1

DRAFT ME MORANDUM TO: Gil Wood, EPA/OAQPS/OID/RDPAG FROM: Beth Friedman, EC/R, Incorporated DATE: August 11, 2010 SUBJECT: Pellet Stove Cost Impacts
The purpose of this memorandum is to describe some of the factors that affect the potential cost imp acts of emission reduction options being considered for pellet stoves as part of the New Source Performance Standards (NSPS) review of residential wood heaters. **I. Background**  A pellet stove is defined as any wood burning heater which operates on pellet fuel. Wood pellets are tightly compacted and dense and have relatively low moisture content. The combination of fuel quality and precise metering of the fuel and air cause the pellets to burn more efficiently than cordwood. Types of pellet fuels include compr essed sawdust, paper products, forest residue, wood chips and other waste biomass, ground nut
- hulls and fruit pits, corn, and cotton seed. Pellet burning stoves look similar to wood stoves; however, they are usually smaller. 1 Approximately 800,000 homes in the U.S. are using wood pellets for heat, in freestanding stoves, fireplace inserts and furnaces. 2 The current NSPS definition of a residential wood heater currently exempts many pellet stoves from the standard due to the fact that they often exceed th e specified air
- to - fuel ratio in the combustion chamber of 35
- to - 1. The result is that many pellet stoves currently on the market have not been certified under the NSPS. If these units become subject to the NSPS, they would have to certify their emission s in order to continue to be sold in the U.S. In addition, depending on the level of the NSPS, some units might not be able to meet the emission limit without modifications. **II. Size of the Pellet Stove**  **Industry** North American s ales of pellet stoves genera ted revenues of $166.9 million, accounting for 32.7 percent of the total residential wood heaters, fireplaces, and hearth heating products market in 2008. This segment sold 130,381 units in 2008, accounting for 25.8 percent of the total number of units so ld. 3 Information provided by The Hearth, Patio & Barbecue Association (HPBA), reported 141,208 U.S.

1 Outdoor Wood Stoves (pellet wood stoves). See: http://www.outdoorswoodstoves.com/wood
-pell et - stoves . 2 Pellet Fuel Institute (What is pellet fuel?). See: http://www.pelletheat.org/3/residential/index.html
. 3 Market Research and Report on North American Residential Wood Heat ers, Fireplaces, and Hearth Heating Products Market . Prepared by Frost & Sullivan. April 26, 2010. P. 30.2

industry shipments of pellet stoves and inserts in 2008. This number dropped 67% to 46,124 in 2009, due to the economic downturn. 4 Biomass stoves (som e of which are pellet stoves and some of which are pellet furnaces or boilers) generated revenues of $9.6 million, accounting for 1.9 percent of the total market. This segment sold 6,819 units, accounting for 1.5 percent of the total number of units sold in 2008. 5 The average price of pellet stoves is $1,279 , with individual model prices ranging from $300 to $3,500 i n 2008. 6 HPBA reported a comparable average price of $1,348
. 7 Biomass stoves were reported to have an average price of $1,403, with individ ual model prices ranging from $350

- $4,000 in 2008 . 8 All prices reflect the sales cost to the pellet stove dealer. The results of the EPA survey of selected pellet stove manufacturers revealed comparable dealer sales prices, with an average price of $,1,3 40 , with reported prices ranging from $780 to $2,100. The average cost to manufacture was $780, with reported prices ranging from $590 to $1,700. These market conditions and prices influence the ability of manufacturers to invest in R&D to develop units that meet potentially lower emission standards. One issue raised by manufacturers is their available cash flow to fund R&D. Another concern is recovering R&D costs of the new models. One manufacturer provided an analysis showing the potential impact of the NSPS. In order to develop a new product family (3 to 4 models) over a 4.5 year period, he estimated the addition of $136.00 to the overhead costs of building the appliance. This would translate into a $226.00 increase in cost to the reseller of the p roduct which ultimately would result in a $378.00 increase in consumer cost. This does not include additional actual manufacturing costs. 9 **III. Universe of Sources Subject to a Potential**  **NSPS** As described above, there are two potential ways that pellet stov e manufacturers could be affected by an NSPS standard. The first group consists of pellet stoves that would meet the proposed standard, but have not yet been certified. Preliminary data indicate that most pellet stoves will meet the current Washington st andard of 4.5 g/hr emissions, which is an option being considered.

