual Energy Outlook ($/M Btu)

F

PRICE COM NAT 2007 = c ommercial sector average fuel price in a State in 2007 (2007$/M Btu),

.

F

PRICE COM STATE YEAR = F PRICE COM STATE 200 7 x ( F

PRICE COM AEO FORECAST YEAR /F PRICE COM AEO FORCAST 2007 ) Eq. 5.14

where

F

PRICE COM STATE YEAR = c ommercial sector average fuel price in a State in a given year (2008$/M Btu),

FPRICE COM AEO FORCAST YEAR = commercial sector reference case national average forecasted fuel price for a given year from the 2009 Annual Energy Outlook ($/M Btu)

Table 5.6.11 and Table 5.6.12 provide data about the c ommercial gas and oil prices by State

.5- 27 Table 5.6.11 Estimated Commercial Natural Gas Prices by Stat e (2008 $/ MBtu )

State Commercial

Natural Gas

Price State Commercial

Natural Gas

Price State Commercial

Natural Gas

Price

Alabama 15.12 Kentucky 11.27 North Dakota 8.18

Alaska 7.71 Louisiana 11.11 Ohio 11.59

Arizona 12.82 Maine 13.45 Oklahoma 10 .52

Arkansas 10.31 Maryland 12.16 Oregon 12.41

California 10.31 Massachusetts 15.31 Pennsylvania 12.57

Colorado 8.16 Michigan 10.02 Rhode Island 14.67

Connecticut 12.55 Minnesota 10.17 South Carolina 13.39

Delaware 14.28 Mississippi 11.0 6 South Dakota 9.00

Dist. Of Col. 13.66 Missouri 11.89 Tennessee 11.82

Florida 12.39 Montana 9.84 Texas 9.70 Georgia 13.17 Nebraska 9.22 Utah 7.74

Hawaii 27.96 Nevada 11.75 Vermont 13.09

Idaho 10.67 New Hampshire 15.57 Virginia 11.76

I llinois 10.51 New Jersey 11.97 Washington 12.35

Indiana 10.20 New Mexico 9.95 West Virginia 12.75

Iowa 10.11 New York 11.71 Wisconsin 10.47

Kansas 12.11 North Carolina 12.61 Wyoming 7.77

Table 5.6.12 Estimated Commercial Oil Prices by State (200 7 $/ MBtu )

State Commercial

Fuel Oil

Price State Commercial

Fuel Oil

Price State Commercial

Fuel Oil

Price

Alabama 15.93 Kentucky 16.62 North Dakota 16.46

Alaska 17.01 Louisiana 15.93 Ohio 16.34

A rizona 17.05 Maine 16.72 Oklahoma 16.38

Arkansas 16.23 Maryland 15.90 Oregon 15.90

California 17.32 Massachusetts 16.61 Pennsylvania 16.11

Colorado 16.77 Michigan 17.37 Rhode Island 17.12

Connecticut 16.98 Minnesota 17.88 South Carolina 15.57

Delaware 15.53 Mississippi 16.38 South Dakota 16.31

Dist. Of Col. 16.70 Missouri 16.34 Tennessee 16.78

Florida 15.63 Montana 16.30 Texas 16.27 Georgia 15.34 Nebraska 16.54 Utah 17.07

Hawaii 16.79 Nevada 17.19 Vermont 18.04

Idaho 17.54 New Hampshire 15.86 Virginia 15.21

Illinois 16.95 New Jersey 17.12 Washington 16.94

Indiana 16.46 New Mexico 16.08 West Virginia 16.12

Iowa 16.46 New York 16.22 Wisconsin 17.09

Kansas 16.51 North Carolina 15.36 Wyoming 16.95

Furthermore, different kinds of bu ilding types typically use fuel in different amounts at different times of the day, week, and year, and therefore face different effective prices. To make appropriate adjustments to reflect different usage patterns between building types, DOE used EIA’s 2003 Commercial Buildings Energy Consumption Survey 18 data set to identify the average fuel costs in the seven building types and compared them with the average costs for all5- 28 commercial customers identified in the survey. DOE used the ratios of fuel costs for each of the seven types of buildings to the national average commercial prices seen in the 2003 CBECS as multipliers to adjust the State

- by

- State average commercial price data estimated for 2007.

FPRICE COM BLD I STATE 200 7 = FPRICE COM STATE 200 7 x ( FPRICE BLDG I US 2003 / FPRICE COM US 2003 ) Eq. 5.15

w here

FPRICE COM BLD I STATE 200 7 = average commercial sector fuel price in building type I in a specific state in 2007 ($/ MBtu ),

FPRICE COM STATE 200 7 = average commercial sector fuel price in a specific state in 200 7 ($/ MBtu ),

FPRICE BLDG I US 2003 = national average commercial sector fuel price in building type I in 2003 CBECS ($/ MBtu ),

FPRICE COM US 2003 = national average c ommercial sector fuel price in 2003 CBECS ($/ MBtu ).

Table 5.6.13 shows the derivation of the fuel price ratios from CBECS.

