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- i CHAPTER 2. ANALYTICAL FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION ........................................................................................................... 2-1 2.2 BACKGROUND ............................................................................................................. 2-4 2.3 MARKET AND TECHNOLOGY ASSESSMENT ........................................................ 2-4 2.3.1 Market Assessment .............................................................................................. 2-4 2.3.2 Technology Assessment....................................................................................... 2-5 2.3.3 Test Procedure ..................................................................................................... 2-5 2.4 SCREENING ANALYSIS .............................................................................................. 2-6 2.4.1 Technology Screening ......................................................................................... 2-6 2.5 ENGINEERING ANALYSIS.......................................................................................... 2-6 2.5.1 Equipment Classes Analyzed............................................................................... 2-6 2.5.2 Manufacturing Cost Assessment.......................................................................... 2-7 2.5.3 Energy Consumption Model................................................................................ 2-7 2.6 ENERGY USE CHARACTERIZATION ....................................................................... 2-8 2.7 MARKUPS TO DETERMINE EQUIPMENT PRICE ................................................... 2-8 2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES .................................... 2-9 2.9 SHIPMENTS ANALYSIS ............................................................................................ 2-11 2.10 NATIONAL IMPACT ANALYSIS .............................................................................. 2-11 2.10.1 National Energy Savings Analysis..................................................................... 2-12 2.10.2 Net Present Value Analysis ............................................................................... 2-12 2.10.3 Efficiency Scenarios and Trends ....................................................................... 2-13 2.11 LIFE-CYCLE COST SUB-GROUP ANALYSIS......................................................... 2-13 2.12 MANUFACTURER IMPACT ANALYSIS.................................................................. 2-14 2.13 UTILITY IMPACT ANALYSIS................................................................................... 2-15 2.14 ENVIRONMENTAL ASSESSMENT .......................................................................... 2-15 2.15 EMPLOYMENT IMPACT ANALYSIS....................................................................... 2-15 2.16 REGULATORY IMPACT ANALYSIS ....................................................................... 2-16 2.17 DEPARTMENT OF JUSTICE REVIEW ..................................................................... 2-16

LIST OF FIGURES

Figure 2.1.1 Flow Diagram of Analyses for the Commercial Refrigeration Equipment

Rulemaking Process............................................................................................... 2-22

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- 1 CHAPTER 2. ANALYTICAL FRAMEWORK

2.1 INTRODUCTION

Section 6295(o)(3)(B) of Title 42 United States Code (42 U.S.C.), as directed by 42 U.S.C. 6316(a) (1)-(3)), requires the U.S. Department of Energy (DOE) to set forth energy conservation standards that are technologically feasible and economically justified, and would achieve the maximum improvement in energy efficiency. This chapter provides a description of the general analytical framework that DOE uses in developing such standards, and in particular, standards for commercial refrigeration equipment (CRE). 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. DOE will also solicit the views of the U.S. Department of Justice (DOJ) on any lessening of competition likely to result from the imposition of a proposed standard.

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. Arrows connecting analyses show types of information that feed from one analysis to another.2

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Figure 2.1.1 Flow Diagram of Analyses for the Commercial Refrigeration Equipment

Rulemaking Process2

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The analyses performed in the Notice of Proposed Rulemaking (NOPR) stage and reported in this technical support document (TSD) are listed below.

• A market and technology assessment characterizes the relevant equipment markets and existing technologies, including prototype designs.

• A screening analysis is conducted to review each technology and determine if it is technologically feasible; is practical to manufacture, install, and service; would adversely affect equipment utility or equipment availability; or would have adverse impacts on health and safety.

• An engineering analysis develops the cost-efficiency relationship, which is the increased manufacturer production cost (material, labor, and factory overhead) of more-efficient equipment. The increased cost to the customer is determined through an analysis of engineering markups, which convert manufacturer production cost to manufacturer selling price (MSP).

• An equipment price markup analysis to determine equipment price converts the MSP estimates from the engineering analysis to customer prices, which are then used in the LCC and payback period (PBP) analyses and the manufacturer impact analysis.

• An energy use analysis is conducted to determine the annual energy use and hourly power consumption characteristics of commercial refrigeration equipment in commercial buildings.

• LCC and PBP analyses calculate, at the customer level, the discounted savings in operating costs (less maintenance and repair costs) throughout the estimated average life of the covered equipment, compared to any increase in the installed cost for the equipment likely to result directly from imposition of the standard.

