CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS 

TABLE OF CONTENTS 

8.1 INTRODUCTION ........................................................................................................... 8-1 

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis................ 8-1 

8.1.2 Overview of Life-Cycle Cost and Payback Period Inputs................................... 8-3 

8.2 LIFE-CYCLE COST INPUTS ........................................................................................ 8-5 

8.2.2 Total Installed Cost Inputs................................................................................... 8-9 

8.2.2.1 Baseline Manufacturer Selling Price ........................................................... 8-11 

8.2.2.2 Manufacturer Selling Price Increases for Higher-Efficiency Products........ 8-11 

8.2.3 Operating Cost Inputs ........................................................................................ 8-14 

8.2.3.1 Annual Energy Consumption.......................................................................8-16 

8.2.3.2 Energy Prices...............................................................................................8-17 

8.2.3.3 Energy Price Trends..................................................................................... 8-17 

8.2.3.4 Repair and Maintenance Costs..................................................................... 8-18 

8.2.4 Motor Lifetime................................................................................................... 8-18 

8.2.5 Discount Rates ................................................................................................... 8-19 

8.2.5.1 Commercial, Industrial, and Agricultural Owners....................................... 8-19 

8.2.5.2 Residential Owners...................................................................................... 8-22 

8.2.6 Effective Date of Standard................................................................................. 8-26 

8.2.7 Product Energy Efficiency in the Base Case ..................................................... 8-26 

8.3 PAYBACK PERIOD INPUTS...................................................................................... 8-27 

8.4 LIFE-CYCLE COST AND PAYBACK PERIOD RESULTS...................................... 8-28 

8.4.1 Polyphase Motors............................................................................................... 8-28 

8.4.2 Capacitor-Start Induction-Run Motors .............................................................. 8-30 

8.4.3 Capacitor-Start Capacitor-Run Motors.............................................................. 8-32 

8.5 REBUTTABLE PAYBACK PERIOD.......................................................................... 8-33 

LIST OF TABLES 

Table 8.1.1 Shares of Motor Owner Type by Application...................................................... 8-2 

Table 8.2.1 Inputs for Life-Cycle Cost and Payback Period Analysis: Polyphase 

Table 8.2.2 Inputs for Life-Cycle Cost and Payback Period Analysis: Capacitor-Start 

Table 8.2.3 Inputs for Life-Cycle Cost and Payback Period Analysis: Capacitor-Start 

Table 8.1.2 Application Shares by Equipment Class.............................................................. 8-3 

Motors.................................................................................................................. 8-7 

Induction-Run Motors.......................................................................................... 8-8 

Capacitor-Run Motors ......................................................................................... 8-9 

Table 8.2.4 Inputs for Total Installed Cost ........................................................................... 8-10 

Table 8.2.5 Engineering Baseline Manufacturer Selling Price............................................. 8-11 

Table 8.2.6 Polyphase Motors: Manufacturer Selling Price Increases, 1 Horsepower......... 8-12 

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Table 8.2.7 Capacitor-Start Induction-Run Motors: Manufacturer Selling Price 

Increases, 0.5 Horsepower ................................................................................. 8-12 

Table 8.2.8 Capacitor-Start Capacitor-Run Motors: Manufacturer Selling Price 

Increases, 0.75 Horsepower ............................................................................... 8-12 

Table 8.2.9 Markups for Small Electric Motors ................................................................... 8-13 

Table 8.2.10 Polyphase Motors: Consumer Equipment Prices, Installation Costs, and 

Total Installed Costs .......................................................................................... 8-13 

Table 8.2.11 Capacitor-Start Induction-Run Motors (48 Frame): Consumer Equipment 

Prices, Installation Costs, and Total Installed Costs.......................................... 8-14 

Table 8.2.12 Capacitor-Start Capacitor-Run Motors: Consumer Equipment Prices, 

Installation Costs, and Total Installed Costs...................................................... 8-14 

Table 8.2.13 Inputs for Operating Cost................................................................................... 8-15 

Table 8.2.14 Average Annual Electricity Use by Efficiency Level for Small Electric 

Motors................................................................................................................ 8-16 

Table 8.2.15 Motor Lifetimes Used in the Life-Cycle Cost Analysis .................................... 8-19 

Table 8.2.16 Adjusted Real Discount Rates for Updated Values of Rf and ERP.................... 8-22 

Table 8.2.17 Weighted Average Cost of Capital for Sectors that Purchase Small Electric 

Motors................................................................................................................ 8-22 

Table 8.2.18 Average Shares of Considered Household Debt and Equity Types .................. 8-23 

Table 8.2.19 Average Nominal Interest Rates for Household Debt Classes (percent)........... 8-24 

Table 8.2.20 Average Real Effective Interest Rates for Household Debt Classes 

(percent)............................................................................................................. 8-24 

Table 8.2.21 Average Nominal and Real Interest Rates for Household Equity Types........... 8-25 

Table 8.2.22 Shares and Interest or Return Rates Used for Household Debt and Equity 

Types.................................................................................................................. 8-26 

Table 8.2.23 Product Energy Efficiency in the Base Case ..................................................... 8-27 

Table 8.4.1 Polyphase Motors: Life-Cycle Cost and Payback Period Results ..................... 8-30 

Table 8.4.2 Capacitor-Start Induction-Run Motors: Life-Cycle Cost and Payback 

Period Results .................................................................................................... 8-31 

Table 8.4.3 Capacitor-Start Capacitor-Run Motors: Life-Cycle Cost and Payback 

Period Results .................................................................................................... 8-33 

LIST OF FIGURES 

Figure 8.1.1 Flow Diagram of Inputs for the Determination of Life-Cycle Cost and 

Payback Period..................................................................................................... 8-5 

Figure 8.2.1 Electricity Price Distributions............................................................................ 8-17 

Figure 8.2.2 Electricity Price Trends...................................................................................... 8-18

Figure 8.4.1 Polyphase Motors: Distribution of Life-Cycle Cost Impacts for Efficiency 

Level 2 ............................................................................................................... 8-29 

Figure 8.4.2 Polyphase Motors: Distribution of Payback Periods for Efficiency Level 2..... 8-29 

Figure 8.4.3 Capacitor-Start Induction-Run Motors: Distribution of Life-Cycle Cost 

Impacts for Efficiency Level 3 .......................................................................... 8-30 

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Figure 8.4.4 Capacitor-Start Induction-Run Motors: Distribution of Payback Periods 

for Efficiency Level 3 ....................................................................................... 8-31 

Figure 8.4.5 Capacitor-Start Capacitor-Run Motors: Distribution of Life-Cycle Cost 

Impacts for Efficiency Level 3 .......................................................................... 8-32 

Figure 8.4.6 Capacitor-Start Capacitor-Run Motors: Distribution of Payback Periods 

for Efficiency Level 3 ....................................................................................... 8-33 

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CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS 

8.1 INTRODUCTION 

This chapter describes the Department of Energy (DOE)’s methodology for analyzing the 

economic impacts of possible energy efficiency standards on individual end users. The effect of 

standards on individual end users includes a change in operating expense (usually decreased) and 

a change in purchase price (usually increased). This chapter describes three metrics DOE used in 

the consumer analysis to determine the effect of standards on individual end users: 

• Life-cycle cost (LCC) is the total consumer expense over the life of an appliance, 

including purchase expense and operating costs (including energy expenditures). DOE 

discounts future operating costs to the time of purchase, and sums them over the lifetime 

of the equipment. 

• Payback period (PBP) is the change in purchase expense due to an increased efficiency 

standard divided by the change in annual operating expense that results from the 

standard. It represents the number of years it will take the user to recover the increased 

purchase expense through decreased operating expenses. 

• Rebuttable payback period is a special case of the PBP. Where LCC and PBP are 

estimated over a range of inputs reflecting actual conditions, rebuttable payback period is 

based on laboratory conditions, specifically DOE test procedure inputs. 

Inputs to the LCC and PBP are discussed in sections 8.2 and 8.3, respectively, of this 

chapter. Results for the LCC and PBP are presented in section 8.4. The rebuttable PBP is 

discussed in section 8.5. Key variables and calculations are presented for each metric. DOE 

performed the calculations discussed here using a Microsoft Excel spreadsheet which is 

accessible on the Internet (http://www.eere.energy.gov/buildings/appliance_standards/). 

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis 

Recognizing that several inputs to the determination of consumer LCC and PBP are 

either variable or uncertain, DOE conducted the LCC and PBP analysis by modeling both the 

uncertainty and variability in the inputs using Monte Carlo simulation and probability 

distributions. DOE developed LCC and PBP spreadsheet models incorporating both Monte Carlo 

simulation and probability distributions by using a Microsoft Excel spreadsheet combined with 

Crystal Ball (a commercially available add-in program). 

In addition to characterizing several of the inputs to the analysis with probability 

distributions, DOE also developed a sample of end-use applications for the equipment. These 

end-use applications determine the use profile of the motor and the economic characteristics of 

the motor owner. 

