CHAPTER 2. ANALYTICAL FRAMEWORK, COMMENTS FROM
 

INTERESTED PARTIES, AND DOE RESPONSES 

TABLE OF CONTENTS
 

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

2.1.1 Overview ................................................................................................................. 1
 

2.1.2 Miscellaneous Rulemaking Issues .......................................................................... 3
 

2.2 MARKET AND TECHNOLOGY ASSESSMENT ........................................................... 7
 

2.2.1 Product Classes and Scope of Coverage................................................................. 8
 

2.2.2 Technology Assessment........................................................................................ 10
 

2.3 SCREENING ANALYSIS ............................................................................................... 14
 

2.4 ENGINEERING ANALYSIS........................................................................................... 14
 

2.4.1 Baseline Products .................................................................................................. 16
 

2.4.2 Space-Constrained Products ................................................................................. 17
 

2.5 MARKUPS TO DETERMINE PRODUCT PRICE ......................................................... 17
 

2.5.1 Distribution Channel Structure ............................................................................. 17
 

2.5.2 Data Sources for Distribution Channel Markups .................................................. 19
 

2.5.3 Markups/Price Determination ............................................................................... 20
 

2.6 ENERGY USE CHARACTERIZATION ........................................................................ 20
 

2.6.1 Residential Energy Use analysis........................................................................... 22
 

2.6.2 Impact of Improved Building Codes..................................................................... 23
 

2.6.3 Inclusion of Commercial Energy Use Analysis .................................................... 24
 

2.6.4 Use of Rated Performance versus Degraded Performance ................................... 24
 

2.6.5 Characterization of Energy Using SEER/HSPF ................................................... 25
 

2.6.6 Development of Regions for Regional Standard Analysis ................................... 25
 

2.7 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES ..................................... 29
 

2.7.1 General Approach for Life-Cycle Cost and Payback Period Analyses ................ 30
 

2.7.2 Electricity Prices ................................................................................................... 31
 

2.7.3 Repair Cost............................................................................................................ 34
 

2.7.4 Maintenance Cost.................................................................................................. 35
 

2.7.5 Discount Rate........................................................................................................ 36
 

2.8 NATIONAL IMPACT ANALYSIS................................................................................. 38
 

2.8.1 Shipments Analysis ............................................................................................... 38
 

2.8.2 Efficiency Scenarios and Trends .......................................................................... 41
 

2.8.3 National Energy Savings Analysis........................................................................ 42
 

2.8.4 Net Present Value Analysis .................................................................................. 43
 

2.9 PRELIMINARY MANUFACTURER IMPACT ANALYSIS ........................................ 44
 

2.9.1 Industry Cash-Flow Analysis................................................................................ 45
 

2.9.2 Manufacturer Subgroup Analysis ......................................................................... 45
 

2.9.3 Competitive Impacts Assessment ......................................................................... 46
 

2.9.4 Cumulative Regulatory Burden ............................................................................ 46
 

2.9.5 Preliminary Results for the Manufacturer Impact Analysis ................................. 48
 

2.9.6 Regional Standards Impacts on Manufacturers .................................................... 48
 

2.10 REGIONAL STANDARDS IMPACTS ANALYSIS...................................................... 49
 

2.10.1 Impacts on Manufacturers..................................................................................... 50
 

2.10.2 Impacts on Distributors, Dealers, and Contractors, and Installers........................ 50
 

2-i 
 

2.10.3 Enforcement .......................................................................................................... 51
 

2.11 LIFE-CYCLE COST SUBGROUP ANALYSIS ............................................................. 53
 

2.12 UTILITY IMPACT ANALYSIS...................................................................................... 54
 

2.13 ENVIRONMENTAL ASSESSMENT ............................................................................. 54
 

2.13.1 Carbon Dioxide ..................................................................................................... 54
 

2.13.2 Sulfur Dioxide....................................................................................................... 54
 

2.13.3 Nitrogen Oxides .................................................................................................... 55
 

2.13.4 Mercury ................................................................................................................. 56
 

2.13.5 Particulate Matter.................................................................................................. 56
 

2.13.6 Monetization of Emissions Reduction Benefits .................................................... 56
 

2.14 EMPLOYMENT IMPACT ANALYSIS.......................................................................... 58
 

2.15 REGULATORY IMPACT ANALYSIS .......................................................................... 58
 

LIST OF TABLES 

Table 2.1 Energy Conservation Standards for Space-Constrained Products ............................. 2-17
 

LIST OF FIGURES 

Figure 2.1 Distribution Channels for Central Air Conditioners and Heat Pumps .................... 2-19
 

2-ii 
 

CHAPTER 2. ANALYTICAL FRAMEWORK, COMMENTS FROM 

INTERESTED PARTIES, AND DOE RESPONSES 

2.1 INTRODUCTION 

2.1.1 Overview 

Section 6295(o)(2)(A) of the Energy Policy and Conservation Act, as amended, 42 USC 

6291 et. seq., requires that when prescribing new or amended energy conservation standards for 

covered products, the U.S. Department of Energy (DOE) promulgate standards that achieve the 

maximum improvements in energy efficiency that are technologically feasible and economically 

justified. This chapter provides a description of the analytical framework that DOE is using to 

evaluate amended energy conservation standards for residential central air conditioners and heat 

pumps. The chapter sets forth the methodology, analytical tools, and relationships among the 

various analyses that are part of this rulemaking. 

The analyses performed as part of the accompanying notice and reported in this 

preliminary technical support document (preliminary TSD) are as follows: 

•	 A market and technology assessment characterizes the relevant products, their markets 

and technology options for improving their energy efficiency, including prototype 

designs. 

•	 A screening analysis reviews each technology option and determines if it is 

technologically feasible; is practicable to manufacture, install, and service; would 

adversely affect product utility or product availability; or would have adverse impacts on 

health and safety. 

•	 An engineering analysis develops relationships that show the manufacturer’s cost of 

achieving increased efficiency. DOE determines the increased cost to the consumer 

through an analysis of manufacturer markups. The engineering analysis also develops 

manufacturer markups that convert manufacturer production cost (MPC) to manufacturer 

selling price (MSP). 

•	 An energy use analysis determines the annual energy use of the considered products. 

•	 A markup analysis develops the distribution channel markups used to determine final 

customer price starting with MSP. 

•	 The LCC and payback period (PBP) analyses calculate the discounted savings in 

operating costs (less any increase in maintenance and repair costs) at the consumer level 

throughout the life of the covered products compared with any increase in the installed 

cost for the products likely to result directly from imposition of the standard. 

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

national impacts of standards on energy, net present value (NPV), and future 

manufacturer cash flows. 

2-1 
 

 

 

 

 

•	 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 preliminary manufacturer impact analysis (MIA) assesses the potential impacts of 

energy conservation standards on manufacturers, such as impacts on capital conversion 

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

In the subsequent notice of proposed rulemaking (NOPR) stage, DOE will revise the 

preliminary analyses just described, to the extent warranted by comments and new information. 

In addition, DOE will perform the following analyses: 

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

cause a standard to affect particular consumer sub-populations (such as low-income 

households) differently than the overall population. 

•	 An MIA will estimate the financial impact of standards on manufacturers and calculate 

impacts on competition, employment, and manufacturing capacity. 

•	 A regional standards impact analysis will examine the impacts of regional standards on 

distributors, dealers, contractors and installers. Analysis of potential impacts of regional 

standards on manufacturers and consumers, as required by EPCA, will be conducted as 

part of the MIA and LCC and PBP analyses, respectively. 

•	 A utility impact analysis will estimate the effects of proposed standards on electric, gas, 

or oil utilities. 

•	 An employment impact analysis will assess the aggregate impacts on national 

employment.
 

•	 An environmental impact analysis will provide estimates of the effects of amended 

energy conservation standards on carbon dioxide (CO2), sulfur dioxide (SO2), nitrogen 

oxides (NOx), and mercury (Hg). 

•	 A regulatory impact analysis (RIA) will evaluate major alternatives to proposed amended 

energy conservation standards, to assess whether such alternatives could achieve 

substantially the same regulatory goal at a lower cost. 

DOE developed this analytical framework in the Rulemaking Framework for Residential 

Central Air Conditioners and Heat Pumps (June 2, 2008). 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 June 6, 2008. 73 FR 32243–45. DOE presented the 

analytical approach to interested parties during a public meeting held on June 12, 2008. The 

framework document is available at 

http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/cac_framework.pdf. 

In response to the publication of the framework document and to the public meeting, 

DOE received numerous comments from interested parties regarding DOE’s analytical approach. 

This chapter summarizes the key comments and describes DOE’s responses. In this chapter, 

DOE also summarizes any significant changes that it has made in the analytical approach 

described in the framework document and that it has incorporated into its preliminary analyses. 

2-2 
In the executive summary of the preliminary TSD, DOE identifies a number of issues for which 

DOE seeks public comment. DOE has explained each of those issues in the relevant analysis 

sections below. 

2.1.2 Miscellaneous Rulemaking Issues 

2.1.2.1 Retention of the Advanced Notice of Proposed Rulemaking 

After publication of the framework document, DOE received comments about whether 

the advanced notice of proposed rulemaking (ANOPR) step should be retained in DOE’s 

rulemaking process. In a joint comment submitted by the American Council for an EnergyEfficient Economy (ACEEE), the Appliance Standards Awareness Project (ASAP), the 

California Energy Commission (CEC), the Northwest Power and Conservation Council (NPCC), 

and the Western Cooling Efficiency Center (WCEC) (hereafter “Joint Comment 1”), these 

interested parties cooperatively expressed a desire for DOE to provide all the analyses 

traditionally associated with the ANOPR for review. (Joint Comment 1, No. 25 at p. 9) In 

addition, Heating, Air Conditioning & Refrigeration Distributors International (HARDI) stated 

that the ANOPR process is even more essential for this rulemaking because of the complexity of 

the standard. Specifically, it mentioned DOE’s unprecedented consideration of regionalizing the 

standard and, in its opinion, DOE’s need for a better understanding of the heating, ventilation, 

and air conditioning (HVAC) distribution channel, its cost structure, and its role within the 

industry (HARDI, No. 32 at p. 2). The Southern Company (Southern) also considers the ANOPR 

an essential part of the rulemaking process. (Southern, No. 39 at p. 4) According to Southern, the 

ANOPR allows “consideration and critique of the economic and market assumptions to be used 

in the NOPR without consideration of proposed stringency levels, and allows the NOPR stage of 

the rulemaking to focus on stringency levels without excessive questioning of the analysis 

assumptions.” The National Rural Electric Cooperative Association (NRECA), Trane, Carrier, 

the Air-Conditioning, Heating, and Refrigeration Institute (AHRI), the Air Conditioning 

Contractors of America (ACCA), and the American Supply Association (ASA) also expressed 

support for DOE’s use of the ANOPR for this rulemaking because it provides an increased level 

of transparency to the process and an opportunity for interested parties to provide valuable 

feedback. (NRECA, No. 35 at p. 2; Trane, No. 16 at p. 5; Carrier, No. 18 at p. 4; AHRI, Public 

Meeting Transcript, No. 13 at p. 14; ACCA, Public Meeting Transcript, No. 23 at p. 28; ASA, 

Public Meeting Transcript, No. 13 at p. 32) 

Section 307 of the Energy Independence and Security Act of 2007 (Pub. L. 110–140; 

EISA 2007) amended the Energy Policy and Conservation Act (EPCA) by removing the 

requirement for DOE to publish an ANOPR when amending standards for consumer products. 

DOE agrees, however, that in past rulemakings, ANOPRs have provided a valuable early 

opportunity for DOE to vet its assumptions and analyses and for interested parties to provide 

comments and data. Therefore, DOE developed an alternative to the ANOPR, consisting of a 

preliminary analysis and a notice of TSD availability to the public. These documents include 

summaries of, and DOE responses to, comments received at the framework workshop and during 

the framework comment period. In addition, a public meeting will be held following publication 

of the preliminary analysis materials. Therefore, the preliminary analysis allows for an expedited 

rulemaking process that does not sacrifice transparency or feedback opportunities for interested 

parties. 

2-3 
 

2.1.2.2 Regional Standards 

Section 306(a) of EISA 2007 amended EPCA to authorize DOE to consider regional 

standards for central air conditioners and heat pumps for one or two regions in addition to a base 

national standard. (42 U.S.C. 6295(o)(6)) In the framework document, DOE requested comment 

on the potential impacts that regional standards for residential central air conditioners and heat 

pumps may have on the industry. HARDI commented that it was concerned about how the 

possible adoption of regional standards might affect ENERGY STAR specifications. (HARDI, 

No. 32 at p. 6) HARDI expressed concern that the ENERGY STAR label could be significantly 

degraded by forcing the brand to be regionalized or moving to prohibitively expensive efficiency 

levels in regions with higher minimum standards. 

ENERGY STAR creates an incentive for manufacturers to develop and for consumers to 

purchase higher efficiency products. However, DOE does not have data to determine degradation 

of the ENERGY STAR label through the imposition of regional standards, and welcome 

comments on the issue. 

2.1.2.3 Effective Date of Standards 

This rulemaking implements the EPCA requirement for a second amended energy 

conservation standards rulemaking for central air conditioners and heat pumps. (42 U.S.C. 

6295(d)(3)(B)) In the framework document, DOE explained that pursuant to the consolidated 

consent decree in New York versus Bodman, No. 05 Civ. 7807 (S.D.N.Y. filed September 7, 

2005) and Natural Resources Defense Council versus Bodman, No. 05 Civ. 7808 (S.D.N.Y. filed 

September 7, 2005), DOE must publish a final rule in this rulemaking by June 30, 2011. 

Consistent with the lead time specified in 42 U.S.C. 6295(d)(3)(B) for the second round of 

amended standards for central air conditioners and heat pumps, DOE determined that any such 

standards would apply to products manufactured on or after 5 years after publication of the final 

rule. DOE expects to publish a final rule by June 30, 2011 as required by the consent decree, 

thereby requiring compliance with the standards effective by June 30, 2016. 

At the framework public meeting, DOE received several comments about the June 2016 

effective date. ACCA stated this date will cause inconsistencies for distributors, because they 

will have to switch to more expensive products during peak season. (ACCA, Public Meeting 

Transcript, No. 13 at p. 89) Lennox suggested that the effective date of the standard should be 

January instead of June 2016 to avoid peak season. (Lennox, Public Meeting Transcript, No. 13 

at p. 76) ASAP believes that under 42 U.S.C. 6295(d)(3)(B), DOE is not bound to any particular 

effective date, providing some flexibility to change the date to minimize manufacturing impact. 

(ASAP, Public Meeting Transcript, No. 13 at p. 100) 

DOE previously determined that the final rule in this rulemaking must be published by 

June 30, 2011 and tentatively decided that the rule would apply to products manufactured 5 years 

later, in June 2016. DOE seeks further comment on compliance during the peak season. 

(Reference Chapter 2 of the preliminary TSD for details.) 

2-4 
 

 

2.1.2.4 Consensus Negotiations 

Efficiency organizations indicated their willingness to participate in developing 

consensus recommendations but requested regular DOE communication with interested parties 

during the preliminary analysis process. They also noted that for consensus negotiations to work, 

DOE should be willing to consider a standard that might include both performance and 

prescriptive elements (such as controls and/or interfaces). (Joint Comment 1, No. 25 at p. 5) For 

residential central air conditioners and heat pumps, DOE lacks the authority to prescribe a 

standard that consists of a “design requirement,” i.e., a prescriptive requirement. (42 U.S.C. 

6291(6)(B), 6292(a)(3)) Further, generally an energy conservation standard must be either a 

performance requirement or a design requirement, but cannot include both elements. (42 U.S.C. 

6291(6)) 

2.1.2.5 Heat Pump Cooling Efficiency Requirements 

NRECA and the Edison Electric Institute (EEI) both stated that final standards for 

cooling efficiency requirements for central air conditioner and heat pump products should be the 

same. (NRECA, No. 35 at p. 1; EEI, No. 20 at p. 3) 

In the previous energy efficiency standards rulemaking for residential central air 

conditioners and heat pumps, DOE prescribed the same cooling-efficiency standard for both 

types of products. This resulted largely from DOE’s concern that higher cooling-efficiency 

ratings for heat pumps might cause consumers to switch to electric resistance furnaces and air 

conditioners, thereby negating the benefits of higher efficiency levels. 66 FR 7169, 7180-81, 

7196 (January 22, 2001)(the 2001 residential central air conditioner and heat pump final rule). In 

this rulemaking, as reflected in this preliminary TSD, DOE is analyzing air-conditioning and 

heat pump products independently of one another to determine if any amended standard levels 

are appropriate. In addition to enabling more precise analysis of each product, these independent 

analyses will facilitate DOE’s determination as to whether to have the same cooling-efficiency 

standards for central air conditioners and heat pumps and will facilitate comments on this issue. 

Based on the analyses it had conducted to date, DOE intends to develop cooling-efficiency 

standards that are the same for both types of products. However, DOE is still considering this 

issue and requests comment on whether to set standards with the same cooling efficiency for air 

conditioners and heat pumps. 

2.1.2.6 Imported Products 

At the framework public meeting, Mitsubishi Electric & Electronics USA, Inc. (MEUS) 

questioned whether the amended energy conservation standard will be applicable to products 

manufactured before but imported after the effective date. (MEUS, Public Meeting Transcript, 

No. 13 at p. 94) 

The amended standards would apply to all such products. If DOE adopts a single set of 

national energy conservation standards for central air conditioners and heat pumps, such 

standards would apply to products “manufactured” on or after a specified date. (42 U.S.C. 

6295(d)(3)(B)) EPCA defines “manufacture" as meaning “to manufacture, produce, assemble or 

import” and "import" as meaning “to import into the customs territory of the United States.” (42 

2-5 
U.S.C. 6291(10), (11)) In addition, if DOE adopts any regional standards, the companion base 

national standards would “apply to all products manufactured or imported into the United States 

on and after the effective date for the standard.” (42 U.S.C. 6295(o)(6)(E)(i)(II)) Any regional 

standard for a product would apply “to any such product installed on or after the effective date of 

the standard.” (42 U.S.C. 6295(o)(6)(E)(ii)) Therefore, for either a single set of national energy 

conservation standards or base national standards adopted in conjunction with regional standards, 

products imported into the customs territory of the United States on or after the effective date 

must comply with the standards, regardless of the date of manufacture. Further, because products 

would be installed after the date of manufacture and import, regional standards would be 

applicable to any products manufactured or imported before but installed after the effective date 

of the standards. 

2.1.2.7 Test Procedure Issues 

DOE received multiple comments at the framework public meeting about revisions to the 

residential central air conditioner and heat pump test procedure. DOE addressed these comments 

in a NOPR recently issued to propose revisions to the central air conditioner and heat pump test 

procedure. That rulemaking is being conducted in parallel with this standards rulemaking. The 

comments apply to the following areas: bench testing of third-party coils, defaults for fan power 

in the test procedure, external static pressure in the test, fan time delay relays, incorporation of 

inverter driven compressors, addition of calculation and reporting requirements for sensible heat 

ratio, how to address testing inconsistencies for ductless mini-splits, and incorporation of 

standby-mode and off-mode energy consumption. 

Several of these comments overlap issues surrounding the development of proposed 

standards, including the possible development of different seasonal energy efficiency ratio 

(SEER) metrics that would apply regionally and would better characterize system efficiency and 

performance for the defined regions. Consistent with the requirement in EPCA for DOE to 

express the “efficiency descriptor” for central air conditioners and heat pumps as SEER, DOE is 

considering adoption of revised SEER metrics to reflect regional operating conditions. DOE has 

examined a method of developing a SEER specific to a four-state, hot-dry region. DOE believes 

that the existing SEER ratings sufficiently address performance in hot-humid climates. For the 

preliminary analysis, DOE did not have sufficient information on how product costs and overall 

system performance might change if a SEER hot-dry metric was used. Therefore, DOE used the 

current SEER rating metric for its energy and economic analysis. DOE will examine comments 

on the development of the hot-dry SEER and its utility in standards setting in the NOPR stage of 

the rulemaking. 

2.1.2.8 Standby-Mode and Off-Mode Energy Consumption 

In Section 310 of EISA 2007, Congress directed DOE to amend test procedures for all 

covered products to include standby mode and off mode energy consumption unless current 

procedures already cover such energy consumption or an integrated test procedure is technically 

infeasible, in which case a separate standby mode and off mode test procedure must be 

prescribed, if technically feasible. (42 U.S.C. 6295(gg)(2)) Section 310 also required any final 

rule establishing or revising standards for covered products adopted after July 1, 2010 to 

incorporate standby mode and off mode energy use. (42 U.S.C. 6295(gg)(3)) Because this energy 

2-6 
conservation standards rulemaking for central air conditioners and heat pumps is scheduled to be 

completed in 2011, the requirement to incorporate standby-mode and off-mode energy use into 

the energy conservation standards analysis is applicable. 

DOE considers standby-mode for central air conditioners and heat pumps to be in effect 

when the system is on during the cooling and heating seasons, but the compressor is not running. 