• A shipments analysis forecasts equipment shipments, which are then used to calculate the national impacts of standards on energy consumption and costs, net present value (NPV), and future manufacturer cash flows.

• A national impact analysis (NIA) assesses the aggregate impacts at the national level of the NPV of total consumer LCC and national energy savings (NES).

• A life-cycle cost sub-group analysis evaluates variations in commercial business type characteristics ( e.g., energy prices, equipment use patterns, installation and maintenance costs) that might cause a standard to affect particular customer sub-populations, such as specific building owners or other customers who purchase and use commercial refrigeration equipment differently than the overall population.2

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• A manufacturer impact analysis estimates the financial impact of standards on manufacturers and calculates impacts on competition, employment, and manufacturing capacity.

• A utility impact analysis estimates the effects of proposed standards on electric utilities.

• An employment impact analysis assesses the aggregate impacts on national employment.

• An environmental assessment provides estimates of changes in emissions of pollutants from electricity generation (carbon dioxide (CO 2 ), oxides of nitrogen (NOx), and sulfur d i oxide (SO 2 )).

• A r egulatory impact analysis presents major alternatives to proposed standards that could achieve substantially the same regulatory goal at a lower cost.

2.2 BACKGROUND

As described in Chapter 1 of this TSD, the Process Rule outlined procedural improvements to the standards rulemaking process, which included a review of the following elements: (1) economic models, (2) analytical tools, (3) methodologies, (4) non-regulatory approaches, and (5) prioritization of future rules. See Appendix A to subpart C of Title 10 Code of Federal Regulations, Part 430 (10 CFR Part 430).

DOE developed this analytical framework for the CRE rulemaking under the Process Rule. DOE documented this analytical framework in the Rulemaking Framework for Commercial Refrigeration Equipment Including Ice-Cream Freezers; Self-Contained Commercial Refrigerators, Freezers, and Refrigerator-Freezers without doors; and Remote Condensing Commercial Refrigerators, Freezers, and Refrigerator-Freezers , and presented the analytical approach to stakeholders during a public meeting held on May 16, 2006. This document is available at http://www.eere.energy.gov/buildings/ appliance_standards/commercial/pdfs/comml_refrig_framework.pdf. The following sections provide a general description of the different analytical components of the rulemaking framework.

2.3 MARKET AND TECHNOLOGY ASSESSMENT

The market and technology assessment characterizes the relevant equipment markets and existing technology options, including prototype designs.

2.3.1 Market Assessment

When initiating a standards rulemaking, DOE develops information on the present and past industry structure and market characteristics for the equipment concerned. This activity assesses the industry and equipment both quantitatively and qualitatively, based on publicly available information, and encompasses the following: (1) manufacturer market share and2

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characteristics, (2) existing regulatory and non-regulatory equipment efficiency improvement initiatives, and (3) trends in equipment 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 CRE market in the United States. Industry publications and trade journals, government agencies, and trade organizations provided the bulk of the information, including (1) manufacturers and their market share, (2) shipments by capacity, and (3) market saturation.

DOE uses the most reliable and accurate data available at the time of analysis. All data will be available for public review. DOE welcomes and will consider any submissions of additional data.

2.3.2 Technology Assessment

DOE typically uses information about existing and past technology options and prototype designs to determine which technologies manufacturers use to attain higher energy performance levels. In consultation with stakeholders, DOE develops a list of technologies for consideration. Initially, these technologies encompass all those DOE believes are technologically feasible.

DOE developed its list of technologically feasible design options after consultation with manufacturers of components and systems, and from trade publications and technical papers. Since many options for improving efficiency are available in existing equipment, product literature and direct examination of commercial refrigeration equipment provided additional information, described in Chapter 3 of the TSD.

2.3.3 Test Procedure

A test procedure outlines the method by which manufacturers will determine the efficiency of their commercial refrigeration equipment, and thereby assess compliance with an energy conservation standard.

Section 136(f)(1)(B) of EPACT 2005 amended section 343 of EPCA (42 U.S.C. 6314) by adding new subsections 343(a)(6)(A)-(D) (42 U.S.C. 6314(a)(6)(A)-(D)), which direct the Secretary to develop test procedures for commercial refrigeration equipment. On December 8, 2006, DOE published a final rule (the December 2006 final rule) in which DOE adopted American National Standards Institute (ANSI)/Air-Conditioning and Refrigeration Institute (ARI) Standard 1200-2006, Performance Rating of Commercial Refrigerated Display Merchandisers and Storage Cabinets , with one modification, as the DOE test procedure for this equipment. 71 FR 71340, 71369-70. a Standard 1200-2006 contains equipment rating
te mperature specifications of 38 ° F (±2 ° F) for commercial refrigerators and refrigerator compartments, 0 ° F (±2 ° F) for commercial freezers and freezer compartments, and -5 ° F (±2 ° F) for ice-cream freezers. The standard requires performance tests to be conducted according to the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) Standard 72-2005, Method of Testing Commercial Refrigerators and Freezers . DOE made only