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 (%)

In each Monte Carlo simulation, for each equipment class, one of the applications is 

identified by sampling a distribution of applications for that equipment class. The selected 

application determines the number of operating hours per year as well as the motor loading. The 

operating hours and the motor loading for the application are used in the energy use calculation. 

There is also a distribution of owner types (by sector) associated with each application 

(Table 8.1.1). The sector to which the application belongs determines the energy price and 

discount rate used in the LCC calculation in each simulation. 

Table 8.1.1 Shares of Motor Owner Type by Application 

Motor Owner Type 

No. Application Industrial Commercial Agricultural Residential 

1 Air and gas compressors 40% 49% 10% 1% 

2 Commercial and industrial heating, ventilating, 

and air-conditioning/refrigeration equipment 40% 50% 10% 0% 

3 Commercial laundry machinery 0% 100% 0% 0% 

4 Conveyors 40% 40% 20% 0% 

5 Farm machinery 0% 0% 100% 0% 

6 Food machinery 20% 60% 20% 0% 

7 General industrial machinery 40% 40% 20% 0% 

8 Industrial and commercial fans and blowers 50% 50% 0% 0% 

9 Machine tools 65% 20% 10% 5% 

10 Packaging machinery 75% 10% 10% 5% 

11 Pumps and pumping equipment 40% 40% 20% 0% 

12 Service industry machinery 40% 40% 20% 0% 

13 Textile machinery 100% 0% 0% 0% 

14 Woodworking machinery 75% 10% 5% 10% 

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Table 8.1.2 Application Shares by Equipment Class 

Equipment Class 

No. Application Polyphase CSIR CSCR 

1 Air and gas compressors 9.2% 8.1% 8.1% 

2 Commercial and industrial heating, ventilating, 

and air-conditioning/refrigeration equipment 4.3% 8.4% 8.4% 

3 Commercial laundry machinery 0.4% 1.2% 1.2% 

4 Conveyors 18.8% 11.8% 11.8% 

5 Farm machinery 3.0% 10.9% 10.9% 

6 Food machinery 8.2% 2.1% 2.1% 

7 General industrial machinery 3.4% 2.4% 2.4% 

8 Industrial and commercial fans and blowers 5.6% 5.9% 5.9% 

9 Machine tools 7.3% 1.9% 1.9% 

10 Packaging machinery 1.0% 0.3% 0.3% 

11 Pumps and pumping equipment 33.0% 41.1% 41.1% 

12 Service industry machinery 1.5% 3.0% 3.0% 

13 Textile machinery 1.2% 0.4% 0.4% 

14 Woodworking machinery 3.1% 2.4% 2.4% 

 Total 100% 100% 100% 

DOE used Energy Information Administration (EIA) data on electricity prices in 2006 for 

different customer classes (which is accessible on the Internet at 

http://www.eia.doe.gov/cneaf/electricity/page/eia861.html) to establish the variability in energy 

pricing. DOE used data from the literature on motor loading and motor application 

characteristics to estimate the variability of annual energy use. Due to the large range of 

applications and motor use characteristics considered in the LCC and PBP analysis, the range of 

annual energy use and energy prices can be quite large. Thus, although the annual energy use and 

energy pricing are not uncertain for any particular application, their variability across all 

applications contributes to the range of LCCs and PBPs calculated for any particular standard 

level. 

Results presented at the end of this chapter are based on 10,000 samples per Monte Carlo 

simulation run. DOE displays the LCC and PBP results as distributions of impacts compared to 

the baseline conditions. 

8.1.2 Overview of Life-Cycle Cost and Payback Period Inputs 

DOE categorizes inputs to the LCC and PBP analysis as follows: (1) inputs for 

establishing the initial expense, otherwise known as the total installed cost, and (2) inputs for 

calculating the operating cost. 

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The primary inputs for establishing the total installed cost are: 

• Baseline manufacturer selling price: The price at which the manufacturer sells the 

baseline equipment, which includes the costs incurred by the manufacturer to produce 

equipment meeting existing standards. 

• Manufacturer selling price increases: The change in manufacturer selling price 

associated with producing equipment to meet a particular standard level. 

• Markups and sales tax: The markups and sales tax associated with converting the 

manufacturer cost to a consumer equipment price. The markups and sale tax are 

described in detail in Chapter 7, Markups for Equipment Price Determination. 

• Installation cost: The cost to the consumer of installing the equipment. The installation 

cost represents all costs required to install the equipment other than the marked-up 

consumer equipment price. The installation cost includes labor, overhead, and any 

miscellaneous materials and parts. Thus, the total installed cost equals the consumer 

equipment price plus the installation cost. 

The primary inputs for calculating the operating cost are: 

• Equipment energy consumption and reactive power: The equipment energy consumption 

is the site energy use associated with operating the equipment. Reactive power is power 

that is reflected back to the electrical system by a change in the phase of alternating 

current power. Chapter 6, Energy and End-Use Load Characterization, details how DOE 

determined the equipment energy consumption based on various data sources. 

• Equipment efficiency: The equipment efficiency dictates the energy consumption 

associated with standard-level equipment (i.e., equipment with efficiencies greater than 

baseline equipment). Chapter 6, Energy Use Characterization, details how energy and 

reactive power change with increasing equipment efficiency and how equipment 

efficiency relates to actual equipment energy use. 

• Energy prices: Energy prices are the prices paid by end users for energy (i.e., electricity). 

DOE determined current energy prices based on data from the DOE-EIA. 

• Energy price trends: DOE used the EIA Annual Energy Outlook 2008 (AEO2008) to 

forecast energy prices into the future. For the results presented in this chapter, DOE used 

the AEO2008 reference case to forecast future energy prices. 

• Repair and maintenance costs: Repair costs are associated with repairing or replacing 

components that have failed. Maintenance costs are associated with maintaining the 

operation of the equipment. 

• Lifetime: The age at which the equipment is retired from service. 

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• Discount rate: The rate at which DOE discounted future expenditures to establish their 

present value. 

Figure 8.1.1 graphically depicts the relationships between the installed cost and operating 

cost inputs for the calculation of the LCC and PBP. In the figure below, the yellow boxes 

indicate the inputs, the green boxes indicate intermediate outputs, and the blue boxes indicate the 

final outputs (the LCC and PBP). 

Figure 8.1.1 Flow Diagram of Inputs for the Determination of Life-Cycle Cost 

and Payback Period 

8.2 LIFE-CYCLE COST INPUTS 

Life-cycle cost is the total customer expense over the life of a piece of equipment, 

including purchase expense and operating costs (including energy expenditures). DOE discounts 

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future operating costs to the time of purchase, and sums them over the lifetime of the equipment. 

DOE defines LCC by the following equation: 

N 

LCC = IC +∑ OCt 

t (1+ r)

Where: 

t=1 

LCC = life-cycle cost in dollars, 

IC = total installed cost in dollars, 

∑ = sum over the lifetime, from year 1 to year N, 

N = lifetime of appliance in years, 

OC = operating cost in dollars, 

r = discount rate, and 

t = year for which operating cost is being determined. 

Because DOE gathered most of its data for the LCC and PBP analysis in 2007, DOE 

expresses dollar values in 2007$. 

Tables 8.1.1 through 8.1.3 summarize the input values that DOE used to calculate the 

LCC and PBP for the three equipment classes of small electric motors: polyphase, capacitor-start 

induction-run (CSIR), and capacitor-start capacitor-run (CSCR) respectively. Each table 

summarizes the total installed cost inputs and the operating cost inputs including the lifetime, 

discount rate, and energy price trends. DOE characterized all of the total cost inputs with singlepoint values, but characterized several of the operating cost inputs with probability distributions 

that capture the input’s uncertainty and/or variability. For those inputs characterized with 

probability distributions, the values provided in the following tables are the average or typical 

values. Also listed in the following tables is the section of the technical support document (TSD) 

where more detailed information on the inputs can be found. The sections following the tables 

discuss total installed cost, operating cost, lifetime, and discount rate. 

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Table 8.2.1 Inputs for Life-Cycle Cost and Payback Period Analysis: Polyphase Motors 

Input Average or Typical Value Characterization 

TSD Chapter 

Reference 

Total Installed Cost Inputs 

Baseline Manufacturer 

Selling Price 

75.8% = $93.46 (engineering) 

76.4% = $94.64 (market) 

Single-Point Value 

Engineering baseline cost adjusted 

to estimated market efficiency of 

76.4% 

8 

Manufacturer Selling 

Price Increase 

84.0% = $23.70 

85.5% = $38.09 

86.5% = $103.74 

88.0% = $288.87 

90.0% = $1,224.52 

Price curve using power law 

interpolation to determine price 

increase relative to engineering 

baseline 

5 

Distribution and OEM 

Markups 

Baseline = 2.26 

Incremental = 1.63 Single-Point Value 7 

Sales Tax 1.0684 Single-Point Value 7 

Installation Cost $252.90 Single-Point Value 8 

Operating Cost Inputs 

Usage 2665 hours/year 

Variability determined from 

distribution of applications. Usage 

ranges from 800 to 5000 

hours/year 

6 

Annual Energy Use Baseline use* = 430 kWh Variability based on usage 6 

Energy Prices 

(Marginal) 

Electric Energy = 6.7 ¢/kWh Variability based on application 

owner types 8 

Repair and Maintenance 

Costs No cost increase with efficiency No cost increase with efficiency 8 

Lifetime 9 years 

Weibull distribution = 

7 to 11 years 8 

Discount Rate 5.89% Variability based on application 

owner types 8 

Energy Price Trend AEO 2008 Reference Case Two sensitivities: 

High & Low Growth Cases 8 

* Annual use provided for market baseline product only. Annual use decreases with increased product efficiency. 