Table 5.6.13 Derived Average Commercial Fuel Price Ratios by Bu ilding Type

Building Type Assembly Education Food

Service Lodging Office Retail Warehouse All Buildings

2003 $/ M B tu (Nat Gas) 8.161 7.660 6.800 6.603 7.702 8.687 8.604 7.624

2003 $/ M B tu (Fuel Oil) 8.374 7.723 7.622 8.380 8.303 7.002 9.447 8.010

Ratio o f Natural Gas Prices to Average of

All Commercial Buildings 1.070 1.005 0.892 0.866 1.010 1.139 1.129 1.000

Ratio of Fuel Oil to Average of All Commercial Buildings 1.045 0.964 0.952 1.046 1.037 0.874 1.179 1.000

Source : CBECS 2003

.

Once the fuel pri ces for the seven commercial building types were adjusted, DOE used the resulting prices in the analysis in conjunction with future fuel price forecast indices from EIA (in real terms, taking into account inflation) to develop future fuel prices as descri bed in section

5.6.2.2

.5- 29 5.6.2.2 Fuel Price Trend s

The fuel price trend s provide the relative change in fuel prices for future years out to the

year 2042. DOE applied a projected trend in national average fuel prices to each customer’ s energy prices. The discussion in this chapter uses the AEO 2009 reference price scenario. In the LCC analysis, the following four scenarios can be analyzed:

1. Constant (real) energy prices at 2008 values (Constant index of 1.0 in F igure 5.6.1 and Figure 5.6.2 )

2. AEO 2009, High Price Case (“High Price” in Figure 5.6.1 and Figure 5.6.2 )

3. AEO 2009 , Reference Case (“ AEO 2009 ” in Figure 5.6.1 and Figure 5.6.2 )

4. AEO 2009 , Low Price Case (“Low Price” in Figure 5.6.1 and Figure 5.6.2 )

Figure 5.6.1 and Figure 5.6.2 show the natural gas fuel and fuel oil price trends for the

three AEO 2009 price projections where prices are assumed to change. DOE extrapolated the values in later years (i.e., after 2030) from their relative sources because AEO 2009 does not

forecast be yond 2030. To arrive at values for these later years, DOE used the price trend from 2020 to 2030 of the forecast to establish prices from the years 2030 to 2044. This method of extrapolation is in line with methods currently used by the EIA to forecast fue l prices for the Federal Energy Management Program.

The default fuel price s trend scenario used in the LCC analysis is the trend from the AEO

2009 Reference Case, shown in Figure 5.6.1 for natural gas and Figure 5.6.2 for fuel oil

. Spreadsheets used in calculating the LCC have the capability to analyze the other fuel price trend scenarios, namely, the AEO 2009 High Price and the AEO 2009 Low Price trends and constant energy prices.5- 30 Gas Price Index Projections

0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

YearIndex (200=1.00) AEO 2009

High Growth

Low Growth

Figure 5.6.1 AEO 2009 Commercial Natural Gas Price Trends

Fuel Oil Index Projections

0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

YearIndex (2007=1.0 AEO 2008

High Growth

Low Growth

Figure 5.6.2 AEO 2009 Commercial Fuel Oil Price Trends5- 31 5.6.2.3 Maintenance and Repair Cost s

Maintenance costs are the costs to the customer of maintaining equipment operation. Maintenance costs include services such as cleaning heat

- exchanger tubes, fireboxes, and burners. Repair costs include costs for repair and replacement of components that fail over the life of the equipment, including repair of controls, burner/blower devices, tubes, and gas regulators. DOE estimated annual routine maintenance costs and repair costs for commercial boiler equipment based on data provided in MARS 8 Facility Cost Forecast System database

. 19

from as $1 ,445 per year for boilers with output capacities of nominally 800 kBtu/h, and $2,835 per year ( $0.945/kB tu -h /yr) for boilers with output capacities of 3,000 kBtu/h, as reported in the MARS 8 Facility Cost Forecast System database. Because data w ere n ot available to indicate how maintenance costs vary with equipment efficiency, DOE decided to use preventive maintenance costs that remain constant as equipment efficiency increases.

The maintenance cost is not the cost associated with the replacement or repair of components that unexpectedly have failed (as discussed above). Rather, it is the cost associated with general maintenance (e.g., checking and maintaining burners, cleaning fireboxes or heat exchanger surfaces, etc ). The cost s for replacement or repair of boiler or boiler system
components that have failed over the normal operational life are considered repair costs. DOE estimated annualized repair costs for commercial boiler equipment also based on data provided

in the MARS 8 Facility Cost Forecast System database

. The MARS database explicitly provides repair costs for commercial boilers of various sizes. Based on the available data, DOE estimated the annualized repair cost for baseline efficiency commercial boilers as $443/yr for boilers with output capacities of nominally 800 kBtu/h, and as $820/yr for boilers with output capacities of 3,000 kBtu/h. DOE assumed that repair costs would increase in direct proportion with increases in equipment prices. As the price of boilers increases with efficienc y, the cost for component repair would also be expected to increase.

DOE based average annual repair costs on the value of the commercial boiler equipment.

Table 5.6.14 shows the average annual repair costs for commercial boile rs by equipment class as developed for the life

- cycle cost analysis

.