a Test procedures are found at 10 CFR section 431.64.2

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one modification to ANSI/ARI Standard 1200-2006: DOE selected -15 ° F (±2 ° F) as the rating temperature for ice-cream freezers, instead of -5 ° F (±2 ° F). 71 FR 71370. In addition, DOE adopted ANSI/Association of Home Appliance Manufacturers (AHAM) Standard HRF-1-2004, Energy, Performance and Capacity of Household Refrigerators, Refrigerator-Freezers and Freezers , for determining compartment volumes. 71 FR 71369-70.

2.4 SCREENING ANALYSIS

The screening analysis examines whether various technologies (1) are technologically feasible; (2) are practicable to manufacture, install, and service; (3) have an adverse impact on equipment utility or availability; and (4) have adverse impacts on health and safety. In the engineering analysis, DOE further considered design options that remained after the screening
process.

2.4.1 Technology Screening

As described in Chapter 4 of this TSD, DOE grouped technologies into the following categories: (1) emerging technologies, which are currently not available on the commercial market but are being examined in the laboratory as possible means to enhance efficiency; and (2) commercially available technologies that are used to improve energy consumption under DOE’s test procedure.

Because the energy descriptor for commercial refrigeration equipment is daily energy consumption and the test procedure uses a steady-state approach, DOE did not include technologies or designs that improve energy consumption under varying ambient conditions ( e.g., expansion valves or variable-speed compressors). Therefore, only those technologies that improve the daily energy consumption rating were considered viable for review.

2.5 ENGINEERING ANALYSIS

As discussed in Chapter 5 of the TSD, the engineering analysis establishes the relationship between the cost and efficiency of commercial refrigeration equipment. This relationship serves as the basis for cost/benefit calculations in terms of individual customers,manufacturers, and the Nation. The engineering analysis discusses the industry-supplied costefficiency curves, the equipment classes analyzed, the representative baseline units, the methodology used to develop manufacturing costs, the methodology used to develop the energy consumption model, the analytically-derived cost-efficiency curves, the methodology used to extend the analysis to low-shipment volume equipment classes, and the use of alternative refrigerants.

2.5.1 Equipment Classes Analyzed

Because of the large number of equipment classes in this rulemaking, the engineering analysis did not assess all covered equipment classes. DOE used the shipment data in the market and technology assessment (Chapter 3) to prioritize equipment classes to analyze. Equipment2

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classes with fewer than 100 annual units shipped were not considered for the analysis, leaving 14 “high-shipment” equipment classes for analysis. According to the equipment shipments, these 14 equipment classes represent 98 percent of the total industry shipments. One additional equipment class, the vertical open remote condensing unit equipment class (VOP.RC.L), was added after discussions with manufacturers. b Thus, 15 covered equipment classes were analyzed

an d 15 cost-efficiency curves were generated in the engineering analysis.

2.5.2 Manufacturing Cost Assessment

DOE conducted a manufacturing cost assessment to estimate the manufacturing costs associated with a decrease in energy consumption for commercial refrigeration equipment. This approach involved disassembling a vertical closed transparent self-contained medium temperature (VCT.SC.M) refrigerator, analysis of the materials and manufacturing processes, and development of a spreadsheet cost model. Using the manufacturing cost assessment, DOE developed a clear and consistent manufacturing cost assessment methodology, built a detailed manufacturing cost assessment model that accurately predicts manufacturing cost, reported the manufacturing costs in aggregated form to maintain confidentiality of the data, and obtained input from stakeholders on the manufacturing cost estimates and assumptions to confirm
accuracy.

