CHAPTER 6. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

TABLE OF CONTENTS

6.1 INTRODUCTION ........................................................................................................... 6-1

6.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis ................ 6-1

6.1.2 Overview of Life-Cycle Cost and Payback Period Analysis Inputs .................... 6-2

6.2 LIFE CYCLE COST ANALYSIS INPUTS .................................................................... 6-4

6.2.1 Total Installed Cost Inputs ................................................................................... 6-5

6.2.1.1 Manufacturer Costs .................................................................................... 6-5

6.2.1.2 Markups ...................................................................................................... 6-6

6.2.1.3 Total Customer Price .................................................................................. 6-6

6.2.1.4 Future Equipment Prices ............................................................................ 6-7

6.2.1.5 Installation Cost .......................................................................................... 6-9

6.2.1.6 Total Installed Cost .................................................................................. 6-13

6.2.2 Operating Cost Inputs ........................................................................................ 6-14

6.2.2.1 Annual Energy Use Savings ..................................................................... 6-14

6.2.2.2 Energy Prices ............................................................................................ 6-14

6.2.2.3 Energy Price Trends ................................................................................. 6-15

6.2.2.4 Repair Cost ............................................................................................... 6-16

6.2.2.5 Maintenance Cost ..................................................................................... 6-18

6.2.2.6 Lifetime .................................................................................................... 6-20

6.2.2.7 Discount Rates .......................................................................................... 6-21

6.2.2.8 Compliance Date of Standard .................................................................. 6-24

6.2.2.9 Base Case Distribution of Efficiency Levels ........................................... 6-25

6.3 PAYBACK PERIOD INPUTS ...................................................................................... 6-26

6.4 LCC AND PBP RESULTS ............................................................................................ 6-27

REFERENCES .......................................................................................................................... 6-34

LIST OF TABLES 

Table 6.1.1 Summary of Inputs and Key Assumptions Used in the LCC and PBP 

Analysis.......................................................................................................... 6-3

Table 6.2.1 Summary of Average Markups ...................................................................... 6-6

Table 6.2.2 Overall Markup for All Equipment Classes................................................... 6-6

Table 6.2.3 Average Customer Price for Small Commercial Air-cooled Air 

Conditioning and Heating Equipment (2013$) .............................................. 6-7

Table 6.2.4 Average Customer Price for Water-Source Heat Pumps (2013$) ................. 6-7

Table 6.2.5 Installation Costs for Baseline Small, 3-phase Air-Cooled Air 

Conditioners and Heat Pumps <65,000 Btu/h.............................................. 6-10

Table 6.2.6 Installation Costs for Baseline Water-Source Heat Pumps .......................... 6-10

6-i 
Table 6.2.7 National Average Installation Costs for Small, 3-phase Air-Cooled Air 

Conditioners and Heat Pumps <65,000 Btu/h (2013$) ................................ 6-11

Table 6.2.8 National Average Installation Costs for Water Source Heat Pumps 

(2013$) ......................................................................................................... 6-11

Table 6.2.9 Installation Cost Indices by State (National Value = 100.0) ....................... 6-12

Table 6.2.10 Installation Cost Indices by Region (National Value = 100.0) .................... 6-13

Table 6.2.11 Average Total Installed Cost for Small, 3-phase Air-Cooled Air 

Conditioners and Heat Pumps <65,000 Btu/h (2013$) ................................ 6-13

Table 6.2.12 Average Total Installed Cost for Water-Source Heat Pumps (2013$) ........ 6-13

Table 6.2.13 Average and Marginal Tariff-based Prices by Region ................................ 6-15

Table 6.2.14 Repair Costs for 3-Phase, Air-Cooled, Air Conditioners < 65,000 

Btu/h ............................................................................................................. 6-17

Table 6.2.15 RS Means Costs Used to Derive Repair Costs for 3-Phase, Air-Cooled 

Heat Pumps < 65,000 Btu/h and Water-Source Heat Pumps ...................... 6-17

Table 6.2.16 Total Repair Costs for 3-Phase, Air-Cooled, Air Conditioning and 

Heating Equipment < 65,000 Btu/h (2013$) ............................................... 6-18

Table 6.2.17 Total Repair Costs for Water Source Heat Pumps (2013$) ......................... 6-18

Table 6.2.18 Annual Repair Costs for 3-Phase, Air-Cooled, Air Conditioning and 

Heating Equipment < 65,000 Btu/h (2013$) ............................................... 6-18

Table 6.2.19 Annual Repair Costs for Water Source Heat Pumps (2013$)...................... 6-18

Table 6.2.20 Maintenance Costs for Air-Cooled Air Conditioning and Heating 

Equipment .................................................................................................... 6-20

Table 6.2.21 Risk Free Rate and Equity Risk Premium (2011-2013) .............................. 6-22

Table 6.2.22 Weighted Average Cost of Capital for Sectors that Purchase 3-phase 

Air-Cooled, Air Conditioning and Heating Equipment ............................... 6-23

Table 6.2.23 Weighted Average Cost of Capital for Sectors that Purchase WaterSource Heat Pumps ...................................................................................... 6-23

Table 6.2.24 Base Case Efficiency Market Shares in 2020 for 3-phase Air-Cooled, 

Air Conditioning and Heating Equipment ................................................... 6-25

Table 6.2.25 Base Case Efficiency Market Shares in 2020 for Water-Source Heat 

Pumps ........................................................................................................... 6-26

Table 6.4.1 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, SplitSystem Air Conditioners <65,000 Btu/h ...................................................... 6-27

Table 6.4.2 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-

Phase Air-Cooled Split-System Air Conditioners <65,000 Btu/h ............... 6-28

Table 6.4.3 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, 

Package Air Conditioners <65,000 Btu/h .................................................... 6-28

Table 6.4.4 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-

Phase Air-Cooled Single-Package Air Conditioners <65,000 Btu/h ........... 6-29

Table 6.4.5 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, Split 

System Heat Pumps <65,000 Btu/h ............................................................. 6-29

Table 6.4.6 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-

Phase Air-Cooled Split System Heat Pumps <65,000 Btu/h ....................... 6-30

Table 6.4.7 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, 

Package Heat Pumps <65,000 Btu/h ............................................................ 6-30

6-ii
Table 6.4.8 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-

Phase Air-Cooled Package Heat Pumps <65,000 Btu/h .............................. 6-30

Table 6.4.9 Life Cycle and Payback Period Results for Water Source Heat Pumps 

<17,000 Btu/h .............................................................................................. 6-31

Table 6.4.10 LCC Savings Relative to the Base-Case Efficiency Distribution for 

Water Source Heat Pumps <17,000 Btu/h .................................................. 6-31

Table 6.4.11 Life Cycle and Payback Period Results for Water Source Heat Pumps 

≥17,000 to <65,000 Btu/h ............................................................................ 6-32

Table 6.4.12 LCC Savings Relative to the Base-Case Efficiency Distribution for 

Water Source Heat Pumps ≥17,000 to <65,000 Btu/h ................................. 6-32

Table 6.4.13 Life Cycle and Payback Period Results for Water Source Heat Pumps 

≥65,000 to <135,000 Btu/h .......................................................................... 6-33

Table 6.4.14 LCC Savings Relative to the Base-Case Efficiency Distribution for 

Water Source Heat Pumps ≥65,000 to <135,000 Btu/h ............................... 6-33

LIST OF FIGURES

Figure 6.2.1 Historical Nominal and Deflated Producer Price Indexes for Unitary 

Air Conditioners except Heat Pumps ............................................................. 6-8

Figure 6.2.2 Historical Nominal and Deflated Producer Price Indexes for All other 

Miscellaneous Refrigeration and Air Conditioning Equipment .................... 6-9

Figure 6.2.3 AEO 2014 Electricity Price Projections by Census Division ...................... 6-16

6-iii
CHAPTER 6. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

6.1 INTRODUCTION

The effect of amended standards on individual customers usually includes a reduction in 

operating cost and an increase in purchase cost. This chapter describes two metrics used in the 

analysis to determine the economic impact of standards on individual commercial customers. 

• Life-cycle cost (LCC) is the total customer cost over the life of an appliance or product, 

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 equipment. 

• Payback period (PBP) measures the amount of time it takes customers to recover the 

assumed higher purchase price of more energy-efficient equipment through reduced 

operating costs.

•

The U.S. Department of Energy (DOE) conducted the LCC and PBP analysis using a 

spreadsheet model developed in Microsoft Excel. When combined with Crystal Ball (a 

commercially available software program), the LCC and PBP model generates a Monte Carlo 

simulation to perform the analysis by incorporating uncertainty and variability considerations in 

certain of the key parameters as discussed further in section 6.1.1. 

Inputs to the LCC and PBP analysis of 3-phase, air-cooled air conditioners, 3-phase, aircooled heat pumps, and water-source heat pumps are discussed in sections 6.2 and 6.3

respectively. Results for each metric are presented in section 6.4. Key variables and calculations 

are presented for each metric. The calculations discussed here were performed with a series of 

Microsoft Excel spreadsheets. 

