CHAPTER 5. LIFE­CYCLE COST AND PAYBACK PERIOD ANALYSIS

TABLE OF CONTENTS

5.1 INTRODUCTION............................................................................................................... 5­1

5.1.1 General Approach for Life­Cycle Cost and Payback Period Analysis................ 5­1

5.1.2 Overview of Life­Cycle Cost and Payback Period Inputs................................... 5­2

5.2 LIFE­CYCLE COST INPUTS

............................................................................................ 5­4

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

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

5.2.2.1 Baseline Contractor Cost

...................................................................... 5­6

5.2.2.2 Standards­Level Contractor Cost Increases.......................................... 5­7

5.2.2.3 Markups

................................................................................................ 5­8

5.2.2.4 Baseline Markup

................................................................................... 5­9

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

5.2.2.6 Overall Markup................................................................................... 5­10

5.2.2.7 Assumptions Used to Estimate Wholesaler and Contractor Markups 5­11

5.3 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS

................................ 5­12

5.3.1 Markups for Mechanical Contractors in the Replacement and New

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

5.4 ESTIMATION OF GENERAL CONTRACTOR MARKUPS

........................................ 5­15

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

5.6 OVERALL MARKUPS

.................................................................................................... 5­16

5.6.1.1 Installation Cost

.................................................................................. 5­17

5.6.1.2 Weighted­Average Total Installed Cost.............................................. 5­21

5.6.2 Operating Cost Inputs........................................................................................ 5­24

5.6.2.1 Fuel Price Analysis

............................................................................. 5­25

5.6.2.2 Fuel Price Trends

................................................................................ 5­28

5.6.2.3 Maintenance and Repair Costs............................................................ 5­30

5.6.2.4 Lifetime............................................................................................... 5­31

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

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

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

5.7.1 Definition........................................................................................................... 5­36

5.7.2 Inputs

................................................................................................................. 5­36

5.8 LIFE­CYCLE COST AND PAYBACK PERIOD RESULTS

......................................... 5­36

5.8.1 Life­Cycle Cost Results..................................................................................... 5­36

5.8.1.1 Differences in Life­Cycle Cost Between Baseline and StandardLevel Equipment................................................................................. 5­37

5.8.2 Payback Period Results...................................................................................... 5­38

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

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

5.10 DETAILED RESULTS

..................................................................................................... 5­41

References.................................................................................................................................. 5­42

5­iLIST OF TABLES

Table 5.1.1 Summary Information of Inputs for the Determination of Life­Cycle Cost and

Payback Period..................................................................................................... 5­4

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

Table 5.2.2 Equipment Classes for the Commercial Packaged Boiler Life­Cycle Cost and

Payback Period Analysis...................................................................................... 5­6

Table 5.2.3 Baseline Contractor Costs per Unit by Equipment Class

......................................... 5­7

Table 5.2.4 Standard­Level Contractor Cost Increases (Cost Increases Relative to the

Cost of Baseline Equipment)

............................................................................... 5­7

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

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

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

All Mechanical Contractors

............................................................................... 5­13

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

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

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

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

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

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

Table 5.6.1 Overall Baseline Markups

...................................................................................... 5­17

Table 5.6.2 Overall Incremental Markups

................................................................................. 5­17

Table 5.6.3 Baseline Installation Cost Equation Parameters

..................................................... 5­18

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

Efficiencies

........................................................................................................ 5­19

Table 5.6.5 Combustion Efficiency (E

c ) Level Assumed for Onset of Incremental

Installation Costs................................................................................................ 5­19

Table 5.6.6 Comparison Between Residential and Commercial Incremental Installation

Cost for Higher­Efficiency Boilers.................................................................... 5­21

Table 5.6.7 Installation Cost Indices (National Value

= 100.0)

................................................ 5­22

5­iiTable 5.6.8 Costs and Markups for 800­kBtu/h Commercial Gas­Fired Hot­Water Boiler

at Efficiency Level 2 at National Average Conditions * ..................................... 5­22

Table 5.6.9 Weighted­Average Equipment Price, Installation Cost, and Total Installed

Costs for the 800­kBtu/h Commercial Packaged Hot­Water Boiler at U.S.

Average Prices (2008$)...................................................................................... 5­24

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

Table 5.6.11 Estimated Commercial Natural Gas Prices by State (2007 $/MBtu).................... 5­26

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

Table 5.6.13 Derived Average Commercial Fuel Price Ratios by Building Type

.................... 5­28

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

................................................. 5­31

Table 5.6.15 Average Discount Rates by Building Type

.......................................................... 5­34

Table 5.8.1 Distribution of Life­Cycle Cost Savings from Baseline Level for Small GasFired Commercial Packaged Boilers*

............................................................... 5­37

Table 5.8.2 Average Life­Cycle Cost Savings from Baseline Level (Level 0) by

Efficiency Level and Equipment Class*............................................................ 5­38

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

Commercial Packaged Boilers........................................................................... 5­38

Table 5.8.4 National Average Payback Periods by Efficiency Level and Equipment

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

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

Table 5.9.2 Average Life­Cycle Cost Savings from a Baseline Level (Level 1) by

Efficiency Level and Equipment Class

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

Table 5.9.3 Average Life­Cycle Cost Savings from a Baseline Level (Level 0) by

Efficiency Level and Equipment Class

– EIA High Price Scenario*................ 5­41

LIST OF FIGURES

Figure 5.1.1 Flow Diagram of Inputs for the Determination of Life­Cycle Cost and

Payback Period..................................................................................................... 5­4

Figure 5.6.1 AEO 2008 Commercial Natural Gas Price Trends................................................ 5­29

Figure 5.6.2 AEO 2008 Commercial Fuel Oil Price Trends...................................................... 5­30

5­iiiCHAPTER 5. LIFE­CYCLE COST AND PAYBACK PERIOD ANALYSIS

5.1 INTRODUCTION

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

assess the life­cycle cost benefits and the payback for adoption of potential energy efficiency

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

set out in American Society of Heating, Refrigerating and Air­Conditioning Standard 90.1­

2007. 1 The effect of higher standards on individual customers includes a change in operating cost

(usually decreased) and a change in purchase cost (usually increased). This chapter describes two

metrics used in the customer analysis to determine the economic viability of higher efficiency

standards on individual commercial customers:

• Life­cycle cost (LCC)

. The total customer cost over the life of an appliance or

equipment, including purchase costs and operating costs (which in turn include

maintenance, repair, and energy costs). Future operating costs are discounted to the time

of purchase, and summed over the lifetime of the appliance or equipment.

• Payback period (PBP)

. The amount of time it takes customers to recover the assumed

higher purchase price of more energy­efficient equipment through lower operating costs.

Inputs to and calculations used in the LCC and PBP analysis of commercial packaged

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

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

calculations discussed here were performed with a series of Microsoft Excel spreadsheets that are

accessible on the DOE web site at

( http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ashrae_products_docs

_meeting.html ).

Appendix 5­A contains additional results from the LCC analysis.

5.1.1 General Approach for Life­Cycle Cost and Payback Period Analysis

Recognizing that each commercial building that uses the commercial packaged boiler

equipment is unique, DOE analyzed variability and uncertainty by performing the LCC and PBP

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

data were developed in TSD chapter 4—public assembly, education, food service, lodging,

office, retail, and warehouse buildings across the United States—and aggregated the results

based on estimated shipments of commercial boilers to these building types. The LCC and PBP

model was developed using Microsoft Excel spreadsheets.

Aside from the relationship between increasing selling price and increasing energy

efficiency, and the type of building in which a boiler is used, the most important factors

influencing the LCC and PBP analysis are related to the State to which each commercial

packaged boiler is shipped. These factors include energy prices, installation cost, markup, and

sales tax. In addition, estimated discount rates for different classes of commercial customer are

used in the LCC analysis. The LCC analysis presented here used the predicted energy

consumption for commercial boilers based on the energy analysis and reviewed in chapter 4 of

the TSD, Energy Use Characterization.

5­1The energy consumption of commercial packaged boilers is sensitive to climatic

conditions and building type, thus energy consumption in the LCC analysis varies by

geographical location and building type. At the national level, the spreadsheets explicitly

accounted for variability in the model inputs for fuel price and markups using distributions based

on the shipment of units to different States and building types.

The LCC and PBP results are displayed as distributions of impacts compared to the

baseline conditions, which for purposes of the Notice of Proposed Rulemaking (NOPR) are the

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

boiler. Results are presented at the end of this chapter.

5.1.2 Overview of Life­Cycle Cost and Payback Period Inputs

The LCC is the total customer cost over the life of the equipment, including purchase cost

and operating cost (i.e.,energy, maintenance and repair cost). Future operating costs are

discounted to the time of purchase and summed over the lifetime of the equipment. The PBP is

the change in purchase cost due to an increased efficiency divided by the change in annual

operating cost that results from the energy conservation standard. It represents the number of

years it will take the customer to recover the increased purchase cost through decreased

operating costs. In the calculation of PBP, future costs are not discounted.

Inputs to the LCC and PBP analysis are categorized as: (1) inputs for establishing the

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

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

• Baseline contractor cost : The cost paid by a contractor to purchase a commercial

packaged boiler of the size and equipment classes analyzed in this analysis. Baseline

contractor costs for equipment are discussed in TSD chapter 3.

• Standard­level contractor cost increase : The incremental change in contractor cost

associated with producing equipment at each of the higher standard levels.

• Markups and sales tax : The markups and sales tax associated with converting the

contractor costs to a customer price.

• Installation price : The cost to the customer of installing the equipment. The installation

price represents the cost required to install the equipment but does not include the

marked­up customer equipment price. The installation price includes labor, overhead, and

any miscellaneous materials and parts. Thus, the total installed cost equals the customer

equipment price plus the installation price.

The inputs for calculating the operating cost are as follows:

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

commercial packaged boilers. Although there are potentially some electrical energy

consumption impacts for different efficiency levels within certain commercial packaged

boiler equipment classes, the LCC analysis includes only the estimates of primary fuel

(either gas or oil) by the equipment itself as calculated in TSD chapter 4. Underlying this

5­2assumption is that any changes in electrical energy consumption, for instance caused by

changes in blower design or controls for equipment meeting the standards, are small.

• Fuel prices : Natural Gas and fuel oil prices used in the analysis are the price in dollars

per million British thermal units (MBtu) paid by each customer. Fuel prices are

determined using average commercial fuel prices in each State, as determined from

available State­by­State Energy Information Administration (EIA) data for 2006. The

2006 average commercial prices were modified to reflect the fact that the seven types of

businesses analyzed pay prices that, on average, are either slightly higher or lower than

the average commercial prices. Details about the development of fuel prices and the data

sources used are found in Section 5.6.2.1.

• Fuel price trends : The EIA’s Annual Energy Outlook 2008 2 (DOE/EIA 2008; hereafter

referred to as AEO 2008) is used to forecast fuel prices. For the results presented in this

chapter, DOE used the AEO 2008 reference case to forecast future fuel prices.

• Maintenance costs : The labor and materials costs associated with maintaining the

operation of the equipment (e.g., cleaning boiler tubes).

• Repair costs : The labor and materials costs associated with repairing or replacing boiler

components that have failed.

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

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

• Discount rate : The rate at which future costs are discounted to establish their present

value.

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

for the calculation of the LCC and PBP. Table 5.1.1 summarizes the values for the various inputs

to the calculation of the LCC and PBP. As noted earlier, most of the inputs are characterized by

distributions that capture variability in the input. The values provided in Table 5.1.1 are the

weighted­average values from the distribution that is being used to characterize the input. Also

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

can be found.

