8

- i LIFE

- CYCLE COST AND PAYBA CK PERIOD ANALYSIS

TABLE OF CONTENTS

8.1 INTRODUCTION

................................ ................................ ................................ ........... 8

- 1

8.1.1 General Approach to Analysis

................................ ................................ ......................... 8

- 1

8.1.2 Overview of Inputs to Analysis

................................ ................................ ....................... 8

- 2

8.1.3 Replacement or New

- Owner Market

................................ ................................ ............... 8

- 5

8.2 INPUTS TO LIFE

- CYCLE COST

................................ ................................ .................. 8

- 6

8.2.1 Inputs to Total Installed Cost

................................ ................................ ........................... 8

- 6

8.2.1.2 Baseline Manufacturer Cost

................................ ................................ ........... 8

- 8

8.2.1.3 Efficiency

- Level Manufacturer Cost Increases

................................ ............. 8

- 8

8.2.1.4 Overall Markup

................................ ................................ .............................. 8

- 8

8.2.1.5 Installation Cost

................................ ................................ ............................. 8

- 9

8. 2.2 Forecasting Future Product Prices

................................ ................................ ................... 8

- 9

8.2.3 Total Installed Cost

................................ ................................ ................................ ........ 8

- 11

8.2.4 Inputs to Operating Cost

................................ ................................ ................................ 8

- 11

8.2.4.1 Annual Energy Consumption

................................ ................................ ....... 8

- 13

8.2.4.2 Energy Prices

................................ ................................ ............................... 8

- 13

8.2.4.3 Energy Price Trends

................................ ................................ ..................... 8

- 15

8.2.4.4 Repair and Maintenance Costs

................................ ................................ ..... 8

- 16

8.2.5 Product Lifetime

................................ ................................ ................................ ............ 8

- 17

8.2.6 Discount Rates

................................ ................................ ................................ ............... 8

- 18

8.2.6.1 Residential Purchases

................................ ................................ ................... 8

- 18

8.2.6.2 Commercial Purchases

................................ ................................ ................. 8

- 23

8.2.7 Effective Date of Potential Standard

................................ ................................ .............. 8

- 27

8.2.8 Product Energy Efficiency in the Base Case

................................ ................................ . 8

- 28

8.3 INPUTS TO PAYBACK PE RIOD

................................ ................................ ................ 8

- 28

8.4 RESULTS OF LIFE

- CYCLE COST AND PAYBA CK PERIOD ANALYSIS

........... 8

- 29

8.4.1 Base case Distributions of Life

- Cycle Cost

................................ ................................ ... 8

- 32

8.4.2 Distributions of Life

- Cycle Costs at Higher Efficiency Levels

................................ ..... 8

- 34

LIST OF TABLES

Table 8.1.1 Summary of Inputs to LCC and PBP Analysis

................................ .................... 8

- 5

Table 8.2.1 Inputs to Total Installed Cost

................................ ................................ ............... 8

- 7

Table 8.2.2 Portable ACs: Baseline Manufacturer Cost

................................ ......................... 8

- 8

Table 8.2.3 Portable ACs: Overall Markups

................................ ................................ ........... 8

- 9

Table 8.2.4 Portable ACs: Total Installed Costs in 2019

................................ ...................... 8

- 11

Table 8.2.5 Inputs to Operating Costs

................................ ................................ ................... 8

- 12

Table 8.2.6 Average Annual Energy Use by Efficiency Level for Residential and

Commercial Applications

................................ ................................ .................. 8

- 138

- ii

Table 8.2.7 Average Residential Electricity Prices in 2012

................................ ................. 8

- 14

Table 8.2.8 Average Commercial Electricity Prices

................................ ............................. 8

- 15

Table 8.2.9 Lifetime Parameters for Portable ACs

................................ ............................... 8

- 17

Table 8.2.10 Income Groups

................................ ................................ ................................ ... 8

- 18

Table 8.2.11 Types of Household Debt and Equity by Income Group

................................ ... 8

- 20

Table 8.2.12 Real Effective Mortgage Interest Rates

................................ ............................. 8

- 21

Table 8.2.13 Average Real Effective Interest Rates for Household Debt, %

......................... 8

- 21

Table 8.2.14 Average Nominal and Real Rates of Return for Househ old Equity

.................. 8

- 22

Table 8.2.15 Average Real Effective Discount Rate

................................ .............................. 8

- 23

Table 8.2.16 Risk

- Free Rates and Equity Risk Premiums, 2004

– 2013

................................ .. 8

- 25

Table 8.2.17 Weighted

- Average Cost of Capital for Sectors that Purchase Portable ACs

..... 8

- 26

Table 8.2.18 Weighted

- Average Cost of Capital for Small Businesses that Purchase

Portable ACs

................................ ................................ ................................ ...... 8

- 27

Table 8.2.19 Portable ACs: Base case Market Shares in 2014

................................ ............... 8

- 28

Table 8.4.1 Summary of LCC and PBP Res ults by Efficiency Level, All Sectors

............... 8

- 30

Table 8.4.2 Summary of Life

- Cycle Cost Savings, All Sectors

................................ ........... 8

- 31

Table 8.4.3 Summary of LCC and PBP Results by Efficiency Level, Residential

Settings

................................ ................................ ................................ ............... 8

- 31

Table 8.4.4 Summary of Life

- Cycle Cost Savings, Residential Settings

............................. 8

- 31

Table 8.4.5 Summary of LCC and PBP Results by Efficiency Level , Commercial

Settings

................................ ................................ ................................ ............... 8

- 31

Table 8.4.6 Summary of Life

- Cycle Cost Savings, Commercial Settings

............................ 8

- 32

LIST OF FIGURES

Figure 8.1.1 Flow Diagram of Inputs and Outputs for LCC and PBP

................................ ..... 8

- 4 Figure 8.2.1 Nominal and Deflated PPI Series for Small Electric Household Appliances

from 1983 to 2013

................................ ................................ .............................. 8

- 10 Figure 8.2.2 Residential and Commercial Electricity Price Trends from AEO 2014

Reference Case

................................ ................................ ................................ ... 8

- 16 Figure 8.4.1 Base case Distribution of LCCs, Residential Settings

................................ ....... 8

- 33 Figure 8.4.2 Base case Distribution of LCCs, Commercial Settings

................................ ..... 8

- 33 Figure 8.4.3 Distribution of LCC Savings for Effic iency Level 1, Residential Settings

....... 8

- 34 Figure 8.4.4 Distribution of LCC Savings for Efficiency Level 1, Commercial Settings

..... 8

- 35 Figure 8.4.5 Range of Average LCC Savings, Residential Settings

................................ ...... 8

- 36 Figure 8.4.6 Range of Average LCC Savings, Commercial Settings

................................ .... 8

- 368

- 1

CHAPTER 8 LIFE

- CYCLE COST AND PAYBA CK PERIOD ANALYSIS

8.1 INTRODUCTION

This chapter describes the U.S. Department of Energy ’ s (DOE ’ s ) method for analyzing the economic impacts of potential energy efficiency standards on individual consumers of portable air conditioners (ACs)

. The effect s of standards on individual consumers include a change in operating expense (usually a decrease) and a change in purchase price (usually an increase). This c hapter describes three metrics DOE used to determine the effect of standards on

individual consumers

.

 Life

- cycle cost (LCC) is the total consumer expense during the life time of an appliance, including purchase expense and operating costs (including energ y expenditures). DOE discounts future operatin g costs to the time of purchase and sums them over the lifetime

of the product

.

 Payback period (PBP) measures the amount of time it takes a consumer to recover the assumed higher purchase price of a more energy efficient product through lower operating costs.