In other words, a system is in standby-mode if it is not actively heating or cooling, but the 

compressor is primed to be activated by the thermostat. DOE considers off-mode for central air 

conditioners and heat pumps to be in effect when a system is not set to a heating-mode or 

cooling-mode. For heat pumps, off-mode is generally characterized by the “shoulder seasons” 

(i.e., fall and spring), when consumers are not heating or cooling their homes. For air 

conditioners, off-mode is generally characterized by all non-cooling seasons. DOE determined 

that standby-mode energy consumption is already accounted for in the SEER and heating 

seasonal performance factor (HSPF) metrics for central air conditioners and heat pumps. DOE 

cannot, however, incorporate off-mode energy consumption into the SEER and/or HSPF metrics 

because by definition, these metrics are seasonal efficiency descriptors. If DOE were to integrate 

off-mode energy consumption into the SEER and/or HSPF metrics, these efficiency descriptors 

would expand beyond the cooling and heating seasons, respectively, and would no longer be 

seasonal efficiency descriptors as required by EPCA, but rather annual efficiency descriptors. 

DOE intends to present off-mode energy consumption in terms of kilowatt hours per year as 

additional information for consideration by interested parties and requests comment on this 

approach. 

2.1.2.9 Federal Preemption 

AHRI asserted that a number of local jurisdictions have mandated efficiency standards 

for central air conditioners and heat pumps that are more stringent than the Federal standards, in 

violation of Federal preemption and causing an additional burden on the industry. (AHRI, No. 24 

at p. 12) 

As AHRI appears to be aware, the DOE standards currently applicable to these products, 

codified at 10 CFR 430.32(c), preempt such state and local standards as provided by EPCA in 42 

U.S.C. 6297(c). EPCA allows States to petition DOE for waivers of preemption for specific state 

standards, however, DOE can grant waiver applications if statutory criteria are met. (42 U.S.C. 

6297(d)) 

2.2 MARKET AND TECHNOLOGY ASSESSMENT 

When DOE begins an energy conservation standards rulemaking, it develops information 

that provides an overall picture of the market for the products considered, including the nature of 

the products, market characteristics, and industry structure. This activity consists of both 

quantitative and qualitative efforts based primarily on publicly available information. The market 

assessment examined manufacturers, trade associations, and the quantities and types of products 

sold and offered for sale. 

DOE reviewed relevant literature and interviewed manufacturers to develop an overall 

picture of the residential central air conditioner and heat pump industry in the United States. 

2-7 
 

 

Industry publications and trade journals, government agencies, and trade organizations provided 

the bulk of the information, including (1) manufacturers and their market shares, (2) shipments 

by product type and cooling capacity, (3) product information, and (4) industry trends. 

Subsequent sections of this chapter describe the comments DOE received in response to 

its review of the central air conditioner and heat pump market for the framework document. The 

analysis developed as part of the market and technology assessment is described in chapter 3 of 

the preliminary TSD. 

2.2.1 Product Classes and Scope of Coverage 

When evaluating and establishing energy conservation standards, DOE generally divides 

covered products into product classes by the type of energy used, capacity, or other performancerelated features that affect efficiency. Different energy conservation standards may apply to 

different product classes. (42 U.S.C. 6295(q)) 

DOE identified seven product classes for this rulemaking: (1) split-system air 

conditioners, (2) split-system heat pumps, (3) single-package air conditioners, (4) single-package 

heat pumps, (5) small-duct high-velocity (SDHV) systems, (6) space-constrained air 

conditioners, and (7) space-constrained heat pumps. DOE directly analyzed the four primary 

residential central air conditioner and heat pump product classes (the first four classes listed 

above). These four product classes represent most of the total shipments of these products. DOE 

describes the technical aspects and energy savings potential for the three remaining product 

classes in chapter 5 of the preliminary TSD. DOE intends to conduct a full technical analysis for 

these three product classes in the NOPR. 

DOE received input from interested parties on the product definitions and product classes 

that DOE included in the framework document. Specifically, DOE received comments on spaceconstrained products; ductless and variable refrigerant flow (VRF) split systems; SDHVs; and 

large-tonnage products. 

2.2.1.1 Space-Constrained Products 

Carrier expressed opposition to the eventual inclusion of through-the-wall (TTW) split air 

conditioners and heat pumps in the space-constrained product class for all but replacement 

applications. According to Carrier, if DOE allowed these TTW products to be covered under the 

space-constrained definition, they would be installed in new construction applications with the 

potential to capture a significant share of that market segment. Carrier asserted that this market 

share shift could occur because manufacturers of TTWs would have an unfair cost advantage as 

a result of their products being subject to a lower minimum efficiency standard. Carrier 

suggested that DOE exclude TTW products from the space-constrained product class or alter the 

space-constrained definition to ensure that TTW products remain limited to their current 

replacement niche. (Carrier, No. 18 at pp. 4–5) National Refrigeration and Air-Conditioning 

Products (NRACP), a TTW manufacturer, also opposes eliminating the TTW product class. In 

contrast to Carrier, NRACP asserts that the definition of “space-constrained product” is 

ambiguous and could lead to a market shift in the opposite direction. NRACP claims that 

manufacturers of non-TTW products would ask to be considered space-constrained products, 

2-8 
 

 

allowing their products to compete in the replacement market segment. (NRACP, No. 34 at p. 1) 

Joint Comment 1 supports the phase-out of the TTW product class and subsequent application of 

the more stringent standard for space-constrained products, the class under which TTW products 

will be covered. (Joint Comment 1, No. 25 at p. 9) 

Under DOE’s regulations, the TTW product classes are defined to include only products 

manufactured before January 23, 2010. 10 CFR 430.2 and 430.32(c)(2). On that date, TTWs 

meeting the definition of “space-constrained products” will become subject to the 12 SEER/7.4 

HSPF energy conservation standard that currently applies to “space-constrained products.” Any 

TTWs that do not satisfy DOE’s definition of space-constrained product, but meet the definition 

of conventional central air conditioners and heat pumps will become subject to the 13 SEER/7.7 

HSPF standard that applies to those products. 10 CFR 430.32(c)(2). In addition, while TTW 

products are primarily installed in replacement applications, DOE’s definition for TTW air 

conditioners and heat pumps does not prevent these products from being installed in new 

construction applications. DOE requests comment on whether the expiration of the TTW product 

classes could result in market shifts and the potential magnitude of these shifts. 

2.2.1.2 Ductless and Variable Refrigerant Flow Split Systems 

During the framework public meeting, interested parties discussed the classification of 

ductless split systems. MEUS stated that ductless mini-splits may warrant a separate product 

class because they are intended for different applications than conventional split systems and 

their cooling capacities are about 12,000 British thermal units per hour (Btu/h). A typical central 

air conditioner system capacity is about 30,000 Btu/h. (MEUS, No. 13 at p. 205) MEUS also 

suggested a separate class for VRF air conditioner and heat pump systems. (MEUS, No. 19 at p. 

2) Like MEUS, Trane recommended that mini-splits be included as an additional product class. 

(Trane, No. 16 at p. 7) Carrier does not support special classes for duct-free splits, multi-splits, or 

VRF products, and AHRI commented that no additional separate product classes are necessary 

for these products. (Carrier, No. 18 at p. 4; AHRI, Public Meeting Transcript, No. 24 at pp. 4, 6). 

Further, Lennox recommends that energy requirements for ductless split systems be set in 

conjunction with other central air conditioners and heat pumps because both types of products 

compete for the same sales and installations. (Lennox, No. 22 at p. 3) 

Like AHRI and Carrier, DOE does not believe ductless or VRF split systems warrant a 

separate product class. Although some mini-split and multi-split systems have capacities as low 

as 12,000 Btu/h, others reach capacities as high as 42,000 Btu/h according to the AHRI 

directory. Also, DOE received comments from other manufacturers similar to Lennox’s during 

development of the test procedure, claiming that ductless split systems compete directly with 

conventional split systems, and not with room air conditioners. For these reasons, DOE does not 

intend to create a separate product class for ductless split systems. In addition, DOE believes 

VRF split systems are a variation of multi-split system products and should be subject to the 

same standard. Therefore, DOE does not plan to develop a separate product class for VRF split 

systems. 

2-9 
2.2.1.3 Small-Duct, High-Velocity Systems 

Joint Comment 1 expressed support for a separate product class for SDHV systems. 

(Joint Comment 1, No. 25 at p. 9) Unico also favors a separate product class for SDHV with an 

official minimum standard instead of the current exemption provision. (Unico, No. 13 at p. 170) 

AHRI commented that the original DOE-proposed product classes are appropriate, and no 

additional separate product classes are necessary. (AHRI, Public Meeting Transcript, No. 24 at 

pp. 4, 6) Similarly, Trane asserted that SDHV products should be held to the same standards as 

mainstream products. (Trane, No. 16 at p. 14) 

DOE intends to maintain the existing separate product class for SDHV products. The 

indoor coil section of an SDHV system is compactly designed to facilitate retrofit installation in 

tight spaces, resulting in smaller face area and more rows of tubing than conventional systems. 

The compact fan coil design and small ducts contribute to high static-pressure loss that the 

blower must overcome, requiring greater fan power. Greater energy consumption of the blower 

motors and limited space for installing the fan coils make it more difficult for SDHV systems to 

increase energy efficiency. To mitigate the burden on the blowers, designers reduce the required 

air volume by cooling it more than a conventional air conditioner, which offers enhanced 

humidity removal but increases cost. DOE believes these design constraints (confined 

installation spaces, high pressure drops, and blower motor power) warrant special consideration 

in the analytical and standards-setting process. In addition, DOE believes its definition for 

SDHV products, found in 10 CFR 430.2, is sufficient to prevent any separate standards for these 

products from becoming a “loop hole.” For these reasons, DOE is considering maintaining a 

separate product class for SDHV systems. DOE plans to evaluate whether it is necessary to 

amend the existing energy conservation standards for these products. 

2.2.1.4 Large-Tonnage Products 

Trane commented that because of transportation and installation challenges, DOE should 

consider placing 4- and 5-ton units in a separate product class. (Trane, No. 16 at p. 11) AHRI 

also suggested that a product class for large-tonnage units may be useful. (AHRI, Public Meeting 

Transcript, No. 24 at p. 4, 6) 

DOE believes that the differences between typical 3-ton and large-tonnage units are not 

significant enough to warrant a separate product class. However, DOE will consider expanding 

its analysis to account for these differences. For instance, the LCC analysis could be modified to 

account for costs associated with transportation and installation costs of large-tonnage units. 

DOE requests comment on other methodologies and data to account for the differences between 

the typical 3-ton and large-tonnage products. 

2.2.2 Technology Assessment 

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

to consider for improving the efficiency of central air conditioners and heat pumps. DOE 

removed from consideration those technology options whose energy consumption could not be 

adequately measured by the existing DOE test procedure. Then DOE removed technologies that 

do not change or affect the energy efficiency metrics of central air conditioners and heat pumps. 

2-10 
 

 

Chapter 3 of the preliminary TSD includes the detailed list of all technology options DOE 

identified for further consideration in this rulemaking. 

In the framework document, DOE presented a list of energy-saving technologies 

identified as relevant to residential central air conditioners and heat pumps. For this rulemaking, 

DOE is using an efficiency-level approach for the engineering analysis. As explained in section 

2.4, the efficiency-level approach is performed in terms of product efficiency levels rather than 

design options and particular technologies. DOE has received comments on some of these 

technologies, namely higher efficiency expansion valves, micro-channel heat exchangers, liquidto-suction heat exchangers, flat-tube heat exchangers, high-efficiency defrost mechanisms, and 

evaporative pre-cooled AC systems. For more detail regarding the technology assessment for this 

rulemaking, see chapter 3 of the preliminary TSD. 

2.2.2.1 Higher Efficiency Expansion Valves 

Trane stated that in the case of modulated systems (e.g., variable speed), the range of 

refrigerant flow may be broader than a conventional thermostatic expansion valve (TXV) can 

handle. Trane asserted that, in these cases, an electronic expansion valve (EEV) may facilitate 

refrigerant flow control, but by itself offers no efficiency benefit. (Trane, No. 16 at p. 9) AHRI 

also stated that TXVs and EEVs do not offer any particular efficiency benefits. (AHRI, No. 24 at 

p. 5) 

TXVs are commonly used in central air conditioners and heat pumps rated at efficiency 

levels of 13 SEER or above. TXVs allow for some degree of adjustment of refrigerant expansion 

and may be more efficient than the capillary tube device under varying conditions. The EEV is 

similar to the TXV but uses an electronic control system to optimize refrigeration-system 

performance under all operating conditions. Because it does this with greater flexibility than a 

TXV, an EEV theoretically allows for increases in energy efficiency under varying conditions. 

DOE understands that while the energy savings may be minimal from a TXV or EEV when 

implemented on its own, they are not negligible. In addition, the energy savings from TXVs and 

EEVs become more obvious when they are implemented with more advanced modulating 

systems. 

2.2.2.2 Micro-Channel Heat Exchangers 

Trane commented that micro-channel heat exchangers offer no efficiency benefit. (Trane, 

No. 16 at pp. 9–10) It stated that micro-channel heat exchangers can be used across the 

efficiency and capacity spectrum, and whether they are employed in any particular design is a 

matter of cost and other product constraints. Trane further asserted that micro-channel heat 

exchangers could be used to remove the space constraint of space-constrained products, which 

should then be subject to the same efficiency standards as mainstream products. AHRI also 

stated that micro-channel heat exchangers do not offer any particular efficiency benefits. (AHRI, 

No. 24 at p. 5) 

In its 2004 Emerging Technologies and Practices Report, ACEEE estimated that microchannel heat exchangers are generally 15 percent more efficient than conventional fin and tube 

exchangers.1

 Compared to current fin-tube heat exchangers, the air passing over a micro-channel 

2-11 
 

 

 

heat exchanger has a longer dwell time, increasing both the efficiency and rate of heat transfer. 

This increase in effectiveness allows the micro-channel heat exchanger to be smaller yet perform 

the same as a regular heat exchanger. The smaller size of the micro-channel heat exchanger 

reduces the refrigerant pressure drop, improving compressor performance. Likewise, a microchannel heat exchanger may achieve better performance in the same volume as a conventional 

heat exchanger. Micro-channel heat exchangers are an emerging technology in the residential 

central air conditioner and heat pump industry and manufacturers are still facing some challenges 

with implementing this technology. However, DOE believes that micro-channel heat exchangers 

have the potential to contribute to energy savings. 

2.2.2.3 Liquid-to-Suction Heat Exchangers 

Trane stated that there are no benefits of liquid-to-suction heat exchangers (LSHXs) in 

normal-functioning systems employing the refrigerant R-410A. (Trane, No. 16 at p. 10) AHRI 

agreed that LSHXs do not offer any particular efficiency benefits. (AHRI, No. 24 at p. 5) 

LSHXs are indirect liquid-to-vapor heat transfer devices that evaporate any residual 

liquid refrigerant that remain in evaporator discharge lines, thereby minimizing the risk of liquid 

refrigerant entering the compressor suction. Generally, LSHXs are installed in air conditioners 

and heat pumps for proper system operation and to improve system performance. Refrigerant 

type, operating temperature, ambient conditions, and other factors, however, determine how an 

LSHX will affect the SEER as measured by DOE’s test procedure for residential central air 

conditioners and heat pumps. Because DOE has not found any conclusive evidence of the 

benefits of LSHXs using R-410A refrigerant, DOE plans to remove this technology from further 

consideration in this rulemaking. 

2.2.2.4 Flat-Tube Heat Exchangers 

Both Trane and AHRI commented that flat-tube heat exchangers do not offer any 

efficiency benefits or savings. (Trane, No. 16 at p. 10; AHRI, No. 24 at p. 5) A flat-tube heat 

exchanger is similar to a micro-channel heat exchanger in concept, although it implements a 

different fin design. This technology, however, is under development for central air conditioners 

and heat pumps, and any possible benefits of its implementation are unknown. Therefore, DOE 

plans to remove this technology from consideration in this rulemaking. 

2.2.2.5 High-Efficiency Defrost Mechanisms 

The standard method for defrosting the outdoor coil during the heating operation of a heat 

pump is to reverse refrigerant flow refrigerant temporarily. This requires heat from air inside the 

unit to heat the outdoor coil and melt the frost. In the framework document, DOE listed two 

defrost mechanisms as alternatives to reversing the flow of the refrigerant that may reduce 

energy consumption of the system: frostless heat pumps and hot water defrost. Trane and 

NRACP agreed that frostless heat pumps are turned off at low temperatures. As a result, they are 

not operational during certain tests and do not meet the requirements of the DOE test procedure 

for heating performance. (Trane, No. 16 at p. 10; NRACP, No. 34 at p. 3) 

2-12 
 

 

DOE is not aware of any frostless heat pumps that turn off at low temperatures. A 

frostless heat pump retards frost formation by increasing the temperature of the outdoor coil via 

added heat to the accumulator. This method of slowing frost accumulation is effective only when 

the ambient temperature is above 32 °F. Frost accumulation cannot be prevented when the 

ambient temperature is below 32 °F and the additional heat is no longer added to the 

accumulator. At temperatures below 32 °F, the frostless heat pump will rely on typical defrost 

methods, but it will still be operational.2

 Therefore, DOE believes that a frostless heat pump can 

still be tested using the DOE test procedure for heating performance. Frostless heat pumps are 

still being developed, however, and potential energy-saving benefits are uncertain when tested 

under the DOE test procedure. Therefore, DOE plans to remove this technology from further 

consideration in this rulemaking. 

Trane also stated that hot water defrost raises issues of freezing. It added that if the 

condensing unit coil is connected to a water system, it would presumably permit water heating in 

cooling mode and would not be rated along with the covered products in this rulemaking. (Trane, 

No. 16 at p.10) 

Hot water defrost systems are still being developed for central heat pumps and any 

potential energy saving benefits from this technology are still uncertain. Therefore, DOE plans to 

remove this technology from consideration in this rulemaking. DOE is unaware of any highefficiency defrost mechanisms used in residential central heat pumps other than frostless heat 

pumps and hot water defrost. As a result, DOE plans to remove high-efficiency defrost 

mechanisms from consideration as a design option in this rulemaking. 

2.2.2.6 Evaporative Pre-Cooled Air-Conditioning Systems 

Energy Solutions stated that if this rulemaking will set regional standards, evaporative 

pre-cooled AC systems should be considered in the western United States. (Energy Solutions, 

Public Meeting Transcript, No. 13 at p. 188) 

An evaporative cooler is a device that cools air by passing it over or through an object 

that is cooled by the evaporation of a liquid. This device is particularly effective in hot-dry 

climates. While the potential exists for an evaporative cooler to be used with a conventional 

central air-conditioning system (i.e., evaporative pre-cooled AC system), DOE is unaware of any 

evaporative pre-cooled AC systems offered as a complete package by a residential central airconditioning manufacturer. DOE believes that an evaporative pre-cooled AC system can only be 

achieved through the use of an evaporative cooler as an after-market product. DOE believes that 

evaporative pre-cooled AC systems are outside the scope of this rulemaking, because the 

rulemaking only addresses newly manufactured products and not the use of after-market 

products. DOE lacks the authority to prescribe a standard that consists of a “design requirement,” 

i.e., requiring the use of an after-market product. (42 U.S.C. 6291(6)(B), 6292(a)(3)) Further, 

generally an energy conservation standard must be either a performance requirement or a design 

requirement, but cannot include both elements. (42 U.S.C. 6291(6))Therefore, DOE will not 

consider evaporative pre-cooled AC systems in its analysis. 

2-13 
 

 

 

2.3 SCREENING ANALYSIS 

The purpose of the screening analysis is to evaluate the technologies identified in section 

2.2.2 to determine which options to consider further and which options to screen out. DOE 

consulted with industry, technical experts, and other interested parties in developing a list of 

energy-saving technologies for the technology assessment. DOE then applied the screening 

criteria to determine which technologies were unsuitable for further consideration in this 

preliminary rulemaking. Chapter 4 of the preliminary TSD, the screening analysis, contains 

details about DOE’s screening criteria. 

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 reviewed the list of central air conditioner and heat pump 

technologies according to these criteria. In the engineering analysis, DOE further considers the 

efficiency-enhancement technologies that it did not eliminate in the screening analysis. 

2.4 ENGINEERING ANALYSIS 

The engineering analysis (chapter 5 of the preliminary TSD) establishes the relationship 

between the manufacturing production cost and the efficiency for each residential central air 

conditioner and heat pump. This relationship serves as the basis for cost-benefit calculations in 

terms of individual consumers, manufacturers, and the nation. Chapter 5 discusses the product 

classes analyzed, representative baseline units, incremental efficiency levels, methodology used 

to develop manufacturing production costs, cost-efficiency curves, impact of efficiency 

improvements on the considered products, and methodology used to extend the analysis to lowshipment-volume product classes. 

