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 Co st 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, a nd 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 PAYB ACK PERIOD RESULTS

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

............................................................................................... 8-28 8.4.2 Capacitor-Start Indu ction-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 Own er 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 In creases, 1 Horsepower

......... 8-12
8-iTable 8.2.7 Capacitor-Start Induction-Run Motors: Ma nufacturer Selling Price Increases, 0.5 Horsepower

................................................................................. 8-12 Table 8.2.8 Capacitor-Start Capacitor-Run Motors: Ma nufacturer 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 E quipment Prices, Installation Costs, and Total Installed Costs

.......................................................................................... 8-13 Table 8.2.11 Capacitor-Start I nduction-Run Motors (48 Fr ame): Consumer Equipment Prices, Installation Costs, a nd Total Installed Costs

.......................................... 8-14 Table 8.2.12 Capacitor-Start Capacitor-Run Motors: Cons umer Equipment Prices, Installation Costs, and To tal 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 Discoun t Rates for Updated Values of R f and ERP

.................... 8-22 Table 8.2.17 Weighted Average Cost of Capita l 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 fo r Household Debt Classes (percent)

........... 8-24 Table 8.2.20 Average Real Effective Intere st 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 Pr ice Distributions

............................................................................ 8-17 Figure 8.2.2 Electricity Price Trends

...................................................................................... 8-18 Figure 8.4.1 Polyphase Motors: Di stribution of Life-Cycle Co st Impacts for Efficiency Level 2

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

..... 8-29 Figure 8.4.3 Capacitor-Start I nduction-Run Motors: Distribution of Life-Cycle Cost Impacts for Efficiency Level 3

.......................................................................... 8-30
8-iiFigure 8.4.4 Capacitor-Start I nduction-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: Distri bution of Payback Periods for Efficiency Level 3

....................................................................................... 8-33

8-iiiCHAPTER 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 (usua lly increased). This chapter describes three metrics DOE used in the consumer analysis to determine the e ffect of standards on individual end users:

• Life-cycle cost(LCC) is the total consumer expe nse over the life of an appliance, including purchase expense and operating costs (including ener gy 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 numbe r of years it will take the user to recover the increased purchase expense through d ecreased operating expenses.

• Rebuttable payback period is a special case of the PBP. Where LCC and PBP are estimated over a range of inputs reflecting ac tual conditions, rebuttabl e payback period is based on laboratory conditions, specif ically 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 pr esented in section 8.4. The rebuttable PBP is discussed in section 8.5. Key variables and calc ulations are presented for each metric. DOE performed the calculations discussed here us ing 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 Co st and Payback Period Analysis Recognizing that several i nputs to the determination of consumer LCC and PBP are either variable or uncertain, DOE conducted th e 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 spread sheet 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 characterizi ng several of the inputs to th e analysis with probability distributions, DOE also develope d a sample of end-use applica tions for the equipment. These end-use applications determine the use profile of the motor and the economic characteristics of the motor owner.

8-1(%) In each Monte Carlo simulation, for each equi pment class, one of the applications is identified by sampling a distribution of applicat ions for that equipment class. The selected application determines the number of operating h ours per year as well as the motor loading. The operating hours and the motor load ing 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 Commerci al 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%

8-2Table 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 (E IA) data on electricit y 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 consider ed 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 partic ular application, their variability across all applications contributes to the range of LCCs and PBPs calculate d for any particular standard level. Results presented at the end of this chap ter are based on 10,000 samples per Monte Carlo simulation run. DOE displays the LCC and PBP resu lts 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 PB P analysis as follows: (1) inputs for establishing the initial ex pense, otherwise known as the total installed cost, and (2) inputs for calculating the operating cost.

8-3The primary inputs for establishi ng the total insta lled cost are:

• Baseline manufacturer selling price : The price at which the manufacturer sells the baseline equipment, which includes the co sts incurred by the manu facturer to produce equipment meeting existing standards.

• Manufacturer selli ng 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 a ssociated with converting the manufacturer cost to a consumer equipm ent price. The markups and sale tax are described in detail in Chapter 7, Mark ups for Equipment Price Determination.

• Installation cost : The cost to the consumer of inst alling the equipment. The installation cost represents all costs required to inst all the equipment othe r than the marked-up consumer equipment price. The installati on 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 calcul ating the operating cost are:

• Equipment energy consumption and reactive power : The equipment energy consumption is the site energy use associated with opera ting the equipment. Reactive power is power that is reflected back to the electrical sy stem by a change in th e phase of alternating current power. Chapter 6, Energy and End-Us e 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 e quipment 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 co sts are associated with maintaining the operation of the equipment.

