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 ANAL YSIS 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 INPUT S ...................................................................................... 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-iTable 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
Tabl e 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- Ph ase, 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

Ta ble 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 Water

Source 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- iiTable 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- iiiCHAPTER 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 operati ng 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, air

cooled 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 o f 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-use rs (comme rcial 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.

6-1As 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 C arlo 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 LC C 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

- Cy cle 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 a re:

• 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 conver ts 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.

6-2The primar y 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 price s 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 vari ous 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. E nergy 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

6-3Inputs Description performance of water

- source heat pumps. U nit 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 fr om 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 Maintenan ce 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 p resent 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 distribution s 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 dat e of 2019 (3 years after expected publication of the final rule)

.

All of the inputs summarized in Table 6.1.1 ar e 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

repa ir 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 

### r OC ICLCC

1 

### )1 /(

6-4LCC = 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 follow ing 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 t he 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.

6-56.2.1.2 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 tim es 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 markup s 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 cos t. 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 1.3 0 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 M arkup for A ll E quipment C lasses 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 manufact urer 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

6-6cost 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.

6-7Figure 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) fo r 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 80.0 100.0 120.0 140.0 160.0 180.0197819801982198419861988199019921994199619982000200220042006200820102012Deflated 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

6-8Figure 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 2012Deflated 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

6-9Within 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 th e installation costs for baseline efficient systems (i.e., 13.0 S EER 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 grea ter 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 A ir Conditioners

and H eat Pumps <65,000 Btu/h

System Type* Person

- hours 2013 Bare Costs Labor w/ O&P Cost per

Person

hour (2013$) Total

Labor
Cost (2013$) Cost per

Person

hour (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

Person

hour (2013$) Total

Labor
Cost (2013$) Cost per

Person

hour (2013$) Total

Labor
Cost (2013$)

Water

- Source Heat Pumps, water

source to air, single package, 1 ton cooling 8 $51 $408 $77 $614

Water

- Source Heat Pumps, water

source to air, single package, 3 ton cooling 11.4 $51 $583 $77 $877

Water

- Source Heat Pumps, water

source to air, single package, 7.5 ton cooling 26.6 $51 $1359 $77 $2047

6-10Table 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

6-11Table 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 weighte d-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

6-12Table 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 no t 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

6-136.2.2 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 ofthe equipment are computed from energy consumption per unit for the baseline and standardco mpliant 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 ($/k Wh) by census division which came
from the 2014 Central Unitary Air Conditioner Notice of Proposed Rulemaking. 6 The prices by census division were in 2012$ in the CUAC rulemaking and were scaled to 2013$ fo r 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.

6-14Table 6.2.13 Average and Marginal T ariff

- based P rices 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 201 4 Reference Case scenarios a 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. 6-15Figure 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 th e repair costs associated with small commercial air

- cooled air

conditioning 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 rep air costs to derive a 3 ton repair cost. Because specific water -source heat pump data were not available, f or 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 th e 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 0.18201120132015201720192021202320252027202920312033203520372039Electricity Price ($/kwh) New England

Mid-Atlantic

East North Central

West North Central

South Atlantic

East South Central

West South Central

Mountain

Pacific

National

6-16Based 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 r epair 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 c osts for air

source 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 water

source heat pumps. Table 6.2.18 shows the annualized repair cos ts for small commercial air

cooled 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

Person

hours 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)

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 U sed to D erive R epair Costs for 3-Phase, Air-Cooled Heat Pumps < 65,000 Btu/h and Water- Source Heat Pumps

System Type Annual

Person

hours 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)

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

6-17Table 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

6-18to 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 Me ans 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 annuali zed 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 ma intenance 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 wate r-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 water

source heat pump class greater than or equal to 65,000 Btu/h and less than 135,000 Btu/h.

Because data were not availabl e 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.

