2

- i CHAPTER 2. ANALYTICAL FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION

................................................................................................................. 2-1

2.2 MARKET AND TECHNOLOGY ASSESSMENT

........................................................... 2-5

2.2.1 Market Assessment

............................................................................................................... 2-5

2.2.2 Technology Assessment

....................................................................................................... 2-5

2 .3 SCREENING ANALYSIS

................................................................................................... 2-5

2.4 ENGINEERING ANALYSIS

.............................................................................................. 2-6

2.5 MARKUPS ANALYSIS

...................................................................................................... 2-7

2 .6 ENERGY USE ANALYSIS

................................................................................................ .2-7

2.7 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

........................................ 2-8

2 .8 SHIPMENTS ANALYSIS

................................................................................................... 2-9

2.9 NATIONAL IMPACT ANALYSIS

.................................................................................... 2-9

2.9.1 National Energy Savings

................................................................................................... 2- 10

2.9.2 Net Present Value of Consumer Benefit

........................................................................... 2- 10

2.10 CONSUMER SUBGROUP ANALYSIS

......................................................................... 2- 11

2.11 MANUFACTURER IMPACT ANALYSIS

.................................................................... 2- 11

2.12 EMPLOYMENT IMPACT ANALYSIS

.......................................................................... 2- 11

2.13 UTILITY IMPACT ANALYSIS

...................................................................................... 2- 12

2.14 ENVIRONMENTAL ASSESSMENT

............................................................................. 2- 12

2.14.1 Carbon Dioxide

.................................................................................................................. 2- 13

2.14.2 Sulfur Dioxide

.................................................................................................................... 2- 13

2.14.3 Nitrogen Oxides

................................................................................................................. 2- 14

2.14.4 Mercury

............................................................................................................................... 2- 14

2.14.5 Particulate Matter

............................................................................................................... 2- 14

2.15 MONETIZING CARBON DIOXIDE AND OTHER EMISSIONS

REDUCTIONS

................................................................................................................... 2- 15

2.16 REGULATORY IMPACT ANALYSIS

.......................................................................... 2- 16

LIST OF FIGURES

Figure 2.1.1 Flow Diagram of Analyses for the Rulemaking Process

....................................... 2-22-1 CHAPTER 2. ANALYTICAL FRAMEWORK

2.1 INTRODUCTION

Section 6295(o)(2)(A) of 42 U.S.C. requires the U.S. Department of Energy (DOE) to set forth energy conservation standards that are technologically feasible and economically justified and would result in significant additional energy conservation. This chapter provides a description of the general analytical framework that DOE uses in developing such standards, in particular, standards for residential clothes dryers and room air conditioners (“the considered products”). The analytical framework is a description of the methodology, the analytical tools, and relationships among the various analyses that are part of this rulemaking. For example, the methodology that addresses the statutory requirement for economic justification includes analyses of life-cycle cost (LCC); economic impact on manufacturers and users; national benefits; impacts, if any, on utility companies; and impacts, if any, from lessening competition among manufacturers.

Figure 2.1.1 summarizes the analytical components of the standards-setting process. The focus of this figure is the center column, identified as “Analyses.” The columns labeled “Key Inputs” and “Key Outputs” show how the analyses fit into the rulemaking process, and how the analyses relate to each other. Key inputs are the types of data and information that the analyses require. Some key inputs exist in public databases; DOE collects other inputs from stakeholders or persons with special knowledge. Key outputs are analytical results that feed directly into the standards-setting process. Dotted lines connecting analyses show types of information that feed from one analysis to another.2-2

Figure 2.1.1 Flow Diagram of Analyses for the Rulemaking Process Utility Impact Analysis

Notice of Proposed Rulemaking (NOPR)

Final Rule Approaches Key Inputs Analyses Key Outputs

Market and Technology
Assessment

Screening Analysis

Engineering Analysis

Product Price
Determination Life

- Cycle Cost and Payback Period Analyses

National Impact Analysis Energy Use

Revise Preliminary Analyses

Life

- Cycle Cost
Sub

- Group Analysis

Manufacturer Impact Analysis Shipments Analysis

Employment Impact Analysis

Revise Analyses • Product Classes

• Technology Options

• Industry Cash Flow

• Sub

- Group Cash

- Flow

• Direct Employment Impacts

• Competitive Impacts

• Cumulative Regulatory Burden • Product Designs

• Life

- Cycle Costs

• Payback Periods

• National Energy Savings

• Net Present Values

• National Employment Impacts

• Revised Results • Characterize Industry

• Market Segmentation

• Non

- Regulatory Programs Framework Document

• Efficiency

- Level Approach

• Design Option Approach

• Energy Prices

• Installation Costs

• Maintenance & Repair Costs

• Accounting Approach

• Backcast and Forecast

• Market Saturation

• Stakeholder Comments

• Demographics

• Manufacturer Interviews

• GRIM Analysis

• Emission Rates

• National Energy Savings

• Stakeholder Comments • Identify Firms/Products

• Historical Shipments

• Retail Price Collection and Analysis

• Manufacturer Prices

• Average Costs

• Manufacturer Financial Data Design Options Product Classes

Retail

Prices Design Energy/ Use

Advance Notice of Proposed Rulemaking (ANO) • Efficiency/Performance • Commercial Products