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

8-4• Discount rate : The rate at which DOE discounted fu ture 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 De termination of Life-Cycle Cost and Payback Period

8.2 LIFE-CYCLE COST INPUTS Life-cycle cost is the total customer e xpense over the life of a piece of equipment, including purchase expense a nd operating costs (including ener gy expenditures). DOE discounts

8-5future operating costs to the time of purchase, an d sums them over the lifetime of the equipment. DOE defines LCC by the following equation:

N LCC = IC + 

## ∑ OC t 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 capac itor-run (CSCR) resp ectively. Each table summarizes the total installed co st inputs and the ope rating cost inputs in cluding the lifetime, discount rate, and energy price tr ends. DOE characterized all of th e total cost inputs with singlepoint values, but characterized several of the opera ting cost inputs with probability distributions that capture the input’s uncertainty and/or variability. For th ose inputs characterized with probability distributions, the values provided in th e following tables are the average or typical values. Also listed in the following tables is th e section of the technica l 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.

8-6Table 8.2.1 Inputs for Life-Cycle Cost and Paybac k 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. A nnual use decreases with increased product efficiency.

8-7Table 8.2.2 Inputs for Life-Cycle Cost and Paybac k 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. A nnual use decreases with increased product efficiency.

8-8Table 8.2.3 Inputs for Life-Cycle Cost and Paybac k 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. A nnual 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:

8-9EQP = equipment price (i.e., customer pric e for the equipment only), expressed in dollars, and INST = installation cost or the customer pric e 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 manuf acturing 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. M anufacturer selling price increase is the change in manufacturer price associated with pr oducing equipment at a standard level. Markups and sales tax convert the manufacturer selling pri ce to a consumer equipment price. The installation cost is the cost to the consumer of installing the equipmen t and represents all costs required to install the equipment other than the marked-up consumer e quipment price. The installation cost includes labor, overhead, and any miscellaneou s materials and parts. Thus, th e 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:
IC BASE = EQP BASE + INST BASE

= MSP MFG × MU OVERALL _ BASE + INST BASE Where:
IC BASE = baseline total installed cost, EQPBASE = consumer equipment price for baseline models, INST BASE = baseline installation cost, MSP MFG = manufacturer selling pr ice for baseline models, and MU OVERALL_BASE = baseline overall markup (produc t 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:

8-10IC STD = EQP STD + INST STD 

## ( EQP BASE + ∆ EQP STD 

## ) ( INST BASE + ∆INST STD 

## ) = + + ∆ 

## ) = 

## ( EQP BASE + INST BASE 

## ) ( EQP STD + ∆INST STD

= IC BASE + 

# ( ∆

MSP MFG × MU OVERALL _ INCR + ∆INST STD 

# )

Where:
IC STD = standard-level total installed cost, EQP STD = consumer equipment price for standard-level models, INST STD = standard-level installation cost, EQP BASE = consumer equipment price for baseline models, ∆ EQP STD = change in equipment price for standard-level models, INST BASE = baseline installation cost, ∆ INST STD = change in installation co st for standard-level models, IC BASE = baseline total installed cost, ∆ MSP MFG = change in manufacturer selling price for standard-level models, and MU OVERALL_INCR = incremental overall markup (p roduct of manufacturer markup, incremental retailer or distri butor markup, and sales tax). The remainder of this section provides information about each of the above input variables that DOE used to calculate the tota l installed cost for small electric motors.

8.2.2.1 Baseline Manufacturer Selling Price The engineering analysis pr ovides 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 pa rticular 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 cl ass for the baseline models analyzed in the engineering analysis.
Table 8.2.5 Engineering Baseline Manufacturer Selling Price Product Class Baseline Efficien cy (%) 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 chapte r 5). Tables 8.2.6 through

8-118.2.8 present the MSP increases al ong with the associated ener gy 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 $1,224.52 Table 8.2.7 Capacitor-Start Induction-Run Moto rs: Manufacturer Selling Price Increases, 0.5 Horsepower Energy Efficiency Level Efficiency (%) Standard-Level MSP Increase (2007$) 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 incrementa l markups estimated for each point in the small motor supply chain. The overall baseline and incremental markups shown are weighted