In the engineering analysis, DOE evaluates a range of product efficiency levels and 

associated manufacturing costs. The purpose of the analysis is to estimate the incremental 

product MSPs that would result from increasing efficiency levels above the baseline model in 

each product class. The engineering analysis considers technologies not eliminated in the 

screening analysis. The LCC analysis uses the cost-efficiency relationships developed in the 

engineering analysis. 

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

the design-option approach, which calculates the incremental costs of adding specific design 

options to a baseline model; (2) the efficiency-level approach, which calculates the relative costs 

of achieving increases in energy efficiency levels without regard to design options used to 

achieve such increases; and/or (3) the reverse-engineering or cost-assessment approach, which 

involves a “bottom-up” manufacturing cost assessment based on a detailed bill of materials 

derived from tear-downs of the product being analyzed. 

In the framework document, DOE stated its intention to use an efficiency-level approach 

for the engineering analysis. In an efficiency-level approach, analysis is performed in terms of 

product efficiency levels rather than focusing solely on design options. For each product class, 

2-14 
the engineering analysis estimates MPCs at each potential efficiency level. Hence, in the 

framework document, DOE requested industry cost-efficiency and shipment data. 

EEI and Joint Comment 1 supported DOE’s use of the efficiency-level approach to 

determine the relationship between MPC and energy efficiency levels. (EEI, No. 20 at p. 5 and 

Joint Comment 1, No. 25 at p. 10) AHRI and ASAP suggested that DOE review the previous 

central air-conditioning and heat pump engineering analysis because prior cost efficiency curves 

were inaccurate. (AHRI, Public Meeting Transcript, No. 13 at p. 196; ASAP, Public Meeting 

Transcript, No. 13 at p. 197) Although AHRI provided industry shipment data, available data 

does not allow DOE to determine the costs to manufacturers of producing central airconditioning and heat pump products at particular efficiency levels. 

For this rulemaking, DOE performed the engineering analysis using an efficiency-level 

approach that incorporated cost-efficiency data that DOE obtained using the reverse-engineering 

methodology. In the rulemaking that resulted in the 2001 residential central air conditioner and 

heat pump final rule, DOE developed its engineering analysis by (1) conducting three teardowns; 

(2) using information obtained from manufacturer interviews; and (3) using manufacturer data 

submissions, AHRI data submissions, and product literature. Because DOE has not received 

cost-efficiency data during the current rulemaking, and because published product literature now 

provides less detail than at the time of the previous rulemaking, DOE has relied primarily on 

system teardowns to develop cost-efficiency relationships for the current rulemaking. As a result, 

DOE has conducted more teardowns for this rulemaking than the previous rulemaking. This 

involved selecting and disassembling several central air conditioners and heat pumps, creating 

bills of materials, and developing a cost model to estimate the MPC of each unit. DOE has also 

shared its draft cost-efficiency data and assumptions with manufacturers in an attempt to 

calibrate its cost-efficiency curves and will continue to do so throughout this rulemaking process. 

Chapter 5 of the preliminary TSD describes the methodology that DOE used to perform the 

efficiency level analysis and derive the cost-efficiency relationship. 

DOE’s engineering analysis produced cost-efficiency curves for the four primary 

residential central air conditioner and heat pump product classes. The cost-efficiency curves are 

described by the efficiency levels and the increase in MPC above the baseline for each level. The 

split-system air conditioner and heat pump product classes have two different rating methods for 

determining SEER, depending on whether the fan blower is included in the rating. If a system is 

rated as a “coil-only” system, the SEER is calculated using a default fan power. These systems 

are generally representative of a condensing unit and evaporator coil installed with an existing 

furnace. If a system is rated as a “blower-coil” system, the SEER is calculated using a specific 

fan power. In blower-coil systems, which are generally representative of a condensing unit 

installed with an air handler or new construction installations, the outdoor condensing unit, 

evaporator coil, and fan blower can all be modified to achieve higher system efficiencies. 

DOE assumed that coil-only systems and blower-coil systems are both prevalent in the 

split-system air-conditioning market, whereas blower-coil systems dominate the vast majority of 

installations in the split-system heat pump market. Therefore, DOE characterized the splitsystem air conditioner product class by developing separate cost-efficiency curves for coil-only 

2-15 
 

 

 

systems and blower-coil systems. DOE characterized the split-system heat pump product class 

using only blower-coil systems. DOE requests comment on the market shares of coil-only and 

blower-coil systems for both split-system air conditioners and split-system heat pumps. DOE 

also requests comment on whether an additional coil-only engineering analysis is necessary to 

characterize split-system heat pumps. 

2.4.1 Baseline Products 

The engineering analysis identifies representative baseline products, which are the 

starting point for estimating the cost of improving the energy efficiency of each product class. 

For this rulemaking, DOE selected as baseline products a model or models—currently offered 

for sale—that meet the existing minimum Federal energy efficiency standards. Chapter 5 of the 

preliminary TSD includes details on the baseline products for each product class. 

2.4.1.1 Representative Capacities 

In the framework document, DOE requested comment on typical baseline units for each 

product class. DOE received several comments on the representative capacities for residential 

central air conditioners and heat pumps. Trane and AHRI recommended that, for split-system 

and single-package air conditioners and heat pumps, DOE use nominal 2-, 3-, and 5-ton units as 

representative capacities. (Trane, No. 16 at p. 12; AHRI, No. 24 at p. 6) Carrier agreed that DOE 

should extend its analysis beyond 3-ton units. (Carrier, No. 18 at p. 6) MEUS commented that 

central air conditioner and heat pump systems should be analyzed at 30,000 Btu/h, mini-splits at 

12,000 Btu/h for one-to-one residential systems, and 24,000 Btu/h for multi-splits and small 

commercial systems. (MEUS, No. 19 at p. 3) 

For the preliminary engineering analysis, DOE used 36,000 Btu/h (i.e., 3-ton) 

cooling/heating capacity systems to develop cost-efficiency relationships for the split-system and 

single-package product classes because the most shipments tend to be around this capacity DOE 

acknowledges, however, that residential central air conditioner and heat pump systems tend to 

reach their optimal efficiency around the 3-ton capacity. For the NOPR, DOE is considering 

performing additional engineering analyses on 2- and 5-ton capacity products to account for 

potential capacity-related impacts. Mini-splits and multi-splits fall under the definition of splitsystem air conditioners and heat pumps, so DOE did not consider separate representative 

capacities for those products. 

2.4.1.2 Refrigerant 

DOE also received comments on the assumed refrigerant used in baseline products. Joint 

Comment 1 stated that adequate consideration of the impact of changing to hydrofluorocarbon 

(HFC) refrigerant requires a new approach to the engineering analysis due to the effects on 

product design and efficiency. (Joint Comment 1, No. 25 at p. 11) 

Because hydrochlorofluorocarbon (HCFC) refrigerants were phased out on January 1, 

2010, DOE based its engineering analysis on products that use HFC refrigerants (i.e., R-410A). 

2-16 
 

 

2.4.2 Space-Constrained Products 

In the framework document, DOE requested comment on the appropriate levels to 

analyze for space-constrained products. DOE also requested comment on appropriate maximum 

technologically feasible efficiency levels for space-constrained products. NRACP commented 

that increasing the SEER for the space-constrained product classes may not be possible. 

(NRACP, No. 34 at pp. 2, 4) NRACP stated that achieving a higher energy conservation standard 

is not possible with components currently available on the market. Therefore, NRACP 

recommended that SEER requirements for space-constrained products remain unchanged. 

Table 2.1 provides current energy conservation standards for space-constrained central 

air conditioners and heat pumps. 

Table 2.1 Energy Conservation Standards for Space-Constrained Products 

Space-Constrained Product Energy Standard 

Air Conditioner 12 SEER 

Heat Pump 12 SEER/7.4 HSPF 

DOE anticipates that, as of January 23, 2010, space-constrained air 

conditioners and heat pumps will include through-the-wall systems. 

DOE did not perform a full engineering analysis for the preliminary analysis for spaceconstrained products due to limited availability of product data. DOE intends to develop an 

engineering analysis for space-constrained products for the NOPR. DOE requests feedback and 

data on space-constrained products to determine potential areas of energy savings. For additional 

information on space-constrained products and DOE’s methodology for developing an 

engineering analysis for these product classes, see chapter 5 of the preliminary TSD. 

2.5 MARKUPS TO DETERMINE PRODUCT PRICE 

DOE used manufacturer-to-consumer markups to convert the MSPs 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) 

based on the markups at each step in each distribution channels to obtain the consumer purchase 

price for the baseline products sold through each channel. DOE similarly calculates incremental 

markups that relate the change in the manufacturer sales price of higher efficiency models (the 

incremental cost increase) to the change in the contractor sales price. 

To develop markups, DOE must identify how the products are distributed from the 

manufacturer to the customer (the distribution channels). After establishing appropriate 

distribution channels for each product class, DOE used economic data from the U.S. Census 

Bureau, HARDI, ACCA, and other sources to define how prices are marked up as the products 

pass from manufacturers to customers. 

2.5.1 Distribution Channel Structure 

Analysis of distribution markups for central air conditioners and heat pumps focused on 

two distribution channels, with markups calculated at specific points along those paths. The 

2-17 
distribution channel differs for new construction or replacement applications (the latter include 

sales to existing buildings that do not already have a residential central air conditioners and heat 

pumps). For new construction applications, the manufacturer typically sells the product to a 

wholesaler-distributor, who sells it to a mechanical contractor, who sells it to a general 

contractor. Each of these latter three entities adds a markup or fee to its purchase price before 

selling the product. DOE understands that virtually all central air conditioners and heat pumps 

installed in new construction follow this distribution channel. For replacement applications, the 

distribution channel is essentially the same, except that there is no general contractor markup. 

In the framework document, DOE proposed the two distribution channels just described, 

as well as a third (manufacturer to large retailer to consumer). While MEUS concurred (MEUS, 

No. 19 at p. 4), DOE received multiple recommendations to combine the three models. HARDI 

suggested one distribution channel with a consistent distribution role. HARDI and CFM 

Distributors, Inc. (CFM) commented that upon understanding the distribution model, DOE 

would need only the distribution channel model to provide more accurate costs. (HARDI, No. 32 

at p. 2; CFM, No. 13 at p. 287) HARDI, CFM, and ACCA all commented that the third channel 

is nonexistent. (HARDI, No. 32 at p. 2; CFM, No. 13 at p. 287; ACCA, No. 23 at p. 5) Other 

manufacturers agreed that a single distribution channel would suffice for the analysis. (Trane, 

No. 16 at p. 18; Carrier, No. 18 at p. 9; Lennox, No. 22 at p. 3; ARI, No. 24 at p. 9) ACEEE 

commented that DOE’s proposal missed two distribution channels: a dealer-direct model 

(merging manufacturing and distribution) and the import model. ACEEE also noted that any 

retail price survey is difficult to use because of the way different contractors price the markup on 

the product versus installation. (ACEEE, No. 13 at p. 293) ACEEE suggested that DOE examine 

manufacturer costs and free on board prices (which are equivalent to DOE’s MSP) in 

conjunction with surveyed retail prices to address regional questions. 

DOE simplified the distribution channels to only two channels, based on industry 

comments. HARDI and the manufacturers’ comments imply that a manufacturer that performs 

its own distribution functions still incurs and charges for those functions. Distribution charges 

would also have to be added in the case of imports. This results in a similar retail price to that in 

a situation of a manufacturer that sells into a separate retail distribution process. There is no need 

to distinguish between these two methods of distribution for calculation of markups. 

While DOE recognizes that the theoretical value in using a valid retail price survey 

directly would avoid the complications associated with calculating individual retail channel 

markups, DOE agrees with ACEEE’s position that a retail price survey is difficult to administer 

and interpret in this market because of the way contractors price their goods and services 

together. Also, current surveyed prices (even if readily available) for high-efficiency products 

today would reflect prices of premium products, not necessarily minimally-compliant products 

under higher standards. 

Based on the comments DOE received in response to the framework document and 

follow-up discussions, DOE determined that distribution channels for new construction units and 

replacement units should be used to develop distribution channel markups. 

2-18 
 

 

Figure 2.1 shows these two distribution channels. Chapter 6 of the preliminary TSD 

provides further descriptions of these channels and details on the fraction of shipments passing 

through each channel. 

New Construction Units: Manufacturer→Distributor→Mechanical Contractor→General 

Contractor→Customer 

Replacement Units: Manufacturer→Distributor→Mechanical Contractor→Customer 

Figure 2.1 Distribution Channels for Central Air Conditioners and Heat Pumps 

DOE will continue to seek data concerning the prevalence of different distribution 

channels, but two channels appear to satisfy the need for estimating representative percentage 

markups. DOE will index differences in contractor costs and sales tax as two significant 

variations. 

2.5.2	 Data Sources for Distribution Channel Markups 

DOE relied on economic data from the U.S. Census Bureau, HARDI, ACCA, and other 

sources to define how prices are marked up as products pass from manufacturers to consumers. 

DOE based the wholesaler and mechanical contractor markups on company balance-sheet data; 

DOE based the general contractor markups on U.S. Census Bureau data for the commercial and 

institutional building construction industry. HARDI and ACCA are trade associations 

representing wholesalers and mechanical contractors, respectively. DOE obtained the company 

balance sheets from the HARDI 2008 Profit Planning Report and ACCA.3,4 DOE used financial 

data from the 2002 U.S. Census Bureau for developing general contractor markups in the same 

form as the balance sheet data for wholesalers and mechanical contractors.5 These balance sheets 

delineate the components of all costs incurred by firms that supply and install air-conditioning 

products. Wholesalers and mechanical contractors to which these reports refer handle multiple 

commodity lines, including residential central air conditioners and heat pumps as well as warmair furnaces. DOE used three key assumptions to estimate markups with these financial data: 

(1)	 The balance sheets accurately represent the various average costs incurred by 

firms distributing and installing air-conditioning and heating products. 

(2)	 These costs can be divided into two categories: (a) costs that vary in proportion to 

the MSP of the air-conditioning and heating products (variable costs), and (b) 

costs that do not vary with the MSP of air-conditioning or heating products (fixed 

costs). 

(3)	 Wholesaler and contractor prices vary in proportion to the wholesaler and 

contractor costs included in the balance sheets. 

DOE seeks summary data of distribution margins to serve as a baseline for distributor 

markups on HVAC products, or other relevant products, to supplement or replace the published 

data. 

2-19 
 

2.5.3 Markups/Price Determination 

DOE received comments on its methods for estimating retail prices for higher efficiency 

central air conditioners and heat pumps. CFM argued that in building a retail price by adding 

distribution channel markups to MSP, DOE must have a full understanding of the market impact 

analysis or DOE will not obtain an accurate idea of the price, and the LCC and PBP analyses will 

be flawed. (CFM, No. 13 at p. 294) CFM also expressed concern about overlooking the cost of 

changes in the standards and product offerings and indicated that the cost of these items would 

have an effect of the overall markup (presumably because of increased inventory carrying cost). 

(CFM, No. 13 at p. 34) It is unclear whether the proposed efficiency standards would materially 

affect inventory turnover rate among elements of the distribution channels or significantly affect 

operation costs, whether the costs could be passed on to customers, and what the resulting 

impacts on markups would be. DOE will search for data to determine such relationships. Unless 

it finds data sources indicating the impact of standards on markups, DOE would not have a basis 

to make an adjustment in the markups during the preliminary analysis. 

HARDI and Trane commented that the cost estimates DOE used in developing the 2001 

residential central air conditioner and heat pump final rule were grossly understated and failed to 

account for the significant costs of getting HVAC products from the point of manufacture to the 

point of proper installation. They stated that a simpler approach would be to use retail prices of 

complete systems at various sizes and SEER levels. (HARDI, No. 32 at p. 3; ARI, No. 24 at p. 5; 

Trane, No. 16 at p. 12) While DOE agrees, in principal, that selecting product prices from a 

database of accurately reported retail prices for complete systems at various efficiency levels 

might be an easier way to get pricing information, DOE knows of no such database and did not 

receive any price data. It is also unclear that such a database would reflect prices that customers 

would pay under different efficiency standard scenarios. Without appropriate retail price data, 

DOE will continue to estimate the retail price using markups in the distribution channel. DOE 

has modified its approach to markups to explicitly include transportation costs, which were 

omitted in 2001 (and which account for effects of product weight on cost). 

HARDI provided two specific comments on the values for markups used in the analysis 

on which DOE based the 2001 residential central air conditioner and heat pump final rule. First, 

HARDI stated that gross margins must be higher on the more efficient systems, not lower as 

previously assumed. (HARDI, No. 32 at p. 3) Second, in assessing current and future product 

prices, HARDI urged DOE to perform a realistic analysis based on recent material price trends. 

(AHRI, No. 24 at p. 4) DOE has included in its estimate of retail price, transportation costs that 

increase with product size, and will increase the price associated with higher efficiency products. 

DOE already captures recent material price increases in the manufacturer costs and will consider 

whether and how best to forecast material prices. 

2.6 ENERGY USE CHARACTERIZATION 

The energy use characterization assesses the energy savings potential from adopting 

higher efficiency standards. The characterization provides the basis for the energy savings values 

DOE uses in the LCC and subsequent analyses. DOE calculated the energy savings for four 

classes of central air conditioner or heat pump products (split-system air conditioners, singlepackage air conditioners, split-system heat pumps, and single-package heat pumps) compared 

2-20 
 

with a base case that included an estimate of the distribution of efficiencies in 2016 by product 

class. DOE considered energy use for both residential and commercial users of these products. 

DOE used data from the 2005 Residential Energy Consumption Survey (RECS) produced 

by the Energy Information Administration (EIA), the most recent survey available, to estimate 

cooling energy use for homes using central air conditioner products, and cooling and heating 

energy use for homes using central heat pump products, with efficiencies representative of those 

in the current stock. DOE used 30 years of state weather data statistics from the National 

Climatic Data Center to weather-normalize the 2005 RECS cooling and heating energy use in 

selected household records to represent long-term average cooling and heating energy. DOE 

assumed that each RECS household had an efficiency equivalent to the average shipped 

efficiency for the vintage central air conditioners or heat pumps identified in RECS, based on 

historical AHRI efficiency data. 

To develop estimates for the DOE base-case energy use for 2016 (the first year for new 

standards), DOE used an estimate of the efficiency distribution in 2016 by product class to select 

for each RECS observation an efficiency level (SEER for air conditioners and HSPF for heat 

pumps) that might be purchased in that year in the absence of new standards. This distribution 

reflects products SEER 13 or higher. DOE then multiplied the weather-normalized cooling 

energy for the RECS household by the ratio of the historical average SEER to the 2016 SEER 

value selected for that record in the base case. Similarly, DOE multiplied the weather-normalized 

heating energy for the RECS household with central heat pumps by the ratio of the vintage-based 

HSPF to the 2016 HSPF value selected for that record in the base case. 

The result of these calculations, carried out over all the selected RECS household records 

and using the RECS sample weights, is an estimated distribution of annual cooling and, for heat 

pumps, heating energy use for residential households. This distribution is provided separately for 

each climate region and represents the DOE 2016 base case. DOE also used the same RECS 

observations and similar ratio techniques to estimate the energy use for each RECS household 

under a higher SEER/HSPF standard, if adopted. DOE uses the difference between the energy 

use for each household in the base case and the standards case to calculate the energy savings for 

that household for each standard level considered. 

DOE also developed estimates of energy use for central air conditioners and heat pumps 

that might be installed in commercial applications. DOE estimated that approximately 7 percent 

of the central air conditioner or heat pump market is actually in commercial buildings. To 

develop the commercial estimates, DOE used the EnergyPlus building energy simulation tool to 

model the energy use of central air conditioners and heat pumps in a single small office building 

served by these products for 238 locations (based on 238 Typical Meteorological Year (TMY2) 

locations). DOE modeled four efficiency levels for central air conditioners and four for heat 

pumps (from 13 SEER to the max-tech level) and extracted the annual cooling, heating, and fan 

energy, as well as the total building cooling capacity, from each simulation at each efficiency 

level. Using the total cooling capacity from each simulation, DOE normalized the simulation 

cooling, heating, and fan energy to that expected for a 3-ton cooling unit. DOE then used 

interpolation to develop annual cooling and, for heat pumps, heating energy by climate at 

intermediate efficiency levels between the baseline level and max-tech level. Annual supply fan 

energy was also calculated and (for the purpose of this analysis) allocated to the cooling or 

2-21 
 

 

heating energy for the simulation based on relative energy cooling and heating energy use 

respectively. DOE used estimates for the fraction of the U.S. population best represented by each 

TMY2 climate to provide weighting factors for the energy results by climate. As with the 

residential energy use characterization, DOE selected locations at random (based on location 

weighting factors), and a 2016 base-case efficiency level (based on the estimated efficiency 

distribution for shipments) for the corresponding LCC analysis. The result is a distribution of 

commercial energy use within each climate region analyzed in the base case. DOE also used the 

same commercial building simulation data and interpolation techniques described to estimate 

energy use for each commercial observation for scenarios in which DOE mandated a higher 

SEER/HSPF standard level. 

