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 Distribu tion 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 vers us Degraded Pe rformance

................................... 24

2.6.5 Characterization of Energy Using SEER/HSPF

................................................... 25

2.6.6 Development of Regions for Re gional Standard Analysis

................................... 25

2.7 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSES

..................................... 29

2.7.1 General Approach for Life-Cycle Co st 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 Impact s on Manufacturers

.................................................... 48

2.10 REGIONAL STANDARDS IMPACTS ANALYSIS

...................................................... 49

2.10.1 Impacts on Manufacturers

..................................................................................... 50

2.10.2 Impacts on Distributors, Dealers, a nd Contractors, and Installers

........................ 50

2-i2.10.3 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 Emission s 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 Cent ral Air Conditioners and Heat Pumps

.................... 2-19

2-iiCHAPTER 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. Depar tment 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 fr amework that DOE is using to evaluate amended energy conserva tion standards for residential ce ntral air conditioners and heat pumps. The chapter sets forth the methodology, an alytical 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 tec hnology option and determines if it is technologically feasible; is practicable to manufacture, install, and service; would adversely affect product utility or product ava ilability; or would ha ve adverse impacts on health and safety.

• An engineering analysis develops relationshi ps 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 manufact urer 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 maintenanc e 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 di rectly from imposition of the standard.

• A shipments analysis forecasts product shipment s, 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 a nd national energy savings (NES).

• A preliminary manufacturer impact analysis (MIA) assesses the potential impacts of energy conservation standards on manufactur ers, such as impacts on capital conversion expenditures, marketing costs, shipments, and research and development costs.

In the subsequent notice of proposed rulema king (NOPR) stage, DOE will revise the preliminary analyses just described, to the exte nt warranted by comments and new information. In addition, DOE will perform the following analyses:

• An LCC subgroup analysis will evaluate varia tions in customer characteristics that might cause a standard to affect particular c onsumer 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, contract ors 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 effect s 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 (CO 2 ), sulfur dioxide (SO 2 ), nitrogen oxides (NO

x ), 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 Fram ework 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/applian ce_standards/residential/pdfs/cac_framework.pdf

.

In response to the publication of the framewo rk document and to the public meeting, DOE received numerous comments from interested pa rties 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.

2-2In 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 Noti ce 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’srulemaking 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 Nort hwest Power and Conser vation Council (NPCC), and the Western Cooling Efficiency Center (W CEC) (hereafter “Joint Comment 1”), these interested parties coope ratively expressed a desire for DOE to provide all the analyses traditionally associated with the ANOPR for re view. (Joint Comment 1, No. 25 at p. 9) In addition, Heating, Air Conditioning & Refrigera tion 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 be tter 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 rulemaki ng process. (Southern, No. 39 at p. 4) According to Southern, the

ANOPR allows “consideration and cr itique of the economic and mark et assumptions to be used in the NOPR without consideration of proposed st ringency 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 Coope rative Association (NRECA), Trane, Carrier, the Air-Conditioning, Heating, and Refrigerati on 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 partie s 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, Publ ic 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 C onservation Act (EPCA) by removing the requirement for DOE to publish an ANOPR when am ending standards for consumer products. DOE agrees, however, that in past rulemaking s, ANOPRs have provided a valuable early opportunity for DOE to vet its assumptions and an alyses 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 availa bility 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.

2-32.1.2.2 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 comme nted 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 manufact urers to develop and for consumers to purchase higher efficiency products. However, DO E does not have data to determine degradation of the ENERGY STAR label through the impos ition of regional standards, and welcome

comments on the issue.

2.1.2.3 Effective Date of Standards

This rulemaking implements the EPCA re quirement for a second amended energy

conservation standards rulemaki ng for central air conditioners and heat pumps. (42 U.S.C. 6295(d)(3)(B)) In the framework document, DOE ex plained 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 ru le 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 ai r 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 seas on. (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 Tr anscript, 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 comme nt on compliance during the peak season. (Reference Chapter 2 of the preliminary TSD for details.)

2-42.1.2.4 Consensus Negotiations

Efficiency organizations indicated their willingness to participate in developing consensus recommendations but requested regula r 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 ener gy 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 E fficiency 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 th e 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 prelimin ary TSD, DOE is analyzing air-conditioning and heat pump products independently of one another to determine if any am ended 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 stan dards 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 conserva tion standard will be applicable to products manufactured before but imported after the effect ive date. (MEUS, Public Meeting Transcript, No. 13 at p. 94)

The amended standards would a pply to all such products. If DOE adopts a single set of national energy conservation standards for ce ntral 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 “ma nufacture" as meaning “to manufacture, produce, assemble or import” and "import" as meaning “to import into the customs territory of the United States.” (42

2-5U.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 pr oduct installed on or after the effective date of the standard.” (42 U.S.C. 6295(o)(6)(E)(ii)) Therefor e, for either a single set of national energy

conservation standards or base na tional standards adopted in conjunc tion 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 th e date of manufacture. Further, because products

would be installed after the da te of manufacture and import, regional standards would be applicable to any products manufactured or importe d before but installed after the effective date

of the standards.

2.1.2.7 Test Procedure Issues

DOE received multiple comments at the framewo rk 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 conditi oner and heat pump test procedure. That rulemaking is being conducted in parallel with this st andards rulemaking. The comments apply to the following areas: bench testin g 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 calcula tion and reporting requireme nts 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 w ould 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 ai r conditioners and heat pumps as SEER, DOE is considering adoption of revised SEER metrics to reflect regiona l operating conditions. DOE has examined a method of developing a SEER specif ic 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-d ry 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 st andby mode and off mode ener gy 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 feasib le. (42 U.S.C. 6295(gg)(2)) Se ction 310 also required any final rule establishing or revising standards fo r 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

2-6conservation standards rulemaking for central air conditioners and h eat pumps is scheduled to be completed in 2011, the requirement to incorporat e standby-mode and off-mode energy use into the energy conservation standards analysis is applicable.

DOE considers standby-mode for central air c onditioners 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 ther mostat. DOE considers off-mode for central air conditioners and heat pumps to be in effect wh en a system is not set to a heating-mode or cooling-mode. For heat pumps, off-mode is ge nerally 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 al ready accounted for in the SEER and heating seasonal performance factor (H SPF) metrics for central air conditioners and heat pumps. DOE cannot, however, incorporate off-mode energy cons umption into the SEER and/or HSPF metrics because by definition, these metrics are seasonal effi ciency 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 s easons, respectively, and would no longer be seasonal efficiency descriptors as required by EP CA, but rather annual efficiency descriptors. DOE intends to present off-mode energy consum ption in terms of kilowatt hours per year as

additional information for consid eration by interested partie s and requests comment on this approach.

