FAQ

FRAMEWORK DOCUMENT for RESIDENTIAL FURNACES AND BOILERS

ENERGY CONSERVATION STANDARDS RULEMAKING

Draft for Public Comment

U.S. Department of Energy

Office of Building Research and Standards

1000 Independence Ave., SW

Washington, DC

July 17, 2001

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TABLE OF CONTENTS

1. INTRODUCTION ...................................................... 1

1.1 STAKEHOLDER PARTICIPATION ..................................... 3

1.2 ADVANCE NOTICE OF PROPOSED RULEMAKING ....................... 4

1.3 NOTICE OF PROPOSED RULEMAKING ................................ 5

1.4 NOTICE OF FINAL RULEMAKING ..................................... 6

2. ANALYSES FOR RULEMAKING ............................................ 7

3. MARKET AND TECHNOLOGY ASSESSMENT .................................. 9

3.1 MARKET ASSESSMENT .......................................... 9

3.2 TECHNOLOGY ASSESSMENT .................................... 10

3.3 PRODUCT CLASSES ........................................... 10

3.4 BASELINE UNITS .............................................. 12

4. SCREENING ANALYSIS ................................................ 13

5. ENGINEERING ANALYSIS .............................................. 15

5.1 ENGINEERING ANALYSIS OVERVIEW ............................. 15

5.2 APPROACHES TO DETERMINING EFFICIENCY IMPROVEMENTS ....... 16

5.2.1 Design Option Approach ................................... 16

5.2.2 Efficiency Level Approach .................................. 17

5.3 APPROACHES TO DETERMINING COST ESTIMATES ................ 18

5.4 ELECTRICITY USE FOR RESIDENTIAL FURNACES AND BOILERS ...... 19

5.5 OTHER REGULATORY CHANGES AFFECTING THE ENGINEERING

ANALYSIS .................................................... 20

6. MANUFACTURING COSTS .............................................. 21

6.1 CHARACTERIZING UNCERTAINTY ................................ 21

6.2 VARIABILITY IN COSTS BETWEEN MANUFACTURERS ............... 22

6.3 PROPRIETARY DESIGNS ....................................... 22

7. PRICES ........................................................... 23

7.1 RETAIL PRICES ............................................... 23

7.2 MANUFACTURER PRICES ....................................... 23

7.3 INSTALLATION AND MAINTENANCE COSTS ........................ 24

8. LIFE-CYCLE COST AND PAYBACK ANALYSIS ................................ 25

9. SHIPMENTS .................................................... 27

9.1 BASE CASE SHIPMENTS FORECAST .............................. 27

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9.2 STANDARDS CASES SHIPMENTS FORECASTS ..................... 27

10. NATIONAL IMPACTS ANALYSIS ......................................... 29

10.1 INPUTS TO FORECASTS ........................................ 29

10.2 CALCULATION OF ENERGY SAVINGS ............................. 29

10.3 NATIONAL NET PRESENT VALUE ................................ 30

11. REVISED ENGINEERING , LCC, AND NES ANALYSIS .......................... 31

12. CONSUMER IMPACTS ................................................ 31

12.1 CONSUMER SUB-GROUP ANALYSIS .............................. 31

13. MANUFACTURER IMPACT ANALYSIS ..................................... 32

13.1 SOURCES OF INFORMATION FOR THE MANUFACTURER IMPACT ANALYSIS

........

32

13.2 INDUSTRY CASH FLOW ANALYSIS ................................. 33

13.3 MANUFACTURER SUB-GROUP ANALYSIS ........................... 33

13.4 COMPETITIVE IMPACTS ASSESSMENT ............................. 33

13.5 CUMULATIVE REGULATORY BURDEN .............................. 34

14. UTILITY IMPACTS .................................................. 35

15. ENVIRONMENTAL ANALYSIS ........................................... 36

16. EMPLOYMENT IMPACTS .............................................. 37

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FRAMEWORK DOCUMENT for RESIDENTIAL FURNACES AND BOILERS

ENERGY CONSERVATION STANDARDS RULEMAKING

Draft for Public Comment

July 17, 2001

1. INTRODUCTION

The purpose of this document is to describe the procedural and analytical approaches the

Department of Energy (hereafter called the Department or DOE) anticipates using to evaluate

whether updated standards should be developed that are more stringent than existing

standards for residential furnaces and boilers. As described in more detail below, the

procedure for developing updated energy conservation standards entails several rounds of

analysis and multiple consultations with stakeholders. This document is intended to inform and

facilitate stakeholders' involvement in the rulemaking process. Section 1 provides an overview

of the process. Sections 2 through 16 discuss analyses to be done. Information regarding the

furnace and boiler standards rulemaking will be maintained on the DOE website at

http://www.eren.doe.gov/buildings/codes_standards

Figure 1 shows a time line for establishing and updating standards for residential furnaces and

boilers, starting with National Appliance Energy Conservation Act of 1987 (NAECA).

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June

2001

Stakeholder Participation

Prior Standards Rulemaking

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Figure 1 . Principal procedural steps in the residential furnace and boiler

standards setting process

In addition to the general discussion presented within its main text, this document contains

comment boxes, like this one, that address issues specific to the application of the analytical

framework to the residential furnaces and boilers rule. These boxes follow a generic description

for each component of a typical energy efficiency standard rulemaking, and include a discussion

of the key issues, the perspectives of the Department on these issues, and a request for

additional stakeholder input.

Section 321 (23) of Energy Policy and Conservation Act (EPCA) defines a furnace as follows:

"the term ` furnace' means a product which utilizes only single-phase electric current, or singlephase electric current or DC current in conjunction with natural gas, propane , or home heating

oil, and which

(A) is designed to be the principal heating source for the living space of a residence;

(B) is not contained within the same cabinet with a central air conditioner whose rated cooling

capacity is above 65,000 Btu per hour;

(C) is an electric central furnace, electric boiler, forced-air central furnace, gravity central

furnace , or low pressure steam or hot water boiler; and

(D) has a heat input rate of less than 300,000 Btu per hour for electric boilers and low pressure

steam or hot water boilers and less than 225 , 000 Btu per hour for forced -air central furnaces,

gravity central furnaces, and electric central furnaces."

Section 325(f)(1)(B) of EPCA required the Department to publish a final rule by Jan 1, 1989, to

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establish an efficiency standard for small furnaces (other than mobile home furnaces) having

an input of less than 45,000 Btu/hr and manufactured on or after January 1, 1992. Section

325(f)(3)(A) of EPCA required the Department to publish a final rule by Jan 1, 1992, to

determine if the statutorily established efficiency standard for mobile home furnaces (75%

AFUE) should be amended. It also required that such rule must provide that any amendment to

this standard level shall apply to mobile home furnaces manufactured on or after January 1,

1994. Based on section 325 (f)(3)(B) of EPCA, the Department was also required to publish a

final rule by January 1, 1994, to determine if the established efficiency standards for all furnaces

(including mobile home furnaces) should be amended. It also required that such rule must

provide that any amendment to this standard level shall apply to all furnaces (including mobile

home furnaces) manufactured on or after January 1, 2002.

In light of the EPCA provisions which stipulate a shorter time frame and an extra review for

mobile home furnaces, should the effective date of standards be different for mobile home

furnaces than for the rest of the residential furnaces and boilers? Should this extra review be

waived? If so, should the effective date for mobile home furnaces be shorter?

1.1 STAKEHOLDER PARTICIPATION

As also indicated by Figure 1, the Department considers stakeholder participation a very

important part of the process for setting energy conservation standards. The Department

actively encourages the participation and interaction of all stakeholders at all stages of the

process. Early and frequent interactions among stakeholders provide a balanced discussion on

critical information required to conduct the analysis to support any standards.

Stakeholders include manufacturers and consumers of furnaces and boilers, energy efficiency

and environmental advocates, state agencies, federal agencies and other groups or individuals

with an interest in the standards.

The energy conservation standards are developed through the rulemaking process, which

involves formal public notifications that are common to the Department's rulemaking activities.