In the corresponding LCC analysis, DOE used the RECS household and commercial 

weights assigned to each TMY2 in conjunction with the 7-percent split between commercial and 

residential customers to select observations in a Monte Carlo analysis to estimate the distribution 

of base-case energy use in each DOE climate region. In addition, DOE developed the energy use 

for each household or commercial observation selected for higher efficiency levels 

corresponding to possible standard levels. The difference in the resulting distribution of energy 

use in the base case—and that in each standards case for each climate region—is the energy 

savings from higher standards. Note that in some cases the selected efficiency for a single 

observation in the base case is higher than the standards case being considered. In those 

instances, no energy savings are calculated for the observation. 

As part of the characterization, DOE made certain implicit assumptions about product 

application, including how the products are operated and under what conditions. Those 

assumptions are documented in chapter 7 of the preliminary TSD, which also provides more 

detail about DOE’s approach. 

During the framework review process, DOE received comments on various segments of 

the proposed analysis. 

2.6.1 Residential Energy Use analysis 

2.6.1.1 Use of RECS Data as Basis of Residential Energy Consumption 

DOE based its estimate of the annual space cooling energy consumption of the stock of 

installed central air conditioners and heat pumps on data from the 2005 RECS. For each 

household with a central air conditioner or heat pump, RECS estimates the product’s annual 

energy consumption from the household’s utility bills. The estimated annual energy consumption 

in RECS corresponds to the unit installed in the household, specifically its capacity and 

efficiency. 

In the framework document, DOE stated that it would use the latest available RECS data 

in the analysis. The latest available RECS data at the time of the public meeting on the 

framework document (June 12, 2008) was from 2001. CFM asserted that using 2001 data in 

2008-2009 is inadequate. (CFM, No. 13 at p. 269) Trane and AHRI also expressed reservations 

about using RECS data. (Trane, No. 16 at p. 16; ARI, No. 24 at p. 7) They contended that the 

2-22 
vintage of the baseline stock in 2016 would be different from the vintage of the products of even 

RECS 2005 households and would consequently lead to overestimation of the energy savings. 

DOE uses the latest and most practical available data for its analysis. At the time of the 

public meeting, only the 2001 RECS was available. The 2005 RECS data became available while 

DOE was developing the preliminary analysis, and DOE used this more recent data. In the 

current analysis, DOE uses RECS heating and cooling energy use as a starting point to project 

baseline energy use in 2016 but accounts for the difference between the 10 SEER standard (the 

basis of the product stock in the 2005 RECS) and the 13 SEER standard (the basis of the default 

base-case purchases in 2016). This is done in the LCC baseline by scaling the energy use in the 

2005 RECS by the ratio of (1) the average SEER (or HSPF) of the vintages of the product stock 

in the 2005 RECS, to (2) the SEER (or HSPF) of projected products purchased in 2016 (under 

the current SEER 13 standard). 

2.6.1.2 Use of RECS Data Not in the Public Domain 

Trane asked if DOE has access to RECS, Commercial Building Energy Consumption 

Survey (CBECS), and American housing survey data more detailed than what is publically 

available. (Trane, No. 13 at pp. 270, 284) All of the 2005 RECS data DOE used in its analysis of 

energy use is publicly available. In developing electricity price data for residential central airconditioning and heat pump applications, however, DOE made limited use of non-publically 

available data stemming from the 2001 RECS to allocate annual energy savings across months. 

DOE used this same information in the 2001 residential central air conditioner and heat pump 

rulemaking and believes that it is an important element of the analysis. For the current analysis, 

DOE’s use of this data is based on statistics from the data used in the 2001 rulemaking. DOE 

will make the statistics available for parties interested in assessing this electricity price data. 

2.6.2 Impact of Improved Building Codes 

The impact of improved building codes is a factor that potentially could impact central air 

conditioner and heat pump energy use and product sizing. Trane expressed that one of DOE’s 

national labs, Pacific Northwest National Laboratory (PNNL), is a center of code development 

for residential buildings, and asked if PNNL could come up with reasonable estimates for the 

changes in cooling or heating loads in new construction. (Trane, No. 13 at p. 278) HARDI noted 

that improved building codes lead to smaller sized products and that properly installed and 

appropriately sized products might save more energy that improperly installed and oversized 

high SEER products. (HARDI, No. 32 at p. 5 and No. 13 at p. 279) Southern suggested that 

comparing energy consumption of a well insulated building with an old, inefficient building may 

be instructive. (Southern, No. 13 at p. 279) 

Building codes may affect cooling and heating loads in homes but DOE has not 

incorporated the impact of revised codes into the preliminary analysis due to the difficulty of 

projecting energy use and product sizing under potential new code scenarios. Even as building 

codes have improved design, residential buildings have increased in size, which compensates for 

(and in some cases may overwhelm) any load reductions due to more efficient design. In 

2-23 
 

response to HARDI’s comment, DOE agrees that there are likely significant energy savings from 

quality installation and correct sizing; however, these savings would also occur with high SEER 

products. DOE acknowledges that greater care in sizing could, by reducing first costs, serve to 

make high SEER products even more cost effective. 

2.6.3 Inclusion of Commercial Energy Use Analysis 

In the framework document, DOE proposed developing building simulations for a single 

small office prototype building to extract energy savings statistics for higher efficiency central 

air conditioner and heat pump products. In response, Carrier commented that a small office 

building would be the best choice. (Carrier, No. 18 at p. 9) Consequently, DOE opted for using a 

small office prototype for developing commercial energy consumption statistics. Trane asked if 

DOE had access to more detailed data from RECS or CBECS than is available publically. 

(Trane, No. 13 at pp. 270, 284). DOE responded that it does not have ready access to such data 

and has not used any finer resolution data for the energy analysis. 

2.6.3.1	 Fraction of Shipments of Central Air Conditioners and Heat Pumps for 

Commercial Applications 

The preliminary analysis is based on a fixed percentage of product shipments used in 

commercial buildings. Comments from the 2001 residential central air conditioner and heat 

pump rulemaking requested that DOE set this fraction at 10 percent. For this rulemaking, DOE 

requested fresh inputs from interested parties about changes to this fraction based on industry 

statistics. Figures ranged widely, from 3 to 5 percent (Carrier, No. 18 at p. 8), to 7.5 percent 

(AHRI, No. 24 at p. 8; Trane, No. 16 at p. 17), to 10 to 20 percent. (ACCA, No. 23 at p. 4) Other 

responses provided estimates that differed across the product subclasses. Trane indicated that the 

share of shipments to the commercial segment is higher for packaged systems than for split 

systems and could be different for other product subclasses (e.g., package systems with 

gas/electric strip heat not covered in this analysis). (Trane, No. 13 at p. 283) MEUS commented 

that the share of the shipments to the commercial segment could be 25 percent for conventional 

single-package systems, 10 percent for conventional split systems, and 30 to 35 percent for 

ductless split systems. (MEUS, No. 19 at p. 4) 

For the preliminary analysis, DOE set the fraction of central air conditioner and heat 

pump systems (all single phase systems) shipped to commercial buildings at 7 percent. DOE 

based this percentage on industry estimates provided in the framework document as well as 

separate comments made from AHRI to the U.S. Environmental Protection Agency (EPA) 

during the development of revised ENERGY STAR levels for central air conditioners and heat 

pumps.a

 DOE acknowledges variation among the product classes in commercial building 

installations, but has no detailed data on which to base an individual class assessment for such 

installations. DOE requests comments on the fraction of covered products that are shipped to 

commercial buildings. 

2.6.4 Use of Rated Performance versus Degraded Performance 

a

 Stakeholder comments on ENERGY STAR spefications for central air conditioners and heat pumps can be found 

at http://www.energystar.gov/index.cfm?c=archives.ac_ashp_spec. 

2-24 
 

Degradation of central air conditioner and heat pump performance over their service life 

is a concern. Southern observed that DOE’s analysis assumed no degradation of performance 

during product lifetimes. (Southern, No. 13 at p. 275) AHRI remarked that if DOE considered 

degradation of performance for the higher SEER products, DOE should consider the same for 

base stock. (AHRI, No. 13 at p. 276) In DOE’s analysis, no degradation of performance of the 

central air conditioner systems is assumed either for the base or test case scenarios, thus making 

consistent the differences among the energy consumption estimates. DOE is unaware of any 

statistically significant scientific study on this issue that could be factored into the analysis; 

therefore, DOE used non-degraded efficiencies in its analysis. 

2.6.5 Characterization of Energy Using SEER/HSPF 

Several commenters questioned SEER’s validity and usefulness as the only energy 

efficiency metric. ACEEE stated that the actual energy used at high temperature bin hours is 

higher than the SEER test procedure captures. (ACEEE, No. 13 at p. 272) Joint Comment 1 

stated that as a driver of product development, SEER fails to encourage adequate 

dehumidification under part load conditions (relevant to the southeastern United States) and it 

does not adequately address the need for higher efficiency at higher outdoor temperatures (a 

concern for the southwestern region). (Joint Comment 1, No. 25 at p. 6) Joint Comment 1 

expressed that EER is an essential parameter and should be used in conjunction with the SEER. 

A joint comment from the Northeast Energy Efficiency Partnerships (NEEP), the Connecticut 

Office of Policy and Management, the New Hampshire Office of Energy and Planning, 

Efficiency Maine, and the Department of Energy Resources (hereafter “Joint Comment 4”) and a 

comment from EEI expressed a similar view. (Joint Comment 4, No. 37 at p. 2; EEI, No. 13 at p. 

47) Sempra Energy (Sempra) stated that it supports use of the EER metric for properly 

measuring performance during peak usage. (Sempra, No. 13 at p. 49) 

EPCA’s definition of “efficiency descriptor” at 42 U.S.C. 6291(22) provides that the 

efficiency descriptor for both central air conditioner and heat pump systems is to be expressed in 

terms of SEER. Consequently, DOE’s analysis did not consider the use of EER as an additional 

or alternate descriptor. 

2.6.6 Development of Regions for Regional Standard Analysis 

Section 306 of EISA 2007 amended EPCA to authorize DOE to establish a national base 

level standard and one or two regional standards for central air conditioners and heat pumps, and 

stipulates that the geographical basis for defining the regions must meet certain specific 

conditions. (42 U.S.C. 6295(o)(6)) In the framework document, DOE sought input from 

interested parties on criteria for determining the regions to which the regional standards could 

apply. DOE received multiple comments on this issue. 

Several comments favored setting regional standards. The Pacific Gas and Electric 

Company (PG&E), Southern California Edison (SCE), Sempra Energy Utilities (Southern 

California Gas Company and San Diego Gas and Electric Company) (Sempra), Sacramento 

Municipal Utility District (SMUD), the Nevada Power Company (NPC), and Sierra Pacific 

Power (SPP) submitted a joint comment (hereafter “Joint Comment 2”) concerning the use of 

regional standards. Joint Comment 2 asserted that, because of national climactic variations, 

2-25 
regional standards are necessary and would benefit customers, increase grid reliability, and 

reduce environmental impacts with minimal negative effects on manufacturers, distributors, and 

contractors. (Joint Comment 2, No. 30 at p. 2) PG&E and Sempra stated that they support 

regional standards, emphasizing California’s need for a hot-dry climate air conditioner standard 

to meet energy efficiency goals. (PG&E, No. 13 at p. 45; Sempra, No. 13 at p. 49) Ice Energy 

stated that incorporating regional climate factors and time-dependent parameters in the standards 

would encourage deployment of more efficient cooling systems. (Ice Energy, No. 33 at p. 1) 

Southern claimed that if the statutory provisions allowed for a second metric like latent capacity, 

regional standards could address the challenge of adequate dehumidification in hot-humid 

climates. (Southern, No. 13 at p. 43) NRECA and the Florida Solar Energy Center (FSEC) want 

economic analysis for different climate zones using appropriate costs. (NRECA, No. 35 at p. 1; 

FSEC, No. 31 at p. 2) 

Some commenters expressed reservations on the merits of setting regional standards. 

Trane observed that some assertions supporting regional standards are inconsistent with the facts. 

(Trane, No. 13 at p. 62) For example, Trane noted that air conditioners have a remarkable ability 

to adjust automatically and thermodynamically in response to the load, providing higher latent 

capacity with high latent load or no latent capacity when indoor relative humidity is low. CFM 

expressed that regional standards are unrealistic because climate zones are not aligned with state 

borders; a better way to address the issue would be to find what meets the specific needs of the 

hot-dry and hot-humid regions. (CFM, No. 13 at pp. 34, 399) Lennox stated that regional 

standards should be applied to central air conditioners and heat pumps only if DOE is certain that 

the standards will deliver the savings and payback forecast projected in the analysis. (Lennox, 

No. 22 at p. 3) 

ACEEE urged completion of the preliminary economic analysis of regional standards 

before the discussion of enforcement issues. (ACEEE, No. 13 at p. 400) Southern, MEUS, 

ACEEE, and Sempra suggested holding further collaborative meetings to discuss criteria for 

defining the regions. (Southern, No. 13 at p. 391; MEUS, No. 13 at p. 396; ACEEE, No. 13 at p. 

400; Sempra, No. 13 at p. 402) 

DOE considered these comments and will conduct a regional-level detailed economic 

analysis as provided for under EPCA, as amended by EISA 2007. Consequently, DOE studied 

options from the various criteria. Several comments presented alternative criteria for defining 

regions to which different performance standards may apply. Trane suggested that the regions be 

defined according to heating degree days (HDDs) and cooling degree day (CDDs), while AHRI 

stated that the defining criteria should be cooling load hours. (Trane, No. 16 at p. 4 and No. 13 at 

p. 393; AHRI No. 24 at p. 3) Carrier urged DOE to evaluate uniform north/south regions to 

harmonize the heating and cooling standards. (Carrier, No. 18 at p. 2) MEUS suggested using the 

present ASHRAE climate zones but aggregating the eight climate zones into three regions: 1 and 

2; 3 and 4; and 6, 7 and 8. (MEUS, No. 19 at p. 1) CFM commented that while regional 

standards seem positive, climate does not adhere to state lines. (CFM, No. 13 at p. 34) 

NYC and CEC suggested that DOE evaluate regional standards for hot-humid conditions 

in the southeast, hot-dry in the west, and temperate in the north. (NYC, No. 17 at p. 3; CEC, No. 

27 at p. 2) Joint Comment 2 suggested defining three standards: a base national standard, a 

standard for the hot-dry climate, and a standard for the hot-humid climate. (Joint Comment 2, 

2-26 
No. 30 at pp. 1, 20) Joint Comment 1 stated that the two regions most appropriate for regional 

standards are the west/southwest (representing a hot-dry climate) and the southeast (representing 

a hot-humid climate). (Joint Comment 1, No. 25 at p. 8) Joint Comment 1 suggested using 

available state-level population-weighted CDD and humidity data as criteria for including states 

in the hot-dry climate region. Joint Comment 1 also suggested an alternative using the latest 

TMY3 data to select contiguous states in which the population-weighted bin-hour distribution is 

systematically hotter and drier than the national average. (Joint Comment 1, No. 25 at pp. 8–9) 

FSEC suggested using the TMY3 dataset and supports a regional standard for the hot-humid 

region. (FSEC, No. 31 at pp. 1–2) Joint Comment 2 suggested developing a hot-dry SEER that 

could be used as a metric for rating the central air conditioner units in this region. (Joint 

Comment 2, No. 30 at pp. 1, 20) 

ACCA said that while EISA 2007 requires that any regional standard be applied to the 

entire state, few states could be associated with a single region based on CDD, cooling load 

hours, or other climate criteria. (ACCA, No. 23 at p. 2) Trane observed that few census divisions 

could be used for defining the boundaries of the regions over the 50 states. (Trane, No. 13 at p. 

350) Trane further contended that while the total cooling capacity of an air conditioner depends 

on the outdoor dry-bulb temperature and the indoor wet-bulb temperature, the latent/sensible 

split depends primarily on the indoor conditions. Since neither the total capacity nor the latent 

split depends on the outdoor relative humidity, it could not be used as a valid parameter to 

distinguish between the hot-dry and hot-humid zones. (Trane, No. 16 at p. 4) 

Joint Comment 1 suggested that DOE compare results of two parallel analyses: one with 

a single national standard and one with up to three regions (hot-dry, hot-humid, and average). 

Joint Comment 1 asserted that although a national increase in the efficiency standard could be 

cost effective, it might not achieve maximum cost-effective energy savings, ensure adequate 

dehumidification or peak load control, or provide manufacturers the best possible routes for 

profitable product differentiation. (Joint Comment 1, No. 25 at p. 3) 

Some comments suggested coordinating the current rulemaking process for central air 

conditioners and heat pumps with other residential products. EEI urged DOE to begin a new 

rulemaking process for the residential central furnaces and boilers to avoid simultaneous 

existence of regional standards for central air conditioners and heat pumps and a single national 

standard for residential heating products. (EEI, No. 20 at p. 2) NRECA advocated quickly 

implementing the central air conditioner and heat pump standards, updating the furnace and 

boiler standards, and ensuring that both have the same effective dates. (NRECA, No. 35 at p. 2) 

AHRI and Trane do not believe that DOE has the authority to establish regional heating 

standards for heat pumps. (AHRI, No. 24 at p. 4; Trane, No. 16 at p. 4) DOE believes that 42 

U.S.C. 6295(o)(6) and other related provisions of EPCA provide authority to set regional 

standards for heat pumps. DOE seeks comment on whether a national standard or regional 

standards would be appropriate for heat pumps. 

Several commenters also expressed a need for harmonization of the central air 

conditioner and heat pump standards with future standards for furnaces and boilers. (Carrier, No. 

18 at p. 2; EEI, No. 20 at p. 2; NRECA, No. 35 at p. 2) DOE examined various alternative 

criteria for establishing regions for analysis. The current calculations for the labeling of central 

2-27 
 

air conditioner cooling energy use are based on 1,000 cooling load hours, a representative 

national average condition. Consequently, DOE proposed for the preliminary analysis that states 

with greater than approximately 1,000–1,100 cooling load hours be included in a “hot” region 

(shown in the cooling hour map in the DOE test procedure). 10 CFR part 430, subpart B, 

appendix M. DOE considered where populations are centered in the western states, as well as 

state and regional CDD data. 

As DOE proceeded with the preliminary analysis for regional standards, the furnace and 

boiler final rule from November 2007 (72 FR 65136-65170) was remanded to DOE for 

reconsideration.6 This rule set standards for residential furnaces and boilers. The LCC subgroup 

analysis performed to support the furnace and boiler rule indicated that positive benefits could be 

derived if a higher efficiency condensing gas-fired furnace is used in the northern regions of the 

country. However, before EISA 2007 amended EPCA, DOE could set only a single national 

standard and therefore, the 2007 furnace and boiler rule was based on a single standard. 

However, EISA 2007 authorized DOE to establish one additional regional standard for the gasfired furnaces and consequently DOE was required by the Second Circuit Court to investigate 

regional standards for the furnace and boiler rule. 

DOE believes that a unified regional definition for both central air conditioners/heat 

pumps and furnaces would have several key benefits, although EISA 2007 does not require a 

coordinated approach for defining the regions: 

•	 Because similar manufacturers produce furnaces and central air conditioners/heat pumps 

and the same distribution network is used for both types of products, a unified regional 

definition would be easier for manufacturers and distributors to implement. 

•	 A unified boundary would likely result in only one product type (furnace or central air 

conditioner/heat pump) being subject to a higher efficiency regional standard in any 

given region. Since these appliances are commonly the most expensive appliances 

purchased in a home, the requirement of high-efficiency units for both types of products 

could have a large first-cost impact on consumers. 

•	 Regional standards may shift enforcement from the manufacturer to consumer point-ofsale and to installation. A single unified north-south boundary will simplify enforcement 

for both product types. There will be less possible combinations of furnaces and air 

conditioners, less motivation for non-compliance as the price differential between the 

base-case options on either side of a regional boundary are lower. 

Upon further examination, DOE realized that the hot-humid and hot-dry regions being 

considered in this rulemaking corresponded to states with less than 4,500 HDD65 (heating 

degree days base 65 o F), and that this 4,500 HDD65 boundary is close to the 5,000 HDD65 

boundary already analyzed in the furnace-rule sensitivity study. DOE examined individual states 

with an average HDD65 between 4,500 and 5,000, and tentatively concluded that they would 

benefit more from higher furnace standards than higher air conditioner standards. Consequently, 

DOE is considering a regional boundary that corresponds roughly to 4,500 HDD65 so that states 

with 4,500 or more heating degree days form the northern region, to which the baseline national 

standard developed in this rulemaking would be applicable. The remaining states would form the 

southern region, where two regional central air conditioner standards (eastern hot-humid and the 

2-28 
 

western hot-dry) would be developed. Chapter 7 of this preliminary TSD discusses the 

development of analysis regions. 