Candidate Standard Levels • Analysis of Energy Use

Data

Environmental
Assessment

Regulatory Impact Analysis Technology Options

• Emission Estimates • Utility Load Factors

• National Energy Savings

• Non

- Regulatory
Alternatives • NEMS

- BT

• ImSET

• NEMS

- BT • Design Options

• Energy Price Forecasts

• Site

- to

- Source Factors • Energy

- Efficiency Levels

Direct Employment Impacts

• National Energy Savings

• National Product Costs

• National Operating Costs • Utility Impacts • Analysis of Market Data

• Analysis of Product Data

• Life

- Cycle Costs

• Payback Periods • Installation Costs

• Maint Costs

• Repair Costs • UEC

• Energy Prices Annual Energy Use (UEC)

Preliminary Manufacturer Impact Analysis • Manufacturer Prices

• Average Costs • Conversion Capital Expenditures

• Direct Employment Impacts

• National Energy Savings

• Net Present Values • Trial Standard Levels ( TSLs )

TSLs • Product Prototypes

Energy

- Efficiency

Levels

• Department of Justice Review Product Designs

Utility Impact Analysis

Notice of Proposed Rulemaking (NOPR)

Final Rule Approaches Key Inputs Analyses Key Outputs

Market and Technology
Assessment

Screening Analysis

Engineering Analysis

Product Price
Determination Life

- Cycle Cost and Payback Period Analyses

National Impact Analysis Energy Use

Analyses

Life

- Cycle Cost
Sub

- Group Analysis

Manufacturer Impact Analysis Shipments Analysis

Employment Impact Analysis

Revise Analyses • Product Classes

• Technology Options

• Industry Cash Flow

• Sub

- Group Cash

- Flow

• Direct Employment Impacts

• Competitive Impacts

• Cumulative Regulatory Burden • Product Designs

• Life

- Cycle Costs

• Payback Periods

• National Energy Savings

• Net Present Values

• National Employment Impacts

• Revised Results • Characterize Industry

• Market Segmentation

• Non

- Regulatory Programs Framework Document

• Efficiency

- Level Approach

• Design Option Approach

• Energy Prices

• Installation Costs

• Maintenance & Repair Costs

• Accounting Approach

• Backcast and Forecast

• Market Saturation

• Stakeholder Comments

• Demographics

• Manufacturer Interviews

• GRIM Analysis

• Emission Rates

• National Energy Savings

• Stakeholder Comments • Identify Firms/Products

• Historical Shipments

• Retail Price Collection and Analysis

• Manufacturer Prices

• Average Costs

• Manufacturer Financial Data Design Options Product Classes

Retail

Prices Design Energy/ Use

Publication of Preliminary Analyses • Efficiency/Performance • Commercial Products

Candidate Standard Levels • Analysis of Energy Use

Data

Environmental
Assessment

Regulatory Impact Analysis Technology Options

• Emission Estimates • Utility Load Factors

• National Energy Savings

• Non

- Regulatory
Alternatives • NEMS

- BT

• ImSET

• NEMS

- BT • Design Options

• Energy Price Forecasts

• Site

- to

- Source Factors • Energy

- Efficiency Levels

Direct Employment Impacts

• National Energy Savings

• National Product Costs

• National Operating Costs • Utility Impacts • Analysis of Market Data

• Analysis of Product Data

• Life

- Cycle Costs

• Payback Periods • Installation Costs

• Maint Costs

• Repair Costs • UEC

• Energy Prices Annual Energy Use (UEC)

Preliminary Manufacturer Impact Analysis • Manufacturer Prices

• Average Costs • Conversion Capital Expenditures

• Direct Employment Impacts

• National Energy Savings

• Net Present Values • Trial Standard Levels ( TSLs )

TSLs • Product Prototypes

Energy

- Efficiency

Levels

• Department of Justice Review Product Designs2-3

The analyses performed as part of the preliminary analysis stage and reported in the preliminary technical support document (preliminary TSD) include:

• A market and technology assessment to characterize the relevant product markets and existing technology options, including prototype designs.

• A screening analysis to review each technology option to decide whether it is technologically feasible; is practicable to manufacture, install, and service; would adversely affect product utility or product availability; or would have adverse impacts on health and safety.

• An engineering analysis to develop cost-efficiency relationships, which indicate the manufacturer’s cost of achieving increased efficiency

.

A markups analysis to develop distribution channel markups that relate the manufacturer production cost (MPC) to the cost to the consumer.

An analysis of the annual energy and water use of the considered products.

LCC and payback period (PBP) analyses to calculate, at the consumer level, the discounted savings in operating costs (minus maintenance and repair costs) throughout the estimated average lifetime of the covered products, compared to any increase in purchase and installation cost likely to result directly from imposition of a given standard.