5­3Baseline

Manufacturer

Price

Std Level

Manufacturer

Price

Total Installed

Cost

Annual Energy

Expense

Repair Cost

Maintenance

Cost Annual

Operating

Expense Lifetime

Operating

Expense Payback

Period

Energy

Consumption Distributor

Markup

Sales Tax Mechanical

Contractor

Markups Customer

Price

Installation

Cost & General

Lifetime

Discount Rate

Fuel

Price Trend Fuel

Prices Customer

Price

Installation

Cost From

Engineering

AnalysisAnalysis

(Price is a(Price is a

Function Function of

Efficiency)

From Markups From Markups

for Equipment Equipment

Price

Determination

AnalysisAnalysis

From Energy From Energy

Us e

Characterization

AnalysisAnalysis

(Energy Use as a (Energy Use as a

Function Function of

Efficiency) ­ Baseline

Manufacturer

Price

StdAnnual

Operating

Expense

Lifetime

Discount Rate

Fuel

Price Trend Level

Manufacturer

Price

Total Installed

Cost

Annual Energy

Expense

Repair Cost

Maintenance

Cost Lifetime

Operating

Expense Payback

Period

Energy

Consumption Distributor

Markup

Sales Tax Mechanical

Contractor

Markups Customer

Price

Installation

Cost & General

Fuel

Prices

Figure 5.1.1 Flow Diagram of Inputs for the Determination of Life­Cycle Cost and Payback

Period

Table 5.1.1 Summary Information of Inputs for the Determination of Life­Cycle Cost and

Payback Period

Factor Weighted­Average Value TSD

Chapter

Total Installed Cost Primary Inputs

Baseline contractor cost

Standard­level contractor cost increases

Markups and sales tax

Installation price Varies with equipment class

Vary with equipment class and efficiency level

Vary with equipment class, distribution channel, and

location

Varies with equipment class Chapter 3

Chapter 5

Chapter 5

Chapter 5

Operating Cost Primary Inputs

Equipment energy consumption

Fuel prices

Fuel price trends

Maintenance costs

Repair costs

Lifetime

Discount rate Varies with equipment class

Vary with location, building type

Vary with price scenario

Vary with equipment class

Vary with equipment class

Varies with type of business

Varies with type of business Chapter 4

Chapter 5

Chapter 5

Chapter 5

Chapter 5

Chapters 3, 5

Chapter 5

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

sections 5.2 through 5.7.

5.2 LIFE­CYCLE COST INPUTS

5.2.1 Definition

Life­cycle cost is defined by the following equation:

5­4N

LCC

= IC + 

# ∑ OC

t /(1 + r ) t Eq. 5.1

t = 1

where

LCC

= life­cycle cost ($),

IC

= total installed cost ($),

∑

= sum over the lifetime, from year 1 to year N, where N

= lifetime of equipment

(years),

OC

= operating cost ($),

r = discount rate,

t = year for which operating cost is being determined.

DOE expresses all of the costs in 2008$ for the LCC analysis. Total installed cost,

operating cost, lifetime, and discount rate are discussed in the following sections.

Because the purpose of the NOPR analysis is to examine the potential impact of DOE

setting energy conservation standards at levels higher than those established in ASHRAE

Standard 90.1­2007 for commercial packaged boilers, DOE assumes the start date for the LCC

analysis is determined as the earliest date that standards higher than ASHRAE Standard 90.1­

2007 levels could go into effect. Under current legislation, this is 2014, 4 years after a rule could

be put into effect setting standards for commercial boilers at levels higher than those shown in

ASHRAE Standard 90.1­2007. In the LCC analysis, the year of equipment purchase is assumed

to be 2014.

5.2.2 Total Installed Cost Inputs

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

IC

= EQP + INST Eq. 5.2

where

EQP

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

INST

= installation price or the customer price to install equipment (i.e., the cost for

labor and materials), ($).

The equipment price is based on the distribution channel through which the customer

purchases the equipment. Because the available cost data were developed based on contractor

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

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

variables DOE used to calculate the total installed cost for commercial packaged boiler

equipment. Table 5.2.1 lists the inputs for the determination of total installed cost.

5­5Table 5.2.1 Inputs for Total Installed Costs

Baseline contractor cost ($)

Standard­level contractor cost increases ($)

Mechanical contractor markup

General contractor markup

Sales tax (%)

Installation price ($)

5.2.2.1 Baseline Contractor Cost

The baseline contractor cost is the cost paid by mechanical contractors purchasing

commercial packaged boilers that meet the existing minimum efficiency (or baseline) standards

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

costs through an efficiency level analysis that estimated contractor costs by efficiency level for

each class of commercial packaged boiler analyzed, but without reference to boiler design

features. Refer to TSD chapter 3, Engineering Analysis, for discussion of the development of

contractor costs data.

DOE developed contractor costs for 10 equipment classes and using two sizes of

commercial packaged boilers typical boiler capacities (800 kBtu per hour [kBtu/h] and 3000

kBtu/h output ratings for small and large commercial packaged boilers, respectively). The LCC

and PBP analysis has been carried out for the typical boiler sizes identified within each

equipment class. Table 5.2.2 shows the 10 equipment classes that DOE evaluated. Table 5.2.3

lists baseline contractor costs per unit.

Table 5.2.2 Equipment Classes for the Commercial Packaged Boiler Life­Cycle Cost and

Payback Period Analysis

Equipment Class Output Capacity (kBtu/h)

Small Gas­Fired Hot Water

Small Gas­Fired Steam All Except Natural Draft

Small Gas­Fired Steam Natural Draft

Small Oil­Fired Hot Water

Small Oil­Fired Steam

Large Gas­Fired Hot Water

Large Gas­Fired Steam All Except Natural Draft

Large Gas­Fired Steam Natural Draft

Large Oil­Fired Hot Water

Large Oil­Fired Steam 800

800

800

800

800

3,000

3,000

3,000

3,000

3,000

5­6Table 5.2.3 Baseline Contractor Costs per Unit by Equipment Class

Equipment Class Baseline Contractor Cost (2008$)

Small Gas­Fired Hot Water

Small Gas­Fired Steam All Except Natural Draft

Small Gas­Fired Steam Natural Draft

Small Oil­Fired Hot Water

Small Oil­Fired Steam

Large Gas­Fired Hot Water

Large Gas­Fired Steam All Except Natural Draft

Large Gas­Fired Steam Natural Draft

Large Oil­Fired Hot Water

Large Oil­Fired Steam 6,294

10,717

11,190

10,168

9,261

14,567

30,441

31,966

23,533

28,870

5.2.2.2 Standards­Level Contractor Cost Increases

The standards­level contractor cost increase is the change in contractor cost associated

with contractor purchase of equipment at higher efficiency levels associated with higher energy

conservation standards. DOE developed contractor costs for higher efficiency levels through

analysis of data provided directly from mechanical contractors or equipment distributors. Refer to

TSD chapter 3, Engineering Analysis, for details. Contractor cost increases as a function of

equipment efficiency were developed for each of the 10 equipment classes. Up to four selected

efficiency levels higher than those in ASHRAE Standard 90.1­2007 were used in the LCC and

PBP analysis. The selection of these higher efficiency levels for the LCC and PBP analysis are

discussed in TSD chapter 3.

The engineering analysis established a distribution of contractor cost increases for each

standard level. Table 5.2.4 summarizes the estimated contractor cost increases for commercial

packaged boiler standard levels considered in the LCC and PBP analysis.

Table 5.2.4 Standard­Level Contractor Cost Increases (Cost Increases Relative to the Cost

of Baseline Equipment)

Equipment Class Increase in Contractor Cost by Efficiency Level*

(2008$)

Level 1 Level 2 Level 3 Level 4

Small Gas­Fired Hot Water

Small Gas­Fired Steam All Except Natural Draft

Small Gas­Fired Steam Natural Draft

Small Oil­Fired Hot Water

Small Oil­Fired Steam

Large Gas­Fired Hot Water

Large Gas­Fired Steam All Except Natural Draft

Large Gas­Fired Steam Natural Draft

Large Oil­Fired Hot Water

Large Oil­Fired Steam 1,044 3,305 6,985 12,329

873 2,695 5,548 7,627

529 1,628 3,339 na

1,189 3,706 7,707 na

803 2,480 6,137 na

1,797 5,614 11,699 36,345

1,656 3,402 5,243 7,184

1,071 3,240 6,536 10,987

4,459 10,131 16,060 na

1,570 4,796 9,768 18,522

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

5­75.2.2.3 Markups

For a given distribution channel, the overall markup is the value determined by

multiplying all of the associated retail markups and the applicable sales tax markups together to

arrive at a single overall distribution channel markup value. The overall markup in turn is

multiplied by the baseline or standards­level contractor cost to arrive at the price paid by the

customer. The overall markup is composed of a baseline markup (i.e., a markup used to convert

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

to convert a standard­level contractor cost increase caused by an increase in efficiency standards

into an incremental customer price). These markups are necessary for mechanical contractors

and in some case general contractors to cover their costs.

DOE recognizes that the price of commercial boilers depends on the distribution channel

the customer uses to purchase the equipment. Typical distribution channels for commercial

heating, ventilation, and air­conditioning (HVAC) equipment include manufacturers’ national

accounts, wholesalers, mechanical contractors, and/or general contractors. DOE developed costs

for mechanical contractors directly in the engineering analysis and estimated cost to customers

using a distribution channel beginning with the mechanical contractor cost. DOE did not develop

an estimate for manufacturer selling prices in the engineering analysis and consequently, did not

develop an estimate of markups for national account distribution channels with sales directly

from manufacturers to customers. Because of the complexity of installation and based on few

shipments to mercantile/retail building types (where national accounts are prevalent), DOE

assumed that sales of commercial packaged boilers involved mechanical contractors.

Consequently, DOE did not develop separate markups for costs through a national account

distribution channel or directly from wholesalers.

DOE developed distribution channel markups in the form of multipliers that represent

increases above the mechanical contractor cost. DOE applied these markups (or multipliers) to

the mechanical contractor costs it developed in the engineering analysis. DOE then added sales

taxes and installation costs to arrive at the final installed equipment prices for baseline and

higher efficiency equipment. DOE identified two separate distribution channels for commercial

boilers that describe how the equipment passes from the mechanical contractor to the customer

(Table 5.2.5). DOE assumed that in the case where an existing boiler is replaced, mechanical

contractors would sell the boiler, along with services necessary to replace the existing boiler,

directly to the customer. DOE assumed that replacement of existing boilers would not involve

general contractors. For new construction, however, DOE assumed that general contractors

would be involved whenever the installation of commercial boiler is involved, resulting in a

further markup on new boilers in addition to the mechanical contractor markup.

Table 5.2.5 Distribution Channels for Commercial Packaged Boiler Equipment

Channel 1 (Replacements) Channel 2 (New Construction)

Mechanical Contractor Mechanical Contractor

General Contractor

Customer Customer

DOE estimated percentages for both the new construction and replacement markets based

on data developed for the shipments model and based on growth in new construction and

5­8replacement of existing stock as determined in the shipments analysis (see TSD chapter 6).

Based on these results, DOE assumed that approximately 33 percent of commercial boilers

purchased will be installed in new construction, and the remaining 67 percent will replace

existing commercial boilers.

For each step in the distribution channels presented above, DOE estimated a baseline

markup and an incremental markup. DOE defined a baseline markup as a multiplier that converts

the mechanical contractor cost of equipment with baseline efficiency to the customer purchase

price for the equipment at the same baseline efficiency level. An incremental markup is defined

as the multiplier to convert the incremental increase in mechanical contractor cost of higher

efficiency equipment to the customer purchase price for the same equipment. Both baseline and

incremental markups only depend on the distribution channel and are independent of the boiler

efficiency levels.

DOE developed the markups for each distribution channel based on available financial

data. DOE based the mechanical contractor markups on data from the Air Conditioning

Contractors of America (ACCA) 3 and on the 2002 U.S. Census Bureau financial data for the

plumbing, heating, and air conditioning industry. DOE derived the general contractor markups

from U.S. Census Bureau financial data for the commercial and institutional building

construction sector. 4

The overall markup is the product of all the markups (baseline or incremental) for the

different steps within a distribution channel plus sales tax. DOE calculated sales taxes based on

2008 State­by­State sales tax data reported by the Sales Tax Clearinghouse. Because both

contractor costs and sales tax vary by State, DOE developed distributions of markups within

each distribution channel by State.

5.2.2.4 Baseline Markup

DOE defined baseline markups as cost multipliers that convert the contractor cost of

equipment with baseline efficiency to the customer purchase price for the equipment at the same

baseline efficiency level.

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

the equipment price:

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

where

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

MCC BASE = mechanical contractor cost of baseline equipment ($),

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

ST

= sales tax (%).

