CHAPTER 2. ANALYTICAL FRAMEWORK

TABLE OF CONTENTS

2.1 INTRODUCTION ........................................................................................................... 2-1 2.2 BACKGROUND ............................................................................................................. 2-4 2.3 MARKET AND TECHNOLOGY ASSESSMENT ........................................................ 2-4 2.3.1 Market Assessment .................................................................................. 2-4 2.3.2 Technology Assessment........................................................................... 2-5 2.3.3 Product Classes ........................................................................................ 2-5 2.4 SCREENING ANALYSIS .............................................................................................. 2-5 2.5 ENGINEERING ANALYSIS.......................................................................................... 2-5 2.5.1 Representative Product Classes ............................................................... 2-6 2.5.2 Selected Baseline Lamps ......................................................................... 2-6 2.5.3 Identified Lamps and Ballast Designs ..................................................... 2-6 2.5.4 Developed Efficacy Levels...................................................................... 2-6 2.6 ENERGY USE CHARACTERIZATION ....................................................................... 2-7 2.7 PRODUCT PRICE DETERMINATION ........................................................................ 2-7 2.8 LIFE-CYCLE COST AND PA YBACK PERIOD ANALYSIS ..................................... 2-7 2.9 SHIPMENTS ANALYSIS............................................................................................... 2-8 2.9.1 Shipment Scenarios.................................................................................. 2-8 2.10 NATIONAL IMPACT ANALYSIS................................................................................ 2-9 2.10.1 National Energy Savings Analysis.......................................................2-10 2.10.2 Net Present Value Analysis .................................................................2-10 2.11 LIFE-CYCLE COST SUB-GROUP ANALYSIS......................................................... 2-11 2.12 MANUFACTURER IMPACT ANALYSIS.................................................................. 2-11 2.13 UTILITY IMPACT ANALYSIS................................................................................... 2-11 2.14 ENVIRONMENTAL ASSESSMENT .......................................................................... 2-12 2.15 EMPLOYMENT IMPACT ANALYSIS....................................................................... 2-13 2.16 REGULATORY IMPACT ANALYSIS........................................................................ 2-13 2.17 DEPARTMENT OF JUSTICE REVIEW ..................................................................... 2-13

LIST OF FIGURES

Figure 2.1.1 Flow Diagram of Analyses for the GSFL and IRL Rulemaking Process ...2-2

2-iCHAPTER 2. ANALYTICAL FRAMEWORK

2.1 INTRODUC TION

Sections 6295(o)(2)(A) a nd (3) of Title 42 United States Code (42 U.S.C. 6295(o)(2)(A) and (3)) require thatenergy conservation standards se t by the U.S. Department of Energy (DOE) be technologically feasible and economically justified, and achieve the maximum improvement in energy efficiency. This chapter provides a description of the general analytical framework that DOE uses in developing such stan dards, and in particular, standards for general service fluorescent lamps (GSFL) and incandescen t reflector lamps (IRL). The analytical framework is a description of the methodology, the analytical tools, and relationships among the various analyses that are part of this rulema king. For example, the methodology that addresses the statutory requirement for economic justificat ion includes analyses of life-cycle cost (LCC); economic impact on manufacturers and users; na tional benefits; impact s, if any, on utility companies; and impacts, if any, from lesse ning competition among manufacturers. DOE will also solicit the views of the Department of Just ice (DOJ) on any lessening of competition that is likely to result from the imposition of a proposed standard.

Figure 2.1.1 summarizes the analytical components of the standards-setting process. T he focus of this figure is the center column, identif ied as “Analyses.” The columns labeled “Key Inputs” and “Key Outputs” show how the analyses fit into the rulemaki ng process, and how the analyses relate to each other. Key inputs are the types of data and information that the analyses require. Some key inputs exist in public databa ses; DOE collects other inputs from stakeholders or persons with special knowledge. Key outputs are analytical results that feed directly into the standards-setting process. Dotted lines connecting analyses show types of information that feed from one analysis to another. While Figure 2.1.1 summarizes the inputs, ou tputs and analyses of a typical standards rulem aking, individual i nputs and outputs may vary by rulemaking. For example, as discussed in Chapter 5 and Chapter 7, this rulemaking combines the results of the engineering analysis and the produc t price determination to derive typical inputs for the LCC and NIA rather than estimating costs in the engineering analysis and marking them up to derive enduser prices.