A shipments analysis to forecast shipments of residential clothes dryers and room air conditioners, which are then used to calculate the national impacts of standards on energy, net present value (NPV), and future manufacturer cash flows.

A national impact analysis (NIA) to assess aggregate impacts at the national level of potential energy conservation standards for the considered products, as measured by the NPV of total consumer economic impacts and the national energy savings (NES).

A preliminary manufacturer impact analysis to assess the potential impacts of energy conservation standards on manufacturers’ capital conversion expenditures, marketing costs, shipments, and research and development costs.

In this direct final rule, DOE presents the results of the above analyses, incorporating revisions to the analyses based on comments and new information received. DOE also presents results of the following additional analyses in the direct final rule:

An LCC subgroup analysis to evaluate variations in consumer characteristics that might cause a standard to affect particular consumer subpopulations, such as low-income households, differently than the overall population.2-4

A manufacturer impact analysis to estimate the financial impact of standards on manufacturers and to calculate impacts on competition, employment, and manufacturing capacity.

A utility impact analysis to estimate the effects of potential standards on electric, gas, or

oil utilities.

An employment impact analysis to assess the aggregate impacts on national employment.

An environmental impact analysis to estimate the effects of amended standards on emissions of carbon dioxide (CO 2 ), sulfur dioxide (SO 2 ), nitrogen oxides (NO X ), and mercury (Hg).

A regulatory impact analysis to examine major alternatives to amended energy conservation standards that potentially could achieve substantially the same regulatory goal at a lower cost.

DOE developed this analytical framework and documented its findings in the Energy Conservation Standards Rulemaking Framework Document for Residential Clothes Dryers and

Room Air Conditioners (the framework document). DOE announced the availability of the framework document in a Notice of Public Meeting and Availability of a Framework Document published in the Federal Register on October 9, 2007. 72 FR 57254. DOE presented the analytical approach to interested parties during a public meeting held on October 24, 2007. The

framework document is available at http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/dryer_roomac_fram ework.pdf

In response to the publication of the framework document and the framework public meeting, DOE received numerous comments from interested parties regarding DOE’s analytical approach. DOE published the preliminary analysis on February 23, 2010 (75 FR 7987), addressing key comments received from interested parties. DOE subsequently held a public meeting on March 16, 2010, to present the preliminary analysis and to seek public comment. The preliminary analysis and preliminary TSD are available at: http://www1.eere.energy.gov/buildings/appliance_standards/residential/preliminary_analysis.htm

l

.

This final rule TSD contains details of the final analyses conducted for residential clothes dryers and room air conditioners.2-5

2.2 MARKET AND TECHNOLOGY ASSESSMENT

The market and technology assessment characterizes the relevant product markets and existing technology options, including prototype designs, for the considered products.

2.2.1 Market Assessment

When initiating a standards rulemaking, DOE develops information on the present and past industry structure and market characteristics for the products concerned. This activity assesses the industry and products, both quantitatively and qualitatively, based on publicly available information. As such, for the considered products, DOE addressed the following: (1) manufacturer market share and characteristics; (2) existing regulatory and non-regulatory product efficiency improvement initiatives; and (3) trends in product characteristics and retail markets. This information serves as resource material throughout the rulemaking.

DOE reviewed existing literature and interviewed manufacturers to get an overall picture of the markets for the considered products in the United States. Industry publications and trade journals, government agencies, and trade organizations provided the bulk of the information, including information on: (1) manufacturers and their market share; (2) shipments by capacity; and (3) market saturation. The appropriate sections of this TSD describe the resulting information as DOE used it in the analysis.

DOE has used the most reliable and accurate data available at the time of each analysis in this rulemaking. All data are available for public review.

2.2.2 Technology Assessment

DOE typically uses information relating to existing and past technology options and prototype designs as inputs to determine what technologies manufacturers use to attain higher performance levels. In consultation with stakeholders

, DOE develops a list of technologies for consideration. Initially, these technologies encompass all those it believes are technologically

feasible.

DOE developed its list of technologically feasible design options for the considered products through consultation with manufacturers of components and systems, and from trade publications and technical papers. Since many options for improving product efficiency are available in existing units, product literature and direct examination provided additional

information.

2.3 SCREENING ANALYSIS

The screening analysis examines various technologies as to whether they: (1) are technologically feasible; (2) are practicable to manufacture, install, and service; (3) have an2-6

adverse impact on product utility or availability; and (4) have adverse impacts on health andsafety. As described in section 2.3.2 above, DOE develops an initial list of efficiencyenhancement options from the technologies identified as technologically feasible in the technology assessment. Then DOE, in consultation with interested parties, reviews the list to determine if these options are practicable to manufacture, install, and service, would adversely affect product utility or availability, or would have adverse impacts on health and safety. In addition, DOE removed from the list technology options that lack energy consumption data as well as technology options whose energy consumption could not be adequately measured by existing DOE test procedures. In the engineering analysis, DOE further considers efficiency enhancement options that it did not screen out in the screening analysis.

