REGULATORY IMPACT ANALYSIS FOR TODAY'S ENERGY

CONSERVATION STANDARDS FOR

RESIDENTIAL FURNACES AND BOILERS

September 2007

U.S. Department of Energy

Assistant Secretary

Office of Energy Efficiency & Renewable Energy

Building Technologies Program

Appliances and Commercial Equipment Standards

Washington, DC 20585

 EE-RM/STD-01-350 COMMENT 164

REGULATORY IMP ACT ANALYSIS FOR TODAY'S ENERGY 

CONSERVATION STANDARDS FOR 

RESIDENTIAL FURNACES AND BOILERS 

September 2007 

U.S. Department of Energy 

Assistant Secretary 

Office of Energy Efficiency & Renewable Energy 

Building Technologies Program 

Appliances and Commercial Equipment Standards 

Washington, DC 20585 
REGULATORY IMPACT ANALYSIS FOR TODAY'S ENERGY CONSERVATION

STANDARDS FOR RESIDENTIAL FURNACES AND BOILERS

TABLE OF CONTENTS

1.0 INTRODUCTION .................................................. RIA-1

2.0 NON-REGULATORY POLICIES ..................................... RIA-2

2.1 Methodology ................................................ RIA-2

2.1.1 Modeling Method ...................................... RIA-2

2.1.2 Policy Assumptions ..................................... RIA-3

2.1.3 Policy Interactions ...................................... RIA-4

2.2 Non-Regulatory Policy Assumptions ............................. RIA-4

2.2.1 No New Regulatory Action ............................... RIA-4

2.2.2 Financial Incentives Policies .............................. RIA-5

2.2.3 Voluntary Energy-Efficiency Targets ....................... RIA-9

2.2.4 Early Replacement ..................................... RIA-11

2.2.5 Bulk Government Purchases ............................. RIA-13

2.3 Non-Regulatory Policy Market Share Impacts ..................... RIA-14

2.4 Results Summary for Non-Regulatory Alternatives ................. RIA-16

LIST OF TABLES

Table RIA.I Policy Alternatives to Today's National Furnace and Boiler Standards ... RIA-1

Table RIA.2 Trial Standard Levels for Residential Furnaces and Boilers ............ RIA-4

Table RIA.3 Benefit/Cost Ratios for Today's Standard and Rebate Policy Cases ...... RIA-7

Table RIA.4 Increased Market Share Penetration Levels from Voluntary Furnace

and Boiler Programs for Targeted Efficiency Levels ................ RIA-11

Table RIA.5 Non-Regulatory Alternatives with Target Levels at TSL B ........... RIA-16

LIST OF FIGURES

Figure RIA.1 Market Penetration Curve for Non-Weatherized Gas Furnaces at

90 Percent AFUE Level ........................................ RIA-8

Figure RIA.2 Market Penetration Curve for Gas Boilers at 82 Percent AFUE Level .... RIA-8

Figure RIA.3 Early Replacement Shipments Projections for Non-Weatherized

Gas Furnaces ............................................... RIA- 13

Figure RIA.4 Penetration Rates for Non-Weatherized Gas Furnaces at

90 Percent AFUE Level ....................................... RIA-14

Figure RIA.5 Penetration Rates for Gas Boilers at 82 Percent AFUE Level ......... RIA-15

 EE-RM/STD-01-350 COMMENT 164

REGULATORY IMPACT ANALYSIS FOR TODAY'S ENERGY CONSERVATION 

STANDARDS FOR RESIDENTIAL FURNACES AND BOILERS 

TABLE OF CONTENTS 

1.0 INTRODUCTION .................................................. RIA-I 

2.0 NON-REGULATORY POLICIES ..................................... RIA-2 

2.1 Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. RIA-2 

2.1.1 Modeling Method ...................................... RIA-2 

2.1.2 Policy Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. RIA-3 

2.1.3 Policy Interactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. RIA-4 

2.2 Non-Regulatory Policy Assumptions ............................. RIA-4 

2.2.1 No New Regulatory Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. RIA-4 

2.2.2 Financial Incentives Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. RIA-S 

2.2.3 Voluntary Energy-Efficiency Targets ....................... RIA-9 

2.2.4 Early Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. RIA-II 

2.2.S Bulk Government Purchases ............................. RIA-13 

2.3 Non-Regulatory Policy Market Share Impacts ..................... RIA-14 

2.4 Results Summary for Non-Regulatory Alternatives ................. RIA-16 

LIST OF TABLES 

Table RIA. 1 Policy Alternatives to Today's National Furnace and Boiler Standards RIA-I 

Table RIA.2 Trial Standard Levels for Residential Furnaces and Boilers . . . . . . . . . . .. RIA-4 

Table RIA.3 Benefit/Cost Ratios for Today's Standard and Rebate Policy Cases . . . . .. RIA-7 

Table RIA.4 Increased Market Share Penetration Levels from Voluntary Furnace 

and Boiler Programs for Targeted Efficiency Levels ................ RIA-II 

Table RIA.S Non-Regulatory Alternatives with Target Levels at TSL B ........... RIA-16 

LIST OF FIGURES 

Figure RIA. 1 Market Penetration Curve for N on-Weatherized Gas Furnaces at 

90 Percent AFUE Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. RIA-8 

Figure RIA.2 Market Penetration Curve for Gas Boilers at 82 Percent AFUE Level .... RIA-8 

Figure RIA.3 Early Replacement Shipments Projections for Non-Weatherized 

Gas Furnaces ............................................... RIA-13 

Figure RIA.4 Penetration Rates for Non-Weatherized Gas Furnaces at 

90 Percent AFUE Level ....................................... RIA-14 

Figure RIA.S Penetration Rates for Gas Boilers at 82 Percent AFUE Level ......... RIA-IS 

RIA-i 
REGULATORY IMPACT ANALYSIS FOR TODAY'S ENERGY CONSERVATION

STANDARDS FOR RESIDENTIAL FURNACES AND BOILERS

1.0 INTRODUCTION

The Department of Energy (DOE) has determined that residential furnace and boiler

energy conservation standards constitute an "economically significant regulatory action" under

Executive Order (E.O.) 12866 "Regulatory Planning and Review." 58 FR 51735, October 4,

1993. Therefore, today's energy conservation standards require a regulatory impact analysis

(RIA), which involves an evaluation of non-regulatory alternatives to the standards. This

document evaluates several possible alternatives to today's standards, and compares the costs and

benefits of each to today's standards. As described in section 2.1.2 of this report, today's

standards are those in trial standard level (TSL) B.

Under the Process Rule (Procedures for Consideration of New or Revised Energy

Conservation Standards for Consumer Products, 10 CFR Part 430, Subpart C, Appendix A),

DOE is committed to continually explore non-regulatory alternatives to standards. DOE has

prepared this regulatory impact analysis pursuant to E.O. 12866, which is subject to review

under the Executive Order by the Office of Information and Regulatory Affairs (OIRA). 58 FR

51735.

DOE identified six major non-regulatory alternatives to standards as representing feasible

policy options to achieve consumer product energy efficiency. These are listed in Table RIA. 1.

DOE evaluated each alternative in terms of its ability to achieve significant energy savings at a

reasonable cost, and compared the effectiveness of each one to the effectiveness of today's

standards.

Table RIA.1 Policy Alternatives to Today's National Furnace and Boiler Standards

No New Regulatory Action

Consumer Rebates

Consumer Tax Credits

Manufacturer Tax Credits

Voluntary Energy-Efficiency Targets

Early Replacement

Bulk Government Purchases

 EE-RM/STD-01-350 COMMENT 164

REGULATORY IMPACT ANALYSIS FOR TODAY'S ENERGY CONSERVATION 

STANDARDS FOR RESIDENTIAL FURNACES AND BOILERS 

1.0 INTRODUCTION 

The Department of Energy (DOE) has determined that residential furnace and boiler 

energy conservation standards constitute an "economically significant regulatory action" under 

Executive Order (E.O.) 12866 "Regulatory Planning and Review." 58 FR 51735, October 4, 

1993. Therefore, today' s energy conservation standards require a regulatory impact analysis 

(RIA), which involves an evaluation of non-regulatory alternatives to the standards. This 

document evaluates several possible alternatives to today's standards, and compares the costs and 

benefits of each to today's standards. As described in section 2.1.2 of this report, today's 

standards are those in trial standard level (TSL) B. 

