`[Federal Register Volume 89, Number 247 (Thursday, December 26, 2024)]
[Rules and Regulations]
[Pages 105188-105285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30369]



[[Page 105187]]

Vol. 89

Thursday,

No. 247

December 26, 2024

Part II





Department of Energy





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10 CFR Part 430





Energy Conservation Program: Energy Conservation Standards for Consumer 
Gas-fired Instantaneous Water Heaters; Final Rule

  Federal Register / Vol. 89 , No. 247 / Thursday, December 26, 2024 / 
Rules and Regulations  

[[Page 105188]]



DEPARTMENT OF ENERGY

10 CFR Part 430

[EERE-2017-BT-STD-0019]
RIN 1904-AF65


Energy Conservation Program: Energy Conservation Standards for 
Consumer Gas-fired Instantaneous Water Heaters

AGENCY: Office of Energy Efficiency and Renewable Energy, Department of 
Energy.

ACTION: Final rule.

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SUMMARY: The Energy Policy and Conservation Act, as amended (``EPCA''), 
prescribes energy conservation standards for various consumer products 
and certain commercial and industrial equipment, including gas-fired 
instantaneous water heaters, which are a type of consumer water heater. 
EPCA also requires the U.S. Department of Energy (``DOE'' or the 
``Department'') to periodically review its existing standards to 
determine whether more-stringent standards would be technologically 
feasible and economically justified, and would result in significant 
energy savings. In this final rule, DOE is adopting amended energy 
conservation standards for gas-fired instantaneous water heaters. It 
has determined that the amended energy conservation standards for these 
products would result in significant conservation of energy, and are 
technologically feasible and economically justified.

DATES: The effective date of this rule is March 11, 2025. Compliance 
with the amended standards established for gas-fired instantaneous 
water heaters in this final rule is required on and after December 26, 
2029.

ADDRESSES: The docket for this rulemaking, which includes Federal 
Register notices, public meeting attendee lists and transcripts, 
comments, and other supporting documents/materials, is available for 
review at www.regulations.gov. All documents in the docket are listed 
in the www.regulations.gov index. However, not all documents listed in 
the index may be publicly available, such as information that is exempt 
from public disclosure.
    The docket web page can be found at www.regulations.gov/docket/EERE-2017-BT-STD-0019. The docket web page contains instructions on how 
to access all documents, including public comments, in the docket.
    For further information on how to review the docket, contact the 
Appliance and Equipment Standards Program staff at (202) 287-1445 or by 
email: [email protected].

FOR FURTHER INFORMATION CONTACT: Ms. Julia Hegarty, U.S. Department of 
Energy, Office of Energy Efficiency and Renewable Energy, Building 
Technologies Office, EE-5B, 1000 Independence Avenue SW, Washington, 
DC, 20585-0121. Telephone: (202) 586-0729. Email: 
[email protected].
    Mr. Uchechukwu ``Emeka'' Eze, U.S. Department of Energy, Office of 
the General Counsel, GC-33, 1000 Independence Avenue SW, Washington, 
DC, 20585-0121. Telephone: (240) 961-8879. Email: 
[email protected].

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Synopsis of the Final Rule
    A. Benefits and Costs to Consumers
    B. Impact on Manufacturers
    C. National Benefits and Costs
    D. Conclusion
II. Introduction
    A. Authority
    B. Background
    1. Current Standards
    2. History of Standards Rulemaking for Gas-fired Instantaneous 
Water Heaters
III. General Discussion
    A. General Comments
    1. General Support
    2. Support for Updated Analysis and Standards at EL 2
    3. General Opposition
    4. Comments on Higher Standards Than Proposed in the NOPR
    B. Scope of Coverage
    C. Test Procedure
    D. Technological Feasibility
    1. General
    2. Maximum Technologically Feasible Levels
    E. Energy Savings
    1. Determination of Savings
    2. Significance of Savings
    F. Economic Justification
    1. Specific Criteria
    a. Economic Impact on Manufacturers and Consumers
    b. Savings in Operating Costs Compared to Increase in Price (LCC 
and PBP)
    c. Energy Savings
    d. Lessening of Utility or Performance of Products
    e. Impact of Any Lessening of Competition
    f. Need for National Energy Conservation
    g. Other Factors
    2. Rebuttable Presumption
IV. Methodology and Discussion of Related Comments
    A. Market and Technology Assessment
    1. Product Classes
    2. Technology Options
    B. Screening Analysis
    1. Screened-Out Technologies
    2. Remaining Technologies
    C. Engineering Analysis
    1. Products With Current UEF-Based Standards
    a. Efficiency Levels
    b. Design Options
    c. Cost Analysis
    d. Shipping Costs and Manufacturer Selling Price
    e. Cost-Efficiency Results
    2. Products Without Current UEF-Based Standards
    a. Crosswalk to Equivalent-Stringency UEF-Based Standards
    b. Consideration of More Stringent Standards
    D. Markups Analysis
    E. Energy Use Analysis
    1. Building Sample
    2. Hot Water Use Determination
    3. Energy Use Determination
    F. Life-Cycle Cost and Payback Period Analysis
    1. Product Cost
    2. Installation Cost
    a. Basic Installation Costs
    b. Venting Costs
    c. Condensate Management Costs
    3. Annual Energy Consumption
    4. Energy Prices
    5. Maintenance and Repair Costs
    6. Product Lifetime
    7. Discount Rates
    8. Energy Efficiency Distribution in the No-New-Standards Case
    9. Payback Period Analysis
    10. Accounting for Product Switching
    11. Analytical Results
    G. Shipments Analysis
    1. Impact of Repair vs. Replace
    H. National Impact Analysis
    1. Product Efficiency Trends
    2. National Energy Savings
    3. Net Present Value Analysis
    I. Consumer Subgroup Analysis
    1. Low-Income Households
    2. Senior-Only Households
    3. Small Business Subgroup
    J. Manufacturer Impact Analysis
    1. Overview
    2. Government Regulatory Impact Model and Key Inputs
    a. Manufacturer Production Costs
    b. Shipments Projections
    c. Capital and Product Conversion Costs
    d. Manufacturer Markup Scenarios
    3. Discussion of MIA Comments
    K. Emissions Analysis
    1. Air Quality Regulations Incorporated in DOE's Analysis
    L. Monetizing Emissions Impacts
    1. Monetization of Greenhouse Gas Emissions
    a. Social Cost of Carbon
    b. Social Cost of Methane and Nitrous Oxide
    2. Monetization of Other Emissions Impacts
    M. Utility Impact Analysis
    N. Employment Impact Analysis
V. Analytical Results and Conclusions
    A. Trial Standard Levels
    B. Economic Justification and Energy Savings
    1. Economic Impacts on Individual Consumers
    a. Life-Cycle Cost and Payback Period
    b. Consumer Subgroup Analysis

[[Page 105189]]

    c. Rebuttable Presumption Payback
    2. Economic Impacts on Manufacturers
    a. Industry Cash Flow Analysis Results
    b. Direct Impacts on Employment
    c. Impacts on Manufacturing Capacity
    d. Impacts on Subgroups of Manufacturers
    e. Cumulative Regulatory Burden
    3. National Impact Analysis
    a. National Energy Savings
    b. Net Present Value of Consumer Costs and Benefits
    c. Indirect Impacts on Employment
    4. Impact on Utility or Performance of Products
    5. Impact of Any Lessening of Competition
    6. Need of the Nation To Conserve Energy
    7. Other Factors
    8. Summary of Economic Impacts
    C. Conclusion
    1. Benefits and Burdens of TSLs Considered for Gas-fired 
Instantaneous Water Heater Standards
    2. Annualized Benefits and Costs of the Adopted Standards
    3. Compliance Dates
VI. Procedural Issues and Regulatory Review
    A. Review Under Executive Orders 12866, 13563, and 14094
    B. Review Under the Regulatory Flexibility Act
    C. Review Under the Paperwork Reduction Act
    D. Review Under the National Environmental Policy Act of 1969
    E. Review Under Executive Order 13132
    F. Review Under Executive Order 12988
    G. Review Under the Unfunded Mandates Reform Act of 1995
    H. Review Under the Treasury and General Government 
Appropriations Act, 1999
    I. Review Under Executive Order 12630
    J. Review Under the Treasury and General Government 
Appropriations Act, 2001
    K. Review Under Executive Order 13211
    L. Information Quality
    M. Congressional Notification
VII. Approval of the Office of the Secretary

I. Synopsis of the Final Rule

    The Energy Policy and Conservation Act, Public Law 94-163, as 
amended (``EPCA''),\1\ authorizes DOE to regulate the energy efficiency 
of a number of consumer products and certain industrial equipment. (42 
U.S.C. 6291-6317, as codified) Title III, Part B of EPCA \2\ 
established the Energy Conservation Program for Consumer Products Other 
Than Automobiles. (42 U.S.C. 6291-6309) These products include gas-
fired instantaneous water heaters, the subject of this document. (42 
U.S.C. 6292(a)(4))
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    \1\ All references to EPCA in this document refer to the statute 
as amended through the Energy Act of 2020, Public Law 116-260 (Dec. 
27, 2020), which reflect the last statutory amendments that impact 
Parts A and A-1 of EPCA.
    \2\ For editorial reasons, upon codification in the U.S. Code, 
Part B was redesignated Part A.
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    Pursuant to EPCA, DOE is required to review its existing energy 
conservation standards for covered consumer products no later than six 
years after issuance of any final rule establishing or amending a 
standard. (42 U.S.C. 6295(m)(1)) Pursuant to that statutory provision, 
DOE must publish either a notification of determination that standards 
for the product do not need to be amended, or a notice of proposed 
rulemaking (``NOPR'') including new proposed energy conservation 
standards (proceeding to a final rule, as appropriate). (Id.) Any new 
or amended energy conservation standard must be designed to achieve the 
maximum improvement in energy efficiency that DOE determines is 
technologically feasible and economically justified. (42 U.S.C. 
6295(o)(2)(A)) Furthermore, the new or amended standard must result in 
significant conservation of energy. (42 U.S.C. 6295(o)(3)(B)) DOE has 
conducted this review of the energy conservation standards for gas-
fired instantaneous water heaters under EPCA's six-year-lookback 
authority described herein. Additionally, for gas-fired instantaneous 
water heaters with 2 or more gallons of storage volume and gas-fired 
instantaneous water heaters with less than or equal to 50,000 British 
thermal units per hour (``Btu/h'') of input, DOE is following the 
provisions in EPCA to translate the current energy factor (``EF'')-
based standards to the uniform energy factor (``UEF'') metric. (42 
U.S.C. 6295(e)(5))
    In accordance with these and other statutory provisions discussed 
in this document, DOE analyzed the benefits and burdens of four trial 
standard levels (``TSLs'') for gas-fired instantaneous water heaters 
with less than 2 gallons of effective storage volume and rated inputs 
greater than 50,000 Btu/h. The TSLs and their associated benefits and 
burdens are discussed in detail in sections V.A through V.C of this 
document. As discussed in section V.C of this document, DOE has 
determined that TSL 2 represents the maximum improvement in energy 
efficiency that is technologically feasible and economically justified. 
The adopted standards, which are expressed in UEF are shown in table 
I.1. These standards apply to products with effective storage volumes 
less than 2 gallons and input ratings greater than 50,000 Btu/h (as 
listed in table I.1) and manufactured in, or imported into, the United 
States starting on December 26, 2029.
    For all other gas-fired instantaneous water heaters, DOE is 
adopting new standards that do not constitute an increase to 
stringency, but simply a change in rating metric to the UEF descriptor. 
These standards apply to all remaining products listed in table I.1 and 
manufactured in, or imported into, the United States starting on 
December 26, 2029.

               Table I.1--Energy Conservation Standards for Gas-Fired Instantaneous Water Heaters
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                                      Effective storage
           Product class             volume (Veff) * and          Draw pattern                    UEF
                                         input rating
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water       <2 gallons (``gal'')   Very Small...............                       0.64
 Heater.                             and <=50,000 Btu/h.
                                                           Low......................                       0.64
                                                           Medium...................                       0.64
                                                           High.....................                       0.64
                                    <2 gal and >50,000     Very Small...............                       0.89
                                     Btu/h.
                                                           Low......................                       0.91
                                                           Medium...................                       0.91
                                                           High.....................                       0.93
                                    >=2 gal and <=200,000  Very Small...............     0.2534-(0.0018 x Veff)
                                     Btu/h.
                                                           Low......................     0.5226-(0.0022 x Veff)
                                                           Medium...................     0.5919-(0.0020 x Veff)
                                                           High.....................     0.6540-(0.0017 x Veff)
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* Veff is the Effective Storage Volume (in gallons), as determined pursuant to 10 CFR 429.17.


[[Page 105190]]

    The following sections of this synopsis summarize the findings of 
the analysis carried out for gas-fired instantaneous water heaters with 
less than 2 gallons of effective storage volume and rated inputs 
greater than 50,000 Btu/h.

A. Benefits and Costs to Consumers 3
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    \3\ All monetary values in this document are expressed in 2023 
dollars unless indicated otherwise. For purposes of discounting 
future monetary values, the present year in the analysis was 2024.
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    The average life-cycle cost (``LCC'') savings are $112, and the 
simple payback period (``PBP''),\4\ 8.9 years, is less than the 20-year 
average lifetime of a gas-fired instantaneous water heater (see section 
IV.F of this document).
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    \4\ The average LCC savings refer to consumers that are affected 
by a standard and are measured relative to the efficiency 
distribution in the no-new-standards case, which depicts the market 
in the compliance year in the absence of new or amended standards 
(see section IV.F.9 of this document). The simple PBP, which is 
designed to compare specific efficiency levels, is measured relative 
to the baseline product (see section IV.C of this document).
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    DOE's analysis of the impacts of the adopted standards on consumers 
is described in section IV.F of this document.

B. Impact on Manufacturers

    The industry net present value (``INPV'') is the sum of the 
discounted cash flows to the industry from the base year through the 
end of the analysis period (2024-2059). Using a real discount rate of 
9.6 percent, DOE estimates that the INPV for manufacturers of gas-fired 
instantaneous water heaters in the case without amended standards is 
$1,193.9 million in 2023$. Under the adopted standards, DOE estimates 
the change in INPV to range from -2.8 percent to 3.4 percent, which is 
approximately -$33.7 million to $40.5 million. In order to bring 
products into compliance with amended standards, it is estimated that 
industry will incur total conversion costs of $20.4 million.
    DOE's analysis of the impacts of the adopted standards on 
manufacturers is described in section IV.J of this document. The 
analytic results of the manufacturer impact analysis (``MIA'') are 
presented in section V.B.2 of this document.

C. National Benefits and Costs

    DOE's analyses indicate that the adopted energy conservation 
standards for gas-fired instantaneous water heaters would save a 
significant amount of energy. Relative to the case without amended 
standards, the lifetime energy savings for gas-fired instantaneous 
water heaters purchased during the 30-year period that begins in the 
anticipated year of compliance with the amended standards (2030-2059), 
amount to 0.58 quadrillion British thermal units (``Btu''), or 
quads.\5\ This represents a savings of 1.9 percent relative to the 
energy use of these products in the case without amended standards 
(referred to as the ``no-new-standards case'').
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    \5\ The quantity refers to full-fuel-cycle (``FFC'') energy 
savings. FFC energy savings includes the energy consumed in 
extracting, processing, and transporting primary fuels (i.e., coal, 
natural gas, petroleum fuels), and, thus, presents a more complete 
picture of the impacts of energy efficiency standards. For more 
information on the FFC metric, see section IV.H.2 of this document.
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    The cumulative net present value (``NPV'') of total consumer 
benefits of the standards for gas-fired instantaneous water heaters 
ranges from $0.87 billion (at a 7-percent discount rate) to $3.06 
billion (at a 3-percent discount rate). This NPV expresses the 
estimated total value of future operating-cost savings minus the 
estimated increased product and installation costs for gas-fired 
instantaneous water heaters purchased during the period 2030-2059.
    In addition, the adopted standards for gas-fired instantaneous 
water heaters are projected to yield significant environmental 
benefits. DOE estimates that the standards will result in cumulative 
emission reductions (over the same period as for energy savings) of 32 
million metric tons (``Mt'') \6\ of carbon dioxide 
(``CO2''), 0.12 thousand tons of sulfur dioxide 
(``SO2''), 86 thousand tons of nitrogen oxides 
(``NOX''), 398 thousand tons of methane 
(``CH4''), 0.06 thousand tons of nitrous oxide 
(``N2O''), and an increase of 0.0004 tons of mercury 
(``Hg'') due to a small increase in electricity use at the adopted 
standards.\7\
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    \6\ A metric ton is equivalent to 1.1 short tons. Results for 
emissions other than CO2 are presented in short tons.
    \7\ DOE calculated emissions reductions relative to the no-new-
standards case, which reflects key assumptions in the Annual Energy 
Outlook 2023 (``AEO2023''). AEO2023 reflects, to the extent 
possible, laws and regulations adopted through mid-November 2022, 
including the Inflation Reduction Act. See section IV.K of this 
document for further discussion of AEO2023 assumptions that affect 
air pollutant emissions.
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    DOE estimates the value of climate benefits from a reduction in 
greenhouse gases (``GHG'') using different estimates of the social cost 
of CO2 (``SC-CO2''), the social cost of methane 
(``SC-CH4''), and the social cost of nitrous oxide (``SC-
N2O'').\8\ Together these represent the social cost of GHG 
(``SC-GHG''). DOE used an updated set of SC-GHG estimates published in 
2023 by the Environmental Protection Agency (``EPA'') (``2023 SC-
GHG''), as well as the interim SC-GHG values (in terms of benefit per 
ton of GHG avoided) developed by an Interagency Working Group on the 
Social Cost of Greenhouse Gases (``IWG'') in 2021 (``2021 Interim SC-
GHG''), which DOE used in the notice of proposed rulemaking for this 
rule before the updated values were available.\9\ These values is 
discussed in section IV.L of this document. The climate benefits 
associated with the average SC-GHG at a 2-percent near-term Ramsey 
discount rate using the 2023 SC-GHG estimates are estimated to be $7.1 
billion, and the climate benefits associated with the average 2021 
Interim SC-GHG estimates at a 3-percent discount rate are estimated to 
be $1.7 billion. DOE notes, however, that the adopted standards would 
be economically justified even without inclusion of the estimated 
monetized benefits of reduced GHG emissions.
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    \8\ Estimated climate-related benefits are provided in 
compliance with Executive Order 12866.
    \9\ Technical Support Document: Social Cost of Carbon, Methane, 
and Nitrous Oxide Interim Estimates Under Executive Order 13990 
published in February 2021 by the IWG. (``February 2021 SC-GHG 
TSD''). www.whitehouse.gov/wp-content/uploads/2021/02/TechnicalSupportDocument_SocialCostofCarbonMethaneNitrousOxide.pdf. 
https://www.epa.gov/system/files/documents/2023-12/eo12866_oil-and-gas-nsps-eg-climate-review-2060-av16-final-rule-20231130.pdf; 
https://www.epa.gov/system/files/documents/2023-12/epa_scghg_2023_report_final.pdf (last accessed July 3, 2024).
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    DOE estimated the monetary health benefits of SO2 and 
NOX emissions reductions using benefit per ton estimates 
from the EPA's Benefits Mapping and Analysis Program,\10\ as discussed 
in section IV.L of this document. DOE did not monetize the change in 
mercury emissions because the quantity is very small. DOE estimated the 
present value of the health benefits would be $0.9 billion using a 7-
percent discount rate, and $2.7 billion using a 3-percent discount 
rate.\11\ DOE is currently only monetizing health benefits from changes 
in ambient fine particulate matter (``PM2.5'') 
concentrations from two precursors (SO2 and NOX), 
and from changes in ambient ozone from one precursor (NOX), 
but will continue to assess the ability to monetize other effects such 
as health benefits from reductions in direct PM2.5 
emissions.
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    \10\ U.S. EPA. Estimating the Benefit per Ton of Reducing 
Directly-Emitted PM2.5, PM2.5 Precursors and 
Ozone Precursors from 21 Sectors. Available at: www.epa.gov/benmap/estimating-benefit-ton-reducing-pm25-precursors-21-sectors.
    \11\ DOE estimates the economic value of these emissions 
reductions resulting from the considered TSLs for the purpose of 
complying with the requirements of Executive Order 12866.
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    Table I.2 summarizes the monetized benefits and costs expected to 
result from the amended standards for gas-

[[Page 105191]]

fired instantaneous water heaters. There are other important 
unquantified effects, including certain unquantified climate benefits, 
unquantified public health benefits from the reduction of toxic air 
pollutants and other emissions, unquantified energy security benefits, 
and distributional effects, among others.

Table I.2--Summary of Monetized Benefits and Costs of the Adopted Energy
 Conservation Standards for Gas-fired Instantaneous Water Heaters at TSL
                  2 Shipped During the Period 2030-2059
               [Veff < 2 gal, Rated Input > 50,000 Btu/h]
------------------------------------------------------------------------
                                                           Billion 2023$
------------------------------------------------------------------------
                            3% discount rate
------------------------------------------------------------------------
Consumer Operating Cost Savings.........................             4.5
Climate Benefits * (2023 SC-GHG estimates)..............             7.1
Climate Benefits * (2021 interim SC-GHG estimates)......             1.7
Health Benefits **......................................             2.7
Total Benefits [dagger] (2023 SC-GHG estimates).........            14.3
Total Benefits [dagger] (2021 interim SC-GHG estimates).             8.9
Consumer Incremental Product Costs [Dagger].............             1.5
Net Benefits [dagger] (2023 SC-GHG estimates)...........            12.8
Net Benefits [dagger] (2021 interim SC-GHG estimates)...             7.4
Change in Producer Cashflow (INPV) [Dagger][Dagger].....     (0.03)-0.04
------------------------------------------------------------------------
                            7% discount rate
------------------------------------------------------------------------
Consumer Operating Cost Savings.........................             1.7
Climate Benefits * (2023 SC-GHG estimates)..............             7.1
Climate Benefits * (2021 interim SC-GHG estimates)......             1.7
Health Benefits **......................................             0.9
Total Benefits [dagger] (2023 SC-GHG estimates).........             9.6
Total Benefits [dagger] (2021 interim SC-GHG estimates).             4.2
Consumer Incremental Product Costs [Dagger].............             0.8
Net Benefits [dagger] (2023 SC-GHG estimates)...........             8.9
Net Benefits [dagger] (2021 interim SC-GHG estimates)...             3.4
Change in Producer Cashflow (INPV) [Dagger][Dagger].....     (0.03)-0.04
------------------------------------------------------------------------
Note: These results include consumer, climate, and health benefits that
  accrue after 2030 from the products shipped during the period 2030-
  2059.
* Climate benefits are calculated using different estimates of the
  social cost of carbon (SC-CO2), methane (SC-CH4), and nitrous oxide
  (SC-N2O). Climate benefits are estimated using two separate sets of
  estimates of the social cost for each greenhouse gas, an updated set
  published in 2023 by the Environmental Protection Agency (EPA) (``2023
  SC-GHG'') and the interim set of estimates used in the NOPR which were
  published in 2021 by the Interagency Working Group on the SC-GHG (IWG)
  (``2021 Interim SC-GHG'') (see section IV.L of this document). For
  presentational purposes of this table, the climate benefits associated
  with the average SC-GHG at a 2 percent near-term Ramsey discount rate
  are shown for the 2023 SC-GHG estimates, and the climate benefits
  associated with the average SC-GHG at a 3 percent discount rate are
  shown for the 2021 interim SC-GHG estimates.
** Health benefits are calculated using benefit-per-ton values for NOX
  and SO2. DOE is currently only monetizing (for SO2 and NOX) PM2.5
  precursor health benefits and (for NOX) ozone precursor health
  benefits, but will continue to assess the ability to monetize other
  effects such as health benefits from reductions in direct PM2.5
  emissions. Table 5 of the EPA's Estimating the Benefit per Ton of
  Reducing PM Precursors from 21 Sectors TSD provides a summary of the
  health impact endpoints quantified in the analysis. See section IV.L
  of this document for more details.
[dagger] Total and net benefits include those consumer, climate, and
  health benefits that can be quantified and monetized. For presentation
  purposes, total and net benefits for both the 3-percent and 7-percent
  cases are presented using the average SC-GHG with 2-percent near-term
  Ramsey discount rate for the 2023 estimate and the average SC-GHG with
  3-percent discount rate for the 2021 interim SC-GHG estimate.
[Dagger] Costs include incremental equipment costs as well as
  installation costs.
[Dagger][Dagger] Operating Cost Savings are calculated based on the life-
  cycle costs analysis and national impact analysis as discussed in
  detail below. See sections IV.F and IV.H of this document. DOE's
  national impacts analysis includes all impacts (both costs and
  benefits) along the distribution chain beginning with the increased
  costs to the manufacturer to manufacture the product and ending with
  the increase in price experienced by the consumer. DOE also separately
  conducts a detailed analysis on the impacts on manufacturers (i.e.,
  manufacturer impact analysis, or ``MIA''). See section IV.J of this
  document. In the detailed MIA, DOE models manufacturers' pricing
  decisions based on assumptions regarding investments, conversion
  costs, cashflow, and margins. The MIA produces a range of impacts,
  which is the rule's expected impact on the INPV. The change in INPV is
  the present value of all changes in industry cash flow, including
  changes in production costs, capital expenditures, and manufacturer
  profit margins. Change in INPV is calculated using the industry
  weighted average cost of capital value of 9.6 percent that is
  estimated in the MIA (see chapter 12 of the final rule technical
  support document (``TSD'') for a complete description of the industry
  weighted average cost of capital). For gas-fired instantaneous water
  heaters, the change in INPV ranges from -$34 million to $41 million.
  DOE accounts for that range of likely impacts in analyzing whether a
  TSL is economically justified. See section V.C of this document. DOE
  is presenting the range of impacts to the INPV under two manufacturer
  markup scenarios: the Preservation of Gross Margin scenario, which is
  the manufacturer markup scenario used in the calculation of Consumer
  Operating Cost Savings in this table; and the Preservation of
  Operating Profit scenario, where DOE assumed manufacturers would not
  be able to increase per-unit operating profit in proportion to
  increases in manufacturer production costs. DOE includes the range of
  estimated INPV in the above table, drawing on the MIA explained
  further in section IV.J of this document to provide additional context
  for assessing the estimated impacts of this final rule to society,
  including potential changes in production and consumption, which is
  consistent with OMB's Circular A-4 and E.O. 12866. If DOE were to
  include the INPV into the net benefit calculation (2023 SC-GHG
  estimates) for this final rule, the net benefits would be $12.8
  billion at 3-percent discount rate and $8.9 billion at 7-percent
  discount rate. Parentheses indicate negative ( ) values.


[[Page 105192]]

    The benefits and costs of the adopted standards can also be 
expressed in terms of annualized values. The monetary values for the 
total annualized net benefits are: (1) the reduced consumer operating 
costs, minus (2) the increase in product purchase prices and 
installation costs, plus (3) the value of climate and health benefits 
of emission reductions, all annualized.\12\
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    \12\ To convert the time-series of costs and benefits into 
annualized values, DOE calculated a present value in 2024, the year 
used for discounting the NPV of total consumer costs and savings. 
For the benefits, DOE calculated a present value associated with 
each year's shipments in the year in which the shipments occur 
(e.g., 2020 or 2030), and then discounted the present value from 
each year to 2024. Using the present value, DOE then calculated the 
fixed annual payment over a 30-year period, starting in the 
compliance year, that yields the same present value.
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    The national operating cost savings are domestic private U.S. 
consumer monetary savings that occur as a result of purchasing the 
covered products and are measured for the lifetime of gas-fired 
instantaneous water heaters shipped during the period 2030-2059. The 
benefits associated with reduced emissions achieved as a result of the 
adopted standards are also calculated based on the lifetime of gas-
fired instantaneous water heaters shipped during the period 2030-2059. 
Total benefits for both the 3-percent and 7-percent cases are presented 
using the average SC-GHG with a 2 percent near-term Ramsey discount 
rate for the 2023 SC-GHG estimates and the average SC-GHG with 3-
percent discount rate for the 2021 interim SC-GHG estimates.\13\
---------------------------------------------------------------------------

    \13\ DOE notes that using consumption-based discount rates 
(e.g., 2 or 3 percent) is appropriate when discounting the value of 
climate impacts. Combining climate effects discounted at an 
appropriate consumption-based discount rate with other costs and 
benefits discounted at a capital-based rate (i.e., 7 percent) is 
reasonable because of the different nature of the types of benefits 
being measured.
---------------------------------------------------------------------------

    Table I.3 presents the total estimated monetized benefits and costs 
associated with the adopted standard, expressed in terms of annualized 
values. The results under the primary estimate are as follows.
    Using a 7-percent discount rate for consumer benefits and costs and 
health benefits from reduced NOX and SO2 
emissions, and the 2-percent near-term Ramsey discount rate case or the 
3-percent discount rate case for climate benefits from reduced GHG 
emissions, the estimated cost of the standards adopted in this rule is 
$88 million per year in increased equipment costs, while the estimated 
annual benefits are $187 million in reduced equipment operating costs, 
$349 million in climate benefits (using the 2023 SC-GHG estimates) or 
$98 million in climate benefits (using the 2021 interim SC-GHG 
estimates), and $101 million in health benefits. In this case, the net 
benefit would amount to $549 million per year (using the 2023 SC-GHG 
estimates) or $297 million per year (using the 2021 interim SC-GHG 
estimates).
    Using a 3-percent discount rate for consumer benefits and costs and 
health benefits from reduced NOX and SO2 
emissions, and the 2-percent near-term Ramsey discount rate case or the 
3-percent discount rate case for climate benefits from reduced GHG 
emissions, the estimated cost of the standards is $87 million per year 
in increased equipment costs, while the estimated annual benefits are 
$268 million in reduced operating costs, $349 million in climate 
benefits (using the 2023 SC-GHG estimates) or $98 million in climate 
benefits (using the 2021 interim SC-GHG estimates), and $158 million in 
health benefits. In this case, the net benefit would amount to $689 
million per year (using the 2023 SC-GHG estimates) or $437 million per 
year (using the 2021 interim SC-GHG estimates).

       Table I.3--Annualized Benefits and Costs of the Adopted Energy Conservation Standards for Gas-Fired
                    Instantaneous Water Heaters at TSL 2 Shipped During the Period 2030-2059
                                    [Veff <2 gal, rated input >50,000 Btu/h]
----------------------------------------------------------------------------------------------------------------
                                                                                Million 2023$/year
                                                                 -----------------------------------------------
                                                                                     Low-net-        High-net-
                                                                      Primary        benefits        benefits
                                                                     estimate        estimate        estimate
----------------------------------------------------------------------------------------------------------------
                                                3% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................             268             249             288
Climate Benefits * (2023 SC-GHG estimates)......................             349             344             355
Climate Benefits * (2021 interim SC-GHG estimates)..............              98              96             100
Health Benefits **..............................................             158             156             161
Total Benefits [dagger] (2023 SC-GHG estimates).................             776             749             804
Total Benefits [dagger] (2021 interim SC-GHG estimates).........             525             502             548
Consumer Incremental Product Costs [Dagger].....................              87              86              89
Net Benefits [dagger] (2023 SC-GHG estimates)...................             689             663             715
Net Benefits [dagger] (2021 interim SC-GHG estimates)...........             437             416             459
Change in Producer Cashflow (INPV) [Dagger][Dagger].............           (3)-4           (3)-4           (3)-4
----------------------------------------------------------------------------------------------------------------
                                                7% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................             187             174             200
Climate Benefits * (2023 SC-GHG estimates)......................             349             344             355
Climate Benefits * (2021 interim SC-GHG estimates)..............              98              96             100
Health Benefits **..............................................             101              99             102
Total Benefits [dagger] (2023 SC-GHG estimates).................             637             616             658
Total Benefits [dagger] (2021 interim SC-GHG estimates).........             386             369             402
Consumer Incremental Product Costs [Dagger].....................              88              87              90
Net Benefits [dagger] (2023 SC-GHG estimates)...................             549             530             568
Net Benefits [dagger] (2021 interim SC-GHG estimates)...........             297             283             312

[[Page 105193]]

 
Change in Producer Cashflow (INPV) [Dagger][Dagger].............           (3)-4           (3)-4           (3)-4
----------------------------------------------------------------------------------------------------------------
Note: These results include consumer, climate, and health benefits that accrue after 2059 from the products
  shipped during the period 2030-2059. The Primary, Low Net Benefits, and High Net Benefits Estimates utilize
  projections of energy prices from the AEO2023 Reference case, Low Economic Growth case, and High Economic
  Growth case, respectively. In addition, incremental equipment costs reflect a medium decline rate in the
  Primary Estimate, a low decline rate in the Low Net Benefits Estimate, and a high decline rate in the High Net
  Benefits Estimate. The methods used to derive projected price trends are explained in sections IV.F.1 and
  IV.H.3 of this document. Note that the Benefits and Costs may not sum to the Net Benefits due to rounding.
* Climate benefits are calculated using different estimates of the global SC-GHG (see section IV.L of this
  document). Climate benefits are estimated using two separate sets of estimates of the social cost for each
  greenhouse gas, an updated set published in 2023 by the Environmental Protection Agency (EPA) (``2023 SC-
  GHG'') and the interim set of estimates used in the NOPR which were published in 2021 by the Interagency
  Working Group on the SC-GHG (IWG) (``2021 Interim SC-GHG'') (see section IV.L of this document). For
  presentational purposes of this table, the climate benefits associated with the average SC-GHG at a 2 percent
  near-term Ramsey discount rate are shown for the 2023 SC-GHG estimates, and the climate benefits associated
  with the average SC-GHG at a 3 percent discount rate are shown for the 2021 interim SC-GHG estimates.
** Health benefits are calculated using benefit-per-ton values for NOX and SO2. DOE is currently only monetizing
  (for SO2 and NOX) PM2.5 precursor health benefits and (for NOX) ozone precursor health benefits, but will
  continue to assess the ability to monetize other effects such as health benefits from reductions in direct
  PM2.5 emissions. Table 5 of the EPA's Estimating the Benefit per Ton of Reducing PM2.5 Precursors from 21
  Sectors TSD provides a summary of the health impact endpoints quantified in the analysis. See section IV.L of
  this document for more details.
[dagger] Total benefits for both the 3-percent and 7-percent cases are presented using the average SC-GHG with 2-
  percent near-term Ramsey discount rate for the 2023 estimate and the average SC-GHG with 3-percent discount
  rate for the 2021 interim SC-GHG estimate.
[Dagger] Costs include incremental equipment costs as well as installation costs.
[Dagger][Dagger] Operating Cost Savings are calculated based on the life-cycle costs analysis and national
  impact analysis as discussed in detail below. See sections IV.F and IV.H of this document. DOE's national
  impacts analysis includes all impacts (both costs and benefits) along the distribution chain beginning with
  the increased costs to the manufacturer to manufacture the product and ending with the increase in price
  experienced by the consumer. DOE also separately conducts a detailed analysis on the impacts on manufacturers
  (i.e., MIA). See section IV.J of this document. In the detailed MIA, DOE models manufacturers' pricing
  decisions based on assumptions regarding investments, conversion costs, cashflow, and margins. The MIA
  produces a range of impacts, which is the rule's expected impact on the INPV. The change in INPV is the
  present value of all changes in industry cash flow, including changes in production costs, capital
  expenditures, and manufacturer profit margins. The annualized change in INPV is calculated using the industry
  weighted average cost of capital value of 9.6 percent that is estimated in the MIA (see chapter 12 of the
  final rule TSD for a complete description of the industry weighted average cost of capital). For gas-fired
  instantaneous water heaters, the annualized change in INPV ranges from -$3 million to $4 million. DOE accounts
  for that range of likely impacts in analyzing whether a TSL is economically justified. See section V.C of this
  document. DOE is presenting the range of impacts to the INPV under two manufacturer markup scenarios: the
  Preservation of Gross Margin scenario, which is the manufacturer markup scenario used in the calculation of
  Consumer Operating Cost Savings in this table; and the Preservation of Operating Profit scenario, where DOE
  assumed manufacturers would not be able to increase per-unit operating profit in proportion to increases in
  manufacturer production costs. DOE includes the range of estimated annualized change in INPV in the above
  table, drawing on the MIA explained further in section IV.J of this document to provide additional context for
  assessing the estimated impacts of this final rule to society, including potential changes in production and
  consumption, which is consistent with OMB's Circular A-4 and E.O. 12866. If DOE were to include the INPV into
  the annualized net benefit calculation (2023 SC-GHG estimates) for this final rule, the annualized net
  benefits would range from $686 million to $693 million at 3-percent discount rate and would range from $546
  million to $553 million at 7-percent discount rate. Parentheses indicate negative ( ) values.

    DOE's analysis of the national impacts of the adopted standards is 
described in sections IV.H, IV.K, and IV.L of this document.

D. Conclusion

    DOE concludes that the standards adopted in this final rule 
represent the maximum improvement in energy efficiency that is 
technologically feasible and economically justified, and would result 
in the significant conservation of energy. Specifically, with regards 
to technological feasibility products achieving these standard levels 
are already commercially available. As for economic justification, 
DOE's analysis shows that the benefits of the standards exceed, to a 
great extent, the burdens of the standards.
    Using a 7-percent discount rate for consumer benefits and costs and 
NOX and SO2 reduction benefits, and a 2-percent 
near-term Ramsey discount rate case or the 3-percent discount rate case 
for GHG social costs, the estimated cost of the standards for gas-fired 
instantaneous water heaters is $88 million per year in increased 
product costs, while the estimated annual benefits are $187 million in 
reduced product operating costs, $349 million in climate benefits 
(using the 2023 SC-GHG estimates) or $98 million in climate benefits 
(using the 2021 interim SC-GHG estimates), and $101 million in health 
benefits. The net benefit amounts to $549 million per year (using the 
2023 SC-GHG estimates) or $297 million per year (using the 2021 interim 
SC-GHG estimates). DOE notes that the net benefits are substantial even 
in the absence of the climate benefits,\14\ and DOE would adopt the 
same standards in the absence of such benefits.
---------------------------------------------------------------------------

    \14\ The information on climate benefits is provided in 
compliance with Executive Order 12866.
---------------------------------------------------------------------------

    The significance of energy savings offered by a new or amended 
energy conservation standard cannot be determined without knowledge of 
the specific circumstances surrounding a given rulemaking.\15\ For 
example, some covered products and equipment have most of their energy 
consumption occur during periods of peak energy demand. The impacts of 
these products on the energy infrastructure can be more pronounced than 
the impacts of products with relatively constant demand. Accordingly, 
DOE evaluates the significance of energy savings on a case-by-case 
basis.
---------------------------------------------------------------------------

    \15\ Procedures, Interpretations, and Policies for Consideration 
in New or Revised Energy Conservation Standards and Test Procedures 
for Consumer Products and Commercial/Industrial Equipment, 86 FR 
70892, 70901 (Dec. 13, 2021).

---------------------------------------------------------------------------

[[Page 105194]]

    As previously mentioned, the standards are projected to result in 
estimated national energy savings (``NES'') of 0.58 quads full-fuel-
cycle (``FFC''), the equivalent of the primary annual energy use of 4 
million homes. Based on these findings, DOE has determined the energy 
savings from the standard levels adopted in this final rule are 
``significant'' within the meaning of 42 U.S.C. 6295(o)(3)(B). A more 
detailed discussion of the basis for these conclusions is contained in 
the remainder of this document and the accompanying TSD.

II. Introduction

    The following section briefly discusses the statutory authority 
underlying this final rule, as well as some of the relevant historical 
background related to the establishment of standards for gas-fired 
instantaneous water heaters, which, as discussed in section III.B of 
this document, are a subset of consumer water heaters. Gas-fired 
instantaneous water heaters are defined at 10 CFR 430.2 as a water 
heater that uses gas as the main energy source, has a nameplate input 
rating less than 200,000 Btu/h, and contains no more than one gallon of 
water per 4,000 Btu per hour of input.

A. Authority

    EPCA authorizes DOE to regulate the energy efficiency of a number 
of consumer products and certain industrial equipment. (42 U.S.C. 6291-
6317, as codified) Title III, Part B of EPCA \16\ established the 
Energy Conservation Program for Consumer Products Other Than 
Automobiles. (42 U.S.C. 6291-6309) These products include gas-fired 
instantaneous water heaters, the subject of this document. (42 U.S.C. 
6292(a)(4))
---------------------------------------------------------------------------

    \16\ As noted previously, for editorial reasons, upon 
codification in the U.S. Code, Part B was redesignated Part A.
---------------------------------------------------------------------------

    The energy conservation program under EPCA, consists essentially of 
four parts: (1) testing, (2) labeling, (3) the establishment of Federal 
energy conservation standards, and (4) certification and enforcement 
procedures. Relevant provisions of EPCA specifically include 
definitions (42 U.S.C. 6291), test procedures (42 U.S.C. 6293), 
labeling provisions (42 U.S.C. 6294), energy conservation standards (42 
U.S.C. 6295), and the authority to require information and reports from 
manufacturers (42 U.S.C. 6296).
    Federal energy efficiency requirements for covered products 
established under EPCA generally supersede State laws and regulations 
concerning energy conservation testing, labeling, and standards. (42 
U.S.C. 6297(a)-(c)) DOE may, however, grant waivers of Federal 
preemption in limited circumstances for particular State laws or 
regulations, in accordance with the procedures and other provisions set 
forth under EPCA. (42 U.S.C. 6297(d))
    Subject to certain criteria and conditions, DOE is required to 
develop test procedures to measure the energy efficiency, energy use, 
or estimated annual operating cost of each covered product. (42 U.S.C. 
6295(o)(3)(A) and 42 U.S.C. 6295(r)) Manufacturers of covered products 
must use the prescribed DOE test procedure as the basis for certifying 
to DOE that their product complies with the applicable energy 
conservation standards and as the basis for any representations 
regarding the energy use or energy efficiency of the product. (42 
U.S.C. 6295(s) and 42 U.S.C. 6293(c)). Similarly, DOE must use these 
test procedures to evaluate whether a basic model complies with the 
applicable energy conservation standard(s). (42 U.S.C. 6295(s)) The DOE 
test procedures for gas-fired instantaneous water heaters appear at 
title 10 of the Code of Federal Regulations (``CFR'') part 430, subpart 
B, appendix E (``appendix E'').
    EPCA prescribed energy conservation standards for gas-fired 
instantaneous water heaters (42 U.S.C. 6295(e)(1)) and directed DOE to 
conduct future rulemakings to determine whether to amend these 
standards. (42 U.S.C. 6295(e)(4)) Not later than six years after the 
issuance of any final rule establishing or amending a standard, DOE 
must publish either a notice of determination (``NOPD'') that standards 
for the product do not need to be amended, or a NOPR including new 
proposed energy conservation standards (proceeding to a final rule, as 
appropriate). (42 U.S.C. 6295(m)(1)) DOE must make the analysis on 
which a NOPD or NOPR is based publicly available and provide an 
opportunity for written comment. (42 U.S.C. 6295(m)(2)) Not later than 
two years after a NOPR is issued, DOE must publish a final rule 
amending the energy conservation standard for the product. (42 U.S.C. 
6295(m)(3)(A))
    DOE must follow specific statutory criteria for prescribing new or 
amended standards for covered products, including gas-fired 
instantaneous water heaters. Any new or amended standard for a covered 
product must be designed to achieve the maximum improvement in energy 
efficiency that the Secretary of Energy (``Secretary'') determines is 
technologically feasible and economically justified. (42 U.S.C. 
6295(o)(2)(A)) Furthermore, DOE may not adopt any standard that would 
not result in the significant conservation of energy. (42 U.S.C. 
6295(o)(3)(B))
    Moreover, DOE may not prescribe a standard if: (1) for certain 
products, including gas-fired instantaneous water heaters, no test 
procedure has been established for the product; or (2) DOE determines 
by rule that the establishment of such standard will not result in 
significant conservation of energy (or, for certain products, water), 
or is not technologically feasible or economically justified. (42 
U.S.C. 6295(o)(3)(A)-(B)) In deciding whether a proposed standard is 
economically justified, DOE must determine whether the benefits of the 
standard exceed its burdens. (42 U.S.C. 6295(o)(2)(B)(i)) DOE must make 
this determination after receiving comments on the proposed standard, 
and by considering, to the greatest extent practicable, the following 
seven statutory factors:
    (1) The economic impact of the standard on manufacturers and 
consumers of the products subject to the standard;
    (2) The savings in operating costs throughout the estimated average 
life of the covered products in the type (or class) compared to any 
increase in the price, initial charges, or maintenance expenses for the 
covered products that are likely to result from the standard;
    (3) The total projected amount of energy (or as applicable, water) 
savings likely to result directly from the standard;
    (4) Any lessening of the utility or the performance of the covered 
products likely to result from the standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
standard;
    (6) The need for national energy and water conservation; and
    (7) Other factors the Secretary considers relevant.
    (42 U.S.C. 6295(o)(2)(B)(i)(I)-(VII))
    Further, EPCA, as codified, establishes a rebuttable presumption 
that a standard is economically justified if the Secretary finds that 
the additional cost to the consumer of purchasing a product complying 
with an energy conservation standard level will be less than three 
times the value of the energy savings during the first year that the 
consumer will receive as a result of the standard, as calculated under 
the applicable test procedure. (42 U.S.C. 6295(o)(2)(B)(iii))
    EPCA, as codified, also contains what is known as an ``anti-
backsliding''

[[Page 105195]]

provision, which prevents the Secretary from prescribing any amended 
standard that either increases the maximum allowable energy use or 
decreases the minimum required energy efficiency of a covered product. 
(42 U.S.C. 6295(o)(1)) Also, the Secretary may not prescribe an amended 
or new standard if interested persons have established by a 
preponderance of the evidence that the standard is likely to result in 
the unavailability in the United States in any covered product type (or 
class) of performance characteristics (including reliability), 
features, sizes, capacities, and volumes that are substantially the 
same as those generally available in the United States. (42 U.S.C. 
6295(o)(4))
    Additionally, EPCA specifies requirements when promulgating an 
energy conservation standard for a covered product that has two or more 
subcategories. A rule prescribing an energy conservation standard for a 
type (or class) of product must specify a different standard level for 
a type or class of products that has the same function or intended use 
if DOE determines that products within such group (A) consume a 
different kind of energy from that consumed by other covered products 
within such type (or class); or (B) have a capacity or other 
performance-related feature which other products within such type (or 
class) do not have and such feature justifies a higher or lower 
standard. (42 U.S.C. 6295(q)(1)) In determining whether a performance-
related feature justifies a different standard for a group of products, 
DOE considers such factors as the utility to the consumer of such a 
feature and other factors DOE deems appropriate. Id. Any rule 
prescribing such a standard must include an explanation of the basis on 
which such higher or lower level was established. (42 U.S.C. 
6295(q)(2))
    Finally, pursuant to the amendments to EPCA contained in the Energy 
Independence and Security Act of 2007, Public Law 110-140, any final 
rule for new or amended energy conservation standards promulgated after 
July 1, 2010, is required to address standby mode and off mode energy 
use. (42 U.S.C. 6295(gg)(3)) Specifically, when DOE adopts a standard 
for a covered product after that date, it must, if justified by the 
criteria for adoption of standards under EPCA (42 U.S.C. 6295(o)), 
incorporate standby mode and off mode energy use into a single 
standard, or, if that is not feasible, adopt a separate standard for 
such energy use for that product. (42 U.S.C. 6295(gg)(3)(A)-(B))
    DOE is publishing this final rule pursuant to the six-year-lookback 
review requirement in EPCA described herein for gas-fired instantaneous 
water heaters with less than 2 gallons of effective storage volume and 
rated inputs greater than 50,000 Btu/h. (42 U.S.C. 6295(m)) DOE is also 
publishing this final rule pursuant to its authority to establish 
uniform efficiency descriptors for covered water heaters (42 U.S.C. 
6295(e)(5))

B. Background

1. Current Standards
    As directed by EPCA (42 U.S.C. 6295(e)(4)), DOE conducted two 
cycles of rulemakings to determine whether to amend the statutory 
standards for consumer water heaters found in 42 U.S.C. 6295(e)(1). The 
most recent rulemaking from April 2010 resulted in amended standards 
using the EF metric originally prescribed by EPCA with a requirement 
for compliance starting on April 16, 2015. 75 FR 20112 (Apr. 16, 2010) 
(the ``April 2010 Final Rule''). Later amendments to EPCA directed DOE 
to establish a uniform efficiency metric for consumer water heaters 
(see 42 U.S.C. 6295(e)(5)(B)).\17\ The Federal test procedure was 
revised to use a new metric, UEF, in a final rule published on July 11, 
2014 (the ``July 2014 UEF TP Final Rule''). 79 FR 40542. In a final 
rule published in the Federal Register on December 29, 2016, the 
existing EF-based energy conservation standards were then translated 
from EF to UEF using a ``conversion factor'' method for water heater 
basic models that were in existence at the time. 81 FR 96204 
(``December 2016 Conversion Factor Final Rule'').
---------------------------------------------------------------------------

    \17\ The requirement for a consumer water heater test procedure 
using UEF as a metric, as well as the requirement for DOE to 
undertake a conversion factor rulemaking to translate existing 
consumer water heater standards denominated in terms of EF to ones 
denominated in terms of UEF, were part of the amendments to EPCA 
contained in the American Energy Manufacturing Technical Corrections 
Act (``AEMTCA''), Public Law 112-210 (Dec. 18, 2012).
---------------------------------------------------------------------------

    The resulting standards for gas-fired instantaneous water heaters 
set forth in DOE's regulations at 10 CFR 430.32(d)(1) are shown in 
table II.1.

            Table II.1--Federal Energy Efficiency Standards for Gas-Fired Instantaneous Water Heaters
----------------------------------------------------------------------------------------------------------------
                                         Rated storage volume and                                 Uniform energy
             Product class                     input rating                Draw pattern *             factor
----------------------------------------------------------------------------------------------------------------
Instantaneous Gas-fired Water Heater..  <2 gal and >50,000 Btu/h.  Very Small...................            0.80
                                                                   Low..........................            0.81
                                                                   Medium.......................            0.81
                                                                   High.........................            0.81
----------------------------------------------------------------------------------------------------------------
* The draw pattern dictates the frequency and duration of hot water draws during the 24-hour simulated use test,
  and is an indicator of delivery capacity of the water heater. Draw patterns are assigned based on the first
  hour rating (``FHR''), for non-flow-activated water heaters, or maximum GPM rating (``Max GPM''), for flow-
  activated water heaters. For the specific FHR and Max GPM ranges which correspond to each draw pattern, see
  section 5.4.1 of appendix E to subpart B of 10 CFR part 430.

    In the December 2016 Conversion Factor Final Rule, DOE declined to 
develop conversion factors and UEF-based standards for consumer water 
heaters of certain sizes (by rated storage volume or input rating) and 
of certain types (i.e., oil-fired instantaneous water heaters) where 
models did not exist on the market at the time to inform the analysis 
of the standards conversion. 81 FR 96204, 96210-96211. For consumer 
water heaters that did not receive converted UEF-based standards, DOE 
provided its interpretation that the original statutory standards--
found at 42 U.S.C. 6295(e)(1) and expressed in terms of the EF metric--
still applied; however, DOE would not enforce those statutorily-
prescribed standards until such a time that conversion factors are 
developed for these products and they can be converted to UEF. Id. 
Thus, the EF-based standards specified by EPCA apply to any consumer 
water heaters which do not have UEF-based standards found at 10 CFR 
430.32(d). The EF-based standards for gas-fired instantaneous water 
heaters which do not have UEF-based standards are set

[[Page 105196]]

forth at 42 U.S.C. 6295(e)(1) and are repeated in table II.2.

Table II.2--EF-Based Federal Energy Conservation Standards for Gas-Fired
                         Consumer Water Heaters
------------------------------------------------------------------------
          Product class                       Energy factor *
------------------------------------------------------------------------
Gas water heaters................  0.62-(0.0019 x Vr)
------------------------------------------------------------------------
* Vr is the rated storage volume (in gallons), as determined pursuant to
  10 CFR 429.17.

2. History of Standards Rulemaking for Gas-Fired Instantaneous Water 
Heaters
    On May 21, 2020, DOE initiated the most recent rulemaking for 
consumer water heaters, including gas-fired instantaneous water 
heaters, by publishing in the Federal Register a request for 
information (``May 2020 RFI''), soliciting public comment on various 
aspects of DOE's planned analyses to help DOE determine whether to 
amend energy conservation standards for consumer water heaters. 85 FR 
30853 (May 21, 2020). DOE subsequently published a notice requesting 
feedback on its preliminary analysis and technical support document 
(``preliminary TSD'') on March 1, 2022 (the ``March 2022 Preliminary 
Analysis'') with a 60-day comment period. 87 FR 11327 (Mar. 1, 2022). 
The comment period was extended by 14 days in a notice published on May 
4, 2022. 87 FR 26303.
    On October 21, 2022, DOE received a set of recommendations on 
amended energy conservation standards for consumer water heaters from a 
coalition of seven public- and private-sector organizations, including 
two water heater manufacturers, three energy efficiency organizations, 
one environmental group, and one consumer organization--collectively 
the Joint Stakeholders--which, in part, addressed standards for gas-
fired instantaneous water heaters. This coalition's submission has been 
referred to as the ``Joint Stakeholder Recommendation.'' (See Document 
No. 49 in Docket No. EERE-2017-BT-STD-0019.)
    On July 28, 2023, DOE published in the Federal Register a notice of 
proposed rulemaking (``July 2023 NOPR'') and technical support document 
(``NOPR TSD'') with a 60-day comment period that proposed new and 
amended standards for consumer water heaters, including gas-fired 
instantaneous water heaters. 88 FR 49058 (Jul. 28, 2023). On September 
13, 2023, DOE presented the proposed standards and accompanying 
analysis at a public meeting. The submissions DOE received in response 
to the July 2023 NOPR pertaining to gas-fired instantaneous water 
heaters are listed in table II.3.

  Table II.3--List of Commenters With Written Submissions Specific to Gas-Fired Instantaneous Water Heaters in
                                         Response to the July 2023 NOPR
----------------------------------------------------------------------------------------------------------------
                                                                     Comment number in the
            Commenter(s)                     Abbreviation                   docket              Commenter type
----------------------------------------------------------------------------------------------------------------
Individual.........................  Hardy.......................  0185....................  Individual.
NPGA, APGA, AGA, and Rinnai........  NPGA, APGA, AGA, and Rinnai.  0441....................  Trade Associations
                                                                                              and Manufacturer.
Carolinas Natural Gas Coalition....  CNGC........................  0648....................  Trade Association.
Jackson Energy Authority...........  JEA.........................  0865....................  Utility.
Watertown Municipal Utilities......  WMU.........................  0872....................  Utility.
Philadelphia Gas Works.............  PGW.........................  0886....................  Utility.
Southeast Gas......................  Southeast Gas...............  0887....................  Utility.
Consumer Energy Alliance...........  CEA.........................  0914....................  Consumer Advocate.
American Society of Gas Engineers..  ASGE........................  0976....................  Trade Association.
Chesapeake Utilities Corporation...  CHPK........................  1008....................  Utility.
Georgia Office of the Attorney       Attorney General of GA......  1026....................  State Official/
 General.                                                                                     Agency.
Advanced Water Heating Initiative..  AWHI........................  1036....................  Efficiency
                                                                                              Organization.
Tennessee Attorney General's Office  Attorney General of TN......  1149....................  State Official/
                                                                                              Agency.
American Pipeline Contractors        APCA........................  1152....................  Trade Association.
 Association.
Texas Public Policy Foundation.....  TPPF........................  1153....................  Academic Institute.
Midwest Energy Efficiency Alliance,  Joint Regional Advocacy       1154....................  Efficiency
 Northeast Energy Efficiency          Groups.                                                 Organizations.
 Partnerships, Northwest Energy
 Efficiency Alliance, South-central
 Partnership for Energy Efficiency
 as a Resource, Southeast Energy
 Efficiency Alliance, Southwest
 Energy Efficiency Project.
American Council for an Energy-      Joint Stakeholders..........  1156....................  Coalition.
 Efficient Economy, Natural
 Resources Defense Council,
 Appliance Standards Awareness
 Project, Northwest Energy
 Efficiency Alliance, Consumer
 Federation of America, Rheem
 Manufacturing.
Office of Governor Brian P. Kemp...  Governor of GA..............  1157....................  State Official/
                                                                                              Agency.
Bradford White Corporation.........  BWC.........................  1164....................  Manufacturer.
Air-Conditioning, Heating, and       AHRI........................  1167....................  Trade Association.
 Refrigeration Institute.
California Energy Commission.......  CEC.........................  1173....................  State Official/
                                                                                              Agency.
Pacific Gas and Electric Company;    CA IOUs.....................  1175....................  Utilities.
 Southern California Edison; and
 San Diego Gas & Electric Company;
 collectively, the California
 Investor-owned Utilities.
Huntsville Utilities...............  Huntsville Utilities........  1176....................  Utility
                                                                                              Association.
Rheem Manufacturing Company........  Rheem.......................  1177....................  Manufacturer.
AGA, APGA, NPGA, Spire.............  Gas Association Commenters..  1181....................  Utility
                                                                                              Association.
A.O. Smith Corporation.............  A.O. Smith..................  1182....................  Manufacturer.
Rinnai America Corporation.........  Rinnai......................  1186....................  Manufacturer.
Northwest Energy Efficiency          NEEA........................  1199....................  Efficiency
 Alliance.                                                                                    Organization.
ONE Gas, Inc.......................  ONE Gas.....................  1200....................  Utility.
Noritz America Corporation.........  Noritz......................  1202....................  Efficiency
                                                                                              Organization.

[[Page 105197]]

 
Robert Bosch LLC...................  Bosch.......................  1204....................  Manufacturer.
U.S. House of Representatives (Nine  U.S. House of                 1205....................  Government Official/
 members, all from Georgia).          Representatives.                                        Agency.
----------------------------------------------------------------------------------------------------------------

    Subsequent to the July 2023 NOPR, DOE determined it would continue 
to consider comments prior to finalizing standards for gas-fired 
instantaneous water heaters, although standards for all other consumer 
water heaters were finalized in a rule published on May 6, 2024 (``May 
2024 Final Rule''). 89 FR 37778. Most recently, DOE published a notice 
of data availability in the Federal Register on July 23, 2024 (``July 
2024 NODA''). 89 FR 59692. The purpose of the July 2024 NODA was to 
make publicly available a full set of analytical results specific to 
gas-fired instantaneous water heaters, including updates as compared to 
the analysis conducted for the July 2023 NOPR after considering the 
comments received. DOE received comments in response to the July 2024 
NODA from the interested parties listed in table II.4.
    In response to the July 2024 NODA, a larger coalition of 
stakeholders co-signed a joint comment recommending standards for gas-
fired instantaneous water heaters. This coalition--consisting of AHRI 
(a trade association representing the views of multiple manufacturers), 
three energy efficiency organizations, one environmental group, and one 
consumer organization--submitted the previous Joint Stakeholder 
Recommendation for renewed consideration by DOE. Hence the submission 
by this larger, more recent coalition is still referred to as the Joint 
Stakeholder Recommendation throughout this final rule.

            Table II.4--List of Commenters With Written Submissions in Response to the July 2024 NODA
----------------------------------------------------------------------------------------------------------------
                                                                Comment number in the
            Commenter(s)                  Abbreviation                  docket                Commenter type
----------------------------------------------------------------------------------------------------------------
Sophie Charlotte DuBard-Weis.......  DuBard-Weis...........  1430.......................  Individual.
Lucy Anderson......................  Anderson..............  1431.......................  Individual.
Anonymous..........................  Anonymous.............  1432.......................  Individual.
American Gas Association (AGA),      Joint Requesters......  1433.......................  Utility Associations;
 American Public Gas Association                                                           Manufacturer.
 (APGA), National Propane Gas
 Association (NPGA), and Rinnai
 America Corporation.
Northwest Energy Efficiency          NEEA..................  1434.......................  Efficiency
 Alliance.                                                                                 Organization.
Rinnai America Corporation.........  Rinnai................  1435, 1443.................  Manufacturer.
Rheem Manufacturing Company........  Rheem.................  1436.......................  Manufacturer.
Air-Conditioning, Heating, and       AHRI..................  1437.......................  Trade Association.
 Refrigeration Institute.
AHRI, ACEEE, ASAP, CFA, NRDC, and    AHRI and the Joint      1438.......................  Trade Association.
 NEEA.                                Stakeholders.
American Gas Association (AGA),      AGA et al.............  1439.......................  Utility Association.
 American Public Gas Association
 (APGA), and National Propane Gas
 Association (NPGA).
A.O. Smith Corporation.............  A.O. Smith............  1440.......................  Manufacturer.
Bradford White Corporation.........  BWC...................  1441.......................  Manufacturer.
Pacific Gas and Electric Company;    CA IOUs...............  1442.......................  Utility.
 Southern California Edison; and
 San Diego Gas & Electric Company;
 collectively, the California
 Investor-owned Utilities.
ASAP, ACEEE, CFA, NCLC, NRDC, NBI,   Joint Advocates.......  1444.......................  Efficiency
 and NEEA.                                                                                 Organization.
U.S. House of Representatives        U.S. House of           1445.......................  Government Official/
 (Three members, all from Georgia).   Representatives.                                     Agency.
----------------------------------------------------------------------------------------------------------------

    A parenthetical reference at the end of a comment quotation or 
paraphrase provides the location of the item in the public record.\18\ 
To the extent that interested parties have provided written comments 
that are substantively consistent with any oral comments provided 
during the September 13, 2023, public meeting, DOE cites the written 
comments throughout this final rule. DOE did not identify any oral 
comments provided during the September 13, 2023, public meeting that 
are not substantively addressed by written comments.
---------------------------------------------------------------------------

    \18\ The parenthetical reference provides a reference for 
information located in the docket of DOE's rulemaking to develop 
energy conservation standards for consumer water heaters. (Docket 
No. EERE-2017-BT-STD-0019, which is maintained at: 
www.regulations.gov). The references are arranged as follows: 
(commenter name, comment docket ID number at page of that document).
---------------------------------------------------------------------------

III. General Discussion

    DOE developed this final rule after a review of the market for the 
subject gas-fired instantaneous water heaters. DOE also considered 
comments, data, and information from interested parties that represent 
a variety of interests. This final rule addresses issues raised by 
these commenters.

