# Project: Market Research a nd Report on North American Residential Wood Heaters, Fi replaces, and Hearth Heating Products Market (P.O. # PO1-IMP403-F&S)



# Final Report April 26, 2010

Submitted to: EC/R Incorporated 501 Eastowne Drive, Suite 250 Chapel Hill, NC 27514

Prepared By: Frost & Sullivan 331 E. Evelyn Ave. Suite 100 Mountain View, CA 94041 (P.O. # PO1-IMP403-F&S) North American Residential Wood Heaters, Firep laces, and Hearth Heating Products MarketFrost & Sullivan 2 Prepared for EC/R Inc. 4/26/2010 North American Residential Wood Heaters, Firep laces, and Hearth Heating Products Market Table of Contents

1) Executive Overview.........................................................................................4

- Project Background and Ob jectives............................................................4

- Introduction.......................................................................................5

- Summary of Methodology......................................................................6

- Definitions........................................................................................9

- Summary of Key Findings.....................................................................11

2) Total Market Analysis......................................................................................14

- Market Overview..............................................................................14

- Overview of Product Segments..............................................................15

- Market Dynamics..............................................................................17

• Industry Challenges.................................................................17

• Market Drivers........................................................................21

• Market Restraints.....................................................................24

- Market Analysis and Revenue Forecas ts (Base Year 2008) .............................27

- Current Market Size By Unit Sh ipments (2008)...........................................29

- Market Analysis – Revenue and Units by Product Type (2008).........................30

- Market Estimate for Unbranded/Non-regulate d Products Currently Sold in the U.S. by Asian Manufacturers (2008)............................ ..................................33

- Installation Cost of Average System by Product Type (2008)...........................34

- Manufacturer’s Price by Prod uct Type (2008)

............................. ................35

- Trends in Regional Variation in Purcha se Price by Product Type.......................35

3) Analysis of Market Trends.................................................................................37

- Fuel Consumption..............................................................................37

- Usage Rates.....................................................................................39

- Motive of Purchase.............................................................................41

- Regional Trends.................................................................................45

- Influences on Buying Styles, Customer Approval, and Other Psychographic Information..................... ..................................................................46

- Reasons for Switching to Alternative Fuel Sources.......................................48

4) Market Conclusions.........................................................................................49Frost & Sullivan 3 Prepared for EC/R Inc. 4/26/2010 - Evaluation of Growth Projections and Demand............................................49

- Potential Market Impacts of Ne w Emission Regulations.................................50

- Conclusions.......................................................................................51

5) Methodology.............................. ....................................................................54Frost & Sullivan 4 Prepared for EC/R Inc. 4/26/2010 

# 1

Executive Overview

Project Background and Objectives

EC/R Inc. is currently providing t echnical support to the United States Environmental Protection Agency (EPA) in the review and possible revision of the current New Source Performance Standard (NSPS) for residential wood heaters, including assessment of sources not covered by the current rule such as hydronic central heating systems. The results of the review will inform EPA’s decision making on potential options for revising the NSPS. EC/R has subcontracted with Frost & Sullivan to undertake an assessment of the wood heaters market in North Ameri ca, including the size of the market by revenues and unit shipments, location and regional distribution, growth trends, and market projections. This information will be valuable in any future assessment of the impacts of regulatory options that may be considered by EPA.
This project has the following primary objectives:

• Gaining an accurate understanding of the current and future market size of residential heaters and hearth heating products

• Understanding the current demand patterns and drivers influencing buying decisions

• Using expert qualitative data to estimate the imp act of potential changes to emissions regulations for these products on various segments of the populationFrost & Sullivan 5 Prepared for EC/R Inc. 4/26/2010 • Understanding the rate of usage and choice of fuel affecting consumer buying decisions

• Understanding the growth vectors for this industry



### Introduction

Because burning wood contributes to air pollution, the w ood heaters, fireplaces, and hearth heating products market has been receivi ng more attention from government agencies and state and local governments. When wood is burned in fireplaces, stoves or other heaters, the pollutants that are released affect air quality both indoors and outdoors. Smoke that is released outdoors can leak into nearby homes, potentially affecting anyone who lives in the neighborhood.
In addition, wood smoke contains a mix of pollutants that can be harmful to a person's health. Wood burning is a significant contributor to fine particulate pollution and wood smoke can irritate eyes, lungs, throat, and sinuses; reduce lung function; trigger head aches and allergies; and increase the severity of existing lung diseases, such as asthma, emphysema, pneumonia and bronchitis. Some chemicals in wood smoke, such as polycyclic aromatic hydrocarbons and volatile organic compounds, have also been linked to

cancer. 1 Further, certain areas of the United States where residential wood burning is common have been designated as “nonattainment” for EPA’s National Ambient Air Quality Standard for fine particulate. These concerns have led government agencies to establish regulations and efficiency guidelines that wood heater, fireplace, and hearth heating product manufacturers must adhere to.
For more than 20 years, an NSPS (Subpart AAA of 40 CFR Part 60) has been in place that regulates the manufacture and sale of certain new residential wo od heaters. Cognizant of EPA, state, and local regulations, the hearth products industry has been developing and manufacturing wood-burning products that emit less particulate matter into the air. While wood-burning appliances manufactured in the 1970s and 1980s produced about 42 grams of particulate per hour, most newer appliances emit 7.5 grams of emissions per hour or less. 2 Stoves that meet the 7.5 grams per hour (gr/hr) requirement (4.1 gr/hr for catalytic stoves) are considered EPA-certified (versus 4.5 gr/hr (2.5 gr/h r for catalytic stoves) for Washington State) and can

1 Source: United States Enviro nmental Protection Agency (http://www.epa.gov/burnwise/healtheffects.html) and Minnesota Pollution Control Agency (http://www.pca.state.mn.us/air/woodsmoke/healtheffects.html)

2 Source: Responsible Wood Burning Factsheet , Hearth, Patio & Barbecue Association (http://basineducation.uwex.edu/centralwis /pdfs/FS_ResponsibleWoodBurning.pdf)Frost & Sullivan 6 Prepared for EC/R Inc. 4/26/2010 reduce emissions by approximately 90 percent. 3 In addition, these appliances are substantially more efficient than older models and consume less fuel to provide the same amount of heat.
The trend toward cleaner-burning and more efficient appliances is also supported by changeout programs that encourage homeowners to replace old, uncertified products with low-emissi on wood-burning and other solid biomass-based appliances. Because these progra ms have the potential to dramatically reduce air pollution, many areas in both the United States and Canada have used these types of programs. In addition, programs that provide incentives, such as rebates, ta x exemptions, and low-interest loans for the purchase of these products, are driving the tran sition toward cleaner-burning and high-efficiency appliances in North America.
In terms of regulations, the market is expected to w itness various changes in the future. The EPA’s review of the NSPS is expected to lead to changes in the st andard. The Clean Air Act requires NSPS to be based on best demonstrated technology (BDT), considering cost and other non-air impacts, and technologies have improved since the NSPS was first promulgated in 1988. Possible changes may include the lowering of particulate matter emissions for freestanding wood stoves, fireplace inserts, and pellet stoves, andextending applicability of the NSPS to units such as hydronic heaters, masonry heaters, other biomassbased units, and fireplaces, furnaces, wood stoves , and pellet stoves currently exempt from EPA certification. 4 Extending the applicability of the NSPS to these additional units may result in parallel additional NSPS subparts.



### Summary of Methodology

Frost & Sullivan used a combination of primary and secondary research methodologies to compile all the necessary information for this proj ect. Secondary research was used to complement the primary research efforts and fill any information gaps.
Primary Research
Primary research formed the basis of this project. Secondary sources were used to generate some contact lists and validate some of the findings. A discussion guide was developed by Frost & Sullivan and approved by EC/R prior to implementation. Primary research interviews were then conducted with manufacturers, Canadian suppliers, distributors, value-added retailers, and home improvement chains. Furthermore, primary research includ ed interviews with industry associations to collect information about

3 Source: United States Environmental Protecti on Agency (http://www.epa.gov/burnwise/how-toguide.html) 4 Source: Houck, James E. Houck and Tiegs, Paul. (December 2009). EPA Regulations/NSPS. Hearth & HomeFrost & Sullivan 7 Prepared for EC/R Inc. 4/26/2010 the market. Discussions were typically telephone conversations, for 30-90 minutes in duration. Notes were taken from the conversations in an elect ronic format and used in the analysis.
In order to ensure that the primary research provides as complete a pict ure as possible of what is happening in the industry at present, as we ll as what can be expected in the near future, specific information was sought from the following sources indicated below:

• Manufacturers, suppliers, distributors, value-added retailers and home improvement channel partners

o Key market trends, market challenges, drivers and restraints

o Market analysis with qualitative and quantita tive metrics on growth, market size, market potential, unit cost, and installation cost

o Impact of voluntary programs and tax credit

o Regional trends in terms of price, user pr eferences, fuel preferences, usage rates, buying patterns, etc.

o Motive of purchase, usage rates, fu el consumption and purchase criteria

o Emission regulations and factors driving the switch to alternate fuels sources

• Industry Associations

o Trend analysis, challenges, drivers, and restraints for North American market

o Market data including market gr owth, market size, and unit cost

o Emission regulations and its impact on the industry

o Factors driving the switch to alternate fuels sources

o Regional trends in terms of price, user pr eferences, fuel preferences, usage rates, buying patterns, etc.

Secondary Research
Secondary research was used to complement our primary research; the following were included:

• Published sources

• Government bodies (e.g. U.S. Census Bureau and U.S. Environmental Protection Agency)

• Industry associations (e.g. published HPBA data)

• Trade journalsFrost & Sullivan 8 Prepared for EC/R Inc. 4/26/2010 • Internet sources
This information was used to enrich and verify the primary data. This data wa s then compared with and contrasted to market data from Frost & Sullivan’s internal databases for validity and authenticity. These databases span more than 20 years of research across most market segments, technologies, and geographies.
Through triangulation and cross-verification of the information and data collected from a variety of sources, Frost & Sullivan believes it has presented an accurate analysis of the wood heaters, fireplaces, and hearth heating products ma rket in North America.

Market Sizing
Primary and secondary data sources were used to creat e a series of forecasts on the size of the total North American residential wood heaters, fireplaces, and he arth heating products as well as the size of each product segment.

• The forecast period was 2006-2015, with a base year of 2008 , and forecasting through 2009-2015.

• Other forecasting variables used in clude historical growth trends, drivers and restraints and their impact on the industry, economic trends, trends in the residential construction market, consumer confidence, climatic variations, raw material pricing trends, and pricing trends of alternative heating sources

. Forecasts were refined from a bottom-up perspective during the latter stages of the primary research discussions. This approach was supplemented with a top-down estimation to arrive at an accurate estimate of the market and to account for unavailable info rmation from some suppliers since a few of the organizations contacted claimed some financial information to be confidential business information (CBI). 5

• Segment-specific market and trending information helped to refine annual growth rate estimates in the forecast models.

• An overall compound annual growth rate (CAGR) was calculated to demonstrate the overall growth rates for each segment.

Internal review of the forecasti ng also provided a cross-check of the forecast foundations and outputs.

5 CBI was separated from other information collected , stored at an EPA-approved CBI storage facility located at the prime contractor, EC/R, Inc., and is being handled in accordance with the EPA/OAQPS Clean Air Act Confidential Business Information Secur ity Manual (EPA 450/B-03-001). There is no CBI contained in this report.Frost & Sullivan 9 Prepared for EC/R Inc. 4/26/2010 

### Definitions

Wood heaters, fireplaces, and hearth products have historically represen ted a relatively small, but integral part of the North American HVAC products market.
Product Segmentation

The total North American wo od heaters, fireplaces, and hearth heati ng products market is segmented by the following product types:

• Wood Stoves

• Pellet Stoves

• Masonry Heaters

• Fireplaces (with and without inserts)

• Outdoor Fireplaces

• Hydronic Central Heating Systems

• Biomass-based Stoves

Product Definitions 6

Wood Stoves
A wood stove is a heating appliance that burns wood fuel. Generally, a wood stove is made of cast iron, steel, or stone, and consists of a solid metal closed fire chamber and an adjustable air control. Some wood stoves are not equipped with an adjustable air control and operate with a single burn rate. Wood stoves are connected to a chimney or flue which fills with hot combustion gases once the fuel is ignited. These units are typically intended for domestic sp ace heating and do not need electricity to operate. Bo th non-certified and EPA-certified wood stoves are curre ntly in use in North American homes.