If sold to a customer by a mechanical contractor through a general­contractor distributor:

EQP GEN CONT BASE = MCC BASE x MU MECH CONT BASE x MU GEN CONT BASE x (1+ST) Eq. 5.4

5­9where

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

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

5.2.2.5 Incremental Markup

Incremental markups are defined as the cost multipliers to convert the incremental

increase in mechanical contractor cost (MCC) of higher efficiency equipment to the incremental

increase in customer purchase price for the same equipment, as shown in the following

equations.

If equipment is sold to a customer directly by a mechanical contractor, the following

equation defines the equipment price:

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

where

EQP MECH CONT INC = incremental increase in mechanical contractor price to the customer of

higher efficiency equipment ($),

MCC INC = incremental increase in mechanical contractor cost of higher efficiency

equipment ($),

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

ST

= sales tax (%).

If equipment is sold to a customer by a mechanical contractor through a generalcontractor distributor, the following equation defines the equipment price:

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

where

EQP GEN CONT INC = incremental increase in general contractor price of higher efficiency

equipment ($),

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

5.2.2.6 Overall Markup

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

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

tax, as indicated by the following equations:

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

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

= MSP BASE x MU OVERALL BASE Eq. 5.7

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

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

= MSP INCR x MU OVERALL INCR Eq. 5.8

5­10EQP CUST = EQP CUST BASE + EQP CUST INCR Eq. 5.9

where

EQP CUST BASE = baseline customer price ($),

EQP CUST INCR = incremental customer price ($),

EQP CUST = total customer price ($),

MU OVERALL BASE = overall weighted baseline markup that is the product of all the weights and

baseline markups for each step of the distribution channel,

MU OVERALL INCR = overall weighted incremental markup that is the product of all the weights

and incremental markups for each step of the distribution channel,

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

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

The use of the overall baseline and overall incremental markups results in the baseline

customer price ( EQP CUST BASE ) and the incremental customer price ( EQP CUST INCR ). For a particular

higher efficiency level that increases MCC, the total equipment price ( EQP CUST ) to the customer

is the sum of the baseline customer price ( EQP CUST BASE ) and the incremental customer price

( EQP CUST INCR ).

5.2.2.7 Assumptions Used to Estimate Wholesaler and Contractor Markups

DOE based the mechanical contractor markups on firm balance­sheet data, while it based

the general contractor markups on U.S. Census Bureau data for the commercial and institutional

building construction industry. DOE obtained the firm balance sheet data from the Air

Conditioning Contractors of America (ACCA) 5,6 for development of mechanical contractor

markups. (ACCA) is a trade association representing mechanical contractors and, while it is not

specific to mechanical contractors installing commercial package boilers, it was used under the

assumption that it would provide markups characteristic of mechanical contractors providing

HVAC equipment in general. DOE used the financial data from the 2002 U.S. Bureau for

developing general contractor markups in the same form as the balance sheet data for

wholesalers and mechanical contractors. 7 These balance sheets break out the components of all

costs incurred by firms that supply and install commercial packaged boilers. a Three key

assumptions used to estimate markups using these financial data are as follows:

1. The firm balance sheets accurately represent the various average costs incurred by firms

distributing and installing commercial packaged boilers.

2. These costs can be divided into two categories: (1) costs that vary in proportion to the

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

MCC of commercial packaged boilers (fixed costs).

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

In support of the first assumption, the balance sheets itemize firm costs into a number of

expense categories, including direct costs to purchase or install the equipment, operating labor

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

residential and commercial air­conditioners and warm­air furnaces.

5­11and occupancy costs, and other operating costs and profit. Although contractors tend to handle

multiple commodity lines (including air conditioners, furnaces, and boilers), the data provide the

most accurate available indication of expenses associated with the mechanical and general

contracting industry as a whole.

Information obtained from the trade literature and selected HVAC wholesalers,

contractors, and consultants support the second assumption. This information indicated that

wholesaler and contractor markups vary according to the quantity of labor and materials used to

distribute and install appliances, with markups on labor tending to be much higher than markups

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

sales volume than in relation to other factors, including appliance efficiency. This last finding

strongly suggested that labor inputs vary more with sales volume than with equipment cost or

efficiency. DOE assumed a division of costs between the costs that do not scale with the MCC

(labor and occupancy expenses), and those that do (operating expenses and profit). This division

of costs led to the estimate of contractor markups described below.

In support of the third assumption, the HVAC wholesaler and contractor industry is

competitive and customer demand for commercial heating and air­conditioning is generally

inelastic, i.e., the demand is not expected to decrease significantly with an increase in price of

equipment. The large number of HVAC firms listed in the 2002 U.S. Census reports indicates

the competitive nature of the market. For example, there are more than 293 Power Boiler

Manufacturers, 8 over 2,800 wholesalers of boilers, radiators, and convector equipment, 9 more

than 37,000 general contractors, 10 and 87,000 HVAC contractors 11 listed in the U.S. Census for

2002. Following standard economic theory, competitive firms facing inelastic demand either set

prices in line with costs or quickly go out of business. 12

5.3 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS

The HVAC contractors, defined here as mechanical contractors, reported median cost

data in an ACCA financial analysis of the HVAC industry. 4 These data are shown in Table 5.3.1.

Table 5.3.1 Baseline Markup, All Mechanical Contractors

Contractor Expenses or Revenue

Per Dollar Per Dollar

Description Sales Revenue Cost of Goods

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

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

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

Baseline Markup ( MU MECH CONT BASE ) 1.37

Source: Air Conditioning Contractors of America, Financial Analysis for the HVACR Contracting Industry, 2005.

Data reported in this analysis are not as detailed as those provided by the other sources,

containing only cost of goods sold and gross margin. Because the gross margin is the sum of

labor, occupancy expenses, operating expenses, and profit, the gross margin allows for the

determination of the baseline markup. The first data column in Table 5.3.1 provides the cost of

goods sold and gross margin as expenses per dollar of sales revenue. The only important

5­12difference is that the direct cost of equipment sales in this table includes installation costs as well

as the cost of goods sold. As shown in the table, the direct cost of sales represents about

$0.73 per dollar of sales revenue to the contractor and the gross margin is $0.27 per dollar of

sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold

by dividing each figure in the first data column by $0.73. For every $1.00 the mechanical

contractor spends on equipment costs, the mechanical contractor earns $1.00 in sales revenue to

cover the equipment cost, and $0.37 to cover the other costs. This totals $1.37 in sales revenue

earned for every $1.00 spent on equipment costs, for a baseline markup ( MU MECH CONT BASE ) of

1.37 for mechanical contractors, because the contractor earns $1.37 in sales revenue for every

$1.00 spent to purchase the equipment.

5.3.1 Markups for Mechanical Contractors in the Replacement and New Construction

Markets

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

all contractors including the replacement and new construction markets. This section describes

how DOE further derived the baseline and incremental markups for these latter two markets. As

above, the ACCA financial data provided gross margin data, which allows for the determination

of only the baseline markup for the two markets, because the gross margin is the sum of all

contractor labor and operating expenses plus profit. Calculation of the incremental markup uses

U.S. Census Bureau data. ACCA data were not used here for the calculation of the incremental

markup as the variable costs are not provided separately.

Table 5.3.2 summarizes the gross margin and resulting baseline markup data for all

mechanical contractors that serve the replacement and new construction markets.

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

All Mechanical Contractors

Description Contractor Expenses or Revenue by Market Type *

Replacement New Construction

Per Dollar

Sales Revenue Per Dollar

Cost of Goods Per Dollar

Sales Revenue Per Dollar

Cost of Goods

Direct Cost of Equipment Sales:

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

Gross Margin: Labor, occupancy,

operating expenses, and profit $0.30 $0.43 $0.25 $0.33

Baseline Markup ( MU MECH CONT BASE ):

Revenue per dollar cost of goods na 1.43 na 1.33

Source: Air Conditioning Contractors of America, Financial Analysis for the HVACR Contracting Industry, 2005.

* na means not applicable in this context.

Using the baseline markup data from Table 5.3.2 and results of a financial analysis, 4

DOE calculated that the baseline markups for the replacement and new markets are 4.4 percent

higher and 2.9 percent lower, respectively, than that for all mechanical contractors serving all

markets. DOE then used the ACCA data to calculate the baseline markup of 1.32 for the

commercial building construction section as shown in Table 5.3.3.

5­13Table 5.3.3 Mechanical Contractor Expenses and Baseline Markup, Residential and Light

Commercial

Contractor Expenses or Revenue

Per Dollar Per Dollar

Description Sales Revenue Cost of Goods

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

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

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

Source: Air Conditioning Contractors of America, Financial Analysis for the HVACR Contracting Industry, 2005.

The markup deviations derived above (i.e., 4.4 percent higher and 2.9 percent lower for

the replacement and new construction markets, respectively) were then applied to the baseline

markup of 1.32 for the residential and light commercial building construction section. This

resulted in baseline markups of 1.38 and 1.28, respectively, for the replacement and new

construction markets served by mechanical contractors for commercial building construction.

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

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

detailed U.S. Census Bureau data for 2002 for all plumbing, heating, and air­conditioning

contractors. 8 The U.S. Census Bureau data were used to calculate the baseline and incremental

markups as shown in Table 5.3.4.

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

Data

Contractor Expenses or Revenue

Per Dollar Per Dollar Cost

Description Sales Revenue of Goods

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

Labor Expenses: Salaries (indirect) and benefits $0.17 $0.26

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

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

Net Profit Before Taxes $0.12 $0.18

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

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

Source: U.S. Census Bureau, Plumbing, Heating, and Air­Conditioning Contractors: 2002, Table 4, Detailed

Statistics for Establishments, 2002.

Using the data in Table 5.3.4, the incremental markup is 19.1 percent lower than the

baseline markup. DOE assumed that this deviation applies equally to the baseline markups for

replacements of 1.38 and new construction of 1.28. This yields incremental markups of 1.12 and

1.04, respectively, for the replacement and new construction markets served by mechanical

contractors.

5­145.4 ESTIMATION OF GENERAL CONTRACTOR MARKUPS

DOE derived markups for general contractors from U.S. Census Bureau data for the

commercial and institutional building construction sector. 5 This sector includes establishments

primarily engaged in construction work, including new construction work, additions, alterations,

and repairs. The U.S. Census Bureau data for the construction sector include detailed statistics

for establishments with payrolls, similar to the data reported by ACCA for wholesalers. The

primary difference is that the U.S. Census Bureau reports itemized revenues and expenses for the

construction industry as a whole in total dollars rather than in typical values for an average or

representative business. Because of this, DOE assumed that the total dollar values that the

U.S. Census Bureau reported, once converted to a percentage basis, represented revenues and

expenses for an average or typical contracting business. Similar to the data for wholesalers,

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

revenue in the first data column.

In Table 5.4.1, the direct cost of sales represents about $0.78 per dollar of sales revenue

to the general contractor. Labor expenses represent $0.08 per dollar of sales revenue, occupancy

expenses represent $0.02 per dollar of sales revenue, other operating expenses represent $0.01,

and profit makes up $0.12 per dollar of sales revenue.

Table 5.4.1 General Contractor Expenses and Markups

Wholesale Firm Expenses or

Revenue

Per Dollar Per Dollar

Description Sales Revenue Cost of Goods

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

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

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

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

Net Profit Before Taxes $0.12 $0.15

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

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

Source: U.S. Census Bureau, Commercial and Institutional Building Construction: 2002, Table 4, Detailed Statistics

for Establishments, 2002.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold,

by dividing each figure in the first data column by $0.78. The data in column two in Table 5.4.1

show that, for every $1.00 the general contractor spends on equipment costs, the general

contractor earns $1.00 in sales revenue to cover the equipment cost, $0.10 to cover labor costs,

$0.03 to cover occupancy expenses, $0.01 for other operating expenses, and $0.15 in profits.

This totals $1.29 in sales revenue earned for every $1.00 spent on equipment costs. Thus, the

general contractor baseline markup ( MU GEN CONT BASE ) is 1.29.