Table 5.6.14 Average Annual Repair Cost per Unit (2008$)

Equipment Class Level 0 (Baseline ) Level 1 Level 2 Level 3 Level 4 *
Small, Gas

- fired, Hot Water 443 502 628 834 1,132 Small, Gas

- fired, Steam, All Except natural Draft 443 472 532 625 694 Small, Gas

- fired, Steam, Natural

Draft 443 460 495 548 na Small, Oil

- fired, Hot Water 443 485 572 710 na Small, Oil

- fired, Steam 443 474 538 67 6 na Large, Gas

- fired, Hot Water 820 900 1,070 1,342 2,441 Large, Gas

- fired, Steam, All Except Natural Draft 820 855 892 932 973 Large, Gas

- fired, Steam, Natural

Draft 820 841 885 952 820 Large, Gas

- fired, Hot Water 820 943 1,099 1,263 820 Large, Oil

- fired, Steam 820 855 928 1,040 820

* na means that this efficiency level was not analyzed5- 32 5.6.2.4 Lifetime
DOE defines equipment lifetime as the age when a commercial boiler is retired from

service. DOE reviewed available literature and consulted with manufacture rs to establish typical equipment lifetimes. The literature and experts consulted offered a wide range of typical equipment lifetimes. DOE used a 30- year lifetime for commercial boilers as established in the 2000 Screening Analysis 20 based on data from ASHRAE’s 1995 Handbook of HVAC Applications 21 . DOE continued to use this estimate for the LCC analysis. Other ASHRAE data on commercial equipment life, including boilers, are available through the ASHRAE Equipment Life/Maintenance Cost Survey, maintained online by ASHRAE

. 22 This ASHRAE database currently has data for 152 fuel- fired boilers in commercial buildings, primarily steel fire or

water -tube boilers. Of these, 28 data points represent boilers that have been removed from

service and have a known life. The a verage life for these units removed from service was 20.8 years, but ranged from 10 to 33 years. One hundred twenty-four boiler units in the data set represent boilers currently used in commercial buildings, but with a known installation date and vintage. The data set indicates that the average life of boilers still in operation was 38.4 years, ranging from 3 to 51 years. ASHRAE’s 2007 Handbook of HVAC Applications 23 contains median equipment service life data from the first 163 commercial buildings that wer e used to

create the online database and presents these data along with the older 1995 ASHRAE data for

the user

.

5.6.2.5 Discount Rate
The discount rate is the rate at which future expenditures are discounted to establish their present value. DOE derived the disco unt rates by estimating the cost of capital for companies that purchase commercial packaged boiler equipment. The cost of capital is commonly used to estimate the present value of cash flows to be derived from a typical company project or investment. Most companies use both debt and equity capital to fund investments, so their cost of capital is the weighted average of the cost to the company of equity and debt financing.

DOE estimated the cost of equity financing by using the C apital A sset P ricing Model ( CAPM)

. 24 The CAPM, which is among the most widely used models to estimate the cost of equity financing, assumes that the cost of equity is proportional to the amount of systematic risk associated with a company. The cost of equity financing tends to be high when a company faces a large degree of systematic risk and it tends to be low when the company faces a small degree of systematic risk.

DOE determined the cost of equity financing by using several variables, including the risk coefficient of a company

, 

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

f ), and the additional return expected on assets facing average market risk, also known as the equity risk premium or ERP . The risk coefficient of a company

, 

### β

, indicates the degree of risk associated

wit h a given firm relative to the level of risk (or price variability) in the overall stock market. Risk coefficients usually vary between 0.5 and 2.0. A company with a risk coefficient of

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

2.0 faces twice the overall stock market risk.5- 33 The following equation gives the cost of equity financing for a particular company:

k

e = R f + ( β x ERP) Eq. 5.16

where

k

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

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

### β = the risk coefficient,

ERP = the expected equity risk premium (%).

DOE defined the risk

- free rate as the yield on long -term government bonds. DOE used a

4.8- percent estimate for the ERP based on data from the Damodaran Online 25 site.

The cost of debt financing is the yield or interest rate paid on money borrowed by a company (for example, by selling bonds). As defined here, the cost of debt includes compensation for default risk (the risk that a firm will go bankrupt) and excludes deductions for

taxes. DOE estimated the cost of debt for companies by adding a risk adjustment factor to the current yield on long-term corporate bonds (the risk free rate). It used this procedure to estimate current (and future) company costs to obtain debt financing. It based the adjustment factor on indicators of company risk, such as credit rating or variability of stock returns.

The weighted

- average cost of capital (WACC) of a company is the weighted

- average cost of debt and equity financing:

k =k

e x w e + k d x w d Eq. 5.17

where

k = the (nominal) cost of capital

, expressed as a percentage ; k

e = the expected rate of return on equity

, expressed as a percentage ; k d = the expected rate of return on debt

, expressed as a percentage ;

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

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

The cost of capital is a nominal rate, because it includes anticipated future inflation in the expected returns from stocks and bonds. The real discount rate or WACC deducts expected inflation ( r ) from the nominal rate. DOE calculated expected inflation from the average of the projected change in gross domestic product prices in the Economic Report of the President

. 26

To estimate the WACC of commercial packaged boilers purchasers, DOE used a sample of companies involved in groceries and multi- line retailing drawn from a database of over 7,300 U.S. companies given on the Damodaran Online website. This database includes most of the publicly traded companies in the United S tates.

For the purpose of t he b oiler analysis, DOE relied on discount rate data determined from two other recently published rulemaking activities that relied on this same methodology defined above. These were for the final rule for Packaged Terminal Air C onditioners and Heat Pumps 275- 34 equipment and the Advanced Notice of Public Rulemaking for Beverage Vending Machines. 28

DOE assigned classes of companies as established in these two previous works to be representative of occupants of each of the seven commercial building types on a one-f or -one basis and used the discount rates developed from the Damodaran data to establish average discount rates for the occupants of each of the seven building types.