Wood Pellet Stoves
A pellet stove is a stove that burns compressed wood pellets to create a source of heat for residential spaces. Some pellet stoves may burn other pellets (e.g., grasses or corn). Pellet stoves create a constant flame by pouring pellets into a hopper which feeds automatically into the stove. Pellet stoves are similar in appearance and work on the same principles as a wood stove, but they burn more efficiently and are more convenient. Most pellet stoves do not require EPA cer tification because most of these stoves do not meet

6 Sources: United States Environmental Protection Agency and Frost & Sullivan (http://www.epa.gov/burnwise/appliances.html)Frost & Sullivan 10 Prepared for EC/R Inc. 4/26/2010 the air-to-fuel ratio limits required by the NSPS definition of wood stov es. A disadvantage of pellet stoves is that, unlike wood stoves, most of these stoves need electricity to ope rate, but some are equipped with a battery backup.
Masonry Heaters
A masonry heater is a site-built or site-assembled de vice for warming a home or any interior space. It consists of a firebox, a large masonry mass, and heat exchange channels that provide additional surface area to absorb heat from the hot exhaust gases before they exit into the chimney. A masonry heater captures the heat from rapidly-burning fires, and then radiates that heat throughout the day at a fairly constant temperature. These heaters are made of masonry, rather than steel. Since the firebox is masonry, fires can burn much hotter than in a metal stove. A masonry heater is free-standing and requires a significant support structure to bear the weight. The masonry exterior can be brick, tile, stone, stucco, or a combination of these materials. Masonry heaters curren tly do not require EPA certification.
Fireplaces
A fireplace is a hearth and fire chamber that can hold an open fire and is ofte n built in conjunction with a chimney. Fireplaces are currently exempt from EP A certification. There are two major types of woodburning fireplaces: traditional masonr y fireplaces and factory-built firepla ces. This analysis will focus on wood fireplaces that are engineered and prefabricated in a manufacturing facility prior to installation. In order to make factory-built firepl aces more efficient and less polluting, some homeowners use fireplace inserts. Fireplace inserts, unlike th e EPA-certified wood stoves that are sometimes inserted into the masonry chamber, are not included in this analysis.
Outdoor Fireplaces
An outdoor fireplace is a device for building fires outsid e of the home. Similar in construction to an indoor fireplace, it often consists of a fi rebox and a chimney. An outdoor fi replace is often simply used as a decorative element, allowing homeowners to enjoy a fire while en tertaining in the b ackyard. Currently, outdoor fireplaces are also ex empt from EPA certification.
Hydronic Central Heating Systems
A hydronic central heating system uses a heat generato r to raise the temperature of water. The heated water is then circulated from the boiler through pipes to heat emitters, such as radiators, convectors, and underfloor heating coils, through which the water loses its heat to the room. The cooler water then returns to the boiler for reheating. These systems are also called outdoor wood heaters or outdoor wood boilers. Although most hydronic heaters are located outdoors, some may also be installed indoors.

Biomass-based StovesFrost & Sullivan 11 Prepared for EC/R Inc. 4/26/2010 A biomass-based stove is a stove that burns biomass fuel other than wood and wood pellets to create a source of heat for residential spaces. These stoves can bu rn biomass fuels such as agricultural crops, plants (including aquatic plants), grasses, residues, and fibe rs. Biomass-based stoves are similar in appearance and work on the same principles as pellet stoves.
End-user Segments
For the purpose of this project, wood heaters, fire places, and hearth heating products covered in this report are only used in residential applications.
Geographic Definition
This project analyzes the wood heater s, fireplaces, and hearth heating pr oducts market in North America, including the United States and Canada. Th e scope of this project excludes Mexico.

Revenue Definition

Revenues for the North American wo od heaters, fireplaces, and hearth heating products market are in current U.S. dollars. The revenues represent the sale price at the manufacturer’s level in 2008; secondary sales figures would be higher. Pricing at the manufacturer’s level is used to avoid the price fluctuations that occur once the system enters the different distribution channels used in this market. Depending on contracts and volumes in each distribution channel, the price for the same product can vary significantly upon leaving the different channels available. All revenues not resulting from the actual product sales such as installation and maintenance fees are excluded from the revenue figures.



### Summary of Key Findings

Following is a summary of key findings and a list of factors identified by manufacturers and industry representatives:

• The North American residential w ood heaters, fireplaces, and hearth heating products market experienced exceptional growth in 2008, with a 16.4 percent revenue growth over 2007.

• The economic crisis, along with the slowdown in the residential construction market and the lack of available credit, is expected to have a negative impact on this market in 2009 and 2010. The pellet stoves and the fireplace product segments we re most affected by the economic downturn in 2009.

• Although interest in these types of appliances ha s increased due to the federal energy efficiency tax credit for biomass stoves, the impact of the cr edit has not been as big as expected because itFrost & Sullivan 12 Prepared for EC/R Inc. 4/26/2010 took some time for the government to announce the efficiency requirements and advertising was inadequate.

• The market is expected to witness positive growth dr iven primarily by the volatile prices of natural gas and heating oil after 2010. However, the high initial cost and competition from alternative heating appliances are expected to restrict growth in the market.

• The wood stoves product segment is the largest segm ent in terms of revenues, while the fireplaces product segment is the largest segment in terms of units. The outdoor fireplaces product segment was the smallest in terms of revenues, and the masonry heaters product segment was the smallest in terms of units.

• The market segment for unbranded/non-regulated products currently sold in the United States by Asian manufacturers is a small but growing segment of the market.

• The main reasons for switching to alternative fuel sources are the price of alternative fuels and the availability of wood and other solid biomass-based fuels.

• Emission regulations that are too strict and difficult to attain would require manufacturers to redesign their products and spend large amounts of money on research and development, which would likely drive unit prices up. In addition, because some companies may not be able to make the investment, manufacturers could potentially go out of business.

• There is a need to create a testing procedure th at accounts for the way appliances are used at home and tests the units the way they are going to be used by the homeowner.

• The lack of a comprehensive national standard is a concern for participants in the industry because the variations in the emission standards in di fferent regions has made it more difficult for manufacturers to create products that meet these different standards and can be sold across the country. While most areas in North American have adopted the emission standards set by the EPA, some areas have set their own standard in order to reduce air pollution.

• There is a need for a testing protocol for masonry heaters that will allow end users to comparethe efficiency and emissions of masonry heaters with other wood-burning and solid biomassbased appliances.

• Most manufacturers and industry representativ es advocate for increased focus on replacing old appliances in order to reduce air pollution, as we ll as educating consumers about proper moisture content for cordwood and the correct way to operate their appliances.Frost & Sullivan 13 Prepared for EC/R Inc. 4/26/2010 • Although demand is expected to increase across all of North America, the greatest demand for these products is expected to continue to be in the Northeast region of the Unites States and the East region of Canada.Frost & Sullivan 14 Prepared for EC/R Inc. 4/26/2010 

# 2

Total Market Analysis

Market Overview

The North American wood heaters, fireplaces, and hearth heating products market generated revenues of $509.9 million in 2008, growing at a rate of 16.4 percent over 2007. This is primarily due to the soaring prices of heating oil and natural gas in 2008, which resulted in tremendous growth in the market. However, the weak economy and the slowdown in new residen tial construction activity in the region halted sales toward the end of 2008. As the economic troubles con tinue, the market is anticipated to witness declining growth in 2009 and 2010. However, the residential wood heaters, fireplaces, an d hearth heating products market is expected to witness an upward growth trend as the economy and new construction market recover. The North American market is estimated to grow at a compound annual growth rate (CAGR) of 4.1 percent from 2009 to 2015. For more information on revenue growth rates, refer to the Market Analysis and Revenue Forecasts section.

One of the main factors dr iving the growth in this market is th e increasing concern about the fluctuating prices of fossil fuels. Volatile natural gas and heating o il prices are driving end users to look for alternative fuels to heat their homes. Given the potential to substantially reduce the cost of heating their homes by using biomass fuels such as wood, wood pellets, and corn, homeowners are more inclined to switch to theseFrost & Sullivan 15 Prepared for EC/R Inc. 4/26/2010 fuels. The overall demand and growth conditions for this market are therefore direc tly tied to the prices of fossil fuels such as natural gas, propane, and heating oil.
The growing need to reduce pollution in order to clean the air is causing a shift toward high-efficiency and cleaner-burning wood and other solid biomass-based appliances. The increasing concerns of environmentally conscious customers have compelled the manufacturers to design equipment that not only offers higher efficiency levels, but also cleaner performance. The market has thus far migrated from the 50 to 60 percent efficiency of olde r woodstoves to the new appliances that can offer up to 78 percent efficiency. The movement toward hi gh-efficiency and clean appliances in the North American market is also being driven by the state and local governments’ efforts to regulate these products and establish the needed regulations as well as the EP A’s voluntary wood stove changeout programs. In addition, some local and state governments are playing a gr eater role in the movement toward cleaner appliances by providing incentives to replace old appliances and creating their own emission standards.
As the demand continues to move toward high-efficiency and cleaner-burning products, the average price for these appliances is expected to increase. However, although they are intere sted in cleaner-burning and efficient appliances, homeowners are an ticipated to continue to look for cost-effective solutions to address their heating needs. As a result, the majority of home owners are expected to make some efforts to reduce air pollution but without having to pay too much.

The North American wood heaters, fire places, and hearth heating products ma rket is a mature market and is very competitive. Due to the high levels of competition, price remains a very important factor for end users when determining what type of appliance to purchase . Price is particularly important in the residential market where consumers tend to be more price-sensitiv e. However, homeowners are particularly interested in a product that will offer them the most heating co st savings. Therefore, purchasing decisions are also affected by the availability of fuel in the region wher e the appliance will be used and the efficiency of the unit.



### Overview of Product Segments

The North American residential wood heating, firepl aces, and hearth heating products market consists of wood stoves, pellet stoves, bioma ss stoves, fireplaces, outdoor firepl aces, masonry heaters, and hydronic central heating systems. Wood stov es have been in the market for many decades, while pellet and other solid-biomass stoves have been more recently introduced to the market.
The wood stoves product segment consists of two ty pes of stoves: catalytic and non-catalytic stoves. Catalytic stoves makeup the smaller subset of this segment and include catalytic combustors that burnFrost & Sullivan 16 Prepared for EC/R Inc. 4/26/2010 combustion gases at lower temperatures. 7 Although there were some issues with catalytic stoves in the past, improved design and a better understanding of the technology have made these units more reliable and efficient. Non-catalytic stoves have also been improved over the last 30 years. These new units have lower emissions and higher efficiencies.
A major advantage of wood stoves is that they are less expensive than pellet and other solid biomass-based stoves. While the average manufactur er’s price for a pellet or a biomass stove was more than $1,200, the average price of a wood stove was $848 in 2008. Particularly in a so ft economy, end users look for costeffective solutions to address their heating needs. Another advantage of wood stoves is that they do not require electricity to operate. In addition, the fact that some homeo wners have access to free or very inexpensive wood is supporting steady growth in the wood stoves product segment.
Pellet stoves are cleaner-burning applia nces and can reach efficiencies ab ove 80 percent. Most pellet stoves do not meet the air-to-fuel ratio limits required by the NSPS definition of wood stoves, and this exempts them from the standards. The most important drivers for this pro duct segment are efficiency and convenience. While these stoves are very efficient an d pollute very little, another reason that consumers are purchasing these appliances is because they are very convenient to operate. Pelle t stoves have a hopper that stores the pellets until they are needed for burning. Th e convenience of just pouring pellets into a hopper that feeds automatically into the stove is driving more homeowners to buy pellet stoves. Additionally, some homeowners want to get away from the work that is involved in gathering and cutting wood. The technology in pellet stoves also allows end users to get a longer burn cycle at a lower output.
Biomass stoves are very similar to pellet stoves, but they can burn corn kernels, nutshells, and pellets made from agricultural crop waste and other biomass fuels. Growth in the biomass stoves segment is mainly driven by the need to reduce heating costs. Since most of the demand for this type of appliance is supported by locally-grown products that can be used as fuel, the av ailability of the fuel is a key factor in this market. Another driver for this product segment is the increasing number of homeowners that are using biomass fuels to reduce their impact on the environment.
Fireplaces are largely designed as decorative pieces, and most are not very efficien t because they draw the heated room air for combustion and send it up the chimney. This has led many homeowners to install a high-efficiency fireplace insert in order to increase the efficiency of their fireplace. However, new fireplaces have been introduced into the market with lower emissions an d somewhat higher efficiencies as a result of the EPA-qualified wo od-burning fireplace program.
A major driver for the wood fireplaces product segment is the homeowner’s desire to have a fireplace in the home. According to the National Association of Home Builders, fireplaces ranked among the top features desired by new home buyers. The vari ety of sizes and designs of wood fireplaces available in the market