For the furnace and boiler energy conservation standards rulemaking, the Department will

employ the rulemaking procedures set forth in Part B of Title III of EPCA and in Appendix A to

Subpart C of 10 Code of Federal Regulations (CFR) 430, "Procedures, Interpretations and

Policies for Consideration of New or Revised Energy Conservation Standards for Consumer

Products" (the Process Rule ), (61 FR 36981, July 15, 1996).

In an energy conservation standards rulemaking, the first of the rulemaking notices is an

Advance Notice of Proposed Rulemaking (ANOPR), which is designed to facilitate extensive

and early public participation and to select candidate standard levels for further analyses. The

ANOPR is followed by the publication of a Notice of Proposed Rulemaking (NOPR) which will

propose energy conservation standards. The completion of the rulemaking process is a Notice

of Final Rulemaking which places the energy conservation standards in the Code of Federal

Regulations.

The process provides numerous opportunities for stakeholder involvement. Specifically, the

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Department intends to request public comments on the ANOPR, with a 75-day public comment

period and at least one public hearing or workshop, and public comments on the NOPR, with a

75-day public comment period and at least one public hearing or workshop. These activities will

be summarized and published in rulemaking notices that appear in the Federal Register and on

the Department's website. Technical Support Documents (TSD) also will be prepared in

conjunction with the notices and distributed for stakeholder review and comment in conjunction

with publication of those notices.

In addition, the Department will elicit stakeholder participation prior to these notices and during

analyses prepared in support of the notices. The first of these opportunities will be the

framework meeting to discuss the information contained in this document, and the Department

will also seek written comments on this document.

The formal rulemaking process for development of energy conservation standards includes

three notices: ANOPR (see Section 1.2 below), NOPR (see Section 1.3 below), and the Notice

of Final Rulemaking (see Section 1.4 below). The activities that are relevant to the development

of energy conservation standards for furnaces and boilers leading to each of these notices and

the relationships among them are described below.

1.2 ADVANCE NOTICE OF PROPOSED RULEMAKING

As part of its initial rulemaking activities, the Department will identify the product design options

or efficiency levels that will be analyzed in detail and those that can be eliminated from further

consideration. This process includes a preliminary market and technology assessment (see

Section 3) and a screening process (see Section 4). These activities include consultations with

stakeholders and independent technical experts who can assist with identifying the key issues

and design options or efficiency levels to be considered.

The technologically feasible design options or efficiency levels that are not eliminated in the

screening process are considered further. The principal activities undertaken during this stage

are: an engineering analysis (see Section 5), a life-cycle cost analysis (see Section 8), and

national energy savings and net present value analyses (see Section 10).

The results of the analyses will be made available on the Department's website for review and

the Department will consider comments on them. This review and comment process may result

in revisions to the analyses. If appropriate, public workshops may be conducted to enhance the

exchange of information and comments. This analytical process culminates with the selection of

candidate standard levels, if any, that will be considered for the Proposed Rule. The candidate

standard levels are contained in the ANOPR which DOE publishes in the Federal Register. The

ANOPR specifies the candidate standard levels that are chosen for further analysis but does

not propose a particular standard. The ANOPR also presents the results of the engineering

analysis and the preliminary analyses of consumer life-cycle costs, national net present value,

and national energy savings. The Department will also make available a TSD containing the

details of all the analyses performed to this point.

Selection of candidate standard levels is based on costs and benefits of design options or

efficiency levels. Design options or efficiency levels which have payback periods that exceed

the average life of the product or which cause life-cycle cost increases relative to the base case

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would generally not be selected as candidate standard levels.

The range of candidate standard levels will typically include:

the most energy efficient level;

• the level with the lowest life-cycle cost;

a level with a payback period of not more than 3 years; and

candidate standard levels that incorporate noteworthy technologies or fill in large gaps

between efficiency levels of other candidate standard levels.

After the publication of the ANOPR, there is a 75-day public comment period and at least one

public hearing or workshop. On the basis of comments received, DOE may revise the analysis

or the candidate standard levels. If major changes are required, stakeholders and technical

experts will be given an opportunity to review the revised analyses.

1.3 NOTICE OF PROPOSED RULEMAKING

After the ANOPR, DOE will conduct further economic impact analyses of the candidate

standard levels. These analyses may include refinements of the analyses done for the ANOPR

and also will include: a consumer sub-group analysis (see Section 12), a manufacturer impact

analysis (see Section 13), a utility impact analysis (see Section 14), an environmental analysis

(see Section 15), and net national employment impacts (see Section 16).

The results of all the analyses will be made available on the Department's website for review

and the Department will consider comments on them. This review and comment process may

result in revisions to the analyses. If appropriate, public workshops may be conducted to

enhance the exchange of information and comments. This analytical process culminates with

the selection of proposed standard levels, if any, that will be presented in the NOPR. The

NOPR, published in the Federal Register, will document the evaluation and selection of any

proposed standards. For each product class, the Department also will identify the maximum

improvement in energy efficiency or maximum reduction in energy use that is technologically

feasible and, if the proposed standards would not achieve these levels, the Department will

identify the reasons for proposing different standards. The NOPR also will present the results of

all the analyses. The Department will also make available a TSD containing the details of all the

analyses.

The Department considers many factors in selecting proposed standards. These factors include

the selection policies established by statute and the many benefits, costs and impacts of the

standards shown by the analyses. Additionally, the Department encourages stakeholders to

develop joint recommendations for standard levels. If the Department receives a joint

recommendation from a representative group of stakeholders, such a recommendation will be

strongly considered in the decision process to select the proposed standard level.

The NOPR is followed by a 75-day public comment period that includes at least one public

hearing or workshop; revisions to the analyses may result from the public comments. On the

basis of the public comments, DOE reviews the proposed standard and impact analyses and

makes modifications as necessary. If major changes to the analyses are required at this stage,

stakeholders and experts will be given an opportunity to review the revised analyses.

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1.4 NOTICE OF FINAL RULEMAKING

The final step in the rulemaking process would be the publication of a Notice of Final

Rulemaking in the Federal Register. The Final Notice promulgates standard levels based on the

record and explains the basis for the selection of those standards. It is accompanied by the final

TSD.

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2. ANALYSES FOR RULEMAKING

This document provides a brief description of the analysis to determine the impacts of possible

standards. It offers an overview of the analytic methodology and discusses the major

components of the analysis. By considering the inter-relationship among these components, the

consistency of approach throughout the analysis is ensured.

A diagram of the analytical framework is shown in Figure 2. This document will primarily

emphasize those components of the methodology which are necessary for issuing an ANOPR.

The analytical components of the standards setting process are summarized in Figure 2. The

focus of this figure is the center column, identified as "Analysis." The columns labeled "Key

Inputs" and "Key Outputs" are intended to indicate how the analyses fit into the rulemaking

process, and how the analyses relate to each other. Key outputs are analytical results that feed

directly into the standard-setting process. Dotted lines connecting analyses indicate types of

information that feed from one analysis to another. Key inputs are the types of data and

information that are required by the analyses. Some key inputs exist in public databases, some

will be collected from stakeholders or others with special knowledge, and some of the key

inputs will be developed by the project team to support the standards-setting process.

Ultimately, the Department intends to select the furnace and boiler energy conservation

standards that achieve the maximum improvement in energy efficiency that is technologically

feasible and economically justified. In the context of this process, economic justification

includes consideration of the economic impacts on domestic furnace and boiler manufacturers

and consumers of furnaces and boilers, national benefits including environmental, issues of

consumer utility and impacts from any lessening of competition. Many of the analyses are

aimed at answering questions about these aspects of economic justification.

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Figure 2: Analytical Framework for Residential Furnaces and Boilers Rulemaking

Approaches

Industry Review

Quantitative Analysis

Qualitative Analysis-Interviews

Tear-Down Analysis

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Design-Option Approach '

L

Efficiency-Level Approach t r'

Key-Inputs

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Historical Information - 1 0.

