12-i 

CHAPTER 12. MANUFACTURER IMPACT ANALYSIS 

12.1 INTRODUCTION ............................................................................................. 12-1

12.2 METHODOLOGY ............................................................................................ 12-1

12.2.1 Phase I: Industry Profile ............................................................................. 12-2

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide .................... 12-3

12.2.2.1 Industry Cash-Flow Analysis ....................................................... 12-3

12.2.2.2 Interview Guides ........................................................................... 12-3

12.2.3 Phase III: Subgroup Analysis ..................................................................... 12-4

12.2.3.1 Manufacturing Interviews ............................................................. 12-4

12.2.3.2 Revised Industry Cash-Flow Analysis.......................................... 12-4

12.2.3.3 Manufacturer Subgroup Analysis ................................................. 12-4

12.2.3.4 Small-Business Manufacturer Subgroup ...................................... 12-5

12.2.3.5 Manufacturing Capacity Impact ................................................... 12-6

12.2.3.6 Employment Impact...................................................................... 12-6

12.2.3.7 Cumulative Regulatory Burden .................................................... 12-6

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES .............................. 12-6

12.3.1 Storage Water Heater Key Issues ............................................................... 12-7

12.3.1.1 Installation Problems for a Significant Number of Consumers .... 12-7

12.3.1.2 Fuel Switching .............................................................................. 12-7

12.3.1.3 Ultra-Low Nitrogen Oxide (NOX) Requirements ......................... 12-7

12.3.1.4 Commercial Installations in Residential Settings ......................... 12-8

12.3.1.5 Profitability ................................................................................... 12-8

12.3.1.6 Appropriateness of Heat Pump Water Heaters ............................. 12-8

12.3.1.7 Issues with Condensing Technology ............................................ 12-9

12.3.1.8 Capital Conversion Costs for Oil-Fired Storage Water Heaters ... 12-9

12.3.2 Gas-Fired Instantaneous Water Heaters Key Issues ................................. 12-10

12.3.2.1 Shipment Trends ......................................................................... 12-10

12.3.2.2 Potential Market Distortion ........................................................ 12-10

12.3.2.3 Retraining Field Technicians ...................................................... 12-10

12.3.2.4 Ultra-Low-NOX Requirements ................................................... 12-10

12.3.3 Traditional Direct Heating Equipment Key Issues ................................... 12-10

12.3.3.1 Consumer Impacts ...................................................................... 12-10

12.3.3.2 Significant Capital and Product Development Costs .................. 12-11

12.3.3.3 Current Market ............................................................................ 12-11

12.3.3.4 Limited Opportunities to Improve Efficiency ............................ 12-11

12.3.3.5 Profitability ................................................................................. 12-11

12.3.4 Gas Hearth Direct Heating Equipment Key Issues ................................... 12-12

12.3.4.1 Loss of Aesthetic Appeal for Decorative Products ..................... 12-12

12.3.4.2 Product Switching and Profitability............................................ 12-12

12.3.4.3 Large Capital and Product Conversion Costs ............................. 12-12

12.3.5 Gas-Fired Pool Heaters Key Issues .......................................................... 12-13

12.3.5.1 Impacts on Consumers ................................................................ 12-13

12.3.5.2 Future Shipment Trends ............................................................. 12-13

12.3.5.3 Concerns about Condensing and Near-Condensing Efficiency Levels 

EE-2006-STD-0129 COMMENT 56.10
12-ii 

 ...................................................................................................... 12-13

12.3.5.4 Future NOX Requirements .......................................................... 12-14

12.4 GRIM INPUTS AND ASSUMPTIONS .......................................................... 12-14

12.4.1 Overview of the GRIM ............................................................................. 12-14

12.4.2 Sources for GRIM Inputs .......................................................................... 12-15

12.4.2.1 Corporate Annual Reports .......................................................... 12-15

12.4.2.2 Standard and Poor Credit Ratings............................................... 12-16

12.4.2.3 Dunn and Bradstreet Reports ...................................................... 12-16

12.4.2.4 Shipment Model.......................................................................... 12-16

12.4.2.5 Engineering Analysis .................................................................. 12-16

12.4.2.6 Manufacturer Interviews ............................................................. 12-16

12.4.3 Financial Parameters ................................................................................. 12-17

12.4.4 Corporate Discount Rate ........................................................................... 12-17

12.4.5 Trial Standard Levels ................................................................................ 12-19

12.4.6 NIA Shipment Forecast ............................................................................ 12-23

12.4.6.1 Base Case Shipments Forecast ................................................... 12-24

12.4.6.2 Standards Case Shipments Forecast ........................................... 12-27

12.4.7 Production Costs ....................................................................................... 12-31

12.4.8 Conversion Costs ...................................................................................... 12-35

12.4.8.1 Capital Conversion Costs ........................................................... 12-35

12.4.8.2 Product Conversion Costs ........................................................... 12-42

12.4.9 Markup Scenarios ..................................................................................... 12-46

12.4.9.1 Preservation of Return on Invested Capital Markup Scenario ... 12-47

12.4.9.2 Preservation of Operating Profit ................................................. 12-51

12.5 INDUSTRY FINANCIAL IMPACTS ............................................................ 12-56

12.5.1 Introduction ............................................................................................... 12-56

12.5.2 Water Heater Industry Financial Impacts ................................................. 12-57

12.5.3 Direct Heating Equipment Industry Financial Impacts ............................ 12-62

12.5.4 Pool Heater Industry Financial Impacts ................................................... 12-66

12.6 IMPACTS ON SMALL DIRECT HEATING EQUIPMENT 

MANUFACTURERS ...................................................................................... 12-67

12.6.1 Impacts on Small Traditional Direct Heating Equipment Manufacturers 12-68

12.6.1.1 Introduction ................................................................................. 12-68

12.6.1.2 Conversion Costs for Traditional Direct Heating Equipment 

Manufacturers ............................................................................... 12-68

12.6.1.3 Estimated Conversion Costs for a Typical Small and Typical Large 

Traditional Direct Heating Equipment Manufacturer ................... 12-69

12.6.1.4 Impact of Conversion Costs on a Typical Small Traditional Direct 

Heating Equipment Manufacturer ................................................ 12-74

12.6.1.5 Conclusion .................................................................................. 12-79

12.6.2 Impacts on Small Gas Hearth Direct Heating Equipment Manufacturers 12-80

12.6.2.1 Introduction ................................................................................. 12-80

12.6.2.2 Conversion Costs for Gas Hearth Direct Heating Equipment 

Manufacturers ............................................................................... 12-80

12.6.2.3 Estimated Conversion Costs for a Typical Small and a Typical Large 

Gas Hearth Direct Heating Equipment Manufacturer .................. 12-81

EE-2006-STD-0129 COMMENT 56.10
12-iii 

12.6.2.4 Impact of Conversion Costs on a Typical Small Gas Hearth Direct 

Heating Equipment Manufacturer ................................................ 12-82

12.6.2.5 Conclusion .................................................................................. 12-83

12.7 OTHER IMPACTS .......................................................................................... 12-85

12.7.1 Employment .............................................................................................. 12-85

12.7.1.1 Methodology ............................................................................... 12-85

12.7.1.2 Gas-Fired and Electric Storage Water Heater Employment Impacts 

 ...................................................................................................... 12-86

12.7.1.3 Oil-Fired Storage Water Heater Employment Impacts .............. 12-88

12.7.1.4 Gas-Fired Instantaneous Water Heater Employment Impacts .... 12-89

12.7.1.5 Traditional Direct Heating Equipment Employment Impacts .... 12-89

12.7.1.6 Gas Hearth Direct Heating Equipment Employment Impacts .... 12-90

12.7.1.7 Pool Heater Employment Impacts .............................................. 12-91

12.7.2 Production Capacity .................................................................................. 12-92

12.7.2.1 Gas-Fired and Electric Storage Water Heaters Capacity Impacts ........ 

 ...................................................................................................... 12-92

12.7.2.2 Oil-Fired Storage Water Heaters Capacity Impacts ................... 12-93

12.7.2.3 Gas-Fired Instantaneous Water Heaters Capacity Impacts ........ 12-94

12.7.2.4 Traditional Direct Heating Equipment Capacity Impacts .......... 12-94

12.7.2.5 Gas Hearth Direct Heating Equipment Capacity Impacts .......... 12-94

12.7.2.6 Gas-Fired Pool Heaters Capacity Impacts .................................. 12-95

12.7.3 Cumulative Regulatory Burden ................................................................ 12-95

12.7.3.1 Federal DOE Regulations for Other Products Produced by Heating 

Product Manufacturers .................................................................. 12-96

12.7.3.2 State Energy Conservation Standards ......................................... 12-98

12.7.3.3 Other State Regulations .............................................................. 12-98

California Lead Regulation ...................................................... 12-98

Standing Pilot Light Ban .......................................................... 12-99

ASME Required Certification.................................................. 12-99

12.7.3.4 State Emission Requirements ..................................................... 12-99

SCAQMD – Ultra-Low-NOX Requirements ........................... 12-99

BAAQMD – Ultra-Low-NOX Requirements ........................... 12-99

Valley Air District – Ultra-Low-NOX Requirements .............. 12-99

TCEQ – Low NOX Requirements .......................................... 12-100

Potential Future NOX Requirements ...................................... 12-100

12.7.3.5 International Energy Conservation Standards .......................... 12-102

Canada Requirements for Residential Electric Storage Tank Water 

Heaters and Gas-Fired Pool Heaters .......................... 12-102

Mexico - Requirements for Residential and Commercial Water 

Heaters ....................................................................... 12-102

12.7.3.6 Uniform Plumbing and Safety Codes ....................................... 12-102

12.7.3.7 Unites States Clean Air Act ...................................................... 12-103

12.8 CONCLUSION .............................................................................................. 12-103

12.8.1 Residential Water Heaters ...................................................................... 12-103

12.8.1.1 Gas-Fired and Electric Storage Water Heaters ......................... 12-103

12.8.1.2 Oil-Fired Storage Water Heaters .............................................. 12-109

EE-2006-STD-0129 COMMENT 56.10
12-iv 

12.8.1.3 Gas-Fired Instantaneous Water Heaters ................................... 12-110

12.8.2 Direct Heating Equipment ...................................................................... 12-111

12.8.2.1 Traditional Direct Heating Equipment ..................................... 12-111

12.8.2.2 Gas Hearth Direct Heating Equipment ..................................... 12-114

12.8.3 Pool Heaters ............................................................................................ 12-115

LIST OF TABLES 

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by 

This Rulemaking ............................................................................................................ 12-5

Table 12.4.1 Financial Parameters Based on 2003-2008 Weighted Company Financial 

Data .............................................................................................................................. 12-17

Table 12.4.2 Cost of Equity Calculation ...................................................................... 12-18

Table 12.4.3 Cost of Debt Calculation......................................................................... 12-19

Table 12.4.4 Water Heater Efficiency Levels and TSLs ............................................. 12-20

Table 12.4.5 Direct Heating Equipment Efficiency Levels and TSLs ........................ 12-22

Table 12.4.6 Pool Heater Efficiency Levels and TSLs ................................................ 12-23

Table 12.4.7 Total NIA Shipments Forecast in 2015 in the Main NIA Shipment Scenario

...................................................................................................................................... 12-23

Table 12.4.8 Breakdown of Total Gas-Fired Storage Water Heater Shipments by Rated 

Storage Volume ........................................................................................................... 12-23

Table 12.4.9 Breakdown of Total Electric Storage Water Heater Shipments by Rated 

Storage Volume ........................................................................................................... 12-24

Table 12.4.10 Breakdown of Total Oil-Fired Storage Water Heater Shipments by Rated 

Storage Volume ........................................................................................................... 12-24

Table 12.4.11 Total NIA Shipments Forecast in 2013 ................................................ 12-24

Table 12.4.12 Base-Case Distribution of Efficiencies for Gas-Fired Storage Water 

Heaters in 2015 (all rated storage volumes) ................................................................ 12-25

Table 12.4.13 Base-Case Distribution of Efficiencies for Total Electric Storage Water 

Heaters in 2015 (all rated storage volumes) ................................................................ 12-25

Table 12.4.14 Base-Case Distribution of Efficiencies for Total Oil-Fired Storage Water 

Heaters in 2015 (all rated storage volumes) ................................................................ 12-25

Table 12.4.15 Base-Case Distribution of Efficiencies for Total Gas-Fired Instantaneous 

Water Heaters in 2015 ................................................................................................. 12-25

Table 12.4.16 Base-Case Distribution of Efficiencies for Total Gas Wall Fan Direct 

Heating Equipment in 2013 ......................................................................................... 12-26

Table 12.4.17 Base-Case Distribution of Efficiencies for Total Gas Wall Gravity Direct 

Heating Equipment in 2013 ......................................................................................... 12-26

Table 12.4.18 Base-Case Distribution of Efficiencies for Total Gas Floor Direct Heating 

Equipment in 2013 ....................................................................................................... 12-26

Table 12.4.19 Base-Case Distribution of Efficiencies for Total Gas Room Direct Heating 

Equipment in 2013 ....................................................................................................... 12-26

Table 12.4.20 Base-Case Distribution of Efficiencies for Total Gas Hearth Direct Heating 

Equipment in 2013 ....................................................................................................... 12-26

EE-2006-STD-0129 COMMENT 56.10
12-v 

Table 12.4.21 Base-Case Distribution of Efficiencies for Total Gas-Fired Pool Heaters in 

2013.............................................................................................................................. 12-27

Table 12.4.22 Distribution of Total Gas-Fired Storage Water Heater Shipments in the 

Standards Case in 2015 (all storage volumes) ............................................................. 12-27

Table 12.4.23 Distribution of Total Electric Storage Water Heater Shipments in the 

Standards Case in 2015 (all storage volumes) ............................................................. 12-27

Table 12.4.24 Distribution of Total Oil-Fired Storage Water Heater Shipments in the 

Standards Case in 2015 (all storage volumes) ............................................................. 12-28

Table 12.4.25 Distribution of Total Residential Gas-Fired Instantaneous Water Heater 

Shipments in the Standards Case in 2015 .................................................................... 12-28

Table 12.4.26 Distribution of Total Gas Wall Fan Direct Heating Equipment Shipments 

in the Standards Case in 2013 ...................................................................................... 12-28

Table 12.4.27 Distribution of Total Gas Wall Gravity Direct Heating Equipment 

Shipments in the Standards Case in 2013 .................................................................... 12-29

Table 12.4.28 Distribution of Total Gas Floor Direct Heating Equipment Shipments in 

the Standards Case in 2013 .......................................................................................... 12-29

Table 12.4.29 Distribution of Total Gas Room Direct Heating Equipment Shipments in 

the Standards Case in 2013 .......................................................................................... 12-29

Table 12.4.30 Distribution of Total Gas Hearth Direct Heating Equipment Shipments in 

the Standards Case in 2013 .......................................................................................... 12-30

Table 12.4.31 Distribution of Total Gas-Fired Pool Heater Shipments in the Standards 

Case in 2013 ................................................................................................................. 12-30

Table 12.4.32 MPC Breakdown for 40-Gallon Gas-Fired Storage Water Heaters* ... 12-32

Table 12.4.33 MPC Breakdown for 50-Gallon Electric Storage Water Heaters ......... 12-32

Table 12.4.34 MPC Breakdown for 32-Gallon Oil-Fired Storage Water Heaters....... 12-32

Table 12.4.35 MPC Breakdown for 199 kBtu/h Gas-Fired Instantaneous Water Heaters

...................................................................................................................................... 12-33

Table 12.4.36 MPC Breakdown for Gas Wall Fan Direct Heating Equipment with an 

Input Rating Greater than 42,000 Btu/h ....................................................................... 12-33

Table 12.4.37 MPC Breakdown for Gas Wall Gravity Direct Heating Equipment with an 

Input Rating Between 27,000 Btu/h and 46,000 Btu/h ................................................ 12-33

Table 12.4.38 MPC Breakdown for Gas Floor Direct Heating Equipment with an Input 

Rating Over 37,000 Btu/h ............................................................................................ 12-33

Table 12.4.39 MPC Breakdown for Gas Wall Gravity Direct Heating Equipment with an 

Input Rating Between 27,000 Btu/h and 46,000 Btu/h ................................................ 12-34

Table 12.4.40 MPC Breakdown for Gas Wall Hearth Direct Heating Equipment with an 

Input Rating Between 27,000 Btu/h and 46,000 Btu/h ................................................ 12-34

Table 12.4.41 MPC Breakdown for Gas-Fired Pool Heaters with a Standing Pilot with a 

250,000 Btu/h Input Rating.......................................................................................... 12-34

Table 12.4.42 MPC Breakdown for Gas-Fired Pool Heaters with Electronic Ignition with 

a 250,000 Btu/h Input Rating ....................................................................................... 12-35

Table 12.4.43 Total Gas-Fired Storage Water Heater Capital Conversion Costs by TSL

...................................................................................................................................... 12-37

Table 12.4.44 Total Electric Storage Water Heater Capital Conversion Costs by TSL .. 12-

37

EE-2006-STD-0129 COMMENT 56.10
12-vi 

Table 12.4.45 Total Oil-Fired Storage Water Heater Capital Conversion Costs by TSL 12-

38

Table 12.4.46 Total Gas-Fired Instantaneous Water Heater Capital Conversion Costs by 

TSL .............................................................................................................................. 12-39

Table 12.4.47 Total Gas Wall Fan Direct Heating Equipment Capital Conversion Costs 

by TSL ......................................................................................................................... 12-40

Table 12.4.48 Total Gas Wall Gravity Direct Heating Equipment Capital Conversion 

Costs by TSL................................................................................................................ 12-40

Table 12.4.49 Total Gas Floor Direct Heating Equipment Capital Conversion Costs by 

TSL .............................................................................................................................. 12-40

Table 12.4.50 Total Gas Room Direct Heating Equipment Capital Conversion Costs by 

TSL .............................................................................................................................. 12-40

Table 12.4.51 Total Gas Hearth Direct Heating Equipment Capital Conversion Costs by 

TSL .............................................................................................................................. 12-41

Table 12.4.52 Total Pool Heater Capital Conversion Costs by TSL ........................... 12-42

Table 12.4.53 Total Gas-Fired Storage Water Heater Product Conversion Costs by TSL

...................................................................................................................................... 12-44

Table 12.4.54 Total Electric Storage Water Heater Product Conversion Costs by TSL . 12-

44

Table 12.4.55 Total Oil-Fired Storage Water Heater Product Conversion Costs by TSL

...................................................................................................................................... 12-44

Table 12.4.56 Total Gas-Fired Instantaneous Water Heater Product Conversion Costs by 

TSL .............................................................................................................................. 12-45

Table 12.4.57 Total Gas Wall Fan Direct Heating Equipment Product Conversion Costs 

by TSL ......................................................................................................................... 12-45

Table 12.4.58 Total Gas Wall Gravity Direct Heating Product Capital Conversion Costs 

by TSL ......................................................................................................................... 12-45

Table 12.4.59 Total Gas Floor Direct Heating Equipment Product Conversion Costs by 

TSL .............................................................................................................................. 12-45

Table 12.4.60 Total Gas Room Direct Heating Equipment Product Conversion Costs by 

TSL .............................................................................................................................. 12-46

Table 12.4.61 Total Gas Hearth Direct Heating Equipment Product Conversion Costs by 

TSL .............................................................................................................................. 12-46

Table 12.4.62 Total Pool Heater Product Conversion Costs by TSL .......................... 12-46

Table 12.4.63 Preservation of Return on Invested Capital Markups for Gas-Fired Storage 

Water Heaters............................................................................................................... 12-47

Table 12.4.64 Preservation of Return on Invested Capital Markups for Electric Storage 

Water Heaters............................................................................................................... 12-48

Table 12.4.65 Preservation of Return on Invested Capital Markups for Oil-Fired Storage 

Water Heaters............................................................................................................... 12-48

Table 12.4.66 Preservation of Return on Invested Capital Markups for Gas-Fired 

Instantaneous Water Heaters ........................................................................................ 12-49

Table 12.4.67 Preservation of Return on Invested Capital Markups for Gas Wall Fan 

Direct Heating Equipment ........................................................................................... 12-49

Table 12.4.68 Preservation of Return on Invested Capital Markups for Gas Wall Gravity 

Direct Heating Equipment ........................................................................................... 12-50

EE-2006-STD-0129 COMMENT 56.10
12-vii 

Table 12.4.69 Preservation of Return on Invested Capital Markups for Gas Floor Direct 

Heating Equipment ...................................................................................................... 12-50

Table 12.4.70 Preservation of Return on Invested Capital Markups for Gas Room Direct 

Heating Equipment ...................................................................................................... 12-50

Table 12.4.71 Preservation of Return on Invested Capital Markups for Gas Hearth Direct 

Heating Equipment ...................................................................................................... 12-51

Table 12.4.72 Preservation of Return on Invested Capital Markups for Gas-Fired Pool 

Heaters ......................................................................................................................... 12-51

Table 12.4.73 Preservation of Operating Profit Markups for Gas-Fired Storage Water 

Heaters ......................................................................................................................... 12-52

Table 12.4.74 Preservation of Operating Profit Markups for Electric Storage Water 

Heaters ......................................................................................................................... 12-52

Table 12.4.75 Preservation of Operating Profit Markups for Oil-Fired Storage Water 

Heaters ......................................................................................................................... 12-53

Table 12.4.76 Preservation of Operating Profit Markups for Gas-Fired Instantaneous 

Water Heaters............................................................................................................... 12-53

Table 12.4.77 Preservation of Operating Profit Markups for Gas Wall Fan Direct Heating 

Equipment .................................................................................................................... 12-54

Table 12.4.78 Preservation of Operating Profit Markups for Gas Wall Gravity Direct 

Heating Equipment ...................................................................................................... 12-54

Table 12.4.79 Preservation of Operating Profit Capital Markups for Gas Floor Direct 

Heating Equipment ...................................................................................................... 12-54

Table 12.4.80 Preservation of Operating Profit Markups for Gas Room Direct Heating 

Equipment .................................................................................................................... 12-55

Table 12.4.81 Preservation of Operating Profit Markups for Gas Hearth Direct Heating 

Equipment .................................................................................................................... 12-55

Table 12.4.82 Preservation of Operating Profit Markups for Gas-Fired Pool Heaters 12-56

Table 12.5.1 Changes in Industry Net Present Value for Gas-Fired and Electric Storage 

Water Heaters (Preservation of Return on Invested Capital Markup Scenario) .......... 12-58

Table 12.5.2 Changes in Industry Net Present Value for Gas-Fired and Electric Storage 

Water Heaters (Preservation of Operating Profit Markup Scenario) ........................... 12-58

Table 12.5.3 Changes in Industry Net Present Value for Oil-Fired Storage Water Heaters 

(Preservation of Return on Invested Capital Markup Scenario) .................................. 12-58

Table 12.5.4 Changes in Industry Net Present Value for Oil-Fired Storage Water Heaters 

(Preservation of Operating Profit Markup Scenario) ................................................... 12-58

Table 12.5.5 Changes in Industry Net Present Value for Gas-Fired Instantaneous Water 

Heaters (Preservation of Return on Invested Capital Markup Scenario) ..................... 12-59

Table 12.5.6 Changes in Industry Net Present Value for Gas-Fired Instantaneous Water 

Heaters (Preservation of Operating Profit Markup Scenario) ...................................... 12-59

Table 12.5.7 Changes in Industry Net Present Value for Traditional Direct Heating 

Equipment (Preservation of Return on Invested Capital Markup Scenario) ............... 12-62

Table 12.5.8 Changes in Industry Net Present Value for Traditional Direct Heating 

Equipment (Preservation of Operating Profit Markup Scenario) ................................ 12-63

Table 12.5.9 Changes in Industry Net Present Value for Gas Hearth Direct Heating 

Equipment (Preservation of Return on Invested Capital Markup Scenario) ............... 12-63

EE-2006-STD-0129 COMMENT 56.10
12-viii 

Table 12.5.10 Changes in Industry Net Present Value for Gas Hearth Direct Heating 

Equipment (Preservation of Operating Profit Markup Scenario) ................................ 12-63

Table 12.5.11 Changes in Industry Net Present Value for Gas-Fired Pool Heaters 

(Preservation of Return on Invested Capital Markup Scenario) .................................. 12-66

Table 12.5.12 Changes in Industry Net Present Value for Gas-Fired Pool Heaters 

(Preservation of Operating Profit Markup Scenario) ................................................... 12-66

Table 12.6.1 Number of Product Lines of a Typical Small Manufacturer .................. 12-69

Table 12.6.2 Number of Product Lines of Typical Large Manufacturer ..................... 12-70

Table 12.6.3 Conversion Costs for a Typical Small Manufacturer for Gas Wall Fan DHE

...................................................................................................................................... 12-70

Table 12.6.4 Conversion Costs for a Typical Large Manufacturer for Gas Wall Fan DHE

...................................................................................................................................... 12-71

Table 12.6.5 Conversion Costs for a Typical Small Manufacturer for Gas Wall Gravity 

DHE ............................................................................................................................. 12-71

Table 12.6.6 Conversion Costs for a Typical Large Manufacturer for Gas Wall Gravity 

DHE ............................................................................................................................. 12-72

Table 12.6.7 Conversion Costs for a Typical Small Manufacturer for Gas Floor DHE.. 12-

72

Table 12.6.8 Conversion Costs for a Typical Large Manufacturer for Gas Floor DHE.. 12-

72

Table 12.6.9 Conversion Costs for a Typical Small Manufacturer for Gas Room DHE 12-

73

Table 12.6.10 Conversion Costs for a Typical Large Manufacturer for Gas Room DHE

...................................................................................................................................... 12-73

Table 12.6.11 Total Conversion Costs for a Typical Small Manufacturer of Traditional 

Direct Heating Equipment (for all traditional DHE) ................................................... 12-74

Table 12.6.12 Total Conversion Costs for a Typical Large Manufacturer of Traditional 

Direct Heating Equipment (for all traditional DHE) ................................................... 12-74

Table 12.6.13 Comparison of a Typical Small Manufacturer’s Gas Wall Fan DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-75

Table 12.6.14 Comparison of a Typical Large Manufacturer’s Gas Wall Fan DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-75

Table 12.6.15 Comparison of a Typical Small Manufacturer’s Gas Wall Gravity DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-76

Table 12.6.16 Comparison of a Typical Large Manufacturer’s Gas Wall Gravity DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-76

Table 12.6.17 Comparison of a Typical Small Manufacturer’s Gas Floor DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-77

Table 12.6.18 Comparison of a Typical Large Manufacturer’s Gas Floor DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-77

Table 12.6.19 Comparison of a Typical Small Manufacturer’s Gas Room DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-77

Table 12.6.20 Comparison of a Typical Large Manufacturer’s Gas Room DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit ..................... 12-78

Table 12.6.21 Comparison of a Typical Small Manufacturer’s Conversion Costs to 

Annual Expenses, Revenue, and Operating Profit (for all traditional DHE) ............... 12-78

EE-2006-STD-0129 COMMENT 56.10
12-ix 

Table 12.6.22 Comparison of a Typical Large Manufacturer’s Conversion Costs to 

Annual Expenses, Revenue, and Operating Profit (for all traditional DHE) ............... 12-79

Table 12.6.23 Number of Product Lines of a Typical Small Gas Hearth DHE 

Manufacturer ................................................................................................................ 12-81

Table 12.6.24 Number of Product Lines of Typical Large Gas Hearth DHE Manufacturer

...................................................................................................................................... 12-81

Table 12.6.25 Conversion Costs for a Typical Small Gas Hearth DHE Manufacturer12-82

Table 12.6.26 Conversion Costs for a Typical Large Gas Hearth DHE Manufacturer12-82

Table 12.6.27 Comparison of a Typical Small Gas Hearth DHE Manufacturer’s 

Conversion Costs to Annual Expenses, Revenue, and Profit ...................................... 12-83

Table 12.6.28 Comparison of a Typical Large Gas Hearth DHE Manufacturer’s 

Conversion Costs to Annual Expenses, Revenue, and Profit ...................................... 12-83

Table 12.7.1 Potential Changes in the Total Number of Domestic Gas-Fired and Electric 

Storage Water Heater Production Workers in 2015 .................................................... 12-87

Table 12.7.2 Potential Changes in the Total Number of Domestic Oil-Fired Storage 

Water Heater Production Workers in 2015 .................................................................. 12-88

Table 12.7.3 Potential Changes in the Total Number of Domestic Traditional Direct 

Heating Production Workers in 2013 .......................................................................... 12-89

Table 12.7.4 Potential Changes in the Total Number of Domestic Gas Hearth Direct 

Heating Equipment Production Workers in 2013 ........................................................ 12-90

Table 12.7.5 Potential Changes in the Total Number of Domestic Pool Heater Production 

Workers in 2013 ........................................................................................................... 12-91

Table 12.7.6 Other DOE and Federal Actions Affecting the Residential Water Heater 

Industry ........................................................................................................................ 12-97

Table 12.7.7 Other DOE and Federal Actions Affecting the Direct Heating Equipment 

Industry ........................................................................................................................ 12-98

Table 12.7.8 Other DOE and Federal Actions Affecting the Pool Heater Industry .... 12-98

Table 12.7.9 Air Quality Management District Low and Ultra-Low-NOX Requirements 

.................................................................................................................................... 12-101

LIST OF FIGURES 

Figure 12.4.1 Using the GRIM to Calculate Cash Flow .............................................. 12-15

Figure 12.5.1 Annual Industry Net Cash Flows for Gas-Fired and Electric Storage Water 

Heaters (Preservation of Return on Invested Capital Markup Scenario) ..................... 12-59

Figure 12.5.2 Annual Industry Net Cash Flows for Gas-Fired and Electric Storage Water 

Heaters (Preservation of Operating Profit Markup Scenario) ...................................... 12-60

Figure 12.5.3 Annual Industry Net Cash Flows for Oil-Fired Storage Water Heaters 

(Preservation of Return on Invested Capital Markup Scenario) .................................. 12-60

Figure 12.5.4 Annual Industry Net Cash Flows for Oil-Fired Storage Water Heaters 

(Preservation of Operating Profit Markup Scenario) ................................................... 12-61

Figure 12.5.5 Annual Industry Net Cash Flows for Gas-Instantaneous Water Heaters 

(Preservation of Return on Invested Capital Markup Scenario) .................................. 12-61

Figure 12.5.6 Annual Industry Net Cash Flows for Gas-Instantaneous Water Heaters 

(Preservation of Operating Profit Markup Scenario) ................................................... 12-62

EE-2006-STD-0129 COMMENT 56.10
12-x 

Figure 12.5.7 Annual Industry Net Cash Flows for Traditional Direct Heating Equipment 

(Preservation of Return on Invested Capital Markup Scenario) .................................. 12-64

Figure 12.5.8 Annual Industry Net Cash Flows for Traditional Direct Heating Equipment 

(Preservation of Operating Profit Markup Scenario) ................................................... 12-64

Figure 12.5.9 Annual Industry Net Cash Flows for Gas Hearth Direct Heating Equipment 

(Preservation of Return on Invested Capital Markup Scenario) .................................. 12-65

Figure 12.5.10 Annual Industry Net Cash Flows for Gas Hearth Direct Heating 

Equipment (Preservation of Operating Profit Markup Scenario) ................................ 12-65

Figure 12.5.11 Annual Industry Net Cash Flows for Gas-Fired Pool Heaters (Preservation 

of Return on Invested Capital Markup Scenario) ........................................................ 12-66

Figure 12.5.12 Annual Industry Net Cash Flows for Gas-Fired Pool Heaters (Preservation 

of Operating Profit Markup Scenario) ......................................................................... 12-67

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CHAPTER 12. MANUFACTURER IMPACT ANALYSIS 

12.1 INTRODUCTION 

In determining whether a standard is economically justified, the U.S. Department of 

Energy (DOE) is required to consider “the economic impact of the standard on the manufacturers 

and on the consumers of the products subject to such a standard.” (42 U.S.C. 6313(a)(6)(B)(i)) 

The law also calls for an assessment of the impact of any lessening of competition as determined 

in writing by the Attorney General. Id. DOE conducted a manufacturer impact analysis (MIA) to 

estimate the financial impact of more stringent energy conservation standards on manufacturers 

of residential water heaters, direct heating equipment (DHE), and gas-fired pool heaters, and 

assessed the impact of such standards on direct employment and manufacturing capacity. 

The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA 

primarily relies on the Government Regulatory Impact Model (GRIM), an industry cash-flow 

model adapted for each product in this rulemaking. The GRIM inputs include information on 

industry cost structure, shipments, and pricing strategies. The GRIM’s key output is the industry 

net present value (INPV). The model estimates the financial impact of more stringent energy 

conservation standards for each product by comparing changes in INPV between a base case and 

the various trial standard levels (TSLs) in the standards case. The qualitative part of the MIA 

addresses product characteristics, manufacturer characteristics, market and product trends, as 

well as the impact of standards on subgroups of manufacturers. 

12.2 METHODOLOGY 

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of 

preparing an industry characterization for the residential water heater, DHE, and pool heater 

industries, including data on market share, sales volumes and trends, pricing, employment, and 

financial structure. In Phase II, “Industry Cash Flow,” DOE used the GRIM to assess the impacts 

of amended energy conservation standards on ten major product types for this rulemaking: 

 Residential Water Heaters 

1) Gas-fired storage water heaters 

2) Electric storage water heaters 

3) Oil-fired storage water heaters 

4) Gas-fired instantaneous water heaters 

Direct Heating Equipment 

5) Gas wall fan direct heating equipment 

6) Gas wall gravity direct heating equipment 

7) Gas floor direct heating equipment 

8) Gas room direct heating equipment 

9) Gas hearth direct heating equipment 

Pool Heaters 

10) Gas-fired pool heaters 

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In Phase II, DOE created a separate GRIM for each of the three heating products and 

separate interview guides to gather information on the potential impacts on manufacturers. These 

interview guides included one for storage water heaters (gas-fired storage, electric storage, and 

oil-fired storage water heaters), one for gas-fired instantaneous water heaters, one for traditional 

DHE (gas wall fan, gas wall gravity, gas floor, and gas room DHE), one for gas hearth DHE, and 

one for gas-fired pool heaters. In the MIA, DOE aggregated the results for similar product 

classes made by the same manufacturers and in the same production facilities to allow DOE to 

better assess the impacts of amended energy conservation standards on manufacturers. 

In Phase III, “Subgroup Impact Analysis,” DOE interviewed manufacturers representing 

over 95 percent of residential storage water heater sales, about 50 percent of gas-fired 

instantaneous water heater sales, approximately 99 percent of traditional DHE sales (gas wall 

fan, gas wall gravity, gas floor, and gas room DHE), over 50 percent of gas hearth DHE sales, 

and about 75 percent of gas-fired pool heater sales. Interviewees included large and small 

manufacturers, providing a representative cross-section of the industries. During interviews, 

DOE discussed financial topics specific to each manufacturer and obtained each manufacturer’s 

view of the industry. The interviews provided DOE with valuable information for evaluating the 

impacts of amended energy conservation standards on manufacturer cash flows, investment 

requirements, and employment. 

DOE groups the MIA results by product classes that are made by the same 

manufacturers. DOE presents results for gas-fired storage and electric storage water heaters 

together because manufacturers typically produce both types of water heaters in the same 

facilities. Results for oil-fired storage and gas-fired instantaneous water heaters are presented 

separately. MIA results for DHE are separated into traditional DHE and gas hearth DHE. Results 

for gas-fired pool heaters are also presented separately. 

12.2.1 Phase I: Industry Profile 

In Phase I of the MIA, DOE prepared a profile of the residential water heater, DHE, and 

pool heater industries that built upon the market and technology assessment prepared for this 

rulemaking. (See chapter 3 of this Technical Support Document (TSD).) Before initiating the 

detailed impact studies, DOE collected qualitative and quantitative financial information and past 

and present market data, including estimated market shares, corporate operating ratios, wages, 

employment, and production cost ratios for several heating product manufacturers. The industry 

profile included a top-down cost analysis of residential water heater, DHE, and pool heater 

manufacturers, from which DOE derived cost and preliminary financial inputs for the GRIM 

analysis (e.g., depreciation; selling, general and administrative expenses (SG&A); and research 

and development (R&D) expenses). 

DOE also used public information to further calibrate its initial characterization of the 

residential water heater, DHE, and pool heater industries, including Securities and Exchange 

Commission (SEC) 10–K reports,1

 Standard & Poor’s (S&P) stock reports,2 Dun and Bradstreet 

(D&B) company profiles,3

 corporate annual reports, and the U.S. Census Bureau’s 2006 Annual 

Survey of Manufacturers (2006 ASM).4 DOE also characterized these industries using 

information from its engineering analysis and the life-cycle cost analysis. 