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Table 8.2.2 Inputs for Life-Cycle Cost and Payback Period Analysis: Capacitor-Start 

Induction-Run Motors 

Input Average or Typical Value Characterization 

TSD Chapter 

Reference 

Total Installed Cost Inputs 

Baseline Manufacturer 

Selling Price 

62.3% = $96.96 (engineering) 

63.3% = $98.19 (market) 

Single-Point Value 

Engineering baseline cost adjusted 

to estimated market efficiency of 

63.3% 

8 

Manufacturer Selling 

Price Increase 

Using power law interpolation: 

70.9% = $11.59 

73.6% = $20.66 

75.4% = $29.45 

78.2% = $50.87 

81.8% = $278.88 

Price curve using power law 

interpolation to determine price 

increase relative to engineering 

baseline 

5 

Distribution and OEM 

Markups 

Baseline = 2.26 

Incremental = 1.63 Single-Point Value 7 

Sales Tax 1.0684 Single-Point Value 7 

Installation Cost $252.90 Single-Point Value 8 

Operating Cost Inputs 

Usage 2557 hours/year 

Variability determined from 

distribution of applications. Usage 

ranges from 800 to 5000 

hours/year 

6 

Annual Energy Use Baseline use* = 392 kWh Variability based on usage 6 

Energy Prices Electric Energy = 6.6 ¢/kWh Variability based on application 

owner types 8 

Repair and Maintenance 

Costs No cost increase with efficiency No cost increase with efficiency 8 

Lifetime 7 years 

Uniform distribution = 

5 to 9 years 8 

Discount Rate 5.89% Variability based on application 

owner types 8 

Energy Price Trend AEO 2008 Reference Case Two sensitivities: 

High & Low Growth Cases 8 

* Annual use provided for market baseline product only. Annual use decreases with increased product efficiency. 

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Table 8.2.3 Inputs for Life-Cycle Cost and Payback Period Analysis: Capacitor-Start 

Capacitor-Run Motors 

Input Average or Typical Value Characterization 

TSD Chapter 

Reference 

Total Installed Cost Inputs 

Baseline Manufacturer 

Selling Price 

68.6% = $116.17 (engineering) 

67.9% = $115.51 (market) 

Single-Point Value 

Engineering baseline cost adjusted 

to estimated market efficiency of 

67.9% 

8 

Manufacturer Selling 

Price Increase 

Using power law interpolation: 

80.2% = $16.55 

82.1% = $26.60 

83.3% = $38.02 

85.2% = $71.21 

87.6% = $498.48 

Price curve using power law 

interpolation to determine price 

increase relative to engineering 

baseline 

5 

Distribution and OEM 

Markups 

Baseline = 2.26 

Incremental = 1.63 Single-Point Value 7 

Sales Tax 1.0684 Single-Point Value 7 

Installation Cost $252.90 Single-Point Value 8 

Operating Cost Inputs 

Usage 2557 hours/year 

Variability determined from 

distribution of applications. Usage 

ranges from 800 to 5000 

hours/year 

6 

Annual Energy Use Baseline use* = 480 kWh Variability based on usage 6 

Energy Prices Electricity = 6.6 ¢/kWh Variability based on application 

owner types 8 

Repair and Maintenance 

Costs No cost increase with efficiency No cost increase with efficiency 8 

Lifetime 7 years 

Uniform distribution = 

5 to 9 years 8 

Discount Rate 5.89% Variability based on application 

owner types 8 

Energy Price Trend AEO 2008 Reference Case Two sensitivities: 

High & Low Growth Cases 8 

* Annual use provided for market baseline product only. Annual use decreases with increased product efficiency. 

8.2.2 Total Installed Cost Inputs 

DOE defines the total installed cost, IC, using the following equation: 

IC = EQP + INST 

Where: 

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EQP = equipment price (i.e., customer price for the equipment only), expressed in 

dollars, and 

INST = installation cost or the customer price to install equipment (i.e., the cost for 

labor and materials), also in dollars. 

The equipment price is based on how the consumer purchases the equipment. As 

discussed in Chapter 7, Markups for Equipment Price Determination, DOE defined markups and 

sales taxes for converting manufacturing selling prices into consumer equipment prices. 

Table 8.2.4 summarizes the inputs for the determination of total installed cost. 

Table 8.2.4 Inputs for Total Installed Cost 

Baseline Manufacturer Selling Price 

Manufacturer Selling Price Increase 

Markups and Sales Tax 

Installation Cost 

The baseline manufacturer selling price is the price charged by the manufacturer to 

produce equipment for the current market. Manufacturer selling price increase is the change in 

manufacturer price associated with producing equipment at a standard level. Markups and sales 

tax convert the manufacturer selling price to a consumer equipment price. The installation cost is 

the cost to the consumer of installing the equipment and represents all costs required to install the 

equipment other than the marked-up consumer equipment price. The installation cost includes 

labor, overhead, and any miscellaneous materials and parts. Thus, the total installed cost equals 

the consumer equipment price plus the installation cost. DOE calculated the total installed cost 

for baseline products based on the following equation: 

ICBASE = EQPBASE + INSTBASE 

= MSPMFG × MUOVERALL _ BASE + INSTBASE 

Where: 

ICBASE = baseline total installed cost, 

EQPBASE = consumer equipment price for baseline models, 

INSTBASE = baseline installation cost, 

MSPMFG = manufacturer selling price for baseline models, and 

MUOVERALL_BASE = baseline overall markup (product of manufacturer markup, baseline 

retailer or distributor markup, and sales tax). 

DOE calculated the total installed cost for standard-level products based on the following 

equation: 

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EERE-2007-BT-STD-0007 COMMENT 07.2
ICSTD = EQPSTD + INSTSTD 

(EQPBASE + ∆EQPSTD ) (INSTBASE + ∆INSTSTD = + )

= (EQP + ∆ ) BASE + INSTBASE ) ( EQPSTD + ∆INSTSTD 

= ICBASE + (∆MSPMFG × MUOVERALL _ INCR + ∆INSTSTD )

Where: 

ICSTD = standard-level total installed cost, 

EQPSTD = consumer equipment price for standard-level models, 

INSTSTD = standard-level installation cost, 

EQPBASE = consumer equipment price for baseline models, 

∆EQPSTD = change in equipment price for standard-level models, 

INSTBASE = baseline installation cost, 

∆INSTSTD = change in installation cost for standard-level models, 

ICBASE = baseline total installed cost, 

∆MSPMFG = change in manufacturer selling price for standard-level models, and 

MUOVERALL_INCR = incremental overall markup (product of manufacturer markup, 

incremental retailer or distributor markup, and sales tax). 

The remainder of this section provides information about each of the above input 

variables that DOE used to calculate the total installed cost for small electric motors. 

8.2.2.1 Baseline Manufacturer Selling Price 

The engineering analysis provides a baseline manufacturer selling price (MSP) that 

includes all manufacturer markups (see TSD chapter 5). While the engineering analysis provided 

an MSP for a particular baseline model at a particular efficiency, the average efficiency of 

models in the market is slightly different. Table 8.2.5 presents the baseline MSP and the 

associated energy efficiency for each equipment class for the baseline models analyzed in the 

engineering analysis. 

Table 8.2.5 Engineering Baseline Manufacturer Selling Price 

Product Class Baseline Efficiency (%) Baseline MSP (2007$) 

Polyphase (1 HP) 75.8 $93.46 

CSIR (0.5 HP) 62.3 $96.96 

CSCR (0.75 HP) 68.6 $116.17 

8.2.2.2 Manufacturer Selling Price Increases for Higher-Efficiency Products 

DOE determined the MSP increases associated with increases in energy efficiency levels 

for small electric motors in the engineering analysis (see TSD chapter 5). Tables 8.2.6 through 

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8.2.8 present the MSP increases along with the associated energy factors for each equipment 

class. 