2.5.3 Energy Consumption Model

DOE developed an energy consumption model to calculate energy consumption of the equipment at various performance levels within each equipment class. The model is based on ANSI/ARI Standard 1200, Performance Rating of Commercial Refrigerated Display Merchandisers and Storage Cabinets , but calculates the total refrigeration load as a summation of electric and non-electric heat loads. Electric heat loads include the internal loads from fan motors, lighting, defrost heaters, and anti-sweat heaters. DOE assumed that all electrical energy ends up as heat inside the case (except for lighting outside of the air curtain on open cases and the defrost power that is consumed condensing the ice on the coils to water). Non-electric loads include heat loads from radiation through glass, seals, and openings; conduction through walls and solid doors; and infiltration of warm, moist air into the case. DOE used a thermal conductivity, or U-factor, to calculate a combined conduction/convection/radiation load for glass. DOE used a simple conduction/convection model to calculate conduction through walls and solid doors, and empirical data on defrost melt water to back-calculate infiltration loads.

b Equipment class designations consist of a combination (in sequential order separated by periods) of an equipment fa mily code (VOP=vertical open, SVO=semivertical open, HZO=horizontal open, VCT=vertical transparent doors, VCS=vertical solid doors, HCT=horizontal transparent doors, HCS=horizontal solid doors, or SOC=service over counter), an operating mode code (RC=remote condensing or SC=self-contained), and a rating temperature code (M=medium temperature (38°F), L=low temperature (0°F), or I=ice-cream temperature (-15°F)). For example, "VOP.RC.M refers to the "vertical open, remote condensing, medium temperature" equipment class. See Chapter 3, Market and Technology Assessment, for a more detailed explanation of the equipment class terminology.2

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2.6 ENERGY USE CHARACTERIZATION

The energy use characterization assesses the energy savings impacts from higher efficiency standards and provides the basis for the energy savings used in the LCC and subsequent analyses. The energy use characterization validated the use of the engineering analysis energy estimates for assessing energy savings for higher equipment efficiencies. DOE assessed the energy savings impacts for seven different classes of remote condensing commercial refrigeration equipment across a range of U.S. climates. Various design options corresponded to different energy efficiency levels. DOE assessed the energy impacts at the level of the refrigeration equipment case (display case) alone, the case and associated refrigeration system, and the whole building. As part of the energy use characterization, DOE made certain engineering assumptions regarding equipment application, including how the equipment is operated and under what conditions and has documented these assumptions in the TSD.

Studies conducted by Arthur D. Little, Inc., Southern California Edison, Lawrence Berkeley National Laboratory, and Caneta Research assisted in characterizing the annual energy consumption of commercial refrigeration equipment. These studies primarily focused on refrigerated display cases packaged with remote condensing units.

For buildings using commercial refrigeration equipment, the primary energy consumption and demand impact are from the energy and power use of the equipment itself and from the associated refrigeration loads and remote condensing equipment, both of which can vary with climate. The impact on building heating and cooling energy is a secondary impact that also relates to climate. Characterizing the energy savings from more-efficient commercial refrigeration equipment and the associated energy impacts from the remote condensing system and the building heating and cooling load is a critical part of the standards rulemaking analysis because it assesses the relative importance of these secondary impacts and validates the engineering energy use estimates.

In the energy use characterization, DOE defined a single building prototype―a mediumsized supermarket—for modeling energy impacts. DOE characterized combinations of design options representing four efficiency levels for each class of remote condensing equipment. DOE used whole building energy analysis software with the capability to model refrigeration equipment and the building prototypes in different climate regions in order to capture the energy impacts at the CRE case, for the refrigeration system and case combined, and for the entire building.

2.7 MARKUPS TO DETERMINE EQUIPMENT PRICE

DOE used manufacturer-to-customer markups to convert the MSP estimates from the engineering analysis to customer prices, which were then used in the LCC, PBP, and manufacturer impact analyses. Because retail prices are required for all the performance levels under consideration, DOE obtained these retail prices by applying manufacturer-to-customer markups to the MSP estimates.2

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Before it can develop markups, DOE must identify distribution channels ( i.e., how the equipment is distributed from the manufacturer to the customer). Once it established proper distribution channels for each of the equipment classes, DOE relied on economic data from the U.S. Census Bureau and input from the trade organization representing distributors of refrigeration equipment to define how equipment are marked up as they pass from the manufacturer to the customer (see Chapter 6 of the TSD).

DOE has estimated manufacturer-to-customer markups for residential air-conditioningproducts and commercial air-conditioning equipment. In the recent commercial unitary airconditioners and heat pumps (CUAC) rulemaking, analysis of distribution channel markups focused on three distribution channel paths and calculated markups for individual points along these paths. Two of these paths involved sales of equipment through a mechanical contractor and then through a general contractor before reaching the final customer. A third “national account” path involved sales directly from manufacturer to the end customer. The CUAC analysis noted that in the case of replacement equipment (approximately 70 percent of the CUAC market), a general contractor typically was not involved and therefore no general contractor markups were incurred for replacement equipment.