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

System Type Annual

Person

hours 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 $20 5 $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 water source 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 fas hion.
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 

    

−

−


### = )(

6-20than 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 o f 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

Th e 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 a verage 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 assi gned 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 ( k

e ) 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

6-21and low risk is associated with a low cost of equity. The systematic risk facing a firm is determined by several variables: the risk coeffic ient of the firm ( β ), the expected return on riskfree assets ( R

f ), 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:

kk
ee = RR ff + ( ββ × EE EE )

E q. 6.5
Where:

K
e = cost of equity,

R

f = 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 risk

free security.” 10

By taking a forty

- year geometric average of Federal Reserve data on annual nominal

retu rns 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 ( k d

) is the interest rate paid on money borrowed by a company.
The cost of debt is estimated by adding a risk adjustment factor ( R
a ) 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:

kk dddd = RR ff + RR aa 6 -22Eq. 6.6
Where:
k di = cost of debt financing for firm, i,

R

f = expected return on risk- free assets, and

R ai = risk adjustment factor to risk

- free rate for firm, i.

DOE estimates the WACC using the following equation:

d dee 

## wkwkWACC ×+×=

Eq. 6.7
Where:

WACC = weighted average cost of capital,

w e = proportion of equity financing, and

w d = proportion of debt financing.

By adjusting for the influence of inflation, DOE e stimates 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 fo r 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 Air

Cooled, 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.

6-236.2.2.8 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 m ore- 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 conservatio n 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 si ze) 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
th e 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 o f 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 co mpliance 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 ana lysis on the ASHRAE Sta ndard 90.1-2013 levels. And t herefore, 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 stand ards 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 sta ndards. 6-24For 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

o f 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 "ef ficiency 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 B ase Case Efficiency Market Shares in the compliance year for 3- phase A ir

Cooled, 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.

6-25Table 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 “simp le” payback, the required electricity cost is only for the year in which a new efficien cy

6-26standard 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 calculat ed 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

- pha se, 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.

6-27Table 6.4.2 LCC Savings Rela tive 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 C usto mers 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.

6-28Table 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 C usto mers 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.

6-29Table 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 C usto mers 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 C usto mers 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).

6-30Table 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 Rel ative to the Base- Case Efficiency Distribution for Water Source Heat Pumps <17,000 Btu/h

Efficiency Level Life

- Cycle Cost Savings

% of C usto mers 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).

6-31Table 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 C usto mers 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).

6-32Table 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 C usto mers 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

.

6-33REFERENCES

1 U.S. Department of Energy-Energy Information Administration, Annual Energy Outlook 2014, April, 2014. Washington, DC. Report No. DOE/EIA-0383(2014). www.eia.gov/forecasts/aeo/pdf/0383%282014%29.pdf

.

2 RS Means Mechanical Cost Data 2013. Reed Construction Data, LLC. 2012.

3 RS Means Facilities Maintenance & Repair Cost Data 2013. Reed C onstruction Data, LLC.
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4 U.S. Department of Labor- Bureau of Labor Statistics. Unitary air -conditioners, except air
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6/6/2013.

5 U.S. Department of Labor- Bureau of Labor Statistics. All other miscellaneous refrigeration and air conditioning equipment. Series PCU3334153334159; www.bls.gov/ppi/

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< www1.eere.energy.gov/buildings/appliance_standards/rulemaking.aspx/ruleid/59 >

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Investment

. American Economic Review , 1958. 48(3): pp. 261-297

< www.jstor.org/stable/1809766 >

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9 Ibbotson Associates, Cost of Capital 2001 Yearbook . 2001. Chicago, IL.

10 Board of Governors of the Federal Reserve System, Federal Reserve Bank Services Private Sector Adjustment Factor . 2005: Washington, DC.

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2013. Damodaran. (Last accessed February, 2014 .) < http://pages. stern.nyu.edu/~adamodar/ >

12 U.S. Department of Energy. 2004. Technical Support Document: Energy Efficiency Program for Commercial and Industrial Equipment: Commercial Unitary Air Conditioners and Heat Pumps . Washington, D.C.

< www1.eere.energy.gov/buildings/appliance_standards/commercial/cuac_tsd_060904.html >

6-34