8-12averages based on the share of shipments in eachdistribution 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 $253. Since DOE found no information to indicate differences in installation costs among motor applications, it used the same installation cost for each equipment cla ss. While DOE did find evidence of increasing installation costs with increasing mo tor size for medium motors in the RS Means data, DOE found no evidence that installation costs would be impacted with increased motor energy efficiency levels for small electric motors.
Total Installed Cost: The total installed cost is the sum of the end user equipment price and the installation cost. Refer back to section 8.2.1 to see th e equations that DOE used to calculate the total installed cost for various en ergy efficiency levels . Table 8.2.10 presents the end user equipment price, installation costs, and total installed costs for each small motor equipment class.
Table 8.2.10 Polyphase Motors: Consumer Equipment Prices, Installation Costs, and Total Installed Costs Energy Efficiency Level Efficiency (%) Equipment Price (2007$) 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

8-13Table 8.2.11 Capacitor-Start Induction-Run Motors (48 Frame): Consumer Equipment Prices, Installation Co sts, 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.

8-14Table 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 w ith standard-level equipment (i.e., equipment with efficiencies greater than baseline equi pment) 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 charge s. Multiplying the annual energy and demand by the appropriate prices yiel ds 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 lifeti me 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 discountedfuture expenditures to establish their present value. DOE calculated the opera ting cost for baseline products based on the following equation:
OC BASE = EC BASE + RC BASE + MC BASE

= AEC BASE × PRICE ENERGY + RC BASE + MC BASE Where:
OC BASE = baseline operating cost, EC BASE = energy expenditure associated withoperating the baseline equipment, RC BASE = repair cost associated with component failure for the baseline equipment, MC BASE = cost for maintaining baseline equipment operation, AEC BASE = annual energy consumption for baseline equipment, PRICE ENERGY = energy price. DOE calculated the operating cost for sta ndard-level products based on the following equation:

8-15OC STD = EC STD + RC STD + MC STD

= AEC STD × PRICE ENERGY + RC STD + MC STD

= 

# ( AEC BASE ∆ AEC STD 

# ) × PRICE ENERGY + RC BASE + ∆RC STD 

## ) ( MC BASE STD 

## )

__ 

## ( + + ∆ MC Where:
OC STD = standard-level operating cost, EC STD = energy expenditure associated withoperating standard-level equipment, RC STD = repair cost associated with component failure for standard-level equipment, MC STD = cost for maintaining standard-level equipment operation, AEC STD = annual energy consumption fo r standard-level equipment, PRICE ENERGY = energy price, ∆

AEC STD = decrease in annual energy c onsumption caused by standard-level equipment, ∆ RC STD = change in repair cost cause d by standard-level equipment, and ∆ MC STD = 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 E fficiency 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

8-168.2.3.2 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 k ilowatt-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 calc ulated the distribution of electricity prices for each customer class. DOE used these electricity price distributions to represent th e customer cost of electricity for the different classes of motor owners. DOE assigned the electricity price distribution for industrial customers to the cla ss 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 electric ity prices. To arrive at prices in future years, it multiplied the aver age 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 Econom ic Growth. These three cases reflect the

8-17uncertainty of economic growth in the forecast period. The high and low growth cases show the projected effects of alternative growth assu mptions on energy market s. 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 2045Price 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 ar e 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 weld s and rivets to fasten or s ecure the frame and assembled components, not nuts and bolts. DOE found no evid ence that any repair or maintenance costs would increase with higher motor energy effici ency. Thus, it did not in clude 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 th e information regarding the lifetime of small motors from the determination analysis. Moto r-industry experts, consulted by DOE during the determination analysis, suggested that the average life for two-dig it 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

8-18account 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 Nationa l Electrical Manufacturers Association/Motor and Motion Association Small-Motor-Efficiency Ta sk Force agreed with an estimated average life of 5 to 10 years for fractional horsepower mo tors, with the average be ing 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 meanlifetime of seven y ears 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 L CC and PBP analysis from estimates of the finance cost of purchasing the c onsidered products. Fo llowing financial theory, the finance cost of raising funds to purchase applia nces 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 th e 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 industr ial, agricultural, and commercial sectors, DOE calculated the discount rate for a distribution of representative product owners. This distribution of representative ow ners is the weighted sum of discount rate distributions for different ownership categories. Within each ow nership category, DOE calculated a distribution of discount rates for owners withinthat category. The disc ount rate for an indi vidual 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.