Under the Process Rule (Procedures for Consideration of New or Revised Energy 

Conservation Standards for Consumer Products, 10 CFR Part 430, Subpart C, Appendix A), 

DOE is committed to continually explore non-regulatory alternatives to standards. DOE has 

prepared this regulatory impact analysis pursuant to E.O. 12866, which is subject to review 

under the Executive Order by the Office ofInformation and Regulatory Affairs (OIRA). 58 FR 

51735. 

DOE identified six major non-regulatory alternatives to standards as representing feasible 

policy options to achieve consumer product energy efficiency. These are listed in Table RIA. I. 

DOE evaluated each alternative in terms of its ability to achieve significant energy savings at a 

reasonable cost, and compared the effectiveness of each one to the effectiveness of today's 

standards. 

Table RIA.1 Policy Alternatives to Today's National Furnace and Boiler Standards 

No New Regulatory Action 

Consumer Rebates 

Consumer Tax Credits 

Manufacturer Tax Credits 

Voluntary Energy-Efficiency Targets 

Early Replacement 

Bulk Government Purchases 

RlA-l 
2.0 NON-REGULATORY POLICIES

2.1 Methodology

This section describes the approach DOE used to analyze non -regulatory policies for the

most common furnace and the most common boiler product classes, which are non-weatherized

gas furnaces and gas boilers. DOE used a similar approach to estimate the impacts of the policy

alternatives for the other furnace and boiler product classes.

2.1.1 Modeling Method

To calculate the national energy savings (NES) and the net present value (NPV)

corresponding to each policy alternative , DOE used the NES Spreadsheet Model (see Chapter 10

of the technical support document (TSD) accompanying today's final rule for a description of the

NES Spreadsheet Model). To compare each alternative to today's standards, DOE quantified the

effect of each alternative on the purchase of furnace and boiler equipment meeting the target

levels. Once it had made the quantitative assumptions for each alternative policy, DOE made the

appropriate revisions to the inputs in the NES Spreadsheet Model . The main model inputs that

DOE revised were (1) market shares of equipment at target efficiencies , and (2) equipment

replacement rates.

The shipments for any given year are comprised of a distribution of efficiency levels.

DOE assumed that standards would affect 100 percent of the shipments, while the

non-regulatory policies would affect a smaller percentage of the shipments . In each policy case,

DOE made particular assumptions about the percentage of shipments impacted by the policy

under analysis. DOE then calculated shipment-weighted average energy consumption and cost

using these market shares.

A shift in market share to higher efficiency may increase the average installed cost of

furnace and boiler equipment. Operating costs will generally decrease due to a decline in energy

consumption. Therefore, DOE was able to calculate an NPV for non-regulatory alternatives in

the same way as it did for today's standard . In some scenarios, total installed cost increases are

partially mitigated by government rebates or tax credits . DOE assumed that credits and rebates

would be paid for by consumers in another form (such as additional taxes), and therefore did not

include them as a benefit for the purposes of calculating the national NPV.

The key measures of the impact of each alternative are:

National energy savings in quadrillion Btus (quads): Cumulative national primary

energy savings for equipment bought in the period from the effective date of the policy

case (2015) to the year 2038 . NES results account for a 15-percent rebound effect. (See

Chapter 10 of the TSD for an explanation of the rebound effect.)

® Net present value: The value of net monetary savings from equipment bought in the

period from the effective date of the policy case (2015) to the year 2038. DOE calculated

RIA-2

 EE-RM/STD-01-350 COMMENT 164

2.0 NON-REGULATORY POLICIES 

2.1 Methodology 

This section describes the approach DOE used to analyze non-regulatory policies for the 

most common furnace and the most common boiler product classes, which are non-weatherized 

gas furnaces and gas boilers. DOE used a similar approach to estimate the impacts of the policy 

alternatives for the other furnace and boiler product classes. 

2.1.1 Modeling Method 

To calculate the national energy savings (NES) and the net present value (NPV) 

corresponding to each policy alternative, DOE used the NES Spreadsheet Model (see Chapter 10 

of the technical support document (TSD) accompanying today's final rule for a description of the 

NES Spreadsheet Model). To compare each alternative to today's standards, DOE quantified the 

effect of each alternative on the purchase of furnace and boiler equipment meeting the target 

levels. Once it had made the quantitative assumptions for each alternative policy, DOE made the 

appropriate revisions to the inputs in the NES Spreadsheet Model. The main model inputs that 

DOE revised were (1) market shares of equipment at target efficiencies, and (2) equipment 

replacement rates. 

The shipments for any given year are comprised of a distribution of efficiency levels. 

DOE assumed that standards would affect 100 percent of the shipments, while the 

non-regulatory policies would affect a smaller percentage of the shipments. In each policy case, 

DOE made particular assumptions about the percentage of shipments impacted by the policy 

under analysis. DOE then calculated shipment-weighted average energy consumption and cost 

using these market shares. 

A shift in market share to higher efficiency may increase the average installed cost of 

furnace and boiler equipment. Operating costs will generally decrease due to a decline in energy 

consumption. Therefore, DOE was able to calculate an NPV for non-regulatory alternatives in 

the same way as it did for today's standard. In some scenarios, total installed cost increases are 

partially mitigated by government rebates or tax credits. DOE assumed that credits and rebates 

would be paid for by consumers in another form (such as additional taxes), and therefore did not 

include them as a benefit for the purposes of calculating the national NPV. 

The key measures of the impact of each alternative are: 

National energy savings in quadrillion Btus (quads): Cumulative national primary 

energy savings for equipment bought in the period from the effective date of the policy 

case (2015) to the year 2038. NES results account for a IS-percent rebound effect. (See 

Chapter 10 of the TSD for an explanation of the rebound effect.) 

• Net present value: The value of net monetary savings from equipment bought in the 

period from the effective date of the policy case (2015) to the year 2038. DOE calculated 

RIA-2 
the NPV as the difference between the present value of equipment and operating

expenditures (including energy) in the base case, and the present value of expenditures in

each alternative policy case . DOE calculated operating expenses (including energy) for

the life of the equipment.

2.1.2 Policy Assumptions

The impacts of non-regulatory policies are by nature uncertain , since they depend on

program implementation and marketing efforts and the subsequent consumer behavior response.

The projected impacts depend on the assumptions regarding the consumer participation rate, and

are therefore subject to more uncertainty than the impacts of mandatory standards , which DOE

assumes will have full compliance. To increase the robustness of the analysis , DOE conducted a

literature review on each non-regulatory policy and consulted with key experts to gather

information on similar incentive programs that have been implemented in the U.S. By studying

field experience with sample programs of each type , DOE sought to make credible assumptions

of their potential market impacts. Section 2.2 below reports the conclusions from this research

as they apply to the policy modeling assumptions and includes the corresponding literature

citations.

Each of the policy alternatives to today's standards that DOE considered improves the

average efficiency of new furnace and boiler equipment relative to the base case (no new

regulatory action). The analysis considers that each alternative policy would induce residential

consumers to purchase units at the same efficiency levels as required by today's standards. This

report refers to these levels as target levels. In contrast to today's standards , however, the

penetration rate in the alternative policy cases may not be 100 percent.

Today's standards are those in TSL B, as shown in Table RIA.2.

 EE-RM/STD-01-350 COMMENT 164

the NPV as the difference between the present value of equipment and operating 

expenditures (including energy) in the base case, and the present value of expenditures in 

each alternative policy case. DOE calculated operating expenses (including energy) for 

the life of the equipment. 

2.1.2 Policy Assumptions 

The impacts of non-regulatory policies are by nature uncertain, since they depend on 

program implementation and marketing efforts and the subsequent consumer behavior response. 

The projected impacts depend on the assumptions regarding the consumer participation rate, and 

are therefore subject to more uncertainty than the impacts of mandatory standards, which DOE 

assumes will have full compliance. To increase the robustness of the analysis, DOE conducted a 

literature review on each non-regulatory policy and consulted with key experts to gather 

information on similar incentive programs that have been implemented in the U.S. By studying 

field experience with sample programs of each type, DOE sought to make credible assumptions 

of their potential market impacts. Section 2.2 below reports the conclusions from this research 

as they apply to the policy modeling assumptions and includes the corresponding literature 

citations. 