DOE was also able to use the data in column two in the table above to estimate the

incremental markups by being able to separate the fixed and variable costs. At one extreme, if all

of the other costs scale with the equipment price (i.e., all costs are variable), the increase in

general contractor price will be $1.29, resulting in an incremental markup of 1.29, or the same as

5­15the baseline markup. At the other extreme, if none of the other costs are variable, then a $1.00

increase in the equipment price will lead to a $1.00 increase in the general contractor price, for

an incremental markup of 1.0. DOE assumed the labor and occupancy costs to be fixed and the

other operating costs and profit to scale with the equipment price (i.e., be variable). In this case,

for a $1.00 increase in the equipment price, the general contractor price will increase by $1.16,

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

5.5 SALES TAX

The sales tax represents State and local sales taxes that are applied to the customer price

for commercial packaged boilers. The sales tax is a multiplicative factor that increases the

customer equipment price. DOE derived sales taxes representative of both State and local sales

taxes from The Sales Tax Clearinghouse, 13 shown in Table 5.5.1.

Table 5.5.1 State Sales Tax Rates

State Combined

State and

Local Tax

Rate State Combined

State and

Local Tax

Rate State Combined

State and

Local Tax

Rate

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Dist. of Columbia

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas 8.10%

1.45%

7.15%

8.15%

8.00%

6.35%

6.00%

0.00%

5.75%

6.70%

6.95%

4.40%

6.05%

7.70%

7.00%

6.75%

6.90% Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina 6.00%

8.70%

5.00%

6.00%

5.00%

6.00%

6.70%

7.00%

6.60%

0.00%

6.60%

7.50%

0.00%

6.95%

6.35%

8.25%

6.80% North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming 5.70%

6.75%

8.05%

0.00%

6.25%

7.00%

6.90%

5.45%

9.40%

8.00%

6.55%

6.05%

5.00%

8.55%

6.00%

5.40%

5.25%

The State­level combined tax rates are applied to the total purchase cost to the customer

located in any State. DOE applied sales taxes to the customer equipment price irrespective of the

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

5.6 OVERALL MARKUPS

DOE multiplied the mechanical and general contractor markups described above by the

sales tax to obtain the overall baseline and incremental markups shown Table 5.6.1 and Table

5.6.2, respectively.

5­16Table 5.6.1 Overall Baseline Markups

Replacement Market* New Construction Market

Mechanical Contractor

General Contractor

Sales Tax

Overall 1.38

na

1.07

1.48 1.28

1.29

1.07

1.77

Overall Weighted Average 1.56

*na means no general contractor markup assumed for this market.

Table 5.6.2 Overall Incremental Markups

Replacement Market* New Construction Market

Mechanical Contractor

General Contractor

Sales Tax

Overall 1.12

na

1.07

1.20 1.04

1.16

1.07

1.29

Overall Weighted Average 1.22

*na means no general contractor markup assumed for this market.

DOE calculated overall markups through each distribution channel depending on whether

the equipment is being purchased for the new construction or replacement market. DOE based

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

mechanical contractor or a general contractor.

Table 5.6.1 and Table 5.6.2 present overall markups, each for both the overall baseline

and incremental markups. The overall baseline markups are 1.48 and 1.77 for replacement and

new markets, respectively. As shown Table 5.6.2, the overall incremental markups are 1.20 and

1.29 for the replacement and new markets, respectively. The weighted­average overall baseline

markup equals 1.57, while the weighted­average overall incremental markup equals 1.23.

DOE used the overall markups to estimate the customer price of baseline equipment,

given the manufacturer selling price of baseline equipment. For example, if the manufacturer

selling price of a commercial packaged boiler is $10,000, DOE can multiply this by the

weighted­average overall baseline markup (1.57) to arrive at a baseline customer price of the

boiler unit of $15,700. Similarly, DOE used the overall incremental markup to estimate changes

in the customer price, given changes in the manufacturer selling price above the baseline price

resulting from a standard to raise equipment efficiency. For example, if a standard increases the

contractor cost for a commercial packaged boiler by $100, DOE can multiply this by the

weighted­average overall incremental markup (1.23) to determine the customer price increase of

$123.

5.6.1.1 Installation Cost

DOE derived national average installation costs for commercial boilers from data

provided in RS Means CostWorks 2008 (RS Means) for commercial boiler equipment with

efficiencies at or below the ASHRAE Standard 90.1­2007 efficiency levels. RS Means provides

estimates for installation costs for hot water and steam boilers by equipment capacity and fuel

type, as well as cost indices that reflect the variation in installation costs for 295 cities in the

5­17United States. The RS Means data identify several cities in all 50 States and the District of

Columbia. DOE incorporated location­based cost indices into the analysis to capture variation in

installation cost, depending on the location of the customer.

RS Means provided unit installation costs for 20 sizes of natural­gas­fired hot­water

boilers between 360­ and 6,970­kBtu/h output capacity and 21 sizes of natural­gas­fired steam

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

and the installation costs include standard controls and insulated jacket, as well as additional

overhead and profit markup factor for the installing contractors and general requirement fees

including design fees for engineers of approximately 1.37. DOE developed linear regressions to

provide estimates of baseline installation costs for natural gas boilers with the resulting

parameters shown in Table 5.6.3

Table 5.6.3 Baseline Installation Cost Equation Parameters

Boiler Type Installation Cost Equation Parameters

Slope ($/kBtu/h) Intercept ($) R 2

Natural­Gas­Fired Hot­Water

Natural­Gas­Fired Steam 2.688

2.372 2,672

3,215 0.972

0.975

RS Means also provided costs for oil­fired boilers described as packaged water tube

boilers, steam or hot­water, #2 oil. However, examination of the costs for these boilers indicated

that the overall installation costs were over twice the cost of the natural gas boilers described

above across the range of oil boilers, with hot­water boilers shown as significantly higher in

installation costs compared with steam boilers. Other installation costs for oil boilers did not

exist in the unit cost section. In a separate section of the Costworks data, RS Means also

provided what are referred to as “Assembly” installation costs for commercial packaged boilers,

which include additional features that may be included in the installation of the boiler tied to the

hydronic system. However, in this section, there were limited data on installation costs. Two

costs provided for cast­iron oil­fired hot­water boilers at 1,084 and 3,550 kBtu/h, appear to be

consistent with the unit cost data and were within 3 percent of the regressed cost for the same

size natural gas hot­water boilers developed by DOE. In addition, RS Means provides separately

in the Assembly installation costs, installation costs for cast­iron, gas and oil, packaged boilers.

These costs appear to be for systems with dual­fire capability. Based on the available data, DOE

assumed that the costs calculated from Table 5.6.3 would also reasonably represent installation

costs for oil­fired hot­water and steam output commercial packaged boilers

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

For certain higher efficiency levels, DOE presumed that additional costs for venting would be

required when compared to installation of boilers just meeting the ASHRAE Standard 90.1­2007

requirements. DOE first estimated the combustion efficiency of all boilers examined. DOE

developed combustion efficiency estimates for boilers at specific thermal efficiency levels using

data from the DOE commercial packaged boiler data set discussed in TSD chapter 2. DOE

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

converting the thermal efficiency at specific levels to combustion, as listed in Table 5.6.4.

5­18Table 5.6.4 Estimated Efficiency Difference ( � ) Between Thermal and Combustion

Efficiencies

Equipment Class �E (%)

Small Gas­Fired Hot Water

Small Gas­Fired Steam All Except Natural Draft

Small Gas­Fired Steam Natural Draft

Small Oil­Fired Hot Water

Small Oil­Fired Steam

Large Gas­Fired Steam All Except Natural Draft

Large Gas­Fired Steam Natural Draft

Large Oil­Fired Steam 1.5

2.0

3.5

2.5

2.5

1.5

2.0

2.5

Based on the resulting combustion efficiencies, DOE determined that additional venting

requirements would be required at or above the efficiency levels shown in Table 5.6.5. This is

compared with the combustion efficiencies determined for ASHRAE Standard 90.1­2007

baseline efficiency levels. For large gas­fired and oil­fired hot­water boilers, the efficiency

descriptor proposed by ASHRAE is a combustion efficiency descriptor at the ASHRAE Standard

90.1­2007 level, also shown. For gas­fired boiler combustion efficiencies at or above 82.5

percent, DOE assumed that a stainless steel vent (e.g., Type L vent) would typically be required

for installation. For the ASHRAE Standard.90.1­2007 levels, DOE assumed that Type B venting

or venting into a masonry chimney would suffice in the boiler installation.

Table 5.6.5 Combustion Efficiency (E

c ) Level Assumed for Onset of Incremental

Installation Costs

Equipment Class Efficiency

Level First

Experiencing

Increased

Venting Costs Estimated

E

c % E

c ASHRAE

Standard 90.1­

2007 Baseline (for

comparison) %

Small Gas­Fired Hot Water

Small Gas­Fired Steam All Except Natural Draft

Small Gas­Fired Steam Natural Draft

Small Oil­Fired Hot Water

Small Oil­Fired Steam

Large Gas­Fired Hot Water

Large Gas­Fired Steam All Except Natural Draft

Large Gas­Fired Steam Natural Draft

Large Oil­Fired Hot Water

Large Oil­Fired Steam 1

2

2

1

2

1

2

na*

1

2 83.5

83.0

82.5

86.5

85.5

83.0

82.5

na*

86.0

85.5 81.5

81.0

80.5

84.5

83.5

82.0

80.5

79.0

84.0

83.5

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

justify increased installation costs.

DOE assumed that when compared with installation of ASHRAE Standard 90.1­2007

efficiency level boilers, installation of new gas boiler installations with efficiency levels at or

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

new installations, the net increase in venting costs could be estimated as the differential in

material price of a Type L vent over a Type B vent with a typical installed length of 35 feet of

straight pipe plus elbows, cap, and flashing. For 3,000­kBtu/h boilers, a 10­inch (in.)­diameter

5­19vent stack was assumed. For 800­kBtu/h boilers a 6­in.­diameter vent stack was assumed. To

these material prices was added an additional installation cost for the labor for replacement of the

venting in a boiler replacement application (two­thirds of all installations), equivalent to $460.

An additional $500 for controls modifications and $300 for installation of condensate

drain lines was used. Finally, an additional $500 for installation costs specific to replacement of

existing boilers with high­efficiency boilers was included. This would include other unspecified

costs for replacement, such as additional costs for boilers vented through masonry chimneys.

Average installation costs for these higher efficiency boilers were calculated to be approximately

$4,970 and $3,237 for 3,000­ and 800­kBtu/h boilers, respectively. Separate costs were not

calculated for the higher efficiency oil­fired boilers, but were estimated to be similar in

magnitude to those calculated above for gas­fired equipment.

DOE recognizes that costs for installation of higher efficiency boilers and replacement of

existing baseline efficiency boilers with higher efficiency boilers are highly uncertain in

commercial buildings and may vary with individual installations and the different efficiency

levels between higher efficiency boilers. By contrast with the above estimates, DOE notes that

the installation costs developed in the recent residential furnace and boiler rulemaking 14 were

estimated at $1,208 for an 86­percent Annual Fuel Utilization Efficiency (AFUE), 105­kBtu/h

input capacity gas boiler, and $664 and $629 for an 85­percent AFUE and 90­percent AFUE gas

boiler, respectively. Costs for a 140­kBtu/h input capacity oil­fired residential boiler were $615

for an 85­percent AFUE boiler, $923 for an 86­percent AFUE boiler, and $1,230 for an 87­

percent AFUE boiler. Table 5.6.6 compares these incremental cost estimates and the commercial

cost estimates developed for this rulemaking.

5­20Table 5.6.6 Comparison Between Residential and Commercial Incremental Installation

Cost for Higher­Efficiency Boilers

Equipment

Class Commercial Incremental Cost

Estimate (Fixed Amount for

Efficiencies Shown Below)

(2008$) Residential Incremental

Cost Estimate (Average of

Efficiencies Shown Below)

(2008$)

Gas­Fired

Hot­Water

Boiler 800­kBtu/h output

boiler (Et ≥ 82%)

$3,402 or $4.05 per

kBtu/h output capacity 3,000­kBtu/h output

boiler (Et ≥ 81.5%)

$4,970 or $1.66 per

kBtu/h output capacity 105­kBtu/h input * boiler

average of AFUE

= 85%

and 86%

$936 or $10.43 per kBtu/h

output capacity

Oil­Fired HotWater Boiler 800­kBtu/h output

boiler (Et ≥ 84%)

$3,237 or $4.05 per

kBtu/h output capacity 3,000­kBtu/h output

boiler (Et ≥ 84%)

$4,970 or $1.66 per

kBtu/h output capacity 140­kBtu/h input * * boiler

average of AFUE

= 85%

and 86%

$769 or $6.42 per kBtu/h

output capacity

* Approximately 90­kBtu/h output capacity.

