CHAPTER 2. ANALYTICAL FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION ...............................................................................................................1
 

2.2 BACKGROUND .................................................................................................................4
 

2.3 MARKET AND TECHNOLOGY ASSESSMENT............................................................5
 

2.3.1	 Market Assessment ............................................................................................5
 

2.3.2	 Product Classes..................................................................................................5
 

2.3.3	 Technology Assessment.....................................................................................6
 

2.4 SCREENING ANALYSIS ..................................................................................................6
 

2.5 ENGINEERING ANALYSIS..............................................................................................7
 

2.5.1	 Product Classes Analyzed..................................................................................8
 

2.5.2	 Cost Assessment ................................................................................................8
 

2.5.3	 Energy­Efficiency Equations for Gas­Fired and Electric Storage Water
 

Heaters ...............................................................................................................8
 

2.6 MARKUPS TO DETERMINE PRODUCT PRICE............................................................9
 

2.7 ENERGY USE CHARACTERIZATION ...........................................................................9
 

2.7.1	 Water Heaters.....................................................................................................9
 

2.7.2	 Direct Heating Equipment and Pool Heaters...................................................10
 

2.8 LIFE­CYCLE COST AND PAYBACK PERIOD ANALYSES ......................................11
 

2.9 SHIPMENTS ANALYSIS ................................................................................................12
 

2.10 NATIONAL IMPACT ANALYSIS..................................................................................12
 

2.10.1	 National Energy Savings Analysis...................................................................13
 

2.10.2	 Net Present Value Analysis .............................................................................13
 

2.10.3	 Efficiency Scenarios and Trends .....................................................................14
 

2.10.4	 Impact of Standards on Natural Gas Prices and Overall Economic
 

Benefits............................................................................................................14
 

2.11 MANUFACTURER IMPACT ANALYSIS......................................................................14
 

2.12 LIFE­CYCLE COST SUBGROUP ANALYSIS ..............................................................15
 

2.13 UTILITY IMPACT ANALYSIS.......................................................................................15
 

2.14 ENVIRONMENTAL IMPACT ANALYSIS....................................................................16
 

2.15 EMPLOYMENT IMPACT ANALYSIS...........................................................................17
 

2.16 REGULATORY IMPACT ANALYSIS ...........................................................................17
 

2.17 DEPARTMENT OF JUSTICE REVIEW .........................................................................18
 

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CHAPTER 2. ANALYTICAL FRAMEWORK

2.1 INTRODUCTION

Section 6295(o)(2)(A) of Chapter 42 of the United States Code (U.S.C.) requires that the

U.S. Department of Energy (DOE), when prescribing new or amended energy conservation

standards, promulgate standards that achieve the maximum improvement in energy efficiency

that DOE determines is both technologically feasible and economically justified. This chapter

provides a description of the general analytical framework that DOE uses in developing such

standards, and in particular, amended energy conservation standards for residential water heaters,

direct heating equipment, and pool heaters. 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 life­cycle 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

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 standards­setting 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

standards­setting process. Arrows connecting analyses show types of information that feed from

one analysis to another.

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EE-2006-STD-0129 COMMENT 56.10
Figure 2.1.1 Flow Diagram of Analyses for the Residential Heating Product Flow Diagram of A Flow Diagram of Analyses for the Residential Heating Products nalyses for the Residential Heating Products Rulemaking  s Rulemaking   Rulemaking 

Process

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Fr~ Doc:tITI:lHI 

• Idemny FirmsProducts 

• Histori0l31 Sh;;;meT'llS • Pnoduot C:II!'~!I 

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- Nmionlll En~;:;: Sl!II!inO!l lI:illy ~act 1T'TJ';act. 

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• NClionlil Energ)" SalJinlllS 

• N;;iIiionlill Pnodud C:oil:li P • N3IIIon31 Qcemina Costs ~IOJII1I.nt Impact 

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• Emi !I!'ion Fi:!l:e!!' 

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, 

, 

Final Rule 
                           

                       

                             

                             

                     

                       

           

                         

                     

                           

                 

                     

                     

                

                               

                           

                         

                             

           

                           

                 

                             

                       

                           

     

                       

                   

                 

   

                           

                             

              

The analyses performed prior to the notice of proposed rulemaking (NOPR) stage as part

of the preliminary analyses and described in the preliminary technical support document

(preliminary TSD) are listed below. These analyses were revised for the NOPR based on new

information from comments received, and are now included as a part of the accompanying notice

and are reported in this technical support document (the NOPR TSD).