Market/ Firm Segmentation 11-

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Existing Technology Options

Equipment Prototvoe Designs

Equipment Simulation Models ^I

Efficiency/Performance

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Market Survey 1^

Expert Forecasts efficiencies i

Install at on cost6

Forecasts

Models

• Historical shipments

• Product saturation

• Voluntary initiatives

ANOPR

Marginal Energy Prides

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...................... j2etail Price^.,,t .................^

• Other

Shipments

....................................

-Other efficiencies

• Efficiency

distribution i

Analysis

Market & Technology

Assessment

Screening Analysis

Engineering

Analysis

1

Life-cycle Cost and Payback

Analysis

National

Impacts Analysis

V

Revised Engineering, LCC,

and NES Analyses E

Demographics

Manufacturer Prices t

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Average

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Utility load factors

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Impacts

Manufacturer

Impact Analysis

Utility Impacts

(NEMS)

Environmental

Analysis (N EMS

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Employment

Impacts

NOPR

FINAL RULE

Revised Analysis

Key-Outputs

i • Payback Distribution

r • Life-cycle Distribution

• Energy savings

• Net Present Values

Payback

• Payback Distribution

• Life-cycle Distribution

Industry Cash-flow with Uncertainty

Utility Revenue Losses

Emissions

►

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3. MARKET AND TECHNOLOGY ASSESSMENT

3.1 MARKET ASSESSMENT

Prior to initiating a detailed impact analysis, the Department will develop information on the

present and past industry structure and market characteristics of the product(s) concerned. It

will be used throughout the standards development process, and at the outset, to determine

product classes, to develop the baseline models, and to identify potential design options or

efficiency levels for each of the product classes. This activity will assess the industry and

products based on publicly available information. Issues to be addressed include the following:

the manufacturer market shares and characteristics; current trends in the number of firms; the

financial situation of individual manufacturers; the marketing channels (manufacturers,

distributors, consumers) being used for different market segments; the existing non-regulatory

efficiency improvement initiatives; and the current trends in product characteristics and retail

markets.

The information collected above will serve as a resource for use throughout the rulemaking. For

instance, market structure data will be particularly useful to conducting the competitive impacts

analysis.

The Department has initiated a market assessment of the residential furnace and boiler industry.

Once completed, collected information will be distributed to the stakeholders for comment.

The residential furnace and boiler market can be divided into segments that are almost

completely independent according to the type of equipment, (e.g., central forced air furnaces,

mobile home furnaces, hot-water and steam systems, cast iron boilers, and copper-finned tube

boilers). The market can be further subdivided by the type of fuel used in the product. Currently

the department is considering residential furnaces and boilers fired by the following fuels: natural

gas, liquified petroleum gas (LPG), and fuel oil.

The Department plans to conduct interviews with manufacturers after the framework workshop.

These interviews will be useful in developing an industry profile which can provide insights and

information to help structure future analysis. The Department is also interested in developing

profiles of individual manufacturers to gain a better understanding of the potential impacts of

standards on both individual firms and particular categories of firms.

Interview participants will be requested to identify all confidential information provided in writing

and orally. Approximately two weeks following the interview, an interview summary will be

provided to give participants the opportunity to confirm the accuracy and protect the

confidentiality of all collected information. All the information transmitted will be considered, when

appropriate, in the Department's decision-making process. However, confidential information will

not be made available for the public record.

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Are there elements not mentioned in the above market characterization which should be

incorporated into this document?

3.2 TECHNOLOGY ASSESSMENT

Information about existing and past technology options and prototype designs will typically be

used as input to determine what technologies manufacturers could utilize to attain higher

energy efficiency levels. In consultation with the stakeholders, the Department intends to

develop a list of technologies that can and should be considered in the analysis. Initially, the list

will encompass all technologies considered to be technologically feasible and it will also serve

to establish the maximum technologically feasible design.

The Department has initiated a technology assessment for residential furnaces and boilers. The

Department is collecting information on technologies that improve eitherthe efficiency of fuel use

or of electricity use. The technologies include those that can improve the overall heat transfer,

the fan and motor efficiency, the combustion process, or the controls.

Are there specific technologies that should or should not be considered for residential furnaces

and boilers?

3.3 PRODUCT CLASSES

Products may be separated into product classes if their capacity or other performance-related

features or attributes, including those that provide utility to the user, inherently affect efficiency

and justify the establishment of a different energy conservation standard, or possible exemption

from energy conservation standards, for products with that feature or attribute. Some of the

features or attributes that might justify the establishment of product classes for residential

furnaces and boilers may include the type of energy used, or the capacity. The Department

often defines product classes using information obtained in discussions with stakeholders and

intends to do so as part of this process. The Department seeks discussion on whether the

following features or attributes affect residential furnace and boiler efficiency and warrant

separate product classes, and whether other characteristics not outlined below should be

considered for defining separate product classes for these products because they affect

efficiency and should be the basis for separate energy conservation standards or exemptions.

EPCA Section 321 (23) states that a "furnace" includes forced-air and gravity central

furnaces, and low pressure steam and hot water boilers and it must have a heat input rate of

less than 300,000 Btu per hour for electric boilers and low pressure steam or hot water

boilers and less than 225,000 Btu per hour for forced-air central furnaces, gravity central

furnaces, and electric central furnaces.

There are two possible ways of classifying furnaces- based on the energy source (gas or oil)

and the installation location. Based on the installation location, the furnace may be classified

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as weatherized (i.e., located outdoor), or non-weatherized. Non-weatherized furnaces are

rated as if they were isolated from the conditioned space. Such a system is called an isolated

combustion system (ICS). In the ICS, the combustion and dilution air are drawn from the

outdoors. It differs from the "indoors" rating applied for boilers classes only, which assumes

that the combustion and dilution air are drawn from the conditioned space. "Outdoor" rating

assumes that the unit is located outdoors.

In the ANOPR (58 Fed. Reg. 47326) for residential furnaces and boilers issued on

September 8, 1993, DOE proposed to consider the following product classes:

• Gas furnaces

- Weatherized

- Non-weatherized

• Oil furnaces

- Weatherized

- Non-weatherized

• Mobile home furnaces

- Gas

- Oil

• Hot-water boilers

- Gas

- Oil

• Steam boilers

- Gas

- Oil

• Combination space /water heating appliance

- Gas

- Oil

Gas furnaces are the predominant type of furnaces in today's market and are found in both

weatherized and non-weatherized categories. Mobile home furnaces fall entirely in the nonweatherized category. Boilers are rated as "indoors" or "outdoors".

There is currently no DOE test procedure for combination appliances, which provide both

space heating and domestic hot water. An American Society of Heating, Refrigerating, and

Air-Conditioning Engineers, Inc. (ASHRAE) test procedure for these products is currently

under development. Therefore combination appliances are not being considered for the

current rulemaking.

Are there any other performance-related features that may warrant creating separate classes

for the products that possess them? If so, what factors, including preserving the utility of the

features to owners, should we consider when deciding whether to establish the new classes?

Please comment as to whether the Department should pursue establishing additional

classes.

Are there some product classes with such low volumes of annual shipments that the

department should not undertake analysis to determine if the efficiency standards should be

upgraded? Are there some product classes that should be combined or merged?

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3.4 BASELINE UNITS

Defining a baseline unit is the starting point for the screening analysis . For each product class,

the baseline unit represents a model with the minimum allowable energy efficiency as specified

in NAECA 1987 and subsequent amendments for small furnaces.

One of the key parameters required for establishing the baseline model is its efficiency . In this

rulemaking, the Department intends to use the following NAECA 1987 minimum efficiency levels

as the primary baseline efficiency: a minimum Annual Fuel Utilization Efficiency (AFUE) of 78%

for gas- and oil-fired central furnaces , 75% for mobile home furnaces , 75% for gas steam

boilers, and 80% for all other boilers.

If additional product classes are established , the Department will apply the appropriate existing

standard as the baseline efficiency for that class.