7 Source: U.S. Department of Energy (http://www.energysaver s.gov/your_home/space_h eating_cooling/index. cfm/mytopic=12570)Frost & Sullivan 17 Prepared for EC/R Inc. 4/26/2010 also supports demand for these units. On the other ha nd, the outdoor fireplace product segment is primarily driven by the desire for homeowners to improve thei r outdoor space and entertain in a more inviting space. Another driver for these products is the fact that a fireplace can poten tially increase the value of the home.
Well-designed masonry heaters can be very efficient, generally reaching efficiencies up to 90 percent. On average, masonry heaters are more efficient than wood stoves and fireplaces. A major advantage of a masonry heater is that it does not need to be loaded with fuel as often as other types of wood-burning appliances. Another advantage of these appliances is th e fact that they do not require electricity to operate. The homeowner’s desire to avoid being dependent on electric power for heat during a power outage is thus expected to drive more people to purchase masonry h eaters. Although prices range from $5,000 to $35,000, masonry heaters are a growing segmen t of the market in North America. This is primarily due to the efficiency of these heaters and the fact that these un its are arguably the cleanes t-burning appliances in the market. Well-designed masonry heaters can potentially generate more heat and, more importantly, produce less pollution than any other wood-burning or other solid biomass-based appliance. 8

Hydronic central heating systems have also been impr oved over the last several years. The primary factor driving growth in this market segment is the desire to reduce heating bills by using less expensive wood to heat the home. Although both indoor and outdoor units are available in the market, most of these systems are outdoor units.



### Market Dynamics
Industry Challenges Figure 2-1 shows the impact of the top challenges facing manufacturers ranked in the order of impact for the North American residential wood heaters, firepl aces, and hearth heating products market from 2009 to 2015. Each of these challenges is discussed further below.

8 Source: U.S. Department of Energy (http://www.energysaver s.gov/your_home/space_h eating_cooling/index. cfm/mytopic=12570)Frost & Sullivan 18 Prepared for EC/R Inc. 4/26/2010 Figure 2-1

Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Industry Challenges Ranked in Order of Impact (North America), 2009–2015

Rank Challenge 1-2 Years 3-4 Years 5-7 Years
1 Forecasting demand presents major challenge for
manufacturers High High High

2 Inconsistency of standards in different regions presents challenge for manufacturers High High Medium

3 Intense price competition challenges
manufacturers Medium/High Medium Medium

4 Competition from Asian manufacturers presents challenge for North Am erican manufacturers Low/Medium Low/Medium Medium

Note: All figures are rounded; the base year is 2008. Source: Frost & Sullivan Forecasting Demand Presents Ma jor Challenge fo r Manufacturers
Gas and electric hearth heating products directly compete against wood-burning and other solid biomassbased appliances. Because the demand for wood-burni ng and other solid biomass-based appliances is strongly tied to the price of alternative fuels, forecasting demand for wood-burning and other solid biomass-based appliances has become challenging for manufacturers of these products.
As the price of heating oil and natural gas increases, the demand for wood and other solid biomass-based appliances also follows an upward trend. When the price of heating oil and/or natural gas is low, it does not make economical sense for a homeowner to switch to a wood-burning or other solid biomass-based appliance. However, when the price of gas and/or heating oil is high, switching to a wood-burning or other solid biomass-based appliance can subs tantially decrease the cost of heati ng the home. As seen recently, the prices for natural gas and heating oil can fluctuate greatly and even spike at very high levels. This fluctuation in the price of fossil fuels has made it very difficult for manufacturers to determine and accurately forecast the demand for thei r products and to effectively adjust their production capacity to meet the market demand. The impact of this challenge is expected to be high thro ughout the forecast period.
Chart 2.1 shows the average price of natural gas in the residential sector of the United States from 2006 to
2011.Frost & Sullivan 19 Prepared for EC/R Inc. 4/26/2010 Source: U.S. Energy Information Administration
Chart 2.2 shows the average retail price of heating oil in cluding taxes in the residential sector of the United States from 2006 to 2011.

Source: U.S. Energy Information Administration
Inconsistency of Standards in Different Regions Presents Ch allenge for Manufacturers
The variations in the standards adopted by different regions are posing a challenge for manufacturers in North America. While most states and provinces in the United States and Canada have adopted the emission standards set by the EPA, other areas, such as the state of Washington, have set their own standard in order to reduce air pollution. In order to be able to sell their products in Washington, manufacturer’s have to ensure that all their wood-burn ing devices meet both the EPA’s standards as well as Washington’s stricter standards. As a result, a few manuf acturers are not able to sell their products in areasFrost & Sullivan 20 Prepared for EC/R Inc. 4/26/2010 that have set stricter standards. On the other hand , according to the Hearth, Patio & Barbecue Association, over 85 percent of all EPA-certified wood stoves sold in the United States al ready meet the stricter Washington State emission limits.
In addition to state requirements, some towns and cities are using zoning and other laws to set their own standards. Some regions in both the United States a nd Canada are imposing restrictions on wood-burning appliances. Hampstead, Quebec, has banned the installa tion of wood stoves and ordered all existing wood stoves to be removed within the next seven years. In Colorado, the Colorado Air Quality Control Commission Regulation No. 4 forbids the use of uncertified appliances on air quality action days from November to March. 9

The EPA has set voluntary qualifica tion levels for fireplaces and hydr onic heaters and some areas have made these voluntary qualifications into requirements in their jurisdiction. This is helping to address the inconsistencies of standards in different regions. The impact of this challenge is expected to be high in theshort and medium term. As the industry moves toward a single North American standard per type of woodburning device, the impact of this ch allenge is expected to decrease.
Intense Price Competition Challenges Manufacturers
One of the main challenges that the market is f acing is price competition. Homeowners have always demanded the best products at the lowest price possibl e. Therefore, manufacturer s have to deliver quality and efficient products at competitive prices. Especially during difficult economic times, price becomes an important factor for many homeowners, compelling manu facturers to price their products competitively.
Maintaining such pricing while maintaining profitability is a challenge for manufacturers, as they attempt to develop products that can meet emission requirements. Since larger companies can compete better on price because of their economies of scale, smaller companies are particularly affected by this challenge. Furthermore, manufacturers are challeng ed to deal with increasing prices for raw materials such as steel and still make a profit. The high price competition in the market makes it difficult for manufacturers to add higher material costs to the price of their products and simultaneously maintain their profit margins. Part of this challenge also includes addressing the price sens itivity issue without selling inferior quality products. Maintaining a strong foothold in the market, while not compromising on the quality of the equipment, is thus critical for manufacturers.
The impact of this challenge is expected to remain medium/high in the short term and decrease to medium in the medium and long term.
Competition from Asian Manufacturers Presents Challenge for North American Manufacturers

9 Source: Colorado Department of Public Health and Environment (http://www.cdphe.state.co.us/ap/woodlocal.html)Frost & Sullivan 21 Prepared for EC/R Inc. 4/26/2010 The North American market conti nues to face a strong degree of co mpetition, with some wood stove manufacturers even adding manufacturing operations in China. The challenge is intensified by the introduction of lower-quality and low-cost products ma nufactured in Asia. These manufacturers target end users who are primarily looking fo r price-competitive appliances.
Heating, fireplace and other hearth heating product manufacturers, es pecially those of fireplaces, are largely impacted by the availability of low-cost impor ts from Asian manufacturers such as China. North American manufacturers are finding it increasingly mo re difficult to compete with Asian manufacturers as the latter benefits from lower overheads and access to low- cost labor. In addition to this, the residential customers are more price conscious and, hence, are mo re likely to settle for an inexpensive appliance even if it is less durable and less efficient than a more expensive appliance.
Because they offer low-en d products, the stiff competition from Asian manufacturers is anticipated to continue to exert downward pricing pressure. Therefore, this challenge is anticipated to have a low/medium impact in the short and medium term and increase to medium by the end of the forecast period.



### Market Drivers

Figure 2-2 shows the market drivers ranked in the orde r of impact for the North American residential wood heaters, fireplaces, and hearth hea ting products market fr om 2009 to 2015. Each of these drivers is discussed further below.

Figure 2-2

Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Market Drivers Ranked in Order of Impact (North America), 2009–2015

Rank Driver 1-2 Years 3-4 Years 5-7 Years
1 Perceived potential of products to reduce heating
costs increases demand in the market High High High

2 Perceived environmental benefits of burning biomass fuels support growth in the market Medium Medium/High Medium/High

3 Programs supporting use of these products drive
sales in the market Medium Medium Medium

4 Reduced emissions and higher efficiency increases
market demand Medium Medium Medium

Source: Frost & SullivanFrost & Sullivan 22 Prepared for EC/R Inc. 4/26/2010 Perceived Potential of Products to Reduce Heat ing Costs Increases Demand in the Market
The desire to reduce the cost of heating the home is motivating homeowners to look for alternative fuels. The fact that using wood-burning and other solid biomass-based appliances has the potential of reducing heating costs has generated interest in these products.
Given the volatility and the fluctuations in the price of natural gas and heating oil, switching to a woodburning or other solid biomass-based heating appliance has the potential of reducing the cost of heating the home. Although the cost savings depend on the cost of the wood and other solid biomass-based fuels and the cost of the appliance, when th e price of gas and heating oil are hi gh, the heating cost savings can be substantial. The cost savings also depend on the availab ility of the fuel in the region where the appliance is being used. When homeowners have “free” and easy access to fuel such as wood and corn, the cost savings from using a wood- or corn-fueled appliance can dr amatically increase. In addition, homeowners can expect to use up to one-third less w ood with an EPA-certified wood applia nce than with an older appliance, further reducing heating costs. 10

The impact of this challenge is expected to be high throughout the forecast period.
Perceived Environmental Benefits of Burning Biom ass Fuels Support Growth in the Market
Consumers are increasingly conscious about the impact of their lifestyle s on the environment. Sustainable living and minimizing one's carbon footprint are growing trends amongst consumers. An increasing level of environmental concern among end users in North America has led many to adopt wood-burning and other solid biomass-based heating technology as a more environmentally sustainable option.

End-user awareness about environmental issues is an im portant contributing factor to this market. With the government and the media encouraging the use of greener technology, an increasing proportion of consumers are willing to switch to renewable energy on the basis of environmental concerns. Becausewood, corn, and other biomass fuels are renewable fuel sources, wood-burning and other solid biomassbased appliances are perceived as more environmenta lly friendly than gas, oil, and electric appliances. Although burning wood and other solid biomass fuels emits small amounts of pollutants into the air, when used properly, wood is often perceived as a better fuel option compared to fossil fuels such as oil, gas, and coal, whose consumption leads to global warming. In addition, wood-burning and other solid biomassbased appliances do not deprive the earth of nonren ewable fossil fuels, and using biomass for energy can potentially cut back on greenhouse gas emissions.
The impact of this challenge is expected to be medium in the short term and increase to medium/high by the end of the forecast period as end-user awareness about the envir onmental benefits of using biomass fuels increases.