Table 5.6.15 shows the economic sectors represented in each of the o ccupancy categories assigned to each building type as well as the source data and number of companies used for determining discount rates. Deducting expected long- term inflation of approximately 2 percent from the cost of capital provides the estimat es of the real discount rate by ownership category

shown in Table 5.6.15. For the LCC analysis, a national average analysis result depends on the weighted average of the discount rates shown weighted by the overall estimate of shipments to each building class as determined in chapter 4.

Table 5.6.15 Average Discount Rates by Building Type

Building

Type Assumed Occupancy/Ownership Categories Used Source for Discount Rate Data Number of

O bservations Wt. Averag e Discount Rate (Real, above inflation)

Assembly Public Tax

- Exempt Long

- Term Borrowing Rate (BVM) * 1 2.15%

Education Public Tax

- Exempt Long

- Term Borrowing Rate (BVM) * 1 2.15%

Food Service Retail Trade Damodaran ( B VM) ** 261 5.85% Range: 1.43%

- 9.19%

Lod ging Large Hotel/Motel Chain Damodaran ( Packaged Terminal

Air

- Conditioner ) † 28 5.53% Range: 3.16%

- 7.69%

Office Office/Health Care Damodaran (BVM) ** 1820 4.96% Range: 0.86%

- 13.37%

Retail Retail Trade Damodaran (BVM) ** 261 5.85% Range: 1.43%

- 9.19%

Wareho use Retail Trade Damodaran (BVM) ** 261 5.85% Range: 1.43%

- 9.19%

* Tax Exempt Borrowing Rate

, developed for Beverage Vending Machine analysis. Original s ource: Yahoo Finance Bonds

Center http://finance.yahoo.com/bonds/composite_bond_rates , Accessed 5

- 23

- 2007

** Refrigerated Beverage Vending Machine ANOPR Analysis

, June 2008 . Original source: Damodaran Jan uary 2007 26

† Packaged Terminal Air Conditioner and Heat Pump Final Rule Analysis

, O ctober 2008 . Original source: Damodaran Jan uary 2008 27

5.6.2.6 Effective Date of Standard
The effective date is the future date when a new standard becomes operative. The Energy Policy and Conservation Act of 1975 (EPCA), as amended, directs DOE to establish ener gy conservation standards for certain commercial and industrial equipment, including commercial heating, air -conditioning, and water- heating equipment. Of particular relevance here, the statute also requires that each time the corresponding industry standa rd

— the ASHRAE/Illuminating Engineering Society of North America (IESNA) Standard 90.1— is amended, DOE must assess whether there is a need to update the uniform national energy conservation standards for the5- 35 same equipment covered under EPCA. Specifically, pursuant to EPCA, DOE must, for those equipment classes for which ASHRAE set more stringent efficiency levels (i.e., commercial packaged boilers), analyze the economic and energy savings potential of amended national energy conservation standards (at both the new ASHRAE Standard 90.1 levels and more stringent efficiency levels). Of particular relevance, the statute also requires that each time the corresponding consensus industry standard— ASHRAE /IESNA 90.1—is amended, DOE must

either

a) establish an amended uniform national standard for the product at the minimum level specified in the a mended ASHRAE/IES NA Standard 90.1 and do so not later than 18 months after the date of publication of the amendment to the ASHRAE/IES Standard 90.1 for a product so prescribed, or

b) determine , by rule published in the Federal Register, and supported by clear and convincing evidence, that adoption of a uniform national standard more stringent than the amended ASHRAE/IES Standard 90.1 for the product would result in significant

addit ional conservation of energy and is technologically feasible and economically justified. If such a rule is published, DOE shall, not later than 30 months after the date of publication of the amendment to the ASHRAE/IES Standard 90.1 for the product, issue the rule establishing the amended standard.

A standard for commercial boilers amended by the Secretary under (a) above shall

become effecti ve for products manufactured on or after a date that is 2 years after the effective date of the applicable minimum en ergy efficiency requirement in the amended ASHRAE/IES

standard referred to in ASHRAE Standard 90.1-2007.

A standard for commercial boilers amended by the Secretary under (b) above shall

become effective for products manufactured on or after a date that is 4 years after the date such rule is published in the Federal Register.

ASHRAE published ASHRAE Standard 90.1-2007 on Jan uary 20, 2008. Thus, depending on whether DOE adopts the amended efficiency levels for boilers shown in the ASHRAE Standard 90.1-2007, or publishes a rule that higher standards are economically justified, results in a different effective date for the amended Federal Standard for a product. If DOE adopts the efficiency level established in ASHRAE Standard 90.1-2007 for the Federal standard, it would most likely publish a rule with an effective data in 2012. If DOE determines

that standards with efficiency levels higher than those levels shown in the amended ASHRAE 90.1-2007 are warranted, it would most likely publish a rule establishing high er Federal

stan dards with an effective date of 2014.

Because the purpose of the commercial boiler LCC analysis is to provide information that would allow DOE to determine whether an efficiency standard higher than that proposed in

ASHRAE Standard 90.1-2007 is economically justified, DOE assumes that the default assumption for the baseline product efficiency in the LCC analysis is t he ASHRAE Standard

90.1-2007 efficiency level and that the alternatives being analyzed are higher efficiency levels.