Table 8.2.6 Polyphase Motors: Manufacturer Selling Price Increases, 1 Horsepower 

Energy Efficiency 

Level 

Efficiency 

(%) 

Standard-Level 

MSP Increase (2007$) 

Engineering Baseline 75.8 -

Market Baseline 76.4 $1.18 

1 84.0 $23.70 

2 85.5 $38.09 

3 86.5 $103.74 

4 88.0 $288.87 

5 90.0 $1,224.52 

Table 8.2.7 Capacitor-Start Induction-Run Motors: Manufacturer Selling Price 

Increases, 0.5 Horsepower 

Energy Efficiency 

Level 

Efficiency 

(%) 

Standard-Level 

MSP Increase (2007$) 

Engineering Baseline 62.3 -

Market Baseline 63.3 $1.23 

1 70.9 $11.59 

2 73.6 $20.66 

3 75.4 $29.45 

4 78.2 $50.87 

5 81.8 $278.88 

Table 8.2.8 Capacitor-Start Capacitor-Run Motors: Manufacturer Selling Price 

Increases, 0.75 Horsepower 

Energy Efficiency 

Level 

Efficiency 

(%) 

Standard-Level 

MSP Increase (2007$) 

Engineering Baseline 68.6 -

Market Baseline 67.9 -$0.66 

1 80.2 $16.55 

2 82.1 $26.60 

3 83.3 $38.02 

4 85.2 $71.21 

5 87.6 $498.48 

Table 8.2.9 shows the baseline and incremental markups estimated for each point in the 

small motor supply chain. The overall baseline and incremental markups shown are weighted 

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averages based on the share of shipments in each distribution channel. Refer to markups for 

equipment price determination (see TSD chapter 7), for details. 

Table 8.2.9 Markups for Small Electric Motors 

Point in Supply Chain Baseline Incremental 

Wholesale 1.17 1.06 

OEM 1.24 1.19 

Retail and Post-OEM 1.43 1.18 

Contractor/Installer 1.10 1.10 

Sales Tax 1.0684 

Overall* 2.42 1.75 

* Weighted average of the three distribution channels. 

DOE derived installation costs for small electric motors from data in the RS Means 

Electrical Cost Data, 2008.

1

 The average cost estimated by DOE is $253. Since DOE found no 

information to indicate differences in installation costs among motor applications, it used the 

same installation cost for each equipment class. While DOE did find evidence of increasing 

installation costs with increasing motor size for medium motors in the RS Means data, DOE 

found no evidence that installation costs would be impacted with increased motor energy 

efficiency levels for small electric motors. 

Total Installed Cost: The total installed cost is the sum of the end user equipment price 

and the installation cost. Refer back to section 8.2.1 to see the equations that DOE used to 

calculate the total installed cost for various energy efficiency levels. Table 8.2.10 presents the 

end user equipment price, installation costs, and total installed costs for each small motor 

equipment class. 

Table 8.2.10 Polyphase Motors: Consumer Equipment Prices, Installation Costs, and 

Total Installed Costs 

Energy Efficiency 

Level 

Efficiency 

(%) 

Equipment Price 

(2007$) 

Installation Cost 

(2007$) 

Total Installed Cost 

(2007$) 

Baseline 75.8 $219.35 $252.90 $472.25 

1 84.0 $259.57 $252.90 $512.47 

2 85.5 $283.99 $252.90 $536.89 

3 86.5 $395.40 $252.90 $648.30 

4 88.0 $709.59 $252.90 $962.49 

5 90.0 $2297.45 $252.90 $2550.35 

8-13 

EERE-2007-BT-STD-0007 COMMENT 07.2
Table 8.2.11 Capacitor-Start Induction-Run Motors (48 Frame): Consumer 

Equipment Prices, Installation Costs, and Total Installed Costs 

Energy Efficiency 

Level 

Efficiency 

(%) 

Equipment Price 

(2007$) 

Installation Cost 

(2007$) 

Total Installed Cost 

(2007$) 

Baseline 62.3 $227.56 $252.90 $480.46 

1 70.9 $247.24 $252.90 $500.14 

2 73.6 $262.63 $252.90 $515.53 

3 75.4 $277.54 $252.90 $530.44 

4 78.2 $313.90 $252.90 $566.80 

5 81.8 $700.84 $252.90 $953.74 

Table 8.2.12 Capacitor-Start Capacitor-Run Motors: Consumer Equipment Prices, 

Installation Costs, and Total Installed Costs 

Energy Efficiency 

Level 

Efficiency 

(%) 

Equipment Price 

(2007$) 

Installation Cost 

(2007$) 

Total Installed Cost 

(2007$) 

Baseline 68.6 $272.65 $252.90 $525.55 

1 80.2 $300.73 $252.90 $553.63 

2 82.1 $317.80 $252.90 $570.70 

3 83.3 $337.17 $252.90 $590.07 

4 85.2 $393.50 $252.90 $646.40 

5 87.6 $1118.60 $252.90 $1371.50 

8.2.3 Operating Cost Inputs 

DOE defines the operating cost, OC, by the following equation: 

OC = EC + RC + MC 

Where: 

EC = energy expenditure associated with operating the equipment, 

RC = repair cost associated with component failure, and 

MC = cost for maintaining equipment operation. 

Table 8.2.45 shows the inputs for determining the operating costs. The inputs listed in 

Table 8.2.45 are also necessary for determining lifetime operating expenses, which include the 

energy price trends, product lifetime, discount rate, and effective date of the standard. 

8-14 

EERE-2007-BT-STD-0007 COMMENT 07.2
Table 8.2.13 Inputs for Operating Cost 

Annual Energy Consumption 

Energy Prices 

Repair and Maintenance Costs 

Energy Price Trends 

Product Lifetime 

Discount Rate 

Effective Date of Standard 

The annual energy consumption is the site energy use associated with operating the 

equipment. The energy consumption associated with standard-level equipment (i.e., equipment 

with efficiencies greater than baseline equipment) is generally less than the consumption 

associated with baseline equipment. Energy prices are the prices paid by end users for energy 

supply including both energy and demand charges. Multiplying the annual energy and demand 

by the appropriate prices yields the annual energy cost. Repair costs are associated with repairing 

or replacing components that have failed, and maintenance costs are associated with maintaining 

the operation of the equipment. DOE used energy price trends to forecast energy supply prices 

into the future and, along with the product lifetime and discount rate, to establish the lifetime 

energy supply costs. The product lifetime is the age at which the equipment is retired from 

service. The discount rate is the rate at which DOE discounted future expenditures to establish 

their present value. DOE calculated the operating cost for baseline products based on the 

following equation: 

OCBASE = ECBASE + RCBASE + MCBASE 

= AECBASE × PRICEENERGY + RCBASE + MCBASE 

Where: 

OCBASE = baseline operating cost, 

ECBASE = energy expenditure associated with operating the baseline equipment, 

RCBASE = repair cost associated with component failure for the baseline 

equipment, 

MCBASE = cost for maintaining baseline equipment operation, 

AECBASE = annual energy consumption for baseline equipment, 

PRICEENERGY = energy price. 

DOE calculated the operating cost for standard-level products based on the following 

equation: 

8-15 

EERE-2007-BT-STD-0007 COMMENT 07.2
OCSTD = ECSTD + RCSTD + MCSTD 

= AECSTD × PRICEENERGY + RCSTD + MCSTD 

= (AECBASE ∆AECSTD )× PRICEENERGY + RCBASE + ∆RCSTD ) (MCBASE STD ) __ ( + + ∆MC 

Where: 

OCSTD = standard-level operating cost, 

ECSTD = energy expenditure associated with operating standard-level equipment, 

RCSTD = repair cost associated with component failure for standard-level 

equipment, 

MCSTD = cost for maintaining standard-level equipment operation, 

AECSTD = annual energy consumption for standard-level equipment, 

PRICEENERGY = energy price, 

∆AECSTD = decrease in annual energy consumption caused by standard-level 

equipment, 

∆RCSTD = change in repair cost caused by standard-level equipment, and 

∆MCSTD = change in maintenance cost caused by standard-level equipment. 

The remainder of this section provides information about each of the above input 

variables that DOE used to calculate the operating costs for small electric motors. 

8.2.3.1 Annual Energy Consumption 

Chapter 6, Energy Use Determination, details how DOE determined the annual energy 

consumption for baseline and standard-level products. Table 8.2.14 provides the average annual 

energy consumption by efficiency level for each small motor equipment class. DOE captured the 

variability in energy consumption by estimating energy consumption for a variety of motor-using 

applications. 

Table 8.2.14 Average Annual Electricity Use by Efficiency Level for Small Electric 

Motors 

Polyphase (1 Horsepower) CSIR (0.5 Horsepower) CSCR (0.75 Horsepower) 

Efficiency kWh Efficiency kWh Efficiency kWh 

76.4% 430 63.3% 392 67.9% 480 

84.0% 265 70.9% 278 80.2% 250 

85.5% 236 73.6% 243 82.1% 222 

86.5% 217 75.4% 220 83.3% 203 

88.0% 190 78.2% 189 85.2% 177 

90.0% 154 81.8% 151 87.6% 143 

8-16 

EERE-2007-BT-STD-0007 COMMENT 07.2
8.2.3.2 Energy Prices 

To estimate the energy prices faced by motor end users throughout the U.S., DOE 

estimated electricity prices for end users in each sector using EIA Form 861 data.2 These data 

are published annually and include annual electricity sales in kilowatt-hours (kWh), revenues 

from electricity sales, and number of consumers, for the residential, commercial, and industrial 

sectors, for every utility serving final consumers. 