10 Source: United States Enviro nmental Protection Agency (http://www.epa.gov/burnwi se/faqconsumer.html)Frost & Sullivan 23 Prepared for EC/R Inc. 4/26/2010 Programs Supporting Use of These Pr oducts Drive Sales in the Market
As local, state, and federal agencies evaluate ways of improving the air quality, new programs to reduce pollution and encourage the use of clean er-burning appliances are emerging . As these agencies continue to encourage citizens to use cleaner- burning appliances to fight the growing pollution problems, changeout programs, low interest loans, sales tax exemption, an d tax credits are being used as incentives to drive citizens to use these appliances.
One of the most recent programs is the Federal Tax Credit, wh ich provides a tax credit for 30 percent of the cost (up to $1,500) for the purchase and professional installation of a qualified wood-burning or other solid biomass-based stove or fireplace inse rt bought between January 1, 2009 , and December 31, 2010. In order to qualify, the stove must have a therma l efficiency rating of at least 75 percent. 11 Changeout programs that offer consumers financial incentives to replace older appliances with newer or EPA-certified wood-burning appliances have also helped to drive growth in the market.
For example, the state of Idaho offers taxpayers who buy new wood stoves or pellet stoves for their homes a tax deduction to replace old, uncertified wood stoves. Other regions offer other types of incentives to encourage homeowners to purchase wood-burning and other solid biomass-based products. The Canadian province of Prince Edward Island offers low interest lo ans and a sales tax exemption on alternative heating systems, such as wood stoves and pellet stoves, to low-income citizens. 12

Because these programs are often brief, the impact of this driver is exp ected to be medium throughout the forecast period.
Reduced Emissions and Higher Effici ency Increases Market Demand
Wood heater, fireplace, and hearth h eating product manufacturers are expect ed to offer appliances that are cleaner-burning and more efficient. Working towards that goal, many, but not all (e.g., hydronic heater manufacturers), manufacturers have reduced particulate emissions and increased the efficiency of their products.
With increasing awareness levels for improved ai r quality, government agencies and homeowners are increasingly demanding cleaner-burning and higher-effi ciency appliances. An EPA-certified wood stove can emit approximately 70 percent less pollution than an older wood stove. In addition, hydronic heaters that meet the EPA's Hydronic Heat er Voluntary Program can emit 70 to 90 percent less pollution than units that are not qualified by the EPA. 13 Also, more efficient appliances reduce the amount of fuel needed to heat the home, further reducing air pollution and providing additional fuel cost savings to the end users.

11 Source: United States Environmental Protection Ag ency (http://www.epa.gov/burnwise/appliances.html) 12 Source: United States Enviro nmental Protection Agency (http://www.epa.gov/burnwise/ordinances.html) 13 Source: United States Environmental Protecti on Agency (http://www.epa.gov/burnwise/how-toguide.html)Frost & Sullivan 24 Prepared for EC/R Inc. 4/26/2010 The trend toward cleaner-burning an d higher-efficiency appliances is expected to increase demand in the market.
Efficiency and particulate emissions are becoming a gr eater concern for manufacturers and will continue to drive this market. The impact of this driver is thus expected to have a medium impact until the end of the forecast period.



### Market Restraints

Figure 2-3 shows the market restraints ranked in the order of impact for the North American residential wood heaters, fireplaces, an d hearth heating products market from 2009 to 2013.

Figure 2-3

Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Market Restraints Ranked in Order of Impact (North America), 2009–2015

Rank Restraint 1-2 Years 3-4 Years 5-7 Years
1 Competing appliances restrict the growth rate of solid biomass-based products High High High

2 Economic downturn and slowdown of residential new construction limits short-term revenue growth High Medium/Low Low

3 High initial cost of products impacts sales Medium Medium Medium
4 Misconceptions about wood-burning appliances limit revenue growth Medium Medium Medium/Low

Source: Frost & Sullivan Competing Appliances Restrict the Growth Rate of Solid Biomass-Based Products
With gas, propane, and electric h eating appliances, such as gas stoves and electric fireplaces, gaining popularity, manufacturers of wood-burning and other solid biomass-based appliances are facing tough competition. Therefore, the growth of competing technologies has remained one of the major restraints in the residential wood heaters, fireplaces, and hearth heating products market.
Gas stoves and fireplaces have b een gaining popularity in recent year s because of their convenience. Unlike wood-burning appliances, which often require the homeowner to cut wood and load the fuel into the appliance, gas and electric units may only require the homeowner to flip of a switch to ignite the fire. Gas and electric appliances require little maintenance and clean up is not required for upkeep. Another advantage of gas products is that they are e fficient and emit very little pollution. In addition, gas stoves are easily installed, can be installed al most anywhere in the home, and do not require aFrost & Sullivan 25 Prepared for EC/R Inc. 4/26/2010 chimney, which makes them ideal for retrofit applic ations. Due to these advantages, the demand for heaters, fireplaces, and other hear th heating products has been split between the differe nt technologies depending on the end-user’s preferences. This is thus limiting the growth of wood-burning and other solid biomass-based products.
The impact of this restraint is expected to be high during the entire forecast period.

Economic Downturn and Slowdown of Residentia l New Construction Limits Short-term Revenue Growth
The slowdown in the North American economy has had a major impact on the purchasing decisions made by homeowners. Due to the difficult economi c times, homeowners are scrutinizing all expenses and cutting back on their purchases. This has resu lted in a decrease in demand for residential wood heaters, fireplaces, and hearth heating products.
The United States economy is experiencing difficulty due to challenges in the housing market, the lack of lending, and the high rate of consumer debt. A lthough Canada is faring somewhat better than the United States, it continues to feel the effects of the American economic struggles. The residential construction market in North America, particularly in the United States, has been witnessing a steep decline over the last three years. This has greatly affected the sale of wood-burning appliances, particularly fireplaces, as they ar e generally installed in new homes.
End users’ speculations of slow growth are also keeping them from investing in home improvementsor building new homes. Even though homeowners recognize the potential benefits of using welldesigned and well-operated w ood-burning and other solid biomass-based appliances, they are refraining from investing in these systems in light of the soft economy. In addition, the economic situation has tightened lending practices, making it more difficult for homeowners to be able to afford these appliances.
This restraint is expected to have a high impact on the growth of the market in the short term. Its impact is likely to decrease to medium/low in the medium term and to low in the long term as the North American economy rebounds.
High Initial Cost of Products Impacts Sales
One of the hurdles to rapid growth in the residential wood heaters, fireplaces, and hearth heatingproducts market is the high initial price of the units. While the perceived benefits of using woodburning and other solid biomass-based products are becoming more apparent to homeowners, the large initial investment continues to limit the demand.
Although using a wood-burning or other solid biomass-based appliance can potentially reduce the cost of heating the home and offers the environmental bene fits of using renewable fuels, price remains anFrost & Sullivan 26 Prepared for EC/R Inc. 4/26/2010 important factor for homeowners. Homeowners are often dissuaded from purchasing these appliances due to the high initial cost. Quality appliances range in price from $300 to upwards of $20,000, which makes it an expensive proposition for the average homeowner. The cost of a wood-burning or other solid biomass-based appliance can also be higher compared to some gas and electric appliances, furtherrestraining growth in this market. While the heating cost savings achieved through the use of woodburning and other solid biomass-based appliances can potentially pay for the equipment in a few years, potential consumers are still postponing purchases due to the upfront expense. This price-sensitive mindset among residential consumers is thus aff ecting the sales of wood-burning and other solid biomass-based appliances.
Budget restraints and high initial costs are expected to continue to limit the market for new wood-burning and other solid biomass-based appliances. This restraint will continue to have an impact until the initial cost decreases. The impact of this restra int is expected to be medium thro ughout the rest of the forecast period because prices are not expected to de crease considerably in the long term.
Misconceptions about Wood-burning Appliances Limit Revenue Growth
Although numerous changes have been made to the technology in wood-burning appliances, people who previously had issues with older appliances continue to hold on to the idea that these appliances do not burn clean. While the technology has improved over the last years to make these units cleaner-burning, most are not as clean as gas and oil appliances.
Wood smoke is a major part of the air pollution problem in North America. Because wood smoke can increase cardiovascular problems, irritate lungs a nd eyes, cause headaches, and aggravate respiratory diseases such as asthma, emphysema and bronchitis, ma ny local, state and federal agencies are looking to restrict the use of wood-burning appliances. 14 Although air pollution remains an issue with older appliances, newer appliances burn more efficiently than older non-certified models, reducing the particulate emissions. In order to reduce emissions, homeowners must use advanced technology and EPA-certified appliances. In addition, they have to use correctly prepared and fully-seasoned firewood and the correct burn techniques. 15

The impact of this restraint is expected to be medium in the short term and decrease to medium/low by the end of the forecast period as end users become more familiar with the new appliances.

14 Source: City of Fort Collins (http://www .fcgov.com/airquality /wood-burning.php) 15 Source: United States Enviro nmental Protection Agency (http://www.epa.gov/burnwi se/faqconsumer.html)Frost & Sullivan 27 Prepared for EC/R Inc. 4/26/2010 

### Market Analysis and Revenue Forecasts

The total revenues for the North Am erican residential wood heaters, fi replaces, and hearth heating products market were $509.9 million in 2008. From 2006 to 2007, the market experienced declining growth due to surplus dealer inventory from 2006, which resulted in fewer orders from the manufacturers. However, in 2008 the market experienced impressive market growth of 16.4 percent over the previous year. This growth was primarily driven by the sudden increase in the pri ce of heating oil and natural gas in North America.
From 2009 to 2010, the weak economy is expected to have a negative impact on the revenue growth of the market. The decline in residential new construction and the lack of credit to both end users and dealers are also expected to limit the demand for these products in the United States and Canada during this period. With the residential construction market expected to bounce back after 2010 and the price of heating oil and natural gas anticipated to continue to fluctuate, the market is likely to witness increasing demand. As North America begins its economic r ecovery, the market is expected to witness an upward trend in revenue growth after 2010. In 2012, the market is expected to witness very strong growth as a result of the economic recovery and the increase in consumer lending . By 2015, the market re venues are projected to reach $413.2 million, with a compound annual growth rate (C AGR) of 4.1 percent from 2009 to 2015.
A key factor increasing the demand for wood-burning and other solid biomass-based appliances is the growing concern about the high cost of heating the home using fossil fuels such as natural gas, propane, or heating oil. As a renewable source of fuel, wood and other solid biomass-based fuels are abundant in many regions and relatively inexpensive. Therefore, burning these fuels for heat can potentially help homeowners take control of high home heating bills.
Growing concerns and awareness among the public abou t air quality issues are increasing the demand for high-efficiency and cleane r-burning appliances. With EPA-certified wood stoves producing as much as 90 percent less wood smoke emissions than uncertified wood-burning appliances, more people are purchasing these types of appliances in order to reduce thei r impact on the environment and decrease air pollution. 16 Constant efforts from the federal government to enha nce the efficiency of the systems and reduce the environmental footprint through regulatory measures are expected to continue to shift the demand toward high-efficiency and clean er-burning appliances.
Figure 2-4 represents the revenue forecasts for the North American residential wood heaters, firepl aces, and hearth heating products market from 2006 to 2015.

16 Source: United States Environmental Protecti on Agency (http://www.epa.gov/burnwise/how-toguide.html)Frost & Sullivan 28 Prepared for EC/R Inc. 4/26/2010 Figure 2-4
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Revenue Forecasts (North America), 2006–2015
Revenue Revenues Growth Rate Year ($ Million) (%)

2006 591.3 -- 2007 437.9 (25.9)
2008 509.9 16.4 2009 325.6 (36.1) 2010 312.7 (4.0)
2011 322.6 3.2
2012 360.2 11.7
2013 376.0 4.4
2014 394.1 4.8
2015 413.2 4.8 Compound Annual Growth Rate (2009-2015): 4.1%

Note: All figures are rounded; the base year is 2008. Source: Frost & Sullivan

Chart 2.1 shows the revenue for ecasts for the North American residential wood heaters, firepl aces, and hearth heating products market from 2006 to 2015.