Traditio nally

, since DOE looks at the LCC from the perspective of the customer (for instance in the use of customer discount rates), we are looking at determining the life

- cycle cost impact from the point of view of a customer purchasing equipment. A customer purc hase decision occurs at5- 36 one particular point in time. Typically, DOE uses the first year that a revised standard would be in effect as the first year in the LCC analysis and the LCC is done over one life cycle of the product in question. Becaus e, in the ca se of the ASHRAE products, DOE is looking at whether there are LCC savings for going higher than ASHRAE, the most logical first date at which a consumer could in fact experience savings from an amended standard higher than ASHRAE

levels is July 1, 2014. Ta king into account the time periods in EPCA for putting a rule into place establishing higher standard levels, and the minimum allowed time period before that rule can go into effect ( 4 years after the date of publication ), 2014 would be used as the start y ear for the analysis of all possible efficiency levels higher than ASHRAE Standard 90.1-2007 levels . The analysis is over a time period from the start year to the expected end of life of the commercial packaged boiler.

5.7 PAYBACK PERIOD INPUT S

5.7.1 Definition

The payback period is the amount of time it takes the consumer 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 annual operating expenditures. This type of calculation is known as a “simple” payback period, because it does not take into account changes in operating cost over time or the time v alue of money, that is, the calculation is done at an

effective discount rate of zero percent.

The equation for PBP is as follows:

PBP = ∆ IC / ∆O C Eq. 5.18

where

PB P = p ayback period ( years ),

∆IC = differ ence in the total installed cost between the more efficient standard level

, equipment ( efficiency level s 2, 3, etc.) and the baseline (efficiency level 1) equipment ($)

, 

### ∆ OC = difference in annual operating costs ($)

.

Payback periods are expressed in year s. Payback periods long er than the life of the equipment mean that the increased total installed cost of the more efficient equipment is not recovered in reduced operating costs over the life of the equipment.

5.7.2 Inputs

The data inputs to PBP are the total in stalled cost of the equipment to the customer for each efficiency level and the annual (first year) operating costs for each efficiency level . The inputs to the total installed cost are the equipment price and the installation cost. The inputs to the opera ting costs are the annual energy cost, the annual repair cost, and the annual maintenance

cost. The PBP analysis uses the same inputs as the LCC analysis described in section 5.2 , except
that fuel price trends and discount rates are not required. Because the PBP is a “simple”5- 37 (undiscounted) payback, the required fuel cost is only for the year in which a new energy conservation standard will take effect —in this case, the year 2014. The fuel price used in the

PBP calculation of fu el cost was the price projected for 2014, expressed in 2008$, but not

discounted to 2007.

5.8 LIFE

- CYCLE COST AND PAYBA CK PERIOD RESULTS

5.8.1 Life

- Cycle Cost Results

This section presents LCC results for the higher efficiency levels specified in the engineering an alysis ( TSD chapter 3 ). The results presented here are based on first costs and annual operating costs calculated for each combination of State and building type (i.e.

, defined as a market segment)

, taking into account the estimated shipment weights to all market segments

. Because the values of many of the inputs vary by market segment in this analysis, DOE represents them both as a distribution of values and as an average value for the nation. Thus,

DOE develops the LCC results as a distribution of life -c ycle cost savings values from the

baseline (level 0)

.

5.8.1.1 Differences in L ife -C ycle Cost B etween Baseline and Standard

- Level Equipment

DOE develops estimates of LCC savings for each efficiency level higher than the baseline ( ASHRAE Standard 90.1-2007 equivalent) efficiency level 0. This section presents the

differences in the LCC of higher efficiency level equipment relative to the baseline level

. For each efficiency level analyzed, DOE rank orders the LCC savings calculated for each market segment from low t o high, keeping track of the total weight of shipments to each market
segment . This results in a cumulative distribution of LCC savings.

For reporting purposes, these LCC savings are depicted as a distribution of decile values of LCC and PBP for the population of commercial packaged boiler sales

. Table 5.8.1 shows the resulting distribution of LCC savings for small gas -fired commercial packaged boilers.

Table 5.8.1 also provides the average LCC differenc e for the population along with the percent of the population experiencing at least some level of positive LCC savings compared with the purchase of the baseline equipment. Similar tables for all equipment classes are found in Appendix 5- A.

Table 5.8.1 Distribution of Life -Cycle Cost Savings from Baseline Level for Small GasFired Commercial Packaged Hot Water Boilers *

Efficiency

Level Decrease in LCC from Baseline (Level 0) Shown by Percentiles of the Distribu tion of Results (2008$) Average

LCC Savings Percent

of Units

with LCC

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

Level 1 (5,981) (2,242) (1,200) (518) (19) 593 1,581 2,187 3,918 6,321 21,688 1,700 59%

Level 2 (10,357) (4,471) (2,430) (1,437) (172) 1,512 3,177 4,256 7,160 11,502 42,448 3,239 60%

Level 3 (17,561) (9,946) (7,314) (5,629) (2,967) (653) 1,704 2,926 6,951 12,689 58,553 1,329 44%

Level 4 (28,369) (18,986) (15,763) (13,963) (9,799) (7,417) (4,814) (2,152) 2,411 10,056 69,254 (4,760) 22% *values in parenthesis are negative

As an example of how to interpret the information in Table 5.8.1 ; t he level 2 efficiency

level change in LC C in the zero

- percentile column is a n LC C saving s of

- $1 0,357 , or a net life5- 38 cycle cost to the consumer of $10,357. This means that 100 percent of the market is estimated to have LCC savings greater than this value. For 9 0 percent of the cases studied (90 th percentile), the change in LCC for lev el 2 results in an LCC savings of $11,502 or less as compared with the

ASHRAE baseline level . Consequently, 10 percent of the cases have LCC savings of greater than $11,502. The largest reduction in LCC for level 2 is $42,448 at the 100 th percentile. The mean change in LCC for l evel 2 is a net savings of $ 3,239. The last column shows that 60 percent of

th e sample has LCC savings (i.e., reductions in LCC greater than zero) when compared to the baseline efficiency level

.