DOE’s review of information for CRE distribution suggested a similar set of three distribution channels would be appropriate:

Manufacturer → Distributor → Mechanical Contractor → Customer (7 percent of sales)

Manufacturer → Distributor → Customer (7 percent of sales)

Manufacturer → Customer (National Account) (86 percent of sales)

The data suggests that a general contractor was not involved in the purchase of commercial refrigeration equipment at either the new construction or replacement levels, and that the fraction of sales through each distribution channel would be the same for both new and replacement equipment.

2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES

The effects of new energy conservation standards on equipment result in changes in operating expenses (usually a decrease) and changes in customer price (usually an increase). DOE analyzed the net effect of new standards on customers by evaluating the net LCC using the cost-efficiency relationship derived in the engineering analysis, as well as the energy costs derived from the energy use characterization analysis. Inputs to the LCC calculation include the installed cost to the customer (customer price plus installation cost), operating expenses (energy expenses and maintenance costs), the lifetime of the appliance, and a discount rate. Chapter 8 discusses these inputs in detail.

The installed and operating costs of equipment typically change in response to new standards (installed cost usually increases while operating cost usually decreases). Thus, there is a specific time in the life of higher-than-baseline efficiency equipment when the net operating-2

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cost benefit (in dollars) from the time of purchase is equal to the incremental first cost of
p u rchasing the more-efficient equipment. The length of time required for equipment to reach this cost-equivalence point is known as the payback period.

DOE conducted the LCC and PBP analyses using typical values to reflect the conditions in the field for equipment life and energy consumption. Distributions of values were used to develop equipment retail price and national or regional energy costs. Discount rates varied by business type. DOE will conduct the life-cycle cost sub-group analysis for the NOPR and include an assessment of impacts on sub-groups of customers.

For commercial refrigeration equipment, it was necessary to determine several of the input values for the LCC estimation, including retail prices; electricity prices; discount rate; maintenance, service, and installation costs; and equipment lifetimes.

DOE reviewed energy price data from the Energy Information Administration (EIA) for commercial refrigeration equipment to establish electricity and natural gas prices. DOE relied on State average energy price data for the commercial sector scaled to reflect average prices paid by businesses using commercial refrigeration equipment relative to the entire commercial sector. DOE used projections of these energy prices for commercial customers to estimate future energy prices in its LCC and PBP analyses. DOE used EIA’s Annual Energy Outlook (AEO) as the default source of projections for future energy prices.

DOE developed discount rates by estimating the cost of capital to businesses that purchase commercial refrigeration equipment covered under this rulemaking. DOE commonly uses the cost of capital to estimate the present value of cash flows to be derived from a typical company project or investment. Most companies use both debt and equity capital to fund investments, so the cost of capital is the weighted-average cost to the firm of equity and debt financing. This corporate finance approach is referred to as the weighted-average cost of capital.

DOE considered expected changes to maintenance, repair, and installation costs for the equipment covered in this rulemaking. Typically, small incremental changes in equipment efficiency incur no, or only very small, changes in repair and maintenance costs over baseline efficiency equipment. Equipment with efficiencies significantly greater than the baseline can incur increased repair and maintenance costs, since such equipment is more likely to incorporate technologies that are new to the industry and not widely available. DOE relied on facilities’ planning literature and industry data to develop appropriate repair and maintenance costs.

DOE divided maintenance costs into preventive maintenance and lighting maintenance activities. Reliable performance is a market prerequisite for commercial refrigeration equipment. Since no data were available to suggest increased preventive maintenance costs for the design options considered, DOE assumed that maintenance costs did not increase with efficiency level.

When lighting changes were considered as design options, DOE separately assessed regular lighting maintenance costs (primarily bulb, ballast, or fixture replacement). Because no data was available to suggest repair costs increase with more-efficient equipment, DOE held repair costs fixed, but made a provision for repair costs that vary in proportion to equipment costs. Unless the efficiency increases considered for this rulemaking result in significantly larger2

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or heavier equipment, DOE determined that more-efficient commercial refrigeration equipment

w o uld not increase installation costs.

DOE used information from various published sources and input from the equipment distributors and the food retail industry to establish average equipment lifetimes for use in the LCC and subsequent analyses.

2.9 SHIPMENTS ANALYSIS

Shipment forecasts are required to calculate the national impacts of standards on energy, NPV, and future manufacturer cash flows. DOE developed shipment forecasts based on an analysis of key market drivers for commercial refrigeration equipment.