Chart 2.1 Residential Wood Heaters, Fireplaces, and Hearth Heatin g Products Market: Revenue Forecasts (North America), 2006-2015

$0 $100 $200 $300 $400 $500 $600 $700

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YearRevenues ($ Million)

Note: All figures are rounded. Source: Frost & SullivanFrost & Sullivan 29 Prepared for EC/R Inc. 4/26/2010 

### Current Market Size By Unit Shipments

In 2008, unit shipments fo r the total North American residential wood heaters, fireplaces, and hearth heating products market totaled 505,111 units, increasing by 15.8 percent over the previous year. The North American market includes both the United States and Canada. In terms of unit shipments, the United States accounts for about 87 percent of the total units sold in 2008. Although the Canadi an market felt less of an impact from the economic downturn, the Unites States market is expected to co ntinue to account for the majority of unit shipments.
Chart 2.2 shows the percent of unit shipments by region for the North American residential wood heaters, fireplaces, and hearth h eating products ma rket in 2008.

Source: Hearth, Patio & Barbecue Association and Frost & Sullivan

The demand for wood and other solid biomass-based products in North America is directly tied to the prices of alternative fuels. The shar p increase in the price of gas and hea ting oil in 2008 consequently drove many homeowners to purchase wood-burning and other solid-biomass heating appliances in order to reduce the cost of heating their home.
In addition, as more end users explore ways to reduce their carbon footprint and look for “environmentally friendly” products, wood and other biomass-based appliances have gained popularity. This trend toward conserving the environment by using sustainable and renewable fuel sources to heat the home has contributed to the increase in sales of wood and other biomass-based appliances. Although unit shipmentsFrost & Sullivan 30 Prepared for EC/R Inc. 4/26/2010 are expected to decrease from 2009 to 2011, a promising economic recovery is expected to stimulate unit shipment growth after 2010.



### Market Analysis – Revenue and Units By Product Type

In 2008, the pellet stoves product segment was the largest contributor to the North American market in terms of revenues. This product segment generated re venues of $166.9 million, accounting for 32.7 percent of the total market in 2008. In terms of units, the pellet stoves product segment was the third largest segment in the market. This segment sold 130,381 units in 2008, accounting for 25.8 percent of the total number of units sold.
The wood stoves product segment was the second largest contributor to the total market, generating revenues of $141.2 million. The wood stoves segment accounte d for 27.7 percent of the revenues of the total residential wood heaters, fire places, and hearth heating products mark et in 2008. In terms of units, the wood stoves product segment was also the second largest segment in the market. This segment sold 166,527 units in 2008, accounting for 33.0 percent of the total number of units sold.
The hydronic central heating systems product segment was the third largest segment in the market in terms of revenues in 2008. The revenues generated by hydronic central heating systems were $99.5 million, representing 19.5 percent of the reve nues of the total North American market. While this segment was the third largest in terms of revenues, the hydronic central heating systems product segment was the fourth largest segment in the market in terms of units. This segment sold 13,385 units and accounted for 2.6 percent of the total number of units sold in 2008.
The wood fireplaces product segment was the fourth larg est segment in the market in terms of revenues in 2008. This product segment generated revenues of $81.4 million and accounted for 16.0 percent of the total residential wood heaters, fireplaces, and hearth heating products market. While this segment was the fourth largest in terms of revenues, the wood firepl aces product segment was th e largest segment in the market in terms of units. This segment sold 180,966 units and accounted for 35.8 percent of the total number of units sold in 2008. Although prices vary, the main reason that this pr oduct segment accounts for the largest share of the units and not the revenues is because average wood fireplaces are the least expensive appliances in this market.
The biomass stoves product segment was the fifth larg est contributor to the No rth American market in terms of revenues. In 2008, this product segment ge nerated revenues of $9.6 million, accounting for 1.9 percent of the total market. In terms of units, the biomass stoves product segment was also the fifth largest segment in the market. This segment sold 6,819 units, accounting for 1.5 percent of the total number of units sold in 2008.Frost & Sullivan 31 Prepared for EC/R Inc. 4/26/2010 The next largest segment in the market in terms of revenues was the masonry heaters product segment. This product segment generated revenues of $6.6 million an d accounted for 1.3 percent of the total market in 2008. In terms of units, the masonry heaters product segment was the smallest segment in the market. This segment sold 730 units and accounted for only 0.1 percent of the total num ber of units sold in 2008. The reason that the masonry heaters product segment accounts for a larger share of the revenues than the unit shipments is because average masonry heaters are more ex pensive than the other appliances in this market.
The smallest segment of the market in terms of revenues was the out door fireplace prod uct segment. In 2008, this product segment generated revenues of $4.8 million, accounting for 0.9 percent of the total market. In terms of units, the outdoor fireplaces product segment was also one of th e smallest segments in the market. This segment sold 6,302 units in 2008, accounting for 1.2 percent of the total number of units sold.
Figure 2-5 shows the revenues and percent of th e total revenues by product type for the North American residential wood heater s, fireplaces, and hearth heati ng products market in 2008.

Figure 2-5
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Revenues and Percent of Total Revenues by Product Type (North America), 2008



### Product Type Revenues (Millions) % of Total Revenues Wood Stoves $141.2 27.7% Pellet Stoves $166.9 32.7% Biomass Stoves $9.6 1.9% Wood Fireplaces $81.4 16.0% Outdoor Fireplaces $4.8 0.9%

Masonry Heaters $6.6 1.3% Hydronic Central Heating Systems $99.5 19.5%
Source: Frost & Sullivan

Figure 2-6 shows the unit shipments and percent of the total units by product type for the North American residential wood heater s, fireplaces, and hearth heati ng products market in 2008.

Figure 2-6Frost & Sullivan 32 Prepared for EC/R Inc. 4/26/2010 Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Unit Shipments and Percent of Total Units by Product Type (North America), 2008



### Product Type Units % of Total Units Wood Stoves 166,527 33.0% Pellet Stoves 130,381 25.8% Biomass Stoves 6,819 1.5% Wood Fireplaces 180,966 35.8% Outdoor Fireplaces 6,302 1.2%

Masonry Heaters 730 0.1% Hydronic Central Heating Systems 13,385 2.6%
Source: Frost & Sullivan

Chart 2.3 shows the percent of revenues by product type for the North American residential wood heaters, fireplaces, and hearth h eating products ma rket in 2008.

Source: Frost & Sullivan
Chart 2.4 shows the percent of unit shipments by product type for the North American residential wood heaters, fireplaces, and hearth heating products market in 2008.Frost & Sullivan 33 Prepared for EC/R Inc. 4/26/2010 Source: Frost & Sullivan



### Market Size for Unbrande d/Non-regulated Products

In 2008, revenues from the sale of unbranded/non-regulated products that are currently sold in the United States by Asian manufacturers were approximately $39.6 million. Although this segment of the market is small compared to the total North American residential wood heaters, fireplaces, and hearth heating products market, manufacturers and industry re presentatives believe this segment has had a tremendous impact on the market. Competition in th e market has intensified with the introduction of lower-quality and low-cost products manufactured in Asia.
These products are typically sold through big box retailers, such as Home Depot and Lowe’s, and are targeted toward end users who are primarily looking for inexpensive appliances. North American manufacturers are therefore finding it increasingly difficu lt to compete with these Asian manufacturers, as they benefit from lower overheads and access to low- cost labor. In addition, the fact that residential customers are more sensitive to price and are more likely to settle for an inexpensive appliance

— even if it is less durable and less efficient

— is adding to the pressure on North American manufacturers. While this is a small segment of the total market, it is expected to continue to grow, further intensifying its impact on the market dynamics in North America.Frost & Sullivan 34 Prepared for EC/R Inc. 4/26/2010 

### Installation Costs of Average System By Product Type

Figure 2-7 shows the installation costs of an average system by product type for the North American residential wood heaters, fireplaces, and hearth heating products market in 2008.

Figure 2-7
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Installation Costs of Average System by Product Type (North America), 2008



### Product Type Installation Cost Wood Stoves $500 Pellet Stoves $300 Biomass Stoves $300 Wood Fireplaces $600 Outdoor Fireplaces $350

Masonry Heaters $6,000 Hydronic Central Heating Systems $2,000

Source: Frost & Sullivan

The installation cost only includes the installation of the appliance and does not include the cost of installing a new chimney, the cost of a blower system or the cost of additional accessories such as mantels and other stone exteriors. An average installation includes installing floor and wall protection, connecting pipes to the unit using the proper material and construction clearances, ensuring proper ventilation, and testing the unit to make sure it is operating properly.

The price of installing a pellet or other biomass-based stove is lower than that of a wood stove because most of these stoves can be direct-vented, making the installation easier. In addition, a wood stove has to terminate above the roof, but a pellet stove does not, making the installation of the wood stove more expensive. The installation of the hydronic central heating system is more elaborate, and therefore, it is also more expensive. Although some installations can include piping, the installation cost shown above does not include piping. The installation cost of masonry heaters is the highest because the installation includes the masonry exterior and most installations are custom projects.Frost & Sullivan 35 Prepared for EC/R Inc. 4/26/2010 

### Manufacturer’s Price By Product Type

Figure 2-8 shows the manufacturer’s price by product type for the North American residential wood heaters, fireplaces, and hearth h eating products market in 2008.

Figure 2-8
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Manufacturer’s Price by Product Type (North America), 2008



### Product Type Average Price Price Range Wood Stoves $848 $200 to $2,800 Pellet Stoves $1,279 $300 to $3,500 Biomass Stoves $1,403 $350 to $4,000 Wood Fireplaces $450 $150 to $5,000 Outdoor Fireplaces $755 $250 to $6,000

Masonry Heaters $9,041 $4,000 to $15,000 Hydronic Central Heating Systems $7,433 $5,000 to $35,000
Source: Frost & Sullivan

The manufacturer’s price is the price of one standard unit and does not include installation, shipping charges, or accessories. The price of a unit can vary depending on the size, effi ciency, and the aesthetics. Prices are also influenced by raw material prices an d intense competition. The price represents the price at the manufacturer’s level. Pricing at the manufacturer’s level is used to avoid the price fluctuations that occur once the unit enters the different distribution channels used in the market. Depending on contracts and volumes in each distribution channel, the price for the same product can vary significantly upon leaving the different channels. In contrast to othe r product segments where manufacturers are primarily selling to distributors and dealers, manufacturers in the masonry heaters products segment sell primarily to the end users.



### Trends in Regional Variation in Purchase Price by Product Type

The purchase price at the manufacturer’s level is the same across North America and does not vary by region. Most manufacturers have a suggested retail price that is not impacted by regional variations. The only difference in price is due to the impact of transportation expenses. Therefore, dealers and distributors that are close to a manufacturing facility or a warehouse often pay less than other dealers and distributors because of the shipping cost and dist ance. Because most of these units are large and/or heavy, shippingFrost & Sullivan 36 Prepared for EC/R Inc. 4/26/2010 costs can range from about $150 to $400. To reduce pr ice differences, some manufacturers have plants all across North America. In addition, so me manufacturers look for carriers that can keep reasonable shipping rates in order to minimize price differences.

Unlike manufaturers in other product segments, mo st manufacturers in the masonry heaters product segment sell directly to end users. Some manufacturers also provide the installation, in which case, the price of the unit does not vary for different regions, but the price of the installation can increase depending on how far away the mason has to travel and if he has to pay for lodging.Frost & Sullivan 37 Prepared for EC/R Inc. 4/26/2010 

# 3

Analysis of Market Trends

Fuel Consumption

Fuel consumption refers to the amount of fuel that a unit consumes over the span of a year, largely during the winter months. The amount of wood consumed by a unit is measured in cords of wood, and a cord of wood is a stack of 48-inch logs (or cut logs equaling 48 inches) that is 4 feet high and 8 feet wide. The amount of pellets consumed by an appliance is measured in tons, and one ton of pellets is equal to 50 40- pound bags of pellets.