A. General Comments

    This section summarizes general comments received from interested 
parties regarding rulemaking timing and process.
    In response to the July 2024 NODA, the Joint Requesters recommended 
that DOE provide stakeholders with an additional 30 days (i.e., for a 
total of 60 days) to comment. The Joint Requesters stated that the 30 
days provided by DOE does not allow stakeholders to sufficiently 
analyze the NODA and the related documents, which appear to incorporate 
new data, use new methodologies, and reach different results from the 
July 2023 NOPR. The Joint Requesters further commented that their 
organizations had limited staff availability during the comment period. 
(Joint Requesters, No. 1433 at pp. 2-3)
    DOE notes the limited scope of the NODA and reiterates that the 
July 2024 NODA updated only specific aspects of DOE's analysis of 
potential amended energy conservation standards for gas-fired 
instantaneous water heaters. The analysis from the July 2023 NOPR was 
updated to reflect the latest available versions of the data sources 
used. Overall, the cost-benefit analysis

[[Page 105198]]

methodology remains largely unchanged between the July 2024 NODA and 
the July 2023 NOPR (see 89 FR 59692, 59693). Furthermore, this analysis 
has been subject to extensive stakeholder input and feedback throughout 
the course of this rulemaking. Commenters were provided a full 60-day 
comment period to review the July 2023 NOPR analysis, and the July 2024 
NODA described in depth the specific areas where DOE's analysis was 
updated while providing the rationale for each update. As such, DOE 
believes a 30-day comment period was appropriate for stakeholders to 
review a limited set of revisions to a previously published analysis 
and provide meaningful comments on the notice. (See Document No. 1446 
in Docket No. EERE-2017-BT-STD-0019.)
    AGA et al. stated that due to the use of data designed for other 
natural gas appliances and not gas-fired instantaneous water heaters 
specifically, DOE should restart the rulemaking process for gas-fired 
instantaneous water heaters, or at a minimum issue a supplemental 
notice. (AGA et al., No. 1439 at p. 1)
    In response, DOE notes that it published the July 2024 NODA to 
inform stakeholders of newly available data and results with respect to 
potential amended standards for gas-fired instantaneous water heaters, 
a limited update to the July 2023 NOPR analysis.
1. General Support
    In response to the July 2023 NOPR, DOE received 2,880 \19\ general 
comments (those which provided general remarks on the impact of the 
rulemaking) \20\ with a significant number of commenters expressing 
support of the proposed standards--including those proposed for gas-
fired instantaneous water heaters--and acknowledging the significant 
energy savings that would result from the adoption of the proposed 
standards.\21\
---------------------------------------------------------------------------

    \19\ The number of comments reflects the number of individual 
party submissions. Specifically, form letters with multiple 
submissions count each submission individually.
    \20\ Commenters who are directly referenced in this final rule 
and appear in table II.3 are not counted in these statistics because 
these submitters typically expressed detailed views that could not 
be generalized as either clear support or clear opposition for all 
aspects of the proposal.
    \21\ One comment in support of the proposed standards, including 
the proposal for gas-fired instantaneous water heaters, had 8,357 
signatories.
---------------------------------------------------------------------------

    AWHI expressed support for more stringent standards for gas-fired 
instantaneous water heaters. (AWHI, No. 1036 at pp. 3-4) The Joint 
Stakeholders stated that the proposed standards for gas-fired 
instantaneous water heaters are consistent with their recommendations. 
(Joint Stakeholders, No. 1156 at p. 2) NEEA, the Joint Regional 
Advocacy Groups (citing the estimated FFC and monetary savings), and 
Bosch supported the proposed standards for gas-fired instantaneous 
water heaters. (NEEA, No. 1199 at p. 9; Joint Regional Advocacy Groups, 
No. 1154 at p. 1; Bosch, No. 1204 at p. 2) Bosch commented that 
condensing gas-fired instantaneous water heaters are readily available 
and widely accepted in the market, and can create significant energy 
savings and emissions reductions. Bosch stated that nearly every gas-
fired instantaneous water heater manufacturer sells a condensing-level 
product and, therefore, the required technology is well-understood and 
minimal research and development efforts would be required to achieve 
the proposed efficiency levels. (Bosch, No. 1204 at p. 2)
    CEC and A.O. Smith also supported DOE's proposed standards for gas-
fired instantaneous water heaters because they would result in 
significant savings, lower monthly energy bills for homeowners, and 
also provide emissions benefits. CEC urged DOE to finalize the proposed 
standards as soon as possible. (CEC, No. 1173 at p. 12; A.O. Smith, No. 
1182 at p. 14)
    Two individual commenters expressed support for the proposed 
rulemaking on the basis that clean energy is necessary for securing a 
peaceful and prosperous future and for the economic benefits that will 
result from the proposed rulemaking. (DuBard-Weis, No. 1430 at p. 1; 
Anderson, No. 1431 at p. 1) An anonymous commenter also expressed 
support for the proposed rulemaking on the basis of reducing emissions 
related to water heaters for the benefit of the planet. (Anonymous, No. 
1432 at p. 2)
2. Support for Updated Analysis and Standards at EL 2
    In response to the July 2024 NODA, DOE received the following 
comments in support of the updated analytical results and potential 
amended standards at efficiency level (``EL'') 2.
    NEEA, AHRI, AHRI and the Joint Stakeholders, the Joint Advocates, 
Rheem, and BWC expressed support for the standards proposed at EL 2 for 
gas-fired instantaneous water heaters in the July 2023 NOPR, with NEEA, 
AHRI, AHRI and the Joint Stakeholders, the Joint Advocates, and BWC 
noting the significant national energy savings and LCC savings for 
consumers. NEEA, The Joint Advocates, and BWC stated that the proposed 
standard aligns with the Joint Stakeholder Recommendations made in 
2022. AHRI and the Joint Stakeholders expressed concern that DOE had 
not yet adopted these standards and commented that the proposed levels 
would, enable a broad set of consumer options while meeting EPCA's 
directives of achieving significant national energy savings as well as 
cost effectiveness and technological feasibility for consumers who 
install these products. The Joint Advocates supported DOE's proposal to 
adopt EL 2 for gas-fired instantaneous water heaters because EL 2 
represents an intermediate condensing level and reflects the Joint 
Stakeholder recommendations. The Joint Advocates further commented that 
DOE's updated analysis in the NODA reinforces the economic and energy 
benefits of adopting EL 2 for gas-fired instantaneous water heaters 
and, while similar to those in the July 2023 NOPR, the updates in the 
July 2024 NODA improve the analysis. (NEEA, No. 1434 at p. 1; Rheem, 
No. 1436 at p. 1; AHRI, No. 1437 at p. 2; AHRI and the Joint 
Stakeholders, No. 1438 at p. 1; BWC, No. 1441 at p. 1; Joint Advocates, 
No. 1444, at pp. 1-2)
    NEEA commented that the July 2024 NODA effectively updates the 
analysis for gas-fired instantaneous water heaters to thoroughly 
represent the market and better account for manufacturer impacts of 
updating standards for gas-fired instantaneous water heaters by 
updating from Energy Information Administration's Residential Energy 
Consumption Survey (``RECS'') 2015 to RECS 2020 data, accounting for 
the use of concentric pipe venting for both condensing and non-
condensing gas-fired instantaneous water heaters, and updating the 
analysis to include outdoor installations of gas-fired instantaneous 
water heaters that don't require venting or that require short through-
the-wall vents. NEEA commented that according to DOE's analysis, 
impacts on manufacturers from a condensing-level standard would be 
modest and potentially beneficial to domestic production. NEEA 
recommended that DOE quickly issue a final rule for gas-fired 
instantaneous water heaters, as NEEA agreed with DOE that condensing-
level standards at EL 2 would be cost effective and deliver significant 
energy savings while having minimal negative impacts. (NEEA, No. 1434 
at pp. 1-3)
    Rheem recommended that DOE amend standards for gas-fired 
instantaneous water heaters to EL 2, stating that DOE's analysis 
remains justified. (Rheem, No. 1436 at p. 1) BWC urged DOE to establish 
minimum energy

[[Page 105199]]

conservation standards for gas-fired instantaneous water heaters at EL 
2 as originally proposed in the July 2023 NOPR and in accordance with 
the Joint Stakeholder Recommendation. BWC stated that establishing 
standards consistent with the Joint Stakeholder Recommendation would 
result in national energy savings of 0.8 quads and provide individual 
consumers average savings of $31 per year.\22\ (BWC, No. 1441 at p. 1)
---------------------------------------------------------------------------

    \22\ BWC cited analytical results provided in the original Joint 
Stakeholder Recommendation (Document No. 49 in this docket), which 
relied on DOE's results from the March 2022 Preliminary Analysis 
(see Joint Stakeholder, No. 49 at p. 5). DOE's most up-to-date 
analysis provided in this final rule indicates a potential for 0.58 
quads of national energy savings, with an average consumer LCC 
savings of $112.
---------------------------------------------------------------------------

3. General Opposition
    In response to the July 2023 NOPR, DOE received comments from 
several stakeholders raising concern over the impact of the proposed 
standards.
    An individual commenter requested careful consideration of the 
impacts of the proposed levels for gas-fired instantaneous water 
heaters on the economy. The individual commenter noted that they work 
at a propane company whose installation and servicing of tankless \23\ 
water heaters is a large part of its income, asserting that the 
proposals, if adopted, could be detrimental to the economy. (Hardy, No. 
185 at p. 1)
---------------------------------------------------------------------------

    \23\ ``Tankless'' models are instantaneous water heaters with 
very little storage volume. These designs comprise the majority of 
consumer gas-fired instantaneous water heaters on the market today.
---------------------------------------------------------------------------

    Commenters from the U.S. House of Representatives indicated that 
the popularity of non-condensing gas-fired instantaneous water heaters 
among homeowners and small business owners across the United States 
reflects the efficiency and affordability of the products. 
Additionally, the Commenters from the U.S. House of Representatives 
stated that restricting consumer access to gas-fired instantaneous 
water heaters by adopting higher standards would reduce consumer choice 
and increase product prices. (U.S. House of Representatives, No. 1205 
at p. 1) Then, in response to the July 2024 NODA, the Commenters from 
the U.S. House of Representatives stated that gas-fired instantaneous 
water heaters are projected to reach 11 percent of the U.S. market by 
2028 and that sales of non-condensing tankless water heaters from 2005 
to 2022 have saved 339 million MMBtus (0.34 quads) and 37.7 billion 
pounds (17 million metric tons) of carbon emissions. Commenters from 
the U.S. House of Representatives also stated that the July 2023 NOPR 
would eliminate the non-condensing gas-fired instantaneous water 
heaters while leaving costlier or higher emission profile products on 
the market. (U.S. House of Representatives, No. 1445 at p. 1)
    Regarding stakeholders' comments that the standards proposed in the 
July 2023 NOPR would discourage adoption of gas-fired instantaneous 
water heaters, DOE notes that it expects the share of gas-fired 
instantaneous water heaters to continue to increase as a percentage of 
the overall U.S. market in both the no-new-standards case and standards 
cases. See section IV.F.10 for a discussion regarding why adoption of 
other types of water heaters in response to amended standards for gas-
fired instantaneous water heaters is highly unlikely. Additionally, DOE 
notes that only one-third of gas-fired instantaneous water heaters 
shipped in 2024 were non-condensing models, with a market share that is 
projected to decrease even in the absence of amended standards. See 
section IV.G of this document and chapter 9 of the final rule TSD for 
additional information on DOE's shipments analysis.
    In addition to emphasizing several of the points it made in 
response to the July 2023 NOPR, Rinnai claimed that, although the July 
2024 NODA appears to make some adjustments for data provided by Rinnai 
as well as other inputs, methods and approaches, it does not 
sufficiently account for historic market data and trends, consumer 
decision making, product and installation costs, and concerns with 
modeling and methodology, nor does it suffice to meet statutory 
requirements relating to economic justification, significant energy 
savings, or product unavailability. Rinnai stated that the analysis in 
the July 2024 NODA does not change its conclusion that the proposed 
rule would limit the affordable, efficient options available to 
consumers, would impede a market-driven shift toward more efficient 
storage-type water heaters,\24\ and would likely result in a net 
reduction in energy savings and an increase in carbon emissions. Rinnai 
therefore requested that DOE correct its claimed deficiencies and flaws 
in the July 2024 NODA, issue a supplemental notice of proposed 
rulemaking to address these changes and allow thorough stakeholder 
input, and reconsider the July 2023 NOPR's proposed rule. Rinnai 
suggested that DOE should either maintain the existing standard for 
gas-fired instantaneous water heaters, or alternatively promulgate 
separate standards for condensing and non-condensing gas-fired 
instantaneous water heaters. (Rinnai, No. 1443 at pp. 2-3)
---------------------------------------------------------------------------

    \24\ The commenter used the phrase ``tank water heaters'' but 
did not clarify how amended standards for gas-fired instantaneous 
water heaters would impede a market transition towards more 
efficient types of storage water heaters; however, they later 
reiterate the concern regarding a shift towards gas-fired storage 
water heaters, which, in general, tend to have lower UEF ratings 
today compared to gas-fired instantaneous water heaters.
---------------------------------------------------------------------------

    Rinnai raised concern with the condensing-level standards supported 
by the Joint Stakeholders, asserting that such standards would not 
adequately consider the gas-fired instantaneous water heater market and 
industry as a whole. Specifically, Rinnai expressed that it does not 
believe that non-condensing gas-fired instantaneous water heaters are 
``on the way out'' of the market. According to Rinnai, the July 2024 
NODA showed a projected 30 percent of gas-fired instantaneous water 
heater sales in 2030 would be non-condensing models, consistent with 
current trends. Rinnai stated that it would suffer the direct impacts 
of this rule, being not only one of the leading manufacturers of gas-
fired instantaneous water heaters in general but also the market leader 
in sales of non-condensing models, producing approximately 60 percent 
of the market share of non-condensing models. (Rinnai, No. 1443 at pp. 
23-24) Rinnai argued that DOE's consumer water heater rulemaking, and 
in particular its actions with regard to gas-fired instantaneous water 
heaters, depend heavily on DOE's interpretation of several statutory 
provisions in EPCA. According to Rinnai, DOE's interpretations of 
statutory provisions are not entitled to deference--for example, DOE's 
interpretation of the unavailability provision, section 6295(o)(4), the 
``significant conservation of energy'' provision, section 6295(o)(3), 
the economic justification provision, section 6295(o)(2)(B), and the 
separate standards provision, section 6295(q). Rinnai expressed its 
concern that DOE's consumer water heater rulemaking, in conjunction 
with its rulemaking proceedings on furnaces and boilers, represent a 
significant overhaul of the appliance manufacturing industry. Rinnai 
commented that, in line with the outcome of West Virginia v. EPA,\25\

[[Page 105200]]

EPCA was not intended to allow DOE to favor one fuel or type of 
appliance over another or to reshape the appliance industry. (Rinnai, 
No. 1443 at pp. 23-24)
---------------------------------------------------------------------------

    \25\ In West Virginia v. EPA, 597 U.S. 697 (2022), the Court 
expounded on the major questions doctrine, and held that agencies 
could not adopt rules with, as Rinnai put it, ``significant 
economic, industry and consumer choice impacts'' without having 
clear congressional authorization to do so. (Rinnai, No. 1443 at p. 
24)
---------------------------------------------------------------------------

    DOE's rulemaking to amend energy conservation standards for gas-
fired instantaneous water heaters does not disallow the production, 
import, or sale of water heaters using any specific fuel type. 
Moreover, gas-fired instantaneous water heaters will not be made 
unavailable as a result of this rulemaking. Stakeholders have not 
indicated that raising standards for gas-fired instantaneous water 
heaters would push consumers towards electric or oil-fired water 
heaters--and such a case would be highly improbable based on DOE's own 
analysis of consumer purchasing decisions. Instead, stakeholders such 
as Rinnai and the Gas Association Commenters appear to indicate that 
more-stringent standards for gas-fired instantaneous water heaters may 
impact shipments of other gas-fired water heaters, and these comments 
are discussed further in section IV.F.10 of this document. As such, 
there is no evidence to support Rinnai's suggestion that DOE's action 
``favors'' one fuel type over another. Furthermore, since the statutory 
consumer water heater standards were established by EPCA at 42 U.S.C. 
6295(e)(1), DOE has maintained separate product classes (i.e., separate 
standards) for gas-fired, oil-fired, and electric water heaters. See 10 
CFR 430.32(d)(1)-(2). These separate product classes are consistent 
with the statutory provisions at 42 U.S.C. 6295(q).
    DOE has statutory authority to routinely evaluate and address 
minimum efficiency levels for gas-fired instantaneous water heaters 
(and all other consumer water heaters). See section II.A of this 
document. As a general matter, energy conservation standards save 
energy by removing the least-efficient technologies and designs from 
the market. Discussed further in section IV.A.1 of this document, non-
condensing gas-fired instantaneous water heaters use only one heat 
exchanger that operates at a higher temperature, whereas condensing 
gas-fired instantaneous water heaters make use of corrosion-resistant 
condensing heat exchangers that can extract far more energy from the 
flue gases exhausted by combustion--causing the exhaust flue gases to 
condense into liquid (hence, the term ``condensing''). Because of this, 
condensing gas-fired instantaneous water heaters are a step up in 
efficiency from non-condensing products. The energy-saving purposes of 
EPCA would be frustrated if DOE were required to set standards that 
maintain less-energy-efficient covered products and equipment in the 
market based simply on the fact that they use a specific type of less-
efficient design.
    DOE has evaluated the statutory criteria--technological 
feasibility, significant energy savings, and economic justification--
and considered the application of the statutory ``unavailability 
provision'' (see 42 U.S.C. 6295(o)(4)) to determine the product class 
structure for gas-fired instantaneous water heaters; see section IV.A.1 
of this document for further details. DOE has not sought to ``reshape 
the appliance industry,'' but rather to set standards in accordance 
with the statutory requirements of EPCA. Analytical results from 
multiple rulemakings indicate that certain segments of the space and 
water heating industries have made significant progress in 
transitioning the market towards more-efficient condensing products, 
and the analysis herein for gas-fired instantaneous water heaters also 
reflects this trend. As such, DOE is not setting condensing-level 
standards simply to increase the usage of condensing technology. 
Rather, DOE has found that condensing-level standards are justified for 
gas-fired instantaneous water heaters based on extensive analysis and 
review.
4. Comments on Higher Standards Than Proposed in the NOPR
    EL 3 corresponds to the efficiency that would meet the current 
ENERGY STAR Specification version 5.0, and as such is an efficiency 
level that many manufacturers currently target. In the July 2023 NOPR, 
DOE tentatively determined that the additional benefits and savings 
from amended standards at EL 3 could be considered significant, but 
there was uncertainty as to whether manufacturing capacity of EL 3 
models could be scaled up to meet national demand for gas-fired 
instantaneous water heaters. 88 FR 49058, 49161. While the July 2023 
NOPR proposed standards at EL 2, DOE requested additional information 
on the benefits and burdens of a potential amended standard for gas-
fired instantaneous water heaters at EL 3, especially with respect to 
manufacturers being able to scale their entire production to EL 3 in 
the compliance time frame being considered by this rulemaking. Id.
    In response, Bosch stated that EL 3 would be significantly more 
difficult to reach compared to EL 2, adding that though EL 3 is 
feasible with current technology, the technology comes with increased 
complexity. Specifically, Bosch stated that the most significant 
challenge in raising the efficiency of a gas-fired instantaneous water 
heater from a UEF of 0.93 to 0.95 for the high draw pattern is the need 
for significant burner modulation. Bosch recommended DOE retain the EL 
2 proposal for gas-fired instantaneous water heaters. (Bosch, No. 1204 
at pp. 4-5) Noritz stated that EL 3 is significantly more difficult to 
reach than EL 2, due to complexity related to the software, controls, 
fan, and gas valve, as well as higher material costs due to increased 
heat exchanger surface area. (Noritz, No. 1202 at p. 3) BWC recommended 
against adopting standards for gas-fired instantaneous water heaters at 
EL 3 because this would be inconsistent with the Joint Stakeholder 
Recommendation, and the proposed standards at EL 2 already amount to 
substantial increase in efficiency. (BWC, No. 1164 at p. 16) Rheem 
stated that it does not support EL 3 for gas-fired instantaneous water 
heaters as the costs to the manufacturer outweigh the benefit of the 
slight increase in UEF. Rheem further stated that EL 3 requires 
completely different condensing technology than EL 2 and will have 
significantly more impact on existing manufacturing facilities. (Rheem, 
No. 1177 at p. 13)
    AHRI stated that gas-fired instantaneous water heaters would 
experience more difficulty achieving EL 3 compared to EL 2 due to 
increasing complexity, driven by designs incorporating full burner 
modulation. AHRI further stated that this would require substantial 
research and development and more expensive components. (AHRI, No. 1167 
at pp. 12-13)
    CEC stated that if DOE received data in response to the request for 
information in the July 2023 NOPR, DOE should consider finalizing a 
standard consistent with EL 3 for gas-fired instantaneous water 
heaters. (CEC, No. 1173 at p. 12)
    In response to the July 2023 NOPR, the CA IOUs encouraged DOE to 
set more stringent standards for gas-fired instantaneous water heaters, 
recommending that DOE establish the standards proposed at TSL 6 in the 
July 2023 NOPR, equivalent to max-tech (i.e., EL 4). According to the 
CA IOUs, more stringent standards for all gas-fired consumer water 
heater sub-classes, specifically at condensing efficiencies, would 
result in significant savings of natural gas in California and across 
the United States. Regarding statements from some stakeholders that 
significant installation barriers are associated with gas condensing 
water heaters, the CA IOUs referred DOE to a report docketed

[[Page 105201]]

in 2019 titled ``Investigation of Installation Barriers and Costs for 
Condensing Gas Appliances.'' \26\ Key findings from this report 
indicate that these challenges impact less than 5 percent of condensing 
gas retrofit installations for residential and commercial applications, 
and that condensate management and chimney relining were minor concerns 
for installing gas condensing products. (CA IOUs, No. 1175 at p. 2) In 
response to the July 2024 NODA, the CA IOUs reiterated that more-
stringent efficiency standards for gas-fired instantaneous water 
heaters would conserve natural gas, reduce emissions, and lower utility 
payments for Californians. The CA IOUs stated that while a standard 
based on EL 2 would generate between $0.13 billion ($2022, at a 7-
percent discount rate) and $0.47 billion ($2022, at a 3-percent 
discount rate) in consumer benefits for all Californians over 30 years, 
a standard based on EL 3 would generate between $0.21 billion ($2022, 
at a 7-percent discount rate) and $0.75 billion ($2022, at a 3-percent 
discount rate) in consumer benefits for all Californians over the same 
time period. The CA IOUs stated that adoption of EL 3 would increase 
consumer benefits by 60 percent relative to EL 2 and reiterated that EL 
3 has the shortest simple payback period of any gas-fired instantaneous 
water heater efficiency level. The CA IOUs urged DOE to adopt a 
standard for gas-fired instantaneous water heaters based on EL 3. (CA 
IOUs, No. 1442 at pp. 1-2)
---------------------------------------------------------------------------

    \26\ EERE-2018-BT-ST-0018-0062. February 28, 2019. Available at: 
www.regulations.gov/comment/EERE-2018-BT-STD-0018-0062 (last 
accessed: Oct. 1, 2024).
---------------------------------------------------------------------------

    In this final rule analysis, DOE finds that although EL 3 would 
present many consumer benefits, the average estimated simple payback 
period for EL 3 is 8.3 years, whereas for EL 2 it is 8.9 years, which 
is not strikingly different in the context of the product's lifespan, 
which is estimated to be about 20 years. DOE acknowledges that setting 
standards at EL 3 for gas-fired instantaneous water heaters would 
require notably higher levels of investment compared to EL 2 for gas-
fired instantaneous water heaters. In this final rule, DOE is adopting 
TSL 2, which corresponds to EL 2 for gas-fired instantaneous water 
heaters. DOE notes that industry would need to significantly scale up 
production of models that meet EL 3 given the lower quantity of 
shipments of these models today. Approximately 60 percent of gas-fired 
instantaneous water heater shipments currently meet the adopted level 
(i.e., EL 2).\27\ However, only 15 percent of gas-fired instantaneous 
water heater shipments currently meet EL 3. To meet EL 3, DOE expects 
manufacturers would implement a more efficient heat exchanger design 
(e.g., replacing a tube condensing heat exchanger with a flat plate 
condensing heat exchanger) and increase the condensing heat exchanger 
area relative to EL 2. DOE understands that implementing the larger, 
improved condensing heat exchanger technology could increase the 
complexity of the manufacturing process compared to the tube design 
condensing heat exchanger technology analyzed at EL 1 and EL 2. Given 
the low shipments volumes and increased complexity of EL 3 models, DOE 
expects most manufacturers would need to add new production lines to 
maintain existing capacity at TSL 3. DOE does not expect most 
manufacturers would need to add new production lines or incur notable 
capital investments to meet TSL 2. DOE estimates that industry 
conversion costs at EL 2 would reach approximately $20 million whereas 
industry conversion costs would triple at EL 3 (approximately $60 
million). See section V.B.2.a of this document for the estimated 
industry conversion costs at each TSL. See section V.C.1 of this 
document for the benefits and burdens of the TSLs considered in this 
rulemaking.
---------------------------------------------------------------------------

    \27\ The term ``current shipments'' refers to no-new-standards 
shipments estimated to occur in 2024 (the reference year).
---------------------------------------------------------------------------

B. Scope of Coverage

    Gas-fired instantaneous water heaters are a subset of consumer 
water heaters. Generally, DOE defines a ``water heater,'' consistent 
with EPCA's definition at 42 U.S.C. 6291(27) and codified at 10 CFR 
430.2, as a product which utilizes oil, gas, or electricity to heat 
potable water for use outside the heater upon demand. An instantaneous-
type water heater is one that heats water but contains no more than one 
gallon of water per 4,000 Btu per hour of input, and consumer gas-fired 
instantaneous water heaters are additionally defined as having an input 
rating less than 200,000 Btu per hour. 10 CFR 430.2; (42 U.S.C. 
6291(27)).
    This rulemaking does not cover gas-fired circulating water heaters, 
which must be used in combination with recirculation pump and a storage 
tank or recirculation loop, and therefore constitute storage-type water 
heaters. 10 CFR 430.2.
    As stated in section I of this document, EPCA prescribed energy 
conservation standards for all consumer water heaters (i.e., those that 
meet the definition of ``water heater'' above). For the purposes of 
this final rule, DOE is solely considering ``gas-fired instantaneous 
water heaters,'' including those for which there are no current UEF-
based standards codified at 10 CFR 430.32(d)(1).
    See section IV.A.1 of this document for discussion of the product 
classes analyzed in this final rule.

C. Test Procedure

    EPCA sets forth generally applicable criteria and procedures for 
DOE's adoption and amendment of test procedures. (42 U.S.C. 6293) 
Manufacturers of covered products must use these test procedures as the 
basis for certifying to DOE that their product complies with the 
applicable energy conservation standards and as the basis for any 
representations regarding the energy use or energy efficiency of the 
product. (42 U.S.C. 6295(s) and 42 U.S.C. 6293(c)). Similarly, DOE must 
use these test procedures to evaluate whether a basic model complies 
with the applicable energy conservation standard(s). 10 CFR 429.110(e). 
The current test procedure for consumer and residential-duty commercial 
water heaters is codified at 10 CFR part 430, subpart B, appendix E. 
Appendix E includes provisions for determining UEF, the metric on which 
current standards are based. 10 CFR 430.32(d)(1).
    DOE most recently amended the test procedure for these products at 
appendix E in the consumer and residential-duty commercial water heater 
test procedure final rule published on June 21, 2023 (``June 2023 TP 
Final Rule'') pursuant to the 7-year review requirement as specified by 
EPCA. (42 U.S.C. 6293(b)(1)(A) and 42 U.S.C. 6314(a)(1)(A)) In that 
final rule, DOE established effective storage volume 
(``Veff'') as a metric to address how much hot water could 
be immediately delivered by the system, taking into account the 
temperature of the stored water and, in the case of circulating water 
heaters, the volume of the paired storage tank. 88 FR 40406. The 
amended test procedure established by the June 2023 TP Final Rule is 
mandatory for gas-fired instantaneous water heater testing starting 
December 18, 2023, 180 days after publication. Id.
    In response to the July 2023 NOPR, BWC reiterated its comments in 
response to the March 2022 Preliminary Analysis asserting that there is 
evidence to suggest that gas-fired instantaneous water heaters may gain 
an unfair advantage in the current test procedure

[[Page 105202]]

as compared to gas-fired storage water heaters. The commenter provided 
DOE with a study published by the Davis Energy Group, Inc. and 
requested that DOE elaborate on its disagreement with the outcome of 
that study. In particular, BWC pointed out that while gas-fired 
instantaneous water heaters are not subjected to standby losses like 
their storage-type counterparts, the number, timing, and frequency of 
draws required for these products causes the heat exchanger to be 
raised to temperature for each draw; and this, according to Davis 
Energy Group, Inc., can cause a bias toward higher efficiency ratings 
for gas-fired instantaneous water heaters. BWC requested further 
discussion on this topic to ensure that both types of gas-fired 
products are treated fairly. (BWC, No. 1164 at pp. 9-10)
    In response, DOE notes that the current test procedure for consumer 
water heaters is designed to represent generally how consumer water 
heaters are used in-field. As such, if one type of water heater 
generally receives higher efficiency ratings than another, it would be 
the result of that water heater type having a more efficient design for 
actual consumer usage patterns than the other. This difference would 
therefore not be a bias, but a reflection of actual differences in 
operating efficiency being captured by the test result. The Davis 
Energy Group, Inc. study cited by BWC shows the efficiency of the gas-
fired instantaneous water heater that was tested was more affected by 
the time between water draws than that of the gas-fired storage water 
heater that was tested. That is, the efficiency of the gas-fired 
instantaneous water heater degraded more when the time between water 
draws increased than did the gas-fired storage water heater. However, 
for these findings to have any significance, DOE would also need 
evidence to show that the water draw sequencing of the current test 
procedure at appendix E is unrepresentative. The draw sequence was 
developed as a representative test method in the 2014 test procedure 
rulemaking that established the UEF test method, and it considered 
factors such as standby loss periods, test stand capabilities, and 
water heater recovery rates (see 79 FR 40542). In the absence of 
sufficient data provided by BWC or the Davis Energy Group, Inc. report 
demonstrating that the current test procedure is unrepresentative, DOE 
cannot conclude that the prescribed test method results in an unfair 
advantage for gas-fired instantaneous water heaters over gas-fired 
storage water heaters. In this standards analysis, DOE has relied on an 
efficiency-level approach to identify potential standards based on UEF 
ratings that are demonstrated (certified) for gas-fired instantaneous 
water heaters on the basis of testing under the DOE test procedure. 
Therefore, hypothetically, even if these products do benefit from 
factors in the test procedure that allow them to have higher UEF 
ratings, all gas-fired instantaneous water heaters would benefit 
equally, and the increase in UEF is reflected in product ratings and 
the efficiency levels selected for the analysis. By basing its analysis 
around commercially available products and their certified ratings in 
the product classes separately, DOE is ensuring that the standards it 
is setting for gas-fired instantaneous water heaters are reflective of 
these products' performance under the appendix E test procedure. DOE 
used a similar approach for all other types of consumer water heaters 
(e.g., gas-fired storage water heaters) when it finalized amended 
standards in a May 6, 2024 final rule pertaining to those products. 89 
FR 37778.

D. Technological Feasibility

1. General
    As discussed, any new or amended energy conservation standard must 
be designed to achieve the maximum improvement in energy efficiency 
that DOE determines is technologically feasible and economically 
justified. (42 U.S.C. 6295(o)(2)(A))
    To determine whether potential amended standards would be 
technologically feasible, DOE first develops a list of all known 
technologies and design options that could improve the efficiency of 
the products or equipment that are the subject of the rulemaking. DOE 
considers technologies incorporated in commercially available products 
or in working prototypes to be ``technologically feasible.'' 10 CFR 
part 430, subpart C, appendix A, sections 6(a)(3)(iii)(A) and 7(b)(1). 
Section IV.A.2 of this document discusses the technology options 
identified by DOE for this analysis. For further details on the 
technology assessment conducted for this final rule, see chapter 3 of 
the final rule technical support document (``TSD'').
    After DOE has determined which, if any, technologies and design 
options are technologically feasible, it further evaluates each 
technology and design option in light of the following additional 
screening criteria: (1) practicability to manufacture, install, and 
service; (2) adverse impacts on product utility or availability; (3) 
adverse impacts on health or safety; and (4) unique-pathway proprietary 
technologies. 10 CFR part 430, subpart C, appendix A, sections 
6(a)(3)(iii)(B) through (E) and 7(b)(2) through (5). Those technology 
options that are ``screened out'' based on these criteria are not 
considered further. Those technology and design options that are not 
screened out are considered as the basis for higher efficiency levels 
that DOE could consider for potential amended standards. Section IV.B 
of this document discusses the results of this screening analysis 
conducted for this final rule. For further details on the screening 
analysis conducted for this final rule, see chapter 4 of the final rule 
TSD.
2. Maximum Technologically Feasible Levels
    EPCA requires that for any proposed rule that prescribes an amended 
or new energy conservation standard, or prescribes no amendment or no 
new standard for a type (or class) of covered product, DOE must 
determine the maximum improvement in energy efficiency or maximum 
reduction in energy use that is technologically feasible for each type 
(or class) of covered products. (42 U.S.C. 6295(p)(1)) Accordingly, in 
the engineering analysis, DOE identifies the maximum efficiency level 
currently available on the market. DOE also defines a ``max-tech'' 
efficiency level, representing the maximum theoretical efficiency that 
can be achieved through the application of all available technology 
options retained from the screening analysis.\28\ In many cases, the 
max-tech efficiency level is not commercially available because it is 
not currently economically feasible.
---------------------------------------------------------------------------

    \28\ In applying these design options, DOE would only include 
those that are compatible with each other that when combined, would 
represent the theoretical maximum possible efficiency.
---------------------------------------------------------------------------

    The max-tech levels that DOE determined for this analysis are 
described in section IV.C.1.a of this document and in chapter 5 of the 
final rule TSD.

E. Energy Savings

1. Determination of Savings
    For each TSL, DOE projected energy savings from application of the 
TSL to gas-fired instantaneous water heaters purchased during the 30-
year period that begins in the first year of compliance with the 
amended standards (2030-2059).\29\ The savings are measured over the 
entire lifetime of products purchased during the 30-year

[[Page 105203]]

analysis period. DOE quantified the energy savings attributable to each 
TSL as the difference in energy consumption between each standards case 
and the no-new-standards case. The no-new-standards case represents a 
projection of energy consumption that reflects how the market for a 
product would likely evolve in the absence of amended energy 
conservation standards.
---------------------------------------------------------------------------

    \29\ DOE also presents a sensitivity analysis that considers 
impacts for products shipped in a 9-year period.
---------------------------------------------------------------------------

    DOE used its national impact analysis (``NIA'') spreadsheet models 
to estimate NES from potential amended standards for gas-fired 
instantaneous water heaters. The NIA spreadsheet model (described in 
section IV.H of this document) calculates energy savings in terms of 
site energy, which is the energy directly consumed by products at the 
locations where they are used. For electricity, DOE reports NES in 
terms of primary energy savings, which is the savings in the energy 
that is used to generate and transmit the site electricity. For natural 
gas, the primary energy savings are considered to be equal to the site 
energy savings. DOE also calculates NES in terms of FFC energy savings. 
The FFC metric includes the energy consumed in extracting, processing, 
and transporting primary fuels (i.e., coal, natural gas, petroleum 
fuels), and thus presents a more complete picture of the impacts of 
energy conservation standards.\30\ DOE's approach is based on the 
calculation of an FFC multiplier for each of the energy types used by 
covered products or equipment. For more information on FFC energy 
savings, see section IV.H.2 of this document.
---------------------------------------------------------------------------

    \30\ The FFC metric is discussed in DOE's statement of policy 
and notice of policy amendment. 76 FR 51282 (Aug. 18, 2011), as 
amended at 77 FR 49701 (Aug. 17, 2012).
---------------------------------------------------------------------------

2. Significance of Savings
    To adopt any new or amended standards for a covered product, DOE 
must determine that such action would result in significant energy 
savings. (42 U.S.C. 6295(o)(3)(B))
    The significance of energy savings offered by a new or amended 
energy conservation standard cannot be determined without knowledge of 
the specific circumstances surrounding a given rulemaking.\31\ For 
example, some covered products and equipment have most of their energy 
consumption occur during periods of peak energy demand. The impacts of 
these products on the energy infrastructure can be more pronounced than 
the impacts of products with relatively constant demand. Accordingly, 
DOE evaluates the significance of energy savings on a case-by-case 
basis, taking into account the significance of cumulative FFC national 
energy savings, the cumulative FFC emissions reductions, and the need 
to confront the global climate crisis, among other factors.
---------------------------------------------------------------------------

    \31\ The numeric threshold for determining the significance of 
energy savings established in a final rule published on February 14, 
2020 (85 FR 8626, 8670) was subsequently eliminated in a final rule 
published on December 13, 2021 (86 FR 70892).
---------------------------------------------------------------------------

    As stated, the standard levels adopted in this final rule are 
projected to result in NES of 0.58 quad, the equivalent of the primary 
annual energy use of about 4 million homes. Based on the amount of FFC 
savings, the corresponding reduction in emissions, and the need to 
confront the global climate crisis, DOE has determined the energy 
savings from the standard levels adopted in this final rule are 
``significant'' within the meaning of 42 U.S.C. 6295(o)(3)(B).

F. Economic Justification

1. Specific Criteria
    As noted previously, EPCA provides seven factors to be evaluated in 
determining whether a potential energy conservation standard is 
economically justified. (42 U.S.C. 6295(o)(2)(B)(i)(I)(VII)) The 
following sections discuss how DOE has addressed each of those seven 
factors in this rulemaking.
a. Economic Impact on Manufacturers and Consumers
    In determining the impacts of potential new or amended standards on 
manufacturers, DOE conducts a manufacturer impact analysis (``MIA''), 
as discussed in section IV.J of this document. First, DOE uses an 
annual cash-flow approach to determine the quantitative impacts. This 
step includes both a short-term assessment--based on the cost and 
capital requirements during the period between when a regulation is 
issued and when entities must comply with the regulation--and a long-
term assessment over a 30-year period. The industry-wide impacts 
analyzed include: (1) INPV, which values the industry on the basis of 
expected future cash flows; (2) cash flows by year; (3) changes in 
revenue and income; and (4) other measures of impact, as appropriate. 
Second, DOE analyzes and reports the impacts on different types of 
manufacturers, including impacts on small manufacturers. Third, DOE 
considers the impact of standards on domestic manufacturer employment 
and manufacturing capacity, as well as the potential for standards to 
result in plant closures and loss of capital investment. Finally, DOE 
takes into account cumulative impacts of various DOE regulations and 
other regulatory requirements on manufacturers.
    For individual consumers, measures of economic impact include the 
changes in LCC and PBP associated with new or amended standards. These 
measures are discussed further in the following section. For consumers 
in the aggregate, DOE also calculates the national NPV of the consumer 
costs and benefits expected to result from particular standards. DOE 
also evaluates the impacts of potential standards on identifiable 
subgroups of consumers that may be affected disproportionately by a 
standard.
b. Savings in Operating Costs Compared To Increase in Price (LCC and 
PBP)
    EPCA requires DOE to consider the savings in operating costs 
throughout the estimated average life of the covered product in the 
type (or class) compared to any increase in the price of, or in the 
initial charges for, or maintenance expenses of, the covered product 
that are likely to result from a standard. (42 U.S.C. 
6295(o)(2)(B)(i)(II)) DOE conducts this comparison in its LCC and PBP 
analysis.
    The LCC is the sum of the purchase price of a product (including 
its installation) and the operating cost (including energy, 
maintenance, and repair expenditures) discounted over the lifetime of 
the product. The LCC analysis requires a variety of inputs, such as 
product prices, product energy consumption, energy prices, maintenance 
and repair costs, product lifetime, and discount rates appropriate for 
consumers. To account for uncertainty and variability in specific 
inputs, such as product lifetime and discount rate, DOE uses a 
distribution of values, with probabilities attached to each value.
    The PBP is the estimated amount of time (in years) it takes 
consumers to recover the increased purchase cost (including 
installation) of a more-efficient product through lower operating 
costs. DOE calculates the PBP by dividing the change in purchase cost 
due to a more-stringent standard by the change in annual operating cost 
for the year that standards are assumed to take effect.
    For its LCC and PBP analysis, DOE assumes that consumers will 
purchase the covered products in the first year of compliance with new 
or amended standards. The LCC savings for the considered efficiency 
levels are calculated relative to the case that reflects projected 
market trends in the absence of new or amended standards. DOE's LCC and 
PBP analysis is

[[Page 105204]]

discussed in further detail in section IV.F of this document.
c. Energy Savings
    Although significant conservation of energy is a separate statutory 
requirement for adopting an energy conservation standard, EPCA requires 
DOE, in determining the economic justification of a standard, to 
consider the total projected energy savings that are expected to result 
directly from the standard. (42 U.S.C. 6295(o)(2)(B)(i)(III)) As 
discussed in section IV.H, DOE uses the NIA spreadsheet models to 
project NES.
d. Lessening of Utility or Performance of Products
    In establishing product classes, and in evaluating design options 
and the impact of potential standard levels, DOE evaluates potential 
standards that would not lessen the utility or performance of the 
considered products. (42 U.S.C. 6295(o)(2)(B)(i)(IV)) Based on data 
available to DOE, the standards adopted in this document would not 
reduce the utility or performance of the gas-fired instantaneous water 
heaters under consideration in this rulemaking.
e. Impact of Any Lessening of Competition
    EPCA directs DOE to consider the impact of any lessening of 
competition, as determined in writing by the Attorney General, that is 
likely to result from a standard. (42 U.S.C. 6295(o)(2)(B)(i)(V)) It 
also directs the Attorney General to determine the impact, if any, of 
any lessening of competition likely to result from a standard and to 
transmit such determination to the Secretary within 60 days of the 
publication of a proposed rule, together with an analysis of the nature 
and extent of the impact. (42 U.S.C. 6295(o)(2)(B)(ii)) To assist the 
Department of Justice (``DOJ'') in making such a determination, DOE 
transmitted copies of its proposed rule and the NOPR TSD to the 
Attorney General for review, with a request that the DOJ provide its 
determination on this issue. In its assessment letter responding to 
DOE, DOJ concluded that the proposed energy conservation standards for 
gas-fired instantaneous water heaters are unlikely to substantially 
lessen competition. DOE is publishing the Attorney General's assessment 
at the end of this final rule.
    In response to the July 2023 NOPR, Rinnai asserted that eliminating 
non-condensing gas-fired instantaneous water heaters from the market 
would create detrimental effects on competition by limiting consumer 
choice, raising prices on more efficient products, eliminating 
consumers' option to make like-for-like product replacements, all of 
which would place Rinnai at a disadvantage as a smaller competitor in a 
concentrated water heater market. (Rinnai, No. 1186 at p. 7) In 
response to the July 2024 NODA, Rinnai commented that the consumer 
water heater market is already a highly concentrated market with three 
dominant players, and that moving to a standard for gas-fired 
instantaneous water heaters that requires condensing technology would 
impede competition. (Rinnai, No. 1443 at p. 22)
    DOE recognizes the importance of competition in the marketplace. 
For this final rule, DOE reviewed its Compliance Certification 
Database,\32\ Air-Conditioning, Heating, and Refrigeration Institute's 
Directory of Certified Product Performance,\33\ California Energy 
Commission's Modernized Appliance Efficiency Database System,\34\ and 
the ENERGY STAR Product Finder dataset \35\ to ensure an up-to-date 
assessment of gas-fired instantaneous water heater manufacturers 
operating in the United States. Through its review, DOE identified 12 
OEMs of gas-fired instantaneous water heaters subject to more stringent 
standards under this rulemaking. All 12 OEMs already manufacture 
condensing gas-fired instantaneous water heaters. Of these 12 
manufacturers, 10 manufacturers, including Rinnai, manufacture products 
that meet the standards adopted in this final rule. Collectively, these 
10 OEMs offer 71 basic models (accounting for 51 percent of model 
listings and 60 percent of shipments in 2024) that meet the adopted 
level (TSL 2). Thus, a variety of companies already participate in the 
condensing gas-fired instantaneous water heater market. Comparatively, 
only eight OEMs currently manufacture non-condensing gas-fired 
instantaneous water heaters. See chapter 3 of the final rule TSD for a 
complete list of manufacturers of gas-fired instantaneous water 
heaters. Based on Rinnai's comments in response to the July 2023 NOPR, 
DOE understands that Rinnai's market share of non-condensing gas-fired 
instantaneous water heaters is 60 percent and their market share of 
condensing gas-fired instantaneous water heater sales is 20 percent. 
(Rinnai No. 1186 at p. 1) Given that all 12 manufacturers already offer 
condensing gas-fired instantaneous water heater products, DOE does not 
anticipate lessening of competition in the gas-fired instantaneous 
water heater market; which is estimated to represent 14 percent of the 
total consumer water heater market in 2030. As previously discussed, 
this conclusion is also supported by the DOJ's assessment letter.
---------------------------------------------------------------------------

    \32\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed July 19, 2024).
    \33\ Air-Conditioning, Heating and Refrigeration Institute's 
Directory of Certified Product Performance is available at https://ahridirectory.org/search/searchhome?Returnurl=%2f (last accessed 
July 23, 2024).
    \34\ California Energy Commission's Modernized Appliance 
Efficiency Database System is available at 
cacertappliances.energy.ca.gov/Pages/Search/AdvancedSearch.aspx 
(last accessed July 19, 2024).
    \35\ ENERGY STAR Product Finder is available at 
www.energystar.gov/productfinder (last accessed July 22, 2024).
---------------------------------------------------------------------------

f. Need for National Energy Conservation
    DOE also considers the need for national energy and water 
conservation in determining whether a new or amended standard is 
economically justified. (42 U.S.C. 6295(o)(2)(B)(i)(VI)) The energy 
savings from the adopted standards are likely to provide improvements 
to the security and reliability of the Nation's energy system. 
Reductions in the demand for electricity also may result in reduced 
costs for maintaining the reliability of the Nation's electricity 
system. DOE conducts a utility impact analysis to estimate how 
standards may affect the Nation's needed power generation capacity, as 
discussed in section IV.M of this document.
    DOE maintains that environmental and public health benefits 
associated with the more efficient use of energy are important to take 
into account when considering the need for national energy 
conservation. The adopted standards are likely to result in 
environmental benefits in the form of reduced emissions of air 
pollutants and GHGs associated with energy production and use. DOE 
conducts an emissions analysis to estimate how potential standards may 
affect these emissions, as discussed in section IV.K of this document; 
the estimated emissions impacts are reported in section V.B.6 of this 
document. DOE also estimates the economic value of emissions reductions 
resulting from the considered TSLs, as discussed in section IV.L of 
this document.
g. Other Factors
    In determining whether an energy conservation standard is 
economically justified, DOE may consider any other factors that the 
Secretary deems to be relevant. (42 U.S.C. 6295(o)(2)(B)(i)(VII)) To 
the extent DOE identifies any relevant information regarding

[[Page 105205]]

economic justification that does not fit into the other categories 
described previously, DOE could consider such information under ``other 
factors.''
2. Rebuttable Presumption
    As set forth in 42 U.S.C. 6295(o)(2)(B)(iii), EPCA creates a 
rebuttable presumption that an energy conservation standard is 
economically justified if the additional cost to the consumer of a 
product that meets the standard is less than three times the value of 
the first year's energy savings resulting from the standard, as 
calculated under the applicable DOE test procedure. DOE's LCC and PBP 
analyses generate values used to calculate the effect potential amended 
energy conservation standards would have on the PBP for consumers. 
These analyses include, but are not limited to, the 3-year PBP 
contemplated under the rebuttable-presumption test. In addition, DOE 
routinely conducts an economic analysis that considers the full range 
of impacts to consumers, manufacturers, the Nation, and the 
environment, as required under 42 U.S.C. 6295(o)(2)(B)(i). The results 
of this analysis serve as the basis for DOE's evaluation of the 
economic justification for a potential standard level (thereby 
supporting or rebutting the results of any preliminary determination of 
economic justification). The rebuttable presumption payback calculation 
is discussed in section IV.F of this final rule.

IV. Methodology and Discussion of Related Comments

    This section addresses the analyses DOE has performed for this 
rulemaking with regard to gas-fired instantaneous water heaters. 
Separate subsections address each component of DOE's analyses.
    DOE used several analytical tools to estimate the impact of the 
standards considered in this document. The first tool is a spreadsheet 
that calculates the LCC savings and PBP of potential amended or new 
energy conservation standards. The NIA uses a second spreadsheet set 
that provides shipments projections and calculates NES and NPV of total 
consumer costs and savings expected to result from potential energy 
conservation standards. DOE uses the third spreadsheet tool, the 
Government Regulatory Impact Model (``GRIM''), to assess manufacturer 
impacts of potential standards. These three spreadsheet tools are 
available on the DOE website for this rulemaking: www.regulations.gov/docket/EERE-2017-BT-STD-0019. Additionally, DOE used output from the 
latest version of the Energy Information Administration's (``EIA's'') 
Annual Energy Outlook (``AEO'') for the emissions and utility impact 
analyses.

A. Market and Technology Assessment

    DOE develops information in the market and technology assessment 
that provides an overall picture of the market for the products 
concerned, including the purpose of the products, the industry 
structure, manufacturers, market characteristics, and technologies used 
in the products. This activity includes both quantitative and 
qualitative assessments, based primarily on publicly-available 
information. The subjects addressed in the market and technology 
assessment for this rulemaking include: (1) a determination of the 
scope of the rulemaking and product classes, (2) manufacturers and 
industry structure, (3) existing efficiency programs, (4) shipments 
information, (5) market and industry trends, and (6) technologies or 
design options that could improve the energy efficiency of gas-fired 
instantaneous water heaters. The key findings of DOE's market 
assessment are summarized in the following sections. See chapter 3 of 
the final rule TSD for further discussion of the market and technology 
assessment.
1. Product Classes
    When evaluating and establishing or amending energy conservation 
standards, DOE establishes separate standards for a group of covered 
products (i.e., establish a separate product class) based on the type 
of energy used, or if DOE determines that a product's capacity or other 
performance-related feature justifies a different standard. (42 U.S.C. 
6295(q)) In making a determination whether a performance-related 
feature justifies a different standard, DOE considers such factors as 
the utility of the feature to the consumer and other factors DOE 
determines are appropriate. (Id.)
    EPCA, as amended by the National Appliance Energy Act (NAECA; Pub. 
L. 100-12), established initial energy conservation standards for 
consumer water heaters, expressed in EF, that were based on three 
product classes differentiated by fuel type: (1) gas-fired, (2) oil-
fired, and (3) electric. (42 U.S.C. 6295(e)(1)) These standards applied 
to consumer water heaters manufactured on or after January 1, 1990. 
Gas-fired instantaneous water heaters were, at the time, required to 
comply with the same EF standards as gas-fired storage water heaters 
because the standards were not differentiated by storage versus 
instantaneous water heaters.
    DOE subsequently amended these EF standards twice, most recently in 
the April 2010 Final Rule, with which compliance was required starting 
on April 16, 2015. 75 FR 20112. By the April 2010 Final Rule, DOE had 
further divided gas-fired consumer water heaters into product classes 
based on demand type (storage, instantaneous), storage volume, and 
input rate. While the April 2010 Final Rule had separate standards for 
gas-fired instantaneous water heaters and gas-fired storage water 
heaters, DOE did not adopt standards for gas-fired instantaneous water 
heaters with less than 50,000 Btu/h of input because, at that time, 
there were no such low-input gas-fired instantaneous water heaters 
available on the market. Id. at 75 FR 20127.
    Most recently, the December 2016 Conversion Factor Final Rule, 
published and effective on December 29, 2016, translated the EF-based 
standards to UEF-based standards. 81 FR 96204. In doing so, separate 
product classes were created for each of the four draw patterns (very 
small, low, medium, and high) in the UEF test procedure. However, due 
to concerns that the UEF test procedure would not apply to gas-fired 
instantaneous water heaters 2 gallons or larger at the time, DOE 
determined that the translated UEF-based standards would apply only to 
gas-fired instantaneous water heaters with less than 2 gallons of 
storage volume. Id. at 81 FR 96205. As a result, UEF-based standards 
were established only for gas-fired instantaneous water heaters with 
less than 2 gallons of storage volume and more than 50,000 Btu/h of 
input. Id. at 81 FR 96205. As discussed in the December 2016 Conversion 
Factor Final Rule, the standards established in EPCA do not define a 
minimum fuel input rate or maximum storage volume for gas-fired 
instantaneous water heaters; therefore, the original standards 
established by EPCA in terms of EF remained applicable to all gas-fired 
instantaneous water heaters without UEF-based standards. Id. at 81 FR 
96209-96211. The four product classes for which DOE has currently 
established UEF-based standards are summarized in table IV.1. The 
product classes without UEF-based standards, for which EF-based 
standards from EPCA apply, are shown in table IV.2.

[[Page 105206]]



  Table IV.1--Gas-Fired Instantaneous Water Heater Product Classes With
                       Current UEF-Based Standards
------------------------------------------------------------------------
                                     Rated storage
          Product type             volume and input      Draw patterns
                                        rating
------------------------------------------------------------------------
Instantaneous Gas-Fired Water     <2 gal and >50,000  Very Small.
 Heater.                           Btu/h.             Low.
                                                      Medium.
                                                      High.
------------------------------------------------------------------------


Table IV.2--Gas-Fired Instantaneous Water Heater Product Classes Without
                       Current UEF-Based Standards
------------------------------------------------------------------------
                                          Rated storage volume and input
             Product class                    rating (if applicable)
------------------------------------------------------------------------
Gas-fired Instantaneous................  <2 gal and <=50,000 Btu/h.
                                         >=2 gal.
------------------------------------------------------------------------

    In response to the July 2024 NODA, A.O. Smith noted that the 
conversion factor rulemaking did not establish a product class for gas-
fired instantaneous water heaters >=2 gallons and <=200,000 Btu/h. A.O. 
Smith noted that, while the intent of the December 2016 Conversion 
Factor Final Rule was to satisfy the requirements of AEMTCA, DOE is not 
statutorily required under EPCA to establish standards in terms of UEF 
for the entirety of this product class because some products meet the 
criteria for exclusion on account of being commercial equipment. (A.O. 
Smith, No. 1440 at p. 3) A.O. Smith claimed that the hot water delivery 
capacity, as a function of input capacity and storage volume, of a 
subset of products in the >=2 gallon, <=200,000 Btu/h proposed product 
class for gas-fired instantaneous water heaters includes equipment that 
would not be used or installed residentially and would only be suitable 
for commercial applications. A.O. Smith noted that equipment meeting 
the capacity ranges of the proposed product class already exist on the 
market and are exclusively used in commercial applications. (A.O. 
Smith, No. 1440 at pp. 3-4) A.O. Smith recommended that DOE re-evaluate 
the gas-instantaneous water heater product class structure and avoid 
prescribing a UEF test metric and standard for these water heaters 
where the UEF metric is inappropriate. A.O. Smith noted that EPCA's 
definition for commercial gas-fired instantaneous water heaters does 
not include a minimum input or volume limit and claimed that it does 
not prevent DOE from specifying a reasonable storage volume threshold 
for gas-fired instantaneous water heaters above which the product would 
be rated to commercial metrics and considered as commercial equipment. 
(A.O. Smith, No. 1440 at p. 4)
    As stated earlier, in the December 2016 Conversion Factor Final 
Rule, DOE determined that the translated UEF-based standards would 
apply only to gas-fired instantaneous water heaters with less than 2 
gallons of storage volume due to concerns at the time that the UEF test 
procedure would not apply to gas-fired instantaneous water heaters 2 
gallons or larger. 81 FR 96204, 96205. However, after conducting the 
market assessment for this rulemaking, DOE is now aware of multiple 
gas-fired instantaneous water heaters with 2 or more gallons of storage 
volume presently on the market. These products are specifically 
marketed for residential applications in publicly available product 
listings and literature.36 37 DOE is not aware of, nor has 
A.O. Smith provided, evidence suggesting that products in this product 
class are designed or marketed exclusively for commercial applications. 
As such, products in this size range have demonstrated residential use 
and therefore do not meet the requirement for exclusion from the UEF 
descriptor as specified at 42 U.S.C. 6295(e)(5)(F)(i).
---------------------------------------------------------------------------

    \36\ American Water Heaters. See the ProLine[supreg] XE 
Polaris[supreg] PG10-34-150-2NV 34-gallon ``Commercial-Grade 
Residential Gas Water Heater'' with 150,000 Btu input rate. 
Information available online at www.americanwaterheater.com/media/28107/nrgss03316.pdf (Last accessed Aug. 29, 2024).
    \37\ HTP. See the ``High Efficiency Crossover Floor Water 
Heater,'' with information provided to compare against typical 
residential 50-gallon gas-fired storage water heaters and tankless 
199,000 Btu/h gas-fired instantaneous water heaters. Information 
available online at www.htproducts.com/literature/mktlit-117.pdf 
(Last accessed Aug. 27, 2024).
---------------------------------------------------------------------------

    In response to the July 2023 NOPR, some stakeholders provided 
comments specific to the proposed standards for gas-fired instantaneous 
water heaters in reference to the ``unavailability provision'' found in 
EPCA, 42 U.S.C. 6295(o)(4). DOE indicated that these comments would not 
be addressed in the May 2024 Final Rule. 89 FR 37778, 37814. After 
further consideration of these comments DOE is addressing them in this 
final rule. Relatedly, DOE received a multitude of comments throughout 
this rulemaking pertaining to a potential product class structure that 
differentiates between non-condensing and condensing products.
    Per 42 U.S.C. 6295(o)(4), which outlines certain criteria for 
prescribing new or amended standards, the Secretary may not prescribe 
an amended or new standard under this section if the Secretary finds 
(and publishes such finding) that interested persons have established 
by a preponderance of the evidence that the standard is likely to 
result in the unavailability in the United States in any covered 
product type (or class) of performance characteristics (including 
reliability), features, sizes, capacities, and volumes that are 
substantially the same as those generally available in the United 
States at the time of the Secretary's finding. The failure of some 
types (or classes) to meet this criterion shall not affect the 
Secretary's determination of whether to prescribe a standard for other 
types (or classes).
    Briefly, condensing and non-condensing products differ in how 
efficiently they make use of flue gas heat. A baseline gas-fired 
instantaneous water heater relies on a single heat exchanger, which 
extracts heat energy from the flue gases and transfers it to the water 
being delivered to the consumer. However, these flue gases contain more 
heat energy than the baseline heat exchanger is able to extract and, as 
a result, much of the heat in the flue gases is lost as they are 
exhausted outdoors. Enhancements to the heat exchanger--including the 
use of a secondary heat exchanger--enable high-efficiency gas-fired 
instantaneous water heaters to extract much more of the energy 
available in the flue gases. When enough energy is extracted by the 
heat exchangers, the flue gases cool to the point where they begin to 
condense,

[[Page 105207]]

forming liquid condensate. This results in a significant rise in 
efficiency. See chapter 3 of the final rule TSD for further discussion 
of condensing heat exchangers.
    As noted in the comments submitted by NPGA, APGA, AGA, and Rinnai 
in response to the July 2023 NOPR, the UEF requirements for gas-fired 
instantaneous water heaters as proposed in the July 2023 NOPR would 
require condensing technology. (NPGA, APGA, AGA, and Rinnai, No. 441 at 
pp. 2-3) Rinnai contended that the proposed rule exceeds DOE's 
authority because it is in conflict with statutory provisions in EPCA, 
most notably the unavailability provision. Rinnai added that if the 
proposed rule were adopted, it would eliminate non-condensing tankless 
water heaters, one of its product offerings. (Rinnai, No. 1186 at p. 2) 
Rinnai further argued that DOE may not make non-condensing gas-fired 
instantaneous water heaters unavailable pursuant to the section 
6295(o)(4) of EPCA (the ``unavailability provision''). Rinnai cited to 
DOE's interpretation of the unavailability provision in a recent 
rulemaking for residential furnaces and commercial water heaters and 
suggested that DOE's interpretation of the provision is unduly narrow 
and not supported by the provision's plain language.\38\ (Rinnai, No. 
1186 at p. 9) Rinnai noted that there is no reference to ``consumer 
utility'' in the unavailability provision detailed in section 
6295(o)(4) of EPCA. Rinnai stated that, rather than relying on the 
plain language of section 6295(o)(4) itself, DOE's interpretation of 
the unavailability provision in section 6295(o)(4) of EPCA relies on 
reading section 6295(q) as a redundant companion provision to section 
6295(o)(4) and suggested there is no basis to do so. Rinnai added that 
this misinterpretation constitutes an evasion of the limits placed on 
DOE's authority by section 6295(o)(4) of EPCA. (Rinnai, No. 1186 at p. 
10)
---------------------------------------------------------------------------

    \38\ DOE finds the better reading of the term ``features'' in 
the unavailability provision (i.e., those features that cannot be 
eliminated by the establishment of a new or amended energy 
conservation standard) to be those features that provide a consumer 
unique utility during the operation of the appliance in performance 
of its major function(s). Stated another way, the ``features'' 
provision and the related utility of such features pertain to those 
aspects of the appliance with which the consumer interacts during 
the operation of the product (i.e., when the product is providing 
its ``useful output'') and the utility derived from those features 
during normal operation. 86 FR 73947, 73955.
---------------------------------------------------------------------------

    Rinnai stated that even if DOE's interpretation of the 
unavailability provision in section 6295(o)(4) of EPCA is taken as 
correct, non-condensing gas-fired instantaneous water heaters still 
provide utility because the consumer's operation of, or interaction 
with, the appliance necessarily depends on whether or not the appliance 
can be installed. Rinnai added that installation costs should be 
considered under the unavailability provision in section 6295(o)(4) of 
EPCA, not just as part of determining whether or not a standard is 
economically justified. (Rinnai, No. 1186 at pp. 10-11) Similarly, ONE 
Gas claimed that DOE's proposed standards for gas-fired instantaneous 
water heaters violate section 6295(o)(4) of EPCA because the 
unavailability provision is not only limited to product classes and 
types, but also certain performance characteristics including, 
features, reliability, sizes, capacities, and volumes within those 
product classes and types. ONE Gas asserted that DOE's association of 
customer utility with understanding of, and interaction with, the 
covered appliance is incorrect and is an overreach in interpretation of 
section 6295 of EPCA. (ONE Gas, No. 1200 at pp. 4-5)
    In response to the July 2024 NODA, Rinnai reiterated its position 
that non-condensing gas-fired instantaneous water heaters have useful 
and valuable features, including the ability to have like-for-like 
replacements, compatibility for easier and wider applications of 
installations, compatibility with non-condensing venting, smaller space 
requirements, and greater efficiency at lower cost than gas-fired 
storage water heaters. Rinnai claimed that there is no sound statutory 
basis for DOE's refusal to recognize that non-condensing gas-fired 
instantaneous water heaters have distinct features and characteristics 
from those of condensing gas-fired instantaneous water heaters that 
provide utility to consumers. Rinnai stated that DOE could instead 
establish separate standards for condensing and non-condensing gas-
fired instantaneous water heaters to recognize the different functions, 
capabilities, and installation requirements while preserving consumer 
choice, and therefore retain the increased energy efficiency standard 
for condensing gas-fired instantaneous water heaters. Rinnai requested 
that DOE run an analysis of this proposal with product substitution and 
other factors taken properly into account. (Rinnai, No. 1443 at pp. 4-
5)
    Regarding Rinnai's request for further analysis on product 
substitution, see section IV.F.10 of this document for further details.
    Regarding Rinnai's assertion that DOE's interpretation of the 
unavailability provision requires a redundant reading of 42 U.S.C. 
6295(q) to 42 U.S.C. 6295(o)(4), DOE notes that while these provisions 
are related, they are not redundant. EPCA provides DOE authority to 
establish product classes with different standard levels under 42 
U.S.C. 6295(q). Under this authority, DOE has to determine if a 
performance-related feature justifies a different standard, i.e., is 
worth preserving in the market, by considering, among other things, 
utility to the consumer. In contrast, for the performance 
characteristics, features, sizes, capacities, and volumes protected 
under the unavailability provision, Congress has already made the 
determination that they should be preserved in the market. DOE uses its 
authority under the product class provision at 42 U.S.C. 6295(q) to 
then ensure that these performance characteristics, features, sizes, 
capacities, and volumes are preserved in the market. Without the 
product class authority, DOE would have to set one standard for a 
covered product that preserves every aspect of a covered product 
protected under the unavailability provision. For example, larger 
capacity gas-fired storage water heaters are generally less-efficient 
than smaller capacity units because standby losses are higher for 
larger capacity storage tanks. As a result, the lower efficiency of the 
largest capacity models could limit DOE's ability to set standards 
under 42 U.S.C. 6295(o)(4). But 42 U.S.C. 6295(q) lets DOE set a more-
stringent standard for smaller capacity gas-fired storage water heaters 
that saves more energy and a less-stringent standard for larger 
capacity gas-fired storage water heaters that helps preserve their 
presence in the market. Finally, it is important to note that the 
product class provision is not just limited to implementing the 
unavailability provision. As the product class provision contemplates 
that the utility of some performance-related features to the consumer 
may not justify preservation in the market under a separate product 
class, it is clear that Congress intended this provision to apply to a 
larger set of performance-related features than would be protected 
under the unavailability provision.
    As for Rinnai's statement that there is no reference to ``consumer 
utility'' in the unavailability provision detailed in section 
6295(o)(4) of EPCA, Rinnai's own comment also cited a House of 
Representatives report that stated the purpose of the unavailability 
provision is to ensure that an amended standard does not deprive 
consumers of product choices and characteristics, features, sizes, 
etc., and that significant energy savings can be achieved without

[[Page 105208]]

sacrificing the utility of an appliance to a consumer. (Rinnai, No. 
1186 at pp. 10). Performance characteristics, features, sizes, 
capacities, and volumes all offer some utility or benefit to the 
consumer. To the extent that Rinnai is suggesting that the protection 
of the unavailability provision in EPCA should be extended to aspects 
of a covered product that offer no utility to a consumer during 
operation, like the less-efficient heat exchanger design of a non-
condensing gas-fired water heater, or whether the venting material is 
plastic or stainless steel, DOE strongly disagrees. Any interpretation 
of the unavailability provision not based on the assumption that 
Congress was concerned with preserving the utility of covered products, 
results in a regulatory framework where DOE is forced to create so many 
product classes that achieving any significant amount of energy savings 
is all but impossible.
    DOE also disagrees with Rinnai's contention that the specific 
provisions of the unavailability provision--performance characteristics 
(including reliability), features, sizes, capacities, and volumes--
should be read to also include, among other things, ``installation 
costs'' and ``greater efficiency at lower cost than gas-fired storage 
water heaters.'' Extending the unavailability provision to installation 
costs and efficiency is demonstrably an impossibly broad interpretation 
of what DOE is expected to preserve in the market under the 
unavailability provision. Efficiency is certainly a performance 
characteristic of a water heater as it measures how well a water heater 
performs its intended function. However, it would be nonsensical for 
efficiency to be a performance characteristic under the unavailability 
provision as the express purpose of the statute is to improve the 
energy efficiency of covered products and equipment, i.e., eliminate 
less-efficient products and equipment from the market. Furthermore, 
cost is certainly a feature of a product. Arguably, it is one of the 
most important features of a product to a consumer. But again, the 
energy-saving purposes of EPCA would be frustrated if DOE were required 
to set standards under the unavailability provision that maintain less-
energy-efficient covered products based solely on the fact that they 
cost less to install. Instead, EPCA expressly contemplates increases in 
the installed cost of a covered product or equipment in the economic 
justification analysis where DOE is directed to consider, among other 
things, the savings in operating costs compared to any increase in the 
initial and maintenance costs of a covered product. (42 U.S.C. 
6295(o)(2)(B)(i)(II)). At bottom, Rinnai's argument is that DOE may not 
eliminate one water-heating option (non-condensing gas instantaneous 
water heaters) if that option is cheaper to install than another, 
different option (condensing gas-fired instantaneous water heaters). 
But, Congress made it clear that kind of comparative assessment is to 
be done as part of the economic analysis and has no role under the 
unavailability provision. As discussed at length elsewhere in this 
document, DOE's economic analysis considers the extent to which its 
standards for gas-fired instantaneous water heaters will affect the 
market.
    Additionally, in determining whether a standard is economically 
justified under EPCA, DOE is directed, among other things, to consider 
any lessening of the utility or performance of the covered product 
likely to result from the standard. Thus, extending the unavailability 
provision to preserve any performance characteristic or feature would 
frustrate EPCA's purpose and statutory scheme. Simply put, EPCA 
requires DOE to adopt standards set at the maximum improvement in 
energy efficiency determined to be technologically feasible and 
economically justified. EPCA anticipates that new or amended energy 
conservation standards will result in the unavailability of certain 
inefficient technologies. An overly broad reading of the unavailability 
provision to include attributes of the covered product not addressed by 
the text of that provision (i.e., efficiency, costs, installation 
costs, etc.) would be at odds with the statute's energy-saving 
purposes. Similarly, DOE disagrees with reading other qualifiers into 
the unavailability provisions, including ``like-for-like replacements, 
compatibility for easier and wider applications of installations, 
compatibility with non-condensing venting, smaller space 
requirements.'' As discussed further below, an existing non-condensing 
gas-fired instantaneous water heater can always be replaced with a 
condensing gas-fired instantaneous water heater in the same place 
(i.e., it is always technically feasible).
    As discussed previously, DOE's interpretation of the unavailability 
provision does not require a redundant reading of 42 U.S.C. 6295(q). 
Instead, DOE interprets these two provisions as complementing one 
another. EPCA provides DOE some discretionary authority to establish 
product classes with different standard levels under 42 U.S.C. 6295(q). 
Under this authority, DOE has to determine if a performance-related 
feature justifies a different standard by considering, among other 
things, utility to the consumer. And based on DOE's own research as 
well as information presented in stakeholder comments, differences in 
cost or complexity of installation between different methods of venting 
(e.g., a condensing water heater versus a non-condensing water heater) 
do not make specific methods of venting a performance-related feature 
under 42 U.S.C. 6295(q)(1)(B), so as to justify separating the products 
into different product classes. In reaching this determination, DOE 
considered Category III venting (for non-condensing designs) and 
Category IV venting (for condensing designs), which are associated but 
external to the covered product, and concluded that condensing gas-
fired instantaneous water heaters can be installed in the same 
locations where non-condensing gas-fired water heaters are currently 
installed. As stated throughout this rulemaking, installation costs and 
considerations are very relevant to the establishment of energy 
conservation standards, and are accounted for in the LCC analysis to 
determine the economic justification of standards.
    Unlike specific methods of venting, a covered product's capacity is 
addressed under the unavailability provision in 42 U.S.C. 6295(o)(4), 
and described under the product class provision in 42 U.S.C. 
6295(q)(1)(B). DOE notes that a water heater's capacity provides 
utility to a consumer during use (unlike the type of venting or 
installation costs). For example, water heaters with higher capacities 
enable consumers to run multiple applications requiring hot water at 
the same time. Further, DOE is required to preserve the utility offered 
by larger capacity water heaters in the market under the unavailability 
provision in 42 U.S.C. 6295(o)(4). Unlike capacity, a lower 
installation cost has no effect on the performance of a water heater 
and offers no utility to a consumer during use. In addition to 
capacity, DOE has also established product classes for water heaters 
based on: volumes (e.g., a division at 2 gallons), input rating (e.g., 
a division at 50,000 Btu/h), delivery capacities (e.g., divisions for 
the very small, low, medium, and high usage patterns), and demand type 
(e.g., storage versus instantaneous); in addition to distinguishing by 
context and applications (e.g., consumer product versus commercial 
equipment) as well as fuel types (e.g., gas-fired, oil-fired, or