2-1Utility Impact Analysis

Notice of Proposed Rulemaking (NOPR)

Final Rule Approaches Key Inputs Analyses Key Outputs

Market and Technology Assessment

Screening Analysis

Engineering Analysis

Product Price Determination Life-Cycle Cost and Payback Period Analyses

National Impact Analysis Energy Use

Revise ANOPR Analyses

Life-Cycle Cost Sub-Group Analysis

Manufacturer Impact Analysis Shipments Analysis

Employment Impact Analysis

Revise Analyses • Product Classes • Technology Options

• Industry Cash Flow • Sub-Group Cash-Flow • Direct Employment Impacts • Competitive Impacts • Cumulative Regulatory Burden • Product Designs

• Life-Cycle Costs • Payback Periods

• National Energy Savings • Net Present Values

• National Employment Impacts

• Revised Results • Characterize Industry • Market Segmentation • Non-Regulatory Programs Framework Document

• Efficiency-Level Approach • Design Option Approach

• Energy Prices • Installation Costs • Maintenance & Repair Costs

• Accounting Approach

• Backcast and Forecast • Market Saturation

• Stakeholder Comments

• Demographics

• Manufacturer Interviews

• GRIM Analysis

• Emission Rates • National Energy Savings

• Stakeholder Comments • Identify Firms/Products • Historical Shipments

•Retail Price Collection and Analysis

• Manufacturer Prices • Average Costs

• Manufacturer Financial Data Design Options Product Classes

Retail Prices Design Energy/ Use

Advance Notice of Proposed Rulemaking (ANOPR) • Efficiency/Performance • Commercial Products

Candidate Standard

Levels • Analysis of Energy Use Data

Environmental Assessment

Regulatory Impact Analysis Technology Options

• Emission Estimates • Utility Load Factors • National Energy Savings

• Non-Regulatory Alternatives • NEMS-BT

• ImSET

• NEMS-BT • Design Options

• Energy Price Forecasts • Site-to-Source Factors • Energy-Efficiency Levels

Direct Employment Impacts

• National Energy Savings • National Product Costs • National Operating Costs • Utility Impacts • Analysis of Market Data

• Analysis of Product Data

• Life-Cycle Costs • Payback Periods • Installation Costs • Maint Costs • Repair Costs • UEC • Energy Prices Annual Energy Use (UEC)

Preliminary Manufacturer Impact Analysis • Manufacturer Prices • Average Costs • Conversion Capital Expenditures • Direct Employment Impacts

• National Energy Savings • Net Present Values • Trial Standard Levels (TSLs)
TSLs • Product Prototypes

Energy-Efficiency Levels

• Department of Justice Review Product Designs

Figure 2.1.1 Flow Diagram of Analyses fo r the GSFL and IRL Rulemaking Process

2-2The analyses revised in the final rule st age and reported in this technical support document (TSD) include:

A market and technology assessment to ch aracterize the releva nt fluorescent and incandescent lamp markets; to identify technolog y options that improve efficacy; and to develop product classes.

A screening analysis to review each technology option and determine if it is technologically feasible; practical to manufacture, install, and service; would adversely affect lamp utility or lamp availability; or would have adverse impacts on health and safety.

An engineering analysis to study the appropriate lamp and lamp-and-ballast designs used as substitutes for the baseline lamps, to select efficacy levels and to determine lamp-and-ballast system power ratings.

An energy use analysis to determine the annual energy consumption of fluorescent and incandescent reflector lamps.

A product price determination to develop aver age end-user prices for the lamp designs and lamps-and-ballast designs used in the analyses.

A life-cycle cost (LCC) and payback period (PBP ) analysis to calculate, at the customer level, the cost-effectiveness of the efficacy levels.

A shipments analysis to estimate yearly shipments of covered fluorescent and incandescent reflector lamp products over th e analysis period.

A national impact analysis (NIA) to assess the aggregate impacts at the national level of the net present value (NPV) and national ener gy savings (NES) of the standard levels.

A LCC sub-group analysis to evaluate variat ions in residential and commercial building characteristics (e.g., energy prices, equipment use behavior, installa tion costs) that might cause a standard to impact particular cu stomer sub-populations, such as sp ecific building owners or other customers that purchase and use the general serv ice fluorescent lamps and incandescent reflector lamps.