2.7 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES 

The effect of amended standards on individual customers usually includes a reduction in 

operating cost and an increase in purchase cost, which together determine the economic impact 

of standards on individual customers. This chapter describes the following two metrics, which 

DOE used in the analysis to measure this impact: 

•	 LCC is the total customer cost of an appliance or product, generally over the life of the 

appliance or product, including purchase and operating costs. The latter consist of 

maintenance, repair, and energy costs. Future operating costs are discounted to the time 

of purchase and summed over the lifetime of the appliance or product. 

•	 PBP measures the amount of time it takes customers to recover the assumed higher 

purchase price of a more energy-efficient product through reduced operating costs. 

New or amended energy conservation standards typically affect product operating 

expenses and purchase prices. DOE evaluated the net LCC to analyze the net effect of amended 

central air conditioner and heat pump standards on consumers. DOE used the cost-efficiency 

relationship derived from the engineering analysis, along with the energy costs derived from the 

energy use characterization. Inputs to the LCC calculation include the installed consumer cost of 

a product (consumer purchase price plus installation cost), operating expenses (energy, repair, 

and maintenance 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 amended standards, there is a time in the life of products with higherthan-baseline efficiency when the net reduction in operating costs (in dollars) since the time of 

purchase is equal to the increase in the purchase price of the higher efficiency product. The 

length of time required for products to reach this cost-equivalence point is known as the 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. 

DOE developed discount rates from estimates of the interest rate (finance cost) applied to 

residential product purchases. Following accepted principles of financial theory, the finance cost 

of raising funds to purchase such products can be interpreted as either (1) the financial cost of 

any debt incurred to purchase products (interest charges on debt), or (2) the opportunity cost of 

any equity used to purchase products (interest earnings on household or business equity). 

The LCC and PBP model was developed using Microsoft Excel spreadsheets combined 

with Crystal Ball, a commercially available add-in. The LCC and PBP analyses explicitly model 

the uncertainty and variability in the model’s inputs using Monte Carlo simulation and 

probability distributions. 

2-29 
 

 

 

The LCC analysis estimated energy use for each central air conditioner or heat pump unit 

as described in chapter 7 of the preliminary TSD. Energy use of central air conditioners and heat 

pumps is sensitive to climate, so it varies by location. An important feature of the LCC and PBP 

analyses is that it has been conducted at both the regional and national levels. Aside from energy 

use, other important factors influencing the analyses include energy prices, installation costs, 

product distribution markups, and sales tax. At the national and regional levels, the LCC 

spreadsheets explicitly model the uncertainty and variability in the model’s inputs using 

probability distributions based on the shipment of products to different regions of the country. 

As mentioned, DOE generated LCC and PBP results as probability distributions using a 

simulation based on Monte Carlo analysis methods in which certain key inputs consist of 

probability distributions rather than single-point values. Therefore, the outcomes can be 

expressed as probability distributions. As a result, the Monte Carlo analysis produces a range of 

LCC and PBP results. A distinct advantage of this type of approach is that DOE can identify the 

percentage of customers achieving LCC savings or attaining certain PBP values, in addition to 

identifying the average LCC savings or average PBP for a particular efficiency level. 

DOE received a number of comments from stakeholders on the LCC and PBP analysis 

methods and proposed sources of data. 

2.7.1 General Approach for Life-Cycle Cost and Payback Period Analyses 

Joint Comment 1 stated that DOE should estimate uncertainty bands in product and 

operating costs (derived from uncertainty in materials costs and in energy costs to consumers) 

and document its methods. DOE should also present methods to examine asymmetries in risks of 

under- versus over-investments in efficiency. (Joint Comment 1, No. 25 at p. 11) Joint Comment 

1 noted that when the LCC analysis gives a rather flat-bottomed curve, DOE must move toward 

maximum feasible efficiency to meet the legal requirements. (Joint Comment 1, No. 25 at p. 11) 

Joint Comment 1 stated that the value of energy during peak load conditions needs to be 

accounted for in the LCC analysis. (Joint Comment 1, No. 25 at pp. 4-5) ACCA asked whether 

the LCC and PBP analyses consider rebates, tax incentives, and other benefits available to the 

consumer to encourage the purchase of more efficient products. (ACCA, No. 13 at p. 277) 

With respect to uncertainty bands, DOE considers costs of materials and services and 

uses a distribution of the costs of such items across the nation. The MSP already accounts for the 

uncertainty of prices of products in the manufacturing process due to uncertainty in materials 

prices. The analysis also considers differences in energy prices across the nation and over time 

(see chapter 7 of the preliminary TSD). DOE’s LCC savings results include the percentages of 

consumers at each efficiency level for whom the LCC savings are positive and negative, and 

those who are not affected (because they already buy products that are more efficient than the 

standard), thus demonstrating the relative risks for consumers from higher efficiency levels (see 

chapter 8 of the preliminary TSD). In addition, the national impact analysis shows the present 

value of net economic savings to the nation at each efficiency level, thus showing the risks to the 

nation of under- and over-investment in efficiency (see chapter 11 of the preliminary TSD). As 

for energy value during the peak load, the LCC analysis uses marginal prices for energy savings 

that account for the prices of residential and commercial energy during the peak periods. With 

respect to meeting legal requirements, DOE considers the LCC at each efficiency level along 

2-30 
 

 

 

with the impact on manufacturers (from the manufacturer impact analysis in chapter 12 of the 

preliminary TSD) and the nation (from the national impact analysis in chapter 11 of the 

preliminary TSD), as well as the other factors set forth in 42 U.S.C. 6295(o)(2)(B) to determine 

whether a given standard level achieves the maximum improvement in energy efficiency that is 

both technically feasible and economically justified. 

DOE’s basic analyses calculate the LCC and PBP without rebates, tax incentives, and 

other methods to “buy down” the installed costs of products. The regulatory impact analysis 

calculates the impact of market incentives of rebates and tax incentives (chapter 18 of the 

preliminary TSD). 

2.7.1.1 Uncertainties in Assumptions 

ACEEE noted DOE’s tendency to use the LCC analysis as the driving agent to make its 

determination when there is significant uncertainty in all its assumptions (i.e., from service life to 

the trajectory of electricity prices). (ACEEE, No. 13 at p. 343) 

DOE does estimate LCC at each efficiency level but, as mentioned above, balances LCC 

along with impacts on manufacturers and the nation, as well as the other required factors, when 

determining whether a given standard level achieves the maximum efficiency improvement that 

is technically feasible and economically justified. 

2.7.1.2 Treatment of Non-Compliant Installations in the Analysis 

CFM asked if the LCC model has a degradation factor to account for sub-performing 

noncompliant installations. CFM has had experience with SEER 13 units being installed on 

improperly matched evaporators, especially in multi-family housing units. (CFM, No. 13 at p. 

337) 

The LCC analysis assumes that energy consumption is the amount calculated in the 

energy analysis, which in turn assumes that the products at each efficiency level achieve the 

relative efficiency that corresponds to the increase in SEER or HSPF for that level. DOE 

currently has no data that would show any systematic deviation from this pattern. 

ACCA asked about the availability of the LCC analysis assumptions so that they could be 

reviewed. (ACCA, No. 13 at p. 336) 

All assumptions for the LCC model are discussed in chapter 8 of the preliminary TSD. 

Additional details on retail markup assumptions are discussed in chapter 6, engineering 

assumptions and manufacturer selling price in chapter 5, and energy consumption in chapter 7. 

2.7.2 Electricity Prices 

Electricity price information is required to calculate the dollar benefits to consumers who 

purchase and operate more efficient central air conditioners and heat pumps. The electricity cost 

savings comprise the benefit side of the cost-benefit analysis used to estimate the LCC impacts 

of more efficient central air conditioners and heat pumps. To value the electricity cost savings, 

DOE developed marginal electricity prices. The marginal electricity price for a given consumer 

2-31 
 

 

 

is the cost of the next increment of electricity use on their utility bill, and is the correct estimate 

of the value of savings that a consumer would see in the real world. 

DOE developed residential marginal electricity prices from tariffs collected in 2008 from 

a representative sample of electric utilities throughout the United States. DOE collected over 150 

residential tariffs from a sample of about 90 electric utilities. As described earlier, DOE 

developed household samples using central air conditioners and heat pumps from the 2005 

RECS. The location of each household can be identified within broad geographic regions (e.g., 

Census Divisions). As a result, each household is assigned to a utility within a region. In turn, 

DOE developed a weighted-average marginal electricity price for each household from all the 

possible utility tariffs that could be assigned to that household. 

DOE also developed commercial marginal electricity prices from tariffs for those 

commercial building applications that use residential central air conditioners and heat pumps. 

DOE used tariffs collected in 2004. Because central air conditioner and heat pump shipments to 

commercial applications are estimated to be low, DOE did not update its commercial tariff 

collection. Rather, DOE adjusted the prices from the 2004 tariffs with scaling factors based on 

the increase in average electricity prices from 2004 to 2008 based on data from EEI Typical Bills 

reports7

 and a summary report on rate increases published by Regulatory Research Associates.8 

Similar to the residential tariffs, DOE collected over 260 commercial tariffs from a sample of 90 

electric utilities. For the commercial buildings characterized and simulated in the Energy Use 

Characterization analysis, DOE assigned all possible tariffs to each building based on its 

geographic location. As with the residential household sample, DOE developed a weightedaverage marginal electricity price for each commercial building from the utility tariffs that could 

possibly be assigned to that building. 

AHRI and Trane questioned the use of marginal electricity prices given that past 

standards rulemakings found only slight differences between average and marginal electricity 

rates. (AHRI, No. 24 at p. 9; Trane, Public Meeting Transcript, No. 13 at pp. 308–309) Carrier 

and Sempra noted that the projected effective date of the standards is relatively distant (2016), 

which makes it difficult to estimate electricity prices. Carrier also stated that due to the 

uncertainty of electricity pricing in the future, the focus of the analysis should not be on the 

development of electricity prices. (Carrier, Public Meeting Transcript, No. 13 at pp. 314-315; 

Sempra, Public Meeting, No. 13 at pp. 310-311) In contrast, PG&E and EEI believe there are 

likely to be significant differences in average and marginal prices. (PG&E, Public Meeting 

Transcript, No. 13 at p. 309; EEI, Public Meeting Transcript, No. 13 at pp. 311-312) Although 

the marginal electricity prices DOE developed for some prior standards rulemakings 

demonstrated little to no difference between average and marginal prices, there is reason to 

believe that marginal prices differ significantly from average prices for highly seasonal and 

peak-coincident end uses such as air conditioning. For example, in a rulemaking on standards for 

commercial unitary air conditioners (CUAC), the DOE-developed marginal electricity prices 

differed substantially from average prices.9

 Therefore, DOE developed marginal electricity 

prices for this rulemaking to ensure that it accurately calculated the value of electricity savings 

due to more efficient central air conditioners and heat pumps. DOE’s current method of 

determining electricity prices based on tariffs allows the calculation of either average or marginal 

electricity prices with little difference in effort. 

2-32 
 

 

A joint comment from the National Resources Defense Council (NRDC), the National 

Consumer Law Center, Inc. (NCLC), and Enterprise Community Partners (ECP) stated that DOE 

should develop time-of-use (TOU) rates for the entire country (hereafter “Joint Comment 3”). 

(Joint Comment 3, No. 36 at pp. 2–3) Ice Energy stated that the analysis should account for 

electrical generation costs based on TOU. (Ice Energy, No. 33 at p. 3) As described above, DOE 

collected residential tariffs to characterize marginal electricity prices for central air conditioners 

and heat pumps. These tariffs are based on electricity use charges (in dollars per kilowatt hour 

($/kWh)) that are a function of the overall household electricity use (in kWh). For example, for 

tariffs with increasing block rates, households will be charged a higher price once electricity 

consumption exceeds defined threshold levels. This type of pricing structure does not necessarily 

reflect the cost to a utility of providing electrical service at different times of the day. Many 

utilities offer optional TOU tariffs that generally charge consumers more for electricity during 

peak periods when it presumably costs the utility more to provide electrical service. During offpeak periods, TOU tariffs are also structured to charge consumers less than they would normally 

be charged under a non-TOU tariff. To determine the effect of TOU pricing structures on 

residential consumers, DOE collected TOU tariffs for those utilities in the sample (50 percent) 

that offered optional TOU tariffs to their customers. This represents a larger percentage of 

potential customers because TOU tariffs are typically offered by larger utilities. Coupling hourly 

energy savings derived from typical residential household and central air conditioner/heat pump 

load profiles with TOU tariffs, DOE was able to derive TOU-based marginal electricity prices. 

Appendix 8-D of this preliminary TSD describes this analysis, which compares marginal prices 

developed from TOU tariffs with marginal prices developed from non-TOU tariffs. For 

commercial prices, existing tariff structures already account for the effect that an end use, such 

as central air conditioning, has on marginal electricity prices. Because utilities bill their 

commercial consumers with demand charges (in $/kWh) in addition to energy charges, the 

resulting marginal prices reflect the contribution that air conditioning has on peak demand. 

Joint Comment 3 stated that the electricity prices that DOE uses do not reflect the full 

costs to the utility system of providing electricity to meet air-conditioning demand. (Joint 

Comment 3, No. 36 at pp. 2-3) In the analysis of CUAC efficiency standards, DOE conducted a 

comprehensive analysis of the real marginal cost of serving peak loads, and compared it to the 

marginal price utilities charge their customers through commercial tariffs. While CUAC is a 

different appliance serving a different customer sector, the technical analysis of peak impacts for 

residential and commercial air conditioning is essentially the same. The analysis for CUAC 

accounted for the diversity of CUAC loads and their coincidence with utility system loads. 

Electric utility capacity costs were determined at a regional level (in $/kWh) and applied to the 

CUAC peak load savings to calculate the capacity component of the real marginal cost. The real 

marginal cost calculation included operating, capacity, and other costs incurred to serve 

customers, and so represented the price the utility would have to charge to cover all of its costs at 

the margin. The results of this analysis showed that on a national average basis, the real marginal 

cost and the tariff-based marginal price were nearly equal, with a value of approximately 

10¢/kwh in 2002$. Across the industry, utilities appear to recover through their tariffs the real 

cost of serving peak loads. At the national level, there are no subsidies. Overall, it seems unlikely 

that a peak impact that does not appear significant for commercial air conditioning would be 

significant for residential central air conditioners. In regions where the total electric load peaks in 

summer, commercial air conditioning tends to be more peak-coincident than residential, because 

the overall system peak is driven by the standard 9:00-to-5:00, 5-day work week schedule that 

2-33 
 

 

 

most commercial buildings follow. Therefore, DOE believes that the conclusions of the price 

analysis for CUAC also apply to central air conditioners and heat pumps, and that on the average 

current utility tariffs capture the true marginal cost of providing electricity for peak-coincident 

end uses. 

DOE used projections of electricity prices from EIA’s Annual Energy Outlook 2009 

(AEO 2009) to estimate future energy prices.10 Joint Comment 1 recommended that DOE 

perform appropriate sensitivity analyses for broad ranges of energy costs. (Joint Comment 1, No. 

25 at p. 4) DOE conducts sensitivity analyses using alternative AEO forecasts in addition to the 

AEO reference forecast. These alternative forecasts reflect different assumptions about economic 

growth and other factors. In general, the range of AEO forecasts bracket the long-run energy 

price forecasts made by other organizations. Joint Comment 3 stated that DOE should not rely 

solely on the AEO forecasts, but should consider relevant factors that occur after the AEO 

publication date. It also suggested that DOE should examine futures contracts for natural gas and 

adjust its electricity price forecasts accordingly. (Joint Comment 3, No. 36 at pp. 3, 6) The AEO 

forecast of electricity and other energy prices is a widely accepted, thoroughly documented, and 

transparent benchmark analysis. AEO price forecasts are recalibrated each year. DOE has 

consistently relied on AEO price forecasts and has used other forecasts, including the various 

AEO scenarios, to delimit the energy prices used in standards analyses. DOE believes this is the 

best approach for forecasting prices. EEI commented that currently 26 states have renewable 

portfolio standard (RPS) mandates and four have RPS goals, and that DOE should take these into 

account in its analysis. (EEI, Public Meeting Transcript, No. 13 at p. 394) The AEO forecasts 

account for all state RPS mandates and their impact on future electricity prices. 

Earthjustice stated that DOE’s forecast of electricity prices should account for the high 

probability of a nationally applicable mandatory regime to limit CO2 emissions. (Earthjustice, 

No. 29 at pp. 3-4) Until any cap and trade legislation is enacted, analysis of its impacts would be 

speculative. DOE uses the most recent AEO forecasts to estimate future electricity prices. If a 

carbon cap and trade regime is enacted, the AEO is likely to incorporate the projected impacts of 

the regime in its forecast. 

2.7.3 Repair Cost 

2.7.3.1 Replacement Cost of Components of Higher Efficiency Products 

DOE received several general comments on repair costs. ACCA noted that while 

maintenance costs may be only slightly more for higher efficiency products, the cost of repair 

and installation increases are enough to warrant consideration as part of the LCC and PBP 

analyses. (ACCA, No. 23 at p. 5) Unico commented that the product lifetime should include a 

factor for product warranty and coverage. (Unico, No. 13 at p. 342) Unico observed that some 

repairs are so expensive that owners replace the whole unit rather than repair the original and this 

calls into question the assumption of one compressor change-out in a lifetime. Danfoss 

commented that in the replacement industry (two-thirds of the total market), the consumer can 

choose to replace the compressor or put in a new and more efficient unit. Danfoss and Lennox 

both commented that the higher cost of higher SEER products drives homeowners toward repair 

and this trend will continue with lower SEER products. (Danfoss, No. 13 at p. 343; Lennox, No. 

13 at p. 338) 

2-34 
 

 

DOE plans to scale the cost of repair to the efficiency and cost of the products. DOE 

seeks comment and data on whether increased standard levels will affect the decision to repair 

rather than replace the product enough to significantly affect the distribution of product lifetimes 

and the estimated number of compressor replacements. 

Lennox commented that while the use of micro-channel heat exchangers resulted in 

smaller units with R-22, it is unclear whether this size reduction is possible with R-410A. A leak 

in a micro-channel would likely require replacing the entire coil, leading to higher replacement 

costs. (Lennox, No. 13 at p. 339) 

Trane commented that it will be using electronically commutated motors (ECMs) on 

blowers, fans, and possibly compressors. Trane urged DOE to obtain estimates for replacement 

part costs of induction motors versus ECM motors and for conventional contacts (relays) for an 

electro-mechanical system versus the electronic control board. (Trane, No. 13 at p. 339) Trane 

asserted that an electronic control board cannot be serviced at the same cost as an 

electromechanical system. Trane also commented that if the standard level leads to a requirement 

for multi-speed outdoor units and the variable speed indoor/outdoor motors, this would 

inevitably lead to significantly higher maintenance and repair costs due to the complexity of the 

diagnosis, the prospect of higher failure rates for more complex systems, and higher repair parts 

costs. (Trane, No. 16 at p. 20) 

DOE has modeled the cost of repair proportional to the relative initial cost of the products 

as efficiency increases. Thus, as efficiency levels increase, the cost of repair will also increase, 

consistent with these industry comments. 

DOE plans, at the notice of proposed rulemaking (NOPR) stage, to address the consumer 

repair versus replace decision in the LCC chapter (chapter 8) by conducting sensitivity analyses 

to identify the effects of increased repair costs versus new purchase costs on LCC. However, 

DOE does not plan to carry this sensitivity analysis through to the national impact analysis. DOE 

plans to address the effects of regional standards on low-income consumers within the subgroup 

analysis (chapter 12) by conducting LCC analyses for these subgroups at the regional level, also 

at the NOPR stage of the rulemaking. However, DOE does not plan to carry either of these 

analyses through to the national impact analysis. 

2.7.4 Maintenance Cost 

DOE received multiple comments concerning the effects of the technical complexity of 

higher efficiency products on maintenance costs. HARDI commented that a greater emphasis on 

planned maintenance must be given to higher efficiency products to maintain the installed 

efficiency. (HARDI, No. 32 at p. 4) According to HARDI, the high potential price of the R-410A 

refrigerant would make a noticeable difference in maintenance costs, especially when higher 

efficiencies require larger charge sizes. The cost of the refrigerant could exceed the value of the 

warranty on the product. (HARDI, No. 13 at p. 333) 

Trane commented that if the minimum efficiency level leads to a requirement for multispeed outdoor units and the variable speed indoor/outdoor motors, significantly higher 

maintenance and repair costs would be expected due to the complexity of the diagnosis, the 

2-35 
prospect of higher failure rates for more complex systems, and higher repair part costs. (Trane, 

No. 16 at p. 20) 

AHRI and Lennox commented that DOE cannot assume that the maintenance repair and 

installation costs will be negligible for more efficient products. Lennox noted that higher 

efficiency products have much larger coils and clogged coils have a bigger effect (implying 

higher maintenance costs). (AHRI, No. 24 at p. 10; Lennox, No. 13 at pp. 338–339) 

PG&E commented that based on extensive study of its field experience, a higher 

efficiency product maintains its actual field performance better over a range of charge, reducing 

maintenance cost. (PG&E, No. 13 at pp. 334–335) 

ACEEE commented that for those manufacturers not adopting micro-channel heat 

exchangers, it is unclear whether new technologies will lead to higher maintenance costs. The 

new technologies include a great deal of foregone advanced and automated diagnostics. These 

improvements should lead to smarter machinery that will be self-correcting and will notify the 

maintenance technician what to bring and do when conducting maintenance. (ACEEE, No. 13 at 

p. 332) 

DOE acknowledges that although some maintenance costs may not increase in higher 

efficiency products, other components likely would cost more to maintain, such as cleaning of 

larger coils and conducting more complex diagnostics of components such as multi-speed 

compressors and variable-speed motor systems and setting of more complex controls. DOE 

assumed that maintenance cost will increase for higher efficiency products in the analysis and 

will scale maintenance cost to the product selling price, which is a proxy for the complexity of 

the mechanical components, electronics, and size of the coils. 