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12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide 

Phase II focused on the financial impacts of amended energy conservation standards on 

the residential water heater, DHE, and pool heater industries. Amended standards can affect 

manufacturers in these industries in three distinct ways: (1) require additional investment, (2) 

raise production costs, and (3) change revenues through higher prices and possibly lower 

shipments. In Phase II, DOE performed preliminary industry cash-flow analyses and prepared 

written guides for manufacturer interviews. DOE performed a cash flow analysis using a separate 

GRIM for manufacturers of residential water heaters, DHE, and gas-fired pool heaters. 

12.2.2.1 Industry Cash-Flow Analysis 

The GRIM uses several factors to determine a series of annual cash flows from the 

announcement year of amended energy conservation standards until several years after the 

standards’ compliance date. These factors include annual expected revenues, costs of sales, 

SG&A, taxes, and capital expenditures related to the amended standards. Inputs to the GRIM 

include manufacturing costs and selling prices and shipments forecasts developed in other 

analyses. DOE derived the manufacturing costs from the engineering analysis and information 

provided by the industry and estimated typical manufacturer markups from public financial 

reports and interviews with manufacturers. DOE developed alternative markup scenarios for 

each GRIM based on discussions with manufacturers. DOE’s shipments analysis, presented in 

chapter 10 of this TSD, provided the basis for the shipment projections in each GRIM. The 

financial parameters were developed using publicly available manufacturer data and were 

revised with information submitted confidentially during manufacturer interviews. The GRIM 

results are compared to base case projections for each industry. The financial impact of amended 

energy conservation standards is the difference between the base-case and standards-case at each 

TSL discounted annual cash flows. 

12.2.2.2 Interview Guides 

During Phase III of the MIA, DOE interviewed manufacturers to gather information on 

the effects of amended energy conservation on revenues and finances, direct employment, capital 

assets, and industry competitiveness. Before the interviews, DOE distributed an interview guide 

for each major product group: storage water heaters, gas-fired instantaneous water heaters, 

traditional DHE, gas hearth DHE, and gas-fired pool heaters. The interview guides provided a 

starting point to identify relevant issues and help identify the impacts of amended energy 

conservation standards on individual manufacturers or subgroups of manufacturers. Most of the 

information DOE received from these meetings is protected by non-disclosure agreements and 

resides with DOE’s contractors. Before each telephone interview or site visit, DOE provided 

company representatives with an interview guide that included the topics for which DOE sought 

input. The MIA interview topics included (1) key issues to this rulemaking; (2) a company 

overview and organizational characteristics; (3) manufacturer production costs (MPCs) and 

selling prices; (4) manufacturer markups and profitability; (5) shipment projections and market 

shares; (6) product mix; (7) financial parameters; (8) conversion costs; (9) cumulative regulatory 

burden; (10) direct employment impact assessment; (11) exports, foreign competition, and 

outsourcing; (12) consolidation; and (13) impacts on small business. The MIA interview guide 

for storage water heaters also included questions about ultra-low-NOX water heaters, unit 

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shipping methods and associated costs, and alternative energy efficiency equations. The 

interview guides are presented in Appendix 12-A. 

12.2.3 Phase III: Subgroup Analysis 

For its analysis, DOE grouped the impacts on gas-fired and electric storage water heaters. 

DOE also grouped the impacts on traditional DHE. DOE presented the impacts on oil-fired 

storage water heaters, gas-fired instantaneous water heaters, gas hearth DHE, and pool heaters 

separately. While conducting the MIA, DOE interviewed a representative cross-section of 

residential water heater, DHE, and pool heater manufacturers. The MIA interviews broadened 

the discussion to include business-related topics. DOE sought to obtain feedback from industry 

on the approaches used in the GRIMs and to isolate key issues and concerns. During interviews, 

DOE defined one manufacturer subgroup of small businesses that could be disproportionately 

impacted by amended energy conservation standards. For DHE, DOE identified 12 small 

business manufacturers, of which two manufacture traditional DHE, nine manufacture hearth 

products, and one manufactures both. 

12.2.3.1 Manufacturing Interviews 

The information gathered in Phase I and the cash-flow analysis performed in Phase II are 

supplemented with information gathered from manufacturer interviews in Phase III. The 

interview process provides an opportunity for interested parties to express their views on 

important issues privately, allowing confidential or sensitive information to be considered in the 

rulemaking process. 

DOE used these interviews to tailor each GRIM to reflect unique financial characteristics 

of each product group. Within each manufacturer group, DOE contacted companies from its 

database of manufacturers. Small and large companies, subsidiaries and independent firms, and 

public and private corporations were interviewed to provide a representation of the industry. 

Interviews were scheduled well in advance to provide every opportunity for key individuals to be 

available for comment. Although a written response to the questionnaire was acceptable, DOE 

sought interactive interviews, which help clarify responses and identify additional issues. The 

resulting information provides valuable inputs to the GRIMs developed for the product classes. 

12.2.3.2 Revised Industry Cash-Flow Analysis 

In Phase II of the MIA, DOE provided manufacturers with preliminary GRIM input 

financial figures for review and evaluation. During the interviews, DOE requested comments on 

the values it selected for the parameters. DOE revised its industry cash-flow models based on 

this feedback. Section 12.4.3 provides more information on how DOE calculated the parameters. 

12.2.3.3 Manufacturer Subgroup Analysis 

Using average cost assumptions to develop an industry cash flow estimate is not adequate 

for assessing differential impacts among manufacturer subgroups. Small manufacturers and other 

manufacturers with a cost structure significantly different from the industry average could be 

more negatively affected. DOE uses the results of the industry characterization to group 

manufacturers exhibiting similar characteristics. During the interviews, DOE discussed the 

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potential subgroups and subgroup members it identified for the analysis. DOE asked 

manufacturers and other interested parties to suggest what subgroups or characteristics are the 

most appropriate to analyze. As described in section 12.2.3, DOE presents the industry impacts 

by major product groupings. These product groupings represent separate markets served by the 

same manufacturers that are typically produced in the same factories. Grouping these product 

categories reduced the need for a subgroup analysis to the consideration of small manufacturers, 

because the impacts of each group are characterized by the MIA separately. 

12.2.3.4 Small-Business Manufacturer Subgroup 

DOE used the Small Business Administration (SBA) small business size standards 

published on August 22, 2008, as amended, and the North American Industry Classification 

System (NAICS) code, presented in Table 12.2.1, to determine whether any small entities would 

be affected by the rulemaking.a

 For the product classes under review, the SBA bases its small 

business definition on the total number of employees for a business, its subsidiaries, and its 

parent companies. An aggregated business entity with fewer employees than the listed limit is 

considered a small business. 

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by 

This Rulemaking 

Industry Description Revenue Limit Employee Limit NAICS 

Residential Water Heater Manufacturing N/A 500 335228 

Direct Heating Equipment Manufacturing N/A 500 333414 

Pool Heater Manufacturing N/A 500 335228 

DOE used the Air-Conditioning, Heating, and Refrigeration Institute (AHRI),5 the 

Hearth, Patio, and Barbecue Association (HPBA),6

 and the Association of Pool and Spa 

Professionals7 member directories to identify manufacturers of residential water heaters, DHE, 

and pool heaters. DOE also reviewed public certification databases including the California 

Energy Commission (CEC),8 ENERGY STAR,9 and other databases. DOE asked interested 

parties and industry representatives if they were aware of other small business manufacturers. 

Then, DOE consulted publicly available data, reports from vendors such as D&B, and 

manufacturers to determine which manufacturers meet SBA’s definition of a small business. 

Based on this analysis, DOE estimates that five residential water heater manufacturers, 12 

DHE manufacturers, and one pool heater manufacturer are considered small businesses. DOE 

attempted to contact the small business to solicit feedback on the potential impacts of energy 

conservation standards. The businesses replied with varying amounts of information in written 

responses and/or interviews. In addition to posing the standard MIA interview questions, DOE 

solicited data on differential impacts these companies might experience from amended energy 

conservation standards. 

DOE found that small water heater and pool heater manufacturers were focused on 

manufacturing products not covered by this rulemaking. Of those products that are covered, most 

already meet the proposed standards and would not be differentially impacted. However, many 

 

a

 The size standards are available on the SBA’s website at 

www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf. 

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small DHE manufacturers could be differentially impacted by amended energy conservation 

standards. DOE reports the potential impacts on small DHE manufacturers in section 12.6. 

12.2.3.5 Manufacturing Capacity Impact 

One significant outcome of amended energy conservation standards could be the 

obsolescence of existing manufacturing assets, including tooling and investment. The 

manufacturer interview guides have a series of questions to help identify impacts of amended 

standards on manufacturing capacity, specifically capacity utilization and plant location 

decisions in the United States and North America, with and without amended standards; the 

ability of manufacturers to upgrade or remodel existing facilities to accommodate the new 

requirements; the nature and value of any stranded assets; and estimates for any one-time 

changes to existing plant, property, and equipment (PPE). DOE’s estimates of the one-time 

capital changes and stranded assets affect the cash flow estimates in the GRIMs. These estimates 

can be found in section 12.4.8; DOE’s discussion of the capacity impact can be found in section 

12.7.2. 

12.2.3.6 Employment Impact 

The impact of amended energy conservation standards on employment is an important 

consideration in the rulemaking process. To assess how domestic direct employment patterns 

might be affected, the interviews explored current employment trends in the residential water 

heater, DHE, and pool heater industries. The interviews also solicited manufacturer views on 

changes in employment patterns that may result from more stringent standards. The employment 

impacts section of the interview guide focused on current employment levels associated with 

manufacturers at each production facility, expected future employment levels with and without 

amended energy conservation standards, and differences in workforce skills and issues related to 

the retraining of employees. The employment impacts are reported in section 12.7.1. 

12.2.3.7 Cumulative Regulatory Burden 

DOE seeks to mitigate the overlapping effects on manufacturers due to amended energy 

conservation standards and other regulatory actions affecting the same products. DOE analyzed 

the impact on manufacturers of multiple, product-specific regulatory actions. Based on its own 

research and discussions with manufacturers, DOE identified regulations relevant to residential 

water heater, DHE, and pool heater manufacturers, such as State regulations and other Federal 

regulations that impact other products made by the same manufacturers. Discussion of the 

cumulative regulatory burden can be found in section 12.7.3. 

12.3 MANUFACTURER IMPACT ANALYSIS KEY ISSUES 

Each MIA interview starts by asking: “What are the key issues for your company 

regarding the energy conservation standard rulemaking?” This question prompts manufacturers 

to identify the issues they feel DOE should explore and discuss further during the interview. The 

following section describes key issues manufacturers mentioned for all product classes under 

review. 

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12.3.1 Storage Water Heater Key Issues 

12.3.1.1 Installation Problems for a Significant Number of Consumers 

During interviews, manufacturers stated that the majority of water heater shipments are 

replacements for the large installed base. Most of the existing stock does not meet the current 

baseline energy factors (EFs). Some manufacturers commented that amended energy 

conservation standards could create serious installation problems for some replacements if unit 

size increases. More efficient storage water heaters are typically larger because of thicker 

insulation and technology-specific components. Many higher efficiency units will not fit into the 

existing spaces in condos, apartments, manufactured homes, and mobile homes, where 

installations are typically in small utility closets designed for individual heating and water 

installation with small volume water heaters. Installing larger replacement water heaters in these 

locations would be prohibitively expensive if the structure had to be altered. In some States, 

especially in the Southeast, water heaters and furnaces are typically located in the attic. If the 

size of the water heater significantly increases, the water heaters would no longer fit through the 

attic opening. 

According to manufacturers, gas-fired storage water heaters installation can be 

problematic in other ways as well. Almost any improvement over baseline units requires an 

installation with appropriate venting and fresh air, which might not be possible in a utility closet 

or attic. These consumers would incur additional costs from adding line power and installing a 

more expensive power venting unit if the new water heater fit in the existing space. 

Depending on the stringency of the amended energy conservation standard, these 

problems could cause some consumers to incur thousands of dollars in installation costs. At a 

minimum, manufacturers were concerned that consumers could be forced to switch to smaller 

capacity units, which could affect consumer utility if the change results in insufficient hot water. 

Manufacturers are also concerned that costly replacements could lead consumers to undertake 

unsafe repairs themselves to prolong the life of the existing water heater rather than pay for a 

substantially more expensive replacement. 

12.3.1.2 Fuel Switching 

All of the interviewed manufacturers expressed concern that this energy conservation 

standard rulemaking could cause fuel switching. While most storage water heater manufacturers 

also sell gas-fired instantaneous water heaters, storage manufacturers are concerned that a more 

aggressive standard on gas-fired and electric storage units could increase the market penetration 

of gas-fired instantaneous water heaters by lowering the first cost differential. Increased 

penetration of gas-fired instantaneous water heaters would reduce the shipments of storage water 

heaters, resulting in lower profitability for storage water heater manufacturers if they lose market 

share to companies that exclusively manufacture instantaneous water heaters. 

12.3.1.3 Ultra-Low Nitrogen Oxide (NOX) Requirements 

Manufacturers of gas-fired storage water heaters are concerned about the high product 

development costs to meet the ultra-low-NOX requirements in some regions of the Southwest. 

Manufacturers are particularly concerned that higher EFs, lower NOX emissions, and compliance 

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with existing safety regulations are often at odds. Manufacturers also stated that the higher cost 

of the ultra-low-NOX gas storage water heaters would hurt consumers in those regions and could 

cause them to switch to less expensive electric storage units. 

12.3.1.4 Commercial Installations in Residential Settings 

Manufacturers agreed with the current definitions for residential storage water heaters. 

Manufacturers added that DOE should not encourage the installation of commercial products that 

could pose safety concerns in residential settings. Manufacturers stated that this could be more of 

an issue with future gas-fired storage products that combine higher input ratings and less storage 

capacity. 

12.3.1.5 Profitability 

 Manufacturers stated that amended energy conservations standards could affect 

profitability. At any TSL, manufacturers will be forced to discontinue some of their existing 

products and make potentially significant product and plant modifications. If manufacturers earn 

a lower markup for more efficient products after the amended energy conservation standard, their 

profit margin would decrease. Energy conservation standards could also harm profitability by 

eliminating opportunities to up-sell more efficient units that earn a greater absolute profit. While 

manufacturers generally agree with DOE’s MPC estimates, many noted that product offerings 

are segmented into multiple models made at various production locations. Multiple product 

offerings could make it more difficult to reach the price points DOE calculates. Higher 

production costs would result in lower margins than those DOE assumes and less profitability. 

12.3.1.6 Appropriateness of Heat Pump Water Heaters 

Heat pump water heaters are effectively required for all rated storage volumes at TSL 6 

and TSL 7 and for a portion of the market at TSL 5 for electric storage water heaters to meet the 

specified efficiency level. Most electric storage water heater manufacturers disagreed with 

DOE’s decision to include heat pump water heaters in the electric storage water heater product 

class. In addition, all electric storage water heater manufacturers agreed that this technology is 

only appropriate for the ENERGY STAR level, not the minimum required efficiency. While 

many manufacturers intend to design heat pump water heaters in response to ENERGY STAR 

criteria or are currently doing so, manufacturers believe that setting a minimum standard during 

the design phase could cause serious and negative consequences. 

Manufacturers listed many reasons why this technology is not ready to be applied across 

the millions of electric storage water heaters needed to satisfy demand. A significant problem is 

that heat pump water heaters could not be installed in a large portion of existing homes without 

substantial and costly modifications to the structure, causing some consumers to incur 

tremendous costs. Several manufacturers commented that the technology has not been fully 

developed and has not yet been proven reliable for large scale manufacturing. Some 

manufacturers are concerned that any problems that arise with applying the technology across 

millions of electric storage water heaters that could not be proven by the compliance date of the 

rule would cause significant harm to their industry. Manufacturers anticipate other problems with 

the production of heat pump water heaters if the standard were set at TSL 6 or 7. For example, 

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there is almost no existing capacity to manufacture water heaters that use heat pump technology, 

especially on the scale that an amended energy conservation standard would require. Requiring 

over 4 million annual shipments in 2015 could lead to acquisition problems because component 

suppliers are not prepared for such an increase in demand. In particular, acquiring sufficient 

compressors, thermal expansion valves, and other purchased parts to meet market demand could 

be a challenge. 

Manufacturers added that setting the energy conservation at a level effectively requiring 

the use of heat pump technology would cause many negative impacts on the industry even if the 

technology were proven by the compliance date specified in the final rule. Because of the 

increased labor required, manufacturers would consider shifting a considerable portion of 

production overseas to obtain viable production costs, as was true for the residential airconditioning industry. Domestic employment in the industry would be affected because only part 

of the production would likely remain in the United States after the compliance date of the 

amended energy conservation standard. 

Manufacturers also stated they would also incur significant conversion costs if the 

standard level effectively mandates heat pump water heaters. Every main assembly line and 

feeder line would need modifications to integrate the new assembly into existing production 

facilities. Finally, manufacturers would face a significant challenge to retrain their service 

technicians and installers for a completely new technology. Because the technology has not been 

fully developed, the skills needed to service and install heat pump water heaters have also not 

been developed. However, manufacturers indicated that their existing technicians do not have the 

combination of plumbing and HVAC skills that would be required. 

12.3.1.7 Issues with Condensing Technology 

Condensing gas-fired water heaters are effectively required for all rated storage volumes 

at TSL 7 and for large rate storage volumes at TSL5. According to manufacturers, customers and 

manufacturers would be harmed if the gas-fired storage water heater energy conservation 

standard were set at these TSLs. Currently, no manufacturer offers residential condensing water 

heaters. Because of the very low volumes for commercial applications, the technology and 

manufacturing capabilities for condensing residential storage water heaters on a large scale are 

not fully developed. The technology is available only in commercial storage water heaters and 

would need to be applied to much lower output capacity and would require substantial product 

development. Manufacturers would also need to make extensive assembly and sub-assembly line 

changes as well as add equipment to manufacture new coils and tanks. Some manufacturers also 

indicated that this technology was not appropriate for all installations, as line power, special 

venting, and condensate management are needed. 

12.3.1.8 Capital Conversion Costs for Oil-Fired Storage Water Heaters 

Oil-storage manufacturers indicated that capital conversion costs for oil-fired storage 

water heaters at higher efficiency levels, while perhaps not appearing prohibitively large on a 

nominal basis, are extremely significant relative to the size of oil-fired water heater shipments. 

At any level above TSL 1, at least one manufacturer with substantial market share indicated that 

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there is a real risk that these capital and product conversion costs could cause the company to 

exit the market. 

12.3.2 Gas-Fired Instantaneous Water Heaters Key Issues 

12.3.2.1 Shipment Trends 

Some manufacturers expressed concern over using the Australian study from the 

preliminary analysis to determine the market penetration of gas-fired instantaneous water 

heaters.10 Some manufacturers stated that Australian government programs made the price points 

for instantaneous water heaters lower, which could affect their adoption in the United States. 

12.3.2.2 Potential Market Distortion 

Manufacturers stated that amended energy conservation standard could greatly affect the 

market penetration of gas-fired instantaneous water heaters. If the prices were greatly increased 

relative to storage water heaters, market penetration could be slowed. A drastic increase in the 

required efficiency (at TSL 7) could disrupt current arrangements with overseas suppliers or 

parent companies and limit product availability in the United States. 

12.3.2.3 Retraining Field Technicians 

Manufacturers stated that an energy conservation standard mandating condensing gasfired instantaneous water heaters at TSL 7 would add a significant burden on manufacturers, who 

would have to retrain their service and field technicians. 

12.3.2.4 Ultra-Low-NOX Requirements 

Manufacturers of gas-fired instantaneous water heaters expressed great concern about the 

conflicting requirements of more stringent EF requirements and pending ultra-low-NOX

requirements. At most efficiency levels, manufacturers commented that there is a tradeoff in 

burner design between higher efficiency and lower NOX emissions. Manufacturers indicated that 

they have not found a solution and are very concerned about concurrently meeting the ultra-lowNOX requirements and the energy conservation standards. 

12.3.3 Traditional Direct Heating Equipment Key Issues 

12.3.3.1 Consumer Impacts 

Manufacturers remarked that energy conservation standards could hurt consumers, 

arguing that many existing installations cannot be replaced with more efficient units because of 

space considerations. Customers that choose these units would either have to pay for structural 

modifications or switch to a different heat source. Some manufacturers also noted that 

improvements in efficiency for the most common type of traditional DHE (gas wall gravity 

DHE) have long payback periods at any TSL. 

All manufacturers stated that gas wall gravity and gas room DHE provide a unique utility 

because they can operate in the event of a power failure. Manufacturers stated that consumers 

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could lose this utility if these products required line power because it could leave many without a 

backup source of heat. 

12.3.3.2 Significant Capital and Product Development Costs 

Manufacturers stated that any product conversion or capital conversion cost would be 

difficult to justify because of the very low shipment volumes of each product line. Manufacturers 

remarked that any required investments could force them to reduce their product offerings at best 

and permanently exit the market at worst. Due to the large number of product offerings that 

would need to be recertified and/or redesigned, some manufacturers argued that 3 years would 

not be enough lead time. Because shipment volumes are so low, any investment would 

significantly add to the final cost of the product, assuming that manufacturers could pass part of 

the increased cost on to consumers. 

Manufacturers are also concerned that higher production costs could drive more 

consumers to purchase a central system rather than replace their failed direct heating system. If 

shipments declined at all, manufacturers stated they would be less able to justify the required 

investment to upgrade products and product lines, which would hurt their industry further. All 

manufacturers said that energy conservation standards are a real threat to their business and 

could cause them to exit the market completely. 

12.3.3.3 Current Market 

Manufacturers expressed concern about the low-volume of the DHE market. Besides low 

shipment volume, the number of manufacturers also has been declining over the past decade. 

Because shipments are mostly low-volume replacements, manufacturers stated that most of the 

traditional DHE market has become a niche. 

12.3.3.4 Limited Opportunities to Improve Efficiency 

 Manufacturers commented that most products on the market today have limited 

opportunities to improve efficiency. Because these products have been through many 

development lifecycles, opportunities to save energy cost effectively for consumers have been 

implemented. 

12.3.3.5 Profitability 

Manufacturers believe that energy conservation standards could reduce profitability 

because more efficient products include more purchased parts. Manufacturers were concerned 

that expensive purchase parts could lower profitability because they would earn a lower margin 

on units in which they assemble rather than manufacture most of the final product 

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12.3.4 Gas Hearth Direct Heating Equipment Key Issues 

12.3.4.1 Loss of Aesthetic Appeal for Decorative Products 

According to manufacturers, all gas hearth products primarily have an aesthetic function 

in addition to a heating function. Gas hearth DHE are used mostly to zone heat when occupants 

are in close proximity or to supplement a central heating system, and only rarely as a primary 

heating source. 

Because gas hearth DHE are decorative items in residences, manufacturers believe that 

energy conservation standards could have a different impact on their industry than other products 

covered by this rulemaking. Gas hearth manufacturers stated that the utility of the heating 

products used strictly for heating is not affected by the appearance of the products and would not 

be affected at any standard level. That is, the utility of water heaters would not be affected by 

amended energy conservation standards as long as hot water is still delivered. Hearth 

manufacturers stated that due to the low usage patterns, consumers choices are typically not 

driven by energy efficiency. Since the aesthetic appeal of their products could be greatly 

compromised by amended energy efficiency standards, demand for their products could diminish 

at higher efficiency standards. Manufacturers stated that they earn premiums for aesthetic 

features such as better-looking flames and better looking masonry, rather than higher efficiency. 

Multiple manufacturers stated that the yellow flames that consumers look for in a log set depend 

on a rich gas-to-air mixture, which inherently limits the achievable energy efficiency. Hence, at 

higher efficiency levels it becomes more difficult to improve efficiency and maintain a desirable 

flame color, an impact that is hard to measure yet which could have a significant effect on the 

industry. 

12.3.4.2 Product Switching and Profitability 

Because the aesthetic appeal of the unit and the flame are critical features, manufacturers 

believe that overly-stringent energy conservation standards could cause customers to switch to 

non-covered hearth products like wood burning stoves or strictly decorative units if the energy 

conservation standards greatly raised product prices. This is particularly true for builders, who 

purchase a significant portion of the available gas hearth products. 

Besides higher prices potentially causing a switching to non-covered products, 

manufacturers were also concerned that more stringent standards had the potential to lower 

demand. At higher costs, manufacturers believe that customers would no longer regularly 

purchase inserts for existing homes or that that gas hearth products in new homes would become 

an option rather than a standard feature. Manufacturers also believe that a shrinking market 

would reduce profits. 

12.3.4.3 Large Capital and Product Conversion Costs 

According to manufacturers, much of the existing production equipment is hard tooled. 

An energy conservation standard that greatly changes the assembly of current product lines 

would increase capital conversion costs and result in stranded assets. At TSL 4 and above, much 

of the capital conversion costs are expected to involve changes to hard tooling to handle new 

EE-2006-STD-0129 COMMENT 56.10
12-13 

materials like additional insulation and baffling, changes to the heat shields, and new stamping 

dies. 

All manufacturers indicated that product conversion costs could also be significant due to 

the large number of models currently on the market. In addition, manufacturers believe they 

could face product development problems for certain products. More stringent annual fuel 

utilization efficiency (AFUE) requirements would be harder to reach with manufacturers’ higher 

volume product lines, such as built-in direct vent fireplaces. Conversely, it is easier to meet 

higher efficiencies with less-popular, free-standing stoves because they can radiate heat in more 

directions. Finally, manufacturers said the product development resources used to meet an 

energy conservation standard that greatly increases efficiency could negatively impact their 

existing products because resources would be shifted away from aesthetic elements. 

12.3.5 Gas-Fired Pool Heaters Key Issues 

12.3.5.1 Impacts on Consumers 

Manufacturers stated that energy conservation standards set above an efficiency level 

achievable using atmospheric technology (TSL 3 through TSL 6) could hurt consumers. 

According to manufacturers, customers will not recoup the initial higher costs with lower utility 

bills at these TSLs. Because most residential pool heaters are a luxury item with low usage 

patterns, most customers do not currently purchase units at TSL 4 and above. Thus, 

manufacturers stated that more-efficient residential pool heaters are only appropriate in 

commercial settings (e.g., hotels, gyms) because the higher usage allows such customers to 

recoup the higher initial costs. 

12.3.5.2 Future Shipment Trends 

Manufacturers commented that pool heater shipments follow new housing starts. Because 

the new housing market is down, manufacturers have lowered their projections for future pool 

heater sales as well. Manufacturers also do not expect future shipments to return to historical 

levels as recent new housing starts have increasingly been on smaller lots that do not have the 

room to accommodate swimming pools. 

Manufacturers are concerned that energy conservation standards could further decrease 

future sales. Because pool heaters are not a necessity, the higher initial cost could dissuade some 

consumers from replacing a failed unit or adding a heater to a new pool or spa. Manufacturers 

are also concerned that a higher price point for gas-fired pool heaters could hurt future shipments 

by making alternatives like solar or heat pump pool heaters comparatively cheaper. 

Manufacturers stated that this trend is already a concern because a few States and utilities have 

offered subsidies for solar water heaters. 

12.3.5.3 Concerns about Condensing and Near-Condensing Efficiency Levels 

Based on the engineering technology options, TSL 5 would require near-condensing 

technologies and TSL 6 would require a fully condensing pool heater. Because of the 

significantly higher costs of near-condensing and condensing products and the lack of a payback 

for most customers, the majority of gas-fired pool heater shipments are atmospheric units. 

EE-2006-STD-0129 COMMENT 56.10
12-14 

Manufacturers indicated that there would be significant capital conversion costs if the energy 

conservation standard were set at a level that eliminated these atmospheric products (TSL 5 and 

TSL 6. 

Some manufacturers have additional concerns about non-atmospheric technologies. 

These manufacturers indicated that at higher efficiencies, products become more complicated 

and can result in higher maintenance costs. Condensing models especially introduce more 

complications to managing condensate, which can cause the units to be less reliable. 

Manufacturers indicated that these reliability and maintenance concerns also occur at nearcondensing levels. Because many of the costly components necessary to manage condensate are 

required at near-condensing levels (TSL 5), some manufacturers expect the market to move to 

fully condensing products if DOE sets the energy conservation standard at TSL 5. 

12.3.5.4 Future NOX Requirements 

Residential gas-fired pool heaters are currently exempt from ultra-low-NOX requirements 

in the Southwest air quality management districts. However, most manufacturers expressed 

concern over future requirements. If air quality management districts set more restrictive NOX

requirements, some manufacturers may be required to undertake a costly redesign of their burner 

systems. 

12.4 GRIM INPUTS AND ASSUMPTIONS 

The GRIM serves as the main tool for assessing the impacts on industry due to amended 

energy conservation standards. DOE relies on several sources to obtain inputs for the GRIM. 

Data and assumptions from these sources are then fed into an accounting model that calculates 

the industry cash flow both with and without amended energy conservation standards. 

12.4.1 Overview of the GRIM 

 The basic structure of the GRIM, illustrated in Figure 12.4.1, is an annual cash flow 

analysis that uses manufacturer prices, manufacturing costs, shipments, and industry financial 

information as inputs, and accepts a set of regulatory conditions such as changes in costs, 

investments, and associated margins. The GRIM spreadsheet uses a number of inputs to arrive at 

a series of annual cash flows, beginning with the base year of the analysis, 2010, and continuing 

to 2043 for DHE and gas-fired pool heaters, and extending to 2045 for water heaters. The model 

calculates the INPV by summing the stream of annual discounted cash flows during this period.11

EE-2006-STD-0129 COMMENT 56.10
12-15 

Figure 12.4.1 Using the GRIM to Calculate Cash Flow 

The GRIM projects cash flows using standard accounting principles and compares 

changes in INPV between the base-case and the standard-case scenario induced by amended 

energy conservation standards. The difference in INPV between the base case and the standard 

case(s) represents the estimated financial impact of the amended energy conservation standard on 

manufacturers. Appendix 12-A provides more technical details and user information for the 

GRIM. 

12.4.2 Sources for GRIM Inputs 

The GRIM uses several different sources for data inputs in determining industry cash 

flow. These sources include corporate annual reports, company profiles, Census data, credit 

ratings, the shipments model, the engineering analysis, and the manufacturer interviews. 

12.4.2.1 Corporate Annual Reports 

Corporate annual reports to the SEC (SEC 10-Ks) provided many of the financial inputs 

to the GRIM. These reports exist for publicly held companies and are freely available to the 

general public. DOE developed initial financial inputs to the GRIM by examining the annual 

SEC 10-K reports filed by publicly-traded manufacturers primarily engaged in manufacturing 

heating products and whose combined product range includes water heaters, DHE, and gas-fired 

pool heaters. Because these companies produce a range of different products, DOE initially 

assumed that the industry average figures calculated for these companies were representative of 

manufacturing for each heating product. Since these companies do not provide detailed 

information about their individual product lines, DOE used the financial information for the 

entire companies as its initial estimates of the financial parameters in all three GRIM analyses. 

These figures were later revised using feedback from interviews to be representative of 

manufacturing for each product class. DOE used corporate annual reports to derive the following 

initial inputs to the GRIM: 

• Tax rate 

• Working capital 

• SG&A 

• R&D 

EE-2006-STD-0129 COMMENT 56.10
12-16 

• Depreciation 

• Capital expenditures 

• Net PPE 

12.4.2.2 Standard and Poor Credit Ratings 

S&P provides independent credit ratings, research, and financial information. DOE relied 

on S&P reports to determine the industry’s average cost of debt when calculating the cost of 

capital. 

12.4.2.3 Dunn and Bradstreet Reports 

D&B provides independent research on company cash flows, revenues, employees, and 

credit-worthiness. Besides conducting manufacturer interviews, DOE used D&B reports to 

profile several manufacturers with the potential to be small businesses. 

12.4.2.4 Shipment Model 

The GRIM used shipment projections derived from DOE’s shipments model in the 

national impact analysis (NIA). The model relied on historical shipments data for water heaters, 

DHE, and gas-fired pool heaters. Chapter 10 of the TSD describes the methodology and 

analytical model DOE used to forecast shipments. 

12.4.2.5 Engineering Analysis 

During the engineering analysis, DOE used a manufacturing cost model to develop MPC 

estimates for residential water heaters, DHE, and gas-fired pool heaters. The analysis provided 

the labor, materials, overhead, and total production costs for products at each efficiency level. 

The engineering analysis also estimated a manufacturer markup to provide the manufacturer 

selling price (MSP) for each product at every efficiency level and a standard shipping cost for 

storage water heaters. 

12.4.2.6 Manufacturer Interviews 

During the course of the MIA, DOE conducted interviews with a representative crosssection of manufacturers. DOE also interviewed manufacturers representing a significant portion 

of sales in every product class. During these discussions, DOE obtained information to determine 

and verify GRIM input assumptions in each industry. Key topics discussed during the interviews 

and reflected in the GRIM include: 

• capital conversion costs (one-time investments in PPE); 

• product conversion costs (one-time investments in research, product development, 

testing, and marketing); 

• product cost structure, or the portion of the MPCs related to materials, labor, 

overhead, and depreciation costs; 

• projected total shipment and shipment distribution mix; and 

• MPCs estimated in the engineering analysis. 

EE-2006-STD-0129 COMMENT 56.10
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12.4.3 Financial Parameters 

Table 12.4.1 provides financial parameters for six public companies engaged in 

manufacturing and selling residential heating products. The values listed are averages over a 6-

year period (2003 to 2008). 

Table 12.4.1 Financial Parameters Based on 2003-2008 Weighted Company Financial Data 

Parameter Weighted 

Average 

Manufacturer 

A B C D E F 

Tax Rate % of taxable income 27.5 26.0 19.9 35.1 34.5 31.2 36.9 

Working Capital % of revenues 11.4 14.7 9.7 18.9 5.3 15.1 28.2 

SG&A % of revenues 20.9 14.9 23.1 12.6 27.5 16.5 21.9 

R&D % of revenues 1.5 2.1 1.2 N/A 1.1 1.6 2.2 

Depreciation % of revenues 2.2 3.0 1.3 3.7 2.9 2.0 3.2 

Capital Expenditures % of revenues 2.2 3.0 1.7 3.5 2.1 2.0 2.1 

Net PPE % of revenues 13.3 20.2 8.2 22.0 13.2 12.9 16.0 

These six companies constitute a significant portion of the water heater, DHE, and pool 

heater market. The values calculated in Table 12.4.1 represent the weighted average estimates 

using financial data from all publicly traded manufacturers that make heating products. While 

most of these companies also manufacture products not covered by this rulemaking, DOE used 

these parameters as initial estimates in each of the straw-man GRIMs. During interviews, water 

heater, DHE, and pool heater manufacturers were asked to provide their own figures for the 

parameters listed in Table 12.4.1. Where applicable, DOE adjusted the parameters in each GRIM 

using this feedback to reflect manufacturing certain product types. 

12.4.4 Corporate Discount Rate 

DOE used the weighted-average cost of capital (WACC) as the discount rate to calculate 

the INPV. A company’s assets are financed by a combination of debt and equity. The WACC is 

the total cost of debt and equity weighted by their respective proportions in the capital structure 

of the industry. DOE estimated the WACC for the residential water heater, DHE, and pool heater 

industries based on several representative companies, using the following formula: 

WACC = After-Tax Cost of Debt x (Debt Ratio) + Cost of Equity x (Equity Ratio) Eq. 1 

The cost of equity is the rate of return that equity investors (including, potentially, the 

company) expect to earn on a company’s stock. These expectations are reflected in the market 

price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used 

means to estimate the cost of equity. According to the CAPM, the cost of equity (expected 

return) is: 

 Cost of Equity = Riskless Rate of Return + β x Risk Premium Eq. 2 

where: 

Riskless rate of return is the rate of return on a “safe” benchmark investment, typically 

considered the short-term Treasury Bill (T-Bill) yield. 

EE-2006-STD-0129 COMMENT 56.10
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Risk premium is the difference between the expected return on stocks and the riskless 

rate. 

Beta (β) is the correlation between the movement in the price of the stock and that of the 

broader market. In this case, Beta equals one if the stock is perfectly correlated with the S&P 500 

market index. A Beta lower than one means the stock is less volatile than the market index. 

DOE determined that the industry average cost of equity for water heater, DHE, and pool 

heater industries is 14.9 percent (Table 12.4.2). 