•	 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 and determine if it is

technologically feasible; is practical 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 cost­efficiency relationships that show the

manufacturer’s cost of achieving increased efficiency. DOE determines the increased cost

to the consumer through an analysis of engineering markups, which convert manufacturer

production cost (MPC) to manufacturer selling price (MSP).

•	 An energy use analysis to determine the annual energy use in the field of the considered

products.

•	 An LCC and payback period (PBP) analyses to calculate, at the consumer level, the

discounted savings in operating costs throughout the estimated average life of the covered

products, compared to any increase in the installed cost for the products likely to result

directly from imposition of the standard.

•	 A shipments analysis to forecast product shipments, which then are used to calculate the

national impacts of standards and future manufacturer cash flows.

•	 A national impact analysis (NIA) to assess the aggregate impacts at the national level of

potential energy conservation standards for each of the considered products, as measured

by the net present value (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, such as impacts on capital conversion

expenditures, marketing costs, shipments, and research and development costs.

The additional analyses DOE performed for the NOPR stage of the rulemaking analysis include

those listed below. In addition, DOE revised the analyses it performed in the preliminary stage

based on comments and new information received.

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•	 An LCC subgroup analysis to evaluate variations in customer characteristics that might

cause a standard to affect particular consumer sub­populations, such as low­income

households, differently than the overall population.

•	 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 proposed standards on electric, gas, or

oil utilities.

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

•	 An environmental impact analysis to provide estimates of the effects of amended energy

conservation standards on three pollutants—sulfur dioxide (SO2), nitrogen oxides (NOX),

and mercury—as well as carbon emissions.

•	 A regulatory impact analysis to present major alternatives to proposed amended energy

conservation standards that could achieve substantially the same regulatory goal at a

lower cost.

2.2 BACKGROUND

DOE developed this analytical framework and documented its findings in the

Rulemaking Framework for Residential Water Heaters, Direct Heating Equipment, and Pool

Heaters (September 27, 2006). 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 November 24, 2006. 71 FR 67825. DOE presented the analytical approach to

interested parties during a public meeting held on January 16, 2007. The framework document is

available at www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/

heating_equipment_framework_092706.pdf.

DOE conducted a preliminary analysis for residential heating products and documented

its findings in the preliminary TSD (January 5, 2009). The preliminary TSD is available at

www1.eere.energy.gov/buildings/appliance_standards/residential/water_pool_heaters_nopm.htm

l. 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.

For a summary of the key comments DOE received from interested parties and DOE’s responses

to those comments, see chapter 2 of the preliminary TSD.

The following sections provide a general description of the different analytical

components of the rulemaking analytical plan. DOE has used the most reliable data available at

the time of each analysis in this rulemaking. All data will be available for public review. DOE

welcomes and will consider any submissions of additional data during the rulemaking process.

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2.3 MARKET AND TECHNOLOGY ASSESSMENT

The market and technology assessment (chapter 3) characterizes the relevant residential

water heater, direct heating equipment, and pool heater 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 and

characteristics, (2) existing regulatory and non­regulatory equipment 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 residential water heater, direct heating equipment, and pool heater industry 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 approximate market

shares, (2) shipments by capacity and equipment class, (3) equipment information, and (4)

industry trends. The appropriate sections of the NOPR describe the analysis and resulting

information leading up to the proposed trial standard level while the supporting documentation is

provided in the different chapters of the TSD.

2.3.2 Product Classes

DOE categorized the product types (i.e., residential water heaters, residential direct

heating equipment, and pool heaters) into product classes and will formulate a separate energy

conservation standard for each product class. The criteria for separation into different classes are

type of energy used, capacity, and other performance­related features such as those that provide

utility to the consumer or others deemed appropriate by the Secretary that would justify the

establishment of a separate energy conservation standard. (42 U.S.C. 6295(q) and 6316(a))

For residential water heaters, the product classes are based on energy source (i.e., gas or

electric) and design (i.e., storage­type, tabletop, and instantaneous or “tankless”). The product

classes for residential water heaters were established by the January 17, 2001, Energy

Conservation Standards for Water Heaters; Final Rule (the January 2001 final rule) amending the

energy conservation standards for residential water heaters and incorporated into section

430.32(d). 66 FR 4474, 4497 (January 17, 2001).