Table 5.8.2 provides the national average life

- cycle cost savings calculated for each efficiency level when compared to the baseline (level 0 ) for a ll product categories.

Table 5.8.2 Average Life -Cycle Cost Savings from B aseline Level (Level 0 ) by E fficiency

Level and Equipment Class*

Equipment Class National Average LCC Savin gs ( 200 8 $) ** Percent of Units with Positive LCC Savings

Level

1 Level

2 Level 3 Level 4 Level

1 Level

2 Level

3 Level

4
Small Gas

- Fired Hot Water 1,700 3,239 1,329 (4,760) 59.3% 59.5% 44.2% 22.5%

Small Gas

- Fired Steam All Except Natural Draft (870) (674) (2,423) (3,064) 23.8% 28.5% 21.6% 21.4%

Small Gas

- Fired Steam Natural Draft (50) 1,657 2,184 na 36.0% 55.6% 55.3% na Small Oil

- Fired Hot W ater 4,902 9,770 11,482 na 83.2% 85.9% 69.8% na Small Oil

- Fired Steam 771 2,626 5,406 na 49.4% 60.7% 62.1% na Large Gas

- Fired Hot Water 6,411 11,303 11,324 13,271 83.9% 80.5% 63.1% 52.8% Large Gas

- Fired Steam All Except Natural Draft 7,876 18 ,144 27,941 37,065 89.1% 95.2% 95.8% 95.8% Large Gas

- Fired Steam Natural Draft 9,531 19,836 28,016 33,835 95.0% 95.9% 94.2% 89.2% Large Oil

- Fired Hot Water 26,820 35,114 42,551 na 96.5% 90.3% 87.3% na Large Oil

- Fired Steam 13,940 27,598 37,9 78 59,175 96.8% 96.5% 91.0% 90.4%

* na means that no efficiency level was designated for analysis.
**values in parenthesis are negative.

5.8.2 Payback Period Results

Th is section presents PBP results for each efficiency level higher than the baseline level.

Si milar to LCC discussion, the analysis provides a distribution for the simple PBP for higher efficiency commercial boilers given the sales to the market segments defined by State and building type for each efficiency level. As with the analysis of LCC savin gs , DOE develop ed a cumulative distribution function of the PBP based on the weights assigned to each market segment and the payback results for each market segment. Table 5.8.3 shows the PBP by efficiency level for small gas

- fired commercial package boilers. Similar tables for all other equipment classes are shown in Appendix 5-A of the TSD

. Table 5.8.3 4 shows the national average PBP results for each of the 10 equipment classes analyzed

.5- 39 Table 5.8.3 Summary of P ayback Period Results by Efficiency Level for Small Gas

- Fired Commercial Packaged Boilers

Efficiency

Level Payback Period from Baseline (Level 0) Shown by Percentiles of the Distribution of Results (yr) Aver age Payback

Period

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

Level 1 4.5 7.7 10.1 10.7 12.6 13.8 16.7 19.7 26.2 34.1 100.0 25.4

Level 2 3.7 7.5 8.8 9.5 11.5 13.0 14.5 17.4 22.4 30.7 100.0 30.6
Level 3 4.0 9.0 9.9 10.8 14.0 14.9 17.5 20.3 27.1 36.8 100.0 42.7

Level 4 4.9 11.1 12.1 13.1 17.3 18.3 20.2 25.3 34.3 46.1 100.0 56.7

Table 5.8.4 National Average Payback Periods by Efficiency Level and Equipment Class *

Equipment Class National Average Pay back Period (Years)

Level 1 Level 2 Level 3 Level 4

Small Gas

- Fired Hot Water 25.4 30.6 42.7 56.7

Small Gas

- Fired Steam All Except Natural Draft 41.6 41.8 50.7 50.8

Small Gas

- Fired Steam Natural Draft 30.9 25.4 28.7 na Small Oil

- Fired Hot Water 16.5 17.5 24.0 na Small Oil

- Fired Steam 30.2 29.9 31.9 na Large Gas

- Fired Hot Water 15.3 19.3 28.7 38.3 Large Gas

- Fired Steam All Except Natural Draft 11.8 8.8 8.0 7.8 Large Gas

- Fired Steam Natural Draft 9.1 8.0 9.0 11.0 Large Oil

- Fired Hot Water 8.4 11 .8 14.3 na Large Oil

- Fired Steam 8.5 8.4 10.3 11.5

* na means that no efficiency level was designated for analysis.