[[Page 105209]]

electric) as required under 42 U.S.C. 6295(q)(1)(A).
    APCA opposed DOE's proposed standards for gas-fired instantaneous 
water heaters because these standards would require condensing 
operation. (APCA, No. 1152 at p. 1) The Governor of Georgia commented 
that the proposed standards would limit consumer choice by reducing the 
availability of many non-condensing tankless water heaters currently on 
the market, negatively impact consumers through increased product 
costs, and contradict EPCA requirements. (Governor of Georgia, No. 1157 
at pp. 1-3)
    ONE Gas indicated that non-condensing/positive vent pressure gas-
fired instantaneous water heaters peak at approximately 0.82 UEF and 
that UEF ratings from 0.89 to 0.93 would be technologically infeasible 
for non-condensing products. (ONE Gas, No. 1200 at pp. 2-3) Huntsville 
Utilities expressed opposition to the proposed standards for gas-fired 
water heaters, adding that it is especially concerned with the proposed 
standards for gas-fired instantaneous water heaters that require an 
efficiency level over 91 percent, effectively eliminating the non-
condensing option for this product class. (Huntsville Utilities, No. 
1176 at p. 1) JEA, WMU, PGW, Southeast Gas, CEA, ASGE and ONE Gas 
stated that the proposed standard for gas-fired water heaters would 
effectively eliminate the option of a non-condensing instantaneous 
water heater and requested that DOE reassess the negative impacts on 
public gas utility customers and manufacturers of water heaters that 
would result from the proposed standard for gas-fired water heaters. 
(JEA, No. 865 at pp. 1-2; WMU, No. 872 at pp. 1-2; PGW, No. 886 at pp. 
1-2; Southeast Gas, No. 887 at pp. 1-2; CEA, No. 914 at pp. 1-2; ASGE, 
No. 976 at pp. 1-2; ONE Gas, No. 1200 at p. 2)
    The Gas Association Commenters expressed that the transition to 
condensing-level efficiencies for gas-fired instantaneous water heaters 
would result in the unavailability of products with what it considered 
to be performance characteristics and features provided by non-
condensing products. This group of commenters cited comments submitted 
by Rinnai, stating that non-condensing gas-fired instantaneous water 
heaters can be installed and used in cases where condensing products 
cannot be (e.g., in high-rise buildings, historically protected 
buildings, or any other building with complications to venting 
capabilities). According to EPCA, the Gas Association Commenters 
stated, DOE should decline to adopt the proposed standard for gas-fired 
instantaneous water heaters on the grounds that it would result in the 
unavailability of products with ``performance characteristics'' and 
``features'' currently available to consumers in the United States. 
(Gas Association Commenters, No. 1181 at p. 7)
    In response to these comments, DOE acknowledges that the standards 
for gas-fired instantaneous water heaters cannot be achieved by non-
condensing designs. Nevertheless, in response to comments from ONE Gas 
suggesting that the amended standards are technologically infeasible, 
condensing-level standards are still technologically feasible because 
condensing designs are widely available on the market. DOE has 
determined that non-condensing technology does not provide any inherent 
performance benefit to consumers beyond what is provided by condensing 
designs. Instead, as discussed previously in this section of this 
document, DOE has determined that non-condensing technology does not 
constitute a performance-related feature for which a separate product 
class must be established under EPCA, nor does non-condensing 
technology warrant preservation under the unavailability provision. 
Condensing gas-fired instantaneous water heaters can be installed in 
the same locations where non-condensing gas-fired water heaters are 
currently installed with proper consideration for the venting 
requirements of condensing water heaters. As discussed in section 
IV.F.2 of this document, the venting requirements of each type of water 
heater are considered in the analysis of installation costs. Moreover, 
DOE has not identified, nor have commenters provided, any specific 
examples of buildings that currently use gas-fired water heaters that 
cannot be retrofitted to accommodate a condensing gas-fired water 
heater in place of an existing non-condensing gas-fired water heater. 
DOE research indicates that historically protected buildings can be 
renovated with appropriate permitting from local jurisdictions.\39\ In 
the case of buildings preserved under the U.S. General Services 
Administration's stewardship program, HVAC renovations have increased 
energy and water efficiency.\40\ When a chimney is not used to vent the 
flue gases (such as when sidewall venting is used), venting 
terminations on the exterior of a building are visually unobtrusive--
far less prominent than outdoor units for air-conditioning systems that 
are often installed in privately-owned homes in historic districts. 
With respect to high-rise buildings, DOE has found that these buildings 
are uncommonly outfitted with consumer gas-fired instantaneous water 
heaters at present because these types of buildings more commonly rely 
on central domestic hot water production (i.e., commercial water 
heaters). This is because if consumer gas-fired instantaneous water 
heaters are centrally located in a multi-family building, they could 
require multiple long vents for flue gases and for combustion air, 
which can be generally prohibitive for both non-condensing and 
condensing products alike. However, even if gas-fired instantaneous 
water heaters are located in some high-rise buildings, they can be 
located near exterior walls, and therefore each unit can have separate 
venting. If high-rise buildings rely on non-condensing gas-fired 
instantaneous water heaters that are installed in each individual 
dwelling rather than in a central location, the building would already 
have venting in place (which would need to be modified to accommodate a 
condensing product, resulting in added installation cost, just as any 
other case). In general, as any gas-fired instantaneous water heater 
would already require venting to the outside, the existing non-
condensing venting can always be converted to condensing venting. These 
installation costs and considerations have been included in the 
quantitative factors of the analysis. See section IV.F.2 for details on 
how they are accounted for in the installation cost analysis and the 
development of LCC estimates. In summary, DOE has not found any cases 
where complications in venting cannot be overcome. As a result, DOE 
finds that interested persons have not established by a preponderance 
of the evidence that the standard is likely to result in the 
unavailability of gas-fired instantaneous water heaters in certain 
applications, e.g., high-rise buildings, historically protected 
buildings, or any other building with complications to venting 
capabilities. So, any argument that non-condensing gas-fired 
instantaneous

[[Page 105210]]

water heaters should be preserved in the market under 42 U.S.C. 
6295(o)(4) must be based on a performance characteristic (e.g., 
reliability), feature, size, capacity, or volume that is unique to non-
condensing gas-fired instantaneous water heaters.
---------------------------------------------------------------------------

    \39\ For example, the Historic Beacon Hill District in Boston, 
Massachusetts has an architectural commission to review proposed 
alterations to exterior architectural features within the district 
that are open to view from a public way. Guidelines for this 
district are provided by the City of Boston, available at: 
www.cityofboston.gov/images_documents/Beacon%20Hill%20Architectural%20Commission%20Guidelines_tcm3-17489.pdf (last accessed August 6, 2024).
    \40\ See, for example, the 2023 report by The Center for 
Historic Buildings, available at: www.gsa.gov/system/files/Stewardship2023_0.pdf (last accessed August 8, 2024).
---------------------------------------------------------------------------

    First, regarding reliability, as discussed in the March 2022 
preliminary analysis and the July 2023 NOPR, standards adopted at EL 2 
would result in a transition towards condensing technology for gas-
fired instantaneous water heaters (for those with less than 2 gallons 
of storage volume and more than 50,000 Btu/h of rated input) but would 
not result in the unavailability of reliably-performing products. (See 
chapter 2 of the preliminary analysis TSD; 88 FR 49058, 49079). 
Condensing gas-fired instantaneous water heaters have been on the 
market for many years. DOE has noted clusters of models at condensing 
efficiency levels as far back as the April 2010 Final Rule. (See table 
IV.11 at 75 FR 20112, 20145, which includes condensing technology at 
efficiency level 7). Over time, condensing models have only grown in 
popularity. Today, about two-thirds of gas-fired instantaneous water 
heater shipments are condensing products. Given this substantial market 
penetration, and the fact that a significant portion of these shipments 
are installed in replacement applications where the upfront cost is 
likely higher than for non-condensing products, and that DOE does not 
expect that consumers on a large scale would trade off efficiency for 
reliability, DOE concludes that condensing gas-fired instantaneous 
water heaters are likely to be just as reliable as non-condensing 
models--otherwise, they would not comprise more than half of nationwide 
shipments. See chapter 9 of the final rule TSD for more details on 
product shipments.
    Regarding sizes, capacities and volumes, gas-fired instantaneous 
water heaters are typically described in terms of capacity, i.e., Btu/
hr. Based on DOE's market assessment, gas-fired instantaneous water 
heaters that meet the adopted EL 2 efficiency are available over the 
full range of capacities up to the maximum input that is allowable by 
statute (200,000 Btu/h), and models on the market also offer modulating 
burners to meet reduced demands. Therefore, no sizes, capacities or 
volumes \41\ will be made unavailable as a result of DOE not separating 
product classes for non-condensing and condensing gas-fired 
instantaneous water heaters in this rule. As a result, DOE finds that 
interested persons have not established by a preponderance of the 
evidence that the standard is likely to result in the unavailability of 
any sizes, capacities, or volumes of gas-fired instantaneous water 
heaters that are substantially the same as those generally available in 
the market.
---------------------------------------------------------------------------

    \41\ Consumer gas-fired instantaneous water heaters often have 
little to no storage volume (i.e., can have 0 gallons of rated 
storage volume), however. These models are also referred to as 
``tankless.'' Hence volume of the gas-fired instantaneous water 
heater is not typically a consideration for most consumers, nor does 
it substantially affect the model's ability to deliver hot water on-
demand.
---------------------------------------------------------------------------

    DOE has found no sound statutory basis for interpreting ``size'' to 
refer to the physical dimensions or total installation footprint of a 
covered product. As technology advances, many products get smaller. 
Computers used to be the size of rooms and now they can fit in a 
pocket. Similarly, televisions, which are covered products under 42 
U.S.C. 6292(a)(12) and are typically referred to by screen size, have 
undergone significant technological advances over the past two decades 
as the market has shifted from cathode-ray-tube (CRT) televisions and 
rear-projection televisions to liquid-crystal-display (LCD) 
televisions. LCD televisions are a fraction of the physical size of a 
CRT television or rear-projection television for the same screen size. 
It would make little sense for the unavailability provision to require 
DOE to preserve CRT and rear-projection televisions in the market 
because they take up more space than an LCD television with the same 
screen size. As such, DOE views size, capacities, and volumes as 
product-specific terms that all refer to the same aspect of a covered 
product.
    Nonetheless, even if a smaller installation footprint is considered 
a performance characteristic or feature, interested persons have not 
established by a preponderance of the evidence that the standard is 
likely to result in the unavailability of gas-fired instantaneous water 
heaters with smaller installation footprints. Gas-fired instantaneous 
water heaters that only just meet the current standards (``baseline'' 
models) are designed with a combustion blower to help exhaust the flue 
gases and improve heat exchange. These designs use ``category III'' 
\42\ venting, which is a type of vent made for pressurized flue gases 
(such as those generated by a baseline gas-fired instantaneous water 
heater with a combustion blower). While category III venting is for 
non-condensing appliances, it is similar to category IV venting (used 
for condensing appliances) because both types handle pressurized flue 
gases from appliances with blowers. Condensing gas-fired instantaneous 
water heaters also use combustion blowers. The primary difference in 
the venting for these designs is the material that the vent is made of: 
category III vents handle higher temperatures and are therefore made of 
metal, whereas category IV vents have to be able to withstand corrosion 
from condensate but can be made of less expensive plastics due to the 
lower temperatures produced by condensing appliances (condensing 
appliances do not exhaust as much heat as non-condensing appliances do 
because condensing appliances are more effective at transferring the 
heat to the water). In a replacement scenario, the existing category 
III venting must be removed and replaced with category IV venting, 
however the new venting can utilize the existing vent run because both 
venting types operate with positive static pressure and can be 
configured horizontally or vertically. As a result, the installation 
footprint can be maintained when switching from a non-condensing to a 
condensing gas-fired instantaneous water heater. As discussed 
previously, the replacement of the venting will incur additional labor 
and material costs, but it is technically feasible. See section IV.F.2 
for further details on installation costs. See chapter 3 of the TSD for 
more details on venting types and baseline components and operation.
---------------------------------------------------------------------------

    \42\ In 2021, the National Fire Protection Association (NFPA) 
and American National Standards Institute (ANSI) published the NFPA 
54/ANSI Z223.1, ``National Fuel Gas Code.'' (NFPA 54-2021). Chapter 
3 of NFPA 54-2021 divides the ``vented appliance'' definition into 
four categories according to whether the appliance operates with 
positive or nonpositive static pressure in the vent and whether 
there is excessive condensate formation in the vent. NFPA 54-2021 
can be found online at: www.nfpa.org/codes-and-standards/nfpa-54-standard-development/54. (Last accessed December 4, 2024).
---------------------------------------------------------------------------

    For these reasons, DOE has concluded that interested persons have 
not established by a preponderance of the evidence that the standard is 
likely to result in the unavailability in the United States of gas-
fired instantaneous water heaters with performance characteristics 
(including reliability), features, sizes, capacities, and volumes that 
are substantially the same as those generally available in the United 
States. Additionally, DOE has determined that separate product classes 
for inefficient non-condensing technology and designs are not justified 
under 42 U.S.C. 6295(q)(1)(B).
    Lastly, DOE notes that the condensing-level standards adopted by 
this final rule do not apply to all gas-

[[Page 105211]]

fired instantaneous water heaters, but only those with less than 2 
gallons of storage volume and more than 50,000 Btu/h of rated input. 
While these products comprise the vast majority of gas-fired 
instantaneous water heaters, it is not the entirety. Further discussion 
of condensing standards for other gas-fired instantaneous water heaters 
is presented in section IV.C.2.b of this document.
2. Technology Options
    In the July 2023 NOPR market analysis and technology assessment, 
DOE identified several technology options initially determined to 
improve the efficiency of gas-fired instantaneous water heaters, as 
measured by the DOE test procedure. The technology options DOE 
identified are listed in table IV.3. These technology options pertain 
to gas-fired instantaneous water heaters with less than 2 gallons of 
stored volume and over 50,000 Btu/h of rated input. Technology options 
for other types of gas-fired instantaneous water heaters are largely 
similar; however, additional options may be used to complement the 
applications of those products. For example, gas-fired instantaneous 
water heaters with substantial storage volume may employ thicker 
insulation to improve UEF ratings by reducing standby losses. As 
discussed in section IV.C of this document, the engineering analysis 
for products with 2 or more gallons of storage volume and for products 
with less than 50,000 Btu/h of rated input consists of a ``crosswalk,'' 
i.e., a translation of existing standards from one metric (EF) to 
another (UEF). Because a crosswalk maintains the same stringency of 
standards, DOE has not completed an assessment of the market for 
technology options used to improve UEF in models subject to the 
translated standards. DOE will continue to monitor the market and 
assess the designs of these models as more information pertaining to 
UEF ratings becomes available.

       Table IV.3--Potential Technologies for Increasing Gas-Fired
                  Instantaneous Water Heater Efficiency
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Technology option
------------------------------------------------------------------------
Electronic ignition...........  Intermittent pilot ignition.
                                Intermittent direct ignition.
                                Hot surface ignition.
Improved burners..............  Condensing pulse combustion.
                                Power burner.
                                Reduced burner size (burner derating).
                               -----------------------------------------
                                Modulating burners....  Step modulating
                                                         burners.
                                                        Fully modulating
                                                         burners.
                               -----------------------------------------
Heat exchanger improvements...  Increased heat exchanger surface area.
                                Flue baffle.
                                Condensing technology.
Improved venting..............  Direct venting.
                                Concentric direct venting.
Improved controls.............  Modulating controls.
------------------------------------------------------------------------

B. Screening Analysis

    DOE uses the following five screening criteria to determine which 
technology options are suitable for further consideration in an energy 
conservation standards rulemaking:
    (1) Technological feasibility. Technologies that are not 
incorporated in commercial products or in commercially viable, existing 
prototypes will not be considered further.
    (2) Practicability to manufacture, install, and service. If it is 
determined that mass production of a technology in commercial products 
and reliable installation and servicing of the technology could not be 
achieved on the scale necessary to serve the relevant market at the 
time of the projected compliance date of the standard, then that 
technology will not be considered further.
    (3) Impacts on product utility. If a technology is determined to 
have a significant adverse impact on the utility of the product to 
subgroups of consumers, or result in the unavailability of any covered 
product type with performance characteristics (including reliability), 
features, sizes, capacities, and volumes that are substantially the 
same as products generally available in the United States at the time, 
it will not be considered further.
    (4) Safety of technologies. If it is determined that a technology 
would have significant adverse impacts on health or safety, it will not 
be considered further.
    (5) Unique-pathway proprietary technologies. If a technology has 
proprietary protection and represents a unique pathway to achieving a 
given efficiency level, it will not be considered further, due to the 
potential for monopolistic concerns.

10 CFR part 430, subpart C, appendix A, sections 6(a)(3)(iii) and 7(b).
    In sum, if DOE determines that a technology, or a combination of 
technologies, fails to meet one or more of the listed five criteria, it 
will be excluded from further consideration in the engineering 
analysis. The reasons for eliminating any technology are discussed in 
the following sections.
    The subsequent sections include DOE's evaluation of each technology 
option against the screening analysis criteria, and whether DOE 
determined that a technology option should be excluded (``screened 
out'') based on the screening criteria.
1. Screened-Out Technologies
    In the July 2023 NOPR, DOE screened out the following technology 
options pertaining to gas-fired instantaneous water heaters based on 
the previously described criteria: condensing pulse combustion and 
reduced burner size. 88 FR 49058, 49083. DOE did not modify its 
screening analysis in the July 2024 NODA or in this final rule 
analysis.
    Regarding condensing pulse combustion, DOE has determined it is not 
technologically feasible for the broader market and not likely to be 
practicable to manufacture, install, and service this technology on the 
scale necessary to serve the relevant market at the time of the 
effective date of this standard. Although condensing pulse

[[Page 105212]]

combustion technology shows promising results in increasing efficiency, 
it has not yet been demonstrated in any commercially-available consumer 
gas-fired instantaneous water heaters. Similar efficiencies are 
achievable with other technologies that have already been introduced on 
the market such that it is unlikely for manufacturing with condensing 
pulse combustion technology to be scaled up in the future. DOE screened 
out reduced burner size due to adverse impacts to consumer utility 
(because reducing the burner size reduces the amount of heat the water 
heater can provide). Further details of the screening analysis are 
provided in chapter 4 of the final rule TSD.
2. Remaining Technologies
    Through a review of each technology, DOE tentatively concludes that 
all of the other identified technologies listed in section IV.B.2 met 
all five screening criteria to be examined further as design options in 
DOE's final rule analysis. In summary, DOE did not screen out the 
following technology options:

                Table IV.4--Remaining Technology Options
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Technology option
------------------------------------------------------------------------
Electronic ignition...........  Intermittent pilot ignition.
                                Intermittent direct ignition.
                                Hot surface ignition.
Burner improvements...........  Power burner.
                               -----------------------------------------
                                Modulating burners....  Step modulating
                                                         burners.
                                                        Fully modulating
                                                         burners.
                               -----------------------------------------
Heat exchanger improvements...  Increased heat exchanger surface area.
                                Flue baffle.
                                Condensing technology.
Improved venting..............  Direct venting.
                                Concentric direct venting.
Improved controls.............  Modulating controls.
------------------------------------------------------------------------

    DOE determined that these technology options are technologically 
feasible because they are being used or have previously been used in 
commercially available products or working prototypes. DOE also finds 
that all of the remaining technology options meet the other screening 
criteria (i.e., practicable to manufacture, install, and service; do 
not result in adverse impacts on consumer utility, product 
availability, health, or safety; and do not utilize unique-pathway 
proprietary technologies). For additional details, see chapter 4 of the 
final rule TSD.

C. Engineering Analysis

    The purpose of the engineering analysis is to establish the 
relationship between the efficiency and cost of the product. There are 
two elements to consider in the engineering analysis: the selection of 
efficiency levels to analyze (i.e., the ``efficiency analysis''), and 
the determination of product cost at each efficiency level (i.e., the 
``cost analysis''). In determining the performance of higher-efficiency 
products, DOE considers technologies and design option combinations not 
eliminated by the screening analysis. For each product class, DOE 
estimates the baseline cost, as well as the incremental cost for the 
product/equipment at efficiency levels above the baseline. The output 
of the engineering analysis is a set of cost-efficiency ``curves'' that 
are used in downstream analyses (i.e., the LCC and PBP analyses and the 
NIA).
    As discussed in section IV.A.1 of this document, certain classes of 
gas-fired instantaneous water heaters currently have UEF-based 
standards, while for others EPCA's EF-based standards apply. For this 
rulemaking, DOE analyzed amended UEF standards for the product classes 
that currently have standards in terms of UEF. For the product classes 
with EF-based standards, DOE developed translated standards in terms of 
UEF for use in the analysis but did not analyze higher efficiency 
levels because, as discussed in section IV.C.2.b of this document, DOE 
does not currently have sufficient information to determine which 
higher efficiencies may be economically justified and result in 
significant national energy savings.
    DOE has analyzed standards with respect to the effective storage 
volume metric (as proposed in the July 2023 NOPR) to allow consistency 
between standards in different product classes. As outlined in the July 
2023 NOPR, there are two types of water heaters that can cause the 
system to store more energy than would be otherwise determined by the 
rated storage volume: (1) water heaters capable of operating with an 
elevated tank temperature, and (2) circulating water heaters.\43\ 88 FR 
49058, 49086. For water heaters that are not capable of storing water 
at elevated tank temperatures, including ``tankless'' models (e.g., 
products with current UEF-based standards), the effective storage 
volume is equivalent to the rated storage volume. However, some gas-
fired instantaneous water heaters can include smaller tanks (i.e., the 
product class for models with at least 2 gallons of storage volume), 
therefore the effective storage volume metric was determined to be 
useful for gas-fired instantaneous water heaters as well.
---------------------------------------------------------------------------

    \43\ As discussed in section III.B of this document, circulating 
gas-fired water heaters are storage-type water heaters that are 
outside the scope of this final rule.
---------------------------------------------------------------------------

    The product classes analyzed in this final rule and the respective 
analytical approaches utilized are listed in table IV.5.

[[Page 105213]]



             Table IV.5--Analysis Approach by Product Class
------------------------------------------------------------------------
                                    Distinguishing
                                    characteristics
  Product category analyzed in    (effective storage       Analysis
         this final rule           volume and input
                                        rating)
------------------------------------------------------------------------
Gas-fired Instantaneous Water     <2 gal and          Converting EF-
 Heater.                           <=50,000 Btu/h.     based standards
                                                       to UEF-based
                                                       standards.
                                  <2 gal and >50,000  Amending UEF-based
                                   Btu/h; All Draw     standards.
                                   Patterns.
                                  >=2 gal and         Converting EF-
                                   <=200,000 Btu/h.    based standards
                                                       to UEF-based
                                                       standards.
------------------------------------------------------------------------

1. Products With Current UEF-Based Standards
    DOE typically uses one of two approaches to develop energy 
efficiency levels for the engineering analysis: (1) relying on observed 
efficiency levels in the market (i.e., the efficiency-level approach), 
or (2) determining the incremental efficiency improvements associated 
with incorporating specific design options to a baseline model (i.e., 
the design-option approach). Using the efficiency-level approach, the 
efficiency levels established for the analysis are determined based on 
the market distribution of existing products (in other words, based on 
the range of efficiencies and efficiency level ``clusters'' that 
already exist on the market). Using the design option approach, the 
efficiency levels established for the analysis are determined through 
detailed engineering calculations and/or computer simulations of the 
efficiency improvements from implementing specific design options that 
have been identified in the technology assessment. DOE may also rely on 
a combination of these two approaches. For example, the efficiency-
level approach (based on actual products on the market) may be extended 
using the design option approach to interpolate to define ``gap fill'' 
levels (to bridge large gaps between other identified efficiency 
levels) and/or to extrapolate to the ``max-tech'' level (particularly 
in cases where the ``max-tech'' level exceeds the maximum efficiency 
level currently available on the market).
    In the July 2023 NOPR, DOE developed efficiency levels with a 
combination of the efficiency-level and design-option approaches. DOE 
conducted a market analysis of currently available models listed in 
DOE's Compliance Certification Database to determine which efficiency 
levels were most representative of the current distribution of gas-
fired instantaneous water heaters available on the market. DOE also 
completed physical teardowns of commercially available units to 
determine which design options manufacturers may use to achieve certain 
efficiency levels. DOE requested comments from stakeholders concerning 
these efficiency levels, which, in this final rule, are consistent with 
those analyzed in the July 2024 NODA.
a. Efficiency Levels
    For each product class, DOE generally selects a baseline model as a 
reference point for each class, and measures anticipated changes 
resulting from potential energy conservation standards against the 
baseline model. The baseline model in each product class represents the 
characteristics of a product typical of that class (e.g., capacity, 
physical size). Generally, a baseline model is one that just meets 
current energy conservation standards, or, if no standards are in 
place, the baseline is typically the most common or least efficient 
unit on the market. The maximum available efficiency level is the 
highest efficiency unit currently available on the market. DOE also 
defines a ``max-tech'' efficiency level to represent the maximum 
possible efficiency for a given product.
    In this final rule, DOE has analyzed the same efficiency levels as 
were considered in the July 2023 NOPR and the July 2024 NODA. These 
efficiency levels are presented in table IV.6. For each draw pattern, 
EL 2 corresponded with the levels proposed in the Joint Stakeholder 
Recommendation (``JSR'') as discussed in section II.B.2 of this 
document. See chapter 5 of the final rule TSD for further details 
regarding the efficiency level analysis.

             Table IV.6--Efficiency Levels for Products With Veff <2 gal, Rated Input >50,000 Btu/h
----------------------------------------------------------------------------------------------------------------
                                                                                UEF
                Efficiency level                 ---------------------------------------------------------------
                                                   Very small *        Low *          Medium           High
----------------------------------------------------------------------------------------------------------------
0 (Baseline)....................................            0.80            0.81            0.81            0.81
1...............................................   [dagger] 0.86   [dagger] 0.87            0.87            0.89
2 (JSR).........................................   [dagger] 0.89   [dagger] 0.91            0.91            0.93
3...............................................   [dagger] 0.90   [dagger] 0.92            0.92            0.95
4 (Max-Tech)....................................   [dagger] 0.91   [dagger] 0.93            0.93            0.96
----------------------------------------------------------------------------------------------------------------
* Only one brand has commercially-available products in the very small draw pattern and low draw pattern at the
  time of this analysis.
[dagger] DOE applied the differences in efficiency levels from the medium draw pattern to define the Efficiency
  Levels 1 through 4 for the very small draw pattern and the low draw pattern.

    In response to the July 2023 NOPR, ONE Gas stated that as 
efficiencies of non-condensing instantaneous gas water heaters have 
increased since their introduction, replacements would accrue 
efficiency gains and emissions reductions over the products when first 
introduced in the 2000s and now at the end of their predicted lives (20 
years according to the Department's analysis). (ONE Gas, No. 1200 at p. 
4)
    DOE agrees that efficiencies of gas-fired instantaneous water 
heaters have increased over time. In the present rulemaking, DOE 
considered the baseline efficiency of gas-fired instantaneous water 
heaters to be equivalent to the current standards. This efficiency was 
required as a result of the April 2010 Final Rule, which set standards 
at a level that typically corresponds to electronic ignition, larger 
non-condensing heat exchangers, and power venting. As shown in chapter 
3

[[Page 105214]]

of the final rule TSD, models are now able to achieve significantly 
higher efficiencies (e.g., condensing levels).
    With respect to efficiency level 2, Rinnai stated that DOE's 
proposed standard is not technically achievable by non-condensing gas-
fired instantaneous water heaters, and, accordingly, will make them 
obsolete. Rinnai noted that it had previously submitted comments on the 
July 2023 NOPR, stating that the proposed rule would eliminate one of 
Rinnai's two residential water heater product offerings and 
significantly impact Rinnai's tankless water heater sales and 
manufacturing facility. (Rinnai, No. 1443 at pp. 1-2)
    DOE has concluded that the efficiency levels analyzed in this 
rulemaking are technologically feasible for gas-fired instantaneous 
water heaters through the use of condensing heat exchangers, which are 
widely used in the market today. DOE understands Rinnai's concern 
regarding the elimination of less-efficient models impacting the 
manufacturer, and therefore these topics are addressed more in detail 
in section IV.J.3 of this document, which discusses MIA comments. After 
consideration of feedback from commenters, DOE is maintaining the 
efficiency levels provided in the July 2024 NODA.
b. Design Options
    Based on its teardown analyses and feedback provided by 
manufacturers in confidential interviews, DOE determined the technology 
options that are most likely to constitute the pathway to achieving the 
efficiency levels assessed. These technology options are referred to as 
``design options.'' While manufacturers may achieve a given efficiency 
level using more than one design strategy, the selected design options 
reflect what DOE expects to be the most likely approach (most likely to 
prove cost-effective) for the market in general in a standards-case 
scenario. Further details are provided in chapter 5 of the final rule 
TSD.
    DOE has found that gas-fired instantaneous water heaters are often 
differentiated based on heat exchanger and burner designs. Step-
modulating burners feature a manifold with multiple solenoids 
regulating the gas flow into the burner. Sections of the burner can be 
shut off or opened up as demand for hot water varies. Each additional 
open solenoid means another ``step up'' in heat input. By contrast, 
fully modulating burners make use of the full combustion chamber and 
heat exchanger surface area, modulating the input rate in tandem with 
the combustion blower. Such systems tend to be more complex than step-
modulating gas-fired instantaneous water heaters. In the March 2022 
Preliminary Analysis, DOE observed some manufacturers using fully 
modulating burners in lieu of step-modulating burners at the max-tech 
efficiency level. In the July 2023 NOPR, DOE analyzed an additional 
efficiency level, EL 3, that was close to the max-tech level, EL 4, and 
used generally similar design options. However, in the July 2024 NODA, 
upon further review DOE found products that meet EL 3 but not EL 4 
using step modulation. Thus, DOE tentatively determined that fully 
modulating burners are more likely to be implemented in only EL 4 
designs. In the July 2024 NODA, based on additional data collected in 
its analyses, DOE also surmised that EL 4 efficiencies could still be 
met without the use of fully modulating burners--i.e., relying mainly 
on improvements to the condensing heat exchanger. DOE stated that this 
result is consistent with the conclusion in the July 2023 NOPR because 
the pathway relying on heat exchanger improvements could be more cost-
effective for manufacturers to mass-produce designs at a scale 
necessary to meet national demand, therefore the Department expects 
that such designs may be more common if standards were to be set at EL 
4 than in the current market. As such, DOE analyzed EL 4 to be 
achievable using either step modulating or fully modulating burners, 
and the manufacturer production cost for EL 4 estimated in the July 
2024 NODA reflected an average of these design pathways. 89 FR 59692, 
59693-59694. Due to the uncertainty regarding which design pathway 
would be more prevalent in the case of standards set at the max-tech 
efficiency level, DOE raised the issue to seek additional information 
from interested parties on this topic.
    In response to the July 2024 NODA, AHRI disagreed with DOE's 
assessment that EL 3 and EL 4 can be achieved using step modulating 
burners. AHRI stated that fully modulating burners are required to 
achieve EL 3 and EL 4. AHRI claimed that fully modulating burners 
provide the precise control necessary to optimize combustion 
efficiency, minimize energy waste, and consistently achieve the higher 
performance levels associated with EL 3 and EL 4. AHRI claimed that 
this is supported by current market data, which shows that the vast 
majority of gas-fired instantaneous water heaters achieving high 
efficiency levels, particularly those with a UEF above 0.93, rely on 
fully modulating burners. AHRI claimed DOE's findings are not supported 
by the existing market landscape. AHRI urged DOE to consider performing 
a detailed review of the efficiency gains that can be realistically 
expected from step modulating versus fully modulating burners, as well 
as a comprehensive assessment of market data in order to support the 
claim that step-modulating burners can be used to achieve EL 3 and EL 
4. (AHRI, No. 1437 at pp. 1-2)
    Rinnai requested that DOE analyze and validate the assumptions 
regarding the feasibility of achieving EL 3 or EL 4 using step 
modulating burners, a change made in the July 2024 NODA. According to 
Rinnai, fully modulating burners consistently achieve EL 3 and EL 4, 
which the July 2024 NODA now contradicts. (Rinnai, No. 1443 at p. 23)
    Rheem disagreed with the design options for EL 3 and EL 4 as 
described in the July 2024 NODA, claiming that step modulation was not 
reflected in the MPCs. Rheem indicated that there are currently no 
models utilizing step modulating burners on the market that meet EL 4. 
In addition, Rheem stated that, while there are step modulating designs 
currently on the market that meet EL 3, some are complex down-fired 
designs that were not reflected in the technology options discussed in 
the NOPR TSD. Finally, Rheem questioned whether traditional step 
modulating designs can meet EL 3 at all input rates. (Rheem, No. 1436 
at p. 2)
    A.O. Smith stated that DOE's engineering analysis should reflect 
the technologies and design pathways currently available on the market 
and avoid making speculative assumptions regarding cost and performance 
of theoretical designs which have not been fully vetted or proven to be 
market ready and emphasized that the use of theoretical design pathways 
is more prone to inaccurate or incomplete cost estimates. (A.O. Smith, 
No. 1440 at pp. 5-6)
    BWC agreed that designs utilizing step modulating burners can 
achieve EL 4, but stated that manufacturers do not widely design their 
products in this way due to their increased complexity, which 
correlates with reduced product lifetimes. Additionally, the 
manufacturer stressed that added product complexity would entail more 
specialized manufacturing processes, leading to additional costs passed 
on to consumers. (BWC, No. 1441 at pp. 1-2) BWC further stated that for 
products achieving EL 4 efficiencies with the use of step modulating 
burners the increased complexity of step modulating burners would make

[[Page 105215]]

products more difficult to efficiently mass produce, requiring the 
development of more specialized manufacturing processes. BWC stated 
that this would lead to increased production costs that may be passed 
on to consumers. (BWC No. 1441 at p. 2)
    To clarify, DOE bases its assignment of design options not only on 
publicly available product literature, but also on its independent 
analysis of teardown samples. DOE combines this information to 
determine what the most cost-effective pathway to increasing efficiency 
may be.
    With respect to burner configuration (i.e., up-fired vs. down-
fired), DOE notes that it has not found evidence to suggest that the 
configuration itself lends to improvements in UEF. Although the topic 
was discussed, burner configuration was not attributed as a design 
option to improve the efficiency of commercial gas-fired instantaneous 
water heaters in DOE's recent rulemaking pertaining to standards for 
that equipment.\44\ Traditional designs of consumer gas-fired 
instantaneous water heaters utilize an ``up-fired'' approach where the 
burner is located at the bottom and directs the flame upwards through a 
heat exchanger above it. This configuration is the natural choice for 
product lines that used buoyancy to vent the flue gases away because 
the hot flue gases can rise through the heat exchanger and exit through 
the vent. However, baseline models today utilize power burners with 
blowers to expel the flue gases without the need for buoyancy to move 
these gases out. Because of this, designs are no longer limited to up-
fired configurations. Down-fired configurations--where the burner and 
blower are located above the heat exchanger--may be preferred by some 
manufacturers due to this design's natural ability to manage condensate 
in condensing models. In a down-fired configuration, gravity allows the 
condensate to collect at a receiver near the secondary (condensing) 
heat exchanger because, in this configuration, the condensing heat 
exchanger is towards the bottom of the water heater. Teardown samples 
show that both firing configurations are used in condensing models 
today. As such, DOE finds that the burner configuration is likely the 
manufacturer's preference rather than an inherent benefit to 
efficiency. See chapters 3 and 5 of the final rule TSD for more 
details.
---------------------------------------------------------------------------

    \44\ See chapter 5 of the TSD to the October 2023 commercial 
water heater standards final rule, available online at: 
www.regulations.gov/document/EERE-2021-BT-STD-0027-0038.
---------------------------------------------------------------------------

    Where DOE has found a correlation between down-fired configurations 
and UEF is in the implementation of fully modulating burners. Down-
fired configurations tend to have higher UEF ratings because fully 
modulating burners are typically always down-fired. This may be 
because, as discussed further in the following paragraphs, fully 
modulating burners require different manufacturing equipment and 
production lines. For example, if a manufacturer is designing a new 
production line for models with fully modulating burners, there may be 
an opportunity to implement a down-fired design for the condensate. 
However, the research and teardown analyses conducted by DOE did not 
yield evidence to suggest that the down-fired configuration causes an 
increase in UEF without the implementation of a fully modulating 
burner. Hence DOE maintains that the pathway to increasing efficiencies 
up to the max-tech level includes incorporating fully modulating burner 
designs, which happen to be down-fired. For condensing efficiency 
levels below the max-tech level, DOE's teardown analyses indicate that 
there would not be a significant difference in MPC between a down-fired 
design and an up-fired design, all else the same. Therefore, DOE has 
not directly analyzed the incorporation of down-fired burners as a 
design option in this engineering analysis except where fully 
modulating burners are used.
    With respect to the burner modulation type, DOE agrees that fully 
modulating burners are capable of achieving higher efficiencies, 
including those from EL 1 through EL 4. However, in its teardowns, DOE 
identified samples of gas-fired instantaneous water heaters currently 
on the market meeting the efficiencies as high as EL 3 using step-
modulating burners. Additionally, the comments from Rheem implicitly 
provide that fully modulating designs are associated with higher costs 
compared to step-modulating designs, which may be a reason step-
modulating burners are still commonly used at higher efficiencies. 
DOE's teardown analyses verify this understanding--fully modulating 
burners use more advanced components that cause MPCs to rise 
commensurately. Responding to the comments from BWC, DOE understands 
that a production line built to manufacture step-modulating burners 
would have additional equipment that a fully modulating burner 
production line would not require. For example, manufacturers typically 
need additional metal presses and/or dies to stamp the compartments of 
a step-modulated burner and combustion chamber. Each manufacturer has 
the ability to choose which type of burner to implement in its designs, 
taking into consideration the pros and cons of each approach (e.g., 
step-modulating burners may cost less overall, but have a trade-off in 
that they require more equipment to manufacture). The availability of 
step-modulating burners at various efficiency levels strongly suggests 
that manufacturers do opt to use this pathway despite the added 
complexity of the production line.
    As stated earlier, DOE aims to identify the most cost-effective and 
likely pathway to achieving higher efficiency levels. The cost-
efficiency curves serve as estimates for what the overall market--not 
just one manufacturer--would experience in a scenario where standards 
are set to that efficiency levels. In the July 2024 NODA, DOE 
tentatively determined that the continued use of step-modulating 
burners, along with heat exchanger improvements, would be the most 
cost-effective pathway to achieve EL 3. Then, to reach EL 4, fully 
modulating burners may have similar cost-effectiveness such that 
manufacturers could opt to use either a step-modulating burner with an 
even larger heat exchanger or a fully modulating burner at this level.
    DOE once again reviewed its teardowns and online product literature 
to assess how different manufacturers implement step-modulating and 
fully modulating burner designs, as suggested by AHRI. To Rheem's 
point, DOE once again found that step-modulating designs on the market 
today can achieve EL 3 and can span the full range of capacities (up to 
200,000 Btu/h), as described in chapter 5 of the final rule TSD. While 
there may be some cases of product lines not reaching EL 3 across the 
full span of capacities, DOE believes these discrepancies in efficiency 
can be addressed by improving the heat exchanger (and the added costs 
of doing so are included in DOE's estimates of MPCs). Considering this, 
the Department has confirmed that the design option pathway to EL 3 
could be more cost-effective using step-modulating burners.
    DOE also found that, although step-modulating designs would be 
capable of meeting EL 4 (as BWC indicated), more manufacturers use 
fully-modulating burners at EL 4. To determine whether step-modulating 
burners would be appropriate to consider for EL 4, DOE evaluated the 
comments from manufacturers regarding manufacturing complexity. 
Currently, approximately only 8 percent of shipments currently

[[Page 105216]]

meet EL 4. In a standards-case-scenario, manufacturers would have to 
significantly ramp up production capacity such that 100 percent of 
models sold in the U.S. would meet that efficiency level. The comments 
from multiple manufacturers serve as a strong indication that, in a 
standards-case-scenario where production capacity for these high-
efficiency models would have to be multiplied, it is more realistic to 
expect designs to use fully modulating burners to simplify the 
production process. Hence, DOE agrees with commenters indicating that 
fully modulating burners are more appropriate for EL 4.
    As a result, the design options analyzed in this final rule are 
listed in table IV.7.

  Table IV.7--Design Options for Gas-Fired Instantaneous: Veff <2 Gal,
                        Rated Input >50,000 Btu/h
------------------------------------------------------------------------
          EL                             Design options
------------------------------------------------------------------------
0....................  Step modulating burner; Non-condensing tube-and-
                        fin heat exchanger.
1....................  Step modulating burner; Condensing tube heat
                        exchanger.
2....................  Step modulating burner; Larger condensing heat
                        exchanger.
3....................  Step modulating burner; Larger, flat plate
                        condensing heat exchanger.
4....................  Fully modulating burner; Larger condensing heat
                        exchanger.
------------------------------------------------------------------------

c. Cost Analysis
    The cost analysis portion of the engineering analysis is conducted 
using one or a combination of cost approaches. The selection of cost 
approach depends on a suite of factors, including the availability and 
reliability of public information, characteristics of the regulated 
product, the availability and timeliness of purchasing the product on 
the market. The cost approaches are summarized as follows:
     Physical teardowns: Under this approach, DOE physically 
dismantles a commercially available product, component-by-component, to 
develop a detailed bill of materials for the product.
     Catalog teardowns: In lieu of physically deconstructing a 
product, DOE identifies each component using parts diagrams (available 
from manufacturer websites or appliance repair websites, for example) 
to develop the bill of materials for the product.
     Price surveys: If neither a physical nor catalog teardown 
is feasible (e.g., for tightly integrated products such as fluorescent 
lamps, which are infeasible to disassemble and for which parts diagrams 
are unavailable), cost-prohibitive, or otherwise impractical (e.g., 
large commercial boilers), DOE conducts price surveys using publicly 
available pricing data published on major online retailer websites and/
or by soliciting prices from distributors and other commercial 
channels.
    In the present case, DOE conducted the analysis using a combination 
of the physical and catalog teardown approaches to develop estimates of 
the manufacturer production cost (``MPC'') at each UEF efficiency level 
analyzed. Data from the teardowns were used to create bills of 
materials (``BOMs'') that capture all of the materials, components, and 
manufacturing processes necessary to manufacture products at various 
efficiency levels spanning the full range of efficiencies from the 
baseline to max-tech. DOE used the BOMs along with publicly available 
material and component cost data as the basis for estimating the MPCs. 
DOE refined its cost estimates and its material and component cost data 
based on feedback received during confidential manufacturer interviews 
conducted during this rulemaking.
    To perform this analysis, DOE selects representative capacities for 
each product class. These capacities reflect the most common or average 
size of a gas-fired instantaneous water heater in that product class, 
and this step is important because the MPC is dependent upon the size 
of the water heater--water heaters with higher input rates cost more to 
manufacture. In the July 2023 NOPR and July 2024 NODA, DOE analyzed 
input rates of 120,000 Btu/h and 199,000 Btu/h as representative 
capacities for the medium and high draw patterns, respectively. DOE has 
determined that these capacities remain representative in this final 
rule. Based on the results of the market assessment, DOE has determined 
that there are very few models in the low draw pattern, with only one 
manufacturer making these products. There are no very small draw 
pattern gas-fired instantaneous water heaters greater than 50,000 Btu/h 
in input rating. DOE's teardown analyses have shown that the design 
option pathways and manufacturer production cost versus efficiency 
curves are generally similar for all tankless gas-fired instantaneous 
water heaters, such that the results from a direct analysis of the 
medium and high draw patterns would be representative for the very 
small and low draw patterns as well. Thus, the very small and low draw 
patterns were not directly analyzed product classes in this final rule.
    Rheem stated that the incremental MPCs from EL 2 to EL 3 and from 
EL 3 to EL 4 are too low, and do not adequately capture the higher 
costs associated with the new step modulation or fully modulating 
burner systems. Furthermore, Rheem reiterated its comment in response 
to the July 2023 NOPR that the incremental retail cost between step 
modulating and fully modulating gas-fired instantaneous water heater 
designs is 50 percent lower than expected. (Rheem, No. 1436 at pp. 2-3)
    As described in section IV.C.1.b, DOE determined that the burner 
design options for EL 3 and EL 4 would be step-modulating burners and 
fully modulating burners, respectively. The July 2024 NODA assumed that 
only a fraction of the market would switch to fully modulating burners 
at EL 4, and, therefore, the incremental cost increase reflected an 
average of some manufacturers retaining the step-modulating burner (no 
additional burner cost) and some manufacturers switching to fully 
modulating burners (significant additional burner cost). As a result, 
the incremental MPC between EL 3 and EL 4 in the July 2024 NODA 
averaged out to be lower than the estimated total cost of switching to 
a fully modulating burner. In this final rule analysis, DOE assumes 
that all models at EL 4 would utilize fully modulating burners. Hence, 
the MPCs at EL 4 are increased to reflect this change in design 
pathway, and this would in turn increase the incremental retail cost 
between EL 3 and EL 4.
    See chapter 5 of the final rule TSD for additional details.
d. Shipping Costs and Manufacturer Selling Price
    As discussed in the July 2024 NODA, DOE similarly maintained the 
methodology for shipping costs from the July 2023 NOPR (see 88 FR 
49058, 49095-49096). DOE updated the cost per trailer using the most 
recent data available. 89 FR 59692. Because many

[[Page 105217]]

gas-fired instantaneous water heaters sold in the United States are 
manufactured overseas, these shipping costs include the cost of 
shipping products from overseas to the United States, and then from the 
coast to the middle of the country.
    A.O. Smith stated that DOE does not account for the increase in 
downstream shipping costs at EL 3 and EL 4 that would result from 
incorporating larger heat exchangers into consumer gas fired 
instantaneous water heaters. (A.O. Smith, No. 1440 at pp. 5-6)
    DOE agrees that larger heat exchangers would increase the product 
footprint. In some cases, this causes fewer units to fit in a container 
or trailer, thereby increasing the per-unit outbound shipping cost to 
manufacturers. To determine how many units would fit, DOE assumed 
standard trailer dimensions and a nearly full truckload configuration 
(see chapter 5 of the final rule TSD for details). In DOE's shipping 
cost calculation, the maximum units that can fit is based not only on 
the size of each unit, but also the possible orientations that boxes 
can be loaded in with. Per DOE's analysis, the same number of units 
could fit in one load whether the model is an EL 3 design or a slightly 
larger EL 4 design. As a result, the shipping costs are estimated to be 
the same at these two efficiency levels.
    To account for manufacturers' non-production costs and profit 
margin, DOE applies a multiplier (the manufacturer markup) to the MPC. 
The resulting manufacturer selling price (``MSP'') is the price at 
which the manufacturer distributes a unit into commerce. DOE developed 
an average manufacturer markup by examining the annual Securities and 
Exchange Commission (``SEC'') 10-K \45\ reports filed by publicly 
traded manufacturers that produce gas-fired instantaneous water 
heaters, the manufacturer markups from the April 2010 Final Rule, and 
feedback from confidential manufacturer interviews. 75 FR 20112. See 
section IV.J.2.d of this document and chapter 12 of the final rule TSD 
for additional detail on the manufacturer markup.
---------------------------------------------------------------------------

    \45\ U.S. Securities and Exchange Commission. Company Filings. 
Available at www.sec.gov/search-filings (last accessed August 7, 
2024).
---------------------------------------------------------------------------

e. Cost-Efficiency Results
    The results of the engineering analysis are reported as cost-
efficiency data in the form of MPCs and shipping costs calculated for 
each efficiency level of each product class for which DOE is proposing 
amended UEF-based standards. As discussed previously, DOE determined 
these costs by developing BOMs based on a combination of physical and 
catalog teardowns and using information in the BOMs along with 
component and material price data to estimate MPCs. As discussed in 
section IV.C.1.c of this document, the very small and low draw patterns 
were not directly analyzed due to the low number of basic models 
identified in these draw patterns during the market and technology 
assessment. However, as shown in section IV.C.1.a of this document, 
higher efficiency levels of the very small and low draw pattern product 
classes continue to be assessed. Further evaluation of the economic 
justification of potential amended standards for gas-fired 
instantaneous water heaters (all models with Veff<2 gal and 
rated input >50,000 Btu/h) is based on the understanding that the 
medium and high draw pattern results are representative of the overall 
market given the very low shipments of very small and low draw pattern 
models. The results of the engineering analysis, in 2023 dollars, are 
summarized in table IV.8.

                      Table IV.8--Engineering Analysis Results for Gas-Fired Instantaneous: Veff <2 Gal, Rated Input >50,000 Btu/h
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    UEF
                           ----------------------------------------------------
            EL                                           Medium        High           MPC (2023$)              MSP (2023$)           Shipping (2023$)
                             Very small      Low      120,000 Btu/ 199,000 Btu/
                                                           h            h
--------------------------------------------------------------------------------------------------------------------------------------------------------
0 (Baseline)..............          N/A          N/A         0.81         0.81  Med: 310.51 High:        Med: 450.24 High:        Med: 4.52 High: 7.63.
                                                                                 327.89.                  475.44.
1.........................          N/A          N/A         0.87         0.89  Med: 441.74 High:        Med: 640.52 High:        Med: 7.07 High: 9.49.
                                                                                 461.02.                  668.48.
2 (JSR)...................          N/A          N/A         0.91         0.93  Med: 445.63 High:        Med: 646.16 High:        Med: 10.17 High:
                                                                                 466.00.                  675.71.                  11.45.
3 (E *)...................          N/A          N/A         0.92         0.95  Med: 451.39 High:        Med: 654.52 High:        Med: 10.17 High:
                                                                                 473.22.                  686.17.                  11.45.
4 (Max tech)..............          N/A          N/A         0.93         0.96  Med: 490.04 High:        Med: 710.56 High:        Med: 10.17 High:
                                                                                 514.99.                  746.74.                  11.45.
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Products Without Current UEF-Based Standards

    In the December 2016 Conversion Factor Final Rule, DOE established 
that EF-based standards as established by EPCA are applicable to 
consumer water heaters but would not be enforced until conversion 
factors and converted standards are adopted. 81 FR 96204, 96209-96211. 
To convert these EF-based standards to UEF-based standards, DOE first 
developed conversion factors that convert tested values measured under 
the DOE test procedure in effect prior to the July 2014 TP Final Rule 
(which produces the EF metric) to values found under the current DOE 
test procedure (which produces the UEF metric). DOE then applied these 
conversion factors to representative baseline models and derived the 
UEF-based energy conservation standards from the resulting UEF values.
    For the July 2023 NOPR, DOE applied a similar methodology to 
translate from minimum efficiency levels denominated in EF to those in 
UEF for classes of covered consumer water heaters that do not yet have 
UEF-based standards. 88 FR 49058, 49098. The translated standards for 
gas-fired instantaneous water heaters are shown in table IV.9. These 
efficiencies all correspond to non-condensing operation.

[[Page 105218]]



               Table IV.9--Translated UEF-Based Energy Conservation Standards for Product Classes Without Established UEF-Based Standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Product class                    Nominal input          Effective storage volume            Draw pattern             Uniform energy factor
--------------------------------------------------------------------------------------------------------------------------------------------------------
Instantaneous Gas-fired Water Heater.  <=50,000 Btu/h..........  <2 gal.......................  Very Small..................                       0.64
                                                                                                Low.........................                       0.64
                                                                                                Medium......................                       0.64
                                                                                                High........................                       0.64
                                       <=200,000 Btu/h.........  >=2 gal......................  Very Small..................     0.2534-(0.0018 x Veff)
                                                                                                Low.........................     0.5226-(0.0022 x Veff)
                                                                                                Medium......................     0.5919-(0.0020 x Veff)
                                                                                                High........................     0.6540-(0.0017 x Veff)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In the July 2023 NOPR, DOE proposed to adopt these translated 
standards and reiterated that the stringency of the standards is not 
increasing as a result of the conversion. 88 FR 49058, 49098-49100.
a. Crosswalk to Equivalent-Stringency UEF-Based Standards
    In the July 2023 NOPR, DOE requested feedback regarding the 
appropriateness of the proposed converted UEF-based standards and 
whether products on the market can meet or exceed the proposed levels. 
88 FR 49058, 49100.
    The Gas Association Commenters stated that DOE did not justify the 
proposed new standards for gas-fired instantaneous water heaters that 
are <2 gallons and <50,000 Btu/h or greater than or equal to 2 gallons. 
In its comments, the Gas Association Commenters interpreted the 
economic analysis performed for gas-fired instantaneous water heaters 
that are <2 gallons and >50,000 Btu/h as being treated as 
representative for all gas-fired instantaneous water heater standards 
being proposed in the July 2023 NOPR. These commenters noted that DOE 
tentatively concluded these product classes are different enough to 
warrant separate standards, but that there was no economic 
justification provided for the two product categories remaining at non-
condensing efficiency levels. Citing the statutory requirement for any 
new or amended energy conservation standards to be technologically 
feasible and economically justified, the Gas Association Commenters 
recommended that DOE modify its approach. (Gas Association Commenters, 
No. 1181 at p. 8)
    EPCA directed DOE to establish a uniform efficiency descriptor to 
be used to regulate all covered water heaters, with certain exceptions 
for water heaters used only in commercial applications. (42 U.S.C. 
6295(e)(5)) Therefore, DOE has conducted this analysis in satisfaction 
of its statutory obligation to delineate standards for all consumer 
water heaters, including gas-fired instantaneous water heaters, in 
terms of UEF. Because the statute requires that the UEF-based standards 
for these product classes reflect the same stringency as the statutory 
EF-based standards that are currently applicable--i.e., these are not 
standards that would require higher efficiency to comply--it is not 
necessary for DOE to conduct an assessment of energy savings or 
economic justification prior to proposing such standards. (42 U.S.C. 
6295(e)(5)(E)(iii) For example, the translated UEF standards can be met 
by non-condensing models and products with standing pilot lights as 
well. The Department believes that the Gas Association Commenters may 
have misinterpreted the analysis for product classes with current UEF-
based standards as also applying to these product classes which have 
EF-based standards. To reiterate, these standards are not being 
established pursuant to EPCA provisions at 42 U.S.C. 6295(o)(A), but 
instead in accordance with those at 42 U.S.C. 6295(e)(5). Additionally, 
the statutory EF-based standards are provided within EPCA and do not 
require separate justification to adopt these stringencies. 89 FR 
37778, 37845.
b. Consideration of More Stringent Standards
    In the July 2023 NOPR, DOE also requested information and data 
regarding the UEF of products within these product classes if they are 
found to generally exceed the proposed levels. 88 FR 49058, 49100.
    Some commenters identified a need to consider more stringent 
standards for gas-fired instantaneous water heaters with less than 
50,000 Btu/h of input, discussed as follows.
    A.O. Smith indicated that simultaneous establishment of baseline 
UEF levels for converted product classes while increasing the standard 
levels for existing product classes creates a scenario where new 
products may emerge, and shipments may shift from product classes with 
more stringent standards to very similar products in new product 
classes with less stringent standards. (A.O. Smith, No. 1182 at p. 14) 
A.O. Smith identified that product classes for <2 gallon and <50,000 
Btu/h gas-fired instantaneous water heaters and >=2 gallon and 
<=200,000 Btu/h gas-fired instantaneous water heaters with non-
condensing standard levels are likely to incentivize circumvention of 
the <2 gallon and >50,000 Btu/h condensing standards. (A.O. Smith, No. 
1182 at p. 14)
    Bosch noted that there are still pathways for non-condensing gas-
fired instantaneous water heaters to stay in the market, which could be 
realized by creating model lines that are either below 50,000 Btu/h in 
input or above 2 gallons in storage capacity. To remedy this, Bosch 
recommended DOE require condensing technology for all gas-fired 
instantaneous water heaters. (Bosch, No. 1204 at pp. 2-3)
    By contrast, the CA IOUs stated that the proposed product sub-class 
with a rated volume of <2 gallons and an input rating of <=50,000 Btu/h 
is appropriate for point-of-use applications and that this subclass 
will not account for a significant amount of gas fired instantaneous 
water heater shipments. (CA IOUs, No. 1442 at pp. 2-3) Rheem suggested 
that DOE consider increasing the standards for gas-fired instantaneous 
water heaters <2 gallons and less than or equal to 50,000 Btu/h of 
input to an efficiency that corresponds to removal of standing pilot 
lights, but not an efficiency that utilizes condensing technology. 
Rheem stated that gas-fired instantaneous water heaters under 50,000 
Btu/h exist and have residential applications (i.e., they are not 
exclusively marketed for recreational vehicles or as portable 
equipment). However, the commenter also wrote that these products are 
not a direct replacement for the condensing gas-fired instantaneous 
water heaters that

[[Page 105219]]

would be required for input rates greater than 50,000 Btu/h, and thus 
generally supported the translated standards for these products. 
(Rheem, No. 1177 at p. 12)
    DOE agrees that there may be a market for gas-fired instantaneous 
water heaters with less than 50,000 Btu/h of input based on the designs 
it has reviewed. Gas-fired instantaneous water heaters with less than 
50,000 Btu/h of heat input are typically used in ``point-of-use'' 
applications (e.g., affixed to a showerhead) because the heat input is 
generally not high enough to serve an entire house. Hence, DOE expects 
that shipments of these ``point-of-use'' tankless gas-fired 
instantaneous water heaters would not easily replace shipments of 
``whole-home'' tankless gas-fired instantaneous water heaters with 
input rates higher than 50,000 Btu/h.
    While DOE acknowledges that removing standing pilot lights would 
result in additional energy savings, DOE does not currently possess 
data supporting more stringent standards than those being established 
as part of this rulemaking. However, DOE may analyze the benefits and 
burdens of higher standards for these products at a later time. 
Further, after the compliance date of this final rule, the availability 
of UEF certification data for these products may inform a future 
analysis of more stringent standards in a future rulemaking.
    In addition to Bosch and A.O. Smith, several other commenters 
raised concerns regarding non-condensing standards for larger gas-fired 
instantaneous water heaters--those with 2 or more gallons of storage 
volume.
    Rheem commented that gas-fired instantaneous water heaters greater 
than or equal to 2 gallons of rated storage volume do not currently 
exist on the market because there is no need for them. (Rheem, No. 1177 
at p. 13) Rheem stated that the >=2 gallons and <=200,000 Btu/h product 
category could be used to circumvent the condensing-level standards for 
<2 gallon and >50,000 Btu/h gas-fired instantaneous water heaters and 
recommended aligning the standards to the condensing levels (e.g., 
change the intercepts in the standards equations for the >2 gallon 
classes to match the amended standards for the <2 gallon classes). 
(Rheem, No. 1177 at p. 13) Rheem reiterated these comments in response 
to the July 2024 NODA. (Rheem, No. 1436 at p. 3)
    In response to the July 2024 NODA, the CA IOUs stated that 
manufacturers could produce gas fired instantaneous water heaters with 
a rated volume of >=2 gallons and an input rating of <=200,000 Btu/h 
that do not meet condensing standards. The CA IOUs expressed concern 
that this would allow manufacturers to avoid meeting condensing 
standards for all consumer gas fired instantaneous water heater 
offerings. The CA IOUs expressed concern that, because of the low cost 
to manufacturers of increasing the rated volume of existing non-
condensing gas fired instantaneous water heaters to 2 gallons or 
higher, DOE's proposal could allow non-condensing products to remain in 
the market at lower prices than condensing products. The CA IOUs urged 
DOE to modify its proposed subclass definitions if it can do so in a 
timely manner and to immediately begin a new rulemaking to address its 
concerns should modifying product sub-classes present a significant 
delay to a final rule being issued for gas fired instantaneous water 
heaters (CA IOUs, No. 1442 at pp. 3-4). Specifically, the CA IOUs 
recommended that DOE expand the existing subclass to include all gas 
fired instantaneous water heaters with a volume less than 20 gallons 
and an input rating >50,000 Btu/h and <=200,000 Btu/h. (CA IOUs, No. 
1442 at pp. 3-4)
    A.O. Smith claimed that, because some products >=2 gallons and 
<=200,000 Btu/h are used only in commercial applications, condensing-
level standards are justified for these products, citing the 
conclusions of DOE's rulemaking for commercial water heaters. (A.O. 
Smith, No. 1440 at p. 4) A.O. Smith emphasized the importance of 
establishing condensing-level standards for all gas-fired instantaneous 
water heaters, noting that finalizing the proposed standard for this 
product class leaves open the opportunity for the entry of new products 
intended to circumvent both consumer condensing standards and 
commercial condensing standards effective in October 2026. (A.O. Smith, 
No. 1440 at p. 4) A.O. Smith stated that in this rulemaking, in 
contrast with the conversion factor rulemaking, DOE is evaluating 
whether more stringent standards for gas-fired instantaneous water 
heaters would be technologically feasible, economically justified, and 
result in significant energy savings and that in this context, DOE must 
consider the factors outlined in EPCA at 42 U.S.C. 6295(q) for 
establishing product classes and adjust the gas-instantaneous product 
classes accordingly. (A.O. Smith, No. 1440 at p.4)
    A.O. Smith recommended that DOE expand the analyzed product class 
from <2 gallons and >50,000 Btu/h to <5 gallons and >50,000 Btu/h to 
ensure that condensing standards are not circumvented through minor 
design changes. (A.O. Smith, No. 1440 at p. 4) A.O. Smith claimed that 
a gas-fired instantaneous water heater with a 5-gallon storage volume 
would have negligible standby losses and a consistent UEF standard 
value could apply to the entire zero-to-five-gallon range. A.O. Smith 
noted that EPCA only established standby loss standards for commercial 
gas-fired instantaneous water heaters with a rated storage volume 
greater than 10 gallons, stating that this indicates that standby 
losses are not expected to be significant enough to warrant separate 
standards and separate product classes until 10 gallons of storage 
volume for commercial gas-fired instantaneous water heaters. A.O. Smith 
stated that this suggests that DOE expanding the storage capacity range 
up to 5 gallons for the gas-fired instantaneous consumer water heater 
product class under consideration for amended standards is appropriate. 
(A.O. Smith, No. 1440 at pp. 4-5)
    In response to A.O. Smith, DOE notes that the most recent 
commercial water heaters rulemaking, which published in the Federal 
Register a final rule on October 6, 2023 (the ``October 2023 Commercial 
Water Heaters Final Rule''), analyzed gas-fired instantaneous water 
heaters that are considered covered commercial equipment under EPCA. 88 
FR 69686, 69706. Specifically, these commercial gas-fired instantaneous 
water heaters are defined at 10 CFR 431.102 as having a rated input 
above 200,000 Btu/h. Id. While the October 2023 Commercial Water 
Heaters Final Rule established condensing-level standards for 
commercial gas-fired instantaneous water heaters, the conclusions of 
that rulemaking would not necessarily apply to gas-fired instantaneous 
water heaters >=2 gallons and <=200,000 Btu/h because these are 
consumer water heaters and were not analyzed in that rulemaking.
    Further, DOE understands that the recommendations to expand the 
applicability of the condensing-level standards to products with 2 or 
more gallons of storage may be based on an assumption that such a 
stringency increase would have minimal impact to the market. However, 
contrary to the comments from Rheem, Bosch, and A.O. Smith, DOE has 
identified several consumer gas-fired instantaneous water heaters on 
the market with 2 or more gallons, as discussed in section IV.A.1 of 
this document. Some of these models use non-condensing operation and 
would not comply with condensing-level standards at efficiency level 2. 
DOE does not currently possess data

[[Page 105220]]

supporting more stringent standards for these products or how more 
stringent standards would affect the market share or consumers of these 
products. Lastly, DOE believes the size of larger, non-condensing gas-
fired instantaneous water heaters may be a barrier for many consumers 
choosing between products with 2 or more gallons of storage and 
products with less than 2 gallons of storage. Many consumers who use 
gas-fired instantaneous water heaters with less than 2 gallons of 
storage do so because of how little space these units take up. As of 
this final rule, all of the gas-fired instantaneous water heaters 
certified to DOE have rated storage volumes of either 0 or 1 gallon--
hence, the term ``tankless'' is often used to describe these products. 
A 2-gallon gas-fired instantaneous water heater would be much larger 
than a model with 0 or 1 gallon of storage. DOE compared the sizes of 
large (i.e., stored volume >=2 gallons) gas-fired instantaneous water 
heaters to the average sizes determined in the engineering analysis for 
products less than 2 gallons. For instance, based on product literature 
published by one manufacturer of large gas-fired instantaneous water 
heaters, its 2.3-gallon model and 3.5-gallon model are over twice as 
deep and significantly taller compared to a typical model on the market 
today.\46\ Thus, it is unclear to what extent consumers would choose to 
install a gas-fired instantaneous water heater with stored volume >=2 
gallons over one with <2 gallons.
---------------------------------------------------------------------------

    \46\ For example, DOE reviewed the product dimensions of the HTP 
Crossover series, a product line of larger gas-fired instantaneous 
water heaters intended for residential wall-hung installations. 
Product dimensions can be found online at: www.htproducts.com/literature/mktlit-118.pdf. (Last accessed on August 28, 2024).
---------------------------------------------------------------------------

    In light of these considerations, DOE is maintaining the proposed 
separation of product classes for products without current UEF-based 
standards in this final rule as proposed in the July 2023 NOPR. DOE 
will continue to monitor the market for these products and may address 
consider potential more-stringent standards for larger gas-fired 
instantaneous water heaters in a future rulemaking.

D. Markups Analysis

    The markups analysis develops appropriate markups (e.g., retailer 
markups, distributor markups, contractor markups) in the distribution 
chain and sales taxes to convert the MSP estimates derived in the 
engineering analysis to consumer prices, which are then used in the LCC 
and PBP analysis. At each step in the distribution channel, companies 
mark up the price of the product to cover business costs and profit 
margin.
    As part of the analysis, DOE identifies key market participants and 
distribution channels. For consumer gas-fired instantaneous water 
heaters, the main parties in the distribution chain are (1) 
manufacturers, (2) wholesalers or distributors, (3) retailers, (4) 
plumbing contractors, (5) builders, (6) manufactured home 
manufacturers, and (7) manufactured home dealers/retailers. See chapter 
6 and appendix 6A of the final rule TSD for a more detailed discussion 
about parties in the distribution chain.
    For this final rule, DOE characterized how consumer gas-fired 
instantaneous water heater products pass from the manufacturer to 
residential and commercial consumers \47\ by gathering data from 
several sources, including consultant reports (available in appendix 6A 
of the final rule TSD), the 2023 BRG report,\48\ and the 2022 Clear 
Seas Research Water Heater contractor survey \49\ to determine the 
distribution channels and fraction of shipments going through each 
distribution channel. The distribution channels for replacement or new 
owners of consumer water heaters in residential applications (not 
including mobile homes) are characterized as follows: \50\
---------------------------------------------------------------------------

    \47\ DOE estimates that 6 percent of gas-fired instantaneous 
water heaters will be shipped to commercial applications in 2030.
    \48\ BRG Building Solutions, The North American Heating & 
Cooling Product Markets (2023 Edition). Available at 
www.brgbuildingsolutions.com/reports-insights (last accessed August 
29, 2024).
    \49\ Clear Seas Research, 2022 Mechanical System--Water Heater. 
Available at clearseasresearch.com/reports/industries/mechanical-systems/ (last accessed August 29, 2024).
    \50\ Based on available data, DOE assumed that for replacement 
or new owners in residential applications consumer gas-fired 
instantaneous water heaters go through the wholesaler/contractor 55 
percent of the time, directly form the retailer 40 percent of the 
time, and through the retailer/contractor 5 percent of the time.