6.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis 

In recognition of the fact that the energy use of three-phase, air-cooled air conditioning 

and heating equipment and water-source heat pumps varies by building type and climate, the 

LCC and PBP calculations analyze energy use based on the distribution of end-users

(commercial buildings types) by census division. The results are expressed as the unit energy 

consumption for each equipment type. The LCC and PBP model was developed using Microsoft 

Excel spreadsheets combined with Crystal Ball. 

The LCC analysis used the estimated energy use for each equipment type as described in 

the energy use analysis in chapter 4. Energy use is sensitive to climate and therefore varies by 

location within the United States. Aside from energy use, other important factors influencing the 

LCC and PBP analysis include energy prices, installation costs, equipment distribution markups, 

and sales taxes. The LCC spreadsheets explicitly modeled both the uncertainty and the variability 

in the model’s inputs. 

6-1 
As mentioned previously, DOE generated LCC and PBP results as probability 

distributions using a simulation based on Monte Carlo analysis methods, in which certain key 

inputs to the analysis consist of probability distributions rather than single-point values. 

Therefore, the outcomes of the Monte Carlo analysis can also be expressed as probability 

distributions. As a result, the Monte Carlo analysis produces a range of LCC and PBP results. A 

distinct advantage of this type of approach is that DOE can identify the percentage of customers 

achieving LCC savings or attaining certain PBP values due to an increased efficiency level, in 

addition to the average LCC savings or average PBP for that efficiency level.

The LCC results are displayed as distributions of impacts compared to a base case. The 

base case efficiency distribution is for 2019 for split system air conditioners and 2020 for the 

other equipment classes and is defined as a mix of efficiency levels reflecting the expected 

distribution of efficiency levels by equipment class. 

6.1.2 Overview of Life-Cycle Cost and Payback Period Analysis Inputs

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

price (including retail markups, sales taxes, and installation costs) and operating cost (including 

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

time of purchase and summed over the lifetime of the equipment. The PBP is the increase in 

purchase cost of a higher efficiency unit divided by the change in annual operating cost of the 

unit. It represents the number of years that 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 

purchase cost, otherwise known as the total installed cost; and (2) inputs for calculating the 

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

The primary inputs for establishing the total installed cost are:

• Baseline manufacturer selling price: The baseline manufacturer selling price (MSP) is 

the price charged by the manufacturer to a wholesaler for equipment meeting existing 

minimum efficiency (or baseline) standards. The MSP includes a markup that converts 

the cost of production (i.e., the manufacturer cost) to a MSP. 

• Standard-level manufacturer selling price increase: The standard-level MSP is the 

incremental change in MSP associated with producing equipment at each of the higher 

standard levels. 

• Markups and sales tax: Markups and sales tax are the wholesaler and contractor margins 

and state and local retail sales taxes associated with converting the MSP to a customer 

price. 

• Installation cost: Installation cost is the cost to the customer of installing the equipment. 

The installation cost represents all costs required to install the equipment but does not 

include the marked-up customer equipment price. The installation cost includes labor, 

overhead, and any miscellaneous materials and parts. 

6-2 
The primary inputs for calculating the operating cost are:

• Equipment energy consumption: The equipment energy consumption is the site energy 

use associated with providing space conditioning to the building. 

• Electricity Prices: Average and marginal electricity prices for commercial buildings are 

determined using a tariff-based analysis. The average electricity price is used to estimate 

operating costs for the baseline, and marginal prices are used to value the operating cost 

savings at higher efficiency levels.

• Electricity price trends: The Energy Information Administration’s (EIA’s) Annual 

Energy Outlook 2014 (AEO 2014)1 is used to project electricity prices into the future. 

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

operation of the equipment. 

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

components that have failed. 

• Lifetime: The age at which the equipment is retired from service.

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

present value.

Table 6.1.1 provides descriptions of the various inputs to the calculation of the LCC and 

PBP. As noted earlier, most of the inputs are characterized by probability distributions that 

capture variability in the input variables. 

Table 6.1.1 Summary of Inputs and Key Assumptions Used in the LCC and PBP 

Analysis 

Inputs Description

Affecting Installed Costs

Equipment Price 

Derived MSP for equipment (from the engineering analysis) and 

multiplied by wholesaler markups and contractor markups plus sales tax 

(from markups analysis). Used the probability distribution for the 

different markups to describe their variability. 

Installation Cost

Includes installation labor derived from RS Means.2 Overhead and 

materials costs and profits are assumed to be included in the contractor’s 

markup. Thus, the total installed cost equals the customer equipment 

price (manufacturer cost multiplied by the various markups plus sales 

tax) plus the installation cost. 

Affecting Operating Costs

Annual Energy Use See chapter 4. 

Energy Efficiency

Seasonal energy efficiency ratio (SEER) is the cooling performance 

descriptor for small commercial air-cooled air conditioners and heat 

pumps. Energy efficiency ratio (EER) is the efficiency descriptor for 

cooling performance of water-source heat pumps. Coefficient of 

performance (COP) is the performance descriptor for heating 

6-3 
Inputs Description

performance of water-source heat pumps. Unit energy consumption data 

is used to determine the annual energy consumption associated with a 

particular standard level.

Electricity Prices

Average and marginal electricity prices for commercial buildings are 

determined using a tariff-based analysis from a representative sample of 

electric utilities. The average electricity price is used to estimate 

operating costs for the baseline, and marginal prices are used to value the 

operating cost savings at higher efficiency levels.

Maintenance Cost

Maintenance costs came from RS Means.3 The cost associated with 

maintaining the operation of the equipment (e.g., cleaning heat exchanger 

coils). Annual maintenance cost does not change as a function of MSP.

Repair Cost

Repair costs were derived from RS Means.3 In order to make the repair 

costs into an annual cost, DOE annualized the present value of the repair 

cost (which takes place in year 10) and applied them over the lifetime of 

the equipment. 

Affecting Present Value of Annual Operating Cost Savings

Equipment Lifetime DOE used Weibull distributions from the 2011 DFR to determine the 

lifetimes of each equipment class in this rulemaking. 

Discount Rate 

Mean real discount rates ranging from 6.57 percent to 7.21 percent for 

various classes of commercial customers of three-phase air-cooled air 

conditioning and heating equipment less than 65,000 Btu/h. Mean real 

discount rates ranging from 3.74 percent to 5.57 percent for water-source 

heat pumps. Discount rates were calculated using financial data from 

Damodaran Online. Probability distributions are used for the discount 

rates.

Compliance Date 

2020 (4 years after expected publication of the final rule) for all 

equipment except Split System AC which has a compliance date of 2019 

(3 years after expected publication of the final rule). 

All of the inputs summarized in Table 6.1.1 are discussed in sections 6.2 and 6.3. 

6.2 LIFE CYCLE COST ANALYSIS INPUTS

Life-cycle cost is the total customer cost over the life of a piece of equipment, including 

purchase cost and operating costs (which are composed of energy costs, maintenance costs, and 

repair costs). Future operating costs are discounted to the time of purchase and summed over the 

lifetime of the equipment. Life-cycle cost is defined by the following equation: 

Eq. 6.1 

Where:

∑=

+= +

N

t

t

t ICLCC OC r

1

/( )1

6-4 
LCC = life-cycle 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, and 

t = year for which operating cost is being determined. 

DOE expresses all the costs in 2013$. Total installed cost, operating cost, lifetime, and 

discount rate are discussed in the following sections. In the LCC analysis, the year of equipment 

purchase is assumed to be 2020 the expected compliance date of energy conservation standards 

higher than the ASHRAE level for the triggered equipment classes, or 2019 for split system air 

conditioners. 

6.2.1 Total Installed Cost Inputs

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

IIII = EEEEEE + IIIIIIII

Eq. 6.2 

Where:

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

INST = installation cost ($) (i.e., the cost for labor and materials). 

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

purchases the equipment. As discussed in chapter 5, DOE defined one major distribution channel 

for new units to describe how the equipment passes from the manufacturer to the customer: the 

manufacturer sells the equipment to a wholesaler or distributor, who sells to a mechanical 

contractor hired by a general contractor. The general contractor purchases and installs the 

equipment on behalf of the customer and adds its markup to the mechanical contractor’s price. 

Replacement equipment follows the same distribution channel, except that there is no general 

contractor. Instead, the mechanical contractor takes on the general contractor’s function. 

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

calculate the total installed cost

6.2.1.1 Manufacturer Costs

DOE developed the manufacturer costs as described in chapter 3, Engineering Analysis. 