2.7.5 Discount Rate 

As described below, DOE developed discount rates separately for residential and 

commercial purchasers of central air conditioners and heat pumps. 

2.7.5.1 Residential Rates 

DOE derived discount rates for the LCC analysis from estimates of the cost to finance the 

purchase of the considered products. Following financial theory, the financial cost of raising 

funds to purchase appliances can be interpreted as (1) the financial cost of any debt incurred to 

purchase a product, or (2) the opportunity cost of any equity used to purchase a product. 

Carrier, AHRI, CFM, and Trane stated that DOE should use a discount rate for residential 

consumers equal to the prevailing credit card rate. (Carrier, No. 18 at p. 10; AHRI, No. 24 at p. 

9; CFM, Public Meeting Transcript, No. 13 at p. 328; Trane, Public Meeting Transcript, No. 13 

at p. 329) Carrier and Trane also commented that over 70 percent of unit sales are for 

replacement and that these would not be included in mortgages. (Carrier, No. 18 at p.10; Trane, 

No. 16 at p. 19) Energy Solutions suggested that DOE factor in default rates on credit cards as a 

negative interest rate when determining the rates associated with credit cards. (Energy Solutions, 

Public Meeting Transcript, No. 13 at p. 329) 

2-36 
 

 

For replacement purchases, households use various methods to finance the purchase of 

major appliances. The frequency with which each financing vehicle is used to purchase an 

appliance is unknown, however. DOE identifies all possible debt or asset classes that might be 

used to purchase the considered appliances or that might be affected indirectly. DOE then 

estimates the average percentage shares of the various types of debt and equity for the average 

U.S. household using data from the Federal Reserve Board’s Survey of Consumer Finances 

(SCF) for a number of years. Using the SCF and other sources, DOE then develops a distribution 

of rates for each type of debt and equity to represent the rates that may apply in the year in which 

amended standards would take effect. For the purchase of products for new homes, which are 

included in the sales price of the home, DOE uses finance costs based on a distribution of 

mortgage rates. Based on data from RECS, DOE determined that new home purchases represent 

approximately 30 percent of residential sales. 

2.7.5.2 Commercial 

DOE developed commercial discount rates based on cost of capital calculated for 

commercial businesses expected to occupy small commercial buildings. For the commercial cost 

of capital data, DOE relied on financial data for industries found in the Damodaran website for 

2009. DOE received a comment on commercial discount rates. 

EEI suggested that DOE use discount rates associated with small businesses most likely 

to use central air conditioners and heat pumps, rather than using discount rates from all types of 

commercial businesses that would use other products. (EEI, No. 20 at p. 7; No. 13 at p. 327) 

For commercial rates, DOE uses discount rates only for businesses that would be 

expected to occupy small commercial buildings. DOE will investigate whether it is possible to 

identify small businesses that would use central air conditioners and heat pumps and whether 

there is likely to be a significant difference in discount rates for such businesses. See chapter 8 in 

the preliminary TSD for further discussion of discount rates. 

2.7.5.3 Product Lifetime 

Product lifetime is the age at which the central air conditioner or heat pump is retired 

from service. In the prior standards rulemaking for these products, DOE conducted a 

comprehensive analysis on product lifetime showing that the average lifetime for central air 

conditioners and heat pumps was 18.4 years. That analysis also demonstrated that compressors 

failed and were replaced on average in year 14 of the system’s life. AHRI and Trane stated that 

the central air conditioner and heat pump lifetimes are 10 and 12 years, respectively. (AHRI, No. 

24 at p. 10; Trane, No. 16 at p. 21) Trane also suggested that DOE use data provided by the 

Census Bureau and/or RECS to deduce central air conditioner and heat pump lifetime. (Trane, 

Public Meeting Transcript, No. 13 at p. 340) ACCA conducted an informal survey of its 

members and determined that central air conditioner and heat pump lifetime is less than 18.4 

years. (ACCA, No. 23 at p. 5) 

DOE based product lifetimes for its prior central air conditioner and heat pump standards 

rulemaking on a consumer survey from the late 1980s commissioned by electric utilities. 

Although the survey was robust and accurate, it may no longer be representative of current 

2-37 
product lifetimes. As a result, DOE conducted an analysis of actual product lifetime in the field 

using a combination of shipments data and responses in RECS on the age of household central 

air conditioner and heat pump products. By combining the results of RECS with the known 

history of appliance shipments, DOE estimated the percentage of central air conditioner and heat 

pump products of a given age still in operation. This survival function, which DOE assumed has 

the form of a cumulative Weibull distribution, provides an average and a median appliance 

lifetime. As described in chapter 8, this analysis yielded an estimate of mean life of 19 years for 

central air conditioners and 16.3 years for heat pumps. 

HARDI stated that product lifetimes decrease for higher efficiency products due to their 

complexity. (HARDI, No. 32 at p. 4) Contrary to HARDI, MEUS stated that higher efficiency 

products should have a longer life expectancy. (MEUS, No. 19 at p. 5) DOE’s method of 

developing product lifetimes does not account for the efficiency or complexity of the product. 

DOE is unaware of data that clearly demonstrates that more efficient or sophisticated products 

have longer or shorter liftimes than more conventional products. Without such data, DOE 

assumed that lifetime was not a function of either efficiency or product complexity. 

2.8 NATIONAL IMPACT ANALYSIS 

The NIA assesses the NES and the NPV from a national perspective of total appliance 

consumer costs and savings expected to result from standards at specific efficiency levels. 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 typical 

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

uncertainty on NES and NPV results, DOE has developed its spreadsheet model to conduct 

sensitivity analyses by running scenarios on specific input variables. 

DOE conducted its NIA to assess impacts for the hot-humid region, the hot-dry region, 

and the remaining parts of the country that are neither hot-humid nor hot-dry (to which the 

national standard would be applicable). Although the sum of the regional impacts does provide 

the impact on the entire Nation, DOE also conducted its NIA for the Nation as a whole without 

consideration of regional implications. This national analysis provided NES and NPV results 

different from those determined by summing the regional impacts. Because inputs to the NIA, 

such as product total installed cost, product annual energy consumption, and product repair and 

maintenance costs, have regional dependencies in addition to being a function of product 

efficiency, the regional level impacts when summed will differ from the impacts that are 

determined at the national level. If DOE proposes regional standards in the NOPR, DOE will 

consider whether to present the national impacts as a sum of the regional results. 

2.8.1 Shipments Analysis 

DOE uses forecasts of product shipments to calculate the national impacts of standards 

on energy use, NPV, and future manufacturer cash flows. DOE developed shipment forecasts 

based on an analysis of key market drivers for each considered product. In DOE’s shipments 

model, shipments of products are driven by new construction, replacement of the existing stock 

2-38 
of installed products, and existing households or buildings that do not already own the product 

(referred to hereafter as new owners). DOE accounted for shipments to commercial buildings as 

well as residential households. The industry provided estimates of the percentage of annual 

central air conditioner and heat pump sales shipped to commercial building applications. These 

estimates ranged from 3 to 10 percent. (Trane, No. 16 at p. 17; Carrier, No. 18 at p. 8; MEUS, 

No. 19 at p. 4; AHRI, No. 24 at p. 8) Based on industry input, DOE assumed 7 percent of central 

air conditioner and heat pump shipments were to commercial applications and accounted for this 

in the shipments model. 

The shipments model takes an accounting approach, tracking market shares of each 

product class and the vintage of units in the existing stock. Stock accounting uses product 

shipments as inputs to estimate the age distribution of in-service product stocks for all years. The 

age distribution of in-service product stocks is a key input to NES and NPV calculations because 

operating costs for any year depend on the age distribution of the stock. DOE used historical 

product shipments to assist in calibrating the shipments model. AHRI and other parties provided 

historical product shipments information. (AHRI, Public Meeting Transcript, No. 13 at p. 352) 

AHRI provided historical shipments for each of the four primary product classes—split-system 

air conditioners, single-package air conditioners, split-system heat pumps, and single-package 

heat pumps—but did not disaggregate the shipments data regionally. As a result, DOE relied on 

historical regional product stock saturation data from past RECS surveys as well as past U.S. 

Census Bureau American Housing Surveys (AHS). Put simply, DOE disaggregated AHRI’s 

historical product shipments regionally by calibrating the resulting product stock saturations to 

the values specified by the RECS and AHS data. DOE used this calibration technique for 

residential shipments only. Commercial shipments were allocated regionally based on the 

percentage allocations determined for residential shipments. 

MEUS stated that it would provide historical shipments data for ductless split systems. 

(MEUS, Public Meeting Transcript, No. 13 at p. 34) For SHDV systems, Unico noted that 

SDHV manufacturers sell only the indoor half of the system, and therefore do not know which 

condenser model installation contractors use for outdoor units. As a result, SDHV shipments data 

are not available. As noted in section 2.2.1.2, DOE considers ductless split systems within the 

product class of split systems and does not analyze ductless systems separately. The analyses 

conducted for this preliminary TSD have not addressed the non-primary product classes that 

include space-constrained products and SDHV systems. DOE requests shipment data from 

interested parties for non-primary products (e.g., SDHV systems, space-constrained products, 

ductless split systems), as well as suggestions on how to treat these product classes in the NOPR. 

To estimate the impact that standards have on product shipments, DOE analyzed the 

impact that purchase price, operating costs, and household income have had on historical central 

air conditioner and heat pump shipments. From this analysis, DOE derived a relative price 

elasticity that estimates shipments impacts as a function of the increase in purchase price, 

operating cost savings, and household income. Although the correlation among historical 

shipments and the above three parameters is not strong, there is enough evidence to suggest a 

connection. Of the three parameters, purchase price has the most significant impact on product 

shipments; an increase in product purchase price will lead to a decrease in product shipments. 

2-39 
Several interested parties remarked that the increase in purchase price due to higher 

efficiency standards would lead to decreased central air conditioner and heat pump shipments. 

Specifically, EEI and Rheem commented that some consumers may switch from central systems 

to room air conditioners when faced with higher product purchase prices. (EEI, No. 20 at p. 8; 

Rheem, Public Meeting Transcript, No. 13 at p. 376) MEUS stated that central heat pump 

consumers may switch to either electric resistance heating systems or hybrid systems if standards 

significantly increase product purchase price. (MEUS, Public Meeting Transcript, No. 13 at pp. 

358–359) Several parties remarked that consumers may choose to repair their products rather 

than replace it if standards lead to significantly higher product purchase prices. (Danfoss, Public 

Meeting Transcript, No. 13 at pp. 274, 359; Trane, Public Meeting Transcript, No. 13 at p. 360; 

HARDI, Public Meeting Transcript, No. 13 at p. 24; CFM, Public Meeting Transcript, No. 13 at 

p. 35; MEUS, No. 19 at p. 5) DOE acknowledges that a significant increase in central air 

conditioner and heat pump purchase prices could cause some potential new owners to forego or 

delay a central air conditioner or heat pump purchase. As described above, DOE developed a 

relative price elasticity to quantify the potential drop in central air conditioner and heat pump 

sales from an increase in purchase price due to standards. 

DOE considered shipments decreases only in the replacement and new owner markets. 

Because most new construction is now routinely equipped with either a central air conditioner or 

heat pump, DOE assumed that any increase in purchase price caused by standards would not 

affect the decision to install a central air conditioner or heat pump system in new construction. In 

the case of the replacement market, DOE assumed that any drop in shipments would be caused 

by consumers deciding to repair rather than replace their products. DOE estimated that the 

extended repair would last 6 years, after which time the products would be replaced. In the case 

of new owners of central air conditioners, DOE assumed that any consumers forgoing a central 

air conditioner purchase would instead buy a room air conditioner. In the case of new owners of 

central heat pumps, DOE assumed that any consumers forgoing a heat pump purchase would 

instead purchase a combination central air conditioner and electric resistance furnace system. 

ACEEE noted that in 2010, products will need to transition to a new refrigerant—R-410a. 

ACEEE stated that R-410a-based systems require a very different class of refrigerant lubricants. 

Consequently, for split systems, DOE should pay attention to the feasibility of component 

replacements rather than system replacements when consumers are required to move from an R22 system to an R-410A system that uses different lubricants and controls. (ACEEE, Public 

Meeting Transcript, No. 13 at p. 362) As described in section 2.4.1.2. DOE did not account for 

the impact of switching to R-410a in determining manufacturer costs. For modeling the 

replacement of split systems in the shipments analysis, DOE assumed that all consumers would 

replace both the outdoor unit and the indoor coil. Although consumers today may replace only 

the outdoor unit and retain the indoor coil, with the transition to R-410a, DOE assumed all 

consumers would replace both components in order to avoid refrigerant and lubricant 

incompatibility issues. Although not explicitly accounting for the effects of R-410A as described 

above, DOE estimated the impact of higher product prices on a consumer’s decision to repair or 

replace a failed unit. 

2-40 
 

Chapter 9 of the preliminary TSD provides additional details on the shipments analysis 

and the impact that higher purchase prices, operating costs, and household income due to 

standards have on product shipments. 

2.8.2 Efficiency Scenarios and Trends 

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

developed efficiency trends for the base case without new standards and the standards case. 

These trends specify the average annual historical and forecasted shipments-weighted product 

efficiencies. 

In the framework document, DOE proposed to use a “roll-up” efficiency scenario in 

developing its forecasts of efficiency trends after standards take effect. Under this scenario, all 

products that perform at levels below a prospective standard are moved, or rolled up, to the 

minimum performance level allowed under the standard. The distribution of products that meet 

the higher efficiency standard levels is unaffected. 

Joint Comment 1 stated that prior rulemakings suggest that the early response to 

standards is a “roll-up” but that eventually, the market begins to shift. Joint Comment 1 

suggested that DOE should attempt to incorporate a blended scenario in the NIA. (Joint 

Comment 1, No. 25 at p. 11) Danfoss also suspected that an initial roll-up and eventual 

efficiency spread are likely. Danfoss stated that the standards that took effect in the early 1990s 

indicate that a roll-up phenomenon occurred immediately, followed a year or two later with the 

sale of products with higher efficiencies. (Danfoss, Public Meeting Transcript, No. 13 at p. 372) 

AHRI stated that over the last 3 years, shipments have included higher product efficiencies. 

AHRI’s expects this trend will continue as energy costs escalate. AHRI suggested forecasting an 

increasing efficiency trend to the effective date of the standard (2016) and using a roll-up 

scenario to estimate the impact from new standards. (AHRI, No. 24 at p. 11) EEI suggests 

reviewing historical efficiency data between 1992 and 2006 to estimate the probable impact from 

new standards. EEI also suggests adding a “time lag” effect once the new standards become 

effective (i.e., accounting for product sales with efficiencies lower than the new standard because 

of manufacturer and distributor inventories). NRDC noted that new legislation and enhanced 

market-pull programs will likely lead to the sale of more efficient products. (NRDC, Public 

Meeting Transcript, No. 13 at p. 375) 

AHRI provided historical shipment-weighted efficiency (SWEF) data for each of the four 

primary product classes between 1992 to 2008, which included new standards for central air 

conditioners and heat pumps in 1992 and 2006. After the 1992 standards took effect, SWEFs 

increased for each product class on average 1 SEER between 1992 and 2005, which is an 

efficiency growth rate of approximately 0.077 SEER per year. After the 2006 standards took 

effect, SWEFs increased in 2007 and 2008, but with limited data, it is difficult to assess the 

growth. After reviewing the historical data from AHRI, DOE believes that new standards will 

cause baseline models to roll up to the standard efficiency level, but that some fraction of 

shipments will remain above the minimum. DOE calculated the SWEF from this resulting 

efficiency distribution. In the years following the standard, DOE estimated that SWEFs for the 

base case will continue to grow at the rate observed between 1992 and 2005 (i.e., 0.077 SEER 

per year) until the max-tech efficiency level is attained, at which point the SWEF was held 

2-41 
 

 

constant. To develop standards case forecasted SWEFs, DOE developed growth trends for each 

standard level that maintained the same per-unit average total installed cost difference for the 

between the base case and each standards case for the year 2016 over the entire forecast period 

(2016–2046). 

HARDI and Trane commented on the effect that market-pull programs such as ENERGY 

STAR can have on the sale of high-efficiency products. HARDI claimed that higher efficiency 

standards could actually hinder the effectiveness of market-pull programs to improve overall 

building performance. For example, higher product costs due to standards can be an issue in 

qualifying for sustainable building credits and initiatives. (HARDI, No. 32 at p. 8) Trane noted 

that manufacturers run off-season rebate programs to promote the sale of high-efficiency 

products. The method described above for forecasting SWEFs after a standard becomes effective 

assumes the continued existence of market-pull programs to encourage the adoption of more 

efficient products. Because DOE used the same efficiency growth rate as the growth rate 

between 1992 and 2005, the effectiveness of future market-pull programs is implicitly assumed 

to be the same as the effectiveness of programs between 1992 and 2005. Chapter 10 of the 

preliminary TSD details the approach DOE used to forecast product efficiencies. 

2.8.3 National Energy Savings Analysis 

The inputs for determining the national energy savings for each product analyzed are: (1) 

annual energy consumption per unit; (2) shipments; (3) product stock; (4) national energy 

consumption; and (5) site-to-source conversion factors. DOE calculated the national energy 

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

the unit energy consumption (also by vintage). DOE calculated annual NES based on the 

difference in national energy consumption for the base case (without new efficiency standards) 

and for each higher efficiency standard. DOE estimated energy consumption and savings based 

on site energy and converted the electricity consumption and savings to source energy. 

Cumulative energy savings are the sum of the NES for each year over the timeframe of the 

analysis. 

In the framework document, DOE stated that it would consider a rebound effect in its 

analyses. A rebound effect occurs when the increased energy efficiency and reduced consumer 

costs of higher efficiency products causes the consumer to alter their behavior resulting in an 

increase in energy consumption. Based on limited research, DOE found that the rebound effect 

for residential space-cooling products appears to be highly variable, ranging from 0 to 50 percent 

(i.e., consumers may activate more efficient air-conditioning products 0 to 50 percent more 

frequently than baseline products). AHRI and Trane stated that the rebound effect is not likely to 

be significant for more efficient central air conditioners and heat pumps. (AHRI, No. 24 at p. 8; 

Trane, No. 16 at p. 17) Joint Comment 1 suggested that DOE review the available literature on 

the rebound effect. (Joint Comment 1, No. 25 at p. 11) DOE found no new literature on the 

subject since the publication of the framework document. Because industry experience indicates 

that it is very unlikely that increase product efficiencies will result in a rebound effect, DOE did 

not include this effect in its analysis. 

2-42 
 

AHRI commented that the analysis period for the national energy savings should not 

exceed the period during which the rule is likely to be in effect before being superseded by a 

subsequent rule. The analysis horizon should be on the order of 10 years. (AHRI, No. 24 at p. 8) 

DOE calculates the NPV of new or amended standards to estimate the impacts of 

standards on the nation. In performing the NPV analysis for the first energy conservation 

standards rulemakings, DOE selected a 30-year analysis period beginning on the effective date of 

the standard because it closely matched the lifetime of the longest-lived products considered for 

standards. Matching the lifetime of the longest-lived products allows for a full turnover of the 

stock. For the next few rulemakings on different products, DOE used the same analysis end date 

but the appropriate start-of-standard date that resulted in a shorter analysis period for those 

products. By the 1990s, DOE found that using the same analysis end date would result in 

rulemaking that could not capture the full impact of amended standards. As a result, DOE 

determined it was necessary to change the analysis end date. DOE settled on the 30-year 

analysis, which allows the full-life capture of any product shipped in the first year a standard 

becomes effective. Because products have varying lifetimes, DOE uses a 30-year period to 

maintain a consistent timeframe to compare the energy savings and economic impacts from all 

standards rulemakings. 

DOE believes that using a 30-year analysis period is appropriate. To compare energy 

savings for residential or commercial equipment classes across varying lifetime appliance 

rulemakings, DOE must use the lifetime of the longest-lived product or equipment type because 

the annual energy consequences of improving the longest-lived residential products or 

commercial equipment would remain unknown until all of the market consisted of improved 

units. That scenario would not occur until the last of the pre-standard equipment is retired. Thirty 

years is a practical estimate for that event for short- and long-lived equipment. The NOPR for 

beverage vending machines discusses this point in further detail. 74 FR 26040–41. 