 Rebuttable payback period is a special case of the PBP. Where as LCC is estimated for a range of inputs that reflect real

- world conditions, rebuttable payback period is based on laboratory conditions, specifically the DOE test procedure.

Inputs to the LCC and PBP calculations are described in sections 8.2 and 8.3

, respectively, of this chapter. Results of the analysis are presented in section 8.4

. Key variables and calculations are presented for each metric

. The calculations discussed here are illustrated

with a Microsoft Excel spreadsheet available on the DOE’s rulemaking website at ( http://www.eere.energy.gov/buildings/appliance_standards/ ). Details and instructions for using the spreadsheets are provid ed in a ppendix 8

- A

.

8.1.1 General Approach to Analysis

Because eac h por table AC installation is unique, DOE incorporates variability and uncertainty into the LCC calculations for a broad sample of purchasers. The results indicate the

number of installations that experience various economic impacts. The LCC analysis emplo ys Monte Carlo simulation s and probability distributions to explicitly model both the uncertainty and the variability in the model ’ s inputs (see appendix 8

- B). In addition to using probability

distributions to characteriz e several of the inputs to the analysis , DOE developed a sample of

individual households that use portable AC s

. By developing household samples, DOE was able to perform the LCC calculations t o account for the variability in energy consumption and/or8

- 2

energy price associated with each hou sehold. DOE also developed a sample of commercial buildings that use portable ACs

.

As described in chapter 7 , DOE used the DOE Energy Information Administration (EIA) ’ s 200 9 Residential Energy Consumption Survey (RECS 2009 ) to develop household samples f or portable ACs based on households that use room ACs

. 1 The EIA constructed RECS 2009, which consists of 12,083 housing units

, to be representati ve of the household population of

the United States

. DOE was able to assign a unique annual energy use and/or energy price to each household in the sample. T he large sample of households considered in the analysis provides wid e range s of annual energy use and energy prices

. ( T he ranges in energy consumption a re pres ented in c hapter 7

. ) The variability in a nnual energy use and/or energy pricing across households contributes to the range of LCCs calculated for a ny particular efficiency level. DOE also used the EIA ’ s 2003 Commercial Buildings Energy Consumption Survey (CEBCS 2003 ) to develop a sample of commer cial buildings that use portable ACs

, again based on buildings that use room ACs. The EIA constructed the 2003 CBECS , which consists of 5,215 commercial buildings

, to be representative of commercial buildings throughout the United

States. DOE utilized CBECS 2003 as it did RECS 2009 to develop a broad sample of buildings

that use portable ACs and to establish the variability of annual energy use and energy prices.

DOE displays LCC results as distributions of effe cts for various efficiency levels

compa red to base case conditions. Results, presented in section 8.4 , were derived from 10 ,000 samples for each Monte Carlo simulation run. To illustrate th e implications of the analysis, DOE generated frequency charts that depict the variation in LCC for each efficiency level considered for potential standards for portable ACs.

8.1.2 Overview of Inputs to Analysis

DOE categorizes inputs to the LCC and PBP analysis as: (1) inp uts for establishing the purchase expense , otherwise known as total installed cost, and (2) inputs for calculating operating cost s

.

Following are t he primary inputs for establishing the total installed cost

.

 Baseline manufacturer cost : The costs incurred by the manufacturer to produce products that meet current minimum efficiency standards , if any

.

 Efficiency

- level manufacturer cost increase : The change in manufacturer cost associated with producing products to meet a particular effici ency level.

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

manufacturer cost to a consumer product cost

.8

- 3

 Installation cost : The cost to the consumer of installing the product

. The installation cost represents all costs required to install the product other than the marked

- up

consumer product cost. The installation cost includes labor, overhead, and any miscellaneous materials and parts

. Thus, the total installed cost equals the consumer product cost plus the installation cost.

Following are the primary inputs for calculating the operating cost

.

 Product energy consumption : The p roduct energy consumption is the site energy use associated with operating the product

.

 Product efficiency : The product efficiency dictates the energy consumption associated

with products that have efficiencies greater than the baseline efficiency

.

 Energy prices : Energy prices are the prices paid by consumers for energy ( e. g. , electricity or gas).

 Energy price trends : DOE used the EIA Annual Energy Outlook 2 014 ( AEO 20 14 ) to

forecast future energy prices f or the results presented in this chapter

.

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

components that fail. Maintenance costs are associated with maintaining the operation

of the product

.

 Lifetime : The age at which the product is retired from service.

 Discount rate : The rate at which DOE discounts future expenditures to establish their present valu e.

The data inputs to PBP are the average total installed cost (product cost and installation

cost ) to the consumer plus the average annual ( first

- year) operating cost s for each efficiency level. The inputs to operating costs are the annual energy cos t, the annual repair cost, and the

annual maintenance cost. Becaus e the PBP represent s a simple payback, the energy price is required only for the year in which a potential energy conservation standard is estimated to take effect. The energy price DOE use s in the PBP calculation i s the price projected for that year.

Figure 8.1.1 depicts the relationships among the inputs to installed cost and operating

cost for the calculati ng a product ’ s LCC and PBP. In the figure, the yellow boxes indicate inputs,

the green boxes indicate intermediate outputs, and the blue boxes indicate final outputs (the LCC and PBP).8

- 4 Figure 8.1.1 Flow Diagram of Inputs and Outputs for LCC and

PBP

Table 8.1.1 summarize s the input values that DOE used to calculate the LCC and PBP for portable ACs

. The table summarizes the inputs to total installed cost and operating cost s, including the product lifetime, discount rate, and energy price trends. DOE use d single

- point

values to characterize all the inputs to total cost , but characterized several inputs to operating

cost using probability distributions that capture the input ’ s uncertainty and/or variability. For those inputs characterized using probability distributions, the values provided in Table 8.1.1 are average or typical values.8

- 5

Table 8.1.1 Summary of Inputs to LCC and PBP Analysis
Input Average or Typical Value Characterization

Baseline

manufacturer cost (2013$) $291.30 Single

- p oint v alue

Efficiency

- level

manufacturer cost

increase (2013$) EL 1 = $4.09

Single

- p oint v alue EL 2 = $4.67

EL 3 = $5.26

EL 4 = $47.76

Manufacturer

m arkup 1.42 Single

- p oint v alue

Retailer m arkup Baseline = 1.36

Incremental = 1.11 Single

- p oint v alue

Sales t ax 7. 1 0% Variable based on region

Baseline

installation cost (2013$) $0.00 Single

- p oint v alue

Annual energy use B aseline r esidential use = 724 kWh Variab l e based on

usage B aseline c ommercial use = 17 13 kWh

201 9 average energy prices (2013$) Residential = 1 2

. 5 c/kWh Variab l e based on region Commercial = 1 1

. 0 c/kWh

201 9 marginal energy prices (2013$) Residential = 1 2

. 0 c/kWh Variab l e based on region Commercial =1 2.2 c/kWh

Annual baseline

maintenance costs $0.00 Single

- p oint v alue

Lifetime 10.5 years Weibull distribution

Discount r ate Mean Residential = 4. 7 % Custom distribution

based on purchaser sample Mean Commercial = 8.1%

Energy price trend AEO 2014 Reference c ase Time s eries

8.1.3 Replacement or New

- Owner Market

The LCC and PBP analys i s use s separate values for replacement product s and for products purchased by consumers who have not owned a portable AC previously (first

- time owners) or are buying an additional unit. T he t ype of application affect s some variables , such as markups, installation costs, and discount rates . The derivation of the appropriate values for new

owners or replacement applications is described in chapter 6 for markups and in this chapter for8

- 6

installation costs and discount rates

. For portable ACs , DOE assumed that there would be no

builder

- install ed products in new ly constructed homes or commercial buildings

.