The National Appliance Energy Conservation Act (NAECA) establishes product classes

for direct heating equipment (42 U.S.C. 6295(e)(3)) However, DOE has proposed reducing the

number of heating capacity ranges for direct heating equipment to better reflect the distribution

of direct heating equipment available on the market. In addition, DOE has proposed adding

separate product class of direct heating equipment – gas hearth products.

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For pool heaters, the only product class is gas­fired pool heaters, which is established by

NAECA. (42 U.S.C. 6295(e)(2)) A full discussion of the product classes for residential heating

products can be found in chapter 3 of the NOPR TSD.

2.3.3 Technology Assessment

As part of the market and technology assessment, DOE developed a list of technologies

for consideration for improving the efficiency of residential water heaters, direct heating

equipment, and pool heaters. DOE typically uses information about existing and past technology

options and prototype designs to determine which technologies manufacturers use to attain

higher performance levels. In consultation with interested parties, 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 for each of the three

products from trade publications and technical papers and through consultation with

manufacturers of components and systems. Since many options for improving product efficiency

are available in existing products, product literature and direct examination provided additional

information.

DOE removed those technology options whose energy consumption could not be

adequately measured by the existing DOE test procedure. Finally, DOE removed technologies

that do not change or affect the energy efficiency metrics of water heaters, direct heating

equipment, and pool heaters before moving on to the screening analysis. Chapter 3 of the NOPR

TSD includes the detailed list of all technology options identified for each type of residential

water heater, direct heating equipment, and pool heaters.

2.4 SCREENING ANALYSIS

After DOE identified the technologies in the technology assessment that could potentially

improve the energy efficiency of residential heating products, DOE conducted the screening

analysis. The purpose of the screening analysis is to evaluate the technologies to determine

which options to consider further and which options to screen out. DOE consults with industry,

technical experts, and other interested parties in developing a list of technologies for

consideration. DOE then applies the screening criteria to determine which technologies are

unsuitable for further consideration in this rulemaking. Chapter 4 of the NOPR TSD, the

screening analysis, contains details on the criteria that DOE uses.

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

product utility or availability; and (4) have adverse impacts on health and safety. In consultation

with interested parties, DOE reviews the list to determine if the technologies described in chapter

3 of the NOPR TSD are practicable to manufacture, install, and service; would adversely affect

product utility or availability; or would have adverse impacts on health and safety. In the

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engineering analysis, DOE further considers the efficiency­enhancement options (i.e.,

technologies) that it did not screen out in the screening analysis.

2.5 ENGINEERING ANALYSIS

The engineering analysis (chapter 5) establishes the relationship between the

manufacturing production cost and the efficiency for each residential heating product. This

relationship serves as the basis for cost/benefit calculations in terms of individual consumers,

manufacturers, and the Nation. Chapter 5 discusses product classes DOE analyzed, the

representative baseline units, the efficiency levels analyzed, 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 other product classes that were not explicitly analyzed.

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

manufacturer selling prices (MSPs) 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. The LCC analysis uses the costefficiency relationships developed in the engineering analysis.

DOE typically structures its engineering analysis around one of three methodologies: (1)

the design­option approach, which calculates the incremental costs of adding specific design

options to a baseline model; (2) the efficiency­level 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 reverse­engineering or cost­assessment approach,

which involves a “bottom­up” manufacturing cost assessment based on a detailed bill of

materials derived from tear­downs of the product being analyzed.

For the NOPR analysis, DOE used both the efficiency level approach to identify

incremental improvements in efficiency for each product and the cost­assessment approach to

develop a cost for each efficiency level. This approach involved physically disassembling

commercially available products, consulting with outside experts, reviewing publicly available

cost and performance information, and modeling equipment cost. The efficiency levels that DOE

considered in the engineering analysis are attainable by using information about technologies

currently available on the market and commonly incorporated into residential heating products

by manufacturers. In addition, DOE associated each efficiency level with a specific technology

to provide interested parties with additional transparency of assumptions and results and the

ability to perform independent analyses for verification. Chapter 5 of the NOPR TSD describes

the methodology that DOE used to perform the efficiency level analysis and derive the costefficiency relationship.

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2.5.1 Product Classes Analyzed

The engineering analysis directly analyzed all product classes covered in this rulemaking.