2.1.2.9 Federal Preemption

AHRI asserted that a number of local jurisd ictions 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 standa rds 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 DO E for waivers of preemp tion for specific state standards, however, DOE can grant waiver applica tions if statutory criteria are met. (42 U.S.C. 6297(d))

2.2 MARKET AND TECHNOLOGY ASSESSMENT

When DOE begins an energy conservation st andards 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 industr y structure. This activity consists of both quantitative and qualitative efforts based primarily on publicly ava ilable information. The market assessment examined manufacturers, trade associ ations, and the quantities and types of products

sold and offered for sale.

DOE reviewed relevant litera ture and interviewed manufact urers to develop an overall picture of the residential central air conditione r and heat pump industry in the United States.

2-7Industry publications and trade journals, governme nt agencies, and trade organizations provided the bulk of the information, including (1) manufac turers and their market shares, (2) shipments by product type and cooling capacity, (3) product information, and (4) industry trends.

Subsequent sections of this chapter descri be 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 t echnology assessment is described in chapter 3 of the preliminary TSD.

2.2.1 Product Classes and Scope of Coverage

When evaluating and establishing energy c onservation standards, DOE generally divides covered products into produc t classes by the type of energy us ed, 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) sing le-package air conditione rs, (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 firs t four classes listed above). These four product classes represent most of the total shipments of these products. DOE describes the technical aspects and energy sa vings 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 a nd variable refrigerant flow (VRF) split systems; SDHVs; and large-tonnage products.

2.2.1.1 Space-Constrained Products

Carrier expressed opposition to the eventual in clusion of through-the-wall (TTW) split air conditioners and heat pumps in the space-cons trained product class for all but replacement applications. According to Carrier, if DOE allo wed these TTW products to be covered under the space-constrained definition, they would be instal led 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 th e 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 Refrigerati on and Air-Conditioning Products (NRACP), a TTW manufacturer, also op poses eliminating the TTW product class. In contrast to Carrier, NRACP asserts that the definition of “space-c onstrained 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,

2-8allowing their products to compete in the replace ment market segment. (NRACP, No. 34 at p. 1) Joint Comment 1 supports the phase-out of the TTW product class and subse quent 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 cla sses 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 pr oducts” will become subject to the 12 SEER/7.4 HSPF energy conservation standard that curren tly applies to “space-c onstrained products.” Any TTWs that do not satisfy DOE’s definition of sp ace-constrained product, but meet the definition

of conventional central air cond itioners and heat pumps will beco me subject to the 13 SEER/7.7 HSPF standard that applies to those produc ts. 10 CFR 430.32(c)(2). In addition, while TTW products are primarily installed in replacemen t 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, intere sted 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 a pplications than conven tional 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 conditione r and heat pump systems. (MEUS, No. 19 at p. 2) Like MEUS, Trane recommended that mini-splits be included as an a dditional product class. (Trane, No. 16 at p. 7) Carrier does not support sp ecial classes for duct-free splits, multi-splits, or VRF products, and AHRI commented that no additi onal separate product cl asses 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 re quirements 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 inst allations. (Lennox, No. 22 at p. 3)

Like AHRI and Carrier, DOE does not believe ductless or VRF split systems warrant a separate product class. Althoug h some mini-split and multi-split sy stems 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 sy stem products and should be subject to the same standard. Therefore, DOE does not plan to develop a sepa rate product class for VRF split

systems.

2-92.2.1.3 Small-Duct, High-Velocity Systems

Joint Comment 1 expressed support for a se parate product class for SDHV systems. (Joint Comment 1, No. 25 at p. 9) Unico also favo rs a separate product class for SDHV with an

official minimum standard instead of the curr ent exemption provision. (Unico, No. 13 at p. 170) AHRI commented that the original DOE-propos ed product classes are appropriate, and no additional separate product cla sses are necessary. (AHRI, Public Meeting Transcript, No. 24 at pp. 4, 6) Similarly, Trane asserted that SDHV produc ts should be held to the same standards as mainstream products. (Trane, No. 16 at p. 14)

DOE intends to maintain the existing sepa rate 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 cont ribute to high static-pressure loss that the blower must overcome, requiring greater fan pow er. Greater energy consumption of the blower motors and limited space for installing the fan co ils 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 conventi onal air conditioner, which offers enhanced humidity removal but increases cost. DOE be lieves these design constraints (confined installation spaces, high pressure drops, and blow er motor power) warrant special consideration in the analytical and standards-setting proce ss. 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 plan s 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 transporta tion and installation challenges, DOE should consider placing 4- and 5-ton units in a sepa rate product class. (Trane, No. 16 at p. 11) AHRI also suggested that a product class for large-tonn age units may be useful. (AHRI, Public Meeting Transcript, No. 24 at p. 4, 6)

DOE believes that the differences between ty pical 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 asse ssment, DOE developed a list of technologies to consider for improving the efficiency of central air conditioners and heat pumps. DOE

removed from consideration thos e technology options whose ener gy 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 me trics of central air conditioners and heat pumps.

2-10Chapter 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 presen ted 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 th e 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 expansi on valves, micro-channel heat exchangers, liquidto-suction heat exchangers, flat-tube heat exch angers, high-efficiency defrost mechanisms, and evaporative pre-cooled AC systems. For more de tail 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 ca se of modulated systems ( e.g. , variable speed), the range of refrigerant flow may be broader than a conven tional 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 pa rticular efficiency benefits. (AHRI, No. 24 at

p. 5)

TXVs are commonly used in central air conditi oners 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 increase s 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 imp lemented with more advanced modulating

systems.