6-5 
6.2.1.2 Markups

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

multiplying all the associated markups and the applicable sales tax together to arrive at a single 

overall distribution chain markup value. The overall markup is multiplied times the baseline or 

standard-compliant manufacturer cost to arrive at the price paid by the customer. Because there 

are baseline and incremental markups associated with the wholesaler and mechanical and general 

contractors, the overall markup is also divided into a baseline markup (i.e., a markup used to 

convert the baseline manufacturer price into a customer price) and an incremental markup (i.e., a 

markup used to convert a standard-compliant manufacturer cost increase due to an efficiency 

increase into an incremental customer price). Markups can differ depending on whether the 

equipment is being purchased for a new construction installation or is being purchased to replace 

existing equipment. DOE developed the overall baseline markups and incremental markups for 

both new construction and replacement applications as a part of the markups analysis (chapter 5 

of the TSD).

Table 6.2.1 displays baseline and incremental markups used to calculate customer price 

from manufacturer cost. Because the relative importance of new construction and replacements 

in total shipments varies among the equipment classes, the total markup varies as well (Table 

6.2.2).

Table 6.2.1 Summary of Average Markups 

Baseline Markup Incremental Markup

Manufacturer 1.30 1.30

Wholesaler 1.36 1.10 

Mechanical Contractor 

(new 

construction/replacement)

1.42/1.50 1.14/1.20 

General Contractor 

(new construction only) 1.31 1.19 

Sales Tax (replacement only) 1.07 1.07

Table 6.2.2 Overall Markup for All Equipment Classes

Baseline Markup Incremental Markup

3.290 1.950

6.2.1.3 Total Customer Price

DOE derived the customer equipment price for the efficiency levels above the baseline 

by taking the product of the baseline manufacturer cost and the baseline overall markup 

(including the sales tax) and adding to it the product of the incremental manufacturer cost and the 

incremental overall markup (including the sales tax). DOE followed the same process for 

shipping costs but in this case the manufacturer markup was not included in the overall markup. 

DOE then added the marked-up shipping cost to the customer equipment price. Markups and the 

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

6-6 
cost for a particular efficiency level (EL) is represented by a distribution of values. Table 6.2.3

and Table 6.2.4 present the average customer equipment price for each equipment class at each 

efficiency level examined. 

Table 6.2.3 Average Customer Price for Small Commercial Air-cooled Air Conditioning 

and Heating Equipment (2013$) 

Equipment Class

Federal 

Standard

Baseline

ASHRAE 

Baseline/

EL0

EL 1 EL 2 EL 3 EL 4 EL 5

Split AC $2,533 $2,685 $2,847 $3,030 $3,210 $3,405 $3,612

Package AC N/A $3,328 $3,551 $3,780 $4,001 $4,222 $4,508

Split HP N/A $3,402 $3,570 $3,830 $4,031 $4,248 N/A

Package HP N/A $4,052 $4,308 $4,554 $4,799 $5,100 N/A

Table 6.2.4 Average Customer Price for Water-Source Heat Pumps (2013$) 

Equipment Class ASHRAE

Baseline EL 1 EL 2 EL 3 EL 4 EL 5

Water Source HP <17,000 

Btu/h $2,521 $2,603 $2,711 $2,885 $2,967 $3,131 

Water Source HP ≥17,000 

to <65,000 Btu/h $3,945 $4,161 $4,433 $4,622 $4,784 $5,113 

Water Source HP ≥65,000 

to 135,000 Btu/h $9,679 $10,403 $11,128 $11,807 $12,676 N/A

6.2.1.4 Future Equipment Prices

To develop an equipment price trend for small commercial air-cooled air conditioners 

<65,000 Btu/h, DOE obtained an inflation-adjusted index of the producer price index (PPI) for 

“unitary air-conditioners, except air source heat pumps” from 1978 to 2013.4

 Although the PPI 

index shown in Figure 6.2.1 shows a long-term declining trend, data for the last decade have 

shown a flat-to-slightly rising trend. Given the uncertainty as to which of the trends will prevail 

in coming years, DOE chose to apply a constant price trend (2013 levels) for the NOPR. Because 

PPI data for air-source heat pumps was not available for very many years, DOE applied the same 

constant price trend to small commercial air-cooled heat pumps. 

6-7 
Figure 6.2.1 Historical Nominal and Deflated Producer Price Indexes for Unitary Air 

Conditioners except Heat Pumps

To develop an equipment price trend for water-source heat pumps, DOE derived an 

inflation-adjusted index of the producer price index (PPI) for “all other miscellaneous 

refrigeration and air-conditioning equipment” from 1990-2013.5 Although the inflation-adjusted 

index shown in Figure 6.2.2 shows a declining trend from 1990 to 2004, data since 2008 have 

shown a flat-to-slightly rising trend. Given the uncertainty as to which of the trends will prevail 

in coming years, DOE chose to apply a constant price trend (2013 levels) for each water-source 

heat pump equipment class. 

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

197819801982198419861988199019921994199619982000200220042006200820102012

Deflated PPI (2013=1)

Nomianl PPI (1982=100)

Unitary air-conditioners, except air source heat pumps Nominal PPI

Unitary air-conditioners, except air source heat pumps Deflated PPI

6-8 
Figure 6.2.2 Historical Nominal and Deflated Producer Price Indexes for All other 

Miscellaneous Refrigeration and Air Conditioning Equipment

6.2.1.5 Installation Cost 

The installation cost is the price to the customer of labor and materials (other than the 

actual equipment) needed to install equipment. DOE derived installation costs from 2013 RS 

Means data.2 RS Means provides estimates on the person-hours required to install HVAC 

equipment and the labor rates associated with the type of crew required to install the equipment. 

DOE calculated the installation cost by multiplying the number of person-hours by the 

corresponding labor rate. RS Means provides specific person-hour and labor rate data for the 

installation of 3-ton air conditioners, 3-ton air to air heat pumps, and 1-, 3-, and 7.5-ton watersource heat pumps. DOE decided that data for 3-ton, single zone air conditioners and 3-ton air to 

air split system heat pumps are representative of installation costs for 3 phase, air-cooled air 

conditioners and heat pumps less than 65,000 Btu/h. DOE determined the 1-, 3-, and 7.5- ton 

water- source heat pumps were representative of the market for water-source heat pumps less 

than 135,000 Btu/h. 

Labor rates vary significantly among regions, and the RS Means data provide the 

necessary information to capture this regional variability. RS Means provides cost indices that 

reflect the labor rates for 656 cities in the United States. Several cities in all 50 states of the 

United States and the District of Columbia are identified in the RS Means data. DOE 

incorporated these cost indices into the analysis to vary the installation cost depending on the 

location of the customer. 

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Deflated PPI (2013=1)

Nomianl PPI (1989=100)

All other miscellaneous refrigeration & air-conditioning equipment Nominal PPI

All other miscellaneous refrigeration & air-conditioning equipment Defalted PPI

6-9 
Within a given equipment class, DOE chose to vary installation costs in direct proportion 

to the weight of the equipment. The weight of the equipment in each equipment class and 

efficiency level was determined through the engineering analysis.

Table 6.2.5 and Table 6.2.6 summarize the nationally representative person-hours and 

labor rates associated with the installation of 3-ton air conditioners, 3-ton air to air heat pumps, 

and 1-, 3-, and 7.5- ton water-source heat pumps as presented in RS Means 2013.

Table 6.2.5 and Table 6.2.6 provide both bare installation costs (i.e., costs before 

overhead and profit (O&P)) and installation costs including O&P. DOE decided that the 

installation costs that include O&P represent the installation costs for baseline efficient systems 

(i.e., 13.0 SEER for small, 3-phase air-cooled air conditioners and heat pumps <65,000 Btu/h,, 

11.2 EER for water-source heat pumps less than 17,000 Btu/h, and 12.0 EER for water-source 

heat pumps of greater than or equal to 17,000 to less than 65,000 Btu/h and greater than or equal 

to 65,000 and less than 135,000 Btu/h).

Table 6.2.5 Installation Costs for Baseline Small, 3-phase Air-Cooled Air Conditioners 

and Heat Pumps <65,000 Btu/h 

System Type*

Person

-hours

2013 Bare Costs Labor w/ O&P

Cost per 

Personhour 

(2013$)

Total 

Labor 

Cost 

(2013$)

Cost per 

Personhour 

(2013$)

Total 

Labor 

Cost 

(2013$)

Rooftop Air Conditioners, single 

zone, electric cool only, 3 ton 

cooling

18.2 $51 $928 $77 $1397 

Air-Source Heat Pumps, air to air, 

split system, 3 ton cooling 13.3 $51 $680 $77 $1023 

Air-Source Heat Pumps, air to air, 

single package, 3 ton cooling 13.3 $51 $680 $77 $1023 

Table 6.2.6 Installation Costs for Baseline Water-Source Heat Pumps

System Type*

Person

-hours

2013 Bare Costs Labor w/ O&P

Cost per 

Personhour 

(2013$)

Total 

Labor 

Cost 

(2013$)

Cost per 

Personhour 

(2013$)

Total 

Labor 

Cost 

(2013$)

Water-Source Heat Pumps, watersource to air, single package, 1 ton 

cooling

8 $51 $408 $77 $614 

Water-Source Heat Pumps, watersource to air, single package, 3 ton 

cooling

11.4 $51 $583 $77 $877 

Water-Source Heat Pumps, watersource to air, single package, 7.5 

ton cooling

26.6 $51 $1359 $77 $2047 

6-10 
Table 6.2.7 and Table 6.2.8 show the national average total installation costs by 

equipment class and efficiency level. The total includes overhead and profit (O&P), which is 

calculated using labor markups from RS Means. For efficiency levels above the baseline, the 

installation costs vary in direct proportion to equipment weight. 