If more detailed approaches , such as a design option approach , are selected for conducting the

engineering analysis , manufacturers may be requested to supply details on the technologies that

they utilize in their baseline or minimum efficiency models . This information will assist the

Department in establishing the individual technologies that can be employed to increase the

efficiency of the product.

Which baseline efficiency levels are most appropriate for this rulemaking?

What equipment capacity should be used in the analysis as the representative capacity for each

product class ? Should this value be the same for central furnaces, mobile home furnaces, hot

water boilers, and steam boilers, or are unique values warranted? If so, what should they be?

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4. SCREENING ANALYSIS

The screening analysis consists of reviewing and selecting the design options for further

analysis.

An initial list of design options will be developed from the technologies identified during the

technology assessment. After the development of this initial list, the Department will review

each design option in consultation with stakeholders to determine if it is practicable to

manufacture, install and service; would adversely impact product utility or product availability; or

would have adverse impacts on health and safety. All design options will be carefully screened

to meet these criteria. Only the design options not eliminated during the screening process will

be considered further in the engineering analysis.

Compiling a list of design options will provide a better understanding of which technologies can

potentially be utilized by manufacturers to improve the equipment efficiency. Knowing the

technologies that are available to manufacturers will also help the Department determine the

maximum technologically feasible efficiency levels.

In developing a list of design options, the Department's primary consideration is how a

technology will impact the primary-fuel based efficiency of the equipment as expressed by its

AFUE. Another consideration is how it will affect the electricity use determined by such indices

as the annual electrical consumption (EAE), which is separately calculated from the DOE Test

Procedure for residential furnaces/boilers.

An initial list of technologies includes:

(A) Improved Heat Exchanger Effectiveness

(B) Electronic Ignition

(C) Increased Fan Efficiency (Air Circulating and Combustion Air Fans)

(D) Increased Motor Efficiency (Air Circulating and Combustion Air Fans)

(E) Induced or Forced Draft

(F) Infrared Burner

(G) Two-Stage Modulation

(H) Continuous Modulation

(I) Condensing Flue Gases

(J) Pulse Combustion (Gas and Oil)

(K) Burner Box or Flue Damper

(L) Stack Damper

(M) Improved or Increased Insulation

(N) Thermophotovoltaic Control System

(0) Gas Driven Heat Pumps

(P) Alternative Fan Motor Speed Control

(Q) Electrohydrodynamic Enhancement of Heat Exchangers

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(R) Delayed Action Oil Pump Solenoid Valve

(S) Flue Gas Recirculation

(T) Atomized Oil Burner

(U) Interrupted Ignition Oil Burner

Are there specific technologies that should or should not be considered for residential furnaces

and boilers?

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5. ENGINEERING ANALYSIS

The engineering analysis consists of estimating the energy consumption and costs of furnaces

and boilers at various levels of increased efficiency. This chapter discusses an overview of the

engineering analysis (Section 5.1), two alternative approaches to estimating efficiency levels

(Section 5.2), and one of the major cost estimation methods, namely tear-down analysis

(Section 5.3). This chapter also discusses electricity consumption for residential furnaces and

boilers (Section 5.4) and other regulatory impacts on the engineering analysis (Section 5.5).

5.1 ENGINEERING ANALYSIS OVERVIEW

The purpose of the engineering analysis is to evaluate the increased equipment efficiency

levels and estimate the associated manufacturing costs. The baseline units and possible design

options are identified in the screening analysis (see Section 4). The Department, in consultation

with stakeholders, will use the most appropriate means that are available to determine the

energy efficiency levels, possibly including an overall system approach or engineering modeling

of the system. The analysis will also account for the ranges and uncertainties in the estimated

energy performance and costs.

The engineering analysis involves estimating the possible efficiency increases based on the

baseline units (described in Section 3.4). Once the baseline units are established, a costefficiency relationship will be developed. The cost-efficiency relationship requires data for two

items: values for the descriptor(s) associated with considered efficiency levels and the cost

estimates to achieve.the increased efficiency.

The efficiency levels corresponding to various design option combinations will be determined

from the information on products that are commercially available, data submitted by

manufacturers and/or engineering calculations.

Cost estimates for the engineering analysis (which are also used for the manufacturer impact

analysis, to be discussed in Section 6) will be obtained from detailed incremental manufacturer

cost data, which include the cost of the equipment components, labor, purchased parts and

material, shipping/packaging and investment. Estimates of the total cost to the consumer (to be

discussed in Section 7) include the retail price of equipment and energy and the installation and

maintenance costs. The Department will generate manufacturing cost estimates through the

use of some combination of tear-down analysis, manufacturer supplied estimates, and direct

estimates of retail prices.

In order to establish a relationship between cost and performance, several key decisions have

to be made. The Department understands that a fundamental decision is whether to use the

design option or efficiency level approach for determining efficiency levels to be studied, as

discussed in Section 5.2. Another fundamental decision concerns selecting a cost estimation

method for those efficiency levels, as discussed in Section 5.3. For example the Department

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may consider the tear-down approach.

5.2 APPROACHES TO DETERMINING EFFICIENCY IMPROVEMENTS

There are two methods for identifying the opportunities for increasing energy efficiency: the

design option approach (technology specific) and the efficiency level approach (mix of

technologies at specific efficiency levels).

5.2.1 Design Option Approach

Under the design option approach, individual design options or combinations of design options

are identified for increasing efficiency. Design option efficiency increases can either be based

on manufacturer or component supplier estimates or can be estimated through the use of

engineering computer simulation models. The incremental manufacturing costs of adding

design options to a baseline model are then established. Individual design options or

combinations of design options are added to the baseline model in order of ascending costeffectiveness. The payback period is typically determined by taking the ratio of the change in

total installed cost (compared to the baseline) to the reduced operating cost ( again , compared

to the baseline), as determined by the test procedure. The design options are then ranked, with

lower payback designs added to the baseline first. Operating costs under the full range of field

conditions are addressed later in the Life-Cycle Cost (LCC) Analysis.

The primary advantage of the design option approach is its ability to analyze individual

technologies and to combine them in sequence. The approach is transparent in that the impact

of any single technology on cost and efficiency can be explicitly established. An additional

advantage is its ability to incorporate designs whose performance has been demonstrated in

prototypes but not yet available in equipment currently on the market. Thus, maximum

technologically feasible designs are more easily established in this approach than in the

efficiency level approach.

Although individual technologies can be assessed under the design option approach, the

procedure can be complex. If individual technologies (especially prototype designs) are

combined in ways not typically utilized by manufacturers, attention must be paid to the overall

system cost and efficiency. In order to determine a technology's impact on the system

efficiency, a computer simulation model is typically employed. Since computer simulation

models exhibit at least some level of inaccuracy, time and effort must be expended to validate a

model's results under a variety of operating conditions. Simulation models may demand

detailed input balanced by the need to protect manufacturers' and component suppliers'

proprietary design strategies. Also, the equipment performance data at specified test conditions

must be acquired in order to validate a model's performance.

The design option approach must be reconciled with the manufacturing impact analysis. The

Department recognizes that the manufacturer cost information derived in a component-based

analysis should reflect the variability in baseline units, design strategies and cost structures that

can exist among manufacturers, in order to be most useful in the manufacturing impact

analysis. Therefore, for the manufacturing impact analysis, the Department may need to derive

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additional manufacturing cost estimates, using other approaches developed in consultation with

stakeholders (see Section 6).

If the design option approach is used for the engineering analysis, methods will have to be

established for determining efficiency increases. As stated above, this can be done either directly

through stakeholder input or through the use of computer simulation models. There is at least

one public domain computer model developed for the Gas Technology Institute (GTI) which

could be used to determine equipment efficiency.

The Department seeks input from stakeholders as to how efficiency impacts could be determined

under the design option approach. If computer simulation models are to be used, which specific

model should be used by the Department?