Manufacturer [rarr] Wholesaler [rarr] Plumbing Contractor [rarr] 
Consumer
Manufacturer [rarr] Retailer [rarr] Consumer
Manufacturer [rarr] Retailer [rarr] Plumbing Contractor [rarr] Consumer

    For mobile home replacement or new owner applications, the same 
distribution channels are applicable for consumer gas-fired 
instantaneous water heaters.\51\
---------------------------------------------------------------------------

    \51\ Based on available data, DOE assumed that consumer gas-
fired instantaneous water heaters in mobile homes go through the 
wholesaler/contractor 55 percent of the time, directly form the 
retailer 40 percent of the time, and though the retailer/contractor 
5 percent of the time. The data indicate that gas-fired 
instantaneous water heaters are almost never sold directly through a 
mobile home retailer.
---------------------------------------------------------------------------

    For consumer gas-fired instantaneous water heaters in commercial 
applications, DOE considers an additional distribution channel for 
which the manufacturer sells the equipment to the wholesaler and then 
to the consumer through a national account in both replacement and new 
construction markets.
    The new construction distribution channel includes an additional 
link in the chain--the builder. The distribution channels for consumer 
gas-fired instantaneous water heaters in new construction \52\ in 
residential applications (not including mobile homes) are characterized 
as follows: \53\
---------------------------------------------------------------------------

    \52\ DOE estimates that in the residential market 48 percent of 
gas-fired instantaneous water heaters will be shipped to new 
construction applications in 2030.
    \53\ DOE's analysis indicates that many builders are large 
enough to have a master plumber and not hire a separate contractor, 
and assigned approximately half of water heater shipments to new 
construction to this channel. DOE estimated that in the new 
construction market, 90 percent of the residential (not including 
mobile homes) and 80 percent in commercial applications goes through 
a wholesaler to builders channel and the rest go through national 
account distribution channel.

    Manufacturer [rarr] Wholesaler [rarr] Plumbing Contractor [rarr] 
Builder [rarr] Consumer
    Manufacturer [rarr] Wholesaler [rarr] Builder [rarr] Consumer
    Manufacturer [rarr] Wholesaler (National Account) [rarr] Consumer

    DOE developed baseline and incremental markups for each actor in 
the distribution chain. Baseline markups are applied to the price of 
products with baseline efficiency, while incremental markups are 
applied to the difference in price between baseline and higher-
efficiency models (the incremental cost increase). The incremental 
markup is typically less than the baseline markup and is designed to 
maintain similar per-unit operating profit before and after new or 
amended standards.\54\
---------------------------------------------------------------------------

    \54\ Because the projected price of standards-compliant products 
is typically higher than the price of baseline products, using the 
same markup for the incremental cost and the baseline cost would 
result in higher per-unit operating profit. While such an outcome is 
possible, DOE maintains that in markets that are reasonably 
competitive it is unlikely that standards would lead to a 
sustainable increase in profitability in the long run.
---------------------------------------------------------------------------

    To estimate average baseline and incremental markups, DOE relied on 
several sources, including: (1) form 10-K \55\ from U.S. Securities and 
Exchange Commission (``SEC'') for Home Depot, Lowe's, Wal-Mart, and 
Costco (for retailers); (2) U.S. Census Bureau 2017 Annual Retail Trade 
Report for

[[Page 105221]]

miscellaneous store retailers (NAICS 453) (for online retailers); \56\ 
(3) U.S. Census Bureau 2017 Economic Census data \57\ on the 
residential and commercial building construction industry (for builder, 
plumbing contractor, mobile home manufacturer); and (4) the U.S. Census 
Bureau 2017 Annual Wholesale Trade Report data \58\ (for wholesalers). 
DOE assumes that the markups for national accounts is half of the value 
of wholesaler markups. In addition, DOE used the 2005 Air Conditioning 
Contractors of America's (``ACCA'') Financial Analysis on the Heating, 
Ventilation, Air-Conditioning, and Refrigeration (``HVACR'') 
contracting industry \59\ to disaggregate the mechanical contractor 
markups into replacement and new construction markets for consumer gas-
fired instantaneous water heaters used in commercial applications.
---------------------------------------------------------------------------

    \55\ U.S. Securities and Exchange Commission. Company Filings. 
Available at www.sec.gov/search-filings (last accessed August 29, 
2024).
    \56\ U.S. Census Bureau, 2017 Annual Retail Trade Report, 
available at www.census.gov/programs-surveys/arts.html (last 
accessed August 29, 2024). Note that the 2017 Annual Retail Trade 
Report was the latest version of the report that includes detailed 
operating expenses data at the time of the analysis.
    \57\ U.S. Census Bureau, 2017 Economic Census Data. available at 
www.census.gov/programs-surveys/economic-census.html (last accessed 
August 29, 2024). Note that the 2017 Economic Census Data is the 
latest version of this data.
    \58\ U.S. Census Bureau, 2017 Annual Wholesale Trade Report. 
available at www.census.gov/wholesale/index.html (last accessed 
August 29, 2024). Note that the 2017 AWTR Census Data is the latest 
version of the report that includes detailed operating expenses 
data.
    \59\ Air Conditioning Contractors of America (``ACCA''), 
Financial Analysis for the HVACR Contracting Industry (2005), 
available at www.acca.org/store#/storefront (last accessed August 
29, 2024). Note that the 2005 Financial Analysis for the HVACR 
Contracting Industry is the latest version of the report and is only 
used to disaggregate the mechanical contractor markups into 
replacement and new construction markets.
---------------------------------------------------------------------------

E. Energy Use Analysis

    The purpose of the energy use analysis is to determine the annual 
energy consumption of consumer gas-fired instantaneous water heaters at 
different efficiencies in representative U.S. single-family homes, 
mobile homes, multi-family residences, and commercial buildings, and to 
assess the energy savings potential of increased consumer gas-fired 
instantaneous water heater efficiency. The energy use analysis 
estimates the range of energy use of consumer gas-fired instantaneous 
water heaters in the field (i.e., as they are actually used by 
consumers). The energy use analysis provides the basis for other 
analyses DOE performed, particularly assessments of the energy savings 
and the savings in consumer operating costs that could result from 
adoption of amended or new standards.
    DOE estimated the annual energy consumption of consumer gas-fired 
instantaneous water heaters at specific energy efficiency levels across 
a range of climate zones, building characteristics, and water heating 
applications. The annual energy consumption includes the natural gas, 
liquid petroleum gas (``LPG''), and electricity used by the consumer 
gas-fired instantaneous water heater.
1. Building Sample
    To determine the field energy use of consumer water heaters used in 
homes, DOE established a sample of households using consumer water 
heaters from EIA's 2015 Residential Energy Consumption Survey (``RECS 
2015'') in the July 2023 NOPR, which was the most recent such survey 
that was then fully available.\60\ DOE selected the household sample 
based on the reported variables from RECS on water heating equipment 
type. The RECS data provide information on the vintage of the home, as 
well as water heating energy use in each household. These data reflect 
how water heaters are actually used by consumers. DOE used the 
household samples not only to determine water heater annual energy 
consumption, but also as the basis for conducting the LCC and PBP 
analyses. DOE projected household weights and household characteristics 
in 2030, the first year of compliance with any amended or new energy 
conservation standards for consumer water heaters. To characterize 
future new homes, DOE used a subset of homes in RECS that were built 
after 2000.
---------------------------------------------------------------------------

    \60\ Energy Information Administration (``EIA''), 2015 
Residential Energy Consumption Survey (``RECS''). Available at 
www.eia.gov/consumption/residential/ (last accessed August 29, 
2024).
---------------------------------------------------------------------------

    For this final rule, DOE incorporated RECS 2020 as the basis of the 
building sample development and updated the analyses accordingly.\61\ 
Incorporating RECS 2020 improves the representativeness of the 
residential building sample as RECS 2020 brings a threefold increase in 
sample size compared to RECS 2015.\62\ A larger sample size generally 
results in smaller standard errors, especially for estimates of smaller 
subpopulations. In this final rule, DOE maintains the same methodology 
in residential sample development as the July 2023 NOPR, using the 
updated RECS.
---------------------------------------------------------------------------

    \61\ Energy Information Administration (``EIA''), 2020 
Residential Energy Consumption Survey (``RECS''). Available at 
www.eia.gov/consumption/residential/ (last accessed August 29, 
2024).
    \62\ According to published data and EIA website, RECS 2020 is 
based upon responses collected from in total 18,496 households which 
is three times greater than 5,686 respondents in RECS 2015.
---------------------------------------------------------------------------

    To determine the field energy use of consumer water heaters used in 
commercial buildings, DOE established a sample of buildings using 
consumer water heaters from EIA's 2018 Commercial Building Energy 
Consumption Survey (``CBECS 2018''), which is the most recent such 
survey that is currently fully available.\63\ DOE has maintained its 
sample development methodology used in July 2023 NOPR for consumer gas-
fired instantaneous water heaters used in commercial applications.
---------------------------------------------------------------------------

    \63\ U.S. Department of Energy: Energy Information 
Administration, Commercial Buildings Energy Consumption Survey 
(2018). Available at: www.eia.gov/consumption/commercial/data/2018/index.php?view=microdata (last accessed August 29, 2024).
---------------------------------------------------------------------------

    AGA et al. supported DOE's incorporation of EIA's 2020 RECS data in 
the July 2024 NODA. (AGA et al., No. 1439 at p. 10)
2. Hot Water Use Determination
    Based on the reported water heating energy use from RECS and CBECS, 
DOE estimated the hot water use for each sampled household and 
building. Then, in order to disaggregate the selected sampled gas-fired 
instantaneous water heaters into draw patterns, DOE used model data 
from DOE's public CCD \64\ and AHRI certification directory \65\ 
together with other publicly available data from manufacturers' 
catalogs of consumer water heaters. DOE also used a combination of 
confidential data provided by AHRI from 2004-2007 \66\ and shipments 
data from BRG Building Solutions 2023 report from 2007 to 2022.\67\
---------------------------------------------------------------------------

    \64\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed August 29, 2024).
    \65\ Air Conditioning Heating and Refrigeration Institute. 
Consumer's Directory of Certified Efficiency Ratings for Heating and 
Water Heating Equipment. December 1, 2023. (Available at 
www.ahridirectory.org) (last accessed August 29, 2024).
    \66\ AHRI. Confidential Instantaneous Gas-fired Water Heater 
Shipments Data from 2004-2007 to LBNL. December 1, 2023
    \67\ BRG Building Solutions. The North American Heating & 
Cooling Product Markets (2023 Edition). 2023.
---------------------------------------------------------------------------

    Responding to the July 2023 NOPR, AHRI recommended DOE explain its 
inputs in the energy use calculations. AHRI commented that DOE's use of 
nesting of various assumptions for residential water heaters leads to 
unlikely results that DOE does not, or cannot, explain. AHRI raised 
concerns on two oddities in the energy use calculations for gas-fired 
instantaneous water heaters. First, the water

[[Page 105222]]

consumption for residential use as computed for the median RECS 
building is 41 gallons per day and the 95th highest use (95th 
percentile) is 3.5 times as much (141 gallons per day) and the 
remaining 5 percent of RECS buildings use between 141 and 997 gallons 
per day, or up to 24 times as much water per day, an unlikely amount 
for a residential household. AHRI stated that this high usage rate for 
these 5 percent heavy users raises the average consumption to 61 
gallons per day, or 50 percent more than the typical or median user. 
AHRI commented that presence and magnitude of these outlier 5 percent, 
heavy users raise serious questions about the accuracy and reliability 
of either (or both) the data that DOE used and/or the methodology it 
used to compute water consumption. Second, even assuming some market 
inefficiencies, AHRI claimed that there still should be a general trend 
towards RECS buildings with greater water use selecting more efficient 
water heaters absent standards. DOE contends that at least some 
purchasers make economically efficient choices. In that circumstance, 
the data should show a trend toward the highest-consuming RECS 
buildings appearing in the higher ELs absent standards. AHRI commented 
that this is not the case in the actual DOE data. Instead, if anything, 
the highest-consuming RECS buildings are assumed to purchase baseline 
water heaters. (AHRI, No. 1167 at p. 19) AHRI asked for an explanation 
of these outlier data points and asked how DOE validated its 
methodology to assure that these are accurate representations of real 
life. AHRI also asked why DOE has not accepted the suggestion by AHRI 
and others to use median, not the mean values for consumption and LCC 
savings to avoid the effects of these outliers and to alleviate, at 
least in part, the deficiencies of its base case efficiency assignment 
issue. (AHRI, No. 1167 at p. 20)
    Gas Association Commenters argued that water consumption should be 
based on household size and that there are problems with water 
consumption calculations, particularly for gas-fired instantaneous 
water heaters. Gas Association Commenters argue that for gas-fired 
instantaneous water heaters, DOE models incorrect tankless water heater 
results (greater outliers than there are for storage unit equivalents) 
in regard to household size. Gas Association Commenters argue the model 
results in unrealistic outliers for smaller households reaching 
consumption levels equivalent to space heating. Gas Association 
Commenters argue that a potential reason for this failure is how the 
model calculates daily water usage. For example, Gas Association 
Commenters argued that in DOE's model, some single person households 
use 200-350 gallons a day which is far from reasonable (4-7 baths of 
water a day every day of the year). Gas Association Commenters argued 
that Draw Pattern ID is based on randomly assigned distribution. Gas 
Association Commenters state that DOE assumes that households will 
always use more water if they use an instantaneous unit. Gas 
Association Commenters argue that while for small storage units, there 
is a 5 percent chance of a large draw pattern but there is a 75 percent 
chance for instantaneous. Gas Association Commenters argued that if 
consumption behavior was more consistent between the gas storage water 
heaters and gas-fired instantaneous water heaters, LCC savings would be 
lower. Gas Association Commenters argues that a better solution would 
be to use the test procedure for water heaters as a basis for modeling 
energy usage rather than assuming draw rates based on the size of the 
original equipment in RECS. Gas Association Commenters suggested that 
alternately, gas-fired instantaneous water heaters could just have the 
same assumptions about water usage as their gas storage water heaters 
counterparts. (Gas Association Commenters, No. 1181 at pp. 25-31) 
Similarly, in response to the July 2024 NODA, Rinnai stated that the 
energy use estimates in the energy conservation standard should use the 
same standardized draw patterns outlined in the UEF test method rather 
than relying on RECS, which the commenters characterized as unreliable. 
Rinnai recommended that the Department use the hot water draw patterns 
from the UEF test method as the basis for comparing efficiency 
proposals and reserve the RECS hot water consumption data for 
estimating national energy savings potential and other downstream 
impacts. (Rinnai, No. 1443 at p. 20)
    In response, DOE notes that RECS and CBECS data provide the 
information on the household size and water heating energy use in 
buildings. RECS and CBECS are the most comprehensive, nationally-
representative, and robust data source on actual household and 
commercial building energy consumption available to DOE. In general, 
DOE has found that the weighted average energy use for water heating 
correlates with the size of the household, i.e., the reported number of 
people in that household. Greater energy expenditure on water heating 
largely falls into the bins of households of larger sizes (4 people and 
above). The hot water use derived based on the water heating energy use 
follows similar pattern (see chapter 7 of the final rule TSD for the 
calculation of hot water use). In terms of AHRI and Gas Association 
Commenters' concern over the heavy users of hot water in the sample, 
when reporting the distribution of the derived hot water use, DOE takes 
into account both consumer water heaters used in residential as well as 
commercial applications. In the final rule analysis, DOE estimated that 
close to 40 percent of the top 5 percent of water-consuming sample 
buildings/households are commercial applications which generally have 
higher upper bound of hot water use. These outlier data points 
therefore represent either data directly reported from RECS or CBECS 
for larger households or commercial applications using consumer water 
heaters, both of which represent real-world usage. In addition, DOE 
evaluates each sampled building/household individually by calculating 
its hot water use and the corresponding cost efficiency thereafter such 
that the average LCC savings as reported is a good representation of 
the aggregated national values. Nevertheless, the LCC spreadsheet 
includes a calculation of median LCC savings, as well as LCC savings at 
various percentiles. These results are publicly available. Even if DOE 
were to rely on the median LCC savings instead of the mean LCC savings, 
DOE's conclusion of economic justification would remain the same.\68\
---------------------------------------------------------------------------

    \68\ See LCC analytical tool spreadsheet for gas-fired 
instantaneous water heater final rule.
---------------------------------------------------------------------------

    For this final rule, DOE incorporated the latest RECS 2020 data for 
its analyses. With the increased sample size and the most recent 
timeline of the fielding of the survey, RECS 2020 provides a large 
sample pool with current national representation of housing 
characteristics and energy consumption. Specifically, for gas-fired 
instantaneous water heaters, which historically have had a lower market 
share relative to the gas storage type, RECS 2020 reports over 800 
sample households utilizing a gas-fired instantaneous water heater. As 
discussed previously, the weighted average of the energy use on water 
heating and the derived hot water use generally correlates with the 
size of the household with deviations that represent the real world 
complexities of the use of a hot water heater in households of 
different types. With the update to RECS 2020, for example, the

[[Page 105223]]

estimate for the hot water use in a single-person household is now 
between 7 and 91 gallons for gas-fired instantaneous water heaters, 
with a weighted average of 32 gallons. The average hot water use across 
all household sizes is 73 gallons, relatively stable compared to 71 
gallons DOE estimated with RECS 2015 in the July 2023 NOPR. DOE 
continues to rely on RECS as the basis of its analyses for its 
incomparable scope of coverage on housing characteristics and energy 
consumption. RECS 2020 is a reflection of the real-world usage in the 
national water heater market. In terms of the assignment of draw 
pattern for gas-fired instantaneous water heaters, DOE derived the 
distribution of different draw patterns based on market research of the 
number of models in each bin that are available on the market. The 
breakdown can be found in chapter 7 of the final rule TSD.
3. Energy Use Determination
    To calculate the energy use of consumer water heaters, DOE 
determined the energy consumption associated with water heating and any 
auxiliary electrical use. DOE calculated the energy use of water 
heaters using a simplified energy equation, the water heater analysis 
model (``WHAM''). WHAM accounts for a range of operating conditions and 
energy efficiency characteristics of water heaters. The current version 
of WHAM is most appropriate for calculating the energy use of electric 
resistance storage water heaters. To account for the characteristics of 
consumer gas-fired instantaneous water heaters, energy use must be 
calculated using modified versions of the WHAM equation. For gas-fired 
instantaneous water heaters, the water heater operating conditions are 
indicated by the daily hot water draw volume, inlet water temperature, 
and thermostat setting. To describe energy efficiency characteristics 
of water heaters, WHAM also uses parameters in the DOE test procedure 
including recovery efficiency (``RE'') and rated input power (``PON''). 
These modified versions are further discussed in chapter 7 and appendix 
7B of the final rule TSD.
    The daily hot water draw volume is estimated based on the gas-fired 
instantaneous water heater energy use from RECS 2020 and CBECS 2018. 
The inlet water temperature is based on weather station temperature 
data and RECS 2020 ground water temperature data for each household. 
The consumer gas-fired instantaneous water heater thermostat setting is 
based on multiple sources including contractor survey data and field 
data.
    AGA et al. stated that electricity consumption should be slightly 
higher for all units installed in unconditioned spaces in the winter 
that are exposed to freezing temperatures because of freeze protection. 
(AGA et al., No. 1439 at p. 7) Similarly, Rinnai noted that the absence 
of freeze protection in the model doesn't adequately account for 
seasonal variation in electricity use and higher consumption for all 
units in unconditioned spaces during winter. (Rinnai, No. 1443 at p.18) 
In response, DOE acknowledges that freeze protection is an integrated 
feature in many tankless water heaters. A freeze protection electric 
heater will activate to protect the internal of the water heater from 
freezing when it reaches certain ambient temperatures. Power 
consumption varies slightly by models but generally is up to 200 Watts 
during freeze protection mode. DOE's energy use analysis is aimed to 
evaluate the electricity and fuel consumption associated with water 
heating, where the electricity use covers the burner operating mode and 
standby mode, and then compare the energy consumed by models at various 
analyzed efficiency levels. Taking into consideration the electricity 
consumption associated with freeze protection mode not only will have 
trivial impact to the total annual electricity use results, given the 
negligible fraction of time the water heater being in such mode 
throughout the year, but also will be inconsequential to the 
electricity use differential between different efficiency levels. 
Therefore, for this final rule DOE maintained its energy use analysis 
method without taking into account electricity use from freeze 
protection operation.
    Gas Association Commenters commented that there is a bug in the LCC 
tool that causes it to use only a single year of weather data rather 
than 10-year average, which they believe impacts gas-fired 
instantaneous water heater results. (Gas Association Commenters, No. 
1181 at p. 34) In response, DOE notes that the analysis uses the NOAA's 
30 year average weather data for the outside air temperature.
    Chapter 7 of the final rule TSD provides details on DOE's energy 
use analysis for consumer gas-fired instantaneous water heaters.

F. Life-Cycle Cost and Payback Period Analysis

    DOE conducted LCC and PBP analyses to evaluate the economic impacts 
on individual consumers of potential energy conservation standards for 
consumer gas-fired instantaneous water heaters. The effect of new or 
amended energy conservation standards on individual consumers usually 
involves a reduction in operating cost and an increase in purchase 
cost. DOE used the following two metrics to measure consumer impacts:
     The LCC is the total consumer expense of an appliance or 
product over the life of that product, consisting of total installed 
cost (manufacturer selling price, shipping costs, distribution chain 
markups, sales tax, and installation costs) plus operating costs 
(expenses for energy use, maintenance, and repair). To compute the 
operating costs, DOE discounts future operating costs to the time of 
purchase and sums them over the lifetime of the product.
     The PBP is the estimated amount of time (in years) it 
takes consumers to recover the increased purchase cost (including 
installation) of a more-efficient product through lower operating 
costs. DOE calculates the PBP by dividing the change in purchase cost 
at higher efficiency levels by the change in annual operating cost for 
the year that amended or new standards are assumed to take effect.
    For any given efficiency level, DOE measures the change in LCC 
relative to the LCC in the no-new-standards case, which reflects the 
estimated efficiency distribution of consumer gas-fired instantaneous 
water heaters in the absence of new or amended energy conservation 
standards. In contrast, the PBP for a given efficiency level is 
measured relative to the baseline product.
    For each considered efficiency level, DOE calculated the LCC and 
PBP for a nationally representative set of housing units and commercial 
buildings. As stated previously, DOE developed household samples from 
the RECS 2020 and CBECS 2018. For each sample household and commercial 
building, DOE determined the energy consumption for the consumer gas-
fired instantaneous water heaters and the appropriate energy price. By 
developing a representative sample of households and commercial 
buildings, the analysis captured the variability in energy consumption 
and energy prices associated with the use of consumer gas-fired 
instantaneous water heaters.
    Inputs to the LCC calculation include the installed cost to the 
consumer, operating expenses, the lifetime of the product, and a 
discount rate. Inputs to the calculation of total installed cost 
include the cost of the product--which includes MPCs, manufacturer 
markups, retailer and distributor markups,

[[Page 105224]]

shipping costs, and sales taxes--and installation costs. Inputs to the 
calculation of operating expenses include annual energy consumption, 
energy prices and price projections, repair and maintenance costs, 
product lifetimes, and discount rates. Inputs to the PBP calculation 
include the installed cost to the consumer and first year operating 
expenses. DOE created distributions of values for product lifetime, 
discount rates, and sales taxes, with probabilities attached to each 
value, to account for their uncertainty and variability.
    The computer model DOE uses to calculate the LCC relies on a Monte 
Carlo simulation to incorporate uncertainty and variability into the 
analysis. The Monte Carlo simulations sample input values from 
constrained probability distributions based on available data and 
consumer water heater user samples. For this rulemaking, the Monte 
Carlo approach is implemented in MS Excel together with the Crystal 
Ball\TM\ add-on.\69\ The model calculated the LCC for products at each 
efficiency level for 10,000 gas-fired instantaneous water heater 
installations in housing and commercial building units per simulation 
run. The analytical results include a distribution of 10,000 data 
points showing the range of LCC savings for a given efficiency level 
relative to the no-new-standards case efficiency distribution (as shown 
in chapter 8 of the final rule TSD). In performing an iteration of the 
Monte Carlo simulation for a given consumer, product efficiency is 
chosen based on its probability. At the high end of the range, if the 
chosen product efficiency is greater than or equal to the efficiency of 
the standard level under consideration, the LCC calculation reveals 
that the hypothetical consumer represented by that data point is not 
impacted by the standard level because that consumer is already 
purchasing a more-efficient product. At the low end of the range, if 
the chosen product efficiency is less than the efficiency of the 
standard level under consideration, the LCC calculation reveals that 
the hypothetical consumer represented by that data point is impacted by 
the standard level. By accounting for consumers who are already 
projected to purchase more-efficient products, DOE avoids overstating 
the potential benefits from increasing product efficiency.
---------------------------------------------------------------------------

    \69\ Crystal Ball\TM\ is commercially-available software tool to 
facilitate the creation of these types of models by generating 
probability distributions and summarizing results within Excel, 
available at www.oracle.com/technetwork/middleware/crystalball/overview/index.html (last accessed August 29, 2024).
---------------------------------------------------------------------------

    DOE calculated the LCC and PBP for consumers of consumer gas-fired 
instantaneous water heaters as if each were to purchase a new product 
in the first year of required compliance with new or amended standards. 
New and amended standards apply to consumer water heaters manufactured 
5 years after the date on which any new or amended standard is 
published. (42 U.S.C. 6295(m)(4)(A)(ii)) Therefore, DOE used 2030 as 
the first full year of compliance with any amended standards for 
consumer gas-fired instantaneous water heaters.
    Table IV.10 summarizes the approach and data DOE used to derive 
inputs to the LCC and PBP calculations. The subsections that follow 
provide further discussion. Details of the spreadsheet model, and of 
all the inputs to the LCC and PBP analyses, are contained in chapter 8 
of the final rule TSD and its appendices.

                    Table IV.10--Summary of Inputs and Methods for the LCC and PBP Analysis *
----------------------------------------------------------------------------------------------------------------
                         Inputs                                                Source/method
----------------------------------------------------------------------------------------------------------------
Product Cost............................................  Derived by multiplying MPCs by manufacturer and
                                                           distribution chain markups and sales tax, as
                                                           appropriate. Used historical data to derive a price
                                                           scaling index to project future product costs.
Installation Costs......................................  Determined with labor and material cost data from
                                                           RSMeans.
Annual Energy Use.......................................  Including fuel use and electricity use.
                                                          Variability: Based on the RECS 2020 and CBECS 2018.
Energy Prices...........................................  Natural Gas: Based on EIA's Natural Gas Navigator data
                                                           for 2022.
                                                          Electricity: Based on EIA's Form 861 data for 2022.
                                                          Propane: Based on EIA's State Energy Data System
                                                           (``SEDS'') for 2021.
                                                          Variability: Regional energy prices determined for 50
                                                           states and District of Columbia for residential and
                                                           commercial applications.
                                                          Marginal prices used for natural gas and electricity
                                                           prices.
Energy Price Trends.....................................  Based on AEO2023 price projections.
Repair and Maintenance Costs............................  Based on RSMeans data and other sources. Assumed
                                                           variation in cost by efficiency.
Product Lifetime........................................  Based on shipments data, multi-year RECS, American
                                                           Housing Survey, American Home Comfort Survey data.
Discount Rates..........................................  Residential: approach involves identifying all
                                                           possible debt or asset classes that might be used to
                                                           purchase the considered appliances, or might be
                                                           affected indirectly. Primary data source was the
                                                           Federal Reserve Board's Survey of Consumer Finances.
                                                          Commercial: Calculated as the weighted average cost of
                                                           capital. Primary data source was Damodaran Online.
Compliance Date.........................................  2030.
----------------------------------------------------------------------------------------------------------------
* Not used for PBP calculation. References for the data sources mentioned in this table are provided in the
  sections following the table or in chapter 8 of the final rule TSD.

1. Product Cost
    To calculate consumer product costs, DOE multiplied the total 
manufacturer price, which is MSPs developed in the engineering analysis 
plus shipping cost, by the markups described previously (along with 
sales taxes). DOE used different markups for baseline products and 
higher-efficiency products, because DOE applies an incremental markup 
to the increase in total manufacturer price associated with higher-
efficiency products.
    Examination of historical price data for certain appliances and 
equipment that have been subject to energy conservation standards 
indicates that the assumption of constant real prices may, in many 
cases, overestimate long-term trends in appliance and equipment prices. 
Economic literature and historical data suggest that the real costs of 
these products may in fact trend

[[Page 105225]]

downward over time according to ``learning'' or ``experience'' 
curves.\70\
---------------------------------------------------------------------------

    \70\ Desroches, L.-B., K. Garbesi, C. Kantner, R. Van Buskirk, 
and H.-C. Yang. Incorporating Experience Curves in Appliance 
Standards Analysis. Energy Policy. 2013. 52 pp. 402-416; Weiss, M., 
M. Junginger, M. K. Patel, and K. Blok. A Review of Experience Curve 
Analyses for Energy Demand Technologies. Technological Forecasting 
and Social Change. 2010. 77(3): pp. 411-428.
---------------------------------------------------------------------------

    In the experience curve method, the real cost of production is 
related to the cumulative production or ``experience'' with a 
manufactured product. This experience is usually measured in terms of 
cumulative production. As experience (production) accumulates, the cost 
of producing the next unit decreases. The percentage reduction in cost 
that occurs with each doubling of cumulative production is known as the 
learning rate. In typical experience curve formulations, the learning 
rate parameter is derived using two historical data series: cumulative 
production and price (or cost). DOE obtained historical PPI data for 
water heating equipment from 1967-1973 and 1977-2022 for all other 
consumer water heaters from the U.S. Bureau of Labor Statistics' 
(``BLS'').\71\ The PPI data reflect nominal prices, adjusted for 
product quality changes. An inflation-adjusted (deflated) price index 
for heating equipment manufacturing was calculated by dividing the PPI 
series by the implicit price deflator for Gross Domestic Product 
Chained Price Index.
---------------------------------------------------------------------------

    \71\ Series ID PCU 33522033522083; see www.bls.gov/ppi/.
---------------------------------------------------------------------------

    From 1967 to 2002, the deflated price index for consumer gas-fired 
instantaneous water heaters was mostly decreasing, or staying flat. 
Since then, the index has risen, primarily due to rising prices of 
copper, aluminum, and steel products which are the major raw material 
used in water heating equipment. The rising prices for copper and steel 
products were attributed to a series of global events, from strong 
demand from China and other emerging economies to the recent severe 
delay in commodity shipping due to the COVID-19 pandemic. Given the 
slowdown in global economic activity in recent years and the lingering 
impact from the global pandemic, DOE believes that the extent to which 
the trends of the past five years will continue is very uncertain. DOE 
also assumes that any current supply chain constraints are short-lived 
and will not persist to the first year of compliance. Given the 
uncertainty regarding the magnitude and direction of potential future 
price trends, DOE decided to use constant prices as the default price 
assumption to project future consumer gas-fired instantaneous water 
heater prices. Thus, projected prices for the LCC and PBP analysis are 
equal to the 2023 values for each efficiency level in each product 
class. However, DOE performed a sensitivity analysis utilizing both a 
decreasing and an increasing price trend (see appendix 8C). The 
relative comparison of potential standard levels remains the same 
regardless of which price trend is utilized and the conclusions of the 
analysis do not change.
    BWC requested that DOE detail its methods in utilizing price 
learning curves for condensing gas products, as was indicated in 
section IV(F)(1) of the July 2023 NOPR, so that stakeholders may review 
them. BWC suggested the additional components required to manufacture 
higher efficiency products required by this proposal, in addition to 
their more complex manufacturing processes, will continue to compel 
higher product costs than is currently expected of non-condensing gas 
water heaters common in the market today, economies of scale 
notwithstanding. (BWC No. 1164 at p. 17) The available data only allow 
estimation of price trends for water heaters as a group, not for 
different efficiency levels of water heaters. DOE agrees that the 
product costs of condensing gas products will continue to be higher 
than non-condensing gas water heaters. However, it is reasonable to 
expect that factors affecting water heaters as a whole, such as growing 
experience in production or changes in commodity prices, will affect 
all water heaters. Thus, for this final rule, DOE maintained that same 
methodology as the July 2023 NOPR and assumed the same price trend 
assumptions would apply to all gas-fired instantaneous water heater 
efficiency levels. To assess the impact of alternative price learning 
assumptions, DOE analyzed scenarios using low- and high-price trends in 
the LCC. From this sensitivity analysis, DOE finds that LCC savings for 
alternative price trends are similar to the reference case results and 
DOE would arrive at the same policy conclusion. See appendix 8C for 
details.
    Responding to the July 2023 NOPR, Ecotemp stated that non-
condensing tankless water heaters typically cost half the price of 
comparable condensing tankless water heaters. (Ecotemp, No. 1092 at p. 
1) Rinnai argued that the marginal price for non-condensing to 
condensing gas-fired instantaneous water heater prices are too low and 
should be $450 rather than the $310 calculated by DOE. (Rinnai, No. 
1186 at p. 24) Rinnai claimed DOE's installed cost differential of $200 
between non-condensing and condensing is too low and based on data 
collected from installers and distributors the value is closer to $665. 
(Rinnai, No. 1443 at p. 19)
    To investigate stakeholder concerns, DOE reviewed present-day 
retail prices for non-condensing and condensing models for this final 
rule. Overall, DOE determined that comparable non-condensing and 
condensing gas-fired instantaneous water heater models can retail for 
similar prices, with condensing models priced competitively at 1.2-1.3 
times the retail price of non-condensing models. In this final rule LCC 
analysis, DOE estimates average retail prices of gas-fired 
instantaneous water heaters at condensing efficiency levels are 1.30-
1.42 times that of the baseline non-condensing gas-fired instantaneous 
water heater corresponding to incremental retail price of $294 to $414. 
DOE notes that gas-fired instantaneous water heaters are marked up 
differently per distribution channels, as discussed in section IV.D, 
and that the incremental in retail prices between any given condensing 
and non-condensing models can be higher or lower than the reported 
values above. DOE's analysis calculated weighted averages taking into 
account both the markup associated with individual distribution 
channels and the probability of water heaters sold to customers through 
each channel. In response to Rinnai's comment on installed cost, which 
is the sum of retail price and installation cost, DOE estimated that 
the differential between non-condensing and condensing slightly lowered 
to between $217 and $337. This is due to average installation cost for 
condensing gas-fired instantaneous water heaters being slightly lower 
than that for non-condensing baseline. See section IV.F.2 for more 
details in the calculation of installation cost.
    Rheem believes that incremental retail costs between step and fully 
modulating designs is about 50 percent too low. (Rheem, No. 1436 at p. 
3; Rheem, No. 1177 at p.12)
    In response, DOE revised the manufacturer production cost for EL 4 
for the final rule such that retail price estimates for max-tech 
designs, which incorporate fully modulating burners, have increased in 
this final rule analysis. The incremental retail price between step 
modulating burner and fully modulating burner gas-fired instantaneous 
water heaters, taking EL 2 and EL 4 as an example, is $106, increasing 
from $56 (in 2022$) in the July 2024 NODA (see section IV.C.1.c for 
more details).

[[Page 105226]]

2. Installation Cost
    The installation cost is the cost to the consumer of installing the 
consumer gas-fired instantaneous water heater, in addition to the cost 
of the water heater itself. The cost of installation covers all labor, 
overhead, and material costs associated with the replacement of an 
existing water heater or the installation of a water heater in a new 
home, as well as delivery of the new water heater, removal of the 
existing water heater, and any applicable permit fees. Higher-
efficiency water heaters may require consumers to incur additional 
installation costs.
    DOE's analysis of installation costs estimated specific 
installation costs for each sample household based on building 
characteristics given in RECS 2020 and CBECS 2018. For this final rule, 
DOE used 2023 RSMeans data for the installation cost estimates, 
including labor costs.72 73 74 75 DOE's analysis of 
installation costs accounted for regional differences in labor costs by 
aggregating city-level labor rates from RSMeans into 50 U.S. States and 
the District of Columbia to match RECS 2020 data and CBECS 2018 data.
---------------------------------------------------------------------------

    \72\ RSMeans Company Inc., RSMeans Mechanical Cost Data. 
Kingston, MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed August 29, 2024).
    \73\ RSMeans Company Inc., RSMeans Residential Repair & 
Remodeling Cost Data. Kingston, MA (2023) (Available at: 
www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed 
August 29, 2024).
    \74\ RSMeans Company Inc., RSMeans Plumbing Cost Data. Kingston, 
MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed August 29, 2024).
    \75\ RSMeans Company Inc., RSMeans Electrical Cost Data. 
Kingston, MA (2023) (Available at: www.rsmeans.com/products/books/2022-cost-data-books) (Last accessed August 29, 2024).
---------------------------------------------------------------------------

    AHRI stated that replacement costs are not uniform across the 
country and vary by regional labor rates, building codes, and 
availability of skilled installers. AHRI believes that this variability 
should be factored in each state when assessing economic impacts. 
(AHRI, No. 1437 at p. 3) In response, as stated above, DOE has 
accounted for the regional difference in labor rates by incorporating 
regional labor cost factors derived from RSMeans. DOE believes that, 
therefore, variability in state level labor costs is factored in in its 
analysis.
a. Basic Installation Costs
    First, DOE estimated basic installation costs that are applicable 
to all consumer gas-fired instantaneous water heaters, in replacement, 
new owner, and new home or building installations. These costs include 
putting in place and setting up the consumer water heater, gas piping 
and/or electrical hookup, permits, water piping, removal of the 
existing consumer water heater, and removal or disposal fees.
    AGA et al. stated that DOE's final Furnaces rule and pending 
Boilers rule show that market shares for condensing and non-condensing 
units vary significantly across different climates, which they believed 
is likely true for gas-fired instantaneous water heaters suggesting 
that different climates and household characteristics could heavily 
influence not only the type of products installed but also the required 
venting parts to ensure safe and effective operation. (AGA et al., No. 
1439 at p. 7) In response to AGA et al.'s comment, it is true that 
space heating products typically have some regionalities, which is 
mainly driven by the varying heating needs across different climate 
zones. For water heating equipment like gas-fired instantaneous water 
heater, however, DOE has not found, nor have stakeholders pointed to, 
any data showing that there would be a similar level of impact of the 
climate on market adoption. In terms of the required venting parts, DOE 
calculated the costs for venting based on the vent material suggested 
by manufacturers and code.
b. Venting Costs
    After accounting for the basic costs for removing the old water 
heater and setting up the new, DOE considered the installation costs 
associated with venting. Non-condensing gas-fired instantaneous water 
heaters are Category III appliances that operate under positive 
pressure. They require stainless steel vent material. Condensing gas-
fired instantaneous water heaters are Category IV appliance that can be 
vented through a PVC, CPVC, or polypropylene vent material. In its 
analysis, DOE accounted for the cost for setting up the vent pipes, 
vent elbows, and terminations of the appropriate material and the air 
intake pipe for those that are direct vented (i.e. combustion air is 
brought in from outdoors).
    DOE received comments after the publication of July 2023 NOPR and 
July 2024 NODA regarding the use of concentric vent, vent length, and 
outdoor installations.
    In response to July 2023 NOPR, Rinnai stated the Department's 
estimated venting costs of $499 for non-condensing gas-fired 
instantaneous water heater and $263 for condensing gas-fired 
instantaneous water heater overstate the cost differential, if any even 
exists. (Rinnai, No. 1186 at p. 24) Rinnai stated that most non-
condensing gas-fired instantaneous water heaters require 3'' diameter 
venting and not 4'' diameter venting as is used in the analysis, 
leading to 25 percent reduction in the cost of venting materials. 
Rinnai stated that more than 75 percent of non-condensing models do not 
use stainless steel venting and instead use concentric and aluminum 
venting. Rinnai stated that 20ft of venting and associated fittings 
used in the LCC analysis needs to be subjected to additional 
sensitivity analysis, including the variation in installed vent 
lengths, materials used, concentric versus single wall vents, and 
product installation location. Rinnai stated that tankless water 
heaters are installed typically on an outside wall, which would require 
far less than 20 feet of venting, and for outdoor installations, no 
venting would be required. (Rinnai, No. 1186 at p. 24)
    In response to July 2024 NODA, Rinnai claimed that the analysis 
overlooks that gas-fired instantaneous water heater installation uses a 
different pipe installation from furnaces that is cheaper and 
significantly shorter than vertical venting. Rinnai stated that they 
account for half of sales for non-condensing gas-fired instantaneous 
water heater units and those units use aluminum/plastic concentric 
venting and have on average 1-2 feet of venting because they are mostly 
installed outside or on outside walls (e.g., garages). Rinnai claimed 
that DOE's estimate for venting components is overestimated compared to 
costs found on retailer websites ($131 vs $85). (Rinnai, No. 1443 at 
pp. 14-15) BWC disagreed with DOE considering a 1 ft. minimum vent 
length as part of their analysis for this July 2024 NODA. They 
commented that while it may be true that some manufacturers of gas-
fired instantaneous water heaters indicate this vent length is possible 
in their literature, according to their experience this is rarely. 
(BWC, No. 1441 at p. 3)
    Rinnai claimed DOE's model makes unjustified assumptions on the 
gas-fired instantaneous water heater installation location. Rinnai 
claimed that the July 2024 NODA only estimates 12 percent of gas-fired 
instantaneous water heaters installed outdoors which is much lower than 
the value inferred from RECS 2020 which reports half of households 
install their water heater in an ``outdoor closet, crawlspace, or 
outdoor''. Rinnai stated their data indicate 23 percent of gas-fired 
instantaneous water heaters are installed outdoors. Rinnai further 
stated that their data show that an additional 55 percent of gas-fired 
instantaneous water heater installations are likely to be located close 
to outside walls in order to minimize venting. (Rinnai, No. 1443 at 
p.18)

[[Page 105227]]

    Rheem believed that only 20 percent of condensing units would be 
installed with concentric venting due to lower relative costs of 
plastic venting and wall/roof penetrations. Rheem estimated that up to 
50 percent of non-condensing units are installed outdoors in new 
construction where non-condensing is more common. Rheem estimated that 
about 40 percent of outdoor installations use recess boxes or pipe 
covers (split evenly between the two). Rheem estimated that 7 percent 
of condensing units are installed outdoors and expects that number to 
rise if energy conservation standards are amended. (Rheem, No. 1436 at 
p. 2-3)
    A.O. Smith and BWC commented that they found DOE's estimate of 50 
percent of condensing gas-fired instantaneous water heaters using 
concentric vent to be high. BWC did not provide a percentage that they 
believe is reasonable. A.O. Smith commented that they would estimate 
only 20 percent of condensing gas-fired instantaneous water heaters use 
a concentric pipe. (A.O. Smith, No. 1440 at p. 6; BWC, No. 1441 at p. 
3)
    BWC stated that DOE underestimated the installed costs for gas-
fired instantaneous water heaters in the July 2024 NODA when assuming 
half of these products installed outdoors, in outdoor closets, or 
crawlspaces, would not require venting. BWC countered that the need for 
venting in these install locations is not uncommon, particularly in 
crawlspaces, which are often located within the building envelope. BWC 
added that some outdoor units require use of a special vent kit, or a 
box that would protect product controls from inclement weather, both of 
which would add to the installed cost of the product. (BWC, No. 1441 at 
p. 3)
    In response, for the July 2024 NODA, DOE made further improvements 
to its methodology used in the July 2023 NOPR to account for the 
venting costs for gas-fired instantaneous water heaters. First, DOE 
took into account the use of a concentric pipe (a pipe used for both 
air intake and venting) for some installations in its analysis, which 
was not previously included in the NOPR analysis. There are two main 
vent configurations for gas-fired instantaneous water heaters--(1) 
single pipe for venting with room air intake or two pipes with one for 
outdoor air intake and one for venting; (2) concentric pipe for both 
air intake and venting. DOE estimated that 90 percent of the non-
condensing and 50 percent of the condensing gas-fired instantaneous 
water heaters that would be direct vented would use concentric pipes 
for the benefit of only having to make one wall penetration. Among all 
installations, these updates result in approximately 22 percent of 
condensing gas-fired instantaneous water heaters and 41 percent of non-
condensing gas-fired instantaneous water heaters being installed with a 
concentric vent. In terms of its impact to the total installation 
costs, because a single concentric pipe is cheaper to install than two 
separate pipes (one for air intake and one for venting) this 
installation scenario reduced overall installation costs, particularly 
for non-condensing gas-fired instantaneous water heaters. Additionally, 
because metal venting for non-condensing water heaters is more 
expensive per foot than plastic venting for condensing water heaters, 
updates to the analysis that decrease the length of total venting 
required for some installations will lower the LCC savings when 
replacing a non-condensing gas-fired instantaneous water heater with a 
condensing gas-fired instantaneous water heater for these 
installations. For this final rule, DOE maintained the methodology used 
in July 2024 NODA.
    Second, DOE adjusted its methodology of estimating the minimum 
length of the vent run in the July 2024 NODA. In the July 2023 NOPR, 
DOE calculated the minimum vent length based on housing configuration 
and installation location and estimated that the shortest route to vent 
a gas-fired instantaneous water heater is 3 ft. DOE conducted further 
research of product literature and concluded that for many 
installations a shorter vent run could be achieved, primarily by 
venting through a side wall. Therefore, DOE recalibrated its 
methodology and estimated that the minimum vent length can be as low as 
1 ft for a certain subset of installations.
    Lastly, in the July 2023 NOPR, DOE did not account for the outdoor 
installation of gas-fired tankless water heaters. In the July 2024 
NODA, DOE utilized the location information from RECS 2020 and assumed 
that half of the residential households that report their water heaters 
being installed in an ``outdoor closet, crawlspace, or outdoor'' would 
actually install the tankless water heater on the outside of a wall 
without venting. Therefore, DOE estimated that among the entire sample, 
about 12 percent of gas-fired instantaneous water heaters are installed 
outdoors. For the outdoor installations, DOE assumed no venting costs 
but a cost for an outdoor installation conversion kit or box needed to 
protect the water heater from weather impacts. As with lowering the 
minimum vent length above, this update to the analysis reduces LCC 
savings when replacing a non-condensing gas-fired instantaneous water 
heater with a condensing gas-fired instantaneous water heater for these 
installations.
    Rinnai asserted that the vent cost distributions used in the July 
2024 NODA are skewed with the average vent cost for non-condensing 
units being higher than the average for condensing units. Additionally, 
Rinnai noted that for EL 0, the vent cost distribution has a border 
spread of higher costs relative to EL1-3 which have a gradual taper 
with more concentration in lower cost brackets. Rinnai claimed that, on 
average, the two types of venting installations are not significantly 
different, though noted that there is a small increase for non-
condensing units due to the venting materials used. (Rinnai, No. 1443 
at pp.15-16) Rinnai pointed to a particular simulation case in which 
the venting cost for EL 0 is $841 and the venting cost at higher ELs is 
$83 and noted that this variation is not supported by typical data and 
affect the accuracy of the July 2024 NODA's economic assessments. 
(Rinnai, No. 1443 at p. 16)
    In response, the difference between the venting costs for non-
condensing and condensing gas-fired instantaneous water heaters depends 
largely on the vent configuration (type of vent pipe and vent length). 
As indicated by Rinnai, the non-condensing units generally have higher 
installation cost because of the more expensive vent material required. 
For this final rule, after accounting for concentric pipes, shorter 
vent lengths, and outdoor installations, as elaborated above, DOE noted 
a decrease in the differential in installation cost between non-
condensing and condensing. The installation cost for non-condensing 
gas-fired instantaneous water heaters is 7 percent higher than the 
condensing, instead of 10 percent higher compared to the July 2023 
NOPR. For this final rule analysis, DOE estimated an average 
installation cost of $1,102 for non-condensing units and $1,025 for 
condensing units. Further details regarding installation cost 
methodology can be found in chapter 8 and appendix 8D of the final rule 
TSD.
    PHCC commented that DOE did not mention additional installation 
costs for vertical vents. PHCC commented that in most vertical 
instances, the installation will require walls to be opened for vent 
removal, new vents and supports installed, and the finished surfaces 
replaced and it appears that DOE did not consider these costs. (PHCC, 
No. 1151 at p. 3) In response, DOE determined that for a fraction of

[[Page 105228]]

replacement installations of gas tankless water heater in an indoor 
closet, the household may opt to conceal the vent pipe that passes 
through the living space. For the length of the concealing needed, DOE 
determined that for most household configurations, when concealing is 
needed, typically the horizontal vent is more likely to pass through 
living space. Vertical run is more likely to be installed by the 
plumber where it is enclosed and outside of living space.
    In response to July 2024 NODA, AGA et al. and Rinnai claimed that 
DOE had applied the same installation cost and venting assumptions from 
gas furnaces to gas-fired instantaneous water heaters which led to 
overestimation of both labor hours and material costs. They noted that 
Category I furnaces operate under negative pressure and are mainly 
vented vertically with substantially longer venting systems, which does 
not reflect the typical venting of a gas-fired instantaneous water 
heater. (AGA et al., No. 1439 at pp. 3-5 and p. 6; Rinnai, No. 1443 at 
pp. 11-14) AGA et al. and Rinnai claimed that in the model 100 percent 
of installations were assumed to use stainless steel parts with 
associated high labor costs due to the complexity of vertical 
installations and that the model failed to account for the fact that 
gas-fired instantaneous water heaters do not universally require such 
extensive venting solutions. They later acknowledged that DOE's model 
had identified 86 percent of installations as horizontal but still 
believed that the percentage of vertical installations was 
overestimated. Additionally, they stated that the average horizontal 
system requires less than 7 feet of venting and follows a 
straightforward work plan like that of a condensing unit, and that 
DOE's model applied the same labor costs to horizontal installations as 
it does to vertical, which resulted in an overestimation. Rinnai also 
echoed this comment. (AGA et al., No. 1439 at pp. 3-5 and p. 6; Rinnai, 
No. 1143, at p. 13)
    AGA et al. claimed that while DOE's model includes cost data for 
alternative materials like double-walled aluminum flex pipe, which is 
approximately half the cost of stainless steel, these alternatives were 
not applied in any of the 10,000 trials, which led to inflated 
installation cost estimates for gas-fired instantaneous water heaters. 
(AGA et al., No. 1439 at p. 4) Similarly, Rinnai commented that the 
July 2024 NODA model incorrectly assumed that stainless-steel pipes are 
used in all 10,000 trials with the end result being venting costs are 
significantly overstated. Furthermore, both AGA et al. and Rinnai 
stated that an additional markup of 39 percent is applied to metal 
venting which further widens the gap in installation cost between EL 0 
and higher efficiency levels. (AGA et al., No. 1439 at p. 5; Rinnai, 
No. 1443 at pp. 14-15)
    In response, DOE believes that commenters have misinterpreted 
documentation in July 2023 NOPR TSD and the July 2024 NODA analytical 
tool. As discussed above, non-condensing gas-fired instantaneous water 
heaters are Category III appliance that operates under positive 
pressure requiring stainless steel vent material. Condensing gas-fired 
instantaneous water heaters are Category IV appliance that can be 
vented through a PVC, CPVC, or polypropylene vent material. DOE did not 
assume the same venting for gas-fired instantaneous water heaters as 
for furnaces. DOE also did not assume 100 percent of non-condensing 
gas-fired instantaneous water heater installations to be using 
stainless steel vent pipe. To further clarify, for the 41 percent of 
non-condensing gas-fired instantaneous water heater installations that 
are assumed to be using a concentric pipe, DOE applied the material 
cost estimated based on market research of aluminum/PVC concentric pipe 
which is the most affordable option on the market. In its analytical 
tool, a conversion factor of 1.33 was applied to convert the material 
price data for a regular 4'' stainless steel vent to that of a 
concentric pipe for simplicity. Note that the conversion factor changed 
slightly from 1.39 in July 2024 NODA because of the update from 2022$ 
to 2023$.
    Rinnai claimed that in the July 2024 NODA, DOE ignored the 
replacement market where consumers already using a non-condensing gas-
fired instantaneous water heaters will have no venting cost with a 
like-for-like replacement. (Rinnai, No. 1443 at p.18) In response, DOE 
believes that it is unlikely for a new gas-fired instantaneous water 
heater to be compatible with the old vent of a unit being replaced, 
even if both water heaters fall under the same vent category. According 
to product literature, many models recommend installation with vent 
pipes from a suggested list of specific brands. Even if the new non-
condensing water heater is from the same manufacturer, the model is not 
likely to be the same since the model nomenclature, specifications and 
designs change every several years and therefore such installation will 
likely require a new venting system. Therefore, DOE did not consider 
the case of reusing stainless steel vent. DOE notes that even if no 
venting cost was associated with a like-for-like replacement of non-
condensing units, given the limited market share of non-condensing gas-
fired instantaneous water heaters in no-new-standards case, this 
assumption will not impact the economic justification reflected in the 
positive LCC savings at the adopted TSL.
c. Condensate Management Costs
    Besides the basic installation cost for removing the old water 
heater and setting up the new and the venting cost associated with 
setting up the flue vent and air intake pipework, DOE also considered 
specifically for condensing gas-fired instantaneous water heaters the 
cost of condensate management. In order to drain condensate properly, 
cost items can apply based on the specifics of the installation 
including condensate pipe, condensate pump, condensate neutralizer, and 
condensate drain. DOE additionally considered cases where a heat tape 
is applied and cases where an electric connection setup is needed.
    In response to the June 2023 NOPR, Rinnai stated that DOE excluded 
from its analysis of condensing gas-fired instantaneous water heaters 
many of the costs of condensate management including drains, pumps, 
neutralizers, and associated and recurring maintenance costs. (Rinnai, 
No. 1186 at pp. 24-25) In response to July 2024 NODA, Rinnai further 
claimed that the analysis underestimates the cost of condensate 
management and states that DOE either omits typical costs needed for 
condensing installations or applies them to a relatively small 
proportion of condensing gas-fired instantaneous water heater 
installations. For example, Rinnai claimed that the July 2024 NODA only 
applies a condensate neutralizer to 12.5 percent of installations 
rather than 25 percent of cases. Rinnai further requested DOE provide 
evidence that the default of 12.5 percent represents a survey of 
installations and market conditions. (Rinnai, No. 1443 at p. 17) In 
response, as mentioned above, DOE took into account various cost items 
for condensate management. DOE assumed that some cost items would apply 
to only a certain fraction of installation. For example, DOE assumed 
that condensate pipe cost is needed for both replacement and new 
construction installations but then only 12.5 percent of replacement 
installations where the household does not have a central AC or heat 
pump would need to be applied the cost of a condensate pump. As Rinnai 
pointed out, DOE assumed that 12.5 percent of all installations would 
be applied the cost of condensate neutralizer. DOE adopted this 
estimate

[[Page 105229]]

based on its market and technology assessment, engineering analysis, 
and its expert consultant feedback. Rinnai however provided no basis to 
support doubling the installation of condensate neutralizers to 25% of 
all cases. Nor has DOE found any other market data to support an 
alternative estimate. For lack of further data and evidence, DOE 
maintained its assumption of 12.5 percent of condensate neutralizer 
installations in this final rule.
    PHCC commented that DOE's assumption that drains are required at or 
near water heaters is wrong as codes do not require it. They commented 
that changing to an appliance that produces condensate will require a 
pump or drain that is near the heater because that condensate cannot 
drain routinely across the floor as it can create slippery surfaces, 
and that an installed pipe to a remote drain can be a trip hazard. PHCC 
commented that the cost for adding a drain should be allocated against 
all replacement water heaters that will produce condensate. (PHCC, No. 
1151 at p. 3) In response, DOE took into consideration the cost items 
of setting up a condensate pump and condensate drain in its analysis. 
Condensate pump is usually needed when the water heater is below the 
closest drain or when without an immediate drain the condensate need to 
be pumped to a remote drain. DOE assumed that for gas-fired 
instantaneous water heaters, around 12.5 percent of the replacements 
will need to set up a new condensate pump when the households do not 
have installed central air conditioner or heat pump that may already be 
equipped with a condensate pump. Accordingly, DOE applied the cost of 
non-corrosive drain to those installations that require the setup of a 
condensate pump. On average, DOE estimated a cost of $36 for condensate 
management in total.
    Noritz commented that the ability to replace a water heater in an 
emergency is an important attribute of value to consumers, and changes 
in installation patterns raise costs and impose other time-related 
constraints such as changing venting patterns, carpentry to make 
changes to the house, and possible electrical work to complete 
installation. Noritz commented that a condensing gas-fired 
instantaneous water heater does provide the same utility to customers, 
but as noted in the NOPR there are significant installation changes 
which would require significant cost. (Noritz, No. 1202 at pp. 1-2) DOE 
agrees that in emergency replacement, like-for-like equipment provides 
the most convenience to the consumer. However, DOE estimates that the 
installation of condensing equipment, including the flue venting, the 
condensate pipe, and pump can be accomplished as part of an emergency 
replacement, meaning that for emergency replacements, non-condensing 
equipment do not necessarily bring significant additional value.
3. Annual Energy Consumption
    For each sampled household and building, DOE determined the energy 
consumption for consumer gas-fired instantaneous water heaters at 
different efficiency levels using the approach described previously in 
section IV.E of this document.
    Higher-efficiency gas-fired instantaneous water heaters reduce the 
operating costs for a consumer, which can lead to greater use of the 
water heater. A direct rebound effect occurs when a product that is 
made more efficient is used more intensively, such that the expected 
energy savings from the efficiency improvement may not fully 
materialize. At the same time, consumers benefit from increased 
utilization of products due to rebound. Although some households may 
increase their water heater use in response to increased efficiency, 
DOE does not include the rebound effect in the LCC analysis because the 
increased utilization of the water heater provides value to the 
consumer, thus it is not simply an added cost. DOE does include rebound 
in the NIA for a conservative estimate of national energy savings and 
the corresponding impact to consumer NPV. See chapter 10 of the final 
rule TSD for more details.
4. Energy Prices
    Because marginal energy price more accurately captures the 
incremental savings associated with a change in energy use from higher 
efficiency, it provides a better representation of incremental change 
in consumer costs than average electricity prices. Therefore, DOE 
applied average energy prices for the energy use of the product 
purchased in the no-new-standards case, and marginal energy prices for 
the incremental change in energy use associated with the other 
efficiency levels considered.
    DOE derived average monthly marginal residential and commercial 
electricity, natural gas, and LPG prices for each state using data from 
EIA.76 77 78 DOE calculated marginal monthly regional energy 
prices by: (1) first estimating an average annual price for each 
region; (2) multiplying by monthly energy price factors, and (3) 
multiplying by seasonal marginal price factors for electricity and 
natural gas. For the derivation of monthly price factors and marginal 
price factors, DOE used historical data from EIA from 2003 up to 2022 
and from 2013 up to 2022, respectively. DOE adjusted energy prices to 
2023$ using the Consumer Price Index. Further details may be found in 
chapter 8 of the final rule TSD.
---------------------------------------------------------------------------

    \76\ U.S. Department of Energy--Energy Information 
Administration, Form EIA-861M (formerly EIA-826) detailed data 
(2022) (Available at: www.eia.gov/electricity/data/eia861m/) (Last 
accessed August 29, 2024).
    \77\ U.S. Department of Energy--Energy Information 
Administration, Natural Gas Navigator (2022) (Available at: 
www.eia.gov/naturalgas/data.php) (Last accessed August 29, 2024).
    \78\ U.S. Department of Energy--Energy Information 
Administration, State Energy Data System (``SEDS'') (2021) 
(Available at: www.eia.gov/state/seds/) (Last accessed August 29, 
2024).
---------------------------------------------------------------------------

    To estimate energy prices in future years, DOE multiplied the 2022 
energy prices by the projection of annual average price changes for 
each of the 50 U.S. states and District of Columbia from the reference 
case in AEO2023, which has an end year of 2050.\79\ To estimate price 
trends after 2050, DOE used the average annual growth rate in prices 
from 2046 to 2050 based on the methods used in the 2022 Life-Cycle 
Costing Manual for the Federal Energy Management Program 
(``FEMP'').\80\
---------------------------------------------------------------------------

    \79\ EIA. Annual Energy Outlook 2023 with Projections to 2050. 
Washington, DC. Available at www.eia.gov/forecasts/aeo/ (last 
accessed August 29, 2024).
    \80\ Lavappa, Priya D. and J.D. Kneifel. Energy Price Indices 
and Discount Factors for Life-Cycle Cost Analysis--2022 Annual 
Supplement to NIST Handbook 135. National Institute of Standards and 
Technology (NIST). NISTIR 85-3273-37, available at www.nist.gov/publications/energy-price-indices-and-discount-factors-life-cycle-cost-analysis-2022-annual (last accessed August 29, 2024).
---------------------------------------------------------------------------

    Rinnai stated that the July 2024 NODA improperly uses national 
averages in its state-level analysis and failed to account for regional 
differences in cost and utilization. Rinnai noted that there are 
significant regional and state differences that directly impact water 
heating demands, the efficiency and operational costs of water heating. 
Rinnai encouraged DOE to consider state-specific data in its 
distribution using discrete inputs to ensure results reflect diverse 
conditions across the U.S. (Rinnai, No. 1443 at p. 20) In response to 
Rinnai's concern, DOE reiterates that, given that the hot water use was 
derived based on representative energy consumption data reported from 
RECS 2020, there is already embedded regionality accounted for in the 
results. For no-new-standards case efficiency distribution, for lack of 
more granular data, DOE did not derive a market share that varies by 
state. In terms of operating costs of water heating, as discussed 
above, DOE utilized state-level energy prices for calculating the 
operating

[[Page 105230]]

costs. See appendix 8E of the final rule TSD for more details.
5. Maintenance and Repair Costs
    Repair costs are associated with repairing or replacing product 
components that have failed in an appliance; maintenance costs are 
associated with maintaining the operation of the product. DOE included 
additional maintenance and repair costs for higher efficiency consumer 
gas-fired instantaneous water heaters (including maintenance costs 
associated with condensate withdrawal and deliming of the heat 
exchanger and repair costs associated with burner and blower assembly) 
based on 2023 RSMeans data.\81\ DOE accounted for regional differences 
in labor costs by using RSMeans regional cost factors.
---------------------------------------------------------------------------

    \81\ RSMeans Company, Inc., RS Means Facilities Repair and 
Maintenance (2023), available at www.rsmeans.com/ (last accessed 
August 29, 2024).
---------------------------------------------------------------------------

    Rinnai and AGA et al. claimed that the July 2024 NODA 
underestimated the maintenance cost associated with general condensate 
withdrawal for condensing gas-fired instantaneous water heater units. 
Rinnai claimed that a basic neutralizer refill can cost between $35-50 
(instead of $20 as assumed in July 2024 NODA). Rinnai also requested 
clarification on the source of the $20 estimate. (Rinnai, No. 1443 at 
p. 17; AGA et al., No. 1439 at p. 7) In response, DOE derived the 
material cost of $20 for condensate management maintenance based on its 
consultant report included in the appendix 8F of the final rule TSD. 
For this final rule, given that the market price can change between the 
time of the final rule analysis and that of the report, DOE reviewed 
the current market prices for refills of condensate neutralizer and 
decided that an average price of $41.17 would be more representative of 
the price paid by the consumers. DOE has updated the LCC analytical 
tool and the final rule TSD accordingly to reflect the market prices it 
reviewed and the updated cost assumption.
6. Product Lifetime
    Product lifetime is the age at which an appliance is retired from 
service. DOE conducted an analysis of gas-fired instantaneous water 
heater lifetimes based on the methodology described in a journal 
paper.\82\ For this analysis, DOE relied on RECS 1990, 1993, 2001, 
2005, 2009, 2015, and 2020.\83\ DOE also used the U.S. Census's 
biennial American Housing Survey (``AHS''), from 1974-2021, which 
surveys all housing, noting the presence of a range of appliances.\84\ 
DOE used the appliance age data from these surveys, as well as the 
historical water heater shipments, to generate an estimate of the 
survival function. The survival function provides a lifetime range from 
minimum to maximum, as well as an average lifetime. DOE estimates the 
average product lifetime to be around 20 years for instantaneous water 
heaters.
---------------------------------------------------------------------------

    \82\ Lutz, J., A. Hopkins, V. Letschert, V. Franco, and A. 
Sturges, Using national survey data to estimate lifetimes of 
residential appliances, HVAC&R Research (2011) 17(5): pp. 28 
(Available at: www.tandfonline.com/doi/abs/10.1080/10789669.2011.558166) (Last accessed August 29, 2024).
    \83\ U.S. Department of Energy: Energy Information 
Administration, Residential Energy Consumption Survey (``RECS''), 
Multiple Years (1990, 1993, 1997, 2001, 2005, 2009, 2015, and 2020) 
(Available at: www.eia.gov/consumption/residential/) (Last accessed 
August 29, 2024).
    \84\ U.S. Census Bureau: Housing and Household Economic 
Statistics Division, American Housing Survey, Multiple Years (1974, 
1975, 1976, 1977, 1978, 1979, 1980, 1981, 1983, 1985, 1987, 1989, 
1991, 1993, 1995, 1997, 1999, 2001, 2003, 2005, 2007, 2009, 2011, 
2013, 2015, 2017, 2019, and 2021) (Available at: www.census.gov/programs-surveys/ahs/) (Last accessed August 29, 2024).
---------------------------------------------------------------------------

    Noritz disputed that condensing and non-condensing products have 
the same average lifespan based on their internal testing. Noritz 
argued that the less complex nature of the non-condensing product in 
their testing typically lasts between 10 and 20 percent longer than a 
similar condensing product. Noritz argued that the analysis conducted 
by DOE that proposes the average lifespan of the two products to be 
identical will impact the LCC and payback analysis. (Noritz, No. 1202 
at p. 3). In response, DOE has not found any evidence in its research 
pointing to a significantly different lifespan for the two types of 
water heaters. As described in appendix 8G of the final rule TSD, the 
data sources cited did not indicate any systematic decrease in lifetime 
for gas-fired condensing products (additionally, a majority of gas-
fired instantaneous water heaters in the market are condensing). For 
this final rule, DOE maintains its methodology of assuming the same 
lifetime for all gas-fired instantaneous water heaters.
    In order to evaluate the impact of the lifetime on the economic 
analysis results, for this final rule DOE conducted a sensitivity 
analysis, where two additional lifetime scenarios were evaluated. The 
sensitivity results do not change DOE's conclusion of economic 
justification of the adopted standards (see appendix 8G of the final 
rule TSD for the comparison of results).
7. Discount Rates
    In the calculation of LCC, DOE applies discount rates appropriate 
to households to estimate the present value of future operating cost 
savings. DOE estimated a distribution of discount rates for consumer 
gas-fired instantaneous water heaters based on the opportunity cost of 
consumer funds.
    DOE applies weighted average discount rates calculated from 
consumer debt and asset data, rather than marginal or implicit discount 
rates.\85\ The LCC analysis estimates net present value over the 
lifetime of the product, so the appropriate discount rate will reflect 
the general opportunity cost of household funds, taking this time scale 
into account. Given the long time horizon modeled in the LCC analysis, 
the application of a marginal interest rate associated with an initial 
source of funds is inaccurate. Regardless of the method of purchase, 
consumers are expected to continue to rebalance their debt and asset 
holdings over the LCC analysis period, based on the restrictions 
consumers face in their debt payment requirements and the relative size 
of the interest rates available on debts and assets. DOE estimates the 
aggregate impact of this rebalancing using the historical distribution 
of debts and assets.
---------------------------------------------------------------------------

    \85\ The implicit discount rate is inferred from a consumer 
purchase decision between two otherwise identical goods with 
different first cost and operating cost. It is the interest rate 
that equates the increment of first cost to the difference in net 
present value of lifetime operating cost, incorporating the 
influence of several factors: transaction costs; risk premiums and 
response to uncertainty; time preferences; interest rates at which a 
consumer is able to borrow or lend. The implicit discount rate is 
not appropriate for the LCC analysis because it reflects a range of 
factors that influence consumer purchase decisions, rather than the 
opportunity cost of the funds that are used in purchases.
---------------------------------------------------------------------------

    To establish residential discount rates for the LCC analysis, DOE 
identified all relevant household debt or asset classes in order to 
approximate a consumer's opportunity cost of funds related to appliance 
energy cost savings. It estimated the average percentage shares of the 
various types of debt and equity by household income group using data 
from the Federal Reserve Board's triennial Survey of Consumer Finances 
\86\ (``SCF'') starting in 1995 and ending in 2019. Using the SCF and 
other sources, DOE developed a distribution of rates for each type of 
debt and asset by income group to represent the rates that may apply in 
the year in which amended standards would take effect.