8.2 INPUTS TO LIFE

- CYCLE COST

The LCC is the total consumer expense during the life of an appliance, including purchase expense and operating costs (including energy expenditures). DOE discounts future operating costs to the time of purchase and sums them over the lifetime of the product. DOE defines LCC by the following equation

.

Where:

LCC = life

- cycle cost in dollars,

IC = total installed cost in dollars, ∑ = sum over product lifetime, from year 1 to year N

, N = lifetime of appliance in years,

OC = operating cost in dollars,

r = discount rate, and

t = year for which operating cost is being determined.

Because DOE gathered most of its data for the LC C in 2013 , DOE expresses dollar

values in 20 13 $.

8.2.1 Inputs to Total Installed Cost

DOE defines the total installed cost using the following equation

.

W here:

C P C = consumer p roduct cost ( i.e.

, consumer cost for the product only), and

INST = i nstallation cost ( the consumer cost to install the product )

.

The product cost depends on how the consumer purchases the product . As discussed in

c hapter 6 , Markups for Produc t Price Determination , DOE defines markups and sales taxes to convert manufacturing costs into consumer product cost s

. Table 8.2.1 summarizes the inputs for

determin ing total installed cost.8

- 7

Table 8.2.1 Inputs to Total Installed Cost

Baseline manufacturer cost

Efficiency

- level manufacturer cost increase

Markups

Sales t ax (part o f markups)

Installation c ost

The baseline manufacturer cost is the cost incurred by the manufacturer to produce products that meet current minimum efficiency standards , if any

. Efficiency

- level manufacturer

cost increase is the change in manufacturer cost associated with producing products at a higher efficiency level. Markups and sales tax convert the manufacturer cost to a consumer product

cost

. The i nstallation cost represents all costs to the consumer for install ing the product

, other

than the marked

- up consumer product cost

. The installation cost includes labor, overhead, and any miscellaneous materials and parts

. DOE calculated the total installed cost for baseline products using the following equation

.

W here:

IC BASE = b aseline total installed cost

, CPC BASE = c onsumer product cost for baseline model,

INST BASE = b aseline installation cost,

COST MFG = m anufacturer cost for baseline model, and

MU OVERALL_BASE = overall b aseline markup (product of manufacturer markup, baseline

retailer and/ or distributor markup, and sales tax).

DOE calculated the total installed cost for products at higher efficiency levels using the following equation

.

W here:

IC EL = total installed cost for higher

- efficiency product

, CPC EL = c onsumer product cost for higher

- efficiency product

,8

- 8

INST EL = installation cost for higher

- efficiency product

, CPC BASE = c onsumer product cost for baseline product

, Δ CPC EL = c hange in product cost for higher

- efficiency product

, INST BASE = b aseline installation cost,

Δ INST EL = c hange in installation cost for higher

- efficiency product

, IC BASE = b aseline total installed cost

, Δ COST

MFG = c hange in manufacturer cost for higher

- efficiency product , and

MU OVERALL_INCR = i ncremental overall markup (product of manufacturer markup,

incremental retailer or distributor markup, and sales tax for higher

efficiency product ).

The rest of this section provides information about eac h of the above input variables that

DOE used to calculate the total installed cost of portable ACs

.

8.2.1.2 Baseline Manufacturer Cost

DOE developed the baseline manufacturer costs for portable ACs as described in c hapter 5, Engineering Analysis. Table 8.2.2 shows t he manufacturer cost for a baseline model that performs at a cooling energy efficiency ratio (EER
cm ) of 2.08

.

Table 8.2.2 Portable ACs : Baseline Manufacturer Cost

Baseline

EER cm Manufacturer Cost

2013$

2.08 291

8.2.1.3 Efficiency

- Level Manufacturer Cost Increases

DOE used a reverse

- engineering analysis to develop manufacturer cost increases

associated with increases in efficiency levels for portable ACs

. Refer to c hapter 5, Engineering Analysis, for details.

8.2.1.4 Overall Markup

The overall markup on a product is determined by multiplying the manufacturer and retailer markups and the sales tax together to arrive at a sing le markup v alue. Table 8.2.3 shows the overall baseline and incremental markups for portable AC s

. Incremental markups are those that apply to products at higher efficiency levels manufactured under a potential energy efficiency standard. Refer to chapter 6 for details.8

- 9

Table 8.2.3 Portable ACs : Overall Markups

Markup Baseline Markup Incremental Markup

Manufacturer 1.42

Retailer 1.36 1.11

Sales Tax 1.07

Overall 2.07 1.69

8.2.1.5 Installation Cost

The cost of installation covers all labor and material costs associated with installing a portable AC in a residence or business enterprise. DOE ’ s research indicates that installation cost for a portable AC is independent of efficiency . DOE assumed an installation cost of $0 for all efficiency levels.

8.2.2 Forecasting Future Product Prices

H istorical price data for certain appliances and equipment that have b een subject to energy conservation standards indicate that the assumption of constant real prices and costs may overestimate long

- term trends in appliance and equipment price s . Economic literature and historical data suggest that the real costs of products may trend downward over time based on

“ learning ” or “ experience ” curves. According to the experience curve approach , the real cost of production is related to the cumulative production or “ experience ” with a product. An extensive

literature d e sc rib es the learning or experience curve phenomenon, which typically is based on observations in the manufacturing sector. Desroches et al. (2013) 1 and Weiss et al. (2010) 2

summar ize the data and literature available to DOE that are relevant to forecasting prices for

certain appliances and equipment.

Typically, DOE uses historical shipments data to estimate cumulative shipments (production ). The historical shipments data for portable ACs are, however, too limited to construct robust cumulative production estimates f or portable ACs. Therefore, DOE decided to use the most representative Producer Price Index (PPI) series for portable ACs to fit to an exponential model having year as the explanatory variable. In this case, the exponential function

takes the form of:

Y = a ∙ e bX

where Y is the proxy for portable AC price, X is the time variable, a is the constant, and b is the slope parameter of the time variable.

To derive the exponential parameters for portable ACs, DOE obtained historical PPI data

for “ small electric household appliances, except fans ” from the Bureau of Labor Statistics for8

- 10

1983 to 2013. 3 Although this PPI series encompass more than portable ACs, no PPI data specific

to portable ACs were available . T he PPI data reflect nominal prices, adjusted for changes in product quality. DOE calculated a n inflation

- adjusted (deflated) price index by dividing the PPI series by the Gross Domestic Product Chained Price Index . The deflated price index is presented

in 2013 dollar. Error! Reference source not found. presents the nominal and inflation

- adjusted PPI trends for portable ACs from 1983 to 2013.

Figure 8.2.1 Nominal and Deflated PPI Series for Small Electric

Household Appliances from 1983 to 2013

For portable ACs, t he regression performed as an exponential trend line fit results in an

R

- square of 0.99, which indicates a superior fit to the data. The fit results in a 1.99

- percent
annual rate of price decline. The final estimated exponential function for portable ACs is:

Y = 3

. 743 × 10 17

∙ e (

− 0

. 0201 ) X

Based on the fitted regressions, DOE derived a price factor index for portable ACs for each future year in the analysis period (2019

– 2048). For the LCC and PBP analysis, DOE8

- 11

renormalized the price factor index, setting 201 3 equal to 1 , to estimate the price of portable ACs

in 201 9, the expected year of any new energy efficiency standard for portable ACs

. In 2019, the price factor is 0.886.

8.2.3 Total Installed Cost

The total installed cost is the sum of the consumer product cost and installation cost.