Each of the policy alternatives to today's standards that DOE considered improves the 

average efficiency of new furnace and boiler equipment relative to the base case (no new 

regulatory action). The analysis considers that each alternative policy would induce residential 

consumers to purchase units at the same efficiency levels as required by today's standards. This 

report refers to these levels as target levels. In contrast to today's standards, however, the 

penetration rate in the alternative policy cases may not be 100 percent. 

Today's standards are those in TSL B, as shown in Table RIA.2. 

RIA-3 
Table RIA.2 Trial Standard Levels for Residential Furnaces and Boilers

Trial Standard NWGF WGF MHF OF GB OB

Levels AFUE % AFUE % AFUE % AFUE % AFUE % AFUE %

TSL 1 80 80 80 80 82 83

TSL A 80 81 80 82 82 83

TSL 2 81 81 80 82 84 83

TSL B 90 81 90 82 82 84

TSL 4 90 81 90 84 84 84

TSL 5 96 83 90 85 99 95

Product class list with current standard level in parentheses:

• NWGF = non-weatherized gas furnace (78%)

• WGF = weatherized gas furnace (78%)

• MHF = mobile home gas furnace (75%)

• OF = oil-fired furnace (78%)

• GB = gas boiler (80%)

• OB = oil-fired boiler (80%)

DOE assumed that the non-regulatory policy impacts last from the effective date for

proposed furnace and boiler standards, 2015, through the end of the analysis period, 2038. DOE

did not consider administrative costs for any of the non-regulatory policies in its analysis.

Inclusion of such costs would decrease their NPV by a small amount.

2.1.3 Policy Interactions

DOE calculated the impacts of each regulatory policy separately from those of the other

policies. In actual practice, certain policies are often most effective when implemented in

combination to provide incentives, such as early replacement with consumer rebates, or early

replacement with bulk government purchases. DOE attempted to make conservative

assumptions to avoid double counting policy impacts. Therefore, the policy impacts reported

below are not additive; the combined impact of several or all of the policies may not be inferred

from adding the results together.

Section 2.3 presents the market penetration curves for each of the non-regulatory policy

cases for non-weatherized gas furnaces and gas boilers.

2.2 Non-Regulatory Policy Assumptions

2.2.1 No New Regulatory Action

The case in which no new regulatory action is taken with regard to residential furnace

and boiler efficiency constitutes the base case scenario described in Chapter 10 of the Furnace

and Boiler TSD.' This case defines the basis of comparison for all other scenarios. By

definition, no new regulatory action yields zero energy savings and an NPV of zero dollars.

RIA-4

 EE-RM/STD-01-350 COMMENT 164

Table RIA.2 Trial Standard Levels for Residential Furnaces and Boilers 

Trial Standard NWGF WGF MHF OF GB OB 

Levels AFUE% AFUE% AFUE% AFUE% AFUE% AFUE% 

TSL 1 80 80 80 80 82 83 

TSLA 80 81 80 82 82 83 

TSL2 81 81 80 82 84 83 

TSLB 90 81 90 82 82 84 

TSL4 90 81 90 84 84 84 

TSL5 96 83 90 85 99 95 

Product class list wIth current standard level III parentheses: 

NWGF = non-weatherized gas furnace (78%) 

WGF = weatherized gas furnace (78%) 

MHF mobile home gas furnace (75%) 

OF oil-fired furnace (78%) 

GB = gas boiler (80%) 

OB = oil-fired boiler (80%) 

DOE assumed that the non-regulatory policy impacts last from the effective date for 

proposed furnace and boiler standards, 2015, through the end of the analysis period, 2038. DOE 

did not consider administrative costs for any of the non-regulatory policies in its analysis. 

Inclusion of such costs would decrease their NPV by a small amount. 

2.1.3 Policy Interactions 

DOE calculated the impacts of each regulatory policy separately from those of the other 

policies. In actual practice, certain policies are often most effective when implemented in 

combination to provide incentives, such as early replacement with consumer rebates, or early 

replacement with bulk government purchases. DOE attempted to make conservative 

assumptions to avoid double counting policy impacts. Therefore, the policy impacts reported 

below are not additive; the combined impact of several or all of the policies may not be inferred 

from adding the results together. 

Section 2.3 presents the market penetration curves for each of the non-regulatory policy 

cases for non-weatherized gas furnaces and gas boilers. 

2.2 Non-Regulatory Policy Assumptions 

2.2.1 No New Regulatory Action 

The case in which no new regulatory action is taken with regard to residential furnace 

and boiler efficiency constitutes the base case scenario described in Chapter 10 of the Furnace 

and Boiler TSD. I This case defines the basis of comparison for all other scenarios. By 

definition, no new regulatory action yields zero energy savings and an NPV of zero dollars. 

RIA-4 
2.2.2 Financial Incentives Policies

DOE considered scenarios in which the Federal government would provide two types of

financial incentives: tax credits and rebates. Tax credits could be granted to consumers who

purchased target-level furnace and boiler equipment, or the government could issue tax credits to

manufacturers to offset costs associated with producing such equipment. The government also

could provide consumers with a cash rebate at the time of purchase.

DOE's evaluation of financial incentive policies used a comprehensive study of the

potential for energy efficiency in California performed by Xenergy, Inc., which summarizes

experience with various utility rebate programs.' Xenergy developed a re-parameterized, mixedsource information diffusion model to estimate market impacts induced by financial incentives

for energy-efficient appliances. The basic premise of this mixed-source model is that

information diffusion drives technology adoption. The model is formulated to characterize the

influences of both internal and external sources of information on consumer behavior by

superimposing two components in the equation, each capturing the effect of one of two different

types of information source. The effects of these two types of information diffusion mechanisms

are different. Internal sources of information influence consumers to purchase new products due

mainly to word-of-mouth from early adopters, while external information sources influence

consumers to change their adoption decisions as a result of marketing efforts and information

coming from outside the consumer group. The mixed-source model describes a combined

impact of the two information-source types, and specific parameterization determines consumer

adoption behavior. (Appendix X of the TSD contains further details.)

Xenergy's model combined these two information diffusion mechanisms and generated a

set of "implementation curves," which Xenergy calibrated using evaluation data from utility

rebate programs conducted in the 1990s. Consumer response to rebate incentives appears to be a

combination of the two information source types. The implementation curves illustrate the

increased penetration of efficient equipment (i.e., increased market share) as a result of consumer

response to benefit/cost (B/C) ratio changes induced by a specific rebate program. The

implementation curves are used to depict various diffusion patterns based on perceived barriers

to consumer purchase of high-efficiency equipment. There are implementation curves for

varying levels of market barriers, from "no barriers" to "extremely high barriers." These curves

provide a means to study the impact of changing the B/C ratio, by reducing the initial equipment

cost through financial incentives, on the consumer participation rate.

To further understand the impacts of financial incentives policies, DOE used studies on

forecasting the impact of consumer tax credits.',' This research differentiated the impact of tax

credits into the "direct price effect," which arises from the incremental equipment cost savings,

and the "announcement effect," which is independent of the rebate amount. The announcement

effect derives from the credibility that a particular technology receives from its inclusion in an

incentive program, as well as changes in product marketing strategy, and the resulting

modifications in markups and pricing. DOE assumed that the direct price effect and the

announcement effect would also apply to rebate programs, and that half of the increases in

RIA-5

 EE-RM/STD-01-350 COMMENT 164

2.2.2 Financial Incentives Policies 

DOE considered scenarios in which the Federal government would provide two types of 

financial incentives: tax credits and rebates. Tax credits could be granted to consumers who 

purchased target-level furnace and boiler equipment, or the government could issue tax credits to 

manufacturers to offset costs associated with producing such equipment. The government also 

could provide consumers with a cash rebate at the time of purchase. 

DOE's evaluation of financial incentive policies used a comprehensive study of the 

potential for energy efficiency in California performed by Xenergy, Inc., which summarizes 

experience with various utility rebate programs.2 Xenergy developed are-parameterized, mixedsource information diffusion model to estimate market impacts induced by financial incentives 

for energy-efficient appliances. The basic premise of this mixed-source model is that 

information diffusion drives technology adoption. The model is formulated to characterize the 

influences of both internal and external sources of information on consumer behavior by 

superimposing two components in the equation, each capturing the effect of one of two different 

types of information source. The effects of these two types of information diffusion mechanisms 

are different. Internal sources of information influence consumers to purchase new products due 

mainly to word-of-mouth from early adopters, while external information sources influence 

consumers to change their adoption decisions as a result of marketing efforts and information 

coming from outside the consumer group. The mixed-source model describes a combined 

impact of the two information-source types, and specific parameterization determines consumer 

adoption behavior. (Appendix X of the TSD contains further details.) 