8-19DOE estimated the cost of equity usi ng the capital asset pricing model (CAPM). 3 The CAPM assumes that the cost of equity ( k e ) 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: th e risk coefficient of the firm ( β ), the expected return on riskfree assets ( R f ), and the equity risk premium ( ERP ). The risk coefficient of the firm indicates the risk associated with that firm relative to the pr ice 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 st ock 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:
k e = R f + 

## ( β × ERP 

## ) Where:
k e = cost of equity, R

f = expected return on risk-free assets, β = risk coefficient of the firm, and ERP = equity risk premium. The cost of debt financing ( k d ) is the interest rate paid on money borrowed by a company. The cost of debt is estimated by adding a risk adjustment factor ( R a ) 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:
k di = R f + R ai Where:
k d = cost of debt financing for firm, i , R

f = expected return on risk-free assets, and R ai = risk adjustment factor to risk-free rate for firm, i

. DOE estimates the WACC using the following equation:
WACC = k e × w e + k d × w d Where:
WACC = weighted average cost of capital, w e = proportion of equity financing, and w d = proportion of debt financing.

8-20Damodaran Online is a widely used sour ce of information about company debt and equity financing for most types of firms. 4 Several parameters of the cost of capital e quations can vary substantially over time, and therefore the estimates can varywith the time period over whic h data is selected and the technical details of the data av eraging method. For guidance on th e 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 calcu lating discount rate averages, u tilizes the gross domestic product price deflator for estimating inflation, and considers the best method for de termining the risk free rate as one where “the time hor izon of the investor is matched with the term of the risk-free security.” 5 In this preliminary analysis, DOE adjusted th e discount rate distribut ions from a previous rulemaking on distribution transformer standard s 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 update d forty year (1967–2007) geometri c 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 di scount rate distribution assumi ng no change in the corresponding company weighted-average cost of capital betas. DOE used th e CAPM equation to derive a relationship between beta and the discount rate th at 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 solv ing the CAPM equation: β = ( k e − R f ) / ERP Where:
k e = cost of equity, R

f = expected return on risk-free assets, β = risk coefficient of the firm, and ERP = equity risk premium. For the notice of proposed rulemaking (NOP R), DOE will perform a full update of the WACC calculation. Table 8.2.17 shows the average WACC valu es 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 va lues represent a private sector cost of capital that is averaged over major busine ss cycles. For all sector s, the averages are slightly lower than 6 percent real.

8-21Table 8.2.16 Adjusted Real Discount Rates for Updated Values of R f 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 fo r 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 equipmen t. In principle, one could estimate the interest rates on the actual fina ncing vehicles used to purchase replacement equipment. The shares of different financing ve hicles in total equipment purchases are unknown, however.

8-22DOE’s approach involves identifying all possibl e debt or asset classes that might be used to purchase equipment, including household as sets 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 thes e would likely not be affected by equipment purchases. DOE estimated the average shar es of the various debt and equity classes in the average U.S. household equity and debt portfolios using Survey of C onsumer Finances (SCF) data for 1989, 1992, 1995, 1998, 2001, and 2004. Table 8.2.18 shows the averag e shares of each considered class. DOE used the mean share of each cl ass across the six years as a ba sis 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 associ ated 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 e ffective real rates in each year and the mean rate across the years. Si nce the interest rates fo r each debt carried by households in these years were established ov er 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.
8-23Table 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 househol ds, DOE sampled a rate for each household from a distribution of rates for each of the a bove 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 classe s, so DOE derived data for these classes from national-level histor ical 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 c overing 1977–2005. DOE assumed rates on checking accounts to be zero. Rates on savings and mone y 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 ar e a weighted average of the stock rates (two-thirds weight) and the bond ra tes (one-third weight) in each year of the 1977–2005 period. DOE adjusted the nominal rates to re al rates using the annua l 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 ea ch asset type cover a ra nge of time, DOE believes they are representative of rates that may be in effect in 2015.

8-24Table 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 househol ds, DOE sampled a rate for each household from a distribution of rates for each of th e 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 effec tive 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 pr ovides 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 acr oss all types of house hold debt and equity, weighted by the shares of each class, is 5.6 percent.