A manufacturer impact analysis (MIA) to calculate the financial impacts of energy conservation standards on lamp manufacturers and to identify impacts on competition, employment at manufacturing plan ts, and manufacturing capacity.

A utility impact analysis to estimate the eff ects of proposed standards on electric utilities.

An environmental assessment to provide estimates of changes in emissions of pollutants from electricity generati on (i.e., carbon dioxide (CO 2 ), oxides of nitrogen (NOx), and sulfur dioxide (SO 2 ).

An employment impact analysis to assess th e aggregate impacts on national employment.

2-3A regulatory impact analysis to present majo r alternatives to proposed standards that could achieve substantially the same regulatory goal at a lower cost.

In response to comments it receives on the NOP R, DOE may revise some of its analyses before publishing the final rule.

2.2 BACKGROUND

As described in Chapter 1 of the TSD, in September 1995, the Departm ent announced a formal effort to consider further improvement s to the process used to develop appliance efficiency standards. The Department called on energy-efficiency groups, manufacturers, trade associations, state agencies, utili ties, and other interested parties to provide input to this effort. As a result of this combined effort, the Department published Procedures, Interpretations and Policies for Consideration of New or Revised Energy Conservation Standards for Consumer Products (the “Process Rule”), 10 CFR 430, Subpart C, Appendix A. The Process Rule outlined the procedural improvements identifie d by the interested parties, and included a review of the: 1) economic models, 2) analytic tools, 3) methodologies, 4) non-regulator y approaches, and 5) prioritization of future rules. The Process Rule recommended that the Department take into account uncertainty and variabil ity by carrying out scenario or probability analysis.

DOE developed this analytical framework fo r the fluorescent and incandescent reflector lamps rulemaking under the Process Rule. DOE doc umented this analytical framework in the Rulemaking Framework for Genera l Service Fluorescent Lamps, Incandescent Reflector Lamps, and General Service Incandescent Lamps (hereafter, “Framework Document”), and presented the analytical approach to stakeholders during a public meeting held on June 15, 2006 (hereafter “Public Meeting”). This document is available at http://www.eere.energy.gov/buildin gs/appliance_standards/reside ntial/pdfs/lamps_framework.pd f . The following sections provide a general descri ption of the different an alytical components of the rulemaking framework.

2.3 MARKET AND TECHNOLOGY ASSESSMENT

The m arket and technology assessment charact erizes the relevant product markets and existing technology options, including prototype designs, and outlines product classes.

2.3 .1 Market Assessment

When initiating a standards rulem aking, DOE develops information on the industry structure and market characterist ics of the product(s) concerned. This activity consists of both quantitative and qualitative efforts to assess the industry based on publicly available information. As such, DOE addresses: (1) industry structur e and manufacturer market shares, (2) existing regulatory and non-regulatory efficiency improve ment initiatives, and (3) trends in product characteristics and retail markets. This inform ation serves as resource material throughout the rulemaking.

2-4DOE has used and will use the most reliable and accurate data available at the time of each analysis in this rulemaking. DOE welcom es and will consider any submissions of additional data.

2.3.2 Technology Assessment

DOE typically uses inform ation relating to existing technology opti ons to develop more efficacious fluorescent and incandescent reflect or lamp designs. DOE prepared a list of technologies for consideration which could improve the efficacy of GSFL and IRL. To develop this list, DOE reviewed manufact urer catalogs, recent trade public ations and technical journals, and consulted with technical experts.

2.3.3 Product Classes

DOE divides covered products into classes by : (a) the type of energy used; and (b) capacity of the product or any other perform ance-related feature that justif ies different standard levels, such as features affecting consumer u tility. (42 U.S.C. 6295(q)) For this rulemaking on lamps, DOE has analyzed GSFL and IRL separa tely, where appropriate . In general, DOE defined product classes using information obtaine d from manufacturers, trade association, and other interested parties.

2.4 SC REENING ANALYSIS

The screening analysis exam ines the techno logy options from the technology assessment as to whether they: (1) are technologically feasib le; (2) are practical to manufacture, install, and service; (3) do not have an adve rse impact on product utility or avai lability; and (4) do not have adverse impacts on health and safety. As descri bed above, DOE develops an initial list of design options from the technologies identified in the technology assessment. Then DOE, in consultation with interested parties, reviews th e list to determine if these technologies are practicable to manufacture, inst all, and service, would advers ely affect product utility or availability, or would have adve rse impacts on health and safety. In the engineering analysis, DOE only considers design options that meet all four of the screening criteria.

