CHAPTER 1. INTRODUCTION

TABLE OF CONTENTS

1.1 PURPOSE OF THE DOCUMENT ................................................................................. 1-1

1.2 SUMMARY OF THE NATIO NAL BENEFITS ............................................................. 1-1

1.3 OVERVIEW OF STANDARD S FOR SMALL, LARGE, AND VERY LARGE

AIR

- COOLED CUAC AND CUHP ................................................................................ 1-5

1.4 PROCESS FOR SETTING ENERGY CONSERVATION STANDARDS ................... 1-6

1.5 STRUCTURE OF THE DOCUMENT ............................................................................ 1-8

LIST OF TABLES

Table 1.2.1 Summary of National Economic Benefits and Costs of Proposed Energy Conservation Standards for Small, Large, and Very Large Commercial Package Air Conditioning and Heating Equipment* ................ 1-2

Table 1.2.2 Annualized Benefits and Costs of Proposed Energy Conservation Standards for Small, Large, and Very Large Commercial Package Air Conditioning and Heating Equipment ........................................................... 1-4

Table 1.4.1 Analyses Under the Process Rule* ................................................................ 1-7

1-iCHAPTER 1. INTRODUCTION

1.1 PURPOSE OF THE DOCUMENT

This notice of proposed rulemaking ( TSD) is a stand -alone report that provides the technical analyses and results supporting the information presented in the notice of proposed rulemaking (NOPR) for small, large, and very large air -cooled CUAC and CUHP . This TSD reports on the activities and analyses conducted in support of the NOPR.

1.2 SUMMARY OF THE NATIONAL BENEFITS

DOE’s analyses indicate that the proposed standards would save a significant amount of energy. The lifetime savings for small, large, and very large air -cooled CUAC and CUHP purchased in the 30-year period that begins in the year of compliance with amended standards (2019–2048) amount to 8.5 quads. This is equivalent to nearly 50 percent of total U.S. commercial sector energy use in 2012.

The cumulative net present value (NPV ) of total customer costs and savings of the proposed standards for small, large, and very large air -cooled CUAC and CUHP ranges from $11.9 billion to $37.7 billion for 7

- percent and 3

- percent discount rates, respectively. This NPV expresses the estimated total value of future operating- cost savings minus the estimated increased product costs for products purchased in 2019–2048.

In addition, the proposed standards would have significant environmental benefits. a The energy savings would result in cumulative emission reductions of 780 million metric tons (Mt) b
of carbon dioxide (CO 2 ), 2,210 thousand tons of methane (CH 4 ), 11.1 thousand tons of nitrous oxide (N 2 O), 2,110 thousand tons of sulfur dioxide (SO 2 ), 734 thousand tons of nitrogen oxides (NO X ) and 2.57 tons of mercury (Hg). c

The value of the CO 2 reductions is calculated using a range of values per metric ton of

CO 2 (otherwise known as the Social Cost of Carbon, or SCC) developed by an interagency process. The derivation of the SCC values is discussed in chapter 14 . Using discount rates appropriate for each set of SCC values, DOE estimates the present monetary value of the CO 2 emissions reduction to be between $4.2 billion and $65.9 billion . Additionally, DOE estimates the present monetary value of the NOx emissions reduction to be $227 million and $728 million

at 7

- percent and 3

- percent discount rates, respectively

.

Table 1.2.1 summarizes the national economic costs and benefits expected to result from the proposed standards for small, large, and very large air -cooled CUAC and CUHP.

a DOE calculated emissions reductions relative to the Annual Energy Outlook (AEO) 2013 Reference case, which generally represents current legislation and environmental regulations for which implementing regulations were available as of December 31, 2012.

b A metric ton is equivalent to 1.1 short tons. Results for NO X and Hg are presented in short tons.

c DOE also estimated CO 2 and, for CH 4 and N 2 O, CO 2 equivalent (CO 2 eq) emissions that occur through 2030. The estimated emissions reductions through 2030 are 4 6 million metric tons CO 2 , 3.5 million tons CO 2 eq for CH 4 , and

186 thousand tons CO 2 eq for N 2 O.