Table 6.2.7 National Average Installation Costs for Small, 3-phase Air-Cooled Air 

Conditioners and Heat Pumps <65,000 Btu/h (2013$) 

Equipment Class

Efficiency Level

Federal 

Baseline

ASHRAE 

Baseline/ 

EL0

EL 1 EL 2 EL 3 EL 4 EL 5 

Split AC

Weight (lbs) 323 346 367 387 405 422 439

Installation 

Cost $1,397 $1,497 $1,587 $1,674 $1,752 $1,825 $1,899 

Package 

AC

Weight (lbs) 341 361 382 402 422 443 463

Installation 

Cost $1,397 $1,479 $1,565 $1,647 $1,729 $1,815 $1,897 

Split HP

Weight (lbs) 358 393 426 456 485 512

Installation 

Cost $1,023 $1,123 $1,218 $1,303 $1,386 $1,464 

Package 

HP

Weight (lbs) 379 411 444 476 508 541

Installation 

Cost $1,023 $1,110 $1,199 $1,285 $1,372 $1,461 

Table 6.2.8 National Average Installation Costs for Water Source Heat Pumps (2013$) 

Equipment Class

Efficiency Level

Federal 

Baseline

ASHRAE 

Baseline EL 1 EL 2 EL 3 EL 4 EL 5

<17,000 

Btu/h

Weight (lbs) 118 131 141 154 177 187 208

Installation 

Cost $614 $683 $738 $807 $924 $979 $1,089 

≥17,000 

to 

<65,000 

Btu/h

Weight (lbs) 260 272 290 313 329 343 371

Installation 

Cost $877 $916 $979 $1,057 $1,111 $1,158 $1,252 

≥65,000 

to 

<135,000 

Btu/h

Weight (lbs) 663 737 811 885 959 1048

Installation 

Cost $2,047 $2,275 $2,504 $2,733 $2,961 $3,235 

6-11 
Table 6.2.9 summarizes the cost indices for installations in each of the 50 States of the 

U.S., plus the District of Columbia, used to vary the nationally representative installation costs in 

Table 6.2.7 and Table 6.2.8. To arrive at an average index for each state, DOE weighted the city 

indices in each state by their population. It used population estimates for the year 2010 from the 

U.S. Census Bureau to calculate a weighted-average index for each state. DOE then assigned 

each state to a census division and calculated a weighted-average index for each region in the 

same manner (Table 6.2.10).

Table 6.2.9 Installation Cost Indices by State (National Value = 100.0) 

State Index State Index State Index

Alabama 50.1 Kentucky 83.6 North Dakota 58.6

Alaska 107.4 Louisiana 62.5 Ohio 93.2

Arizona 79.5 Maine 75.9 Oklahoma 66.4

Arkansas 58.9 Maryland 83.8 Oregon 99.6

California 124.9 Massachusetts 120.6 Pennsylvania 116.4

Colorado 78.8 Michigan 101.4 Rhode Island 112.0

Connecticut 119.8 Minnesota 112.9 South Carolina 52.3

D.C 95.3 Mississippi 52.4 South Dakota 41.4

Delaware 119.5 Missouri 99.2 Tennessee 73.2

Florida 68.0 Montana 73.2 Texas 56.8

Georgia 68.9 Nebraska 80.5 Utah 70.8

Hawaii 112.9 Nevada 100.3 Vermont 75.1

Idaho 75.6 New Hampshire 83.0 Virginia 73.1

Illinois 130.6 New Jersey 126.5 Washington 107.2

Indiana 81.9 New Mexico 70.5 West Virginia 88.6

Iowa 80.5 New York 163.8 Wisconsin 97.7

Kansas 73.9 North Carolina 55.7 Wyoming 67.2

6-12 
Table 6.2.10 Installation Cost Indices by Region (National Value = 100.0) 

Region Index

New England 110.3

Mid Atlantic 141.0

East North Central 104.3

West North Central 91.2

South Atlantic 68.7

East South Central 66.3

West South Central 58.7

Mountain 79.1

Pacific 120.4

6.2.1.6 Total Installed Cost 

The total installed cost is the sum of the equipment price and the installation cost. MSPs, 

markups, and sales taxes all can take on a variety of values, depending on location, so the 

resulting total installed cost for a particular efficiency level will not be a single-point value, but 

rather a distribution of values. Table 6.2.11 and Table 6.2.12 present the average total installed 

cost for each equipment class at each efficiency level examined. 

Table 6.2.11 Average Total Installed Cost for Small, 3-phase Air-Cooled Air Conditioners 

and Heat Pumps <65,000 Btu/h (2013$) 

Equipment 

Class

Efficiency Level

Federal 

Baseline

ASHRAE 

Baseline/ EL0 EL 1 EL 2 EL 3 EL 4 EL 5

Split AC $3,930 $4,181 $4,434 $4,704 $4,962 $5,230 $5,511

Package AC N/A $4,807 $5,117 $5,427 $5,730 $6,037 $6,405

Split HP N/A $4,526 $4,788 $5,133 $5,417 $5,711 N/A

Package HP N/A $5,162 $5,507 $5,839 $6,170 $6,560 N/A

Table 6.2.12 Average Total Installed Cost for Water-Source Heat Pumps (2013$)

Equipment 

Class

Efficiency Level

ASHRAE 

Baseline EL 1 EL 2 EL 3 EL 4 EL 5

<17,000 Btu/h $3,204 $3,341 $3,517 $3,809 $3,945 $4,220

≥17,000 to 

<65,000 Btu/h $4,862 $5,140 $5,490 $5,733 $5,942 $6,365 

≥65,000 to 

<135,000 Btu/h $11,954 $12,907 $13,861 $14,768 $15,911 N/A

6-13 
6.2.2 Operating Cost Inputs

DOE defined the operating cost by the following equation: 

OC = EC + MC

Eq. 6.3 

Where:

OC = operating cost ($), 

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

MC = annual maintenance cost for maintaining equipment operation ($). 

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

calculate the operating costs by equipment class and efficiency level. The annual energy costs of 

the equipment are computed from energy consumption per unit for the baseline and standardcompliant cases (efficiency level 2, 3, and so on), combined with the energy prices. Equipment 

lifetime, discount rate, and compliance date of the standard are required for determining the 

operating cost and for establishing the operating cost present value. 

6.2.2.1 Annual Energy Use Savings 

For each equipment class, DOE calculated the annual energy use savings for each product 

at each efficiency level by taking the difference between a considered efficiency level and the 

baseline efficiency level. 

6.2.2.2 Energy Prices

In this analysis, DOE used electricity prices ($/kWh) by census division which came 

from the 2014 Central Unitary Air Conditioner Notice of Proposed Rulemaking.6 The prices by 

census division were in 2012$ in the CUAC rulemaking and were scaled to 2013$ for this

analysis. Electricity cost savings at efficiency levels above the ASHRAE baseline were 

calculated using the annual marginal price per kWh, as shown in Table 6.2.13. For each 

efficiency level, the operating costs savings are calculated by multiplying the reduction in 

electricity consumption (in kWh) by the annual marginal price. 

6-14 
Table 6.2.13 Average and Marginal Tariff-based Prices by Region 

Census Division Average Marginal

2013 $/kWh

New England $0.16 $0.10

Mid-Atlantic $0.16 $0.10

East North Central $0.13 $0.07

West North Central $0.08 $0.06

South Atlantic $0.11 $0.07

East South Central $0.09 $0.06

West South Central $0.08 $0.06

Mountain $0.11 $0.07

Pacific $0.15 $0.11

US Average $0.12 $0.08

6.2.2.3 Energy Price Trends

DOE projected future electricity prices using trends in national-average commercial 

electricity price from AEO 2014, as shown in Figure 6.2.3. The US average trend is shown as a 

heavy dashed line. DOE used AEO 2014 Reference Case scenariosa for the nine census 

divisions. DOE applied the projected energy price for each of the nine census divisions based on 

the distribution of buildings across divisions, as discussed in Chapter 4. 

a The reference case is a business-as-usual estimate, given known market, demographic, and technological trends.