** Approximately 120­Btu/h output capacity.

DOE notes that these commercial incremental installation cost estimates assume a boiler

with a baseline efficiency equivalent to that in ASHRAE Standard 90.1­2007. Where a

distribution of boiler efficiencies exists in the market as assumed in the national net present value

(NPV) analysis (see chapter 7), no incremental installation costs result from moving between an

existing high­efficiency boiler and a replacement existing high­efficiency boiler.

5.6.1.2 Weighted­Average Total Installed Cost

As presented in Eq. 5.2, the total installed cost is the sum of the equipment price and the

installation price including any incremental installation costs for higher higher­efficiency

equipment. DOE derived the customer equipment price for any given standard level by

multiplying the baseline contractor cost by the baseline markup and adding to it the product of

the incremental contractor cost and the incremental markup. Because contractor costs, markups,

and the sales tax all can take on a variety of values, depending on location, the resulting total

installed cost for a particular standard level will not be a single­point value, but rather a

distribution of values.

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

State­by­State installation cost indices, shown in Table 5.6.7, to convert the contractor costs to

total installed costs for a case where the incremental installation costs are held flat. The

installation cost indices are factors used to vary the installation costs on a State­by­State basis to

reflect regional variation in labor and other costs involved in installation. To arrive at an average

index for each State, DOE first weighted city indices from RS Means Costworks in each State by

their population within the State. DOE used population weights for the year 2000 from the U.S.

Census Bureau to calculate a weighted­average index for each State from the RS Means data.

5­21Table 5.6.8 summarizes the weighted average or mean costs and markups necessary for

determining the weighted­average baseline and standard­level 2 total installed costs for the

800­kBtu/h gas­fired hot­water boiler as an example. The weighted­average costs for the 800­

kBtu/h gas­fired hot­water boiler equipment class are presented for the baseline level at national

average markup rates and national average installation costs. The example presented also applies

the corresponding incremental contractor costs and the baseline and incremental markups to

provide an indication of the increase in the customer cost due to an increase in rated energy

efficiency. The baseline contractor cost and the standard­level contractor cost increases are the

starting points for determining the total installed cost (values are taken directly from Table 5.2.3

and Table 5.2.4).

Table 5.6.7 Installation Cost Indices (National Value = 100.0)

State Index State Index State Index

Alabama 0.631 Kentucky 0.842 North Dakota 0.642

Alaska 1.072 Louisiana 0.627 Ohio 1.014

Arizona 0.791 Maine 0.753 Oklahoma 0.615

Arkansas 0.620 Maryland 0.939 Oregon 1.140

California 1.265 Massachusetts 1.235 Pennsylvania 1.229

Colorado 0.860 Michigan 1.070 Rhode Island 1.182

Connecticut 1.266 Minnesota 1.224 South Carolina 0.452

Delaware 1.253 Mississippi 0.600 South Dakota 0.399

Dist. of Columbia 0.996 Missouri 1.056 Tennessee 0.712

Florida 0.679 Montana 0.774 Texas 0.636

Georgia 0.739 Nebraska 0.881 Utah 1.446

Hawaii 1.195 Nevada 1.425 Vermont 0.700

Idaho 0.768 New Hampshire 0.919 Virginia 0.744

Illinois 1.376 New Jersey 1.327 Washington 1.080

Indiana 0.889 New Mexico 0.749 West Virginia 0.913

Iowa 0.813 New York 1.719 Wisconsin 1.039

Kansas 0.724 North Carolina 0.453 Wyoming 0.644

Table 5.6.8 Costs and Markups for 800­kBtu/h Commercial Gas­Fired Hot­Water Boiler at

* Efficiency Level 2 at National Average Conditions

Variable Weighted Average or Mean Value

Baseline Contractor Cost

Standard­Level Contractor Cost Increase (Efficiency Level 2)

Overall Markup Factor–Baseline

Overall Markup Factor–Incremental

Installation Cost–Baseline

Installation Cost–Incremental

Installation Cost Factor $6,294

$3,305

1.557

1.216

$6,595

$3,237

1.0 **

* Incremental installation costs held flat.

** National Average Installation Cost Factor defined as 1.0.

To illustrate the derivation of the weighted­average total installed cost shown in

Table 5.6.8, DOE presents the calculation below for the baseline (level 0) and for a higher

efficiency level (level 2) 800­kBtu/h commercial gas­fired hot­water boiler. For the baseline

product, the calculation of the total installed cost at national average conditions is as follows:

5­22IC BASE = EQP BASE +INST BASE x ISTINDEX Eq. 5.10

= MFG BASE x MU BASE + INST BASE x ISTINDEX

= $6,294 x (1.557) + $6,595 x (1.0)

= $9,800 + $6,595 x (1.0)

= $16,395

where

IC

= total installed cost ($),

EQP

= equipment price ($),

INST

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

MFG

= contractor cost ($),

MU

= markup.

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

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

markup.

In view of incremental equipment price changes, DOE based the derivation of the level 2

total installed cost on determining the change in equipment price over the baseline equipment

price. The contractor cost increment for a higher efficiency level is multiplied by the incremental

markup.

DOE calculated the level 2 total installed cost ( IC LEVEL2 ) as follows:

IC LEVEL2 = EQP LEVEL0 + �EQP LEVEL2 + INST LEVEL2 +�INST LEVEL2 Eq. 5.11

= CONT BASE x MU BASE + �CONT LEVEL2

x MU LEVEL2 + (INST LEVEL0 +�INST LEVEL2 ) x ISTINDEX

= $6,294 x (1.557) + $3,305 x (1.216) + ($6,595 + $3,237) x (1.0)

= $23,651

where

IC

= total installed cost ($),

EQP

= equipment price ($),

INST

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

MFG

= contractor cost ($),

MU

= markup,

ISTINDEX

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

national average.

Table 5.6.9 presents the weighted­average equipment price, installation costs, and total

installed costs for the 800­kBtu/h commercial packaged gas­fired hot water boiler equipment

class at the baseline level and each higher efficiency level examined.

5­23Table 5.6.9 Weighted­Average Equipment Price, Installation Cost, and Total Installed

Costs for the 800­kBtu/h Commercial Packaged Hot­Water Boiler at U.S. Average Prices

(2008$)

Equipment Installation Total Installed

Efficiency Level Price Cost Cost*

0 (Baseline) $9,798 $6,595 $16,393

1 $11,068 $9,832 $20,900

2 $13,817 $9,832 $23,650

3 $18,293 $9,832 $28,125

4 $24,792 $9,832 $34,625

* Equipment price + installation cost may not add to total because of rounding error. Total is exact.

5.6.2 Operating Cost Inputs

DOE based the operating cost for the LCC analysis on full load­equivalent operating hour

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

maintenance cost data. After the LCC analysis was performed, DOE generated a distribution of

LCC differences (i.e., the LCC difference between the baseline equipment and equipment with a

higher efficiency level) to determine the mean LCC difference, as well as the percentage of

buildings analyzed that had LCC savings associated with more efficient equipment.

DOE defined the operating cost by the following equation:

OC

= EC+ RC+ MC Eq. 5.12

where

OC

= operating cost ($),

EC

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

RC

= repair cost associated with component failure ($),

MC

= service cost for maintaining equipment operation ($).

The remainder of this section provides information about the variables that DOE used to

calculate the operating cost for commercial packaged boiler equipment.

Table 5.6.10 shows the inputs for the determination of operating costs. The lifetime,

discount rate, and effective date of the standard are required for determining the operating cost

and for establishing the operating cost present value. The fuel consumption for the baseline

(which by definition is efficiency level 0 for the Final Rule) and the other efficiency levels

examined (efficiency levels 1, 2, etc.) determine the principle variable of interest for comparing

the lifetime operating costs at different standard levels.

5­24Table 5.6.10 Inputs for Operating Costs

Fuel price ($)

Fuel price trend

Repair cost ($)

Maintenance cost ($)

Lifetime (years)

Discount rate (percent)

Effective date of standard

Baseline annual fuel consumption (kBtu/yr)

Standards case annual fuel consumption (kBtu/yr)

5.6.2.1 Fuel Price Analysis

Fuel prices are needed to convert the gas or oil energy savings from higher­efficiency

equipment into energy cost savings. Because of the variation in annual fuel consumption savings

and equipment costs across the country, DOE considered regional differences in fuel prices. This

section describes the development of fuel prices and fuel price forecasts used in the analysis of

commercial packaged boilers.

DOE divided the continental United States into the 50 States and the District of

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

the State level for 2006, EIA fuel escalation factors from the AEO 2008 were used to escalate

prices to 2007 average fuel price estimates for use in the LCC analysis. Furthermore, different

kinds of building types typically use fuel in different amounts at different times of the day, week,

and year, and therefore face different effective prices. To make appropriate adjustments to reflect

different usage patterns between building types, DOE used EIA’s 2003 Commercial Buildings

Energy Consumption Survey 15 data set to identify the average fuel costs in the seven building

types and compared them with the average costs for all commercial customers identified in the

survey. DOE used the ratios of fuel costs for each of the seven types of buildings to the national

average commercial prices seen in the 2003 CBECS as multipliers to adjust the State­by­State

average commercial price data estimated for 2007.

DOE weighted the prices each building type paid in each State by the estimated sales of

commercial boilers to each building type to obtain a weighted­average national average natural

gas and national average fuel oil price for 2007. The State and building type weights reflect the

probabilities that a given boiler unit shipped will operate with a given fuel price. The effective

prices (2007$) ranged from approximately $4.75 per thousand (M) Btu to approximately

$27.98 per MBtu for natural gas, and from approximately $14.83 per MBtu to approximately

$17.56 per MBtu for commercial fuel oil.

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

years to the year 2042. DOE applied the AEO 2008 reference case as the default scenario and

extrapolated the trend in values from 2020 to 2030 of the forecast to establish prices from 2030

to 2042. This method of extrapolation is in line with methods the EIA uses to forecast fuel prices

for the Federal Energy Management Program.

5­25DOE used reported average effective commercial fuel prices at the State level from EIA’s

State Energy Price Data. 16,17 The latest available prices from this source are for the calendar year

2006. These prices were adjusted to represent 2007$ prices using the forecasted ratio between

2007 and 2006 national commercial retail fuel prices from the 2008 Annual Energy Outlook

.

FPRICE

COM STATE 2007 = FPRICE

COM STATE 2006 x (FPRICE

COM AEO FORECAST 2007 /FPRICE

COM AEO FORECAST 2006 )

Eq. 5.13

where

FPRICE

COM STATE YEAR = commercial sector average fuel price in a State or the United States

in a particular year ($/MBtu),

FPRICE

COM AEO FORCAST YEAR = commercial sector reference case national average forecasted fuel

price in a specific year from the 2008 Annual Energy Outlook

($/MBtu).

Table 5.6.11 and Table 5.6.12 provide data about the commercial gas and oil prices

by State.