2.4 ENGINEERING ANALYSIS

The engineering analysis (chapter 5 of the final rule TSD) establishes the relationship between the manufacturing production cost and the efficiency for each class of residential clothes dryers and room air conditioners. This relationship serves as the basis for cost/benefit calculations in terms of individual consumers, manufacturers, and the nation. Chapter 5 discusses the product classes DOE analyzed, the representative baseline units, the incremental efficiencylevels, the methodology DOE used to develop the manufacturing production costs, the costefficiency curves, the impact of efficiency improvements on the considered products, and the methodology DOE used to extend the analysis to low-shipment-volume product classes.

In the engineering analysis, DOE evaluates a range of product efficiency levels and their associated manufacturing costs. The purpose of the analysis is to estimate the incremental MPCs for a product that would result from increasing efficiency levels above the level of the baseline model in each product class. The engineering analysis considers technologies not eliminated in the screening analysis, although certain technologies were not analyzed due to negligible incremental efficiency improvements or the inability of the existing DOE test procedures to measure any reduction in energy use. DOE considers the remaining technologies, designated as design options, in developing the cost-efficiency curves, which are subsequently used for the LCC and PBP analyses.

DOE typically structures its engineering analysis around one of three methodologies: (1) the design-option approach, which calculates the incremental costs of adding specific design options to a baseline model; (2) the efficiency-level approach, which calculates the relative costs of achieving increases in energy efficiency levels without regard to the particular design options used to achieve such increases; and/or (3) the reverse-engineering or cost-assessment approach, which involves a “bottom-up” manufacturing cost assessment based on a detailed bill of materials derived from tear-downs of the product being analyzed.

In the framework document, DOE proposed to use the design-option approach for residential clothes dryers and the efficiency-level approach room air conditioners, combining each with the cost-assessment approach to develop a cost for each efficiency level. This2-7

approach involved physically disassembling commercially available products, consulting with outside experts, reviewing publicly available cost and performance information, and modeling equipment cost. DOE determined in the preliminary analysis that the efficiency-level approach was more appropriate for clothes dryers, and used this approach for the clothes dryer engineering final rule analysis. The efficiency levels that DOE considered in the engineering analysis are attainable using technologies currently available on the market in residential clothes dryers and room air conditioners, or have been demonstrated in working prototypes. In addition, DOE associated each efficiency level with specific technologies that manufacturers might use to provide interested parties with additional transparency of assumptions and results and the ability to perform independent analyses for verification. Chapter 5 of th is TSD describes the methodology and results of the efficiency level analysis used to derive the cost-efficiency relationships.

2.5 MARKUPS ANALYSIS

DOE used markups to convert the manufacturer costs estimated in the engineering analysis to consumer prices, which then were used in the LCC and PBP and manufacturer impact analyses. DOE calculates markups for baseline products (baseline markups) and for more efficient products (incremental markups). The incremental markup relates the change in the manufacturer sales price of higher-efficiency models (the incremental cost increase) to the change in the retailer or distributor sales price.

To develop markups, DOE identifies how the products are distributed from the manufacturer to the customer. After establishing appropriate distribution channels, DOE relied on economic data from the U.S. Census Bureau and other sources to define how prices are marked up as the products pass from the manufacturer to the customer. See chapter 6 of this TSD for details on the development of markups.

2.6 ENERGY USE ANALYSIS

The energy use analysis, which assesses the energy savings potential from higher efficiency levels, provides the basis for the energy savings values used in the LCC and subsequent analyses. The goal of the energy use analysis is to generate a range of energy use values that reflects actual product use in American homes. The analysis uses information on use of actual products in the field to estimate the energy that would be used by new products at various efficiency levels.

Measurements of field energy use often vary considerably from the rated usage as determined by the DOE test procedure. To determine the field energy use by products that would meet possible energy efficiency standards, DOE used data from the 2005 RECS

. 1 RECS is a national sample survey of housing units that collects statistical information on the consumption of and expenditures for energy in housing units along with data on energy-related characteristics2-8

of the housing units and occupants. DOE developed separate samples for homes that used residential clothes dryers and room air conditioners, and then developed sub-samples for each considered product class. For room air conditioners, DOE used climate data specific to each sample household to apportion annual electricity use for room air conditioner operation among the months in the year. Chapter 7 of th is TSD provides more detail about DOE’s approach for characterizing energy use of clothes dryers and room air conditioners.

2.7 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

New energy conservation standards affect products’ operating expenses—usually decreasing them—and consumer prices for the products—usually increasing them. DOE analyzes the effect of amended standards on consumers by evaluating changes in the LCC of owning and operating the product. To evaluate the change in LCC, DOE used the cost-efficiency relationship derived in the engineering analysis, along with the energy costs derived from the energy use characterization. Inputs to the LCC calculation include the installed cost of a product to the consumer (consumer purchase price plus installation cost), operating expenses (energy expenses and maintenance costs), the lifetime of the unit, and a discount rate.

Because the installed cost of a product typically increases while operating cost typicallydecreases in response to new standards, there is a time in the life of products having higher-thanbaseline efficiency when the net operating-cost benefit (in dollars) since the time of purchase is equal to the incremental first cost of purchasing the higher-efficiency product. The length of time required for products to reach this cost-equivalence point is known as the payback period (PBP).

