17 -i CHAPTER 17. REGULATORY IMPACT ANALYSIS

TABLE OF CONTENTS

17.1 INTRODUCTION ............................................................................................................ 17-1 17.2 METHODOLOGY ........................................................................................................... 17-1 17.3 NON -R EGULATORY POLICIES ................................................................................... 17-3 17.3.1 No New Regulatory Action ............................................................................... 17-3 17.3.2 Consumer Rebates ............................................................................................. 17-3 17.3.3 Consumer Tax Credits ....................................................................................... 17-4
17.3.4 Manufacturer Tax Credits .................................................................................. 17-4 17.3.5 Voluntary Energy Efficiency Programs ............................................................. 17-4
17.3.6 Bulk Government Purchases .............................................................................. 17-5
17.4 SUMMARY OF RESULTS FOR NON

- REGULATORY ALTERNATI VES ............... 17-6 REFERENCES .......................................................................................................................... 17-7

LIST OF TAB LES

Table 17.4.1 Cumulative NES of Non-Regulatory Alternatives Compared to the Proposed Standards for Ballasts ........................................................................................ 17-6 Table 17.4.2 Cumulative NPV of Non-Regulatory Alternatives Compared to the Proposed Standards for Ballasts......................................................................... 17-617 -1 CHAPTER 17. REGULATORY IMPACT ANALYSIS

17.1 INTRODUCTION

The U.S. Department of Energy (DOE) has determined that energy conservation standards for ballasts constitute an “economically significant regulatory action” under Executive Order (E.O.) 12866, Regulatory Planning and Review. 58 FR 51735, 51735. (Oct. 4, 1993). Under 10 CFR part 430, subpart C, appendix A, section III.12, DOE committed to evaluating non-regulatory alternatives to proposed standards by performing a regulatory impact analysis (RIA) . 61 FR 36981, 36978 (July 15, 1996). This RIA, which DOE has prepared pursuant to E.O. 12866, evaluates potential non-regulatory alternatives, comparing the costs and benefits of each to those of the proposed standards. 58 FR 51735, 51741. As noted in E.O. 12866, this RIA is subject to review by the Office of Manage ment and Budget’s Office of Information and Regulatory Affairs. 58 FR 51735, 51740.

For this notice of proposed rulemaking (NOPR), DOE identified six major, nonregulatory alternatives to standards as representing feasible policy options to achieve potenti ally similar improvements in ballast energy efficiency:

• No New Regulatory Action

• Consumer Rebates

• Consumer Tax Credits

• Manufacturer Tax Credits

• Voluntary Energy Efficiency Programs

• Bulk Government Purchases

DOE evaluated each alternative that applies to th e ballasts covered by this proposed rule in terms of its ability to achieve significant energy savings at a reasonable cost, and compared the effectiveness of each alternative to that of the proposed standards. The following sections discuss the analysis m ethod used, the non-regulatory alternatives considered, and the energy savings calculated.

17.2 METHODOLOGY

This section describes the method DOE used to analyze the energy savings and cost effectiveness of the six non-regulatory policy alternatives (excluding the alternative of no new regulatory action) for the identified ballasts . This section also describes the assumptions underlying the analysis.

DOE used integrated national impact analysis

- regulatory impact analysis (NIA

- RIA) spreadsheet models to calculate the national energy savings (NES) and net present value (NPV) associated with each non -regulatory policy alternative. Chapter 11 of the NOPR technical support document (TSD) describes the NIA spreadsheet models.

DOE quantified the effect of each alternative on the purchase of products that meet target levels , which are defined as the efficiency levels in the proposed standards. After establishing the17 -2 quantitative assumptions underlying each alternative, DOE appropriately revised inputs to the
NIA -RIA spreadsheet models. The primary model input revised w as market shares of products meeting target efficiency levels. The shipments of products for any given year reflect a distribution of efficiency levels. DOE assumed that the proposed standards would affect 100 percent of the shipments of products that did not meet target levels in the base case, whereas the non-regulatory policies would affect a smaller percentage of those shipments. DOE made certain assumptions about the percentage of shipments affected by each alternative policy.

Increasing a product’s efficiency often increases its average installed cost but generally decrease s its operating costs because energy consumption declines. DOE th erefore calculated an NPV for each non-regulatory alternative in the same way it did for the proposed standards. Because DOE assumed that consumers would re- pay credits and rebates in some way (such as additional taxes), DOE did not include rebates or tax credits as a consumer benefit when calculating national NPV. DOE’s analysis also excluded any administrative costs for the non

regulatory policies; including such costs would decrease the NPVs slightly.