5.2.2 Efficiency Level Approach

The efficiency level approach establishes a relationship between manufacturer cost and

increased efficiency at predetermined efficiency levels. It has the initial advantage of being

simple and straightforward. During the rulemaking process, manufacturers (typically through

their trade associations) provide incremental manufacturer cost data for incremental increases

in efficiency. Cost-efficiency curves can then be constructed directly from this data. Additionally,

the efficiency level approach allows manufacturers the ability to supply detailed cost data

without revealing unique and proprietary design strategies for achieving the increased efficiency

levels.

However, the simplicity of the efficiency level approach is also its primary drawback. Namely,

since technological details are not available, it is difficult to verify whether the costs being

provided are comparable and accurately represent the specific efficiency level. In addition,

prototypical designs become difficult to evaluate and maximum technologically feasible designs

are then difficult to ascertain. For example, if two manufacturers choose markedly different

designs with significantly different costs to attain the same efficiency level, taking an average of

the costs may not accurately represent the situation. As a result, some stakeholders may prefer

to supplement the engineering analysis with additional detail which needs to be derived from

other sources in order to verify the accuracy of the data supplied through the efficiency level

approach.

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If the efficiency level approach is selected for conducting the engineering analysis,

predetermined efficiency levels will be selected by the Department based on consultations with

stakeholders. Efficiency levels will be based upon the AFUE for fuel efficiency and the EAE for

electricity use.

As discussed above, the efficiency level approach requires some verification of the data

submitted. Other approaches, such as the design option method, can be conducted in parallel

with the efficiency level approach used to verify the accuracy of its data.

The Department seeks input on what methods could be utilized to verify the data provided by

manufacturers using the efficiency level approach. The Department also seeks comments on

the appropriate ways to align the AFUE and EAE levels.

5.3 APPROACHES TO DETERMINING COST ESTIMATES

The Department strongly prefers to use a single set of cost-efficiency estimates in its analysis,

and to account for variability and uncertainty by using ranges, rather than analyzing competing

scenarios. Stakeholders are welcome to submit their own estimates in the form of a public

comment, but the Department intends to analyze the differences among independent estimates

and to synthesize them into a range along with a most likely value. The cost estimates used

should have the following characteristics:

• a level of transparency that permits validation by outside parties,

• a level of detail that permits outside parties to evaluate the design choices underlying

the analysis,

• protection of sensitive or confidential information,

• a basis of generally accepted cost and performance estimation methodologies,

• an assessable level of statistical certainty, and

• availability by the scheduled deadline.

To the extent possible, the Department will seek the involvement of outside experts, and will

include manufacturers and other stakeholders in the process.

Are there a particular cost estimating methodologies that are most appropriate for residential

furnaces/boilers? What role will manufacturers or other stakeholders be willing to play in the

development of cost estimates?

Tear-Down Analysis

The use of a component-based engineering analysis or tear-down analysis provides useful

information including the identification of potential technological paths manufacturers could use

to achieve increased equipment energy efficiency. Under tear-down analysis, "off-the-shelf"

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equipment commercially available on the market are purchased and physically analyzed, i.e.,

dismantled component -by-component to determine what technologies and designs

manufacturers currently employ to increase energy efficiency . Independent costing methods

along with manufacturer and component supplier data are then used to estimate the costs of

the components.

The tear-down analysis will be drawing on readily available data (provided directly by individual

manufacturers through a process approved by the trade organization). For the tear-down

analysis to satisfy the data requirements , the Department anticipates it will be necessary to:

1) develop a consensus methodology with stakeholders' input,

2) work with the trade organization and individual manufacturers to select a statistically

representative sample of products,

3) receive key design data from those manufacturers for the sample products,

4) undertake tear-downs and production cost analysis,

5) verify Department estimates with the individual manufacturers to whom they apply,

6) aggregate the results and present them to the trade organization for review, and

7) revise the analysis and present it to the stakeholders for review and comment.

The primary disadvantage of tear-down analysis is the time and effort required to analyze "offthe-shelf" equipment. Several models from a diverse range of manufacturers may have to be

assessed in order to ensure that an accurate representation of technological paths for

increasing efficiency are identified . In addition , since only the "off-the-shelf" equipment at hand

is being analyzed , new combinations of existing technologies or prototypical designs may not

be captured by the analysis , thus making it difficult to establish the maximum technologically

feasible designs.

Tear-down analysis is a complementary methodology to both the design option and efficiency

level approaches . It can serve as verification of costs collected for an efficiency level analysis or

provide information on design options and costs for a design option analysis.

Several different residential furnace and boiler models will need to be evaluated in order to

ensure that all representative technologies for increasing efficiency are identified.

What guidelines should the Department consider when selecting the number and types of

models to be analyzed under tear-down analysis?

5.4 ELECTRICITY USE FOR RESIDENTIAL FURNACES AND BOILERS

Electricity consumption by fuel-fired residential furnaces and boilers is substantial and is not

captured by the AFUE energy descriptor. The Department is considering ways in which the

electricity consumption of fuel-fired residential furnaces and boilers could be improved.

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The equipment efficiency descriptor, AFUE, is derived from a standard test procedure. The

test procedure does not provide an efficiency descriptor which includes the electricity used by

the equipment. However, it provides a procedure to calculate the annual electricity use.

Some equipment design options intended to improve AFUE can negatively impact electricity

use. Conversely, some design options intended to improve electricity use, can negatively

impact AFUE. The Department intends to assess the impact of design options on AFUE as

well as on the electricity used by the equipment.

Current standards for residential furnaces and boilers are based on the AFUE only. What are

the potential benefits and drawbacks of mandating a minimum fuel efficiency standard as well

as an annual electricity consumption in this rulemaking?

A logical way to regulate the electricity use of fuel-fired residential furnaces and boilers would

be to specify a maximum annual electrical consumption (EAE) that would vary by the rated

output of the equipment. The current DOE test procedure (10CFR430, Subpart B, Appendix

N) provides a means to determine AFUE and also calculates EAE. The Gas Appliance

Manufacturers' Association (GAMA) and the California Energy Commission (CEC) both list

EAE in their directories.

The Department is seeking comment on whether to regulate electricity use by fuel-fired

residential furnaces and boilers and if the proposed method is appropriate.

5.5 OTHER REGULATORY CHANGES AFFECTING THE ENGINEERING ANALYSIS

While conducting the engineering analysis, the Department will attempt to identify "outside"

regulations and issues that could impact the engineering analysis, such as building codes,

Environmental Protection agency (EPA) regulations (emission standards), and

plumbing/sewage system restriction issues.

Are there any additional "outside" issues that stakeholders are aware of that should be

considered by the Department in its analysis of residential furnaces and boilers?

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6. MANUFACTURING COSTS

Manufacturing costs are needed for the engineering analysis as well as for the manufacturer

impact analysis and are used as one means of determining retail prices. This section discusses

three considerations of manufacturing costs important to the manufacturer impact analysis,

specifically characterization of uncertainty (Section 6.1), variability among manufacturers' costs

(Section 6.2), and treatment of proprietary designs (Section 6.3).

The Department intends to ask manufacturers to participate in the development of the cost

estimates. The Department intends to develop its own cost estimates in cooperation with the

manufacturers. The Department recognizes that any cost estimates developed by using the

design option approach may need to be revised for the manufacturer impact analysis in order

to account for different design strategies.

The Department welcomes suggestions and comments concerning the development of

manufacturing cost information.

6.1 CHARACTERIZING UNCERTAINTY

DOE intends to establish a range of costs around the average manufacturing cost of

incorporating various design options (or achieving various efficiency levels).

The Department proposes that the cost estimation method be bounded by a range. For

example, manufacturers could provide their most likely point estimate and a range describing

the lowest and highest values they consider likely (for each design option or efficiency level).

Those values could be used to construct either a triangular or bounded normal distribution for

costs. Similar approaches were used during some recent rulemakings. (For example, the

design-option approach was used during the residential water heater rulemaking and the

efficiency-level approach during the residential clothes washer rulemaking.) The individual

manufacturer submittals would be aggregated by using a spreadsheet model and summaries

would be reported as percentile values. The entire cost distribution would then be used in the

calculation of life-cycle costs.