Typically, hydronic central heating systems have the highest average fuel consumption in this market because they are often used to prov ide heat to the entire house. Due to the fact that outdoor fireplaces are only used occasionally, they ha ve the lowest average fuel consum ption as compared to the other appliances in the market.
Figure 3-1 shows the fuel consumption by product type for the North American residential wood heaters, fireplaces, and hearth h eating products market in 2008.Frost & Sullivan 38 Prepared for EC/R Inc. 4/26/2010 Figure 3-1
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Fuel Consumption by Product Type (North America), 2008



### Product Type Average Consumption Range of Consumption Wood Stoves 3 to 3.5 cords of wood 1 to 6 cords of wood Pellet Stoves 2.5 to 3 tons of pellets 1 to 4 tons of pellets Biomass Stoves 2.5 to 3 tons of pellets 1 to 4 tons of pellets Wood Fireplaces 0.1 to 0.5 cords of wood Maximum 0.5 cords of wood Outdoor Fireplaces 0.1 to 0.4 cords of wood Maximum 0.4 cords of wood

Masonry Heaters 2.5 cords of wood 1.5 to 4 cords of wood Hydronic Central Heating Systems 9 cords of wood 6 to 15 cords of wood

Source: Frost & Sullivan

The amount of fuel that is consumed over a year varies depending on whether the unit is being used as a primary source of heating, a secondary source of heatin g, or for recreational use. Units that are used as a primary source of heating consume more fuel than when they are used as a second ary source of heat or for recreational use, since end users rely on thes e units to provide heat to their homes.

Figure 3-2 shows the fuel consumption by motive of purchase for the North American residential wood heaters, fireplaces, and hearth h eating products market in 2008.

Figure 3-2
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Fuel Consumption by Motive of Purchase (North America), 2008



### Product Type Primary Secondary Recreational Wood Stoves 5

‐ 6 cords of wood 3

‐ 4.5 cords of wood 1

‐ 2.5 cords of wood Pellet Stoves 3.5

‐ 4 tons of pellets 2

‐ 3 tons of pellets 1

‐ 1.5 tons of pellets Biomass Stoves 3.5

‐ 4 tons of pellets 2

‐ 3 tons of pellets 1

‐ 1.5 tons of pellets Wood Fireplaces N/A 0.5 cords of wood 0.1

‐ 0.4 cords of wood Outdoor Fireplaces N/A N/A 0.1

‐ 0.4 cords of wood

Masonry Heaters 3

‐ 4 cords of wood 1.5

‐ 2.5 cords of wood N/A Hydronic Central Heating Systems 9

‐ 15 cords of wood 6

‐ 8.5 cords of wood N/A

Source: Frost & Sullivan

Other factors that affect fuel cons umption are the size of the home or sp ace being heated, the efficiency of the unit, and climate. Fuel consumption is high in colder regions such as the Northeast and the Midwest due to the greater need for heat in those regions. While in the Northwest region fuel consumption is medium,Frost & Sullivan 39 Prepared for EC/R Inc. 4/26/2010 fuel consumption in regions such as the South and Southwest are low due to the moderate temperatures in those areas.

Figure 3-3 shows the level of fuel consumption by region for the North American residential wood heaters, fireplaces, and hearth heating products market in 2008.

Figure 3-3
Residential Wood Heaters, Fireplaces, and Hear th Heating Products Ma rket: Level of Fuel Consumption by Region (North America), 2008



### Region 17 

### Average Temperature (Dec. to Feb.) Fuel Consumption Northeast 10°F to 30°F High Midwest 0°F to 30°F High

South 30°F to 60°F Low Northwest 10°F to 40°F Medium Southwest 20°F to 60°F Low Source: Climate Prediction Center and Frost & Sullivan



### Usage Rates

Figure 3-4 shows usage rates by product type for the North American residential wood heaters, fireplaces, and hearth heating products market in 2008.

Figure 3-4
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Usage Rates by Product Type (North America), 2008

17 The regions are defined according to the U.S. Census Bureau definition of Regions of the United States. However, the West region is divided into Northwest an d Southwest for this analysis to account for climatic differences.Frost & Sullivan 40 Prepared for EC/R Inc. 4/26/2010 

### Product Type Usage per day Usage per year Wood Stoves 4 to 5 hours 3.5 to 4 months Pellet Stoves 4 to 5 hours 4.5 to 5 months Biomass Stoves 4 to 5 hours 4 to 4.5 months Wood Fireplaces 3 to 4 hours 10 to 20 times Outdoor Fireplaces 2 to 3 hours 10 to 15 times

Masonry Heaters All day 4 to 4.5 months Hydronic Central Heating Systems All day (as needed) 5 to 5.5 months
Source: Frost & Sullivan
In general, hydronic central heating systems are used for a longer period of time during the year, while outdoor fireplaces are generally used the least b ecause they are purchased for recreational use.

The usage rates vary depending on whether the unit is being used as a primary source of heating, a secondary source of heating, or for recreational use. Othe r factors that affect usage are the cost of the fuel, the outside temperature, and how long the winter is in the region where the appliance is being used, among others. Usage is high in colder regions such as th e Northeast and the Midwest because cold temperatures are conducive to the use of these ap pliances. While in the Northwest region usage is medium, usage in the South and Southwest regions is low due to the higher average temperatures in those areas.

Figure 3-5 shows the level of usage by region for th e North American residentia l wood heaters, fireplaces, and hearth heating products market in 2008.

Figure 3-5
Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Level of Usage by Region (North America), 2008Frost & Sullivan 41 Prepared for EC/R Inc. 4/26/2010 

### Region 18 

### Average Temperature (Dec. to Feb.) Usage
Northeast 10°F to 30°F High Midwest 0°F to 30°F High

South 30°F to 60°F Low Northwest 10°F to 40°F Medium Southwest 20°F to 60°F Low Source: Climate Prediction Center and Frost & Sullivan



### Motive of Purchase

Because stoves and fireplaces are more effective in heating a room, these appl iances are not typically used as a primary source of heat. These appliances are most often used to heat the areas of the homemost frequently used by its occupants. By turning down the furnace thermostat and using a woodburning or other solid biomass-based appliance to heat a specific zone in the home, end users can lower their heating costs and help conserve energy.
Almost half of the people who purchase wood stoves use them as a secondary source of heat, while only about 20 percent purchase these appliances for r ecreational use. Pellet stoves are also primarily purchased to be used as secondary sources of heat . However, due to their efficiency and convenience, a larger percentage of these are purchased as a pr imary source of heat compared to wood and biomassbased stoves. Compared to wood and pellet stoves, biomass-based stoves have the highest percentage of people who purchase them as a secondary source of heat.
Indoor wood fireplaces are primarily purchased for recreational use and are typically used on weekends or special occasions. However, about 12 pe rcent of these units are purchased as secondary sources of heat, and many are used with a fireplac e insert to increase efficiency. Outdoor fireplaces are strictly purchased for recreational use and are ty pically used on weekends, special occasions, or in the fall when it starts to get cold outside. Masonr y heaters are almost evenly purchased as a primary and a secondary source of heat, while the hydronic central heating systems are mainly purchased as a primary source of heat.
Figure 3-6 shows the motive of purchase by product type for the North American residential wood heaters, fireplaces, and hearth h eating products market in 2008.
Figure 3-6

18 The regions are defined according to the U.S. Census Bureau definition of Regions of the United States. However, the West region is divided into Northwest an d Southwest for this analysis to account for climatic differences.Frost & Sullivan 42 Prepared for EC/R Inc. 4/26/2010 Residential Wood Heaters, Fireplaces, and Hearth Heating Products Market: Motive of Purchase by Product Type (North America), 2008



### Product Type Primary Secondary Recreational Wood Stoves 34% 46% 20% Pellet Stoves 39% 45% 16% Biomass Stoves 33% 52% 15% Wood Fireplaces 0% 12% 88% Outdoor Fireplaces 0% 0% 100%

Masonry Heaters 54% 46% 0% Hydronic Central Heating Systems 86% 14% 0%
Source: Frost & Sullivan
Chart 3.1 shows the percent breakdown for the motive of purchase of wood stoves in North America in 2008.

Source: Frost & Sullivan
Chart 3.2 shows the percent breakdown for the motive of purchase of pellet stoves in North America in 2008.Frost & Sullivan 43 Prepared for EC/R Inc. 4/26/2010 Source: Frost & Sullivan
Chart 3.3 shows the percent breakdown for the motive of purchase of biomass-based stoves in North America in 2008.

Source: Frost & SullivanFrost & Sullivan 44 Prepared for EC/R Inc. 4/26/2010 Chart 3.4 shows the percent breakdown for the motive of purchase of wood fireplaces in North America in 2008.

Source: Frost & Sullivan
Chart 3.5 shows the percent breakdown for the motive of purchase of masonry heaters in North America in 2008.

Source: Frost & SullivanFrost & Sullivan 45 Prepared for EC/R Inc. 4/26/2010 Chart 3.6 shows the percent breakdown for the motive of purchase of hydronic central heating systems in North America in 2008.

Source: Frost & Sullivan



### Regional Trends

The demand for wood-burning and other solid biomass- based appliances in a specific region largely depends on the price of alternative fuels in the ar ea, as well as availability and access to the fuel. Access to the fuel means having phy sical access to the source, and having the right to gather wood or the necessary space to coll ect the fuel. However, access to fuel ca n be restricted due to limitations imposed by local jurisdictions. For example, governmental bodies have restricted the use of wood in areas such as California, Colorado, and Montreal. Others restrict the installation of wood-burning appliances in new construction. Such restricti ons have an enormous impact on the wood-burning products market and force end users to switch to other types of fuels.
In general, rural areas, the Northeast region of the United States, and the East region of Canada are the biggest markets for wood-burning products. The demand for wood-burning products also comes from the Northwest and the Midwest in the United States. Although these units are used throughout North America, wood-burning appliances are also used in areas where wood is readily available, such as Washington and Alaska.Frost & Sullivan 46 Prepared for EC/R Inc. 4/26/2010 The wood fireplaces product segmen t is tied to the re sidential construction market, and the recent decline in residential new construction has affected the demand for these appliances. With a number of home builders recently offering fireplaces only as an upgrade and a few not offering them at all anymore, the demand for wood fireplaces in the Sout hwest and Southeast regions of the United Sates has severely declined.
Masonry heaters are mostly used in the Northeast region of the United States and the East region of Canada. In Quebec and Ontario, particularly in th e Toronto area, the masonry heaters product segment is growing. The hydronic central heating systems are mostly used in the Northeast and the Upper Midwest region of the United Sates and the East region of Canada. More of these appliances are also being used in states such as Ohio, Iowa, and Indiana. In addition, the hydronic central heating systems market segment has increased in Alaska, North Dakota, and South Dakota. However, there was a decline in demand in some regions of the Great Lakes area due to the economy.
The biggest market for pellet stoves is in the Northeast region of the Unites States and the East region in Canada. According to the Hearth, Patio and Barbecue Association, 47 percent of the pellet stoves sold in the United States, from 1999 to 2008, were sold in the East. The demand for pellet stoves is also affected by the location of pellet manufacturing plants. The market for biomass stoves is fueled by locally produced fuel sources. For corn stoves, th e biggest market is in the Midwest, particularly the Corn Belt region of the United States. The Corn Belt region includes Iowa, Indiana, Illinois, and Ohio, and parts of South Dakota, North Dakota, Nebraska, Kansas, Minneso ta, Wisconsin, Michigan, Missouri, and Kentucky. 19



### Influences on Buying Styles, Customer Approval, and Other Psychographic Information

Many factors influence consumer preferences that are attributed to psychographic variables such as personality, values, attitudes, interests, or lifestyles. According to manufacturers and industry representatives, in the North American residentia l wood heaters, fireplaces, and hearth heating products market, price, efficiency, aesthetics, a nd the unit size are the key factors homeowners use when considering buying one of th ese appliances. Other key purchase criteria include payback period, warranty, brand, and durability.
Because most end users purchase these appliances to reduce the cost of hea ting their home, price is one of the most important factors in the purchas ing decision. Price is also important because residential end users are often more price-sens itive than commercial end users. In addition,

19 Source: Wikipedia (http://en.wikipedia.org/wiki/Grain_Belt)Frost & Sullivan 47 Prepared for EC/R Inc. 4/26/2010 homeowners are increasingly concerned about the environment and their carbon footprint. This has led them to look more closely at the efficiency of the unit when making a purchase. Aesthetics and unit size are also very important to end users, since the size of the unit determines the heat output that end users can expect.
Convenience is also an important factor when c onsidering what type of appliance to purchase. Typically, homeowners who are not willing or are unable to cut their own wood choose to purchase a pellet or other solid biomass-based appliance because it is more convenient to buy a bag of pellets and requires less work. In the wood fireplace and outdoor fireplace product segments, aesthetics are often more important to homeowners becau se these appliances are primaril y purchased for recreational use and not as primary sources of heat.
In the masonry heaters product segment, the benefits of efficiency and a cleaner-burning appliance are more important than price. Aesthetics and the ve rsatility of the design are other key purchase criteria for masonry heaters. While price and efficiency are key factors in the buying decision, homeowners purchasing a hydronic central heating system are also looking for dealers who can provide quality service. In addition, warranty has become very important in the hydronic central heating systems product segment.
Chart 3.7 shows the key purchase criteria in the North America residential wood heaters, fireplaces, and hearth heating products market in 2008.