[[Page 105231]]

DOE assigned each sample household a specific discount rate drawn from 
one of the distributions. The average rate across all types of 
household debt and equity and income groups is 4.2 percent. See chapter 
8 of the final rule TSD for further details on the development of 
consumer discount rates.
---------------------------------------------------------------------------

    \86\ The Federal Reserve Board, Survey of Consumer Finances 
(1995, 1998, 2001, 2004, 2007, 2010, 2013, 2016, and 2019) 
(Available at: www.federalreserve.gov/econres/scfindex.htm) (last 
accessed August 29, 2024). The Federal Reserve Board is currently 
processing the 2022 Survey of Consumer Finances, which is expected 
to be fully available in late 2023.
---------------------------------------------------------------------------

    To establish commercial discount rates for the small fraction of 
consumer gas-fired instantaneous water heaters installed in commercial 
buildings, DOE estimated the weighted-average cost of capital using 
data from Damodaran Online.\87\ The weighted-average cost of capital is 
commonly used to estimate the present value of cash flows to be derived 
from a typical company project or investment. Most companies use both 
debt and equity capital to fund investments, so their cost of capital 
is the weighted average of the cost to the firm of equity and debt 
financing. DOE estimated the cost of equity using the capital asset 
pricing model, which assumes that the cost of equity for a particular 
company is proportional to the systematic risk faced by that company. 
DOE's commercial discount rate approach is based on the methodology 
described in a Lawrence Berkeley National Laboratory report, and the 
distribution varies by business activity.\88\ The average rate for 
consumer gas-fired instantaneous water heaters used in commercial 
applications in this final rule analysis, across all business activity, 
is 6.9 percent.
---------------------------------------------------------------------------

    \87\ Damodaran Online, Data Page: Costs of Capital by Industry 
Sector (2021) (Available at: pages.stern.nyu.edu/~adamodar/) (Last 
accessed August 29, 2024).
    \88\ Fujita, S., Commercial, Industrial, and Institutional 
Discount Rate Estimation for Efficiency Standards Analysis: Sector-
Level Data 1998-2018 (Available at: ees.lbl.gov/publications/commercial-industrial-and) (Last accessed August 29, 2024).
---------------------------------------------------------------------------

    See chapter 8 of this final rule TSD for further details on the 
development of consumer and commercial discount rates.
8. Energy Efficiency Distribution in the No-New-Standards Case
    To accurately estimate the share of consumers that would be 
affected by a potential energy conservation standard at a particular 
efficiency level, DOE's LCC analysis considered the projected 
distribution (market shares) of product efficiencies under the no-new-
standards case (i.e., the case without amended or new energy 
conservation standards). This approach reflects the fact that some 
consumers may purchase products with efficiencies greater than the 
baseline levels.
    To estimate the energy efficiency distribution of consumer gas-
fired instantaneous water heaters for 2030, DOE used available 
shipments data by efficiency including in previous AHRI submitted 
historical shipment data,\89\ ENERGY STAR unit shipments data,\90\ and 
data from a 2023 BRG Building Solutions report.\91\ To cover gaps in 
the available shipments data, DOE used DOE's public CCD model database 
\92\ and AHRI certification directory.\93\
---------------------------------------------------------------------------

    \89\ AHRI. Confidential Instantaneous Gas-fired Water Heater 
Shipments Data from 2004-2007 to LBNL. March 3, 2008.
    \90\ ENERGY STAR. Unit Shipments data 2010-2021. multiple 
reports. (Available at: www.energystar.gov/partner_resources/products_partner_resources/brand_owner_resources/unit_shipment_data) 
(Last accessed August 29, 2024).
    \91\ BRG Building Solutions. The North American Heating & 
Cooling Product Markets (2023 Edition). 2023.
    \92\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed August 29, 2024).
    \93\ Air Conditioning Heating and Refrigeration Institute. 
Consumer's Directory of Certified Efficiency Ratings for Heating and 
Water Heating Equipment. May 16, 2023. (Available at 
www.ahridirectory.org) (Last accessed August 29, 2024).
---------------------------------------------------------------------------

    The estimated market shares for the no-new-standards case for 
consumer gas-fired instantaneous water heaters are shown in table 
IV.11. See chapter 8 of the final rule TSD for further information on 
the derivation of the efficiency distributions.

              Table IV.11--No-New-Standards Case Energy Efficiency Distributions in 2030 for Consumer Gas-Fired Instantaneous Water Heaters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Draw pattern
                                                         -----------------------------------------------------------------------------------------------
                                                                        Low                           Medium                           High
                    Efficiency level                     -----------------------------------------------------------------------------------------------
                                                                           Market share                    Market share                    Market share
                                                               UEF *            (%)            UEF *            (%)            UEF *            (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Gas-Fired Instantaneous Water Heaters, <2 gal and 50,000 Btu/h
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................  ..............  ..............            0.81             30%            0.81             30%
1.......................................................  ..............  ..............            0.87               8            0.89               8
2.......................................................  ..............  ..............            0.91              48            0.93              47
3.......................................................  ..............  ..............            0.92               6            0.95               7
4.......................................................  ..............  ..............            0.93               8            0.96               8
--------------------------------------------------------------------------------------------------------------------------------------------------------
* UEF at the representative rated capacity.

    The LCC Monte Carlo simulations draw from the efficiency 
distributions and assign an efficiency to the gas-fired instantaneous 
water heater purchased by each sample household in the no-new-standards 
case according to these distributions.
    Finally, DOE considered the 2019 AHCS survey,\94\ which includes 
questions to recent purchasers of HVAC equipment regarding the 
perceived efficiency of their equipment (Standard, High, and Super High 
Efficiency), as well as questions related to various household and 
demographic characteristics. DOE did not find similar data for consumer 
water heaters, but believes that the HVAC data is relevant to other 
larger appliances such as consumer water heaters since they similarly 
represent large energy end uses. From these data, DOE found that 
households with larger square footage exhibited a higher fraction of 
High- or Super-High efficiency equipment installed. The fraction of 
respondents with ``super high efficiency'' equipment was larger by 
approximately 5 percent for larger households and correspondingly 
smaller for smaller households. DOE therefore used the AHCS data to 
adjust its water heater efficiency distributions as follows: (1) the 
market share of higher efficiency equipment for households under 1,500 
sq. ft. was decreased by 5 percentage

[[Page 105232]]

points; and (2) the market share of condensing equipment for households 
above 2,500 sq. ft. was increased by 5 percentage points. Other 
household and demographic characteristics in the survey did not exhibit 
any statistical correlations with efficiency.
---------------------------------------------------------------------------

    \94\ Decision Analysts, 2019 American Home Comfort Studies 
(Available at: www.decisionanalyst.com/syndicated/homecomfort/) 
(Last accessed August 29, 2024).
---------------------------------------------------------------------------

    DOE acknowledges that economic factors may play a role when 
consumers, commercial building owners, or builders decide on what type 
of water heater to install. However, assignment of water heater 
efficiency for a given installation based solely on economic measures 
such as life-cycle cost or simple payback period does not fully and 
accurately reflect actual real-world installations. There are a number 
of market failures discussed in the economics literature that 
illustrate how purchasing decisions with respect to energy efficiency 
are unlikely to be perfectly correlated with energy use, as described 
below. While this literature is not specific to water heaters, DOE 
finds that the method of assignment simulates behavior in the water 
heater market, where market failures and other consumer preferences 
result in purchasing decisions not being perfectly aligned with 
economic interests, more realistically than relying only on apparent 
cost-effectiveness criteria derived from the limited information in 
CBECS or RECS. DOE further emphasizes that its approach does not assume 
that all purchasers of water heaters make economically irrational 
decisions (i.e., the lack of a correlation is not the same as a 
negative correlation). As part of the sample assignment, some homes or 
buildings with large hot water use will be assigned higher efficiency 
water heaters, and some homes or buildings with particularly low hot 
water use will be assigned baseline water heaters. By using this 
approach, DOE acknowledges the variety of market failures and other 
consumer behaviors present in the water heater market, and does not 
assume certain market conditions unsupported by the available evidence.
    First, consumers are motivated by more than simple financial trade-
offs. There are consumers who are willing to pay a premium for more 
energy-efficient products because they are environmentally 
conscious.\95\ There are also several behavioral factors that can 
influence the purchasing decisions of complicated multi-attribute 
products, such as water heaters. For example, consumers (or decision 
makers in an organization) are highly influenced by choice 
architecture, defined as the framing of the decision, the surrounding 
circumstances of the purchase, the alternatives available, and how 
they're presented for any given choice scenario.\96\ The same consumer 
or decision maker may make different choices depending on the 
characteristics of the decision context (e.g., the timing of the 
purchase, competing demands for funds), which have nothing to do with 
the characteristics of the alternatives themselves or their prices. 
Consumers or decision makers also face a variety of other behavioral 
phenomena including loss aversion, sensitivity to information salience, 
and other forms of bounded rationality.\97\ R.H. Thaler, who won the 
Nobel Prize in Economics in 2017 for his contributions to behavioral 
economics, and Sunstein point out that these behavioral factors are 
strongest when the decisions are complex and infrequent, when feedback 
on the decision is muted and slow, and when there is a high degree of 
information asymmetry.\98\ These characteristics describe almost all 
purchasing situations of appliances and equipment, including water 
heaters. The installation of a new or replacement water heater is done 
infrequently, as evidenced by the mean lifetime for water heaters. 
Additionally, it would take at least one full water heating season for 
any impacts on operating costs to be fully apparent. Further, if the 
purchaser of the water heater is not the entity paying the energy costs 
(e.g., a building owner and tenant), there may be little to no feedback 
on the purchase. Additionally, there are systematic market failures 
that are likely to contribute further complexity to how products are 
chosen by consumers, as explained in the following paragraphs.
---------------------------------------------------------------------------

    \95\ Ward, D.O., Clark, C.D., Jensen, K.L., Yen, S.T., & 
Russell, C.S. (2011): ``Factors influencing willingness-to pay for 
the ENERGY STAR[supreg] label,'' Energy Policy, 39(3), 1450-1458. 
(Available at: www.sciencedirect.com/science/article/abs/pii/S0301421510009171) (Last accessed January 5, 2024).
    \96\ Thaler, R.H., Sunstein, C.R., and Balz, J.P. (2014). 
``Choice Architecture'' in The Behavioral Foundations of Public 
Policy, Eldar Shafir (ed).
    \97\ Thaler, R.H., and Bernartzi, S. (2004). ``Save More 
Tomorrow: Using Behavioral Economics in Increase Employee Savings,'' 
Journal of Political Economy 112(1), S164-S187. See also Klemick, 
H., et al. (2015) ``Heavy-Duty Trucking and the Energy Efficiency 
Paradox: Evidence from Focus Groups and Interviews,'' Transportation 
Research Part A: Policy & Practice, 77, 154-166. (providing evidence 
that loss aversion and other market failures can affect otherwise 
profit-maximizing firms).
    \98\ Thaler, R.H., and Sunstein, C.R. (2008). Nudge: Improving 
Decisions on Health, Wealth, and Happiness. New Haven, CT: Yale 
University Press.
---------------------------------------------------------------------------

    The first of these market failures--the split-incentive or 
principal-agent problem--is likely to affect water heaters more than 
many other types of appliances. The principal-agent problem is a market 
failure that results when the consumer that purchases the equipment 
does not internalize all of the costs associated with operating the 
equipment. Instead, the user of the product, who has no control over 
the purchase decision, pays the operating costs. There is a high 
likelihood of split incentive problems in the case of rental properties 
where the landlord makes the choice of what water heater to install, 
whereas the renter is responsible for paying energy bills In the LCC 
sample, for gas-fired instantaneous water heaters, approximately 10 
percent of households are renters. Given the greater market share of 
instantaneous water heaters in new construction compared to other water 
heater product classes, this fraction of renters is lower than the 
national average (which is approximately one third). For low-income 
households (see section IV.I of this document and chapter 11 of the 
final rule TSD), however, the fraction of renters increases to 38 
percent of households. The principle-agent problem can also impact 
homeowners. For example, in new construction, builders influence the 
type of water heater used in many homes but do not pay operating costs. 
Finally, contractors install a large share of water heaters in 
replacement situations, and they can exert a high degree of influence 
over the type of water heater purchased based on which products they 
are familiar with.
    In addition to the split-incentive problem, there are other market 
failures that are likely to affect the choice of water heater 
efficiency made by consumers. For example, emergency replacements of 
essential equipment such as water heaters are strongly biased toward 
like-for-like replacement (i.e., replacing the non-functioning 
equipment with a similar or identical product). Time is a constraining 
factor during emergency replacements and it may not be possible to 
consider the full range of available options on the market. The 
consideration of alternative product options is far more likely for 
planned replacements and installations in new construction.
    Additionally, Davis and Metcalf \99\ conducted an experiment 
demonstrating that the nature of the information available to consumers 
from EnergyGuide labels posted on air conditioning equipment results in 
an inefficient allocation of energy efficiency across households with

[[Page 105233]]

different usage levels. Their findings indicate that households are 
likely to make decisions regarding the efficiency of the climate 
control equipment of their homes that do not result in the highest net 
present value for their specific usage pattern (i.e., their decision is 
based on imperfect information and, therefore, is not necessarily 
optimal).
---------------------------------------------------------------------------

    \99\ Davis, L.W., and G.E. Metcalf (2016): ``Does better 
information lead to better choices? Evidence from energy-efficiency 
labels,'' Journal of the Association of Environmental and Resource 
Economists, 3(3), 589-625. (Available at: www.journals.uchicago.edu/doi/full/10.1086/686252) (Last accessed January 5, 2024).
---------------------------------------------------------------------------

    In part because of the way information is presented, and in part 
because of the way consumers process information, there is also a 
market failure consisting of a systematic bias in the perception of 
equipment energy usage, which can affect consumer choices. Attari, et 
al.\100\ show that consumers tend to underestimate the energy use of 
large energy-intensive appliances but tend to overestimate the energy 
use of small appliances. Water heaters are one of the largest energy-
consuming end-uses in a home. Therefore, it is likely that consumers 
systematically underestimate the energy use associated with water 
heater, resulting in less cost-effective water heater purchases.
---------------------------------------------------------------------------

    \100\ Attari, S.Z., M.L. DeKay, C.I. Davidson, and W. Bruine de 
Bruin (2010): ``Public perceptions of energy consumption and 
savings.'' Proceedings of the National Academy of Sciences 107(37), 
16054-16059 (Available at: www.pnas.org/content/107/37/16054) (Last 
accessed January 5, 2024).
---------------------------------------------------------------------------

    These market failures may affect a sizeable share of the consumer 
population. A study by Houde \101\ indicates that there is a 
significant subset of consumers that appear to purchase appliances 
without taking into account their energy efficiency and operating costs 
at all, though subsequent studies using alternative methodologies have 
highlighted other consumer groups who are to some extent responsive to 
local energy prices with their appliance purchases.\102\ The extent to 
which consumers are perceptive of energy prices and product efficiency 
when making appliance purchasing decisions is a topic of ongoing 
research.
---------------------------------------------------------------------------

    \101\ Houde, S. (2018): ``How Consumers Respond to Environmental 
Certification and the Value of Energy Information,'' The RAND 
Journal of Economics, 49 (2), 453-477 (Available at: 
onlinelibrary.wiley.com/doi/full/10.1111/1756-2171.12231) (Last 
accessed January 5, 2024).
    \102\ Houde, S. and Meyers, E. (2021). ``Are consumers attentive 
to local energy costs? Evidence from the appliance market,'' Journal 
of Public Economics, 201 (Available at: sciencedirect.com/science/article/pii/S004727272100116X) (Last accessed March 7, 2024).
---------------------------------------------------------------------------

    Although consumer gas-fired instantaneous water heaters are 
predominantly installed in the residential sector, some are also 
installed in commercial buildings (6 percent of projected shipments; 
see chapter 9 of the final rule TSD). There are market failures 
relevant to consumer gas-fired instantaneous water heaters installed in 
commercial applications as well. It is often assumed that because 
commercial and industrial customers are businesses that have trained or 
experienced individuals making decisions regarding investments in cost-
saving measures, some of the commonly observed market failures present 
in the general population of residential customers should not be as 
prevalent in a commercial setting. However, there are many 
characteristics of organizational structure and historic circumstance 
in commercial settings that can lead to underinvestment in energy 
efficiency.
    First, a recognized problem in commercial settings is the 
principal-agent problem, where the building owner (or building 
developer) selects the equipment and the tenant (or subsequent building 
owner) pays for energy costs.103 104 Indeed, more than a 
quarter of commercial buildings in the CBECS 2018 sample are occupied 
at least in part by a tenant, not the building owner (indicating that, 
in DOE's experience, the building owner in some cases is not 
responsible for paying energy costs). Additionally, some commercial 
buildings have multiple tenants. There are other similar misaligned 
incentives embedded in the organizational structure within a given firm 
or business that can impact the choice of a water heater. For example, 
if one department or individual within an organization is responsible 
for capital expenditures (and therefore equipment selection) while a 
separate department or individual is responsible for paying the energy 
bills, a market failure similar to the principal-agent problem can 
result.\105\ Additionally, managers may have other responsibilities and 
often have other incentives besides operating cost minimization, such 
as satisfying shareholder expectations, which can sometimes be focused 
on short-term returns.\106\ Decision-making related to commercial 
buildings is highly complex and involves gathering information from and 
for a variety of different market actors. It is common to see 
conflicting goals across various actors within the same organization as 
well as information asymmetries between market actors in the energy 
efficiency context in commercial building construction.\107\
---------------------------------------------------------------------------

    \103\ Vernon, D., and Meier, A. (2012). ``Identification and 
quantification of principal-agent problems affecting energy 
efficiency investments and use decisions in the trucking industry,'' 
Energy Policy, 49, 266-273.
    \104\ Blum, H. and Sathaye, J. (2010). ``Quantitative Analysis 
of the Principal-Agent Problem in Commercial Buildings in the U.S.: 
Focus on Central Space Heating and Cooling,'' Lawrence Berkeley 
National Laboratory, LBNL-3557E. (Available at: escholarship.org/uc/item/6p1525mg) (Last accessed January 5, 2024).
    \105\ Prindle, B., Sathaye, J., Murtishaw, S., Crossley, D., 
Watt, G., Hughes, J., and de Visser, E. (2007). ``Quantifying the 
effects of market failures in the end-use of energy,'' Final Draft 
Report Prepared for International Energy Agency. (Available from 
International Energy Agency, Head of Publications Service, 9 rue de 
la Federation, 75739 Paris, Cedex 15 France).
    \106\ Bushee, B.J. (1998). ``The influence of institutional 
investors on myopic R&D investment behavior,'' Accounting Review, 
305-333. DeCanio, SJ. (1993). ``Barriers Within Firms to Energy 
Efficient Investments,'' Energy Policy, 21(9), 906-914. (explaining 
the connection between short-termism and underinvestment in energy 
efficiency).
    \107\ International Energy Agency (IEA). (2007). Mind the Gap: 
Quantifying Principal-Agent Problems in Energy Efficiency. OECD Pub. 
(Available at: www.iea.org/reports/mind-the-gap) (Last accessed 
January 5, 2024)
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    Second, the nature of the organizational structure and design can 
influence priorities for capital budgeting, resulting in choices that 
do not necessarily maximize profitability.\108\ Even factors as simple 
as unmotivated staff or lack of priority-setting and/or a lack of a 
long-term energy strategy can have a sizable effect on the likelihood 
that an energy efficient investment will be undertaken.\109\ U.S. tax 
rules for

[[Page 105234]]

commercial buildings may incentivize lower capital expenditures, since 
capital costs must be depreciated over many years, whereas operating 
costs can be fully deducted from taxable income or passed through 
directly to building tenants.\110\
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    \108\ DeCanio, S.J. (1994). ``Agency and control problems in US 
corporations: the case of energy-efficient investment projects,'' 
Journal of the Economics of Business, 1(1), 105-124.
    Stole, L.A., and Zwiebel, J. (1996). ``Organizational design and 
technology choice under intrafirm bargaining,'' The American 
Economic Review, 195-222.
    \109\ Rohdin, P., and Thollander, P. (2006). ``Barriers to and 
driving forces for energy efficiency in the non-energy intensive 
manufacturing industry in Sweden,'' Energy, 31(12), 1836-1844.
    Takahashi, M and Asano, H (2007). ``Energy Use Affected by 
Principal-Agent Problem in Japanese Commercial Office Space 
Leasing,'' In Quantifying the Effects of Market Failures in the End-
Use of Energy. American Council for an Energy-Efficient Economy. 
February 2007.
    Visser, E and Harmelink, M (2007). ``The Case of Energy Use in 
Commercial Offices in the Netherlands,'' In Quantifying the Effects 
of Market Failures in the End-Use of Energy. American Council for an 
Energy-Efficient Economy. February 2007.
    Bjorndalen, J. and Bugge, J. (2007). ``Market Barriers Related 
to Commercial Office Space Leasing in Norway,'' In Quantifying the 
Effects of Market Failures in the End-Use of Energy. American 
Council for an Energy-Efficient Economy. February 2007.
    Schleich, J. (2009). ``Barriers to energy efficiency: A 
comparison across the German commercial and services sector,'' 
Ecological Economics, 68(7), 2150-2159.
    Muthulingam, S., et al. (2013). ``Energy Efficiency in Small and 
Medium-Sized Manufacturing Firms,'' Manufacturing & Service 
Operations Management, 15(4), 596-612. (Finding that manager 
inattention contributed to the non-adoption of energy efficiency 
initiatives).
    Boyd, G.A., Curtis, E.M. (2014). ``Evidence of an `energy 
management gap' in US manufacturing: Spillovers from firm management 
practices to energy efficiency,'' Journal of Environmental Economics 
and Management, 68(3), 463-479.
    \110\ Lovins, A. (1992). Energy-Efficient Buildings: 
Institutional Barriers and Opportunities. (Available at: rmi.org/insight/energy-efficient-buildings-institutional-barriers-and-opportunities/) (Last accessed January 5, 2024).
    Fazzari, S.M., Hubbard, R.G., Petersen, B.C., Blinder, A.S., and 
Poterba, J.M. (1988). ``Financing constraints and corporate 
investment,'' Brookings Papers on Economic Activity, 1988(1), 141-
206.
    Cummins, J.G., Hassett, K.A., Hubbard, R.G., Hall, R.E., and 
Caballero, R.J. (1994). ``A reconsideration of investment behavior 
using tax reforms as natural experiments,'' Brookings Papers on 
Economic Activity, 1994(2), 1-74.
    DeCanio, S.J., and Watkins, W.E. (1998). ``Investment in energy 
efficiency: do the characteristics of firms matter?'' Review of 
Economics and Statistics, 80(1), 95-107.
    Hubbard R.G. and Kashyap A. (1992). ``Internal Net Worth and the 
Investment Process: An Application to U.S. Agriculture,'' Journal of 
Political Economy, 100, 506-534.
---------------------------------------------------------------------------

    Third, there are asymmetric information and other potential market 
failures in financial markets in general, which can affect decisions by 
firms with regard to their choice among alternative investment options, 
with energy efficiency being one such option.\111\ Asymmetric 
information in financial markets is particularly pronounced with regard 
to energy efficiency investments.\112\ There is a dearth of information 
about risk and volatility related to energy efficiency investments, and 
energy efficiency investment metrics may not be as visible to 
investment managers,\113\ which can bias firms towards more certain or 
familiar options. This market failure results not because the returns 
from energy efficiency as an investment are inherently riskier, but 
because information about the risk itself tends not to be available in 
the same way it is for other types of investment, like stocks or bonds. 
In some cases energy efficiency is not a formal investment category 
used by financial managers, and if there is a formal category for 
energy efficiency within the investment portfolio options assessed by 
financial managers, they are seen as weakly strategic and not seen as 
likely to increase competitive advantage.\114\ This information 
asymmetry extends to commercial investors, lenders, and real-estate 
financing, which is biased against new and perhaps unfamiliar 
technology (even though it may be economically beneficial).\115\ 
Another market failure known as the first-mover disadvantage can 
exacerbate this bias against adopting new technologies, as the 
successful integration of new technology in a particular context by one 
actor generates information about cost-savings, and other actors in the 
market can then benefit from that information by following suit; yet 
because the first to adopt a new technology bears the risk but cannot 
keep to themselves all the informational benefits, firms may 
inefficiently underinvest in new technologies.\116\
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    \112\ Mills, E., Kromer, S., Weiss, G., and Mathew, P.A. (2006). 
``From volatility to value: analysing and managing financial and 
performance risk in energy savings projects,'' Energy Policy, 34(2), 
188-199.
    Jollands, N., Waide, P., Ellis, M., Onoda, T., Laustsen, J., 
Tanaka, K., and Meier, A. (2010). ``The 25 IEA energy efficiency 
policy recommendations to the G8 Gleneagles Plan of Action,'' Energy 
Policy, 38(11), 6409-6418.
    \113\ Reed, J.H., Johnson, K., Riggert, J., and Oh, A.D. (2004). 
``Who plays and who decides: The structure and operation of the 
commercial building market,'' U.S. Department of Energy Office of 
Building Technology, State and Community Programs. (Available at: 
www1.eere.energy.gov/buildings/publications/pdfs/commercial_initiative/who_plays_who_decides.pdf) (Last accessed 
January 5, 2024).
    \114\ Cooremans, C. (2012). ``Investment in energy efficiency: 
do the characteristics of investments matter?'' Energy Efficiency, 
5(4), 497-518.
    \115\ Lovins 1992, op. cit. The Atmospheric Fund. (2017). Money 
on the table: Why investors miss out on the energy efficiency 
market. (Available at: taf.ca/publications/money-table-investors-
energy-efficiency-market/) (Last accessed January 5, 2024).
    \116\ Blumstein, C. and Taylor, M. (2013). Rethinking the 
Energy-Efficiency Gap: Producers, Intermediaries, and Innovation. 
Energy Institute at Haas Working Paper 243. (Available at: 
haas.berkeley.edu/wp-content/uploads/WP243.pdf) (Last accessed 
January 5, 2024).
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    In sum, the commercial and industrial sectors face many market 
failures that can result in an under-investment in energy efficiency. 
This means that discount rates implied by hurdle rates \117\ and 
required payback periods of many firms are higher than the appropriate 
cost of capital for the investment.\118\ The preceding arguments for 
the existence of market failures in the commercial and industrial 
sectors are corroborated by empirical evidence. One study in particular 
showed evidence of substantial gains in energy efficiency that could 
have been achieved without negative repercussions on profitability, but 
the investments had not been undertaken by firms.\119\ The study found 
that multiple organizational and institutional factors caused firms to 
require shorter payback periods and higher returns than the cost of 
capital for alternative investments of similar risk Another study 
demonstrated similar results with firms requiring very short payback 
periods of 1-2 years in order to adopt energy-saving projects, implying 
hurdle rates of 50 to 100 percent, despite the potential economic 
benefits.\120\ For small businesses, the payback periods for higher 
efficiency gas-fired instantaneous water heaters are typically 7 to 8 
years on average, longer than the usual requirement of 1 to 2 years, 
which ultimately discounts the significant long-term savings from these 
higher efficiency products. A number of other case studies similarly 
demonstrate the existence of market failures preventing the adoption of 
energy-efficient technologies in a variety of commercial sectors around 
the world, including office buildings,\121\ supermarkets,\122\ and the 
electric motor market.\123\
---------------------------------------------------------------------------

    \117\ A hurdle rate is the minimum rate of return on a project 
or investment required by an organization or investor. It is 
determined by assessing capital costs, operating costs, and an 
estimate of risks and opportunities.
    \118\ DeCanio 1994, op. cit.
    \119\ DeCanio, S.J. (1998). ``The Efficiency Paradox: 
Bureaucratic and Organizational Barriers to Profitable Energy-Saving 
Investments,'' Energy Policy, 26(5), 441-454.
    \120\ Andersen, S.T., and Newell, R.G. (2004). ``Information 
programs for technology adoption: the case of energy-efficiency 
audits,'' Resource and Energy Economics, 26, 27-50.
    \121\ Prindle 2007, op. cit. Howarth, R.B., Haddad, B.M., and 
Paton, B. (2000). ``The economics of energy efficiency: insights 
from voluntary participation programs,'' Energy Policy, 28, 477-486.
    \122\ Klemick, H., Kopits, E., Wolverton, A. (2017). ``Potential 
Barriers to Improving Energy Efficiency in Commercial Buildings: The 
Case of Supermarket Refrigeration,'' Journal of Benefit-Cost 
Analysis, 8(1), 115-145.
    \123\ de Almeida, E.L.F. (1998). ``Energy efficiency and the 
limits of market forces: The example of the electric motor market in 
France'', Energy Policy, 26(8), 643-653. Xenergy, Inc. (1998). 
United States Industrial Electric Motor Systems Market Opportunity 
Assessment. (Available at: www.energy.gov/sites/default/files/2014/04/f15/mtrmkt.pdf) (Last accessed January 5, 2024).
---------------------------------------------------------------------------

    The existence of market failures in the residential and commercial 
sectors is well supported by the economics literature and by a number 
of case studies. Although these studies are not specifically targeted 
to the water heater market, they cover decision-making generally and 
the impact of energy efficiency, operating costs, and future savings/
expenditures on those decisions, all of which apply to the purchase of 
a consumer gas-fired instantaneous water heater. DOE is not aware of 
any market failure studies specifically and narrowly focused on gas-
fired instantaneous water heaters and so relies on the available 
literature discussed above. If DOE developed an efficiency distribution 
that assigned water heater efficiency in the no-new-standards case 
solely according to energy use or economic considerations such as life-
cycle cost or payback period, the resulting distribution of 
efficiencies within the building sample

[[Page 105235]]

would not reflect any of the market failures or behavioral factors 
above. DOE thus concludes such a distribution would not be 
representative of the water heater market.
    AGA et al. stated that DOE's model makes several assumptions that 
significantly impact its outcomes. According to AGA et al., DOE does 
not account for regional variations when implementing a national market 
share for each product level, and bases installation on square footage 
rather than other household attributes such as the number of bathrooms, 
bedrooms, or inhabitants. (AGA et al., No. 1439 at p. 7)
    Rinnai asserted that installations of condensing and non-condensing 
units vary regionally and DOE should account for this in the model 
instead of using national market share for each product level and 
assuming an increased likelihood a consumer purchases a more efficient 
option based on square footage. (Rinnai, No. 1443 at p.18)
    In response, DOE notes that the market share data for gas-fired 
instantaneous water heaters are not available at a regional or State 
level. Manufacturer and industry associations did not provide any 
regional or State-level shipments data by efficiency level to be 
incorporated into the analyses. There is similarly no data set DOE is 
aware of, nor that any stakeholder pointed to, that correlates gas-
fired instantaneous water heater efficiency to household attributes or 
consumer demographics. DOE therefore used national-level data to 
estimate the market share by efficiency level for gas-fired 
instantaneous water heaters. However, RECS 2020 is a nationally 
representative survey of energy consumption and incorporates regional 
variation with respect to household attributes, water heater usage, 
water inlet temperature, and energy consumption. Therefore, the LCC 
analysis does include regional variation with respect to housing 
characteristics, sample location, labor cost (and therefore 
installation cost), and estimates of water heating usage. The total 
costs are therefore not based solely on square footage, but rather on 
multiple household attributes. Square footage is used to adjust the 
national efficiency distribution based on the observed consumer 
behavior that larger homes are more likely to invest in more efficient 
water heating equipment, as discussed above.
    Rinnai objected to DOE's use of the Monte Carlo method for 
estimating energy savings, which Rinnai argues overstates benefits by 
ignoring rational consumer choice. Rinnai further stated that this 
error is compounded by not analyzing product switching. (Rinnai, No. 
1443 at pp. 22-23)
    In response, DOE notes that there are a multitude of market 
failures present in the water heater market that can influence the 
efficiency of water heater chosen by consumers in the absence of new 
standards, as discussed above. DOE is not ignoring rational consumer 
choice, rather the methodology acknowledges the range in consumer 
behavior present in the market, including those who make equipment 
choices that minimize their costs. Those consumers are indeed reflected 
in the analysis, along with other consumers who do not or cannot make 
choices that minimize their costs for a variety of reasons. With 
respect to switching to other types of water heaters, as discussed in 
greater detail in section IV.F.10 of this document, the LCC savings 
over a longer product lifetime, other attributes of instantaneous water 
heaters valued by consumers, logistical barriers to switching in some 
housing contexts, and marginal installed cost differences will minimize 
the incentives for consumers to switch to alternative water heater 
product classes rather than simply adopting a standards-compliant gas-
fired instantaneous water heater. DOE therefore concludes that the 
likelihood of an adopted standard for gas-fired instantaneous water 
heaters driving any significant product class switching to be 
negligible.
    AGA et al. commented that DOE's assignment methodology is 
unreasonable and simulates extreme and unreasonable purchasing behavior 
as well as skews the result of DOE's analysis. They contended that 
economic considerations do influence purchasing behavior yet DOE's 
assignment methodology assumes that economic considerations never 
matter. (AGA et al., No. 1439 at pp. 8-9)
    In response, DOE has never stated that economic considerations 
never matter. This is a mischaracterization of the analysis. DOE 
acknowledges the full range of consumer behaviors in the water heater 
market and the analysis is modeled to reflect this range. As discussed 
below, the model produces a variety of outcomes including a significant 
fraction of consumers who choose an efficiency level that minimizes 
their life-cycle costs in the absence of new standards. These are 
consumers that the commenter would characterize as ``reasonable'' and 
they are reflected in the total sample. However, DOE also acknowledges 
that other groups of consumers exist who face a variety of market 
failures, preventing from choosing an efficiency level that minimizes 
their life-cycle costs in the absence of new standards.
    DOE's focus on a limited number of variables in projecting the 
efficiency assignment in the no-new-standards case reflects the limits 
that constrain consumer decision-making. A full life-cycle analysis 
requires a variety of inputs, such as product prices, product energy 
consumption, energy prices, maintenance and repair costs, product 
lifetime, and discount rates. All of these figures are--by their 
nature--forward looking, predictive, and, therefore, subject to 
uncertainty. To account for uncertainty and variability in specific 
inputs, such as equipment lifetime and discount rate, DOE uses a 
distribution of values, with probabilities attached to each value.
    In terms of how consumers make purchase decisions in the real 
world, a typical consumer has neither the expertise nor the time to 
review information about discount rates, projected price trends, or the 
host of other variables included in DOE's own calculations. Instead, 
consumers generally rely on the appliances recommended by contractors, 
who typically prefer to install appliances that are in stock and with 
which they are familiar. That is particularly true in emergency 
replacement situations, such as when an appliance and a replacement 
must be obtained and installed quickly. Consumer decisions, therefore, 
do not necessarily involve an exhaustive review of all variables that 
may affect long-run costs, but instead primarily reflect the prevalence 
of existing units in the relevant market.
    There are many reasons to conclude that this imperfect decision-
making environment leads consumers to purchase fewer condensing gas-
fired instantaneous water heaters than would be economically justified. 
Studies show that consumers tend to undervalue energy efficiency and 
that a subset appear to purchase appliances without taking into account 
their energy efficiency and operating costs at all.
    The market failures that generally affect energy-related decisions 
are particularly pernicious in the context of consumer water heaters. 
As discussed elsewhere in this document, landlords, contractors, and 
developers often make the choice of what appliance to install but do 
not benefit from the lower operating costs associated with condensing 
units (or suffer from the higher utility bills associated with non-
condensing units).
    As courts have found, EPCA itself recognizes that consumers do not 
invariably select appliances that are cost-justified in the long-term, 
but

[[Page 105236]]

instead, the statute reflects Congress's ``concern[] over the tendency 
of consumers to reject efficiency-improving appliances with long 
payback periods.'' Natural Res. Def. Council, Inc. v. Herrington, 768 
F.2d 1355, 1405 (D.C. Cir. 1985). Indeed, ``[n]umerous witnesses 
[before Congress] . . . testified that the average consumer looks for a 
payback from higher purchase prices within 3 years.'' Id. (quotation 
marks omitted). This propensity to focus on the short term is 
especially unfortunate here, where the benefits of condensing units 
extend for two decades or more. By authorizing DOE to amend efficiency 
standards, Congress acted in part to rectify this and other distortions 
in appliance markets. See id. (noting that ``Congress viewed this 
consumer behavior as a kind of market failure'').
    In promulgating EPCA (Pub. L. 94-163, 89 Stat. 871 (1975)), 
Congress itself expressed a view that markets are not perfect, enacting 
the statute to promote national ``energy conservation,'' including by 
improving the energy efficiency of certain ``major appliances'' and 
``consumer products.'' (42 U.S.C. 6201(4), (5)) Congress initially 
established a voluntary, market-based program for achieving that goal 
(see Sec.  325, 89 Stat. 923-26), but it soon amended EPCA to require 
mandatory energy conservation standards (see National Energy 
Conservation Policy Act, Pub. L. 95-619, tit. IV, pt. 2, Sec.  422, 92 
Stat. 3206, 3259-62 (1978)), and Congress has continued to amend EPCA 
over time to revise those standards and to advance the goal of energy 
conservation.
    The use of the efficiency assignment methodology of the gas-fired 
instantaneous water heater efficiency in the no-new-standards case in 
the LCC model is a methodological approach that reflects the full range 
of consumer behaviors in this market, including consumers who make 
informed and beneficial cost-minimizing decisions and other consumers 
who, due to the market failures discussed, do not or cannot make such 
perfectly beneficial decisions. The methodology is further constrained 
by shipments data by efficiency level; it must produce an overall 
distribution that matches the available market data. For example, for 
the gas-fired instantaneous water heater consumer sample at the adopted 
standard level (EL 2), DOE's methodology results in the following 
groups of consumers:
    (1) Consumers who, in the absence of standards, choose a lower 
efficiency product with a lower life-cycle cost based on their surveyed 
hot water usage. These consumers are making an optimal choice from the 
perspective of cost savings in the model in the no-new-standards case. 
These are consumers who are choosing a baseline non-condensing gas-
fired instantaneous water heater (EL 0) or consumers choosing a 
condensing gas-fired instantaneous water heater with the lowest 
efficiency (EL 1). With amended standards, they are made to purchase a 
more efficient product at EL 2 and therefore experience a net cost in 
the standards case. (15 percent of the gas-fired instantaneous water 
heater sample.) These consumers represent nearly half of all consumers 
choosing EL 0 in the no-new-standards case, therefore the efficiency 
assignment model is already assigning minimum-cost choices to this 
fraction of consumers in the no-new-standards case.
    (2) Consumers who, in the absence of standards, choose a higher 
efficiency product that also lowers their life-cycle cost compared to 
the baseline efficiency product. These are consumers who are choosing a 
condensing gas-fired instantaneous water heater with higher efficiency, 
including at the adopted standard level (EL 2, EL 3, and EL 4). These 
consumers are making a cost-minimizing choice in the model in the no-
new-standards case. With amended standards, these consumers are not 
impacted because they are already purchasing a standards-compliant 
product. (34 percent of the gas-fired instantaneous water heater 
sample.) The efficiency assignment model is already assigning minimum-
cost choices to this fraction of consumers in the no-new-standards 
case.
    (3) Consumers who, in the absence of standards, choose a lower 
efficiency product that does not minimize the life-cycle cost. These 
are consumers who are choosing a baseline non-condensing gas-fired 
instantaneous water heater (EL 0) or consumers choosing a condensing 
gas-fired instantaneous water heater with the lowest efficiency (EL 1). 
The market failures discussed above apply to these consumers, 
preventing them from making the choice that minimizes their life-cycle 
costs in the no-new-standards case. With amended standards, they are 
made to purchase a more efficient product at EL 2 that ultimately 
results in a lower life-cycle cost. These consumers experience a net 
benefit as a result of the standard. (23 percent of the gas-fired 
instantaneous water heater sample)
    (4) Consumers who, in the absence of standards, choose a higher 
efficiency product that does not lower their life-cycle cost compare to 
the baseline or lower efficiency product. These are consumers who are 
choosing a condensing gas-fired instantaneous water heater with higher 
efficiency, including at the adopted standard level (EL 2, EL 3, and EL 
4). Although these consumers are choosing a higher efficiency product 
in the no-new-standards case, they may have incomplete knowledge of the 
energy consumption of the equipment or may value environmental features 
such as efficiency more heavily, resulting in a choice of a higher 
efficiency product that does not lower life-cycle cost compared to a 
baseline or lower efficiency product. With amended standards, these 
consumers are not impacted because they are already purchasing a 
standards-compliant product. (29 percent of the gas-fired instantaneous 
water heater sample)
    DOE's methodological approach is a proxy that ultimately reflects a 
diversity of scenarios for consumers and therefore the range of 
outcomes that will result from this diversity. The approach already 
reflects market share outcomes with some degree of market efficiency 
and optimal decision-making among some consumers, but the approach also 
acknowledges a number of factors that hinder perfect decision-making 
for others. Furthermore, the model produces an overall distribution of 
efficiency that matches the available shipments data.
    Although DOE's efficiency assignment methodology does not 
explicitly model consumer decision making, nor does it take a stance on 
the rationality or irrationality of specific consumers, DOE believes 
that the approach would be consistent with a model in which some share 
of consumers make optimal cost-minimizing decisions, and some 
consumers--in the face of market failures--do not. The use of an 
assignment of gas-fired instantaneous water heater efficiency is a 
methodological approach that reflects the full range of consumer 
behaviors in this market, including consumers who make beneficial 
decisions that minimize their costs and consumers who, due to market 
failures, do not or cannot make such beneficial decisions, both of 
which occur in reality. Within those constraints, DOE then assigns 
product efficiencies to consumers in the LCC, consistent with the 
economics literature discussed above, to reflect neither purely 
rational nor purely irrational decision-making.
    DOE's analytical approach reflects some degree of market 
efficiency. An alternative approach which assumes consumer behavior is 
based solely on cost outcomes, for example by ranking

[[Page 105237]]

LCCs and using those to assign efficiencies, is not evidenced by the 
scientific literature surveyed above or by any data submitted in the 
course of this rulemaking. This approach depends on the assumption, for 
example, that homeowners know--as a rule--the efficiency of their 
homes' water heater and water heating energy use, such that they always 
make water heating investments accordingly. Similarly, this approach 
assumes that, faced with a water heater failure, homeowners will always 
select as a replacement the most economically beneficial available 
model. Given the work documenting market failures in the energy 
efficiency contexts described above, DOE believes that such assumptions 
would bias the outcome of the analysis to the least favorable results. 
DOE's approach, by contrast, recognizes that assumptions like these 
hold for some consumers some of the time--but not all consumers and not 
at all times.
    As part of the assignment, some households or buildings with large 
water heating loads will be assigned higher-efficiency water heaters in 
the no-new-standards case, and some households or buildings with 
particularly low water heating loads will be assigned baseline water 
heaters--i.e., the lowest cost investments.
    Regarding the role of contractors, DOE notes that they can exert a 
high degree of influence over the type of water heater purchased. DOE 
acknowledges that they can serve as an information mediator. However, 
it is possible for a contractor to also influence the decision toward a 
familiar like-for-like replacement, for example, or perhaps the 
quickest replacement option available (e.g., based on equipment 
availability). Ultimately, there are multiple actors involved in the 
decision-making process which results in complex purchasing behavior.
    As DOE has noted, there is a complex set of behavioral factors, 
with sometimes opposing effects, affecting the water heater market. It 
is impractical to model every consumer decision incorporating all of 
these effects at this extreme level of granularity given the limited 
available data. Given these myriad factors, DOE estimates the resulting 
distribution of such a model would be very scattered with high 
variability. It is for this reason DOE utilizes a probability 
distribution (after accounting for market share constraints) to 
approximate these effects. This is the standard methodological approach 
used on all of DOE's prior rules. The methodology is not an assertion 
of economic irrationality, but instead, it is a methodological 
approximation of complex consumer behavior. The analysis is neither 
necessarily biased toward high or low energy savings. The methodology 
does not preferentially assign lower-efficiency gas-fired instantaneous 
water heaters to households in the no-new-standards case where savings 
from the rule would be greatest, nor does it preferentially assign 
lower-efficiency gas-fired instantaneous water heaters to households in 
the no-new-standards case where savings from the rule would be 
smallest. However, it is worth noting that energy use could be 
improperly estimated if preferences for energy efficiency are 
correlated with demand for hot water. Some consumers were assigned the 
water heaters that they would have chosen if they had engaged in 
perfect economic thinking. Others were assigned less-efficient water 
heaters even where a more-efficient water heater would eventually 
result in life-cycle savings, simulating scenarios where, for example, 
various market failures prevent consumers from realizing those savings. 
Still others were assigned water heaters that were more efficient than 
one would expect simply from life-cycle costs analysis, reflecting, 
say, ``green'' behavior, whereby consumers ascribe independent value to 
minimizing harm to the environment.
    DOE cites the available economic literature of which it is aware on 
this subject, supporting the existence of the various market failures 
in other appliance markets which would give rise to such a 
distribution, and has requested more data or studies on this topic in 
the May 2020 RFI, March 2022 preliminary analysis, and July 2023 NOPR. 
DOE is not aware of any specific study regarding how consumer water 
heaters (and their efficiency) are purchased.
    DOE acknowledges that in the LCC, there are a handful of outcomes 
with large benefits as a consequence of the assignment methodology. 
Nevertheless, the median results (instead of the average results) from 
the LCC continue to show positive LCC savings at the adopted standard 
levels. However, for gas-fired instantaneous water heaters, DOE 
considered a sensitivity analysis that eliminated these outcomes with 
large benefits. Under certain combinations of parameters, particularly 
in new construction, the total installed cost of a condensing, higher 
efficiency gas-fired instantaneous water heater can be lower than a 
non-condensing baseline gas-fired instantaneous water heater (due to 
the differing vent lengths and material costs). With assignment 
methodology used by DOE (and the constraints of the market data by 
efficiency level), there are a handful of individual gas-fired 
instantaneous water heater LCC consumers assigned a baseline non-
condensing gas-fired instantaneous water heater even though a higher 
efficiency product would cost less. This is a rare outcome and only 
occurs for approximately 2.5 percent of the sample. In the sensitivity 
analysis, DOE removed these outlier consumers from the analysis in case 
they may be overly biasing the overall results. This sensitivity 
scenario therefore eliminates any instance of a consumer assigned EL 0 
even though EL 2 would cost less to install. The resulting average LCC 
savings are reduced to $87 across the rest of the entire gas-fired 
instantaneous water heater consumer sample, with 15 percent of 
consumers experiencing a net cost, 20 percent experiencing a net 
savings, and 65 percent of consumers not impacted by the rule. Although 
the average LCC savings are reduced in this sensitivity analysis, and 
slightly more consumers are negatively impacted by the adopted 
standards, the average (and median) LCC savings remain positive and 
there continue to be significant energy and environment savings. DOE 
continues to conclude that the adopted standard level for gas-fired 
instantaneous water heaters is economically justified even in this 
sensitivity analysis that eliminates outlier results.\124\
---------------------------------------------------------------------------

    \124\ These sensitivity results can be found in the LCC Results 
spreadsheet, available at www.regulations.gov/docket/EERE-2017-BT-STD-0019 (docket reference).
---------------------------------------------------------------------------

    In summary, DOE's efficiency assignment methodology produces 
overall results that are consistent with the observed distribution of 
efficiency across products as seen in the shipments data. The 
methodology also results in a share of consumers being assigned product 
efficiencies that minimize their life-cycle costs in the absence of 
standards. This represents consumers making informed decisions 
regarding the efficiency of their products, without amended standards. 
These consumers will be negatively impacted by the adopted standard 
levels and the analysis accounts for these impacts. However, the 
methodology also acknowledges that some consumers are unable to 
minimize the life-cycle costs of their products for a variety of 
reasons discussed in the economics literature (e.g., renters with no 
say in the products purchased for their household). Even for motivated 
and informed consumers, the information and data required to ultimately 
make the best product choice that minimizes life-cycle cost is

[[Page 105238]]

complex and time-consuming. As a result, there are a subset of 
consumers for whom adopting more stringent standard levels will result 
in life-cycle savings. DOE's methodology reflects some degree of market 
efficiency in terms of consumer choice of product efficiency, but it 
also reflects a variety of observed effects that inhibit perfect market 
efficiency. This is representative of the water heater market. On the 
whole, when accounting for both consumers negatively impacted by, as 
well as those benefiting from, amended standards, DOE's analysis 
demonstrates that there are economically justified savings.
9. Payback Period Analysis
    The payback period is the amount of time (expressed in years) it 
takes the consumer to recover the additional installed cost of more-
efficient products, compared to baseline products, through energy cost 
savings. Payback periods that exceed the life of the product mean that 
the increased total installed cost is not recovered in reduced 
operating expenses.
    The inputs to the PBP calculation for each efficiency level are the 
change in total installed cost of the product and the change in the 
first-year annual operating expenditures relative to the baseline. DOE 
refers to this as a ``simple PBP'' because it does not consider changes 
over time in operating cost savings. The PBP calculation uses the same 
inputs as the LCC analysis when deriving first-year operating costs.
    As noted previously, EPCA establishes a rebuttable presumption that 
a standard is economically justified if the Secretary finds that the 
additional cost to the consumer of purchasing a product complying with 
an energy conservation standard level will be less than three times the 
value of the first year's energy savings resulting from the standard, 
as calculated under the applicable test procedure. (42 U.S.C. 
6295(o)(2)(B)(iii)) For each considered efficiency level, DOE 
determined the value of the first year's energy savings by calculating 
the energy savings in accordance with the applicable DOE test 
procedure, and multiplying those savings by the average energy price 
projection for the year in which compliance with the amended standards 
would be required.
10. Accounting for Product Switching
    For the preliminary analysis, DOE did not account for product 
switching under potential standards. For the July 2023 NOPR and this 
final rule, DOE maintained the same approach and did not include any 
product switching with respect to gas-fired instantaneous water heaters 
in its analysis. DOE assumes that any product switching as a result of 
the adopted standards is likely to be minimal.
    As discussed in the specific examples in the following paragraphs 
and in section 9.4 of the final rule TSD, the costs to switch to 
another product class can be higher than simply purchasing a standards-
compliant product in the same product class. When faced with the need 
to replace a gas-fired instantaneous water, a consumer can either 
install a standards-compliant product of the same product class as they 
originally had, or consider a switch to a standards-compliant product 
of an alternative product class. Similarly, when faced with the need to 
install a consumer water heater in new construction, the consumer can 
choose from available standards-compliant products across various 
product classes. As part of considering which water heater to purchase, 
consumers look at the first cost, the installation cost, expected 
energy savings, and the amenities provided by the water heaters such as 
the location within the residence and the amount of hot water the water 
heater could deliver.
    In consumer hot water heater replacement scenarios, shipments data 
demonstrate purchasers mostly replace their existing water heater with 
the same product class when purchase price is similar (see section 
9.3.1 of chapter 9 of the TSD for details). In the case of gas-fired 
instantaneous water heaters, other product classes often cost more to 
switch to and install than a standards-compliant gas-fired 
instantaneous water heater (as discussed below). Even if, for a given 
household, another product class costs less, DOE expects other factors 
(including logistical barriers, lower LCC savings, shorter product 
lifetimes, and other attributes consumers value in instantaneous water 
heaters) to limit product-switching. Because of the higher cost in some 
scenarios, consumer preferences, and other limitations on product-
switching, DOE concludes it is extremely unlikely that consumers would 
choose to switch product classes specifically in response to these 
amended standards. In the absence of amended standards, some consumers 
choose to switch for reasons other than simply cost, and that is 
reflected in historical market trends that are incorporated into the 
analysis. However, for the purposes of the analysis, the issue is 
whether more consumers would switch due to the higher incremental costs 
of standards-compliant products. DOE concludes that this is very 
unlikely and therefore market trends will be unaffected.
    DOE compared the costs of a consumer switching from a baseline non-
condensing gas-fired instantaneous water heater to three potential 
replacement options (standards-compliant gas-fired instantaneous water 
heater, baseline gas-fired storage water heater under the recently 
updated standard, and baseline electric storage water heater under the 
recently updated standard), in both residential new construction and 
replacement scenarios for existing households. In the new construction 
scenario, the analysis shows that average total installed costs are 
typically lowest for a standards-compliant gas-fired instantaneous 
water heater. In the replacement scenario, the factors considered in 
DOE's analysis show that average total installed costs are lower in 
some cases and marginally higher in others. However, switching to an 
alternative option also involves several additional costs to 
accommodate the alternative water heater, including new venting, 
electrical upgrades, and potential relocation of the water heater. 
Accordingly, even if, for a given household, a potential replacement 
option other than a standards-compliant gas-fired instantaneous water 
heater is cheaper to install, DOE expects that other factors will limit 
consumer incentives for product switching: logistical barriers arising 
from different physical and space requirements as described below, the 
greater LCC savings of a gas-fired instantaneous water heater, the 
longer lifetime of a gas-fired instantaneous water heater, and consumer 
preferences for instantaneous water heater attributes such as limitless 
hot water supply. DOE notes many consumers have already switched from a 
gas-fired storage to a gas-fired instantaneous water heater despite the 
high costs of doing so (to replace all the venting and potentially 
relocate the water heater), and does not expect this trend to reverse 
as a result of the amended standards.
    In the hypothetical case of a consumer switching from a gas-fired 
instantaneous water heater to an electric storage water heater when 
replacing a water heater in an existing household, there are likely 
additional installation costs necessary to add an electrical connection 
since this type of water heater typically requires high wattage. These 
are costs above and beyond the normal equipment and installation costs. 
In some cases, it may be possible to install a 120-volt heat pump 
storage water heater with minimal additional installation costs, 
particularly if there is a standard electrical outlet nearby already. 
In most

[[Page 105239]]

cases, however, a standard 240-volt electrical storage water heater 
would be installed. To do so, the consumer would need to add a 240-volt 
circuit to either an existing electrical panel or upgrade the entire 
panel if there is insufficient room for the additional amperage. The 
installation of a new 240-volt circuit by a qualified electrician will 
be at least several hundred dollars. Panel upgrade costs are 
significant and can be approximately $750-$2,000 to upgrade to a 200-
amp electrical panel.\125\ Older homes and homes with gas-fired space 
heating (e.g., homes with gas furnaces) are more likely to need an 
electrical panel upgrade in order to install an electric storage water 
heater, given the relatively modest electrical needs of the home at the 
time of construction. The average total installed cost of a replacement 
standards-compliant electric storage water heater is $1,913,\126\ 
therefore the average total costs to switch to an electric storage 
water heater, after accounting for electrical upgrade costs, easily 
exceed the average replacement cost of a standards-compliant gas-fired 
instantaneous water heater ($2,499). Given the significant additional 
installation costs for nearly all homes potentially switching to an 
electric water heater, DOE estimates that very few consumers would 
switch from gas-fired instantaneous water heaters to electric water 
heaters as a result of an energy conservation standard, especially at 
the adopted standard at TSL 2. When including the above additional 
costs, the average total installed cost to switch to an electric water 
heater is higher than the standards-compliant gas-fired instantaneous 
water heater. Instantaneous water heaters also provide differing 
utility to consumers compared to storage water waters (e.g., limitless 
hot water) and thus these products are not perfect substitutes. 
Additionally, storage water heaters require more space than a gas-fired 
instantaneous water heater and may require relocating the water heater, 
incurring even greater costs. Switching from a gas-fired instantaneous 
water heater to an electrical water heater is especially unlikely in 
the case of an emergency replacement where time is a critical factor. 
When a water heater fails, consumers typically have limited time to 
make a decision on what new water heater to purchase and rely upon 
replacing the water heater with one that is similar to the one that 
failed. Consumers are unlikely to invest in switching fuels to a water 
heater that utilizes a different fuel source in the emergency 
replacement scenario. See section 9.4 of the final rule TSD for a 
summary comparison of costs.
---------------------------------------------------------------------------

    \125\ For example, see: www.homeadvisor.com/cost/electrical/upgrade-an-electrical-panel/#upgrade (last accessed August 29, 
2024).
    \126\ These results are available in the May 2024 final rule LCC 
Results spreadsheet (EERE-2017-BT-STD-0019-1424), where LCC results 
are available separately for replacements and new construction. 
Available at: www.regulations.gov/document/EERE-2017-BT-STD-0019-1424 (last accessed: Aug. 29, 2024).
---------------------------------------------------------------------------

    In the hypothetical case of a consumer switching from a gas-fired 
instantaneous water heater to a gas-fired storage water heater when 
replacing a water heater in an existing household, there are additional 
installation costs necessary as well. The vast majority of gas-fired 
storage water heaters (``GSWHs'') utilize non-condensing technology 
that utilizes Category I type B metal vent material, whereas gas-fired 
instantaneous water heaters require Category III or Category IV venting 
material, depending on the existing efficiency level. Regarding 
existing non-condensing gas-fired instantaneous water heaters, A.O. 
Smith and Rinnai noted that these utilize Category III venting (A.O. 
Smith, No. 1182 at p. 15; Rinnai, No. 1443 at p. 12). Condensing gas-
fired instantaneous water heaters require Category IV venting. 
Switching from a gas-fired instantaneous water heater to a baseline 
GSWH would therefore require replacing the venting regardless of the 
existing efficiency of the gas-fired instantaneous water heater. 
Replacing the venting system would result in significant additional 
installation costs if a consumer opted to switch to a GSWH. The most 
comparable cost for this scenario is the average cost to install a GSWH 
in new construction ($2,095),\127\ which requires all-new venting, 
however this estimate does not include removal and disposal costs for 
the old equipment or potentially relocating the water heater. GSWHs and 
gas-fired instantaneous water heaters have very different physical 
dimensions and space requirements, with GSWHs being significantly 
larger water heaters. Switching from a gas-fired instantaneous water 
heater to a GSWH may not always be possible in the available space and 
may require even larger costs to accommodate a GSWH (e.g., relocating 
the water heater in the home). This may be particularly acute in 
smaller households where space is at a premium (e.g., townhomes). All 
of these additional costs can easily exceed many hundreds of dollars, 
if not higher, depending on need to relocate the water heater.\128\ 
Therefore, the total cost to switch to a GSWH can exceed the cost to 
simply replace with a standards-compliant gas-fired instantaneous water 
heater ($2,499). This situation is the same as exists today, prior to 
the amendment of standards for either gas-fired instantaneous water 
heaters or for GSWHs. The cost differential is very similar between the 
two and the market share of instantaneous water heaters is growing 
relative to storage tank water heaters, not the reverse. See section 
9.4 of the final rule TSD for a summary comparison of costs.
---------------------------------------------------------------------------

    \127\ These results are available in the May 2024 final rule LCC 
Results spreadsheet (EERE-2017-BT-STD-0019-1424), where LCC results 
are available separately for replacements and new construction. 
Available at: www.regulations.gov/document/EERE-2017-BT-STD-0019-1424 (last accessed: Aug. 29, 2024).
    \128\ As an example of such costs, table 8D.5.66 in the final 
rule TSD estimates permitting, removal, and disposal costs of $260. 
Section 8D.3.5.3 (3) of the May 2024 final rule TSD estimates that 
relocation costs in the case of electric storage water heaters could 
range up to $2,000. Relocating GSWHs would incur similar costs to 
accommodate all-new water and gas lines in a relocation. Available 
at: www.regulations.gov/document/EERE-2017-BT-STD-0019-1416 (last 
accessed: Aug. 29, 2024).
---------------------------------------------------------------------------

    Furthermore, the average lifetime of a gas-fired instantaneous 
water heater is approximately 20 years, compared to approximately 14.5 
years for GSWHs, which results in a total annualized cost of ownership 
for instantaneous water heaters that is even lower compared to GSWHs. 
Instantaneous water heaters also provide differing utility to consumers 
(e.g., limitless hot water) and thus these products are not perfect 
substitutes. These attributes are clearly valued by consumers, given 
the recent increasing market share of gas-fired instantaneous water 
heaters. Consumers that have already paid the costs to switch from an 
existing GSWH to a gas-fired instantaneous water heater in the absence 
of any amended standard are highly unlikely to switch back to a GSWH 
due to amended standards and pay all of those extra costs again.
    As a result of all the cost and other considerations above, DOE 
estimates that it is highly unlikely that consumers would switch from 
gas-fired instantaneous water heaters to GSWHs when needing to replace 
their existing water heater, specifically as a result of the 
incremental costs of an energy conservation standard, particularly in 
the case of an emergency replacement.
    Even if some small subset of existing gas-fired instantaneous water 
heater consumers opt to switch to GSWHs instead of replacing their gas-
fired instantaneous water heaters with a more efficient unit as a 
result of the adopted standards, despite the additional costs in doing 
so, those consumers would still need to switch to a more efficient

[[Page 105240]]

GSWH at the newly adopted standard level. 89 FR 37778. While this would 
result in a marginal increase in energy consumption and life-cycle 
costs for these consumers, those increases are smaller than if the 
consumers switched to a previous baseline GSWH. Furthermore, these 
marginal increases would be outweighed by the energy savings and life 
cycle savings of the remaining consumers of gas-fired instantaneous 
water heaters. For example, even if 10 percent of gas-fired 
instantaneous water heater consumers elected to switch to GSWHs despite 
the costs, the percentage of consumers experiencing a net cost would 
increase by at most 10 percent and the average LCC savings for gas-
fired instantaneous water heater consumers would still be positive, 
which would not change the conclusion of economic justification. It 
would likely take approximately half of the GIWH purchasers to choose a 
gas storage water heater instead of a GIWH in order for the economic 
justification to come into question, which is not a plausible scenario 
given the facts and analysis concerning the costs associated with 
switching as presented above.
    In new construction, the average total installed costs are 
different because new venting is always required if installed indoors, 
however the location of the water heater can be optimized to limit 
those venting costs for gas-fired instantaneous water heaters. Water 
heaters can also be installed outdoors in some cases. In today's 
market, the total installed cost of a gas-fired instantaneous water 
heater in new construction is typically less than a GSWH, a factor in 
the increasing market share of gas-fired instantaneous water heaters 
seen in recent historical shipments (as described in section IV.G) and 
projected in the no-new-standards case. With newly adopted standards 
for both GSWHs and gas-fired instantaneous water heaters, the average 
total installed cost (including all venting) of a minimally standards-
compliant GSWH in residential new construction is $2,095,\129\ which is 
similar to and slightly higher than a minimally compliant gas-fired 
instantaneous water heater in residential new construction at the 
amended standard level ($2,070). The adopted standard levels for both 
GSWHs and gas-fired instantaneous water heaters therefore preserve this 
market dynamic and gas-fired instantaneous water heaters will continue 
to have total installed costs that are similar to or lower on average 
in new construction compared to GSWHs. Furthermore, gas-fired 
instantaneous water heaters have longer lifetimes (representing a more 
cost-effective investment) and additional features (such as a smaller 
footprint and endless hot water supply) that will continue to be 
attractive to some builders and consumers. As a result, DOE estimates 
that the existing trend of increasing gas-fired instantaneous water 
heater market share in new construction will continue.
---------------------------------------------------------------------------

    \129\ These results are available in the May 2024 final rule LCC 
Results spreadsheet (EERE-2017-BT-STD-0019-1424), where LCC results 
are available separately for replacements and new construction. The 
total installed costs for baseline models (reflecting the current 
minimally compliant models) are similarly less for gas-fired 
instantaneous water heaters compared to GSWHs. Available at: 
www.regulations.gov/document/EERE-2017-BT-STD-0019-1424 (last 
accessed: Aug. 29, 2024).
---------------------------------------------------------------------------

    In existing installations of GSWHs, there are significant costs to 
switch from a GSWH to a gas-fired instantaneous water heater, since new 
venting is required. In today's market, however, some consumers are 
electing to make that switch despite the extra costs, because 
instantaneous water heaters have certain attributes that consumers 
value (e.g., smaller footprint, endless supply of hot water). Even with 
the adopted standard for gas-fired instantaneous water heaters, the 
relative incremental cost will be similar because DOE also recently 
adopted a revised standard for GSWH in a May 2024 final rule, so costs 
for both product classes will increase. 89 FR 37778. For example, the 
average total installed cost of a pre-standard baseline GSWH in a 
residential replacement installation was estimated to be $1,376 in the 
May 2024 final rule, whereas the average total installed cost of a 
baseline gas-fired instantaneous water heater in a residential 
replacement installation is estimated to be $2,282.\130\ Therefore, 
switching to baseline gas-fired instantaneous water heaters in existing 
GSWH installations in today's market already represents a significant 
additional cost, estimated to be $906 on average, nearly twice the cost 
of simply replacing a GSWH with another GSWH. Despite this extra cost, 
the market share of gas-fired instantaneous water heaters in 
replacement installations is increasing. With newly adopted standards 
for both product classes, the average installed costs in residential 
replacement installations for minimally compliant products are 
estimated to be $1,523 and $2,499 for GSWHs and gas-fired instantaneous 
water heaters, respectively, with a difference of $976. Therefore, 
there is still a significant additional cost to switch after the 
adoption of new standards, just as in today's market. However, 
instantaneous water heaters will continue to have the same attributes 
and features that some consumers prefer and those consumers will 
continue to make the switch when replacing their existing storage water 
heaters, despite the costs of doing so. The adopted standard level for 
gas-fired instantaneous water heaters is unlikely to significantly 
disrupt this existing market dynamic because there was already a high 
cost to switch from existing GSWHs to gas-fired instantaneous water 
heaters.
---------------------------------------------------------------------------

    \130\ Separate LCC results for residential vs. commercial 
buildings and replacement installations vs. new construction are 
available in the LCC results spreadsheets. The May 2024 final rule 
LCC results spreadsheet is available at: www.regulations.gov/document/EERE-2017-BT-STD-0019-1424 (last accessed Sept. 17, 2024).
---------------------------------------------------------------------------