6-15 

 
Figure 6.2.3 AEO 2014 Electricity Price Projections by Census Division 

6.2.2.4 Repair Cost

Repair costs are associated with repairing or replacing components that have failed. DOE 

utilized RS Means to find the repair costs associated with small commercial air-cooled airconditioning and heating equipment, and water-source heat pumps. For air-cooled air 

conditioners, DOE used the repair costs for a 3 ton, single zone rooftop unit. For air-cooled heat 

pumps, DOE took the repair costs for 1.5 ton, 5 ton, and 10 ton air to air heat pumps and linearly 

scaled the repair costs to derive a 3 ton repair cost. Because specific water-source heat pump data 

were not available, for water-source heat pumps, DOE also used the repair costs for 1.5 ton, 5 

ton, and 10 ton air to air heat pumps and linearly scaled the repair costs to derive costs for 1 ton, 

3 ton, and 7.5 ton water-source heat pumps. DOE assumed the air-source costs would be 

representative of the water-source costs.

RS Means breaks down repair costs into two components, material and labor. DOE 

assumed the repair costs in RS Means represented the current baseline efficiency level. DOE 

then scaled the material portion of the repair costs by the percentage increase in manufacturer 

production costs at each efficiency level. 

0.06

0.08

0.10

0.12

0.14

0.16

0.18

201120132015201720192021202320252027202920312033203520372039

Electricity Price ($/kwh)

New England

Mid-Atlantic

East North Central

West North Central

South Atlantic

East South Central

West South Central

Mountain

Pacific

National

6-16 
Based on information in RS Means, DOE assumed the repair would take place in the 10th 

year of the equipment life. In order to make the repair costs into an annual value, DOE 

annualized the present value of the repair costs in year 10 over the lifetime of the equipment. 

Table 6.2.14 shows the repair costs used for air-cooled air conditioners, and Table 6.2.15

shows the repair costs for air to air heat pumps which were used to derive the repair costs for airsource heat pumps and water-source heat pumps. Table 6.2.16 shows one-time repair costs for 

small commercial air-cooled equipment, and Table 6.2.17 shows one-time repair costs for watersource heat pumps. Table 6.2.18 shows the annualized repair costs for small commercial aircooled equipment, and Table 6.2.19 shows the annualized repair costs for water-source heat 

pumps. 

Table 6.2.14 Repair Costs for 3-Phase, Air-Cooled, Air Conditioners < 65,000 Btu/h 

System 

Type

Annual 

Personhours

Bare Costs Labor and Materials w/O&P 

Mat’l

($2013)

Cost 

per 

Personhour

($2013)

Annual 

Labor 

Cost

($2013)

Annual 

Total 

Cost

($2013)

Mat’l

($2013)

Cost 

per 

Personhour

($2013)

Annual 

Labor 

Cost

($2013)

Annual 

Total 

Cost

($2013)

Single 

zone 

rooftop 

unit, 3 

ton

$18 $770 $57 $1,011 $1,766 $1,453 $85 $1,522 $2,974 

Table 6.2.15 RS Means Costs Used to Derive Repair Costs for 3-Phase, Air-Cooled Heat 

Pumps < 65,000 Btu/h and Water-Source Heat Pumps

System 

Type

Annual 

Personhours

Bare Costs Labor and Materials w/O&P

Mat’l 

($2013)

Cost 

per 

Personhour 

($2013)

Annual 

Labor 

Cost

($2013)

Annual 

Total 

Cost 

($2013)

Mat’l

($2013)

Cost 

per 

Personhour

($2013)

Annual 

Labor 

Cost

($2013)

Annual 

Total 

Cost

($2013)

1.5 ton 

air to 

air HP

$16 $603 $57 $887 $1,482 $716 $85 $1,336 $2,051 

5 ton 

air to 

air HP

$18 $954 $57 $1,002 $1,935 $1,667 $85 $1,508 $3,175 

10 ton 

air to 

air HP

$24 $1,966 $51 $1,210 $3,225 $3,555 $77 $1,822 $5,377 

6-17 
Table 6.2.16 Total Repair Costs for 3-Phase, Air-Cooled, Air Conditioning and Heating 

Equipment < 65,000 Btu/h (2013$)

Equipment Class

Federal 

Baseline

ASHRAE 

Baseline/ 

EL 0

EL 1 EL 2 EL 3 EL 4 EL 5

Split AC $2,974 $3,114 $3,261 $3,417 $3,584 $3,761 $3,950

Package AC $2,974 $3,148 $3,148 $3,321 $3,494 $3,668 $3,841

Split HP $2,548 $2,634 $2,638 $2,771 $2,880 $2,996 N/A

Package HP $2,548 $2,662 $2,662 $2,777 $2,891 $3,006 N/A

Table 6.2.17 Total Repair Costs for Water Source Heat Pumps (2013$) 

Equipment Class Federal 

Baseline

ASHRAE 

Baseline/ 

EL 0

EL 1 EL 2 EL 3 EL 4 EL 5

<17,000 Btu/h $1,759 $1,801 $1,792 $1,834 $1,906 $1,940 $2,007

≥17,000 to <65,000 Btu/h $2,548 $2,609 $2,674 $2,833 $3,008 $3,190 $3,478

≥65,000 to <135,000 

Btu/h $4,324 $4,658 $4,658 $4,993 $5,328 $5,730 $4,658 

Table 6.2.18 Annual Repair Costs for 3-Phase, Air-Cooled, Air Conditioning and Heating 

Equipment < 65,000 Btu/h (2013$)

Equipment Class

Federal 

Baseline

ASHRAE 

Baseline/ 

EL 0

EL 1 EL 2 EL 3 EL 4 EL 5

Split AC $146 $153 $160 $168 $176 $184 $194

Package AC N/A $154 $163 $171 $180 $188 $197

Split HP N/A $141 $145 $152 $158 $164 N/A

Package HP N/A $142 $148 $154 $160 $166 N/A

Table 6.2.19 Annual Repair Costs for Water Source Heat Pumps (2013$) 

Equipment Class

ASHRAE 

Baseline/ 

EL 0

EL 1 EL 2 EL 3 EL 4 EL 5

<17,000 Btu/h $92 $93 $95 $99 $101 $104

≥17,000 to <65,000 Btu/h $133 $139 $149 $159 $170 $186

≥65,000 to <135,000 Btu/h $237 $254 $271 $288 $308 N/A

6.2.2.5 Maintenance Cost

The maintenance cost is the routine cost to the customer of maintaining equipment operation. 

DOE took annualized maintenance costs for air conditioners and heat pumps from data in RS 

Means Online, which provides estimates on the person-hours, labor rates, and materials required 

6-18 
to maintain air-conditioning equipment. DOE took annualized maintenance costs for CUACs 

from data in RS Means Online, which provides estimates on the person-hours, labor rates, and 

materials required to maintain CUAC equipment. RS Means specifies the following 11 actions 

that constitute required annual maintenance: 

• Check with operating or area personnel for deficiencies.

• Check tensions, condition, and alignment of belts; adjust as necessary. 

• Lubricate shaft and motor bearings. 

• Replace air filters.

• Clean electrical wiring and connections; tighten loose connections. 

• Clean coils, evaporator drain pan, blowers, fan motors, and drain piping as required. 

• Perform operational check of unit; make adjustments on controls and other components 

as required.

• During operation of unit, check refrigerant pressure; add refrigerant as necessary. 

• Check compressor oil level; add oil as required. 

• Clean area around unit. 

• Fill out maintenance checklist and report deficiencies.

DOE calculated the annualized maintenance cost by multiplying the number of personhours by the corresponding labor rate and adding to it the associated materials costs. RS Means

provides specific cost data for the maintenance of rooftop air conditioners ranging in cooling 

capacity from 3 through 24 tons as well as for air-cooled heat pumps up to 5 tons and over 5 

tons. RS Means did not provide maintenance costs specific to water-source heat pumps. DOE 

took the 3 through 24 ton rooftop air conditioner data to be representative of maintenance costs 

for the small commercial air-cooled air conditioner equipment classes. DOE took the up to 5 ton 

air-cooled heat pump data to be representative of maintenance costs for the small commercial 

air-cooled heat pump equipment classes and the water-source heat pump classes less than 65,000 

Btu/h. DOE took the over 5 ton air-cooled heat pump data to be representative of the watersource heat pump class greater than or equal to 65,000 Btu/h and less than 135,000 Btu/h. 

Because data were not available to indicate how maintenance costs vary with equipment 

efficiency, the Department decided to use costs that stay constant as equipment efficiency 

increases.

Table 6.2.20 summarizes the nationally representative annualized maintenance costs for 

the relevant equipment as presented in RS Means Online. Table 6.2.20 provides both bare 

maintenance costs (i.e., costs before O&P) and maintenance costs including O&P. DOE uses 

maintenance costs including O&P in its analysis. 

