17-A-i

APPENDIX 17-A. REGULATORY IMPACT ANALYSIS SUPPORTING 

MATERIAL 

TABLE OF CONTENTS

17-A.1 MARKET PENETRATION CURVES DEVELOPED BY XENERGY............17-A-1

17-A.2 IMPACTS OF CONSUMER TAX CREDITS....................................................17-A-2

17-A.3 EPACT 2005 FEDERAL TAX CREDITS FOR CONSUMERS AND 

MANUFACTURERS OF RESIDENTIAL APPLIANCES................................17-A-3

17-A.3.1 Tax Credits for Consumers of Residential Appliances........................................17-A-3

17-A.3.2 Tax Credits for Manufacturers of Energy Efficient Appliances..........................17-A-4

LIST OF FIGURES

Figure 17-A.1.1 Comparison of Exponential and Logistic Curves Showing External and 

Internal Influences on Consumers ...........................................................17-A-2
17-A-1

APPENDIX 17-A. SUPPORTING MATERIAL: REGULATORY IMPACT ANALYSIS

17-A.1 MARKET PENETRATION CURVES DEVELOPED BY XENERGY

Xenergy, Inc., developed a re-parameterized, mixed-source model of information 

diffusion to estimate market impacts induced by financial incentives for energy efficient 

appliances. The basic premise of this mixed-source model is that information diffusion drives 

technology adoption. There is extensive economic literature discussing the diffusion process of 

new products as technologies evolve. Some of the literature focuses primarily on the 

development of analytical models of diffusion patterns of new products for individual consumers 

or for technologies from competing firms.1, 2, 3 One study records researchers’ attempts to 

investigate underlying factors that drive diffusion processes.4 Because of the distinct 

characteristics of diverse new products, few studies have conclusively developed a universally 

applicable model. Some key findings, however, seem to have gained wide recognition in 

academia and industry. 

First, all potential users may adopt new technologies, regardless of their economic 

benefits and technological merits. Many products face a ceiling on their adoption rate. Second, 

not all adopters purchase new products at the same time. Some act quickly after the introduction 

of a new product, while others respond slowly, waiting for products to become more mature. 

Third, diffusion processes can be approximately characterized by asymmetric S-curves, depicting 

three stages of diffusion: starting, accelerating, and decreasing as the adoption ceiling is 

reached.

One important diffusion model, the epidemic model, is used widely in marketing and 

social studies on diffusion. It assumes that (1) all consumers value the benefits of a new product 

identically and (2) the cost of a new product is constant or declines monotonically over time. 

What induces a consumer to purchase the new product is information about the availability and 

benefits of the product. In other words, it is information diffusion that drives individual 

consumers’ adoption of new product.3 By superimposing a logistic function on an exponential 

function, the model incorporates information diffusion from both internal sources (news spread 

by word of mouth from early adopters) and external sources (the “announcement effect” by 

government, other institutions, or commercial advertising).1, 4

 

The relative degree of influence by internal and external sources determines the general 

shape of the diffusion curve for the specific product.1, 4 For instance, if the adoption of a product 

is influenced more by external sources of information diffusion (announcement effect) than by 

internal sources (word of mouth among early adopters to prospective adopters), the rate of 

diffusion at the beginning of the diffusion process is much higher. This effect reflects the 

immediate information exposure to a significant number of prospective adopters brought about 

by external sources, in contrast to the more gradual exposure of early adopters, a small 

proportion of the population, to other prospective adopters. Graphically speaking, a relatively 

dominant external source of information diffusion gives an immediate jump-start to the adoption 
17-A-2

of a new product in the first years, forming a concave curve with respect to the Y axis (the 

exponential curve in Figure 17-A.1.1). Adoption of a new product influenced more strongly by 

internal sources of information diffusion (such as a social network formed by prospective 

adopters) may start with a few early adopters and increase gradually as the number of adopters 

increases. This process forms a convex curve (the logistic curve in Figure 17-A.1.1).