Table 12.4.2 Cost of Equity Calculation 

Parameter 

IndustryWeighted 

Average 

%

Manufacturer 

A B C D E F 

(1) Average Beta 1.0 .66 .90 .40 1.19 1.2 1.0* 

(2) Yield on 10-Year 

T-Bill (1990-2007) 5.8 - - - - - - 

(3) Market Risk Premium 

(1926-1999) 9.2 - - - - - - 

Cost of Equity (2)+[(1)*(3)] 14.9 - - - 

Equity/Total Capital 38.4 33.1 47.4 16.5 37.3 35.3 .03 

* Estimated Beta

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond 

rating is associated with a particular spread. One way of estimating a company’s cost of debt is 

to treat it as a spread (usually expressed in basis points) over the risk-free rate. DOE used this 

method to calculate the cost of debt for all six manufacturers by using S&P ratings and adding 

the relevant spread to the risk-free rate. 

In practice, investors use a variety of different maturity Treasury bonds to estimate the 

risk-free rate. DOE used the 10-year Treasury bond return because it captures long-term inflation 

expectations and is less volatile than short-term rates. The risk free rate is estimated to be 

approximately 6 percent, which is the average 10-year Treasury bond return between 1990 and 

2008. 

For the cost of debt, S&P’s Credit Services provided the average spread of corporate 

bonds for the six public manufacturers between 2003 and 2008. DOE added the industryweighted average spread to the average T-Bill yield over the same period. Since proceeds from 

debt issuance are tax deductible, DOE adjusted the gross cost of debt by the industry average tax 

rate to determine the net cost of debt for the industry. Table 12.4.3 presents the derivation of the 

cost of debt and the capital structure of the industry (i.e. the debt ratio (debt/total capital)). 

EE-2006-STD-0129 COMMENT 56.10
12-19 

Table 12.4.3 Cost of Debt Calculation 

Parameter 

IndustryWeighted 

Average 

%

Manufacturer 

A B C D E F 

S&P Bond Rating -- A- BB+ CCC AAA BB- A+ 

(1) Yield on 10-Year 

T-Bill (1990-2007) 5.8 - - - - - - 

(2) Gross Cost of Debt 8.4 7.5 9.0 13.3 7.05 9.45 7.2 

(3) Tax Rate 27.5 26.0 19.9 35.1 34.5 31.2 36.9 

Net Cost of Debt 

(2) x ((1)-(3)) 6.1 - - - - - - 

Debt/Total Capital 60.6 66.9 52.6 - 62.7 64.7 99.97 

Using public information for these six companies, the initial estimate for the water heater, 

DHE, and pool heater industries’ WACC was approximately 11.4 percent. Subtracting an 

inflation rate of 2.9 percent between 1990 and 2008, the inflation-adjusted WACC and the initial 

estimate of the discount rate used in the straw-man GRIM is 8.5 percent. DOE also asked for 

feedback on the 8.5 percent discount during manufacturer interviews. Where applicable, DOE 

adjusted the discount rate for certain product types using this feedback. 

12.4.5 Trial Standard Levels 

DOE developed TSLs for residential water heaters, DHE, and gas-fired pool heaters. 

Table 12.4.4 through Table 12.4.6 present the efficiency level and engineering technology option 

at each TSL used in each GRIM. DOE uses an equation to calculate the efficiency at each TSL 

for water heaters and scales the efficiency for other input rating ranges for DHE. Consequently, 

the efficiencies shown Table 12.4.4 through Table 12.4.6 only apply to the indicated rated 

storage volume for water heaters and input capacity range for DHE. However, the technology 

options and the efficiency levels are consistent across all rated volumes and input capacity 

ranges. 

EE-2006-STD-0129 COMMENT 56.10
12-20 

Table 12.4.4 Water Heater Efficiency Levels and TSLs 

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5* 

Gas-Fired 

Storage Water Heaters 

EF (at or below 

60 gallons unless indicated) 

0.675 – (0.0015 x 

Rated Storage 

Volume in 

gallons) 

0.675 – (0.0012 

x Rated Storage 

Volume in 

gallons) 

0.675 – (0.0012 

x Rated Storage 

Volume in 

gallons) 

0.675 – (0.0012 

x Rated Storage 

Volume in 

gallons) 

For Rated Storage Volume at or below 55 gallons: 0.675 – (0.0012 x Rated Storage Volume in gallons) 

EF (above 60 

gallons unless indicated) 

0.699 – (0.0019 x 

Rated Storage 

Volume in 

gallons) 

0.717 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

0.717 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

0.717 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

For Rated Storage Volume above 55 gallons: 0.831 – (0.00078 x Rated Storage Volume in gallons) 

Efficiency Level EL 1 EL 2 EL 2 EL 2 EL 2 / EL 6 Technology 

Option 

Standing pilot, 

1.5” insulation 

Standing pilot, 

2” insulation 

Standing pilot, 

2” insulation 

Standing pilot, 

2” insulation 

Standing pilot, 2” 

insulation / 

Condensing, power 

vent, 2” ins 

Electric 

Storage Water Heaters 

EF (at or below 

80 gallons unless indicated) 

0.967 – (0.00095 

x Rated Storage 

Volume in 

gallons) 

0.966 – (0.0008 

x Rated Storage 

Volume in 

gallons) 

0.965 – (0.0006 

x Rated Storage 

Volume in 

gallons) 

0.960 – (0.0003 

x Rated Storage 

Volume in 

gallons) 

For Rated Storage Volume at or below 55 gallons: EF = 0.960 – (0.0003 x Rated Storage Volume in gallons) 

EF (above 80 

gallons unless indicated) 

1.013 – (0.00153 

x Rated Storage 

Volume in 

gallons) 

1.026 – 

(0.00155 x 

Rated Storage 

Volume in 

gallons) 

1.051 – 

(0.00168 x 

Rated Storage 

Volume in 

gallons) 

1.088 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

For Rated Storage Volume above 55 gallons: EF = 2.057 – (0.00113 x Rated Storage Volume in gallons) 

Efficiency Level EL 2 EL 3 EL 4 EL 5 EL 5 / EL 6 Technology 

Option 

2.25" foam 

insulation 

2.5" foam 

insulation 

3" foam 

insulation 

4" foam 

insulation 

4" foam insulation / 

Heat pump water 

heater 

EE-2006-STD-0129 COMMENT 56.10
12-21 

Oil-Fired 

Storage 

Water Heaters 

EF 

0.64 – (0.0019 x 

Rated Storage 

Volume in 

gallons) 

0.66 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

0.66 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

0.68 – (0.0019 x 

Rated Storage 

Volume in 

gallons) 

0.68 – (0.0019 x Rated 

Storage Volume in 

gallons) 

Efficiency Level EL 3 EL 4 EL 5 EL 5 EL 5 Technology 

Option 

2.5” fiberglass 

insulation 

2” foam 

insulation 

2.5” foam 

insulation 

2.5” foam 

insulation 2.5” foam insulation 

Gas-Fired 

Instantaneous Water Heaters 

EF 

0.82 – (0.0019 x 

Rated Storage 

Volume in 

gallons) 

0.82 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

0.82 – (0.0019 

x Rated Storage 

Volume in 

gallons) 

0.82 – (0.0019 x 

Rated Storage 

Volume in 

gallons) 

0.82 – (0.0019 x Rated 

Storage Volume in 

gallons) 

Efficiency Level EL 4 EL 4 EL 4 EL 4 EL 4 Technology 

Option 

Electronic 

ignition, power 

vent, improved 

HX area 

Electronic 

ignition, power 

vent, improved 

HX area 

Electronic 

ignition, power 

vent, improved 

HX area 

Electronic 

ignition, power 

vent, improved 

HX area 

Electronic ignition, 

power vent, improved 

HX area 

* TSL 5 has different efficiency requirements for gas-fired and electric storage water heater with rated storage volumes equal to or belogallons. The technology options and efficiency levels in the table show the split requirements at TSL 5. 

EE-2006-STD-0129 COMMENT 56.10
12-22 

Table 12.4.5 Direct Heating Equipment Efficiency Levels and TSLs 

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Gas Wall Fan 

(ovar 42,000 

Btu/h) 

Annual Fuel 

Utilization 

Efficiency 

(AFUE)* %

75 76 77 80 75 80 

Efficiency 

Level 

EL 1 EL 2 EL 3 EL 4 EL 1 EL 4 

Technology 

Option 

Intermittent 

ignition, twospeed blower 

Intermittent 

ignition, 

improved 

HX 

Intermittent 

ignition, twospeed blower, 

improved HX 

Induced 

draft, 

electronic 

ignition 

Intermittent 

ignition, 

two-speed 

blower 

Induced draft, 

electronic 

ignition 

Gas Wall 

Gravity 

(between 27,000 

Btu/h and 46,000 

Btu/h) 

 AFUE % 66 68 71 71 72 72 

Efficiency 

Level 

EL 1 EL 2 EL 3 EL 3 EL 4 EL 4 

Technology 

Option 

Standing 

pilot, 

improved HX 

Standing 

pilot, 

improved 

HX 

Standing 

pilot, 

improved HX 

Standing 

pilot, 

improved 

HX 

Electronic 

ignition 

Electronic 

ignition 

Gas Floor 

 (over 37,000 

Btu/h) 

 AFUE % 58 58 58 58 58 58 

Efficiency 

Level 

EL 1 EL 1 EL 1 EL 1 EL 1 EL 1 

Technology 

Option 

Standing 

pilot, 

improved HX 

Standing 

pilot, 

improved 

HX 

Standing 

pilot, 

improved HX 

Standing 

pilot, 

improved 

HX 

Standing 

pilot, 

improved 

HX 

Standing 

pilot, 

improved HX 

Gas Room 

(between 27,000 

Btu/h and 46,000 

Btu/h) 

 AFUE % 66 67 68 68 83 83% 

Efficiency 

Level 

EL 2 EL 3 EL 4 EL 4 EL 5 EL 5 

Technology 

Option 

Standing 

pilot, 

improved HX 

Standing 

pilot, 

improved 

HX 

Standing 

pilot, 

improved HX 

Standing 

pilot, 

improved 

HX 

Electronic 

ignition, 

multiple 

heat 

exchanger 

design 

Electronic 

ignition, 

multiple heat 

exchanger 

design 

Gas Hearth 

(between 27,000 

and 46,000 

Btu/h) 

 AFUE % 67 67 67 72 72 93% 

Efficiency 

Level 

EL 1 EL 1 EL 1 EL 2 EL 2 EL 3 

Technology 

Option 

Electronic 

ignition 

Electronic 

ignition 

Electronic 

ignition 

Fan 

assisted 

Fan 

assisted Condensing 

* AFUE is reported in British thermal units (Btu) per hour (h). The AFUE requirements are for the 

indicated input rating ranges only. As described in the engineering analysis, the AFUE requirements are 

scaled for other input rating ranges. 

EE-2006-STD-0129 COMMENT 56.10
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Table 12.4.6 Pool Heater Efficiency Levels and TSLs 

TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Gas Wall Fan 

(over 42,000 Btu/h) 

Thermal 

Efficiency %

81 82 83 84 86 95 

Efficiency 

Level 

EL 2 EL 3 EL 4 EL 5 EL 6 EL 8 

Technology 

Option 

Improved 

HX 

Improved 

HX, more 

effective 

insulation 

(combustion 

chamber) 

Power 

venting 

Power 

venting, 

improved 

HX 

Sealed 

combustion, 

improved 

HX 

Sealed 

combustion, 

condensing, 

improved 

HX 

12.4.6 NIA Shipment Forecast 

The GRIM estimates manufacturer revenues based on total-unit-shipment forecasts and 

the distribution of these values by efficiency level. Changes in the efficiency mix at each 

standard level are a key driver of manufacturer finances. For this analysis, the GRIM used the 

NIA shipments forecasts from 2008 to 2045 for water heaters and 2008 to 2043 for DHE and 

gas-fired pool heaters. However, for all heating products, only the shipments in 2010 and after 

have an impact on INPV because 2010 is the base year to which future cash flows are summed. 

Chapter 10 of the TSD explains DOE’s calculations of total shipments in detail. Table 12.4.7 

shows total shipments forecasted in the shipment analysis for water heaters in 2015; Table 12.4.8 

through Table 12.4.10 show the distribution of storage water heaters by rated storage volume; 

Table 12.4.11 shows forecasted shipments for DHE and gas-fired pool heaters in 2013. 

Table 12.4.7 Total NIA Shipments Forecast in 2015 in the Main NIA Shipment Scenariob

Product Class Total Industry Shipments* 

Gas-Fired Storage Water Heaters 4,205,600 

Electric Storage Water Heaters 5,162,900 

Oil-Fired Storage Water Heaters 34,800 

Gas-Fired Instantaneous Water Heaters 1,587,000 

*Estimates rounded to the nearest hundred. 

Table 12.4.8 Breakdown of Total Gas-Fired Storage Water Heater Shipments by Rated 

Storage Volume 

Rated Storage Volume 

Percentage of Gas-Fired 

Storage Water Heater 

Shipments 

30-Gallons 13.5 

40-Gallons 45.3 

50-Gallons 37.4 

66-Gallons 1.9 

75-Gallons 1.9 

 

b

 The estimated compliance date for the residential water heater energy conservation standard is estimated to be 

March 2015. 

EE-2006-STD-0129 COMMENT 56.10
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Table 12.4.9 Breakdown of Total Electric Storage Water Heater Shipments by Rated 

Storage Volume 

Rated Storage Volume 

Percentage of Electric 

Storage Water Heater 

Shipments 

30-Gallons 22.8 

40-Gallons 33.8 

50-Gallons 34.2 

66-Gallons 3.3 

80-Gallons 4.6 

119-Gallons 1.3 

Table 12.4.10 Breakdown of Total Oil-Fired Storage Water Heater Shipments by Rated 

Storage Volume 

Rated Storage Volume 

Percentage of Oil-Fired 

Storage Water Heater 

Shipments 

32-Gallons 67.0 

50-Gallons 33.0 

Table 12.4.11 Total NIA Shipments Forecast in 2013c

Product Class Total Industry Shipments* 

Gas Wall Fan DHE 39,600 

Gas Wall Gravity DHE 106,200 

Gas Floor DHE 2,000 

Gas Room DHE 20,900 

Hearth DHE 799,900 

Gas-Fired Pool Heaters 230,200 

*Estimates rounded to the nearest hundred. 

12.4.6.1 Base Case Shipments Forecast 

As part of the shipment analysis, DOE estimated the shipment distribution by efficiency 

level for residential water heaters, DHE, and gas-fired pool heaters. Table 12.4.12 through Table 

12.4.21 show the base case distributions of shipments by TSL estimated in the NIA for various 

product classes for the year the amended energy conservation standards take effect. 

 

c

 The estimated compliance date for the DHE and pool heater energy conservation standard is estimated to be March 

2013. 

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Table 12.4.12 Base-Case Distribution of Efficiencies for Gas-Fired Storage Water Heaters 

in 2015 (all rated storage volumes) 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 

Required EF for a 40-

Gallon Rated Storage 

Volume* 

0.59 0.62 0.63 0.64 0.65 0.67 0.80 

Percentage of Total 

Shipments at Each 

Efficiency Level 

78.3 4.4 6.5 3.0 2.2 4.3 1.4 

* The indicated EFs are only for the 40-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

Table 12.4.13 Base-Case Distribution of Efficiencies for Total Electric Storage Water 

Heaters in 2015 (all rated storage volumes) 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 EL 7 

Required EF for a 50-

Gallon Rated Storage 

Volume 

0.90 0.91 0.92 0.93 0.94 0.95 2.00 2.20 

Percentage of Total 

Shipments at Each 

Efficiency Level 

36.7 31.5 2.9 14.6 4.2 5.3 3.9 0.9 

* The indicated EFs are only for the 50-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

Table 12.4.14 Base-Case Distribution of Efficiencies for Total Oil-Fired Storage Water 

Heaters in 2015 (all rated storage volumes) 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 EL 7 

EF* 0.53 0.54 0.56 0.58 0.60 0.62 0.66 0.68 

Percentage of Total 

Shipments at Each 

Efficiency Level 

14.6 16.9 0.0 16.3 7.1 11.7 26.6 6.9 

* The indicated EFs are only for the 32-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

Table 12.4.15 Base-Case Distribution of Efficiencies for Total Gas-Fired Instantaneous 

Water Heaters in 2015 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 EL 7 EL 8 

EF 0.62 0.69 0.78 0.80 0.82 0.84 0.85 0.92 0.95 

Percentage of Total 

Shipments at Each 

Efficiency Level 

0.2 2.1 1.0 12.5 63.6 2.7 3.5 9.1 5.3 

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Table 12.4.16 Base-Case Distribution of Efficiencies for Total Gas Wall Fan Direct Heating 

Equipment in 2013 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 

AFUE %* 74 75 76 77 80 

Percentage of Total 

Shipments at Each 

Efficiency Level 

40.9 4.6 40.9 9.1 4.6 

* The indicated AFUEs are only for the over 42,000 Btu/h representative input rating range. As described in the 

engineering analysis, the required AFUE is scaled to for other input rating ranges. 

Table 12.4.17 Base-Case Distribution of Efficiencies for Total Gas Wall Gravity Direct 

Heating Equipment in 2013 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 

AFUE %* 64 66 68 71 72 

Percentage of Total 

Shipments at Each 

Efficiency Level 

30.0 30.0 40.0 0.0 0.0 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.18 Base-Case Distribution of Efficiencies for Total Gas Floor Direct Heating 

Equipment in 2013 

Efficiency Level Baseline EL 1 

AFUE %* 57 58 

Percentage of Total 

Shipments at Each 

Efficiency Level 

42.9 57.1 

* The indicated AFUEs are only for the over 37,000 Btu/h representative input rating range. As described in the 

engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.19 Base-Case Distribution of Efficiencies for Total Gas Room Direct Heating 

Equipment in 2013 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 EL 5 

AFUE %* 64 65 66 67 68 83 

Percentage of Total 

Shipments at Each 

Efficiency Level 

25.0 25.0 25.0 0.0 0.0 25.0 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.20 Base-Case Distribution of Efficiencies for Total Gas Hearth Direct Heating 

Equipment in 2013 

Efficiency Level Baseline EL 1 EL 2 EL 3 

AFUE %* 64 67 72 93 

Percentage of Total 

Shipments at Each 

Efficiency Level 

49.1 37.6 13.1 0.2 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

EE-2006-STD-0129 COMMENT 56.10
12-27 

Table 12.4.21 Base-Case Distribution of Efficiencies for Total Gas-Fired Pool Heaters in 

2013 

Efficiency Level Baseline EL 1 EL 2 EL 3 EL 4 EL 5 EL 6 EL 7 EL 8 

Thermal Efficiency % 78 79 81 82 83 84 86 90 95 

Percentage of Total 

Shipments at Each 

Efficiency Level 

0.0 36.0 17.6 22.2 2.6 16.1 4.6 0.0 0.9 

12.4.6.2 Standards Case Shipments Forecast 

To examine the effects of amended energy conservation standards on shipments, which 

affect the INPV, DOE used the base case shipments described in the previous section. For the 

standards case, DOE assumed shipments at lower efficiencies would roll up into higher 

efficiency levels in response to an increase in energy conservation standards. This scenario 

assumes that demand for high efficiency equipment is a function of its price without regard for 

the standard level. Table 12.4.22 through Table 12.4.31 show the distributions of efficiencies for 

the various product classes in 2015 in the standards case. 

Table 12.4.22 Distribution of Total Gas-Fired Storage Water Heater Shipments in the 

Standards Case in 2015 (all storage volumes) 

Percentage of 

Total Shipments 

at Each 

Efficiency Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 78 

EL 1 4 83 

EL 2 6 6 89 89 89 87 89

EL 3 3 3 3 3 3 3 3

EL 4 2 2 2 2 2 2 2

EL 5 4 4 4 4 4 4 4 

EL 6 1 1 1 1 1 4 1 100 

Table 12.4.23 Distribution of Total Electric Storage Water Heater Shipments in the 

Standards Case in 2015 (all storage volumes) 

Percentage of 

Total Shipments 

at Each 

Efficiency Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 37 

EL 1 31 

EL 2 3 71 

EL 3 15 15 86 

EL 4 4 4 4 90 

EL 5 5 5 5 5 95 91 

EL 6 4 4 4 4 4 8 99

EL 7 1 1 1 1 1 1 1 100 

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Table 12.4.24 Distribution of Total Oil-Fired Storage Water Heater Shipments in the 

Standards Case in 2015 (all storage volumes) 

Percentage of 

Total Shipments 

at Each 

Efficiency Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 15 

EL 1 17 

EL 2 0 

EL 3 16 48 

EL 4 7 7 55 

EL 5 12 12 12 67 67 67 67

EL 6 27 27 27 27 27 27 27

EL 7 7 7 7 7 7 7 7 100 

Table 12.4.25 Distribution of Total Residential Gas-Fired Instantaneous Water Heater 

Shipments in the Standards Case in 2015 

Percentage of 

Total Shipments 

at Each 

Efficiency Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 0 

EL 1 2 

EL 2 1 

EL 3 13 

EL 4 64 79 79 79 79 79 79 

EL 5 3 3 3 3 3 3 3 

EL 6 3 3 3 3 3 3 3 

EL 7 9 9 9 9 9 9 9 

EL 8 5 5 5 5 5 5 5 100 

Table 12.4.26 Distribution of Total Gas Wall Fan Direct Heating Equipment Shipments in 

the Standards Case in 2013 

Percentage 

of Total 

Shipments 

at Each 

Efficiency 

Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 41 

EL 1 5 45 45 

EL 2 41 41 86 41 

EL 3 9 9 9 95 9 

EL 4 5 5 5 5 100 5 100 

EE-2006-STD-0129 COMMENT 56.10
12-29 

Table 12.4.27 Distribution of Total Gas Wall Gravity Direct Heating Equipment Shipments 

in the Standards Case in 2013 

Percentage 

of Total 

Shipments 

at Each 

Efficiency 

Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 30 

EL 1 30 60 

EL 2 40 40 100 

EL 3 0 0 0 100 100 

EL 4 0 0 0 0 0 100 100 

Table 12.4.28 Distribution of Total Gas Floor Direct Heating Equipment Shipments in the 

Standards Case in 2013 

Percentage 

of Total 

Shipments 

at Each 

Efficiency 

Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 43 

EL 1 57 100 100 100 100 100 100 

Table 12.4.29 Distribution of Total Gas Room Direct Heating Equipment Shipments in the 

Standards Case in 2013 

Percentage 

of Total 

Shipments 

at Each 

Efficiency 

Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 25 

EL 1 25 

EL 2 25 75 

EL 3 0 0 75 

EL 4 0 0 0 75 75 

EL 5 25 25 25 25 25 100 100 

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12-30 

Table 12.4.30 Distribution of Total Gas Hearth Direct Heating Equipment Shipments in 

the Standards Case in 2013 

Percentage 

of Total 

Shipments 

at Each 

Efficiency 

Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 49 

EL 1 38 87 87 87 

EL 2 13 13 13 13 100 100 

EL 3 0 0 0 0 0 0 100 

Table 12.4.31 Distribution of Total Gas-Fired Pool Heater Shipments in the Standards 

Case in 2013 

Percentage 

of Total 

Shipments 

at Each 

Efficiency 

Level 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 0 

EL 1 36 

EL 2 18 54 

EL 3 22 22 76 

EL 4 3 3 3 78 

EL 5 16 16 16 16 95 

EL 6 5 5 5 5 5 99 

EL 7 0 0 0 0 0 0 

EL 8 1 1 1 1 1 1 100 

DOE calculated the residential water heater shipments using the scenarios developed in 

the NIA. To calculate the likely impacts water heater manufacturers at each TSL in the standards 

case, DOE used the main NIA shipment scenario. The main NIA shipment scenario accounts for 

fuel switching. In this scenario, DOE considered the potential for current electric storage water 

heaters to be replaced by a gas-fired storage water heater if amended energy conservation 

standards for electric storage water heaters were to require the use of heat pump technology. This 

scenario affects the gas-fired and electric storage water heater results at TSL 6 and TSL 7 only. 

TSL 5 also had the potential to cause consumers to switch from electric storage to gas-fired 

water heaters for rate storage volumes above 55-gallons. However, the percentage of consumers 

that would benefit from switching is too small to impact shipments. 

While the NIA also included scenarios that estimate the market penetration of gas-fired 

instantaneous water heaters, to calculate the INPV impacts on gas-fired, electric, and gas-fired 

instantaneous water heaters, DOE used the main NIA scenario that uses the reference gas-fired 

instantaneous market penetration scenario. Finally, the main NIA scenario used the reference 

economic growth scenario and the moderate rate of efficiency growth shipments scenarios. In the 

GRIM, the user can calculate the results for any combination of the fuel switching and gas-fired 

instantaneous market penetration shipment scenarios. 

EE-2006-STD-0129 COMMENT 56.10
12-31 

For the DHE and pool heater shipments, DOE used the NIA shipments for each TSL in 

the standards case. DOE describes the NIA scenarios in chapters 10 and 11 of the TSD. 

12.4.7 Production Costs 

Changes in production costs affect revenues and gross profits. Products that are more 

efficient typically cost more to produce than baseline products (chapter 5). For the MIA, DOE 

used the MPCs derived in the engineering analysis using appropriate production volume 

estimates. For instance, more efficient products sold under existing energy conservation 

standards are manufactured at lower production volumes than baseline efficiency products. 

Enacting more stringent energy conservation standards will increase production volumes for 

more efficient units. The GRIM also included the proportion of costs devoted to labor, materials, 

overhead, and depreciation that make up the full cost of production or MPCs. DOE estimated the 

proportion of costs associated with each cost category by using information from the engineering 

analysis. DOE used the same percentages for material, labor, and total overhead (depreciation 

and factory overhead) from the engineering analysis. For the MPC breakdown in the MIA, DOE 

developed different depreciation values for each product type by using a deprecation value that is 

consistent with historical information in SEC 10-Ks. The remainder of total overhead was 

allocated to factory overhead. 

For gas-fired storage water heaters in the MIA, DOE used both the standard and ultralow-NOX MPCs developed in the engineering analysis. In the MIA DOE used the weighted 

average MPC of water heaters with standard and ultra-low-NOX burners at each efficiency level. 

For gas-fired, electric, and oil-fired storage water heaters, DOE calculated a standard 

shipping cost at each efficiency level analyzed (chapter 5). For the MIA, DOE treated the 

shipping cost as a production cost adder like the material or labor cost, not as a non-production 

cost like SG&A. For the MIA, DOE used the shipping costs calculated in the engineering 

analysis divided by the appropriate manufacturer markup. Treating the shipping cost as a 

production cost adder had the same cost impact on consumers as the costs shown in the 

engineering analysis but is consistent with how manufacturers treat shipping costs. 

As discussed in the engineering analysis, the MSP is comprised of production costs (the 

direct manufacturing costs or MPCs), non-production costs (indirect costs like SG&A), and 

profit. For gas-fired, electric, and oil-fired storage water heaters in the MIA, MSP is calculated 

by multiplying the MPC by the manufacturer markup and adding the shipping cost. The MSPs 

for DHE and pool heaters are calculated by multiplying the MPCs by the appropriate 

manufacturer markup for that product. 

Table 12.4.32 through Table 12.4.42 show the production cost estimates used in the 

GRIM for the representative storage volume and input rating. 

EE-2006-STD-0129 COMMENT 56.10
12-32 

Table 12.4.32 MPC Breakdown for 40-Gallon Gas-Fired Storage Water Heaters* 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead

$

Depreciation

$

MPC 

$

Shipping 

Cost 

$

MSP 

$

Baseline 20.80 147.17 12.01 5.55 185.53 19.23 262.28 

TSL 1 

(EL 1) 21.34 153.90 12.59 5.79 193.62 20.20 273.64 

TSL 2, 3, 4, 

5, 6 

(EL 2) 

22.40 168.06 12.80 6.27 209.52 27.78 302.25 

TSL 7 

(EL 6) 42.75 380.17 22.75 13.75 459.42 27.78 629.62 

* The cost information for gas-fired storage water heaters uses a weighted average of the standard and ultra-lowNOX costs developed in the engineering analysis. 

Table 12.4.33 MPC Breakdown for 50-Gallon Electric Storage Water Heaters 

TSL 

(Efficiency 

Level) 

Labor 

$ 

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

Shipping 

Cost 

$

MSP 

$

Baseline 18.49 100.45 10.06 3.89 132.89 23.81 193.90 

TSL 1 

(EL 2) 19.28 109.82 10.44 4.20 143.74 24.69 208.68 

TSL 2 

(EL 3) 19.51 113.54 10.58 4.33 147.96 25.64 215.02 

TSL 3 

(EL 4) 20.01 120.11 10.86 4.55 155.52 26.67 225.73 

TSL 4, 5 

(EL 5) 21.15 135.49 11.63 5.07 173.34 28.99 250.86 

TSL 6 

(EL 6) 64.65 443.28 17.92 15.84 541.69 49.38 742.74 

TSL 7 

(EL 7) 69.54 483.13 18.91 17.22 588.80 51.28 804.94 

Table 12.4.34 MPC Breakdown for 32-Gallon Oil-Fired Storage Water Heaters 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

Shipping 

Cost 

$

MSP 

$

Baseline 37.96 393.00 121.71 24.58 577.24 16.13 766.54 

TSL 1 

(EL 3) 39.40 408.22 126.33 25.52 599.47 24.69 804.01 

TSL 2 

(EL 4) 39.56 405.89 125.35 25.38 596.18 17.86 792.89 

TSL 3, 4, 5, 

6 

(EL 5) 

40.06 413.49 128.35 25.88 607.78 24.69 814.80 

TSL 7 

(EL 7) 50.68 476.26 128.63 29.15 684.73 16.13 906.27 

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12-33 

Table 12.4.35 MPC Breakdown for 199 kBtu/h Gas-Fired Instantaneous Water Heaters 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 

Level 82.21 169.52 21.26 9.44 282.42 409.51 

TSL 1−6 

(EL 4) 99.84 335.97 22.41 15.84 474.06 687.38 

TSL 7 

(EL 8) 159.57 761.78 31.04 32.92 985.30 1,428.69 

Table 12.4.36 MPC Breakdown for Gas Wall Fan Direct Heating Equipment with an Input 

Rating Greater than 42,000 Btu/h 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 86.03 168.71 86.14 10.43 351.31 474.27 

TSL 1, 5 

(EL 1) 89.85 188.71 86.24 11.17 375.96 507.55 

TSL 2 

(EL 2) 93.85 192.90 88.81 11.50 387.05 522.52 

TSL 3 

(EL 3) 98.03 205.11 91.45 12.08 406.66 549.00 

TSL 4, 6 

(EL 4) 102.41 256.85 91.78 13.81 464.85 627.55 

Table 12.4.37 MPC Breakdown for Gas Wall Gravity Direct Heating Equipment with an 

Input Rating Between 27,000 Btu/h and 46,000 Btu/h 

TSL 

(Efficiency 

Level ) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 34.16 111.71 55.11 6.15 207.13 279.62 

TSL 1 

(EL 1) 34.92 117.21 74.47 6.94 233.53 315.27 

TSL 2 

(EL 2) 45.65 128.80 68.54 7.44 250.43 338.07 

TSL 3−4 

(EL 3) 47.93 140.68 88.30 8.48 285.38 385.27 

TSL 5−6 

(EL 4) 50.33 203.31 90.04 10.52 354.20 478.17 

Table 12.4.38 MPC Breakdown for Gas Floor Direct Heating Equipment with an Input 

Rating Over 37,000 Btu/h 

TSL 

(Efficiency 

Level) 

Labor

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 101.22 174.54 70.63 10.60 356.99 481.94 

TSL 1−TSL 6 

(EL 1) 106.28 191.23 71.82 11.31 380.64 513.87 

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12-34 

Table 12.4.39 MPC Breakdown for Gas Wall Gravity Direct Heating Equipment with an 

Input Rating Between 27,000 Btu/h and 46,000 Btu/h 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 42.87 110.64 65.60 6.71 225.81 304.84 

TSL 1 

(EL 2) 51.87 128.65 68.34 7.62 256.47 346.24 

TSL 2 

(EL 3) 51.09 136.87 66.90 7.80 262.66 354.59 

TSL 3−4 

(EL 4) 53.65 154.35 56.03 8.08 272.11 367.35 

TSL 5−6 

(EL 5) 59.01 265.42 69.73 12.06 406.23 548.41 

Table 12.4.40 MPC Breakdown for Gas Wall Hearth Direct Heating Equipment with an 

Input Rating Between 27,000 Btu/h and 46,000 Btu/h 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 54.35 191.64 102.27 10.66 358.92 484.54 

TSL 1−3 

(EL 1) 55.01 191.33 99.77 10.59 356.71 481.56 

TSL 4−5 

(El 2) 82.56 286.15 146.27 15.76 530.74 716.50 

TSL 6 

(EL 3) 98.09 598.67 162.96 26.32 886.04 1,196.15 

Table 12.4.41 MPC Breakdown for Gas-Fired Pool Heaters with a Standing Pilot with a 

250,000 Btu/h Input Rating 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 86.27 325.62 102.20 15.14 529.23 688.00 

TSL 1 

(El 2) 101.86 326.41 109.13 15.82 553.23 719.20 

TSL 2 

(El 3) 110.38 344.52 112.63 16.71 584.23 759.50 

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12-35 

Table 12.4.42 MPC Breakdown for Gas-Fired Pool Heaters with Electronic Ignition with a 

250,000 Btu/h Input Rating 

TSL 

(Efficiency 

Level) 

Labor 

$

Material 

$

Overhead 

$

Depreciation

$

MPC 

$

MSP 

$

Baseline 87.00 341.81 103.17 15.66 547.64 711.93 

TSL 1 

(El 2) 95.91 356.81 103.19 16.37 572.28 743.97 

TSL 2 

(EL 3) 100.71 381.81 103.35 17.25 603.12 784.05 

TSL 3 

(EL 4) 110.78 436.81 106.87 19.27 673.73 875.85 

TSL 4 

(EL 5) 116.32 486.81 110.92 21.02 735.07 955.59 

TSL 5 

(EL 6) 127.95 703.64 120.39 28.03 980.01 1,274.01 

TSL 6 

(EL 8) 154.82 1,275.65 126.77 45.85 1,603.09 2,084.01 

12.4.8 Conversion Costs 

Amended energy conservation standards typically cause manufacturers to incur one-time 

conversion costs to bring their production facilities and product designs into compliance with 

new regulations. For the MIA, DOE classified these one-time conversion costs into two major 

groups: capital conversion costs and product conversion costs. Capital conversion costs are onetime investments in PPE to adapt or change existing production facilities so that new product 

designs can be fabricated and assembled under the new regulation. Product conversion costs are 

one-time investments in research, development, testing, marketing and other costs to make 

product designs comply with amended energy conservation standards. The following sections 

describe the inputs DOE used in the GRIM in greater detail. 

12.4.8.1 Capital Conversion Costs 

DOE evaluated the level of capital conversion costs manufacturers would incur to comply 

with amended energy conservation standards. This evaluation drew from multiple data sources 

and methodologies. Table 12.4.43 through Table 12.4.52 show DOE’s estimates of the capital 

conversion costs used for each product class. The methodology used to calculate the capital 

conversion costs for each product class is also described below. 

During the MIA interviews, DOE asked manufacturers to estimate the capital conversion 

costs needed to expand their production of higher efficiency products and to describe the tooling 

and plant changes those changes would entail. For most TSLs for residential gas-fired storage 

water heaters and electric storage water heaters, DOE based its capital conversion cost estimates 

on these interviews. DOE weighted the data submittals from manufacturers by market share and 

then extrapolated the manufacturers’ capital conversion costs for each product class to represent 

the industry-wide cost. DOE verified the reasonableness of the capital conversion cost submittals 

for gas-fired and electric storage water heaters by performing a separate bottoms-up estimate 

based on the number of sub-assembly and assembly lines for each manufacturer and the extent of 

EE-2006-STD-0129 COMMENT 56.10
12-36 

tooling changes needed at each TSL. Assembly line modification costs were based on the costs 

for recent line upgrades. Finally, DOE used a top-down approach to verify that the sum of new 

investments and existing capital stock resulted in a ratio of net PPE to revenue that was 

characteristic of the industry structure from manufacturers’ SEC 10-K reports. 

For gas-fired and electric storage water heaters with rated storage volumes equal to or 

below 55-gallons at TSL 5, DOE used its industry-wide estimate for the capital conversion costs 

to reach the required efficiencies. However, at TSL 5 DOE also estimated the additional capital 

conversion costs required for gas-fired and electric storage water heaters with rated storage 

volumes greater than 55-gallons. For electric storage water heaters, DOE estimated the additional 

tooling and production equipment that would be required for a dedicated heat pump assembly 

line for rated storage volumes greater than 55-gallons. The tooling and equipment costs were 

estimated for a manufacturer to build an annex to an existing production facility for a given 

shipment volume of heat pump water heaters, assuming that manufacturers would integrate 

purchased heat pump assemblies into their products. To calculate the total capital conversion cost 

for heat pumps with large rated storage volumes at TSL 5, DOE used market share data to 

estimate the shipments of large volume heat pump water heaters that would be needed to meet 

each manufacturer’s demand. Assuming that each manufacturer would only build a dedicated 

production line in one of their existing facilities, DOE then estimated the additional capital 

conversion costs for each manufacturer to build its estimated shipment volume of heat pumps 

and totaled the estimate for each manufacturer. The gas-fired storage water heater capital 

conversion costs for large volumes at TSL 5 were calculated using individual estimates for each 

manufacturer as well. Similarly, these estimates included the tooling and production equipment 

that would be required to build a dedicated condensing line for different shipment volumes of 

large water heaters as an annex. In addition, the estimates assumed that manufacturers would 

produce new coils in-house and included coil production as part of the capital conversion costs. 