6-19 
Table 6.2.20 Maintenance Costs for Air-Cooled Air Conditioning and Heating Equipment

System Type

Annual 

Personhours

Bare Costs Labor and Materials w/O&P

Mat’l 

($2013)

Cost 

per 

Person

-hour 

($2013)

Annual 

Labor 

Cost 

($2013)

Annual 

Total 

Cost 

($2013)

Mat’l 

($2013)

Cost 

per 

Person

-hour 

($2013)

Annual 

Labor 

Cost 

($2013)

Annual 

Total 

Cost 

($2013)

Packaged unit, 

air-cooled, 3-tons 

through 24-tons

2.4 $74 $57 $136 $210 $93 $85 $205 $297

Heat pump, air 

cooled, up to 5 ton 3.2 $45 $57 $182 $226 $56 $85 $221 $329

Heat pump, air 

cooled, over 5 ton 3.6 $74 $57 $203 $277 $93 $85 $306 $398

6.2.2.6 Lifetime

DOE defines lifetime as the age when equipment is retired from service. In the April 

2014 Notice of Data Availability (NODA), DOE identified the average lifetime as 15 years for 3-

phase, air-cooled air conditioning and heating equipment <65,000 Btu/ and 19 years for watersource heat pumps. (79 FR 20114) For this NOPR, DOE uses a "survival function" to more 

accurately represent equipment lifetime. DOE used the survival functions in the form of Weibull 

distributions presented in the 2011 DFR for residential central air conditioners and heat pumps. 

The Weibull distribution is a probability distribution function commonly used to measure 

failure rates.4 Its form is similar to an exponential distribution, which would model a fixed 

failure rate, except that it allows for a failure rate that changes over time in a particular fashion. 

The cumulative distribution takes the form: 

 for x > θ and P(x) = 1 for x ≤ θ,

Eq. 6.4 

Where:

P(x) = probability that the appliance is still in use at age x,

x = appliance age,

α = the scale parameter, which is the decay length in an exponential distribution, 

β = the shape parameter, which determines the way in which the failure rate changes 

in time, and

θ = the delay parameter, which allows for a delay before any failures occur.

 The 2011 DFR include Weibull distributions for both air conditioners and heat pumps. 

The air conditioner function uses an alpha of 20.29, a beta of 1.89, and a theta of 1. This resulted 

in a mean lifetime of 19.0 years and a median lifetime of 17.7 years. This is a longer lifetime 

e x

xP

β

α

θ 



 



 − −

)( =

6-20 
than the 15 years estimated in the NODA, which was for larger commercial equipment. DOE 

believes that the estimated lifetime from the 2011 DFR for single-phase air conditioners used in 

commercial settings is more representative of the lifetime for similar three-phase air conditioners 

than is the estimate for larger equipment used in the NODA. 

The heat pump function used an alpha of 17.04, a beta of 1.64, and a theta of 1. This 

resulted in mean lifetime of 16.24 years and a median lifetime of 14.63 years. 

DOE also applied the air conditioner function to water-source heat pumps as they are 

estimated to have a mean lifetime of 19 years and DOE does not expect the shape of the function 

to be significantly different.

6.2.2.7 Discount Rates

The discount rate is the rate at which future expenditures and savings are discounted to 

establish their present value. 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. Following financial 

theory, the finance cost of raising funds for expenditure can be interpreted as: (1) the financial 

cost of any debt incurred to maintain equipment, or (2) the opportunity cost of any equity used to 

maintain equipment. Similarly, the value of cost savings can be interpreted as: (1) the cost 

avoided by decreasing debt, or (2) the return earned from increasing equity holdings. 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 firm of equity and debt financing.7

 DOE defines the discount 

rate as the weighted average cost of capital (WACC), calculated as the weighted average of the 

cost of equity financing and the cost of debt financing, as estimated from financial data for 

publicly traded firms in the sectors that purchase commercial air conditioners.

Damodaran Online is a widely used source of information about company debt and 

equity financing for most types of firms, and was the primary source of data for this analysis.8

Companies included in the Damondaran Online database were assigned to the categories listed 

below for 3-phase air-cooled air conditioning and heating equipment: 

• Small Office

• Small Retail

For water-source heat pumps, companies were assigned to the following categories: 

• Property owners

• Medical services

• Lodging

• Offices

• Public 

 

DOE estimated the cost of equity using the capital asset pricing model (CAPM).9

 The 

CAPM assumes that the cost of equity (ke) for a particular company is proportional to the 

systematic risk faced by that company, where high risk is associated with a high cost of equity 

6-21 
and low risk is associated with a low cost of equity. The systematic risk facing a firm is 

determined by several variables: the risk coefficient of the firm (β), the expected return on riskfree assets (Rf), and the equity risk premium (ERP). The risk coefficient of the firm indicates the 

risk associated with that firm relative to the price variability in the stock market. The expected 

return on risk-free assets is defined by the yield on long-term government bonds. The ERP

represents the difference between the expected stock market return and the risk-free rate. The 

cost of equity financing is estimated using the following equation, where the variables are 

defined as above: 

kkee = RRff + (ββ × EE EE)

Eq. 6.5 

Where:

 

Ke = cost of equity, 

Rf = expected return on risk-free assets,

β = risk coefficient of the firm, and 

ERP = equity risk premium. 

Several parameters of the cost of capital equations can vary substantially over time, and 

therefore the estimates can vary with the time period over which data is selected and the 

technical details of the data averaging method. For guidance on the time period for selecting and 

averaging data for key parameters and the averaging method, DOE used Federal Reserve 

methodologies for calculating these parameters. In its use of the CAPM, the Federal Reserve 

uses a forty-year period for calculating discount rate averages, utilizes the gross domestic 

product price deflator for estimating inflation, and considers the best method for determining the 

risk free rate as one where “the time horizon of the investor is matched with the term of the riskfree security.”10 

By taking a forty-year geometric average of Federal Reserve data on annual nominal 

returns for 10-year Treasury bills, DOE found for this analysis the following risk free rates for 

2011-2013 (Table 6.2.21). DOE also estimated the ERP by calculating the difference between 

risk free rate and stock market return for the same time period.11 

Table 6.2.21 Risk Free Rate and Equity Risk Premium (2011-2013) 

Year Risk free rate (%) ERP (%)

2011 6.61% 2.94%

2012 6.41% 3.99%

2013 6.24% 5.30%

 The cost of debt financing (kd) is the interest rate paid on money borrowed by a company. 

The cost of debt is estimated by adding a risk adjustment factor (Ra) to the risk-free rate. This 

risk adjustment factor depends on the variability of stock returns represented by standard 

deviations in stock prices. So for firm i, the cost of debt financing is: 

kkdddd = RRff + RRaa

6-22 
Eq. 6.6 

Where:

kdi = cost of debt financing for firm, i, 

Rf = expected return on risk-free assets, and

Rai = risk adjustment factor to risk-free rate for firm, i. 

DOE estimates the WACC using the following equation: 

dee ×+×= wkwkWACC d

Eq. 6.7 

Where:

WACC = weighted average cost of capital,

we = proportion of equity financing, and 

wd = proportion of debt financing. 

By adjusting for the influence of inflation, DOE estimates the real weighted average cost 

of capital, or discount rate, for each company. DOE then aggregates the company real weighted 

average costs of capital to estimate the discount rate for each of the ownership types in the 

analysis. An overall average is estimated by weighting each ownership type’s discount rate by its 

estimated share of the equipment market. The values are presented in

Table 6.2.22 for small commercial air-cooled air conditioners and heat pumps and Table 

6.2.23 for water-source heat pumps. While WACC values for any category may trend higher or 

lower over substantial periods of time, these values represent a private sector cost of capital that 

is averaged over major business cycles. 

Table 6.2.22 Weighted Average Cost of Capital for Sectors that Purchase 3-phase AirCooled, Air Conditioning and Heating Equipment

Sector

Discount 

Rate

Standard 

Deviation

Market 

Share

Small Office 6.57% 2.09% 47%

Small Retail 7.21% 2.06% 53%

Source: Damodaran Online Data Page: Costs of Capital by Industry Sector, 2011,2012,2013. 

Table 6.2.23 Weighted Average Cost of Capital for Sectors that Purchase Water-Source 

Heat Pumps

Sector

Discount 

Rate

Standard 

Deviation

Market 

Share

Offices 5.13% 2.05% 26%

Public 3.74% 1.43% 30%

Lodging 5.57% 1.87% 5%

Property owners 5.15% 1.20% 29%

Medical services 4.73% 1.66% 10%

Source: Damodaran Online Data Page: Costs of Capital by Industry Sector, 2011,2012,2013. 