    Even if a small subset of existing GSWH consumers, who would have 
switched to gas-fired instantaneous water heaters in the no-new-
standards case, instead remain with GSWHs as a result of the adopted 
standards, the adopted rule for gas-fired instantaneous water heaters 
will still result in significant energy savings even though the overall 
energy savings might be incrementally lower than estimated in this 
final rule analysis. In this hypothetical scenario, even if the market 
growth of gas-fired instantaneous water heaters slows down and more 
consumers remain with GSWHs, there are still energy and LCC savings for 
gas-fired instantaneous water heaters, the rule as a whole saves a 
significant amount of energy, and therefore the conclusion of economic 
justification remains unchanged.
    DOE received comments from stakeholders who were concerned that, if 
DOE were to adopt more stringent standards for gas-fired instantaneous 
water heaters compared to the standards adopted for gas-fired storage 
water heaters, consumers would opt for gas-fired storage water heaters 
instead of gas-fired instantaneous water heaters, which could have 
negative impacts to the outcome of this rulemaking.
    TPPF stated that consumers recognize the differences between 
condensing and non-condensing products, which leads consumers to 
purchase products at different price points. Because condensing 
products are more expensive, TPPF stated, consumers will instead opt 
for non-condensing gas-fired storage water heaters, and these economic 
tradeoffs illustrate that condensing and non-condensing water heaters 
are not interchangeable. (TPPF, No. 1153 at pp. 3-4)
    Rinnai stated their expectation that most would-be consumers of 
non-condensing tankless water heaters would instead purchase less 
efficient

[[Page 105241]]

gas-fired storage water heaters if the proposed standards are 
finalized. Rinnai asserted that, because DOE does not adequately 
account for such product switching, DOE's analysis overstates LCC and 
energy savings for gas-fired instantaneous water heaters. Rinnai 
estimated that at least 80 percent of their current non-condensing gas-
fired instantaneous water heater sales would switch to non-condensing 
gas-fired storage water heaters as a result of the proposed rule. 
Rinnai added that based on their calculations, if 31 percent of the 
market switched, there would be a net loss of 0.4 percent in energy 
savings and 0.04 percent in emissions reductions as compared to the 
manufacturer's analysis of a no-new-standards case scenario over the 
first 20 years the proposed rule goes into effect. (Rinnai, No. 1186 at 
pp. 2-18)
    The Attorney General of GA commented that condensing and non-
condensing gas-fired tankless water heaters are highly efficient and 
reduce standby heat loss as compared to traditional storage-type units. 
The Attorney General of GA commented that both types (condensing and 
non-condensing) of tankless water heaters require less energy and have 
higher lifespans than units with tanks, and both types currently 
satisfy DOE's minimum efficiency requirement. (Attorney General of GA, 
No. 1026 at p. 1) In response to the July 2024 NODA, Commenters from 
the U.S. House of Representatives claimed that the ``unique design'' of 
non-condensing gas-fired instantaneous water heaters yields a longer 
appliance life-cycle by heating water only on demand, limiting exposure 
to corrosive elements. (U.S. House of Representatives, No. 1445 at p. 
1)
    DOE agrees with the commenters that instantaneous water heaters are 
different from storage water heaters because they heat water on demand; 
however, this ability is not unique to non-condensing gas-fired 
products. ``Tankless'' models are instantaneous water heaters with very 
little storage volume. They are equipped with sensors that activate the 
heating process based on water flow to produce hot water on demand. 
Endless hot water is a feature that is valued by some consumers, as 
indicated by the recent increasing market share of gas-fired 
instantaneous water heaters. Furthermore, DOE's analysis shows that 
gas-fired instantaneous water heaters can have longer lifetimes than 
gas-fired storage water heaters. The estimated average lifetime for a 
gas-fired instantaneous water heater is about 20 years, whereas gas-
fired storage water heaters operate for about 14 to 15 years. This is 
one reason why there has been a historical trend of increasing 
shipments of gas-fired instantaneous water heaters--both non-condensing 
and condensing--and why it is reasonable to expect consumers to 
continue opting for gas-fired instantaneous water heaters in a scenario 
where standards are set at a condensing efficiency level.
    Rinnai noted that the efficiency levels for gas-fired instantaneous 
water heaters proposed in the July 2023 NOPR represent a much larger 
increase from existing standards than the proposed efficiency levels 
for gas-fired storage water heaters. (Rinnai, No. 1186 at pp. 6-7) 
Commenters from the U.S. House of Representatives expressed concern 
that the efficiency level for the proposed standards for gas-fired 
storage water heaters are less stringent than the efficiency level 
proposed for gas tankless water heaters. Commenters from the U.S. House 
of Representatives asserted that this efficiency difference would 
restrict consumer choice and increase prices. (U.S. House of 
Representatives, No. 1025 at pp. 1-2) Commenters from the U.S. House of 
Representatives reiterated these concerns in response to the July 2024 
NODA, claiming that the proposed standards would eliminate non-
condensing gas-fired instantaneous water heaters from the market. The 
U.S. House of Representatives stated that the proposed standards would 
leave condensing gas-fired instantaneous water heaters, which are 
significantly more expensive, and gas-fired storage water heaters, 
which have significantly higher emissions profiles, on the market. 
(U.S. House of Representatives, No. 1445 at p. 1) Commenters from the 
U.S. House of Representatives claimed that the proposed standards would 
harm consumers who rely on the size, cost, and flexibility of gas-fired 
instantaneous water heaters. (U.S. House of Representatives, No. 1445 
at p. 1)
    CNGC urged DOE to reconsider the implications on both consumers and 
manufacturers, stating that if efficiency standards exceed 91 percent, 
it becomes technologically infeasible to produce non-condensing gas-
fired tankless water heaters at their current affordable price, leaving 
consumers to choose less-efficient storage water heaters and undermine 
environmental goals. (CNGC, No. 648 at p. 1) CHPK and Huntsville 
Utilities also stated that the unattainable energy efficiency 
requirements for gas-fired instantaneous water heaters utilizing non-
condensing technology would discourage consumers from investing in 
tankless models, and instead they would purchase less-efficient water 
heaters. (CHPK, No. 1008 at pp. 1-2; Huntsville Utilities, No. 1176 at 
p. 1) The Attorney General of GA commented that the proposed standards 
are feasible only for condensing units and would make tankless water 
heaters unaffordable for many consumers. The Attorney General of GA 
added that the proposed rulemaking will effectively eliminate non-
condensing gas-fired tankless water heaters and leave consumers with a 
choice between less-efficient storage water heaters, or more expensive 
condensing tankless water heaters, and suggested that if consumers are 
incentivized to purchase inefficient storage water heaters, the rule 
will violate DOE's requirement that any new or amended standards must 
result in a significant conservation of energy. (Attorney General of 
GA, No. 1026 at pp. 1-2)
    DOE recognizes that total installed cost is a significant factor in 
consumer decision-making when purchasing a new water heater. In this 
final rule, DOE has incorporated specific feedback from stakeholders to 
improve its life-cycle cost analysis with respect to installation cost 
estimates. As discussed above, DOE concludes that, based on costs, 
consumers who already have gas-fired instantaneous water heaters would 
not switch to a gas-fired storage water heater when making a 
replacement. Secondly, in new construction, installing a gas-fired 
instantaneous water heater is still less expensive on average than 
installing a gas-fired storage water heater with the adoption of 
amended standards. Thirdly, consumers switching from gas-fired storage 
water heaters to gas-fired instantaneous water heaters in the no-new-
standards case will require a change to the venting configuration 
regardless of whether the gas-fired instantaneous water heater is non-
condensing or condensing. The choice to switch from a storage water 
heater to an instantaneous water heater in the no-new-standards case is 
influenced by other factors beyond just cost. Based on its assessments 
of total installed costs in the life-cycle cost analysis, DOE has 
determined that it is unlikely for consumers to stop switching from 
gas-fired storage water heaters to gas-fired instantaneous water 
heaters only as a result of the adopted rule. Even if that premise was 
true, where a fraction of consumers in the amended standards case, as 
compared to the no-new-standards case, opted to stay with storage water 
heaters instead of switching to instantaneous water heaters, DOE would 
still find economic justification with the adopted rule. A majority of 
consumers would have to

[[Page 105242]]

forgo adopting instantaneous water heaters in the standards case for 
the rule to result in an increase in energy consumption, a scenario DOE 
has determined to not be remotely plausible given the discussion of 
total installed costs above.
    The Attorney General of TN commented that the proposed rulemaking 
does not consider the loss of consumer utility that could occur from 
the implementation of these standards, particularly consumers' needs 
for different types of water heaters (i.e., condensing versus non-
condensing) depending on the configuration of their home. The Attorney 
General of TN commented that by reducing market availability for non-
condensing, gas-fired, instantaneous water heaters in favor of less 
affordable electric-powered water heaters, the proposed rulemaking 
would lead consumers to purchase less-efficient non-condensing gas-
storage water heaters. (Attorney General of TN, No. 1149 at p. 3)
    In the July 2023 NOPR, DOE explained why non-condensing versus 
condensing gas-fired appliances do not constitute a consumer utility 
for which the Department can justify separate standards. 88 FR 49058, 
49079. This determination is discussed further in section IV.A.1 of 
this document.
    NPGA, APGA, AGA, and Rinnai stated that DOE misunderstands the 
consumer water heater market due to its claim that consumers do not 
make decisions based on rational economic terms, but conceded that many 
water heater decisions are made in emergencies where price and 
immediate availability are the strongest factors in decision-making. 
According to NPGA, APGA, AGA, and Rinnai, DOE rejects the idea that 
consumers would switch products across various product classes and does 
not evaluate associated market shifts, and by failing to understand 
that by limiting or eliminating the market for non-condensing 
instantaneous water heaters, consumers may choose to switch to a non-
condensing gas-fired storage water heaters, resulting in a lower UEF 
and enhanced emissions from their water heater and has not accounted 
for installation costs of this potential product class switch. (NPGA, 
APGA, AGA, and Rinnai, No. 441 at p. 3)
    In response, DOE notes that its assessment is based on the 
comparison of total installed costs needed to switch from product class 
to product class, as noted above. The total costs to switch product 
classes in response to an amended standard are higher than simply 
purchasing a compliant product in the same product class. Therefore, 
DOE estimates no switching in response to an amended standard as a 
result of incremental costs. DOE does not reject the idea that this may 
happen in the no-new-standards case for reasons other than just total 
cost. Indeed, the shipments projection accounts for recent market 
trends that show growing consumer demand for gas-fired instantaneous 
water heaters compared to GSWHs. Consumers are valuing instantaneous 
water heater features beyond just cost. DOE estimates that this trend 
will not substantively change in the standards case, given that cost 
comparison between GSWHs and gas-fired instantaneous water heaters is 
similar, whether at baseline ELs or at the adopted ELs.
    Commenting on the July 2023 NOPR, Ecotemp commented that product 
switching, from tankless to tank water heaters is likely to happen as a 
result of this rule and DOE not modeling that possibility is missing a 
huge consumer base doing exactly that. (Ecotemp, No. 1092 at p. 2) NMHC 
and NAA stated that DOE fails to properly evaluate the impacts of 
market unavailability that forces product switching with the example of 
the elimination of non-condensing tankless water heaters from the 
proposed standard potentially requiring a non-condensing gas storage 
water heater over a traditional replacement of non-condensing tankless 
water heaters, and the 25 percent drop in efficiency associated with 
these products. NMHC and NAA stated that this rule will result in 
greater use of electric water heaters in replacement of existing gas 
water heaters which will require more interconnectivity, changes to 
power systems, and upgrades to electrical infrastructure. (NMHC and 
NAA, No. 996 at p. 5)
    In response, DOE notes that existing market trends are incorporated 
into the shipments analysis and projection. To the extent that some 
product classes are becoming more prevalent in certain types of 
buildings, that is reflected in the no-new-standards case shipments 
projection. With respect to switching from a tankless to storage tank 
water heater, as summarized above, DOE determines that minimal 
switching would happen to either a gas-fired storage or electric 
storage water heater. As DOE has discussed above, the costs to switch 
product classes in response to amended standards are larger than simply 
purchasing standards-compliant products within the same product 
classes. Therefore, DOE estimates that no additional switching will 
occur beyond existing market trends.
    Atmos Energy argued that because the cost to fuel switch is high, 
DOE fails to ``acknowledge the equally prohibitive costs that will be 
associated with high efficiency gas appliances as a result of this 
proposal and the lack of gas-fired replacements in the market.'' (Atmos 
Energy, No. 1183 at p. 6). Rinnai argued that DOE has failed to take 
into account substitution effects in replacement markets, especially in 
regards to non-condensing gas-fired instantaneous water heater. Rinnai 
argued that in particular the lack of consideration of non-condensing 
gas-fired instantaneous water heater to gas storage water heater (due 
to lack of condensing gas-fired instantaneous water heater option) is 
not being represented. (Rinnai, No. 1186 at pp. 30-31) As discussed 
above, DOE estimates that switching away from gas-fired instantaneous 
water heaters as a result of the rule is likely to be negligible, due 
to the high installation costs of such switching, (costs that are 
acknowledged to be high by Atmos Energy in their comment). DOE finds no 
evidence that there would be a lack of condensing gas-fired 
instantaneous water heater models available in the standards case for 
replacements. Many such models for gas-fired instantaneous water 
heaters are currently available on the market by multiple 
manufacturers. See chapter 8 and appendix 8D of the final rule TSD for 
detailed description of the installation costs.
    Rinnai stated that the July 2024 NODA declares that no consumers 
would switch between product categories, including to gas storage water 
heaters, an assumption that Rinnai stated would contradict historic 
market data and evidence of consumer purchasing behavior. According to 
Rinnai, gas tankless water heaters are taking market share from gas 
tank sales, with GSWH sales declining at the same time gas-fired 
instantaneous water heater sales have increased. Rinnai speculated that 
this may be due to consumer purchasing decisions due to the increased 
cost to purchase and install gas-fired instantaneous water heater. 
Rinnai also note that by removing non-condensing gas-fired 
instantaneous water heater options, consumers may be less inclined to 
replace an existing GWSH with an even more expensive condensing gas-
fired instantaneous water heater unit. Rinnai stated that DOE's 
position that consumers purchasing gas tankless water heaters will 
never consider buying a gas tank in contrary to observable market 
behavior. (Rinnai, No. 1443, at p. 2 and pp. 5-8)
    In contrast, the Joint Advocates supported DOE's conclusion that 
the proposed standards for gas-fired instantaneous water heaters would 
not

[[Page 105243]]

result in any significant product switching among consumers. The Joint 
Advocates commented that, contrary to one manufacturer's assumption, 
such an outcome is highly unlikely for the following reasons: (1) gas-
fired instantaneous water heaters are already significantly more 
expensive than gas storage water heaters and that the total installed 
cost of a gas-fired instantaneous water heater that just meets the 
current standard is 41 percent higher than that of a gas storage water 
heater; (2) the cost differential between gas storage and gas-fired 
instantaneous water heaters would remain essentially unchanged at the 
proposed standard level (i.e., the estimated total installed cost of 
gas-fired instantaneous water heaters would remain at 41 percent higher 
than gas storage water heaters); (3) consumers with an existing gas-
fired instantaneous water heater would be unlikely to replace it with a 
gas storage water heater due to space and venting issues; and (4) DOE 
data show that 70 percent of current gas-fired instantaneous water 
heater sales are already at condensing levels and more than 60 percent 
of current sales meet EL 2. For these reasons, the Joint Advocates 
supported DOE's determination that additional consumer product 
switching is unlikely as a result of amended standards for gas-fired 
instantaneous water heaters. (Joint Advocates, No. 1444 at pp. 2-3)
    A.O. Smith agreed with DOE's conclusion that condensing standards 
for gas-instantaneous water heaters would not shift shipments away from 
tankless products due to significant cost for changing venting system. 
The commenter also noted that approximately 65 percent of shipments are 
already condensing products and it suggests that consumers are already 
voluntarily opting for condensing tankless products despite their 
higher initial costs over non-condensing tankless products. (A.O. 
Smith, No. 1440 at p. 6)
    In response, DOE acknowledges that historic and present-day market 
trends show an increasing demand for gas-fired instantaneous water 
heaters over GSWHs. This overall trend is incorporated into the 
shipments analysis and shipment projections, as discussed in section 
IV.G of this document. However, this market dynamic is occurring in the 
absence of any new energy conservation standard for gas-fired 
instantaneous water heaters. In new construction, instantaneous water 
heaters are becoming popular in large part because the total installed 
cost of a gas-fired instantaneous water heater is, on average, similar 
to or less than a GSWH, since new venting is required in either case 
and the venting length can be very short for gas-fired instantaneous 
water heaters. Even with the adopted standard level, gas-fired 
instantaneous water heaters will continue to be similar to or less 
expensive to install in new construction, on average, and therefore the 
standard is highly unlikely to cause significant product switching to 
GSWHs. Furthermore, instantaneous water heaters also provide differing 
utility to consumers (e.g., limitless hot water, smaller footprint) 
compared to storage water heaters. These attributes are clearly valued 
by consumers, given the recent increasing market share of gas-fired 
instantaneous water heaters.
11. Analytical Results
    Rinnai stated that the Department has proposed new minimum 
efficiency standards for twelve separate categories of consumer gas-
fired instantaneous water heaters but the Department provided only one 
life-cycle-cost analysis for them. (Rinnai, No. 1186 at p. 34)
    In response, DOE clarifies that for two types of gas-fired 
instantaneous water heaters (and each of their four their associated 
draw patterns), DOE is only updating the rating metric to the UEF 
descriptor and the adopted standards do not constitute an increase in 
stringency. This applies to 8 of the 12 categories the commenter 
identified. For gas-fired instantaneous water heaters with less than 2 
gallons of effective storage volume and rated inputs greater than 
50,000 Btu/h, DOE conducted an analysis, as presented in this final 
rule, to determine whether amended UEF standards would be appropriate 
and justified. Two of the four draw patterns have no products and no 
market share in today's market and thus there is no analysis to 
conduct. For the remaining two draw patterns (medium and high draw), 
they are fully analyzed as part of DOE's rulemaking analysis and 
incorporated into the LCC consumer sample. DOE assigned a draw pattern 
to the sampled household or building based on the market split of two 
draw patterns. The analytical results are a weighted average 
representing the economic impact to the market as a whole combing the 
two draw patterns. Additionally, the published analytical results 
spreadsheet contains the breakdown of the results by draw patterns.
    Commenting on the July 2023 NOPR, Rinnai argued that the density 
distribution of its LCC analysis for gas-fired instantaneous water 
heaters shows heavily skewed distributions which can be attributed to 
high impact outliers. Rinnai argued that because the mean is being used 
to determine feasibility, it moves the LCC results away from its 
central tendencies and typical savings/costs for consumers. Rinnai 
argued that DOE should do a sensitivity analysis on gas-fired 
instantaneous water heater to defend the impact of the proposal. 
(Rinnai, No. 1186 at p. 21) Rinnai argued that small changes in 
estimates of installation costs or maintenance costs for condensing 
gas-fired instantaneous water heaters could result in negative average 
LCC savings. Rinnai argued this sensitivity warrants not enacting the 
standard for gas-fired instantaneous water heaters. (Rinnai, No. 1186 
at p. 22)
    Rinnai noted that the LCC probability distribution contains a long 
tail with many consumers experiencing higher LCC values than the 
average value. Rinnai suggested that DOE should produce results using 
``different averaging'' to better understand the impact of different 
data populations. Rinnai stated that DOE should consider the 
distribution in consumer trade-offs between upfront costs and long-term 
savings, as well as the overall costs that many consumers will face 
across different scenarios, to provide more accurate insights on 
consumer behavior, purchasing decisions, and impacts on cost savings 
and energy savings. (Rinnai, No. 1443 at pp. 20-21) In response, DOE 
clarifies that it uses probability distributions for a number of input 
variables that are reasonably expected to exhibit natural variation and 
diversity in practice (e.g., lifetime, repair cost, installation 
costs). These probability distributions are modeling diversity and are 
representative of the real world. In contrast, DOE addresses input 
uncertainty primarily with the use of sensitivity scenarios. To 
determine whether the conclusions of the analysis are robust, DOE 
performed several sensitivity scenarios with more extreme versions of 
these input variables (e.g., high/low economic growth and energy price 
scenarios, alternative price trend scenarios, alternative mean lifetime 
scenarios). The relative comparison of potential standard levels in the 
analysis remains the same throughout these sensitivity scenarios, 
confirming that the conclusion of economic justification is robust 
despite some input uncertainty. Furthermore, DOE provides a range of 
statistics in the LCC spreadsheet, including median values and values 
at various percentiles for many intermediate variables, as well as the 
full data output table for all 10,000 samples. For example, the 25th 
and 75th

[[Page 105244]]

percentiles of average LCC savings for all ELs are available in the LCC 
spreadsheet. DOE also provides a distribution of impacts, including 
consumers with a net benefit, net cost, and not impacted by the rule in 
the LCC spreadsheet and in chapter 8 of the final rule TSD.
    DOE develops probabilities for as many inputs to the LCC analysis 
as possible, to reflect the distribution of impacts as comprehensively 
as possible. For example, DOE develops probabilities for building 
sampling, installation costs, lifetime, discount rate, and efficiency 
distribution, among other inputs. If there are insufficient data with 
respect to a specific input parameter to create a robust probability 
distribution, DOE will utilize a single input parameter. Such approach 
is neither arbitrary nor capricious; it is informed by the available 
data.
    The installation and maintenance cost estimates are the result of a 
significant research and cite multiple sources, as discussed at length 
in section IV.F.2 and appendix 8D of the final rule TSD. DOE has 
incorporated feedback from various stakeholders and revised those costs 
for this final rule. There is no basis to expect installation costs are 
under- or overestimated and therefore creating sensitivity scenarios 
based on hypothetical adjustments to those costs is unwarranted.
    As discussed in section IV.F.8, DOE also conducted a sensitivity 
analysis for gas-fired instantaneous water heaters in which certain 
positive outlier outcomes were replaced. While the average (and median) 
LCC savings are reduced in this sensitivity analysis, they are still 
positive.\131\
---------------------------------------------------------------------------

    \131\ This sensitivity result can be found in the LCC Results 
spreadsheet, available at XXXX.
---------------------------------------------------------------------------

    DOE provides stakeholders with the opportunity to provide accurate 
data to represent a breadth of operating conditions, prices, and use 
cases. In the absence of stakeholder provided information, DOE makes a 
good-faith effort to collect reliable data from various sources and 
summarize assumptions on the missing parameters. The Monte Carlo 
simulation and its large number of samples (10,000 for each product 
class) ensures that the results converge to a representative average. 
For some inputs whose uncertainty is not well characterized, such as 
future equipment prices or economic growth conditions, DOE performed a 
series of sensitivity analyses to ensure that the results of the 
analysis are not strongly dependent on those inputs and that the 
conclusions of the analysis remain the same. As a result, DOE's 
conclusion of economic justification is robust to a broad range of 
sensitivity scenarios which capture the uncertainty inherent in 
economic projections.
    Rinnai claimed that the LCC savings at the EL 2 in the July 2024 
NODA are minimal (approximately $5 a year), while imposing substantial 
costs on a large percentage of consumers. Rinnai claimed that the July 
2024 NODA results are based on flawed and inaccurate data and 
assumptions and Rinnai's analysis shows the LCC savings would be 
negative at the proposed EL if DOE adjusted venting installation costs. 
(Rinnai, No. 1443 at pp.10, 18-19 and 25) In response, DOE has 
individually responded to Rinnai's specific comments to the venting 
installation cost methodology in section IV.F.2. DOE reviewed the 
analytical method for this final rule and based on the results the LCC 
savings are still in support of the proposed efficiency level.

G. Shipments Analysis

    DOE uses projections of annual product shipments to calculate the 
national impacts of potential amended or new energy conservation 
standards on energy use, NPV, and future manufacturer cash flows.\132\ 
The shipments model takes an accounting approach, tracking market 
shares of products and the vintage of units in the stock. Stock 
accounting uses product shipments as inputs to estimate the age 
distribution of in-service product stocks for all years. The age 
distribution of in-service product stocks is a key input to 
calculations of both the NES and NPV, because operating costs for any 
year depend on the age distribution of the stock.
---------------------------------------------------------------------------

    \132\ DOE uses data on manufacturer shipments as a proxy for 
national sales, as aggregate data on sales are lacking. In general, 
one would expect a close correspondence between shipments and sales.
---------------------------------------------------------------------------

    DOE developed shipment projections based on historical data and an 
analysis of key market drivers for each product. DOE estimated consumer 
gas-fired instantaneous water heater shipments by projecting shipments 
in three market segments: (1) replacement of existing consumer gas-
fired instantaneous water heaters; (2) new housing; and (3) new owners 
in buildings that did not previously have a consumer gas-fired 
instantaneous water heater or existing gas-fired instantaneous water 
heater owners that are adding an additional consumer gas-fired 
instantaneous water heater.\133\
---------------------------------------------------------------------------

    \133\ The new owners primarily consist of households that add or 
switch to a different water heater option during a major remodel. 
Because DOE calculates new owners as the residual between its 
shipments model compared to historical shipments, new owners also 
include shipments that historically switch away from water heater 
product class to another.
---------------------------------------------------------------------------

    To project gas-fired instantaneous water heater replacement 
shipments, DOE developed retirement functions from gas-fired 
instantaneous water heater lifetime estimates and applied them to the 
existing products in the housing stock, which are tracked by vintage. 
DOE calculated replacement shipments using historical shipments and 
lifetime estimates. Annual historical shipments sources are: (1) AHRI 
data submittals; \134\ (2) the BRG Building Solutions 2023 report; 
\135\ (3) ENERGY STAR unit shipments data; \136\ and (4) the 2010 
Heating Products Final Rule. In addition, DOE adjusted replacement 
shipments by taking into account demolitions, using the estimated 
changes to the housing stock from AEO2023.
---------------------------------------------------------------------------

    \134\ AHRI. Confidential Instantaneous Gas-fired Water Heater 
Shipments Data from 2004-2007 to LBNL. March 3, 2008.
    \135\ BRG Building Solutions. The North American Heating & 
Cooling Product Markets (2023 Edition). 2023.
    \136\ ENERGY STAR. Unit Shipments data 2010-2021. multiple 
reports. Available at www.energystar.gov/partner_resources/products_partner_resources/brand_owner_resources/unit_shipment_data 
(last accessed August 29, 2024).
---------------------------------------------------------------------------

    To project shipments to the new housing market, DOE used the 
AEO2023 housing starts and commercial building floor space projections 
to estimate future numbers of new homes and commercial building floor 
space. DOE then used data from U.S. Census Characteristics of New 
Housing,137 138 Home Innovation Research Labs Annual Builder 
Practices Survey,\139\ RECS 2020, AHS 2021, and CBECS 2018 to estimate 
new construction water heater saturations for consumer gas-fired 
instantaneous water heaters.\140\
---------------------------------------------------------------------------

    \137\ U.S. Census. Characteristics of New Housing from 1999-
2022. Available at www.census.gov/construction/chars/ (last accessed 
August 29, 2024).
    \138\ U.S. Census. Characteristics of New Housing (Multi-Family 
Units) from 1973-2022. Available at www.census.gov/construction/chars/mfu.html (last accessed August 29, 2024).
    \139\ Home Innovation Research Labs (independent subsidiary of 
the National Association of Home Builders (``NAHB''). Annual Builder 
Practices Survey (2015-2019). Available at www.homeinnovation.com/trends_and_reports/data/new_construction (last accessed August 29, 
2024).
    \140\ Note that DOE does not project housing regionally. New 
housing is therefore assumed to grow in the same regional 
distribution as the current data would suggest.
---------------------------------------------------------------------------

    DOE estimated shipments to the new owners' market based on residual 
shipments from the calculated replacement and new construction 
shipments compared to historical shipments in the last 5 years (2018-

[[Page 105245]]

2023 for this final rule). DOE compared this with data from the 
Decision Analysts' 2002 to 2022 American Home Comfort Study \141\ and 
2023 BRG data, which showed similar historical fractions of new owners. 
DOE used the last 10 years (2013-2022) of modeled new owner data to 
project trend into future years from 2023-2059. If the resulting 
fraction of new owners is negative, DOE assumed that it was primarily 
due to equipment switching or non-replacement and added this number to 
replacements (thus reducing the replacements value).
---------------------------------------------------------------------------

    \141\ Decision Analysts, 2002, 2004, 2006, 2008, 2010, 2013, 
2016, 2019, and 2022 American Home Comfort Study. Available at 
www.decisionanalyst.com/syndicated/homecomfort/ (last accessed 
August 29, 2024).
---------------------------------------------------------------------------

    For the preliminary analysis and July 2023 NOPR, assumptions 
regarding future policies encouraging electrification of households and 
electric water heating were speculative at that time, so such policies 
were not incorporated into the shipments projection.
    DOE acknowledges, however, that ongoing electrification policies at 
the Federal, State, and local levels are likely to encourage 
installation of electric water heaters in new homes and adoption of 
electric water heaters in homes that currently use gas-fired water 
heaters. For example, the Inflation Reduction Act includes incentives 
for heat pump water heaters and electrical panel upgrades. However, 
there are many uncertainties about the timing and impact of these 
policies that make it difficult to fully account for their likely 
impact on gas and electric water heater market shares in the time frame 
for this analysis (i.e., 2030 through 2059). Nonetheless, DOE's 
shipments projections account for impacts that are most likely in the 
relevant time frame. The assumptions are described in chapter 9 and 
appendix 9A of the final rule TSD. The changes result in a decrease in 
gas-fired instantaneous water heater shipments in the no-new-standards 
case in 2030 compared to the preliminary analysis. DOE acknowledges 
that electrification policies may result in a larger decrease in 
shipments of gas-fired instantaneous water heaters than projected in 
this final rule, especially if stronger policies are adopted in coming 
years. However, this would occur in the no-new amended standards case 
and thus would only reduce the energy savings estimated in this adopted 
rule. For example, if incentives and rebates shifted 5 percent of 
shipments in the no-new amended standards case from gas-fired 
instantaneous water heaters to heat pump electric storage water 
heaters, then the energy savings estimated for gas-fired instantaneous 
water heaters in this adopted rule would decline by approximately 5 
percent. The estimated consumer impacts are likely to be similar, 
however, except that the percentage of consumers with no impact at a 
given efficiency level would increase. DOE notes that the economic 
justification for the adopted rule would not change if DOE included the 
impact of incentives and rebates in the no-new-standards case, even if 
the absolute magnitude of the savings were to decline.
    DOE does not estimate that a significant market shift away from 
instantaneous water heaters would occur, given that the relative 
comparison of prices between gas-fired instantaneous and storage water 
heaters will remain similar. See section IV.F.10 for a detailed 
discussion.
1. Impact of Repair vs. Replace
    DOE estimated a fraction of consumer gas-fired instantaneous water 
heater replacement installations that choose to repair their equipment, 
rather than replace their equipment in the new standards case. The 
approach captures not only a decrease in consumer gas-fired 
instantaneous water heater replacement shipments, but also the energy 
use from continuing to use the existing consumer gas-fired 
instantaneous water heater and the cost of the repair. DOE assumes that 
the demand for water heating is inelastic and, therefore, that no 
household or commercial building will forgo either repairing or 
replacing their equipment (either with a new consumer gas-fired 
instantaneous water heater or a suitable water heating alternative).
    For details on DOE's shipments analysis and the repair option, see 
chapter 9 of the final rule TSD.

H. National Impact Analysis

    The NIA assesses the national energy savings (``NES'') and the NPV 
from a national perspective of total consumer costs and savings that 
would be expected to result from new or amended standards at specific 
efficiency levels.\142\ (``Consumer'' in this context refers to 
consumers of the product being regulated.) DOE calculates the NES and 
NPV for the potential standard levels considered based on projections 
of annual product shipments, along with the annual energy consumption 
and total installed cost data from the energy use and LCC analyses. For 
the present analysis, DOE projected the energy savings, operating cost 
savings, product costs, and NPV of consumer benefits over the lifetime 
of consumer gas-fired instantaneous water heaters sold from 2030 
through 2059.
---------------------------------------------------------------------------

    \142\ The NIA accounts for impacts in the United States and U.S. 
territories.
---------------------------------------------------------------------------

    DOE evaluates the impacts of new or amended standards by comparing 
a case without such standards with standards-case projections. The no-
new-standards case characterizes energy use and consumer costs for each 
product class in the absence of new or amended energy conservation 
standards. For this projection, DOE considers historical trends in 
efficiency and various forces that are likely to affect the mix of 
efficiencies over time. DOE compares the no-new-standards case with 
projections characterizing the market for each product class if DOE 
adopted new or amended standards at specific energy efficiency levels 
(i.e., the TSLs or standards cases) for that class. For the standards 
cases, DOE considers how a given standard would likely affect the 
market shares of products with efficiencies greater than the standard.
    DOE uses a spreadsheet model to calculate the energy savings and 
the national consumer costs and savings from each TSL. Interested 
parties can review DOE's analyses by changing various input quantities 
within the spreadsheet. The NIA spreadsheet model uses typical values 
(as opposed to probability distributions) as inputs.
    Table IV.12 summarizes the inputs and methods DOE used for the NIA 
analysis for the final rule. Discussion of these inputs and methods 
follows the table. See chapter 10 of the final rule TSD for further 
details.

                   Table IV.12--Summary of Inputs and Methods for the National Impact Analysis
----------------------------------------------------------------------------------------------------------------
                         Inputs                                                   Method
----------------------------------------------------------------------------------------------------------------
Shipments...............................................  Annual shipments from shipments model.
Compliance Date of Standard.............................  2030.

[[Page 105246]]

 
Efficiency Trends.......................................  No-new-standards case: Based on historical data.
                                                          Standard cases: Roll-up in the compliance year and
                                                           then DOE estimated growth in shipment-weighted
                                                           efficiency in all the standards cases.
Annual Energy Consumption per Unit......................  Annual weighted-average values are a function of
                                                           energy use at each TSL.
Total Installed Cost per Unit...........................  Annual weighted-average values are a function of cost
                                                           at each TSL.
                                                          Incorporates projection of future product prices based
                                                           on historical data.
Annual Energy Cost per Unit.............................  Annual weighted-average values as a function of the
                                                           annual energy consumption per unit and energy prices.
Repair and Maintenance Cost per Unit....................  Annual values do not change with efficiency level.
Energy Price Trends.....................................  AEO2023 projections (to 2050) and extrapolation
                                                           thereafter.
Energy Site-to-Primary and FFC Conversion...............  A time-series conversion factor based on AEO2023.
Discount Rate...........................................  Three and seven percent.
Present Year............................................  2024.
----------------------------------------------------------------------------------------------------------------

1. Product Efficiency Trends
    A key component of the NIA is the trend in energy efficiency 
projected for the no-new-standards case and each of the standards 
cases. Section IV.F.8 of this document describes how DOE developed an 
energy efficiency distribution for the no-new-standards case (which 
yields a shipment-weighted average efficiency) for the year of 
anticipated compliance with an amended standard. To project the trend 
in efficiency absent amended standards for consumer gas-fired 
instantaneous water heaters over the entire shipments projection 
period, DOE used available historical shipments data and manufacturer 
input. The approach is further described in chapter 10 of the final 
rule TSD.
    For the standards cases, DOE used a ``roll-up'' scenario to 
establish the shipment-weighted efficiency for the year that standards 
are assumed to become effective (2030). In this scenario, the market 
shares of products in the no-new-standards case that do not meet the 
standard under consideration would ``roll up'' to meet the new standard 
level, and the market share of products above the standard would remain 
unchanged.
    To develop standards case efficiency trends after 2030, DOE used 
historical shipment data and current consumer gas-fired instantaneous 
water heater model availability by efficiency level (see chapter 8). 
DOE estimated growth in shipment-weighted efficiency by assuming that 
the implementation of ENERGY STAR's performance criteria and other 
incentives would gradually increase the market shares of higher 
efficiency water heaters. Using historical BRG shipments data and 
ENERGY STAR criteria, DOE estimated the annual increase in market share 
for condensing units between 2015--2022 and assumed the increasing 
trend would continue would continue over the shipments projection 
period. DOE notes that at present, most gas-fired instantaneous water 
heater models already achieve EL 2 or higher.
2. National Energy Savings
    The national energy savings analysis involves a comparison of 
national energy consumption of the considered products between each 
potential standards case (``TSL'') and the case with no new or amended 
energy conservation standards. DOE calculated the national energy 
consumption by multiplying the number of units (stock) of each product 
(by vintage or age) by the unit energy consumption (also by vintage). 
DOE calculated annual NES based on the difference in national energy 
consumption for the no-new-standards case and for each higher 
efficiency standard case. DOE estimated energy consumption and savings 
based on site energy and converted the electricity consumption and 
savings to primary energy (i.e., the energy consumed by power plants to 
generate site electricity) using annual conversion factors derived from 
AEO2023. For natural gas, primary energy is the same as site energy. 
Cumulative energy savings are the sum of the NES for each year over the 
timeframe of the analysis.
    Use of higher-efficiency products is sometimes associated with a 
direct rebound effect, which refers to an increase in utilization of 
the product due to the increase in efficiency. DOE examined a 2009 
review of empirical estimates of the rebound effect for various energy-
using products.\143\ This review concluded that the econometric and 
quasi-experimental studies suggest a mean value for the direct rebound 
effect for household water heating of around 10 percent. DOE also 
examined a 2012 ACEEE paper \144\ and a 2013 paper by Thomas and 
Azevedo.\145\ Both of these publications examined the same studies that 
were reviewed by Sorrell, as well as Greening et al.,\146\ and 
identified methodological problems with some of the studies. The 
studies believed to be most reliable by Thomas and Azevedo show a 
direct rebound effect for water heating products in the 1-percent to 
15-percent range, while Nadel concludes that a more likely range is 1 
to 12 percent, with rebound effects sometimes higher for low-income 
households that could not afford to adequately heat their homes prior 
to weatherization. DOE applied a rebound effect of 10 percent for 
consumer gas-fired instantaneous water heaters used in residential 
applications based on studies of other residential products and the 
value used for consumer water heaters in the 2010 Final Rule for 
Heating Products, and 0 percent for consumer water heaters in 
commercial applications, which also matches EIA's National Energy

[[Page 105247]]

Modeling System (``NEMS'') for residential and commercial water heating 
and is consistent with other recent energy conservation standards 
rulemakings.147 148 149 150 The calculated NES at each 
efficiency level is therefore reduced by 10 percent in residential 
applications. DOE also included the rebound effect in the NPV analysis 
by accounting for the additional net benefit from increased consumer 
gas-fired instantaneous water heaters usage, as described in section 
IV.H.3 of this document.
---------------------------------------------------------------------------

    \143\ Steven Sorrell, et al., Empirical Estimates of the Direct 
Rebound Effect: A Review, 37 Energy Policy 1356-71 (2009). Available 
at www.sciencedirect.com/science/article/pii/S0301421508007131 (last 
accessed August 29, 2024).
    \144\ Steven Nadel, ``The Rebound Effect: Large or Small?'' 
ACEEE White Paper (August 2012). Available at www.aceee.org/files/pdf/white-paper/rebound-large-and-small.pdf (last accessed August 
29, 2024).
    \145\ Brinda Thomas and Ines Azevedo, Estimating Direct and 
Indirect Rebound Effects for U.S. Households with Input-Output 
Analysis, Part 1: Theoretical Framework, 86 Ecological Econ. 199-201 
(2013). Available at www.sciencedirect.com/science/article/pii/S0921800912004764) (last accessed August 29, 2024).
    \146\ Lorna A. Greening, et al., Energy Efficiency and 
Consumption--The Rebound Effect--A Survey, 28 Energy Policy 389-401 
(2002). Available at www.sciencedirect.com/science/article/pii/S0301421500000215 (last accessed August 29, 2024).
    \147\ See www.eia.gov/outlooks/aeo/nems/documentation/ (last 
accessed August 29, 2024).
    \148\ DOE. Energy Conservation Program for Certain Industrial 
Equipment: Energy Conservation Standards for Small, Large, and Very 
Large Air-Cooled Commercial Package Air Conditioning and Heating 
Equipment and Commercial Warm Air Furnaces; Direct final rule. 81 FR 
2419 (Jan. 15, 2016). Available at www.regulations.gov/document/EERE-2013-BT-STD-0021-0055 (last accessed August 29, 2024).
    \149\ DOE. Energy Conservation Program: Energy Conservation 
Standards for Residential Boilers; Final rule. 81 FR 2319 (Jan. 15, 
2016). Available at www.regulations.gov/document/EERE-2012-BT-STD-0047-0078 (last accessed August 29, 2024).
    \150\ DOE. Energy Conservation Program: Energy Conservation 
Standards for Commercial Packaged Boilers; Final Rule. 85 FR 1592 
(Jan. 10, 2020). Available at www.regulations.gov/document/EERE-2013-BT-STD-0030-0099 (last accessed August 29, 2024).
---------------------------------------------------------------------------

    In 2011, in response to the recommendations of a committee on 
``Point-of-Use and Full-Fuel-Cycle Measurement Approaches to Energy 
Efficiency Standards'' appointed by the National Academy of Sciences, 
DOE announced its intention to use FFC measures of energy use and 
greenhouse gas and other emissions in the national impact analyses and 
emissions analyses included in future energy conservation standards 
rulemakings. 76 FR 51281 (Aug. 18, 2011). After evaluating the 
approaches discussed in the August 18, 2011 notice, DOE published a 
statement of amended policy in which DOE explained its determination 
that EIA's National Energy Modeling System (``NEMS'') is the most 
appropriate tool for its FFC analysis and its intention to use NEMS for 
that purpose. 77 FR 49701 (Aug. 17, 2012). NEMS is a public domain, 
multi-sector, partial equilibrium model of the U.S. energy sector \151\ 
that EIA uses to prepare its Annual Energy Outlook. The FFC factors in 
corporate losses in production and delivery in the case of natural gas 
(including fugitive emissions) and additional energy used to produce 
and deliver the various fuels used by power plants. The approach used 
for deriving FFC measures of energy use and emissions is described in 
appendix 10B of the final rule TSD.
---------------------------------------------------------------------------

    \151\ For more information on NEMS, refer to The National Energy 
Modeling System: An Overview 2018, DOE/EIA-0581(2019), April 2019. 
Available at www.eia.gov/outlooks/aeo/nems/documentation/ (last 
accessed August 29, 2024).
---------------------------------------------------------------------------

    Rinnai claimed that DOE has not adequately explained how national 
energy savings at the proposed level increased to 0.52 quads in the 
July 2024 NODA from 0.4 quads in the NOPR. (Rinnai, No. 1443 at p. 8)
    For the July 2023 NOPR, DOE incorporated RECS 2015 as the basis of 
the building sample development and energy use determination, while for 
July 2024 NODA, DOE incorporated RECS 2020 as the basis of the building 
sample development and energy use determination and updated the 
analyses accordingly (see section IV.E of this document). The updated 
RECS includes a much larger sample size and higher water usage and 
energy consumption estimates on average for consumer gas-fired 
instantaneous water heaters. Using RECS 2020 for the sample development 
and energy use determination therefore results in larger differences in 
annual energy consumption between higher efficiency levels and lower 
efficiency levels. Because the estimates of national energy savings are 
based on the differences in annual energy consumption between higher 
efficiency levels and lower efficiency levels, the estimated national 
primary energy savings increased from approximately 0.45 quads to 
approximately 0.52 quads. Rinnai claims the national energy savings and 
associated emission reductions are overstated because DOE did not 
properly account for consumers switching to gas-fired storage water 
heaters as a response to the standard which would increase overall 
energy consumption of water heaters. Rinnai projects that an additional 
savings of 0.61 quads and reductions of 39 million metric tons in 
CO2 emissions are possible if non-condensing gas-fired 
instantaneous water heaters are allowed to stay on the market. Rinnai 
requested DOE analyze product substitution and the impact of various 
scenarios on energy savings and emission reductions (Rinnai, No. 1443 
at pp. 8-9, 26) Rinnai believes that would-be purchasers of non-
condensing gas-fired instantaneous water heaters would likely purchase 
gas-fired storage water heaters rather than condensing gas-fired 
instantaneous water heaters. Rinnai states that if 30 percent of would-
be purchasers opted for gas-fired storage water heaters instead, there 
would be no energy savings by the standard. Rinnai believes that fewer 
people are purchasing gas-fired instantaneous water heater in 2023 due 
to inflation, implying that gas-fired instantaneous water heater 
purchasers are price-sensitive. (also Rinnai, No. 1435, at p. 2, 4, 10-
11, 14-15)
    DOE estimates that it is highly unlikely that consumers would 
switch from gas-fired instantaneous water heaters to gas-fired storage 
water heaters specifically as a result of the incremental costs of an 
energy conservation standard because the differential costs between the 
two products will remain similar (see section IV.F.10 for an expanded 
discussion). Therefore, product switching as a result of the proposed 
standards is likely to be negligible. DOE's estimates of national 
energy savings and associated emission reductions appropriately reflect 
current data and market trends. Any potential energy savings that might 
occur from consumers switching from gas-fired storage water heaters to 
gas-fired instantaneous water heaters, in the absence of new standards, 
is already incorporated into the no-new-standards case. And because DOE 
estimates that switching is unlikely to be impacted as a result of 
amended standards, these potential energy savings are present in both 
the standards and no-new-standards cases. The commenter's projection of 
additional energy savings and emissions reduction if non-condensing 
gas-fired instantaneous water heaters are allowed to stay on the market 
is a misunderstanding of DOE's estimates of national energy savings and 
associated emission reductions.
3. Net Present Value Analysis
    The inputs for determining the NPV of the total costs and benefits 
experienced by consumers are (1) total annual installed cost, (2) total 
annual operating costs (energy costs and repair and maintenance costs), 
and (3) a discount factor to calculate the present value of costs and 
savings. DOE calculates net savings each year as the difference between 
the no-new-standards case and each standards case in terms of total 
savings in operating costs versus total increases in installed costs. 
DOE calculates operating cost savings over the lifetime of each product 
shipped during the projection period.
    As discussed in section IV.F.1 of this document, DOE used constant 
prices as the default price assumption to project future consumer gas-
fired instantaneous water heater prices. However, DOE also developed 
consumer gas-fired instantaneous water heater price trends based on 
historical PPI data. To evaluate the effect of uncertainty regarding 
the price trend estimates, DOE investigated the impact of different 
product price projections on the consumer NPV for the considered TSLs 
for consumer gas-

[[Page 105248]]

fired instantaneous water heaters. In addition to the default constant 
price trend, DOE considered two product price sensitivity cases: (1) a 
price decline case and (2) price increase case based on PPI data. The 
derivation of these price trends and the results of these sensitivity 
cases are described in appendix 10C of the final rule TSD.
    The operating cost savings are energy cost savings, which are 
calculated using the estimated energy savings in each year and the 
projected price of the appropriate form of energy. To estimate energy 
prices in future years, DOE multiplied the average regional energy 
prices by the projection of annual national-average residential energy 
price changes in the Reference case from AEO2023, which has an end year 
of 2050. To estimate price trends after 2050, the 2046-2050 average was 
used for all years. As part of the NIA, DOE also analyzed scenarios 
that used inputs from variants of the AEO2023 Reference case that have 
lower and higher economic growth. Those cases have lower and higher 
energy price trends compared to the Reference case. NIA results based 
on these cases are presented in appendix 10C of the final rule TSD.
    In considering the consumer welfare gained due to the direct 
rebound effect, DOE accounted for change in consumer surplus attributed 
to additional water heating from the purchase of a more efficient unit. 
Overall consumer welfare is generally understood to be enhanced from 
rebound. The net consumer impact of the rebound effect is included in 
the calculation of operating cost savings in the consumer NPV results. 
See appendix 10E of the final rule TSD for details on DOE's treatment 
of the monetary valuation of the rebound effect.
    In calculating the NPV, DOE multiplies the net savings in future 
years by a discount factor to determine their present value. For this 
final rule, DOE estimated the NPV of consumer benefits using both a 3-
percent and a 7-percent real discount rate. DOE uses these discount 
rates in accordance with guidance provided by the Office of Management 
and Budget (``OMB'') to Federal agencies on the development of 
regulatory analysis.\152\ The discount rates for the determination of 
NPV are in contrast to the discount rates used in the LCC analysis, 
which are designed to reflect a consumer's perspective. The 7-percent 
real value is an estimate of the average before-tax rate of return to 
private capital in the U.S. economy. The 3-percent real value 
represents the ``social rate of time preference,'' which is the rate at 
which society discounts future consumption flows to their present 
value.
---------------------------------------------------------------------------

    \152\ U.S. Office of Management and Budget. Circular A-4: 
Regulatory Analysis. Available at www.whitehouse.gov/omb/information-for-agencies/circulars (last accessed Mar. 5, 2024). DOE 
used the prior version of Circular A-4 (September 17, 2003) in 
accordance with the effective date of the November 9, 2023 version. 
Available at www.whitehouse.gov/wp-content/uploads/legacy_drupal_files/omb/circulars/A4/a-4.pdf (last accessed August 
29, 2024).
---------------------------------------------------------------------------

I. Consumer Subgroup Analysis

    In analyzing the potential impact of new or amended energy 
conservation standards on consumers, DOE evaluates the impact on 
identifiable subgroups of consumers that may be disproportionately 
affected by a new or amended national standard. The purpose of a 
subgroup analysis is to determine the extent of any such 
disproportional impacts. DOE evaluates impacts on particular subgroups 
of consumers by analyzing the LCC impacts and PBP for those particular 
consumers from alternative standard levels. For this final rule, DOE 
analyzed the impacts of the considered standard levels on three 
subgroups: (1) low-income households, (2) senior-only households, and 
(3) small businesses. The analysis used subsets of the RECS 2020 sample 
composed of households and CBECS 2018 sample composed of commercial 
buildings that meet the criteria for the three subgroups. DOE used the 
LCC and PBP spreadsheet model to estimate the impacts of the considered 
efficiency levels on these subgroups. Chapter 11 of the final rule TSD 
describes the consumer subgroup analysis.
1. Low-Income Households
    Low-income households, as defined by the poverty thresholds from 
the U.S. Bureau of the Census, are significantly more likely to be 
renters or live in subsidized housing units and less likely to be 
homeowners. DOE notes that in these cases, the landlord purchases the 
equipment and may pay the gas bill as well. RECS 2020 includes data on 
whether a household pays for the gas bill, allowing DOE to categorize 
households appropriately in the analysis.\153\ For this consumer 
subgroup analysis, DOE considers the impact on the low-income household 
narrowly, excluding any costs or benefits that are accrued by either a 
landlord or subsidized housing agency. This allows DOE to determine 
whether low-income households are disproportionately affected by an 
amended energy conservation standard in a more representative manner. 
By contrast, for the main LCC results for the whole consumer sample, 
all costs and benefits are accrued by the user of the product.
---------------------------------------------------------------------------

    \153\ RECS 2020 includes a category for households that pay only 
some of the gas bill. For the low-income consumer subgroup analysis, 
DOE assumes that these households pay 50 percent of the gas bill, 
and, therefore, would receive 50 percent of operating cost benefits 
of an amended energy conservation standard.
---------------------------------------------------------------------------

    DOE finds no evidence that significant rental cost increases would 
occur due to an amended standard. Rental prices are largely dictated by 
supply and demand of housing in individual locations, not the sum of 
equipment costs in those rentals, such that two similar rentals could 
have widely differing prices. Furthermore, a landlord would be 
responsible for replacing an end-of-life gas-fired instantaneous water 
heater in the no-new-standards case as well yet the rent is unlikely to 
increase simply because of this regular maintenance. The installation 
costs estimated in the LCC already include any potential replacement of 
venting for gas-fired instantaneous water heaters. Finally, even if a 
landlord were to fully pass on the incremental costs due to amended 
standards, those costs would presumably be spread out over a monthly 
rent spanning many years, possibly the lifetime of the water heater, 
resulting in relatively small monthly rent increases. It is for these 
reasons that the low-income subgroup analyzes impacts assuming renters 
do not bear installation and equipment costs. However, as described in 
section IV.F, for the overall LCC analysis, DOE makes the simplifying 
assumption that all installation and equipment costs are paid for by 
the consumer of the equipment, including renters. Therefore, the main 
LCC results do assume that landlords pass on all costs and yet the 
analysis still finds that the rule is economically justified. The main 
LCC and the consumer subgroup analysis are therefore two boundary 
conditions with respect to costs and benefits accrued by renters.
    The majority of low-income households that experience a net cost at 
higher efficiency levels are homeowner households, as opposed to 
renters. These households typically have lower hot water use. Unlike 
renters, homeowners would bear the full cost of installing a new water 
heater. For these households, a potential rebate program to reduce the 
total installed costs would be effective in lowering the percentage of 
low-income consumers with a net cost. DOE understands that the 
landscape of low-income consumers with a gas-fired instantaneous water 
heater may change before the

[[Page 105249]]

compliance date of amended energy conservation standards, if finalized. 
For example, point-of-sale rebate programs are being considered that 
may moderate the impact on low-income consumers to help offset the 
total installed cost of a higher efficiency gas-instantaneous water 
heater. Currently, DOE is aware that the Inflation Reduction Act will 
likely include incentives for certain water heaters, although the 
specific implementation details have yet to be finalized. Point-of-sale 
rebates or weatherization programs could also reduce the total number 
of low-income consumers that would be impacted because the household no 
longer has a water heater to upgrade.
    Responding to the July 2023 NOPR, Atmos Energy argued the 
elimination of non-condensing instantaneous water heaters will cause 
consumers to switch to less efficient options. Atmos Energy and ECSC 
argued that non-condensing instantaneous water heaters require less 
space and changing to a condensing alternative (or electric 
alternatives) will cost significantly more. Atmos Energy and ECSC 
argued that this elimination will impact low-income/multi-family/small 
home consumers disproportionately. (Atmos Energy, No. 1183 at pp. 2-3; 
ECSC, No. 1185 at pp. 1-2) As DOE has discussed in section IV.F.10 of 
this document, it is very unlikely that consumers would switch from 
existing non-condensing instantaneous water heaters to storage water 
heaters in response to amended standards. The costs to do so would 
exceed the costs of simply installing a standards-compliant condensing 
instantaneous water heater. Furthermore, both a standards-compliant 
instantaneous water heater and a non-condensing instantaneous water 
heater require less space compared to a storage water heater.
    Additionally, DOE does not expect the existing market trends of 
consumers switching from storage to instantaneous water heaters (in the 
no-new-standards case) would be impacted by an amended standard, as any 
incremental cost for a condensing instantaneous water heater would be 
small compared to the overall costs to switch from a storage to an 
instantaneous water heater.
    Commenters from the U.S. House of Representatives stated that the 
proposed rulemaking imposes an unattainable standard for non-
condensing, gas-fired tankless water heaters, and expressed concern 
that it would discourage budget-conscious consumers from investing in 
tankless models, negatively impacting Georgia manufacturing companies. 
(U.S. House of Representatives, No. 1205 at p. 1) Commenters from the 
U.S. House of Representatives reiterated these comments in response to 
the July 2024 NODA. (U.S. House of Representatives, No. 1445 at p. 1)
    In response to the affordability concerns, DOE acknowledges that 
the average installed cost of gas-fired instantaneous water heaters at 
EL 2 is estimated to increase by $231 compared to current baseline 
efficiency levels. However, as discussed in chapter 11 of the TSD, low-
income households make up only 3.2 percent of the market for gas-fired 
instantaneous water heaters, and of these approximately 38 percent are 
renters who would likely benefit from the increased efficiency through 
energy savings without bearing the full burden of installation costs. 
DOE estimates that at EL 2 low-income consumers of gas-fired 
instantaneous water heaters will experience on average lifecycle cost 
savings of $248, with only 6.5 percent of low-income consumers 
experiencing a net cost. DOE acknowledges that a small proportion of 
low-income homeowners may experience higher installation costs for 
condensing gas-fired instantaneous water heaters. However, DOE 
estimates that the energy savings benefits across the low-income 
subgroup outweigh these costs. See section V.B.1.b for detailed 
results.
2. Senior-Only Households
    Senior-only households are households with occupants who are all at 
least 65 years of age. RECS 2020 includes information on the age range 
of household occupants, allowing for the identification of senior-only 
households from the sample Senior-only households comprised 23.5 
percent of the country's households. In estimating the LCC impacts to 
senior-only households, it is assumed that any residual value of a 
long-lived product is capitalized in the value of the home.
3. Small Business Subgroup
    DOE identified small businesses in CBECS 2018 using threshold 
levels for maximum number of employees within each building principal 
building activity.
    GRA commented that the proposed standards will discourage 
restaurants from investing in tankless models and instead choose less 
efficient water heating solutions and add constraints for restaurant 
operating with limited space availability. GRA stated that many 
restaurants rely on gas-fired tankless water heaters due to their space 
saving attributes and the proposed standards would disproportionately 
limit the options of small businesses, resulting in higher costs and 
reduced efficiency. (GRA, No. 449 at p. 1)
    As DOE has discussed in section IV.F.10, it is very unlikely that 
businesses would switch from existing non-condensing instantaneous 
water heaters to storage water heaters in response to amended 
standards. The costs to do so would exceed the costs of simply 
installing a standards-compliant condensing instantaneous water heater. 
Additionally, DOE does not expect the existing market trends of 
businesses investing in or switching from storage to instantaneous 
water heaters (in the no-new-standards case) would be impacted by an 
amended standard, as any incremental cost for a condensing 
instantaneous water heater would be small compared to the overall costs 
to switch from a storage to an instantaneous water heater. If a 
business is considering investing in a tankless model, they are doing 
so for space-saving or energy saving reasons that remain valid with a 
condensing tankless water heater.