2.5 ENGINEERING ANALYSIS

In the engineering analysis, DOE selects re presentative product classes to analyze. It then selects baseline lamps from these repr esentative product classe s, and develops lamp designs that represent more efficacious versions of the baseline lamps. DOE then uses these lamp designs to develop efficacy levels (ELs ). While DOE establishes ELs based on lamp designs, it also is developing lamp-and-ball ast designs for the LCC and NIA. DOE is considering lamp-and-ballast designs for the G SFL LCC and NIA because fluorescent lamps are a component of a system, and their performance is related to the ballast on which it operates. In addition to selecting lamp-and-ballast systems, th e engineering analysis develops system power ratings which DOE uses to develop energy consumption in Chapter 6.

2-52.5 .1 Representative Product Classes

DOE reviewed covered lamps and the associat ed product classes. In the case where a product had multiple product classes, DOE identi fied and selected certain product classes as “representative” product classes wh ere DOE would concentrate its an alytical effort. DOE chose these representative product classes primar ily because of their high market volumes.

2.5.2 Selected Baseline Lamps

DOE selected baseline lamps from the re presentative product classes on which it conducted the engineering analysis (and subseque nt analyses). These baseline lamps were selected to represent the characte ristics of lamps in a given produc t class. Typically, a baseline lamp is one that just meets existing mandato ry energy conservation st andards or one that represents the typical lamp sold. Specific charac teristics such as correlated color temperature (CCT), operating life, and light ou tput were all selected to ch aracterize the most common lamps purchased by consumers today. For all the repr esentative product classes, DOE selected multiple baseline lamps, to ensure consideration of di fferent high-volume lamps and their associated consumer economics.

2.5.3 Identified Lamps and Ballast Designs

DOE selected a series of more-efficacious lamps for each of the baseline lamps considered within each represen tative product class. DOE only c onsidered technolo gies that met all four criteria in the screening analysis. DOE considered these technologies either explicitly as design options or implicitly as design options in corporated into commercially available lamps at the efficiency levels evaluated. These selections were made such that potential substitutions maintained light output above a maximum 10-per cent decrease from the baseline lamp’s light output and that the substitute lamp had perfor mance characteristics similar to those of the baseline lamp. In identifying the more-efficacious substitutes, DOE utilized a database of commercially available lamps. For GSFL, DOE considered commercially available lamps under two different substitute scenario s: (1) lower-wattage lamps that operated on existing ballasts and whose system light output never dropped below 10 percent of the baseline system and (2) moreefficacious lamps that have the same rated wattage , and, therefore, must be associated with a ballast replacement in order to save energy and maintain light output. For IRL, DOE used some commercially available lamps, but also deve loped “model” lamps which incorporate design options that may not be commercially available for certain lamp types and wattages but which use commercially available technologies. For example, DOE developed efficacy estimates for reduced-wattage IRL with an HIR coating.

2.5.4 Developed Efficacy Levels

Having iden tified the more-efficacious substi tutes for each of the baseline lamps (or lamp-and-ballast systems), DOE developed efficacy levels based on the co nsideration of several factors including: (1) the design options associ ated with the specific lamps being studied (e.g., grades of phosphor for fluorescent lamps, the use of infrared coatings for IRL, etc.); (2) the

2-6ability of lamps across wattages to comply with the standard level of a given product class; 1 and (3) the maximum technologica lly feasible level.

2.6 EN ERGY USE CHARACTERIZATION

The energy-use characterization provides es tim ates of annual energy use for the two categories of lamps which DOE uses in the LCC and PBP analyses and the NIA. To develop annual energy use estimates, DOE multiplied a nnual usage (in hours per year) by the system power estimates (in watts). DOE developed th e system power estimates in the engineering analysis. To derive annual en ergy usage, DOE used data publish ed in the U.S. Lighting Market Characterization: Volume I (LMC), the Residential Energy Consumption Survey (RECS), the Commercial Building Energy Survey (CBECS ) and the Manufacturer Energy Consumption Survey (MECS).

2.7 PRODUCT PRICE DETERMINATION

This chapter focuses on the methodol ogy followed by DOE in developing enduser product prices for lamps and ballasts used in the rulemaking anal ysis. DOE based the product price determination for lamps and ba llasts on marked-dow n manufacturer price schedules, developing low, mid and high end-user retail prices.