6-23 
6.2.2.8 Compliance Date of Standard 

Generally, covered equipment to which a new or amended energy conservation standard 

applies must comply with the standard if such equipment is manufactured or imported on or after 

a specified date. In this NOPR, DOE is evaluating whether more-stringent efficiency levels than 

those in ASHRAE Standard 90.1-2013 would be technologically feasible, economically justified, 

and result in a significant additional amount of energy savings. If DOE were to propose a rule 

prescribing energy conservation standards at the efficiency levels contained in ASHRAE 

Standard 90.1-2013 for the triggered equipment classes, EPCA states that compliance with any 

such standards shall be required on or after a date which is two or three years (depending on 

equipment size) after the compliance date of the applicable minimum energy efficiency 

requirement in the amended ASHRAE/IES standard. (42 U.S.C. 6313(a)(6)(D)) Given the 

equipment size at issue here, DOE has applied the two-year implementation period to determine 

the compliance date of any energy conservation standard equal to the efficiency levels specified 

by ASHRAE Standard 90.1-2013 proposed by this rulemaking. Thus, if DOE decides to adopt 

the efficiency levels in ASHRAE Standard 90.1-2013, the compliance date of the rulemaking 

would be dependent upon the date specified in ASHRAE Standard 90.1-2013 or its publication 

date, if none is specified. In this case, the rule would apply to small commercial air-cooled air 

conditioners and heat pumps less than 65,000 Btu/h manufactured on or after January 1, 2017, 

which is two years after the date specified in ASHRAE Standard 90.1-2013. The rule would 

apply to water-source heat pumps manufactured on or after October 9, 2015, which is two years 

after the publication date of ASHRAE Standard 90.1-2013. 

 If DOE were to propose a rule prescribing energy conservation standards more stringent 

than the efficiency levels contained in ASHRAE Standard 90.1-2013, EPCA states that 

compliance with any such standards is required for products manufactured on or after a date 

which is four years after the date the final rule is published in the Federal Register. (42 U.S.C. 

6313(a)(6)(D)) DOE has applied this 4-year implementation period to determine the compliance 

date for any energy conservation standard more stringent than the efficiency levels specified by 

ASHRAE Standard 90.1-2013 that might be prescribed at the final rule stage for the equipment 

classes triggered by ASHRAE. Thus, for equipment for which DOE might adopt a level more 

stringent than the ASHRAE efficiency levels, the rule would apply to products manufactured on 

or after a date four years from the date of publication of the final rule, which the statute requires 

to be completed by April 9, 2016 (thereby resulting in a compliance date no later than April 9, 

2020).b

 

Economic justification is not required for DOE to adopt the efficiency levels in ASHRAE 

90.1-2013, as DOE is statutorily required to, at a minimum, adopt those levels. Therefore, DOE 

did not perform an LCC analysis on the ASHRAE Standard 90.1-2013 levels. And therefore, for 

purposes of the LCC analysis, DOE used 2020 as the first year of compliance with amended 

standards. 

b Since ASHRAE published ASHRAE Standard 90.1-2013 on October 9, 2013, EPCA requires that DOE publish a 

final rule adopting more-stringent standards than those in ASHRAE Standard 90.1-2013, if warranted, within 30 

months of ASHRAE action (i.e., by April 2016). Thus, four years from April 2016 would be April 2020, which 

would be the anticipated compliance date for DOE adoption of more-stringent standards.

6-24 

 
For split system air-cooled air conditioners, which DOE evaluated under the 6 year look 

back, DOE applied a different compliance date. Specifically, EPCA states that amended 

standards prescribed under this subsection shall apply to products manufactured after a date that 

is the later of—(I) the date that is 3 years after publication of the final rule establishing a new 

standard; or (II) the date that is 6 years after the effective date of the current standard for a 

covered product. (42 U.S.C. 6313(a)(6)(C)(iv)) Because DOE must publish a final rule by April 

9, 2016, in the case that it adopts standards higher than those in ASHRAE 90.1 for the other 

equipment classes, DOE projected that the date under clause (I) would be April 2019, which is 

later than the date under clause (II). For purposes of its analysis, DOE used 2019 as the first year 

of compliance with amended standards.

6.2.2.9 Base Case Distribution of Efficiency Levels

DOE created base case efficiency distributions for the compliance year based on model 

availability in the AHRI certified directory. DOE bundled the efficiency levels into "efficiency 

ranges" and determined the percentage of models within each range. DOE applied the 

percentages of models within each efficiency range to the total unit shipments for a given 

equipment class to estimate the distribution of shipments within the base case. 

DOE has estimated a base-case efficiency trend of approximately 1 SEER every 35 years, 

based on the EER trend from 2012 to 2035 found in the Commercial Unitary Air Conditioner 

Advance Notice of Proposed Rulemaking.12 DOE applied this efficiency trend to estimate the 

base case efficiency distribution in the year in which compliance is expected for any standards 

adopted higher than the ASHRAE level.c Table 6.2.24 and Table 6.2.25 show the distributions. 

Table 6.2.24 Base Case Efficiency Market Shares in the compliance year for 3-phase AirCooled, Air Conditioning and Heating Equipment 

Split System AC Single Package AC Split System HP Single Package HP

SEER Market 

Share SEER Market Share SEER Market Share SEER Market Share

13.0 26% N/A N/A N/A N/A N/A N/A

14.0 50% 14.0 52% 14.0 80% 14.0 69%

15.0 22% 15.0 30% 15.0 19% 15.0 21%

16.0 2% 16.0 7% 16.0 1% 16.0 9%

17.0 0% 17.0 4% 17.0 0% 17.0 1%

18.0 0% 18.0 7% 18.0 0% 18.0 1%

19.0 0% 19.0 0%

Note: The compliance year is 2019 for Split System AC and 2020 for Single Package AC, Split System HP, and 

Single Package HP.

c Chapter 8 contains additional information about development of efficiency distributions for the ASHRAE level and 

use of the base-case efficiency trend.

6-25 

 
Table 6.2.25 Base Case Efficiency Market Shares in 2020 for Water-Source Heat Pumps

WSHP 

<17,000 Btu/h 

WSHP 

≥17,000 to

<65,000 Btu/h 

WSHP 

≥65,000 to

<135,000 Btu/h 

EER Market 

Share EER Market Share EER Market Share

12.2 0.7% 13.0 7.6% 13.0 0.0%

13.0 49.7% 14.6 55.1% 14.0 29.8%

14.0 22.0% 16.6 25.0% 15.0 48.5%

15.7 20.5% 18.0 8.9% 16.0 20.1%

16.5 4.9% 19.2 2.5% 17.2 1.7%

18.1 2.3% 21.6 1.0%

6.3 PAYBACK PERIOD INPUTS

The PBP is the amount of time it takes the customer to recover the assumed higher 

purchase cost of more energy-efficient 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 first year annual operating expenditures. 

The equation for PBP is: 

PBP =∆IC/∆OC 

Eq. 6.8 

Where:

PBP = payback period in years, 

∆ IC = difference in the total installed cost between the more efficient standard-level 

equipment (efficiency levels 2, 3, etc.) and the baseline efficiency equipment, and 

∆OC = difference in first year annual operating costs.

Payback periods are expressed in years. Payback periods can be greater than the life of 

the equipment if the increased total installed cost of the more efficient equipment is not 

recovered fast enough in reduced operating costs. 

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 and the annual maintenance cost (or, in the case of 

rebuttable PBP, only the annual energy cost). The PBP uses the same inputs as the LCC analysis, 

except that electricity price trends and discount rates are not required. Since the PBP is a 

“simple” payback, the required electricity cost is only for the year in which a new efficiency

6-26 
standard is to take effect—in this case, 2019 for split system air conditioners and 2020 for all 

other equipment classes. 

6.4 LCC AND PBP RESULTS

This section presents the results of the LCC and PBP analysis. As discussed previously, 

DOE used probability distributions to characterize the uncertainty in many of the inputs to the 

analysis. DOE used Monte Carlo simulation to perform the LCC calculations. LCC and PBP 

calculations were performed 10,000 times, sampling from the probability distributions that DOE 

developed to characterize many of the inputs to the analysis. 

For each set of customers using the equipment in each equipment class, DOE calculated 

the average LCC and LCC savings and the simple PBP for each efficiency level. DOE calculated 

simple payback relative to the baseline equipment. DOE calculated LCC savings relative to the 

base-case efficiency distribution in the compliance year. Based on the Monte Carlo simulations 

that DOE performed, for each standard level DOE also calculated the share of customers 

receiving a net LCC cost. 

Table 6.4.1 through Table 6.4.14 show the LCC and PBP results for each equipment 

class. In general, the average LCC savings are negative for nearly all equipment classes and 

efficiency levels, with the exception of water-source heat pumps greater than or equal to 17,000 

Btu/h and less than 65,000 Btu/h, is has positive LCC savings for the first three efficiency levels. 