The Department seeks comment on these approaches to quantifying the uncertainty in our

manufacturing cost estimates.

6.2 VARIABILITY IN COSTS BETWEEN MANUFACTURERS

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The Department is committed to assessing the differential impacts of standards on individual

manufacturers. The detailed sub-group manufacturing impact analysis will entail calculating

cash flows separately for each class of manufacturer defined. If appropriate, manufacturer

impact analyses will be performed for individual firms.

Manufacturing costs submitted to DOE for appliance standard analyses have demonstrated a

large variability. The Department prefers using cost data from all manufacturers. The companyspecific cost information developed for the engineering analysis can also be used to perform

analysis for each manufacturer or manufacturer subgroup.

The method to be used in assessing manufacturer impacts will be discussed during an analysis

workshop to be held after publication of the ANOPR. The Department is considering use of the

Government Regulatory Impact Model (GRIM), which has been used in the rulemaking for

several other products.

The Department seeks comment on the approach of grouping the manufacturers.

6.3 PROPRIETARY DESIGNS

The Department will consider in its analysis all design options that are commercially available or

present in a working prototype, including proprietary designs. Proprietary designs will be fully

considered in the Department's engineering and economic analyses.

The Department is sensitive to manufacturer concerns regarding proprietary designs and will

ensure that provisions are made to maintain the confidentiality of any proprietary data submitted

by manufacturers. This information will provide input to the competitive impacts assessment and

other economic analyses.

Are there proprietary designs which the Department should consider for residential furnaces and

boilers? If so, what types of approaches should be used to acquire the cost data necessary for

evaluating these designs?

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7. PRICES

How standards-related manufacturing costs are passed-through from manufacturers to

consumers has an impact on both consumers and manufacturers. The consumer and

manufacturer impact analyses are linked. For this reason, retail prices used for the life-cycle

cost analysis need to be reconciled with manufacturer costs developed in the engineering

analysis.

7.1 RETAIL PRICES

At the pre-ANOPR stage, a consumer life-cycle cost analysis, based on average retail prices, is

used to perform an initial selection of potential standards levels. Retail prices are needed for the

base case, and for all efficiency levels to be considered. Several approaches are possible to

obtain these retail prices. Potential approaches include: 1) using a survey of existing prices on

the market; 2) surveying manufacturers and other market experts to predict consumer

willingness to pay higher prices; 3) applying various mark-ups to variable manufacturing costs.

The Department is considering using all of the approaches described above to, generate

estimates of future prices and to conduct uncertainty analysis of the range generated, and will

submit results to stakeholders for review.

Which of the above approaches are most appropriate for this rule? Which are the most

appropriate data sources to use? Are there any factors to consider that may distort the results?

The Department welcomes suggestions and comments concerning collection of estimates of

future retail prices.

Additionally, the Department seeks input regarding the following specific issues:

How should the Department collect accurate equipment costs and prices for residential

equipment that is not usually sold as a retail commodity? Should the Department handle

equipment pricing differently for new construction vs. retrofit since the volume purchasing for

new construction may result in lower prices to the consumers?

7.2 MANUFACTURER PRICES

Manufacturer prices are used during the industry cash flow phase of the manufacturer impact

analysis (section 13). These can be estimated by using the same techniques as retail prices,

but they can also draw directly on information provided by manufacturers or distributors or

tracked by organizations such as the U.S. Census Bureau or private market reports.

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The Department welcomes suggestions and comments concerning estimates of current and

future manufacturer prices.

7.3 INSTALLATION AND MAINTENANCE COSTS

Installation and maintenance costs together with retail prices are used in the life-cycle cost

analysis . These costs can be estimated using the same techniques used to develop retail

prices . Installation and maintenance costs can also be derived directly from information

provided by distributors or installers.

The Department welcomes suggestions and comments concerning estimates of current and

future installation and maintenance costs.

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8. LIFE-CYCLE COST AND PAYBACK ANALYSIS

The effect of standards on a purchaser of a product includes a change in the operating

expense (which usually decreases) and a change in the purchase price (which usually

increases). The net effect is analyzed by calculating the life-cycle cost using the engineering

performance data for energy consumption and equipment retail prices . Inputs to the LCC

calculation include the installed cost to the purchaser (purchase price plus installation cost),

operating expenses (energy and maintenance costs), lifetime of the appliance , and a discount

rate.

In the ANOPR stage , the life-cycle cost analysis will be conducted using typical values to reflect

conditions in the field for appliance price and life, fuel costs , energy usage and discount rates.

The detailed impact calculation , conducted after the ANOPR , will have a comprehensive

assessment of impacts on subgroups of purchasers as described in Section 12.

In analyzing residential furnace and boiler life -cycle costs , there are two possible approaches

the Department may take in estimating equipment energy consumption. One approach relies on

conditional demand analysis estimates of heating loads while the other uses simulation-based

modeling . Either approach can consider regional impacts due to climate and energy price on lifecycle cost.

Do stakeholders believe that regional variations in climate and energy price should be analyzed

at this stage (the ANOPR stage) of the analysis or at a later stage (the NOPR stage)? The

Department seeks input from stakeholders as to the reasonableness of each of the above

approaches (i.e., heating load estimation or simulation-based building analysis) for estimating

the impacts of energy price and climate on life-cycle cost.

In the ANOPR stage , uncertainty analysis will be conducted on several key variables . During

the post-ANOPR consumer analysis (Section 12), the Department will evaluate additional

parameters identified as significant.

Based on results of the life-cycle cost analysis , DOE will select candidate standard levels for

analysis . The range of candidate standard levels will typically include a combination of design

options or efficiency levels with the lowest life-cycle cost , as well as other levels yet to be

determined by the Department.

For residential furnaces and boilers , it will be necessary to determine input values for several

variables . The following discusses some of these variables.

Retail Prices : The determination of prices is described in Section 7.

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Annual Energy Use: As described above, the Department may choose to base operating and lifecycle cost either on estimates of usage patterns, or on building energy simulations developed

from data, in order to provide a reasonable estimate of the savings possible from more efficient

equipment in addition to demonstrating the variability in life-cycle costs due to climatic conditions

and energy price.

Fuel and Electricity Prices: Projections of future energy price trends for the life-cycle cost

analysis will use high and low projections of national average residential energy prices by type.

The most recent Energy Information Administration (EIA) Annual Energy Outlook will be used

as the main source of projections for this uncertainty analysis. The Department is considering

alternative methods of forecasting future energy prices including methods for determining the

marginal energy prices.

Lifetime: Industry sources indicate that the approximate average life of residential furnaces is

17-18 years, while the typical life of residential boilers is 25 years. The Department is likely to

use these as mean values with uncertainty based on stakeholder input.

Are these reasonable values for the lifetimes? What are reasonable ranges of values for the

equipment lifetimes, and do they depend on operating conditions, applications and geography?

Should the same range be used for all product classes?

Discount Rate: The calculation of consumer life-cycle costs requires the use of an appropriate

discount rate. The discount rate used in such calculations is intended to approximate the

time-value of money of those who would pay the additional equipment prices resulting from a

proposed standard and who would also, presumably, benefit from the resulting savings in energy

expenses. Consequently, the most appropriate discount rate depends on the characteristics of

the parties affected by a proposed standard. Currently the Department anticipates performing

separate analyses using a discount rate of approximately 6%, with a range from 0% to 18%,

consistent with the discount rates used in a recent residential central Air Conditioners and Heat

Pumps rulemaking analysis. The Department will consider any information that provides

evidence of purchasers' actual financing or opportunity costs related to residential furnaces and

boilers and may use a distribution of discount rates, if appropriate.

Maintenance, Service, and Installation Costs: The Department will consider expected changes

to maintenance, service, and installation costs for residential furnaces and boilers where

applicable.