Xenergy's model combined these two information diffusion mechanisms and generated a 

set of "implementation curves," which Xenergy calibrated using evaluation data from utility 

rebate programs conducted in the1990s. Consumer response to rebate incentives appears to be a 

combination of the two information source types. The implementation curves illustrate the 

increased penetration of efficient equipment (i.e., increased market share) as a result of consumer 

response to benefit/cost (B/C) ratio changes induced by a specific rebate program. The 

implementation curves are used to depict various diffusion patterns based on perceived barriers 

to consumer purchase of high-efficiency equipment. There are implementation curves for 

varying levels of market barriers, from "no barriers" to "extremely high barriers." These curves 

provide a means to study the impact of changing the B/C ratio, by reducing the initial equipment 

cost through financial incentives, on the consumer participation rate. 

To further understand the impacts of financial incentives policies, DOE used studies on 

forecasting the impact of consumer tax credits.3

, 4 This research differentiated the impact of tax 

credits into the "direct price effect," which arises from the incremental equipment cost savings, 

and the "announcement effect," which is independent of the rebate amount. The announcement 

effect derives from the credibility that a particular technology receives from its inclusion in an 

incentive program, as well as changes in product marketing strategy, and the resulting 

modifications in markups and pricing. DOE assumed that the direct price effect and the 

announcement effect would also apply to rebate programs, and that half of the increases in 

RIA-5 
market penetration associated with rebates would be due to the direct price effect and half to the

announcement effect.

Consumer Rebates

DOE modeled the impact of the consumer rebate policy by determining the increase in

market penetration of target-level equipment relative to the base case . For non-weatherized gas

furnaces, DOE estimated the impact of increasing the B/C ratio via a rebate that paid 26 percent

of the incremental installed cost between a non-weatherized gas furnace meeting the base case

efficiency levels and a unit meeting the target efficiency. DOE based the 26 percent rebate

amount on rebate programs for condensing gas furnaces throughout the nation.', 6, 7, s, 9, 10, 11, 12, 13, 14

The average rebate in these programs amounted to about 26 percent of the incremental installed

cost for condensing furnaces.

For gas boilers, DOE assumed that the rebate would cover 60 percent of the incremental

installed cost between a boiler meeting the base case efficiency level and a unit meeting the

target efficiency. It based this amount on the average rebate level in programs for 85 percent

4FUE gas boilers,b which amounted to about 60 percent of incremental installed cost. ', ' 8, 9, 10, 1 1,

DOE assumed the rebates would remain in effect until they had transformed the market

so that the market shift in efficiency shares seen in the first year of the program would be

maintained throughout the forecast period (2015-2038).

DOE first calculated the B/C ratio for the unit meeting the target level relative to the base

case with no rebate. It then calculated another B/C ratio for the unit meeting the target level,

with a rebate, relative to the base case unit. Because of the incremental cost reduction due to the

rebate, the B/C ratio for the rebate policy unit is larger (see Table RIA.3).

a The base case is a market weighted -average of units at several AFUE levels.

' While the target level (82 percent) is lower than 85-percent AFUE for these rebate programs, DOE assumed that a

rebate program could be designed to pay an equivalent percentage of the incremental installed costs of the targeted

gas boilers.

RIA-6

 EE-RM/STD-01-350 COMMENT 164

market penetration associated with rebates would be due to the direct price effect and half to the 

announcement effect. 

Consumer Rebates 

DOE modeled the impact of the consumer rebate policy by determining the increase in 

market penetration of target-level equipment relative to the base case. For non-weatherized gas 

furnaces, DOE estimated the impact of increasing the B/C ratio via a rebate that paid 26 percent 

of the incremental installed cost between a non-weatherized gas furnace meeting the base case 

efficiency levela and a unit meeting the target efficiency. DOE based the 26 percent rebate 

amount on rebate programs for condensing gas furnaces throughout the nation.s, 6, 7, 8, 9,10, II, 12, 13, 14 

The average rebate in these programs amounted to about 26 percent of the incremental installed 

cost for condensing furnaces. 

For gas boilers, DOE assumed that the rebate would cover 60 percent of the incremental 

installed cost between a boiler meeting the base case efficiency level and a unit meeting the 

target efficiency. It based this amount on the average rebate level in programs for 85 percent 

{}FUE gas boilers,b which amounted to about 60 percent of incremental installed cost.s

, 7,8,9,10, II, 

DOE assumed the rebates would remain in effect until they had transformed the market 

so that the market shift in efficiency shares seen in the first year of the program would be 

maintained throughout the forecast period (2015-2038). 

DOE first calculated the B/C ratio for the unit meeting the target level relative to the base 

case with no rebate. It then calculated another B/C ratio for the unit meeting the target level, 

with a rebate, relative to the base case unit. Because of the incremental cost reduction due to the 

rebate, the B/C ratio for the rebate policy unit is larger (see Table RIA.3). 

a The base case is a market weighted-average of units at several AFUE levels. 

b While the target level (82 percent) is lower than 85-percent AFUE for these rebate programs, DOE assumed that a 

rebate program could be designed to pay an equivalent percentage of the incremental installed costs of the targeted 

gas boilers. 

RIA-6 
Table RIA.3 Benefit/Cost Ratios for Toda 's Standard and Rebate folic Cases

NWGF*

at 90%

AFUE

GB**

at 82%

AFUE

Benefit (Lifetime Operating Cost Savings) $524 $333

Incremental Installed Cost (Increased Installed Cost) $698 $168

B/C Ratio with no rebate 0.8 2.0

Rebate Amount

Adjusted Incremental Installed Cost (Increased Installed Cost after Rebate)

$180

$518

$101

$67

B/C Ratio for Rebate Policy Case 1.0 5.0

*NWGF = non-weatherized gas f irnace

**GB = gas boiler

DOE then used the curves shown in Figures RIA. 1, RIA.2, RIA.4, and RIA.5 to estimate

the increased percentage of consumers who would purchase the units that meet the policy target

levels if given a rebate incentive.

For non-weatherized gas furnaces at a 90 -percent AFUE standard level, DOE chose the

"moderate barriers," since 90 percent AFUE imposes an economic burden for a large fraction of

southern customers. For gas boilers at the 82-percent AFUE standard level, DOE chose the "low

barriers," since these efficiency levels are a common product with relatively large market share

in 2004. DOE also used the "low barriers " curve for the other product classes.

Figures RIA.1 and RIA. 2 show the penetration rates of target-level units as a function of

B/C ratios. Using this method, DOE estimated that, for the non-weatherized gas furnace product

class, the market share of equipment meeting the policy target due to a rebate policy would

increase by 1.2 percent at a target level of 90 -percent AFUE. For the gas boiler product class,

DOE estimated that the market share of equipment meeting the policy target due to a rebate

policy would increase by 19 percent for 82-percent AFUE units. To calculate the impacts of this

policy, DOE adjusted the base case shipments projection in the NES model to reflect these

percentage increases in market share of efficient furnace and boiler models.

 EE-RM/STD-01-350 COMMENT 164

T a e bi RIA . 3 B ene tit/C I os t R a f lOS £ or T d ' o aYs St an d d d R b t p ar an e a e o r ICY C ases 

Benefit (Lifetime Operating Cost Savings) 

Incremental Installed Cost (Increased Installed Cost) 

B/C Ratio with no rebate 

Rebate Amount 

Adjusted Incremental Installed Cost (Increased Installed Cost after Rebate) 

B/C Ratio for Rebate Policy Case 

*NWGF non-weathenzed gas furnace 

**GB = gas boiler 

NWGF* 

at 90% 

AFUE 

$524 

$698 

0.8 

$180 

$518 

1.0 

GB** 

at 82% 

AFUE 

$333 

$168 

2.0 

$101 

$67 

5.0 

DOE then used the curves shown in Figures RIA. 1 , RIA.2, RIA.4, and RIA.5 to estimate 

the increased percentage of consumers who would purchase the units that meet the policy target 

levels if given a rebate incentive. 

For non-weatherized gas furnaces at a 90-percent AFUE standard level, DOE chose the 

"moderate barriers," since 90 percent AFUE imposes an economic burden for a large fraction of 

southern customers. For gas boilers at the 82-percent AFUE standard level, DOE chose the "low 

barriers," since these efficiency levels are a common product with relatively large market share 

in 2004. DOE also used the "low barriers" curve for the other product classes. 