DOE used market share data to estimate the shipment volume required for each manufacturer 

and assumed that each manufacturer would build a dedicated condensing line for large volume 

water heaters in only one of their existing production facilities. To calculate the total capital 

conversion costs for condensing water heaters with large rated volumes at TSL 5, DOE totaled 

its estimate for each manufacturer to build its estimate large size condensing line. 

Table 12.4.43 and Table 12.4.44 show DOE’s estimates for the gas-fired and electric 

storage water heater capital conversion costs. For gas-fired storage water heaters, the changes to 

the insulation thickness at TSL 1 through TSL 6 do not require manufacturers to make 

substantial changes to their existing plants or assembly lines. At TSL 5, the capital conversion 

costs reflect DOE’s estimate for each manufacturer to build a dedicated condensing gas-fired 

storage water heater line and new heat exchanger assembly equipment in an existing facility for 

rated storage volumes above 55-gallons. The condensing designs for gas-fired storage water 

heaters at TSL 7 would also require costly changes to manufacture much more complex products 

across all gas-fired shipments. A significant expense at TSL 7 would involve purchasing new 

coil manufacturing equipment at every manufacturing facility to supply millions of annual 

shipments. In addition, all existing assembly lines would need to be overhauled to accommodate 

manufacturing products with the new technology. Plant layouts would also have to be 

restructured and existing flexible assembly lines would likely be discontinued. For electric 

storage water heaters, manufacturers would need to purchase additional foaming stations to reach 

the efficiencies at TSL 2 through TSL 5. However, the existing plant layouts would not need to 

EE-2006-STD-0129 COMMENT 56.10
12-37 

be greatly altered at TSL 1 through TSL 3. At TSL 4 and TSL 5, the increased insulation 

thickness would require manufacturers to lengthen existing assembly lines or add additional 

assembly lines because the much thicker insulation lowers the throughput of existing assembly 

lines. The capital conversion costs at TSL 5 reflect the costs for manufacturers to significantly 

increase the insulation thickness for water heaters with rated storage volumes equal to or below 

55-gallons. The capital conversion costs at TSL 5 also include the costs for manufacturers to 

each build a dedicated heat pump assembly line for water heaters with rated storage volumes 

greater than 55-gallons. The capital conversion costs at TSL 6 and TSL 7 include the capital 

required to manufacture heat pump water heaters across all rated storage volumes. DOE assumed 

that manufacturers would initially source the heat pump modules. However, at these TSLs all 

electric assembly and subassembly lines would require significant conversion to accommodate 

the top-heavy assembly. All electric assembly lines would also need to be lengthened to integrate 

merging new tank assembly with the heat pump modules. Finally, the major technology changes 

for water heaters that use condensing or heat pump technology would require manufacturers to 

install much more sophisticated testing equipment. 

Table 12.4.43 Total Gas-Fired Storage Water Heater Capital Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 1 Standing pilot, 1.5” insulation 0.0 

TSL 2–TSL 4 2 Standing pilot, 2.0” insulation 0.0 

TSL 5* 2 / 6 

Standing pilot, 2.0” insulation / 

Condensing, power vent, 2” 

insulation 

10.7 

TSL 6 2 Standing pilot, 2.0” insulation 0.0 

TSL 7 6 Condensing, power vent, 2” 

insulation 111.1 

*The efficiency levels and technology options are shown for rated storage volumes equal to or below 55-gallons / 

above 55-gallons. 

Table 12.4.44 Total Electric Storage Water Heater Capital Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 2 2.25” foam insulation 0.0 

TSL 2 3 2.5” foam insulation 3.9 

TSL 3 4 3” foam insulation 3.9 

TSL 4 5 4” foam insulation 37.1 

TSL 5* 5 / 6 4” foam insulation / Heat pump 

water heater 47.4 

TSL 6 6 Heat pump water heater 69.3 

TSL 7 7 Heat pump water heater 78.1 

* The efficiency levels and technology options are shown for rated storage volumes equal to or below 55-gallons / 

above 55-gallons. 

EE-2006-STD-0129 COMMENT 56.10
12-38 

For oil-fired storage water heaters, DOE did not receive a representative number of 

estimates or enough information during interviews to base its capital conversion costs on a topdown estimate. For these product classes, DOE relied primarily on a bottom-up approach to 

verify the feedback provided during interviews. DOE based the bottom-up estimates on feedback 

from manufacturer interviews to estimate the types and cost of the production equipment that the 

industry would be required to change or purchase at each TSL. DOE then used product catalogs 

and available certification databases to determine how many product lines would need to be 

upgraded or converted for each manufacturer at each TSL. DOE calculated the industry-wide 

capital conversion cost by multiplying its estimate for changing an existing production line or 

creating a new production line by the number of lines that would need to be converted at each 

TSL. Table 12.4.45 shows the estimates for the oil-fired storage water heater capital conversion 

costs. The capital conversion cost estimates for TSL 1 through TSL 6 involve relatively minor 

changes to existing production lines. The capital conversion costs are relatively minor because 

the basic assembly and technology of the existing products on the market that meet these 

efficiencies do not vary significantly at these TSLs. However, TSL 7 would require significant 

changes for some manufacturers. A multi-flue design would require manufacturers that do not 

offer products to purchase equipment to assemble the new head design. Existing assembly lines 

would also require modification because existing products are mainly assembled from the bottom 

up whereas a multi-flue design requires new equipment to manufacture both the tank and water 

heater head. 

Table 12.4.45 Total Oil-Fired Storage Water Heater Capital Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 3 2.5” fiberglass insulation 0.2 

TSL 2 4 2” foam insulation 0.2 

TSL 3−TSL 6 5 2.5” foam insulation 0.2 

TSL 7 7 1” foam insulation, multi flue 

design 3.6 

DOE calculated its capital conversion cost estimates for gas-fired instantaneous water 

heaters in a similar manner as the oil-fired storage water heater estimates. DOE based its capital 

conversion costs on a bottom-up estimate that also used feedback from manufacturer interviews. 

DOE estimate cost of the production equipment and plant modifications that the industry would 

require at each TSL if it did not currently have products that met that efficiency. DOE then used 

product catalogs and certification databases to determine how many product lines would be 

upgraded by each manufacturer at each TSL. DOE calculated the industry-wide capital 

conversion cost by multiplying its estimate for changing an existing production line or creating a 

new production line by the number of production lines that would need to be converted at each 

TSL. Table 12.4.46 shows the estimates for the capital conversion costs for gas-fired 

instantaneous water heaters. At TSL 1 through TSL 6 would not require the industry to change 

their existing production facilities because every manufacturer offers products that meet these 

efficiencies. In addition, manufacturers offer products at TSL 1 through TSL 6 in sufficient 

quantities that no additional equipment would need to be purchased if the amended energy 

conservation were set at this efficiency. At TSL 7, manufacturers would be required to purchase 

EE-2006-STD-0129 COMMENT 56.10
12-39 

equipment to manufacture different heat exchangers. In addition, existing product lines would 

also require modification to accommodate different sized components for the redesigned 

products. 

Table 12.4.46 Total Gas-Fired Instantaneous Water Heater Capital Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1−TSL 6 4 Electronic ignition, power vent, 

improved HX area 0.0 

TSL 7 8 Electronic ignition, power vent, 

direct vent, condensing 9.6 

DOE calculated the traditional DHE capital conversion costs in a similar manner as oilfired storage and gas-fired instantaneous water heaters. DOE used information from 

manufacturer interviews to understand the types of changes that would be required to reach 

certain efficiencies. DOE then estimated a cost per product line at each efficiency for 

manufacturers to either upgrade existing product lines or, if manufacturers did not offer existing 

products, change equipment to manufacture standards-compliant products. DOE also used 

product catalogs and certification databases to determine how many product lines would be 

upgraded or converted for each manufacturer at each TSL. DOE calculated the industry-wide 

capital conversion cost by multiplying its estimate for to cost to change existing production lines 

by the number of production lines that would need to be converted at each TSL. Because total 

manufacturing scale is critical for traditional DHE businesses to remain viable, DOE calculated 

the capital conversion costs for the traditional DHE market assuming that all product lines that 

did not meet the required efficiencies would be converted. However, if fewer product lines were 

converted at more stringent TSLs the per-product line capital conversion costs would increase 

per manufacturer. Table 12.4.47 through Table 12.4.50 show DOE’s estimates for the traditional 

DHE product classes. The traditional DHE capital conversion costs are related to the number and 

efficiencies of the existing products manufacturers offer. If manufacturers offer existing products 

in the market, the per-product line costs assumed by DOE was lower. If manufacturers currently 

offer products that meet the efficiencies required at that TSL, DOE assumed that some of the 

capital conversion costs would be shared across the product lines that needed to be upgraded and 

most of the additional capital conversion costs would be to increase the production of lowvolume products in the market. The capital conversion costs for each manufacturer increase if 

they do not currently offer related products. At these efficiencies, manufacturers would have to 

purchase significantly more equipment, including dies to manufacture products that differ greatly 

from most of their existing products and to assemble newly designed heat exchangers. 

EE-2006-STD-0129 COMMENT 56.10
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Table 12.4.47 Total Gas Wall Fan Direct Heating Equipment Capital Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1, TSL 5 1 Intermittent ignition, two-speed 

blower 0.0 

TSL 2 2 Intermittent ignition, improved 

HX 0.4 

TSL 3 3 Intermittent ignition, two-speed 

blower, improved HX 1.0 

TSL 4, TSL 6 4 Induced draft, electronic 

ignition 2.1 

Table 12.4.48 Total Gas Wall Gravity Direct Heating Equipment Capital Conversion Costs 

by TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 1 Standing pilot, improved HX 0.8 

TSL 2 2 Standing pilot, improved HX 0.9 

TSL 3−TSL 4 3 Standing pilot, improved HX 2.0 

TSL 5−TSL 6 4 Electronic ignition 2.8 

Table 12.4.49 Total Gas Floor Direct Heating Equipment Capital Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1−TSL 6 1 Standing pilot, improved HX 0.1 

Table 12.4.50 Total Gas Room Direct Heating Equipment Capital Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 2 Standing pilot, improved HX 0.4 

TSL 2 3 Standing pilot, improved HX 1.1 

TSL 3−TSL 4 4 Standing pilot, improved HX 1.4 

TSL 5−TSL 6 5 Electronic ignition, multiple 

heat exchanger design 1.8 

DOE calculated the gas hearth capital conversion costs in a similar manner as traditional 

DHE. DOE used information from manufacturer interviews to understand the types of changes 

that would be required to reach certain efficiencies. DOE then estimated a cost per product line 

EE-2006-STD-0129 COMMENT 56.10
12-41 

at each efficiency for manufacturers to either upgrade existing product lines or, if products did 

not exist, change equipment to manufacture standards-compliant products. DOE also used 

product catalogs and certification databases to determine how many product lines would be 

upgraded or converted for each manufacturer at each TSL. DOE calculated the industry-wide 

capital conversion cost by multiplying its estimate for to cost to change existing production lines 

by the number of production lines that would need to be converted at each TSL. For gas hearth 

DHE, DOE assumed that the extremely large number of products in the market would make it 

likely that manufacturers would convert only a portion of their existing products at more 

stringent TSLs. DOE assumed that manufacturers would only convert up to 50-percent of their 

existing product lines that did meet the required efficiencies. Table 12.4.51 show DOE’s 

estimates for the total gas hearth DHE capital conversion costs. The capital conversion costs at 

TSL 1 through TSL 3 do not involve substantial plant changes. These small capital conversion 

costs involve minor changes for a few manufacturers to accommodate other improvements such 

as additional baffling. At TSL 4 and TSL 5, the capital conversion costs involve changes to 

handle new materials like additional insulation and baffling, changes to the heat shields, and 

some new stamping dies for manufacturers that need to greatly alter their existing designs that do 

not reach the required efficiencies. However, at TSL 1 through TSL 5, the capital conversion 

costs are relatively minor because the efficiency requirements can be met with purchased parts. 

These changes result in relatively low capital conversion costs because the purchased parts 

would not require the industry to replace major hard tooling at TSL 1 through TSL 5. However, 

the capital conversion costs greatly increase at TSL 6 because manufacturers would likely need a 

secondary heat exchanger at the max-tech level, which could alter the size and structure of most 

existing product lines. DOE assumed that manufacturers would only convert up to 50-percent of 

their existing product lines which does lower the required capital conversion costs for the 

industry at TSL 6. However, manufacturers would be able to continue to supply their customers 

even if they offer fewer product lines after standards. Because most product lines are typically 

produced on separate lines and are produced in runs, manufacturers would not lose sales due to 

plant capacity constraints even if they offered fewer total gas hearth DHE products covered by 

this rulemaking. 

Table 12.4.51 Total Gas Hearth Direct Heating Equipment Capital Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1−TSL 3 1 Electronic ignition 0.2 

TSL 4−TSL 5 2 Fan assisted 0.5 

TSL 6 3 Condensing 4.0 

DOE calculated the gas-fired pool heater capital conversion costs in a similar manner as 

gas-fired and electric storage water heaters. DOE used the estimates manufacturers provided 

about the required tooling and plant changes needed to offer products at higher efficiencies. DOE 

weighted the estimates provided by manufacturers by market share and then extrapolated capital 

conversion costs to represent the industry-wide cost. DOE verified these estimates by performing 

a separate bottoms-up estimate of the required tooling for each manufacturer at higher 

efficiencies and verifying that the total capital conversion resulted in a characteristic ratio of net 

EE-2006-STD-0129 COMMENT 56.10
12-42 

PPE to industry-wide revenue. Table 12.4.52 shows the estimated conversion costs for gas-fired 

pool heaters. The conversion costs at TSL 1 and TSL 2 are relatively minor because most 

manufacturers currently offer products that meet these efficiencies and would not be required to 

make significant changes to their production facilities. At TSL 4 and TSL 5, most manufacturers 

would have to make relatively minor changes to their existing production lines. At these TSLs, 

most of the capital conversion costs involve changes to the heat exchanger fabrication 

equipment. The capital conversion costs also include the additional equipment manufacturers 

need to expand the production of currently low-volume products. At TSL 5 and TSL 6, the 

capital conversion costs increase substantially for manufacturers. In addition to changing 

subassembly lines for component parts including heat exchanger fabrication, manufacturers 

would also have to make changes to their main assembly lines. The capital conversion costs also 

increase at these TSLs because the different materials used by manufacturers would require 

changes to production equipment on their feeder lines, especially to fabricate heat exchangers. 

Finally, the capital conversion costs increase substantially at TSL 6 because manufacturers that 

do not currently offer condensing products would have to purchase costly fabrication equipment. 

Table 12.4.52 Total Pool Heater Capital Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Capital 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 2 Improved HX 0.0 

TSL 2 3 

Improved HX, more effective 

insulation (combustion 

chamber) 

0.3 

TSL 3 4 Power venting 1.2 

TSL 4 5 Power venting, improved HX 1.4 

TSL 5 6 Sealed combustion, Improved 

HX 4.4 

TSL 6 8 Sealed combustion, 

condensing, improved HX 7.1 

12.4.8.2 Product Conversion Costs 

DOE assessed the product conversion costs that manufacturers would be required to 

make at each TSL. For residential gas-fired and electric storage water heaters and gas-fired pool 

heaters, DOE obtained estimates for these costs through manufacturer interviews. DOE 

estimated average industry product conversion expenditures by weighting the estimates by 

market share. DOE then extrapolated the interviewed manufacturers’ product conversion costs 

for each product class to account for the market share of companies that were not interviewed. 

DOE verified the estimates by comparing them to its own estimate of the product development, 

testing, certification, and training effort required by each manufacturer at each TSL. DOE also 

compared its estimates to the total cost of other recent product development efforts 

manufacturers also provided (such as the cost to redesign burners to comply with ultra-low-NOX

requirements). 

For gas-fired and electric storage water heaters with rated storage volumes equal to or 

below 55-gallons at TSL 5, DOE used its industry-wide estimate for the product conversion costs 

EE-2006-STD-0129 COMMENT 56.10
12-43 

to reach the required efficiencies. However, at TSL 5 DOE also estimated the additional product 

conversion costs required for gas-fired and electric storage water heaters with rated storage 

volumes greater than 55-gallons. At TSL 5, the efficiency requirements for the smaller gas-fired 

and electric storage water heaters are equivalent to TSL 4. Therefore, at TSL 5 DOE used the 

industry-wide product and capital conversion costs for the smaller volumes at TSL 4. DOE 

assumed the additional product conversion costs for the larger sizes at TSL 5 scaled with the 

industry-wide product conversion costs for condensing and heat pump water heaters. At TSL 5 

for electric storage water heaters, DOE multiplied the product conversion estimates at TSL 6, 

which would essentially require heat pump water heaters across the full range of rated storage 

volumes, by the percentage of total electric storage water heater models that are above 55 gallons 

(i.e., 27 percent). Similarly, DOE estimated the product conversion costs for larger gas-fired 

storage water heaters at TSL 5 by multiplying its industry-wide product conversion cost for 

condensing water heaters at TSL 7 by the percentage of total gas-fired water heaters that are 

above 55 gallons (i.e., 11 percent). 

For DHE and instantaneous water heaters, DOE did not receive sufficient manufacturer 

data to serve as the basis for industry-wide product conversion estimates. For these products, 

DOE reviewed product literature and publicly available information about the efficiency of 

existing product lines. DOE used this information to estimate the number of product lines that 

manufacturers would need to modify or develop at each TSL. DOE also used information from 

interviews with manufacturers and conversations with industry experts to estimate the 

engineering, certification, and product development time required per product line at each TSL. 

DOE assumed that these costs represent the product conversion costs for a manufacturer that has 

to upgrade product lines to meet that efficiency. DOE also assumed that that the product 

development costs increase as the design changes become more complex and if manufacturers do 

not currently offer products that meet or exceed the required efficiency. DOE calculated the 

industry-wide product conversion costs by multiplying its estimates of a per-line product 

development cost by the number of product lines manufacturers would need to modify or 

develop at each TSL. For traditional DHE and gas-fired water heaters, DOE assumed that 

manufacturers would convert all existing product lines that did not meet the efficiencies required 

at that TSL. However, for gas hearth DHE DOE assumed that manufacturers would only convert 

up to 50-percent of their existing product lines that did not meet the required efficiencies. Table 

12.4.53 through Table 12.4.62 illustrate DOE’s estimates of the product conversion cost. 

EE-2006-STD-0129 COMMENT 56.10
12-44 

Table 12.4.53 Total Gas-Fired Storage Water Heater Product Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 1 Standing pilot, 1.5” insulation 5.5 

TSL 2–TSL 4 2 Standing pilot, 2.0” insulation 5.5 

TSL 5* 2 / 6 

Standing pilot, 2.0” insulation / 

Condensing, power vent, 2” 

insulation 

7.7 

TSL 6 2 Standing pilot, 2.0” insulation 5.5 

TSL 7 6 Condensing, power vent, 2” 

insulation 20.2 

*The efficiency levels and technology options are shown for rated storage volumes equal to or below 55-gallons / 

above 55-gallons. 

Table 12.4.54 Total Electric Storage Water Heater Product Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 2 2.25” foam insulation 5.5 

TSL 2 3 2.5” foam insulation 7.6 

TSL 3 4 3” foam insulation 7.6 

TSL 4 5 4” foam insulation 7.6 

TSL 5* 5 / 6 4” foam insulation / Heat pump 

water heater 21.2 

TSL 6 6 Heat pump water heater 50.2 

TSL 7 7 Heat pump water heater 52.4 

* The efficiency levels and technology options are shown for rated storage volumes equal to or below 55-gallons / 

above 55-gallons 

Table 12.4.55 Total Oil-Fired Storage Water Heater Product Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 3 2.5” fiberglass insulation 0.3 

TSL 2 4 2” foam insulation 0.3 

TSL 3−TSL 6 5 2.5” foam insulation 0.3 

TSL 7 7 1” foam insulation, multi flue 

design 1.0 

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Table 12.4.56 Total Gas-Fired Instantaneous Water Heater Product Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1−TSL 6 4 Electronic ignition, power vent, 

improved HX area 0.0 

TSL 7 8 Electronic ignition, power vent, 

direct vent, condensing 8.0 

Table 12.4.57 Total Gas Wall Fan Direct Heating Equipment Product Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1, TSL 5 1 Intermittent ignition, two-speed 

blower 0.1 

TSL 2 2 Intermittent ignition, improved 

HX 0.2 

TSL 3 3 Intermittent ignition, two-speed 

blower, improved HX 0.5 

TSL 4, TSL 6 4 Induced draft, electronic 

ignition 0.9 

Table 12.4.58 Total Gas Wall Gravity Direct Heating Product Capital Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 1 Standing pilot, improved HX 0.3 

TSL 2 2 Standing pilot, improved HX 0.4 

TSL 3, TSL 4 3 Standing pilot, improved HX 0.8 

TSL 5, TSL 6 4 Electronic ignition 1.8 

Table 12.4.59 Total Gas Floor Direct Heating Equipment Product Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1−TSL 6 1 Standing pilot, improved HX 0.1 

EE-2006-STD-0129 COMMENT 56.10
12-46 

Table 12.4.60 Total Gas Room Direct Heating Equipment Product Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 2 Standing pilot, improved HX 0.2 

TSL 2 3 Standing pilot, improved HX 0.5 

TSL 3−TSL 4 4 Standing pilot, improved HX 0.6 

TSL 5−TSL 6 5 Electronic ignition, multiple 

heat exchanger design 1.5 

Table 12.4.61 Total Gas Hearth Direct Heating Equipment Product Conversion Costs by 

TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1−TSL 3 1 Electronic ignition 0.5 

TSL 4−TSL 5 2 Fan assisted 1.4 

TSL 6 3 Condensing 8.1 

Table 12.4.62 Total Pool Heater Product Conversion Costs by TSL 

TSL Efficiency 

Level Technology Option 

Total Product 

Conversion 

Costs 

2008$ millions

Baseline - - 0.0 

TSL 1 2 Improved HX 0.0 

TSL 2 3 

Improved HX, more effective 

insulation (combustion 

chamber) 

0.0 

TSL 3 4 Power venting 2.6 

TSL 4 5 Power venting, improved HX 2.6 

TSL 5 6 Sealed combustion, Improved 

HX 4.6 

TSL 6 8 Sealed combustion, 

condensing, improved HX 5.5 

12.4.9 Markup Scenarios 

DOE used several standards case markup scenarios to represent the uncertainty about the 

impacts of amended energy conservation standards on prices and profitability. In the base case, 

DOE used the same baseline markups calculated in the engineering analysis for all product 

classes. In the standards case, DOE considered different markup scenarios for each type of 

product (i.e., water heaters, DHE, and gas-fired pool heaters). DOE then used markup scenarios 

to bound the range of profitability following amended energy conservation standards for each 

TSL. For each product class, DOE used the markup scenarios that characterize the range of 

EE-2006-STD-0129 COMMENT 56.10
12-47 

possible market responses after amended energy standards. For the three heating products, DOE 

considered two markup scenarios: the preservation of return on invested capital (ROIC) and the 

preservation of operating profit. 

12.4.9.1 Preservation of Return on Invested Capital Markup Scenario 

ROIC is the net operating profit after taxes (NOPAT) divided by the total invested 

capital. The total invested capital includes both fixed assets and working capital, or net PPE plus 

working capital. In this scenario, the markups are calibrated to yield the same return on invested 

capital the year after the compliance date of the amended energy conservation standards as the 

return in the base case. This scenario models the situation in which manufacturers maintain a 

similar level of profitability from the investments required by amended energy conservation 

standards as they do from their current business operations. Under this scenario, manufacturers 

have higher NOPAT after standards, but manufacturers also have greater working capital and 

investment requirements. Because manufacturers are able to earn additional returns on the 

investments required by amended energy conservation standards, the preservation of return on 

invested capital markup scenario represents the high bound to profitability. For those standard 

levels where the investments are consistent with historical ratios of revenue to net PPE, the 

resulting markups are consistent with baseline markups. Table 12.4.63 through Table 12.4.76 

lists the products DOE analyzed with the corresponding markups at each TSL. 

Table 12.4.63 Preservation of Return on Invested Capital Markups for Gas-Fired Storage 

Water Heaters 

EL 

(EF)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5** TSL 6 TSL 7 

Baseline 

(0.59) 1.31 - - - - - - - 

EL 1 

(0.62) 1.31 1.31 - - - - - - 

EL 2 

(0.63) 1.31 1.31 1.30 1.30 1.30 1.30 / - 1.30 - 

EL 3 

(0.64) 1.31 1.31 1.31 1.31 1.31 1.31 / - 1.31 - 

EL 4 

(0.65) 1.31 1.31 1.31 1.31 1.31 1.31 / - 1.31 - 

EL 5 

(0.67) 1.31 1.31 1.31 1.31 1.31 1.31 / - 1.31 - 

EL 6 

(0.80) 1.31 1.31 1.31 1.31 1.31 1.31 / 1.29 1.31 1.29 

* The indicated EFs are only for the 40-gallon representative storage volume. As described in the engineering 

analysis, the required EF are calculated using an equation. 

** For TSL 5, markups are shown for rated storage volumes equal to or below 55-gallons / above55-gallons 

EE-2006-STD-0129 COMMENT 56.10
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Table 12.4.64 Preservation of Return on Invested Capital Markups for Electric Storage 

Water Heaters 

EL 

(EF)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5** TSL 6 TSL 7 

Baseline 

(0.90) 1.28 - - - - - - - 

EL 1 

(0.91) 1.28 - - - - - - - 

EL 2 

(0.92) 1.28 1.28 - - - - - - 

EL 3 

(0.93) 1.28 1.28 1.28 - - - - - 

EL 4 

(0.94) 1.28 1.28 1.28 1.28 - - - - 

EL 5 

(0.95) 1.28 1.28 1.28 1.28 1.28 1.28 / - - - 

EL 6 

(2.0) 1.28 1.28 1.28 1.28 1.28 1.28 / 1.26 1.26 - 

EL 7 

(2.2) 1.28 1.28 1.28 1.28 1.28 1.28 / 1.28 1.28 1.26 

* The indicated EFs are only for the 50-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

** For TSL 5, markups are shown for rated storage volumes equal to or below 55-gallons / above 55-gallons 

Table 12.4.65 Preservation of Return on Invested Capital Markups for Oil-Fired Storage 

Water Heaters 

EL 

(EF)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 

(0.53) 1.30 - - - - - - - 

EL 1 

(0.54) 1.30 - - - - - - - 

EL 2 

(0.56) 1.30 - - - - - - - 

EL 3 

(0.58) 1.30 1.30 - - - - - - 

EL 4 

(0.60) 1.30 1.30 1.30 - - - - - 

EL 5 

(0.62) 1.30 1.30 1.30 1.30 1.30 1.30 1.30 - 

EL 6 

(0.66) 1.30 1.30 1.30 1.30 1.30 1.30 1.30 - 

EL 7 

(0.68) 1.30 1.30 1.30 1.30 1.30 1.30 1.30 1.31 

* The indicated EFs are only for the 32-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

EE-2006-STD-0129 COMMENT 56.10
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Table 12.4.66 Preservation of Return on Invested Capital Markups for Gas-Fired 

Instantaneous Water Heaters 

EL 

(EF) 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 

(0.62) 1.45 - - - - - - - 

EL 1 

(0.69) 1.45 - - - - - - - 

EL 2 

(0.78) 1.45 - - - - - - - 

EL 3 

(0.80) 1.45 - - - - - - - 

EL 4 

(0.82) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 - 

EL 5 

(0.84) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 - 

EL 6 

(0.85) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 - 

EL 7 

(0.92) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.41 

Table 12.4.67 Preservation of Return on Invested Capital Markups for Gas Wall Fan 

Direct Heating Equipment 

TSL 

(AFUE)*

Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(74%) 1.35 - - - - - - 

EL 1 

(75%) 1.35 1.35 - - - 1.35 - 

EL 2 

(76%) 1.35 1.35 1.35 - - 1.35 - 

EL 3 

(77%) 1.35 1.35 1.35 1.36 - 1.35 - 

EL 4 

(80%) 1.35 1.35 1.35 1.35 1.37 1.35 1.37 

* The indicated AFUEs are only for the over 42,000 Btu/h representative input rating range. As described in the 

engineering analysis, the required AFUE is scaled for other input rating ranges. 

EE-2006-STD-0129 COMMENT 56.10
12-50 

Table 12.4.68 Preservation of Return on Invested Capital Markups for Gas Wall Gravity 

Direct Heating Equipment 

TSL 

(AFUE)*

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(64%) 1.35 - - - - - - 

EL 1 

(66%) 1.35 1.36 - - - - - 

EL 2 

(68%) 1.35 1.35 1.35 - - - - 

EL 3 

(71%) 1.35 1.35 1.35 1.36 1.36 - - 

EL 4 

(72%) 1.35 1.35 1.35 1.35 1.35 1.35 1.35 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.69 Preservation of Return on Invested Capital Markups for Gas Floor Direct 

Heating Equipment 

TSL 

(AFUE)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(57%) 1.35 - - - - - - 

EL 1 

(58%) 1.35 1.37 1.37 1.37 1.37 1.37 1.37

* The indicated AFUEs are only for the over 37,000 Btu/h representative input rating range. As described in the 

engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.70 Preservation of Return on Invested Capital Markups for Gas Room Direct 

Heating Equipment 

TSL 

(AFUE)*

Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(64%) 1.35 - - - - - - 

EL 1 

(65%) 1.35 - - - - - - 

EL 2 

(66%) 1.35 1.36 - - - - - 

EL 3 

(67%) 1.35 1.35 1.40 - - - - 

EL 4 

(68%) 1.35 1.35 1.35 1.41 1.41 - - 

EL 5 

(83%) 1.35 1.35 1.35 1.35 1.3500 1.38 1.38 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

EE-2006-STD-0129 COMMENT 56.10
12-51 

Table 12.4.71 Preservation of Return on Invested Capital Markups for Gas Hearth Direct 

Heating Equipment 

TSL 

(AFUE)*

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(64%) 1.35 - - - - - - 

EL 1 

(65%) 1.35 1.35 1.35 1.35 - - - 

EL 2 

(66%) 1.35 1.35 1.35 1.35 1.34 1.34 - 

EL 3 

(67%) 1.35 1.35 1.35 1.35 1.35 1.35 1.34 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.72 Preservation of Return on Invested Capital Markups for Gas-Fired Pool 

Heaters 

TSL 

(Thermal 

Efficiency) 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(78%) 1.30 - - - - - - 

EL 1 

(79%) 1.30 - - - - - - 

EL 2 

(81%) 1.30 1.30 - - - - - 

EL 3 

(82%) 1.30 1.30 1.30 - - - - 

EL 4 

(83%) 1.30 1.30 1.30 1.30 - - - 

EL 5 

(84%) 1.30 1.30 1.30 1.30 1.30 - - 

EL 6 

(86%) 1.30 1.30 1.30 1.30 1.30 1.30 - 

EL 7 

(90%) 1.30 1.30 1.30 1.30 1.30 1.30 - 

EL 8 

(95%) 1.30 1.30 1.30 1.30 1.30 1.30 1.29 

12.4.9.2 Preservation of Operating Profit 

Operating profit is defined as earnings before interest and taxes. The implicit assumption 

of this markup scenario is that industry maintains only its base case operating profit (in absolute 

dollars) after the amended standard. DOE implemented this scenario in the GRIM by setting the 

manufacturer markups at each TSL to yield the base case operating profit the year after the 

compliance date. Industry profitability is reduced in this scenario because higher production 

costs are not fully passed on to customers. As manufacturing costs increase, manufacturers are 

more severely harmed because they can only pass through a portion of these higher costs. The 

industry passes through its increased production costs on to customers, but higher R&D, SG&A, 

and other non-production costs lower the per-unit profit. This scenario represents the lower 

EE-2006-STD-0129 COMMENT 56.10
12-52 

bound of industry profitability following amended energy conservation standards because higher 

production costs do not bring manufacturers additional NOPAT. Table 12.4.73 through Table 

12.4.82 lists the products DOE analyzed with the corresponding markups at each TSL. 

Table 12.4.73 Preservation of Operating Profit Markups for Gas-Fired Storage Water 

Heaters 

EL 

(EL)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5** TSL 6 TSL 7 

Baseline 

(0.59) 1.31 - - - - - - - 

EL 1 

(0.62) 1.31 1.31 - - - - - - 

EL 2 

(0.63) 1.31 1.31 1.30 1.30 1.30 1.30 / - 1.30 - 

EL 3 

(0.64) 1.31 1.31 1.31 1.31 1.31 1.31 / - 1.31 - 

EL 4 

(0.65) 1.31 1.31 1.31 1.31 1.31 1.31 / - 1.31 - 

EL 5 

(0.67) 1.31 1.31 1.31 1.31 1.31 1.31 / - 1.31 - 

EL 6 

(0.80) 1.31 1.31 1.31 1.31 1.31 1.31 / 1.26 1.31 1.26 

* The indicated EFs are only for the 40-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

** For TSL 5, markups are shown for rated storage volumes equal to or below 55-gallons / above 55-gallons 

Table 12.4.74 Preservation of Operating Profit Markups for Electric Storage Water 

Heaters 

EL 

(EF)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5** TSL 6 TSL 7 

Baseline 

(0.90) 1.28 - - - - - - - 

EL 1 

(0.91) 1.28 - - - - - - - 

EL 2 

(0.92) 1.28 1.28 - - - - - - 

EL 3 

(0.93) 1.28 1.28 1.28 - - - - - 

EL 4 

(0.94) 1.28 1.28 1.28 1.28 - - - - 

EL 5 

(0.95) 1.28 1.28 1.28 1.28 1.27 1.27 / - - - 

EL 6 

(2.0) 1.28 1.28 1.28 1.28 1.28 1.28 / 1.23 1.23 - 

EL 7 

(2.2) 1.28 1.28 1.28 1.28 1.28 1.28 / 1.28 1.28 1.23 

* The indicated EFs are only for the 50-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

** For TSL 5, markups are shown for less rated storage volumes equal to or below 55-gallons / above 55-gallons 

EE-2006-STD-0129 COMMENT 56.10
12-53 

Table 12.4.75 Preservation of Operating Profit Markups for Oil-Fired Storage Water 

Heaters 

EL 

(EF)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 

(0.53) 1.30 - - - - - - - 

EL 1 

(0.54) 1.30 - - - - - - - 

EL 2 

(0.56) 1.30 - - - - - - - 

EL 3 

(0.58) 1.30 1.30 - - - - - - 

EL 4 

(0.60) 1.30 1.30 1.30 - - - - - 

EL 5 

(0.62) 1.30 1.30 1.30 1.30 1.30 1.30 1.30 - 

EL 6 

(0.66) 1.30 1.30 1.30 1.30 1.30 1.30 1.30 - 

EL 7 

(0.68) 1.30 1.30 1.30 1.30 1.30 1.30 1.30 1.29 

* The indicated EFs are only for the 32-gallon representative storage volume. As described in the engineering 

analysis, the required EFs are calculated using an equation. 