To compare economic costs and savings using discounted present value, it is common in 

economics to use the stream of benefits and costs over the lifetime of the equipment. In DOE 

energy conservation standards rulemakings, the outer limit for economic benefits and costs is 

established in the NPV analysis as the last year of life of the oldest equipment purchased during 

the 30-year period used for energy savings comparisons. 

2.8.4 Net Present Value Analysis 

The inputs for determining 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 annual 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 based on real discount 

rates of 3 and 7 percent to discount future costs and savings to present values. 

2-43 
 

 

 

DOE calculated increases in total installed costs as the difference in total installed cost 

between the base case and standards case (i.e., once the standards take effect). Because the more 

efficient products bought in the standards case usually cost more than products bought in the 

base case, cost increases appear as negative values in the NPV. 

DOE expressed savings in operating costs as decreases associated with the lower energy 

consumption of products bought in the standards case compared to the base efficiency case. 

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. 

The national impacts analysis examines the potential economic impacts of alternative 

standard levels on consumers who purchase the considered products. Joint Comment 3 stated that 

DOE should quantify the effect of the standard on electricity prices and the value of reduced 

electricity bills to all consumers. (Joint Comment 3, No. 36 at p. 5) DOE investigated the 

possibility of estimating the impact of specific standard levels on electricity prices in its 

rulemaking for general service fluorescent lamps and incandescent reflector lamps.11 While 

natural gas markets exhibit a simple chain of agents from producers to consumers, the power 

industry is a complex mix of fuel suppliers, producers, and distributors. Even though the 

distribution of electricity is regulated everywhere, its institutional structure varies. Upstream 

components are more complicated and generation is priced using different methods across the 

country. For these and other reasons, accurate modeling of the response of electricity prices to a 

decrease in residential-sector demand due to standards is problematic. Thus, DOE does not plan 

to estimate the value of potentially reduced electricity costs associated with revised standards for 

all consumers. 

Chapter 10 of the preliminary TSD provides additional details on the national impacts 

analysis. 

2.9 PRELIMINARY MANUFACTURER IMPACT ANALYSIS 

DOE performed a preliminary MIA to estimate the financial impact of higher energy 

conservation standards on residential central air conditioner and heat pump manufacturers, and to 

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 industry-cash-flow model customized for these 

three industries. The GRIM inputs are information on 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 product 

characteristics, characteristics of particular firms, and market and product trends, and includes 

assessment of the impacts of standards on manufacturer subgroups. Chapter 12 of the 

preliminary TSD describes the complete preliminary MIA. 

DOE conducts each MIA in three phases and will further tailor the analytical framework 

for each MIA based on comments from interested parties. In Phase I, DOE creates an industry 

profile to characterize the industry and identify important issues that require consideration. In 

2-44 
Phase II, DOE prepares an industry cash-flow model and interview questionnaire to guide 

subsequent discussions. In Phase III, DOE interviews manufacturers and assesses the impacts of 

standards quantitatively and qualitatively. DOE assesses industry and subgroup cash flow and 

NPV using the GRIM. DOE then assesses impacts on competition, manufacturing capacity, 

employment, and regulatory burden based on manufacturer interview feedback and discussions. 

Until recently, DOE reported MIA results in its standards rulemakings only during the 

NOPR phase of the rulemaking. However, DOE is now evaluating and reporting preliminary 

MIA information in this preliminary analysis. DOE gathered this information during the 

preliminary manufacturer interviews conducted for the engineering analysis. See chapter 12 of 

the preliminary TSD for a summary of manufacturers’ concerns regarding the impacts of 

amended energy conservation standards for this rulemaking. 

As part of the NOPR, DOE will seek comments from manufacturers about their potential 

loss of market share, changes in the efficiency distribution within each industry, and the total 

reduction in product shipments at each amended energy conservation standard level. DOE will 

then estimate the impacts on the industry quantitatively and qualitatively. DOE seeks further 

comment from interested parties about the impact of amended standards on domestic 

manufacturers. See the issues for which DOE seeks comment in the executive summary. 

The following is an overview of the information DOE will collect and the analysis it will 

conduct during the preliminary MIA (chapter 12 of the preliminary TSD). 

2.9.1 Industry Cash-Flow Analysis 

The industry cash-flow analysis relies primarily on the GRIM. DOE uses the GRIM to 

analyze the financial impacts of more stringent energy conservation standards on the industry 

that produces the products covered by the standard. The GRIM analysis uses many factors to 

determine annual cash flows from a new standard: annual expected revenues; manufacturer 

costs, including cost of goods sold, depreciation, research and development, selling, general, and 

administrative expenses; taxes; and conversion capital expenditures. DOE compares the results 

against base-case projections that involve no new standards. The financial impact of new 

standards is then the difference between the two sets of discounted annual cash flows. Other 

performance metrics such as return on invested capital are available from the GRIM. For more 

information on the industry cash-flow analysis, refer to chapter 12 of the preliminary TSD. 

2.9.2 Manufacturer Subgroup Analysis 

Industry cost estimates are not adequate to assess differential impacts among subgroups 

of manufacturers. For example, small and niche manufacturers, or manufacturers whose cost 

structure differs significantly from the industry average, could be more negatively affected by the 

imposition of standards. Ideally, DOE would consider the impact on every firm individually; 

however, since this usually is not possible, DOE typically uses the results of the industry 

characterization to group manufacturers exhibiting similar characteristics. 

DOE outlined the process it uses to establish manufacturer subgroups in the framework 

document and sought comment from interested parties on any potential subgroups within the 

2-45 
 

industry. Joint Comment 1 suggested that DOE should address impacts on other market 

participants (distributors, dealers, etc.) as an extension of DOE’s usual analyses. (Joint Comment 

1, No. 25 at p. 9) HARDI argued that increases in efficiency standards do not guarantee 

significant energy savings and can negatively impact small businesses if all factors and market 

realities are not taken fully into account. (HARDI, No. 32 at pp. 1, 3) AHRI commented that 

DOE should examine the impact of the rule on all manufacturers of different product classes. 

AHRI stated that DOE should also assess the impact on component suppliers, dealers, 

distributors, contractors, and the manufactured housing industry. (AHRI, No. 24 at p. 12) 

DOE has characterized the impacts on the residential central air conditioner and heat 

pump industry. DOE did not identify any manufacturer subgroups within the industry other than 

small manufacturers. DOE will consider the possible effects of amended energy conservation 

standards for residential central air conditioners and heat pumps on small businesses. DOE 

identified a few small businesses within the industry in chapter 3 of the preliminary TSD. During 

the manufacturer interview process conducted as part of the NOPR, DOE will discuss the 

potential subgroups and subgroup members it has identified for the analysis. DOE will encourage 

manufacturers to recommend subgroups or characteristics appropriate for the subgroup analysis. 

DOE will also attempt to contact component suppliers, dealers, distributors, and contractors 

during the manufacturer interview process conducted for the NOPR. For more detail on the 

manufacturer subgroup analysis, see chapter 12 of the preliminary TSD. 

2.9.3 Competitive Impacts Assessment 

DOE must consider whether a new standard is likely to reduce industry competition, and 

the Attorney General must determine the impacts, if any, of reduced competition. DOE will 

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

The competitive impacts assessment will focus on assessing the impacts on smaller 

manufacturers. DOE will base this assessment on manufacturing cost data and information 

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

information to help assess asymmetrical cost increases to some manufacturers, increased 

proportion of fixed costs potentially increasing business risks, and potential barriers to market 

entry (e.g., proprietary technologies). The NOPR will be submitted to the Attorney General for a 

review of the impacts of standards on competition. The Attorney General’s comments on the 

proposed rule will be considered in preparing the final rule. 

2.9.4 Cumulative Regulatory Burden 

DOE recognizes and seeks to mitigate the overlapping effects on manufacturers of new or 

revised DOE standards and other regulatory actions affecting the same products. DOE will 

analyze and consider the impact on manufacturers of multiple, product-specific regulatory 

actions. DOE outlined the cumulative regulatory burden process in the framework document and 

sought comment on any additional regulations facing the residential central air conditioner and 

heat pump industry. 

2-46 
2.9.4.1 Refrigerant Phase-Out 

In the framework document, DOE discussed how the EPA HCFC phase-out beginning on 

January 1, 2010 could impact the central air conditioner and heat pump industry. 68 FR 2820. 

Joint Comment 2 stated that the current standard-setting process for residential cooling products 

is complicated by many new factors, including the mandatory shift away from R-22 (HCFC) to 

HFC or other refrigerants in 2010, unprecedented increases in raw material pricing, and sizable 

increases in electricity cost. (Joint Comment 2, No. 30 at p. 3) ACCA stated that the cost of R-22 

has doubled in the last few years as a result of regulatory phase-outs and increased demand. 

(ACCA, No. 23 at p. 3) ACCA suggested that DOE should periodically assess the price of R-22 

throughout the rulemaking to ensure that the engineering analysis is using a proper value. EEI 

stated that manufacturers will have switched over most, if not all, of their products to R-410A by 

2010. Because this rule does not go into effect until 2016, the only impact of the reduced 

availability of R-22 will be on the retrofit market. EEI concluded that the impacts on this rule 

will therefore be minimal. (EEI, No. 20 at p. 6) 

Because production of R-22 central air conditioner and heat pump products will 

discontinue by 2010, any issues regarding the availability of R-22 will be related to the retrofit 

market. The reduced availability of R-22 may result in price increases relative to retrofit 

products. While retrofit products are outside the scope of this rulemaking, any OEMs that also 

deal with retrofit products could face an additional cumulative regulatory burden. DOE will 

consider the potential impact of refrigerant price increases on the retrofit market as part of the 

MIA analysis in the NOPR. 

HARDI commented that the potential for increased refrigerant costs (due to reduced 

availability, shorter lifetimes, and increased charge sizes) poses a significant threat to 

manufacturers. (HARDI, No. 32 at p. 7) HARDI stated that combined with lengthening 

manufacturer warranties on higher efficiency products, the liability may potentially exceed the 

affordability or availability of HFC refrigerants. HARDI also stated that increased speculation 

about the affordability and availability of HFC refrigerants could further hinder already sluggish 

sales of new products. HARDI commented that DOE should consider the refrigerant 

ramifications of residential central air conditioner and heat pump regulations that could increase 

the demand for HFC refrigerants. HARDI stated concerns about R-410A availability in addition 

to slow acceptance of new replacement refrigerants in product manufacturer warranty terms, 

which adds to concerns of long-term refrigerant supplies/options. (HARDI, No. 32 at p. 8) 

Emerson, Trane, and Carrier also expressed concern about the central air conditioner and 

heat pump industry’s transition to R-410A, stating that the supply of the new refrigerant might be 

in question. (Emerson, Public Meeting Transcript, No. 13 at p. 257; Trane, No. 16 at p. 14; and 

Carrier, No. 18 at p. 7) AHRI and Lennox recommended that DOE carefully study the impact of 

climate change legislation on the availability and price of HFC refrigerants, as there is a 

possibility that prices will dramatically increase and that not enough refrigerant will be available 

to meet the new energy conservation standards (AHRI, No. 24 at p. 7; Lennox, Public Meeting 

Transcript, No. 13 at p. 383) HARDI commented that its members have prepared for the 

transition from R-22 to HFC refrigerants such as R-410A. They also said that any regulatory 

efforts to change this to control GHG emissions would adversely impact the industry. (HARDI, 

No. 32 at p. 7) Lennox commented that given the uncertainties around climate change legislation 

2-47 
and potential regulation, the industry could be going through another refrigerant change at the 

same time that the new rulemaking becomes effective. (Lennox, Public Meeting Transcript, No. 

13 at p. 363) 

DOE used HFC refrigerant R-410A as the basis for its analysis. While pending climate 

change legislation might result in a phase-out or production caps for HFC refrigerants over the 

course of this rulemaking, any analysis of potential impacts before such legislation is enacted 

would be speculative. During interviews with manufacturers, DOE was unable to obtain any 

data that would quantify HFC refrigerant price increases. DOE requests data or information on 

projected HFC cost increases and the basis for such projections. DOE also seeks comment on the 

extent to which interested parties expect projected HFC costs to increase, the timing of these 

increases, and the certainty of the increases. 

2.9.4.2 Additional Regulations 

In addition to the HCFC refrigerant phase-out, the industry identified other regulations or 

pending regulations that should be considered in the cumulative regulatory burdens analysis. 

MEUS said that DOE should consider ASHRAE standard 90.1-2007 for economizer and 

ventilation air requirements; ASHRAE Draft Standard 189 for advanced energy designs; and 

International Codes Council (ICC) building and energy codes. (ICC 2009 codes) (MEUS, No. 19 

at p. 6) 

DOE identified several regulations relevant to central air conditioners and heat pumps, 

including energy conservation standards and regional standards for other products made by 

central air conditioner and heat pump manufacturers, the EPA phase-out of HCFCs, and building 

codes. DOE will examine the potential impacts of these regulatory burdens in greater detail in 

the MIA conducted for the NOPR. 

2.9.5 Preliminary Results for the Manufacturer Impact Analysis 

As part of the preliminary MIA, DOE discussed potential impacts of amended energy 

conservation standards with manufacturers responsible for a majority of central air conditioner 

and heat pump sales. These discussions occurred during the interviews DOE conducted for the 

engineering analysis. The interviews provided valuable information that DOE used to evaluate 

the impacts of amended energy conservation standards on manufacturers’ cash flows, 

manufacturing capacities, and employment levels. DOE discusses its findings from the 

preliminary MIA interviews in the executive summary and in chapter 12 of the preliminary TSD. 

2.9.6 Regional Standards Impacts on Manufacturers 

For the preliminary analysis, DOE conducted limited interviews with manufacturers 

regarding the potential impacts of regional standards as they relate to residential central air 

conditioners and heat pumps. 

Manufacturers stated that the implementation of regional standards would generally 

complicate their production processes, decrease their economies of scale, and complicate product 

distribution. Any additional testing, certification, rating, or labeling would increase costs, and 

2-48 
 

 

could have a harmful impact, particularly on small manufacturers. Manufacturers stated that 

margins across the industry have decreased in past years, and that imposing region-specific 

standards would likely further this decline. Manufacturers were also concerned that more 

stringent regional standards may impact consumers’ decisions to repair rather than replace units, 

as well as possible consumer switching to alternative products (i.e., multiple room air 

conditioners). Manufacturers asserted that this would be especially evident in low-income 

regions. Some manufacturers also stated that cost increases resulting from regional standards 

may cause them to stop selling products in certain regions. 

As required by EPCA, DOE plans to evaluate any differential impacts regional standards 

may have on manufacturers. DOE will tailor its MIA interview guides to include questions 

exploring the quantitative and qualitative impacts of regional standards on manufacturers. 

Potential impacts could include additional compliance, inventory, or marketing costs associated 

with the promulgation of regional standards. To the extent appropriate, DOE may evaluate 

subgroups of manufacturers that are differentially impacted by regional standards. One possible 

subgroup, for example, may be manufacturers that own distribution networks. DOE will include 

any differential financial impacts if it determines appropriate in its GRIM analysis. DOE seeks 

further comment regarding the potential impact of regional standards on manufacturers of 

residential central air conditioners and heat pumps. In addition, DOE is seeking market data that 

will assist in the identification and analysis of the impacts of regional standards on 

manufacturers. 

2.10 REGIONAL STANDARDS IMPACTS ANALYSIS 

During the framework public meeting, several interested parties indicated that there could 

be additional impacts on product distributors and contractors if DOE establishes regional 

standards. Several interested parties commented that there would be enforcement issues with 

regional standards. In establishing a framework for regional standards, EISA 2007 appears to 

recognize that DOE has not dealt with these issues previously, as the appliance standards 

programs historically set only national standards, and states that DOE shall consider the impact 

of additional regional standards on consumers, manufacturers, and other market participants, 

including product distributors, dealers, contractors, and installers. 

DOE addresses impacts on consumers in chapter 8 and chapter 11 of the preliminary 

TSD. DOE plans to analyze the impacts of regional standards on consumers within these 

chapters by calculating consumer LCCs and subgroup LCCs on a regional basis. For the NOPR, 

DOE plans to analyze the impacts of regional standards on manufacturers as part of the 

manufacturer impact analysis (chapter 12 of the preliminary TSD), as described in section 2.9.6. 

To address concerns regarding impacts of regional standards on distributors, dealers, contractors 

and installers, DOE intends to develop a new regional standards impacts analysis as a separate 

TSD chapter at the NOPR stage that identifies specific impacts of concern and examines the 

significance and scale of these impacts on the affected parties. If necessary, the analysis will also 

propose how the energy and economic analyses might be adjusted to reflect the impacts. See 

chapter 17 of the preliminary TSD for a preliminary assessment of the impacts of regional 

standards on market participants other than manufacturers and consumers. 

2-49 
2.10.1 Impacts on Manufacturers 

DOE will analyze the impacts of regional standards on manufacturers in the MIA. See 

section 2.9.6 for more detail. 

2.10.2 Impacts on Distributors, Dealers, and Contractors, and Installers 

HARDI stated that regional standards will increase non-compliance and would create a 

major competitive disadvantage for contractors that seek to comply. (HARDI, No. 32 at p. 5) 

This situation already exists in California after implementation of Title 24 requirements. Kent & 

O’Connor stated that splitting a metropolitan area with regional standards would have a 

significant competitive impact, particularly if a price difference exists between the higher 

efficiency and the national standard units. (Kent & O’Connor, No. 13 at p. 231) The National 

Association of Home Builders (NAHB) commented that a general contractor usually will not 

have any special HVAC expertise. If regional standards are implemented, a builder is likely to 

use more time and effort double-checking that units are compliant. The extra cost of this effort 

should be included in the payback analysis, the cumulative regulatory burden, the employment 

impact analysis, and the regulatory impact analysis. NAHB also commented that regional 

standards would affect home builders, most of which are small businesses; as such, a regulatory 

flexibility analysis would be necessary. (NAHB, No. 21 at pp. 1, 2). 

For the preliminary analysis, DOE conducted limited interviews with distributors and 

contractors, and sought comment regarding the potential impacts of regional standards as they 

relate to residential central air conditioners and heat pumps. 

Distributors had concerns regarding the implementation of regional standards and the 

potential impact of those standards on their business. Distributors were concerned that possible 

disparities between the regional boundaries for standards and existing distribution boundaries 

may prove problematic. Distributors stated that regional standards may be defined based on 

geographic boundaries composed of state lines, which are usually different than the boundaries 

that affect the composition of markets for central air conditioners and heat pumps. These market 

boundaries are determined by several factors, such as utility service areas, composition of 

existing building types within an area, and the delineation of natural climatic regions. 

Additionally, distributors were concerned about the possible impact of regional standards 

on the efficiency of the distribution chain, and ultimately, their ability to control costs. Similar to 

manufacturers, national and regional distributors stated that they would face decreases in their 

economies of scale, which currently benefit manufacturers of products that can be stocked and 

sold nationwide. Specifically, if certain products could not be sold throughout the entire country, 

then the cost of those products in the regions where they could be sold would be driven up. 

Distributors also stated that climates within a specific geographic region may vary, and certain 

areas within a geographic region may have more limited cooling demand than the surrounding 

areas. As a result, sales in those areas, where high-efficiency cooling equipment would not be as 

well justified, would likely be depressed. Distributors that service areas that lay on borders 

between regions would be particularly affected, as their costs would increase due to the more 

complex and diverse inventories. This would also limit the growth of distributors into 

neighboring areas which fall into a different climate region. DOE seeks further comment 

2-50 
 

 

regarding the potential impact of regional standards on distributors, dealers, contractors, and 

installers of residential central air conditioners and heat pumps. In addition, DOE is seeking 

market data that will assist in the identification and analysis of the impacts of regional standards 

on distributors, dealers, contractors, and installers. 

DOE plans to address the issues raised in the interviews as well as the comments on 

regional standards. DOE plans to perform a sensitivity analysis of the effects of additional 

inventory costs and carrying charges on firm profitability of typical heating, air-conditioning, 

and refrigeration distributors at the national and regional levels. To conduct this analysis, DOE 

plans to use detailed sample industry data on income statements and balance sheets from 

HARDI’s Profit Reports. Because this source contains data by region and size of firm, DOE 

plans to examine the effects of firm size and region on the profitability calculations. DOE will 

investigate using enterprise sales data from Bureau of the Census County Business Patterns. and 

Bureau of the Census Geographical Area Series for 2002 on border counties for the regions of 

interest to determine the location and net fraction of distributors likeliest to be affected by selling 

in multiple regions. Distribution of air-conditioning wholesalers by size of sales also is available 

in the Bureau of the Census publication Establishment and Firm Size-2002. If similar questions 

concerning elements of the balance sheets and income statements are later raised for contractors 

and installers, similar detailed establishment financial and geographic area data series are also 

available in the 2002 Economic Census for mechanical and general contractors and would allow 

DOE to conduct similar analyses of contractors and installers. 