Figures RIA. 1 and RIA.2 show the penetration rates of target-level units as a function of 

B/C ratios. Using this method, DOE estimated that, for the non-weatherized gas furnace product 

class, the market share of equipment meeting the policy target due to a rebate policy would 

increase by 1.2 percent at a target level of 90-percent AFUE. For the gas boiler product class, 

DOE estimated that the market share of equipment meeting the policy target due to a rebate 

policy would increase by 19 percent for 82-percent AFUE units. To calculate the impacts of this 

policy, DOE adjusted the base case shipments projection in the NES model to reflect these 

percentage increases in market share of efficient furnace and boiler models. 

RIA-7 
100%

90%

80%

70%

50%

20%

1 0%

0%

0 2 4 6 8 10 12 14

Participant Benefit-Cost Ratio

Change of

Penetration

} Rate = 1.2%

Figure RIA. 1 Market Penetration Curve for Non-Weatherized Gas Furnaces

at 90 Percent AFUE Level

100%

90%

80% - --------------------- Low Barriers ---- _ _ __

Curve

.dt 70% ----- ---------

®

Change of

50% - - - - - - - - - - ^----------- - - - - - - - - - - - - - - - - - - - - Penetration

E Penetration Rate = 57% at B/C ratio ( Rate = 19%

= 40% E - - - - ---- ofd------ ----------- _ -

X

30%-...__/_\________________-_______________________

20%

Penetration Rate = 38% at B/C ratio

--of2---- ------- ---------------

2 4 6 8 10 12 14

Participant Benefit-Cost Ratio

Figure RIA.2 Market Penetration Curve for Gas Boilers at 82 Percent AFUE

Level

RIA-8

 EE-RM/STD-01-350 COMMENT 164

100% ,-----------------------------

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

lO% 

0% 

Penetration Rate = 1.1 % 

at BIC ratio of 0.8 

Moderate Barriers Curve 

10 12 14 

Participant Benefit-Cost Ratio 

Change of 

Penetration 

Rate = 1.2% 

Figure RIA.1 Market Penetration Curve for Non-Weatherized Gas Furnaces 

at 90 Percent AFUE Level 

~ a: 

" 0 

~ " II) 

DE 

:::l 

E 'x 

III 

:;: 

100% -,--------------------------------, 

90% ---------------

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0010 -]--

_ _ _________ L,&W 6arIi~rs_ _ _ _ _ _ _ _ _ _ _ 

Curve 

---------1- ~_~.::;-~-~-~----- ----=-=-~~--. 

------ - - - --~~~- ------- - -------

----------~~ ~\ -------- -------------------}~:~:e:t~n Penetration Rate = 57% at BIC ratio Rate = 19% 

-- -----offi------ - ----- ------------

10 

Participant Benefit-Cost Ratio 

12 14 

Figure RIA.2 Market Penetration Curve for Gas Boilers at 82 Percent AFUE 

Level 

RlA-8 
Consumer Tax Credits

DOE assumed a consumer tax credit equivalent to the amount covered by rebates (i.e., 26

percent of the incremental cost between non-weatherized gas furnace base case equipment and

equipment meeting the policy target levels, and 60 percent of the incremental cost for gas

boilers). DOE estimated that the consumer participation rate would be lower than that for

consumer rebates. Research on tax credits has shown that the time delay to the consumer in

receiving a reimbursement via tax credit, plus the added transaction costs in tax return

preparation, make the tax credit incentive less effective than a rebate received at the time of

purchase. Based on previous analysis,16 DOE assumed that only 60 percent of the customers

who would take advantage of a rebate would take advantage of the tax credit.

Using a similar approach as for the rebate policy , DOE estimated that the market share of

target-efficiency gas furnace units would increase due to consumer tax credits by 0.7 percent

over the base case at the 90-percent AFUE level. For gas boilers at 82-percent AFUE, the

market share would increase by 12.5 percent. DOE assumed the impact of this policy would be

to permanently transform the market so that the shipment-weighted efficiency gain seen in the

first year of the program would be maintained throughout the forecast period.

Manufacturer Tax Credits

DOE assumed that a manufacturer tax credit program would effectively result in a lower

price to the consumer by an amount equivalent to that provided by rebates (i.e., 26 percent of the

incremental price difference for furnaces meeting base case efficiency levels and those meeting

the policy targets, and 60 percent of the incremental price difference for boilers). Because these

tax credits would go to manufacturers instead of consumers, DOE assumed that manufacturers

would pass on the reduced costs, causing the direct price effect . However, DOE assumed that

the announcement effect would not occur because the program would not be visible to the

consumers. Since the direct price effect is approximately equivalent to the announcement

effect,' DOE assumed that half of the consumers assumed to take advantage of consumer tax

credits would purchase more-efficient products with a manufacturer tax credit program. As a

result, DOE estimated that the market share of efficient non-weatherized gas furnaces would

increase due to manufacturer tax credits by 0.4 percent over the base case at the 90-percent

AFUE standard level and by 6.2 percent for gas boilers at the 82-percent AFUE standard level.

DOE assumed the impact of this policy would be to permanently transform the market so that the

shipment-weighted efficiency gain seen in the first year of the program would be maintained

throughout the forecast period.

2.2.3 Voluntary Energy-Efficiency Targets

For a non-weatherized gas furnace target level of 90-percent AFUE, DOE assumed that

the voluntary target would be achieved through manufacturer participation in a gradual phaseout

of production of units below 90-percent AFUE. It assumed that this phaseout would increase

from 2015."

RIA-9

 EE-RM/STD-01-350 COMMENT 164

Consumer Tax Credits 

DOE assumed a consumer tax credit equivalent to the amount covered by rebates (i.e., 26 

percent of the incremental cost between non-weatherized gas furnace base case equipment and 

equipment meeting the policy target levels, and 60 percent of the incremental cost for gas 

boilers). DOE estimated that the consumer participation rate would be lower than that for 

consumer rebates. Research on tax credits has shown that the time delay to the consumer in 

receiving a reimbursement via tax credit, plus the added transaction costs in tax return 

preparation, make the tax credit incentive less effective than a rebate received at the time of 

purchase. Based on previous analysis,16 DOE assumed that only 60 percent of the customers 

who would take advantage of a rebate would take advantage of the tax credit. 

Using a similar approach as for the rebate policy, DOE estimated that the market share of 

target-efficiency gas furnace units would increase due to consumer tax credits by 0.7 percent 

over the base case at the 90-percent AFUE level. For gas boilers at 82-percent AFUE, the 

market share would increase by 12.5 percent. DOE assumed the impact of this policy would be 

to permanently transform the market so that the shipment-weighted efficiency gain seen in the 

first year of the program would be maintained throughout the forecast period. 

Manufacturer Tax Credits 

DOE assumed that a manufacturer tax credit program would effectively result in a lower 

price to the consumer by an amount equivalent to that provided by rebates (i.e., 26 percent of the 

incremental price difference for furnaces meeting base case efficiency levels and those meeting 

the policy targets, and 60 percent of the incremental price difference for boilers). Because these 

tax credits would go to manufacturers instead of consumers, DOE assumed that manufacturers 

would pass on the reduced costs, causing the direct price effect. However, DOE assumed that 

the announcement effect would not occur because the program would not be visible to the 

consumers. Since the direct price effect is approximately equivalent to the announcement 

effect,3 DOE assumed that half of the consumers assumed to take advantage of consumer tax 

credits would purchase more-efficient products with a manufacturer tax credit program. As a 

result, DOE estimated that the market share of efficient non-weatherized gas furnaces would 

increase due to manufacturer tax credits by 0.4 percent over the base case at the 90-percent 

AFUE standard level and by 6.2 percent for gas boilers at the 82-percent AFUE standard level. 

DOE assumed the impact of this policy would be to permanently transform the market so that the 

shipment-weighted efficiency gain seen in the first year of the program would be maintained 

throughout the forecast period. 