DOE developed a set of shipment forecasts for each equipment class for each set of standards analyzed. These standards case forecasts were used to evaluate the impacts of standards on equipment shipments. Standards case forecasts were derived using the same data sets as base case forecasts. However, because the standards case forecasts account for the increase in customer price and the decrease in operating costs caused by standards, forecasted shipments can deviate from the base case. The magnitude of the difference between the standards case and base case shipment forecasts depends on the estimated customer price increase as well as the operating cost savings due to the standard. Because the customer price tends to have a larger impact than operating cost on equipment purchase decisions, standards case forecasts typically show a drop in equipment shipments relative to the base case.

The data required to develop sensitivities of shipments to customer price and operatingcost-savings were limited. Therefore, DOE modeled total standards case shipments forecasts as identical to base case shipments, but provided the option of defining scenarios ( i.e., specified impacts to equipment shipments) rather than developing sensitivities to customer price or operating-cost-savings.

2.10 NATIONAL IMPACT ANALYSIS

The national impact analysis assesses the NPV of total customer LCC and NES. DOE determined both the NPV and NES for the performance levels considered for the equipment classes analyzed. To make the analysis more accessible and transparent to all stakeholders, DOE prepared an NES Spreadsheet Model in Microsoft Excel to forecast energy savings and the national economic costs and savings resulting from new standards. The NES Spreadsheet Model uses typical values for inputs or outputs (as opposed to probability distributions). To assess the impact of input uncertainty on the NES and NPV results, DOE can conduct sensitivity analyses for future analyses by running scenarios on input variables of interest to stakeholders. Chapter 10 of the TSD describes DOE’s assessment of the aggregate economic impacts at the National level.2

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2.10.1 N ational Energy Savings Analysis

Th e inputs for the determination of NES for each class of commercial refrigeration equipment analyzed are (1) annual energy consumption per unit, (2) shipments, (3) equipment 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 commercial refrigeration equipment (by vintage) by the unit energy consumption (also by vintage). c Then, DOE calculated national annual energy savings from the difference between

n a tional energy consumption in the base case (without new efficiency standards) and in each higher efficiency standard case. DOE estimated energy consumption and savings based on site energy, and converted the electricity consumption and savings to source energy. Cumulative energy savings are the sum of the annual NES, which DOE determined over specified time periods.

The stock of commercial refrigeration equipment depends on annual shipments and the lifetime of the equipment. DOE conducted shipments projections under the base efficiency case and higher efficiency standards cases for a variety of possible equipment efficiency scenarios and equipment efficiency trends. DOE’s shipments model presumed that growth in commercial floor space for building types using commercial refrigeration equipment as well as necessary stock replacements drove shipments of new commercial refrigeration equipment. DOE’s shipments model did not assess changes in total CRE shipments as a function of standard level, either due to increases in first costs or decreases in energy consumption.

2.10.2 Net Present Value Analysis

The inputs for the determination of NPV are (1) total annual installed cost, (2) total annual operating cost savings, (3) discount factor, (4) present value of costs, and (5) present value of savings. DOE calculated net savings each year as the difference between total operating cost savings (including electricity, repair, and maintenance cost savings) and increases in total installed costs (including equipment price and installation cost). DOE calculated savings over the life of the equipment, accounting for differences in yearly energy rates. DOE calculated NPV as the difference between the present value of operating cost savings and the present value of increased total installed costs. DOE discounted future costs and savings to the present with a discount factor.

DOE calculated increases in total installed costs as the product of the difference in the total installed cost between the base case and standards case ( i.e., once the standards take effect) and the annual shipments in the standards case. Because costs of the more-efficient equipment bought in the standards case are higher than those of equipment bought in the base case, price increases appear as negative values in the NPV.

DOE expressed operating cost savings as decreases in operating costs associated with the lower energy consumption of equipment bought in the standards case compared to the base efficiency case. Total operating cost savings are the product of savings per unit and the number of units of each vintage surviving in a particular year.

c Vintage represents the age of the equipment.2

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2.10.3 E fficiency Scenarios and Trends

S everal of the inputs for determining NES ( e.g., the annual energy consumption per unit) and NPV ( e.g., the total annual installed cost and the total annual operating cost savings) depend on the efficiency of the equipment. Thus, DOE developed base case and standards caseefficiency trends. The efficiency trends specify the annual historical and forecasted shipmentweighted average equipment efficiencies.

DOE based historical shipment-weighted average efficiency trends for commercial refrigeration equipment on limited efficiency data. Once DOE established historical efficiency trends, it could determine future trends of equipment efficiency, and in turn, annual energy consumption by extrapolating from the historical trend.