0.0 

0.2 

0.4 

0.6 

0.8 

1.0 

$0.00 $0.05 $0.10 $0.15 $0.20 $0.25 

Electricity Price (2006 $/kWh) 

Cumulative Probability 

Industrial 

Commercial 

Residential 

Figure 8.2.1 Electricity Price Distributions 

DOE sorted the volumes of electricity sold as reported by the year 2006 EIA Form 861 

by price and customer class and calculated the distribution of electricity prices for each customer 

class. DOE used these electricity price distributions to represent the customer cost of electricity 

for the different classes of motor owners. DOE assigned the electricity price distribution for 

industrial customers to the class of agricultural motor owners. The resulting electricity price 

distributions are shown in Figure 8.2.1. 

8.2.3.3 Energy Price Trends 

DOE used price forecasts by the EIA to estimate the trends in electricity prices. To arrive 

at prices in future years, it multiplied the average prices described in the preceding section by the 

forecast of annual average price changes in EIA’s AEO 2008.

9

 To estimate the trend after 2030, 

DOE followed past guidelines provided to the Federal Energy Management Program by EIA and 

used the average rate of change during 2020–2030 for electricity prices. 

DOE calculated LCC and PBP using three separate projections from AEO 2008: 

Reference, Low Economic Growth, and High Economic Growth. These three cases reflect the 

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EERE-2007-BT-STD-0007 COMMENT 07.2
uncertainty of economic growth in the forecast period. The high and low growth cases show the 

projected effects of alternative growth assumptions on energy markets. Figure 8.2.2 shows the 

residential and commercial electricity price trends based on the three AEO 2008 projections. For 

the LCC results presented in section 8.4, DOE used only the energy price forecasts from the 

AEO reference case. 

0.88 

0.90 

0.92 

0.94 

0.96 

0.98 

1.00 

1.02 

1.04 

1.06 

1.08 

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 

Price Trend (2005=1) 

High Growth - Res 

High Growth - Comm 

Reference - Res 

Reference - Comm 

Low Growth - Res 

Low Growth - Comm 

Year 

Figure 8.2.2 Electricity Price Trends 

8.2.3.4 Repair and Maintenance Costs 

DOE understands that small electric motors are usually not repaired. Most small motors 

are mass produced and are not constructed or designed to be repaired because the manufacturing 

process uses spot welding welds and rivets to fasten or secure the frame and assembled 

components, not nuts and bolts. DOE found no evidence that any repair or maintenance costs 

would increase with higher motor energy efficiency. Thus, it did not include any changes in 

repair and maintenance costs for motors more efficient than baseline products. 

8.2.4 Motor Lifetime 

For this preliminary analysis DOE used the information regarding the lifetime of small 

motors from the determination analysis. Motor-industry experts, consulted by DOE during the 

determination analysis, suggested that the average life for two-digit motors is at most 10 years, 

depending on the usage and physical environment. A complicating factor is that, in some cases, 

the potential lifetime of the motor may be longer than that of the equipment, so the actual motor 

lifetime is limited by the lifetime of the equipment. Similarly, replacement motors, which 

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EERE-2007-BT-STD-0007 COMMENT 07.2
account for about one-third of the market for the considered motors, may have a shorter average 

lifetime than motors installed in original equipment. 

In the determination analysis, the National Electrical Manufacturers Association/Motor 

and Motion Association Small-Motor-Efficiency Task Force agreed with an estimated average 

life of 5 to 10 years for fractional horsepower motors, with the average being closer to 10 years 

for polyphase motors and closer to 5 years for single-phase motors. Based on the available motor 

lifetime information, DOE elected to use a mean lifetime of seven years for capacitor-start 

motors and nine years for polyphase motors. DOE then characterized the product lifetime with a 

Weibull probability distribution that ranged from the minimum to maximum lifetime estimates 

shown in Table 8.2.15. 

Table 8.2.15 Motor Lifetimes Used in the Life-Cycle Cost Analysis 

Equipment Class Minimum 

years 

Average 

years 

Maximum 

years 

Polyphase 7 9 11 

CSIR and CSCR 5 7 9 

DOE understands that life expectancy does not change dramatically with a premium 

efficient product as compared to standard product. Therefore, it used the same lifetime range for 

all energy efficiency levels. 

8.2.5 Discount Rates 

DOE derived the discount rates for the LCC and PBP analysis from estimates of the 

finance cost of purchasing the considered products. Following financial theory, the finance cost 

of raising funds to purchase appliances can be interpreted as: (1) the financial cost of any debt 

incurred to purchase equipment, or (2) the opportunity cost of any equity used to purchase 

equipment. For public companies, the value of ownership shares is the equity capital of the 

company, while for households the value of savings and investments is the equity capital of the 

household. 

8.2.5.1 Commercial, Industrial, and Agricultural Owners 

For motors purchased and used in the industrial, agricultural, and commercial sectors, 

DOE calculated the discount rate for a distribution of representative product owners. This 

distribution of representative owners is the weighted sum of discount rate distributions for 

different ownership categories. Within each ownership category, DOE calculated a distribution 

of discount rates for owners within that category. The discount rate for an individual owner is the 

weighted average cost of capital (WACC) where, given the mix of debt and equity for that 

individual owner, a weighted average of the discount rates for each loan and investment 

calculated in which the weights are equal to the size of the loan or investment. 

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EERE-2007-BT-STD-0007 COMMENT 07.2
DOE estimated the cost of equity using the capital asset pricing model (CAPM).3 The 

CAPM assumes that the cost of equity (ke) for a particular company is proportional to the 

systematic risk faced by that company, where high risk is associated with a high cost of equity 

and low risk is associated with a low cost of equity. The systematic risk facing a firm is 

determined by several variables: the risk coefficient of the firm (β), the expected return on riskfree assets (Rf), and the equity risk premium (ERP). The risk coefficient of the firm indicates the 

risk associated with that firm relative to the price variability in the stock market. The expected 

return on risk-free assets is defined by the yield on long-term government bonds. The ERP 

represents the difference between the expected stock market return and the risk-free rate. The 

cost of equity financing is estimated using the following equation, where the variables are 

defined as above: 

ke = Rf + (β× ERP) 

Where: 

ke = cost of equity, 

Rf = expected return on risk-free assets, 

β = risk coefficient of the firm, and 

ERP = equity risk premium. 

The cost of debt financing (kd) is the interest rate paid on money borrowed by a company. 

The cost of debt is estimated by adding a risk adjustment factor (Ra) to the risk-free rate. This 

risk adjustment factor depends on the variability of stock returns represented by standard 

deviations in stock prices. So for firm i, the cost of debt financing is: 

kdi = Rf + Rai 

Where: 

kd = cost of debt financing for firm, i, 

Rf = expected return on risk-free assets, and 

Rai = risk adjustment factor to risk-free rate for firm, i. 

DOE estimates the WACC using the following equation: 

WACC = ke × we + kd × wd 

Where: 

WACC = weighted average cost of capital, 

we = proportion of equity financing, and 

wd = proportion of debt financing. 

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EERE-2007-BT-STD-0007 COMMENT 07.2
Damodaran Online is a widely used source of information about company debt and 

equity financing for most types of firms.4 

Several parameters of the cost of capital equations can vary substantially over time, and 

therefore the estimates can vary with the time period over which data is selected and the 

technical details of the data averaging method. For guidance on the time period for selecting and 

averaging data for key parameters and the averaging method, DOE used Federal Reserve 

methodologies for calculating these parameters. In its use of the CAPM, the Federal Reserve 

uses a forty year period for calculating discount rate averages, utilizes the gross domestic product 

price deflator for estimating inflation, and considers the best method for determining the risk free 

rate as one where “the time horizon of the investor is matched with the term of the risk-free 

security.” 5 

In this preliminary analysis, DOE adjusted the discount rate distributions from a previous 

rulemaking on distribution transformer standards with updated values of the equity risk 

premium, inflation, and the risk free rate using the 10-year Treasury bond as the risk free 

security. By taking an updated forty year (1967–2007) geometric average of Damodaran Online 

data, DOE found for this analysis a real (inflation-adjusted) risk free rate of 3.15 percent and an 

equity risk premium of 3.50 percent. The values for the previous analysis were 3.20 percent and 

5.50 percent respectively. Table 8.2.16 shows the conversion from previous set of parameters to 

the new values and the new discount rate distribution assuming no change in the corresponding 

company weighted-average cost of capital betas. DOE used the CAPM equation to derive a 

relationship between beta and the discount rate that was used to convert discount rates to the 

values that correspond to the new values of risk free rate and ERP. DOE obtained following 

equation for beta by solving the CAPM equation: 

β = (ke − Rf ) / ERP 

Where: 

ke = cost of equity, 

Rf = expected return on risk-free assets, 

β = risk coefficient of the firm, and 

ERP = equity risk premium. 