2.2.3 Voluntary Energy-Efficiency Targets 

For a non-weatherized gas furnace target level of90-percent AFUE, DOE assumed that 

the voluntary target would be achieved through manufacturer participation in a gradual phaseout 

of production of units below 90-percent AFUE. It assumed that this phaseout would increase 

from 2015Y 

RIA-9 
For gas boilers at 82-percent AFUE, DOE modeled the voluntary efficiency target policy

assuming expansion of existing Energy Star endorsement labeling programs conducted by the

Environmental Protection Agency and DOE for these two products. 18 The Energy Star program

sets minimum energy-efficiency specifications for various products, including furnace and boiler

equipment. Energy Star encourages consumer adoption of these products through marketing to

promote consumer label recognition, adoption of the specifications by various efficiency

incentive programs, and manufacturer production and promotion of Energy Star-compliant

appliances.

For gas boilers, DOE estimated that an expanded Energy Star program that targeted 82-

percent AFUE equipment could moderately increase the market share at these levels. In this

case, DOE used estimates of the market impact of the existing Energy Star programs.", 19 For

gas boilers, DOE assumed the programs resulting from this voluntary efficiency targets policy

would increase projected market share of the targeted units above the penetration increases

estimated by the Energy Star program by 75 percent for gas boilers at the 82-percent AFUE

target level. The Energy Star level for gas boilers is 85-percent AFUE.

Table RIA.4 shows the estimated market share increases from the voluntary efficiency

target policy.

 EE-RM/STD-01-350 COMMENT 164

For gas boilers at 82-percent AFUE, DOE modeled the voluntary efficiency target policy 

assuming expansion of existing Energy Star endorsement labeling programs conducted by the 

Environmental Protection Agency and DOE for these two products. IS The Energy Star program 

sets minimum energy-efficiency specifications for various products, including furnace and boiler 

equipment. Energy Star encourages consumer adoption of these products through marketing to 

promote consumer label recognition, adoption of the specifications by various efficiency 

incentive programs, and manufacturer production and promotion of Energy Star-compliant 

appliances. 

For gas boilers, DOE estimated that an expanded Energy Star program that targeted 82-

percent AFUE equipment could moderately increase the market share at these levels. In this 

case, DOE used estimates of the market impact of the existing Energy Star programs. 17, 19 For 

gas boilers, DOE assumed the programs resulting from this voluntary efficiency targets policy 

would increase projected market share of the targeted units above the penetration increases 

estimated by the Energy Star program by 75 percent for gas boilers at the 82-percent AFUE 

target level. The Energy Star level for gas boilers is 85-percent AFUE. 

Table RIA.4 shows the estimated market share increases from the voluntary efficiency 

target policy. 

RIA-l 0 
Table A.4 Increased Market Share Penetration Levels from Voluntary Furnace and

Non-Weatherized Gas

Furnaces and Mobile Home

Furnaces

Weatherized

Gas Furnaces Oil Furnaces Gas Boilers Oil Boilers

Year of 83% & 84%

Program 90% AFUE 81% AFUE 82% AFUE 82% AFUE AFUE

2015 0% 0% 0% 0% 0%

2016 0% 0% 0% 3% 2%

2017 0% 0% 0% 5% 3%

2018 1% 1% 1% 8% 5%

2019 2% 2% 2% 10% 7%

2020 3% 3% 3% 13% 8%

2021 4% 4% 4% 16% 10%

2022 4% 4% 4% 18% 12%

2023 5% 5% 5% 21% 13%

2024 5% 5% 5% 23% 15%

2025 5% 5% 5% 25% 16%

2026 6% 6% 6% 26% 17%

2027 6% 6% 6% 26% 18%

2028 6% 6% 6% 26% 18%

2029 6% 6% 6% 26% 18%

2030 7% 7% 7% 26% 18%

2031 7% 7% 7% 26% 19%

2032 7% 7% 7% 26% 19%

2033 7% 7% 7% 26% 19%

2034 8% 8% 8% 27% 19%

2035 8% 8% 8% 27% 20%

2036 8% 8% 8% 27% 20%

2037 8% 8% 8% 27% 20%

2038 8% 8% 8% 27% 20%

* The percentages in each column refer to shares of the eligible market in each case.

2.2.4 Early Replacement

Early replacement refers to the replacement of furnace and boiler units before the end of

their useful lives. The purpose of this policy is to replace old, inefficient equipment with higherefficiency units.

In the 1990s, DOE studied the feasibility of a Federal program to promote early

replacement of appliances under the Energy Policy Act of 1992.20 This study identified policy

options for early replacement that included a direct national early replacement program,

replacement of Federally owned appliances, promotion through equipment manufacturers,

consumer incentives, incentives to utilities, and building regulations.`

° The analysis concluded that, while cost-effective opportunities for early replacement exist, a widespread Federal

early replacement program was not economically justified. Because premature retirement means that a unit may be

replaced by an appliance less efficient than the eventual replacement would probably have been, energy savings

would be smaller than anticipated. Early replacement programs could increase sales volatility in the long run by

(continued...)

Boiler Programs for Tar eted Efficiency Levels*

RIA-11

 EE-RM/STD-01-350 COMMENT 164

Table RIAA Increased Market Share Penetration Levels from Voluntary Furnace and 

B·l 01 er P rograms ~ or T arge t e d Effi IClency . L I eve s* 

Non-Weatherized Gas 

Furnaces and Mobile Home Weatherized 

Furnaces Gas Furnaces Oil Furnaces Gas Boilers Oil Boilers 

Year of 83% & 84% 

Program 90% AFUE 81% AFUE 82% AFUE 82% AFUE AFUE 

2015 0% 0% 0% 0% 0% 

2016 0% 0% 0% 3% 2% 

2017 0% 0% 0% 5% 3% 

2018 1% 1% 1% 8% 5% 

2019 2% 2% 2% 10% 7% 

2020 3% 3% 3% 13% 8% 

2021 4% 4% 4% 16% 10% 

2022 4% 4% 4% 18% 12% 

2023 5% 5% 5% 21% 13% 

2024 5% 5% 5% 23% 15% 

2025 5% 5% 5% 25% 16% 

2026 6% 6% 6% 26% 17% 

2027 6% 6% 6% 26% 18% 

2028 6% 6% 6% 26% 18% 

2029 6% 6% 6% 26% 18% 

2030 7% 7% 7% 26% 18% 

2031 7% 7% 7% 26% 19% 

2032 7% 7% 7% 26% 19% 

2033 7% 7% 7% 26% 19% 

2034 8% 8% 8% 27% 19% 

2035 8% 8% 8% 27% 20% 

2036 8% 8% 8% 27% 20% 

2037 8% 8% 8% 27% 20% 

2038 8% 8% 8% 27% 20% .. * The percentages III each column refer to shares of the eilglb1e market III each case. 

2.204 Early Replacement 

Early replacement refers to the replacement of furnace and boiler units before the end of 

their useful lives. The purpose of this policy is to replace old, inefficient equipment with higherefficiency units. 

In the 1990s, DOE studied the feasibility of a Federal program to promote early 

replacement of appliances under the Energy Policy Act of 1992.20 This study identified policy 

options for early replacement that included a direct national early replacement program, 

replacement of Federally owned appliances, promotion through equipment manufacturers, 

consumer incentives, incentives to utilities, and building regulations. c 

C The analysis concluded that, while cost-effective opportunities for early replacement exist, a widespread Federal 

early replacement program was not economically justified. Because premature retirement means that a unit may be 

replaced by an appliance less efficient than the eventual replacement would probably have been, energy savings 

would be smaller than anticipated. Early replacement programs could increase sales volatility in the long run by 

(continued ... ) 

RIA-II 
For this analysis, DOE considered a program that targets the units in the stock that have

efficiency levels lower than the policy target level and encourages their early replacement with

products at the target efficiency level. Shipments not affected by the early replacement program

have base case efficiency levels. Shipments to new construction in 2015 and beyond are not

affected by this program. (Chapter 9 of the TSD describes the general approach for estimating

replacements in each year; the NES model uses a retirement function that tracks the percentage

of units retiring and surviving for each vintage.)

DOE assumed that a portion of the furnace and boiler units in the existing stock in 2015,

the first year of the analysis period , would be replaced by models meeting the target levels. It

modeled this policy by assuming an increase of 20 percent (over the natural replacement rate

based on units being replaced at the end of their useful lives ) in the number of replaced units in

the first year. It based this level on one of the cases in the report described above. DOE

assumed that the program would last as long as it took to completely replace all of the eligible

furnaces and boilers in the stock in the year that the program began (2015).