Figure 17-A.1.1 Comparison of Exponential and Logistic Curves Showing External and 

Internal Influences on Consumers

17-A.2 IMPACTS OF CONSUMER TAX CREDITS

Because there have been no consumer tax credits for microwave ovens, DOE analyzed 

data from Oregon's Residential Energy Tax Credit (RETC) for dishwashers as an analogous 

kitchen product. DOE calculated that for 2006 Oregon taxpayers claimed credits for 14 percent 

of dishwasher shipments to the State. DOE found no data comparing sales of efficient 

dishwashers in Oregon and Washington. To estimate how many of the tax credit claims likely 

were due to utility rebates and to market impacts, DOE reviewed a report by Itron on utility 

rebate programs in California. That report compared the percentage of residential clothes washer 

and dishwasher rebate programs in 2005.5 Free riders are consumers who would have purchased 

efficient appliances without a tax credit or rebate incentive but claimed the credit. Itron found 

that the penetration rate of ENERGY STAR dishwashers (85 percent) was much higher than that 
17-A-3

of ENERGY STAR clothes washers (40 percent). Itron also found that the percentage of free 

riders was greater for dishwasher programs than for clothes washer programs. DOE’s previous 

estimates showed that the incremental cost compared to a baseline unit was much smaller for 

high efficiency dishwashers than for high efficiency clothes washers,6, 7 which could explain the 

higher penetration rate for efficient dishwashers. An incentive program for a product having a 

higher market share would tend to have more free riders. Based on these various factors, DOE 

estimated that market impacts (partly due to free riders) were responsible for a higher percentage 

of tax credit claims for dishwashers than for residential clothes washers. 

Itron’s report contained two estimates of free riders for ENERGY STAR dishwashers in 

2005. DOE took the simple average of the supplier estimate of 93 percent and the self-reported 

consumer estimate of 59 percent, yielding 76 percent. DOE also developed a simple average of 

estimated free riders for residential clothes washers, averaging 77 percent from suppliers and 43 

percent from consumers to yield 60 percent. DOE assumed that the difference in numbers of free 

riders between the two products would be on the order of the difference between the two 

estimates (16 percent).

DOE interpreted the higher percentage of consumers purchasing dishwashers as free 

riders, and the lower percentage of taxpayers influenced primarily by rebates, to estimate that 49 

percent of Oregon's 2006 dishwasher tax credits claimed (6.9 percent of total dishwasher 

shipments to the State) were due to market impacts. It estimated that utility rebates were 

responsible for 32 percent of tax credits claimed (4.5 percent of total shipments). DOE attributed 

the remaining 20 percent of tax credits claimed (2.8 percent of total shipments) to the ability of 

the consumer to claim a tax credit.

17-A.3 EPACT 2005 FEDERAL TAX CREDITS FOR CONSUMERS AND 

MANUFACTURERS OF RESIDENTIAL APPLIANCES 

This section describes the products that qualified for Federal tax credits for consumers 

and manufacturers of energy efficient residential appliances under EPACT 2005.

17-A.3.1 Tax Credits for Consumers of Residential Appliances

EPACT 2005 included Federal tax credits for consumers who installed efficient air 

conditioners or heat pumps; gas or oil furnaces; furnace fans; and/or gas, oil, or electric heat 

pump water heaters in new or existing homes.8,9,10 These tax credits were in effect in 2006 and 

2007, expired in 2008, and were reinstated for 2009–2010 by the American Recovery and 

Reinvestment Act (ARRA). There was a $1,500 cap on the credit per home, including the 

amount received for insulation, windows, and air and duct sealing. Congress extended this 

provision for 2011 with some modifications to eligibility requirements, and reductions in the cap 

to $500 per home.

Residential appliances must meet the following specifications, as applicable, to qualify 

for Federal tax credits.
17-A-4

• Furnaces and Boilers:

o Until December 31, 2010: Natural gas & propane furnaces must meet an Annual 

Fuel Use Efficiency (AFUE) 95 or higher, oil furnaces and gas, oil and propane 

boilers must meet an AFUE of 90 or better. 

o From January 1 through December 31, 2011: Natural gas & propane furnaces 

must meet an Annual Fuel Use Efficiency (AFUE) 95 or higher, oil furnaces and 

gas, oil and propane boilers must meet an AFUE of 95 or better. In addition, the 

credit only covers costs up to $150.

• Central Air Conditioning Units: 

o Until December 31, 2010: Central air conditioning units and air-source heat 

pumps must meet the highest tier standards set by the Consortium for Energy 

Efficiency (CEE) as of February 17, 2009, which in most cases requires a 

Seasonal Energy Efficiency Ratio (SEER) of 16. SEER measures performance 

throughout the cooling season. 

o Until December 31, 2011: same specifications, the credit only covers costs up to 

$300.

• Fans for heating and cooling systems: 

o Until December 31, 2010: fan uses no more than 2% of total heating system 

energy use, as defined by DOE test procedure.

o From January 1 through December 31, 2011: $50 for any advanced main air 

circulating fan

• Water Heaters: 

o Until December 31, 2010: 

 Gas or propane water heaters—Energy Factor of at least 0.82, or a thermal 

efficiency of at least 90%

 Heat pump water heaters—Energy Factor of at least 2.0

o From January 1 through December 31, 2011: same specifications, the credit only 

covers costs up to $300.