However, due to the wide range of storage volumes for storage water heaters and input capacities

for other covered products, not all volume and capacity ranges were directly analyzed in the

engineering analysis and the subsequent analyses. The market data presented in the market and

technology assessment (chapter 3) was used to prioritize covered products to be analyzed based

on either storage volume or input capacity. DOE defined four product classes of water heaters,

five product classes of direct heating equipment, and one product class of pool heaters for this

rulemaking. For storage water heaters, DOE analyzed one representative storage volume for each

product class. For instantaneous gas­fired water heaters, the five classes of direct heating

equipment, and pool heaters, DOE analyzed a representative input capacity or an input capacity

range for each product class. DOE then extended the analysis of the representative product

classes to the entire range of products covered. A description of the representative products

analyzed and the methodology for extending the analysis to other product sizes can be found in

chapter 5 of the NOPR TSD.

2.5.2 Cost Assessment

The manufacturing cost assessment estimated the manufacturing costs associated with

residential heating products at various efficiency levels, including baseline, intermediate, and

max­tech levels. The purpose of the cost assessment is to estimate the cost of increasing the

energy efficiency for each of the residential heating product types. The approach involved

selecting representative products, disassembling specific units, analyzing the materials and

manufacturing processes used to manufacture those units, and developing a spreadsheet cost

model allowing DOE to convert the material and manufacturing processes into the manufacturer

production cost. DOE developed a detailed manufacturing cost assessment model that estimates

manufacturer production cost, reports the manufacturer production costs in aggregated form to

maintain confidentiality of the data, and incorporates input from stakeholders on the

manufacturer production cost estimates and assumptions. After assessing the manufacturer

production cost using the cost model, DOE developed manufacturer markups to establish the

MSP for products at each efficiency level. More detail on the MPCs and MSPs is available in

chapter 5 of the NOPR TSD.

2.5.3 Energy­Efficiency Equations for Gas­Fired and Electric Storage Water Heaters

As part of the engineering analysis for residential water heaters, DOE also reviewed the

energy­efficiency equations that define the existing Federal energy conservation standards for

gas­fired and electric storage water heaters. In particular, DOE reviewed the relationship

between energy factor (EF) and rated storage volume for these two product classes. DOE also

investigated alternative energy­efficiency equations to define amended energy conservation

standards. See chapter 5 of the NOPR TSD for more information on the representative rated

storage volumes, the efficiency levels analyzed, the relationship of the current market to the

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current energy conservation standards, and the relationship between EF and rated storage

volume.

2.6 MARKUPS TO DETERMINE PRODUCT PRICE

DOE used manufacturer­to­consumer markups to convert the manufacturer selling prices

estimated in the engineering analysis to customer prices, which then were used in the LCC, PBP,

and manufacturer impact analyses. DOE calculates markups for baseline products (baseline

markups) and for more efficient products (incremental markups) based on the markups at each

step in the distribution channel. The overall incremental markup relates the change in the

manufacturer sales price of higher­efficiency models (the incremental cost increase) to the

change in the retailer or distributor sales price.

In order to develop markups, DOE identifies how the products are distributed from the

manufacturer to the customer (the distribution channels). DOE estimated manufacturer­tocustomer markups for residential heating products based on separate distribution channels for

water heaters, direct heating equipment, and pool heaters. After establishing appropriate

distribution channels for each of the product classes, 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. A detailed description of the distribution channels and the

markup applied at each step in the distribution process can be found in chapter 6 of the NOPR

TSD.

2.7 ENERGY USE CHARACTERIZATION

The energy use characterization, which assesses the energy savings potential from

adopting higher efficiency standards, provides the basis for the energy savings values used in the

LCC and subsequent analyses. DOE calculated the energy savings for each heating product class

compared to baseline models. As part of the characterization, DOE made certain engineering

assumptions regarding product application, including how the products are operated and under

what conditions. Those assumptions are documented in chapter 7 of the NOPR TSD, which also

provides more detail about DOE’s approach.

2.7.1 Water Heaters

For residential storage­type water heaters, DOE relied on an energy use analysis tool, the

water heater analysis model, and a hot water draw model. For this rulemaking, DOE modified

earlier versions of the tools, which were used to conduct the previous rulemaking that concluded

in 2001. Combined with data from the Energy Information Administration’s (EIA’s) 2005

Residential Energy Consumption Survey (RECS), these analysis tools enable DOE to establish

the variation in water heater energy consumption in the United States.