1-1Table 1.2.1 Summary of National Economic Benefits and Costs of Proposed Energy Conservation Standards for Small, Large, and Very Large Commercial Package Air Conditioning and Heating Equipment *

Category Present Value Billion 2013$ Discount Rate

Benefits

Operating Cost Savings 20.6 7%

59.7 3%

CO 2 Reduction Monetized Value ($12.0/t case)** 6.1 5%

CO 2 Reduction Monetized Value ($40.5/t case)** 30.9 3%

CO 2 Reduction Monetized Value ($62.4/t case)** 49.9 2.5%

CO 2 Reduction Monetized Value ($119/t case)** 95.9 3%

NO X Reduction Monetized Value (at $2,684/ton)** 0.3 7%

1.1 3%

Total Benefits† 51.9 7%

91.6 3%

Costs

Incremental Installed Costs 4.1 7%

8.8 3%

Total Net Benefits

Including Emissions Reduction Monetized Value† 47.8 7%

82.8 3%

* This table presents the costs and benefits associated with small, large, and very large air

- cooled CUAC and CUHP shipped in 2019−2048. These results include benefits to customers which accrue after 2048 from the products purchased in 2019−2048. The results account for the incremental variable and fixed costs incurred by manufacturers due to the standard, some of which may be incurred in preparation for the rule.

** The CO 2 values represent global monetized values of the SCC, in 2013 $, in 2015 under several scenarios of the updated SCC values . The first three cases use the averages of SCC distributions calculated using 5%, 3%, and 2.5% discount rates, respectively. The fourth case represents the 95 th percentile of the SCC distribution calculated using a
3% d iscount rate. The SCC time series used by DOE incorporate an escalation factor. The value for NO X is the average of the low and high values used in DOE’s analysis.
† Total Benefits for both the 3% and 7% cases are derived using the series corresponding to average SCC with 3

- percent discount rate.

The benefits and costs of today’s proposed standards, for products sold in 2019-2048, can also be expressed in terms of annualized values. The annualized monetary values are the sum of (1) the annualized national economic value of the benefits from consumer operation of products that meet the proposed standards; consisting primarily of operating cost savings from using less energy, minus increases in equipment purchase and installation costs, which is another way o f

1-2representing customer NPV, and (2) the annualized monetary value of the benefits of CO 2 and

NO X emission reductions. d

Although combining the values of operating savings and CO 2 emission reductions provides a useful perspective, two issues should be considered. First, the national operating savings are domestic U.S. consumer monetary savings that occur as a result of market

transactions while the value of CO 2 reductions is based on a global value. Second, the assessments of operating cost savings and CO 2 savings are performed with different methods that use different time frames for analysis. The national operating cost savings is measured for the lifetime of small, large, and ver y large air -cooled CUAC and CUHP shipped in 2019–2048. The SCC values, on the other hand, reflect the present value of some future climate- related impacts resulting from the emission of one ton of carbon dioxide in each year. These impacts continue

well be yond 2100.

Estimates of annualized benefits and costs of the proposed standards are shown in Table 1-2. The results under the primary estimate are as follows. Using a 7-percent discount rate for

benefits and costs other than CO 2 reduction, for which DOE us ed a 3 -percent discount rate along with the average SCC series that uses a 3 -percent discount rate, the cost of the standards proposed in today’s rule is $190 million per year in increased equipment costs, while the benefits are $ 1,089 million per year in reduced equipment operating costs, $1,055 million in CO 2 reductions, and $17 million in reduced NO X emissions. In this case, the net benefit amounts to $1,971 million per year. Using a 3

- percent discount rate for all benefits and costs and the average

SCC series, the cost of the standards proposed in today’s rule is $284 million per year in increased equipment costs, while the benefits are $ 2,153 million per year in reduced operating costs, $1,055 million in CO 2 reductions, and $36 million in reduced NO X em issions. In this case, the net benefit amounts to $2,960 million per year.

d DOE used a two

- step calculation process to convert the time

- series of costs and benefits into annualized values. First, DOE calculated a present value in 2013, the year used for discounting the NPV of total customer costs and savings, for the time

- series of costs and benefits using discount rates of three and seven percent for all costs and benefits except for the value of CO 2 reductions. For the latter, DOE used a range of discount rates. From the present value, DOE then calculated the fixed annual paymen t over a 30

- year period (2019 through 2048) that yields the same present value. The fixed annual payment is the annualized value. Although DOE calculated annualized values, this does not imply that the time

- series of cost and benefits from which the annualized values were determined is a steady stream of payments.