DOE based its standards case forecasts ( i.e., forecasts of efficiency trends after standards take effect) on the use of a roll-up efficiency scenario and parallel growth trend. Under a roll-up scenario, all equipment at performance levels below a prospective standard are moved or rolled up to the minimum performance level allowed under the new standard. The distribution of equipment at higher efficiency standard levels is unaffected ( i.e., this equipment remains at its pre-standard performance levels). The roll-up efficiency scenario dictates how DOE determined efficiency distributions in the first year a new standard takes effect, but does not define how equipment efficiency will be distributed in the future. Under the parallel growth trend, DOE assumes that the standards case efficiency trend parallels the base case efficiency trend. In other words, the initial jump in shipment-weighted efficiency that occurs when the standard first becomes effective is maintained throughout the forecast.

2.11 LIFE-CYCLE COST SUB-GROUP ANALYSIS

The LCC sub-group analysis evaluates economic impacts on virtually any group ofcustomers. During the NOPR stage, DOE intends to evaluate the impacts on particular subgroups in part by analyzing the LCC and PBP for these customers.

DOE intends to evaluate variations both in regional energy prices and use that might affect the NPV of an energy-efficiency standard to customer sub-groups. DOE will seek estimates of the variability of each input parameter and consider this variability when calculating customer impacts. Variations in energy use for a particular equipment type or equipment class depend on factors such as climate, building type, and type of business. DOE intends to perform sensitivity analyses to consider how differences in energy use will affect various sub-groups of
customers.

DOE will determine the impact on customer sub-groups using the LCC spreadsheet model. The spreadsheet model for the LCC analysis can be used with different data inputs. The standard LCC analysis includes various commercial building types that use commercial refrigeration equipment. Moreover, DOE can analyze the LCC for any sub-group by using the LCC spreadsheet model and only sampling that sub-group. Details of this model are explained in the section describing the LCC and PBP analyses.2

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DOE is particularly sensitive to increases in the customer price of more-efficient

c o mmercial refrigeration equipment. Such sub-groups as small businesses ( i.e., those with low annual revenues) might not be able to afford a significant increase in the price of commercial refrigeration equipment. For these types of customers, increases in first costs for equipment could preclude the purchase of a new CRE unit. As a result, some customers might keep refrigeration equipment beyond its useful life. These older pieces of equipment are generally less efficient, and their efficiency may decline if kept beyond their useful life. Also, increases in first cost could preclude the purchase and use of equipment altogether, resulting in a potentially large loss of utility.

Although business income and annual revenues are not known for the business types analyzed in the LCC analysis, the floor space occupied by a business may be an indicator of its annual income. If this is generally true, DOE will be able to perform sub-group analyses on smaller businesses. If DOE determines that business income does not correlate with floor space, then DOE may not be able to perform sub-group analyses on smaller businesses. In this event, DOE will seek other sources of data to perform these analyses.

2.12 MANUFACTURER IMPACT ANALYSIS

The manufacturer impact analysis focuses on manufacturers of commercial refrigeration equipment. Potential impacts would include quantitative and qualitative financial effects that might result from new energy efficiency standards, and consequently lead to changes in manufacturing practices. DOE will identify these potential impacts through interviews with manufacturers and other stakeholders.

Previously, DOE did not report manufacturer impact analysis results during the advanced notice of proposed rulemaking (ANOPR) phase. However, DOE recently announced changes to the manufacturer impact analysis format through a report issued to Congress on January 31, 2006 (as required by section 141 of the Energy Policy Act of 2005 (EPACT 2005)). d Under this new f o rmat, DOE collects, evaluates, and reports preliminary information and data in the ANOPR. Such preliminary information includes the anticipated conversion capital expenditures by efficiency level and the corresponding anticipated impacts on jobs. DOE solicits this information during the ANOPR engineering analysis manufacturer interviews.

During the NOPR stage of the rulemaking, DOE conducts the manufacturer impact analysis in three phases. Phase one consists of preparing an industry characterization and identifying issues. Phase two addresses the broader industry where DOE would use the Government Regulatory Impact Model to perform an industry cash-flow analysis. Phase three involves interviewing manufacturers. DOE develops the questionnaire for Phase three in Phase two. At the beginning of Phase three, DOE will interview manufacturers and adjust the industry cash-flow analysis as appropriate. Thereafter, Phase three will entail additional cash-flow analyses of the different sub-groups that the rulemaking could affect. During Phase three, DOE

d This report, entitled “Energy Conservation Standards Activities,” is available on the DOE website at htt p://www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html.2

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also will examine any additional impacts on competition, manufacturing capacity, direct

e m ployment, and the cumulative burden of other regulations affecting manufacturers.