For the notice of proposed rulemaking (NOPR), DOE will perform a full update of the 

WACC calculation. 

Table 8.2.17 shows the average WACC values for the three non-residential ownership 

types in the small electric motors analysis. While discount rates for any sector may trend higher 

or lower over substantial periods of time, these values represent a private sector cost of capital 

that is averaged over major business cycles. For all sectors, the averages are slightly lower than 6 

percent real. 

8-21 

EERE-2007-BT-STD-0007 COMMENT 07.2
Table 8.2.16 Adjusted Real Discount Rates for Updated Values of Rf and ERP. 

Previous 

Discount Rate 

(%) 

CAPM Beta 

Value 

Updated 

Discount Rate 

(%) 

Industrial 

Discount Rate 

Distribution 

(%) 

Commercial 

Discount Rate 

Distribution 

(%) 

0.5 -0.491 1.43 0.0 0.0 

1.5 -0.309 2.07 0.0 0.0 

2.5 -0.127 2.70 0.5 3.1 

3.5 0.055 3.34 1.3 1.2 

4.5 0.236 3.98 4.2 2.1 

5.5 0.418 4.61 14.6 9.8 

6.5 0.600 5.25 24.7 22.4 

7.5 0.782 5.89 24.9 23.9 

8.5 0.964 6.52 6.6 23.2 

9.5 1.145 7.16 6.5 6.6 

10.5 1.327 7.80 8.6 4.0 

11.5 1.509 8.43 6.8 2.3 

12.5 1.691 9.07 0.9 0.5 

13.5 1.873 9.70 0.2 0.1 

14.5 2.055 10.34 0.1 0.7 

15.5 2.236 10.98 0.0 0.0 

16.5 2.418 11.61 0.0 0.0 

Table 8.2.17 Weighted Average Cost of Capital for Sectors that Purchase Small Electric 

Motors 

Sector Weighted-Average Cost of Capital 

Industrial 5.92% 

Agricultural 5.92% 

Commercial 5.86% 

8.2.5.2 Residential Owners 

Households use a variety of methods to finance equipment. In principle, one could 

estimate the interest rates on the actual financing vehicles used to purchase replacement 

equipment. The shares of different financing vehicles in total equipment purchases are unknown, 

however. 

8-22 

EERE-2007-BT-STD-0007 COMMENT 07.2
DOE’s approach involves identifying all possible debt or asset classes that might be used 

to purchase equipment, including household assets that might be affected indirectly.a DOE did 

not include debt from primary mortgages and equity of assets considered non-liquid (such as 

retirement accounts), since these would likely not be affected by equipment purchases. DOE 

estimated the average shares of the various debt and equity classes in the average U.S. household 

equity and debt portfolios using Survey of Consumer Finances (SCF) data for 1989, 1992, 1995, 

1998, 2001, and 2004. Table 8.2.18 shows the average shares of each considered class. DOE 

used the mean share of each class across the six years as a basis for estimating the effective 

financing of equipment. 

Table 8.2.18 Average Shares of Considered Household Debt and Equity Types 

Type 1989 

SCF 

1992 

SCF 

1995 

SCF 

1998 

SCF 

2001 

SCF 

2004 

SCF 

Mean 

(%) 

Home equity loans 4.3 4.5 2.7 2.8 2.8 4.4 3.6 

Credit cards 1.6 2.1 2.6 2.2 1.7 2.0 2.0 

Other installment loans 2.8 1.7 1.4 1.7 1.1 1.3 1.7 

Other residential loans 4.4 6.9 5.2 4.3 3.1 5.8 4.9 

Other line of credit 1.1 0.6 0.4 0.2 0.3 0.5 0.5 

Checking accounts 5.8 4.7 4.9 3.9 3.6 4.2 4.5 

Savings & money market 19.2 18.8 14.0 12.8 14.2 15.1 15.7 

Certificate of deposit (CD) 14.5 11.7 9.4 7.0 5.4 5.9 9.0 

Savings bond 2.2 1.7 2.2 1.1 1.2 0.9 1.5 

Bonds 13.8 12.3 10.5 7.0 7.9 8.4 10.0 

Stocks 22.4 24.0 25.9 36.9 37.5 28.0 29.1 

Mutual funds 8.0 11.1 20.9 20.1 21.3 23.4 17.5 

Total 100 100 100 100 100 100 100 

DOE estimated interest or return rates associated with each type of equity and debt. The 

data source for the interest rates for loans, credit cards, and lines of credit is the Federal Reserve 

Board’s SCF in 1989, 1992, 1995, 1998, 2001, and 2004. Table 8.2.19 shows the average 

nominal rates in each year, and the inflation rates used to calculate real rates. For home equity 

loans, DOE calculated effective interest rates in a similar manner as for mortgage rates, since 

interest on such loans is tax deductible. Table 8.2.20 shows the average effective real rates in 

each year and the mean rate across the years. Since the interest rates for each debt carried by 

households in these years were established over a range of time, DOE believes they are 

representative of rates that may be in effect in 2015. 

a An indirect effect would arise if a household sold some assets in order to pay off a loan or credit card debt that 

might have been used to finance the actual appliance purchase. 

8-23 

EERE-2007-BT-STD-0007 COMMENT 07.2
Table 8.2.19 Average Nominal Interest Rates for Household Debt Classes (percent) 

Type 1989 

SCF 

1992 

SCF 

1995 

SCF 

1998 

SCF 

2001 

SCF 

2004 

SCF 

Mean 

(%) 

Home equity loans 11.5 9.6 9.6 9.8 8.7 5.7 9.2 

Credit cards* - - 14.2 14.5 14.2 11.7 13.6 

Other installment loans 9.0 7.8 9.3 7.8 8.7 7.4 8.3 

Other residential loans 8.8 7.6 7.7 7.7 7.5 6.0 7.5 

Other line of credit 14.8 12.7 12.4 11.9 14.7 8.8 12.5 

Inflation rate 4.82 3.01 2.83 1.56 2.85 2.66 

* No interest rate data available for credit cards in 1989 or 1992. 

Table 8.2.20 Average Real Effective Interest Rates for Household Debt Classes (percent) 

Type 1989 

SCF 

1992 

SCF 

1995 

SCF 

1998 

SCF 

2001 

SCF 

2004 

SCF 

Mean 

(%) 

Home equity loans 3.8 4.3 4.4 5.8 3.8 1.9 4.0 

Credit cards* - - 11.0 12.7 11.1 9.1 11.0 

Other installment loans 4.9 5.8 7.0 6.6 6.1 5.4 6.0 

Other residential loans 4.0 4.7 4.8 6.0 4.6 3.3 4.6 

Other line of credit 9.6 9.4 9.3 10.2 7.3 6.0 8.7 

* No interest rate data available for credit cards in 1989 or 1992. 

To account for variation among new households, DOE sampled a rate for each household 

from a distribution of rates for each of the above debt classes. DOE developed a probability 

distribution of interest rates for each debt class based on the SCF data. 

Similar rate data are not available from the SCF for the asset classes, so DOE derived 

data for these classes from national-level historical data. The interest rates associated with 

certificates of deposit (CDs), 6 savings bonds,7

 and bonds (AAA corporate bonds) 8 are from 

Federal Reserve Board time-series data covering 1977–2005. DOE assumed rates on checking 

accounts to be zero. Rates on savings and money market accounts are from Cost of Savings 

Index data covering 1984–2005. 9 The rates for stocks are the annual returns on the Standard and 

Poor’s (S&P) 500 in the 1977–2005 period. 10 The mutual fund rates are a weighted average of 

the stock rates (two-thirds weight) and the bond rates (one-third weight) in each year of the 

1977–2005 period. DOE adjusted the nominal rates to real rates using the annual inflation rate in 

each year. Average nominal and real interest rates for the classes of assets are shown in Table 

8.2.21. Since the interest and return rates for each asset type cover a range of time, DOE believes 

they are representative of rates that may be in effect in 2015. 

8-24 

EERE-2007-BT-STD-0007 COMMENT 07.2
Table 8.2.21 Average Nominal and Real Interest Rates for Household Equity Types 

Type Average Nominal Rate (%) Average Real Rate (%) 

Checking accounts - 0.0 

Savings and money market 5.5 2.3 

CDs 6.9 2.4 

Savings bonds 8.0 3.5 

Bonds 8.8 4.2 

Stocks 13.3 8.8 

Mutual funds 11.6 7.0 

To account for variation among new households, DOE sampled a rate for each household 

from a distribution of rates for each of the above asset types. DOE developed a normal 

probability distribution of interest rates for each asset type by using the mean value and standard 

deviation from the distribution. 