The policy would create a jump in shipments of equipment meeting target AFUE levels

relative to the base case in the early years of the program (see Figure RIA.3). As a result, more

higher-efficiency units meeting the policy targets would be quickly brought into the equipment

stock, leading to an immediate gain in the weighted -average equipment efficiency compared to

the base case . However, unlike the other policy cases discussed, the weighted-average efficiency

would drop back down to meet the levels in the base case as the eligible stock of equipment for

early replacement became depleted.

(...continued)

encouraging a temporary increase in production followed by a lull in demand . Early replacement could be

economical in localities with high energy cost conditions or environmental constraints , when replacement appliances

are much more efficient than existing stock , or when a major technology breakthrough has recently occurred,

creating the need for a ready market.

RIA- 12

 EE-RM/STD-01-350 COMMENT 164

For this analysis, DOE considered a program that targets the units in the stock that have 

efficiency levels lower than the policy target level and encourages their early replacement with 

products at the target efficiency level. Shipments not affected by the early replacement program 

have base case efficiency levels. Shipments to new construction in 2015 and beyond are not 

affected by this program. (Chapter 9 of the TSD describes the general approach for estimating 

replacements in each year; the NES model uses a retirement function that tracks the percentage 

of units retiring and surviving for each vintage.) 

DOE assumed that a portion of the furnace and boiler units in the existing stock in 2015, 

the first year of the analysis period, would be replaced by models meeting the target levels. It 

modeled this policy by assuming an increase of20 percent (over the natural replacement rate 

based on units being replaced at the end of their useful lives ) in the number of replaced units in 

the first year. It based this level on one of the cases in the report described above. DOE 

assumed that the program would last as long as it took to completely replace all of the eligible 

furnaces and boilers in the stock in the year that the program began (2015). 

The policy would create a jump in shipments of equipment meeting target AFUE levels 

relative to the base case in the early years of the program (see Figure RIA.3). As a result, more 

higher-efficiency units meeting the policy targets would be quickly brought into the equipment 

stock, leading to an immediate gain in the weighted-average equipment efficiency compared to 

the base case. However, unlike the other policy cases discussed, the weighted-average efficiency 

would drop back down to meet the levels in the base case as the eligible stock of equipment for 

early replacement became depleted. 

C ( ••• continued) 

encouraging a temporary increase in production followed by a lull in demand. Early replacement could be 

economical in localities with high energy cost conditions or environmental constraints, when replacement appliances 

are much more efficient than existing stock, or when a major technology breakthrough has recently occurred, 

creating the need for a ready market. 

RIA-l2 
4. 5-

4.0

3.5 _

3.0

c

2 5.

a 2. 0

-Base Case

1 . 5

1 0

Early Replacement

. Scenario

0 5. - -- - -- -

0 0.

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Figure RIA.3 Early Replacement Shipments Projections for Non-Weatherized

Gas Furnaces

2.2.5 Bulk Government Purchases

DOE assumed that a bulk government purchase policy would encourage Federal, State,

and local governments to purchase equipment meeting the target levels. Aggregating public

sector demand could provide a market signal to manufacturers and vendors that some of their

largest customers seek suppliers with products that meet an efficiency target at good prices. This

program also could induce market pull" impacts through the effects of manufacturers and

vendors achieving economies of scale for high-efficiency products.

DOE assumed that government agencies, such as the Department of Housing and Urban

Development (HUD), would administer such a program. At the Federal level, this would be an

enhancement to the existing Federal Energy Management Program (FEMP). FEMP has

procurement guidelines for Federal government equipment purchasing, and Federal construction

requirements include these guidelines for installing or replacing equipment."

DOE assumed that this policy would impact a subset of housing units for which

government agencies purchase or influence the purchase of furnaces and boilers. This subset

would mainly consist of public housing and housing on military bases. To represent this subset,

DOE considered low-income households identified in the Residential Energy Consumption

Survey (RECS) from 200122 (see Chapter 11 of the TSD for a description of the low-income

household sample). According to RECS 2001, 7.8 percent of the households with gas furnaces

and 17.5 percent of those with gas boilers were classified as low-income. DOE assumed that

these same percentages of furnace and boiler shipments would go to low-income households in

RIA-13

 EE-RM/STD-01-350 COMMENT 164

4.5 ~---------------------------------------, 

4.0 - ,-----

3.5 

"f 3.0 

~ --·------··--- - - I ....... w:::-~ 

S§ 

;; 2.5 +---------- ri 

c 

., 

[ 2.0 +-------F- ------------- --------------~ 

~ 

iV o 1.5 +-J-=-.,.---- ---- I1.0 +--------------1 

0.5 +-------- ----

____ Base Case 

- Early Replacement 

Scenario 

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 

---- . _. - _ . . _ .. .. _ . . _ -----------" 

Figure RIA.3 Early Replacement Shipments Projections for Non-Weatherized 

Gas Furnaces 

2.2.5 Bulk Government Purchases 

DOE assumed that a bulk government purchase policy would encourage Federal, State, 

and local governments to purchase equipment meeting the target levels. Aggregating public 

sector demand could provide a market signal to manufacturers and vendors that some of their 

largest customers seek suppliers with products that meet an efficiency target at good prices. This 

program also could induce market pull" impacts through the effects of manufacturers and 

vendors achieving economies of scale for high-efficiency products. 

DOE assumed that government agencies, such as the Department of Housing and Urban 

Development (HUD), would administer such a program. At the Federal level, this would be an 

enhancement to the existing Federal Energy Management Program (FEMP). FEMP has 

procurement guidelines for Federal government equipment purchasing, and Federal construction 

requirements include these guidelines for installing or replacing equipment.21 

DOE assumed that this policy would impact a subset of housing units for which 

government agencies purchase or influence the purchase of furnaces and boilers. This subset 

would mainly consist of public housing and housing on military bases. To represent this subset, 

DOE considered low-income households identified in the Residential Energy Consumption 

Survey (RECS) from 2001 22 (see Chapter 11 of the TSD for a description of the low-income 

household sample). According to RECS 2001, 7.8 percent of the households with gas furnaces 

and 17.5 percent of those with gas boilers were classified as low-income. DOE assumed that 

these same percentages of furnace and boiler shipments would go to low-income households in 

RIA-I 3 
each year.

To estimate the market impact, DOE considered previous analysis of the bulk

government purchasing policy in the residential air conditioner RIA,23 where it assumed a fivepercent increase in market share of higher-efficiency units over the base case due to the policy.

Since DOE envisions that the policy for furnaces and boilers would build on the existing FEMP

program for gas furnaces, DOE assumed that the government purchase policy would likely cause

a 10-percent increase in market share in each year. Thus, an additional 10 percent (above the

base case) of shipments to eligible low-income households would meet the target levels through

this policy. The result is an additional penetration of equipment meeting the target efficiency

levels of 0.8 percent and 1.8 percent (10 percent respectively of the low-income households with

gas furnaces and gas boilers).

2.3 Non-Regulatory Policy Market Share Impacts

Figures RIA.4 and RIA.5 show the market share (penetration rate) impacts for each of the

non-regulatory policy cases for non-weatherized gas furnaces and gas boilers. In each case, the

market penetration refers to the eligible market for the particular product. For each product

class, the proposed standard (not shown in the figures) would result in a 100-percent penetration.

16%

14%

12%

2%

10%

8%

6%

4%

--Voluntary Targets

-Consumer Rebates

Consumer Tax Credits

-• Manufacturer Tax Credits

- 4--Bulk Government Purchaes

-Early Replacement

10,

X-X x^ _, x Y^ ii %H--7C--?[-X- Y Yt--7C 7[•-X ):-fit 7^X Y^ >E--7'-

2015 2020 2025 2030 2035

Figure RIA.4 Penetration Rates for Non-Weatherized Gas Furnaces at 90

Percent AFUE Level

RIA-14

 EE-RM/STD-01-350 COMMENT 164

each year. 

To estimate the market impact, DOE considered previous analysis of the bulk 

government purchasing policy in the residential air conditioner RIA,23 where it assumed a fivepercent increase in market share of higher-efficiency units over the base case due to the policy. 

Since DOE envisions that the policy for furnaces and boilers would build on the existing FEMP 

program for gas furnaces, DOE assumed that the government purchase policy would likely cause 

a lO-percent increase in market share in each year. Thus, an additional 10 percent (above the 

base case) of shipments to eligible low-income households would meet the target levels through 

this policy. The result is an additional penetration of equipment meeting the target efficiency 

levels of 0.8 percent and 1.8 percent (10 percent respectively of the low-income households with 

gas furnaces and gas boilers). 