Error! Reference source not found. present s the total installed costs in 2019 for the portable ACs in the residential and commercial sectors, accounting for the effects of the learning curve

. C osts are presented at the baselin e level and each efficiency level identified in chapter 5

. Slight differences in installed cost between the residential and commercial sectors for a given efficiency level reflect the different geographic distributions of installations and, hence, differen t sales tax

distributions.

Table 8.2.4 Portable ACs: Total Installed Costs in 2019

Efficiency

Level EER cm Residential Total

Installed Cost 2013$ Commercial Total

Installed Cost 2013$

Baseline 2.08 53 4 53 4

1 3.53 5 40 5 40

2 4.32 54 1 54 1

3 5.28 54 2 54 2

4 5.82 605 605

8.2.4 Inputs to Operating Cost

DOE defines a product ’ s operating cost ( OC) using the following equation

.

W here :

EC = e nergy expenditure associated with operating the product

, RC = r epair cost associated with component failure, and

MC = c ost for maintaining product operation.

Table 8.2.5 shows the inputs for determining the annual operating costs and their

discounted value throughout a product ’ s lifetime

.8

- 12

Table 8.2.5 Inputs to Operating Cost s

Annual energy consumption

Energy prices and price trends

Repair and maintenance costs

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

. The annual energy consumption changes with product efficiency. Energy prices are the prices paid by consumers for energy ( e.g

. , electricity or gas). Multiplying the annual energy consumption by the energy price yields the annual energy cost. Repair costs are associated with repairing or replacing components that fail. Maintenance costs are associated with maintaining the operation of the product

. DOE used energy price trends to forecast energy prices into the

future and to establish the present value of lifetime energy costs.

DOE calculated the annual operating cost for baseline products using the following equation

.

W here:

O C BASE = o perating cost for baseline product

, AE C BASE = a nnual energy consumption for baseline product

, PRICE

ENERGY = e nergy price,

RC BASE = r epair cost associated with component failure for baseline product,

and

MC BASE = c ost for maintaining baseline product

.

DOE calculated the annual operating cost for higher

- efficiency products using the following equation

.

W here:

O C EL = o perating cost for higher

- efficiency product,

AE C EL = a nnual energy consumption for higher

- efficiency product

, PRICE

ENERGY = e nergy price,

RC EL = r epair cost associated with component failure for higher

- efficiency

product, and

MC EL = c ost for maintaining higher

- efficiency product.8

- 13

The rest of this section provides information about each of the above input variables that DOE used to calculate the operating costs for portable ACs

.

8.2.4.1 Annual Energy Consumption

As described in c hapter 7, Energy Use Characterization

, and in section 8.1.1 of this chapter , DOE used from RECS 2009 and CBECS 2003 to develop a sample of individual

households and commercial buildings that have portable ACs

. DOE perform ed the LCC

calculation for each household and commercial enterprise in its samples to account for the variability in both energy use and energy price. Table 8.2.6 provide s the average annual energy consumption by efficiency level for portable ACs in residential and commercial applications

.

Table 8.2.6 Average Annual Energy Use by Efficiency Level for Residential and

Commercial Applications

E fficiency

Level EER cm Residential

Energy Use

kWh Commercial

Energy Use

kWh

Baseline 2.08 724 1,713

1 3.53 525 1,411

2 4.32 473 1,330

3 5.28 434 1,274

4 5.82 400 1,173

8.2.4.2 Energy Prices

DOE derived average monthly energy prices for various geographic areas in the United

States u sing the latest data from the EIA and monthly energy price factors that DOE developed

. DOE then assigned an appropriate energy price to each household and commercial building in the sample s , depending on building type (residential or commercial) and geographic location.

Average Electricity Prices

. DOE derived annual electricity prices for 2012 from EIA

Form 826 data. 4 The EIA Form 826 data include e nergy prices by s tate . DOE calculated annual electricity prices for each RECS or CBECS region by averaging monthly energy prices by s tate

to obtain s tate electricity prices. For regions having more than one s tate , DOE weighted each

s tate ’ s average pri ce by its number of households in 2012

. Table 8.2.7 and Table 8.2.8 show the electricity prices by region for residential and commercial sectors, respectively ( s ee appendix 8

- C for more details )

.8

- 14

Table 8.2.7 Average Residential Electricity Prices in 2012

RECS Region 2013$ /kWh

Connecticut, Maine, New Hampshire, Rhode Island, Vermont 0.165

Massachusetts 0.151

New York 0.178

New Jersey 0.160
Pennsylvania 0.129

Illinois 0.117

Indiana, Ohio 0.115
Michigan 0.143

Wisconsin 0.134

Iowa, Minnesota, North Dakota,

South Dakota 0.111

Kansas, Nebraska 0.109

Missouri 0.102
Virginia 0.113

Delaware, District of Columbia, Maryland 0.131
Georgia 0.112

North Carolina, South Carolina 0.114

Florida 0.116
Alabama, Kentucky, Mississippi 0.106

Tennessee 0.103

Arkansas, Louisiana, Oklahoma 0.091

Texas 0.111

Colorado 0.116
Idaho, Montana, Utah, Wyoming 0.097

Arizona 0.113

Nevada, New Mexico 0.118

California 0.155
Oregon, Washington 0.091

Alaska 0.182

Hawaii 0.379
West Virginia 0.100

U

. S

. Average 0.1208

- 15

Table 8.2.8 Average Commercial Electricity Price s Census Division 2013$/kWh
New England 0.139

Middle Atlantic 0.130

East North Central 0.096

West North Central 0.086

South Atlantic 0.095

East South Central 0.100

West South Central 0.081

Mountain 0.091

Pacific 0.129

U.S. Av erage 0.105

Monthly Electricity Prices

. Portable ACs are used during the warm months of the year. As described in chapter 7, DOE assigned each household and commercial enterprise to a NOAA

weather station . After matching the household or enterprise to a weather station, DOE utilized the monthly data for cooling

- degree day s from the corresponding weather station to estimate the relative fraction of cooling

- degree days by month (see appendix 7 A for more deta ils). DOE divided the number of cooling

- degree days in each month by the total number of cooling

- degree days in the year for the corresponding weather station. DOE assumed the relative fraction of cooling

- degree days by month reflects the appropriate weigh ting of electricity usage by month.

In conducting the LCC analysis for portable ACs, DOE used monthly electricity prices because electricity tariffs show seasonal variation in many areas of the country. To determine monthly electricity prices, DOE devel oped monthly price factors for electricity based on long

term price data. See appendix 8 C for a de scription of DOE ’ s method for developing price

factors . DOE multiplied the annual prices shown in the previous tables by the monthly price factors to derive p rices for each month.

M arginal Electrici ty P

rices

. Monthly e lectricity prices were adjusted by applying seasonal marginal price factors to determine monthly marginal electricity prices. The marginal energy prices were used to determine the cost to the consumer of the variations in energy

consumed. For a detailed discussion of the development of marginal energy price factors and for a comparison to other data and methods, see appendix 8 C

.

8.2.4.3 Energy Price Trends

DOE used price fore casts in the EI A ’ s Annual Energy Outlook 2014 5 ( AEO 2014 ) to
estimate future trends in electricity prices for the residential and commercial sectors

. To arrive at prices in future years, DOE multiplied the average prices described in the preceding section by the forecast of annual average price changes in AEO 2014

. T o estimate the trend after 2040

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

, apply ing the average rate of change during 202 5

– 20 40 to future prices

. DOE calculated LCC8

- 16

and PBP using the Reference Case in AEO 2014

. Figure 8.2.2 show s residential and commercial

electricit y price trends

.