2.8 LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

The effects of new energy conservation standards on equipment re su lt in changes in operating expenses (usually decreas ed) and changes in customer price (usually increased). DOE analyzed the net effect of new standards on consumers by evaluating the net LCC using the efficacies and system power rati ngs derived in the engineering analysis and the cost trends derived from the product price determination. I nputs to the LCC calculati on include the installed cost to the customer (customer price plus instal lation cost), operating expenses (energy expenses and maintenance costs), the lifetime of the appliance, and a discount rate.

DOE reviewed the Energy Information Administration’s (EIA’s) energy price data for GSFL and IRL to establish electricity prices. DOE relied on regional average electricity price data for the residential and commercial sectors. DOE used projections of these electricity prices for residential and commercial customers to estimate future electricity prices in its LCC analysis. DOE used EIA’s Annual Energy Outlook ( AEO ) as the default source of projections for future electricity prices.

DOE developed discount rates by estimating th e cost of capital to companies that purchase lamps covered under this rulemaking. Fo r residential consumers of GSFL and IRL, DOE derived the discount rates from estimates of the interest or “f inance cost” to purchase

1 Efficacy levels span multiple lamps of different wattages. In selecting trial standard levels, DOE considered whether these multiple lamps can meet the efficacy levels.

2-7residential products. By applyi ng the financial theory, the fina nce cost of raising funds to purchase residential products can be interpreted as: (1) the financia l cost of any debt incurred to purchase residential products, prin cipally interest charges on debt, or (2) the opportunity cost of any equity used to purchase residential produc ts, principally interest earnings on household equity. Household equity is represented by holdi ngs in assets such as stocks and bonds, as well as the return on homeowner equit y. DOE obtained much of the da ta required to determine the cost of debt and equity from the Federal Reserve Board’s triennial Survey of Consumer Finances

.
For commercial and industrial consumers of GSFL and IRL, DOE used the same approach it relied on for developi ng discount rates for other comme rcial equipment. DOE derives discount rates for commercial c onsumers by estimating the cost of capital of companies that purchase commercial equipment. The cost of cap ital is commonly used to estimate the present value of cash flows to be derived from a t ypical company project or investment. Most companies use both debt and equity capital to fu nd investments, so the cost of capital is the weighted-average cost of equity and debt financing. This corporat e finance approach is referred to as the weighted-average cost of capital (WACC).

Chapter 8 also describes the PBP analysis, wh ich calculates the amount of time needed to recover the additional cost that consumers pay fo r increased efficiency. Numerically, the simple payback period is the ratio of the increase in purchase price to the decrease in annual energy
costs.

2.9 SHIPMENTS ANALYSIS

Shipm ent forecasts are required to calculat e the national impacts of standards on energy, NPV, and future manufacturer cash flows. DOE de veloped shipment forecasts using historical data as a basis for projecting future shipments of the GSFL and IRL that are the subject of this rulemaking. In projecting shipments, DOE accounted for several market segments including: (1) new construction; (2) renovation; (3) lamp failure; (4) ballast failure or fi xture replacement (for GSFL only); and (5) retrofit. In addition, DOE us ed market-share matrices to characterize the product mix of the shipments and installed stock.

2.9 .1 Shipment Scenarios

To calculate shipm ents, DOE created severa l base-case and standards case shipment scenarios. As rapidly emerging new lighting technologies (such as reflector compact fluorescent lamps (RCFL), ceramic metal-halide, and light-emitting diodes) could penetrate GSFL and IRL markets and significantly affect shipment fo recasts, DOE creates two base-case shipment scenarios: Existing Technologies and Emergi ng Technologies. The Existing Technologies scenario, considering only tec hnologies that have already ach ieved technological and market maturation assumes more limited penetration of other higher efficacy products than the Emerging Technologies scenario.

To characterize consumer behavior in the standards-case for GSFL, DOE considers many lamp-and-ballast system properties that consum ers take into account when purchasing their

2-8GSFL systems. Specifically, DOE regards sy stem price, system energy consumption, and system lumen output as three ke y drivers of consumer purchases . DOE develops two sets of shipment scenarios, to characterize consumers that may weigh these factors differently. The first set of scenarios comprises the “Roll-up” and “Shift” scenarios; the se cond set comprises the “High” and “Market segment-based” lighting expertise scenarios.