Table 12.4.76 Preservation of Operating Profit Markups for Gas-Fired Instantaneous 

Water Heaters 

EL 

(EF) 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7 

Baseline 

(0.62) 1.45 - - - - - - - 

EL 1 

(0.69) 1.45 - - - - - - - 

EL 2 

(0.78) 1.45 - - - - - - - 

EL 3 

(0.80) 1.45 - - - - - - - 

EL 4 

(0.82) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 - 

EL 5 

(0.84) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 - 

EL 6 

(0.85) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 - 

EL 7 

(0.92) 1.45 1.45 1.45 1.45 1.45 1.45 1.45 1.38 

EE-2006-STD-0129 COMMENT 56.10
12-54 

Table 12.4.77 Preservation of Operating Profit Markups for Gas Wall Fan Direct Heating 

Equipment 

TSL 

(AFUE)*

Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(74%) 1.35 - - - - - - 

EL 1 

(75%) 1.35 1.35 - - - 1.35 - 

EL 2 

(76%) 1.35 1.35 1.35 - - 1.35 - 

EL 3 

(77%) 1.35 1.35 1.35 1.34 - 1.35 - 

EL 4 

(80%) 1.35 1.35 1.35 1.35 1.34 1.35 1.34 

* The indicated AFUEs are only for the over 42,000 Btu/h representative input rating range. As described in the 

engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.78 Preservation of Operating Profit Markups for Gas Wall Gravity Direct 

Heating Equipment 

TSL 

(AFUE)*

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(64%) 1.35 - - - - - - 

EL 1 

(66%) 1.35 1.35 - - - - - 

EL 2 

(68%) 1.35 1.35 1.35 - - - - 

EL 3 

(71%) 1.35 1.35 1.35 1.34 1.34 - - 

EL 4 

(72%) 1.35 1.35 1.35 1.35 1.35 1.33 1.33 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.79 Preservation of Operating Profit Capital Markups for Gas Floor Direct 

Heating Equipment 

TSL 

(AFUE)* 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(57%) 1.35 - - - - - - 

EL 1 

(58%) 1.35 1.35 1.35 1.35 1.35 1.35 1.35

* The indicated AFUEs are only for the over 37,000 Btu/h representative input rating range. As described in the 

engineering analysis, the required AFUE is scaled for other input rating ranges. 

EE-2006-STD-0129 COMMENT 56.10
12-55 

Table 12.4.80 Preservation of Operating Profit Markups for Gas Room Direct Heating 

Equipment 

TSL 

(AFUE)*

Markups by TSL

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(64%) 1.35 - - - - - - 

EL 1 

(65%) 1.35 - - - - - - 

EL 2 

(66%) 1.35 1.35 - - - - - 

EL 3 

(67%) 1.35 1.35 1.35 - - - - 

EL 4 

(68%) 1.35 1.35 1.35 1.34 1.34 - - 

EL 5 

(83%) 1.35 1.35 1.35 1.35 1.35 1.33 1.33 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

Table 12.4.81 Preservation of Operating Profit Markups for Gas Hearth Direct Heating 

Equipment 

TSL 

(AFUE)*

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(64%) 1.35 - - - - - - 

EL 1 

(65%) 1.35 1.35 1.35 1.35 - - - 

EL 2 

(66%) 1.35 1.35 1.35 1.35 1.33 1.33 - 

EL 3 

(67%) 1.35 1.35 1.35 1.35 1.35 1.35 1.32 

* The indicated AFUEs are only for the between 27,000 Btu/h and 46,000 Btu/h representative input rating range. 

As described in the engineering analysis, the required AFUE is scaled for other input rating ranges. 

EE-2006-STD-0129 COMMENT 56.10
12-56 

Table 12.4.82 Preservation of Operating Profit Markups for Gas-Fired Pool Heaters 

TSL 

(Thermal 

Efficiency) 

Markups by TSL 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 

Baseline 

(78%) 1.30 - - - - - - 

EL 1 

(79%) 1.30 - - - - - - 

EL 2 

(81%) 1.30 1.30 - - - - - 

EL 3 

(82%) 1.30 1.30 1.30 - - - - 

EL 4 

(83%) 1.30 1.30 1.30 1.29 - - - 

EL 5 

(84%) 1.30 1.30 1.30 1.30 1.29 - - 

EL 6 

(86%) 1.30 1.30 1.30 1.30 1.30 1.28 - 

EL 7 

(90%) 1.30 1.30 1.30 1.30 1.30 1.30 - 

EL 8 

(95%) 1.30 1.30 1.30 1.30 1.30 1.30 1.26 

12.5 INDUSTRY FINANCIAL IMPACTS 

Using the inputs and scenarios described in the previous sections, the GRIM estimated 

indicators of financial impacts on the residential water heater, DHE, and pool heater industries. 

The following sections detail additional inputs and assumptions for residential gas-fired storage, 

electric storage, oil-fired storage, and gas-fired instantaneous water heaters. The main results of 

the MIA are also reported in this section. The MIA consists of two key financial metrics: INPV 

and annual cash flows. 

12.5.1 Introduction 

The INPV measures the industry value and is used in the MIA to compare the economic 

impacts of different TSLs in the standards case. The INPV is different from DOE’s NPV, which 

is applied to the U.S. economy. The INPV is the sum of all net cash flows discounted at the 

industry’s cost of capital or discount rate. The water heater GRIM estimates cash flows from 

2008 to 2045; the DHE and pool heater GRIM estimates cash flows from 2008 to 2043. All three 

of the GRIM analyses use the same analysis period used in the NIA (chapter 11). 

In the MIA, DOE compares the INPV of the base case (no amended energy conservation 

standards) to that of each TSL in the standards case. The difference between the base case and a 

standards case INPV is an estimate of the economic impacts that implementing that particular 

TSL would have on the industry. For the residential water heater, DHE, and pool heater 

industries, DOE examined the two markup scenarios described above: the preservation of return 

on invested capital and the preservation of operating profit to bound the potential range of 

impacts. 

EE-2006-STD-0129 COMMENT 56.10
12-57 

While INPV is useful for evaluating the long-term effects of amended energy 

conservation standards, short-term changes in cash flow are also important indicators of the 

industry’s financial situation. For example, a large investment over 1 or 2 years could strain the 

industry’s access to capital. Consequently, the sharp drop in financial performance could cause 

investors to flee, even though recovery may be possible. Thus, a short-term disturbance can have 

long-term effects that the INPV cannot capture. To get an idea of the behavior of annual net cash 

flows, Figure 12.5.1 through Figure 12.5.6 below present the annual net or free cash flows from 

2008 through 2021 for the base case and different TSLs in the standards case. 

Because the same markup scenarios are used for the three heating products, each of the 

figures below has a similar shape. Annual cash flows are discounted to the base year, 2010. 

Before 2010, there are no differences between the base case and each TSL in the standards cases. 

Between 2010 and the compliance date of the amended energy conservation standard, cash flows 

are driven by the level of conversion costs and the proportion of these investments spent every 

year. After the standard announcement date (i.e., the publication date of the final rule), industry 

cash flows begin to decline as companies use their financial resources to prepare for the amended 

energy conservation standard. The more stringent the amended energy conservation standard, the 

greater the impact on industry cash flows in the years leading up to the compliance date, as 

product conversion costs lower cash inflows from operations and capital conversion costs 

increase cash outflows for capital expenditures. 

Free cash flow in the year the amended energy conservation standards take effect is 

driven by two competing factors. In addition to capital and product conversion costs, amended 

energy conservation standards could create stranded assets, i.e., tooling and equipment that 

would have enjoyed longer use if the energy conservation standard had not made them obsolete. 

In this year, manufacturers write down the remaining book value of existing tooling and 

equipment whose value is affected by the amended energy conservation standard. This one time 

write down acts as a tax shield that alleviates decreases in cash flow from operations in the year 

of the write-down. In this year, there is also an increase in working capital that reduces cash flow 

from operations. A large increase in working capital is needed due to more costly production 

components and materials, higher inventory carrying to sell more expensive products, and higher 

accounts receivable for more expensive products. Depending on these two competing factors, 

cash flow can either be positively or negatively affected in the year the standard takes effect. 

In the years following the compliance date of the standard, the impact on cash flow 

depends on the operating revenue. More stringent TSLs typically have a positive impact on cash 

flows relative to the base case under the preservation of return on invested capital scenario 

because manufacturers are able to earner higher NOPAT at each TSL in the standards case, 

which increases operating income. There is very little impact on cash flow from operations under 

the preservation of operating profit scenario because this scenario is calibrated to have the same 

operating income in the standards case at each TSL as the base case as in the year after the 

standard takes effect. 

12.5.2 Water Heater Industry Financial Impacts 

Table 12.5.1 through Table 12.5.6 provide the INPV estimates for the residential water 

heater industry. Figure 12.5.1 through Figure 12.5.6 present the annual net cash flows for gasEE-2006-STD-0129 COMMENT 56.10
12-58 

fired and electric storage water heaters, gas-fired oil water heaters, and gas-fired instantaneous 

water heaters for each of the different markup scenarios. 

Table 12.5.1 Changes in Industry Net Present Value for Gas-Fired and Electric Storage 

Water Heaters (Preservation of Return on Invested Capital Markup Scenario) 

Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 6 7 

INPV (2008$ 

millions) $842.7 $838.9 $837.7 $837.8 $839.2 $821.8 $840.7 $905.7 

Change in 

INPV 

(2008$ 

millions) - (3.8) (5.1) (4.9) (3.5) (20.9) (2.0) 62.9 

(%) - -0.45 -0.60 -0.59 -0.41 -2.48 -0.24 7.47 

*For tables in section 12.5.2, values in parenthesis indicate negative numbers 

Table 12.5.2 Changes in Industry Net Present Value for Gas-Fired and Electric Storage 

Water Heaters (Preservation of Operating Profit Markup Scenario) 

Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 6 7 

INPV (2008$ 

millions) $842.7 $830.4 $812.0 $807.4 $763.9 $720.1 $536.9 $305.1 

Change in 

INPV 

(2008$ 

millions) - (12.3) (30.7) (35.3) (78.8) (129.9) (305.8) (537.6) 

(%) - -1.46 -3.64 -4.19 -9.35 -15.41 -36.29 -63.79 

Table 12.5.3 Changes in Industry Net Present Value for Oil-Fired Storage Water Heaters 

(Preservation of Return on Invested Capital Markup Scenario) 

Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 6 7 

INPV (2008$ 

millions) $8.7 8.5 8.5 8.5 8.5 8.5 8.5 7.4 

Change in 

INPV 

(2008$ 

millions) - (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (1.3) 

(%) - -1.93 -1.78 -1.96 -1.96 -1.96 -1.96 -14.84 

Table 12.5.4 Changes in Industry Net Present Value for Oil-Fired Storage Water Heaters 

(Preservation of Operating Profit Markup Scenario) 

Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 6 7 

INPV (2008$ 

millions) $8.7 8.3 8.4 8.3 8.3 8.3 8.3 5.2 

Change in 

INPV 

(2008$ 

millions) - (0.3) (0.3) (0.4) (0.4) (0.4) (0.4) (3.5) 

(%) - -3.89 -3.58 -4.31 -4.31 -4.31 -4.31 -39.86 

EE-2006-STD-0129 COMMENT 56.10
12-59 

Table 12.5.5 Changes in Industry Net Present Value for Gas-Fired Instantaneous Water 

Heaters (Preservation of Return on Invested Capital Markup Scenario) 

Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 6 7 

INPV (2008$ 

millions) $603.5 $604.7 $604.7 $604.7 $604.7 $604.7 $604.7 $683.8 

Change in 

INPV 

(2008$ 

millions) - 1.2 1.2 1.2 1.2 1.2 1.2 80.3 

(%) - 0.20 0.20 0.20 0.20 0.20 0.20 13.31 

Table 12.5.6 Changes in Industry Net Present Value for Gas-Fired Instantaneous Water 

Heaters (Preservation of Operating Profit Markup Scenario) 

Units Base 

Case 

Trial Standard Level 

1 2 3 4 5 6 77 

INPV (2008$ 

millions) $603.5 $601.7 $601.7 $601.7 $601.7 $601.7 $601.7 $537.6 

Change in 

INPV 

(2008$ 

millions) - (1.8) (1.8) (1.8) (1.8) (1.8) (1.8) (65.9) 

(%) - -0.30 -0.30 -0.30 -0.30 -0.30 -0.30 -10.91 

-400.00

-300.00

-200.00

-100.00

0.00

100.00

200.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation 

Standards Compliance Date

March 2015

Gas & Electric Storage

Markup Scenario:Preservation of ROIC Instantaneous Penetration: Reference

Fuel Switching: On

Figure 12.5.1 Annual Industry Net Cash Flows for Gas-Fired and Electric Storage Water 

Heaters (Preservation of Return on Invested Capital Markup Scenario) 

EE-2006-STD-0129 COMMENT 56.10
12-60 

-400.00

-300.00

-200.00

-100.00

0.00

100.00

200.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation 

Standards Compliance Date

March 2015

Gas & Electric Storage

Markup Scenario:Preservation of Operating Profit Instantaneous Penetration: Reference

Fuel Switching: On

Figure 12.5.2 Annual Industry Net Cash Flows for Gas-Fired and Electric Storage Water 

Heaters (Preservation of Operating Profit Markup Scenario) 

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation 

Standards Compliance Date

March 2015

Oil Storage

Markup Scenario:Preservation of ROIC Instantaneous Penetration: Reference

Fuel Switching: On

Figure 12.5.3 Annual Industry Net Cash Flows for Oil-Fired Storage Water Heaters 

(Preservation of Return on Invested Capital Markup Scenario) 

EE-2006-STD-0129 COMMENT 56.10
12-61 

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation 

Standards Compliance Date

March 2015

Oil Storage

Markup Scenario:Preservation of Operating Profit Instantaneous Penetration: Reference

Fuel Switching: On

Figure 12.5.4 Annual Industry Net Cash Flows for Oil-Fired Storage Water Heaters 

(Preservation of Operating Profit Markup Scenario) 

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation 

Standards Compliance Date

March 2015

Gas Instantaneous

Markup Scenario:Preservation of ROIC Instantaneous Penetration: Reference

Fuel Switching: On

Figure 12.5.5 Annual Industry Net Cash Flows for Gas-Instantaneous Water Heaters 

(Preservation of Return on Invested Capital Markup Scenario) 

EE-2006-STD-0129 COMMENT 56.10
12-62 

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6 TSL 7

Energy Conservation 

Standards Compliance Date

March 2015

Gas Instantaneous

Markup Scenario:Preservation of Operating Profit Instantaneous Penetration: Reference

Fuel Switching: On

Figure 12.5.6 Annual Industry Net Cash Flows for Gas-Instantaneous Water Heaters 

(Preservation of Operating Profit Markup Scenario) 

12.5.3 Direct Heating Equipment Industry Financial Impacts 

Table 12.5.7 through Table 12.5.10 provide the INPV estimates for the DHE industry. 

Figure 12.5.7 through Figure 12.5.10 present the annual net cash flows for traditional DHE and 

gas hearth DHE for each markup scenario. 

Table 12.5.7 Changes in Industry Net Present Value for Traditional Direct Heating 

Equipment (Preservation of Return on Invested Capital Markup Scenario) 

 

Units Base 

Case 

TSL 

1 2 3 4 5 6 

INPV 2008$ millions 17.9 17.5 17.3 16.9 16.7 16.2 15.7 

Change in 

INPV 

2008$ 

millions* - (0.4) (0.6) (1.1) (1.3) (1.8) (2.2) 

% - -2.27 -3.42 -5.91 -7.16 -9.99 -12.28 

* For tables in section 12.8.2, values in parenthesis indicate negative numbers 

EE-2006-STD-0129 COMMENT 56.10
12-63 

Table 12.5.8 Changes in Industry Net Present Value for Traditional Direct Heating 

Equipment (Preservation of Operating Profit Markup Scenario) 

 

Units Base 

Case 

TSL 

1 2 3 4 5 6 

INPV 2008$ millions 17.9 16.3 14.9 11.9 10.4 9.9 7.2 

Change in 

INPV 

2008$ millions - (1.6) (3.1) (6.0) (7.6) (8.0) (10.8) 

% - -9.11 -17.20 -33.54 -42.14 -44.84 -59.98 

Table 12.5.9 Changes in Industry Net Present Value for Gas Hearth Direct Heating 

Equipment (Preservation of Return on Invested Capital Markup Scenario) 

 

Units Base 

Case 

TSL 

1 2 3 4 5 6 

INPV 2008$ millions 86.4 85.5 85.5 85.5 88.8 88.8 96.6 

Change in 

INPV 

2008$ millions - (0.9) (0.9) (0.9) 2.4 2.4 10.2 

% - -1.07 -1.07 -1.07 2.80 2.80 11.82 

Table 12.5.10 Changes in Industry Net Present Value for Gas Hearth Direct Heating 

Equipment (Preservation of Operating Profit Markup Scenario) 

 

Units Base 

Case 

TSL 

1 2 3 4 5 6 

INPV 2008$ millions 86.4 86.2 86.2 86.2 71.6 71.6 31.2 

Change in 

INPV 

2008$ millions - (0.2) (0.2) (0.2) (14.8) (14.8) (55.1) 

% - -0.22 -0.22 -0.22 -17.13 -17.13 -63.83 

EE-2006-STD-0129 COMMENT 56.10
12-64 

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Energy Conservation Standards 

Compliance Date

March 2013

Direct Heating Equipment

Markup Scenario:Preservation of ROIC Shipment Scenario: Rollup

Figure 12.5.7 Annual Industry Net Cash Flows for Traditional Direct Heating Equipment 

(Preservation of Return on Invested Capital Markup Scenario) 

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Energy Conservation Standards 

Compliance Date

March 2013

Direct Heating Equipment

Markup Scenario:Preservation of Operating Profit Shipment Scenario: Rollup

Figure 12.5.8 Annual Industry Net Cash Flows for Traditional Direct Heating Equipment 

(Preservation of Operating Profit Markup Scenario) 

EE-2006-STD-0129 COMMENT 56.10
12-65 

-60.00

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Energy Conservation Standards 

Compliance Date

March 2013

Hearth

Markup Scenario:Preservation of ROIC Shipment Scenario: Rollup

Figure 12.5.9 Annual Industry Net Cash Flows for Gas Hearth Direct Heating Equipment 

(Preservation of Return on Invested Capital Markup Scenario) 

-60.00

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Year

Net Cash Flow Totals for 

Baseline TSL 1 TSL 2 TSL 3 TSL 4 TSL 5 TSL 6

Energy Conservation Standards 

Compliance Date

March 2013

Hearth

Markup Scenario:Preservation of Operating Profit Shipment Scenario: Rollup

Figure 12.5.10 Annual Industry Net Cash Flows for Gas Hearth Direct Heating Equipment 

(Preservation of Operating Profit Markup Scenario) 

EE-2006-STD-0129 COMMENT 56.10
12-66 

12.5.4 Pool Heater Industry Financial Impacts 

Table 12.5.11 and Table 12.5.12 provide the estimates for the pool heater industry. Figure 

12.5.11 and Figure 12.5.12 present the annual net cash flows for pool heaters for each markup 

scenario. 

Table 12.5.11 Changes in Industry Net Present Value for Gas-Fired Pool Heaters 

(Preservation of Return on Invested Capital Markup Scenario) 

 

Units Base 

Case 

TSL 

1 2 3 4 5 6 

INPV 2008$ millions 61.4 61.4 61.8 61.1 61.9 64.5 74.2 

Change in 

INPV 

2008$ 

millions* - 0.1 0.4 (0.2) 0.5 3.1 12.9 

% - 0.13 0.66 -0.39 0.88 5.03 20.96 

* For tables in section 12.5.4, values in parenthesis indicate negative numbers 

Table 12.5.12 Changes in Industry Net Present Value for Gas-Fired Pool Heaters 

(Preservation of Operating Profit Markup Scenario) 

 

Units Base 

Case 

TSL 

1 2 3 4 5 6 

INPV 2008$ millions 61.4 61.2 60.3 55.8 53.9 41.8 16.8 

Change in 

INPV 

2008$ millions - (0.2) (1.0) (5.6) (7.5) (19.5) (44.5) 

% - -0.29 -1.66 -9.06 -12.15 -31.82 -72.59 

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Net Cash Flow Totals for Pool Heaters

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 TSL 6

Energy Conservation 

Standards Compliance Date

March 2013

Preservation of ROIC Markup Scenario Rollup Shipment Scenario

Figure 12.5.11 Annual Industry Net Cash Flows for Gas-Fired Pool Heaters (Preservation 

of Return on Invested Capital Markup Scenario) 

EE-2006-STD-0129 COMMENT 56.10
12-67 

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2

0

0

8

$

M

i

l

l

io

n

s

Net Cash Flow Totals for Pool Heaters

Baseline TSL1 TSL2 TSL3 TSL4 TSL5 TSL 6

Energy Conservation 

Standards Compliance Date

March 2013

Preservation of Operating Profit Markup Scenario Rollup Shipment Scenario

Figure 12.5.12 Annual Industry Net Cash Flows for Gas-Fired Pool Heaters (Preservation 

of Operating Profit Markup Scenario) 

12.6 IMPACTS ON SMALL DIRECT HEATING EQUIPMENT MANUFACTURERS 

DOE identified 12 small business DHE manufacturers in the market and technology 

assessment. Of these 12 small business manufacturers, three manufacture traditional DHE, 10 

manufacture gas hearth DHE, and one manufactures both traditional and gas hearth DHE. To 

determine the number of small direct heating manufacturers that could be affected by this 

rulemaking, DOE conducted a more focused examination of the characteristics of the DHE 

manufacturers. DOE used all available public information to identify potential small businesses 

DHE manufacturers. DOE’s research involved the AHRI and HPBA membership directories, the 

AHRI and CEC product databases, individual company websites, and marketing research tools, 

including D&B reports. DOE also asked interested parties and industry representatives if they are 

aware of any other small business manufacturers. DOE used this information to create a list of 

every company that manufactures or sells DHE. DOE reviewed all publicly available data and 

contacted select companies on its list, as necessary, to determine whether they meet SBA’s 

definition of a small business manufacturer of covered DHE. DOE screened out companies that 

did not offer products covered by this rulemaking, did not meet the definition of a small 

business, branded products as distributors but were not the original equipment manufacturer, or 

are foreign owned and operated. 

EE-2006-STD-0129 COMMENT 56.10
12-68 

12.6.1 Impacts on Small Traditional Direct Heating Equipment Manufacturers 

12.6.1.1 Introduction 

Traditional DHE manufacturers are extremely concerned about the potential for amended 

energy conservation standards to harm their industry. The small shipment volume of products in 

the traditional market has greatly reduced the number of competitors in the past decade. The 

traditional DHE market is mostly a replacement market. While DOE explicitly analyzed one 

representative input capacity range for the gas wall gravity, gas wall fan, gas floor, and gas room 

types of DHE, manufacturers offer product lines that typically span multiple input rating ranges 

with many different features. This can result in many individual products, or stock keeping units, 

offered by each manufacturer in each product line. The wide range of product offerings is a 

legacy of the previously higher volume market. The remaining manufacturers have stayed in 

business by consolidating brands and the legacy products of companies that are no longer in 

business to take increasing shares of a smaller total market. DHE manufacturers offer a wide 

scope of products manufactured at low production volumes to ensure that they can maintain a 

viable portion of the replacement market. 

Three major manufacturers control almost 100 percent of the traditional DHE market. 

Two of the three major manufacturers of traditional DHE meet the SBA’s small business criteria. 

One of the small businesses produces only traditional DHE and has products in all four 

traditional DHE product classes (i.e., gas wall fan, gas wall gravity, gas floor, and gas room 

DHE). The second small business manufacturer produces all five product classes of DHE, 

including gas hearth DHE. A third small business has less than 1 percent of the traditional DHE 

market. This company offers two gas wall gravity models, but is mainly focused on specialty 

hearth products not covered by this rulemaking. Because of its focus on specialty hearth 

products, this company likely would discontinue production of these two gas wall gravity models 

if the amended energy conservation standard is set above the current efficiencies of these 

products. However, the company does not certify these products, making it difficult to determine 

if they will need to be upgraded in response to amended energy conversation standards. To show 

the differential impacts on small businesses in the traditional DHE market, DOE focused on how 

the two major small business manufacturers would be harmed relative to the higher-volume 

company in the market. 

12.6.1.2 Conversion Costs for Traditional Direct Heating Equipment Manufacturers 

Because each product line is manufactured in low volumes, the discrepancy between unit 

shipments and the number of product lines requiring significant product and capital conversion 

costs results in negative impacts for all manufacturers. Many product development costs (e.g., 

testing, certification) are somewhat fixed, making manufacturing scale an important 

consideration in determining whether the product conversion costs are economically justified. 

Similarly, although capital conversion costs can be capitalized over a number of years, these 

costs must be paid upfront and have a large enough volume to justify an added per-unit cost. 

 DOE calculated its capital and product conversion costs for traditional DHE by 

estimating a per-product line cost and assuming that every manufacturer would face the same per 

product line costs in each product class. DOE also assumed that any product line that does not 

EE-2006-STD-0129 COMMENT 56.10
12-69 

meet the efficiency level being analyzed would be upgraded, requiring both product conversion 

and capital conversion costs. DOE used public data to calculate the number of product lines that 

would need to be upgraded at each TSL for each product class. To determine industry-wide 

capital and product conversion costs, DOE multiplied the estimate of the per-product line 

product and capital conversion cost at each TSL by the number of product lines that would 

require capital and product conversion costs. The estimates DOE used for capital conversion and 

product conversion costs rose as products became more complex. In addition, the estimates 

assume that every product line that falls below the required efficiency will be upgraded. 

12.6.1.3 Estimated Conversion Costs for a Typical Small and Typical Large 

Traditional Direct Heating Equipment Manufacturer 

To show how the small business traditional DHE manufacturers could be differentially 

harmed, DOE compared the conversion costs for a typical large and a typical small 

manufacturer. To calculate conversion costs for a typical small and large manufacturer, DOE 

used the same publicly available information to determine the average number of product lines 

that meet each efficiency in each product class for a typical small and a typical large traditional 

DHE manufacturer. For its estimates of the typical small manufacturer, DOE did not include the 

product lines of the small business manufacturer that only offers two gas room heaters. Since the 

other two small business manufacturers have a significant market share and are focused heavily 

on products covered by this rulemaking, the product lines of these two small business 

manufacturers were averaged to create an estimate for the typical small manufacturer shown in 

the following sections. For both the small and large manufacturer, DOE multiplied the number of 

product lines that fall below the required efficiency by its estimate of the per-line capital and 

product conversion costs. Table 12.6.1 and Table 12.6.2 show DOE’s estimates for the number 

of product lines at each TSL for a typical small and a typical large traditional DHE manufacturer, 

respectively. 

Table 12.6.1 Number of Product Lines of a Typical Small Manufacturer 

Number of Gas 

Wall Fan-Type 

Product Lines 

at Each TSL 

Number of Gas 

Wall GravityType Product 

Lines at Each 

TSL 

Number of 

Gas FloorType 

Product 

Lines at 

Each TSL 

Number of 

Gas RoomType 

Product 

Lines at 

Each TSL 

Total 

Product 

Lines for all 

Product 

Classes 

Baseline 2 1.5 0.5 1 5 

TSL 1 0 1 0.5 0.5 2 

TSL 2 1 0.5 0.5 0.5 2.5 

TSL 3 0.5* 0 0.5 0 1 

TSL 4 1 0 0.5 0 1.5 

TSL 5 0 1 0.5 0 1.5 

TSL 6 1 1 0.5 0 2.5 

* Fractions of product lines result from taking the average number of product lines from publicly-available 

information 

EE-2006-STD-0129 COMMENT 56.10
12-70 

Table 12.6.2 Number of Product Lines of Typical Large Manufacturer 

Number of Gas 

Wall Fan-Type 

Product Lines 

at Each TSL 

Number of Gas 

Wall GravityType Product 

Lines at Each 

TSL 

Number of 

Gas FloorType 

Product 

Lines at 

Each TSL 

Number of 

Gas RoomType 

Product 

Lines at 

Each TSL 

Total 

Product 

Lines for all 

Product 

Classes 

Baseline 1 0 1 0 2 

TSL 1 1 1 1 0 3 

TSL 2 2 3 1 0 6 

TSL 3 2 0 1 1 4 

TSL 4 0 0 1 1 2 

TSL 5 1 0 1 0 2 

TSL 6 0 0 1 0 1 

 Amended energy conservation standards could impact small business manufacturers 

more seriously because they lack the resources necessary to alter their existing products and 

production facilities for those TSLs requiring major redesigns. While DOE expects all 

manufacturers could be negatively impacted by amended energy conservation standards to 

varying degrees, small businesses will face higher product conversion costs at lower TSLs than 

their higher-volume competitor. Both large and small manufacturers have several product 

offerings in each product class, sometimes at varying efficiency levels, but the larger 

manufacturer benefits more from manufacturing scale. As a result, small business manufacturers 

will have to upgrade more product lines at lower TSLs. Table 12.6.3 through Table 12.6.12 show 

the conversion costs for each product class for a typical small and large manufacturer. 

Table 12.6.3 Conversion Costs for a Typical Small Manufacturer for Gas Wall Fan DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 2 - - - 

EL 1 

(TSL 1−TSL 2) 0 - 0.05 0.05 

EL 2 

(TSL 2) 1 0.12 0.05 0.17 

EL 3 

(TSL 3) 0.5 0.29 0.14 0.42 

EL 4 

(TSL 4, TSL 6) 1 0.57 0.24 0.81 

EE-2006-STD-0129 COMMENT 56.10
12-71 

Table 12.6.4 Conversion Costs for a Typical Large Manufacturer for Gas Wall Fan DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 1 - - - 

EL 1 

(TSL 1−TSL 2) 1 - 0.02 0.02 

EL 2 

(TSL 2) 2 0.12 0.05 0.17 

EL 3 

(TSL 3) 2 0.39 0.18 0.57 

EL 4 

(TSL 4, TSL 6) 0 0.97 0.42 1.38 

Table 12.6.5 Conversion Costs for a Typical Small Manufacturer for Gas Wall Gravity 

DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 1.5 - - - 

EL 1 

(TSL 1) 1 0.38 0.15 0.53 

EL 2 

(TSL 2) 0.5 0.36 0.15 0.51 

EL 3 

(TSL 3−TSL 4) 0 0.60 0.24 0.84 

EL 4 

(TSL 4−TSL 6) 1 0.84 0.54 1.38 

EE-2006-STD-0129 COMMENT 56.10
12-72 

Table 12.6.6 Conversion Costs for a Typical Large Manufacturer for Gas Wall Gravity 

DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 0 - - - 

EL 1 

(TSL 1) 1 - - - 

EL 2 

(TSL 2) 3 0.15 0.06 0.20 

EL 3 

(TSL 3−TSL 4) 0 0.80 0.32 1.12 

EL 4 

(TSL 5−TSL 6) 0 1.12 0.72 1.84 

Table 12.6.7 Conversion Costs for a Typical Small Manufacturer for Gas Floor DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 0.5 - - - 

EL 1 

(TSL 1−TSL 6) 0.5 0.03 0.02 0.04 

Table 12.6.8 Conversion Costs for a Typical Large Manufacturer for Gas Floor DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 1 - - - 

EL 1 

(TSL 1−TSL 6) 1 0.05 0.04 0.09 

EE-2006-STD-0129 COMMENT 56.10
12-73 

Table 12.6.9 Conversion Costs for a Typical Small Manufacturer for Gas Room DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 1 - - - 

EL 1 0 0.18 0.08 0.25 

EL 2 

(TSL 1) 0.5 0.18 0.08 0.25 

EL 3 

(TSL 2) 0.5 0.53 0.23 0.75 

EL 4 

(TSL 3−TSL 4) 0 0.70 0.30 1.00 

EL 5 

(TSL 5−TSL 6) 0 0.70 0.60 1.30 

Table 12.6.10 Conversion Costs for a Typical Large Manufacturer for Gas Room DHE 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer

(2008$ 

Millions)

Baseline 0 - - - 

EL 1 0 - - - 

EL 2 

(TSL 1) 0 - - - 

EL 3 

(TSL 2) 0 - - - 

EL 4 

(TSL 3−TSL 4) 1 - - - 

EL 5 

(TSL 5−TSL 6) 0 0.35 0.30 0.65 

EE-2006-STD-0129 COMMENT 56.10
12-74 

Table 12.6.11 Total Conversion Costs for a Typical Small Manufacturer of Traditional 

Direct Heating Equipment (for all traditional DHE) 

Total Capital 

Conversion Costs 

for a Typical 

Small 

Manufacturer 

(2008$ Millions)

Total Product 

Conversion Costs 

for a Typical 

Small 

Manufacturer 

(2008$ Millions)

Total Conversion 

Costs for a 

Typical Small 

Manufacturer 

(2008$ Millions)

Baseline 0 0 0 

TSL 1 0.58 0.29 0.86 

TSL 2 1.03 0.44 1.47 

TSL 3 1.61 0.69 2.31 

TSL 4 1.89 0.80 2.69 

TSL 5 1.57 1.20 2.77 

TSL 6 2.13 1.40 3.53 

Table 12.6.12 Total Conversion Costs for a Typical Large Manufacturer of Traditional 

Direct Heating Equipment (for all traditional DHE) 

Total Capital 

Conversion Costs 

for a Typical 

Large 

Manufacturer 

(2008$ Millions)

Total Product 

Conversion Costs 

for a Typical 

Large 

Manufacturer 

(2008$ Millions)

Total Conversion 

Costs for a 

Typical Large 

Manufacturer 

(2008$ Millions)

Baseline 0 0 0 

TSL 1 0.05 0.06 0.11 

TSL 2 0.31 0.15 0.46 

TSL 3 1.24 0.54 1.77 

TSL 4 1.82 0.77 2.59 

TSL 5 1.52 1.08 2.60 

TSL 6 2.49 1.47 3.96 

 Modifying facilities and developing new, more efficient products causes a typical small 

manufacturer to incur higher product conversion costs than a typical larger manufacturer for TSL 

1 through TSL 5. Because the large manufacturer offers more products at higher efficiencies, a 

typical small manufacturer faces disproportionate costs at the lower TSLs in absolute terms at 

TSL 1 through TSL 5. However, at TSL 4 through TSL 6, a typical small and large manufacturer 

face similar product and capital conversion costs because a similar number of product lines fall 

below the required efficiency levels. 

12.6.1.4 Impact of Conversion Costs on a Typical Small Traditional Direct Heating 

Equipment Manufacturer 

Despite being similar in absolute terms, at these TSLs the small business manufacturers 

are more likely to be disproportionately harmed because they have a much lower volume over 

which to spread similar conversion costs. To show how a smaller scale could greatly harm a 

typical small manufacturer, DOE used estimates of the market shares within the industry for each 

product class to estimate the annual revenue, operating profit, R&D expense, and capital 

expenditures for a typical large and small manufacturer. To determine the annual revenue of a 

typical small and a typical large manufacturer, DOE multiplied the 2010 revenue calculated in 

EE-2006-STD-0129 COMMENT 56.10
12-75 

the GRIM for each product class by the market share of a typical large and a typical small 

manufacturer for that product class. DOE used the same industry financial parameters for the 

percentage of revenue operating profit, R&D, and capital expenditures for a typical small and 

large manufacturer for all product classes. To calculate the annual typical operating profit, R&D 

expense, and capital conversion expense, DOE multiplied the revenue of typical small and large 

manufacturers by these parameters and compared this figure to its estimate of product and capital 

conversion costs for those manufacturers. Table 12.6.13 through Table 12.6.22 show these 

comparisons. 