Recognizing that several inputs to the determination of consumer LCC and PBP are either variable or uncertain, DOE conducted the LCC and PBP analysis by modeling both the uncertainty and variability in the inputs using Monte Carlo simulation and probability

distributions. DOE developed LCC and PBP spreadsheet mod els incorporating both Monte Carlo simulation and probability distributions by using Microsoft Excel spreadsheets combined with Crystal Ball (a commercially available add

- in program).

As described above in section 2.6

, DOE developed samples of individual households or commercial enterprises that use residential clothes dryers and room air conditioners. By developing such samples, DOE was able to perform the LCC and PBP calculations for each household to account for the variability in energy consumption and electricity price associated with actual users of the considered products. DOE identified several other input values for estimating the LCC, including retail prices, discount rates, and product lifetime. DOE characterized discount rates and product lifetime with probability distributions.

DOE developed discount rates separately for residential consumers and commercial customers. Because some room air conditioners are used in commercial applications, DOE developed commercial discount rates for those commercial subsectors that purchase room air conditioners. DOE developed discount rates from estimates of the interest rate, or finance cost,2-9

applied to purchases of residential and commercial products. Following accepted principles of financial theory, the finance cost of raising funds to purchase such products can be interpreted as: (1) the financial cost of any debt incurred to purchase products, principally interest charges on debt; or (2) the opportunity cost of any equity used to purchase products, principally interest earnings on household equity.

DOE considered installation, maintenance and repair costs for the efficiency levels considered in this rulemaking. Typically, small incremental changes in energy efficiency produce no, or only minor, changes in repair and maintenance costs over baseline efficiency products. Products having efficiencies that are significantly greater than baseline models can incur increased repair and maintenance costs, as they are more likely to incorporate technologies that are new to the industry.

2.8 SHIPMENTS ANALYSIS

Forecasts of product shipments are needed to calculate the national impacts of standards on energy use, NPV, and future manufacturer cash flows. DOE developed shipment forecasts based on an analysis of key market drivers for each considered product. In DOE’s shipments model, shipments of products are driven by new construction, stock replacements, and other types of purchases.

The shipments models take an accounting approach, tracking market shares of each product class and the vintage of units in the existing stock. Stock accounting uses product shipments as inputs to estimate the age distribution of in-service product stocks for all years. The age distribution of in-service product stocks is a key input to calculations of both the NES and NPV, because operating costs for any year depend on the age distribution of the stock.

DOE also considers the impacts on shipments from changes in product purchase price and operating cost associated with higher energy efficiency levels. Chapter 9 of this TSD provides additional details on the shipments analysis.

2.9 NATIONAL IMPACT ANALYSIS

The national impact analysis assesses the aggregate impacts at the national level of potential energy conservation standards for each of the considered products, as measured by the NPV of total consumer economic impacts and the NES. DOE determined the NPV and NES for the efficiency levels considered for each of the product classes analyzed. To make the analysis more accessible and transparent to all interested parties, DOE prepared a Microsoft Excel spreadsheet model to forecast NES and the national consumer economic costs and savings resulting from new standards. The spreadsheet model uses typical values as inputs (as opposed to2-10

probability distributions). To assess the effect of input uncertainty on NES and NPV results, DOE may conduct sensitivity analyses by running scenarios on specific input variables. Chapter 10 of this TSD provides additional details regarding the national impact analysis.

Several of the inputs for determining NES and NPV depend on the forecast trends in product energy efficiency. For the base case (which presumes no revised standards), DOE uses the efficiency distributions developed for the LCC analysis, and assumes some rate of change over the forecast period. In this analysis, DOE has used a roll-up scenario in developing its forecasts of efficiency trends after standards take effect. Under a roll-up scenario, all products that perform at levels below a prospective standard are moved, or rolled-up, to the minimum performance level allowed under the standard. Product efficiencies above the standard level

under consideration would remain the same as before the revised standard takes effect.

2.9.1 National Energy Savings

The inputs for determining the NES for each product analyzed are: (1) annual energy consumption per unit; (2) shipments; (3) product stock; (4) national energy consumption; and (5)

site- to -source conversion factors. DOE calculated the national energy consumption by multiplying the number of units, or stock, of each product (by vintage, or age) by the unit energy consumption (also by vintage). DOE calculated annual NES based on the difference in national energy consumption for the base case (without new efficiency standards) and for each higher efficiency standard. DOE estimated energy consumption and savings based on site energy, and converted the electricity consumption and savings to source primary) energy. Cumulative energy savings are the sum of the NES for each year.

2.9.2 Net Present Value of Consumer Benefit

The inputs for determining NPV of the total costs and benefits experienced by consumers of the considered appliances are: (1) total annual installed cost; (2) total annual savings in operating costs; (3) a discount factor; (4) present value of costs; and (5) present value of savings. DOE calculated net savings each year as the difference between the base case and each standards case in total savings in operating costs and total increases in installed costs. DOE calculated savings over the life of each product. NPV is the difference between the present value of operating cost savings and the present value of total installed costs. DOE used a discount factor based on real discount rates of 3% and 7% to discount future costs and savings to present values.