1-3Table 1.2.2 Annualized Benefits and Costs of Proposed Energy Conservation Standards for Small, Large, and Very Large Commercial Packag e Air Conditioning and Heating Equipment

Discount Rate Primary Estimate Low Net

Benefits

Estimate High Net

Benefits

Estimate

million 2013$/year

Benefits

Operating Cost Savings 7% 2,177 1,984 2,407

3% 3,426 3,127 3,781

CO 2 Reduction Monetized Value ($12.0/t case)** 5% 484 467 505

CO 2 Reduction Monetized Value ($40.5/t case)** 3% 1,774 1,714 1,846

CO 2 Reduction Monetized Value ($62.4/t case)** 2.5% 2,632 2,543 2,737

CO 2 Reduction Monetized Value ($119/t case)** 3% 5,504 5,317 5,727

NO X Reduction Monetized Value (at $2,684/ton)** 7% 36.18 34.75 37.90

3% 60.89 58.85 63.40

Total Benefits† 7% plus CO 2 range 2,698 to 7,718 2,486 to 7,336 2,950 to 8,172

7% 3,988 3,733 4,291

3% 5,262 4,900 5,691

3% plus CO 2 range 3,972 to 8,991 3,653 to 8,503 4,349 to 9,572

Costs

Incremental Product Costs 7% 430 350 485

3% 507 433 550

Net Benefits

Total† 7% plus CO 2 range 2,268 to 7,288 2,135 to 6,986 2,465 to 7,687

7% 3,558 3,383 3,806

3% 4,755 4,468 5,140

3% plus CO 2 range 3,465 to 8,484 3,220 to 8,071 3,799 to 9,021

1-4* This table presents the annualized costs and benefits associated with small, large, and very large air

- cooled CUAC and CUHP shipped in 2019−2048. These results include benefits to customers which accrue after 2048 from the products purchased in 2019−2048

. The results account for the incremental variable and fixed costs incurred by

manufacturers due to the standard , some of which may be incurred in preparation for the rule. The Primary, Low Benefits, and High Benefits Estimates utilize projections of energy prices from the AEO2013 Reference case, Low Economic Growth case, and High Economic Growth case, respectively. In addition, incremental product costs reflect no change for projected product price trends in the Primary Estimate, an increasing trend for pr ojected product prices in the Low Benefits Estimate, and a decreasing trend for projected product prices in the High Benefits Estimate. The methods used to derive projected price trends are explained in section IV.F.

** The CO 2 values represent global monetized values of the SCC, in 2013 $, in 2015 under several scenarios of the updated SCC values . The first three cases use the averages of SCC distributions calculated using 5%, 3%, and 2.5% discount rates, respectively. The fourth case represents the 95 th percentile of the SCC distribution calculated using a
3% discount rate. The SCC time series incorporate an escalation factor. The value for NO X is the average of the low and high values used in DOE’s analysis.

† Total Benefits for both the 3

- percent and 7

- percent cases are derived using the series corresponding to average

SCC with 3

- percent discount rate. In the rows labeled “7% plus CO 2 range” and “3% plus CO 2 range,” the operating

cost and NO X benefits are calculated using the labeled discount rate, and those values are added to the full range of

CO 2 values.

1.3 OVERVIEW OF STANDARDS FOR SMALL, LARGE, AND VERY LARGE

AIR

- COOLED CUAC AND CUHP

Title III, Part C e of the Energy Policy and Conservation Act of 1975 (EPCA or the Act), Pub. L. 94-163 (42 U.S.C. 6311-6317, as codified), was added by the National Energy Conservation Policy Act (Pub. L. 95-619 (Nov. 9, 1978). That law established the Energy Conservation Program for Certain Industrial Equipment, which includes provisions covering the commercial heating an d air -conditioning equipment that is the subject of this notice. f In general, this program addresses the energy efficiency of certain types of commercial and industrial equipment. Relevant provisions of the Act include definitions (42 U.S.C. 6311), energy conservation standards (42 U.S.C. 6313), test procedures (42 U.S.C. 6314), labelling provisions (42 U.S.C. 6315), and the authority to require information and reports from manufacturers (42 U.S.C. 6316).