Table 12.6.13 Comparison of a Typical Small Manufacturer’s Gas Wall Fan DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage of 

Annual 

Capex 

% 

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 2 0 0 0 0 

EL 1 

(TSL 1−TSL 2) 0 0 64 1 27 

EL 2 

(TSL 2) 1 110 71 4 101 

EL 3 

(TSL 3) 0.5 273 192 9 256 

EL 4 

(TSL 4, TSL 6) 1 534 345 17 489 

Table 12.6.14 Comparison of a Typical Large Manufacturer’s Gas Wall Fan DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage of 

Annual 

Capex 

%

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 1 0 0 0 0 

EL 1 

(TSL 1−TSL 2) 1 0 14 0 6 

EL 2 

(TSL 2) 2 48 31 2 44 

EL 3 

(TSL 3) 2 158 111 5 149 

EL 4 

(TSL 4, TSL 6) 0 398 257 13 365 

EE-2006-STD-0129 COMMENT 56.10
12-76 

Table 12.6.15 Comparison of a Typical Small Manufacturer’s Gas Wall Gravity DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage 

of Annual 

Capex 

%

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 1.5 0 0 0 0 

EL 1 

(TSL 1) 1 214 129 7 192 

EL 2 

(TSL 2) 0.5 344 207 11 309 

EL 3 

(TSL 3−TSL 4) 0 566 341 18 508 

EL 4 

(TSL 4−TSL 6) 1 793 768 29 835 

Table 12.6.16 Comparison of a Typical Large Manufacturer’s Gas Wall Gravity DHE 

Conversion Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage 

of Annual 

Capex 

%

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 0 0 0 0 0 

EL 1 

(TSL 1) 1 0 0 0 0 

EL 2 

(TSL 2) 3 36 22 1 33 

EL 3 

(TSL 3−TSL 4) 0 199 120 6 178 

EL 4 

(TSL 5−TSL 6) 0 278 270 10 293 

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Table 12.6.17 Comparison of a Typical Small Manufacturer’s Gas Floor DHE Conversion 

Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage 

of Annual 

Capex 

%

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 0.5 0 0 0 0 

EL 1 

(TSL 1−TSL 6) 0.5 262 296 10 294 

Table 12.6.18 Comparison of a Typical Large Manufacturer’s Gas Floor DHE Conversion 

Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage 

of Annual 

Capex 

%

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 1 0 0 0 0 

EL 1 

(TSL 1−TSL 6) 1 497 562 20 558 

Table 12.6.19 Comparison of a Typical Small Manufacturer’s Gas Room DHE Conversion 

Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage 

of Annual 

Capex 

%

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 1 0 0 0 0 

EL 1 0 361 233 12 331 

EL 2 

(TSL 1) 0.5 361 233 12 331 

EL 3 

(TSL 2) 0.5 1083 700 35 992 

EL 4 

(TSL 3−TSL 4) 0 1445 933 47 1323 

EL 5 

(TSL 5−TSL 6) 0 1445 1865 61 1720 

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Table 12.6.20 Comparison of a Typical Large Manufacturer’s Gas Room DHE Conversion 

Costs to Annual Expenses, Revenue, and Operating Profit 

Efficiency 

Level 

Number of 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Cost as a 

Percentage 

of Annual 

Capex 

%

Product 

Conversion 

Cost as a 

Percentage 

of Annual 

R&D 

Expense 

%

Total 

Conversion 

Cost as a 

Percentage 

of Annual 

Revenue 

%

Total 

Conversion 

Cost as a 

Percentage of 

Annual EBIT

%

Baseline 0 0 0 0 0 

EL 1 0 0 0 0 0 

EL 2 

(TSL 1) 0 0 0 0 0 

EL 3 

(TSL 2) 0 0 0 0 0 

EL 4 

(TSL 3−TSL 4) 1 0 0 0 0 

EL 5 

(TSL 5−TSL 6) 0 420 542 18 500 

Table 12.6.21 Comparison of a Typical Small Manufacturer’s Conversion Costs to Annual 

Expenses, Revenue, and Operating Profit (for all traditional DHE) 

Capital 

Conversion Cost 

as a Percentage of 

Annual Capital 

Expenditures 

(Capex) 

%

Product 

Conversion Cost 

as a Percentage of 

Annual R&D 

Expense 

%

Total Conversion 

Cost as a 

Percentage of 

Annual Revenue

%

Total Conversion 

Cost as a 

Percentage of 

Annual Earnings 

Before Interest 

and Taxes (EBIT)

%

Baseline 0 0 0 0 

TSL 1 170 128 6 163 

TSL 2 242 155 8 221 

TSL 3 378 245 12 347

TSL 4 443 283 14 404 

TSL 5 367 425 15 416 

TSL 6 499 495 19 531 

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Table 12.6.22 Comparison of a Typical Large Manufacturer’s Conversion Costs to Annual 

Expenses, Revenue, and Operating Profit (for all traditional DHE) 

Capital 

Conversion Cost 

as a Percentage of 

Annual Capex 

%

Product 

Conversion Cost 

as a Percentage of 

Annual R&D 

Expense 

%

Total Conversion 

Cost as a 

Percentage of 

Annual Revenue

%

Total Conversion 

Cost as a 

Percentage of 

Annual EBIT 

%

Baseline 0 0 0 0 

TSL 1 7 12 0 10

TSL 2 42 30 1 40 

TSL 3 167 110 5 154 

TSL 4 246 158 8 225 

TSL 5 206 220 8 225 

TSL 6 337 300 12 344 

12.6.1.5 Conclusion 

Though the investments required at each TSL can be considered substantial for all 

companies, the impacts could be worse for a typical small business because they have much 

lower production volumes yet a comparable number of product offerings. At more stringent 

TSLs, it is more likely that manufacturers of traditional DHE will reduce the number of product 

lines they offer to keep their conversion costs at manageable levels. Additionally, small business 

manufacturers will face increasingly difficult decisions on whether to invest the capital required 

to be able to continue offering a full range of products, cut product lines, consolidate to maintain 

a large enough combined scale to spread the required conversion costs and operating expenses, 

or to exit the market altogether. Because of the high and somewhat fixed conversion costs, all 

manufacturers are likely to eliminate their lower volume product lines first. Small business 

manufacturers might only be able to afford to selectively upgrade their most popular products 

and be forced to discontinue lower volume products because the product development costs that 

would be required to upgrade all of their existing product lines would be too high. 

 DOE’s product line analysis reveals that small business manufacturers could be 

disproportionately harmed at more stringent TSLs as small business traditional direct heating 

manufacturers have less access to capital than their large, higher-volume competitor. For 

example, larger manufacturers can more easily justify new capital equipment that can be shared 

among multiple product lines. Additionally, higher-volume manufacturers are usually more 

diversified and can thus fund capital and product conversion costs using cash generated from all 

products. Unlike higher-volume manufacturers, small business manufacturers cannot leverage 

resources from other departments. With these considerations, it is more likely that small 

businesses would have to spend an even greater proportion of their annual R&D and capital 

expenditures than shown in the industry-wide figures. 

 Finally, small business manufacturers have less buying power than their larger, 

diversified competitors. Traditional DHE is a low-volume industry, which can make it difficult 

for any manufacturer to take advantage of bulk purchasing power or economies of scale. The two 

small businesses have approximately half the market share of their larger competitors, which 

puts them at a disadvantage when purchasing components and raw materials. In addition, the 

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large manufacturer has a parent company that manufactures products and equipment other than 

traditional DHE. This manufacturer’s larger scale and additional manufacturing capacity 

(required for products and equipment other than DHE) also give the company more leverage 

with its suppliers because it purchases greater volumes of components and raw materials. During 

the manufacturer interviews, small businesses commented that to comply with amended energy 

conservation standards, they would likely have to buy more purchased parts instead of producing 

them in house. This would increase per-product costs and reduce profits since they will 

manufacture a smaller portion of higher cost products. Because the large manufacturer has an 

advantage in purchasing power that would likely allow it to buy purchased parts at lower costs, 

an amended energy conservation standard that requires more purchased parts could 

disproportionately harm the profitability of small businesses. 

12.6.2 Impacts on Small Gas Hearth Direct Heating Equipment Manufacturers 

12.6.2.1 Introduction 

As discussed in section 12.3.4, gas hearth manufacturers are concerned that amended 

energy conservation standards could affect consumer utility of gas hearth products. They are also 

concerned about the potential impact amended energy conservation standards to alter the size of 

the gas hearth market and the current economic downturn, which has made it harder for 

consumers and builders to purchase gas hearth DHE. 

The gas hearth DHE industry is characterized by a large number of manufacturers offering 

a wide variety of hearth products. The number of competitors in the market has been declining in 

recent years due to industry consolidation and smaller companies exiting the market. Three 

major domestic manufacturers now supply a majority of the marketplace. None of the three 

major manufacturers are considered small businesses by the SBA’s criteria. The remainder of 

products are either imported (mostly from Canada) or produced by one of 12 domestic 

manufacturers that hold varying market shares. Ten of these 12 companies that have much 

smaller market shares are the 10 small business manufacturers DOE identified for gas hearth 

DHE. 

12.6.2.2 Conversion Costs for Gas Hearth Direct Heating Equipment 

Manufacturers 

 During interviews, manufacturers indicated their product lines typically are not based on 

efficiency. Rather, product lines are grouped into gas stoves, gas inserts, or gas fireplaces with 

similar appearances and shapes that span input ratings to appeal to a range of customers with 

different heating and aesthetic requirements. A product line is typically built on the same 

production platform and shares many of the appearance and optional features. Because gas 

hearth products lines are based on appearance, features, and dimensions, these product lines do 

not always have the same efficiency across input capacities. The large number of product lines 

that would require product and capital conversion costs at more stringent TSLs could put a 

substantial burden on manufacturers. 

DOE calculated its capital and product development costs for gas hearth DHE in a similar 

manner as traditional DHE. DOE estimated a per-line cost and also assumed that every 

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manufacturer would face the same conversion cost. DOE used certification databases, product 

catalogs, interviews with manufacturers, and sources of public information to estimate the 

number of product lines that meet each TSL for every gas hearth DHE manufacturer for which 

data was available. If a product line contained several products that met different efficiencies at 

different capacities, DOE assumed that the product line would be redesigned in response to 

amended energy conservation standards whenever the least efficient product did not meet the 

required efficiency level. To get its industry wide capital and product conversion costs, the 

estimate of the per product line product and capital conversion cost at each TSL was multiplied 

by the number product lines that would require capital and product conversion costs. The 

estimates DOE used for the capital and product conversion cost rise as products become more 

complex. However, unlike traditional DHE, for gas hearth DHE DOE assumed that the 

extremely large number of products in the market would make it likely that manufacturers would 

convert only a portion of their existing products at more stringent TSLs. DOE assumed that 

manufacturers would only convert up to 50 percent of their existing product lines. 

12.6.2.3 Estimated Conversion Costs for a Typical Small and a Typical Large Gas 

Hearth Direct Heating Equipment Manufacturer 

 To show how small business manufacturers could be affected compared to large 

manufacturers, DOE assumed that the entire gas hearth DHE industry was comprised of the 12 

manufacturers identified in the market and technology assessment (chapter 3 of the TSD). Using 

all available public data, DOE then identified the product lines and efficiency levels for the 

product line made by these manufacturers. DOE used this information to calculate the number of 

product lines of a typical large and small manufacturer. Table 12.6.23 and Table 12.6.24 show 

DOE’s estimates for the number of product lines of a typical small and large gas hearth 

manufacturer at each TSL. 

Table 12.6.23 Number of Product Lines of a Typical Small Gas Hearth DHE Manufacturer 

AFUE 

(for the between 27,000 Btu/h and 46,000 

Btu/h representative input rating range) 

Number of 

Product Lines 

Baseline 64 5 

TSL 1−3 67 3 

TSL 4−5 72 1 

TSL 6 93 0 

Table 12.6.24 Number of Product Lines of Typical Large Gas Hearth DHE Manufacturer 

AFUE 

(for the between 27,000 Btu/h and 46,000 

Btu/h representative input rating range) 

Number of 

Product Lines 

Baseline 64 8 

TSL 1−3 67 6 

TSL 4−5 72 3 

TSL 6 93 0 

 Table 12.6.23 shows that a typical small manufacturer offers nine total product lines: five 

at baseline efficiency (i.e., 64 percent AFUE), three at 67 percent AFUE, and one at 72 percent 

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AFUE. Table 12.6.23 suggests that a typical small manufacturer would need to upgrade up to 

five product lines at TSLs 1 through 3, up to eight product lines at TSLs 4 and 5, and up to nine 

at TSL 6. Table 12.6.24 shows that a typical large manufacturer currently offers 17 total product 

lines: eight at the baseline (64 percent AFUE), six at 67 percent AFUE, and three at 72 percent 

AFUE. Table 12.6.24 suggests that a typical large manufacturer would upgrade up to eight 

product lines at TSLs 1 through 3, up to 14 product lines at TSLs 4 and 5, and up to 17 at TSL 6. 

 To calculate the capital and product conversion costs for a typical large and small 

manufacturer, DOE multiplied its estimate of the per-product line capital and product conversion 

costs by the number of product lines a typical large and small manufacturer would need to 

upgrade at each TSL. As stated, DOE assumed that manufacturers would convert enough product 

lines that did not meet the required efficiencies so that the total number of product lines offered 

by manufacturers did not drop below 50 percent of their existing number of product lines. Table 

12.6.25 and Table 12.6.26 show DOE’s estimates for the product and capital conversion costs 

that a typical large and small manufacturer would incur at each TSL. 

Table 12.6.25 Conversion Costs for a Typical Small Gas Hearth DHE Manufacturer 

Efficiency 

Level 

Number of 

Base Case 

Product Lines 

for a Typical 

Small 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Small 

Manufacturer 

$

Product 

Conversion 

Costs for a 

Typical Small 

Manufacturer 

$

Total 

Conversion 

Costs for a 

Typical Small 

Manufacturer 

$

Baseline 5 0 0 0 

EL 1 

(TSL 1−TSL 3) 3 25,000 66,667 91,667 

EL 2 

(TSL 4−TSL 5) 1 75,000 200,000 275,000 

EL 3 

(TSL 6) 0 400,000 800,000 1,200,000 

Table 12.6.26 Conversion Costs for a Typical Large Gas Hearth DHE Manufacturer 

Efficiency 

Level 

Number of 

Base Case 

Product Lines 

for a Typical 

Large 

Manufacturer 

Capital 

Conversion 

Costs for a 

Typical Large 

Manufacturer

$

Product 

Conversion 

Costs for a 

Typical Large 

Manufacturer

$

Total 

Conversion 

Costs for a 

Typical Large 

Manufacturer 

$

Baseline 8 0 0 0 

EL 1 

(TSL 1−TSL 3) 6 50,000 133,333 183,333 

EL 2 

(TSL 4−TSL 5) 3 125,000 333,333 458,333 

EL 3 

(TSL 6) 0 800,000 1,600,000 2,400,000 

12.6.2.4 Impact of Conversion Costs on a Typical Small Gas Hearth Direct Heating 

Equipment Manufacturer 

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Because a typical large manufacturer has significantly higher market shares and a greater 

number product lines, a typical large manufacturer has higher conversion costs than a typical 

small manufacturer on an absolute basis. However, a typical small business manufacturer could 

be disproportionately affected at every TSL. To show how a much lower-volume manufacturing 

scale could harm a small business manufacturer, DOE used the market share of a typical large 

manufacturer and a typical small manufacturer to estimate their annual revenues, EBITs, R&D 

expenses, and capital expenditures. To determine annual revenue, DOE multiplied the 2010 

revenue calculated in the GRIM for each product class by the market share of a typical large and 

small manufacturer. DOE used the same industry financial parameters for the percentage of 

revenue for operating profit, R&D, and capital expenditures for a typical small and large 

manufacturer. To calculate the annual typical operating profit, R&D expense, and capital 

conversion expenses, DOE multiplied the revenue of typical small and large manufacturers by 

these parameters and compared this figure to its estimate of the product and capital conversion 

cost for a typical small and large manufacturer. Table 12.6.27 and Table 12.6.28 show these 

comparisons. 

Table 12.6.27 Comparison of a Typical Small Gas Hearth DHE Manufacturer’s 

Conversion Costs to Annual Expenses, Revenue, and Profit 

Capital 

Conversion Cost 

as a Percentage of 

Annual Capex 

%

Product 

Conversion Cost 

as a Percentage of 

Annual R&D 

Expense 

%

Total Conversion 

Cost as a 

Percentage of 

Annual Revenue

%

Total Conversion 

Cost as a 

Percentage of 

Annual EBIT 

%

Baseline 0 0 0 0 

TSL 1−3 33.2 141.8 2.9 83.0 

TSL 4−5 99.7 425.5 8.8 248.9 

TSL 6 531.9 1702.2 38.3 1086.2 

Table 12.6.28 Comparison of a Typical Large Gas Hearth DHE Manufacturer’s 

Conversion Costs to Annual Expenses, Revenue, and Profit 

Capital 

Conversion Cost 

as a Percentage of 

Annual Capex 

%

Product 

Conversion Cost 

as a Percentage of 

Annual R&D 

Expense 

%

Total Conversion 

Cost as a 

Percentage of 

Annual Revenue

%

Total Conversion 

Cost as a 

Percentage of 

Annual EBIT 

%

Baseline 0 0 0 0 

TSL 1−3 3.2 13.5 0.3 7.9 

TSL 4−5 7.9 33.8 0.7 19.8 

TSL 6 50.7 162.1 3.6 103.4 

12.6.2.5 Conclusion 

DOE’s product line analysis illustrates that small business manufacturers have the 

potential to be differentially impacted by amended energy conservation standard because the 

small business manufacturers typically have a disproportionate number of product lines relative 

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to their much smaller scale. For TSL 4 through TSL 6, amended energy conservation standards 

could force a typical small business manufacturer to hire additional engineers, discontinue 

product lines, or selectively upgrade more popular products with their present limited 

engineering and product development resources. Because the annual shipments of small business 

manufacturers are several times lower than those of major manufacturers and small 

manufacturers typically only manufacture hearth products, small companies have less buying 

power than their larger competitors. The higher production volumes of the large manufacturers 

give them more leverage to negotiate lower prices with component and material suppliers. 

Because these conversion costs are more substantial relative to the size of a typical small 

business, large manufacturers could take additional market share from small business 

manufacturers at TSL 4 through TSL 6. Because TSLs 4 and 5 require additional plant 

modifications, the added conversion costs make it more likely that small business manufacturers 

could discontinue some of their least popular product lines at TSL 4 and TSL 5. At TSL 6, the 

substantial conversion costs could cause even a large manufacturer to offer fewer product lines to 

bring down the significant product conversion costs. Consequently, it is increasingly likely that 

higher conversion costs could cause many small business manufacturers to exit the market or 

become severely constrained with the number of product lines offered at TSLs 4 through TSL 6. 

While DOE’s product line analysis reveals the potential for small business manufacturers 

to be disproportionately harmed by energy conservation standards, especially at TSLs 4 through 

TSL 6, a small gas hearth DHE manufacturer is likely to face additional challenges from 

amended energy conservation standards at these TSLs. The estimates in Table 12.6.27 and Table 

12.6.28 assume that a typical large and small manufacturer spend the same percentage of annual 

revenues on R&D and capital expenditures, and earn the same EBIT as the industry-wide figure. 

However, if a small business manufacturer spends less than the industry figure, the impacts on a 

typical small business would be even greater. Also, because a typical large manufacturer has a 

parent company and thus more access to product development and engineering resources, small 

business manufacturers have fewer resources than major manufacturers to upgrade product lines. 

Having a parent company also gives major manufacturers greater access to capital.

At TSLs 1 through 3, a typical small manufacturer would not face prohibitively large 

conversion costs to meet the amended energy conservation standards. At these TSLs, the 

amended energy conservation standards could be met with products that use electric ignition, 

which is not particularly capital intensive. These changes would also not require significant 

investments in product development costs by small businesses. The most substantial portion of 

the conversion costs at TSLs 1 through 3 would be testing, recertifying, and remarketing all the 

existing product lines that currently meet the baseline efficiencies. In addition, at TSL 1 through 

TSL 3, it is likely that small business manufacturers would not discontinue a large number of 

product lines to lower product and capital conversion costs because these costs are not 

substantial. A typical small manufacturer has multiple product lines that meet and exceed the 

required efficiencies at TSL 3. Also, the proposed standard levels do not require manufacturers 

to substantially redesign product lines that fall below TSL 3. 

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12.7 OTHER IMPACTS 

12.7.1 Employment 

12.7.1.1 Methodology 

To quantitatively assess the impacts of amended energy conservation standards on 

residential water heater, DHE, and pool heater manufacturing employment, DOE used the GRIM 

to estimate the domestic labor expenditures and number of employees in the base case and at 

each TSL in the standards case throughout the analysis period. DOE used statistical data from the 

U.S. Census Bureau, the results of the engineering analysis, and interviews with manufacturers 

to estimate the inputs necessary to calculate industry-wide labor expenditures and domestic 

employment levels. 

In the GRIM, DOE used the labor content of each product and the MPCs from the 

engineering analysis to estimate the annual labor expenditures in each industry. In the GRIMs, 

the labor expenditures in each year are calculated by multiplying the MPCs by the labor 

percentage of each product from the engineering analysis. DOE used information from the 

manufacturer interviews to estimate the portion of total labor expenditures for the United States. 

DOE multiplied the total annual labor expenditures in the GRIM by the percentage of 

U.S. production for domestic consumption to calculate domestic labor expenditures for 

production labor in each industry. The domestic annual labor expenditures in the GRIM were 

converted to domestic production employment levels by dividing production labor expenditures 

by the annual payment per production worker (production worker hours times the labor rate 

found in the 2006 ASM.d

 DOE calculated the number of non-production employees by 

multiplying the number of production workers by the ratio of non-production workers to 

production workers calculated using the employment data in the 2006 ASM. 

DOE calculated the domestic annual labor expenditures and employment levels for the 

base case and at each TSL. The impacts on domestic employment due to standards can be 

assessed by comparing the employment results in the base case to the results at each TSL. In the 

GRIM analyses, the estimates are the maximum potential employment in the industry because 

they assume manufacturers would continue to produce the same scope of covered products in the 

same production facilities. Consequently, the upper bound of the employment impacts calculated 

in the GRIM assumes that domestic production is not shifted to lower-labor-cost countries. 

Because there is a real risk of manufacturers exiting the market or no longer offering the same 

scope of covered products in response to amended energy conservation standards, the lower end 

of the range of employment results in this section include the estimate of the total number of 

U.S. production workers in the industry that could lose their job if all existing production were to 

no longer be made domestically. Consequently, the lower bound of the potential negative 

employment analysis does not account for some manufacturers’ dependence on the total 

production volume of all products produced in a facility to achieve an adequate scale. For 

example, should a water heater manufacturer move part of its production abroad, its domestic 

 

d

 The labor rates and production hours per year per employee found in the Census Bureau’s 2006 are similar to 

figures reported in the engineering analysis. DOE used 2006 ASM figures to ensure a consistent set of publicly 

available data for the manufacturing employment analysis. 

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production facility may no longer have the manufacturing scale to get volume discounts on its 

purchases or be able to justify maintaining major capital equipment. Thus, the impact on a 

manufacturing facility due to a line closure can affect far more employees than just the 

production workers directly associated with a covered product. 

While the results present a range of employment impacts following the compliance date 

of amended energy conservation standards, the discussion below also includes a qualitative 

discussion of the likelihood of negative employment impacts at the various TSLs. 

12.7.1.2 Gas-Fired and Electric Storage Water Heater Employment Impacts 

The GRIM forecasts the gas-fired and electric storage domestic labor expenditure for 

production labor in 2015 will be approximately $135 million. Using the $17.54 wage rate and 

2,084 production hours per year per employee found in the 2006 ASM, the GRIM estimates 

there will be approximately 3,690 U.S. production employees involved in manufacturing gasfired and electric storage water heaters covered by this rulemaking. In addition, DOE estimates 

that 608 non-production employees in the United States will support gas-fired and electric 

storage water heater production.e

 The employment spreadsheet of the water heater GRIM shows 

the annual domestic employment impacts in further detail. Approximately two-thirds of gas-fired 

and electric storage water heaters sold in the United States are manufactured domestically. 

Table 12.7.1 illustrates the range of potential impacts of amended energy conservation 

standards on domestic production employment levels at each TSL for the gas-fired and electric 

storage water heater market. 

 

e

As defined in the 2006 ASM, production workers number include “workers (up through the line-supervisor 

level) engaged in fabricating, processing, assembling, inspecting, receiving, storing, handling, packing, 

warehousing, shipping (but not delivering), maintenance, repair, janitorial and guard services, product 

development, auxiliary production for plant's own use (e.g., power plant), recordkeeping, and other services 

closely associated with these production operations at the establishment covered by the report. Employees 

above the working-supervisor level are excluded from this item.” Non-production workers are defined as 

“employees of the manufacturing establishment including those engaged in factory supervision above the linesupervisor level. It includes sales (including driver-salespersons), sales delivery (highway truck drivers and 

their helpers), advertising, credit, collection, installation and servicing of own products, clerical and routine 

office functions, executive, purchasing, financing, legal, personnel (including cafeteria, medical, etc.), 

professional, and technical employees. Also included are employees on the payroll of the manufacturing 

establishment engaged in the construction of major additions or alterations utilized as a separate work force.” 

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Table 12.7.1 Potential Changes in the Total Number of Domestic Gas-Fired and Electric 

Storage Water Heater Production Workers in 2015 

Trial Standard Level 

Baseline 1 2 3 4 5 6 7 

Total Number of Domestic 

Production Workers in 

2015 (without changes in 

production locations) 

3,690 3,758 3,842 3,881 3,977 4,396 7.768 9,823 

Potential Changes in 

Domestic Production 

Workers in 2015* 

- 

(3,690) 

- 68 

(3,690) 

- 152 

(3,690) - 

191 

(3,690) - 

287 

(3,690) - 

706 

(3,690) - 

4,078 

(3,690) - 

6,133 

*DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

During manufacturer interviews, gas-fired and electric storage water heater 

manufacturers stated that they expect employment levels to remain relatively constant at TSL 1 

through TSL 4. At these TSLs, baseline gas-fired and electric storage water heaters would be 

improved by increasing the insulation thickness around the tank. These improvements would not 

greatly alter the manufacturing process and are not likely to significantly change employment 

levels. 

At TSL 5, domestic employment would likely increase if manufacturers build their 

dedicated heat pump line for large rated storage volumes in the United States. However, because 

the labor content to assemble fully integrated heat pump water heaters is much higher than most 

models currently on the market, manufacturers could also decide to build these lines in existing 

overseas production facilities. At TSL 5, the sourcing decisions would also impact the likely 

employment impacts. If manufacturers built a dedicated condensing line for large rated storage 

volumes in the United States, domestic employment could increase. 

The employment impacts calculated show TSL 6 and TSL 7 estimate changes to 

domestic gas-fired and electric storage water heater employment. These TSLs effectively would 

require the use of integrated heat pump water heater technology for electric storage water heaters 

for all rate volumes. Manufacturers stated that at these levels, they initially would expect to 

purchase fully-assembled heat pump modules from off-shore suppliers since they lack the 

experience, space, and scale to assemble such units. The purchased modules would be joined to 

modified tanks assemblies made on existing assembly lines. DOE noted that some heat pump 

modules are wholly self-contained (i.e. the refrigerant system is sealed prior to being shipped to 

the water heater manufacturer) while other modules require some final assembly on-site to create 

a sealed system. Heat pump water heaters would also require significantly more testing 

compared to traditional resistance-style water heaters. While the industry typically has 

manufacturing facilities with a mix of dedicated and non-dedicated assembly lines by fuel type, 

flexible assembly lines may have to be discontinued at TSL 6 and TSL 7, because heat pump 

water heaters are top-heavy, take longer to test, and take significantly longer to assemble than 

electric storage water heaters that use resistance-heater elements. Present facilities would likely 

need line extensions to accommodate the additional time and labor required for assembling and 

testing heat pump water heaters while maintaining throughput. Therefore, if manufacturers 

source the heat pump modules and continue to assemble electric storage water heaters in their 

existing facilities, it is likely that employment would increase. However, the expected increase in 

the labor required to manufacturer heat pump water heaters may also accelerate the trend of 

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water heater manufacturers locating new or expanding existing production facilities outside the 

United States, especially if a manufacturer decides to assemble heat pump modules in-house. 

Because TSL 7 requires additional improvements over TSL 6, the potential positive impacts on 

employment at TSL 7 are greater if manufacturers upgrade existing facilities because the 

additional improvements also require more labor. 

At TSL 7 (the max-tech level) gas-fired storage water heaters would have to operate in a 

fully condensing mode. DOE research suggests that condensing gas-fired water heaters would be 

more complex than standard power-vent products and less efficient products and therefore would 

require additional labor to assemble. If manufacturers did not change their sourcing decisions at 

TSL 7, it is likely there would be positive employment impacts for gas-fired storage water 

heaters. 

12.7.1.3 Oil-Fired Storage Water Heater Employment Impacts 

The GRIM calculates that the oil-fired domestic labor expenditure for production labor in 

2015 will be approximately $1.4 million. Using the $17.54 wage rate and 2,084 production hours 

per year per employee found in the 2006 ASM, the GRIM estimates there will be approximately 

38 U.S. production employees involved in manufacturing oil-fired storage water heaters covered 

by this rulemaking in 2015. In addition, DOE estimates that six non-production employees in the 

United States will support oil-fired storage water heater production and manufacturer sales. The 

employment spreadsheet of the water heater GRIM shows the annual domestic employment 

impacts in further detail. Approximately 95 percent of oil-fired storage water heaters sold in the 

United States are manufactured domestically. 

Table 12.7.2 illustrates the range of potential impacts of amended energy conservation 

standards on domestic production employment levels at each TSL for the oil-fired water heater 

market. 

Table 12.7.2 Potential Changes in the Total Number of Domestic Oil-Fired Storage Water 

Heater Production Workers in 2015 

Trial Standard Level 

Baseline 1 2 3 4 5 6 7 

Total Number of Domestic 

Production Workers in 

2015 (without changes in 

production locations) 

38 37 40 37 37 37 37 47 

Potential Changes in 

Domestic Production 

Workers in 2015* 

- 

(38) - 

(1) (38) - 2 (38) - (1) (38) - (1) (38) - (1) (38) - (1) (38) - 9 

*DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers. 

At TSL 1 through TSL 6, DOE does not expect substantial changes to domestic 

employment in the oil-fired storage water heater market if manufacturers are able to use the 

insulation type and thickness technology options in the engineering analysis to reach the 

efficiency requirements at these TSLs. At TSL 7, DOE research suggests that if all current 

suppliers continue to compete, domestic employment would likely increase slightly, because the 

non-proprietary, higher-efficiency heat exchangers required to reach this TSL would also require 

more labor to fabricate and assemble. However, given the size of the oil-fired storage water 

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heater market and the expected product conversion costs, companies that do not currently make 

oil-fired storage water heaters at these efficiency levels could choose to exit the market. If the 

remaining manufacturers do not need to increase employment levels to meet the total market 

demand, employment in the residential oil-fired market could hence decline. 

12.7.1.4 Gas-Fired Instantaneous Water Heater Employment Impacts 

DOE’s research suggests that currently no gas-fired instantaneous water heaters are made 

domestically. All manufacturers or their domestic distributors do maintain offices in the United 

States to handle technical support, training, certification, and other requirements. However, as 

amended energy conservation standards for instantaneous water heaters are raised, the additional 

complexity of standards-compliant water heaters may require additional training and field 

support, thereby resulting in higher employment levels. Thus domestic employment may 

increase marginally due to amended energy conservation standards. 

12.7.1.5 Traditional Direct Heating Equipment Employment Impacts 

The GRIM calculates that the traditional DHE domestic labor expenditure for production 

labor in 2013 will be approximately $9 million. Using the $14.76 wage rate and 2,036 production 

hours per year per employee found in the 2006 ASM, the GRIM estimates there will be 

approximately 300 U.S. production employees involved in manufacturing traditional DHE 

covered by this rulemaking. DOE also estimates that 168 non-production employees in the 

United States will support traditional DHE production. The employment spreadsheet of the DHE 

GRIM shows the annual domestic employment impacts in further detail. Approximately 100 

percent of traditional DHE sold in the United States are manufactured domestically. 

Table 12.7.3 illustrates the range of potential impacts of amended energy conservation 

standards on domestic production employment levels at each TSL for the traditional DHE 

market. 

Table 12.7.3 Potential Changes in the Total Number of Domestic Traditional Direct 

Heating Production Workers in 2013 

TSL 

Baseline 1 2 3 4 5 6 

Total Number of Domestic 

Production Workers in 

2013 (without changes in 

production locations) 

300 305 330 344 350 348 361 

Potential Changes in 

Domestic Production 

Workers in 2013* 

- (300) - 5 (300) - 

30 

(300) - 

44 

(300) - 

50 (300) - 48 (300) - 61 

There could be negative employment impacts for direct heating equipment at any of the 

considered TSLs if manufacturers’ expectations are realized regarding higher prices yielding 

reduced demand. Besides increasing component costs, more stringent TSLs put additional 

pressure on manufacturers that could require them to invest in low-volume products, discontinue 

product lines that do not meet the required efficiency level, or exit the market altogether. The 

results shown in Table 12.7.3 above reflect upper end of the range of potential employment 

impacts. 

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While multiple manufacturers could be adversely affected by amended energy 

conservation standards, at TSL 1 and TSL2, most businesses have existing products in at least 

three of the four traditional DHE product types. If manufacturers chose to expand production of 

those products that meet the required efficiencies, employment could increase. Any manufacturer 

that decided to discontinue product lines could reduce total employment within the industry if it 

impacted the availability of substitute replacement products. Net employment impacts if 

manufacturers discontinued product lines at TSL 1 and TSL 2 would depend on total product 

demand and the source of replacement production labor. At TSL 3 and above, products become 

increasingly more complex, require higher capital and product conversion costs, and, hence, are 

likely to lead to the discontinuation of more product lines. Additionally, every manufacturer 

would face product conversion costs that required a complete redesign for at least one product 

class at TSL 3 and above. An amended energy conservation standard at TSL 3 and above could 

cause small businesses to exit the market completely or stop producing certain product classes. If 

small and large manufacturers discontinued product lines or exited the market, domestic 

employment would be impacted if replacements were not available or a manufacturer exited the 

market and its market share was not captured by another manufacturer. 

12.7.1.6 Gas Hearth Direct Heating Equipment Employment Impacts 

The GRIM calculates that, absent amended energy conservation standards, the gas hearth 

DHE domestic labor expenditure for production labor in 2013 will be approximately $37 million. 

Using the $14.76 wage rate and 2,036 production hours per year per employee found in the 2006 

ASM, the GRIM estimates there will be approximately 1,243 U.S. production employees 

involved in manufacturing gas hearth DHE covered by this rulemaking in 2013. In addition, 

DOE estimates that 697 non-production employees in the United States will support gas hearth 

DHE production. The employment spreadsheet of the DHE GRIM shows the annual domestic 

employment impacts in further detail. Approximately 80 percent of gas hearth DHE sold in the 

United States are manufactured domestically. 

Table 12.7.4 illustrates the range of potential impacts of amended energy conservation 

standards on domestic production employment levels at each TSL for the gas hearth DHE 

market. 

Table 12.7.4 Potential Changes in the Total Number of Domestic Gas Hearth Direct 

Heating Equipment Production Workers in 2013 

TSL 

Baseline 1 2 3 4 5 6 

Total Number of Domestic 

Production Workers in 

2013 (without changes in 

production locations) 

1,243 1,250 1,250 1,250 1,759 1,759 2,089 

Potential Changes in 

Domestic Production 

Workers in 2013* 

- 

(1,243) -

7 

(1,243) -

7 

(1,243) -

7 

(1,243) -

516 

(1,243) -

516 

(1,243) -

846 

*DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers. 

DOE does not expect significant employment impacts at TSL 1 through TSL 3. A 

substantial portion of the industry meets the requisite efficiencies required by these TSLs and 

DOE research suggests manufacturers can make products at these TSLs by replacing standing 

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pilot ignition systems with electronic ignition systems. For TSL 4 through TSL 6, manufacturers 

would be increasingly likely to exit the market or reduce their product offerings. At TSL 4 and 

TSL 5, air circulating blowers are required and at TSL 6 condensing operation is required, 

making these products increasingly complex. At these levels, manufacturers suggested the size of 

the gas hearth DHE market covered by today’s rulemaking could be impacted due to possible 

consumer reactions, which could also put additional pressure on domestic firms to consolidate or 

exit the market. A smaller market could reduce employment if the higher labor content required 

to manufacturer standards-compliant products is more than offset by a decline industry sales. 

12.7.1.7 Pool Heater Employment Impacts 

The GRIM calculates that the pool heater domestic labor expenditure for production labor 

in 2013 will be approximately $24 million. Using the $17.54 wage rate and 2,084 production 

hours per year per employee found in the 2006 ASM, the GRIM estimates there will be 

approximately 644 U.S. production employees involved in manufacturing gas-fired pool heaters 

covered by this rulemaking. In addition, DOE estimates that 106 non-production employees will 

support gas-fired pool heater production. The employment spreadsheet of the pool heater GRIM 

shows the annual domestic employment impacts in further detail. Approximately 100 percent of 

gas-fired pool heaters sold in the United States are manufactured domestically. 

Table 12.7.5 illustrates the range of potential impacts of amended energy conservation 

standards on domestic production employment levels at each TSL for the gas-fired pool heater 

market. 

Table 12.7.5 Potential Changes in the Total Number of Domestic Pool Heater Production 

Workers in 2013 

TSL 

Baseline 1 2 3 4 5 6 

Total Number of Domestic 

Production Workers in 

2013 (without changes in 

production locations) 

644 657 678 710 737 807 975 

Potential Changes in 

Domestic Production 

Workers in 2013* 

- 

(644) - 

13 

(644) - 

34 

(644) - 

66 

(644) - 

93 

(644) - 

163 

(644) - 

331 

*DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers. 

As shown in Table 12.7.5, there are relatively minor employment impacts at TSL 1 

through TSL 4 because the technology options at these TSLs involve mostly component changes 

that do not greatly affect labor. For example, the technology changes for existing products that 

meet TSLs 3 and 4 require power venting. While this technology would change the installation 

of much of the installed base and cause manufacturers to increase the production of low-volume 

products, the basic assembly of the pool heater at the point of manufacture is not substantially 

changed. However, the existing products in the market at TSL 5 are near-condensing products 

and products at TSL 6 use fully condensing technology. At TSL 5 and above, manufacturers 

must either upgrade an increasing number of products or discontinue products. The higherefficiency products at TSL 5 and TSL 6 are typically more complex and take longer to assemble, 

resulting in increased employment if shipments levels are maintained. However, manufacturers 

have stated that the higher prices of higher-efficiency products could result in fewer annual 

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shipments, which could reduce employment as well. At TSL 5 and TSL 6, manufacturers are 

especially concerned that the closer their products come to condensing technology, the higher 

production costs could reduce industry-wide shipments. If manufacturers experienced a drop in 

total shipments, the domestic employment in the gas-fired pool heater industry could be 

negatively affected. 