The following are key measures for evaluating the impact of each alternative:

• National energy savings, given in quadrillion British thermal units (quads), describes the cumulative national primary energy savings for products bought during the period from the effective date of the policy (2 014) through the end of the analysis period (2043).

• Net present value represents the value in 20 09$ (discounted to 2011) a of net monetary savings from products bought during the period from the effective date of the policy (2014) through the end of the analysis period (2043).

• DOE calculated the NPV as the difference between the present value of installed product cost and operating expenditures in the base case and the present value of those costs in each policy case. DOE calculated operating expenses (including energy costs) for the life of the product.

DOE quantified the market penetration of each alternative

, i.e. , what percent of consumers below the target efficacy level would migrate to the higher efficacy product , and revised its inputs to the NIA

- RIA spreadsheet models. With these modifications, DOE calculated the NES and NPV of each non-regulatory alternative and compared it to that of the proposed standards, which correspond with trial standard level (TSL) 3.

DOE’s analyses indicate d that the proposed standards at TSL 3 would save a significant amount of energy— with cumulative NES estimated at 3.7–6.3 quads over 30 years (2014 through 2043). The corresponding cumulative NPV of total consumer costs and savings of the proposed standards for ballasts , in 2009$, ranges from $11.2 billion (at a 7

- percent discount rate) to $23.0 billion (at a 3 -percent discount rate).

a The final rule for ballasts is expected to be published in 2011.17 -3 DOE calculated the impacts of each regulatory policy separately from those of the other policies. In actual practice, certain policies are often most effective wh en implemented in combination to provide incentives, such as consumer and manufacturer credits . DOE attempted to make conservative assumptions to avoid double-counting policy impacts. Therefore, the policy impacts reported below are not additive; the combi ned impact of several or all of the policies may not be inferred from adding the results together.

17.3 NON

- REGULATORY POLICIES

The following subsections describe DOE’s analysis of the impacts of the six nonregulatory policy alternatives to chosen standards fo r ballasts . (Because the alternative of No New Regulatory Action has no energy or NPV impacts, essentially representing the NIA base case, DOE did not perform additional analysis for that alternative.) DOE developed estimates of the market penetration of h igh -efficiency products with each of the non-regulatory policy alternatives and compared them to the NIA base case.

17.3.1 No New Regulatory Action

The base case is the one in which no new regulatory action is taken with regard to the energy efficiency of ballas ts , as described in the NOPR TSD chapter 11 , National Impact Analysis. The base case provides the basis of comparison for all other policies. By definition, no new regulatory action yields zero energy savings and an NPV of zero dollars.

17.3.2 Consumer Rebates

Co nsumer rebates cover a portion of the difference in incremental product price between products meeting baseline efficacy levels and those meeting higher efficacy levels, resulting in a higher percentage of consumers purc hasing more efficacious models and d ecreased aggregated energy use compared to the base case . For ballasts , DOE assumed a rebate that paid 70 percent of the incremental product price , based on its research for the 2009 Lamps Rule, 1 focusing on existing utility rebate programs for replacing a T12 system with a T8 system or upgrading an existing T8 system to a more efficacious T8 system

.
DOE’s previous research ( for the 2000 B allast Rule 2 ) showed that for the rebate amount that was equal to the full incremental cost, consumer response rate was about 25 percent. For a rebate worth 70 percent of the incremental cost , DOE assumed a re sponse rate of 18 percent , and estimated a corresponding shift of 18 percent in market shares toward more efficient products, with no change in total shipments.

Although the rebate program reduces the total installed cost to the customer, it is financed by tax revenues. Therefore, from a societal perspective , the installed cost at any efficiency level does not change with the rebate program; rather , part of the cost is transferred from the consumer to taxpayers as a whole. Consequently, DOE assumed that equipment costs in the rebates scenario were identical to the NIA base case.

DOE assumed that rebates would remain in effect for the duration of the analysis period.17 -4 17.3.3 Consumer Tax Credits

Consumer tax credits are considered a viable non

- regulatory market transformation program, as shown by the inclusion of Federal consumer tax credits in the Energy Policy Act o f 2005 ( EPAct 2005 ; Pub L. No 109-58, 119 Stat 1026 (2005) ) for various residential appliances. From a consumer perspective, the most important difference between rebate and tax credit programs is that a rebate can be obtained quickly, whereas receipt of tax credits is delayed until income taxes are filed or a tax refund is provided by the Internal Revenue Service ( IRS ).

As with consumer rebates, DOE assumed that consumer tax credits paid 70 percent of the incremental product price , but estimated a differ ent response rate. The delay in reimbursement makes tax credit s less attractive than rebate s; consequently , DOE estimated a response rate that is 60 percent of that for rebate program s ( per the 2000 Ballast Rule), or 11 percent

.