Table 8.2.22 summarizes the mean real effective rates of each type of equity or debt. 

DOE determined the average share of each debt and asset using SCF data for 1989, 1992, 1995, 

1998, 2001, and 2004. Each year of SCF data provides the debt and asset shares for U.S. 

households. DOE averaged the debt and asset shares over the six years of survey data to arrive at 

the shares shown below. The average rate across all types of household debt and equity, 

weighted by the shares of each class, is 5.6 percent. 

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EERE-2007-BT-STD-0007 COMMENT 07.2
Table 8.2.22 Shares and Interest or Return Rates Used for Household Debt and Equity 

Types 

Type Average Share of Household 

Debt plus Equity (%)* 

Mean Effective Real 

Rate (%)** 

Home equity loans 3.6 4.0 

Credit cards 2.0 11.0 

Other installment loans 1.7 6.0 

Other residential loans 4.9 4.6 

Other line of credit 0.5 8.7 

Checking accounts 4.5 0.0 

Savings and money market accounts 15.7 2.3 

CDs 9.0 2.4 

Savings bonds 1.5 3.5 

Bonds 10.0 4.2 

Stocks 29.1 8.8 

Mutual funds 17.5 7.0 

Total/Weighted-average discount rate 100 5.6 

* Not including primary mortgage or retirement accounts.

** Adjusted for inflation and, for home equity loans, loan interest tax deduction.

8.2.6 Effective Date of Standard 

The effective date of an energy conservation standard is the future date when a new 

standard becomes operative. Section 346(b)(3) of the Energy Policy and Conservation Act 

(EPCA) requires that any standard for small electric motors "shall apply to small electric motors 

manufactured 60 months after the date such rule is published." (42 USC 6317(b)(3)) In view of 

the Report to Congress on Appliance Energy Efficiency Rulemakings, dated February 2008, 

DOE is required to publish an energy conservation standard final rule by February 28, 2010. 

(See http://www1.eere.energy.gov/buildings/appliance_standards/schedule_setting.html.) 

Therefore, the effective date of any new energy conservation standards for small electric motors 

would be in February 2015. Moreover, DOE calculated the LCC for all end users as if they each 

would purchase a new piece of equipment in the year the standard takes effect. 

8.2.7 Product Energy Efficiency in the Base Case 

For purposes of conducting the LCC analysis, DOE analyzed standard levels relative to a 

base case (i.e., the case without new energy efficiency standards). This requires an estimate of 

the distribution of product efficiencies in the base case (i.e., what consumers would have 

purchased in the year 2015 in the absence of new standards). In other rulemakings, DOE often 

uses the distribution of product efficiencies currently in the marketplace to develop its estimate 

8-26 

EERE-2007-BT-STD-0007 COMMENT 07.2
of such distribution in the base case. DOE did find some models offered in the manufacturer 

catalogues that were low first cost and then had matching higher efficiency units. These so-called 

'matched pairs' would seem to indicate that there is some voluntary purchasing of higher 

efficiency motors. However, DOE did not have any data on what proportion this would be. DOE 

assumed that all motors purchased in the base case would be at the baseline efficiency levels, as 

shown in Table 8.2.23. 

Table 8.2.23 Product Energy Efficiency in the Base Case 

Product Class Efficiency 

Polyphase 75.8 

CSIR 62.3 

CSCR 68.6 

8.3 PAYBACK PERIOD INPUTS 

The payback period is the amount of time it takes the consumer to recover the assumed 

higher purchase expense of more energy-efficient equipment as a result of lower operating costs. 

Numerically, the PBP is the ratio of the increase in purchase expense (i.e., from a less efficient 

design to a more efficient design) to the decrease in annual operating expenditures. This type of 

calculation is known as a “simple” payback period, because it does not take into account changes 

in operating expense over time or the time value of money; i.e., the calculation is done at an 

effective discount rate of zero percent. 

The equation for PBP is: 

∆IC PBP = ∆OC 

Where: 

∆IC = increase in the total installed cost between the more efficient standard level 

and the baseline design, and 

∆OC = decrease in annual operating expenses. 

Payback periods are expressed in years. Payback periods greater than the life of the 

product indicate that the increased total installed cost is not recovered in reduced operating 

expenses. 

The data inputs to PBP are the total installed cost of the equipment to the consumer for 

each efficiency level and the annual (first year) operating expenditures for each standard level. 

The inputs to the total installed cost are the equipment price and the installation cost. The inputs 

to the operating costs are the annual energy cost, the annual repair cost, and the annual 

maintenance cost. The PBP uses the same inputs as the LCC analysis as described in section 8.2, 

except that lifetime, energy price trends and discount rates are not required. Since the PBP is a 

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EERE-2007-BT-STD-0007 COMMENT 07.2
“simple” payback, the required energy price is only for the year in which a new standard is to 

take effect—in this case, the year 2015. The energy price DOE used in the PBP calculation was 

the price projected for that year. 

8.4 LIFE-CYCLE COST AND PAYBACK PERIOD RESULTS 

This section presents the LCC and PBP results for small motors. As discussed in section 

8.1.1, DOE’s approach for conducting the LCC analysis relied on developing samples of 

customers that use each of the products. DOE also characterized the uncertainty of many of the 

inputs to the analysis with probability distributions. DOE used a Monte Carlo simulation 

technique to perform the LCC calculations on the customers in the sample. For each set of 

sample customers using the equipment in each equipment class, DOE calculated the average 

LCC and LCC savings and the median and average PBP for each of the standard levels. 

In the subsections below, DOE presents figures showing the distribution of LCCs in the 

base case for each equipment class. Also presented below for a specific standard level are figures 

showing the distribution of LCC impacts and the distribution of PBPs. The figures are presented 

as frequency charts that show the distribution of LCCs, LCC impacts, and PBPs with their 

corresponding probability of occurrence. DOE generated the figures for the distributions from a 

Monte Carlo simulation run based on 10,000 samples. The LCC and PBP calculations were 

performed 10,000 times by sampling from the probability distributions that DOE developed to 

characterize many of the inputs. 

Based on the Monte Carlo simulations that DOE performed, for each standard-level, 

DOE calculated the share of small motor users with a net LCC benefit, with a net LCC cost, and 

with no impact. To illustrate the range of LCC and PBP impacts among the small motor end 

users, the sections below present figures that provide such information for each equipment class. 

8.4.1 Polyphase Motors 

Figure 8.4.1 is an example of a frequency chart showing the distribution of LCC 

differences for the case of efficiency level 2 for polyphase motors. In the figure, a text box next 

to a vertical line at that value on the x-axis shows the mean change in LCC (a savings of $29 in 

the example here). DOE can generate a frequency chart like the one shown in Figure 8.4.1 for 

every standard level. 

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EERE-2007-BT-STD-0007 COMMENT 07.2
0 

100 

200 

300 

400 

500 

-100 40 180 320 460 600 

Life-cycle Cost Savings ($) 

Frequency 

Mean = $29 

Figure 8.4.1 Polyphase Motors: Distribution of Life-Cycle Cost 

Impacts for Efficiency Level 2 

Figure 8.4.2 is an example of a frequency chart showing the distribution of payback 

periods of efficiency level 2 for polyphase motors. DOE can generate a frequency chart like the 

one shown in Figure 8.4.2 for every standard level. 

0 

100 

200 

300 

400 

500 

0 5 10 15 20 25 30 35 

Payback Period (years) 

Frequency 

Mean = 7 years 

Figure 8.4.2 Polyphase Motors: Distribution of Payback Periods 

for Efficiency Level 2 

Table 8.4.1 summarizes the LCC and PBP results for polyphase motors. The highest 

energy efficiency level with positive average LCC savings is level 2, 85.5 percent; 

approximately 66 percent of end users are estimated to have a net benefit (i.e., LCC decrease) at 

this level. The increase in average total installed cost at this level (relative to the base case) is 

$66, or 14 percent, while operating costs decrease by $14, or 45 percent. 

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EERE-2007-BT-STD-0007 COMMENT 07.2
Table 8.4.1 Polyphase Motors: Life-Cycle Cost and Payback Period Results 

Energy 

Efficiency Efficiency 

Life-Cycle Cost Life-Cycle Cost Savings Payback Period 

(years) 

Average Average 

Annual 

Consumers with 

Level Installed Median Average 

Price Operating 

Cost 

Average 

LCC 

Average 

Savings Net 

Cost 

Net 

Benefit 

Baseline 76.37% $482 $31 $692 

1 84.00% $523 $19 $653 $40 17.4% 82.6% 4.0 4.9 

2 85.50% $548 $17 $664 $29 33.9% 66.1% 5.5 6.6 

3 86.50% $663 $16 $769 -$77 89.3% 10.7% 13.6 16.5 

4 88.00% $986 $14 $1,079 -$386 99.7% 0.3% 33.5 40.7 

5 90.00% $2,619 $11 $2,695 -$2,002 100.0% 0.0% 124.4 150.6 

8.4.2 Capacitor-Start Induction-Run Motors 

Figure 8.4.3 is an example of a frequency chart showing the distribution of LCC 

differences for the case of efficiency level 3 for CSIR motors. DOE can generate a frequency 

chart like the one shown in Figure 8.4.3 for every efficiency level. 