In the first set of standards-case scenarios for GSFL, the Roll-up scenario represents a standards-case in which all product efficacies in the base case that do not meet the standard would roll up to meet the new standard level. Consumers who in the base case purchase lamps above the standard level are not affected as they are assumed to continue to purchase the same base case lamp or lamp system in the Roll-up scenario. The Roll-up scenario characterizes consumers primarily driven by the first-cost of the lamp. In contrast, the Shift scenario models a standards-case in which allbase case consumer purchases are affected by the standard (whether or not their base case efficacy is below the standard).scenario. The second set of standards-case GSFL scenarios comprises the lighting expertis e scenarios: High and Market Segment-Based. This set of scenarios characterizes consumers’ d ecisions (or lack thereof) to either maintain equivalent light output upon the purchase of a ne w higher efficacy lamp or accept higher lighting levels. The High expertise scenar io generally characterizes more sophisticated lighting decisions in which consistent lighting leve ls and/or energy savings play a determinant role in consumer behavior. In this scenario, cons umers are more likely to choose a lower ballast factor to pair with higher efficacy lamps or reduced-wattage la mps. Conversely, in the Market Segment-Based scenario, DOE assumes consumers occasionally accept high lighting levels and reduced (or in many cases, zero) energy savings as a consequence of their expe rtise (or lack thereof).

As with GSFL, DOE considers two sets of stan dards-case scenarios for IRL. The first set of scenarios for IRL includes the “Roll-up” and “Shift” scenarios. Again, the Roll-up scenario represents a standards-case in which all product e fficacies in the base case that do not meet the standard would roll up to meet the new standard level. Those product effi cacies that were above the standard level are considered unaffected, as consumers continue to purchase the same base case lamp or lamp system. The Roll-up scenario characterizes consumers primarily driven by the first-cost of the lamp In contrast, the Sh ift scenario models a standards-case in which all base case consumer purchases are affected by th e standard (whether or not their base case efficacy meets the standard). The second set of standards-case IRL scenarios includes the “RCFL Product Substitution” and “Bulged Reflecto r (BR) Product Substitution” scenarios. In both scenarios, DOE assumes consumers do not nece ssarily continue to purchase the same lamp as they do in the base case. Thus, in the RCFL and BR Product Substitution scenarios, DOE models a shift to reflector compact fluorescen t lamps or exempted BR lamps respectively.

2.10 N ATIONAL IMPACT ANALYSIS

The national impact analysis assesses the NP V of total customer LCC and NES. DOE determined both the NPV and NES for the performa nce levels considered for the product classes analyzed. To make the analysis more accessi ble and transparent to all stakeholders, DOE prepared an NES Spreadsheet Model in Micros oft Excel to forecast energy savings and the national economic costs and savings resulting from new standards. The NES Spreadsheet Model

2-9does not use probability distributi ons for inputs or outputs. To assess the impact of input uncertainty on the NES and NPV results, DOE can conduct sensitivity analyses for future analyses by running scenarios on input variables thatare of interest to st akeholders. Chapter 11 of the TSD describes DOE’s assess ment of the aggregate economic impacts at the national level.

2.10 .1 National Energy Savings Analysis

The inputs DOE uses to determ ine the NES are: (1) annual energy consumption per unit; (2) shipments; (3) equipment stock; (4) nati onal energy consumption; and (5) site-to source conversion factors. DOE calculates the nati onal energy consumption by multiplying the number of units, or stock, of lamps (by vintage) by the unit energy consumption (also by vintage). 2 DOE calculates national annual en ergy savings from the difference between national energy consumption in the base case (without new energy conservation standards) and in each standards case (with new energy conservati on standards). The analysis includes estimates of energy savings by fuel type used for generating elec tricity. DOE estimates energy consumption and savings based on site energy, and converts the electricity cons umption and savings to source energy. Cumulative energy savings are the sum of the annual NES, which DOE determines over specified time periods.

2.10.2 Net Present Value Analysis

The inputs DOE uses to determ ine the NPV are: (1) total annual inst alled cost; (2) total annual operating cost savings; (3) discount factor; (4) pr esent value of cost s; and (5) present value of savings. DOE calculates net savings e ach year as the differenc e between total operating cost savings and increases in total installed costs (including equipment price and installation cost). DOE calculates savings over the life of the equipment, accounting for differences in yearly energy rates. DOE calculates NPV as the difference between the present value of operating cost savings and the pr esent value of increased total installed costs. DOE discounts future costs and savings to the present with a discount factor.