8-25Table 8.2.22 Shares and Interest or Return Rates Us ed 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 conservati on standard is the future date when a new standard becomes operative. S ection 346(b)(3) of the Energy Policy and Conservation Act (EPCA) requires that any standard for small electr ic 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 App liance Energy Efficiency Rule makings, dated February 2008, DOE is required to publish an energy conservatio n standard final rule by February 28, 2010. (See http://www1.eere.energy.gov/buildings/a ppliance_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 calcula ted 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 th e base case (i.e., what consumers would have purchased in the year 2015 in the absence of new standards). In othe r rulemakings, DOE often uses the distribution of product efficiencies curr ently in the marketplace to develop its estimate

8-26of such distribution in the base case. DOE did find some mode ls offered in the manufacturer catalogues that were low first costand then had matching higher e fficiency units. These so-called 'matched pairs' would seem to indicate thatthere is some voluntary purchasing of higher efficiency motors. However, DOE did not have any data on what proporti on 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 operati ng 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 = ∆ O C Where:
∆ IC = increase in the total installed cost between the more effi cient standard level and the baseline design, and ∆ OC = decrease in annual operating expenses. Payback periods are expressed in years. Pa yback periods greater than the life of the product indicate that the increase d total installed cost is not recovered in reduced operating expenses. The data inputs to PBP are the total installe d 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 in stalled cost are the equipment price and the installati on cost. The inputs to the operating costs are the annual energy co st, 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 disc ount rates are not requir ed. Since the PBP is a

8-27“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 result s for small motors. As discussed in section 8.1.1, DOE’s approach for conducting the L CC analysis relied on de veloping 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 us ed a Monte Carlo simulation technique to perform the LCC calculations on th e 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 aver age PBP for each of the standard levels. In the subsections below, DOE presents figur es showing the distribut ion of LCCs in the base case for each equipment class. Also presente d below for a specific sta ndard level are figures showing the distribution of LCC impacts and the distribution of PBPs. Th e 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 ba sed on 10,000 samples. The LCC and PBP calculations were performed 10,000 times by sampling from the proba bility distributions th at 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 pr ovide such information for each equipment class.

8.4.1 Polyphase Motors Figure 8.4.1 is an example of a freque ncy chart showing the distribution of LCC differences for the case of efficiency level 2 fo r polyphase motors. In the figure, a text box next to a vertical line at that value on the x-axis shows the mean cha nge in LCC (a savings of $29 in the example here). DOE can generate a frequenc y chart like the one show n in Figure 8.4.1 for every standard level.

8-280 100 200 300 400 500

-100 40 180 320 460 600 Life-cycle Cost Savings ($)Frequency Mean = $29

Figure 8.4.1 Polyphase Motors: Distribut ion of Life-Cycle Cost Impacts for Efficiency Level 2 Figure 8.4.2 is an example of a frequenc y chart showing the di stribution of payback periods of efficiency level 2 for polyphase moto rs. 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 us ers are estimated to have a net benefit (i.e., LCC decrease) at this level. The increase in average total installed cost at this leve l (relative to the base case) is $66, or 14 percent, while operating co sts decrease by $14, or 45 percent.

8-29Table 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 Median Average Level Installed 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 freque ncy 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 frequenc y chart showing the di stribution 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.

8-30500

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 Pe riods for Efficiency Level 3
Table 8.4.2 summarizes the L CC 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 user s are estimated to have a net cost (i.e., LCC increase) at this level. The increase in average total installe d 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: Li fe-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 Median Average Net 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

8-318.4.3 Capacitor-Start Capacitor-Run Motors Figure 8.4.5 is an example of a freque ncy 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 frequenc y chart showing the di stribution 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.

8-32500

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 Pe riods 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 be nefit 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 Median Average Net 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 co st more to buy than a motor of standard energy efficiency. However, the more efficient motor will usually cost less to operate due to

8-33reductions in operating costs (i.e., lower energy bills ). The PBP is the time (usually expressed in years) it takes to recover the a dditional installed cost of the mo re 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 economi cally justified if the S ecretary 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 testis 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. Therefor e, DOE is not includi ng a calculation of the rebuttable presumption at this stage of the rule making, but intends to prepare one for the NOPR stage. At that time, DOE w ill publish its calculations and comment on whether any of the candidate standard levels under c onsideration appear to satisfy the rebuttable presumption test.

8-34REFERENCES

1 RS Means. Electrical Cost Data, 28 th 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. < h ttp://www.federalreserve.gov/boarddocs/ Press/other/2005/2 0051012/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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