DOE calculated increases in total installed costs as the product of the difference in total installed cost between the base case and standards case ( i.e ., once the standards take effect). Because the more efficient products bought in the standards case usually cost more than products bought in the base case, cost increases appear as negative values in the NPV.

DOE expressed savings in operating costs as decreases associated with the lower energy consumption of products bought in the standards case compared to the base efficiency case.2-11

Total savings in operating costs are the product of savings per unit and the number of units of each vintage that survive in a given year.

2.10 CONSUMER SUBGROUP ANALYSIS

The consumer subgroup analysis evaluates economic impacts on selected groups of consumers who might be adversely affected by a change in the national energy conservation standards for the considered products. DOE evaluates impacts on particular subgroups of consumers primarily by analyzing the LCC impacts and PBP for those particular consumers using the LCC spreadsheet model.

For this rulemaking, DOE analyzed as subgroups: (1) low-income households; (2) households solely occupied by senior citizens.

2.11 MANUFACTURER IMPACT ANALYSIS

The MIA assesses the impacts of new energy conservation standards on manufacturers of the considered products. Potential impacts include financial effects, both quantitative and qualitative, that might lead to changes in the manufacturing practices for these products

. DOE identified these potential impacts through interviews with manufacturers and other interested parties.

DOE conduct ed

the MIA in three phases, and further tailor ed the analytical framework based on interested parties’ comments. In Phase I, an industry profile was created to characterize the industry, and a preliminary MIA was conducted to identify important issues that required consideration. In Phase II, an industry cash flow model and an interview questionnaire were prepared to guide subsequent discussions. In Phase III, manufacturers were interviewed, and the impacts of standards were assessed both quantitatively and qualitatively. Industry and subgroup cash flow and NPV were assessed through use of the Government Regulatory Impact Model (GRIM). Then impacts on competition, manufacturing capacity, employment, and cumulative regulatory burden were assessed based on manufacturer interview feedback and discussions. DOE discusses its findings from the MIA in chapter 12 of the final rule TSD.

2.12 EMPLOYMENT IMPACT ANALYSIS

New or amended energy conservation standards can impact employment both directl y and indirectly. Direct employment impacts are changes in the number of employees at the plants2-12

that produce the covered products

, and at the affiliated distribution and service companies, resulting from the adoption of new standards. DOE evaluated direct employment impacts in the MIA. Indirect employment impacts may result from expenditures shifting between goods (the substitution effect) and changes in income and overall expenditure levels (the income effect) that occur due to the adoption of standards.

DOE investigated the combined direct and indirect employment impacts of standards using the Pacific Northwest National Laboratory (PNNL)’s “Impact of Sector Energy Technologies” (ImSET) model. The ImSET model, which was developed for DOE’s Office o f Planning, Budget, and Analysis, estimates the employment and income effects energy-saving technologies produced in buildings, industry, and transportation. In comparison with simple economic multiplier approaches, ImSET allows for more complete and automated analysis of the economic impacts of energy conservation investments.

2.13 UTILITY IMPACT ANALYSIS

The utility impact analysis estimates the effects of amended energy conservation standards on installed electricity generation capacity and electricity generation. For this analysis, DOE adapted NEMS, which is a large multi-sectoral, partial-equilibrium model of the U.S. energy sector that the EIA has developed throughout the past decade, primarily for preparing

EIA’s AEO . In previous rulemakings, a variant of NEMS (currently termed NEMS-BT, BT referring to DOE’s Building Technologies Program), was developed to better address the specific impacts of an energy conservation standard. NEMS, which is available in the public domain, produces a widely recognized baseline energy forecast for the United States. The typical NEMS outputs include forecasts of electricity and natural gas sales, prices, and electric generating capacity.

DOE conducts the utility impact analysis as a scenario that departs from the latest Annual Energy Outlook reference case. In other words, the energy savings impacts from amended energy conservation standards are modeled using NEMS-BT to generate forecasts that deviate from the

AEO reference case.

2.14 ENVIRONMENTAL ASSESSMENT

To comply with the National Environmental Policy Act and the requirements of 42 U.S.C. 6295(o)(2)(B)(i)(VI) and 6316(a), DOE intends to prepare an environmental assessment of the impacts of amended energy conservation standards for residential clothes dryers and room air conditioners on the human environment. The primary environmental effects of these standards would be reduced power plant emissions resulting from reduced consumption of electricity. DOE will assess these environmental effects by using NEMS-BT to provide key2-13

inputs to its analysis. The portion of the environmental assessment that will be produced by NEMS-BT considers carbon dioxide (CO 2 ), nitrogen oxides ( NO

x ), and mercury (Hg). The environmental assessment also considers impacts on SO 2 emissions and discusses particulate matter (PM) emissions. After a brief discussion of general methodology, this section will address

each of the relevant emissions.