5.9 ESTIMATES OF IMPACTE D CUSTOMER S

T he LCC savings and the estimates of the commercial boiler sales with positive LCC savings shown in section 5.8 relat e to the purchase of baseline efficiency equ ipment at the 90.1-2007 efficiency levels for each equipment class. DOE also considers information regarding

the current distribution of efficiencies sold into the market. DOE has no direct data on that distribution, but as a proxy has considered the distribution of efficiencies of boiler models

available to the market. DOE developed estimates of the fraction of impact customers and how

those customers are impacted by making three assumptions : ( 1) DOE assumed that the current distribution of boiler efficiencies sold into the market is equivalent to the distribution of efficiency of models available to the market (based on the augmented DOE database of boile r models discussed in TSD chapter 2); ( 2) DOE assumed that the efficiencies sold into the market

are evenly distributed across all market segments at a national level regardless of the benefits of purchase of higher effic iency equipment (i.e., no correlati on between the positive benefits of higher efficiency levels and the purchase of higher efficiency equipment) ; and ( 3) DOE assumed that the current distribution of shipments of boilers by efficiency levels reasonably approximates the likely future shipments distribution by efficiency levels in the absence of standards.

While each of these assumptions can be argued to be simplistic, together they allo w DOE to estimate the fraction of customers who would likely experience LCC savings compared with5- 40 what they would likely purchase in the absence of an amended DOE standard. F or example

, if only 50 percent of the market currently purchases at an efficiency level below level 2, and the analysis in section 5.8 suggests that 60 percent of the market has a reduced LC C for purchase of equipment at level 2 , then by definition at least 50 percent of the market is not impacted by standards set at level 2 because it already would be expected to purchase equipment at efficiency levels higher than the proposed level 2 standard. Of those that are likely impacted (e.g.

, current customer purchases at efficiency levels below level 2), the fraction benefiting would be expected to be no larger than 60 percent based on the national estimate of customers who benefit for purchases of level 2 when compared to the ASHRAE baseline (level 0)

. Forty percent of the impacted customers would likely see no LCC benefit, again assuming that the distribution of customers benefiting and the distribution of customers purchasing higher efficiency equ ipment

are not correlated.

Proceeding in this fashion, DOE estimate d the total fraction of customers likely to receive LCC benefits assuming that the likelihood of sales into higher efficiency levels represents future sales. The results of this analysis ar e shown in Table 5.9.1

.

Table 5.9.1 Fraction of Customers Impacted by Efficiency Level and Equipment Class *

Equipment Class Percentage Sales Impacted (%)

Level 1 Level 2 Level 3 Lev el 4

Small Gas

- Fired Hot

Water Equipment with Net LCC Increase 9 21 42 64 Equipment with No Change in LCC 77 48 25 18 Equipment with Net LCC Savings 14 31 33 19

Small Gas

- Fired Steam All Except

Natural Draft Equipment with Net LCC Increase 27 58 71 73 Equipment with No Change in LCC 64 19 10 7 Equipment with Net LCC Savings 9 23 19 20

Small Gas

- Fired

Steam Natural Draft Equipment with Net LCC Increase 44 35 43 na Equipment with No Change in LCC 32 22 3 na Equipment with Net LCC Saving s 25 43 54 na

Small Oil

- Fired Hot

Water Equipment with Net LCC Increase 10 10 28 na Equipment with No Change in LCC 39 27 7 na Equipment with Net LCC Savings 51 63 65 na

Small Oil

- Fired

Steam Equipment with Net LCC Increase 29 46 54 na Equipme nt with No Change in LCC 58 24 6 na Equipment with Net LCC Savings 13 30 40 na

Large Gas

- Fired Hot

Water Equipment with Net LCC Increase 8 15 31 45 Equipment with No Change in LCC 51 23 17 6 Equipment with Net LCC Savings 41 62 52 50 Large Gas

- Fired Steam All Except

Natural Draft Equipment with Net LCC Increase 4 4 3 3 Equipment with No Change in LCC 61 26 23 20 Equipment with Net LCC Savings 34 70 74 77

Large Gas

- Fired

Steam Natural Draft Equipment with Net LCC Increase 1 2 4 10 Equip ment with No Change in LCC 88 42 24 7 Equipment with Net LCC Savings 12 55 72 83

Large Oil

- Fired Hot

Water Equipment with Net LCC Increase 2 7 10 na Equipment with No Change in LCC 52 24 24 na Equipment with Net LCC Savings 46 69 66 na

Large Oi l- Fired

Steam Equipment with Net LCC Increase 1 2 8 9 Equipment with No Change in LCC 66 41 16 11 Equipment with Net LCC Savings 33 57 77 81

* na means that no efficiency level was designated for analysis.5- 41 5.9.1 Sensitivit y to Fuel Escalation Rate

The sens itivity to fuel escalation rate was examined using the escalation rates provided in

the AEO 2009 high

- energy price and low- energy price scenarios. Table 5.9.2 and Table 5.9.3 examine the national average LCC saving s for the AEO 2009 low- energy price scenario and

AEO 2009 high

- energy price scenarios respectively . For the high price scenario, while the average LCC savings are increased for most efficiency levels above the baseline when compared

with the reference case , there are no changes in the level showing the highest LCC savings when compared with the results using the AEO 2009 reference case. For the low- energy price scenario, the average LCC savings is reduced for all efficiency levels above the baseline when compared with the reference case (see Table 5.8.2 ). However, there are no changes in the efficiency level showing the highest LCC savings when compared with the results using the AEO 2009 reference

case

The PBP is calculated based on first -year energy savings and thus is insensitive to fuel

escalation rate scenarios.