Figure 8.2.2 Residential and Commercial Electricity Price

Trends from AEO 2014 Reference Case

8.2.4.4 R epair and Maintenance Costs

The maintenance cost is the cost of regular scheduled product maintenance. The repair cost is the cost to repair a product when it fails. Typically, small incremental changes in product efficiency incur no

, or only very small

, changes in repair and mainten ance costs compared to baseline products. For portable ACs , DOE found no data about repair frequencies. DOE assumed that repair frequencies are low and do not increase for higher

- capacity or higher

- efficiency units.

Because repair and maintenance costs to not increase with efficiency level, DOE assumed a cost of $0 for all efficiency levels.8

- 17

8.2.5 Product Lifetime

The product l ifetime is the age at which a product is retired from service . Rather than use a single average value for the lifetime of portable ACs

, DOE developed a lifetime distribution to characterize the probability a portable AC will be retired from service at a given age. This

section describe s the survival function DOE developed for its analysis.

DOE assumed that the probability function for the annual survival of portable ACs would

take the form of a Weibull distribution. A Weibull distribution is a probability distribution commonly used to measure failure rates. a Its form is similar to an exponential distribution, which

models a fixed failur e rate, except that a Weibull distribution allows for a failure rate that changes over time in a specific fashion. The cumulative Weibull distribution takes the form:

for x > θ and

P(x) = 1 for x ≤ θ

Where:

P(x) = probability that the appliance is still in use at age x ,

x = age of appliance in years

,

α = scale parameter, which would be the decay length in an exponential

distribution

, β = shape parameter, which determines the way in which the failure rate chan ges

through time

, and

θ = delay parameter, which allows for a delay before any failures occur.

When β = 1, the failure rate is constant over time, giving the distribution the form of a cumulative exponential distribution. In the case of appliances, β commonly is greater than 1, reflecting an increasing failure rate as appliances age

. DOE estimated a delay parameter of θ = 1

year
, based on the typical manufacturer warranty period for portable ACs

. Based on values for room ACs, DOE assumed a maximum lifet ime of 20 years and an average lifetime of 10. 47

years, then solved for the scale and shape parameters

. 6 Table 8.2.9 shows the lifetime parameters

for portable ACs

. See appendix 8D for more details.

Table 8.2.9 Lifetime Parameters for Portable ACs

Value Weibull Parameters

Minimum (years) Average

(years) Maximum

(years) Maximum

Percentile (%) Alpha

(scale) Beta

(shape)

3 10.47 20 99 10.66 2.64

a For reference on the Weibull distribution, see sections 1.3.6.6.8 and 8.4. 1.3 of the NIST/SEMATECH e

- Handbook of Statistical Methods

, < www.itl.nist.gov/div898/handbook/ >

.8

- 18

8.2.6 Discount Rates

The d iscount rate is the rate at which DOE discounts future consumer expenditures to establish their present value. DOE derived discount rates for the LCC from estimates of the finance cost of purchasing household appliances . Following financial theory, the finance cos t of raising funds to purchase appliances can be interpreted as (1) the financial cost of any debt incurred to purchase products , or (2) the opportunity cost of any equity used to purchase products

. The opportunity cost of funds may include interest paymen ts on debt and lost interest

returns on assets. DOE considers both possibilities

. DOE also estimated discount rates for purchasers of portable ACs in the commercial sector.

8.2.6.1 Residential Purchases

DOE believes that few if any portable ACs are installed by builders in new homes. Therefore, DOE evaluated the costs associated with consumers purchasing portable ACs

themselves. DOE used publicly available data (the Federal Reserve Board ’ s Survey of Consumer

Finance s 7 [ SCF ]) to estimate a consum er ’ s opportunity cost of funds for purchasing a portable

AC

. A discount rate is applied in the LCC to future energy cost savings and non

- energy operations and maintenance costs in order to present the estimated net LCC and LCC savings.

DOE notes that the d iscount rate used in the LCC analysis is distinct from an implicit discount

rate, because it is not used to model consumer purchase decisions.

DOE estimates individual distributions of discount rate s for six income groups, divided based on income percen tile as reported in the Federal Reserve Board ’ s SCF

. 7 The groups reflect the fact that low and high income consumers tend to have substantially different propo rtions of debt and asset types and tend to face different interest rates on debts and assets. Table 8.2.10 lists the income groups DOE identified. Summaries of debts, asse ts, and discount rates p resented in this chapter are averages across the entire population.

Table 8.2.10 Income Groups Income Group Percen tile of Income

1 1 st to 20 th

2 21 st to 40 th

3 41 st to 60 th

4 61 st to 80 th

5 81 st to 90 th

6 91 th to 99 th

Sources: Federal Reserve Board. Survey of Consumer Finances (SCF) for 1995, 1998, 2001, 2004, 2007, and 2010.

Debt and Asset Classes

. DOE ’ s approach to approximating a consumer ’ s opportunity

cost of funds involved identifying all relevant household debt or asset classes ’ . The approach assumes that, when future expenditures are required or future savings acc umulate , consumers are likely to draw from or add to their collection of debt and asset holdings approximately in proportion to their current holdings . DOE has included several previously excluded debt types8

- 19

(vehicle and education loans, mortgages, and all forms of home equity loan) in order to better

account for all the borrowing options available to consumers.

DOE uses t he average percentage of total debt plus equity and the associated interest rate of each asset and debt type to calculate a weighted

- average discount rate for each SCF

hous ehold

. T he household

- level discount rates then are aggregated to develop distributions of discount rates for each of the six income groups. Note that in the past DOE aggrega ted asset and debt types among households by summing the dollar value s across all households and then calculating percentages . Weighting by dollar value gave disproportionate influence to the percentages and rates of asset s and debt s of higher

- income consumers. DOE has shifted to a

household

- level weighting to more accuratel y reflect the average consumer in each income

group.

DOE estimated the average percentages of each type of debt and equity using data from

the Federal Reserve Board ’ s SCF for 1995, 1998, 2001, 2004, 2007, and 2010. 7

, b DOE derived

the household

- weighted mean percentages of each source of financing throughout the 5 years surveyed. Table 8.2.11 lists the percentages of each type of household debt and equity used by each of the six income groups identified. DOE posits that these long

- term averages are most appropriate for use in its analysis.

b Although two older versi ons of the SCF are available (1989 and 1992), those surveys are not used in this analysis because they do not provide all the necessary types of data ( e.g. , credit card interest rates). DOE believes that the

15

- year span covered by the five surveys adequat ely represent recent debt and equity percentages and interest rates.8

- 20

Table 8.2.11 Types of Household Debt and Equity by Income Group

Type of Debt or Equity Income Group

1 2 3 4 5 6

Debt %

Mortgage 18.9 24.1 33.1 38.1 39.3 25.0

Home equity loan 3.1 3.3 2.6 3.6 4.5 7.2

Credit card 15.3 13.0 11.8 8.7 6.0 2.7

Other installment loan 25.1 20.6 17.3 13.2 9.6 4.7

Other residential loan 0.7 0.6 0.6 0.7 1.0 1.2

Other line of credit 1.6 1.5 1.3 1.5 2.1 1.8

Equity %

Savings account 18.5 16.0 12.7 10.6 10.4 7.9

Money market account 3.6 4.5 4.0 4.5 5.0 8.6

Certificate of deposit 7.0 7.8 5.5 5.0 4.4 4.2

Savings bond 1.8 1.7 1.9 2.2 1.7 1.1

Bonds 0.2 0.4 0.5 0.7 0.8 3.8

Stocks 2.3 3.1 4.4 5.7 7.6 15.8

Mutual funds 2.1 3.5 4.3 5.7 7.6 15.9

Total 100.0 100.0 100.0 100.0 100.0 100.0

Sources: Federal Reserve Board. Survey of Consumer Finances (SCF) for 1995, 1998, 2001, 2004, 2007, and 2010.