Section 342(a) of EPCA concerns energy conservation standards for small, large, and very large, air -cooled CUAC and CUHP. (42 U.S.C. 6313(a)) This category of equipment has a rated capacity between 64,000 Btu/h and 760,000 Btu/h. It is designed to heat and cool commercial buildings and is typically located on the building’s rooftop. Section 5(b) of the American Energy Manufacturing Technical Corrections Act of 2012 (Pub. L. No. 112-210 (Dec. 18, 2012) (AEMTCA) amended Section 342(a)(6) of EPCA. Among other things, AEMTCA

modified the manner in which DOE mu st amend the energy efficiency standards for certain types of commercial and industrial equipment. DOE is typically obligated either to adopt those standards developed by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE)

– or to adopt levels more stringent than the ASHRAE levels if there is clear and convincing evidence in support of doing so (42 U.S.C. 6313(a)(6)(A)). AEMTCA added to this process a requirement that DOE initiate a rulemaking to consider amending the

e For editorial reasons, upon codification in the U.S. Code, Part C was re

- designated Part A

- 1.

f All references to EPCA in this document refer to the statute as amended through the American Energy Manufacturing Technical Corrections Act of 2012, Pub. L. 112

- 210 (Dec. 18, 2012).

1-5st andards for any covered equipment as to which more than 6 years has elapsed since the issuance of the most recent final rule establishing or amending a standard for the equipment as of the date of AEMTCA’s enactment, December 18, 2012. (42 U.S.C. 6313(a)(6 )(C)(vi)) Under this new framework, DOE must issue either a notice of determination that the current standards do not need to be amended or a notice of proposed rulemaking (NOPR) containing proposed standards by December 31, 2013. See 42 U.S.C. 6313(a)(6)( C)(i) and (vi). g

DOE most recently issued amended standards for small, large, and very large, air- cooled CUAC and CUHP on October 18, 2005, which codified both the amended standards for small and large equipment and the new standards for very large equipm ent set by the Energy Policy Act of 2005 (EPAct 2005), Pub. L. No. 109-58, 70 FR 60407 (Aug. 8, 2005).

1.4 PROCESS FOR SETTING ENERGY CONSERVATION STANDARDS

Under EPCA, when DOE is studying new or amended standards, it must consider, to the
greatest extent practicable, the following seven factors:

1) the economic impact of the standard on the manufacturers and consumers of the affected products;

2) the savings in operating costs throughout the estimated average life of the product compared to any increases in the initial cost or maintenance expense;

3) the total projected amount of energy savings likely to result directly from the imposition of the standard;

4) any lessening of the utility or the performance of the products likely to result from the imposition of the standard;

5) the impact of any lessening of competition, as determined in writing by the Attorney General, that is likely to result from th e imposition of the standard;

6) the need for national energy conservation; and

7) other factors the Secretary considers relevant. (42 U.S.C. 6313(a)(6)(B))

Other statutory requirements are set forth in 42 U.S.C. 6313(a)(6)(A)– (C)

.

DOE considers interested party participation to be a very important part of the process for setting energy conservation standards. Through formal public notifications ( i.e.

, Federal Register notices) , DOE actively encourages the participation and interaction of all interested par tie s during the comment period in each stage of the rulemaking. Beginning with the f ramework document and during subsequent comment periods, interactions among interested partie s provide a balanced discussion of the information that is required for the standards rulemaking.

g Subparagraph (A) and subparagraph (B) refer to 42 U.S.C. 6313(a)(6).

1-6B efore DOE determines whether or not to adopt a proposed energy conservation standard, it must first solicit comments on the proposed standard. Any new or amended standard must be designed to achieve significant additional conservation o f energy and be technologically feasible and economically justified. To determine whether economic justification exists, DOE must review comments on the proposal and determine that the benefits of the proposed standard exceed its burdens to the greatest ex tent practicable, weighing the seven factors listed above.

The energy conservation standards rulemaking process involves two formal public notices, which DOE publishes in the Federal Register . The first notice is the NOPR, which
presents the analyses of the impacts of potential amended energy conservation standards on consumers, manufacturers, and the Nation; DOE’s weighting of these impacts of amended energy conservation standards; and the proposed energy conservation standards for the equip ment . The second notice is the final rule, which presents a discussion of the comments received in response to the NOPR; the revised analyses; DOE’s weighting of these impacts; the amended energy conservation standards DOE is adopting for each product; and the effective dates of the amended energy conservation standards.

Table 1.4.1 Analyses Under the Process Rule *

Preliminary Analyses NOPR Final Rule

Market and technology assessment Customer subgroup analysis Revised NOPR analyses

Screening analysis Manufacturer impact analysis
Engineering analysis Utility impact analysis
Energy use determination Emissions analysis
Markups for equipment price

determination Employment impact analysis

Life

- cycle cost and payback period analysis Regulatory impact analysis

Shipments analysis
National impact analysis

* In the current rulemaking, DOE conducted the analyses listed under Preliminary Analyses as part of the NOPR analysis.