2.13 UTILITY IMPACT ANALYSIS

The utility impact analysis will include an analysis of the impact of higher efficiency standards on electric and gas utilities. DOE is considering adapting the National Energy Modeling System (NEMS) produced by the EIA for this analysis. NEMS (EIA 2005) is a large multi-sectoral, partial-equilibrium model of the U.S. energy sector that EIA has developed over the past decade, primarily for the purpose of preparing DOE’s AEO . In prior rulemakings, a variant of NEMS (currently termed NEMS-BT, BT referring to the DOE’s Building Technologies Program) was developed to better address the specific impacts of an equipment efficiency standard.

The NEMS produces a widely recognized baseline energy forecast for the United States through 2030, and is available to the public. The typical NEMS outputs include forecasts of electricity sales, price, and avoided electric generating capacity. The energy savings impacts from amended energy conservation standards will be modeled using NEMS-BT to generate forecasts that deviate from the AEO reference case.

2.14 ENVIRONMENTAL ASSESSMENT

The primary environmental effects of energy conservation standards for the commercial refrigeration equipment covered under this rulemaking will be reduced emissions resulting from reduced electrical energy consumption. The environmental assessment will track the impact of possible standards on three energy-related emissions: CO 2 , NOx, and SO 2 . DOE intends to base
t h ese calculations on the NEMS-BT modeling work proposed for the utility impact analysis. This approach has the advantage of examining the marginal impact of higher efficiency standards for the covered equipment on the utility generation mix and the subsequent environmental emissions.

NEMS-BT tracks CO 2 emissions with a detailed module that produces robust results be cause of its broad coverage of all sectors and inclusion of interactive effects. NEMS-BT also includes a module for SO 2 allowance trading and forecasts SO 2 allowance prices. The simulation of SO 2 trading tends to imply that physical emissions effects will be zero. However, there is an SO 2 b enefit from conservation in the form of a lower allowance price and, if large enough to be

ca lculable by NEMS, this value can be reported. NEMS-BT also has an algorithm for estimating NOx emissions from power generation.

2.15 EMPLOYMENT IMPACT ANALYSIS

The imposition of standards can affect employment both directly and indirectly. Direct employment impacts are changes in the number of employees at the plants that produce the covered equipment and at affiliated distribution and service companies resulting from the2

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imposition of new standards. DOE will evaluate direct employment impacts in the manufacturer i m pact analysis. 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 because of the imposition of standards. The combined direct and indirect employment impacts will be investigated in the employment impact analysis using the Pacific Northwest National Laboratory’s “Impact of Sector Energy Technologies” (ImSET) model. The ImSET model was developed for DOE’s Office of Planning, Budget, and Analysis, and estimates the employment and income effects of energy-saving technologies 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.

2.16 REGULATORY IMPACT ANALYSIS

In the NOPR stage, DOE will prepare a regulatory impact analysis (RIA) pursuant to Executive Order 12866, “Regulatory Planning and Review,” 58 FR 51735, October 4, 1993, which is subject to review under the Executive Order by the Office of Information and Regulatory Affairs at the Office of Management and Budget. The RIA will address the potential for non-regulatory approaches to supplant or augment energy conservation standards to improve the energy efficiency or reduce the energy consumption of the commercial refrigeration equipment covered under this rulemaking.

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 intends to consider the likely effects of non-regulatory initiatives on equipment energy use, consumer utility, and LCC. DOE will base its assessment on the actual impacts of any such initiatives to date, but also will consider potential impacts that any existing initiative might have in the future.

2.17 DEPARTMENT OF JUSTICE REVIEW

Section 325(o)(2)(B)(i)(V) of the Energy Policy and Conservation Act (EPCA) states that before the Secretary of Energy may prescribe a new or amended energy conservation standard, the Secretary shall ask the U.S. Attorney General to make a determination of “the impact of any lessening of competition...that is likely to result from the imposition of the standard.” (42 U.S.C. 6295) Pursuant to this requirement, DOE will solicit the views of the DOJ on any lessening of competition likely to result from the imposition of a proposed standard. DOE will give the views provided full consideration in assessing economic justification of a proposed standard. In addition, DOE may consult with DOJ at earlier stages in the standards development process to obtain preliminary views on competitive impacts.