DOE determined the annual energy consumption of water heaters in actual housing units

by considering the primary factors that determine energy use: hot water use per household, the

energy efficiency characteristics of the water heater, and water heater operating conditions other

than hot water draws. DOE used a hot water draw model to determine hot water use for each

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household in the sample. The characteristics of each water heater’s energy efficiency were taken

from the engineering analysis. DOE developed water heater operating conditions (other than hot

water draws) from weather data and other relevant sources. DOE calculated the energy use of

water heaters using a simplified energy equation, the water heater analysis model (WHAM),

which accounts for a range of operating conditions and energy efficiency characteristics of water

heaters.

For heat pump water heaters, DOE investigated the issue of overcooling of the indoor

space. To account for these indirect effects on home heating (and cooling), DOE estimated the

impact on energy consumption for space heating and air conditioning for each home in the RECS

subsample of homes containing electric water heaters with the water heater located in the

conditioned space.

To analyze gas­fired instantaneous water heaters, DOE modified the approach used for

storage water heaters to account for the absence of a storage tank. DOE applied a performance

adjustment factor to account for evidence that the rated energy efficiency of instantaneous water

heaters does not accurately portray actual performance. DOE used a performance adjustment

factor for GIWH field energy use that varies with the household hot water consumption.

2.7.2 Direct Heating Equipment and Pool Heaters

To represent actual households likely to purchase and use direct heating equipment, DOE

developed a household sample from RECS 2005. The sample comprises units that used a

floor/wall furnace, fireplace, or heater as the primary or secondary source of heat. DOE believes

that the sample size for direct heating equipment is large enough to provide representative data

on the conditions under which U.S. households use such products.

For households for which it is evident that the natural gas used for heating is associated

solely with using the direct heating equipment as the primary or secondary heat source, DOE

used the household’s annual fuel consumption for heating from RECS 2005. For households that

used a gas furnace as the primary heating equipment and direct heating equipment as a secondary

heat source, DOE adjusted the house heating load to estimate the energy use of the direct heating

equipment. RECS reports the fraction of heating energy consumed by the secondary products.

DOE reduced the house heating load ascribable to direct heating equipment by subtracting the

estimated amount of heat provided by the secondary system.

To represent actual households likely to purchase and use pool heaters, DOE developed a

household sample from RECS 2005. Although the RECS sample for pool heaters is relatively

small, DOE believes that it is the best available source for estimates of pool heater energy use in

the field. To account for the different energy use characteristics of residential pool and spa

heaters, DOE used a distribution of values for operating hours that encompasses a wide range of

situations, including those with and without spa heating. DOE did not separately analyze energy

usage for pool heaters and spa heaters.

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DOE relied on the assumptions in the DOE test procedures to establish the typical annual

energy consumption of direct heating equipment and pool heaters. However, DOE did modify

some of the assumptions to better reflect actual operating conditions. For direct heating

equipment, DOE used home heating loads derived from RECS instead of the average

assumptions in the test procedure. For pool heaters, DOE used pool heater heating loads derived

from RECS instead of the average test procedure assumptions.

2.8 LIFE­CYCLE COST AND PAYBACK PERIOD ANALYSES

New energy conservation standards affect products’ operating expenses—usually

decreasing them—and consumer prices for the products—usually increasing them. DOE

analyzed the net effect of amended standards on consumers by evaluating the net LCC. To

evaluate the net LCC, DOE used the cost­efficiency 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 and repair costs),

the lifetime of the unit, and a discount rate.

Because the installed cost of a product typically increases while operating cost typically

decreases in response to new standards, there is a time in the life of products having higher­thanbaseline efficiency when the net operating­cost benefit (in dollars) since the time of purchase is

equal to the incremental first cost of purchasing the higher­efficiency product. The length of time

required for products to reach this cost­equivalence point is known as the payback period (PBP).

DOE conducted the LCC and PBP analyses using typical values to reflect energy

consumption in the field. DOE identified several input values for estimating the LCC, including

retail prices; electricity prices; discount rate; maintenance, repair, and installation costs; and

product lifetimes. Chapter 8 of the NOPR TSD provides more detail about DOE’s approach.