Table 5.6.11 Estimated Commercial Natural Gas Prices by State (2007 $/MBtu)

Commercial Commercial Commercial

Natural Gas Natural Gas Natural Gas

State Price State Price State Price

Alabama 15.37 Kentucky 12.85 North Dakota 9.27

Alaska 4.75 Louisiana 11.41 Ohio 12.35

Arizona 11.96 Maine 13.51 Oklahoma 11.08

Arkansas 10.36 Maryland 12.84 Oregon 12.51

California 10.34 Massachusetts 15.73 Pennsylvania 13.75

Colorado 9.31 Michigan 10.55 Rhode Island 15.10

Connecticut 13.02 Minnesota 10.13 South Carolina 13.63

Delaware 14.80 Mississippi 12.07 South Dakota 9.43

Dist. Of Col. 14.31 Missouri 12.68 Tennessee 12.58

Florida 13.56 Montana 10.93 Texas 9.99

Georgia 13.60 Nebraska 9.49 Utah 9.08

Hawaii 27.98 Nevada 11.48 Vermont 11.12

Idaho 10.98 New Hampshire 14.71 Virginia 11.99

Illinois 10.74 New Jersey 12.51 Washington 11.59

Indiana 11.36 New Mexico 10.35 West Virginia 12.67

Iowa 10.23 New York 11.60 Wisconsin 10.16

Kansas 12.19 North Carolina 13.54 Wyoming 9.88

5­26Table 5.6.12 Estimated Commercial Oil Prices by State (2007 $/MBtu)

Commercial Commercial Commercial

Fuel Oil Fuel Oil Fuel Oil

State Price State Price State Price

Alabama 15.18 Kentucky 15.94 North Dakota 15.79

Alaska 17.30 Louisiana 15.18 Ohio 15.55

Arizona 16.81 Maine 15.82 Oklahoma 15.72

Arkansas 15.47 Maryland 15.38 Oregon 16.04

California 17.07 Massachusetts 15.92 Pennsylvania 15.40

Colorado 16.31 Michigan 16.59 Rhode Island 16.48

Connecticut 16.24 Minnesota 16.65 South Carolina 14.98

Delaware 15.08 Mississippi 15.62 South Dakota 15.64

Dist. Of Col. 16.03 Missouri 15.68 Tennessee 16.09

Florida 15.12 Montana 15.85 Texas 15.51

Georgia 14.83 Nebraska 15.87 Utah 16.60

Hawaii 16.56 Nevada 16.96 Vermont 17.08

Idaho 17.56 New Hampshire 15.28 Virginia 15.00

Illinois 16.12 New Jersey 15.83 Washington 16.67

Indiana 15.87 New Mexico 15.32 West Virginia 15.62

Iowa 15.79 New York 15.53 Wisconsin 16.72

Kansas 15.84 North Carolina 14.90 Wyoming 16.48

Furthermore, DOE recognized that different kinds of businesses typically use fuel in

different amounts at different times of the day, week, and year, and therefore face different

effective prices. To make this adjustment, DOE used the 2003 CBECS data set to identify the

average prices paid by the four kinds of businesses in this analysis compared with the average

prices paid by all commercial customers. Equation 8.7 shows the ratios of prices paid by the four

types of businesses were used to increase or decrease the average commercial prices.

FPRICE

COM BLD I STATE 2006 = FPRICE

COM STATE 2006 x (FPRICE

BLDG I US 2003 / FPRICE

COM US 2003 ) Eq. 5.14

where

FPRICE

COM BLD I STATE 2006 = average commercial sector fuel price in building type I

(supermarkets) in a specific state in 2006 ($/MBtu),

FPRICE

COM STATE 2006 = average commercial sector fuel price in a specific state in 2006

($/MBtu),

FPRICE

BLDG I US 2003 = national average commercial sector fuel price in building type I in

2003 CBECS ($/MBtu),

FPRICE

COM US 2003 = national average commercial sector fuel price in 2003 CBECS

($/MBtu).

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

5­27Table 5.6.13 Derived Average Commercial Fuel Price Ratios by Building Type

Building Type Assembly Education Food

Service Lodging Office Retail Warehouse All

Buildings

$/MBtu (Nat Gas) 8.161 7.660 6.800 6.603 7.702 8.687 8.604 7.624

$/MBtu (Fuel Oil) 8.374 7.723 7.622 8.380 8.303 7.002 9.447 8.010

Ratio of Natural 1.070 1.005 0.892 0.866 1.010 1.139 1.129 1.000

Gas Prices to

Average of All

Commercial

Buildings

Ratio of Fuel Oil 1.045 0.964 0.952 1.046 1.037 0.874 1.179 1.000

to Average of All

Commercial

Buildings

Source : CBECS 2003.

Once the fuel prices for the four commercial building types (stores) were adjusted, DOE

used the resulting prices in the analysis in conjunction with future fuel price forecast indices

from EIA (in real terms, taking into account inflation) to develop future fuel prices as described

in section 5.6.2.2.

5.6.2.2 Fuel Price Trends

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

year 2042. DOE applied a projected trend in national average fuel prices to each customer’s

energy prices. The discussion in this chapter uses the AEO 2008 reference price scenario. In the

LCC analysis, the following four scenarios can be analyzed:

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

Figure 5.6.2)

2. AEO 2008, High Price Case (“High Price” in Figure 5.6.1 and Figure 5.6.2)

3. AEO 2008, Reference Case (“AEO 2008” in Figure 5.6.1 and Figure 5.6.2)

4. AEO 2008, Low Price Case (“Low Price” in Figure 5.6.1 and Figure 5.6.2)

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

three AEO 2008 price projections where prices are assumed to change. DOE extrapolated the

values in later years (i.e., after 2030) from their relative sources because AEO 2008 does not

forecast beyond 2030. To arrive at values for these later years, DOE used the price trend from

2020 to 2030 of the forecast to establish prices from the years 2030 to 2044. This method of

extrapolation is in line with methods currently used by the EIA to forecast fuel prices for the

Federal Energy Management Program.

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

2008 Reference Case, shown in Figure 5.6.1 for natural gas and Figure 5.6.2 for fuel oil.

Spreadsheets used in calculating the LCC have the capability to analyze the other fuel price trend

5­28scenarios, namely, the AEO 2008 High Price and the AEO 2008 Low Price trends and constant

energy prices.

Gas Price Index Projections

0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

YearIndex(2007=1.00) AEO 2008

High Growth

Low Growth

Figure 5.6.1 AEO 2008 Commercial Natural Gas Price Trends

5­29Fuel Oil Index Projections

0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

YearIndex(2007=1.00) AEO 2008

High Growth

Low Growth

Figure 5.6.2 AEO 2008 Commercial Fuel Oil Price Trends

5.6.2.3 Maintenance and Repair Costs

Maintenance costs are the costs to the customer of maintaining equipment operation.

Maintenance costs include services such as cleaning heat­exchanger tubes, fireboxes, and

burners. Repair costs include costs for repair and replacement of components that fail over the

life of the equipment, including repair of controls, burner/blower devices, tubes, and gas

regulators. DOE estimated annual routine maintenance costs and repair costs for commercial

boiler equipment based on data provided in MARS 8 Facility Cost Forecast System database. 18

from as $1,445 per year for boilers with output capacities of nominally 800 kBtu/h, and $2,835

per year ($0.945/kBtu­h/yr) for boilers with output capacities of 3,000 kBtu/h, as reported in the

MARS 8 Facility Cost Forecast System database. Because data were not available to indicate

how maintenance costs vary with equipment efficiency, DOE decided to use preventive

maintenance costs that remain constant as equipment efficiency increases.

The maintenance cost is not the cost associated with the replacement or repair of

components that unexpectedly have failed (as discussed above). Rather, it is the cost associated

with general maintenance (e.g., checking and maintaining burners, cleaning fireboxes or heat

exchanger surfaces, etc). The costs for replacement or repair of boiler or boiler system

components that have failed over the normal operational life are considered repair costs. DOE

estimated annualized repair costs for commercial boiler equipment also based on data provided

in the MARS 8 Facility Cost Forecast System database. The MARS database explicitly provides

repair costs for commercial boilers of various sizes. Based on the available data, DOE estimated

the annualized repair cost for baseline efficiency commercial boilers as $443/yr for boilers with

output capacities of nominally 800 kBtu/h, and as $820/yr for boilers with output capacities of

5­303,000 kBtu/h. DOE assumed that repair costs would increase in direct proportion with increases

in equipment prices. As the price of boilers increases with efficiency, the cost for component

repair would also be expected to increase.

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

Table 5.6.14 shows the average annual repair costs for commercial boilers by equipment class as

developed for the life­cycle cost analysis.

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

Equipment Class Level 0

(Baseline) Level 1 Level 2 Level 3 Level 4*

Small, Gas­fired, Hot Water

Small, Gas­fired, Steam, All

Except natural Draft

Small, Gas­fired, Steam, Natural

Draft

Small, Oil­fired, Hot Water

Small, Oil­fired, Steam

Large, Gas­fired, Hot Water

Large, Gas­fired, Steam, All

Except Natural Draft

Large, Gas­fired, Steam, Natural

Draft

Large, Gas­fired, Hot Water

Large, Oil­fired, Steam 443

443

443

443

443

820

820

820

820

820 502

472

460

485

474

900

855

841

943

855 628

532

495

572

538

1,070

892

885

1,099

928 834

625

548

710

676

1,342

932

952

1,263

1,040 1,132

694

na

na

na

2,441

973

820

820

820

*na means that this efficiency level was not analyzed

5.6.2.4 Lifetime

DOE defines equipment lifetime as the age when a commercial boiler is retired from

service. DOE reviewed available literature and consulted with manufacturers to establish typical

equipment lifetimes. The literature and experts consulted offered a wide range of typical

equipment lifetimes. DOE used a 30­year lifetime for commercial boilers as established in the

2000 Screening Analysis 19 based on data from ASHRAE’s 1995 Handbook of HVAC

Applications 20

. DOE continued to use this estimate for the LCC analysis. Other ASHRAE data

on commercial equipment life, including boilers, are available through the ASHRAE Equipment

Life/Maintenance Cost Survey, maintained online by ASHRAE. 21 This ASHRAE database

currently has data for 152 fuel­fired boilers in commercial buildings, primarily steel fire or

water­tube boilers. Of these, 28 data points represent boilers that have been removed from

service and have a known life. The average life for these units removed from service was

20.8 years, but ranged from 10 to 33 years. One hundred twenty­four boiler units in the data set

represent boilers currently used in commercial buildings, but with a known installation date and

vintage. The data set indicates that the average life of boilers still in operation was 38.4 years, ranging from 3 to 51 years. ASHRAE’s 2007 Handbook of HVAC Applications 22 contains

median equipment service life data from the first 163 commercial buildings that were used to

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

the user.

5­315.6.2.5 Discount Rate

The discount rate is the rate at which future expenditures are discounted to establish their

present value. DOE derived the discount rates by estimating the cost of capital for companies

that purchase commercial packaged boiler equipment. The cost of capital is commonly used to

estimate the present value of cash flows to be derived from a typical company project or

investment. Most companies use both debt and equity capital to fund investments, so their cost of

capital is the weighted average of the cost to the company of equity and debt financing.

DOE estimated the cost of equity financing by using the Capital Asset Pricing Model

(CAPM). 23 The CAPM, which is among the most widely used models to estimate the cost of

equity financing, assumes that the cost of equity is proportional to the amount of systematic risk

associated with a company. The cost of equity financing tends to be high when a company faces

a large degree of systematic risk and it tends to be low when the company faces a small degree of

systematic risk.

DOE determined the cost of equity financing by using several variables, including the

risk coefficient of a company, 

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

f ), and the

additional return expected on assets facing average market risk, also known as the equity risk

premium or ERP

. The risk coefficient of a company, 

### β

, indicates the degree of risk associated

with a given firm relative to the level of risk (or price variability) in the overall stock market.

Risk coefficients usually vary between 0.5 and 2.0. A company with a risk coefficient of

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

2.0 faces twice the overall stock market risk.

The following equation gives the cost of equity financing for a particular company:

k

e = R f + (β x ERP) Eq. 5.15

where

k

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

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



### β

= the risk coefficient,

ERP

= the expected equity risk premium (%).

DOE defined the risk­free rate as the yield on long­term government bonds. DOE used a

4.8­percent estimate for the ERP based on data from the Damodaran Online 24 site.

The cost of debt financing is the yield or interest rate paid on money borrowed by a

company (for example, by selling bonds). As defined here, the cost of debt includes

compensation for default risk (the risk that a firm will go bankrupt) and excludes deductions for

taxes. DOE estimated the cost of debt for companies by adding a risk adjustment factor to the

current yield on long­term corporate bonds (the risk free rate). It used this procedure to estimate

current (and future) company costs to obtain debt financing. It based the adjustment factor on

indicators of company risk, such as credit rating or variability of stock returns.

5­32The weighted­average cost of capital (WACC) of a company is the weighted­average cost

of debt and equity financing:

k =k

e x w e + k d x w d Eq. 5.16

where

k

= the (nominal) cost of capital, expressed as a percentage;

k

e = the expected rate of return on equity, expressed as a percentage;

k

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

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

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

The cost of capital is a nominal rate, because it includes anticipated future inflation in the

expected returns from stocks and bonds. The real discount rate or WACC deducts expected

inflation ( r ) from the nominal rate. DOE calculated expected inflation from the average of the

projected change in gross domestic product prices in the Economic Report of the President

. 25

To estimate the WACC of commercial packaged boilers purchasers, DOE used a sample

of companies involved in groceries and multi­line retailing drawn from a database of over 7,300

U.S. companies given on the Damodaran Online website. This database includes most of the

publicly traded companies in the United States.