2.14.1 Carbon Dioxide

In the absence of any Federal emissions control regulation of power plant emissions of

CO 2 , a DOE standard is likely to result in reductions of these emissions. The CO 2 emission reductions likely to result from a standard will be estimated using NEMS-BT and national energy savings estimates drawn from the NIA spreadsheet model. The net benefit of the standard is the difference between emissions estimated by NEMS-BT at each standard level considered and the

AEO Reference Case. NEMS-BT tracks CO 2 emissions using a detailed module that provides results with broad coverage of all sectors and inclusion of interactive effects.

2.14.2 Sulfur Dioxide

SO 2 emissions from affected Electric Generating Units (EGUs) are subject to nationwide and regional emissions cap and trading programs, and DOE has preliminarily determined that these programs create uncertainty about the standards’ impact on SO 2 emissions. Title IV of the Clean Air Act sets an annual emissions cap on SO 2 for affected EGUs in all 50 states and the District of Columbia (D.C.). SO 2 emissions from 28 eastern states and D.C. are also limited under the Clean Air Interstate Rule (CAIR, 70 Fed. Reg. 25162 (May 12, 2005)), which created an allowance-based trading program that would have gradually replaced the Title IV program in those states and D.C. Although CAIR has been remanded to EPA by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit), see North Carolina v. EPA , 550 F.3d 1176 (D.C. Cir. 2008), it will remain in effect until it is replaced by a rule consistent with the D.C. Circuit’s earlier opinion in North Carolina v. EPA , 531 F.3d 896 (D.C. Cir. 2008). On July 6, 2010, EPA proposed the Transport Rule, a replacement for CAIR, which would limit emissions from EGUs in 32 states, potentially through the interstate trading of allowances, among other options. 75 FR 45210 (Aug. 2, 2010).

The attainment of emissions caps is typically flexible among EGUs and is enforced through the use of emissions allowances and tradable permits. Under existing EPA regulations, any excess SO 2 emissions allowances resulting from the lower electricity demand caused by the imposition of an efficiency standard could be used to permit offsetting increases in SO 2 emissions by any regulated EGU. However, if the standard resulted in a permanent increase in the quantity of unused emissions allowances, there would be an overall reduction in SO 2 emissions from the standards. While there remains some uncertainty about the ultimate effects of efficiency standards on SO 2 emissions covered by the existing cap and trade system, the NEMSBT modeling system that DOE uses to forecast emissions reductions currently indicates that no physical reductions in power sector emissions would occur for SO 2

.2-14

2.14.3 Nitrogen Oxides

NEMS-BT also has an algorithm for estimating NO

x emissions from power generation.

As with SO 2 emissions, these emissions will be affected by CAIR and its replacement. The recent legal history surrounding CAIR, including its proposed replacement by the Transport Rule, is discussed above.

Much like SO 2 emissions, a cap on NO

x emissions would mean that energy conservation standards may have little or no physical effect on these emissions in the 28 eastern states and the D.C. covered by CAIR or any states covered by the proposed Transport Rule. Because all states covered by CAIR opted to reduce NO

x emissions through participation in cap-and-trade programs for electric generating units, emissions from these sources are currently capped across the CAIR region.

DOE used NEMS-BT to estimate the emissions reductions from possible standards in the states where emissions are not capped.

2.14.4 Mercury

Similar to emissions of SO 2 and NO

x , future emissions of Hg would have been subject to emissions caps. In May 2005, EPA issued the Clean Air Mercury Rule (CAMR). 70 Fed. Reg. 28606 (May 18, 2005). CAMR would have permanently capped emissions of mercury for new and existing coal-fired power plants in all states by 2010. However, on February 8, 2008, the

D.C. Circuit issued a decision in New Jersey v. Environmental Protection Agency , in which it vacated CAMR. 517 F.3d 574 (D.C. Cir. 2008). EPA has decided to develop emissions standards for power plants under the Clean Air Act (Section 112), consistent with the D.C. Circuit’s opinion on CAMR. See http://www.epa.gov/air/mercuryrule/pdfs/certpetition_withdrawal.pdf

. Pending EPA's forthcoming revisions to the rule, DOE is excluding CAMR from its Environmental Analysis. In the absence of CAMR, a DOE standard would likely reduce Hg emissions and DOE plans to use NEMS-BT to estimate these emission reductions. However, DOE continues to review the impact of rules that reduce energy consumption on Hg emissions, and may revise its assessment of Hg emission reductions in future rulemakings.

2.14.5 Particulate Matter

DOE acknowledges that particulate matter (PM) exposure can impact human health. Power plant emissions can have either direct or indirect impacts on PM. A portion of the pollutants emitted by a power plant are in the form of particulates as they leave the smoke stack. These are direct, or primary, PM emissions. However, the great majority of PM emissions associated with power plants are in the form of secondary sulfates, which are produced at a significant distance from power plants by complex atmospheric chemical reactions that often involve the gaseous (non-particulate) emissions of power plants, mainly SO 2 and NO

x . The quantity of the secondary sulfates produced is determined by a very complex set of factors including the atmospheric quantities of SO 2 and NO

x , and other atmospheric constituents and conditions. Because these highly complex chemical reactions produce PM comprised of different2-15

constituents from different sources, EPA does not distinguish direct PM emissions from power plants from the secondary sulfate particulates in its ambient air quality requirements, PM monitoring of ambient air quality, or PM emissions inventories. For these reasons, it is not currently possible to determine how the amended standard impacts either direct or indirect PM emissions. Therefore, DOE is not planning to assess the impact of these standards on PM emissions. Further, as described previously, it is uncertain whether efficiency standards will result in a net decrease in power plant emissions of SO 2 and NO

x , since those pollutants are now largely regulated by cap and trade systems.