DOE used EIA’s energy price data to determine recent prices of electricity, natural gas,

oil, and liquefied petroleum gas. DOE used projections of those energy prices from EIA’s

Annual Energy Outlook (AEO) 2009 to estimate future energy prices. In calculating energy

consumption, DOE considered the rebound effect (also called a take­back effect, or offsetting

behavior), which refers to the increased energy consumption resulting from actions that increase

energy efficiency and reduce consumer costs. The rebound effect assumes that consumers give

up some of the potential energy savings to receive more service. To determine how the rebound

effect may impact the energy savings for the considered heating products, DOE searched the

literature on the rebound effect. DOE also considered how the National Energy Modeling system

(NEMS), which is used for developing EIA's AEO, incorporates a rebound effect. Based on

available information, DOE used a rebound effect of 10 percent for water heaters, 15 percent for

direct heating equipment, and 10 percent for pool heaters. For more detail on the rebound effect,

see chapter 8 of the NOPR TSD.

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DOE developed discount rates from estimates of the interest rate, or finance cost, applied

to purchases of residential 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 expected changes to maintenance, repair, and installation costs for the

products covered in this rulemaking. The installation costs for residential heating products

depend largely on the products’ electrical power and venting requirements. Typically, small

incremental changes in product 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 efficiencies can incur increased repair and maintenance costs

because they are more likely to incorporate technologies that are more advanced.

DOE used information from various published literature sources as well as input from

manufacturers and other stakeholders to establish distributions of product lifetimes for use in the

life­cycle cost and subsequent analyses.

2.9 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. 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 in­service product stocks for all years. The age distribution of in­service 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 evaluated the potential for energy conservation standards to induce product

switching, especially for water heaters. In particular, DOE examined the potential for

switching from a heat pump electric storage water heater to a gas­fired water heater. DOE used

data from the 2005 RECS to estimate the percentage of households expected to purchase an

electric water heater in the base case that could switch to a gas­fired water heater. To estimate

how many of the households that could switch to gas­fired water heaters would do so, DOE

considered the difference in installed cost between a gas­fired storage water heater and an

electric heat pump water heater for different gas water heater designs.

Chapter 9 of the NOPR TSD provides additional details on the shipments analysis.

2.10 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

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net present value (NPV) of total consumer economic impacts and the national energy savings

(NES). DOE determined both the NPV and NES for the performance levels considered for 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

as inputs typical values (as opposed to probability distributions). To assess the effect of input

uncertainty on NES and NPV results, DOE conducted sensitivity analyses by running scenarios

on specific input variables, which are described in chapter 10 of the NOPR TSD.

2.10.1 National Energy Savings Analysis

The inputs for determining the national energy savings (NES) for each product analyzed

are: (1) annual energy consumption per unit, (2) shipments, (3) product stock, (4) national energy

consumption, and (5) site­to­source conversion factors. DOE calculated the national energy

consumption by multiplying the number of units, or stock, of each product (by vintage) by the

unit energy consumption (also by vintage).a 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 energy. Cumulative

energy savings are the sum of the NES for each year.

The stock of a product is dependent on annual shipments and the lifetime of the product.

DOE projected shipments under the base efficiency case and higher efficiency standards cases

for various product efficiency scenarios and product efficiency trends. DOE’s shipments model

assumed that shipments of new products are driven by new construction as well as stock

replacements.

2.10.2 Net Present Value Analysis

The inputs for determining net present value (NPV) 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, 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 total installed costs. DOE used a discount factor

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.

a Vintage represents the age of the product.

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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.

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.

2.10.3 Efficiency Scenarios and Trends

Several of the inputs for determining NES and NPV depend on the product efficiency.

DOE developed efficiency trends for the base case and standards cases. These trends specify the

average annual historical and forecasted shipments­weighted product efficiencies.

DOE used data from industry sources to develop average shipments­weighted efficiency

trends for the considered products. After establishing efficiency trends, DOE derived annual

energy consumption based on relationships between efficiency and unit energy consumption.

DOE used a roll­up efficiency scenario in developing its forecasts of efficiency trends

after standards take effect. Under a roll­up scenario, all products that perform at levels below a

prospective standard are moved, or rolled­up, to the minimum performance level allowed under

the standard. The distribution of products that meet the higher efficiency standard levels is

unaffected.

2.10.4 Impact of Standards on Natural Gas Prices and Overall Economic Benefits

The national impacts analysis examines the potential economic impacts of alternative

standard levels on consumers who purchase the considered products. To evaluate potentially

important indirect effects of energy conservation standards on energy users in general, DOE

analyzed the potential impacts of amended standards on natural gas prices and the associated

benefits for all natural gas consumers in all sectors of the economy.