4 http://pelletheat.org/pdfs/Hearth
- Shipments - U.S.
- 98
- 2009
- revised
- official.pdf
. 5 Market Research and Report on North American Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market . Prepared by Frost & Sullivan. April 26, 2010. P. 30. 6 Market Research and Report on North American Resi dential Wood Heaters, Fireplaces, and Hearth Heating Products Market . Prepared by Frost & Sullivan. April 26, 2010. P. 35. 7 Market Information Questions & HPBA Responses. December 2009. 8 Market Research and Report on North American Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market . Prepared by Frost & Sullivan. April 26, 2010. P. 35. 9 Letter from Mike Haefner, American Energy Systems, to Beth Friedman, EC/R, Inc. July 26, 2010.3

The following figure shows the emissions performance of pellet stoves that are currently certified, with the addition of a few uncertified stoves, for which we have reproducible emission s data. As can be seen, all but one of the pellet appliances in this data set w ould meet the 4.5 g/hr emission limit.

We also looked at the list of certified pellet stoves on both the EPA and Washington state lists. Of the 224 pellet stove models fr om both lists , 221 models produced by 35 manufacture r s would meet the Washington limit. Only 3 models produced by 3 manufacturers would not meet the limit. (We are still reviewing potential impacts of a limit lower that the Washington limit). Assuming t hat the rest of the pellet stove market has comparable performance, we would expect to see only a small cost impact of requiring a 4.5 g/hr standard in terms of having to redesign units to meet an NSPS. The cost impacts, therefore, would be limited to certification costs of model lines. However, for the option of tightening the emission standard, some number of pellet stove models will either be abandoned or manufacturers will invest in developing new model lines that can meet the standards. Any new mode ls would incur both R&D costs and certification costs. **IV. R&D and Certification Costs**  Certification testing of the final product only costs about $5,000 per model based on the current test protocol. 10 Total costs to the manufacturer to monitor the test, t est at different fuels, etc. would increase this cost. Of greater concern to manufacturers than the cost may be the availability of exi s ting test labs to meet the demand for certification testing in the timeframe allowed by the NSPS implementation schedul e .

10 Conversation with John Dupree, EPA. Augus t 20, 2009.4

We have heard various estimates of the costs to bring a wood heater from concept to completion. A recent Hearth and Home article estimated the total cost to bring a model from conception to market as $645,000 to $750,000 for steel stoves and over $1 m illion for cast
- iron, enameled wood stoves. Costs would decrease for separate models in the same line by up to 25%. One manufacturer estimate s that the NSPS and safety testing component of these costs would constitute $40,000 per model
. 11 Another manu facturer estimated costs to bring a product family to certification (3 to 4 individual models) of $2,141,500. These costs include several elements, such as salaries for the design engineer and other staff, lab & laboratory equipment, test lab salaries, pr ototypes, test fuel, pre
- testing services, testing services, outside consultants, re
- tooling, marketing expenses, and education expenses. The manufacturer estimated that the cost of testing a flex fuel appliance would be $67,500.00 per model or $202,500. 00 for a product family of 3 models. 12 (Note that this manufacturer focuses on manufacturing flex fuel appliances, which are more difficult to design and produce tha n traditional wood pellet fuel appliances. The se costs include testing for additional fue l types.) Other manufacturers estimate d an average cost $1,360,000 to bring four fireboxes to market to remain competitive in the market place. Each firebox will take at least 14 to 18 months to design and certify (with an average of 16 months per fire box). 13 These R&D costs apply whether there is an NSPS or not, as manufacturers routinely update their model lines or develop new model lines to meet consumer demand for new features, improved appearance, and improved performance. Therefore, it is diffic ult to attach the entire R&D cost to the costs associated with meeting a certain emission limit, assuming that the rate at which a model line is developed remains the same as it would in the absence of an NSPS limit that forces redesign. The timeframe in which the NSPS is implemented and the average model turnover rate are important variables.

11 James E. Houck and Paul Tiegs. There’s a Freight Train Comin’ . Hearth and Home. December 2009. 12 Letter from Mike Haefner, American Energy Systems, to Beth Friedman, EC/R, Inc. July 26, 2010. 13 Stove Builder International and United St ates Stove Company. NSPS Review/Revision and Impact on our Com panies. June 2010.