Source: Frost & SullivanFrost & Sullivan 48 Prepared for EC/R Inc. 4/26/2010 The chart above shows the top four purchase criteria in the market and their importance based on the manufacturers’ perception. The criteria were ra nked on a scale of 1 to 10, with 10 being most important, and a weighted average was taken to determine the overall rank.



### Reasons for Switching to Alternative Fuel Sources

The primary reason that a homeowner would switch to an alternative fuel source is if that fuel source is cheaper than wood or other solid biomass fuel sources. The primary reason that homeowners purchase wood-burning and other solid biomass-based appliances is to reduce their heating costs. Therefore, if an alternative fu el source is less expensive and can offer heating cost savings, a homeowner is likely to switch to using that fuel. Another reason that homeowners would switch to an alternative fuel source is if burning wood was banned in their area. With a number of local, tribal, and state jurisdictions restricting the use of wood-burning appliances, many end users are being driven to alternative fuel sources.
The availability of wood and other solid biomass fuel sources can also have an impact on the decision to switch to alternative fuels. For example, if the Department of Forestry decided that the trees in the national forest system are no longer going to be ava ilable for either a business or an individual to cut down and make firewood, the decision would likely force many homeowners to switch to an alternative fuel source.Frost & Sullivan 49 Prepared for EC/R Inc. 4/26/2010 

# 4

Market Conclusions

Evaluation of Growth Projections and Demand

Due to leftover dealer inventory, the North American residential wood heaters, fireplaces, and hearth heating products market experienced declining growth in 2007 over the previous year. After this decline, the market experienced exceptional revenue growth, growing at 16.4 percent from 2007 to 2008. This growth was primarily driven by the dramatic increase in the price of heating oil and natural gas in 2008. However, from 2009 to 2010, the weak economy, the decline in residential new construction, and the lack of credit are expected to have a negative impact on the revenue growth of the market. While the revenue growth forecast in 2009 was -36.1 percent, revenue growth forecast is expected to be -4.0 percent in 2010. The federal energy efficiency tax credit has help ed mitigate some of the impact from the economic downturn. However, the tax credit was not as successf ul in driving demand as expected because it took some time for the government to announce the ef ficiency requirements and advertising has been insufficient. The extremely cold weather in the winter of 2009 and the tax credit in the United States are expected to drive some demand for these applian ces in 2010.
After 2010, the potential to cut heating costs by using wood and other solid biomass-based appliances, as well as the rebound in the residential construction ma rket, are expected to in crease market demand. In 2012, the market is expected to witness very strong growth due to the rebound of the economy and theFrost & Sullivan 50 Prepared for EC/R Inc. 4/26/2010 housing market, and an increase in lending. Although high insurance premiums, regional restrictions on wood-burning appliances, competition from other technologies, and the high initial cost are anticipated to continue to limit the demand, the total market is expected to grow at a compound annual growth rate (CAGR) of 4.1 percent from 2009 to 2015.
The greatest demand for these products is expected to continue to come from the Northeast region of the United States and the East region of Canada, but adoption in other parts of North America where wood and other solid biomass-based fuels are av ailable is expected to increase. Although all product segments are anticipated to grow, the pellet and other solid biomass-based stoves are anticipated to have the greatest growth potential due to the increasing desire to use su stainable fuel sources and the fact that these newer technologies are cleaner-burning.



### Potential Market Impacts of New Emission Regulations

Manufacturers and industry representatives contacted dur ing this project identified several factors that they believe EPA should consider in developing an y new emissions regulations for the residential biomass heating industry. These factors have the potential to affect market conditions for these products.
According to these representatives, one of the most important factors to consider when formulating new emission regulations for the North American residential wood heaters, fireplaces, and hearth heating products market is the affect that new regulations will have on product price

— although reducing air pollution must be the primary goal. Stricter emission regulations can potentially require manufacturers to redesign their products or devel op entirely new products, which can result in high research and development costs. This , in turn, can lead to higher prices to the distributors and dealers and, ultimately, to the end users. Because residentia l end users are very sensitive to price increases, higher prices can discourage some homeow ners from purchasing these appliances.
In addition, manufacturing and industry representa tives assert that the costs associated with redesigning or developing a product and going throu gh the EPA certification process can be too high for some smaller companies. The testing for each model can cost up to $20,000. Manufacturers who are unable to redesign their products to meet new emission standards can potentially go out of business since they will not be allowed to sell their existing products.
Another major factor representatives said should be considered when formulating new emission regulations for this industry is the way the appliances are used in the home. It is critical to create a testing procedure that accounts for the way appliances are used at home and test the units the way they are going to be used by the homeowner. Some manufacturers discussed the value and need to include aFrost & Sullivan 51 Prepared for EC/R Inc. 4/26/2010 test condition at a low burn rate (as opposed to possi bly eliminating the low burn rate test.) The reason is that these manufacturers feel that this reflects real world operating conditions and, in some cases, the manufacturers feel that eliminating that test would give an unfair advantage to certain product types.
The lack of a comprehensive national standard is al so a key factor cited by manufacturers and industry representatives that needs to be addressed when formulating new emission regulations for this market. Due to the lack of a national standard, some st ate, local, and tribal governmental bodies have established their own standards in order to reduce air pollution in their area. While most states and provinces in the United States and Canada have adopted the emission standards set by the EPA, manufacturers claim that variations in the emission standards in different regions has made it more difficult for them to create products that meet th ese different standards and can be sold across the country. Therefore, they say it is necessary to creat e a national standard that can be adopted in Canada to allow manufacturers to design one appliance that can be legally sold throughout North America. They also note that creating a national standa rd has the potential to increase compliance.
The lack of a testing protocol for masonry heaters is another factor cited by manufacturers and industry representatives that should be considered in the development of any new emission standards. They state that the masonry heaters product segment needs an emissions testing protocol that is not only rational and scientifically sound, but can al so be repeated and guarantee low emissions. The industry is eager to establish a testing protocol that can allow the efficiency and emissions levels of masonry heaters to be compared with those of other wood-burning and solid biomass-based appliances. Because some areas only allow th e installation of EPA-certified appliances, a classification from the EPA and the ability to certify these products w ould be anticipated to have an enormous impact on the masonry heaters product segment.
The final key factor to consider cited by manufactu rers and industry representatives is the distinction between different types of fuels. Some manufacturers and industry representatives believe that there is a need to create a separate standard for wood a nd other solid biomass-based appliances. Because the emissions test was designed with wood-burning applian ces in mind, the test addresses some issues that do not apply to other biomass-based appliances. These units require a test that takes into account the slight differences between wood-burning and other solid biomass-based appliances.



### Conclusions

Manufacturers and industry representatives agree that new emission regulations for the North American residential wood heaters, fireplaces, and hearth heati ng products market are necessary. TheyFrost & Sullivan 52 Prepared for EC/R Inc. 4/26/2010 also agree that the new emission regulations must ta ke into account the impact that these regulations will have on the growth of the market and on the pa rticipants. Manufacturers are concerned that strict emissions regulations will require them to redesign their existing products or develop new products to meet the standards. Because de veloping new low-emitting products and testing each model requires a large investment, manufacturers and industry represen tatives are concerned about the strain this will put on manufacturers, particularly smaller manufacturers. There is also concern about an increase in prices due to stricter emission requirements. The main concern is that higher prices will dissuade many homeowners from purchasing these appliances . An increase in price can therefore become a major restraint in the market.

In order to address this issue, most manufacturers and industry representatives agree that setting the particle emissions standards at 4.5 grams per hour, Washington State’s current limit, for non-catalytic stoves and 2.5 grams per hour for catalytic stoves would be achievable for most manufacturers and still help to reduce air pollution. Given that about 85 percent of wood stoves already meet Washington State’s current limit according to the Hearth, Patio & Barbecue Association, the particle emissions standards would need to be lowered beyond those of Washington State in order to truly reduce emissions, but these standards need to be attain able at a reasonable cost to the manufacturers.

In addition, because the units not covered by the current New Source Performance Standards (NSPS) produce a little more than one-third of the total air emissions from residential solid-fuel burning, setting emissions standards for currently exempt appliances, such as fireplaces, hydronic central heating systems, masonry heaters, and other soli d biomass-based stoves, can help to significantly improve air quality. 20 However, these emission standards must also be achievable at a reasonable cost in order to minimize their impact on the manufacturers.
Another main concern for manufacturers is addressing the efficiency of the units. Currently, the test for efficiency assigns default efficiencies of 63 percent for non-catalytic stoves and 72 percent for catalytic stoves, and these default ratings are shown on stove brochures. Most manufacturers and industry representatives agree that the efficiency test methods need to be standardized and regulated. This would ensure that efficiency ratings reflect the actual efficien cy of every model and would allow homeowners to compare appliances based on accurate information. In addition, a method to ensure that appliances meet BDT for the life of the appliance needs to be developed.
Because 70 to 80 percent of wood st oves currently used in U.S. homes are older units, replacing these inefficient appliances would have an enormous impact on air quality. 21 Many manufacturers and industry representatives believe that providing incentives for hom eowners to replace these older

20 Source: Houck, James E. Houck and Tiegs, Paul. (December 2009). EPA Regulations/NSPS. Hearth & Home 21 Source: United States Envir onmental Protection Agency (h ttp://www.epa.gov/burnwise/how-toguide.html)Frost & Sullivan 53 Prepared for EC/R Inc. 4/26/2010 appliances would have a greater impact on cleaning the air than creating stricter standards. A good way to approach this would be to prohibit the use of older stoves, giving end users incentives and a time frame for replacing their old appliances.
Furthermore, manufacturers and industry representati ves believe that it is necessary to educate end users on the proper moisture content for cordwood and how to correctly operate their appliances. They also believe it is necessary to st andardize the quality of the fuel.Frost & Sullivan 54 Prepared for EC/R Inc. 4/26/2010 

# 5

Methodology

Frost & Sullivan Methodology

Frost & Sullivan used a combination of primary and secondary research methodologies to compile all the necessary information for this proj ect. Secondary research was used to complement the primary research efforts and fill any information gaps.
Step 1: Launch Data Collection Phase
During this step, the analyst team designed the data collection process and implemented the secondary research phase. For EC/R, the tasks involved in this project were to:

• Review all secondary research data based on:

3⁄4 Frost & Sullivan research database on the North American residential HVAC products market

3⁄4 Frost & Sullivan corporate library

3⁄4 Frost & Sullivan customer databaseFrost & Sullivan 55 Prepared for EC/R Inc. 4/26/2010 3⁄4 Frost & Sullivan competitor database

3⁄4 Online databases

3⁄4 Trade journals

3⁄4 University library affiliations

• Create filing systems (especially for confiden tial business information (CBI) received from vendors interviewed)