2.2.2.2 Micro-Channel Heat Exchangers

Trane commented that micro-channel heat exchan gers offer no efficiency benefit. (Trane, No. 16 at pp. 9–10) It stated that micro-channe l 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 asse rted 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 o ffer 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 excha ngers, the air passing over a micro-channel

2-11heat 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 faci ng some challenges with implementing this technology. However, DO E believes that micro-cha nnel 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 refri gerant 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 tr ansfer devices that evaporate any residual liquid refrigerant that remain in evaporator discharge lines, thereby minimizing the risk of liquid refrigerant entering the compressor suction. Gene rally, LSHXs are installed in air conditioners and heat pumps for proper system operation a nd 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 ha s 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 te mporarily. 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 reversin g the flow of the refrigerant that may reduce energy consumption of the system: frostless h eat 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 certa in tests and do not meet the require ments of the DOE test procedure for heating performance. (Trane, No. 16 at p. 10; NRACP, No. 34 at p. 3)

2-12DOE is not aware of any frostless heat pumps that turn off at low temperatures. A frostless heat pump retards frost formation by in creasing the temperature of the outdoor coil via

added heat to the accumulator. This method of sl owing 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 syst em, it would presumably permit water heating in cooling mode and would not be ra ted along with the covered product s 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 technol ogy are still uncertain. Therefore, DOE plans toremove this technology from consideration in this rulemaking. DOE is unaware of any highefficiency defrost mechanisms used in residen tial 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 rulema king 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 cool s 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 evapor ative cooler to be used with a conventional central air-conditioning system ( i.e. , evaporative pre-cooled AC system), DOE is unaware of anyevaporative 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 sta ndard that consists of a “design requirement,” i.e., requiring the use of an after-market produ ct. (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.

2-132.3 SCREENING ANALYSIS

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

2.2.2 to determine which options to consider fu rther and which options to screen out. DOE consulted with industry, technical experts, and ot her 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 va rious 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 di d 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 th e 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, co st-efficiency curves, impact of efficiencyimprovements on the considered products, and methodology used to extend the analysis to lowshipment-volume product classes.

In the engineering analysis, DOE evaluate s 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 ef ficiency 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 an alysis around one of three methodologies: (1) the design-option approach, which calculates the incremental cost s 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 leve ls without regard to design options used to achieve such increases; and/or (3) the reverse- engineering or cost-asse ssment approach, which involves a “bottom-up” manufactur ing 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,

2-14the 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 Tran script, No. 13 at p. 196; ASAP, Public Meeting Transcript, No. 13 at p. 197) Although AHRI prov ided 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 cent ral air conditioner and heat pump final rule, DOE developed its engineer ing analysis by (1) conducting three teardowns; (2) using information obtained from manufacturer interviews; and (3) using manufacturer data submissions, AHRI data submissions, and produc t literature. Because DOE has not received cost-efficiency data during the current rulema king, and because publishe d 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 rule making 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 conti nue to do so throughout th is rulemaking process. Chapter 5 of the preliminary TSD describes th e methodology that DOE used to perform the efficiency level analysis and deri ve 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 increa se in MPC above the baseline for each level. The split-system air conditioner and heat pump product classes have two differe nt rating methods for determining SEER, depending on whether the fan blow er is included in the rating. If a system is rated as a “coil-only” system, the SEER is calcu lated using a default fan power. These systems are generally representative of a condensing un it 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 modi fied 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 blow er-coil systems dominate the vast majority ofinstallations 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

2-15systems and blower-coil systems. DOE character ized 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 repr esentative 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 mode ls—currently offered for sale—that meet the existing minimum Federal energy efficiency standards. Chapter 5 of the preliminary TSD includes details on the ba seline 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 seve ral comments on the representa tive 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. (C arrier, 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 system s, 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 se parate representative capacities for those products.

2.4.1.2 Refrigerant

DOE also received comments on the assumed re frigerant 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 th e engineering analysis due to the effects on product design and efficiency. (Joint Comment 1, No. 25 at p. 11)

Because hydrochlorofluorocarbon (HCFC) re frigerants were phased out on January 1, 2010, DOE based its engineering analysis on products that use HFC refrigerants ( i.e. , R-410A).

2-162.4.2 Space-Constrained Products

In the framework document, DOE requeste d comment on the appropriate levels to analyze for space-constrained products. DOE al so requested comment on appropriate maximum technologically feasible efficiency levels for space-constrained products. NRACP commented that increasing the SEER for the space-cons trained 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 spac e-constrained products remain unchanged.

Table 2.1 provides current energy conservati on standards for space-constrained central air conditioners and heat pumps.

Table 2.1 Energy Conservation Standard s 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 limite d availability of pr oduct data. DOE intends to develop an engineering analysis for space-constrained produc ts 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 ma rkups for baseline products (baseline markups) based on the markups at each step in each distri bution 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 distributi on channels). After es tablishing appropriate distribution channels for each product class, DOE used economic data from the U.S. Census Bureau, HARDI, ACCA, and other sources to defi ne how prices are marked up as the products pass from manufacturers to customers.

2.5.1 Distribution Channel Structure

Analysis of distribution markups for centra l air conditioners and heat pumps focused on two distribution channels, with markups calcula ted at specific points along those paths. The

2-17distribution channel differs for ne w construction or replacement a pplications (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 mech anical contractor, who sells it to a general

contractor. Each of these latter three entities a dds a markup or fee to its purchase price before selling the product. DOE understands that virtuall y all central air conditioners and heat pumps

installed in new construction follow this distribu tion channel. For replacement applications, the distribution channel is essentially the same, excep t that there is no general contractor markup.

In the framework document, DOE proposed the two distribution channe ls just described, as well as a third (manufacturer to large retaile r 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 c onsistent 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, an d ACCA all commented th at 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 di stribution 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 (w hich are equivalent to DOE’s MSP) in conjunction with surveyed retail pri ces 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 sepa rate 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 necessari ly 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.

2-18Figure 2.1 shows these two distribution ch annels. 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 Ce ntral 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 contract or costs and sales ta x 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 cont ractor 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 Pr ofit Planning Re port and ACCA. 3,4 DOE used financial

data from the 2002 U.S. Census Bureau for devel oping 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 mechanic al contractors to which these reports refer handle multiple commodity lines, including residential central ai r 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 categor ies: (a) costs that vary in proportion to the MSP of the air-conditioning and hea ting 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 marg ins to serve as a baseline for distributor markups on HVAC products, or ot her relevant products, to suppl ement or replace the published

data.

2-192.5.3 Markups/Price Determination

DOE received comments on its methods for estima ting retail prices for higher efficiency central air conditioners and heat pumps. CFM argue d 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 ex pressed 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 st andards on markups, DOE would not have a basis to make an adjustment in the ma rkups 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 gr ossly 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 si mpler 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 prin cipal, 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 s cenarios. Without appropr iate retail price data,

DOE will continue to estimate th e retail price using markups in the distribution channel. DOE has modified its approach to markups to exp licitly include transporta tion costs, which were omitted in 2001 (and which account for e ffects of product weight on cost).

HARDI provided two specific comments on the va lues 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) S econd, 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 pr ice associated with high er efficiency products. DOE already captures recent material price increases in the manufacturer costs and will consider

whether and how best to fo recast 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 fourclasses 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

2-20with a base case that included an estimate of the distribution of efficiencies in 2016 by product class. DOE considered energy use for both reside ntial and commercial user s of these products.