DOE intends to develop an enforcement plan for regional standards as stated in section 

2.10.3. DOE may also analyze (quantitatively or qualitatively, as data allow) the impacts that 

regional boundaries would have for distributors and dealers. DOE currently does not have data 

available on the potential impact of record-keeping and other administrative compliance costs for 

regional standards on the part of general contractors or other parts of the central air conditioner 

and heat pump distribution channels that would allow DOE to address NAHB’s concern. If such 

data become available, DOE plans to use 2002 Census data identified in this section to analyze 

the effects of such costs on firm profitability in the new chapter on the impacts of the regional 

standards on the distribution channels. 

2.10.3 Enforcement 

As noted above, several comments expressed concerns about enforcement of regional 

standards. HARDI indicated that it has serious concerns that regionalization strategy for central 

air conditioner and heat pump energy conservation standards will be unenforceable. (HARDI, 

No. 32 at p. 5) AHRI also believes that regional standards may be impractical and unenforceable. 

(AHRI, No. 24 at p. 3) ACCA stated their agreement and further commented that regional 

standards will result in confusion to consumers in the marketplace. (ACCA, No. 23 at p. 2) Kent 

& O’Connor stated that when regional boundaries are being drawn, the willingness of a state to 

enforce the standard should be considered. (Kent & O’Connor, No. 13 at p. 240) Trane also 

commented that code officials may be the only entities that could effectively enforce regional 

standards, especially in areas close to regional boundaries. (Trane, No. 16 at p. 5) 

Carrier posed a number of questions for DOE to consider, including: (1) what the 

enforcement mechanism will be; (2) if states will be responsible for enforcing the regional 

2-51 
standard; (3) what regulations cover cross state-line transfers of non-compliant products; (4) how 

distributors will supply multiple regions addressed in the enforcement process; and (5) how 

enforcement regulations will address the issue of certain OEM systems that alone cannot meet a 

higher efficiency in one region but may be eligible for sale if an independent manufacturer’s coil 

is used. (Carrier, No. 18 at p. 3) 

ACCA urged DOE not to wait for a regional standards decision before developing an 

enforcement plan, stating that the practicality and feasibility of enforcement should be part of the 

general evaluation of regional standards. (ACCA, No. 23 at p. 2) Lennox agreed that regional 

standards are useless unless the enforcement issues are resolved. (Lennox, No. 13 at p. 395) Joint 

Comment 1 suggested that DOE should consult with industry groups such as HARDI 

(distributors), ACCA, SMACNA, and MCA (contractors) as well as building code officials 

(ICC) and the National Association of State Energy Officials in the development of enforcement 

plans. (Joint Comment 1, No. 25 at p. 9) Carrier suggested that DOE hold sessions with state 

regulators to determine their willingness and ability to enforce regional energy standards. 

(Carrier, No. 18 at p. 4) ACCA encourages DOE to hold another collaborative meeting to discuss 

regional standards enforcement. (ACCA, No. 13 at p. 397) HARDI commented that the U.S. 

Department of Housing and Urban Development was unable to formulate regional criteria due to 

enforcement issues and that enforcement proposals should be made available for public debate. 

(HARDI, No. 13 at p. 398) 

If regional standards are adopted for this rulemaking, EISA 2007 mandates that an 

enforcement plan rulemaking be initiated no later than 90 days after the issuance of the standard 

final rule. 42 U.S.C. 6295(o)(6)(G)(ii)(I). DOE has not yet determined the enforcement 

mechanism for regional standards; however DOE believes that an effective enforcement plan 

will likely be composed of multiple enforcement mechanisms. Among mechanisms DOE is 

considering are: 

1) appropriate modifications to appliance labels to indicate in which regions of the country 

specific equipment is allowed to be installed; 

2)	 requirements that marketing literature for systems clearly indicate in which regions a 

product could be legally installed; 

3)	 encouraging state and local entities to adopt these regional standards in building codes 

and to provide reference to the required minimum efficiencies in required mechanical or 

electrical permits; 

4)	 encouraging states who have regional appliance standards to adopt and codify the 

appropriate regional standards enacted by DOE; 

5)	 clearly indicating in law that installations that don’t meet regional standards could result 

in installers being subject to fines for each occurrence; 

6)	 requirements to certify compliance of installations through warranty registration or other 

registration means; 

2-52 
7) an informational program so that consumers are made aware of any regional standards, 

what to look for in purchasing equipment, and what implications there would be for 

improper installation; and 

8)	 competitively-driven enforcement where manufacturers/distributors/contractors report 

other manufacturers/distributors/contractors whose actions result in installations not in 

compliance with Federal standards. 

Certain features of any enforcement plan would be that it not unduly regulate interstate 

commerce or otherwise constrain where a product may be manufactured or through which states 

a product can be transported and that it not place undue financial burden on consumers, 

manufacturers, contractors, distributors, dealers or installers. While DOE believes that much of 

the liability for proper installation will inevitably lie with the installer, it believes that 

manufacturers and distributors can play a role in enforcement through labeling and possibly 

providing data, such as ongoing statistics, regarding non-complying products sold for final 

installation in a given region. 

For the NOPR, as part of its analysis of regional impacts on distributors, dealers, 

contractors, and installers, DOE will analyze California’s Title 24 requirements and other extant 

state-level standards and consider the issues that have developed concerning their enforcement. 

DOE will also seek industry input on the viability of the above enforcement mechanisms, other 

mechanisms DOE should consider, and the extent to which these mechanisms would result in 

additional financial burdens to consumers, manufacturers, contractors, distributors, dealers, and 

installers. DOE will consider and note all comments related to enforcement of regional 

standards submitted before the issuance of an enforcement plan rulemaking. 

2.11 LIFE-CYCLE COST SUBGROUP ANALYSIS 

The LCC subgroup analysis evaluates economic impacts on selected consumers groups 

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 will use 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. 

Joint Comment 3 stated that DOE should fully analyze the energy savings potential of 

regional standards. (Joint Comment 3, No. 36 at p. 2) Low-income consumers will be 

disproportionally affected by standard levels unsuited to their region. 

DOE will conduct a regional LCC and PBP analysis that will sample low-income 

households and determine the potential for the proposed standards to disproportionately affect 

them. Low-income households may be disproportionally affected because they may use a 

costlier-than-average mix of debt instruments to pay for first costs. 

2-53 
2.12 UTILITY IMPACT ANALYSIS 

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

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

Energy Modeling System (NEMS), a large multi-sectoral, partial-equilibrium model of the U.S. 

energy sector that the EIA developed throughout the past decade primarily for preparing EIA’s 

AEO. In previous rulemakings, a variant of NEMS (currently termed NEMS-BT, BT referring to 

DOE’s Building Technologies Program) was developed to address the specific impacts of an 

energy conservation standard. 

Available in the public domain, NEMS produces a widely recognized baseline energy 

forecast for the United States through 2030. The typical NEMS outputs include 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 NEMS-BT to 

generate forecasts that deviate from the AEO reference case. 

2.13 ENVIRONMENTAL ASSESSMENT 

The intent of the environmental assessment is to quantify and consider the environmental 

effects of amended energy conservation standards for central air conditioners and heat pumps. 

The primary environmental effects of these standards would be reduced power plant emissions 

resulting from reduced consumption of electricity. DOE will assess these environmental effects 

by using NEMS-BT to provide key inputs to its analysis. The portion of the environmental 

assessment that will be produced by NEMS-BT considers carbon dioxide (CO2), nitrogen oxides 

(NOX), and mercury (Hg). The environmental assessment also considers impacts on SO2 

emissions. After a brief discussion of general methodology, this section will address each of the 

relevant emissions. This section then explains how DOE plans to monetize the benefits 

associated with emissions reductions. 

2.13.1 Carbon Dioxide 

In the absence of any Federal regulation of power plant emissions of CO2, a DOE 

standard is likely to result in reductions of these emissions. The CO2 emission reductions likely 

to result from a standard will be estimated using NEMS-BT and national energy savings 

estimates drawn from the NIA spreadsheet model. The net benefit of the standard is the 

difference between emissions estimated by NEMS-BT at each standard level considered and the 

AEO Reference Case. NEMS-BT tracks CO2 emissions using a detailed module that provides 

results with broad coverage of all sectors and inclusion of interactive effects. 

2.13.2 Sulfur Dioxide 

DOE has preliminarily determined that SO2 emissions from affected Electric Generating 

Units (EGUs) are subject to nationwide and regional emissions cap and trading programs that are 

likely to eliminate the standards’ impact on SO2 emissions. The costs of meeting such emission 

cap requirements are integrated in the electricity prices used in DOE’s analysis of the standards. 

Title IV of the Clean Air Act sets an annual emissions cap on SO2 for all affected EGUs. SO2 

emissions from 28 eastern States and the District of Columbia (DC) are also limited under the 

2-54 
Clean Air Interstate Rule (CAIR, published in the Federal Register on May 12, 2005. 70 FR 

25162 (May 12, 2005)), which creates an allowance-based trading program that will gradually 

replace the Title IV program in those States and DC. (The recent legal history surrounding CAIR 

is discussed below.) The attainment of the emissions caps is flexible among EGUs and is 

enforced through the use of emissions allowances and tradable permits. Under existing EPA 

regulations, any excess SO2 emission allowances resulting from the lower electricity demand 

caused by the imposition of an efficiency standard could be used to permit offsetting increases in 

SO2 emissions by any regulated EGU. However, if the standard resulted in a permanent increase 

in the quantity of unused emission allowances, there would be an overall reduction in SO2 

emissions from the standards. While there remains some uncertainty about the ultimate effects of 

efficiency standards on SO2 emissions covered by the existing cap and trade system, the NEMSBT modeling system that DOE plans to use to forecast emissions reductions currently indicates 

that no physical reductions in power sector emissions would occur for SO2. 

Even if there is no significant reduction in the overall emissions of SO2 that results from 

the standard, there may still be some economic benefit from reduced demand for SO2 emission 

allowances that is not fully reflected in the cost savings experienced by individual consumers. 

Electricity savings that decrease the overall demand for SO2 emissions allowances could lower 

allowance prices and thereby result in some economic benefits for all electricity consumers, not 

just those that reduced their electricity use as a result of an efficiency standard. DOE does not 

plan to monetize this particular benefit because the effect on the SO2 allowance price from any 

single energy conservation standard is likely to be small and highly uncertain. 

2.13.3 Nitrogen Oxides 

NEMS-BT also has an algorithm for estimating NOX emissions from power generation. 

The impact of these emissions, however, will be affected by the CAIR, which the Environmental 

Protection Agency (EPA) issued on May 12, 2005. CAIR will permanently cap emissions of 

NOX in 28 eastern states and the District of Columbia. 70 FR 25162 (May 12, 2005). 

Much like SO2 emissions, a cap on NOX emissions means that the amended central air 

conditioner and heat pumps standards may have little or no physical effect on these emissions in 

the 28 eastern States and the DC covered by CAIR. Although CAIR has been remanded to the 

EPA by the DC Circuit, it will remain in effect until it is replaced by a rule consistent with the 

Court’s July 11, 2008, opinion in North Carolina v. EPA. 531 F.3d 896 (DC Cir. 2008); see also 

North Carolina v. EPA, 550 F.3d 1176 (DC Cir. 2008). Because all States covered by CAIR 

opted to reduce NOX emissions through participation in cap-and-trade programs for electric 

generating units, emissions from these sources are capped across the CAIR region. 

Standards may produce an environmental-related economic benefit in the form of lower 

prices for emissions allowance credits. As with SO2 allowance prices, DOE does not plan to 

monetize this particular benefit because the effect on the NOX allowance price from any single 

energy conservation standard is likely small and highly uncertain. 

Accordingly, DOE plans to use NEMS-BT to estimate the emissions reductions from 

possible standards in the 22 States where emissions are not capped. 

2-55 
2.13.4 Mercury 

Similar to emissions of SO2 and NOX, future emissions of Hg would have been subject to 

emissions caps. In May 2005, EPA issued the Clean Air Mercury Rule (CAMR). 70 FR 28606 

(May 18, 2005). CAMR would have permanently capped emissions of mercury for new and 

existing coal-fired power plants in all States by 2010. However, on February 8, 2008, the DC 

Circuit issued its decision in New Jersey v. Environmental Protection Agency, in which the DC 

Circuit, among other actions, vacated the CAMR. 517 F.3d 574 (DC Cir. 2008). EPA has 

decided to develop emissions standards for power plants under the Clean Air Act (Section 112), 

consistent with the DC Circuit’s opinion on the CAMR. See 

http://www.epa.gov/air/mercuryrule/pdfs/certpetition_withdrawal.pdf. Pending EPA's 

forthcoming revisions to the rule, DOE is excluding the CAMR from its Environmental 

Analysis. In the absence of CAMR, a DOE standard would likely reduce Hg emissions and DOE 

plans to use NEMS-BT to estimate these emission reductions. 

2.13.5 Particulate Matter 

DOE acknowledges that particulate matter (PM) impacts are of concern due to human 

exposures that can impact health. But impacts of PM emissions reduction are much more 

difficult to estimate than other emissions reductions due to the complex interactions between 

PM, other power plant emissions, meteorology, and atmospheric chemistry that impact human 

exposure to particulates. Human exposure to PM usually occurs at a significant distance from the 

power plants that are emitting particulates and particulate precursors. When power plant 

emissions travel this distance, they undergo highly complex atmospheric chemical reactions. 

Although the EPA does keep inventories of direct PM emissions of power plants, in its source 

attribution reviews, the EPA does not separate direct PM emissions from power plants from the 

sulfate particulates indirectly produced through complex atmospheric chemical reactions. The 

great majority of PM emissions from power plants are of these secondary particles (secondary 

sulfates). Thus, it is not useful to examine how the amended standard impacts direct PM 

emissions independent of indirect PM production and atmospheric dynamics. Therefore, DOE is 

not planning to assess the impact of these standards on particulate emissions. Further, even the 

cumulative impact of PM emissions from power plants and indirect emissions of pollutants from 

other sources is unlikely to be significant. 

2.13.6 Monetization of Emissions Reduction Benefits 

For those emissions for which real national emission reductions are anticipated (CO2, Hg, 

and NOX for 22 states), only ranges of estimated economic values based on environmental 

damage studies of varying quality and applicability are available. Therefore, DOE plans on 

reporting estimates of monetary benefits derived using these values and plans to consider these 

benefits in weighing the costs and benefits of each of the standard levels considered. In 

accordance with U.S. Office of Management and Budget (OMB) guidance, DOE will conduct 

two calculations of the monetary benefits derived using each of the economic values used, one 

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

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

CO2 emissions, it is DOE’s intent to use in its analysis the most current Social Cost of Carbon 

2-56 
 

(SCC) values developed and/or agreed to by interagency reviews. The SCC is intended to be a 

monetary measure of the incremental damage resulting from greenhouse gas (GHG) emissions, 

including, but not limited to, net agricultural productivity loss, human health effects, property 

damage from sea level rise, and changes in ecosystem services. Any effort to quantify and to 

monetize the harms associated with climate change will raise serious questions of science, 

economics, and ethics. But with full regard for the limits of both quantification and monetization, 

the SCC can be used to provide estimates of the social benefits of reductions in GHG emissions. 

DOE uses the most recent interagency estimates of the potential global benefits resulting 

from reduced CO2 emissions. At the time of this notice, these estimates are $4.7, $21.4, $35.1, 

and $64.9 per metric ton of CO2 (in 2007 dollars). These values are then adjusted to 2009$ using 

the standard GDP deflator value of 2008 and 2009. For emissions (or emission reductions) that 

occur in later years, these values grow in real terms over time.. . . Additionally, the interagency 

group determined that a range of values from 7 percent to 23 percent should be used to adjust the 

global SCC to calculate domestic effects, although preference will be given to consideration of 

the global benefits of reducing CO2 emissions. 

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

the contribution of CO2 and other GHG to changes in the future global climate and the potential 

resulting damages to the world economy. Thus, these values are subject to change. 

DOE also intends to estimate the potential monetary benefit of reduced NOX, and Hg 

emissions resulting from the standard levels it considers. For NOX emissions, available estimates 

suggest a very wide range of monetary values for NOX emissions, ranging from $370 per ton to 

$3,800 per ton of NOX from stationary sources, measured in 2001$ (equivalent to a range of 

$447 to $4,591 per ton in 2009$).). Refer to the OMB, Office of Information and Regulatory 

Affairs, “2006 Report to Congress on the Costs and Benefits of Federal Regulations and 

Unfunded Mandates on State, Local, and Tribal Entities,” for additional information. 

For Hg emissions reductions, DOE has previously determined that the impact of mercury 

emissions from power plants on humans is considered highly uncertain. However, DOE 

identified two estimates of the environmental damage of mercury based on two estimates of the 

adverse impact of childhood exposure to methyl mercury on intelligence quotient (IQ) for 

American children, and subsequent loss of lifetime economic productivity resulting from these 

IQ losses. The high-end estimate is based on an estimate of the current aggregate cost of the loss 

of IQ in American children that results from exposure to mercury of U.S. power plant origin 

($1.3 billion per year in year 2000$), which works out to $33.7 million per ton emitted per year 

(in 2009$). Refer to L. Trasande et al., “Applying Cost Analyses to Drive Policy that Protects 

Children,” 1076 Ann. N.Y. Acad. Sci. 911 (2006) for additional information. The low-end 

estimate is $0.66 million per ton emitted (in 2004$) or $0.749 million per ton in 2009$, which 

will be updated to 2009$. DOE derived this estimate from a published evaluation of mercury 

control using different methods and assumptions from the first study but also based on the 

present value of the lifetime earnings of children exposed. See Ted Gayer and Robert Hahn, 

“Designing Environmental Policy: Lessons from the Regulation of Mercury Emissions,” 

Regulatory Analysis 05–01, American Enterprise Institute-Brookings Joint Center for Regulatory 

Studies, Washington, DC (2004). A version of this paper was published in the Journal of 

2-57 
Regulatory Economics in 2006. The estimate was derived by back-calculating the annual 

benefits per ton from the net present value of benefits reported in the study. 

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

report in the preliminary TSD. 

2.14 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 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 may 

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

changes in income and overall expenditure levels (the income effect). DOE will use PNNL’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 energy-saving 

technologies produce in buildings, industry, and transportation. Compared with simple economic 

multiplier approaches, ImSET allows for more complete and automated analysis of the economic 

impacts of energy conservation investments. 

2.15 REGULATORY IMPACT ANALYSIS 

In the NOPR, DOE will prepare an RIA pursuant to Executive Order 12866, Regulatory 

Planning and Review, 58 FR 51735, October 4, 1993. The RIA 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 non-regulatory 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 non-regulatory efforts by manufacturers, utilities, and other 

interested parties can substantially affect energy efficiency or reduce energy consumption. DOE 

will base its assessment on the actual impacts of any such initiatives to date, but also will 

consider information presented by interested parties on the impacts existing initiatives might 

have in the future. 

2-58 
 

REFERENCES
 

1. ACEEE. Emerging Technologies and Practices. 2004. (Last accessed May 18, 2009.) 

http://www.aceee.org/pubs/a042_h13.pdf 

2 . Oak Ridge National Laboratory. 2002. Frost-less Heat Pump. 

3. Heating, Air Conditioning & Refrigeration Distributors International. 2008. 2008 Profit 

Report (2007 Data). 

4. Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR 

Contracting Industry. 

5. U.S. Census Bureau. 2002. Commercial and Institutional Building Construction: 2002. 

Report EC02-231-236220. 

6. U.S. Court of Appeals for the Second Circuit, voluntary remand, State of New York, et al. 

v. Department of Energy, et al., April 15, 2009. 

7. Edison Electric Institute, EEI Typical Bills and Average Rates Report. 

<http://www.eei.org/products_and_services/descriptions_and_access/typ_bills_report.htm> 

8. Regulatory Research Associates, Inc., Average Regulated Retail Price of Electricity, 2007 

& Comparative Historical Data, 2008. Jersey City, NJ. 

9. U.S. Department of Energy–Office of Energy Efficiency and Renewable Energy. Technical 

Support Document: Energy Efficiency Program for Commercial and Industrial Equipment: 

Commercial Unitary Air Conditioners and Heat Pumps. July 2004. Chapter 8. 

<http://www1.eere.energy.gov/buildings/appliance_standards/commercial/cuac_tsd_06090 

4.html> 

10. U.S. Department of Energy–Energy Information Administration. An Updated Annual 

Energy Outlook 2009 Reference Case Reflecting Provisions of the American Recovery and 

Reinvestment Act and Recent Changes in the Economic Outlook. April 2009. Report #: SROIAF/2009-03.

 <http://www.eia.doe.gov/oiaf/servicerpt/stimulus/index.html?featureclicked=1&> 

11. U.S. Department of Energy–Office of Energy Efficiency and Renewable Energy, Energy 

Conservation Program: Energy Conservation Standards for General Service Fluorescent 

Lamps and Incandescent Reflector Lamps; Proposed Rule. Federal Register 2009 74(69): 

16920–16968. 

2-59