Interest Rates for Types of Debt

. DOE ’ s source for interest rates for mortgages, loans, credit cards, and lines of credit was the Federal Reserve Board ’ s SCF for 1995, 1998, 2001, 2004, 2007, and 2010, 7 which associates an interest rate with each type of debt for each

household in the SCF . In calculating effective interest rates for home equity loans and

mor tgages, DOE accounted for the fact that interest on both is tax deductible ( see Table 8.2.12 ).

The effective rate corresponds to the interest rate a fter deduction of mortgage interest for income tax purposes and after adjusting for inflation (using the Fisher formula). c For example, a 6

- percent nominal mortgage rate has an effective rate of 4.5 percent for a household paying taxes

at a 25

- percent marg inal rate. When adjusted for an inflation rate of 2 percent, the effective real rate becomes 2.45 percent. 8

c The Fisher formula is given by: Real Interest Rate = [(1 + Nominal Interest Rate) / (1 + Inflation Rate)]

– 1.8

- 21

Table 8.2.12 Real Effective Mortgage Interest Rates

Year Mortgage Interest Rates in Selected Years %

Average

Nominal Interest

Rate Inflation

Rate 9 Applicable

Marginal Tax

Rate 10 Average Real Effective

Interest Rate

1995 8.2 2.83 24.2 3.3

1998 7.9 1.56 25.0 4.3

2001 7.6 2.85 24.2 2.8

2004 6.2 2.66 20.9 2.2

2007 6.3 2.85 20.6 2.1

2010 5.7 1.64 20.0 2.9

Table 8.2.13 shows the household

- weighted average effective real rates for various types of household debt. Because the interest rate for each type of debt reflect s economic conditions throughout numerous years and various phases of economic growth and recession, DOE expects

them to be representative of rates in effect in 2019 , the expected date of compliance for any new standard for portable ACs

.

Table 8.2.13 Average Real Effec tive Interest Rates for Household Debt

, %

Type of Debt Income Group

1 2 3 4 5 6

Mortgage 6.6 6.2 6.1 5.2 5.0 4.0

Home equity loan 7.0 6.9 6.7 5.9 5.7 4.3

Credit card 15.2 15.0 14.5 14.2 14.0 14.5

Other installment

loan 10.8 10.3 9.9 9.4 8.7 8.6

Other residential loan 9.8 10.2 8.9 8.2 7.7 7.4

Other line of credit 9.1 10.9 9.6 8.8 7.4 6.1

Sources: Federal Reserve Board. Survey of Consumer Finances (SCF) for 1995, 1998, 2001, 2004, 2007, and 2010.

Interest Rates for Types of Assets

. No rate data are available from the SCF for classes of assets, so DOE derived interest rates from various sources of national historical data (1983

– 2013). The interest rates associated with certificates of deposit, 11 savings bonds, 12 and bonds (AAA corporate bonds) 13 were collected from Federal Reserve Board time

- series data. Rates on money market accounts came from Cost of Savings Index data. 14 Rates on savings accounts were

estimated as one

- half the rate for money market accounts, based on recent differential s between8

- 22

the return on the two types o f asset s . The rates for stocks are the annual returns on the Standard

and Poor ’ s. 15 Rates for mutual funds are a weighted average of the stock rates (two

- thirds weight) and bond rates (one

- third weight) in each year. D OE assumed rates on checking

accounts to be zero.

DOE adjusted the nominal rates to real rates using the annual inflation rate for each year. Average nominal and real interest rates for the classes of household assets are listed in Table

8.2.14 . Because the interest and return rates for each type of asset reflect economic conditions throughout numerous years, DOE expects them to be representative of rates that may be in effect

in 2019. For each asset type, DOE developed a distribution of rate s, as shown in appendix 8

- E

.

Table 8.2.14 Average Nominal and Real Rates of Return for Household Equity

Type of Equity Average Real

Rate %

Savings account 1.0

Money market account 1.9

Certificate of deposit 1.9

Savings bonds 3.4

Bonds 4.2

Stocks 9.4

Mutual fund 7.4

Calculation and Summary of Consumer Discount Rate s

. Using the asset and debt data

discussed above , DOE calculated distributions of discount rate s for each income group. First,

DOE calculated the discount rate for each consumer in each of the six years of the SCF , using the following formula

.

DR i = ∑ S h are i

, j

j × Rate i

, j

Where:

DR i = discount rate for consumer i

, S h are i

, j = percent of asset or debt type j for consumer i

, and

Rate i

, j = real interest rate or rate of return o n asset or debt type j for consumer i

.

After the real discount rate was estimated for each consumer, DOE compiled the

distribution of discount r ates in each SCF by income group by calculating the proportion of

consumers whose discount rates fell in to bins having 1

- percent increments, ranging from 0 or 1

percent to more than 30 percent. Giving equal weight to each SCF , DOE compiled a six

- survey dis tribution of discount rates.8

- 23

Table 8.2.15 presents the average real effective discount rate and its standard deviation for each of the six income groups. To acco unt for variation s among households, DOE sampled a

rate for each RECS household from the distributio ns for the appropriate income group. (RECS provides hou sehold income data). Appendix 8 E p resents the full probability distributions for each income group that DOE considered in the LCC analysis.

Table 8.2.15 Average Real Effective Discount Rate

Income Group Discount

Rate %

1 4.85

2 5.12

3 4.75

4 4.04

5 3.80

6 3.57

Overall Average 4.49

8.2.6.2 Commercial Purchases

“Regular

- Size” The commercial discount rate is the rate at which future operating costs are discounted to establish their present value in the LCC analysis. The discount rate value is applied in the LCC to future year energy costs and non

- ener gy operations and maintenance costs

to calculate the estimated net life

- cycle cost of products of various efficiency levels and life

cycle cost savings as compared to the baseline for a representative sample of commercial end

users.

DOE’s method views th e purchase of a higher efficiency appliance as an investment that yields a stream of energy cost savings. DOE derives the discount rates for the LCC analysis by estimating the cost of capital for companies that purchase portable ACs. The weighted average

c ost of capital (WACC) is commonly used to estimate the present value of cash flows to be derived from a typical company project or investment. Most companies use both debt and equity capital to fund investments, so their cost of capital is the weighted ave rage of the cost to the firm of equity and debt financing, as estimated from financial data for publicly traded firms in the sectors that purchase portable ACs. 16

Damodaran Online , which is widely used as a source of information about debt and equity financing for most types of firms, was the primary source of data for this analysis. 15
Detailed sectors included in the Damondaran Online database are assigned to the aggregate categories of retail, property management, medical, industrial, lodging, office, and other.

DOE estimated the cost of equity using the capital asset pricing model (CAPM). 17 The CAPM assumes that the cost of equity ( k
e ) for a particular company is proportional to the8

- 24

systematic risk that company face s , where by high risk is associated with a high cost of equity and low risk is associated with a low cost of equity. The systematic risk facing a firm is determined by severa l variables: the risk coefficient of the firm ( β ), the expected return on risk

free assets ( R

f ), and the equity risk premium ( ERP ). The risk coefficient of the firm indicates the risk associated with that firm relative to the price variability in the stock market. The expected

return on risk

- free assets is defined by the yield on long

- term government bonds. The ERP represents the difference between the expected stock market return and the risk

- free rate. The cost of equity financing is estimated using the f ollowing equation, in which the variables are

defined as above

.

Where:

k
e = cost of equity,

R f = expected return on risk

- free assets, β = risk coefficient of the firm, and

ERP = equity risk premium.