DOE used data from the 2005 Residential Ener gy Consumption Survey (RECS) produced by the Energy Information Administration (EIA), the most recent survey available, to estimate cooling energy use for homes using central ai r conditioner products, and cooling and heating energy use for homes using central heat pump pro ducts, with efficiencies representative of those in the current stock. DOE used 30 years of st ate 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-t erm average cooling and heating energy. DOE

assumed that each RECS household had an effi ciency equivalent to the average shipped efficiency for the vintage central air conditione rs or heat pumps identified in RECS, based on

historical AHRI ef ficiency data.

To develop estimates for the DOE base-case en ergy use for 2016 (the first year for new standards), DOE used an estimate of the efficien cy 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 annua l 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 t echniques to estimate the energy use for each RECS household under a higher SEER/HSPF standa rd, if adopted. DOE uses the difference between the energy

use for each household in the base case and the st andards 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 a nd heat pumps in a single small office building served by these products for 238 locations (bas ed 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 cap acity, 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 devel op annual cooling and, for heat pumps , heating energy by climate at intermediate efficiency levels between the base line level and max-tech level. Annual supply fan energy was also calculated and (for the purpose of this analysis) allocated to the cooling or

2-21heating 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 se lected locations at random (based on location weighting factors), and a 2016 base-case efficien cy 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 re gion. In addition, DOE developed the energy use

for each household or commercial observation selected for higher efficiency levels corresponding to possible standard levels. The di fference in the resulting distribution of energy

use in the base case—and that in each standa rds 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 ar e 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 c ooling 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 h eat 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 2 001. CFM asserted that using 2001 data in 2008-2009 is inadequate. (CFM, No. 13 at p. 269) Tr ane 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

2-22vintage of the baseline stock in 2016 would be diff erent 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 availabl e. 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 coo ling 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 th e 2005 RECS) and the 13 SEER standard (the basis of the default base-case purchases in 2016). This is done in th e 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 ba sed on statistics from the data us ed 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 fact or 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 Laborat ory (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 c onstruction. (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 an d 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 pote ntial new code scenarios. Even as building codes have improved design, reside ntial buildings have increased in size, which compensates for (and in some cases may overwhelm) any load re ductions due to more efficient design. In

2-23response to HARDI’s comment, DOE agrees that th ere are likely significant energy savings from quality installation and correct si zing; however, these savings would also occur with high SEER products. DOE acknowledges that greater care in si zing 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 res ponse, 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 detaile d 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 resi dential central air conditioner and heat pump rulemaking requested that DOE set this fra ction at 10 percent. For this rulemaking, DOE requested fresh inputs from intere sted 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 th e 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). (Tra ne, 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 fra ction of central air conditioner and heat pump systems (all single phase systems) shippe d to commercial buildings at 7 percent. DOE based this percentage on industry estimates pr ovided 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 fracti on 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

.

2-24Degradation of central air conditioner and h eat pump performance over their service life

is a concern. Southern observed that DOE’s an alysis 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 fo r 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 questione d 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 capture s. (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 (releva nt 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 essen tial parameter and should be used in conjunction with the SEER. A joint comment from the Northeast Energy Effi ciency Partnerships (NEEP), the Connecticut Office of Policy and Management, the New Ha mpshire 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 “efficien cy descriptor” at 42 U.S.C. 6291(22) provides that the efficiency descriptor for both cen tral 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 Re gional Standard Analysis

Section 306 of EISA 2007 amended EPCA to au thorize DOE to estab lish 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 th at, because of national climactic variations,

2-25regional standards are necessary and would benefit customers, increase grid reliability, and reduce environmental impacts with minimal negati ve 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 cond itioner 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 st atutory provisions allowed for a s econd metric like latent capacity, regional standards could addre ss 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 regi onal 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 cap acity 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 conditione rs and heat pumps only if DOE is certain that the standards will deliver the savings and paybac k forecast projected in the analysis. (Lennox, No. 22 at p. 3)

ACEEE urged completion of the preliminary ec onomic analysis of regional standards

before the discussion of enforcement issues . (ACEEE, No. 13 at p. 400) Southern, MEUS, ACEEE, and Sempra suggested holding further co llaborative 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-leve l detailed economic analysis as provided for under EPCA, as amen ded by EISA 2007. Consequently, DOE studied options from the various criteria. Several comments presented alternative criteria for defining regions to which different performance standards ma y 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 DO E to evaluate uniform north/south regions to harmonize the heating and cooling standards. (Car rier, 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 re gional standards for hot-humid conditions in the southeast, hot-dry in the west, and temper ate 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,

2-26No. 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-we ighted CDD and humidity data as criteria for including states in the hot-dry climate region. Joint Comment 1 al so 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 nationa l average. (Joint Comment 1, No. 25 at pp. 8–9) FSEC suggested using the TMY3 dataset and su pports 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 cent ral 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 w ith 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 th e 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 indoo r wet-bulb temperature, the latent/sensible split depends primarily on the i ndoor conditions. Since neither the total capacity nor the latent split depends on the outdoor relative humidity, it c ould 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 pr ovide manufacturers the be st possible routes for profitable product differentiation. (J oint Comment 1, No. 25 at p. 3)

Some comments suggested coordinating the cu rrent 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 c onditioners and heat pumps and a single national

standard for residential hea ting products. (EEI, No. 20 at p. 2) NRECA advocated quickly implementing the central air conditioner and h eat 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 th e 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 aut hority to set regional standards for heat pumps. DOE seeks comment on whether a national standard or regional standards would be appr opriate 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. Th e current calculations for the labeling of central

2-27air conditioner cooling energy use are based on 1,000 cooling load hours, a representative national average condition. Consequently, DOE propos ed for the preliminary analysis that states with greater than approximate ly 1,000–1,100 cooling load hours be included in a “hot” region (shown in the cooling hour map in the DOE te st 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 residentia l furnaces and boilers. The LCC subgroup analysis performed to support the furnace and boile r 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 establis h one additional regional standard for the gasfired furnaces and consequently DOE was require d by the Second Circuit Court to investigate regional standards for the furnace and boiler rule.