12.7.2 Production Capacity 

12.7.2.1 Gas-Fired and Electric Storage Water Heaters Capacity Impacts 

Amended energy conservation standards could cause short term capacity constraints for 

gas-fired storage water heaters at TSL 7 and cause short term capacity constraints for electric 

storage water heaters at TSL 6 and TSL 7. However, the remaining TSLs, manufacturers could 

maintain capacity levels and continue to meet market demand under amended energy 

conservation standards. 

DOE research suggests for the efficiency requirements for gas-fired storage water heaters 

could be met by adding more foam insulation to all volume sizes at TSL 1 through TSL 4 and 

TSL 6. These changes would not require gas-fired storage water heater manufacturers to greatly 

alter their existing production facilities or equipment and would not cause capacity constraints. 

TSL 5 could also result in a constrained market for large volume sizes if manufacturers do not 

make the required investments to offer gas-fired condensing water heaters at relatively low 

shipment volumes. 

The dramatically different technology required at the max-tech level for gas-fired storage 

water heaters introduces problems that could cause short-term capacity constraints in the market. 

At TSL 7 (the max-tech level), all manufacturers would need to redesign all of their existing 

products because none currently offer residential water heaters that use condensing technology. 

Manufacturers would also have to retrain their installers and servicers to handle technology that 

varies significantly from the majority of existing products on the market. The fundamental 

fabrication and production equipment of gas-fired storage water heaters are substantially 

different for water heaters that use condensing technology. Equipment to manufacture required 

heat exchangers and new tank designs would be required, as well as substantial changes to all 

subassembly and main assembly lines to handle the new technology. DOE estimates that 

manufacturers would incur over $110 million in capital conversion costs to make these plant 

modifications if all residential gas-fired storage water heaters required condensing technology. 

For comparison, the base-case estimate for the net PPE for gas-fired storage water heaters is 

approximately $166 million. This comparison of the estimate of current net PPE to the required 

capital conversion costs indicates the plant and equipment changes require manufacturers to 

almost completely modify or replace a substantial portion of their existing production assets for 

gas-fired storage water heaters. DOE also estimates that these changes would strand 

approximately $26 million of existing assists, mainly the book value of existing equipment that 

can no longer be used with condensing technology. In addition, manufacturers believe that there 

could be problems with quality control to manufacture more complex products on high-volume 

production lines. Throughput issues could further increase the capital costs required if the line 

rates required manufacturers to install additional production lines. Manufacturers indicated that 

these potential problems and the extremely substantial changes that are required to their facilities 

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could cause a constrained market until the production equipment is installed and the high speed 

manufacturing of what are currently low-volume commercial products can be expanded to meet 

the demand of the gas-fired residential water heater market. 

For electric storage water heaters, TSL 1 through TSL 3 would require only minor 

changes to existing products to increase the tank insulation thickness. At TSL 4, more substantial 

plant modifications would be required because changes to the insulation thickness would require 

more foaming stations and additional production lines due to a lower throughput. However, 

electric storage water heater manufacturers would be able to maintain manufacturing capacity 

levels and continue to meet market demand under amended energy conservation standards at 

these TSLs. These TSLs do not require prohibitively costly or complex changes to existing 

facilities or most products on the market today. TSL 5 could also result in a constrained market 

for large volume sizes if manufacturers do not make the required investments to offer electric 

heat pump water heaters at relatively low shipment volumes. 

Electric storage water heater manufacturers indicated that there could be potential 

capacity impacts at TSL 6 or TSL 7, which effectively require heat pump technology. However, 

manufacturers of electric storage water heaters indicated that significant changes to production 

facilities would be required if amended energy conservation standards effectively mandated heat 

pump water heaters for all rated volume sizes (TSL 6 and TSL 7). Several manufacturers stated 

that they could move all or part of their production to Mexico to take advantage of lower labor 

costs if more complex heat pump water heaters were required. Manufacturers indicated that they 

would likely source the heat pump module initially if they were required to exclusively 

manufacture heat pump water heaters. However, a dramatic increase in the demand for heat 

pump modules could strain suppliers, especially in the short-term. Finally, manufacturers also 

stated that they have very little experience with manufacturing heat pump water heaters. 

Manufacturers indicated that the changes to their facilities (including potential plant sourcing 

decisions) could cause a constrained market until the production equipment is installed and any 

problems with high speed manufacturing are resolved. 

12.7.2.2 Oil-Fired Storage Water Heaters Capacity Impacts 

While amended energy conservation standards could impact the current market shares in 

the oil-fired market, it is unlikely that standards would result in a constrained market. For oilfired storage water heaters, the fundamental fabrication and assembly equipment would not be 

expected to change significantly in order to comply with TSL 1 through TSL 6. While DOE 

research suggests that products that meet TSL 1 though TSL 6 require relatively minor changes 

to the insulation material or thickness, the product conversion costs necessary at these TSLs 

could cause at least one manufacturer with significant market share to exit the residential oilfired storage water heater market due to the low total shipment volumes. At any efficiency level 

that would likely require a multi-flue heat exchanger (i.e., TSL 7), all but one manufacturer 

would need to make a significant and costly redesign of existing residential oil-fired product 

lines and related manufacturing facilities. These substantial changes could cause manufacturers 

to exit the residential oil-fired storage water heater market. However, even TSL 7 is unlikely to 

result in a constrained market even if any manufacturer exited the oil-fired residential water 

heater market. One residential oil-fired storage water heater manufacturer with significant market 

share has products that meet the max-tech level. Due to the low shipment volumes of oil-fired 

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storage water heaters, this manufacturer could meet the total industry demand and industry-wide 

capacity would not be impacted. 

12.7.2.3 Gas-Fired Instantaneous Water Heaters Capacity Impacts 

Short-term capacity constraints for gas-fired instantaneous water heaters could develop at 

TSL 7. DOE research suggests that all gas-fired instantaneous water heaters are currently 

imported. If the amended energy conservation standards required more-efficient products than 

those currently offered, foreign manufacturers and parent companies would have to decide 

whether the relatively small market for gas-fired instantaneous water heaters in the United States 

would justify the required investments. DOE expects that TSL 1 through TSL 6 would be 

unlikely to disrupt supply to the United States because of the number of existing product lines 

that manufacturers could offer without substantial product development. The number of existing 

product lines on the market drops substantially at TSL 7. There could be capacity constraints in 

response to amended energy conservation standards at TSL 7 which could lead to capacity 

constraints once amended efficiency standards go into effect, depending on the reactions of 

manufacturers. 

12.7.2.4 Traditional Direct Heating Equipment Capacity Impacts 

Amended energy conservation standards could lead to a constrained traditional DHE 

market. DOE does not expect that traditional DHE manufacturers would need to substantially 

modify existing facilities in response to amended energy conservation standards at TSL 1 or TSL 

2. However, at TSL 3 though TSL 6, some manufacturers would face complete product redesigns 

for either gas wall fan or gas room DHE. A complete redesign would entail significant product 

development, tooling, certification and testing costs. Some manufacturers indicated that low 

shipment volumes would make these costs unjustifiable for many product lines, thereby leading 

to the discontinuation of those lines. Small businesses with less access to capital would be even 

more likely to face this problem than higher-volume, more diversified competitors, possibly 

resulting in further industry consolidation. Pressure that forced manufacturers to consolidate or 

exit the market could also strain the remaining manufacturers’ capacity to increase production to 

meet industry demand. However at TSL 3, manufacturers would enough existing products in 

multiple product classes that they could selectively upgrade enough product lines to meet 

industry demand and remain in business. However, setting an amended energy conservation 

standard above TSL 3 could lead to manufacturing capacity problems for certain product classes 

if manufacturers cannot make the tooling changes in time to meet the standard, manufacturers do 

not have the resources to develop products that meet the required efficiencies, or manufacturers 

discontinue product lines rather than to invest an amount equal to the required conversion costs. 

12.7.2.5 Gas Hearth Direct Heating Equipment Capacity Impacts 

Gas hearth DHE manufacturers did not indicate that amended energy conservation 

standards would lead to a constrained market. Rather, such manufacturers are concerned that 

more stringent energy conservation standards could exert additional pressures on companies to 

consolidate or exit the market. Manufacturers predict that unit shipments would decline 

increasingly as the amended energy conservation standard is set closer to max-tech (i.e., TSL 6). 

Manufacturers also indicated that the high capital conversion costs would lead all manufacturers 

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to drop product lines or to not convert all existing product lines at TSL 4 through TSL 6 because 

of the smaller market for covered gas hearth products that is anticipated in the event of a more 

stringent amended energy conservation standard. The reduction in market demand and the lower 

number of product lines available are likely to lead to an overcapacity of covered products within 

the industry, even if multiple lower-volume competitors exit the market. 

12.7.2.6 Gas-Fired Pool Heaters Capacity Impacts 

Manufacturers indicated that, while potentially negative impacts were possible at lower 

TSLs, industry capacity could be impacted at more stringent TSLs. At TSL 1 through TSL 4, 

DOE research suggests that manufacturers could retool without causing capacity constraints in 

the market. If DOE were to set amended energy conservation standards at near-condensing or 

condensing levels, most gas-fired pool heater manufacturers stated that short-term production 

capacity could be affected. While only TSL 6 requires fully-condensing products, manufacturers 

indicated that adoption of amended standards at TSL 5 and above could cause them to only 

manufacture fully-condensing products in order to minimize longevity and warranty issues. 

Thus, TSL 5 and TSL 6 would require manufacturers to incur significant product and capital 

conversion costs. Consequently, an amended energy conservation standard at or above TSL 5 

could lead to short-term capacity problems if manufacturers cannot make the tooling, equipment, 

and assembly changes in time to meet the standard. 

12.7.3 Cumulative Regulatory Burden 

While any one regulation may not impose a significant burden on manufacturers, the 

combined effects of several impending regulations may have serious consequences for some 

manufacturers, groups of manufacturers, or an entire industry. Assessing the impact of a single 

regulation may overlook this cumulative regulatory burden. For the cumulative regulatory 

burden analysis, DOE describes other significant product-specific regulations that could affect 

residential water heater, DHE, and pool heater manufacturers that will take effect 3 years before 

or after the compliance date of amended energy conservation standards for these products.f

 In 

addition to the amended energy conservation regulations on residential water heaters, DHE, and 

gas-fired pool heaters, several other Federal regulations and pending regulations apply to these 

products and other equipment produced by the same manufacturers. 

Companies that produce a wide range of regulated products may be faced with more 

capital and product development expenditures than competitors with a narrower scope of 

products. Regulatory burdens can prompt companies to exit the market or reduce their product 

offerings, potentially reducing competition. Smaller companies in particular can be affected by 

regulatory costs since these companies have lower sales volumes over which they can amortize 

the costs of meeting new regulations. A proposed standard is not economically justified if it 

contributes to an unacceptable level of cumulative regulatory burden. 

 

f

 The compliance date for residential water heaters is 5 years from the date of publication of the final rule 

(approximately March 2015). The compliance date for direct heating equipment and pool heaters is 3 years from the 

date of publication of the final rule (approximately March 2013). 

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12.7.3.1 Federal DOE Regulations for Other Products Produced by Heating Product 

Manufacturers 

In addition to the amended energy conservation standards on heating products, several 

other Federal regulations and pending regulations apply to other products produced by the same 

manufacturers. DOE recognizes that each regulation can significantly affect a manufacturer’s 

financial operations. Multiple regulations affecting the same manufacturer can quickly strain 

manufacturers’ profits and possibly cause an exit from the market. Table 12.7.6 through Table 

12.7.8 list the Federal regulations that could also affect manufacturers of residential water 

heaters, DHE, and pool heaters in the 3 years leading up to and after the compliance date of 

amended energy conservation standards for these products. The amount of cumulative burden on 

any particular firm is extremely variable since the product scope of each company is different. 

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Table 12.7.6 Other DOE and Federal Actions Affecting the Residential Water Heater 

Industry 

Regulation Approximate 

Compliance Date* 

Number of 

Impacted 

Companies 

from the 

Market and 

Technology 

Assessment 

(MTA) (See 

chapter 3) 

Estimated 

Industry Total 

Conversion 

Expenses 

Cooking Products 2012 1 $22.6 (2006$)g

Residential Boilers 2012 4 N/A†

General Service Fluorescent Lamps 

and Incandescent Reflector Lamps 2012 1 $363.1 million (2008$)h

Direct Heating Equipment 2013* 1 See section 12.4.8 

Residential Pool Heaters 2013* 2 See section 12.4.8 

Residential Clothes Dryers 2014* 1 N/A††

Fluorescent Lamp Ballasts 2014* 1 N/A††

Residential Refrigerators and 

Freezers 2014* 1 N/A††

Residential Clothes Washers 2015* 2 N/A††

Small Electric Motors 2015* 1 N/A††

Commercial Distribution 

Transformers 2015* 1 N/A††

High Intensity Discharge Lamps 2015* 1 N/A††

Commercial Small Electric Motors 2015* 1 N/A††

Residential Central Air Conditioners 2016* 1 N/A††

*The dates listed are an approximation. The exact dates are pending final DOE action. 

† Energy conservation standards and compliance dates for residential boilers can be found at 10 CFR 

430.32(e)(2)(ii)-(iv). 

†† For energy conservation standards for rulemakings awaiting DOE final action, DOE does not have a finalized 

estimated total industry conversion cost. For minimum performance requirements prescribed by the Energy 

Independence and Security Act of 2007 (EISA 2007), DOE did not estimate total industry conversion costs because 

an MIA was not completed as part of a rulemaking. Pub. L. 110-140. EISA 2007 made numerous amendments to the 

Energy Policy and Conservation Act (EPCA) of 1975, Pub. L. 94-163, (42 U.S.C. 6291–6309), which established an 

energy conservation program for major household appliances and industrial and commercial equipment.

 

g

 Estimated industry conversion expenses were published in the TSD for the April 2009 residential cooking products 

final rule. 74 FR 16040. The TSD for the 2009 residential cooking products final rule can be found at: 

http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/74fr16040.pdf 

h

 Estimated industry conversion expenses were published in the TSD for the July 2009 general service fluorescent 

lamps and incandescent reflector lamps final rule. 74 FR 34154. The TSD for the July 2009 general service 

fluorescent lamps and incandescent reflector lamps final rule can be found at: 

http://www1.eere.energy.gov/buildings/appliance_standards/pdfs/74fr34080.pdf 

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Table 12.7.7 Other DOE and Federal Actions Affecting the Direct Heating Equipment 

Industry 

Regulation Approximate 

Compliance Date* 

Number of 

Impacted 

Companies 

from the 

MTA 

Estimated 

Industry Total 

Conversion 

Expenses 

Residential Dehumidifiers 2012 1 N/A†

Residential Boilers 2012* 1 N/A††

Residential Water Heaters 2015* 1 See section 12.4.8 

Residential Central Air Conditioners 2016* 1 N/A†

*The dates listed are an approximation. The exact dates are pending final DOE action. 

† For energy conservation standards for rulemakings awaiting DOE final action, DOE does not have a finalized 

estimated total industry conversion expense. 

†† Energy conservation standards and compliance dates for residential boilers can be found at 10 CFR 

430.32(e)(2)(ii)-(iv). 

Table 12.7.8 Other DOE and Federal Actions Affecting the Pool Heater Industry 

Regulation Approximate 

Compliance Date* 

Number of 

Impacted 

Companies 

from the 

MTA 

Estimated 

Industry Total 

Conversion 

Expenses 

Residential Boilers 2012* 2 N/A†

Residential Water Heaters 2015* 2 See section 12.4.8 

Residential Central Air Conditioners 2016* 1 N/A††

*The dates listed are an approximation. The exact dates are pending final DOE action. 

† Energy conservation standards and compliance dates for residential boilers can be found at 10 CFR 

430.32(e)(2)(ii)-(iv). 

††For energy conservation standards for rulemakings awaiting DOE final action, DOE does not have a finalized 

estimated total industry conversion cost. 

12.7.3.2 State Energy Conservation Standards 

The State of California mandates energy conservation standards for residential water 

heaters, DHE, and pool heaters. The California water heater standards are identical to existing 

Federal standards for covered water heaters, DHE, and pool heaters. California regulations 

include products outside of the rated storage and input capacity ranges for the product types 

covered by Federal standards in this rulemaking. California has specific regulations for 

instantaneous oil-fired water heaters, which are similar to Federal standards for oil-fired storage 

water heaters. California also issues standards for oil-fired and electric heat pump pool heaters. 

12.7.3.3 Other State Regulations 

California Lead Regulation 

The California State Assembly issued AB 1953, which will phase out lead from brass 

plumbing used to convey drinking water in water utility distribution pipes and in consumer 

plumbing fittings and faucets. Beginning on January 1, 2010, only the lead-free plumbing 

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components meeting the AB 1953 0.25 percent lead content standard can be sold in California. 

This regulation could affect components used in water heater manufacturing. 

Standing Pilot Light Ban 

California Title 20 and Florida HB 7135 banned constant burning pilots on gas-fired pool 

heaters. Both State laws also require that gas-fired pool heaters have an on/off switch mounted 

outside the pool heater that allows users to shut off the heater without adjusting the thermostat 

setting. The California law is in effect; the Florida law will go into effect after July 1, 2011. 

Other states have expressed intentions of enacting similar standards. 

ASME Required Certification 

 Some states are moving toward requiring units certified by the American Society of 

Mechanical Engineers (ASME), a non-profit group that sets many industrial and manufacturing 

standards. A pool heater that is made to ASME standards will perform to a set of specifications 

determined by ASME, specifically in relation to the operating water pressure the appliance can 

handle. 

12.7.3.4 State Emission Requirements 

SCAQMD – Ultra-Low-NOX Requirements 

The South Coast Air Quality Management District (SCAQMD) is the air pollution 

control agency for all of Orange County and the urban portions of Los Angeles, Riverside and 

San Bernardino counties. The SCAQMD covers about half of the population of the state of 

California. The SCAQMD has enacted two rules concerning natural gas-fired water heaters as 

part of its efforts to limit NOX emissions in its area. Rule 1121 covers residential water heaters 

with a rated heat input capacity of less than 75,000 Btu/h, and Rule 1146.2 sets emission 

requirements for instantaneous water heaters by covering all residential water heaters with a 

rated heat capacity of less than 2,000,000 Btu/h. Rule 1146.2 also includes standards for mobile 

home water heaters. The specific requirements and compliance dates set by the SCAQMD for 

each set of products are shown in Table 12.7.9. 

BAAQMD – Ultra-Low-NOX Requirements 

The Bay Area Air Quality Management District (BAAQMD) is the public agency 

entrusted with regulating stationary sources of air pollution in the San Francisco Bay area. The 

BAAQMD passed Rule 9-6, which phases in emission requirements for residential water heaters 

with a rated heat capacity of less than 75,000 Btu/h. Additionally, Rule 9-6 sets standards for 

instantaneous water heaters and gas-fired pool heaters that must be complied with in 2013. The 

specific requirements and compliance dates set by the BAAQMD for each set of products are 

shown in Table 12.7.9. 

Valley Air District – Ultra-Low-NOX Requirements 

The San Joaquin Valley Air Pollution Control District (Valley Air District) sets emission 

control measures in California’s Central Valley area. The Valley Air District adopted Rule 4902, 

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which set emission requirements for residential water heaters, including mobile home water 

heaters. In addition to these standards which are already in effect, Rule 4902 sets future NOX

emission requirements for residential water heaters, instantaneous water heaters, and gas-fired 

pool heaters. The specific requirements and compliance dates set by the Valley Air District for 

each set of products are shown in Table 12.7.9. 

TCEQ – Low NOX Requirements 

The Texas Commission on Environmental Equality (TCEQ) is the environmental agency 

for the state of Texas. The TCEQ has the authority to set emission requirements and place them 

in the Texas Administrative Code, including Rule 117.3205, which has been in effect since 2007. 

Rule 117.3205 set standards for residential water heaters, including mobile home water heaters 

and instantaneous water heaters. Although the TCEQ set low NOX emissions requirements, it has 

not developed ultra-low-NOX requirements like several of California’s regional agencies. The 

specific requirements set by the TCEQ for each set of products are shown in Table 12.7.9. 

Potential Future NOX Requirements 

DHE and gas-fired pool heater manufacturers have not been affected by NOX emissions 

reduction standards yet, but many anticipate State and regional legislation, particularly in 

California. Low NOX emissions standards already exist in California for natural gas-fired water 

heaters and natural gas-fired fan central furnaces. If low NOX emissions standards are established 

for DHE and gas-fired pool heaters, manufacturers would face significant compliance costs for 

independent lab certification. DHE manufacturers would also face compliance costs for 

redesigning burners and gas-fired pool heater manufacturers would face compliance costs for 

redesigning units. 

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Table 12.7.9 Air Quality Management District Low and Ultra-Low-NOX Requirements 

Current 

Requirement

Future 

Requirement

Compliance 

Date

Current 

Requirement

Future 

Requirement

Compliance 

Date

Current 

Requirement

Atmospheric Water Heaters (</= 50 Gal.)

<75 10 ng/j or 15 

ppm N/A N/A 10 ng/j N/A N/A 40 ng/j 

Atmospheric Water Heaters (> 50 Gal.)

<75 10 ng/j or 15 

ppm N/A N/A 40 ng/j 10 ng/j 1/1/2010 40 ng/j 

Direct-Vent, Power-Vent, and Power Direct-Vent Storage Tank Water Heaters

<75 10 ng/j or 15 

ppm

N/A N/A 40 ng/j 10 ng/j 1/1/2011 40 ng/j 

Mobile Home Water Heaters

<75 40 ng/j or 55 

ppm

N/A N/A 40 ng/j N/A N/A 40 ng/j 

Instantaneous Water Heaters

75 - 200 40 ng/j or 55 

ppm

14 ng/j or 20 

ppm

1 1/1/2012 40 ng/j 14 ng/j 1/1/2013 N/A 

Pool Heaters N/A N/A N/A 40 ng/j or 55 

ppm

14 ng/j or 20 

ppm

1/1/2013 N/A 

Direct Heating Equipment N/A N/A N/A N/A N/A N/A N/A 

1) SCAQMD does not specifically set emission requirements for instantaneous water heaters, but by setting standards for all Typ

covered instantaneous water heaters within that rated heat input capacity must meet this requirement.

SCAQMD BAAQMD Val

Product Type

Input 

Range 

(kBtu/h)

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12.7.3.5 International Energy Conservation Standards 

Canada Requirements for Residential Electric Storage Tank Water Heaters and GasFired Pool Heaters 

The Canadian Standards Association (CSA) enacted C191-04, a national standard 

specifying requirements related to delivery, minimum standby performance, heater element 

ratings, and marking of electric storage tank water heaters. This standard applies to stationary 

storage tank water heaters that have a rated capacity of 184 or 284 L (40 or 60 gal) and are 

intended for use with pressure systems in residential premises and similar locations. 

The CSA has specified energy conservation standards for gas-fired pool heaters similar to 

Federal energy conservation standards. By adopting ANSI Z21.56/CSA 4.7, the CSA sets a 

minimum thermal efficiency of 78 percent. 

While Canada has not issued standards for direct heating equipment, Canada has 

established product classes for vented gas fireplaces and fireplace heaters. Manufacturers 

indicated that the P4 test procedure to rate products in Canada does contribute a cumulative 

burden. 

Mexico - Requirements for Residential and Commercial Water Heaters 

The National Commission for Energy Efficiency (CONUEE) is a decentralized agency 

under Mexico’s Secretary of Energy that develops official national standards for energy 

efficiency. One such standard, NOM-003-ENER-2000, applies to residential and commercial 

water heaters and places special emphasis on limits, test methods, and labeling. An amendment 

to this standard in 2002 adjusted the thermal efficiency for residential and commercial use to 74 

percent and 79 percent, respectively. It is currently under revision. 

12.7.3.6 Uniform Plumbing and Safety Codes 

Plumbing, building, and safety codes are adopted by local jurisdictions to provide safety 

for users and to protect public health. They define requirements for construction, installation, and 

specification for gas vented hearth products. 

Designated as an American National Standard, the Uniform Plumbing Code (UPC) is a 

model code developed by the International Association of Plumbing and Mechanical Officials to 

govern the installation and inspection of plumbing systems as a means of promoting the public's 

health, safety and welfare. Similarly, the International Building Code (IBC), which has been 

adopted throughout most of the United States, is a model building code developed by the 

International Code Council. Both codes are updated on a three year basis and impact 

specifications of water heater and gas vented hearth product manufacturing and installation. 

The American National Standards Institute (ANSI) and the Canadian Standards 

Association (CSA) jointly promote safety standards for gas-fired pool heaters and vented gas 

fireplaces. ANSI Z21.56/CSA 4.7 and ANSI Z21.88-2009/CSA 2.33, also an American National 

Standard, are model standards representing a basic criterion for safe operation, substantial and 

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durable construction, and acceptable performance of gas-fired pool heaters and vented gas 

fireplace heaters, respectively. These codes are updated frequently and impact specifications of 

pool heater and vented gas fireplace heater manufacturing. 

Manufacturers of all heating products must comply with various local building, 

plumbing, and safety codes and standards within the United States as well as codes and standards 

adopted internationally. 

12.7.3.7 Unites States Clean Air Act 

The Clean Air Act is defines the EPA's responsibilities for protecting and improving the 

nation's air quality and the stratospheric ozone layer. The most significant of these additional 

regulations are the EPA mandated phase-out of hydro chlorofluorocarbons (HCFCs). The Act 

demands on a quarterly basis that any person who produced, imported, or exported certain 

substances, including HCFC refrigerants, must report the amount produced, imported and 

exported. Additionally, effective January 1, 2015, selling, manufacturing, and using any such 

substance is banned unless such substance has been used, recovered, and recycled; is used and 

entirely consumed in the production of other chemicals; or is used as a refrigerant in appliances 

manufactured prior to January 1, 2020. Finally, production phase-outs will continue until January 

1, 2030 when such production will be illegal. These bans could trigger design changes to natural 

or low global warming potential refrigerants and could impact the insulation used in products 

covered by this rulemaking. 

12.8 CONCLUSION 

The following sections summarize the different impacts for the scenarios DOE believes 

are most likely to capture the range of impacts on residential water heater, DHE, and pool heater 

manufacturers at each TSL in the standards case. While these scenarios bound the range of the 

most plausible impacts on manufacturers, some circumstances could cause manufacturers to 

experience impacts outside this range. 

12.8.1 Residential Water Heaters 

12.8.1.1 Gas-Fired and Electric Storage Water Heaters 

TSL 1 represents an improvement in efficiency from the baseline level of 0.59 EF to 0.62 

EF for gas-fired storage water heaters for the representative rated storage volume of 40 gallons. 

For electric storage water heaters TSL 1 represents an improvement in efficiency from the 

baseline level of 0.90 EF to 0.92 EF for the representative rated storage volume of 50 gallons. At 

TSL 1, DOE estimates the impacts on INPV to range from -$3.8 million to -$12.3 million, or a 

change in INPV of -0.45 percent to -1.46 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 4.8 percent, to $58.1 million, compared to the base-case 

value of $61.0 million in the year leading up to the standards. Currently, over 75 percent of the 

gas-fired storage water heaters are sold at the baseline level. However, all manufacturers also 

offer a full line of gas-fired storage water heaters that meet the gas-fired efficiencies at TSL 1. 

Although the majority of the electric storage water heater shipments do not meet TSL 1, every 

manufacturer also offers a full line of electric storage water heaters at or above this level. 

Because manufacturers have existing products and manufacturers could reach the required 

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efficiencies with relatively minor changes to the foam insulation thickness at TSL 1, 

manufacturers of gas-fired and electric storage water heaters would have minimal conversion 

costs at TSL 1. Because the technology required at TSL 1 is similar to the baseline, the INPV 

impacts are similar for both markup scenarios. It is hence unlikely that TSL 1 would greatly 

reduce manufacturers’ profitability. 

TSL 2 represents an improvement in efficiency from the baseline level of 0.59 EF to 0.63 

EF for gas-fired storage water heaters for the representative rated storage volume of 40 gallons. 

For electric storage water heaters, TSL 2 represents an improvement in efficiency from the 

baseline level of 0.90 EF to 0.93 EF for the representative rated storage volume of 50 gallons. At 

TSL 2, DOE estimates the impacts on INPV to range from -$5.1 million to -$30.7 million, or a 

change in INPV of -0.60 percent to -3.64 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 8.7 percent, to $55.7 million, compared to the base-case 

value of $61.0 million in the year leading up to the standards. Currently, over 80 percent of the 

gas-fired storage water heaters sold do not meet TSL 2. At TSL 2, manufacturers are expected to 

meet the gas-fired efficiency requirements by adding additional insulation to their existing 

products. The conversion costs at TSL 2 are relatively minor for gas-fired storage water heaters 

because most manufacturers have a full line of products at the required efficiency for TSL 2 and 

only minor changes in the manufacturing process would be required. Although the majority of 

the electric storage water heater market is below the efficiency specified for electric storage 

water heaters at TSL 2, more than 28 percent of the market is at or above this level. 

Manufacturers would have increasing conversion costs for both capital and product conversion 

for electric storage water heaters to modify production facilities to accommodate the extra 

insulation required at TSL 2. Because the technology required at TSL 2 is similar to the baseline 

for gas-fired and electric storage water heaters, however, it is unlikely that TSL 2 would greatly 

impact manufacturers’ profitability. 

Similar to TSL 2, TSL 3 represents an improvement in efficiency from the baseline level 

of 0.59 EF to 0.63 EF for gas-fired storage water heaters for the representative rated storage 

volume of 40 gallons. Because the efficiency requirements for gas-fired storage water heaters are 

the same at TSL 3 as at TSL 2, the impacts on manufacturers are the same as at TSL 2 for the 

gas-fired storage efficiency requirements. There are small impacts on manufacturers to improve 

the efficiency of the majority of the gas-fired storage shipments from the baseline. However, 

because these changes are expected to be relatively minor increases to the insulation thickness, 

the impacts on the industry are not substantial because these changes do not greatly alter the 

current manufacturing process. TSL 3 represents a further improvement in efficiency for electric 

storage water heaters from the baseline level of 0.90 EF to 0.94 EF for the representative rated 

storage volume of 50 gallons. To achieve the efficiency levels for TSL 3, electric storage 

manufacturers would be expected to further increase tank insulation thickness, with still 

relatively small conversion costs because many manufacturers already manufacture storage water 

heaters at TSL 3. DOE estimates the INPV impacts to range from -$4.9 million to -$35.3 million, 

or a change in INPV of -0.59 percent to -4.19 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 8.7 percent to $55.7 million, compared to the base-case 

value of $61.0 million in the year leading up to the standards. 

Similar to TSL 2 and TSL 3, TSL 4 represents an improvement in efficiency from the 

baseline level of 0.59 EF to 0.63 EF for gas-fired storage water heaters for the representative 

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rated storage volume of 40 gallons. Because the efficiency requirements for gas-fired storage 

water heaters are the same at TSL 4 as at TSL 2 and TSL 3, the impacts on gas-fired 

manufacturers are the same. There are small impacts on manufacturers to improve the efficiency 

of the majority of the gas-fired storage shipments from the baseline. However, because these 

changes are expected to be relatively minor increases to the insulation thickness, the impacts on 

the industry are not substantial because these changes do not greatly alter the current 

manufacturing process. TSL 4 represents a further improvement in efficiency from the baseline 

level of 0.90 EF to 0.95 EF for electric storage water heaters at the representative rated storage 

volume of 50 gallons. Based on a review of units on the market at these efficiency levels, DOE 

expects that manufacturers would likely further increase insulation levels. Because not all 

manufacturers have models at this efficiency currently available on the market, however, DOE 

expects that electric storage water heater manufacturers would incur higher conversion costs at 

TSL 4 than at TSL 3. At TSL 4, DOE estimates the INPV impacts to range from -$3.5 million to 

-$78.8 million, or a change in INPV of -0.41 percent to -9.35 percent. At this level, the industry 

cash flow is estimated to decrease by approximately 33.2 percent to $40.8 million, compared to 

the base-case value of $61.0 million in the year leading up to the standards. Only a small number 

of electric storage water heaters on the market meet the efficiency level for electric storage water 

heaters required by TSL 4. Electric storage manufacturers would have increasing conversion 

costs for both capital and product conversion to greatly increase the production of low volume 

products. The capital conversion costs for electric storage water heaters are more substantial than 

for gas-fired storage water heaters because each production line would require additional 

foaming stations to accommodate the greatly increased insulation thicknesses and, due to slower 

production speeds, adding additional production lines in existing facilities to maintain current 

shipment volumes. Manufacturers also noted that they were concerned about TSL 4 for electric 

storage water heaters because of problems with the test procedure that could make it difficult 

replicate the efficiencies required at this TSL. 

TSL 5 has the same efficiency requirements as TSL 4 for gas-fired and electric storage 

water heaters with rated storage volumes less than 55 gallons. Because the efficiency 

requirements for gas-fired and electric storage water heaters with rated storage volumes less than 

55 gallons are equal to TSL 4, at TSL 5 manufacturers share the same concerns for these rated 

storage volumes as at TSL 4. However, the efficiency requirements for gas-fired storage water 

heaters with rated storage volumes greater than 55 gallons effectively require condensing 

technology, and the efficiency requirements for electric storage water heaters with rated storage 

volumes greater than 55 gallons effectively require heat pump technology. At TSL 5, DOE 

estimates the INPV impacts to range from -$20.9 million to -$129.9 million, or a change in 

INPV of -2.48 percent to -15.41 percent. At this level, the industry cash flow is estimated to 

decrease by approximately 55.6 percent to $27.1 million, compared to the base-case value of 

$61.0 million in the year leading up to the standards. The higher, negative impacts on INPV are 

largely caused by the additional conversion costs required to substantially change the technology 

commonly used in large size gas-fired and electric storage water heaters today. DOE estimates 

the approximately 4 percent of gas-fired storage water heater shipments with rated volumes 

greater than 55 gallons would require an additional $13 million in conversion costs to use 

condensing technology. DOE estimates the approximately 9 percent of gas-fired storage water 

heater shipments with rated volumes greater than 55 gallons would require an additional $24 

million in conversion costs to use heat pump technology. 

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Much of the additional capital conversion costs calculated for large volume sizes at TSL 

5 involve creating additional gas-fired and electric storage assembly lines in a facility adjacent to 

a current production facility. Because high-volume manufacturing facilities are typically 

arranged for units with similar assembly processes, the more complex technology used for larger 

rated volumes at TSL 5 could not be accommodated on existing production lines. The estimated 

product conversion costs at TSL 5 would involve retraining existing service and installation 

personnel, who have little experience installing and servicing storage water heaters that use tehse 

advanced technologies. To minimize unit damage and warranty claims and to improve market 

acceptance, manufacturers would likely have to expend significant additional resources to hire 

training staff to provide more technical support. The other portion of the product conversion 

costs for large rated volumes are the product development effort to redesign existing products. 

Manufacturers could face constraints regarding the abilities of their engineering teams to develop 

multiple water heater families at TSL 5, as most engineering departments have limited 

experience with either technology. At a minimum, the efficiency requirements at TSL 5 would 

require manufacturers to convert existing commercial condensing gas products for residential 

use. However, multiple manufacturers would also have to develop completely new platforms in 

order to remain cost-competitive. Even if a manufacturer were to offer incur these high 

conversion costs, the high product development and capital conversion costs for a small segment 

of the overall market make it likely that consumers will have fewer product families to choose 

from after the compliance date of the final rule. 

Even if manufacturers offer gas condensing and electric heat pump water heaters for the 

large gallon sizes at TSL 5, there could be additional, negative impacts on consumers that could 

lead to a smaller market for these products. Consumers might no longer purchase water heaters 

with rated storage volumes above 55 gallons because of substantially higher increased first costs 

than most products currently on the market, the unfamiliar technologies, and size limitations. 

Because of these changes in the market, at TSL 5, manufacturers could decide that the demand 

for residential heat pump and condensing gas water heaters would drop to a point where the high 

product conversion and capital costs required for a small portion of total shipments are not 

justified. As a result, manufacturers would no longer manufacture residential storage water 

heaters at rated storage volumes above 55 gallons. In addition, consumers could be impacted if 

fewer contractors were willing to install these more complex products, especially if field 

technicians did not obtain any additional licenses and test equipment that could be required to 

service heat pump water heaters. These additional requirements would also likely increase 

installation and service costs beyond current levels since consumers would have fewer 

servicers/installers to choose from. 