2.3 Non-Regulatory Policy Market Share Impacts 

Figures RIA.4 and RIA.5 show the market share (penetration rate) impacts for each of the 

non-regulatory policy cases for non-weatherized gas furnaces and gas boilers. In each case, the 

market penetration refers to the eligible market for the particular product. For each product 

class, the proposed standard (not shown in the figures) would result in a 100-percent penetration. 

16%,-------------------

14% +--~""=:-_:;_c_-------------__1 

12% +-------.0.",----------__1 

10% +-----------"-'. 

-c.-Voluntary Targets 

-Consumer Rebates 

Consumer Tax Credits 

.-..,IIf-Manufacturer Tax Credits 

ulk Government Purchaes 

-r" Early Replacement 

8% --.--...... --.--....... ------"""'--.--------

6'10+--------------~~ ----------~ 

4'10+---------7 -------~,,----------~ 

2015 2020 2025 2030 2035 

Figure RIA.4 Penetration Rates for Non-Weatherized Gas Furnaces at 90 

Percent AFUE Level 

RIA-14 
30%

--Voluntary Targets

-':-Consumer Rebates

Consumer Tax Credits

25% Manufacturer Tax Credits

-x--Bulk Government Purchaes

---Early Replacement /

20%

15 %

mac X • 9 X # 3E^

2015 2020 2025 2030 2035

Figure RIA.5 Penetration Rates for Gas Boilers at 82 Percent AFUE Level

 EE-RM/STD-01-350 COMMENT 164

30%,--------------------------------------------------------------------------, 

25% 

20% 

15% 

-cO-Voluntary Targets 

-f:t-Consumer Rebates 

Consumer Tax Credits 

Manufacturer Tax Credits 

=->E=-Bulk Government Purchaes 

. '-f-Early Replacement 

________ n .•... 1"- 11 ___ _ 

________ n ____ • ______ _ 

+--1---+--- 1 L;. .. 

10% + ______ "__ r--~" __ Unn .•• _______ • . _ n •• ___ ---j 

, 5% 

2015 2020 2025 2030 2035 

Figure RIA.S Penetration Rates for Gas Boilers at 82 Percent AFUE Level 

RIA-IS 
2.4 Results Summary for Non-Regulatory Alternatives

Table RIA.5 shows the NES and NPV of the efficiency target level equal to TSL B. The

results are for all six product classes. The case in which no regulatory action is taken with

regard to furnaces and boilers constitutes the base case (or "No Action") scenario, in which

energy savings and NPV are zero by definition. For comparison, the table includes the impacts

of the proposed energy conservation standards. The NPV amounts shown in Table RIA.5 refer

to the NPV based on two discount rates (seven percent and three percent real).

Table RIA.5 Non-Re gulatory Alternatives with Tar et Levels at TSL B

Primary

Net Present Value*

(billion 2006$)

Policy Alternatives

Energy Savings

(quads) 7% discount rate 3% discount rate

No New Regulatory Action 0.0 0.0 0.0

Consumer Rebates 0.098 0.089 0.480

Consumer Tax Credits 0.059 0.054 0.288

Manufacturer Tax Credits 0.030 0.027 0.144

Voluntary Energy Efficiency Targets 0.148 0.071 0.731

Early Replacement 0.330 0.119 0.829

Bulk Government Purchases 0.031 0.013 0.120

Today's Standards at TSL B 3.209 0.975 11.069

* Net present value (NPV) is the value of a time series of costs and savings. DOE determined the NPV from 2015 to

2038 in billions of 2006$.

The alternatives DOE examined would not save as much energy or have as high NPV as

the standards. Also, several of the alternatives, such as consumer or manufacturer tax credits,

would require new enabling legislation, since authority to carry out those alternatives does not

presently exist.

 EE-RM/STD-01-350 COMMENT 164

2.4 Results Summary for Non-Regulatory Alternatives 

Table RIA.5 shows the NES and NPV of the efficiency target level equal to TSL B. The 

results are for all six product classes. The case in which no regulatory action is taken with 

regard to furnaces and boilers constitutes the base case (or "No Action") scenario, in which 

energy savings and NPV are zero by definition. For comparison, the table includes the impacts 

of the proposed energy conservation standards. The NPV amounts shown in Table RIA.5 refer 

to the NPV based on two discount rates (seven percent and three percent real). 

T a e bl RIA 5 N R I t ° on- eeu a ory Alt erna f Ives WI °th T ar~et Lit eve s a TSL B 

Net Present Value * 

Primary (billion 2006$) 

Energy Savings 

Policy Alternatives (quads) 7% discount rate 3 % discount rate 

No New Regulatory Action 0.0 0.0 0.0 

Consumer Rebates 0.098 0.089 0.480 

Consumer Tax Credits 0.059 0.054 0.288 

Manufacturer Tax Credits 0.030 0.027 0.144 

Voluntary Energy Efficiencv Targets 0.148 0.071 0.731 

Early Replacement 0.330 0.119 0.829 

Bulk Government Purchases 0.031 0.013 0.120 

Today's Standards at TSL B 3.209 0.975 11.069 

* Net present value (NPV) IS the value of a tIme senes of costs and savmgs. DOE detenmned the NPV from 2015 to 

2038 in billions of 2006$. 

The alternatives DOE examined would not save as much energy or have as high NPV as 

the standards. Also, several of the alternatives, such as consumer or manufacturer tax credits, 

would require new enabling legislation, since authority to carry out those alternatives does not 

presently exist. 

RIA-16 
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RIA-17

 EE-RM/STD-01-350 COMMENT 164

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Furnaces and Boilers, 2007. Washington, D.C. 

<http://www.eere.energy.gov/buildings/appliance_standards/residentiallfurnaces_boilers.htm 

1> 

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Efficiency., 2002. XENERGY Inc. Oakland, CA. Prepared for The Energy Foundation and 

The Hewlett Foundation. 

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Forecasting and Social Change, 2002.69(2002): pp. 511-518. 

4. Lawrence Berkeley National Laboratory-End-Use Forecasting Group, Analysis of Tax 

Credits for Efficient Equipment, 2005. (Last accessed June 10,2005.) 

<http://enduse.lbl.gov/Projects/TaxCredits.html> 

5. NSTAR, High-Efficiency Heating Equipment Rebate Program, 2005. (Last accessed June 

10,2005.) 

<http://www.nstaronline.comlcustomer _service/energy_efficiency / gas.asp#Heating%20Equi 

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<http://www.gasnetworks.comlefficiency/resid_heating.asp> 

8. New Jersey's Clean Energy Program and Warm Advantage Program, Gas Furnace, Boiler 

and Water Heater Rebate Program, 2005. (Last accessed June 10,2005.) 

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<http://www.baystategas.comlforhome/rebates.htm> 

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RIA-17 
accessed June 10, 2005.) <http://socalgas.com/residential/savemoney/home_erp.shtml>

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<http://www.cia.doe.gov/emeu/recs/recs200l/Publicuse2OOl.html>

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RIA-18

 EE-RM/STD-01-350 COMMENT 164

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13. Pacific Gas and Electric Company, Rebatesfor Existing Single Family Homes, (Last 

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<http://www.pse.com/yourhome/rebates/ gasfurnace.html> 

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/innovative _space _ waterheater _ ia.html> 

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and Freezers, including Environmental Assessment and Regulatory Impact Analysis, July, 

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ENERGY STAR Voluntary Labeling Program. Energy Policy, 2000. 28(15): pp. 1137-1150. 

18. U.S. Environmental Protection Agency and U.S. Department of Energy, Energy Star 

Program, (Last accessed June 10,2005.) <http://www.energystar.gov> 

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STAR Voluntary Labeling Program: 2001 Status Report, 2002. Lawrence Berkeley 

Laboratory. Berkeley, CA. Report No. LBNL-48496. 

20. McMahon, J. E. and J. P. Harris, Early Replacement of Appliances, 1994. Lawrence Berkeley 

Laboratories. Berkeley, CA. Unpublished report to U.S. Department of Energy. 

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Document: Energy Efficiency Standards for Consumer Products: Residential Central Air 

Conditioners and Heat Pumps Including: Regulatory Impact Analysis, May, 2002. 

Washington, D.C. 

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RIA-I 8