DOE believes that a unified regional defin ition 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 manufactur ers 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 hi gher 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 po ssible combinations of furnaces and air conditioners, less motivation fo r 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 se nsitivity study. DOE examined individual states with an average HDD65 between 4,500 and 5,000, a nd tentatively concluded that they would benefit more from higher furnace standards than higher air conditioner standards. Consequently, DOE is considering a regional boundary that co rresponds roughly to 4,500 HDD65 so that states with 4,500 or more heating degree days form th e northern region, to which the baseline national standard developed in this rule making would be applicable. The remaining states would form the southern region, where two regional central air co nditioner standards (eastern hot-humid and the

2-28western 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 individua l 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 chap ter describes the following two metrics, which DOE used in the analysis to measure this impact:

• LCC is the total customer cost of an applia nce or product, generally over the life of the appliance or product, including purchase a nd operating costs. The latter consist of maintenance, repair, and energy costs. Futu re 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 cu stomers to recover the assumed higher purchase price of a more energy-efficient product through reduced operating costs.

New or amended energy conservation sta ndards 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 calcu lation include the installed consumer cost of a product (consumer purchase price plus installati on cost), operating expenses (energy, repair, and maintenance costs), the lifetime of the unit, and a discount rate.

Because the installed cost of a product typical ly increases while operating cost typically decreases in response to amended standards, ther e 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 th is 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; maintena nce, repair, and installation costs; and product lifetimes.

DOE developed discount rates fro m estimates of the interest ra te (finance cost) applied to residential product purchases. Following accepted prin ciples 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 (interes t earnings on household or business equity).

The LCC and PBP model was developed usin g 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.

2-29The 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 ai r 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 th e regional and national levels. Aside from energy use, other important factors influencing the anal yses 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 met hods 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 stak eholders on the LCC and PBP analysis methods and proposed sources of data.

2.7.1 General Approach for Life-Cycle Co st and Payback Period Analyses

Joint Comment 1 stated that DOE should es timate uncertainty ba nds in product and operating costs (derived from uncertainty in mate rials 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. (J oint 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 Comme nt 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 cons iders 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 manufac turing 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 LC C 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 fo r 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-i nvestment in efficiency (see chap ter 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 require ments, DOE considers the LCC at each efficiency level along

2-30with the impact on manufacturers (from the manufacturer impact analysis in chapter 12 of the preliminary TSD) and the nation (from the nati onal impact analysis in chapter 11 of the preliminary TSD), as well as the other factors se t 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 le vel 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 In stallations in the Analysis

CFM asked if the LCC model has a degrada tion 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 c onsumption is the amount calculated in the energy analysis, which in turn assumes that th e products at each efficiency level achieve the relative efficiency that corresponds to the incr ease in SEER or HSPF for that level. DOE currently has no data that would show an y systematic deviation from this pattern.

ACCA asked about the availabilit y 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 ma rkup 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 cal culate 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

2-31is 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 cons umer would see in the real world.

DOE developed residential marg inal electricity prices from tariffs collected in 2008 from a representative sample of elect ric utilities throughout the United States. DOE collected over 150 residential tariffs from a samp le of about 90 electric utilitie s. As described earlier, DOE developed household samples using central ai r conditioners and heat pumps from the 2005

RECS. The location of each household can be id entified 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 elec tricity 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 reside ntial central air conditioners and heat pumps.

DOE used tariffs collected in 2004. Because cent ral air conditioner and heat pump shipments to commercial applications are es timated to be low, DOE did notupdate its co mmercial tariff collection. Rather, DOE adjusted the prices fro m the 2004 tariffs with scaling factors based on the increase in average electrici ty prices from 2004 to 2008 based on data from EEI Typical Bills

reports 7 and a summary report on rate increases publis hed by Regulatory Research Associates. 8

Similar to the residential tariffs, DOE collected over 260 commercial tariff s from a sample of 90 electric utilities. For the commercial buildings characterized and simulated in the Energy Use Characterization analysis, DOE assigned all po ssible 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 margin al electricity prices given that past standards rulemakings found only slight differen ces 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 da te 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 Me eting 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 significantl y 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.

2-32A joint comment from the National Resour ces Defense Council (NRDC), the National Consumer Law Center, Inc. (NCLC), and Enterpri se Community Partners (ECP) stated that DOE should develop time-of-use (TOU) rates for the en tire 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 En ergy, 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 househol d electricity use (in kW h). For example, for tariffs with increasing block ra tes, 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 duringpeak 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 determin e 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 custom ers. This represents a larger percentage of potential customers because TOU tariffs are typica lly offered by larger utilities. Coupling hourly energy savings derived from typical residentia l household and central ai r 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 alread y 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 dema nd 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 electri city to meet air-cond itioning 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 $/kWh) and applied to the CUAC peak load savings to calculate the capacity component of the real ma rginal cost. The real marginal cost calculation included operating, capacity, and other costs incurred to serve customers, and so represented the price the utility would have to charge to cover all of its costs at the margin. The results of this analysis showed that on a national average basis, the real marginal cost and the tariff-based marginal price were nearly equal, with a value of approximately 10¢/kwh in 2002$. 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 sign ificant 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 mo re peak-coincident than residential, because the overall system peak is driven by the standa rd 9:00-to-5:00, 5-day work week schedule that

2-33most commercial buildings follow. Therefore, DOE believes that the conclusions of the price analysis for CUAC also apply to central air c onditioners 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 pr ices 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 foreca sts 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. Jo int 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 shoul d examine futures contracts for natural gas and adjust its electricity price forecasts accordingl y. (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 ha s 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 R PS 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 thei r 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 CO 2 emissions. (Earthjustice, No. 29 at pp. 3-4) Until any cap and trade legislati on is enacted, analysis of its impacts would be speculative. DOE uses the most recent AEO forecas ts 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 re pair 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 comment ed that the product lifetime should include a factor for product warranty and coverage. (Unic o, No. 13 at p. 342) Unico observed that some repairs are so expensive that owners replace the w hole 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-t hirds of the total market), the consumer can choose to replace the compressor or put in a ne w 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 w ith lower SEER products. (Danfoss, No. 13 at p. 343; Lennox, No. 13 at p. 338)

2-34DOE plans to scale the cost of repair to th e 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 signif icantly affect the distri bution of pr oduct lifetimes and the estimated number of compressor replacements.

Lennox commented that while the use of mic ro-channel heat exchangers resulted in smaller units with R-22, it is unclear whether th is 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 moto rs 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 elect ronic 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 fo r more complex systems, and higher repair parts costs. (Trane, No. 16 at p. 20)

DOE has modeled the cost of re pair proportional to the relativ e 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 rulemaki ng (NOPR) stage, to address the consumer repair versus replace decision in the LCC chapte r (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 gi ven 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

2-35prospect 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 as sume that the main tenance repair and installation costs will be negligible for more efficient products. Lennox noted that higher efficiency products have much larger coils a nd 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 st udy of its field experience, a higher efficiency product maintains its actual field perf ormance better over a range of charge, reducing maintenance cost. (PG&E, No. 13 at pp. 334–335)

ACEEE commented that for those manufactur ers not adopting micro-channel heat exchangers, it is unclear whether new technologie s will lead to higher maintenance costs. The new technologies include a great deal of forego ne advanced and automated diagnostics. These improvements should lead to smarter machinery th at will be self-correc ting 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 mainte nance costs may not increase in higher efficiency products, other component s likely would cost more to maintain, such as cleaning of larger coils and conducting mo re 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 hi gher efficiency products in the analysis and

will scale maintenance cost to th e product selling price, which is a proxy for the complexity of the mechanical components, elect ronics, and size of the coils.