From a societal perspective , tax credits ( like rebates ) do not change the installed cost of the equipment , but rather transfer a portion of the cost from the consumer to taxpayers as a whole. DOE, therefore, assumed that equipment costs in the consumer tax credits scenari o were identical to the
NIA base case.

17.3.4 Manufacturer Tax Credits

Manufacturer tax credits are considered a viable non

- regulatory market transformation program, as shown by the inclusion of Federal tax credits in EPAct 2005 for manufacturers of residential a ppliances. Those manufacturer tax credits were in effect for models produced in 2006 and 2007 and reinstated under the American Recovery and Reinvestment Act ( ARRA ) for 2009 and 2010. DOE was unable to locate data from the IRS or other sources on manufactu rer response to the Federal credits. Similar to consumer tax credits, manufacturer tax credits would effectively result in lower product prices for consumers by an amount that covers part of the incremental price difference between products meeting baseline efficiency levels and those meeting targeted efficiency levels.

DOE assumed that this incentive policy would help reimburse manufacturers for retooling costs. Because these tax credits would go to manufacturers instead of consumers, DOE assumed that manu facturers would pass the reduced costs on to consumers. Only these “direct price effects” that would be visible to the consumer, with the tax credit program itself visible only to affected manufacturers. The impact of manufacturer tax credit s is differenti ated into direct price effect s, which arise from the consumer cost savings, and “announcement effects ” that establish credibility of a particular technology by its inclusion in an incentive program. DOE assumed that these effects split the overall response rate equally. 3

Therefore, the response rate for manufacturer tax credit s is assumed to be a half of that for consumer tax credit s, or 5.5 percent . As discussed above, DOE assumed that total installed costs will remain unchanged from the NIA base case , with no change in total shipments.

17.3.5 Voluntary Energy Efficiency Programs

DOE estimated the impact of a voluntary energy efficiency program based on its research for the 2009 Lamps Rule, in which it reviewed the historical and projected market transformati on17 -5 performance of past and current ENERGY STAR  programs. In 1991, t he Environmental Protection Agency (EPA) introduced Green Lights, a voluntary (non-regulatory) program to reduce air pollution by promoting energy

- efficient lighting. Companies that participate d in this program installed energy -efficient lighting where it proved to be cost- effective (as long as lighting quality was not diminished). In return, the EPA provided technical assistance and public recognition. In a similar effort, the EPA launched ENERGY STAR in 1992 as a voluntary labeling program to help consumers identify the most energy efficient products on the market. In 1996, Green Lights became a part of the ENERGY STAR program. 4

To determine how a lighting market would respond to a voluntary energy program, DOE analyzed the success of the Green Lights program in the 1990s. One of the significant results of the Green Lights program was observed in the fluorescent ballast market. Electronic ballasts are, on average, more efficient than magnet ic ballasts. As such, as a result of the Green Lights initiative, electronic ballasts began to enter the market in increasing numbers. The study that analyzed the impact of public programs on fluorescent ballast shipments concluded that of all the electronic ballasts shipped between 1986 and 2000, about 45 percent were due to a public

program. 5 To estimate how the market would change over th e analysis period for this rule, DOE took 45 percent of the higher- efficiency ballast shipments and divided it by the sum of those shipments plus the total ballast shipments. The 55 percent of higher

- efficiency ballast shipments that did not occur as a result of a public program were not included in the denominator, since consumers who bought these ballasts were considered to already be using energy

- efficient technologies. DOE concluded that 13 percent of the market would shift to more efficient products as a result of a voluntary energy efficiency program. This percentage was applied across all baselines and efficiency levels.

DOE assumed that the impact of this policy would be to permanently transform the market so that the increased market penetration see n in the first year of the program would be maintained throughout the forecast period.

17.3.6 Bulk Government Purchases

In this policy alternative, “bulk government purchases” refers to programs that encourage Federal, State, and local governments to purchase products meeting applicable energy conservation standards. The motivations for this policy are that (1) aggregating public sector demand could provide a market signal to manufacturers and vendors that some of their largest customers seek suppliers with pro ducts that meet efficiency target s at competitive prices, and (2) this could induce “market pull” impacts through the effects of manufacturers and vendors achieving economies of scale for high

- efficiency products.

Similar to previous analysis, DOE used floor space data from the 2003 commercial buildings energy consumption survey (CBECS 2003) 6 to derive the proportion of governmentowned floor space to total commercial floor space (including malls), which is 23.7 percent. DOE assumed that floor space owned by government was proportional to ballast sales. DOE then added a 1.4 percent market

- pull impact to arrive at a conservative 2 5.1 percent market penetration rate. 7 This percentage was used for commercial and industrial ballasts across all TSLs. Bulk governm ent purchases will not affect the residential market. DOE assumed that the impact of this policy would be to permanently transform the market so that the increased market17 -6 penetration seen in the first year of the program would be maintained throughout the forecast period.