• Structure research tables, figures, and charts

• Develop in-depth table of contents

• Develop competitor database

Step 2: Select Interview Strategy and Design of Survey for Primary Research
The strategy used to conduct effective interviews is cr itical to the success of every research project. In Step 2, Frost & Sullivan developed dedicated discussion guides for th e interview participants in each segment with the input and approval from EC/R before initiating primary research. In addition, a predefined contact list of key industr y participants was developed with the input from EC/R and the Frost & Sullivan research team

. This step ensured that the research team asked the relevant questions to obtain information to formulate key industry metrics and uncover key market trends relevant to the project, including the following:

• Market trends, challenges, drivers and restraints

• Market growth, market size, market potential, unit cost, and installation cost

• Impact of voluntary programs and federal energy efficiency tax credit

• Regional trends

• Motive of purchase, usage rates, fu el consumption and purchase criteria

• Emission regulations

• Factors driving the switch to alternate fuels sources

Step 3: Test the Survey Design
Before Frost & Sullivan put interview strategies and surveys into use across the entire market, it tested them for efficacy and accuracy. The analyst team corrected all design problems before attempting any additional interviews. During this step the analyst team contacted 3 companies to test the survey.Frost & Sullivan 56 Prepared for EC/R Inc. 4/26/2010 Participants reviewed each survey inst rument to ensure that the survey:

• Used readily understandable terminology

• Took all measurements in the same format

• Asked all questions in the right order

• Yielded the desired information

• Stimulated respondents to cooperate

Step 4: Conduct Primary Market Research
The primary market research is the heart of every Frost & Sullivan study. In Step 4, Frost & Sullivan obtained primary data directly from manufacturers, Canadian suppliers, distributors, value-added resellers and home improvement channel partne rs, and industry associations. Its finely honed interviewing skills enabled the analyst team to elicit valuable market information from market participants. Using Frost & Sullivan's uniquely designe d research techniques, the analysts were able to obtain masses of information invaluable for identifying trends, market size, and challenges in the marketplace.
All collected data was stored in a Consulting Center database - a confidential electronic database on the server for North America. This database houses a protected 'work-in-progress' database that was issued specifically for this proj ect, with restricted access rights to the lead analyst and project manager. All data, interview notes and secondary materi al including analysis and writing was done directly on this database during the duration of the project. Only Frost & Sullivan staff directly working on the project had password protected access to the information during the duration of the project. After the project is completed, the Project Manager will lock the database to restrict access to the information. Information provided that was claimed to be CBI was either mailed back to the manufacturer or directly to EC/R as they are an EPA-certified CBI storage f acility, and erased from the Frost & Sullivan database. (Note: there is no CBI in this report.)
Using our proprietary databases, Frost & Sullivan deve loped a list of potential contacts to be targeted for telephone based primary interviews. The tenta tive number of interviews per product segment was established at the beginning of the project and th e number of actual interviews was based on the response from the target companies. A total of 31 in -depth discussions were held with manufacturers and industry representatives. The fi nal group resulted in a viable samp le because the interviews were conducted with senior level decision makers w ho have a high likelihood of providing the required market information. However, becau se there are no organized or reco rded data sources pertaining to unbranded/non-regulated products, this section is a best effort estimation, compiled through feedback from interviewed sources.Frost & Sullivan 57 Prepared for EC/R Inc. 4/26/2010 For this project, the below table outlines the nu mber of companies and industry associations interviewed by segment:

Product Segment/Category Number of Interviews

Manufacturers of wood stoves 4
Manufacturers of pellet stoves 3
Manufacturers of masonry heaters 3
Manufacturers of fireplaces 3
Manufacturers of outdoor fireplaces 3
Manufacturers of hydronic central heating systems 3

Manufacturers of biomass-bases stoves 3
Canadian suppliers 4

Distributors 2
Value-added resellers and home improvement channels 1
Industry Associations 2

Cross-Verification of Data
Cross-verifying the information received is an important part of this step. Frost & Sullivan analysts are trained to listen for misleading or incorrect information, to detect when a respondent may be purposefully providing incorrect information or is merely guessing. Erroneous information thus almost always reveals itself during the cross-veri fication stage of the research process.

Frost & Sullivan cross-verified all data from each respondent by interviewing others in the same industry, where possible. Furthermore, answers were confirmed by speaking to other manufacturers and industry representatives. In addition, Frost & Sullivan leve raged its in-house database and ongoing research in the residential heating market in the cross-verification process. Finally, the results were corroborated using other market research measurements. The analyst team discarded any misleading information that did not integrate with the entire market analysis.
Bottom-Up ApproachFrost & Sullivan 58 Prepared for EC/R Inc. 4/26/2010 Frost & Sullivan prides itself on its use of a so-called bottom-up Market Engineering methodology. In a bottom-up method of market measurement, each final market measurement represents the sum of many detailed, bottom-rung measurements.

Frost & Sullivan calculated mark et forecasts and market size s by interviewing each industry competitor and deriving each comp any's annual shipments to—or re venues from—the defined market. To calculate the total market size, measure its gr owth rate, and make market forecasts, the analyst team first cross-verified all measurements and then added them to derive the final measurement of the total market.
Since some organizations claimed CBI for some company financial information, the team utilized Frost & Sullivan's regular market bottom-up analysis and supplemented it with a top-down estimation to arrive at an accurate estimate of the market and to account fo r unavailable information from some suppliers. Additional secondary research was undert aken to compile information of key segments where data through primary research was not forthc oming. For instance market data from the Hearth, Patio & Barbecue Association was used to compleme nt Frost & Sullivan's data regarding the revenue breakdown between the United States and Canada, and verify estimates of unit shipments for the segments that the association covers.
Top-Down Approach
The top-down approach consisted of asking a few industry participants to estimate the total size of the market, assess its growth rate, and make a forecast. These numbers were then averaged to make a final projection. As mentioned above Frost & Sullivan primarily used a bottom-up methodology and this approach was used to fill in any information gaps from companies claiming CBI.

Step 5: Research Analysis: Finding "Point A"

Once all the information had been co llected, the analyst team explored the most important question of any market research project: Where is the market right now? In ot her words, where is "Point A"?
Companies cannot possibly navigate the marketplace until they have obtained this market "fix." Without it, business planning and strategic decision support are not possible.
Several key measurements, such as the following were used to determine Point A for this project:

• Market share

• Historic market growth rate

• Market size

• Market segmentationFrost & Sullivan 59 Prepared for EC/R Inc. 4/26/2010 • Pricing

• Competitive activities

• Number of competitors

• Customer base measurements

• Market maturity

Step 6: Market Forecasting: Finding "Point B"
Once Point A was accurately identified , the next step was to identify the future position in the market (Point B). To determine this, Frost & Sullivan util izes its proprietary forecasting model which takes various factors into consideration. Most market re search firms provide forecasts that cite only the measurement of market sizes at some future time. In contrast, as with other Frost & Sullivan projects, forecasts for this project we re influenced by an evalua tion of components such as:

• Market trends

• Technical trends

• Regulatory trends

• Market maturity measurements

• Market share movements
The forecast also included many other measurements such as historical growth trends, which when taken over time can help support a market forecast or analysis of a certain marketing scenario. In addition, Frost & Sullivan analyzed the primary market drivers and restraints and their impact on the market in the short, medium and long term before constructing a total market forecast.
Expert-Opinion Consensus Model
To improve the quality, accuracy, a nd depth of its forecasts, Frost & Su llivan used the expert-opinion consensus forecasting model of market measurement for this project. We began by analyzing all the data collected in the previous steps. From this an alysis as well as from many measurements of change over time, an indication of the market's pattern and direction emerges.
Frost & Sullivan then discussed this data with market experts, including company presidents, company vice presidents, executive directors, vice presiden ts of sales, vice presidents of marketing, R&D managers, product managers, directors of market res earch, and others. After reviewing the data, these experts often provided significant strategic insights into the direction and velocity of the market.Frost & Sullivan 60 Prepared for EC/R Inc. 4/26/2010 In its more than 40 years of market research expe rience, Frost & Sullivan has found the expert-opinion consensus forecasting methodol ogy to be the most reliable system of forecasting when combined with other elements of the Market Engineering methodology.
Because of the many uncontrollable variables in the marketplace, the accuracy of any forecast is almost impossible to guarantee. What can and must be determined with some accuracy, to enable companies to plan accordingly, are the direction of the market and its approximate speed. Frost & Sullivan finds the expert-opinion c onsensus forecasting model to be the most reliable forecasting tool for this in today's market.
Forecasting models based solely on statistics often do not adequate ly describe th e high-technology markets on which Frost & Sullivan reports. The statistical data underlying these approaches often cannot be found, or the markets that are the subject of the forecast are simply moving too fast. Moreover, many statistical forecas ting models do not adequately in corporate the wide variety of market drivers denoting most markets.
Other Forecast Assumptions

Frost & Sullivan forecasted the No rth American residential wood h eaters, fireplaces, and hearth heating products market by providing independent and economically unbiased information. Frost & Sullivan used the following assumptions to support the forecasts for this market:

• Positive impact from the economic recovery starting in 2010

• Slow rebound of residential new construction market beginning in 2010

• Exceptionally cold weather in the winter of 2009 expected to drive additional demand in 2010

• Stable raw material prices

• Stable, although slightly increasing, alternative fuels prices

• Positive impact from tax credit in 2009 and 2010

• Due to the undetermined time frame and modifications of the impending revision of the NSPS for residential wood heaters, including assessment of sources not covered by the current rule such as hydronic central heating systems, the potential impact of such new emission regulation on the market was not accounted for in th e forecast. However, considering the potential impact of such impending regulation, the analysis does factor in a conservative growth rate for such product segments.
Indexes are essentially an attempt to summarize ma sses of data, showing general changes over time. In developing forecasts, Frost & Sullivan analysts us ed those indexes that can have a direct correlation to the behavior of markets.Frost & Sullivan 61 Prepared for EC/R Inc. 4/26/2010 The use of and reliance on specific indexes can vary according to the scope of the research study and the specific client needs. The following list illustra tes the sources used for key indicators in all Frost & Sullivan publications, unless otherwise stated.
consumer price index (CPI): The rate of increase/decrease in prices for consumer goods. Source: the Statistical Abstract of the U.S., Bureau of Labor Statistics (BLS).
gross domestic product (GDP): The total output of goods and services produced by labor and property in the United States. Source: the Survey of Current Business by the Bureau of Economic Analysis (BEA).
gross national product (GNP): The GDP plus income derived from U.S. labor and property operating abroad. Source: BEA.

inflation: A general rise in prices for goods and factor s of production. It is indicated by various barometers: CPI, producer price index, Dow Jones, commodity spot price index, employment cost index.
producer price index (PPI): The average change in price receiv ed by producers of all U.S.-produced commodities at all stages of processing. Source: BLS.
factory inventories: A measure of the amount of product residing in warehouses or along the distribution channel. Shrinking inventory may signal diminishing supply, increasing demand, rising prices, or more efficient distribution methods. Ris ing inventories may suggest the opposite. Source: U.S. Bureau of the Census, Current Industrial Reports.
population: Census figures used for sizing potential consumer markets. Source: U.S. Census Bureau, the Statistical Abst ract of the U.S.

interest rates: Used to forecast the cost of borrowing m oney for expansion or capital investments. They are set by the Federal Reserve Bank.
The standard economic assumptions for forecasting include the behavior th at specific industries exhibit in relation to these indexes. As an example, the market for the construction of heating systems has historically trailed the market for new constr uction by a few months. Therefore, the accuracy of some forecasts can be increased by understanding and following the appropriate indexes.
Frost & Sullivan research can provide timely meas urement information on market position and related trends, providing the basis for the forecast. This is often achieved through an understanding of the economic models and conditions that have a potential impact on market development.

Once market data was collected a nd analyzed, and the forecasts were developed, the forecasts were matched to the appropriate lead ing economic indicators for each specific industry. Analyst teamsFrost & Sullivan 62 Prepared for EC/R Inc. 4/26/2010 checked the relationship to the ec onomic indicators as part of the overall Frost & Sullivan quality control process.