2.7.5 Discount Rate

As described below, DOE de veloped discount ra tes separately fo r residential and commercial purchasers of central ai r 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 fi nancial 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)

2-36For replacement purchases, households use va rious 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 cl asses 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 a nd 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 base d 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 co mmercial discount rates.

EEI suggested that DOE use discount rates a ssociated with small businesses most likely

to use central air conditioners a nd heat pumps, rather than using discount rates from all types of

commercial businesses that woul d use other products. (EEI, No. 20 at p. 7; No. 13 at p. 327)

For commercial rates, DOE uses discount ra tes 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 di scount rates for such businesses. See chapter 8 in the preliminary TSD for further di scussion 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 rule making for these products, DOE conducted a comprehensive analysis on produc t 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 cond itioner and heat pump lif etime is less than 18.4 years. (ACCA, No. 23 at p. 5)

DOE based product lifetimes for its prior centr al 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

2-37product lifetimes. As a result, DOE conducted an analysis of actua l product lifetime in the field using a combination of shipment s data and responses in RECS on the age of household central air conditioner and heat pump products. By co mbining 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. Th is 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 fo r 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 th e efficiency or complexity of the product. DOE is unaware of data that clearly demonstrates that more efficient or sophisticated products have longer or shorter lift imes 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 spreadsh eet model to conduct sensitivity analyses by running scenar ios 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 ar e 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 impli cations. 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 cons umption, and product repair and maintenance costs, have regi onal 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 pr oposes 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 fo r each considered product. In DOE’s shipments model, shipments of products ar e driven by new construction, replacement of the existing stock

2-38of 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 pr ovided estimates of the percentage of annual central air conditioner and heat pump sales shi pped 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 th e existing stock. Stock accounting uses product shipments as inputs to estimate the age distributi on of in-service product stocks for all years. The age distribution of in-service pr oduct stocks is a key input to NES and NPV calculations because operating costs for any year depend on the age di stribution 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 produc t classes—split-system air conditioners, single-package air conditioners, split-system heat pumps, and single-package heat pumps—but did not disaggregate the shipment s 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 calibra ting the resulting product stock saturations to the values specified by the RECS and AHS da ta. DOE used this ca libration technique for residential shipments only. Commercial shipme nts 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 installa tion 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 anal yze ductless systems separately. The analyses conducted for this preliminary TS D have not addressed the non- primary product classes that include space-constrained products and SDHV sy stems. DOE requests shipment data from interested parties for non-pr imary products (e.g., SDHV system s, 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 para meters is not strong, there is enough evidence to suggest a connection. Of the three parameters, purchase pr ice has the most significant impact on product shipments; an increase in product purchase price will lead to a decrease in product shipments.

2-39Several 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. (M EUS, Public Meeting Transcript, No. 13 at pp. 358–359) Several partie s remarked that consumers may choose to repair their products rather than replace it if standards lead to significantl y higher product purchase pr ices. (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 th at a significant increase in central air conditioner and heat pump purchase prices could ca use some potential new owners to forego or delay a central air conditioner or heat pump pur chase. As described above, DOE developed a relative price elasticity to quantify the potentia l 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 e quipped 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 year s, 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 cons umers 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 syst ems require a very different cl ass of refrigerant lubricants. Consequently, for split systems, DOE should pay attention to the feasibility of componentreplacements rather than system replacements when consumers are required to move from an R22 system to an R-410A system that uses diff erent 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, w ith 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 ac counting 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.

2-40Chapter 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 depe nd 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 afte r standards take effect. Under this scenario, all products that perform at levels below a prosp ective standard are moved, or rolled up, to the minimum performance level allowed under the standa rd. 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 incorpor ate 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. Danf oss stated that the standards th at took effect in the early 1990s indicate that a roll-up phenomenon occurred immedia tely, followed a year or two later with the sale of products with higher efficiencies. (Danfo ss, Public Meeting Transcript, No. 13 at p. 372) AHRI stated that over the last 3 years, shipme nts 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 da te 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 efficienci es 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 sa le of more efficient products. (NRDC, Public Meeting Transcript, No. 13 at p. 375)

AHRI provided historical shipment-weighted effi ciency (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 w ith limited data, it is di fficult 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

2-41constant. 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 effectivene ss of market-pull progra ms 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 forecastin g 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) shipme nts; (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 vint age). DOE calculated a nnual NES based on the difference in national energy consumption for th e 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 th at it would consider a rebound effect in its analyses. A rebound effect occurs when the increa sed energy efficiency and reduced consumer costs of higher efficiency products causes the c onsumer to alter their behavior resulting in an increase in energy consumption. Based on limite d research, DOE found that the rebound effect for residential space-cooling produ cts 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 st ated that the rebound effect is not likely to be significant for more efficient central air c onditioners 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. Becaus e industry experience indicates that it is very unlikely that increase product effi ciencies will result in a rebound effect, DOE did not include this effect in its analysis.

2-42AHRI 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 anal ysis 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 a llows 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-standa rd 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 imp act 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 an y product shipped in the first year a standard becomes effective. Because products have vary ing lifetimes, DOE uses a 30-year period to maintain a consistent timeframe to compare th e 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 re main unknown until all of the ma rket 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 fo r short- and long-lived equipment. The NOPR for beverage vending machines discusses th is 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, th e 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) tota l 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 ye ar 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 in stalled costs. DOE used a discount factor based on real discount rates of 3 and 7 percent to discount futu re costs and savings to present values.