DOE calculates increases in total installed co sts as the product of the difference in the total installed cost between th e base case and standards case and the annual shipments in the standards case. Because costs of the more-effi cient equipment bought in the standards case are higher than those of equipment bought in the base case, price increases appear as negative values in the NPV.

DOE expresses operating cost savings as decrea ses in operating costs associated with the lower energy consumption of equipment bought in the standards case compared to the base efficiency case. Total operating cost savings are the product of savings per unit and the number of units of each vintage surv iving in a particular year.

2 Vintage represents the age of the equipment.

2-102.11 LI FE-CYCLE COST SUB-GROUP ANALYSIS

A consum er subgroup comprises a subset of th e population that is likely, for one reason or another, to be impacted disproportionately by new or revised energy co nservation standards. In this NOPR, DOE identified low-income consum ers, houses of worship, historical facilities, and institutions that serve low-income populations as consumers that would be disproportionately impacted by th e proposed standards. The L CC sub-group analysis evaluates impacts on these consumer sub-groups by accounti ng for variations in key inputs to the LCC analysis.

2.12 MANUFACTURER IMPACT ANALYSIS

DOE perfor med a MIA to estimate the fina ncial impact of higher energy conservation standards on GSFL and IRL manuf acturers, and to calculate the impact of such standards on domestic manufacturing employment and capac ity. The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA primarily re lies on two separate Government Regulatory Impact Models (GRIMs)

 industry-cash-flow models customized for this rulemaking. The GRIM inputs are data characterizing the industr y cost structure, shipments, and revenues. The key output is the industry net present value. Different sets of assumptions (scenarios) will produce different results. The qualitative part of the MIA addresses factors such as product characteristics, charac teristics of particular firms, and market and product trends, and includes an assessment of the impacts of sta ndards on subgroups of manufacturers. The complete MIA is outlined in Chapter 12 of the TSD.

DOE conducted the MIA in three phases. Ph ase 1, “Industry Profile,” consisted of the preparation of an industry ch aracterization. Phase 2, “Industry Cash Flow,” focused on the industry as a whole. In this phase, DOE used two separate GRIMs (one for the GSFL industry and one for IRL industry) to prepare an indus try cash-flow analysis. DOE used publicly available information developed in Phase 1 to adapt each GRIM structur e to facilitate the analysis of amended GSFL and IRL standards. In Phase 3, “Subgroup Impact Analysis,” DOE conducted interviews with manuf acturers representing the major ity of domestic GSFL and IRL sales. During these interviews, DOE discusse d engineering, manufactur ing, procurement, and financial topics specific to each company, and also obtained each manuf acturer’s view of the industry as a whole. The interv iews provided valuable informa tion DOE used to evaluate the impacts of an amended energy conservation standard on manufacturer cash flows, manufacturing capacities, and employment levels.

2.13 UTILITY IMPACT ANALYSIS

The utility impact analy sis includes an an alysis of the impact of higher energy conservation standards on the el ectric utility industries. DOE has adapted the National Energy Modeling System (NEMS) produced by the EIA for this analysis. NEMS (EIA 2005) is a large multi-sectoral general-equilibrium model of the U. S. energy sector that has been developed over the past decade by the EIA, primarily for the purpose of preparing DOE’s AEO . In prior rulemakings, a variant of NEMS (currently termed NEMS-BT, BT referring to the DOE’s

2-11Building Technologies Program) was developed to better address the specific impacts of an equipment efficiency standard.

The NEMS produces a widely recognized base line energy forecast for the United States through the year 2030, and is ava ilable in the public domain. Th e typical NEMS outputs include forecasts of electricity sales, price, and avoide d electric generating capacity. DOE conducted the utility impact analysis as a scen ario departing from the latest AEO reference case. In other words, the energy savings impacts from amende d energy conservation standards were modeled using NEMS-BT to generate forecasts that deviate from the AEO reference case.