For other energy-using products (e.g., water heaters or central air conditioners), the Department

has prepared spreadsheet models for calculating LCC considering uncertainty and ranges in

input variables. Although these models are specific to each product, their general structure can

be applied to residential furnaces and boilers. The past models will be presented at the

Workshop to demonstrate basic concepts pertaining to the LCC analysis.

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9. SHIPMENTS

9.1 BASE CASE SHIPMENTS FORECAST

The Department intends to develop a base case forecast of equipment shipments in the

absence of more stringent standards. This forecast will include a distribution of shipments by

efficiency level and will require an assessment of the impacts of past and existing nonregulatory efforts by manufacturers, utilities and other stakeholders. DOE intends to seek

information on the actual impacts of such initiatives to date, but may also consider any

information regarding the possible impacts that existing initiatives might have in the future.

Such information could include a demonstration of the steps that manufacturers, distribution

channels, utilities or others will take to realize such voluntary efficiency improvements.

What existing non-regulatory initiatives should DOE consider? What other approaches should

the Department consider to establish the base case shipments forecast?

The base case shipments forecast will be used as input to three subsequent analyses: the

National Impacts Analysis (Section 10); Industry Cash Flow Analysis ( Section 13); and the

Manufacturer Sub-Group Analysis (Section 13).

9.2 STANDARDS CASES SHIPMENTS FORECASTS

To perform the National Impacts Analysis, a forecast of shipment weighted efficiency of new

equipment is estimated annually to the year 2030. To assess the average impact on the

affected consumer population and the distribution of these impacts on consumer sub-groups, a

forecast of equipment shipments by efficiency level is needed for the year a new standard

would come into effect. To assess the industry cash flow, a forecast of annual equipment

shipments is needed.

For all candidate standard levels, DOE is considering the use of two approaches to conduct the

required shipment forecasts: 1) a time series regression model to derive shipments based on

an analysis of key market drivers for the particular product; and 2) an accounting model to

consider additional variables (e.g., retirement functions, price elasticities).

What other approaches should the Department consider to establish the standard cases

shipments forecast? What are the best information sources for past shipment data by

efficiency level?

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The appliance standards analysis recently conducted for residential central air conditioners and

heat pumps serves as an example of what methods can be employed to forecast the base case

shipments. Of the proposed forecasts for base case shipments, several are based on time

series data. Although time series models tend to give accurate fits to historical shipment trends,

they cannot explicitly account for changes in the number of households, changes in the percent

of households owning the appliance, fluctuations in retail price, or changes in operating

expense.

Another method used previously, termed the accounting model, based on the accounting of

new building construction and historical rates of ownership (saturation rates), is also proposed

here. Primary drawbacks of this method include: 1) saturations of units in new and stock

buildings must be forecasted, 2) building construction must also be forecasted, although the

Annual Energy Outlook (AEO) and other sources do provide readily available forecasts, and 3)

retirement of units must be based upon assumptions regarding lifetimes. However, this

simplified method has the advantage of separately accounting for units installed in new

construction and existing buildings. More importantly, product saturation rates can be

expressed as a function of consumer price and operating cost to capture their impact on future

shipments. In expressing saturation rates in this manner, consumer price and operating cost

elasticities can be developed to calibrate forecasts to historical shipments.

Since the accounting model can account for changes in consumer price and operating cost and

for possible fuel switching, the Department is considering the use of this approach, adapted to

the residential furnaces and boilers market, to estimate base case shipments forecasts.

What alternate approaches should we consider for forecasting shipments?

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10. NATIONAL IMPACTS ANALYSIS

In Section 8, the life-cycle cost and pay back for individual consumers are estimated. In this

section, a preliminary assessment of the aggregate impacts at the national level is conducted.

Measures of impact to be reported include the net present value of total consumer life-cycle

costs, national energy savings and national employment.

10.1 INPUTS TO FORECASTS

Analyzing impacts of Federal energy-efficiency standards requires a comparison of projected

U.S. energy consumption with and without new (more stringent) standards. The cases without

new standards are referred to as base case projections. The forecasts contain projections of

unit energy consumption of new equipment, annual equipment shipments and the price of

purchased equipment. The derivations of the base case shipments forecast are described in

Section 9.1 and standards case shipments forecasts are discussed in Section 9.2. Approaches

to determining retail prices are described in Section 7.1.

The base case shipments forecast developed under Section 9.1 would incorporate the likely

effects of market forces and of any non-regulatory initiatives.

10.2 CALCULATION OF ENERGY SAVINGS

The Department intends to calculate the national energy consumption for each year beginning

with the expected compliance date of the standards for each analysis scenario. National energy

consumption by fuel type will be calculated for the base case and for each candidate standard

level. This calculation may be done by one or more alternative approaches, including: 1) use of

a simple spreadsheet to multiply annual shipment forecasts by unit energy savings; or 2) use of

the Energy Information Administration's National Energy Modeling System (NEMS).

In response to requests from some stakeholders for a simple, transparent model, LBNL has

developed for DOE the National Energy Savings (NES) spreadsheets. NES provides a credible

stand-alone forecast of national energy savings and net present value for residential furnaces

and boilers.

The Department has prepared spreadsheet models for other products to forecast energy savings

and to demonstrate how the growth in efficiency can be accounted for over time. Although these

models are specific to each product, their general structure can also be applied to residential

furnaces and boilers.

10.3 NATIONAL NET PRESENT VALUE

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The national net present value of the candidate standards levels is calculated in conjunction

with the national energy consumption. Annual energy expenditures are calculated from annual

energy consumption by incorporating forecasted energy prices. The shipment and energy

efficiency distribution forecasts from Sections 9.1 and 9.2 are used. Annual equipment

expenditures are calculated from the price per unit times the forecasted shipments. The

difference between a base case and a standards case scenario represents the national energy

bill savings and the increased equipment expenditures in dollars. The difference each year

between energy bill savings and increased equipment expenditures represents the net savings

(if positive) or net costs (if negative). These annual values are discounted to the present and

aggregated to obtain the net present value result.

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11. REVISED ENGINEERING, LCC, AND IVES ANALYSIS

Based on consideration of the comments received for the ANOPR, DOE will make the

necessary changes to the analysis and candidate standards levels. If major changes are

required at this stage, stakeholders will be given an opportunity to review them.

12. CONSUMER IMPACTS

The analysis of consumer impacts will include: estimated life-cycle cost impacts on consumers

based on the national average energy prices and energy usage; assessments of life-cycle cost

impacts on subgroups of consumers based on major regional differences in usage or energy

prices and significant variations in installation costs or performance; sensitivity analyses using

high and low discount rates and high and low energy price forecasts; consideration of changes

to product utility and other impacts of likely concern to all (or some) consumers, based to the

extent practicable on direct input from consumers; and consideration of the increased first cost

to consumers and the time required for energy cost savings to pay back these first costs.

12.1 CONSUMER SUB-GROUP ANALYSIS

The Department will analyze LCC for specific subsets of the population that are likely, for one

reason or another, to be impacted disproportionately by new standards.

What, if any, consumer issues are associated with higher efficiency furnaces and boilers?

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13. MANUFACTURER IMPACT ANALYSIS

The policies outlined in the Department's "process rule" (61 Fed. Reg. 36974, July 15, 1996)

called for substantial revisions to the analytical framework to be used in performing

manufacturer impact analysis. The Department held a public workshop on March 11 and 12,

1997, to describe and obtain comment on a new generic methodology to be used in performing

future manufacturing impact analyses of products covered under the NAECA. The Department

intends to apply this methodology to other EPCA-related efficiency standards as well, tailoring

the methodology for each rule on the basis of stakeholder comments.

13.1 SOURCES OF INFORMATION FOR THE MANUFACTURER IMPACT ANALYSIS

Prior analysis described earlier serves as the basis for much of the manufacturer impact

analysis. Information includes financial parameters (Section 3.1), manufacturing costs (Section

6.0), shipments forecasts (Section 9.0), and price forecasts (Section 7.0). This information is

supplemented with information gathered during interviews with manufacturers. The interview

process has a key role in the manufacturer impact analyses, since it provides an opportunity for

interested parties to privately express their views on important issues, allowing confidential or

sensitive information to be considered in the rulemaking decision.