2-43DOE 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 us ually 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 cons idered 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 mode ling 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 reside ntial central air conditioner and heat pump manufacturers, and to calculate the impact of such standards on employ ment 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 engineerin g analysis and shipments forecasts. The key GRIM output is the industry net present value (INP V). 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 w ill further tailor the analytical framework for each MIA based on comments from interested pa rties. In Phase I, DOE creates an industry profile to characterize the industry and identify im portant issues that require consideration. In

2-44Phase II, DOE prepares an industry cash-flow model and interview questionnaire to guide subsequent discussions. In Phase III, DOE inte rviews manufacturers and assesses the impacts of standards quantitatively and qua litatively. 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 manu facturer 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 fo r the engineering analysis. See chapter 12 of the preliminary TSD for a summary of manufacturers’ concerns regarding the impacts of amended energy conservation st andards 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 conserva tion standard level. DOE will then estimate the impacts on the industry quantita tively and qualitatively. DOE seeks further comment from interested par ties 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 stringen t energy conservation standards on the industry that produces the products covered by the standa rd. 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 impac ts among subgroups of manufacturers. For example, small and nich e manufacturers, or manufacturers whose cost structure differs significantly from the industry aver age, could be more negatively affected by the imposition of standards. Ideally, DOE would cons ider 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 establis h manufacturer subgroups in the framework document and sought comment from interested parties on any potential subgroups within the

2-45industry. 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 imp act 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 a ll manufacturers of diff erent product classes.

AHRI stated that DOE should also assess th e impact on component suppliers, dealers, distributors, contractors, and the manufacture d housing industry. (AHRI, No. 24 at p. 12)

DOE has characterized the impacts on the re sidential 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 centr al air conditioners and heat pumps on small businesses. DOE

identified a few small businesses within the industr y in chapter 3 of the preliminary TSD. During the manufacturer interview pro cess conducted as part of th e NOPR, DOE will discuss the potential subgroups and subgroup members it has id entified for the analysis. DOE will encourage manufacturers to recommend subgroups or characte ristics appropriate for the subgroup analysis. DOE will also attempt to contact component supp liers, dealers, distribut ors, and contractors during the manufacturer interview process c onducted 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 impact s, 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 compe tition. 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 manufacturer s of multiple, product-sp ecific regulatory actions. DOE outlined the cumulative regulatory burden process in the framework document and sought comment on any additional regulations faci ng the residential central air conditioner and heat pump industry.

2-462.9.4.1 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 resi dential 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 DO E should periodically assess the price of R-22 throughout the rulemaking to ensure that the en gineering analysis is using a proper value. EEI

stated that manufacturers will ha ve 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 avai lability 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 pr oducts, 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 refr igerants could further hinder already sluggish sales of new products. HARDI commented that DOE should consider the refrigerant

ramifications of residential central air conditione r and heat pump regulations that could increase the demand for HFC refrigerants. HARDI stated concerns about R-410A av ailability in addition to slow acceptance of new replacement refrige rants in product manufacturer warranty terms, which adds to concerns of long-term refrige rant supplies/options. (HARDI, No. 32 at p. 8)

Emerson, Trane, and Carrier also expressed concern about the centr al air conditioner and heat pump industry’s transition to R-410A, stating th at 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 recomm ended 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 refrige rant 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 th e uncertainties around climate change legislation

2-47and potential regulation, the industry could be goin g 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 basi s 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 pot ential 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 AS HRAE standard 90.1-2007 for economizer and ventilation air requirements; AS HRAE Draft Standard 189 for advanced energy designs; and International Codes Council (I CC) building and energy codes. (ICC 2009 codes) (MEUS, No. 19 at p. 6)

DOE identified several regulati ons relevant to central air conditioners and heat pumps, including energy conservation standards and re gional standards for other products made by central air conditioner and heat pump manufacture rs, 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 manuf acturers responsible for a majori ty of central air conditioner and heat pump sales. These discussions occurred during the interviews DOE conducted for the engineering analysis. The interviews provided valu able 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 conducte d 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 implementati on of regional standards would generally complicate their production proce sses, decrease their economies of scale, and complicate product distribution. Any additional testin g, certification, rating, or la beling would increase costs, and

2-48could 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. Ma nufacturers 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 appropria te, 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 nati onal standards, and states that DOE shall consider the impact of additional regional standards on consumers, manufacturers, a nd other market participants, including product distributors, dealer s, 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 re gional standards on consumers within these chapters by calculating consumer LCCs and su bgroup 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 th e 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 mig ht 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 othe r than manufacturers and consumers.

2-492.10.1 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 ar ea with regional standards would have a significant competitive impact, particularly if a price difference exists between the higher efficiency and the national standard units. (K ent & 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, th e cumulative regulatory burden, the employment impact analysis, and the regulatory impact an alysis. NAHB also commented that regional standards would affect home builders, most of wh ich 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 ai r conditioners and heat pumps.

Distributors had concerns regarding the imp lementation of regiona l standards and the potential impact of those standards on their busine ss. 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, wh ich 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 current ly 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 mo re limited cooling demand than the surrounding areas. As a result, sales in those areas, where hi gh-efficiency cooling equipment would not be as well justified, would likely be de pressed. 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

2-50regarding the potential impact of regional standa rds on distributors, deal ers, contractors, and

installers of residen tial 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, cont ractors, 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 statem ents 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 w holesalers 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 contra ctors and would allow DOE to conduct similar analyses of c ontractors 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 part s 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 Cens us 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 comme nts expressed concerns about enforcement of regional

standards. HARDI indicated that it has serious co ncerns 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 ag reement 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

2-51standard; (3) what regulations cover cross stat e-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 eligib le for sale if an inde pendent 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 st andards. (ACCA, No. 23 at p. 2) Lennox agreed that regional

standards are useless unless the enforcement issu es 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) Carri er 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 Urba n Development was unable to form ulate regional criteria due to

enforcement issues and that en forcement 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 a ppliance 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 le gally installed;

3) encouraging state and local entities to adopt these regional standards in building codes and to provide reference to the required minimu m efficiencies in required mechanical or electrical permits;

4) encouraging states who have regional app liance standards to adopt and codify the appropriate regional stan dards 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 installa tions through warranty registration or other registration means;

2-527) 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/distributor s/contractors whose actions re sult in installations not in compliance with Federal standards.

Certain features of any enforcement plan w ould 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, distri butors, dealers or installers. Wh ile 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 viabilit y of the above enforcem ent mechanisms, other mechanisms DOE should consider, and the extent to which these mechanisms would result in

additional financial burdens to consumers, manufacturers, c ontractors, distribut ors, 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 pa rticular 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 increas es 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 an alysis that will sample low-income households and determine the potential for the proposed standards to disproportionately affect them. Low-income households may be dispropo rtionally affected because they may use a costlier-than-average mix of debt instruments to pay for first costs.

2-532.12 UTILITY IMPACT ANALYSIS

The utility impact analysis includes an analysis of the effect of ne w energy conservation standards on the electric and the gas utility indus tries. 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 devel oped to address the specific impacts of an energy conservation standard.