17.4 SUMMARY OF RESULTS FOR NON

- REGULATORY ALTERNATIVES

Table 17.4.1 and Table 17.4.2 show the NES and NPV for the non- regulatory alternatives analyzed. The case in which no regulatory action is taken with regard to ballasts constitutes the base case (or “No Action”) scenario. Since this is the base case, energy savings and NPV are zero by defi nition. For comparison, the table includes the results of the NES and NPV for TSL 3 associated with the proposed energy conservation standard. Energy savings expressed in quads in terms of primary or source energy, which includes generation and transmission losses from electricity utility sector

. The NES and NPVs shown in the tables are computed only for roll up scenario for both existing and emerging technologies. This scenario better reflects market behavior, because only consumers of below the target ef ficiency levels are affected. This is the

same ta rget group that non- regulatory alternatives aim to influence.

Table 17.4.1 Cumulative NES of Non- Regulatory Alternatives Compared to the Proposed Standards for Ballasts

Policy Alternatives Cumulative NES ( billion 2009$ ) Existing technologies Emerging technologies No New Regulatory Action 0 0
Consumer Rebates 1.98 1.28
Consumer Tax Credits 1.13 0.70
Manufacturer Tax Credits 0.88 0.55 Voluntary Energy Efficiency Programs 1.24 0.76
Bulk Government Purchases 1.78 1.08 Proposed Standards (TSL 3) 5.34 3.12

Table 17.4.2 Cumulative NPV of Non- Regulatory Alternatives Compared to the Proposed Standards for Ballasts

Policy Alternatives Cumulative NPV (billion 2009$) Existing technologies Emerging technologies
7% Discount 3% Discount 7% Discount 3% Discount No New Regulatory Action 0 0 0 0
Consumer Rebates 5.18 10.40 3.96 7.49
Consumer Tax Credits 2.55 5.35 1.82 3.55
Manufacturer Tax Credits 1.96 4.12 1.40 2.73 Voluntary Energy Efficiency Programs 2.81 5.88 2.00 3.90
Bulk Government Purchases 4.07 8.51 2.90 5.65 Proposed Standards (TSL 3) 11.23 23.86 7.92 15.73

As shown above , none of the policy alternatives DOE examined would save as much energy as and have a lower NPV than the proposed standards level of TSL 3. Also, several alternatives would require legislation, such as commercial customer or Federal tax credits, because
there is curren tly no authority to carry out those alternatives.17 -7 REFERENCES

1. U.S. Department of Energy– Office of Energy Efficiency and Renewable Energy. Energy Conservation Standards and Test Procedures for General Service Fluorescent Lamps and Incandescent Reflector Lamps: Technical Support Document; Final Rule. July 2009. Washington, D.C.

< http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/ch_17_lamps_ standards_final_tsd.pdf >

2. U.S. Department of Energy– Office of Energy Efficiency and Renewable Energy . Energy Conservation Program for Consumer Products: Fluorescent La mp Ballasts Energy Conservation Standards: Technical Support Document; Proposed Rule. January 2000. Washington, D.C.

< www.eere.energy.gov/buildings/appliance_standards/residential/pdfs/appendix_b.pdf >

3. U.S. Department of Energy– Office of Energy Efficiency and Renewable Energy. Energy Conservation Program for Consumer Products: Energy Conservation Standards for Residential Furnaces and Boilers: Technical Support Document; Final Rule. November 2007. Washington, D.C.

< http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/fb_fr_tsd/ria.p df

>

4. ENERGY STAR

. Major Milestones

. (Last accessed December 2010.)

< www.energystar.gov/index.cfm?c=about.ab_milestones >

5. Horowitz, Marvin J. Economic Indicators of Market Transformation: En ergy Efficient Lighting and EPA’s Green Lights. Energy Journal . 2001. 22 :( 4 ): pp. 95

– 122.

6. U.S. Depa rtment of Energy

– Energy Information Administration. Commercial Building Energy Consumption Survey: Micro- level Data, File 2 Building Activities, Special Measures of Size, and Multi- building Facilities. (Last accessed February 9, 2011.)

< http://www.eia.doe.gov/emeu/cbecs/public_use.html >

7. U.S. Department of Energy– Office of Energy Efficiency and Renewable Energy. Regulatory Impact Analysis: Energy Conservation Standards for Consumer Products, Covering: Fluorescent Lamp Ballasts. October 1999. Washington, D.C.

< http://www1.eere.energy.gov/buildings/appliance_standards/reside ntial/pdfs/regulatory_im pact.pdf >