Similar to TSL 2 through TSL 4, TSL 6 represents an improvement in efficiency from the 

baseline level of 0.59 EF to 0.63 EF for gas-fired storage water heaters for the representative 

rated storage volume of 40 gallons. Similarly, the impacts on manufacturers due to the gas-fired 

storage efficiencies are relatively minor because the required efficiencies for all volume sizes can 

likely be met with relatively minor changes to the insulation thickness. For electric storage water 

heaters, TSL 6 represents an improvement in efficiency from the baseline level of 0.90 EF to 2.0 

EF for electric storage water heaters at the representative rated storage volume of 50 gallons. At 

TSL 6, DOE estimates the impacts on INPV to range from -$2.0 million to -$305.8 million, or a 

change in INPV of -0.24 percent to -36.29 percent. At TSL 6, the industry cash flow is estimated 

to decrease by approximately 75.7 percent, to $14.8 million, compared to the base-case value of 

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$61.0 million in the year leading up to the standards. To achieve efficiencies at or above TSL 6 

would effectively require the use of heat pumps for electric storage water heaters for all rated 

volumes, a technology option that has yet to see wide adoption in the U.S. market. The higher 

expected purchased part content and market pressures would be expected to reduce manufacturer 

profits margins substantially. Although most electric storage water heater manufacturers 

indicated that they are in the process of developing heat pump water heaters, all manufacturers 

believe that an efficiency level that requires heat pump water heater technology is not 

appropriate as an amended energy conservation standard. Manufacturers stated that they would 

face substantial costs to switch their entire electric storage water heater production over to heat 

pump electric storage water heaters. Several manufacturers expect that they will have to buy the 

heat pump modules from outside vendors since most water heater manufacturers have no 

experience manufacturing heat pumps and have limited space in their facilities to produce heat 

pump systems. Multiple manufacturers stated that even if they were to simply buy and integrate 

heat pump modules, there would be substantial product development and capital conversion 

costs because present facilities are not adequate to handle the heat pump modules. DOE 

estimates that manufacturers would incur almost $70 million in capital conversion costs to 

modify production facilities to exclusively manufacture heat pump electric storage water heaters. 

These capital conversion cost estimates do not include the cost of building manufacturing 

capacity to produce the refrigeration units because manufacturers indicated that these are likely 

to be purchased subassemblies. 

Furthermore, manufacturers stated that they would consider moving all or part of their 

existing production capacity abroad if the energy conservation standard is set at TSL 6 because 

many manufacturers expect that they would have to redesign their facilities completely to 

accommodate a minimum energy conservation standard at this TSL. According to these 

manufacturers, building a new facility entails less business disruption risk than attempting to 

completely redesign and upgrade existing facilities, and lower labor rates in Mexico and other 

countries abroad may entice manufacturers to move their production facilities outside of the U.S. 

In addition, manufacturers are very concerned about the significant number of customers who 

would face extremely costly installations for electric storage water heater replacements if a 

standard effectively requiring heat pump technology is mandated. According to manufacturers, a 

significant percentage of electric storage water heaters are installed in space-constrained 

environments which cannot accommodate the additional space required for the heat pump 

module. This is especially true for mobile homes and other consumer sub-groups that use smaller 

capacity tanks. 

Another concern of manufacturers at TSL 6 is the amount of additional training that 

would be necessary to upgrade the installation, distribution, and maintenance networks on the 

scale necessary to support an electric storage water heater market that used heat pump 

technology exclusively. Manufacturers are concerned that the typical installer or repair person 

would not have the requisite knowledge to troubleshoot or repair heat pump water heaters. 

Manufacturers also expressed concern about profitability if amendments to the minimum energy 

conservation standard for electric storage water heaters were to require the use of heat pump 

technology. An amended energy conservation standard that effectively mandated heat pump 

technology would completely change the nature of their business. The production costs for an 

integrated heat pump water heater at the 50-gallon representative rated storage volume are 

approximately four times the baseline production costs. Specifically, manufacturers believe that 

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because this technology results in much more expensive units than the majority of products on 

the market today, not all of the increased costs could be passed on to the customer. In addition, 

the significantly higher production costs would require an additional $256 million in working 

capital to purchase significantly more expensive components, carry more costly inventory, and 

handle higher accounts receivable. DOE estimates that the working capital requirement and 

conversion costs would cause electric storage water heater manufacturers to incur a total onetime investment of at least $375 million in an electric storage market valued at approximately 

$311 million. Finally, manufacturers believe it is unlikely that they could earn the same return on 

these extremely large investments, so profitability would be expected to decrease after the 

compliance date of the amended energy conservation standards. 

TSL 7 represents an improvement in efficiency from the baseline level of 0.59 EF to 0.80 

EF for gas-fired storage water heaters for the representative rated storage volume of 40 gallons. 

TSL 7 represents an improvement in efficiency from the baseline level of 0.90 EF to 2.2 EF for 

electric storage water heaters at the representative rated storage volume of 50 gallons. At TSL 7, 

DOE estimates the impacts on INPV to range from $62.9 million to -$537.6 million, or a change 

in INPV of 7.47 percent to -63.79 percent. At TSL 7, the industry cash flow is estimated to 

decrease by approximately 171.6 percent, to -$43.7 million, compared to the base-case value of 

$61.0 million in the year leading up to the standards. Because TSL 7 also requires improved heat 

pump technology (with additional efficiency-related improvements to both the heat pump 

module and the water heater tank), electric storage water heater manufacturers shared the same 

concerns at TSL 7 as they had at TSL 6. Because additional, more-costly improvements to heat 

pump technology are required, however, electric storage water heater manufacturers were more 

concerned about the potential for energy conservation standards to greatly disrupt the industry if 

the amended energy conservation standard were set at TSL 7. 

For gas-fired storage water heaters, TSL 7 requires manufacturers to produce fullycondensing gas-fired storage water heaters, which is significantly more complex than the 

insulation changes required at most lower TSLs. Currently no manufacturer offers residential 

gas-fired storage water heaters with condensing technology. Manufacturers would need to 

redesign their products at the condensing level, which would force manufacturers to incur 

significant product and capital conversion costs. Some loss in product utility may also occur for 

units that are presently installed in space-constrained applications because condensing water 

heaters require greater installation space to accommodate bigger heat exchangers, fully-installed 

blowers, and other components that non-condensing models do not feature. At the condensing 

level, manufacturers would be required to purchase substantial tooling to fabricate new coil and 

tank designs and make changes to all subassembly and main assembly lines. DOE estimates that 

manufacturers would incur approximately $111 million in capital conversion costs to modify 

their production facilities. Some gas-fired storage water heater manufacturers stated during 

interviews that they would consider moving facilities offshore at TSL 7 to take advantage of 

lower labor costs. In addition, due to the complexity and large size of storage water heaters at 

this efficiency, manufacturers are concerned that installations will be far more difficult and could 

force many consumers to pay substantially higher installed costs if their replacement water 

heater does not fit into their existing space. Manufacturers are also concerned about profitability 

if standards were set at a level that would effectively require condensing technology. An 

amended energy conservation standard that effectively mandated condensing gas-fired storage 

water heaters would completely change the existing structure of the industry. Because this 

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technology results in much more expensive units than the majority of products on the market 

today, manufacturers argued that not all of the increased costs could be passed on to the 

customer. In addition, the significantly higher production costs would require at least an 

additional $145 million in working capital to purchase significantly more expensive components, 

carry more costly inventory, and handle higher accounts receivable. DOE estimates that the 

working capital requirement and conversion costs would cause gas-fired storage water heater 

manufacturers to incur a total one-time investment of at least $276 million in a gas-fired storage 

market valued at approximately $532 million. While there is a slightly positive impact if 

manufacturers get the same return on these investments as in the base case, manufacturers 

believe that they will not earn the same return from the substantially higher capital requirements 

at TSL 7. 

12.8.1.2 Oil-Fired Storage Water Heaters 

TSL 1 represents an improvement in efficiency for oil-fired storage water heaters from 

the baseline level of 0.53 EF to 0.58 EF for the representative rated storage volume of 32 gallons. 

At TSL 1, DOE estimates the impacts on INPV to range from -$0.2 to -$0.3 million, or a change 

in INPV of -1.93 percent to -3.89 percent. At this level, the industry cash flow would be 

expected to decrease by approximately 28.5 percent, to $0.4 million, compared to the base-case 

value of $0.6 million in the year leading up to the standards. At TSL 1, one of the two major 

manufacturers would have to incur relatively small product and capital conversion costs to 

slightly modify their existing product line. DOE research suggests that this TSL can be met with 

changes to the insulation thickness of baseline products. However, if more costly design changes 

were required it could have more of an impact on the industry. 

TSL 2 represents an improvement in efficiency from the baseline level of 0.53 EF to 0.60 

EF for the representative rated storage volume of 32 gallons. At TSL 2, DOE estimates the 

impacts on INPV to range from -$0.2 million to -$0.3 million, or a change in INPV of -1.78 

percent to -3.58 percent. At this level, the industry cash flow is estimated to decrease by 

approximately 28.5 percent, to $0.4 million, compared to the base-case value of $0.6 million in 

the year leading up to the standards. Similar to TSL 1, at TSL 2 DOE has tentatively concluded, 

based on a review of existing products on the market, that TSL 2 could be met with changes to 

the type and thickness of the insulation. The impacts at TSL 1 are slightly worse than at TSL 2 

because the technology option for existing oil-fired storage water heaters on the market results in 

lower product costs at TSL 2. However, if TSL 2 is met with similar insulation changes, only one 

of two major manufacturers would still be required to slightly modify their current residential 

oil-fired storage product lines at TSL 2. 

TSL 3 through TSL 6 represent an improvement in efficiency from the baseline level of 

0.53 EF to 0.62 EF for the representative rated storage volume of 32 gallons. At these levels, 

DOE estimates the impacts on INPV to range from -$0.2 million to -$0.4 million, or a change in 

INPV of -1.96 percent to -4.31 percent. At this level, the industry cash flow decreases by 

approximately 28.5 percent, to $0.4 million, compared to the base-case value of $0.6 million in 

the year leading up to the standards. At these TSLs, one major manufacturer would have to incur 

relatively minor product and capital conversion costs to modify their existing oil-fired residential 

storage water heater product line. DOE has tentatively concluded based on a review of existing 

products on the market that the efficiency requirements at TSL 3 through TSL 6 could be met 

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with changes to the type and thickness of the insulation. Due to the low volume of oil-fired 

storage water heaters, if any manufacturer had to make substantial product or capital conversion 

costs to reach the amended energy conservation standard using a more complex technology, 

these substantial costs could force them to consider exiting the residential oil-fired storage water 

heater market. 

TSL 7 (the max-tech level) represents an improvement in efficiency from the baseline 

level of 0.53 EF to 0.68 EF for the representative rated storage volume of 32 gallons. At TSL 7, 

DOE estimates the impacts on INPV to range from -$1.3 million to -$3.5 million, or a change in 

INPV of -14.84 percent to -39.86 percent. At this level, the industry cash flow is estimated to 

decrease by approximately 342.5 percent, to -$1.3 million, compared to the base-case value of 

$0.6 million in the year leading up to the standards. At TSL 7, at least one major manufacturer 

would have to incur very substantial product and capital conversion to redesign the combustion 

and baffling system to include a multi flue design. Given the small size of the residential oil-fired 

storage water heater market, this manufacturer stated that these extremely large substantial 

product and capital conversion costs would be difficult to justify. At TSL 7, it is possible that 

this manufacturer would exit the residential oil-fired storage water heater market. Because there 

are only two main manufacturers that supply the vast majority of U.S. shipments of oil-fired 

storage water heaters, any manufacturer exiting the market could lead to a market disruption. 

12.8.1.3 Gas-Fired Instantaneous Water Heaters 

TSL 1 through TSL 6 represent an improvement in efficiency from the baseline gas-fired 

instantaneous water heater efficiency level of 0.62 EF to 0.82 EF for the representative input 

capacity of 199 kBtu/h. At TSL 1 through TSL 6, DOE estimates the INPV impacts to range 

from $1.2 million to -$1.8 million, or a change in INPV of 0.20 percent to -0.30 percent. At this 

level, the industry cash flow is estimated to remain at the base-case value of $75.0 million in the 

year leading up to the standards. DOE research suggests that over 80 percent of gas-fired 

instantaneous products sold today meet or exceed this efficiency, and nearly all manufacturers of 

gas-fired instantaneous water heaters currently make products that meet or exceed the efficiency 

required by TSL 1 through TSL 6. Hence, there appears to be little risk that TSL 1 through TSL 

6 would greatly harm manufacturers or reduce the number of manufacturers that sell these 

products. 

TSL 7 (the max-tech level) represents an improvement in efficiency from the baseline 

level of 0.62 EF to 0.95 EF for the representative input capacity of 199 kBtu/h. At TSL 7, DOE 

estimates the INPV impacts to range from $80.3 million to -$65.9 million, or a change in INPV 

of 13.31 percent to -10.91 percent. At this level, the industry cash flows are estimated to decrease 

by approximately 5.9 percent to $70.5 million, compared to the base-case value of $75.0 million 

in the year leading up to the standards. Only one manufacturer currently offers a gas-fired 

instantaneous water heater that meets the max-tech efficiency on the U.S. market. Most 

manufacturers would incur substantial product conversion and capital conversion costs to 

upgrade their existing products at TSL 7. To reach 0.95 EF, a more complex condensing model 

would need to be developed. Because only one manufacturer offers products that meet this 

efficiency, TSL 7 could greatly reduce the number of gas-fired instantaneous water heaters 

offered for sale in the United States. 

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12.8.2 Direct Heating Equipment 

12.8.2.1 Traditional Direct Heating Equipment 

For traditional DHE, TSL 1 represents an improvement in efficiency from the baseline 

level of 74-percent AFUE to 75-percent AFUE for gas wall fan DHE, an improvement in 

efficiency from the baseline level of 64-percent AFUE to 66-percent for gas wall gravity DHE, 

an improvement in efficiency from the baseline level of 57-percent AFUE to 58-percent AFUE 

for gas floor DHE (the max-tech level), and an improvement in efficiency from the baseline level 

of 64-percent AFUE to 66-percent AFUE for gas room DHE at their respective representative 

input rating ranges. DOE research suggests that manufacturers would use an intermittent ignition 

and a two-speed blower for gas wall fan DHE and an improved heat exchanger design for gas 

wall gravity, gas floor units, and gas room DHE to achieve the efficiencies required by TSL 1. At 

TSL 1, DOE estimates the impacts on INPV to range from $0.4 to -$1.6 million, or a change in 

INPV of -2.27 percent to -9.11 percent. At this level, the industry cash flow is estimated to 

decrease by approximately 45.7 percent, to $0.8 million, compared to the base-case value of $1.4 

million in the year leading up to the standards. While some manufacturers may need to make 

redesigns to some of their products even at TSL 1, manufacturers generally have a significant 

number of products that meet the required efficiencies for most traditional DHE product types, 

and for this reason, a complete exit from the market by any manufacturer is unlikely. 

TSL 2 represents an improvement in efficiency from the baseline level of 74-percent 

AFUE to 76-percent for gas wall fan DHE, an improvement in efficiency from the baseline level 

of 64-percent AFUE to 68-percent AFUE for gas wall gravity DHE, an improvement in 

efficiency from the baseline level of 57-percent AFUE to 58-percent AFUE for gas floor DHE 

(the max-tech level), and an improvement in efficiency from the baseline level of 64-percent 

AFUE to 67-percent for gas room DHE at the representative input rating ranges for each product 

type. DOE research suggests that at TSL 2, manufacturers would opt to use an improved heat 

exchanger and intermittent ignition for gas wall fan DHE, and make further improvements to the 

heat exchanger for gas wall gravity and gas room DHE, and use the same improved heat 

exchanger for gas floor DHE as at TSL 1 to reach the efficiency levels required by TSL 2. At 

TSL 2, DOE estimates the impacts in INPV to range from -$0.6 million to -$3.1 million, or a 

change in INPV of -3.42 percent to -17.20 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 86.1 percent, to $0.2 million, compared to the base-case 

value of $1.4 million in the year leading up to the standards. At TSL 2, every manufacturer 

would face higher product development costs in order to offer a similar range of product 

offerings. However, at TSL 2, it is likely that more products would be discontinued because 

more of the current products on the market fall below the required efficiencies. As a result, 

manufacturers must either expend resources to cover the necessary product conversion and 

capital conversion costs, or they will be forced to discontinue some of their existing product 

lines. While TSL 2 would have a significant impact on manufacturers, most manufacturers 

would not be expected to face a complete redesign for most traditional DHE product types. Even 

if manufacturers lowered the number of product lines offered in certain product classes, 

manufacturers would have enough existing products that meet or exceed the required efficiencies 

to upgrade most of their existing product lines and maintain viable production volumes after the 

compliance date of the energy conservation standards. 

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TSL 3 represents an improvement in efficiency from the baseline level of 74-percent 

AFUE to 77-percent for gas wall fan DHE, an improvement in efficiency from the baseline level 

of 64-percent AFUE to 71-percent AFUE for gas wall gravity units, an improvement in 

efficiency from the baseline level of 57-percent AFUE to 58-percent AFUE for gas floor DHE 

(the max-tech level), and an improvement in efficiency from the baseline level of 64-percent 

AFUE to 68-percent for gas room DHE at the representative input rating ranges. DOE research 

suggests that manufacturers would improve baseline units by adding an intermittent ignition, a 

two-speed blower, and an improved heat exchanger for gas wall fan units, make further 

improvements to the heat exchanger used to reach TSL 2 for gas wall gravity and gas room units, 

and use the same improved heat exchanger for gas floor DHE as at TSL 1 and TSL 2 to reach the 

efficiency levels of TSL 3. At TSL 3, DOE estimates the INPV impacts to range from -$1.1 

million to -$6.0 million, or a change in INPV of -5.91 percent to -33.54 percent. At this level, the 

industry cash flow is estimated to decrease by approximately 161.8 percent to -$0.9 million, 

compared to the base-case value of 1.4 million in the year leading up to the standards. The large 

estimated impact on INPV suggests that manufacturers would be substantially harmed if 

profitability were impacted. 

At TSL 3, products increasingly rely on purchased parts, making it more likely that 

manufacturers’ profitability would decline. At TSL 3, it is likely that some manufacturers would 

reduce the number of product lines offered in order to lower the product conversion and capital 

conversion costs required at TSL 3. Discontinuing product lines would still have a negative 

impact on the manufacturers that selectively upgrade existing product lines since many 

manufacturers rely on aggregated production scale from all products they sell to secure favorable 

purchased part and raw material prices. The fixed portion of product conversion costs, such as 

certification and the total capital conversion costs, typically require a minimum shipment volume 

in order to be economically justifiable to the manufacturer. However, at TSL 3, most 

manufacturers have existing products that meet the required efficiencies in three out of the four 

product types of traditional DHE. Because manufacturers have a substantial number of product 

lines that meet the required efficiencies at TSL3, even if manufacturers selectively upgrade their 

existing product lines, they would be expected to maintain a viable production volume after the 

compliance date of the energy conservation and not exit the market completely. 

 TSL 4 is the max-tech level for gas wall fan DHE. TSL 4 represents an improvement in 

efficiency from the baseline level of 74-percent AFUE to 80-percent for gas wall fan DHE at the 

representative input rating range. The efficiency requirements for gas wall gravity, gas floor, and 

gas room DHE are the same at TSL 4 as at TSL 3. To achieve the max-tech level for gas wall fan 

DHE, DOE research suggests that manufacturers would need to use an electronic ignition and 

induced draft. DOE anticipates that manufacturers would make the same improvements to the 

heat exchangers as necessary to achieve TSL 3 for gas wall gravity, gas floor, and gas-room 

DHE. At TSL 4, DOE estimates the INPV impacts to range from -$1.3 million to -$7.6 million, 

or a change in INPV of -7.16 percent to -42.14 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 202.3 percent to -$1.4 million, compared to the basecase value of $1.4 million in the year leading up to the standards. 

Most manufacturers’ products are below the max-tech level for gas wall fan DHE, which 

further increases the total capital and product conversion costs over TSL 3. At TSL 4, most 

manufacturers would have to completely redesign their gas wall fan products and purchase new 

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tooling. The discrepancy between the number of unit shipments and the number of product lines 

requiring significant product development to meet the potential energy conservation standards is 

a large driver of the negative impacts at TSL 4. When faced with these substantial costs, most 

manufacturers would likely discontinue products in this product class or possibly exit the market 

altogether. In addition, at TSL 4 every manufacturer would face significant conversion costs in 

every product type, making it much more likely that the industry would offer far fewer products 

and that the industry would have fewer competitors after the compliance date of the amended 

standards. Besides the likelihood of multiple manufacturers discontinuing product lines or 

exiting the market, the large impact on INPV shows that manufacturers would also be 

substantially harmed if profitability were impacted for existing or redesigned products. 

TSL 5 represents an improvement in efficiency from the baseline level of 74-percent 

AFUE to 75-percent AFUE for gas wall fan DHE, an improvement in efficiency from the 

baseline level of 64-percent AFUE to 72-percent AFUE for gas wall gravity units (the max-tech 

level), an improvement in efficiency from the baseline level of 57-percent AFUE to 58-percent 

AFUE for gas floor DHE (the max-tech level), and an improvement in efficiency from the 

baseline level of 64-percent AFUE to 83-percent AFUE (the max-tech level) for gas room DHE 

at the representative input rating ranges for each product type. To achieve the efficiencies 

required by TSL 5, DOE research suggests that manufacturers would need to use an intermittent 

ignition and a two-speed blower for gas wall fan DHE, use an electronic ignition for gas wall 

gravity DHE, use an improved heat exchanger for gas floor DHE, and use electronic ignition and 

a multiple heat exchanger design for gas room DHE. At TSL 5, DOE estimates the impacts on 

INPV to range from -$1.8 million to -$8.0 million, or a change in INPV of -9.99 percent to -

44.84 percent. At this level, the industry cash flow is estimated to decrease by approximately 

195.5 percent, to -$1.3 million, compared to the base-case value of $1.4 million in the year 

leading up to the standards. 

Most traditional DHE models available on the market today are below the max-tech level 

for gas wall gravity and gas room DHE, which leads to higher total capital and product 

conversion costs and more negative impacts on INPV at TSL 5 than TSL 4. DOE research 

suggests that at TSL 5, most manufacturers would have to completely redesign and buy new 

tooling in order to offer gas wall gravity and gas room products at these efficiency levels. The 

small number of unit shipments and the large number of product lines that would require 

significant product development to meet the energy conservation standards is a large driver of 

the negative impacts at TSL 5. Hence, the potential number of product lines being discontinued 

and the number of manufacturers exiting the market at TSL 5 would be expected to be greater 

than at TSL 4, with even greater repercussions on consumer choice, employment, and 

competition. 

TSL 6 is set at the max-tech level for all traditional DHE product classes. The efficiency 

requirements for gas wall gravity, gas floor, and gas room DHE are the same at TSL 6 as at TSL 

5. However, TSL 6 also represents an improvement from 75-percent to 80-percent AFUE for gas 

wall fan DHE (the max-tech level). To achieve the max-tech level for gas wall fan DHE, DOE 

research suggests that manufacturers would need to use an electronic ignition and induced draft. 

As to the other products, DOE anticipates that manufacturers would need to use an electronic 

ignition for gas wall gravity DHE, use an improved heat exchanger for gas floor DHE, and use 

electronic ignition and a multiple heat exchanger design for gas room DHE. At the max-tech 

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TSL (TSL 6), DOE estimates the INPV impacts to range from -$2.2 million to -$10.8 million, or 

a change in INPV of -12.28 percent to -59.98. At this level, the industry cash flow is estimated to 

decrease by approximately 269.5 percent to -$2.4 million, compared to the base-case value of 

$1.4 million in the year leading up to the standards. Most products currently available are below 

the max-tech level for all product classes. At the max-tech level, most manufacturers would be 

faced with complete product redesigns for almost all product lines and significant plant changes 

to remain in the market. Most manufacturers would be expected to discontinue products or exit 

the market altogether. Due to the low volume of shipments in the industry, it unlikely that any 

manufacturer could offer close to the range of products currently offered today. Hence, some 

product classes may cease to be commercially available. It is very likely that multiple 

manufacturers would exit the market at the max-tech level for every product class. 

12.8.2.2 Gas Hearth Direct Heating Equipment 

TSL 1 through TSL 3 represents an improvement in efficiency from the baseline level of 

64-percent AFUE to 67-percent AFUE for gas hearth DHE at the 27,000 Btu/h to 46,000 Btu/h 

representative input rating range. To reach 67-percent AFUE from baseline efficiency, 

manufacturers would likely use an electronic ignition. At TSL 1 through TSL 3, DOE estimates 

the impacts on INPV to range from -$0.2 million to -$0.9 million, or a change in INPV of -0.22 

percent to -1.07 percent. At this level, the industry cash flow is estimated to decrease by 

approximately 7.6 percent, to $2.6 million, compared to the base-case value of $2.8 million in 

the year leading up to the standards. Most manufacturers offer multiple products that meet this 

efficiency level. Because there are so many product lines at the baseline efficiency, however, 

there could be fairly substantial product conversion costs at this TSL because manufacturers 

would have to recertify all of the baseline products after slight modification. In addition, some 

manufactures could be required to make other minor changes to their production lines to 

accommodate other improvements such as additional baffling. DOE research suggests that such 

changes may be inexpensive since they would not require the industry to replace major hard 

tooling at TSL 1 through TSL 3. Because of the small change in product costs at TSL 1 through 

TSL 3, it is unlikely that manufacturer profitability would decrease appreciably to maintain the 

existing shipments. 

TSL 4 and TSL 5 represent an improvement in efficiency from the baseline level of 64-

percent AFUE to 72-percent AFUE for gas hearth DHE at the 27,000 Btu/h to 46,000 Btu/h 

representative input rating range. DOE research suggests that fan-assisted gas hearth DHE 

products could reach 72-percent AFUE from baseline efficiency. At TSL 4 and TSL 5, DOE 

estimates the impacts on INPV to range from $2.4 million to -$14.8 million, or a change in INPV 

of 2.80 percent to -17.13 percent. At this level, the industry cash flow is estimated to decrease by 

approximately 19.9 percent, to $2.3 million, compared to the base-case value of $2.8 million in 

the year leading up to the standards. At TSL 4 and TSL 5, gas hearth manufacturers would likely 

reduce the scope of their product offerings to lower the required conversion costs to comply with 

the energy conservation standard. Many of the smaller manufacturers could consider exiting the 

market when faced with fairly substantial product and capital conversion costs that are not 

justified by their shipment volumes. Much of the capital conversion costs are expected to involve 

changes to handle new materials like additional insulation and baffling, changes to the heat 

shields, and new stamping dies for many manufacturers that need to greatly alter their existing 

designs. Manufacturers will also incur additional product conversion costs for product 

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development and certification because most products currently sold would not meet the 

efficiency requirements of TSL 4 and TSL 5. While most of the changes above the baseline 

require manufacturers to purchase or manufacture more costly components that increase MPC, 

the resulting higher MSPs also concerned manufacturers. Manufacturers stated that the market is 

very price sensitive, so any increase in unit price could invariably lead to fewer sales. Hence, 

manufacturers expect that the industry would have to lower its profit margins in order to reduce 

shipments impacts that could result from cost increases related to potential energy efficiency 

improvements. 

TSL 6 represents an improvement in efficiency from the baseline level of 64-percent 

AFUE to 93-percent AFUE for gas hearth DHE at the 27,000 Btu/h to 46,000 Btu/h 

representative input rating range. To reach 93-percent AFUE from the baseline efficiency, 

manufacturers would need to use a condensing design. At the max-tech TSL (TSL 6), DOE 

estimates the impacts on INPV to range from $10.2 million to -$55.1 million, or a change in 

INPV of 11.82 percent to -63.83 percent. At this level, the industry cash flow is estimated to 

decrease by approximately 128.8 percent, to -$0.8 million, compared to the base-case value of 

$2.8 million in the year leading up to the standards. 

At TSL 6, manufacturers indicated they would greatly reduce the scope of their product 

offerings to lower the required costs to comply with an amended energy conservation standard at 

this level. Because there are very few products on the market today that use this technology, the 

product development costs greatly increase at this TSL. DOE research suggests that 

manufacturers would likely need a secondary heat exchanger at the max-tech level, which could 

alter the size and structure of most existing product lines. Manufacturers expressed concern 

regarding their ability to use existing tooling and equipment, much of which may become 

obsolete when hearths have to be redesigned from the ground up to accommodate the efficiency 

requirements at this level. It is also very likely that many of the 10 small business manufacturers 

could be forced to exit the market when faced with these substantial conversion costs since they 

do not have the access to capital, the product development resources, or the shipment volumes to 

justify these conversion costs. 

Manufacturers also stated that they were concerned about consumer utility issues at TSL 

6. Smaller units would likely be significantly impacted at this TSL because the low inherent 

interior volume makes it much more difficult to accommodate a secondary heat exchanger 

without narrowing the area available for the logs and flame. Manufacturers also indicated that it 

gets progressively more difficult to imitate a natural, wood-burning flame appearance at this 

efficiency level, which could hurt sales and reduce consumer utility. Finally, manufacturers were 

concerned that the MPCs at the max-tech level are estimated to be more than double the baseline 

costs for the representative input rating range. In order to maintain shipments of gas hearth DHE 

with substantially higher costs and potential consumer utility impacts, manufacturers believe that 

profitability would be greatly impacted. 

12.8.3 Pool Heaters 

TSL 1 represents an improvement in efficiency from the baseline level of 78-percent 

thermal efficiency to 81-percent thermal efficiency for the representative input rating of 250,000 

Btu/h. At TSL 1, DOE estimates the INPV impacts to range from $0.1 million to -$0.2 million, 

EE-2006-STD-0129 COMMENT 56.10
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or a change in INPV of 0.13 percent to -0.29 percent. At this level, the industry cash flow would 

not be expected to change from the base-case value of $2.7 million in the year leading up to the 

standards. Over 60 percent of current gas-fired pool heaters meet or exceed the efficiency 

requirements at TSL 1. DOE research suggests that changes to the heat exchanger would allow 

baseline products to meet TSL 1. These changes would not require major modifications to 

existing units, resulting in minimal impacts to manufacturers at TSL 1. 

TSL 2 represents an improvement in efficiency from the baseline level of 78-percent 

thermal efficiency to 82-percent thermal efficiency for the representative input rating of 250,000 

Btu/h. At TSL 2, DOE estimates the INPV impacts to range from $0.4 to -$1.0 million, or a 

change in INPV of 0.66 percent to -1.66 percent. At this level, the industry cash flow is expected 

to decrease by approximately 3.9 percent to $2.6 million, compared to the base-case value of 

$2.7 million in the year leading up to the standards. Almost half of the pool heaters currently are 

sold at or above this efficiency level, and nearly all manufacturers make products that can 

achieve the efficiency required at TSL 2. DOE research suggests that minor improvements to 

heat exchangers and insulation surrounding the combustion chamber would need to be made to 

convert lower-efficiency units to this efficiency, causing manufacturers to incur small capital 

conversion costs. However, because the basic designs of atmospheric pool heaters that comprise 

the majority of current shipments remain relatively unchanged at TSL 2, there are minimal 

impacts on manufacturers. 

TSL 3 represents an improvement in efficiency from the baseline level of 78-percent 

thermal efficiency to 83-percent thermal efficiency for the representative input rating of 250,000 

Btu/h. At TSL 3, DOE estimates the INPV impacts to range from -$0.2 to -$5.6 million, or a 

change in INPV of -0.39 percent to -9.06 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 43.0 percent to $1.6 million, compared to the base-case 

value of $2.7 million in the year leading up to the standards. DOE research suggests that most 

manufacturers would have to improve product lines to reach an 83-percent thermal efficiency by 

using power venting technology. DOE research also suggests that while the MPCs are not 

expected to increase significantly, most manufacturers would incur some product and capital 

conversion costs to increase their production of existing lower volume products at TSL 3. TSL 3 

would eliminate most common atmospheric models on the market today, which could hurt 

profitability if consumer demand for gas-fired pool heaters holds at its current level despite the 

higher production costs at this TSL. 

TSL 4 represents an improvement in efficiency from the baseline level of 78-percent 

thermal efficiency to 84-percent thermal efficiency for the representative input rating of 250,000 

Btu/h. At TSL 4, DOE estimates the INPV impacts to range from $0.5 million to -$7.5 million, 

or a change in INPV of 0.88 percent to -12.15 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 45.9 percent to $1.5 million, compared to the base-case 

value of $2.7 million in the year leading up to the standards. Similar to TSL 3, TSL 4 would 

require fairly substantial capital and product conversion costs. Because this efficiency level 

eliminates all atmospheric models that are currently on the market and requires additional 

improvements over TSL 3, the capital conversion costs are even higher at TSL 4. DOE research 

suggests that manufacturers would have to design products that use power venting and an 

improve heat exchanger, which could be costly to develop. Manufacturers stated that the high 

component costs at TSL 4 would result in substantially higher costs for consumers. The higher 

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production costs and conversion costs make it more likely that manufacturers’ concerns about 

reduced profitability would be realized at TSL 4. 

TSL 5 represents an improvement in efficiency from the baseline level of 78-percent 

thermal efficiency to 86-percent thermal efficiency for the representative input rating of 250,000 

Btu/h. At TSL 5, DOE estimates the INPV impacts to range from $3.1 million to -$19.5 million, 

or a change in INPV of 5.03 percent to -31.82 percent. At this level, the industry cash flow is 

estimated to decrease by approximately 108.9 percent to -$0.2 million, compared to the basecase value of $2.7 million in the year leading up to the standards. Over 90 percent of current 

shipments are below this efficiency level. Manufacturers would incur a significant conversion 

costs at TSL 5 and would likely significantly reduce the scope of their product offerings. DOE 

research suggests that manufacturers would switch remaining units to sealed combustion systems 

and improved heat exchanger designs, adding substantial production cost and eliminating 

unpowered units from the market. Manufacturers believe that consumers would look for 

alternatives to gas-fired pool heaters or not replace failed units due to the higher product costs 

that would result from an amended energy conservation standard at TSL 5. Manufacturers also 

indicated that problems at efficiencies they consider near-condensing could force some 

companies to only offer fully condensing units with even greater negative paybacks for 

consumers. A further concern of manufacturers relates to the current installer and maintenance 

base for pool heaters, which would require significant additional training to be able to properly 

install, troubleshoot, and service increasingly complex pool heaters. 

TSL 6 (max-tech level) represents an improvement in efficiency from the baseline level of 

78-percent thermal efficiency to 95-percent thermal efficiency for the representative input rating 

of 250,000 Btu/h. At TSL 6, DOE estimates the INPV impacts to range from $12.9 million to -

$44.5 million, or a change in INPV of 20.96 percent to -72.59 percent. At this level, the industry 

cash flow is estimated to decrease by approximately 157.2 percent to -$1.6 million, compared to 

the base-case value of $2.7 million in the year leading up to the standards. Almost all gas-fired 

pool heaters currently on the market are well below this efficiency level. Manufacturers would 

face significant conversion costs at TSL 6 in order to develop condensing systems or refine 

existing designs to achieve lower cost condensing pool heaters. DOE research suggests that heat 

exchanger materials would need to withstand acidic condensate created by condensing pool 

heaters. In light of strong concerns about consumer reaction to a substantially-increased first cost 

at TSL 6, manufacturers do not believe this efficiency level could be justified for residential pool 

heater consumers due to low usage and significantly higher costs. Manufacturers believe that 

consumers would not be willing to purchase such an expensive product and would either find an 

alternative to gas-fired pool heaters or no longer purchase a gas-fired pool heater. In addition, at 

TSL 6 manufacturers are also concerned about the industry’s ability to educate and retrain 

installers and servicers of pool heaters in time for the compliance date of the standard. 

Condensing units with sealed combustion are more complex than the vast majority of 

atmospheric units on the market today and would require significant additional training for safe 

installation and maintenance. Manufacturers also expect product support costs to increase 

significantly as complexity increases the likelihood and frequency of events such as component 

failures and unit lockouts that would require manufacturer support and servicing, as well as 

increased warranty costs. Besides increasing warranty costs for manufacturers, the issues and 

costs associated with proper unit maintenance post-warranty could potentially cause them to 

switch fuel sources (e.g., switching to heat pump or solar water heaters) or abandon pool heating 

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altogether.

EE-2006-STD-0129 COMMENT 56.10
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