0 

100 

200 

300 

400 

500 

-50 0 50 100 150 200 250 300 350 400 450 

Life-cycle Cost Savings ($) 

Frequency 

Mean = $18 

Figure 8.4.3 Capacitor-Start Induction-Run Motors: 

Distribution of Life-Cycle Cost Impacts for 

Efficiency Level 3 

Figure 8.4.4 is an example of a frequency chart showing the distribution of payback 

periods of efficiency level 3 for CSIR motors. DOE can generate a frequency chart like the one 

shown in Figure 8.4.4 for every efficiency level. 

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EERE-2007-BT-STD-0007 COMMENT 07.2
500 

400 

300 

200 

100 

0 

0 7 14 21 28 35 

Payback Period (years) 

Frequency 

Mean = 6 years 

Figure 8.4.4 Capacitor-Start Induction-Run Motors: 

Distribution of Payback Periods for Efficiency 

Level 3 

Table 8.4.2 summarizes the LCC and PBP results for CSIR motors. The highest energy 

efficiency level with positive average LCC savings is level 3, 75.4 percent; however, 

approximately 39 percent of end users are estimated to have a net cost (i.e., LCC increase) at this 

level. The increase in average total installed cost at this level (relative to the base case) is $52, or 

11 percent, while operating costs decrease by $12, or 43 percent. 

Table 8.4.2 Capacitor-Start Induction-Run Motors: Life-Cycle Cost and Payback Period 

Results 

Energy 

Efficiency 

Level 

Efficiency 

Life-Cycle Cost Life-Cycle Cost Savings Payback Period 

(years) 

Average 

Installed 

Price 

Average 

Annual 

Operating 

Cost 

Average 

LCC 

Average 

Savings 

Users with 

Net Median Average 

Cost 

Net 

Benefit 

Baseline 63.30% $490 $28 $648 

1 70.90% $510 $20 $622 $26 17.7% 82.3% 2.8 3.7 

2 73.60% $526 $17 $624 $24 27.8% 72.2% 3.8 5.0 

3 75.40% $542 $16 $630 $18 39.3% 60.7% 4.8 6.2 

4 78.20% $579 $14 $655 -$7 65.1% 34.9% 7.0 9.0 

5 81.80% $977 $11 $1,037 -$390 99.8% 0.2% 32.1 41.6 

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8.4.3 Capacitor-Start Capacitor-Run Motors 

Figure 8.4.5 is an example of a frequency chart showing the distribution of LCC 

differences for the case of efficiency level 3 for CSCR motors. DOE can generate a frequency 

chart like the one shown in Figure 8.4.5 for every efficiency level. 

0 

100 

200 

300 

400 

500 

-50 50 150 250 350 450 550 650 

Life-cycle Cost Savings ($) 

Frequency 

Mean = $45 

Figure 8.4.5 Capacitor-Start Capacitor-Run Motors: 

Distribution of Life-Cycle Cost Impacts for 

Efficiency Level 3 

Figure 8.4.6 is an example of a frequency chart showing the distribution of payback 

periods of efficiency level 3 for CSCR motors. DOE can generate a frequency chart like the one 

shown in Figure 8.4.6 for every efficiency level. 

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500 

400 

300 

200 

100 

0 

0 5 10 15 20 25 30 

Payback Period (years) 

Frequency 

Mean = 5 years 

Figure 8.4.6 Capacitor-Start Capacitor-Run Motors: 

Distribution of Payback Periods for Efficiency 

Level 3 

Table 8.4.3 summarizes the LCC and PBP results for CSCR motors. The highest energy 

efficiency level with positive average LCC savings is level 3, 83.3 percent; approximately 72 

percent of end users are estimated to have a net benefit at this level. The increase in average total 

installed cost at this level (relative to the base case) is $66, or 12 percent, while operating costs 

decrease by $19, or 56 percent. 

Table 8.4.3 Capacitor-Start Capacitor-Run Motors: Life-Cycle Cost and Payback Period 

Results 

Energy 

Efficiency 

Level 

Efficiency 

Life-Cycle Cost Life-Cycle Cost Savings Payback Period 

(years) 

Average 

Installed 

Price 

Average 

Annual 

Operating 

Cost 

Average 

LCC 

Average 

Savings 

Users with 

Net Median Average 

Cost 

Net 

Benefit 

Baseline 67.91% $532 $34 $724 

1 80.20% $561 $18 $661 $63 8.8% 91.2% 2.0 2.6 

2 82.10% $578 $16 $667 $57 18.0% 82.0% 2.9 3.7 

3 83.30% $598 $15 $680 $45 27.6% 72.4% 3.9 5.0 

4 85.20% $656 $13 $727 -$3 61.8% 38.3% 6.6 8.5 

5 87.60% $1,402 $10 $1,460 -$735 100.0% 0.0% 41.7 53.4 

8.5 REBUTTABLE PAYBACK PERIOD 

A more energy efficient motor will usually cost more to buy than a motor of standard 

energy efficiency. However, the more efficient motor will usually cost less to operate due to 

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EERE-2007-BT-STD-0007 COMMENT 07.2
reductions in operating costs (i.e., lower energy bills). The PBP is the time (usually expressed in 

years) it takes to recover the additional installed cost of the more efficient motor through energy 

cost savings. Section 325(o)(2)(B)(iii) of EPCA (42 U.S.C. 6295(o)(2)(B)(iii)) provides a 

rebuttable presumption that a standard is economically justified if the Secretary of Energy finds 

that “the additional cost to the consumer of purchasing a product complying with an energy 

conservation standard level will be less than three times the value of the energy. . . savings 

during the first year that the consumer will receive as a result of the standard, as calculated under 

the applicable test procedure.” This rebuttable-presumption test is an alternative path to 

establishing economic justification. 

At this time however, DOE does not have a test procedure in place for preparing a 

rebuttable presumption calculation estimate. Therefore, DOE is not including a calculation of the 

rebuttable presumption at this stage of the rulemaking, but intends to prepare one for the NOPR 

stage. At that time, DOE will publish its calculations and comment on whether any of the 

candidate standard levels under consideration appear to satisfy the rebuttable presumption test. 

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EERE-2007-BT-STD-0007 COMMENT 07.2
REFERENCES 

1 RS Means. Electrical Cost Data, 28th Annual Edition, 2005. Kingston, MA. p. 97. 

2 U.S. Department of Energy-Energy Information Administration. Form EIA-861 for 2004, 

2004. Washington, DC. <http://www.eia.doe.gov/cneaf/electricity/page/eia861.html> 

3 Ibbotsons Associates. SBBI Valuation Edition 2001 Yearbook, 2001. Chicago, IL. pp. 38, 44. 

4 Damodaran Online. The Data Page: Cost of Capital by Industry Sector, 2006. 

<http://pages.stern.nyu.edu/~adamodar/> 

5 The Federal Reserve Board. Federal Reserve Bank Services Private Sector Adjustment 

Factor, 2005, Docket No.OP-1229. Washington, DC. 

<http://www.federalreserve.gov/boarddocs/Press/other/2005/20051012/attachment.pdf> 

6 The Federal Reserve Board. Federal Reserve Statistical Release, Selected Interest Rates, 

Historical Data, Instrument: CDs (secondary market), Maturity: 6-month, Frequency: 

Annual, Description: Average rate on 6-month negotiable certificates of deposit (secondary 

market), quoted on an investment basis, 2006. Washington, DC. 

<http://www.federalreserve.gov/releases/H15/data.htm> 

7 The Federal Reserve Board. Federal Reserve Statistical Release, Selected Interest Rates, 

Historical Data, Instrument: State and local bonds, Maturity: 20-year, Frequency: Monthly, 

Description: Bond buyer go 20-bond municipal bond index, 2006. Washington, DC. 

<http://www.federalreserve.gov/releases/H15/data.htm> 

8 The Federal Reserve Board. Federal Reserve Statistical Release, Selected Interest Rates, 

Historical Data, Instrument: Corporate bonds/Moody’s Seasoned AAA, Frequency: Annual, 

Description: Moody’s yield on seasoned corporate bonds – all industries, AAA, 2006. 

Washington, DC. <http://www.federalreserve.gov/releases/H15/data.htm> 

9 Mortgage-X, Mortgage Information Service. Cost of Savings Index (COSI) Index History, 

2006. <http://mortgage-x.com/general/indexes/default.asp> (Last accessed, October 10, 

2006). 

10 Damodaran Online. The Data Page: Historical Returns on Stocks, Bonds, and Bills – United 

States, 2006. <http://pages.stern.nyu.edu/~adamodar/> 

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