2.15 MONETIZING CARBON DIOXIDE AND OTHER EMISSIONS

REDUCTIONS

In this section, DOE explains how it plans to monetize the benefits associated with

emissions reductions. For those emissions for which real national emission reductions are anticipated (CO 2 , Hg, and NO

x for 22 states), only ranges of estimated economic values based on environmental damage studies of varying quality and applicability are available. Therefore, DOE reports estimates of monetary benefits derived using these values and consider these benefits in weighing the costs and benefits of each of the standard levels considered.

In order to estimate the monetary value of benefits resulting from reduced emissions of

CO 2 emissions, it is DOE’s intent to use in its analysis the most current Social Cost of Carbon (SCC) values developed and/or agreed to by interagency reviews. The SCC is intended to be a monetary measure of the incremental damage resulting from greenhouse gas (GHG) emissions, including, but not limited to, net agricultural productivity loss, human health effects, property damage from sea level rise, and changes in ecosystem services. Any effort to quantify and to monetize the harms associated with climate change will raise serious questions of science, economics, and ethics. But with full regard for the limits of both quantification and monetization, the SCC can be used to provide estimates of the social benefits of reductions in GHG emissions.

At the time of this analysis, the most recent interagency estimates of the potential global benefits resulting from reduced CO 2 emissions in 2010 were $4.7, $21.4, $35.1, and $64.9 per metric ton in 2007 dollars. These values are then adjusted to 2009$ using the standard GDP deflator value for 2008 and 2009. For emissions (or emission reductions) that occur in later years, these values grow in real terms over time. Additionally, the interagency group determined that a range of values from 7 percent to 23 percent should be used to adjust the global SCC to calculate domestic effects, although DOE will give preference to consideration of the global benefits of reducing CO 2 emissions. See appendix 16A of this TSD for the full range of annual SCC estimates from 2010 to 2050. To calculate a present value of the stream of monetary values, DOE will discount the values in each of the four cases using the discount rates that had been

used to obtain the SCC values in each case.2-16

DOE recognizes that scientific and economic knowledge continues to evolve rapidly as to

the contribution of CO 2 and other GHG to changes in the future global climate and the potential resulting damages to the world economy. Thus, these values are subject to change.

DOE also intends to estimate the potential monetary benefit of reduced NO X emissions resulting from the standard levels it considers. For NO

x emissions, available estimates suggest a very wide range of monetary values for NO X emissions, ranging from $370 per ton to $3,800 per

ton of NO X from stationary sources, measured in 2001$ (equivalent to a range of $447 to $4,591 per ton in 2009$). Refer to the OMB, Office of Information and Regulatory Affairs, “2006 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities,” for additional information. In accordance with U.S. Office of Management and Budget (OMB) guidance, DOE will conduct two calculations of the monetary benefits derived using each of the economic values used for NO

x , one using a real discount rate of 3 percent and another using a real discount rate of 7 percent.

DOE does not plan to monetize estimates of Hg in this rulemaking. DOE is aware of multiple agency efforts to determine the appropriate range of values used in evaluating the potential economic benefits of reduced Hg emissions. DOE has decided to await further guidance regarding consistent valuation and reporting of Hg emissions before it once again monetizes Hg in its rulemakings.

2.16 REGULATORY IMPACT ANALYSIS

DOE prepared a regulatory impact analysis (RIA) under Executive Order 12866, “Regulatory Planning and Review,” 58 FR 51735, October 4, 1993, which was subject to review under the Executive Order by the Office of Information and Regulatory Affairs (OIRA) at the Office of Management and Budget. The RIA evaluated non-regulatory alternatives to standards, in terms of their ability to achieve significant energy savings in the considered products at a reasonable cost, and compared the effectiveness of each one to the effectiveness of the adopted

standards.

DOE recognizes that voluntary or other non-regulatory efforts by manufacturers, utilities, and other interested parties can result in substantial improvements to energy efficiency or reductions in energy consumption. DOE consider ed the likely effects of non-regulatory initiatives on product energy use, consumer utility, and LCC. DOE based its assessment on the actual impacts of any such initiatives to date, but also consider ed information presented regarding the impacts that any existing initiative might have in the future.2-17 REFERENCES

1 U.S. Department of Energy- En ergy Information Administration, Residential Energy Consumption Survey, 2005 Public Use Microdata Files , 2009. Washington, DC. Available

online at: http://www.eia.doe.gov/emeu/recs/recspubuse05/pubuse05.html