For the purpose of the boiler analysis, DOE relied on discount rate data determined from two

other recently published rulemaking activities that relied on this same methodology defined

above. These were for the final rule for Packaged Terminal Air Conditioners and Heat Pumps 26

equipment and the Advanced Notice of Public Rulemaking for Beverage Vending Machines. 27

DOE assigned classes of companies as established in these two previous works to be

representative of occupants of each of the seven commercial building types on a one­for­one

basis and used the discount rates developed from the Damodaran data to establish average

discount rates for the occupants of each of the seven building types.

Table 5.6.15 shows the economic sectors represented in each of the occupancy categories

assigned to each building type as well as the source data and number of companies used for

determining discount rates. Deducting expected long­term inflation of approximately 2 percent

from the cost of capital provides the estimates of the real discount rate by ownership category

shown in Table 5.6.15. For the LCC analysis, a national average analysis result depends on the

weighted average of the discount rates shown weighted by the overall estimate of shipments to

each building class as determined in chapter 4.

5­33Table 5.6.15 Average Discount Rates by Building Type

Building

Type Assumed

Occupancy/Ownership

Categories Used Source for Discount Rate Data Number of

Observations Wt. Average

Discount Rate (Real,

above inflation)

Assembly

Education

Food Service

Lodging

Office

Retail

Warehouse Public

Public

Retail Trade

Large Hotel/Motel Chain

Office/Health Care

Retail Trade

Retail Trade Tax­Exempt Long­Term

Borrowing Rate (BVM) *

Tax­Exempt Long­Term

Borrowing Rate (BVM) *

Damodaran (BVM) **

Damodaran ( Packaged Terminal

Air­Conditioner ) †

Damodaran (BVM) **

Damodaran (BVM) **

Damodaran (BVM) ** 1

1

261

28

1820

261

261 2.15%

2.15%

5.85%

Range: 1.43%­9.19%

5.53%

Range: 3.16%­7.69%

4.96%

Range: 0.86%­13.37%

5.85%

Range: 1.43%­9.19%

5.85%

Range: 1.43%­9.19%

* Tax Exempt Borrowing Rate, developed for Beverage Vending Machine analysis. Original source: Yahoo Finance

Bonds Center http://finance.yahoo.com/bonds/composite_bond_rates

, Accessed 5­23­2007

** Refrigerated Beverage Vending Machine ANOPR Analysis, June 2008. Original source: Damodaran January

2007 26

† Packaged Terminal Air Conditioner and Heat Pump Final Rule Analysis, October 2008. Original source:

Damodaran January 2008 27

5.6.2.6 Effective Date of Standard

The effective date is the future date when a new standard becomes operative. The Energy

Policy and Conservation Act of 1975 (EPCA), as amended, directs DOE to establish energy

conservation standards for certain commercial and industrial equipment, including commercial

heating, air­conditioning, and water­heating equipment. Of particular relevance here, the statute

also requires that each time the corresponding industry standard—the ASHRAE/Illuminating

Engineering Society of North America (IESNA) Standard 90.1—is amended, DOE must assess

whether there is a need to update the uniform national energy conservation standards for the

same equipment covered under EPCA. Specifically, pursuant to EPCA, DOE must, for those

equipment classes for which ASHRAE set more stringent efficiency levels (i.e., commercial

packaged boilers), analyze the economic and energy savings potential of amended national

energy conservation standards (at both the new ASHRAE Standard 90.1 levels and more

stringent efficiency levels). Of particular relevance, the statute also requires that each time the

corresponding consensus industry standard—ASHRAE/IESNA 90.1—is amended, DOE must

either

a) establish an amended uniform national standard for the product at the minimum level

specified in the amended ASHRAE/IESNA Standard 90.1 and do so not later than

18 months after the date of publication of the amendment to the ASHRAE/IES Standard

90.1 for a product so prescribed, or

5­34b) determine, by rule published in the Federal Register, and supported by clear and

convincing evidence, that adoption of a uniform national standard more stringent than the

amended ASHRAE/IES Standard 90.1 for the product would result in significant

additional conservation of energy and is technologically feasible and economically

justified. If such a rule is published, DOE shall, not later than 30 months after the date of

publication of the amendment to the ASHRAE/IES Standard 90.1 for the product, issue

the rule establishing the amended standard.

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

become effective for products manufactured on or after a date that is 2 years after the effective

date of the applicable minimum energy efficiency requirement in the amended ASHRAE/IES

standard referred to in ASHRAE Standard 90.1­2007.

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

become effective for products manufactured on or after a date that is 4 years after the date such

rule is published in the Federal Register.

ASHRAE published ASHRAE Standard 90.1­2007 on January 20, 2008. Thus,

depending on whether DOE adopts the amended efficiency levels for boilers shown in the

ASHRAE Standard 90.1­2007, or publishes a rule that higher standards are economically

justified, results in a different effective date for the amended Federal Standard for a product. If

DOE adopts the efficiency level established in ASHRAE Standard 90.1­2007 for the Federal

standard, it would most likely publish a rule with an effective data in 2012. If DOE determines

that standards with efficiency levels higher than those levels shown in the amended ASHRAE

90.1­2007 are warranted, it would most likely publish a rule establishing higher Federal

standards with an effective date of 2014.

Because the purpose of the commercial boiler LCC analysis is to provide information that

would allow DOE to determine whether an efficiency standard higher than that proposed in

ASHRAE Standard 90.1­2007 is economically justified, DOE assumes that the default

assumption for the baseline product efficiency in the LCC analysis is the ASHRAE Standard

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

Traditionally, since DOE looks at the LCC from the perspective of the customer (for instance in

the use of customer discount rates), we are looking at determining the life­cycle cost impact from

the point of view of a customer purchasing equipment. A customer purchase decision occurs at

one particular point in time. Typically, DOE uses the first year that a revised standard would be

in effect as the first year in the LCC analysis and the LCC is done over one life cycle of the

product in question. Because, in the case of the ASHRAE products, DOE is looking at whether

there are LCC savings for going higher than ASHRAE, the most logical first date at which a

consumer could in fact experience savings from an amended standard higher than ASHRAE

levels is July 1, 2014. Taking into account the time periods in EPCA for putting a rule into place

establishing higher standard levels, and the minimum allowed time period before that rule can go

into effect (4 years after the date of publication), 2014 would be used as the start year for the

analysis of all possible efficiency levels higher than ASHRAE Standard 90.1­2007 levels. The

analysis is over a time period from the start year to the expected end of life of the commercial

packaged boiler.

5­355.7 PAYBACK PERIOD INPUTS

5.7.1 Definition

The payback period is the amount of time it takes the consumer to recover the assumed

higher purchase cost of more energy­efficient equipment as a result of lower operating costs.

Numerically, the PBP is the ratio of the increase in purchase cost (i.e., from a less efficient

design to a more efficient design) to the decrease in annual operating expenditures. This type of

calculation is known as a “simple” payback period, because it does not take into account changes

in operating cost over time or the time value of money, that is, the calculation is done at an

effective discount rate of zero percent.

The equation for PBP is as follows:

PBP =�IC/�OC Eq. 5.17

where

PBP

= payback period (years),

�IC

= difference in the total installed cost between the more efficient standard level,

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

equipment ($),



### � OC

= difference in annual operating costs ($).

Payback periods are expressed in years. Payback periods longer than the life of the

equipment mean that the increased total installed cost of the more efficient equipment is not

recovered in reduced operating costs over the life of the equipment.

5.7.2 Inputs

The data inputs to PBP are the total installed cost of the equipment to the customer for

each efficiency level and the annual (first year) operating costs for each efficiency level. The

inputs to the total installed cost are the equipment price and the installation cost. The inputs to

the operating costs are the annual energy cost, the annual repair cost, and the annual maintenance

cost. The PBP analysis uses the same inputs as the LCC analysis described in section 5.2, except

that fuel price trends and discount rates are not required. Because the PBP is a “simple”

(undiscounted) payback, the required fuel cost is only for the year in which a new energy

conservation standard will take effect—in this case, the year 2014. The fuel price used in the

PBP calculation of fuel cost was the price projected for 2014, expressed in 2007$, but not

discounted to 2007.

5.8 LIFE­CYCLE COST AND PAYBACK PERIOD RESULTS

5.8.1 Life­Cycle Cost Results

This section presents LCC results for the higher efficiency levels specified in the

engineering analysis (TSD chapter 3). The results presented here are based on first costs and

annual operating costs calculated for each combination of State and building type (i.e., defined as

5­36a market segment), taking into account the estimated shipment weights to all market segments.

Because the values of many of the inputs vary by market segment in this analysis, DOE

represents them both as a distribution of values and as an average value for the nation. Thus,

DOE develops the LCC results as a distribution of life­cycle cost savings values from the

baseline (level 0).

5.8.1.1 Differences in Life­Cycle Cost Between Baseline and Standard­Level Equipment

DOE develops estimates of LCC savings for each efficiency level higher than the

baseline (ASHRAE Standard 90.1­2007 equivalent) efficiency level 0. This section presents the

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

each efficiency level analyzed, DOE rank orders the LCC savings calculated for each market

segment from low to high, keeping track of the total weight of shipments to each market

segment. This results in a cumulative distribution of LCC savings.

For reporting purposes, these LCC savings are depicted as a distribution of decile values

of LCC and PBP for the population of commercial packaged boiler sales. Table 5.8.1 shows the

resulting distribution of LCC savings for small gas­fired commercial packaged boilers.

Table 5.8.1 also provides the average LCC difference for the population along with the percent

of the population experiencing at least some level of positive LCC savings compared with the

purchase of the baseline equipment. Similar tables for all equipment classes are found in

Appendix 5­A.

Table 5.8.1 Distribution of Life­Cycle Cost Savings from Baseline Level for Small GasFired Commercial Packaged Boilers*

Efficiency

Level Decrease in LCC from Baseline (Level 0)

Shown by Percentiles of the Distribution of Results (2008$) Average

LCC

Savings Percent

of Units

with LCC

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

Level 1 (6,640) (2,669) (1,822) (1,286) (718) 34 484 1,385 2,938 6,102 19,009 860 51%

Level 2 (11,243) (5,286) (3,481) (1,996) (891) 238 1,770 2,952 5,905 11,547 37,702 2,007 51%

Level 3 (18,847) (10,218) (8,317) (6,605) (4,715) (2,410) (707) 1,466 5,364 13,071 51,800 (319) 37%

Level 4 (29,969) (19,410) (17,703) (15,017) (11,880) (9,102) (7,262) (3,712) 181 10,798 60,781 (6,649) 20%

*Values in parenthesis are negative.

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

level change in LCC in the zero­percentile column is an LCC savings of ­$11,243, or a net life

cycle cost to the consumer of $11,243. This means that 100 percent of the market is estimated to

have LCC savings greater than this value. For 90 percent of the cases studied (90 th percentile),

the change in LCC for level 2 results in an LCC savings of $11,547 or less as compared with the

ASHRAE baseline level. Consequently, 10 percent of the cases have LCC savings of greater than

$11,547. The largest reduction in LCC for level 2 is $37,702 at the 100 th percentile. The mean

change in LCC for level 2 is a net savings of $2,007. The last column shows that 51 percent of

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

baseline efficiency level.

Table 5.8.2 provides the national average life­cycle cost savings calculated for each

efficiency level when compared to the baseline (level 0) for all product categories.