Several parameters in the cost of capital equations can change substantially over time, so that the estimates can vary depending on the period for which data are selected and the details of

the data

- averaging method. DOE uses Federal Reserve methodologies for both the period and

data to select for key parameters and for the averaging method. When applying the CAPM, the

Federal Reserve uses a 40

- year period for calculating discount rate averages, utilizes the gross domestic product price deflator for estimat ing inflation, and considers the best method for determining the risk

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

term of the risk

- free security. ” 18

By taking a 40

- year average of Federal Reserve data on annual nominal r eturns for 10

- year Treasury bills, DOE estimated the risk

- free rates for 2004‒ 2013 ( see Table 8.2.16 ). 19 DOE

also estimate d the ERP by calculating th e difference between the risk

- free rate and stock market

returns for the same period, as estimated using Damodaran On line data on the historical return to

stocks. 158

- 25

Table 8.2.16 R isk

- Free Rate s and Equity Risk Premium s , 2004

– 2013

Year Risk

- Free

Rate % ERP %

2004 7.10 3.25

2005 7.11 3.68

2006 7.10 3.49

2007 7.08 3.36

2008 7.01 2.40

2009 6.88 3.07

2010 6.74 3.23

2011 6.61 2.94

2012 6.41 3.99

2013 6.24 5.30

The cost of debt financing ( k d ) is the interest rate paid on money borrowed by a company. The cost of debt is estimated by adding a risk adjustment factor ( R
a ) to the risk

- free rate. This risk adjustment factor depends on the variability of stock returns represented by standard deviations in stock prices. F or firm i , the cost of debt financing is calculated as :

Where:

k d = cost of debt financing for firm, i

, R f = expected return on risk

- free assets, and

R ai = risk adjustment factor for firm, i

.

DOE estimated the weighted

- average cost of capital for a firm using the following equation

.

Where:

WACC = weighted

- average cost of capital,

w e = proportion of equity financing, and

w d = proportion of debt financing.8

- 26

By adjusting for inflation, DOE estimated the real weighted

- average cost of capital, or discount rate, for each compa ny in its sample of companies that have portable ACs . DOE then aggregated each company ’ s real WACC to estimate the discount rate for each type of ownership in the analysis of portable ACs in commercial settings

. Table 8.2.17 shows the average WACC

values f or the major sectors that purchase portable ACs

. Although WACC values for any sector may trend higher or lower over substantial periods

, the val ues represent a cost of capital that is averaged over major business cycles.

Table 8.2.17 Weighted

- Average Cost of Capital for Sectors that Purchase Portable ACs

Sector Real Weighted

- Average

Cost of Capital % Standard

Deviation %

Retail 3.56 2.01

Medical 3.96 1.49

Hotels 6 .23 2.37

Food s ervice 3.73 2.20

Office 5.41 2.18

Education 2.46 2.21

Other 4.09 1. 46

Small Business The Small Business Administration (SBA) defines a small business by its annual receipts or its number of employees. CWAF are used throughout the U.S. economy, so DOE did not assign a different distribution of CWAF applications or sectors of the economy to this subgroup.

The capital asset pricing model (CAPM) underestimates the cost of capital for small companies. In CAPM, the risk premium β is used to account for the higher returns associated with greater risk. However, for small companies, particularly very small companies, historic returns have been significantly higher than the CAPM equation predicts. T his additional return

can be accounted for by adding a size premium to the cost of equity for small firms:

Where:

k
e = c ost of equity,

R f = e xpected return on risk

- free assets, β = risk coefficient of the firm,

ERP = e quity risk premium , and

= s ize p remium.8

- 27

DOE obtained size premium data from Ibbotson Associates’ Stocks, Bonds, Bills, and Inflation 200 9 Yearbook

. 17 For the period of 1926

- 2008 , the average size premium for the smallest companies in all industries is 5.81 percent, imply ing that on average, historic performance of small companies has been 5.81 percent higher than the CAPM estimate of the small company cost of equity

. d

DOE calculated the real weighted average cost of capital using the cost of equity including a size premium for small companies instead of the CAPM cost of equity. 17 Table

8.2.18 presents DOE’s estimates of the dis count rates for small comp anies.

Table 8.2.18 Weighted

- Average Cost of Capital for Small Businesses that Purchase

Portable ACs

Sector Real Weighted

- Average

Cost of Capital % Standard

Deviation %

Retail 9.00 3.65

Medical 8.04 2.78

Hotels 8.11 3.16

Food s ervice 8.35 3.39

Office 7.47 3.25

Education 2.46 2.21

Other 8.29 3.53

8.2.7 Effective Date of Potential Standard

The effective date is the future date when a potential energy efficiency standard becomes operative. Based on DOE ’ s implementation report for energy conservation standards activities submitted pursuant to Section 141 of the Energy Policy Act of 2005, a final rule for the portable

ACs being considered for this standards rulema king is scheduled for completion in August

2016

. 20 The effective date of any new energy efficiency standards for the products would be 3 years after the final rule is published, or August 2019

. DOE calculated the LCC for all consumers as if each would purchase a new portable AC in the year potential standard s would

take effect.

d In this calculation , small companies are defined as companies with marke t capitalization of less than or equal to $218.53 million, the Ibbotson Associates’ definition of Decile 10 companies.8

- 28

8.2.8 Product Energy Efficienc y in the Base Case

To estimate the percentage of consumers who would be affected by a potential standard at any of the efficiency level s identified in chapter 5 , DOE ’ s LCC analysis first considered the projected distribution of efficiencies for products that consumers purchase under the base case (the case without new energy efficiency standards). DOE refers to this distribution of product energy efficiencies as the base case efficiency di stribution. Using the projected distribution of

efficiencies for portable ACs , DOE randomly assigned a product efficiency to each household

and commercial user drawn from the RECS 2009 and CBECS 2003 data sets . If a consumer is assigned a product efficienc y that i s greater than or equal to the efficiency under consideration,

the LCC calculation show s that th e consumer would not be affected by that efficiency level. T he

energy efficiency distributions that DOE used in the LCC analysis are described below.

DOE counted the numbers of portable AC models available from online retailers to obtain the percentage of single

- duct and dual

- duct models . The single

- duct models were

allocated to the baseline efficiency level. The dual

- duct models were split evenly betwe en efficiency levels 1 and 2. DOE is unaware of any models on th e market that exceed efficiency

level 2. Table 8.2.19 shows the resulting base case efficiency distribution. DOE assumed that the

residential and commercial sector s have the same base case efficiency distribution.

Table 8.2.19 Portable ACs : Base case Market Shares in 2014 Efficiency

Level EER cm Market

Share %

Baseline 2.08 90.0

1 3.53 5.0

2 4.32 5.0

3 5.28 0.0

4 5.82 0.0

8.3 INPUTS TO PAYBACK PERIOD

The payback period (PBP) is the amount of time

, expressed in years

, it takes a consumer to recover the assumed higher purchase price of a more energy efficient produc t through lower operating costs. Payback periods can exceed the life of a produc t if the increased total installed

cost of the more efficient produc t is not recovered quickly enough through reduced operating

costs. Numerically, the PBP is the ratio of the increase in purchase cost ( i.e., from a less efficient to a more efficient design) to the decrease in first

- year annual operating expenditures. The equation for PBP is:

PB P = ∆ IC

∆ OC8

- 29

Where:

PBP = payback period in years,

∆ IC = difference in the total installed cost between the more efficient produc t

(efficiency levels 1

, 2, 3, etc.) and the baseline produc t , and

∆ OC = difference in first

- year annual operating costs between the more efficient

produc t and the baseline product

.

The data inputs to PBP are the total installed cost of the produc t to the consu mer for each efficiency level and the annual ( first

- year) operating costs for each efficiency level. As for the
LCC, t he inputs to the total installed cost are the produc t price and installation cost. The inputs to the operating costs are the annual energy and annual maintenance cost s . The PBP uses the same inputs as does the LCC analysis, except that electricit y price trends are not required. Because the PBP is a simple payback, the required electricity cost is only for t he year in which a potential new efficiency standard would take effect

— in this case, 2019

.