DOE considered two scenarios for standards. The Max­NPV scenario consists of

standards that reflect the energy efficiency levels found to have the greatest consumer NPV. The

Max­Tech scenario encompasses standards that reflect the identified max­tech energy efficiency

levels. The Max­Tech scenario represents the upper bound for impacts on natural gas prices.

DOE’s analysis used a variant of the modeling program NEMS, known as NEMS­BT,

which has been modified to account for the natural gas savings associated with possible

standards. Like other widely used energy­economic models, NEMS incorporates parameters to

estimate the changes in energy prices that would result from an increase or decrease in energy

demand. The response of price to a decrease in demand is termed the “inverse price elasticity.”

The overall inverse price elasticity observed in NEMS changes over the forecast period based on

the model’s dynamics of natural gas supply and demand.

2.11 MANUFACTURER IMPACT ANALYSIS

DOE performed a manufacturer impact analysis (MIA) to estimate the financial impact of

higher energy conservation standards on manufacturers of the three heating products, and to

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calculate the impact of such standards on employment and manufacturing capacity. The MIA has

both quantitative and qualitative aspects. The quantitative part of the MIA relies on the

government regulatory impact model (GRIM), an industry­cash­flow model customized for these

three industries. The GRIM inputs are information regarding the industry cost structure,

shipments, and revenues. This includes information from many of the analyses described above,

such as manufacturing costs and prices from the engineering analysis and shipments forecasts.

The key GRIM output is the industry net present value (INPV). Different sets of assumptions

(scenarios) will produce different results. The qualitative part of the MIA addresses factors such

as equipment characteristics, characteristics of particular firms, and market and equipment

trends, and includes assessment of the impacts of standards on subgroups of manufacturers. The

complete MIA is described in chapter 12 of the NOPR TSD.

DOE conducted each MIA in this rulemaking in three phases. In Phase I, DOE created an

industry profile to characterize the industry and identify important issues that require

consideration. In Phase II, DOE prepared an industry cash­flow model and an interview

questionnaire to guide subsequent discussions. In Phase III, DOE interviewed manufacturers, and

assessed the impacts of standards both quantitatively and qualitatively. DOE assessed industry

and subgroup cash flow and NPV using the GRIM. DOE then assessed impacts on competition,

manufacturing capacity, employment, and regulatory burden based on manufacturer interview

feedback and discussions.

2.12 LIFE­CYCLE COST SUBGROUP ANALYSIS

The LCC 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 in part by

analyzing the LCC impacts and PBP for those particular consumers.

DOE used the LCC spreadsheet model to evaluate impacts on consumer subgroups. DOE

can analyze the LCC for any subgroup by applying the LCC spreadsheet model to only that

subgroup. DOE is particularly sensitive to increases in the consumer price of the considered

products, wishing to avoid a negative economic impact on any identified consumer subgroup.

2.13 UTILITY IMPACT ANALYSIS

The utility impact analysis included an analysis of the effect of new energy conservation

standards on the electric and the gas utility industries. For this analysis, DOE adapted NEMS,

which is a large multi­sectoral, partial­equilibrium 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 NEMS­BT, 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 through the year 2030. The typical NEMS outputs include

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forecasts of electricity sales, prices, and electric generating capacity. DOE conducts the utility

impact analysis as a scenario that departs from the latest AEO reference case. In other words, the

energy savings impacts from amended energy conservation standards are modeled using NEMSBT to generate forecasts that deviate from the AEO reference case.

2.14 ENVIRONMENTAL IMPACT ANALYSIS

The intent of the environmental assessment (EA) is to fulfill requirements to properly

quantify and consider the environmental effects of all new Federal rules. The primary

environmental effects of energy conservation standards for heating products would be reduced

power plant emissions resulting from reduced consumption of electricity. DOE assessed these

environmental effects by using NEMS­BT to provide key inputs to its analysis. The portion of

the environmental assessment produced by NEMS­BT considers three pollutants, sulfur dioxide

(SO2), nitrogen oxides (NOX), and mercury (Hg), and carbon dioxide (CO2).