2.14 ENVIRONMENTAL ASSESSMENT

DOE conducted the environm ental assessment (EA) pursuant to the National Environmental Policy Act and the requirement s under 42 U.S.C. 6295(o)(2) to determine the environmental impacts of the amended sta ndards. (42 U.S.C. 6316(a)) The primary environmental effects of energy conservation sta ndards for GSFL and IRL are reduced emissions resulting from reduced electrical energy consumpti on. The environmental impact analysis tracks the impact of possible standards on three en ergy-related emissions: carbon dioxide (CO 2 ), nitrogen oxides (NO X ), and mercury (Hg). The analyses do not include the estimated reduction in power plant emissions of sulfur dioxide (SO 2 ) because the Clean Air Act Amendments of 1990 set an emissions cap on SO 2 emitted by the power generation sector and it is assumed that SO 2 emissions will always be at, or near, the ceiling. DOE based the environmental assessment calculations on the NEMS-BT modeling work propos ed for the utility impact analysis. The output is the forecasted physical emissions. The net benefit of the standard is the difference between emissions estimated by NEMS-BT and the AEO2008 Reference Case. This approach has the advantage of examining the marginal imp act of standards for general service fluorescent lamps and incandescent reflector lamps on the utility generation mix and the subsequent environmental emissions.

CO 2 emissions are tracked in NEMS-BT by a de tailed module that produces robust results because of its broad coverage of all sectors and inclusion of inte ractive effects. NEMS-BT also includes a module for SO 2 -allowance trading and delivers a forecast of SO 2 -allowance prices. It is important to note, however, that simulation of SO 2 trading tends to imply that physical emissions effects will be zero, as it is assumed that SO 2 emissions will always be at, or near, the emissions cap set by the Clean Air Act. Thus, there is virtually no possible SO 2 environmental benefit from electricity savings as long as there is an enforc ement of the emissions ceiling. However, there is an SO 2 benefit from conservation in the fo rm of a lower allowance price and, if big enough to be calculable by NE MS, this value can be reported.

NO X emissions are currently not regulated by a national cap and trade program. DOE generated low- and high-end estimates of changes in NO X emissions associated with an energy conservation standard using current emi ssion rates for the power sector in the AEO . Hg emissions are also currently notregulated by a national cap and trade program. DOE generated low- and high-end estimates of changes in Hg em issions associated with an energy conservation standard using current emission rates for the power sector in the AEO

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2-122-13 2.15 EMPLOYMENT IMPACT ANALYSIS

The imposition of standards can impact employme nt both directly and indirectly. Direct employment impacts are changes in the number of employees at the factories that produce the covered lamp types, along with the affiliated di stribution and service companies, resulting from the imposition of new standards. DOE evaluate s direct employment impacts in the MIA. Indirect employment impacts may result from expenditures shifti ng between goods (the substitution effect) and changes in income and overall expenditure levels (the income effect) that occur due to the imposition of standards. The co mbined direct and indirect employment impacts are investigated in the employment impact analysis using the Pacific Northwest National Laboratory’s “Impact of Sector Energy Technolog ies” (ImSET) model. The ImSET model was developed for DOE’s Office of Planning, Budget, and Analysis, and estimates the employment and income effects of energy-sa ving technologies in buildings, i ndustry, and transportation. In comparison with simple economic multiplier appro aches, ImSET allows for more complete and automated analysis of the economic imp acts of energy conservation investments.

2.16 REGULATORY IMPACT ANALYSIS

DOE prepared a regulatory impact analys is (RIA) pursuant to Executive Order 12866, “Regulatory Planning and Review ,” 58 FR 51735, October 4, 1993, wh ich is subject to review under the Executive Order by the Office of Information and Regulatory Affair s at the Office of Management and Budget. The RIA addressed th e potential for non-regulatory approaches to supplant or augment energy conservation standards to improve the energy efficiency of GSFL and IRL on the market.

2.17 DEPARTMENT OF JUSTICE REVIEW

Section 325(o)(2)(B)(i)(V) of the Energy Policy and Conserva tion Act states that, bef ore the Secretary of Energy may prescribe a new or amended energy cons ervation standard, the Secretary shall ask the U.S. Attorney General to make a determination of “the impact of any lessening of competition...that is likely to result from the imposition of the standard.” (42 U.S.C. 6295) Pursuant to this requirement, DOE solic ited the views of DOJ on any lessening of competition that is likely to result from the im position of a proposed standard and gave the views provided full consideration in assessing econom ic justification of a proposed standard.