Table 5.9.2 Average Life -Cycle Cost Savings from a Baseline Level (Level 1) by E fficiency

Level and Equipment Class

– EI A Low Price Scenario *

Equipment Class National Average LCC Savin gs ( 2008 $) ** Percent of Units with Positive LCC Savings

Level 1 Level 2 Level 3 Level 4 Level

1 Level

2 Level

3 Level

4
Small Gas

- Fired Hot Water 1,362 2,579 362 (6,020) 55% 56% 41% 21%

Small Gas

- Fired Steam All Except Natural Draft (1,045) (1,021) (2,937) (3,740) 21% 26% 20% 20%

Small Gas

- Fired Steam Natural Draft (234) 1,293 1,644 na 33% 51% 49% na Small Oil

- Fired Hot Water 3,399 6,833 7,176 na 76% 76% 63% na Small Oil

- Fired S team (8) 1,086 2,398 na 37% 50% 52% na Large Gas

- Fired Hot Water 5,777 10,051 9,468 8,869 83% 78% 62% 50% Large Gas

- Fired Steam All Except Natural Draft 7,218 16,844 26,015 34,529 89% 94% 95% 95% Large Gas

- Fired Steam Natural Draft 8,839 18,4 69 25,991 31,168 95% 96% 93% 89% Large Oil

- Fired Hot Water 21,182 26,757 31,537 na 92% 87% 85% na Large Oil

- Fired Steam 11,017 21,821 29,417 45,238 94% 93% 88% 87%

* na means that no efficiency level was designated for analysis.
**values in par enthesis are negative.5- 42 Table 5.9.3 Average Life -Cycle Cost Savings from a Baseline Level (Level 0 ) by E fficiency

Level and Equipment Class

– EIA High Price Scenario *

Equipment Class National Average LCC Savin gs ( 2008 $) ** Percent of Units with Positive LCC Savings

Level 1 Level 2 Level 3 Level 4 Level

1 Level

2 Level

3 Level

4
Small Gas

- Fired Hot Water 1,450 2,751 614 (5,692) 55% 58% 43% 21%

Small Gas

- Fired Steam All Except Natural Draft (1,000) (931) ( 2,803) (3,564) 21% 27% 20% 21%

Small Gas

- Fired Steam Natural Draft (186) 1,388 1,785 na 33% 53% 53% na Small Oil

- Fired Hot Water 4,042 8,089 9,018 na 78% 80% 65% na Small Oil

- Fired Steam 325 1,745 3,685 na 41% 52% 58% na Large Gas

- Fired Hot Wat er 5,942 10,378 9,952 10,016 83% 79% 62% 52% Large Gas

- Fired Steam All Except Natural Draft 7,390 17,183 26,517 35,190 89% 95% 95% 96% Large Gas

- Fired Steam Natural Draft 9,019 18,825 26,519 31,864 95% 96% 93% 89% Large Oil

- Fired Hot Water 2 3,594 30,333 36,249 na 95% 87% 86% na Large Oil

- Fired Steam 12,267 24,293 33,080 51,201 95% 96% 90% 88%

* na means that no efficiency level was designated for analysis.
**values in parenthesis are negative.

5.10 DETAILED RESULTS

DOE presents more deta iled results for the LCC analysis in Appendix 5-A.5- 43 REFERENCES

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2008. Energy Standard for Buildings Except Low- Rise Residential Buildings

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.
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Available at: http://www.census.gov/prod/ec02/ec0223i236220.pdf

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. Whitestone Research, Washington, D.C.

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.
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. Washington, D.C.5- 45 27 U.S. Department of Energy-Office of Energy Efficiency and Renewable Energy. 2008. Packaged Terminal Air Conditioners and Heat Pumps Energy Conservation Standard Final Rule Technical Support Document and supporting Life Cycle Cos t Analysis Spreadsheet . Available at: http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ptacs_pthps_final _rule.html. (Acce ssed September 2008).

28 U.S. Department of Energy-Office of Energy Efficiency and Renewable Energy. 2008. Refrigerated Beverage Vending Machines Energy Conservation Standard Advance Notice of Proposed Rulemaking Technical Support Document and supporting L ife Cycle Cost Analysis Spreadsheet . Available at: <http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ptacs_pthps_fina l_rule.html.>.> (Accessed September 2008).5- 46 ABBREVIATED TERMS

ACCA Air Conditioning Contractors of America

AEO Annual Energy Outlook

AFUE Annual Fuel Utilization Efficiency

ANOPR Advanced Notice of Proposed Rulemaking

ASHRAE Americ an Society of Heating, Refrigerating and Air -Conditioning

Btu British thermal unit(s)

BVM beverage vending machine

CAPM Capital Asset Pricing Model

CBECS Commercial Buildings Energy Consumption Survey

DOE U.S. Department of Energy

EIA (DOE) Energy Information Administration EPCQ Energy Policy and Conservation Act of 1975

ERP equity risk premium

ft foot(feet)

h hour(s)

HVAC heating, ventilation, and air-conditioning

HVACR heating, ventilation, air -conditioning, and refrigeration

IESNA Illuminating Engineering Society of North America

kBtu/h kilo British thermal units per hour kWh kilowatt hour(s)

LCC life

- cycle cost

MBtu million British thermal units

MCC mechanical contractor cost

NOPR Notice of Proposed Rulemaking

NPV net prese nt value

PBP payback period

PTAC packaged terminal air -conditioner

WACC weighted

- average cost of capital

yr year(s)