Table 6.4.1 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, Split-System 

Air Conditioners <65,000 Btu/h 

Efficiency 

Level

Average Costs

2013$ Simple 

Payback 

years

Average 

Lifetime

years Installed 

Cost

First Year’s 

Operating 

Cost

Lifetime 

Operating 

Cost

LCC

Federal 

Baseline $3,859 $765 $7,424 $11,282 N/A 19 

0 $4,106 $762 $7,389 $11,495 68 19 

1 $4,353 $755 $7,326 $11,680 49 19

2 $4,619 $749 $7,268 $11,887 47 19 

3 $4,873 $753 $7,302 $12,176 80 19

4 $5,138 $757 $7,342 $12,480 148 19 

5 $5,415 $762 $7,400 $12,815 562 19

Note: The results for each efficiency level are calculated assuming that all customers use equipment with that 

efficiency level. The PBP is measured relative to the baseline equipment. 

6-27 
Table 6.4.2 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-Phase 

Air-Cooled Split-System Air Conditioners <65,000 Btu/h 

Efficiency Level

Life-Cycle Cost Savings

% of Customers that Experience Average Savings*

Net Cost 2013$

0 26% ($55)

1 75% ($196)

2 97% ($398)

3 100% ($687)

4 100% ($992)

5 100% ($1,326)

* The calculation includes households with zero LCC savings (no impact).

Table 6.4.3 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, Package Air 

Conditioners <65,000 Btu/h 

Efficiency 

Level

Average Costs

2013$ Simple 

Payback 

years

Average 

Lifetime

years Installed 

Cost

First Year’s 

Operating 

Cost

Lifetime 

Operating 

Cost

LCC

ASHRAE 

Baseline $4,731 $761 $7,408 $12,139 N/A 19 

1 $5,036 $747 $7,275 $12,311 47 19 

2 $5,343 $742 $7,224 $12,567 50 19

3 $5,642 $746 $7,262 $12,904 80 19 

4 $5,944 $750 $7,300 $13,244 128 19 

5 $6,308 $755 $7,350 $13,659 261 19 

Note: The results for each efficiency level are calculated assuming that all customers use equipment with that 

efficiency level. The PBP is measured relative to the baseline equipment. 

6-28 
Table 6.4.4 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-Phase 

Air-Cooled Single-Package Air Conditioners <65,000 Btu/h 

Efficiency Level

Life-Cycle Cost Savings

% of Customers that Experience Average Savings*

Net Cost 2013$

1 49% ($89) 

2 81% ($297) 

3 89% ($596)

4 93% ($913) 

5 100% ($1,326) 

* The calculation includes households with zero LCC savings (no impact).

Table 6.4.5 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, Split System 

Heat Pumps <65,000 Btu/h 

Efficiency 

Level

Average Costs

2013$ Simple 

Payback 

years 

Average 

Lifetime

years Installed 

Cost

First Year’s 

Operating 

Cost

Lifetime 

Operating 

Cost

LCC

ASHRAE 

Baseline $4,467 $784 $6,969 $11,436 N/A 16 

1 $4,725 $772 $6,857 $11,582 35 16 

2 $5,066 $766 $6,807 $11,873 41 16 

3 $5,346 $766 $6,811 $12,157 54 16 

4 $5,636 $767 $6,819 $12,454 70 16

Note: The results for each efficiency level are calculated assuming that all customers use equipment with that 

efficiency level. The PBP is measured relative to the baseline equipment. 

6-29 
Table 6.4.6 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-Phase 

Air-Cooled Split System Heat Pumps <65,000 Btu/h 

Efficiency Level

Life-Cycle Cost Savings

% of Customers that Experience Average Savings*

Net Cost 2013$

1 75% ($117) 

2 99% ($406) 

3 100% ($690)

4 100% ($988) 

* The calculation includes households with zero LCC savings (no impact).

Table 6.4.7 Life Cycle and Payback Period Results for 3-phase, Air-Cooled, Package 

Heat Pumps <65,000 Btu/h 

Efficiency 

Level

Average Costs

2013$ Simple 

Payback 

years 

Average 

Lifetime

years Installed 

Cost

First Year’s 

Operating 

Cost

Lifetime 

Operating 

Cost

LCC

ASHRAE 

Baseline $5,103 $786 $6,982 $12,085 N/A 16 

1 $5,444 $773 $6,869 $12,313 50 16 

2 $5,771 $766 $6,810 $12,581 50 16 

3 $6,099 $767 $6,817 $12,915 67 16

4 $6,484 $768 $6,823 $13,307 87 16 

Note: The results for each efficiency level are calculated assuming that all customers use equipment with that 

efficiency level. The PBP is measured relative to the baseline equipment. 

Table 6.4.8 LCC Savings Relative to the Base-Case Efficiency Distribution for 3-Phase 

Air-Cooled Package Heat Pumps <65,000 Btu/h 

Efficiency Level

Life-Cycle Cost Savings

% of Customers that 

Experience Average Savings* 

Net Cost 2013$

1 68% ($157)

2 90% ($399)

3 99% ($728)

4 99% ($1,117)

* The calculation includes households with zero LCC savings (no impact).

6-30 
Table 6.4.9 Life Cycle and Payback Period Results for Water Source Heat Pumps 

<17,000 Btu/h 

Efficiency 

Level

Average Costs

2013$ Simple 

Payback 

years 

Average 

Lifetime

years Installed 

Cost

First Year’s 

Operating 

Cost

Lifetime 

Operating 

Cost

LCC

ASHRAE 

Baseline $3,184 $645 $7,581 $10,765 -- 19 

1 $3,320 $636 $7,469 $10,789 15 19 

2 $3,494 $628 $7,385 $10,879 17 19

3 $3,782 $619 $7,271 $11,054 20 19 

4 $3,917 $615 $7,229 $11,146 21 19 

5 $4,189 $609 $7,159 $11,349 24 19

Note: The results for each efficiency level are calculated assuming that all customers use equipment with that 

efficiency level. The PBP is measured relative to the baseline equipment. 

Table 6.4.10 LCC Savings Relative to the Base-Case Efficiency Distribution for Water 

Source Heat Pumps <17,000 Btu/h 

Efficiency Level

Life-Cycle Cost Savings

% of Customers that Experience Average Savings*

Net Cost 2013$

1 0% $0

2 46% ($46)

3 68% ($173)

4 89% ($259)

5 95% ($458)

* The calculation includes households with zero LCC savings (no impact).

6-31 
Table 6.4.11 Life Cycle and Payback Period Results for Water Source Heat Pumps 

≥17,000 to <65,000 Btu/h 

Efficiency 

Level

Average Costs

2013$ Simple 

Payback

years

Average 

Lifetime

years Installed 

Cost

First Year’s 

Operating 

Cost

Lifetime 

Operating 

Cost

LCC

ASHRAE 

Baseline $4,834 $1,102 $12,980 $17,814 -- 19 

1 $5,111 $1,059 $12,473 $17,584 6.2 19

2 $5,458 $1,024 $12,057 $17,515 7.3 19 

3 $5,700 $1,008 $11,868 $17,569 8.2 19 

4 $5,908 $999 $11,759 $17,667 9.1 19 

5 $6,328 $982 $11,564 $17,892 10.8 19

Note: The results for each efficiency level are calculated assuming that all customers use equipment with that 

efficiency level. The PBP is measured relative to the baseline equipment. 

Table 6.4.12 LCC Savings Relative to the Base-Case Efficiency Distribution for Water 

Source Heat Pumps ≥17,000 to <65,000 Btu/h 

Efficiency Level

Life-Cycle Cost Savings

% of Customers that Experience Average Savings*

Net Cost 2013$

1 2% $19

2 29% $62

3 53% $14

4 66% ($80)

5 76% ($303) 

* The calculation includes households with zero LCC savings (no impact).

6-32 
Table 6.4.13 Life Cycle and Payback Period Results for Water Source Heat Pumps 

≥65,000 to <135,000 Btu/h 

Efficiency 

Level

Average Costs

2013$ Simple 

Payback 

years 

Average 

Lifetime

years Installed 

Cost

First Year’s 

Operating 

Cost

Lifetime 

Operating 

Cost

LCC

ASHRAE 

Baseline $11,886 $2,170 $25,586 $37,471 -- 19 

1 $12,832 $2,095 $24,705 $37,537 14 19

2 $13,780 $2,057 $24,246 $38,026 16 19 

3 $14,681 $2,024 $23,865 $38,546 17 19 

4 $15,817 $1,993 $23,492 $39,309 20 19 

Note: The results for each efficiency level are calculated assuming that all customers use equipment with that 

efficiency level. The PBP is measured relative to the baseline equipment. 

Table 6.4.14 LCC Savings Relative to the Base-Case Efficiency Distribution for Water 

Source Heat Pumps ≥65,000 to <135,000 Btu/h 

Efficiency Level

Life-Cycle Cost Savings

% of Customers that Experience Average Savings*

Net Cost 2013$

1 -** -**

2 27% ($147)

3 72% ($556)

4 93% ($1,305)

* The calculation includes households with zero LCC savings (no impact).

**The base case efficiency distribution has 0% market share at the ASHRAE baseline; therefore there are 

no savings for EL1. 

6-33 
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6-34