5­37Table 5.8.2 Average Life­Cycle Cost Savings from Baseline Level (Level 0) by Efficiency

Level and Equipment Class*

Equipment Class National Average LCC Savings

(2008$)**

Level

1 Level

2 Level

3 Level

4 Percent of Units with Positive

LCC Savings

Level

1 Level

2 Level

3 Level

4

Small Gas­Fired Hot Water

Small Gas­Fired Steam All Except Natural Draft

Small Gas­Fired Steam Natural Draft

Small Oil­Fired Hot Water

Small Oil­Fired Steam

Large Gas­Fired Hot Water

Large Gas­Fired Steam All Except Natural Draft

Large Gas­Fired Steam Natural Draft

Large Oil­Fired Hot Water

Large Oil­Fired Steam 860 2,007 (319) (6,649)

(1,530) (1,545) (3,521) (4,163)

(712) 789 1,103 na

2,441 5,376 5,212 na

(732) 88 864 na

5,254 9,421 8,678 7,637

6,711 16,291 25,415 34,087

8,339 17,917 25,371 30,669

18,874 23,498 27,342 na

9,613 19,472 26,117 40,322 51% 51% 37% 20%

17% 26% 19% 20%

28% 50% 47% na

67% 65% 60% na

30% 40% 43% na

81% 74% 60% 48%

86% 94% 95% 95%

92% 95% 93% 89%

89% 86% 80% na

88% 89% 86% 86%

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

**Values in parenthesis are negative.

5.8.2 Payback Period Results

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

Similar to LCC discussion, the analysis provides a distribution for the simple PBP for higher

efficiency commercial boilers given the sales to the market segments defined by State and

building type for each efficiency level. As with the analysis of LCC savings, DOE developed a

cumulative distribution function of the PBP based on the weights assigned to each market

segment and the payback results for each market segment. Table 5.8.3 shows the PBP by

efficiency level for small gas­fired commercial package boilers. Similar tables for all other

equipment classes are shown in Appendix 5­A of the TSD. Table 5.8.34 shows the national

average PBP results for each of the 10 equipment classes analyzed.

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

Commercial Packaged Boilers

Payback Period from Baseline (Level 0) Average

Efficiency

Level Shown by Percentiles of the Distribution of Results (yr) Payback

Period

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

Level 1 4.8 8.6 10.4 11.5 13.3 14.7 16.4 20.6 29.2 36.5 100.0 26.8

Level 2 3.9 7.3 8.9 10.2 11.4 12.8 14.8 18.0 23.7 32.3 100.0 30.7

Level 3 4.2 8.8 9.9 11.0 12.8 14.4 16.1 20.1 26.9 36.9 100.0 42.5

Level 4 4.9 10.8 11.4 12.7 15.2 17.5 19.5 24.4 33.0 45.2 100.0 56.5

5­38Table 5.8.4 National Average Payback Periods by Efficiency Level and Equipment Class*

Equipment Class National Average Payback Period (Years)

Level 1 Level 2 Level 3 Level 4

Small Gas­Fired Hot Water

Small Gas­Fired Steam All Except Natural Draft

Small Gas­Fired Steam Natural Draft

Small Oil­Fired Hot Water

Small Oil­Fired Steam

Large Gas­Fired Hot Water

Large Gas­Fired Steam All Except Natural Draft

Large Gas­Fired Steam Natural Draft

Large Oil­Fired Hot Water

Large Oil­Fired Steam 26.8 30.7 42.5 56.5

44.1 42.8 51.2 50.7

33.5 26.6 28.9 na

19.2 19.6 26.6 na

35.1 33.7 35.0 na

16.0 19.3 27.8 37.1

12.5 9.1 8.1 7.7

9.8 8.2 9.1 10.8

9.3 12.9 15.4 na

9.7 9.3 11.2 12.3

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

5.9 ESTIMATES OF IMPACTED CUSTOMERS

The LCC savings and the estimates of the commercial boiler sales with positive LCC

savings shown in section 5.8 relate to the purchase of baseline efficiency equipment at the

90.1­2007 efficiency levels for each equipment class. DOE also considers information regarding

the current distribution of efficiencies sold into the market. DOE has no direct data on that

distribution, but as a proxy has considered the distribution of efficiencies of boiler models

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

those customers are impacted by making three assumptions: (1) DOE assumed that the current

distribution of boiler efficiencies sold into the market is equivalent to the distribution of

efficiency of models available to the market (based on the augmented DOE database of boiler

models discussed in TSD chapter 2); (2) DOE assumed that the efficiencies sold into the market

are evenly distributed across all market segments at a national level regardless of the benefits of

purchase of higher efficiency equipment (i.e., no correlation between the positive benefits of

higher efficiency levels and the purchase of higher efficiency equipment); and (3) DOE assumed

that the current distribution of shipments of boilers by efficiency levels reasonably approximates

the likely future shipments distribution by efficiency levels in the absence of standards.

While each of these assumptions can be argued to be simplistic, together they allow DOE

to estimate the fraction of customers who would likely experience LCC savings compared with

what they would likely purchase in the absence of an amended DOE standard. For example, if

only 50 percent of the market currently purchases at an efficiency level below level 2, and the

analysis in section 5.8 suggests that 60 percent of the market has a reduced LCC for purchase of

equipment at level 2, then by definition at least 50 percent of the market is not impacted by

standards set at level 2 because it already would be expected to purchase equipment at efficiency

levels higher than the proposed level 2 standard. Of those that are likely impacted (e.g., current

customer purchases at efficiency levels below level 2), the fraction benefiting would be expected

to be no larger than 60 percent based on the national estimate of customers who benefit for

purchases of level 2 when compared to the ASHRAE baseline (level 0). Forty percent of the

impacted customers would likely see no LCC benefit, again assuming that the distribution of

customers benefiting and the distribution of customers purchasing higher efficiency equipment

are not correlated.

5­39Proceeding in this fashion, DOE estimated the total fraction of customers likely to receive

LCC benefits assuming that the likelihood of sales into higher efficiency levels represents future

sales. The results of this analysis are shown in Table 5.9.1.

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

Equipment Class Percentage Sales Impacted (%)

Level 1 Level 2 Level 3 Level 4

Small Gas­Fired Hot

Water Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 11 26 47 66

77 48 25 18

12 27 28 17

Small Gas­Fired

Steam All Except

Natural Draft Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 30 60 73 na

64 19 10 na

6 21 17 na

Small Gas­Fired

Steam Natural Draft Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 49 39 51 na

32 22 3 na

19 38 46 na

Small Oil­Fired Hot

Water Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 20 25 37 na

39 27 7 na

41 48 56 na

Small Oil­Fired

Steam Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 29 46 54 29

58 24 6 58

13 30 40 13

Large Gas­Fired Hot

Water Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 9 20 34 49

51 23 17 6

40 58 49 46

Large Gas­Fired

Steam All Except

Natural Draft Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 6 5 4 4

61 26 23 20

33 69 73 77

Large Gas­Fired

Steam Natural Draft Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 1 3 6 10

88 42 24 7

11 55 71 82

Large Oil­Fired Hot

Water Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 5 11 15 na

52 24 24 na

43 65 61 na

Large Oil­Fired

Steam Equipment with Net LCC Increase

Equipment with No Change in LCC

Equipment with Net LCC Savings 4 7 11 12

66 41 16 11

30 53 73 77

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

5.9.1 Sensitivity to Fuel Escalation Rate

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

AEO 2008 high­energy price and low­energy price scenarios. Table 5.9.2 and Table 5.9.3

examine the national average LCC savings for the AEO 2008 low­energy price scenario and

AEO 2008 high­energy price scenarios respectively. For the high price scenario, while the

average LCC savings are increased for most efficiency levels above the baseline when compared

with the reference case, there are no changes in the level showing the highest LCC savings when

compared with the results using the AEO 2008 reference case. For the low­energy price scenario,

the average LCC savings is reduced for all efficiency levels above the baseline when compared

with the reference case (see Table 5.8.2). However, there are no changes in the efficiency level

5­40showing the highest LCC savings when compared with the results using the AEO 2008 reference

case

The PBP is calculated based on first­year energy savings and thus is insensitive to fuel

escalation rate scenarios.

Table 5.9.2 Average Life­Cycle Cost Savings from a Baseline Level (Level 1) by Efficiency

Level and Equipment Class

– EIA Low Price Scenario*

National Average LCC Savings Percent of Units with Positive

(2008$)** LCC Savings

Level Level Level Level

Equipment Class Level 1 Level 2 Level 3 Level 4 1 2 3 4

Small Gas­Fired Hot Water 663 1,657 (774) (7,155) 49% 50% 34% 20%

Small Gas­Fired Steam All Except Natural Draft (1,630) (1,725) (3,757) (4,468) 15% 24% 16% 19%

Small Gas­Fired Steam Natural Draft (825) 576 805 na 25% 45% 45% na

Small Oil­Fired Hot Water 1,240 3,057 1,858 na 51% 59% 45% na

Small Oil­Fired Steam (1,350) (1,114) (1,458) na 22% 30% 33% na

Large Gas­Fired Hot Water 4,873 8,716 7,713 5,545 80% 74% 58% 45%

Large Gas­Fired Steam All Except Natural Draft 6,297 15,476 24,211 32,505 85% 93% 94% 95%

Large Gas­Fired Steam Natural Draft 7,894 17,054 24,118 29,054 92% 94% 93% 89%

Large Oil­Fired Hot Water 14,360 16,867 18,651 na 86% 78% 66% na

Large Oil­Fired Steam 7,256 14,843 19,297 29,260 84% 86% 85% 78%

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

**Values in parenthesis are negative.

Table 5.9.3 Average Life­Cycle Cost Savings from a Baseline Level (Level 0) by Efficiency

Level and Equipment Class

– EIA High Price Scenario*

National Average LCC Savings Percent of Units with Positive

(2008$)** LCC Savings

Level Level Level Level

Equipment Class Level 1 Level 2 Level 3 Level 4 1 2 3 4

Small Gas­Fired Hot Water 983 2,282 141 (5,962) 51% 52% 40% 22%

Small Gas­Fired Steam All Except Natural Draft (1,464) (1,397) (3,271) (3,828) 17% 27% 19% 20%

Small Gas­Fired Steam Natural Draft (651) 921 1,316 na 28% 51% 48% na

Small Oil­Fired Hot Water 3,731 7,922 8,989 na 76% 79% 64% na

Small Oil­Fired Steam (59) 1,437 3,525 na 37% 49% 57% na

Large Gas­Fired Hot Water 5,473 9,902 9,470 9,713 82% 77% 63% 51%

Large Gas­Fired Steam All Except Natural Draft 6,920 16,706 26,034 34,906 86% 94% 95% 96%

Large Gas­Fired Steam Natural Draft 8,549 18,348 26,035 31,578 93% 95% 93% 89%

Large Oil­Fired Hot Water 23,698 30,710 36,894 na 95% 87% 86% na

Large Oil­Fired Steam 12,099 24,411 33,478 52,345 95% 95% 90% 88%

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

5.10 DETAILED RESULTS

DOE presents more detailed results for the LCC analysis in Appendix 5­A.

5­41REFERENCES

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. Prentice Hall, Upper Saddle River,

New Jersey.

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. Available at:

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(Accessed on October 12, 2008).

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. Whitestone Research, Washington, D.C.

19 Somasundaram S., P.R. Armstrong, D.B. Belzer, S.C. Gaines, D.L. Hadley, S. Katipumula,

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5­4326 U.S. Department of Energy­Office of Energy Efficiency and Renewable Energy. 2008.

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Spreadsheet

. Available at:

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_rule.html. (Accessed September 2008).

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Analysis Spreadsheet

. Available at:

<http://www1.eere.energy.gov/buildings/appliance_standards/commercial/ptacs_pthps_fina

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5­44ABBREVIATED TERMS

ACCA Air Conditioning Contractors of America

AEO Annual Energy Outlook

AFUE Annual Fuel Utilization Efficiency

ANOPR Advanced Notice of Proposed Rulemaking

ASHRAE American Society of Heating, Refrigerating and Air­Conditioning

Btu British thermal unit(s)

BVM beverage vending machine

CAPM Capital Asset Pricing Model

CBECS Commercial Buildings Energy Consumption Survey

DOE U.S. Department of Energy

EIA (DOE) Energy Information Administration

EPCQ Energy Policy and Conservation Act of 1975

ERP equity risk premium

ft foot(feet)

h hour(s)

HVAC heating, ventilation, and air­conditioning

HVACR heating, ventilation, air­conditioning, and refrigeration

IESNA Illuminating Engineering Society of North America

kBtu/h kilo British thermal units per hour

kWh kilowatt hour(s)

LCC life­cycle cost

MBtu million British thermal units

MCC mechanical contractor cost

NOPR Notice of Proposed Rulemaking

NPV net present value

PBP payback period

PTAC packaged terminal air­conditioner

WACC weighted­average cost of capital

yr year(s)

5­45