J. Manufacturer Impact Analysis

1. Overview
    DOE performed an MIA to estimate the financial impacts of amended 
energy conservation standards on manufacturers of gas-fired 
instantaneous water heaters and to estimate the potential impacts of 
such standards on direct employment and manufacturing capacity. The MIA 
has both quantitative and qualitative aspects and includes analyses of 
projected industry cash flows, the INPV, investments in research and 
development (``R&D'') and manufacturing capital, and domestic 
manufacturing employment. Additionally, the MIA seeks to determine how 
amended energy conservation standards might affect manufacturing 
employment, capacity, and competition, as well as how standards 
contribute to overall regulatory burden. Finally, the MIA serves to 
identify any disproportionate impacts on manufacturer subgroups, 
including small business manufacturers.
    The quantitative part of the MIA primarily relies on the GRIM, an 
industry cash flow model with inputs specific to this rulemaking. The 
key GRIM inputs include data on the industry cost structure, unit 
production costs, product shipments, manufacturer markups, and 
investments in R&D and manufacturing capital required to produce 
compliant products. The key GRIM outputs are the INPV, which is the sum 
of industry annual cash flows over the analysis period, discounted 
using the industry-weighted average

[[Page 105250]]

cost of capital, and the impact to domestic manufacturing employment. 
The model uses standard accounting principles to estimate the impacts 
of more-stringent energy conservation standards on a given industry by 
comparing changes in INPV between a no-new-standards case and the 
various standards cases (i.e., ``TSLs''). To capture the uncertainty 
relating to manufacturer pricing strategies following amended 
standards, the GRIM estimates a range of possible impacts under 
different manufacturer markup scenarios.
    The qualitative part of the MIA addresses manufacturer 
characteristics and market trends. Specifically, the MIA considers such 
factors as a potential standard's impact on manufacturing capacity, 
competition within the industry, the cumulative impact of other DOE and 
non-DOE regulations, and impacts on manufacturer subgroups. The 
complete MIA is outlined in chapter 12 of the final rule TSD.
    DOE conducted the MIA for this rulemaking in three phases. In Phase 
1 of the MIA, DOE prepared a profile of the gas-fired instantaneous 
water heater manufacturing industry based on the market and technology 
assessment, preliminary manufacturer interviews, and publicly-available 
information. This included a top-down analysis of gas-fired 
instantaneous water heater manufacturers that DOE used to derive 
preliminary financial inputs for the GRIM (e.g., revenues; materials, 
labor, overhead, and depreciation expenses; selling, general, and 
administrative expenses (``SG&A''); and R&D expenses). DOE also used 
public sources of information to further calibrate its initial 
characterization of the gas-fired instantaneous water heater 
manufacturing industry, including company filings of form 10-K from the 
SEC,\154\ corporate annual reports, the U.S. Census Bureau's Quarterly 
Survey of Plant Capacity Utilization,\155\ U.S. Census Bureau's Annual 
Survey of Manufactures (``ASM''),\156\ and reports from D&B 
Hoovers.\157\
---------------------------------------------------------------------------

    \154\ U.S. Securities and Exchange Commission. Company Filings. 
Available at www.sec.gov/search-filings (last accessed August 29, 
2024).
    \155\ The U.S. Census Bureau. Quarterly Survey of Plant Capacity 
Utilization. (2007-2019). Available at www.census.gov/programs-surveys/qpc/data/tables.html (last accessed August 29, 2024).
    \156\ U.S. Census Bureau's Annual Survey of Manufactures. 
(2021). Available at: www.census.gov/programs-surveys/asm/data/tables.html (last accessed January 18, 2024).
    \157\ The D&B Hoovers login is available at app.dnbhoovers.com 
(last accessed August 29, 2024).
---------------------------------------------------------------------------

    In Phase 2 of the MIA, DOE prepared a framework industry cash-flow 
analysis to quantify the potential impacts of amended energy 
conservation standards. The GRIM uses several factors to determine a 
series of annual cash flows starting with the announcement of the 
standard and extending over a 30-year period following the compliance 
date of the standard. These factors include annual expected revenues, 
costs of sales, SG&A and R&D expenses, taxes, and capital expenditures. 
In general, energy conservation standards can affect manufacturer cash 
flow in three distinct ways: (1) creating a need for increased 
investment, (2) raising production costs per unit, and (3) altering 
revenue due to higher per-unit prices and changes in sales volumes.
    In addition, during Phase 2, DOE developed interview guides to 
distribute to manufacturers of gas-fired instantaneous water heaters in 
order to develop other key GRIM inputs, including product and capital 
conversion costs, and to gather additional information on the 
anticipated effects of energy conservation standards on revenues, 
direct employment, capital assets, industry competitiveness, and 
subgroup impacts.
    In Phase 3 of the MIA, DOE conducted structured, detailed 
interviews with representative manufacturers. During these interviews, 
DOE discussed engineering, manufacturing, procurement, and financial 
topics to validate assumptions used in the GRIM and to identify key 
issues or concerns. As part of Phase 3, DOE also evaluated subgroups of 
manufacturers that may be disproportionately impacted by amended 
standards or that may not be accurately represented by the average cost 
assumptions used to develop the industry cash flow analysis. Such 
manufacturer subgroups may include small business manufacturers, low-
volume manufacturers, niche players, and/or manufacturers exhibiting a 
cost structure that largely differs from the industry average. DOE 
identified one subgroup for a separate impact analysis: small business 
manufacturers. The small business subgroup is discussed in section VI.B 
of this document, ``Review under the Regulatory Flexibility Act'' and 
in chapter 12 of the final rule TSD.
2. Government Regulatory Impact Model and Key Inputs
    DOE uses the GRIM to quantify the changes in cash flow due to new 
or amended standards that result in a higher or lower industry value. 
The GRIM uses a standard, annual discounted cash-flow analysis that 
incorporates manufacturer costs, manufacturer markups, shipments, and 
industry financial information as inputs. The GRIM models changes in 
costs, distribution of shipments, investments, and manufacturer margins 
that could result from an amended energy conservation standard. The 
GRIM spreadsheet uses the inputs to arrive at a series of annual cash 
flows, beginning in 2024 (the base year of the analysis) and continuing 
to 2059. DOE calculated INPVs by summing the stream of annual 
discounted cash flows during this period. For manufacturers of gas-
fired instantaneous water heaters, DOE used a real discount rate of 9.6 
percent, which was derived from industry financials and then modified 
according to feedback received during manufacturer interviews.
    The GRIM calculates cash flows using standard accounting principles 
and compares changes in INPV between the no-new-standards case and each 
standards case. The difference in INPV between the no-new-standards 
case and a standards case represents the financial impact of the new or 
amended energy conservation standard on manufacturers. As discussed 
previously, DOE developed critical GRIM inputs using a number of 
sources, including publicly available data, results of the engineering 
analysis, results of the shipments analysis, and information gathered 
from industry stakeholders during the course of manufacturer 
interviews. The GRIM results are presented in section V.B.2 of this 
document. Additional details about the GRIM, the discount rate, and 
other financial parameters can be found in chapter 12 of the final rule 
TSD.
a. Manufacturer Production Costs
    Manufacturing more efficient products is typically more expensive 
than manufacturing baseline products due to the use of more complex 
components, which are typically more costly than baseline components. 
The changes in the MPCs of covered products can affect the revenues, 
gross margins, and cash flow of the industry.
    As discussed in section IV.C.1 of this document, DOE conducted a 
market analysis of currently available models listed in DOE's CCD to 
determine which efficiency levels were most representative of the 
current distribution of gas-fired instantaneous water heaters available 
on the market. DOE also completed physical teardowns of commercially 
available units to determine which design options manufacturers may use 
to achieve certain efficiency levels. In this final rule, DOE developed 
efficiency levels

[[Page 105251]]

with a combination of the efficiency-level and design-option 
approaches. DOE requested comments from stakeholders and conducted 
interviews with manufacturers in advance of the July 2023 NOPR 
concerning these initial efficiency levels, which have been updated 
based on the feedback DOE received. For a complete description of the 
MPCs, see section IV.C.1 of this document and chapter 5 of the final 
rule TSD.
b. Shipments Projections
    The GRIM estimates manufacturer revenues based on total unit 
shipment projections and the distribution of those shipments by 
efficiency level. Changes in sales volumes and efficiency mix over time 
can significantly affect manufacturer finances. For this analysis, the 
GRIM uses the NIA's annual shipment projections derived from the 
shipments analysis from 2024 (the base year) to 2059 (the end year of 
the analysis period). See section IV.G of this document and chapter 9 
of the final rule TSD for additional details.
c. Capital and Product Conversion Costs
    New or amended energy conservation standards could cause 
manufacturers to incur conversion costs to bring their production 
facilities and product designs into compliance. DOE evaluated the level 
of conversion-related expenditures that would be needed to comply with 
each considered efficiency level for gas-fired instantaneous water 
heaters. For the MIA, DOE classified these conversion costs into two 
major groups: (1) capital conversion costs, and (2) product conversion 
costs. Capital conversion costs are investments in property, plant, and 
equipment necessary to adapt or change existing production facilities 
such that new compliant product designs can be fabricated and 
assembled. Product conversion costs are investments in research, 
development, testing, marketing, and other non-capitalized costs 
necessary to make product designs comply with new or amended energy 
conservation standards.
    In the July 2023 NOPR and the July 2024 NODA, DOE relied on 
manufacturer feedback to evaluate the level of capital and product 
conversion costs that gas-fired instantaneous water heater 
manufacturers would likely incur to meet each analyzed efficiency 
level. 88 FR 49058, 49127-49128; 89 FR 59692, 59699-59700. During 
confidential interviews, DOE asked manufacturers to estimate the 
capital conversion costs (e.g., changes in production processes, 
equipment, and tooling), needed to meet the various efficiency levels. 
DOE also asked manufacturers to estimate the redesign effort and 
engineering resources required at various efficiency levels to quantify 
the product conversion costs. DOE then estimated industry-level 
conversion costs by scaling feedback from OEMs by the estimated number 
of manufacturers that would need to make these investments at each TSL.
    At lower TSLs, manufacturer feedback and a review of the market 
indicate that most manufacturers already have sufficient condensing 
production capacity and offer range of models that meet the required 
efficiency levels. Thus, DOE modeled low-levels of capital and product 
conversion costs for most manufacturers at TSL 1 and TSL 2. As TSLs 
increase in stringency, DOE expects most manufacturers would need to 
add production capacity as fewer shipments currently meet the required 
levels and product designs increase in complexity. DOE also expects 
product conversion costs would increase at higher TSLs since fewer 
manufacturers currently offer fewer models that meet the efficiency 
levels required. For the July 2024 NODA, DOE refined its conversion 
cost estimates to reflect feedback submitted by Rinnai in response to 
the July 2023 NOPR. (Rinnai, No. 1186 at p. 23) DOE incorporated 
Rinnai's estimate of $15 million \158\ required to retrofit its 
Griffin, GA factory to produce condensing gas-fired instantaneous water 
heaters into its conversion cost estimates at TSL 1 and modeled 
additional incremental investments to reach higher TSLs, consistent 
with manufacturer feedback from confidential interviews. DOE 
incorporated Rinnai's estimate to convert its U.S. production facility 
in its analysis to avoid underestimating the potential investments 
required to meet potential amended standards. Alternatively, Rinnai 
could choose to maintain condensing capabilities in its existing 
facilities in Japan, in which case industry conversion costs would be 
lower.
---------------------------------------------------------------------------

    \158\ Rinnai's public comment in response to the July 2023 NOPR 
(Rinnai No. 1186 at p. 23 and p. 51, which corresponds to p. 13 of 
Attachment A) cited two different estimates: $15 million (p. 23) and 
a range of $3 and $9 million (p. 51). To avoid underestimating 
potential investments, DOE incorporated the higher estimate of $15 
million provided by Rinnai.
---------------------------------------------------------------------------

    For this final rule, DOE updated its conversion cost estimates from 
2022$ to 2023$ but otherwise maintained its conversion cost methodology 
used in the July 2024 NODA.
    In general, DOE assumes all conversion-related investments occur 
between the year of publication of the final rule and the year by which 
manufacturers must comply with the amended standard. The conversion 
cost figures used in the GRIM can be found in section V.B.2 of this 
document. For additional information on the estimated capital and 
product conversion costs, see chapter 12 of the final rule TSD.
d. Manufacturer Markup Scenarios
    MSPs include direct manufacturing production costs (i.e., labor, 
materials, and overhead estimated in DOE's MPCs) and all non-production 
costs (i.e., SG&A, R&D, and interest), along with profit. To calculate 
the MSPs in the GRIM, DOE applied manufacturer markups to the MPCs 
estimated in the engineering analysis for each efficiency level. 
Modifying these manufacturer markups in the standards case yields 
different sets of impacts on manufacturers. For the MIA, DOE modeled 
two standards-case manufacturer markup scenarios to represent 
uncertainty regarding the potential impacts on prices and profitability 
for manufacturers following the implementation of amended energy 
conservation standards: (1) a preservation of gross margin percentage 
scenario, and (2) a preservation of operating profit scenario. These 
scenarios lead to different manufacturer markup values that, when 
applied to the MPCs, result in varying revenue and cash flow impacts.
    Under the preservation of gross margin percentage scenario, DOE 
applied a single uniform ``gross margin percentage'' across all 
efficiency levels, which assumes that manufacturers would be able to 
maintain the same amount of profit as a percentage of revenues at all 
efficiency levels within a product class. As MPCs increase with 
efficiency, this scenario implies that the per-unit dollar profit will 
increase. DOE estimated a gross margin percentage of 31 percent for 
gas-fired instantaneous water heaters.\159\ Manufacturers tend to 
believe it is optimistic to assume that they would be able to maintain 
the same gross margin percentage as their production costs increase, 
particularly for minimally efficient products. Therefore, this scenario 
represents a high bound to industry profitability under an amended 
energy conservation standard.
---------------------------------------------------------------------------

    \159\ The gross margin percentage of 31 percent is based on a 
manufacturer markup of 1.45.
---------------------------------------------------------------------------

    Under the preservation of operating profit scenario, DOE modeled a 
situation in which manufacturers are not able to increase per-unit 
operating profit in proportion to increases in MPCs. In the 
preservation of operating

[[Page 105252]]

profit scenario, as the cost of production goes up under a standards 
case, manufacturers are generally required to reduce their manufacturer 
markups to a level that maintains base-case operating profit. DOE 
implemented this scenario in the GRIM by lowering the manufacturer 
markups at each TSL to yield approximately the same earnings before 
interest and taxes in the standards case as in the no-new-standards 
case in the year after the compliance date of the amended standards. 
The implicit assumption behind this scenario is that the industry can 
only maintain its operating profit in absolute dollars after the 
standard.
    A comparison of industry financial impacts under the two 
manufacturer markup scenarios is presented in section V.B.2.a of this 
document.
3. Discussion of MIA Comments
    In response to the July 2023 NOPR, Rinnai stated that DOE's review 
of manufacturer impacts did not account for the direct impact of the 
rulemaking on Rinnai's manufacturing facility located in Griffin, 
Georgia, which is tooled and optimized for production of non-condensing 
gas-fired instantaneous water heaters. Rinnai commented that the 
Griffin facility cost $70 million to build. Rinnai estimates that 
should the Griffin plant close, it would lead to a loss of gross profit 
between $30 million to $36 million, annually, and a write-off of $2 
million in capital expenditures that could not be repurposed. Rinnai 
asserted that it would require more than $15 million \160\ to repurpose 
its Griffin facility to produce condensing gas-fired instantaneous 
water heaters, which may be cost prohibitive given current product 
capacity in Japan. Additionally, Rinnai asserted that it was not 
contacted by DOE as part of this rulemaking. Rinnai commented that the 
levels proposed in the July 2023 NOPR would make its new Griffin 
production facility largely obsolete and lead to eliminating 122 jobs. 
(Rinnai No. 1186 at pp. 22-23) Rinnai noted that of its roughly 72 gas-
fired instantaneous models on the market, 32 meet the proposed 0.91 UEF 
standard for gas-fired instantaneous water heaters, meaning that more 
than half of its models would be eliminated from the market. (Rinnai, 
No. 1186 at pp. 4-5)
---------------------------------------------------------------------------

    \160\ Rinnai's submission (Rinnai No. 1186 at p. 23 and p. 51, 
which corresponds to p. 13 of Attachment A) cited two different 
estimates: $15 million (p. 23) and a range of $3 and $9 million (p. 
51). To avoid underestimating potential investments, DOE references 
the higher estimate provided by Rinnai.
---------------------------------------------------------------------------

    In response to the July 2024 NODA, Rinnai questioned DOE's 
assumption that it would convert its Griffin, Georgia manufacturing 
facility to produce condensing gas-fired instantaneous water heaters. 
Rinnai restated that it has overseas manufacturing capacity for 
condensing gas-fired instantaneous water heaters, and the need to 
expand that capacity would depend on an assessment of market demand. 
Rinnai commented that under a condensing-level standard, it is not 
realistic to assume Rinnai would maintain current sales levels (i.e., 
prospective purchasers may choose condensing products from competitors 
rather than Rinnai). Rinnai requested that DOE publish a GRIM to 
support and substantiate its MIA. (Rinnai No. 1443 at pp. 21-22)
    The Governor of Georgia stated that the standards proposed in the 
July 2023 NOPR could negatively impact the non-condensing gas-fired 
instantaneous water heater industry in the State of Georgia and could 
harm domestic manufacturing jobs. (Governor of Georgia, No. 1157 at pp. 
1-3) The Attorney General of GA stated that the standards proposed in 
the July 2023 NOPR, if adopted, would have a negative economic impact 
on the State of Georgia, which is host to a large new facility 
optimized for manufacturing non-condensing units. The Attorney General 
of GA added that the proposed rulemaking could eliminate manufacturing 
jobs in Georgia, particularly jobs held by female and minority workers. 
(Attorney General of GA, No. 1026 at pp. 1-2) Commenters from the U.S. 
House of Representatives added that the proposed rulemaking would have 
a negative economic impact on the State of Georgia, which is home to 
the largest domestic assembly facility for non-condensing gas-fired 
instantaneous water heaters. (U.S. House of Representatives, No. 1205 
at p. 1) Commenters from the U.S. House of Representatives reiterated 
this comment in response to the July 2024 NODA. (U.S. House of 
Representatives, No. 1445 at p. 1)
    CNGC noted that investments made by Rinnai, a member of its 
coalition, would be put at risk if the standards were adopted as 
proposed in the July 2023 NOPR. (CNGC No. 648 at p. 1) Gas Association 
Commenters further highlighted Rinnai's concerns, citing Rinnai's 
recently opened facility in Griffin, Georgia, which exclusively makes 
non-condensing gas-fired instantaneous water heaters, as potentially 
being off-shored.
    Regarding the potential impact to domestic production employment 
due to amended standards, DOE understands that Rinnai recently invested 
approximately $70 million to develop its new Georgia manufacturing 
facility dedicated to non-condensing gas-fired instantaneous water 
heaters.\161\ DOE acknowledges that converting the manufacturing 
facility to produce condensing gas-fired instantaneous water heaters is 
feasible but would require additional investment. Currently, Rinnai 
imports their condensing gas-fired instantaneous water heaters from 
Japan, while producing only the non-condensing models domestically. 
Rinnai's decision of whether to repurpose its Georgia facility likely 
depends on a range of factors, such as its parent company's (Rinnai 
Corporation) willingness to make further capital investments, the role 
of the U.S. water heater market in Rinnai Corporation's overall 
business strategy, and U.S. demand for gas-fired instantaneous water 
heaters. A review of Rinnai Corporation's public financial statements 
indicates that it has invested approximately $823 million in capital 
expenditures globally in fiscal year 2021 through fiscal year 2024, 
projecting a further outlay of approximately $148 million in capital 
expenditures globally in fiscal year 2025.\162\ Based on information 
detailed in Rinnai's corporate annual report, Rinnai identifies the 
United States as a key foreign market for growth.\163\ In fiscal year 
2024, U.S. water heater sales accounted for nearly 20 percent of Rinnai 
Corporation's worldwide water heater sales.\164\ Consistent with 
historical trends and market data cited by stakeholders,\165\ DOE 
projects that the domestic gas-fired instantaneous water heater market 
will continue to

[[Page 105253]]

grow in the no-new-standards and standards cases. Furthermore, DOE 
expects that the portion of condensing gas-fired instantaneous water 
heater will increase. In 2024 (the reference year), DOE estimates that 
domestic gas-fired instantaneous water heater shipments totaled 1.26 
million (representing approximately 12 percent of the overall domestic 
consumer water heater market), with condensing gas-fired instantaneous 
water heaters accounting for 67 percent of shipments. In 2030 (the 
compliance year), in the absence of the amended standards, DOE expects 
that shipments of gas-fired instantaneous water heaters would total 
1.43 million (representing approximately 14 percent of the overall 
domestic consumer water heater market), with condensing gas-fired 
instantaneous water heaters accounting for 70 percent of shipments. In 
2030, with the amended standards in place (i.e., TSL 2), DOE expects 
that shipments of gas-fired instantaneous water heaters would still 
total approximately 1.43 million, with the share of condensing gas-
fired instantaneous water heaters rising to 100 percent. As discussed 
in section IV.F.10 of this document, DOE did not include any product 
switching with respect to gas-fired instantaneous water heaters in its 
analysis as DOE determined that any product switching as a result of 
the adopted standards is likely to be minimal. As discussed in section 
IV.G.1 of this document, DOE's shipments analysis accounts for the 
fraction of consumers that would choose to repair their gas-fired 
instantaneous water heater rather than replace their gas-fired 
instantaneous water heater in the standards cases.
---------------------------------------------------------------------------

    \161\ Rinnai cites a total investment of $70 million in the 
Georgia facility in its public comment in response to the July 2023 
NOPR (Rinnai, No. 1186 at p. 23), stating the facility opened in 
2022 (Id. at p. 1). Construction of the Georgia facility began in 
2020. Press Release available at: www.rinnai.us/announcements/
rinnai-america-breaks-ground-on-new-factory (last accessed August 6, 
2024).
    \162\ Rinnai Corporation's public financial statements are 
available at: www.rinnai.co.jp/en/ir/ (last accessed September 27, 
2024). DOE converted these values from Japanese Yen to U.S. Dollars 
using the U.S. Department of the Treasury's exchange rate as of June 
30, 2024, available at: https://fiscaldata.treasury.gov/datasets/treasury-reporting-rates-exchange/treasury-reporting-rates-of-exchange (last accessed September 27, 2024).
    \163\ Rinnai's Medium-Term Business Plan 2021-2025 is available 
at: www.rinnai.co.jp/en/ir/document/pdf/202103outlook.pdf. (p. 15) 
(last accessed August 6, 2024).
    \164\ Rinnai Corporation's ``Financial Results of Fiscal 2024, 
ended March 31, 2024 Reference Data'' is available at: 
www.rinnai.co.jp/en/ir/document/pdf/202403reference.pdf. (p. 4) (May 
9, 2024) (Last accessed September 27, 2024).
    \165\ Rinnai commented in response to the July 2024 NODA ``Since 
their introduction in 2004, gas tankless water heaters have grown to 
10 percent of the water heater market in the U.S. and are projected 
to grow to 12 percent by 2027.'' (See Rinnai, No. 1443 at p. 1)
---------------------------------------------------------------------------

    DOE previously analyzed the potential changes in direct employment 
in the July 2023 NOPR. 88 FR 49058, 49145-49147. For the July 2024 
NODA, DOE revised its direct employment analysis to account for 
Rinnai's new domestic production facility dedicated to manufacturing 
gas-fired instantaneous water heaters. 89 FR 59692, 59697. (See Rinnai, 
No. 1186 at p. 1) DOE is not currently aware of other domestic 
production facilities of gas-fired instantaneous water heaters. 
Therefore, in the July 2024 NODA, DOE estimated that approximately 20 
percent of gas-fired instantaneous water heaters are currently produced 
in the United States. DOE derived this value by using its shipments 
analysis and market share feedback from Rinnai's comments to the July 
2023 NOPR.\166\ (Id.) DOE maintained the 20 percent estimate for this 
final rule analysis. For the July 2024 NODA, DOE relied on the 
employment figures provided in Rinnai's comments in response to the 
July 2023 NOPR to estimate the potential range of direct employment 
impacts in 2030 (the analyzed compliance year) at higher efficiency 
levels. In the July 2024 NODA, DOE modeled the domestic employment 
impacts ranging from a reduction of 128 production workers to an 
increase of 75 production workers at TSL 1 through TSL 4 in 2030. Based 
on revised employment estimates provided by Rinnai in response to the 
July 2024 NODA, DOE updated its estimate of domestic production workers 
from 128 to 190 \167\ in 2030 but otherwise maintained its direct 
employment methodology. (Rinnai No. 1443 at p. 1) Therefore, for this 
final rule, DOE models a lower-bound decrease of 190 domestic 
production workers and an upper-bound increase in domestic direct 
employment of 62 percent (an increase of approximately 117 production 
workers, for a total of 307 domestic production workers) at TSL 1 
through TSL 4 in 2030. DOE notes that the direct employment analysis is 
intended to establish a realistic range of potential impacts to 
domestic employment under amended standards, given the best public 
information available at this time. As Rinnai noted in their comment, 
if Rinnai does not maintain current sales levels under a condensing-
level standard, the change in employment may be lower than the maximum 
increase estimated. See section V.B.2.b of this document for additional 
details on the direct employment analysis.
---------------------------------------------------------------------------

    \166\ In 2023, DOE estimates that approximately 0.41 million out 
of the 1.22 million gas-fired instantaneous water heater unit 
shipments are non-condensing. In response to the July 2023 NOPR, 
Rinnai commented that its domestic market share of non-condensing 
gas-fired instantaneous water heaters is 60 percent: (60% x 0.41 
million) / 1.22 million = 20%.
    \167\ Rinnai commented that it currently employes 183 full-time 
employees and 49 temporary employees at its Griffin, Georgia plant. 
DOE's shipments analysis indicates shipments of non-condensing gas-
fired instantaneous water heaters in the no-new-standards case will 
increase by approximately 4 percent from 2024 to 2030 (the 
compliance year). (183 employees x 1.04) = 190 employees.
---------------------------------------------------------------------------

    Regarding the potential investment required to convert Rinnai's 
newly built domestic production facility, DOE incorporated Rinnai's 
feedback provided in response to the July 2023 NOPR into its conversion 
cost model for the July 2024 NODA and this final rule. Although DOE 
cannot be certain whether or not Rinnai would invest in repurposing its 
U.S. manufacturing facility, DOE incorporated Rinnai's feedback into 
its industry conversion cost estimates to avoid underestimating the 
potential investments industry would incur as a result of amended 
standards. Should Rinnai choose to maintain condensing capabilities in 
its existing facilities in Japan, the industry conversion costs would 
be lower. DOE updated its conversion cost estimates from 2022$ to 2023$ 
for this final rule but otherwise maintained its methodology from the 
July 2024 NODA. See section IV.J.2.c and section V.B.2.a of this 
document and chapter 12 of the final rule TSD for additional 
information on conversion costs.
    Regarding Rinnai's assertion that it was not contacted to provide 
feedback in advance of the July 2023 NOPR, DOE notes that manufacturer 
outreach and interviews are conducted by DOE's contractors under 
nondisclosure agreements. As such, information surrounding manufacturer 
outreach and participation is kept as confidential by DOE's contractors 
and cannot be disclosed.
    Regarding Rinnai's request to review the GRIM, DOE notes that a 
copy of the GRIM developed for this final rule analysis is available 
for download at: www.regulations.gov/docket/EERE-2017-BT-STD-0019/document.
    In response to the July 2023 NOPR, AHRI stated that it supported 
the inclusion of amortization of product conversion costs under 
standards into the projected MSP in a recent rulemaking for microwave 
ovens, and urges DOE to use this methodology in all rulemakings.\168\ 
AHRI further asked DOE to explain the justification for amortizing 
conversion costs in one instance but not in all. (AHRI, No. 1167 at pp. 
20-21)
---------------------------------------------------------------------------

    \168\ Technical Support Document: Energy Efficiency Program For 
Commercial And Industrial Equipment: Microwave Ovens. Available at 
www.regulations.gov/document/EERE-2017-BT-STD-0023-0022.
---------------------------------------------------------------------------

    DOE models different manufacturer markup scenarios to assess the 
potential impacts on prices and profitability for manufacturers 
following the implementation of amended energy conservation standards. 
The analyzed scenarios lead to different manufacturer markup values 
that, when applied to the manufacturer production costs, result in 
varying revenue and cash flow impacts. These scenarios are meant to 
reflect the potential range of financial impacts for manufacturers of 
the specific covered product or equipment. The analyzed manufacturer 
markup scenarios vary by rulemaking because they are informed by 
manufacturer feedback and reflect the market for the specific product 
type.
    For the July 2023 NOPR and the July 2024 NODA, DOE applied a 
preservation of gross margin percentage

[[Page 105254]]

scenario to reflect an upper bound to industry profitability under 
amended standards and a preservation of operating profit scenario to 
reflect a lower bound of industry profitability under amended 
standards. 88 FR 49058, 49128; 89 FR 59692, 59700. For gas-fired 
instantaneous water heaters, manufacturing more efficient products is 
generally more expensive than manufacturing baseline or minimally 
efficient products, as reflected by the MPCs estimated in the 
engineering analysis (see section IV.C.1 of this document). Under the 
preservation of gross margin scenario for gas-fired instantaneous water 
heaters, incremental increases in MPCs at higher efficiency levels 
result in an increase in per-unit dollar profit per unit sold. As shown 
in table V.6, under the preservation of gross margin scenario, the 
standards case INPV increases relative to the no-new-standards case 
INPV at all analyzed TSLs, resulting in a positive change in INPV at 
TSL 1-TSL 4. This implies that the increase in cashflow from the higher 
MSP outweighs the estimated conversion costs at each of the considered 
TSLs. In other words, under the preservation of gross margin scenario, 
the gas-fired instantaneous water heater industry more than recovers 
conversion costs incurred as a result of amended standards. The 
approach used in the microwave ovens rulemaking (i.e., a conversion 
cost recovery scenario) modeled a scenario in which manufacturers 
recover investments such that INPV in the standards cases are equal to 
the INPV in the no-new-standards case, resulting in no change in INPV 
at the considered TSLs. 88 FR 39912, 39935. Thus, if DOE applied a 
conversion cost recovery scenario in this rulemaking, the potential 
change in INPV at each considered TSL would be within the range of 
estimated impacts resulting from the preservation of gross margin 
scenario and preservation of operating profit scenario. As such, DOE 
maintained the two standards-case manufacturer markup scenarios used in 
the July 2023 NOPR for this final rule as they most appropriately 
reflect the upper (least severe) and lower (more severe) impacts to 
manufacturer profitability under amended standards.
    In response to the July 2023 NOPR, AHRI submitted written comments 
regarding cumulative regulatory burden. AHRI urged DOE to consider the 
high volume of regulatory activity that directly affects manufacturers 
of consumer water heaters, including gas-fired instantaneous water 
heaters, and expressed concern that DOE was rushing to publish recent 
rulemakings, risking significant revision that will prolong 
uncertainty, confuse consumers, and potentially undermine broader 
policy goals. AHRI cited standards and test procedure rulemakings for 
other covered products and equipment, as well as low and zero NOx 
actions by California Air Resources Board (``CARB'') and individual air 
quality management districts. (AHRI, No. 1167 at pp. 7-9)
    In response to the July 2023 NOPR, BWC commented that the impact of 
cumulative regulatory burden experienced by manufacturers is not 
limited to conversion costs, but also to the preparations manufacturers 
must undergo in order to respond to proposed rules. BWC further stated 
that DOE has promulgated several major rulemakings that will directly 
impact the products that BWC manufactures, in addition to actions 
undertaken by other governments and programs, and that the ability of 
manufacturers to draw on outside resources for assistance will be 
severely limited by the concurrent needs of many manufacturers across 
rulemakings, particularly in the case of third-party laboratories. BWC 
stated that due to the burden this rulemaking will place on third-party 
laboratories, as well as the general burden of multiple concurrent 
ongoing regulatory actions, BWC strongly disagreed with DOE's decision 
not to consider test rulemakings as part of its analysis. (BWC, No. 
1164 at pp. 24-26) BWC also stated that, due to concurrent regulatory 
actions regarding energy efficiency at both the State and Federal 
levels, it disagreed with DOE's conclusion in section VI.B.5 of the 
July 2023 NOPR that there are no rules or regulations that duplicate, 
overlap, or conflict with this proposed rule and encouraged DOE to 
account for all of these issues, ideally allowing manufacturers more 
time to review and respond to DOE rulemakings when requested. (BWC, No. 
1164 at p. 24)
    With respect to comments regarding the regulatory burden, DOE 
recognizes that the gas-fired instantaneous water heater industry is 
subject to regulations from Federal, State, and local entities. DOE 
analyzes and considers the impact on manufacturers of multiple product/
equipment-specific Federal regulatory actions. Specifically, DOE 
analyzes cumulative regulatory burden pursuant to section 13(g) of 
appendix A. 10 CFR part 430, subpart C, appendix A, section 13(g); 10 
CFR 431.4. DOE notes that regulations that are not yet finalized are 
not considered as cumulative regulatory burden, as the timing, cost, 
and impacts of unfinalized rules are speculative. However, to aid 
stakeholders in identifying potential cumulative regulatory burden, DOE 
does list rulemakings that have proposed rules, which have tentative 
compliance dates, compliance levels, and compliance cost estimates. The 
results of this analysis can be found in section V.B.2.e of this 
document.
    Regarding AHRI's comment about ultra-low NOx and zero NOx 
regulations, DOE notes that in its analysis of cumulative regulatory 
burden, DOE considers Federal, product specific regulations that have 
compliance dates within 3 years of one another. DOE is not aware of any 
Federal or State ultra-low NOx or zero NOx regulations specific to gas-
fired instantaneous water heaters with compliance dates within the 7-
year cumulative regulatory burden timeframe (2027-2033).\169\ DOE notes 
that certain localities (i.e., California Air Districts) have adopted 
regulations requiring ultra-low NOx consumer water heaters. DOE 
accounts for the portion of ultra-low NOx shipments in its analysis. 
DOE notes that two California Air Districts--the Bay Area \170\ and 
South Coast \171\ Air Quality Management Districts have adopted 
amendments to eliminate NOx emissions from certain gas-fired 
instantaneous water heaters beginning in 2031 and 2026, respectively. 
There are currently no natural gas-fired instantaneous water heaters on 
the market that would meet the zero NOx standards, though manufacturers 
may choose to develop them.
---------------------------------------------------------------------------

    \169\ CARB has stated that it is committed to explore developing 
and proposing zero-emission GHG standards for new space and water 
heaters sold in California as part of the 2022 State Strategy for 
the State Implementation Plan adopted in September 2022. However, at 
the time of issuance, CARB has not adopted such standards for gas-
fired instantaneous water heaters. Additional information is 
available at: https://ww2.arb.ca.gov/our-work/programs/building-decarbonization/zero-emission-space-and-water-heater-standards/meetings-workshops. (Last accessed Aug. 7, 2024).
    \170\ Available at: www.baaqmd.gov/~/media/dotgov/files/rules/
reg-9-rule-4-nitrogen-oxides-from-fan-type-residential-central-
furnaces/2021-amendments/documents/20230315_rg0906-
pdf.pdf?rev=436fcdb037324b0b8f0c981d869e684d&sc_lang=en. (Last 
accessed Aug. 7, 2024).
    \171\ Available at: www.aqmd.gov/docs/default-source/rule-book/recent-rules/r1146_2-060724.pdf?sfvrsn=8 (Last accessed Aug. 29, 
2024).
---------------------------------------------------------------------------

    Regarding BWC's request that DOE not discount the costs for 
stakeholders to review rulemakings, although DOE appreciates that 
monitoring and responding to rulemakings does impose costs for 
stakeholders, DOE believes that this is outside the scope of analysis 
for individual product rulemakings. Because EPCA requires DOE to 
establish and maintain the energy conservation program for consumer 
products and to

[[Page 105255]]

periodically propose new and amended standards (or propose that 
standards for products do not need to be amended) and test procedures, 
DOE considers this rulemaking activity to be part of the analytical 
baseline (i.e., in the no-new-standards case and the standards case). 
That is, these activities (e.g., reviewing proposed rules or proposed 
determinations) would exist regardless of the regulatory option that 
DOE adopts through a rulemaking and would be independent from the 
conversion costs required to adapt product designs and manufacturing 
facilitates to meet an amended standard.
    In response to the July 2024 NODA, Rheem stated that they agreed 
with a 70 percent market share estimate for condensing gas-fired 
instantaneous water heaters and gradual shift towards condensing 
models. Rheem indicated that most manufacturers already possess the 
design and manufacturing capabilities necessary to produce products 
across the full range of efficiencies. Rheem stated that while a 
condensing-level standard at EL 2 or EL 3 would require manufactures to 
repurpose and retool assembly lines, a standard consistent with EL 2 
(i.e., TSL 2) would be less disruptive compared to higher efficiency 
levels, which would require a fully modulating burner design and higher 
investment. Rheem generally agreed with the conclusions of the 
manufacturer impact analysis but stated that they did not believe the 
additional energy savings at EL 3 compared to EL 2 were great enough to 
justify the greater cost to manufacturers. (Rheem No. 1436 at p. 3)
    Regarding the need for manufacturers to repurpose and retool 
assembly lines, DOE accounted for the capital and product conversion 
costs associated with increasing production of condensing gas-fired 
instantaneous water heaters in its analysis. Consistent with Rheem's 
comment, DOE's analysis estimates that conversion costs would be higher 
at EL 3 and EL 4 compared to EL 2. See section IV.J.2.c and section 
V.B.2.a of this document and chapter 12 of the final rule TSD for 
additional information on conversion costs. In this final rule, DOE is 
adopting TSL 2. See section V.C of this document for a discussion of 
the benefits and burdens of the TSLs considered.
    The Joint Advocates commented that DOE's analysis for the July 2024 
NODA shows that the potential impacts on gas-fired instantaneous water 
heater manufacturers at EL 2 and higher would be modest and that, 
specifically, the potential impact on INPV at EL 2 ranges from a loss 
of 2.7 percent to a gain of 3.2 percent. (Joint Advocates, No. 1444 at 
pp. 1-2) The Joint Advocates commented that the proposed standards for 
gas-fired instantaneous water heaters could increase U.S. manufacturing 
jobs because the labor content required to produce a condensing gas-
fired instantaneous water heater is approximately 59 percent more than 
that required to produce a non-condensing gas-fired instantaneous water 
heater. (Joint Advocates, No. 1444 at p. 2)
    Regarding the potential impacts on gas-fired instantaneous water 
heater manufacturers, for this final rule, the estimated change in INPV 
at TSL 2 ranges from a loss of 2.8 percent to a gain of 3.4 percent. 
See section V.B.2.a of this document for additional information on the 
MIA results. Regarding the potential impacts to direct employment, for 
this final rule, DOE models a lower-bound decrease of 190 production 
workers and an upper-bound increase in domestic direct employment of 62 
percent (an increase of approximately 117 production workers, for a 
total of 307 domestic production workers) at TSL 1 through TSL 4 in 
2030. See section V.B.2.b of this document for additional information 
on DOE's direct employment analysis.

K. Emissions Analysis

    The emissions analysis consists of two components. The first 
component estimates the effect of potential energy conservation 
standards on power sector and site (where applicable) combustion 
emissions of CO2, NOX, SO2, and Hg. 
The second component estimates the impacts of potential standards on 
emissions of two additional greenhouse gases, CH4 and 
N2O, as well as the reductions in emissions of other gases 
due to ``upstream'' activities in the fuel production chain. These 
upstream activities comprise extraction, processing, and transporting 
fuels to the site of combustion.
    The analysis of electric power sector emissions of CO2, 
NOX, SO2, and Hg uses emissions intended to 
represent the marginal impacts of the change in electricity consumption 
associated with amended or new standards. The methodology is based on 
results published for the AEO, including a set of side cases that 
implement a variety of efficiency-related policies. The methodology is 
described in appendix 13A in the final rule TSD. The analysis presented 
in this final rule uses projections from AEO2023. Power sector 
emissions of CH4 and N2O from fuel combustion are 
estimated using Emission Factors for Greenhouse Gas Inventories 
published by the EPA.\172\
---------------------------------------------------------------------------

    \172\ Available at www.epa.gov/sites/production/files/2021-04/documents/emission-factors_apr2021.pdf (last accessed August 29, 
2024).
---------------------------------------------------------------------------

    The on-site operation of consumer gas-fired instantaneous water 
heaters involves combustion of fossil fuels and results in emissions of 
CO2, NOX, SO2, CH4, and 
N2O where these products are used. Site emissions of these 
gases were estimated using Emission Factors for Greenhouse Gas 
Inventories and, for NOX and SO2, emissions 
intensity factors from an EPA publication.\173\
---------------------------------------------------------------------------

    \173\ U.S. Environmental Protection Agency. External Combustion 
Sources. In Compilation of Air Pollutant Emission Factors. AP-42. 
Fifth Edition. Volume I: Stationary Point and Area Sources. Chapter 
1. Available at www.epa.gov/air-emissions-factors-and-quantification/ap-42-compilation-air-emissions-factors#Proposed/ 
(last accessed August 29, 2024).
---------------------------------------------------------------------------

    FFC upstream emissions, which include emissions from fuel 
combustion during extraction, processing, and transportation of fuels, 
and ``fugitive'' emissions (direct leakage to the atmosphere) of 
CH4 and CO2, are estimated based on the 
methodology described in chapter 15 of the final rule TSD.
    The emissions intensity factors are expressed in terms of physical 
units per MWh or MMBtu of site energy savings. For power sector 
emissions, specific emissions intensity factors are calculated by 
sector and end use. Total emissions reductions are estimated using the 
energy savings calculated in the national impact analysis.
1. Air Quality Regulations Incorporated in DOE's Analysis
    DOE's no-new-standards case for the electric power sector reflects 
the AEO, which incorporates the projected impacts of existing air 
quality regulations on emissions. AEO2023 reflects, to the extent 
possible, laws and regulations adopted through mid-November 2022, 
including the emissions control programs discussed in the following 
paragraphs the emissions control programs discussed in the following 
paragraphs, and the Inflation Reduction Act.\174\
---------------------------------------------------------------------------

    \174\ For further information, see the Assumptions to AEO2023 
report that sets forth the major assumptions used to generate the 
projections in the Annual Energy Outlook. Available at www.eia.gov/outlooks/aeo/assumptions/ (last accessed August 29, 2024).
---------------------------------------------------------------------------

    SO2 emissions from affected electric generating units 
(``EGUs'') are subject to nationwide and regional emissions cap-and-
trade programs. Title IV of the Clean Air Act sets an annual emissions 
cap on SO2 for affected EGUs in the 48 contiguous States and 
the District of Columbia (``DC''). (42 U.S.C. 7651 et

[[Page 105256]]

seq.) SO2 emissions from numerous States in the eastern half 
of the United States are also limited under the Cross-State Air 
Pollution Rule (``CSAPR''). 76 FR 48208 (Aug. 8, 2011). CSAPR requires 
these States to reduce certain emissions, including annual 
SO2 emissions, and went into effect as of January 1, 
2015.\175\ The AEO incorporates implementation of CSAPR, including the 
update to the CSAPR ozone season program emission budgets and target 
dates issued in 2016. 81 FR 74504 (Oct. 26, 2016). Compliance with 
CSAPR is flexible among EGUs and is enforced through the use of 
tradable emissions allowances. Under existing EPA regulations, for 
states subject to SO2 emissions limits under CSAPR, any 
excess SO2 emissions allowances resulting from the lower 
electricity demand caused by the adoption of an efficiency standard 
could be used to permit offsetting increases in SO2 
emissions by another regulated EGU.
---------------------------------------------------------------------------

    \175\ CSAPR requires States to address annual emissions of 
SO2 and NOX, precursors to the formation of 
fine particulate matter (``PM2.5'') pollution, in order 
to address the interstate transport of pollution with respect to the 
1997 and 2006 PM2.5 National Ambient Air Quality 
Standards (``NAAQS''). CSAPR also requires certain States to address 
the ozone season (May-Sept.) emissions of NOX, a 
precursor to the formation of ozone pollution, in order to address 
the interstate transport of ozone pollution with respect to the 1997 
ozone NAAQS. 76 FR 48208 (Aug. 8, 2011). EPA subsequently issued a 
supplemental rule that included an additional five States in the 
CSAPR ozone season program; 76 FR 80760 (Dec. 27, 2011) 
(Supplemental Rule), and EPA issued the CSAPR Update for the 2008 
ozone NAAQS. 81 FR 74504 (Oct. 26, 2016).
---------------------------------------------------------------------------

    However, beginning in 2016, SO2 emissions began to fall 
as a result of the Mercury and Air Toxics Standards (``MATS'') for 
power plants.\176\ 77 FR 9304 (Feb. 16, 2012). The final rule 
establishes power plant emission standards for mercury, acid gases, and 
non-mercury metallic toxic pollutants. Because of the emissions 
reductions under the MATS, it is unlikely that excess SO2 
emissions allowances resulting from the lower electricity demand would 
be needed or used to permit offsetting increases in SO2 
emissions by another regulated EGU. Therefore, energy conservation 
standards that decrease electricity generation will generally reduce 
SO2 emissions. DOE estimated SO2 emissions 
reduction using emissions factors based on AEO2023.
---------------------------------------------------------------------------

    \176\ In order to continue operating, coal power plants must 
have either flue gas desulfurization or dry sorbent injection 
systems installed. Both technologies, which are used to reduce acid 
gas emissions, also reduce SO2 emissions.
---------------------------------------------------------------------------

    CSAPR also established limits on NOX emissions for 
numerous States in the eastern half of the United States. Energy 
conservation standards would have little effect on NOX 
emissions in those States covered by CSAPR emissions limits if excess 
NOX emissions allowances resulting from the lower 
electricity demand could be used to permit offsetting increases in 
NOX emissions from other EGUs. In such case, NOx emissions 
would remain near the limit even if electricity generation goes down. 
Depending on the configuration of the power sector in the different 
regions and the need for allowances, however, NOX emissions 
might not remain at the limit in the case of lower electricity demand. 
That would mean that standards might reduce NOx emissions in covered 
States. Despite this possibility, DOE has chosen to be conservative in 
its analysis and has maintained the assumption that standards will not 
reduce NOX emissions in States covered by CSAPR. Standards 
would be expected to reduce NOX emissions in the States not 
covered by CSAPR. DOE used AEO2023 data to derive NOX 
emissions factors for the group of States not covered by CSAPR.
    The MATS limit mercury emissions from power plants, but they do not 
include emissions caps and, as such, DOE's energy conservation 
standards would be expected to slightly reduce Hg emissions. DOE 
estimated mercury emissions reduction using emissions factors based on 
AEO2023, which incorporates the MATS.

L. Monetizing Emissions Impacts

    As part of the development of this final rule, for the purpose of 
complying with the requirements of Executive Order 12866, DOE 
considered the estimated monetary benefits from the reduced emissions 
of CO2, CH4, N2O, NOX, and 
SO2 that are expected to result from each of the TSLs 
considered. In order to make this calculation analogous to the 
calculation of the NPV of consumer benefit, DOE considered the reduced 
emissions expected to result over the lifetime of products shipped 
during the projection period for each TSL. This section summarizes the 
basis for the values used for monetizing the emissions benefits and 
presents the values considered in this final rule.
1. Monetization of Greenhouse Gas Emissions
    To monetize the benefits of reducing GHG emissions, the July 2023 
NOPR used the interim social cost of greenhouse gases (``SC-GHG'') 
estimates presented in the Technical Support Document: Social Cost of 
Carbon, Methane, and Nitrous Oxide Interim Estimates Under Executive 
Order 13990 published in February 2021 by the Interagency Working Group 
on the SC-GHG (``IWG'') (``2021 Interim SC-GHG estimates''). As a 
member of the IWG involved in the development of the February 2021 SC-
GHG TSD, DOE agreed that the 2021 interim SC-GHG estimates represented 
the most appropriate estimate of the SC-GHG until revised estimates 
were developed reflecting the latest, peer-reviewed science. See 87 FR 
78382, 78406-78408 for discussion of the development and details of the 
2021 interim SC-GHG estimates. The IWG has continued working on 
updating the interim estimates, but has not published final estimates.
    Accordingly, in the regulatory analysis of its December 2023 Final 
Rule, ``Standards of Performance for New, Reconstructed, and Modified 
Sources and Emissions Guidelines for Existing Sources: Oil and Natural 
Gas Sector Climate Review,'' the EPA estimated climate benefits using a 
new, updated set of SC-GHG estimates (``2023 SC-GHG estimates''). EPA 
documented the methodology underlying the new estimates in the RIA for 
the December 2023 Final Rule and in greater detail in a technical 
report entitled ``Report on the Social Cost of Greenhouse Gases: 
Estimates Incorporating Recent Scientific Advances'' that was presented 
as Supplementary Material to the RIA.\177\ The 2023 SC-GHG estimates 
incorporate recent research addressing recommendations of the Natural 
Academies of Science, Engineering, and Medicine (National Academies), 
responses to public comments on an earlier sensitivity analysis using 
draft SC-GHG estimates included in EPA's December 2022 proposal in the 
oil and natural gas sector standards of performance rulemaking, and 
comments from a 2023 external peer review of the accompanying technical 
report.\178\
---------------------------------------------------------------------------

    \177\ https://www.epa.gov/system/files/documents/2023-12/eo12866_oil-and-gas-nsps-eg-climate-review-2060-av16-final-rule-20231130.pdf; https://www.epa.gov/system/files/documents/2023-12/epa_scghg_2023_report_final.pdf (last accessed July 3, 2024).
    \178\ https://www.epa.gov/system/files/documents/2023-12/epa_scghg_2023_report_final.pdf (last accessed July 3, 2024).
---------------------------------------------------------------------------

    On December 22, 2023, the IWG issued a memorandum directing that 
when agencies ``consider applying the SC-GHG in various contexts . . . 
agencies should use their professional judgment to determine which 
estimates of the SC-GHG reflect the best available evidence, are most 
appropriate for particular analytical contexts, and best facilitate 
sound decision-making''

[[Page 105257]]

consistent with OMB Circular A-4 and applicable law.\179\
---------------------------------------------------------------------------

    \179\ https://www.whitehouse.gov/wp-content/uploads/2023/12/IWG-Memo-12.22.23.pdf (last accessed July 3, 2024).
---------------------------------------------------------------------------

    DOE has been extensively involved in the IWG process and related 
work on the SC-GHGs for over a decade. This involvement includes DOE's 
role as the federal technical monitor for the seminal 2017 report on 
the SC-GHG issued by the National Academies, which provided extensive 
recommendations on how to strengthen and update the SC-GHG 
estimates.\180\ DOE has also participated in the IWG's work since 2021. 
DOE technical experts involved in this work reviewed the 2023 SC-GHG 
methodology and report in light of the National Academies' 
recommendations and DOE's understanding of the state of the science.
---------------------------------------------------------------------------

    \180\ Valuing Climate Damages: Updating Estimation of the Social 
Cost of Carbon Dioxide [verbar] The National Academies Press. 
(available at: nap.nationalacademies.org/catalog/24651/valuing-climate-damages-updating-estimation-of-the-social-cost-of) (last 
accessed July 3, 2024).
---------------------------------------------------------------------------

    Based on this review, in the July 2024 NODA, DOE proposed for 
public comment its preliminary determination that the updated 2023 SC-
GHG estimates, including the approach to discounting, represent a 
significant improvement in estimating the SC-GHG through incorporating 
the most recent advancements in the scientific literature and by 
addressing recommendations on prior methodologies. That NODA presented 
climate benefits using both the 2023 SC-GHG values and the 2021 interim 
SC-GHG estimates. 89 FR 59693, 59700. In this final rule, DOE has not 
made a final decision regarding that preliminary assessment or adoption 
of the updated 2023 SC-GHG estimates, as such a decision is not 
necessary for purposes of this rule. DOE will continue to decide, for 
each particular analytical context, whether to rely on, present for 
presentation purposes, or use in some other way, the updated 2023 SC-
GHG values, the 2021 interim SC-GHG estimates, or both. In this final 
rule, DOE is presenting estimates using both the updated 2023 SC-GHG 
values and the 2021 interim SC-GHG estimates, as DOE believes itis 
appropriate to give the public more complete information regarding the 
benefits of this rule. DOE notes, however, that the adopted standards 
would be economically justified using either set of SC-GHG values, and 
even without inclusion of the estimated monetized benefits of reduced 
GHG emissions. In future rulemakings, DOE will continue to evaluate the 
applicability in context and use our professional judgment to apply the 
SC-GHG estimates that are most appropriate to use at that time.
    The 2023 EPA technical report presents SC-GHG values for emissions 
years through 2080; therefore, DOE did not monetize the climate 
benefits of GHG emissions reductions occurring after 2080 when using 
the 2023 estimates for the SC-GHG. DOE expects additional climate 
impacts to accrue from GHG emissions changes post 2080, but due to a 
lack of readily available SC-GHG estimates for emissions years beyond 
2080 and the relatively small emission effects expected from those 
years, DOE has not monetized these additional impacts in this analysis. 
Similarly, the interim 2021 interim SC-GHG estimates include values 
through 2070. DOE expects additional climate benefits to accrue for 
products still operating after 2070, but a lack of available SC-GHG 
estimates published by the IWG for emissions years beyond 2070 prevents 
DOE from monetizing these potential benefits in this analysis.
    The overall climate benefits are generally greater when using the 
higher, updated 2023 SC-GHG estimates, compared to the climate benefits 
using the older 2021 interim SC-GHG estimates, which were used in the 
July 2023 NOPR. The net benefits of the rule are positive, however, 
under either SC-GHG calculation methodology; in fact, the net benefits 
of the rule are positive without including any monetized climate 
benefits at all. The adopted standards would be economically justified 
even without inclusion of the estimated monetized benefits of reduced 
GHG emissions using either methodology, therefore the conclusions of 
the analysis (as presented in section V.C of this document) are not 
dependent on which set of estimates of the SC-GHG are used in the 
analysis or on the use of the SC-GHG at all. The adopted standard level 
would remain the same under either SC-GHG calculation methodology (or 
without using the SC-GHG at all).
    DOE received several comments regarding its preliminary 
determination on the use of the 2023 SC-GHG methodologies in the July 
2024 NODA. As noted above, DOE is not making a final determination 
regarding which of the two sets of SC-GHG is most appropriate to apply 
here or across all DOE analyses. Accordingly, DOE is not addressing in 
this rule comments regarding such a final determination. Because DOE is 
presenting results using both sets of estimates, however, to the extent 
that commenters raised concerns about any reference to the 2023 SC-GHG 
methodologies, DOE is responding to that limited set of comments here.
    AHRI disagreed with DOE's use of 2023 SC-GHG estimates in its 
analysis to justify proposed energy conservation standards. AHRI stated 
that adoption of 2023 SC-GHG methodologies introduces complexity, 
uncertainty, and traceability issues. AHRI recommended that DOE provide 
guidance on how 2023 SC-GHG methodologies were applied and offer 
comparison to the analysis performed in the July 2023 NOPR (AHRI, No. 
1437 p. 3).
    Rinnai disagreed with DOE's preliminary decision to adopt 2023 SC-
GHG methodologies, which they claim introduce challenges regarding the 
traceability of the data, the complexity and uncertainty of the new 
estimates, validation of the long-term costs and benefits of GHG 
emissions and the ability to compare the July 2024 NODA and July 2023 
NOPR results. Rinnai further states that if the DOE updates the SC-GHG 
methodology, the update should be performed for all water heater 
product classes to reflect a fair comparison. (Rinnai, No. 1443 at p. 
10)
    In response, DOE reiterates that it would promulgate the same 
standards in this final rule even in the absence of the benefits of the 
GHG reductions achieved by the rule because the adopted standards for 
gas-fired instantaneous water heaters are economically justified even 
without including such benefits. DOE would also promulgate the same 
standards in this final rule using either the 2021 interim SC-GHG 
estimates or the 2023 SC-GHG estimates. In this rule, DOE is presenting 
SC-GHG results using both the interim 2021 SC-GHG estimates and the 
updated 2023 SC-GHG estimates.
    In the July 2024 NODA, DOE preliminarily agreed with EPA's 
assessment that the updates implemented in the 2023 SC-GHG estimates 
reflect the best available science and address recommendations from the 
National Academies. DOE acknowledges commenters' concerns regarding 
uncertainty of the new estimates, but notes that the 2021 interim SC-
GHG estimates are also uncertain and that uncertainty is inherent in 
all complex cost estimates that quantify physical impacts and translate 
them into dollar values.
    DOE further notes that EPA accounted for uncertainty in various 
aspects of the 2023 SC-GHG estimates in each of the modules and 
comprehensively discussed these sources of uncertainty in the Final SC-
GHG Report and supporting literature. (See, e.g., EPA Report at p. 77; 
EPA RTC A-1-7). According to EPA, the updated

[[Page 105258]]

approaches taken in the methodology behind the 2023 SC-GHG estimates 
were specifically chosen because they allow for a more explicit 
representation of uncertainty. Moreover, the treatment of uncertainty 
was a key focus of the peer review process. Several peer reviewers 
commended EPA on its comprehensive approach to incorporating 
uncertainty (EPA Peer Review Summary Report, pgs. 26, 31, 33, etc.). 
and EPA responded to peer review comments on remaining questions about 
uncertainty by expanding and clarifying the discussion around 
uncertainty in each module (throughout section 2) and added appendix 
A.8 and table A.8.1 to further account for uncertainty.
    Because, in this rule, DOE is presenting both the interim 2021 SC-
GHG estimates and the 2023 SC-GHG estimates, the comment contending 
that the updated 2023 SC-GHG estimates are less traceable or less 
transparent than the 2021 interim SC-GHG estimates are no longer 
relevant. Insofar as this comment objects to DOE even referring to the 
2023 SC-GHG methodologies and using them for presentation purposes, 
however, we note that EPA developed these estimates through a process 
that included an initial draft with sensitivity analyses, independent 
peer review, responses to peer review and comments, available 
documentation associated with the underlying inputs and a public docket 
that includes all the studies and reports cited in the analysis. (See 
e.g., EPA's ``Report on the Social Cost of Greenhouse Gases: Estimates 
Incorporating Recent Scientific Advances'' [verbar] US EPA; EPA RTC A-
7-4).
    Because, in this rule, DOE is presenting both the interim 2021 SC-
GHG estimates and the 2023 SC-GHG estimates, the comments that adding 
an additional, updated estimate of the SC-GHG benefits impairs the 
public or the industry's ability to compare the July 2024 NODA and July 
2023 NOPR results with the final rule are not relevant.
    Finally, the commenter asserted that DOE should update the SC-GHG 
values for all water heater product classes to reflect a fair 
comparison. As stated above, because DOE is presenting both the interim 
2021 SC-GHG estimates and the 2023 SC-GHG estimates for this rule, this 
comment is not relevant.
    BWC stated that the 2023 SC-GHG estimates are a significant step 
forward in quantifying the social cost of greenhouse gases. BWC further 
commented that given the permanence of any minimum energy conservation 
standards that are established by DOE under EPCA, it is essential that 
the Department first finalize a robust, consistent, and objective 
approach towards accurately calculating SC-GHG before allowing this 
metric to economically justify more stringent standards that would 
otherwise not yield a positive net present value. BWC also questioned 
the consistency of the methodologies going forward and the extent that 
peer experts were able to review and participate in the process. (BWC, 
No. 1441 at p. 3-4)
    DOE appreciates commenter's statement that the 2023 SC-GHG 
estimates are an important step forward in the monetization of 
greenhouse gas emissions.
    With respect to the commenter's concerns about peer review, DOE 
notes again that the 2023 SC-GHG estimates were subjected to 
independent peer review in line with EPA's Peer Review Handbook 4th 
Edition, 2015. This process was conducted by an independent contractor 
and involved two separate comment periods for outside experts. EPA 
reported that the peer reviewers commended the agency on its 
development of this update and labeled it a much-needed improvement in 
estimating the SC-GHG. (EPA Report at p. 3; EPA RTC A-7-11).
    Regarding the commenter's concerns about the consistency of the 
methodologies going forward (BWC, No. 1441 at p. 3-4), DOE reiterates 
that it is presenting climate benefits using both sets of SC-GHG 
estimates and that, in future rulemakings, DOE will continue to 
evaluate the applicability in context and use its professional judgment 
to apply the SC-GHG estimates that are most appropriate to use at that 
time.
    Finally, DOE reiterates that it would promulgate the same standards 
in this final rule even in the absence of the benefits of the GHG 
reductions achieved by the rule. DOE would also promulgate the same 
standards in this final rule, using either the 2021 interim SC-GHG 
estimates, rather than the 2023 SC-GHG estimates. Thus, DOE did not, in 
fact, rely on either the 2023 SC-GHG estimates or the 2021 interim SC-
GHG estimates ``to economically justify more stringent standards that 
would otherwise not yield a positive net present value,'' as the 
commenter suggests because the adopted standards for gas-fired 
instantaneous water heaters are economically justified even without 
including such benefits.
    DOE's derivations of the SC-CO2, SC-N2O, and 
SC-CH4 values used for this final rule are discussed in the 
following sections, and the results of DOE's analyses estimating the 
benefits of the reductions in emissions of these GHGs are presented in 
section V.B.6 of this document.
a. Social Cost of Carbon
    The SC-CO2 values used for this final rule are presented 
using two sets of SC-GHG estimates. One set is the 2023 SC-GHG 
estimates published by the EPA, which are shown in table IV.13 in 5-
year increments from 2020 to 2050. The set of annual values that DOE 
used is presented in appendix 14A of the final rule TSD. These 
estimates include values out to 2080. DOE expects additional climate 
benefits to accrue for products still operating after 2080, but a lack 
of available SC-CO2 estimates for emissions years beyond 
2080 prevents DOE from monetizing these potential benefits in this 
analysis.

 Table IV.13--Annual SC-CO2 Values Based on 2023 SC-GHG Estimates, 2020-
                                  2050
                       [2020$ per Metric Ton CO2]
------------------------------------------------------------------------
                                                     Near-term Ramsey
                                                       discount rate
                 Emissions year                  -----------------------
                                                   2.5%    2.0%    1.5%
------------------------------------------------------------------------
2020............................................     117     193     337
2025............................................     130     212     360
2030............................................     144     230     384
2035............................................     158     248     408
2040............................................     173     267     431
2045............................................     189     287     456
2050............................................     205     308     482
------------------------------------------------------------------------

    DOE also presents results using interim SC-CO2 values 
based on the values developed for the February 2021 SC-GHG TSD, which 
are shown in table IV.14 in 5-year increments from 2020 to 2050. The 
set of annual values that DOE used, which was adapted from estimates 
published by EPA in 2021,\181\ is presented in appendix 14A of the 
final rule TSD. These estimates are based on methods, assumptions, and 
parameters identical to the estimates published by the IWG (which were 
based on EPA modeling), and include values for 2051 to 2070.
---------------------------------------------------------------------------

    \181\ See EPA, Revised 2023 and Later Model Year Light-Duty 
Vehicle GHG Emissions Standards: Regulatory Impact Analysis, 
Washington, DC, December 2021. Available at nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P1013ORN.pdf (last accessed Dec. 03, 2024).

[[Page 105259]]



               Table IV.14--Annual SC-CO2 Values Based on 2021 Interim SC-GHG Estimates, 2020-2050
                                           [2020$ per Metric Ton CO2]
----------------------------------------------------------------------------------------------------------------
                                                                    Discount rate and statistic
                                                 ---------------------------------------------------------------
                      Year                                                                            3% 95th
                                                    5% average      3% average     2.5% average     percentile
----------------------------------------------------------------------------------------------------------------
2020............................................              14              51              76             152
2025............................................              17              56              83             169
2030............................................              19              62              89             187
2035............................................              22              67              96             206
2040............................................              25              73             103             225
2045............................................              28              79             110             242
2050............................................              32              85             116             260
----------------------------------------------------------------------------------------------------------------

    DOE multiplied the CO2 emissions reduction estimated for 
each year by the SC-CO2 value for that year in all of the 
cases. DOE adjusted the values to 2023$ using the implicit price 
deflator for gross domestic product (``GDP'') from the Bureau of 
Economic Analysis. To calculate a present value of the stream of 
monetary values, DOE discounted the values in all of the cases using 
the specific discount rate that had been used to obtain the SC-
CO2 values in each case.
b. Social Cost of Methane and Nitrous Oxide
    The SC-CH4 and SC-N2O values used for this 
final rule are presented using two sets of SC-GHG estimates. One set is 
the 2023SC-GHG estimates published by the EPA. table IV.15 shows the 
updated sets of SC-CH4 and SC-N2O estimates in 5-
year increments from 2020 to 2050. The full set of annual values used 
is presented in appendix 14A of the final rule TSD. These estimates 
include values out to 2080.

                                 Table IV.15--Annual SC-CH4 and SC-N2O Values Based on 2023 SC-GHG Estimates, 2020-2050
                                                                 [2020$ per Metric Ton]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              SC-CH4                                          SC-N2O
                                                         -----------------------------------------------------------------------------------------------
                     Emissions year                               Near-term Ramsey discount rate                  Near-term Ramsey discount rate
                                                         -----------------------------------------------------------------------------------------------
                                                               2.5%            2.0%            1.5%            2.5%            2.0%            1.5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
2020....................................................           1,257           1,648           2,305          35,232          54,139          87,284
2025....................................................           1,590           2,025           2,737          39,972          60,267          95,210
2030....................................................           1,924           2,403           3,169          44,712          66,395         103,137
2035....................................................           2,313           2,842           3,673          49,617          72,644         111,085
2040....................................................           2,702           3,280           4,177          54,521          78,894         119,032
2045....................................................           3,124           3,756           4,718          60,078          85,945         127,916
2050....................................................           3,547           4,231           5,260          65,635          92,996         136,799
--------------------------------------------------------------------------------------------------------------------------------------------------------

    DOE also presents results using interim SC-CH4 and SC-
N2O values based on the values developed for the February 
2021 SC-GHG TSD. Table IV.16 shows the updated sets of SC-
CH4 and SC-N2O estimates from the latest 
interagency update in 5-year increments from 2020 to 2050. The full set 
of annual unrounded values used in the calculations is presented in 
appendix 14A of the final rule TSD. These estimates include values out 
to 2070.

                                                 Table IV.16--Annual SC-CH4 and SC-N2O Values Based on 2021 Interim SC-GHG Estimates, 2020-2050
                                                                                     [2020$ per Metric Ton]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              SC-CH4                                                          SC-N2O
                                                                 -------------------------------------------------------------------------------------------------------------------------------
                                                                                    Discount rate and statistic                                     Discount rate and statistic
                              Year                               -------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      3% 95th                                                         3% 95th
                                                                    5% average      3% average     2.5% average     percentile      5% average      3% average     2.5% average     percentile
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2020............................................................             670           1,500           2,000           3,900           5,800          18,000          27,000          48,000
2025............................................................             800           1,700           2,200           4,500           6,800          21,000          30,000          54,000
2030............................................................             940           2,000           2,500           5,200           7,800          23,000          33,000          60,000
2035............................................................           1,100           2,200           2,800           6,000           9,000          25,000          36,000          67,000
2040............................................................           1,300           2,500           3,100           6,700          10,000          28,000          39,000          74,000
2045............................................................           1,500           2,800           3,500           7,500          12,000          30,000          42,000          81,000
2050............................................................           1,700           3,100           3,800           8,200          13,000          33,000          45,000          88,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    DOE multiplied the CH4 and N2O emissions 
reduction estimated for each year by the SC-CH4 and SC-
N2O estimates for that year in each of the cases. DOE 
adjusted the values to 2023$ using the implicit price deflator for GDP 
from the Bureau of Economic Analysis. To calculate a present value of 
the stream of monetary values, DOE discounted the values in each of the 
cases using the specific discount rate

[[Page 105260]]

that had been used to obtain the SC-CH4 and SC-
N2O estimates in each case.
2. Monetization of Other Emissions Impacts
    For the final rule, DOE estimated the monetized value of 
NOX and SO2 emissions reductions from electricity 
generation using benefit-per-ton estimates for that sector from the 
EPA's Benefits Mapping and Analysis Program.\182\ Table 5 of the EPA 
TSD provides a summary of the health impact endpoints quantified in the 
analysis. DOE used EPA's values for PM2.5-related benefits 
associated with NOX and SO2 and for ozone-related 
benefits associated with NOX for 2025, 2030, 2035, and 2040, 
calculated with discount rates of 3 percent and 7 percent. DOE used 
linear interpolation to define values for the years not given in the 
2025 to 2040 period; for years beyond 2040, the values are held 
constant (rather than extrapolated) to be conservative. DOE combined 
the EPA regional benefit-per-ton estimates with regional information on 
electricity consumption and emissions from AEO2023 to define weighted-
average national values for NOX and SO2 (see 
appendix 14B of the final rule TSD).
---------------------------------------------------------------------------

    \182\ U.S. Environmental Protection Agency. Estimating the 
Benefit per Ton of Reducing Directly-Emitted PM2.5, 
PM2.5 Precursors and Ozone Precursors from 21 Sectors. 
Available at www.epa.gov/benmap/estimating-benefit-ton-reducing-directly-emitted-pm25-pm25-precursors-and-ozone-precursors (last 
accessed August 29, 2024.
---------------------------------------------------------------------------

    DOE also estimated the monetized value of NOX and 
SO2 emissions reductions from site use of natural gas in 
consumer gas-fired instantaneous water heaters using benefit per ton 
estimates from the EPA's Benefits Mapping and Analysis Program. 
Although none of the sectors covered by EPA refers specifically to 
residential and commercial buildings, the sector called ``area 
sources'' would be a reasonable proxy for residential and commercial 
buildings.\183\ The EPA document provides high and low estimates for 
2025 and 2030 at 3- and 7-percent discount rates.\184\ DOE used the 
same linear interpolation and extrapolation as it did with the values 
for electricity generation.
---------------------------------------------------------------------------

    \183\ ``Area sources'' represents all emission sources for which 
states do not have exact (point) locations in their emissions 
inventories. Because exact locations would tend to be associated 
with larger sources, ``area sources'' would be fairly representative 
of small dispersed sources like homes and businesses.
    \184\ ``Area sources'' are a category in the 2018 document from 
EPA but are not used in the 2021 document cited above. See: 
www.epa.gov/sites/default/files/2018-02/documents/sourceapportionmentbpttsd_2018.pdf.
---------------------------------------------------------------------------

    DOE multiplied the site emissions reduction (in tons) in each year 
by the associated $/ton values, and then discounted each series using 
discount rates of 3 percent and 7 percent as appropriate.

M. Utility Impact Analysis

    The utility impact analysis estimates the changes in installed 
electrical capacity and generation projected to result for each 
considered TSL. The analysis is based on published output from the NEMS 
associated with AEO2023. NEMS produces the AEO Reference case, as well 
as a number of side cases that estimate the economy-wide impacts of 
changes to energy supply and demand. For the current analysis, impacts 
are quantified by comparing the levels of electricity sector 
generation, installed capacity, fuel consumption and emissions in the 
AEO2023 Reference case and various side cases. Details of the 
methodology are provided in the appendices to chapter 15 of the final 
rule TSD.
    The output of this analysis is a set of time-dependent coefficients 
that capture the change in electricity generation, primary fuel 
consumption, installed capacity and power sector emissions due to a 
unit reduction in demand for a given end use. These coefficients are 
multiplied by the stream of electricity savings calculated in the NIA 
to provide estimates of selected utility impacts of potential new or 
amended energy conservation standards. The utility analysis also 
estimates the impact on gas utilities in terms of projected changes in 
natural gas deliveries to consumers for each TSL.
    BWC expressed concerns that DOE overestimated the impact of this 
metric in the analysis presented in the July 2024 NODA pointing to 
table III.9, which demonstrates electric utility impact results 
indicating a substantial decrease in electric load for both installed 
capacity, as well as electric generation. BWC contended that since gas-
fired instantaneous water heaters utilize very little electric energy, 
they question how adopting more stringent energy conservation standards 
for these products could impact electric load demand to such a 
significant extent. (BWC, No. 1441 at p. 4)
    In response, DOE notes that the changes listed in table III.9 of 
the July 2024 NODA in installed capacity and generation are 
significantly smaller than total US electric capacity which is over a 
million Megawatts. Additionally, DOE notes that results for EL 1 
through 3 results in an increase in installed capacity as denoted by 
parentheses.

N. Employment Impact Analysis

    DOE considers employment impacts in the domestic economy as one 
factor in selecting a standard. Employment impacts from new or amended 
energy conservation standards include both direct and indirect impacts. 
Direct employment impacts are any changes in the number of employees of 
manufacturers of the products subject to standards. The MIA addresses 
those impacts. Indirect employment impacts are changes in national 
employment that occur due to the shift in expenditures and capital 
investment caused by the purchase and operation of more-efficient 
appliances. Indirect employment impacts from standards consist of the 
net jobs created or eliminated in the national economy, other than in 
the manufacturing sector being regulated, caused by (1) reduced 
spending by consumers on energy, (2) reduced spending on new energy 
supply by the utility industry, (3) increased consumer spending on the 
products to which the new standards apply and other goods and services, 
and (4) the effects of those three factors throughout the economy.
    One method for assessing the possible effects on the demand for 
labor of such shifts in economic activity is to compare sector 
employment statistics developed by the Labor Department's Bureau of 
Labor Statistics (``BLS''). BLS regularly publishes its estimates of 
the number of jobs per million dollars of economic activity in 
different sectors of the economy, as well as the jobs created elsewhere 
in the economy by this same economic activity. Data from BLS indicate 
that expenditures in the utility sector generally create fewer jobs 
(both directly and indirectly) than expenditures in other sectors of 
the economy.\185\ Bureau of Economic Analysis input-output multipliers 
also show a lower labor intensity per million dollars of activity for 
utilities as compared to other industries.\186\ There are many reasons 
for these differences, including wage differences and the fact that the 
utility sector is more capital-intensive and less labor-intensive than 
other sectors. Energy conservation standards have the effect of 
reducing consumer utility bills. Because reduced consumer expenditures 
for energy likely lead to increased expenditures in other

[[Page 105261]]

sectors of the economy, the general effect of efficiency standards is 
to shift economic activity from a less labor-intensive sector (i.e., 
the utility sector) to more labor-intensive sectors (e.g., the retail 
and service sectors). Thus, these data suggest that net national 
employment may increase due to shifts in economic activity resulting 
from energy conservation standards.
---------------------------------------------------------------------------

    \185\ See U.S. Bureau of Labor Statistics. Industry Output and 
Employment. Available at: www.bls.gov/emp/data/industry-out-and-emp.htm (last accessed August 19, 2024).
    \186\ See U.S. Department of Commerce-Bureau of Economic 
Analysis. Regional Input-Output Modeling System (RIMS II) User's 
Guide. Available at: www.bea.gov/resources/methodologies/RIMSII-user-guide (last accessed Jan. 18, 2024).
---------------------------------------------------------------------------

    DOE estimated indirect national employment impacts for the standard 
levels considered in this final rule using an input/output model of the 
U.S. economy called Impact of Sector Energy Technologies version 4 
(``ImSET'').\187\ ImSET is a special-purpose version of the ``U.S. 
Benchmark National Input-Output'' (``I-O'') model, which was designed 
to estimate the national employment and income effects of energy-saving 
technologies. The ImSET software includes a computer- based I-O model 
having structural coefficients that characterize economic flows among 
187 sectors most relevant to industrial, commercial, and residential 
building energy use.
---------------------------------------------------------------------------

    \187\ Livingston, O.V., S.R. Bender, M.J. Scott, and R.W. 
Schultz. ImSET 4.0: Impact of Sector Energy Technologies Model 
Description and User's Guide. 2015. Pacific Northwest National 
Laboratory: Richland, WA. PNNL-24563.
---------------------------------------------------------------------------

    DOE notes that ImSET is not a general equilibrium forecasting 
model, and that there are uncertainties involved in projecting 
employment impacts, especially changes in the later years of the 
analysis. Because ImSET does not incorporate price changes, the 
employment effects predicted by ImSET may over-estimate actual job 
impacts over the long run for this rule. Therefore, DOE used ImSET only 
to generate results for near-term timeframes (2030-2034), where these 
uncertainties are reduced. For more details on the employment impact 
analysis, see chapter 16 of the final rule TSD.

V. Analytical Results and Conclusions

    The following section addresses the results from DOE's analyses 
with respect to the considered energy conservation standards for 
consumer gas-fired instantaneous water heaters. It addresses the TSLs 
examined by DOE, the projected impacts of each of these levels if 
adopted as energy conservation standards for consumer gas-fired 
instantaneous water heaters, and the standards levels that DOE is 
adopting in this final rule. Additional details regarding DOE's 
analyses are contained in the final rule TSD supporting this document.