On February 1, 2013, DOE published a request for information and notice of document availability for small, large, and very large, air cooled CUAC and CUHP. 78 FR 7296. This

notice is available at: http://www.regulations.gov/#!documentDetail;D=EERE-2013- BT

- STD

0007-0002 . The notice sought to solicit information from the public to help DOE determine whether national standards more stringent than those that are currently in place would result in a significant amount of additional energy savings and whether those national standards would be technologically feasible and economically justified. Separately, DOE also sought information on the merits of adopting integrated energy efficiency ratio (IEER) as the energy efficiency descriptor for small, large, and very large air -cooled CUAC and CUHP.

As part of the information gathering and sharing process, DOE organized and held interviews with manufacturers of the equipment considered in this rulemaking as part of the engineering analysis. DOE had four objectives for these interviews: (1) solicit manufacturer

1-7feedback on the draft inputs to the engineering analysis; (2) solicit feedback on topics related to

the manufacturer impact analysis; (3) provide an opportunity to express manufacturers’ concerns to DOE; and (4) foster cooperation between manufacturers and DOE. DOE incorporated the information gathered during the engineering interviews with manufacturers into its enginee ring analysis (chapter 5 of the NOPR TSD ) and the manufacturer impact analysis (chapter 12 of the

NOPR TSD ).

1.5 STRUCTURE OF THE DOCUMENT

This preliminary TSD outlines the analytical approaches used in this rulemaking. The TSD consists of fourteen chapters, an environmental assessment, a regulatory impact analysis, and appendices.

Chapter 1 Introduction: provides an overview of the appliance standards pr ogram and how it applies to this rulemaking and outlines the structure of the

document.

Chapter 2 Analyt ical Framework: describ es the rulemaking process.

Chapter 3 Market and Technology Assessment: characterizes the market for the considered products and the technologies available for increasing product efficiency.

Chapter 4 Screening Analysis: identifies all the design options that improve efficiency of the considered products and determines which technology options are viable for consideration in the engineering analysis.

Chapter 5 Engineering Analysis: discusses the methods used for developi ng the relationship between increased manufacturer price and increased efficiency.

Chapter 6 Markups Analysis: discusses the methods used for establishing markups for converting manufacturer prices to customer product cost s.

Chapter 7 Energy Use Analys is: discusses the pro cess used for generating energy

use estimates for the considered products as a function of standard

levels.

Chapter 8 Life

- Cycle Cost and Payback Period Analysis: discusses the methods used to analyze effects of standards on individual customers and users of

the products and compares the LCC and PBP of products with and without higher efficiency standards.

Chapter 9 Shipments Analysis: estimate s shipments of the products over the 30- year analysis period that is used in performing the national impact analysis (NIA) , including how shipments may vary under alternative standard

levels

.

1-8Chapter 10 National Impact Analysis: assesse s the national energy savings, and the national net present value of total consumer costs and savings, expe cted to result from specific, potential energy conservation standards.

Chapter 11 Consumer Subgroup Analysis: discusses the effects of potential standards on different subgroups of consumers.

Chapter 12 Manufacturer Impact Analysis: discusses the effec ts of standards on the finances and profitability of product manufacturers.

Chapter 13 Em issions Analysis: discusses the effects of standards on three pollutants—sulfur dioxide (SO 2 ), nitrogen oxides (NO

x ), and mercury—

as well as CO 2 emissions.

Chapter 14 Monetization of Emissions Reductions: discusses the basis for estimated monetary values used for the reduced emissions of CO 2 and NO

x that are expected to result from each of the TSLs considered.

Chapter 1 5 Utility Impact Analysis: discusses selected effects of potential standards

on electric utilities.

Chapter 1 6 Employment Impact Analysis: discusses the effects of standards on national employment.

Chapter 17 Regulatory Impact Analysis: discusses the impact of non

- regulatory

alternatives to efficiency standards.

Appendix 5 A Engineering Questionnaires

Appendix 6 A Detailed Data for Equipment Price Markups

Appendix 7A Modifications to Simulations for Energy Use Calculations

Appendix 8A Distributions used for Discount Rates

Appendix 10A Full

- Fuel

- Cycle Multipliers

Appendix 10B National Net Present Value of Consumer Benefits using Alternative Equipment Price Forecast s and Economic Growth Scenarios

Appendix 14A Social Cost of Carbon for Regulatory Impact Analysis Under Executive

Order 1 2866

Appendix 14B Technical Update of Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866

1-9Appendix 17A Regulatory Impact Analysis: Supporting Materials

1-10