DOE also calculates a rebuttable PBP, which is the time it takes the consumer to recover the assumed higher purchase cost of a more energy efficient produc t through lower energy costs. Numerically, the rebuttable PBP is the ratio of the increase in purchase cost (from a less efficient

to a more efficient design) to the decreas e in annual energy expenditures, which is the decrease

in first

- year annual energy cost s as calculated using the DOE test procedure . The calculation excludes repair and maintenance costs. Because t here currently is no DOE test procedu re for portable ACs

— it is in development

— DOE has not yet calculated the rebuttable PBP.

8.4 RESULTS OF LIFE

- CYCLE COST AND PAYBA CK PERIOD ANALYSIS

This section presents the LCC and PBP results for portable ACs

. A s discussed in section

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

consumers who use room ACs (as a stand

- in for portable ACs)

. DOE characterized the uncertainty of many of the inputs to the analysis with probability distributions. DOE used a Monte Carlo simulation technique to calculate the average LCC and LCC savings for the

consumers in the sample. The calculation of payback period uses average values rather than

distributions. PBP is calculated by dividing the change in average installed cost by the change in

average first

- year operating cost for the baseline efficiency level and each higher efficiency level

considered

.

DOE calculated LCC sav ings and PBPs relative to the base case products that it assigned

to sample households . As noted in sec tion 8.2.8 , for some consumers DOE assigned a base lin e product that is more efficient than some of the efficiency levels considered . For that reason, the average LCC impacts are not equal to the differe nce between the LCC of a specific efficiency

level and the LCC of the baseline product

.8

- 30

LCC calculations were performed 10,000 times on the sample of consumers established

for residential and commercial applications

. Each LCC calculation was performed o n a single

consumer who was selected from the sample. The selection of a consumer was based on its weight ( i.e.

, how representativ e a particular consumer is of other consumer s in the distribution ). Each LCC calculation also sampled from the probability distributions that DOE developed to characterize many of the inputs to the analysis.

Based on the Monte Carlo simulations, DOE calculated the percent of consumers who would experience a net LCC cost for each efficiency level

. DOE considered a consumer to receive no impact at a given efficiency level if DOE assigned it a base lin e product that operates

at the same or higher efficiency than the level under consideration

. T he tables and figures presented below illustrate the range of LCC impacts among sample consumers of portable ACs.

Table 8.4.1 through Table 8.4.6 show the LCC and PBP results by efficiency level for portable ACs

. The efficiency level s correspond to th os e identified in the engineering analysis (chapter 5)

. The LCC results presented in Table 8.4.1 and Table 8.4.2 combine the results for

residential and commercial users , which means that DOE had to assign an appropriate weight to the results for each type of u ser. DOE found no shipment data on portable ACs that give a breakdown between commercial and residential purchasers. DOE assumed that 99 percent of shipments are to the residential sector and 1 percent to the commercial sector.

Table 8.4.1 Summary of LCC and PBP Res ults by Efficiency Level

, All Sectors

Efficiency

Level EER cm Average Costs 2013$ Simple Payback

years Installed

Cost First Year ’ s Operating Cost Lifetime

Operating Cost LCC

Baseline 2.08 534 101 866 1,399

--

1 3.53 540 73 621 1,161 0.21

2 4.32 541 65 558 1,098 0.19

3 5.28 542 59 509 1,051 0.19

4 5.82 605 54 464 1,069 1.51

Note: The average LCC, LCC savings, and simple PBP for each efficiency level are calculated assuming that all

consumers use products having that EL. This assumption allows the results for each efficiency level to be compared under the same conditions.8

- 31

Table 8.4.2 Summary of Life

- Cycle Cost Savings

, All Sectors

Efficiency

Level EER cm Life

- Cycle Cost Savings

% of Consumers Who Experience Net Cost Average Savings

2013$

1 3.53 32 213

2 4.32 34 272

3 5.28 36 319

4 5.82 37 301

Note: The LCC savings for each efficiency level are calcula ted relative to the base case efficiency distribution

. The

calculation includes households that experience zero LCC savings (no impact).

Table 8.4.3 Summary of LCC and PBP Results by Efficiency Level, Residential Settings

Efficiency

Level EER cm Average Costs 2013$ Simple Payback

years Installed

Cost First Year ’ s Operating Cost Lifetime

Operating Cost LCC

Baseline 2.08 534 101 861 1,394

--

1 3.53 540 72 617 1,156 0.21

2 4.32 541 64 553 1,094 0.19

3 5.28 542 59 505 1,046 0.19

4 5.82 605 53 461 1,066 1.52

Table 8.4.4 Summary of Life

- Cycle Cost Savings, Residential Settings

Efficiency

Level EER cm Life

- Cycle Cost Savings

% of Consumers Who Experience Net Cost Average Savings

2013$

1 3.53 32 212

2 4.32 34 271

3 5.28 35 319

4 5.82 37 300

Table 8.4.5 Summary of LCC and PBP Results by Efficiency Level

, Commercial Settings

Efficiency

Level EER cm Average Cost s 2013$ Simple Payback8

- 32 Installed

Cost First Year ’ s

Operating

Cost Lifetime

Operating

Cost LCC years

Baseline 2.08 534 190 1,351 1

, 884

--

1 3.53 540 150 1,066 1

, 606 0.15

2 4.32 541 139 9,90 1

, 5 31 0.1 4

3 5.28 54 2 131 938 1

, 48 0 0.13

4 5.82 605 117 836 1

, 44 1 0.9 8

Table 8.4.6 Summary of Life

- Cycle Cost Savings

, Commercial Settings

Efficiency

Level EER cm Life

- Cycle Cost Savings

% of Consumers Who Experience Net Cost Average Savings

2013$

1 3.53 50 253

2 4.32 52 326

3 5.28 55 376

4 5.82 30 415

8.4.1 Base case Distributions of Life

- Cycle Cost

Figure 8.4.1 show s the base case LCC distribution f or portable ACs for residential

consumers. The figure show s the full range of LCCs for the sample of portable ACs

. Figure 8.4.2

shows the base case distributions of LLC for portable ACs in commercial settings.8

- 33 Figure 8.4.1 Base case Distribution of LCC s , Residential Settings

Figure 8.4.2 Base case Distribution of LCC s , Commercial

Settings8

- 34

8.4.2 Distribution s of Life

- Cycle Costs at Higher Efficiency Levels

Figure 8.4.3 and Figure 8.4.4 are frequency chart s that show the distribution s of LCC savings at efficiency level 1 for portable AC s used in residential and commercial settings,

res pectively . DOE can generate frequency chart s similar to those shown for every efficiency

level

.

Figure 8.4.3 Distribution of LCC Savings for Efficiency Level 1

, Residential Settings8

- 35 Figure 8.4.4 Distribution of LCC Savings for Efficiency Level 1

,

Commercial Settings

Figure 8.4.5 and Figure 8.4.6 show the range of LCC savings f or the efficiency levels

considered for portable ACs in residential and commercial settings, respectively

. For each efficiency level, the top and the bottom of the box indicate the 75 th and 25 th percentiles, respectively. The red line at the middle of the box ind icates the median; 50 percent of households

or establishments have life

- cycle cost savings greater than this value. The “ whiskers ” at the bottom and the top of each box indicate the 5 th and 95 th percentiles. The red circle shows the

average LCC savings for each efficiency level.8

- 36 Figure 8.4.5 Range of Average LCC Savings , Residential Settings

Figure 8.4.6 Range of Average LCC Savings , Commercial

Settings8

- 37

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