Available in the public domain, NEMS produ ces a widely recognized baseline energy forecast for the United States through 2030. Th e typical NEMS outputs include forecasts of electricity sales, prices, a nd 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 conserva tion 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 consid er the environmental effects of amended energy conservation standard s for central air conditioners and heat pumps. The primary environmental effects of these stan dards 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 (CO 2 ), nitrogen oxides (NO X ), and mercury (Hg). The environmental assessment also considers impacts on SO 2 emissions. After a brief discussion of general methodology, this s ection 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 regula tion of power plant emissions of CO 2 , a DOE standard is likely to result in reductions of these emissions. The CO 2 emission reductions likely to result from a standard will be estimated using NEMS-BT and national energy savings estimates drawn from the NIA spreadsheet model. The net benefit of the standard is the difference between emissions estimated by NEMS-BT at each standard level considered and the

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

2.13.2 Sulfur Dioxide

DOE has preliminarily determined that SO 2 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 SO 2 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 SO 2 for all affected EGUs. SO 2 emissions from 28 eastern States and the Distri ct of Columbia (DC) are also limited under the

2-54Clean 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 a nd DC. (The recent legal history surrounding CAIR is discussed below.) The attain ment 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 SO 2 emission allowances resulting from the lower electricity demand caused by the imposition of an efficiency standard could be used to permit offsetting increases in

SO 2 emissions by any regulated EGU. However, if the standard resulted in a permanent increase in the quantity of unused emission allowances , there would be an overall reduction in SO 2 emissions from the standards. While there remains some uncertainty about the ultimate effects of efficiency standards on SO 2 emissions covered by the existin g cap and trade system, the NEMSBT modeling system that DOE plans to use to forecast emissions reducti ons currently indicates that no physical reductions in power sector emissions would occur for SO 2

.

Even if there is no significant redu ction in the overall emissions of SO 2 that results from the standard, there may still be some ec onomic benefit from reduced demand for SO 2 emission allowances that is not fully reflected in the co st savings experienced by individual consumers. Electricity savings that decrease the overall demand for SO 2 emissions allowances could lower allowance prices and thereby result in some econo mic 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 SO 2 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 NO X 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

NO X in 28 eastern states and the District of Columbia. 70 FR 25162 (May 12, 2005).

Much like SO 2 emissions, a cap on NO X 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. 2 008). Because all States covered by CAIR opted to reduce NO X emissions through participation in cap-and-trade programs for electric generating units, emissions from these sources are capped across the CAIR region.

Standards may produce an envir onmental-related econo mic benefit in the form of lower prices for emissions allowance credits. As with SO 2 allowance prices, DOE does not plan to monetize this particul ar benefit because the effect on the NO X 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.

2-552.13.4 Mercury

Similar to emissions of SO 2 and NO X , future emissions of Hg would have been subject to emissions caps. In May 2005, EPA issued th e 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 th e CAMR. 517 F.3d 574 (DC Cir. 2008). EPA has decided to develop emissions standards for pow er plants under the Clean Air Act (Section 112),

consistent with the DC Circ uit’s opinion on the CAMR. See http://www.epa.gov/air/mercuryr ule/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 sta ndard 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 us ually 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 doe s not separate direct PM emissions from power plants from the sulfate particulates indirectly produced through complex atmos pheric chemical reactions. The great majority of PM emissions from power plan ts are of these seconda ry particles (secondary sulfates). Thus, it is not useful to examine how the amended standard impacts direct PM emissions independent of indir ect PM production and atmospheric dynamics. Therefore, DOE is not planning to assess the impact of these standa rds on particulate emissions. Further, even the cumulative impact of PM emissions from power plan ts and indirect emissions of pollutants from other sources is unlikely to be significant.

2.13.6 Monetization of Emissi ons Reduction Benefits

For those emissions for which real nationa l emission reductions are anticipated (CO 2 , Hg,

and NO X for 22 states), only ranges of estimate d economic values base d 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 st andard 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

CO 2 emissions, it is DOE’s intent to use in its an alysis the most current Social Cost of Carbon

2-56(SCC) values developed a nd/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 ecosy stem 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 quantifi cation and monetization, the SCC can be used to provide estimates of the social benefits of reduc tions in GHG emissions.

DOE uses the most recent interagency estimates of the potential global benefits resulting

from reduced CO 2 emissions. At the time of this notice, these estimates are $4.7, $21.4, $35.1, and $64.9 per metric ton of CO 2 (in 2007 dollars). These values are then adjusted to 2009$ 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 per cent 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 CO 2 emissions.

DOE recognizes that scientific and economic kno wledge continues to evolve rapidly as to

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

DOE also intends to estimate the potential monetary benefit of reduced NO X , and Hg emissions resulting from the standard levels it considers. For NO X emissions, available estimates suggest a very wide range of monetary values for NO X emissions, ranging from $370 per ton to $3,800 per ton of NO X from stationary sources, measured in 2001$ (equivalent to a range of $447 to $4,591 per ton in 2009$).). Refer to the OM B, Office of Information and Regulatory Affairs, “2006 Report to Congre ss on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Trib al Entities,” for additional information.

For Hg emissions reductions, DOE has previous ly determined that the impact of mercury emissions from power plants on humans is c onsidered 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 life time economic productivit y 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 ex posure to mercury of U.S. power plant origin ($1.3 billion per year in year 2000$), which wo rks 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 deri ved this estimate from a publis hed 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 ch ildren exposed. See Ted Gayer and Robert Hahn, “Designing Environmental Policy: Lessons from the Regulation of Mercury Emissions,” Regulatory Analysis 05–01, American Enterprise In stitute-Brookings Joint Center for Regulatory Studies, Washington, DC (2004). A version of th is paper was published in the Journal of

2-57Regulatory Economics in 2006. Th e estimate was derived by ba ck-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 employ ment both directly a nd indirectly. Direct employment impacts are changes in the number of employees at plants that produce the covered products and at the affiliated distribution a nd 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) mo del to investigate the combined direct and indirect employment impacts. The ImSET model, which was de veloped 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 comp lete and automated anal ysis 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, 19 93. 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 th e 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 pr oducts covered under this rulemaking.

DOE recognizes that non-regulatory efforts by manufacturers, utilities, and other interested parties can substantia lly 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.

2-58REFERENCES

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 & Refrigera tion Distributors International. 2008. 2008 Profit Report (2007 Data).

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. Report EC02-231-236220.

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v. Department of Energy, et al., April 15, 2009.

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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.

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4.html >

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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.

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