The Department or its contractors will conduct detailed interviews with as many manufacturers

as is necessary to gain insight into the range of potential impacts of standards. During the

interviews, the Department solicits information on the possible impacts of potential efficiency

levels on manufacturing costs, equipment prices, sales, direct employment, capital assets, and

industry competitiveness. Both qualitative and quantitative information is valuable. Interviews

will be scheduled well in advance in order to provide every opportunity for key individuals to be

available for comment. Although a written response to the questionnaire is acceptable, an

interactive interview process is preferred because it helps clarify responses and provides the

opportunity for additional issues to be identified.

Interview participants will be requested to identify all confidential information provided in writing

or orally. All information transmitted will be considered, as appropriate, in DOE's decisionmaking process. However, confidential information will not be made available in the public

record. Participants will also be asked to identify all information they wish included in the public

record but that they do not want to have associated with their interview. This information will be

incorporated into the public record but reported without attribution.

DOE will collate the completed interview questionnaires and prepare a summary of the major

issues and outcomes. The Department will seek comment on the outcome of the interview

process.

13.2 INDUSTRY CASH FLOW ANALYSIS

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The Industry Cash Flow Analysis relies primarily upon the GRIM. The Department uses the

GRIM to analyze the financial impacts of more stringent energy efficiency standards on the

industry that produces the products covered by the standard.

The GRIM analysis uses a number of factors -- annual expected revenues; manufacturer costs

such as costs of sales, selling and general administration costs; taxes; and capital expenditures

related to depreciation, new standards, and maintenance -- to arrive at a series of annual cash

flows beginning from the announcement of the new standard and continuing for several years

after implementation. The results are compared against baseline projections that involve no

new standards. The financial impact of new standards is then the difference between the two

sets of discounted annual cash flows. Other performance metrics such as return on invested

capital are also available from the GRIM.

For discussion purposes, the Department will prepare a list of default financial values to be used

in the GRIM industry analysis. These will be calculated by studying publicly available financial

statements of furnace and boiler manufacturers, if available, or statements of companies in

similar industries.

13.3 MANUFACTURER SUB-GROUP ANALYSIS

Using industry "average" cost values is not adequate for assessing differential impacts among

sub-groups of manufacturers. Smaller manufacturers, niche players, or manufacturers

exhibiting a cost structure that differs largely from the industry average could be more

negatively impacted. Ideally, the Department would consider the impact on every firm

individually. In highly concentrated industries this may be possible. In industries having

numerous participants, the Department uses the results of the industry characterization to

group manufacturers exhibiting similar characteristics.

What procedures should we follow when scheduling interviews and requesting information? Is

there any value in grouping manufacturers into sub-groups? More generally, what would a well

executed sub-group analysis entail?

13.4 COMPETITIVE IMPACTS ASSESSMENT

Legislation directs the Department to consider any lessening of competition that is likely to

result from standards above the current minimum efficiency standards. It further directs the

Attorney General to gauge the impacts, if any, of any lessening of competition. DOE will make

a determined effort to gather and report firm-specific financial information and impacts. The

competitive analysis will focus on assessing the impacts to smaller, yet significant,

manufacturers. The assessment will be based on manufacturing cost data and on information

collected from interviews with manufacturers. The manufacturer interviews will focus on

gathering information that would help in assessing asymmetrical cost increases to some

manufacturers, increased proportion of fixed costs potentially increasing business risks, and

potential barriers to market entry (proprietary technologies, etc.)

13.5 CUMULATIVE REGULATORY BURDEN

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The Department will recognize and seek to mitigate the overlapping effects on manufacturers of

new or revised DOE standards and other regulatory actions affecting the same equipment or

companies.

The Department is aware that regulations that affect the manufacturers of residential air

conditioners and heat pump, such as the increase in the efficiency standards for residential

water heaters and residential unitary air conditioners and heat pumps, also affect this industry.

Are there any other regulations or pending regulations that the Department should consider?

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14. UTILITY IMPACTS

To perform the Utility Impacts Analysis, which would include an analysis of the electric and gas

utility industry, the Department is considering using the ETA's NEMS. NEMS is a large multisectoral partial equilibrium model of the U.S. energy sector that has been developed over

several years by the EIA primarily for the purpose of preparing the Annual Energy Outlook

(AEO). NEMS produces a widely recognized baseline forecast for the United States through

2030 and is available in the public domain. Outputs of the utility analysis can parallel results that

appear in the latest AEO, with some additions. Typical output includes forecasts of sales, price,

and avoided capacity. The entire utility analysis can be conducted as a policy deviation from the

latest AEO, and the assumptions in place there can serve as the basic set of assumptions

applied.

Should we consider using alternative methods to NEMS for conducting the utility impacts

analysis?

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15. ENVIRONMENTAL ANALYSIS

The standards analysis tracks three types of energy- related emissions : sulfur dioxide (SO2),

nitrous oxides (NOx) and carbon dioxide (C02). These emissions are calculated based on

conversion factors developed by EIA for translating natural gas and oil savings into emission

reductions.

To perform the Environmental Analysis, the Department will use EIA's NEMS. Outputs of the

environmental analysis will mostly parallel results that appear in the latest AEO, with some

additions. The entire environmental analysis can be conducted as a policy deviation from the

latest AEO, and the assumptions in place there can be the basic set of assumptions applied.

For example, the operating characteristics (energy conversion efficiency, emissions rates, etc.)

of future electricity generating plants can be exactly those used in the latest AEO.

Carbon emissions are tracked in NEMS by a detailed carbon module which has broad coverage

of all sectors and inclusion of interactive effects. NEMS also includes a module for SO2

allowance trading and delivers a forecast of SO2 allowance prices. It is important to note,

however, that accurate simulation of SO2 trading tends to imply that the physical emissions

effects will be zero. This fact has caused confusion in the past, and, in prior energy efficiency

standards analyses, a simple emission reduction has been reported with the caveat that

emissions trading implies that this reduction is unlikely to be realized. However, there is an SO2

benefit from conservation in the form of a lower allowance price, and if it is significant enough to

be calculable by NEMS, this value can be reported. NEMS also includes an algorithm for

estimating the NOx emissions from power generation, but as for SO2, this is somewhat

inadequate because it does not estimate in-building emissions. Separate in-building NOX and

SO2 emissions will be estimated based on simple emissions factors derived from general

literature.

The results for the environmental analysis can be reported in the form of a complete NEMS run.

In general, NEMS outputs become the tables of an AEO, and these should provide a good idea

of the range of results available. NEMS output lists NOx and carbon emissions and a resulting

SO2 trading price and SO2 impact from oil-fired furnaces and boilers.

Are there any other environmental factors the Department should consider? If so,

what additional analytical methods are appropriate for addressing them?

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16. EMPLOYMENT IMPACTS

Both direct and indirect impacts on employment are possible from standards . Direct

employment impacts would result if standards led to a change in the number of employees at

the plants that produce the covered product , along with the affiliated distribution and service

companies . The Department will estimate the direct employment impacts in the manufacturer

sub-group analysis described in Section 13 . In addition , the Department will estimate the

combined direct and indirect (net national) impacts on employment for product manufacturers,

relevant service industries , energy suppliers, and the economy in general. Indirect impacts may

result both from expenditures shifting among goods (substitution effect), and from changing

equipment and operating costs , which will lead to a change in overall expenditure levels

(income effect). The Net National Employment Impacts analysis will capture both direct and

indirect impacts by estimating the national job creation (or elimination ) from possible standards,

resulting from reallocation of the associated consumer expenditures for purchasing and

operating appliances . The Department will examine and review alternative methods or models

to assess employment impacts.

Do the above methods seem adequate for estimating both direct and indirect employment

impacts? If not, what other methods or models should be used to assess employment impacts?

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