NEMS­BT is run similarly to the AEO NEMS, except that heating product energy use is

reduced by the amount of energy saved (by fuel type) due to each TSL. The inputs of national

energy savings come from the NIA spreadsheet model; the output is the forecasted physical

emissions at each TSL. The net benefit of the standard is the difference between emissions

estimated by NEMS­BT at each TSL and the AEO Reference Case. NEMS­BT tracks CO2

emissions using a detailed module that provides results with broad coverage of all sectors and

inclusion of interactive effects. For the NOPR, DOE used the AEO 2009 NEMS (stimulus

version).

DOE’s assessment accounts for existing regulations that affect emissions of the

considered pollutants and CO2. The EA does not include the estimated reduction in power sector

emissions of SO2, because DOE has determined that due to the presence of national caps on SO2

emissions, any reduction in electricity generation resulting from an energy conservation standard

would not affect the overall level of SO2 emissions in the United States.

Future emissions of NOx were made subject to emissions caps under the Clean Air

Interstate Rule (CAIR) issued by the U.S. Environmental Protection Agency on March 10, 2005.

70 FR 25162 (May 12, 2005). CAIR permanently capped emissions in 28 eastern States and the

District of Columbia (D.C.). The CAIR was vacated by the U.S. Court of Appeals for the District

of Columbia Circuit (D.C. Circuit) in its July 11, 2008 decision in North Carolina v.

Environmental Protection Agency. 531 F.3d 896 (D.C. Cir. 2008) However, on December 23,

2008, the D.C. Circuit decided to allow CAIR to remain in effect until it is replaced by a rule

consistent with the court’s earlier opinion. 550 F.3d 1176 (D.C. Cir. 2008) The NEMS­BT model

used for the NOPR incorporates the impacts of the CAIR on NOx emissions. The reported NOx

emissions reductions refer to those States not covered by the CAIR caps.

Future emissions of Hg would have been subject to emissions caps under the Clean Air

Mercury Rule (CAMR), which would have permanently capped emissions of mercury for new

and existing coal­fired plants in all States by 2010 (70 FR 28606). However, the CAMR was

vacated by the D.C. Circuit in its decision in New Jersey v. Environmental Protection Agency.

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517 F 3d 574 (D.C. Cir. 2008) Thus, DOE was able to use the NEMS­BT model to estimate the

changes in Hg emissions resulting from the proposed rule.

NEMS does not estimate emissions at homes from gas­fired appliances (e.g., gas­fired

water heaters, direct heating equipment and gas pool heaters). Therefore, DOE made separate

estimates of the effect of amended standards on CO2, NOx, and SO2 emissions from gas­fired

appliances, based on emissions factors derived from the literature.

In addition to providing estimates of quantitative impacts of heating products standards

on CO2 emissions and other emissions, DOE applied monetary values to represent the potential

economic value of such emissions reductions. DOE based its estimates of the monetary value of

emissions reductions on the economic benefits likely to result from such reductions. DOE

examined a range of monetary values found in the literature.

For more detail on the environmental assessment, refer to the environmental assessment

report in the NOPR TSD.

2.15 EMPLOYMENT IMPACT ANALYSIS

The imposition of standards can affect employment both directly and indirectly. Direct

employment impacts are changes, produced by new standards, in the number of employees at

plants that produce the covered products and at the affiliated distribution and service companies.

DOE evaluated direct employment impacts in the manufacturer impact analysis. Indirect

employment impacts that occur because of the imposition of standards may result from

consumers shifting expenditures between goods (the substitution effect) and from changes in

income and overall expenditure levels (the income effect). DOE utilized Pacific Northwest

National Laboratory’s impact of sector energy technologies (ImSET) model to investigate the

combined direct and indirect employment impacts. The ImSET model, which was developed for

DOE’s Office of Planning, Budget, and Analysis, estimates the employment and income effects

energy­saving technologies produce 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 prepared 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 addresses the potential for nonregulatory approaches to supplant or augment energy conservation standards in order to improve

the energy efficiency or reduce the energy consumption of the products covered under this

rulemaking.

DOE recognizes that voluntary or other non­regulatory efforts by manufacturers, utilities,

and other interested parties can substantially affect energy efficiency or reduce energy

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consumption. DOE based its assessment on the actual impacts of any such initiatives to date, but

also considered information presented by interested parties regarding the impacts existing

initiatives 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 U.S Department of Justice

(DOJ) on any lessening of competition that is likely to result from the imposition of a proposed

new energy conservation standard. DOE will give the views provided full consideration in

assessing economic justification of a proposed standard.

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