17-A.3.2 Tax Credits for Manufacturers of Energy Efficient Appliances

EPACT 2005 provided Federal Energy Efficient Appliance Credits to manufacturers that 

produced high-efficiency refrigerators, clothes washers, and dishwashers in 2006 and 2007.11

The Emergency Economic Stabilization Act of 200812 amended the credits and extended them 

through 2010. The credits were extended again to 2011 with modifications in the eligibility 

requirements. Manufacturers who produce these appliances receive the credits for increasing 

their production of qualifying appliances. The credits were available for models produced in 

2008, 2009, and 2010 and 2011. 

The credit amounts applied to each unit manufactured. The credit to manufacturers of 

qualifying clothes washers, refrigerators and dishwashers is capped at $75 million for the period 

of 2008-2010. However, the most efficient refrigerator (30%) and clothes washer (2.2 MEF/4.5 

wcf) models are not subject to the cap. The credit to manufacturers is capped at $25 million for 
17-A-5

2011. The most efficient refrigerators (35%) and clothes washers (2.8 MEF/3.5 WCF) are 

exempted from this cap.13
17-A-6

REFERENCES

 1 Geroski, P.A. Models of Technology Diffusion. 2000. Research Policy. 29: 603–625.

2 Hall, B.H., and B. Khan. Adoption of New Technology. 2003. Department of Economics, 

University of California, Berkeley, CA. Working Paper No.E03-330.

3 Lekvall, P., and C. Wahlbin. A Study of Some Assumptions Underlying Innovation 

Diffusion Functions. 1973. Swedish Journal of Economics.

4 Van den Bulte, C. Want to Know How Diffusion Speed Varies Across Countries and Products? 

Try a Bass Model. 2002. Product Development and Management Association. PDMA Vision. 

October. XXVI, No 

5 Itron and KEMA. 2004/2005 Statewide Residential Retrofit Single-Family Energy Efficiency 

Rebate Evaluation. 2007. Prepared for the California Public Utilities Commission, Pacific Gas 

and Electric Company, San Diego Gas and Electric Company, Southern California Edison, and 

Southern California Gas Company. Itron, Inc., and KEMA, Inc.: Oakland, CA. CPUC-Id#: 

1115-04.

6 U.S. Department of Energy. Technical Support Document: Energy Efficiency Standards for 

Consumer Products and Commercial and Industrial Equipment: Residential Dishwashers, 

Dehumidifiers, and Cooking Products, and Commercial Clothes Washers. November 2007. 

Washington, D.C. Chapter 8. (Last accessed May 6, 2011.) 

http://www.eere.energy.gov/buildings/appliance_standards/residential/home_appl_tsd.html

7 U.S. Department of Energy. Final Rule Technical Support Document (TSD): Energy Efficiency 

Standards for Consumer Products: Clothes Washers. December 2000. Washington, D.C. 

Chapter 7. (Last accessed May 6, 2011.) 

http://www.eere.energy.gov/buildings/appliance_standards/residential/clwash_0900_r.html 

8 Tax Incentives Assistance Project, Consumer Tax Incentives: Home Heating & Cooling 

Equipment. (Last accessed May 6, 2011.) <www.energytaxincentives.org/consumers/heatingcooling.php>

9 Energy Policy Act of 2005, 119 STAT. 594 Public Law 109–58. Section 1333, 26 USC 25C 

note, (Posted August 8, 2005) (Last accessed May 6, 2011.) 

<http://frwebgate3.access.gpo.gov/cgibin/getdoc.cgi?dbname=109_cong_public_laws&docid=f:publ058.109.pdf>

10 Consortium for Energy Efficiency, CEE High-Efficiency Specification: Central Air 

Conditioners and Air Source Heat Pumps, January 1, 2009. (Last accessed May 6, 2011.) 

<http://www.cee1.org/resid/rs-ac/res-ac_specs.pdf>
17-A-7

 11 U.S. Department of the Treasury, Internal Revenue Service, Form 8909, (Last accessed May 

6, 2011.) <www.irs.gov/pub/irs-pdf/f8909.pdf>

12 Emergency Economic Stabilization Act of 2008. (Last accessed May 6, 2011.) 

<http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=110_cong_bills&docid=f:h1424enr.txt.pdf

13 Tax Incentives Assistance Project, Manufacturers Incentives, (Last accessed May 6, 2011.) 

<http://energytaxincentives.org/builders/appliances.php>