A. Trial Standard Levels

    In general, DOE typically evaluates potential new or amended 
standards for products and equipment by grouping individual efficiency 
levels for each class into TSLs. Use of TSLs allows DOE to identify and 
consider manufacturer cost interactions between the product classes, to 
the extent that there are such interactions, and price elasticity of 
consumer purchasing decisions that may change when different standard 
levels are set.
    In the analysis conducted for this final rule, DOE analyzed the 
benefits and burdens of four TSLs for consumer gas-fired instantaneous 
water heaters. These TSLs are equivalent to each of the ELs analyzed by 
DOE with results presented in this document. TSL 1 represents a 
transition from non-condensing to condensing technology (i.e., through 
the addition of a secondary condensing heat exchanger). TSL 2 
represents an intermediate condensing efficiency which can be achieved 
using larger heat exchangers. TSL 3 represents a further improvement by 
the use of a heat exchanger with even more surface area, such as a 
flat-plate heat exchanger design, and is the efficiency level required 
to meet the EPA's ENERGY STAR specification criteria. Finally, TSL 4 
represents the max-tech efficiency, which may be achieved by use of 
fully modulating burners and further improvements to the heat 
exchanger. DOE presents the results for the TSLs in this document, 
while the results for all efficiency levels that DOE analyzed are in 
the final rule TSD. Table V.1 presents the TSLs and the corresponding 
efficiency levels that DOE has identified for potential amended energy 
conservation standards for consumer gas-fired instantaneous water 
heaters.

               Table V.1--Trial Standard Levels for Consumer Gas-Fired Instantaneous Water Heaters
----------------------------------------------------------------------------------------------------------------
                                                                     Trial standard level
                Product class                -------------------------------------------------------------------
                                                     1                2                3                4
----------------------------------------------------------------------------------------------------------------
                                                                       Efficiency level
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters (Veff                1                2                3                4
 <2 gal, Rated Input >50,000 Btu/h).........
----------------------------------------------------------------------------------------------------------------

B. Economic Justification and Energy Savings

1. Economic Impacts on Individual Consumers
    DOE analyzed the economic impacts on consumer gas-fired 
instantaneous water heaters consumers by looking at the effects that 
potential amended standards at each TSL would have on the LCC and PBP. 
DOE also examined the impacts of potential standards on selected 
consumer subgroups. These analyses are discussed in the following 
sections.
a. Life-Cycle Cost and Payback Period
    In general, higher-efficiency products affect consumers in two 
ways: (1) purchase price increases, and (2) annual operating costs 
decrease. Inputs used for calculating the LCC and PBP include total 
installed costs (i.e., product price plus installation costs), and 
operating costs (i.e., annual energy use, energy prices, energy price 
trends, repair costs, and maintenance costs). The LCC calculation also 
uses product lifetime and a discount rate. Chapter 8 of the final rule 
TSD provides detailed information on the LCC and PBP analyses.
    Table V.2 and table V.3 show the LCC and PBP results for the TSLs 
considered. In the first table, the simple payback is measured relative 
to the baseline product. In the second table, the impacts are measured 
relative to the efficiency distribution in the no-new-standards case in 
the compliance year (see section IV.F.8 of this document). Because some 
consumers purchase products with higher efficiency in the no-new-
standards case, the average savings are less than the difference 
between the average LCC of the baseline product and the average LCC at 
each TSL. The savings refer only to consumers who are affected by a

[[Page 105262]]

standard at a given TSL. Those who already purchase a product with 
efficiency at or above a given TSL are not affected. Consumers for whom 
the LCC increases at a given TSL experience a net cost.

                                    Table V.2--Average LCC and PBP Results for Gas-Fired Instantaneous Water Heaters
                                                        [Veff <2 gal, rated input >50,000 Btu/h]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Average costs 2023$
                                                         ---------------------------------------------------------------- Simple payback      Average
                    Efficiency level                                       First year's      Lifetime                         (years)        lifetime
                                                          Installed cost  operating cost  operating cost        LCC                           (years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................           2,087             303           4,571           6,659  ..............            20.0
1.......................................................           2,304             285           4,339           6,644            12.6            20.0
2.......................................................           2,318             277           4,210           6,528             8.9            20.0
3.......................................................           2,334             273           4,154           6,487             8.3            20.0
4.......................................................           2,424             270           4,107           6,531            10.3            20.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The results for each TSL are calculated assuming that all consumers use products at that efficiency level. The PBP is measured relative to the
  baseline product.


 Table V.3--Average LCC Savings Relative to the No-New-Standards Case for Gas-Fired Instantaneous Water Heaters
                                    [Veff <2 gal, rated input >50,000 Btu/h]
----------------------------------------------------------------------------------------------------------------
                                                                                      Life-cycle cost savings
                                                                                 -------------------------------
                                                                                                    Percent of
             Trial standard level                       Efficiency level            Average LCC   consumers that
                                                                                     savings *    experience net
                                                                                      (2023)           cost
----------------------------------------------------------------------------------------------------------------
1.............................................  1...............................             (1)            17.5
2.............................................  2...............................             112            15.2
3.............................................  3...............................              90            25.0
4.............................................  4...............................              39            56.2
----------------------------------------------------------------------------------------------------------------
* The savings represent the average LCC for affected consumers.
Parentheses indicate negative (-) values.

b. Consumer Subgroup Analysis
    In the consumer subgroup analysis, DOE estimated the impact of the 
considered TSLs on low-income households, senior-only households, and 
small businesses. Table V.4 compares the average LCC savings and PBP at 
each efficiency level for the consumer subgroups with similar metrics 
for the entire consumer sample for consumer gas-fired instantaneous 
water heaters. In most cases, the average LCC savings and PBP for low-
income households and senior-only households at the considered 
efficiency levels are not substantially different from the average for 
all households. Chapter 11 of the final rule TSD presents the complete 
LCC and PBP results for the subgroups.

 Table V.4--Comparison of LCC Savings and PBP for Consumer Subgroups and All Households; Gas-Fired Instantaneous
                                                  Water Heaters
                                    [Veff <2 gal, rated input >50,000 Btu/h]
----------------------------------------------------------------------------------------------------------------
                                                    Low-income      Senior-only        Small
                       TSL                          households      households      businesses    All households
----------------------------------------------------------------------------------------------------------------
                                           Average LCC Savings (2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................             141            (38)           (158)             (1)
2...............................................             248              80            (51)             112
3...............................................             152              75              10              90
4...............................................             123              18            (44)              39
----------------------------------------------------------------------------------------------------------------
                                          Simple Payback Period (years)
----------------------------------------------------------------------------------------------------------------
1...............................................             9.9            13.5            10.2            12.6
2...............................................             7.1             9.6             7.2             8.9
3...............................................             6.6             8.9             6.6             8.3
4...............................................             7.9            10.9             7.8            10.3
----------------------------------------------------------------------------------------------------------------
                                           Consumers with Net Cost (%)
----------------------------------------------------------------------------------------------------------------
1...............................................             8.2            20.0            24.5            17.5
2...............................................             6.5            16.6            25.7            15.2

[[Page 105263]]

 
3...............................................            11.0            26.4            43.1            25.0
4...............................................            31.8            57.5            67.0            56.2
----------------------------------------------------------------------------------------------------------------
                                         Consumers with Net Benefit (%)
----------------------------------------------------------------------------------------------------------------
1...............................................            17.1             8.9             7.1            12.5
2...............................................            26.2            21.4            17.1            22.5
3...............................................            67.0            57.5            44.9            59.9
4...............................................            55.0            33.7            27.6            35.6
----------------------------------------------------------------------------------------------------------------
Note: Numbers in parentheses indicate a negative number.

c. Rebuttable Presumption Payback
    As discussed in section III.F.2 of this document, EPCA establishes 
a rebuttable presumption that an energy conservation standard is 
economically justified if the increased purchase cost for a product 
that meets the standard is less than three times the value of the 
first-year energy savings resulting from the standard. In calculating a 
rebuttable presumption payback period for each of the considered TSLs, 
DOE used discrete values, and, as required by EPCA, based the energy 
use calculation on the DOE test procedures for consumer gas-fired 
instantaneous water heaters. In contrast, the PBPs presented in section 
V.B.1.a of this document use averages that were calculated using 
distributions that reflect the range of energy use in the field.
    Table V.5 presents the rebuttable-presumption payback periods for 
the considered TSLs for consumer gas-fired instantaneous water heaters. 
While DOE examined the rebuttable-presumption criterion, it considered 
whether the standard levels considered for this rule are economically 
justified through a more detailed analysis of the economic impacts of 
those levels, pursuant to 42 U.S.C. 6295(o)(2)(B)(i), that considers 
the full range of impacts to the consumer, manufacturer, Nation, and 
environment. The results of that analysis serve as the basis for DOE to 
definitively evaluate the economic justification for a potential 
standard level, thereby supporting or rebutting the results of any 
preliminary determination of economic justification.

                                Table V.5--Rebuttable-Presumption Payback Periods
----------------------------------------------------------------------------------------------------------------
                     TSL                             1                2                3                4
----------------------------------------------------------------------------------------------------------------
                                                                            (years)
                                             -------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters.......            11.0              7.9              7.4              9.2
----------------------------------------------------------------------------------------------------------------

2. Economic Impacts on Manufacturers
    DOE performed an MIA to estimate the impact of amended energy 
conservation standards on manufacturers of gas-fired instantaneous 
water heaters. The next section describes the expected impacts on 
manufacturers at each considered TSL. Chapter 12 of the final rule TSD 
explains the analysis in further detail.
a. Industry Cash Flow Analysis Results
    In this section, DOE provides GRIM results from the analysis, which 
examines changes in the industry that would result from a standard. The 
following tables summarize the estimated financial impacts (represented 
by changes in INPV) of potential amended energy conservation standards 
on manufacturers of gas-fired instantaneous water heaters, as well as 
the conversion costs that DOE estimates manufacturers of gas-fired 
instantaneous water heaters would incur at each TSL.
    As discussed in section IV.J.2.d of this document, DOE modeled two 
scenarios to evaluate a range of cash flow impacts on the gas-fired 
instantaneous water heater industry: (1) the preservation of gross 
margin percentage scenario and (2) the preservation of operating profit 
scenario. Under the preservation of gross margin percentage scenario, 
DOE applied a single uniform ``gross margin percentage'' across all 
efficiency levels. As MPCs increase with efficiency, this scenario 
implies that the per-unit dollar profit would also increase. DOE 
assumed a ``gross margin percentage'' of 31 percent for gas-fired 
instantaneous water heaters.\188\ This gross margin percentage (and the 
corresponding manufacturer markup) is the same as the one that DOE used 
in the engineering analysis and the no-new-standards case of the GRIM. 
Because this scenario assumes that a manufacturer's absolute dollar 
markup would increase as MPCs increase in the standards cases, it 
represents the upper bound to industry profitability under potential 
amended energy conservation standards.
---------------------------------------------------------------------------

    \188\ The gross margin percentage of 31 percent is based on a 
manufacturer markup of 1.45.
---------------------------------------------------------------------------

    The preservation of operating profit scenario reflects 
manufacturers' concerns about their inability to maintain margins as 
MPCs increase to reach more-stringent efficiency levels. In this 
scenario, while manufacturers make the necessary investments required 
to convert their facilities to produce compliant products, operating 
profit does not change in absolute dollars and decreases as a 
percentage of revenue.
    Each of the modeled manufacturer markup scenarios results in a 
unique set of cash flows and corresponding industry values at each TSL. 
In the following discussion, the INPV results refer to the difference 
in industry value between the no-new-standards case and each standards 
case resulting from the sum of discounted cash flows from 2024 through 
2059. To provide perspective on the short-run cash flow impact, DOE

[[Page 105264]]

includes in the discussion of results a comparison of free cash flow 
between the no-new-standards case and the standards case at each TSL in 
the year before amended standards are required.

            Table V.6--Manufacturer Impact Analysis for Gas-Fired Instantaneous Water Heaters Under the Preservation of Gross Margin Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Trial standard level *
                                                        Units                 No-new-    ---------------------------------------------------------------
                                                                          standards case         1               2               3               4
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV......................................  2023$ millions..............         1,193.9         1,234.0         1,234.4         1,217.6         1,275.2
Change in INPV............................  2023$ millions..............  ..............            40.1            40.5            23.7            81.2
                                            %...........................  ..............             3.4             3.4             2.0             6.8
Free Cash Flow (2029).....................  2023$ millions..............            91.7            84.6            82.9            65.2            65.2
Change in Free Cash Flow (2029)...........  2023$ millions..............  ..............           (7.1)           (8.8)          (26.5)          (26.5)
                                            %...........................  ..............           (7.8)           (9.6)          (28.9)          (28.9)
Product Conversion Costs..................  2023$ millions..............  ..............             2.5             3.7             4.8             4.8
Capital Conversion Costs..................  2023$ millions..............  ..............            13.9            16.7            55.3            55.3
                                                                         -------------------------------------------------------------------------------
    Total Investment Required **..........  2023$ millions..............  ..............            16.5            20.4            60.1            60.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Numbers in parentheses indicate a negative number.
** Numbers may not sum exactly due to rounding.


          Table V.7--Manufacturer Impact Analysis for Gas-Fired Instantaneous Water Heaters Under the Preservation of Operating Profit Scenario
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Trial standard level *
                                                        Units                 No-new-    ---------------------------------------------------------------
                                                                          standards case         1               2               2               4
--------------------------------------------------------------------------------------------------------------------------------------------------------
INPV......................................  2023$ millions..............         1,193.9         1,171.1         1,160.2         1,132.1         1,119.5
Change in INPV............................  2023$ millions..............  ..............          (22.9)          (33.7)          (61.8)          (74.5)
                                            %...........................  ..............           (1.9)           (2.8)           (5.2)           (6.2)
Free Cash Flow (2029).....................  2023$ millions..............            91.7            84.6            82.9            65.2            65.2
Change in Free Cash Flow (2029)...........  2023$ millions..............  ..............           (7.1)           (8.8)          (26.5)          (26.5)
%.........................................  ............................           (7.8)           (9.6)          (28.9)          (28.9)
Product Conversion Costs..................  2023$ millions..............  ..............             2.5             3.7             4.8             4.8
Capital Conversion Costs..................  2023$ millions..............  ..............            13.9            16.7            55.3            55.3
Total Investment Required **..............  2023$ millions..............  ..............            16.5            20.4            60.1            60.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Numbers in parentheses indicate a negative number.
** Numbers may not sum exactly due to rounding.

    At TSL 1, DOE estimates that impacts on INPV would range from -
$22.9 million to $40.1 million, or a change in INPV of -1.9 percent to 
3.4 percent. At TSL 1, industry free cash flow is $84.6 million, which 
is a decrease of $7.1 million, or a drop of 7.8 percent, compared to 
the no-new-standards case value of $91.7 million in 2029, the year 
leading up to the standards year. Approximately 70 percent of gas-fired 
instantaneous water heater shipments are expected to meet TSL 1 by the 
analyzed 2030 compliance date in the no-new-standards case.
    TSL 1 would set the energy conservation standard for gas-fired 
instantaneous water heaters at EL 1. Compared to the non-condensing 
design considered at baseline, the design options analyzed at TSL 1 
includes a tube design condensing heat exchanger. Out of the 12 gas-
fired instantaneous water heater OEMs identified, 11 offer models that 
meet TSL 1. These 11 manufacturers currently offer 84 unique basic 
models, accounting for 61 percent of model listings, that meet this 
TSL. Based on feedback from manufacturer interviews and a review of the 
market, DOE does not expect that most manufacturers would need to add 
production capacity or incur significant capital conversion costs to 
meet this level. However, in response to the July 2023 NOPR, one 
manufacturer commented that its U.S. production facility is currently 
optimized to produce non-condensing models. Converting this U.S. 
production facility to produce condensing gas-fired instantaneous water 
heaters would require significant investment. To avoid underestimating 
the potential investments required to meet levels that may necessitate 
condensing technology (i.e., TSL 1 through TSL 4), DOE incorporated the 
expected investments required to convert its U.S. production facility 
to accommodate production of condensing gas-fired instantaneous water 
heaters. DOE does not expect that there would be notable product 
conversion costs at this TSL since most manufacturers offer a range of 
models that already meet this level. DOE estimates that industry would 
incur approximately $13.9 million in capital conversion costs and $2.5 
million in product conversions at TSL 1. Industry conversion costs 
total $16.5 million.
    At TSL 1, the shipment-weighted average MPC for gas-fired 
instantaneous water heaters increases by 9.4 percent relative to the 
no-new-standards case shipment-weighted average MPC for gas-fired 
instantaneous water heaters in 2030. In the preservation of gross 
margin percentage scenario, the increase

[[Page 105265]]

in cashflow from the higher MSP outweighs the $16.5 million in 
conversion costs, causing a positive change in INPV at TSL 1 under this 
scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case, but manufacturers do not earn additional profit 
from their investments. In this scenario, the manufacturer markup 
decreases in 2030. This reduction in the manufacturer markup and the 
$16.5 million in conversion costs incurred by manufacturers cause a 
slightly negative change in INPV at TSL 1 under the preservation of 
operating profit scenario. See section IV.J.2.d of this document for a 
discussion of the manufacturer markup scenarios.
    At TSL 2, DOE estimates that impacts on INPV would range from -
$33.7 million to $40.5 million, or a change in INPV of -2.8 percent to 
3.4 percent. At TSL 2, industry free cash flow is $82.9 million, which 
is a decrease of $8.8 million, or a drop of 9.6 percent compared to the 
no-new-standards case value of $91.7 million in 2029, the year leading 
up to the standards year. Approximately 62 percent of gas-fired 
instantaneous water heater shipments are expected to meet TSL 2 by the 
analyzed 2030 compliance date in the no-new-standards case.
    TSL 2 would set the energy conservation standard for gas-fired 
instantaneous water heaters at EL 2. The design options analyzed at TSL 
2 include increasing the tube design condensing heat exchanger area 
relative to TSL 1. Of the 12 gas-fired instantaneous water heater OEMs, 
10 manufacturers offer models that meet TSL 2. These 10 OEMs currently 
offer 71 unique basic models, accounting for 51 percent of model 
listings, that meet this TSL. As with TSL 1, DOE does not expect that 
most manufacturers would need to add production capacity (or incur 
notable capital conversion costs) to meet this level. However, the 
larger condensing heat exchanger that manufacturers may implement to 
meet TSL 2 could necessitate some capital investments to optimize 
production lines. Similar to TSL 1, DOE does not expect that there 
would be significant product conversion costs at this level since most 
manufacturers already offer a range of models that meet TSL 2. DOE 
estimates that industry would incur approximately $16.7 million in 
capital conversion costs and $3.7 million in product conversions at TSL 
2. Industry conversion costs total $20.4 million.
    At TSL 2, the shipment-weighted average MPC for gas-fired 
instantaneous water heaters increases by 9.8 percent relative to the 
no-new-standards case shipment-weighted average MPC for gas-fired 
instantaneous water heaters in 2030. In the preservation of gross 
margin percentage scenario, the increase in cashflow from the higher 
MSP outweighs the $20.4 million in conversion costs, causing a positive 
change in INPV at TSL 2 under this scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards, but manufacturers do not earn additional profit from 
their investments. In this scenario, the manufacturer markup decreases 
in 2030. This reduction in the manufacturer markup and the $20.4 
million in conversion costs incurred by manufacturers cause a slightly 
negative change in INPV at TSL 2 under the preservation of operating 
profit scenario.
    At TSL 3, DOE estimates that impacts on INPV would range from -
$61.8 million to $23.7 million, or a change in INPV of -5.2 percent to 
2.0 percent. At TSL 3, industry free cash flow is $65.2 million, which 
is a decrease of $26.5 million, or a drop of 28.9 percent, compared to 
the no-new-standards case value of $91.7 million in 2029, the year 
leading up to the standards year. Approximately 16 percent of gas-fired 
instantaneous water heater shipments are expected to meet TSL 3 by the 
analyzed 2030 compliance date in the no-new-standards case.
    TSL 3 would set the energy conservation standard for gas-fired 
instantaneous water heaters at EL 3. The design options analyzed at TSL 
3 include a more efficient heat exchanger design (i.e., replacing a 
tube condensing heat exchanger with a flat plate condensing heat 
exchanger) and increasing the condensing heat exchanger area relative 
to TSL 2. Of the 12 gas-fired instantaneous water heater OEMs, 10 
manufacturers offer models that meet TSL 3. These 10 manufacturers 
currently offer 48 unique basic models, accounting for 34 percent of 
model listings, that meet this TSL. Based on feedback from manufacturer 
interviews and public comments, DOE understands that implementing the 
larger, improved condensing heat exchanger technology would increase 
the complexity of the manufacturing process compared to the tube design 
condensing heat exchanger technology analyzed at TSL 1 and TSL 2.
    At this level, most manufacturers would need to add additional 
assembly lines to meet demand, which would require a large capital 
investment. The investment required to add production capacity would 
vary by manufacturer as it depends on floor space availability in and 
around existing manufacturing plants. Compared to TSL 1 and TSL 2, 
manufacturers offer fewer models that meet the required efficiency 
levels. Manufacturers without any models that meet TSL 3 would need to 
develop new gas-fired instantaneous water heater products with more 
complex, efficient condensing heat exchanger designs. Manufacturers 
with gas-fired instantaneous water heaters that meet TSL 3 may need to 
allocate technical resources to provide a full range of product 
offerings since most manufacturers currently only offer a handful of 
models that meet TSL 3. DOE estimates that manufacturers would incur 
approximately $55.3 million in capital conversion costs and $4.8 
million in product conversions at TSL 3. Industry conversion costs 
total $60.1 million.
    At TSL 3, the shipment-weighted average MPC for gas-fired 
instantaneous water heaters increases by 11.2 percent relative to the 
no-new-standards case shipment-weighted average MPC for gas-fired 
instantaneous water heaters in 2030. In the preservation of gross 
margin percentage scenario, the increase in cashflow from the higher 
MSP outweighs the $60.1 million in conversion costs, causing a slightly 
positive change in INPV at TSL 3 under this scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards case, but manufacturers do not earn additional profit 
from their investments. In this scenario, the manufacturer markup 
decreases in 2030. This reduction in the manufacturer markup and the 
$60.1 million in conversion costs incurred by manufacturers cause a 
negative change in INPV at TSL 3 under the preservation of operating 
profit scenario.
    At TSL 4, DOE estimates that impacts on INPV would range from -
$74.5 million to -$81.2 million, or a change in INPV of -6.2 percent to 
6.8 percent. At TSL 4, industry free cash flow is $65.2 million, which 
is a decrease of $26.5 million, or a drop of 28.9 percent, compared to 
the no-new-standards case value of $91.7 million in 2029, the year 
leading up to the standards year. Approximately 8 percent of gas-fired 
instantaneous water heater shipments are expected to meet TSL 4 by the 
analyzed 2030 compliance date in the no-new-standards case.
    TSL 4 would set the energy conservation standard for gas-fired

[[Page 105266]]

instantaneous water heaters at EL 4 (i.e., max-tech). The design 
options analyzed at TSL 4 include replacing the step-modulating burner 
with a fully modulating burner and increasing the condensing heat 
exchanger area relative to TSL 3. Of the 12 gas-fired instantaneous 
water heaters, five manufacturers offer models that meet this TSL. 
These five manufacturers currently offer 19 unique basic models, 
accounting for 14 percent of model listings, that meet this TSL. As 
with TSL 3, DOE understands that implementing the larger, improved 
condensing heat exchanger design would add a significant amount of 
complexity to the manufacturing process compared to the tube design 
condensing heat exchanger technology at TSL 1 and TSL 2. As such, DOE 
expects similar capital conversion costs at TSL 3 and TSL 4. At max-
tech, fewer manufacturers offer fewer models that meet the required 
efficiencies compared to TSL 3. DOE estimates that manufacturers would 
incur approximately $55.3 million in capital conversion costs and $4.8 
million in product conversions at TSL 4. Industry conversion costs 
total $60.1 million.
    At TSL 4, the shipment-weighted average MPC for gas-fired 
instantaneous water heaters increases by 20.1 percent relative to the 
no-new-standards case shipment-weighted average MPC for gas-fired 
instantaneous water heaters in 2030. The increase in cashflow from the 
higher MSP outweighs the $60.1 million in conversion costs, causing a 
positive change in INPV at TSL 4 under this scenario.
    Under the preservation of operating profit scenario, manufacturers 
earn the same per-unit operating profit as would be earned in the no-
new-standards, but manufacturers do not earn additional profit from 
their investments. In this scenario, the manufacturer markup decreases 
in 2030. This reduction in the manufacturer markup and the $60.1 
million in conversion costs incurred by manufacturers cause a negative 
change in INPV at TSL 4 under the preservation of operating profit 
scenario.
b. Direct Impacts on Employment
    To quantitatively assess the potential impacts of amended energy 
conservation standards on direct employment in the gas-fired 
instantaneous water heater industry, DOE used feedback from stakeholder 
comments, the engineering analysis, and shipments analysis to estimate 
the domestic labor expenditures and number of direct employees in the 
no-new-standards case and in each of the standards cases during the 
analysis period.
    In the July 2023 NOPR, DOE estimated that approximately 70 percent 
of consumer water heaters subject to the proposed amended standards 
were produced domestically. Of that 70 percent, DOE estimated that all 
gas-fired instantaneous water heaters, which currently account for 12 
percent of the overall consumer water heater market, were produced 
outside of the United States. For the July 2024 NODA, DOE revised its 
direct employment analysis to account for Rinnai's new domestic 
production facility dedicated to manufacturing non-condensing gas-fired 
instantaneous water heaters. In the July 2024 NODA, DOE estimated that 
approximately 20 percent of gas-fired instantaneous water heaters were 
produced domestically. DOE derived this value by using its shipments 
analysis and public market share feedback.\189\ (Rinnai No. 1186 at p. 
1) DOE maintained the 20 percent estimate from the July 2024 NODA for 
this final rule.
---------------------------------------------------------------------------

    \189\ In 2023, DOE estimates that approximately 0.41 million out 
of the 1.22 million gas-fired instantaneous water heater unit 
shipments are non-condensing. In response to the July 2023 NOPR, 
Rinnai commented that its domestic market share of non-condensing 
gas-fired instantaneous water heaters is 60 percent: (60% x 0.41 
million) / 1.22 million = 20%.
---------------------------------------------------------------------------

    In addition to Rinnai's market share feedback, DOE relied on the 
employment figures provided in Rinnai's comments in response to the 
July 2023 NOPR to estimate the potential range of direct employment 
impacts in 2030 (the analyzed compliance year) in the July 2024 NODA. 
Rinnai's comments indicated that there were 122 domestic production 
workers dedicated to manufacturing non-condensing gas-fired 
instantaneous water heaters in 2023. (Rinnai No. 1186 at p. 1) Using 
results of the shipments analysis, DOE projected that there would be 
approximately 128 domestic production workers in 2030 (the analyzed 
compliance year) in the no-new-standards case.
    To establish a conservative lower bound, DOE assumed domestic 
manufacturers would shift production to foreign countries at efficiency 
levels that would likely necessitate condensing technology. The upper 
bound domestic direct employment estimate corresponds to a potential 
increase in the number of domestic workers that would result from 
amended energy conservation standards if manufacturers continue to 
produce the same scope of covered products within the United States 
after compliance takes effect (i.e., 20 percent of gas-fired 
instantaneous water heater shipments continue to be manufactured 
domestically). Results of DOE's engineering and product teardown 
analyses indicate that additional labor is required (on a per-unit 
basis) to produce a condensing gas-fired instantaneous water heater 
compared to a non-condensing gas-fired instantaneous water heater. As 
such, DOE modeled an increase in domestic direct employment in the 
upper bound scenario.
    For this final rule, DOE updated its estimate of domestic 
production workers of gas-fired instantaneous water heaters from 128 to 
190 \190\ in 2030 based on stakeholder comments in response to the July 
2024 NODA but otherwise maintained its direct employment methodology. 
(Rinnai No. 1443 at p. 1) DOE estimates that in the absence of new or 
amended energy conservation standards for consumer water heaters there 
would be 3,859 domestic production employees for the overall consumer 
water heater market in 2030.\191\
---------------------------------------------------------------------------

    \190\ Rinnai commented that it currently employes 183 full-time 
employees and 49 temporary employees at its Griffin, Georgia plant. 
DOE's shipments analysis indicates shipments of non-condensing gas-
fired instantaneous water heaters in the no-new-standards case will 
increase by approximately 4 percent from 2024 to 2030 (the 
compliance year).
    \191\ In support of the May 2024 Final Rule, DOE estimated that 
the total domestic direct employment for gas-fired storage, oil-
fired storage, and electric storage water heaters would be 4,110 in 
2030 in the no-new-standards case, representing 3,669 production 
workers and 441 non-production workers. 89 FR 37778, 37900-37901. 
See the May 2024 Final Rule GRIM available for download at: 
www.regulations.gov/document/EERE-2017-BT-STD-0019-1422. (3,669 + 
190 = 3,859 domestic production workers in 2030, absent standards).
---------------------------------------------------------------------------

    For the conservative lower bound of direct employment impacts for 
this final rule, DOE models a decrease of domestic direct employment of 
190 production workers at TSL 1 through TSL 4 in 2030. This lower bound 
reflects the scenario where Rinnai chooses to continue to source 
condensing gas-fired instantaneous water heaters from Japan. In 
response to the July 2023 NOPR and July 2024 NODA, Rinnai commented 
that due to the large upfront investment required to repurpose its 
Georgia facility to accommodate production of condensing gas-fired 
instantaneous water heaters and its current production capacity of 
condensing gas-fired instantaneous water heaters in Japan, it is 
possible that manufacturing could shift overseas. (Rinnai No. 1186 at 
p. 23; Rinnai No. 1443 at pp. 21-22)
    For the upper bound of direct employment impacts, using a shipment-
weighted average, DOE estimates that the labor content required to 
produce a

[[Page 105267]]

condensing gas-fired instantaneous water heater is approximately 62 
percent more than the labor content required to produce a non-
condensing gas-fired instantaneous water heater. See chapter 12 of the 
final rule TSD for the estimated labor content by efficiency level. 
Therefore, DOE models an upper-bound increase in domestic direct 
employment of 62 percent (an increase of approximately 117 production 
workers, for a total of 307 domestic production workers) at TSL 1 
through TSL 4 in 2030.
    Additional details on the analysis of direct employment, as well as 
the estimated labor content for each efficiency level, can be found in 
chapter 12 of the final rule TSD. Additionally, the employment impacts 
discussed in this section are independent of the employment impacts 
from the broader U.S. economy, which are documented in chapter 16 of 
the final rule TSD.
c. Impacts on Manufacturing Capacity
    Nearly all gas-fired instantaneous water heater OEMs currently 
offer condensing gas-fired instantaneous water heater models. Of the 12 
manufacturers identified, 11 manufacturers already offer a range of 
condensing gas-fired instantaneous water heater models that meet TSL 1. 
DOE estimates that condensing gas-fired instantaneous water heaters 
account for 67 percent of current shipments. For a condensing-level 
standard, most manufacturers would have to repurpose and retool 
assembly lines to produce only condensing models since the 
manufacturing processes (e.g., production of secondary heat exchangers) 
differ between condensing and non-condensing gas-fired instantaneous 
water heater models. Manufacturer feedback indicates that most 
manufacturers could meet TSL 1 and TSL 2 without adding new production 
lines. However, at TSL 3 and TSL 4, DOE expects most manufacturers 
would have to add production lines due to increased complexity and 
incorporation of a larger, more efficient heat exchanger design. 
Additionally, while most shipments already meet TSL 2, fewer shipments 
meet TSL 3 or TSL 4. Currently, 60 percent of shipments meet TSL 2 
whereas 15 percent and 8 percent of shipments meet TSL 3 and TSL 4, 
respectively. However, at TSL 2 (the adopted level), DOE expects that 
manufacturers would be able to add capacity and adjust product designs 
in the five-year period between the announcement year of the amended 
standard and the compliance year of the amended standard.
d. Impacts on Subgroups of Manufacturers
    As discussed in section IV.J of this document, using average cost 
assumptions to develop an industry cash flow estimate may not be 
adequate for assessing differential impacts among manufacturer 
subgroups. Small manufacturers, niche manufacturers, and manufacturers 
exhibiting a cost structure substantially different from the industry 
average could be affected disproportionately. DOE used the results of 
the industry characterization to group manufacturers exhibiting similar 
characteristics. Consequently, DOE identified small business 
manufacturers as a subgroup for a separate impact analysis.
    For the small business subgroup analysis, DOE applied the small 
business size standards published by the U.S. Small Business 
Administration (``SBA'') to determine whether a company is considered a 
small business. The size standards are codified at 13 CFR part 121. To 
be categorized as a small business under North American Industry 
Classification System (``NAICS'') code 335220, ``Major Household 
Appliance Manufacturing,'' a gas-fired instantaneous water heater 
manufacturer and its affiliates may employ a maximum of 1,500 
employees. The 1,500-employee threshold includes all employees in a 
business's parent company and any other subsidiaries. Based on this 
classification, DOE did not identify any manufacturers that qualify as 
a domestic small business.
    The small business subgroup analysis is discussed in more detail in 
chapter 12 of the final rule TSD. DOE examines the potential impacts of 
this final rule on small business manufacturers in section VI.B of this 
document.
e. Cumulative Regulatory Burden
    One aspect of assessing manufacturer burden involves looking at the 
cumulative impact of multiple DOE standards and the regulatory actions 
of other Federal agencies and States that affect the manufacturers of a 
covered product or equipment. While any one regulation may not impose a 
significant burden on manufacturers, the combined effects of several 
existing or impending regulations may have serious consequences for 
some manufacturers, groups of manufacturers, or an entire industry. 
Multiple regulations affecting the same manufacturer can strain profits 
and lead companies to abandon product lines or markets with lower 
expected future returns than competing products. For these reasons, DOE 
conducts an analysis of cumulative regulatory burden as part of its 
rulemakings pertaining to appliance efficiency.
    For the cumulative regulatory burden analysis, DOE examined 
Federal, product-specific regulations that could affect gas-fired 
instantaneous water heater manufacturers and that take effect 
approximately 3 years before or after the estimated compliance date 
(2027 to 2033). This information is presented in table V.8.

  Table V.8--Compliance Dates and Expected Conversion Expenses of Federal Energy Conservation Standards Affecting Gas-Fired Instantaneous Water Heater
                                                            Original Equipment Manufacturers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Industry
                                                                                Number of OEMs   Approx. standards       Industry      conversion costs/
           Federal Energy Conservation Standard             Number of OEMs *     affected by      compliance year    conversion costs  equipment revenue
                                                                               today's rule **                         ($ millions)           ***
--------------------------------------------------------------------------------------------------------------------------------------------------------
Consumer Pool Heaters 88 FR 34624 (May 30, 2023).........                 20                  3               2028       48.4 (2021$)                1.5
Consumer Boilers [dagger] 88 FR 55128 (August 14, 2023)..                 24                  8               2030       98.0 (2022$)                3.6
Commercial Refrigerators, Refrigerator-Freezers, and                      83                  1               2028      226.4 (2022$)                1.6
 Freezers [dagger] 88 FR 70196 (October 10, 2023)........
Dehumidifiers [dagger] 88 FR 76510 (November 6, 2023)....                 20                  1               2028        6.9 (2022$)                0.4
Consumer Furnaces 88 FR 87502 (December 18, 2023)........                 14                  3               2029      162.0 (2022$)                1.8

[[Page 105268]]

 
Refrigerators, Refrigerator-Freezers, and Freezers 89 FR                  63                  2  [Dagger] 2029 and      830.3 (2022$)                1.3
 3026 (January 17, 2024).................................                                                     2030
Consumer Conventional Cooking Products 89 FR 11434                        35                  1               2028       66.7 (2022$)                0.3
 (February 14, 2024).....................................
Consumer Clothes Dryers 89 FR 18164 (March 12, 2024).....                 19                  2               2028      180.7 (2022$)                1.4
Residential Clothes Washers 89 FR 19026 (March 15, 2024).                 22                  2               2028      320.0 (2022$)                1.8
Dishwashers 89 FR 31398 (April 24, 2024).................                 21                  2               2027      126.9 (2022$)                2.1
Consumer Water Heaters 89 FR 37778 (May 6, 2024).........                 16                  4               2029      239.8 (2022$)                1.9
Miscellaneous Refrigeration Products 89 FR 38762 (May 7,                  49                  1               2029      130.7 (2022$)                2.9
 2024)...................................................
Air-Cooled Unitary Air Conditioners and Heat Pumps 89 FR                   9                  1               2029      288.0 (2022$)                2.1
 44052 (May 20, 2024)....................................
Walk-in Coolers and Freezers [dagger][dagger]............                 87                  1               2028       91.5 (2023$)                0.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
* This column presents the total number of OEMs identified in the energy conservation standard rule that is contributing to cumulative regulatory
  burden.
** This column presents the number of OEMs producing gas-fired instantaneous water heaters that are also listed as OEMs in the identified energy
  conservation standard that is contributing to cumulative regulatory burden.
*** This column presents industry conversion costs as a percentage of product revenue during the conversion period. Industry conversion costs are the
  upfront investments manufacturers must make to sell compliant products/equipment. The revenue used for this calculation is the revenue from just the
  covered product/equipment associated with each row. The conversion period is the timeframe over which conversion costs are made and lasts from the
  publication year of the final rule to the compliance year of the energy conservation standard. The conversion period typically ranges from 3 to 5
  years, depending on the rulemaking.
[dagger] These rulemakings are at the NOPR stage, and all values are subject to change until finalized through publication of a final rule.
[Dagger] For the refrigerators, refrigerator-freezers, and freezers energy conservation standards direct final rule, the compliance year (2029 or 2030)
  varies by product class.
[dagger][dagger] At the time of issuance of the final rule, the WICFs final rule has been issued and is pending publication in the Federal Register.
  Once published, the final rule pertaining to WICFs will be available at: www.regulations.gov/docket/EERE-2017-BT-STD-0009.

3. National Impact Analysis
    This section presents DOE's estimates of the NES and the NPV of 
consumer benefits that would result from each of the TSLs considered as 
potential amended standards.
a. National Energy Savings
    To estimate the energy savings attributable to potential amended 
standards for consumer gas-fired instantaneous water heaters, DOE 
compared their energy consumption under the no-new-standards case to 
their anticipated energy consumption under each TSL. The savings are 
measured over the entire lifetime of products purchased during the 30-
year period that begins in the year of anticipated compliance with 
amended standards (2030-2059). Table V.9 presents DOE's projections of 
the NES for each TSL considered for consumer gas-fired instantaneous 
water heaters. The savings were calculated using the approach described 
in section IV.H.2 of this document.

  Table V.9--Cumulative National Energy Savings for Consumer Gas-Fired Instantaneous Water Heaters; 30 Years of
                                                    Shipments
                                                   [2030-2059]
----------------------------------------------------------------------------------------------------------------
                                                                       Trial standard level
                                                 ---------------------------------------------------------------
                                                         1               2               3               4
----------------------------------------------------------------------------------------------------------------
                                                                               quads
----------------------------------------------------------------------------------------------------------------
                                                 Primary Energy
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            0.32            0.52            0.76            0.97
----------------------------------------------------------------------------------------------------------------
                                                   FFC Energy
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            0.35            0.58            0.85            1.07
----------------------------------------------------------------------------------------------------------------


[[Page 105269]]

    OMB Circular A-4 \192\ requires agencies to present analytical 
results, including separate schedules of the monetized benefits and 
costs that show the type and timing of benefits and costs. Circular A-4 
also directs agencies to consider the variability of key elements 
underlying the estimates of benefits and costs. For this rulemaking, 
DOE undertook a sensitivity analysis using 9 years, rather than 30 
years, of product shipments. The choice of a 9-year period is a proxy 
for the timeline in EPCA for the review of certain energy conservation 
standards and potential revision of and compliance with such revised 
standards.\193\ The review timeframe established in EPCA is generally 
not synchronized with the product lifetime, product manufacturing 
cycles, or other factors specific to consumer gas-fired instantaneous 
water heaters. Thus, such results are presented for informational 
purposes only and are not indicative of any change in DOE's analytical 
methodology. The NES sensitivity analysis results based on a 9-year 
analytical period are presented in table V.10. The impacts are counted 
over the lifetime of consumer gas-fired instantaneous water heaters 
purchased during the period 2030-2038.
---------------------------------------------------------------------------

    \192\ U.S. Office of Management and Budget. Circular A-4: 
Regulatory Analysis. Available at: www.whitehouse.gov/omb/information-for-agencies/circulars (last accessed August 29, 2024). 
DOE used the prior version of Circular A-4 (September 17, 2003) in 
accordance with the effective date of the November 9, 2023 version. 
Available at: www.whitehouse.gov/wp-content/uploads/legacy_drupal_files/omb/circulars/A4/a-4.pdf (last accessed August 
29, 2024).
    \193\ EPCA requires DOE to review its standards at least once 
every 6 years, and requires, for certain products, a 3-year period 
after any new standard is promulgated before compliance is required, 
except that in no case may any new standards be required within 6 
years of the compliance date of the previous standards. (42 U.S.C. 
6295(m)) While adding a 6-year review to the 3-year compliance 
period adds up to 9 years, DOE notes that it may undertake reviews 
at any time within the 6-year period and that the 3-year compliance 
date may yield to the 6-year backstop. A 9-year analysis period may 
not be appropriate given the variability that occurs in the timing 
of standards reviews and the fact that for some products, the 
compliance period is 5 years rather than 3 years.

  Table V.10--Cumulative National Energy Savings for Consumer Gas-Fired Instantaneous Water Heaters; 9 Years of
                                                    Shipments
                                                   [2030-2038]
----------------------------------------------------------------------------------------------------------------
                                                                       Trial standard level
                                                 ---------------------------------------------------------------
                                                         1               2               3               4
----------------------------------------------------------------------------------------------------------------
                                                                               quads
----------------------------------------------------------------------------------------------------------------
                                                 Primary Energy
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            0.10            0.16            0.21            0.27
----------------------------------------------------------------------------------------------------------------
                                                   FFC Energy
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            0.11            0.17            0.24            0.30
----------------------------------------------------------------------------------------------------------------

b. Net Present Value of Consumer Costs and Benefits
    DOE estimated the cumulative NPV of the total costs and savings for 
consumers that would result from the TSLs considered for consumer gas-
fired instantaneous water heaters. In accordance with OMB Circular A-4, 
DOE calculated NPV using both a 7-percent and a 3-percent real discount 
rate. Table V.11 shows the consumer NPV results with impacts counted 
over the lifetime of products purchased during the period 2030-2059.

    Table V.11--Cumulative Net Present Value of Consumer Benefits for Consumer Gas-Fired Instantaneous Water
                                         Heaters; 30 Years of Shipments
                                                   [2030-2059]
----------------------------------------------------------------------------------------------------------------
                                                                       Trial standard level
                  Discount rate                  ---------------------------------------------------------------
                                                         1               2               3               4
----------------------------------------------------------------------------------------------------------------
                                                                           billion 2023$
----------------------------------------------------------------------------------------------------------------
                                             3 percent discount rate
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            1.26            3.06            4.89            4.50
----------------------------------------------------------------------------------------------------------------
                                             7 percent discount rate
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            0.24            0.87            1.45            0.98
----------------------------------------------------------------------------------------------------------------

    The NPV results based on the aforementioned 9-year analytical 
period are presented in table V.12. The impacts are counted over the 
lifetime of products purchased during the period 2030-2038. As 
mentioned previously, such results are presented for informational 
purposes only and are not indicative of any change in DOE's analytical 
methodology or decision criteria.

[[Page 105270]]



    Table V.12--Cumulative Net Present Value of Consumer Benefits for Consumer Gas-Fired Instantaneous Water
                                          Heaters; 9 Years of Shipments
                                                   [2030-2038]
----------------------------------------------------------------------------------------------------------------
                                                                       Trial standard level
                  Discount rate                  ---------------------------------------------------------------
                                                         1               2               3               4
----------------------------------------------------------------------------------------------------------------
                                                                           billion 2023$
----------------------------------------------------------------------------------------------------------------
                                             3 percent discount rate
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            0.44            1.09            1.66            1.50
----------------------------------------------------------------------------------------------------------------
                                             7 percent discount rate
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heaters...........            0.10            0.41            0.66            0.43
----------------------------------------------------------------------------------------------------------------

    The previous results reflect the use of a default trend to estimate 
the change in price for consumer gas-fired instantaneous water heaters 
over the analysis period (see section IV.F.1 of this document). DOE 
also conducted a sensitivity analysis that considered one scenario with 
a lower rate of price decline than the reference case and one scenario 
with a higher rate of price decline than the reference case. The 
results of these alternative cases are presented in appendix 10C of the 
final rule TSD. In the high-price-decline case, the NPV of consumer 
benefits is higher than in the default case. In the low-price-decline 
case, the NPV of consumer benefits is lower than in the default case.
c. Indirect Impacts on Employment
    DOE estimates that amended energy conservation standards for 
consumer gas-fired instantaneous water heaters will reduce energy 
expenditures for consumers of those products, with the resulting net 
savings being redirected to other forms of economic activity. These 
expected shifts in spending and economic activity could affect the 
demand for labor. As described in section IV.N of this document, DOE 
used an input/output model of the U.S. economy to estimate indirect 
employment impacts of the TSLs that DOE considered. There are 
uncertainties involved in projecting employment impacts, especially 
changes in the later years of the analysis. Therefore, DOE generated 
results for near-term timeframes (2030-2034), where these uncertainties 
are reduced.
    The results suggest that the adopted standards are likely to have a 
negligible impact on the net demand for labor in the economy. The net 
change in jobs is so small that it would be imperceptible in national 
labor statistics and might be offset by other, unanticipated effects on 
employment. Chapter 16 of the final rule TSD presents detailed results 
regarding anticipated indirect employment impacts.
4. Impact on Utility or Performance of Products
    As discussed in section III.F.1.d of this document, DOE has 
concluded that the standards adopted in this final rule will not lessen 
the utility or performance of the gas-fired instantaneous water heaters 
under consideration in this rulemaking. Manufacturers of these products 
currently offer units that meet or exceed the adopted standards.
5. Impact of Any Lessening of Competition
    DOE considered any lessening of competition that would be likely to 
result from new or amended standards. As discussed in section III.F.1.e 
of this document, EPCA directs the Attorney General of the United 
States (``Attorney General'') to determine the impact, if any, of any 
lessening of competition likely to result from a proposed standard and 
to transmit such determination in writing to the Secretary within 60 
days of the publication of a proposed rule, together with an analysis 
of the nature and extent of the impact. To assist the Attorney General 
in making this determination, DOE provided the Department of Justice 
(``DOJ'') with copies of the NOPR and the TSD for review. In its 
assessment letter responding to DOE, DOJ concluded that the proposed 
energy conservation standards for gas-fired instantaneous water heaters 
are unlikely to substantially lessen competition. DOE is publishing the 
Attorney General's assessment at the end of this final rule.
6. Need of the Nation To Conserve Energy
    Enhanced energy efficiency, where economically justified, improves 
the Nation's energy security, strengthens the economy, and reduces the 
environmental impacts (costs) of energy production. Chapter 15 in the 
final rule TSD presents the estimated impacts on electricity-generating 
capacity, relative to the no-new-standards case, for the TSLs that DOE 
considered in this rulemaking.
    Energy conservation resulting from potential energy conservation 
standards for gas-fired instantaneous water heaters is expected to 
yield environmental benefits in the form of reduced emissions of 
certain air pollutants and GHG. Table V.13 provides DOE's estimate of 
cumulative emissions reductions expected to result from the TSLs 
considered in this rulemaking. In the case of mercury, negative values 
(denoted in parenthesis) indicate a slight increase in emissions due to 
slightly higher electricity use at those TSLs. The emissions were 
calculated using the multipliers discussed in section IV.K of this 
document. DOE reports annual emissions reductions for each TSL in 
chapter 13 of the final rule TSD.

[[Page 105271]]



 Table V.13--Cumulative Emissions Reduction for Gas-Ffired Instantaneous Water Heaters Shipped During the Period
                                                    2030-2059
----------------------------------------------------------------------------------------------------------------
                                                                       Trial standard level
                                                 ---------------------------------------------------------------
                                                         1               2               3               4
----------------------------------------------------------------------------------------------------------------
                                    Electric Power Sector and Site Emissions
----------------------------------------------------------------------------------------------------------------
CO2 (million metric tons).......................              17              28              40              47
CH4 (thousand tons).............................             0.3             0.6             0.8             1.1
N2O (thousand tons).............................            0.03            0.06            0.08            0.11
SO2 (thousand tons).............................            0.04            0.10            0.17            0.75
NOX (thousand tons).............................              15              25              35              41
Hg (tons).......................................        (0.0004)        (0.0004)        (0.0003)          0.0035
----------------------------------------------------------------------------------------------------------------
                                               Upstream Emissions
----------------------------------------------------------------------------------------------------------------
CO2 (million metric tons).......................               2               4               6               7
CH4 (thousand tons).............................             244             397             575             669
N2O (thousand tons).............................            0.00            0.01            0.01            0.01
SO2 (thousand tons).............................            0.01            0.02            0.03            0.04
NOX (thousand tons).............................              38              62              89             104
Hg (tons).......................................        (0.0000)        (0.0000)        (0.0000)          0.0000
----------------------------------------------------------------------------------------------------------------
                                               Total FFC Emissions
----------------------------------------------------------------------------------------------------------------
CO2 (million metric tons).......................              19              32              46              54
CH4 (thousand tons).............................             244             398             576             671
N2O (thousand tons).............................            0.04            0.06            0.09            0.12
SO2 (thousand tons).............................            0.05            0.12            0.20            0.79
NOX (thousand tons).............................              53              86             125             145
Hg (tons).......................................        (0.0004)        (0.0004)        (0.0003)          0.0035
----------------------------------------------------------------------------------------------------------------
Note: Totals may not equal sums due to rounding. Negative values refer to an increase in emissions.

    As part of the analysis for this rule, DOE estimated monetary 
benefits likely to result from the reduced emissions of CO2 
that DOE estimated for each of the considered TSLs for gas-fired 
instantaneous water heaters. Section IV.L of this document discusses 
the estimated SC-CO2 values that DOE used. Table V.14 and 
table V.15 present the value of CO2 emissions reduction at 
each TSL for each of the SC-CO2 cases. The time-series of 
annual values is presented for the selected TSL in chapter 14 of the 
final rule TSD.

  Table V.14--Present Value of CO2 Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped During
                                              the Period 2030-2059
                                           [2023 estimates of SC-GHG]
----------------------------------------------------------------------------------------------------------------
                                                                          Near-term Ramsey discount rate
                               TSL                               -----------------------------------------------
                                                                       2.5%            2.0%            1.5%
----------------------------------------------------------------------------------------------------------------
                                                                                  (billion 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................................             2.2             3.8             6.8
2...............................................................             3.5             6.1            11.0
3...............................................................             5.1             8.8            15.9
4...............................................................             6.0            10.3            18.7
----------------------------------------------------------------------------------------------------------------


  Table V.15--Present Value of CO2 Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped During
                                              the Period 2030-2059
                                         [2021 interim SC-GHG estimates]
----------------------------------------------------------------------------------------------------------------
                                                                            SC-CO2 Case
                                                 ---------------------------------------------------------------
                                                                   Discount rate and statistics
                       TSL                       ---------------------------------------------------------------
                                                                                                     3%  95th
                                                    5%  Average     3%  Average    2.5%  Average    percentile
----------------------------------------------------------------------------------------------------------------
                                                                          (billion 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................             0.2             0.7             1.1             2.2
2...............................................             0.3             1.2             1.8             3.5
3...............................................             0.4             1.7             2.6             5.1

[[Page 105272]]

 
4...............................................             0.4             2.0             3.1             5.9
----------------------------------------------------------------------------------------------------------------

    As discussed in section IV.L.2, DOE estimated the climate benefits 
likely to result from the reduced emissions of methane and 
N2O that DOE estimated for each of the considered TSLs for 
gas-fired instantaneous water heaters. Table V.16 and table V.17 
present the value of the CH4 emissions reduction at each 
TSL, and table V.18 and table V.19 present the value of the 
N2O emissions reduction at each TSL. The time-series of 
annual values is presented for the selected TSL in chapter 14 of the 
final rule TSD.

   Table V.16--Present Value of Methane Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped
                                           During the Period 2030-2059
                                           [2023 estimates of SC-GHG]
----------------------------------------------------------------------------------------------------------------
                                                                          Near-term Ramsey discount rate
                               TSL                               -----------------------------------------------
                                                                       2.5%            2.0%            1.5%
----------------------------------------------------------------------------------------------------------------
                                                                                  (billion 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................................             0.4             0.6             0.9
2...............................................................             0.7             1.0             1.4
3...............................................................             1.0             1.4             2.0
4...............................................................             1.2             1.6             2.4
----------------------------------------------------------------------------------------------------------------


   Table V.17--Present Value of Methane Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped
                                           During the Period 2030-2059
                                         [2021 Interim SC-GHG estimates]
----------------------------------------------------------------------------------------------------------------
                                                                            SC-CH4 Case
                                                 ---------------------------------------------------------------
                                                                   Discount rate and statistics
                       TSL                       ---------------------------------------------------------------
                                                                                                     3%  95th
                                                    5%  Average     3%  Average    2.5%  Average    percentile
----------------------------------------------------------------------------------------------------------------
                                                                          (billion 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................             0.1             0.3             0.4             0.8
2...............................................             0.2             0.5             0.7             1.3
3...............................................             0.2             0.7             1.0             1.8
4...............................................             0.3             0.8             1.1             2.1
----------------------------------------------------------------------------------------------------------------


Table V.18--Present Value of Nitrous Oxide Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped
                                           During the Period 2030-2059
                                           [2023 estimates of SC-GHG]
----------------------------------------------------------------------------------------------------------------
                                                                          Near-term Ramsey discount rate
                               TSL                               -----------------------------------------------
                                                                       2.5%            2.0%            1.5%
----------------------------------------------------------------------------------------------------------------
                                                                                  (billion 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................................           0.001           0.002           0.003
2...............................................................           0.002           0.003           0.006
3...............................................................           0.003           0.005           0.008
4...............................................................           0.004           0.006           0.011
----------------------------------------------------------------------------------------------------------------


[[Page 105273]]


Table V.19--Present Value of Nitrous Oxide Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped
                                           During the Period 2030-2059
                                         [2021 Interim SC-GHG estimates]
----------------------------------------------------------------------------------------------------------------
                                                                            SC-N2O Case
                                                 ---------------------------------------------------------------
                                                                   Discount rate and statistics
                       TSL                       ---------------------------------------------------------------
                                                                                                     3%  95th
                                                    5%  Average     3%  Average    2.5%  Average    percentile
----------------------------------------------------------------------------------------------------------------
                                                                          (billion 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................          0.0001          0.0005          0.0008          0.0014
2...............................................          0.0002          0.0008          0.0013          0.0022
3...............................................          0.0003          0.0012          0.0019          0.0032
4...............................................          0.0004          0.0016          0.0025          0.0043
----------------------------------------------------------------------------------------------------------------

    DOE is well aware that scientific and economic knowledge about the 
contribution of CO2 and other GHG emissions to changes in 
the future global climate and the potential resulting damages to the 
global and U.S. economy continues to evolve rapidly. DOE, together with 
other Federal agencies, will continue to review methodologies for 
estimating the monetary value of reductions in CO2 and other 
GHG emissions. This ongoing review will consider the comments on this 
subject that are part of the public record for this and other 
rulemakings, as well as other methodological assumptions and issues. 
DOE notes, however, that the adopted standards would be economically 
justified even without inclusion of monetized benefits of reduced GHG 
emissions.
    DOE also estimated the monetary value of the economic benefits 
associated with NOX and SO2 emissions reductions 
anticipated to result from the considered TSLs for gas-fired 
instantaneous water heaters. The dollar-per-ton values that DOE used 
are discussed in section IV.L of this document. Table V.20 presents the 
present value for NOX emissions reduction for each TSL 
calculated using 7-percent and 3-percent discount rates, and table V.21 
presents similar results for SO2 emissions reductions. The 
results in these tables reflect application of EPA's low dollar-per-ton 
values, which DOE used to be conservative. The time-series of annual 
values is presented for the selected TSL in chapter 14 of the final 
rule TSD.

  Table V.20--Present Value of NOX Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped During
                                              the Period 2030-2059
----------------------------------------------------------------------------------------------------------------
                                                                                    7% Discount     3% Discount
                                       TSL                                             rate            rate
----------------------------------------------------------------------------------------------------------------
                                                                                          (million 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................................................             554           1,650
2...............................................................................             892           2,675
3...............................................................................           1,260           3,830
4...............................................................................           1,468           4,481
----------------------------------------------------------------------------------------------------------------


  Table V.21--Present Value of SO2 Emissions Reduction for Gas-Fired Instantaneous Water Heaters Shipped During
                                              the Period 2030-2059
----------------------------------------------------------------------------------------------------------------
                                                                                    7% Discount     3% Discount
                                       EL                                              rate            rate
----------------------------------------------------------------------------------------------------------------
                                                                                          (million 2023$)
----------------------------------------------------------------------------------------------------------------
1...............................................................................            0.04            0.22
2...............................................................................             0.9             2.9
3...............................................................................             1.9             5.9
4...............................................................................            12.9            39.1
----------------------------------------------------------------------------------------------------------------

    Not all the public health and environmental benefits from the 
reduction of GHG, NOx, and SO2 are captured in the values 
above, and additional unquantified benefits from the reductions of 
those pollutants as well as from the reduction of direct PM and other 
co-pollutants may be significant. DOE has not included monetary impact 
of the change in Hg emissions because the change is very small.
7. Other Factors
    The Secretary, in determining whether a standard is economically 
justified, may consider any other factors that the Secretary deems to 
be relevant. (42 U.S.C. 6295(o)(2)(B)(i)(VII)) No other factors were 
considered in this analysis.
8. Summary of Economic Impacts
    Table V.22 and table V.23 present the NPV values that result from 
adding the estimates of the economic benefits resulting from reduced 
GHG and NOX and SO2 emissions to the NPV of 
consumer benefits calculated for each TSL considered in this 
rulemaking. The consumer benefits are domestic U.S.

[[Page 105274]]

monetary savings that occur as a result of purchasing the covered 
products and are measured for the lifetime of products shipped during 
the period 2030-2059. The climate benefits associated with reduced GHG 
emissions resulting from the adopted standards are global benefits, and 
are also calculated based on the lifetime of gas-fired instantaneous 
water heaters shipped during the period 2030-2059.

          Table V.22--Consumer NPV Combined with Present Value of Climate Benefits and Health Benefits
                                             [2023 SC-GHG estimates]
----------------------------------------------------------------------------------------------------------------
          Category of climate benefits                 TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
                   Using 3% Discount Rate for Consumer NPV and Health Benefits (billion 2023$)
----------------------------------------------------------------------------------------------------------------
2.5% Near-term Ramsey DR........................             5.5            10.0            14.8            16.2
2.0% Near-term Ramsey DR........................             7.3            12.8            18.9            21.0
1.5% Near-term Ramsey DR........................            10.6            18.2            26.7            30.1
----------------------------------------------------------------------------------------------------------------
                   Using 7% Discount Rate for Consumer NPV and Health Benefits (billion 2023$)
----------------------------------------------------------------------------------------------------------------
2.5% Near-term Ramsey DR........................             3.4             6.0             8.8             9.6
2.0% Near-term Ramsey DR........................             5.1             8.9            12.9            14.4
1.5% Near-term Ramsey DR........................             8.4            14.2            20.7            23.5
----------------------------------------------------------------------------------------------------------------


          Table V.23--Consumer NPV Combined with Present Value of Climate Benefits and Health Benefits
                                         [2021 Interim SC-GHG estimates]
----------------------------------------------------------------------------------------------------------------
          Category of climate benefits                 TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
                   Using 3% Discount Rate for Consumer NPV and Health Benefits (billion 2023$)
----------------------------------------------------------------------------------------------------------------
5% Average SC-GHG case..........................             3.2             6.2             9.3             9.7
3% Average SC-GHG case..........................             3.9             7.4            11.1            11.8
2.5% Average SC-GHG case........................             4.5             8.3            12.3            13.3
3% 95th percentile SC-GHG case..................             5.9            10.6            15.6            17.1
----------------------------------------------------------------------------------------------------------------
                   Using 7% Discount Rate for Consumer NPV and Health Benefits (billion 2023$)
----------------------------------------------------------------------------------------------------------------
5% Average SC-GHG case..........................             1.1             2.2             3.3             3.2
3% Average SC-GHG case..........................             1.8             3.4             5.1             5.2
2.5% Average SC-GHG case........................             2.4             4.3             6.3             6.7
3% 95th percentile SC-GHG case..................             3.8             6.6             9.6            10.5
----------------------------------------------------------------------------------------------------------------

C. Conclusion

    When considering new or amended energy conservation standards, the 
standards that DOE adopts for any type (or class) of covered product 
must be designed to achieve the maximum improvement in energy 
efficiency that the Secretary determines is technologically feasible 
and economically justified. (42 U.S.C. 6295(o)(2)(A)) In determining 
whether a standard is economically justified, the Secretary must 
determine whether the benefits of the standard exceed its burdens by, 
to the greatest extent practicable, considering the seven statutory 
factors discussed previously. (42 U.S.C. 6295(o)(2)(B)(i)) The new or 
amended standard must also result in significant conservation of 
energy. (42 U.S.C. 6295(o)(3)(B)).
    For this final rule, DOE considered the impacts of amended 
standards for gas-fired instantaneous water heaters at each TSL, 
beginning with the maximum technologically feasible level, to determine 
whether that level was economically justified. Where the max-tech level 
was not justified, DOE then considered the next most efficient level 
and undertook the same evaluation until it reached the highest 
efficiency level that is both technologically feasible and economically 
justified and saves a significant amount of energy.
    To aid the reader as DOE discusses the benefits and/or burdens of 
each TSL, tables in this section present a summary of the results of 
DOE's quantitative analysis for each TSL. In addition to the 
quantitative results presented in the tables, DOE also considers other 
burdens and benefits that affect economic justification. These include 
the impacts on identifiable subgroups of consumers who may be 
disproportionately affected by a national standard and impacts on 
employment.
    DOE also notes that the economics literature provides a wide-
ranging discussion of how consumers trade off upfront costs and energy 
savings in the absence of government intervention. Much of this 
literature attempts to explain why consumers appear to undervalue 
energy efficiency improvements. There is evidence that consumers 
undervalue future energy savings as a result of: (1) a lack of 
information; (2) a lack of sufficient salience of the long-term or 
aggregate benefits; (3) a lack of sufficient savings to warrant 
delaying or altering purchases; (4) excessive focus on the short term, 
in the form of inconsistent weighting of future energy cost savings 
relative to available returns on other investments; (5) computational 
or other difficulties associated with the evaluation of relevant 
tradeoffs; and (6) a divergence in incentives (for example, between 
renters and owners, or builders and purchasers). Having less than 
perfect foresight and a high degree of uncertainty about the future, 
consumers may trade off these types of investments at a higher than 
expected rate between current consumption and uncertain future energy 
cost savings.
    In DOE's current regulatory analysis, potential changes in the 
benefits and costs of a regulation due to changes in consumer purchase 
decisions are included in two ways. First, if

[[Page 105275]]

consumers forgo the purchase of a product in the standards case, this 
decreases sales for product manufacturers, and the impact on 
manufacturers attributed to lost revenue is included in the MIA. 
Second, DOE accounts for energy savings attributable only to products 
actually used by consumers in the standards case; if a standard 
decreases the number of products purchased by consumers, this decreases 
the potential energy savings from an energy conservation standard. DOE 
provides estimates of shipments and changes in the volume of product 
purchases in chapter 9 of the final rule TSD. However, DOE's current 
analysis does not explicitly control for heterogeneity in consumer 
preferences, preferences across subcategories of products or specific 
features, or consumer price sensitivity variation according to 
household income.\194\
---------------------------------------------------------------------------

    \194\ P.C. Reiss and M.W. White. Household Electricity Demand, 
Revisited. Review of Economic Studies. 2005. 72(3): pp. 853-883. 
doi: 10.1111/0034-6527.00354.
---------------------------------------------------------------------------

    While DOE is not prepared at present to provide a fuller 
quantifiable framework for estimating the benefits and costs of changes 
in consumer purchase decisions due to an energy conservation standard, 
DOE is committed to developing a framework that can support empirical 
quantitative tools for improved assessment of the consumer welfare 
impacts of appliance standards. DOE has posted a paper that discusses 
the issue of consumer welfare impacts of appliance energy conservation 
standards, and potential enhancements to the methodology by which these 
impacts are defined and estimated in the regulatory process.\195\ DOE 
welcomes comments on how to more fully assess the potential impact of 
energy conservation standards on consumer choice and how to quantify 
this impact in its regulatory analysis in future rulemakings. General 
considerations for consumer welfare and preferences as well as the 
special cases of complementary goods are areas DOE plans to explore in 
a forthcoming RFI related to the agency's updates to its overall 
analytic framework.
---------------------------------------------------------------------------

    \195\ Sanstad, A. H. Notes on the Economics of Household Energy 
Consumption and Technology Choice. 2010. Lawrence Berkeley National 
Laboratory. Available at: www1.eere.energy.gov/buildings/appliance_standards/pdfs/consumer_ee_theory.pdf (last accessed 
September 12, 2024).
---------------------------------------------------------------------------

1. Benefits and Burdens of TSLs Considered for Gas-fired Instantaneous 
Water Heater Standards
    Table V.24 and table V.25 summarize the quantitative impacts 
estimated for each TSL for gas-fired instantaneous water heaters with 
effective storage volumes less than 2 gallons and with rated inputs 
greater than or equal to 50,000 Btu/h. The national impacts are 
measured over the lifetime of gas-fired instantaneous water heaters 
purchased during the 30-year period that begins in the anticipated year 
of compliance with amended standards (2030-2059). The energy savings, 
emissions reductions, and value of emissions reductions refer to full-
fuel-cycle results. DOE is presenting monetized benefits of GHG 
emissions reductions in accordance with the applicable Executive 
Orders, and DOE would reach the same conclusion presented in this final 
rule in the absence of the estimated benefits from reductions in GHG 
emissions, including the estimates published by EPA in December 2023 or 
the Interim Estimates presented by the Interagency Working Group in 
2021. The efficiency levels contained in each TSL are described in 
section V.A of this document.

   Table V.24--Summary of Analytical Results for Gas-Fired Instantaneous Water Heaters TSLs: National Impacts
----------------------------------------------------------------------------------------------------------------
                    Category                           TSL 1           TSL 2           TSL 3           TSL 4
----------------------------------------------------------------------------------------------------------------
                                     Cumulative FFC National Energy Savings
----------------------------------------------------------------------------------------------------------------
Quads...........................................            0.35            0.58            0.85            1.07
----------------------------------------------------------------------------------------------------------------
                                       Cumulative FFC Emissions Reductions
----------------------------------------------------------------------------------------------------------------
CO2 (million metric tons).......................              19              32              46              54
CH4 (thousand tons).............................             244             398             576             671
N2O (thousand tons).............................            0.04            0.06            0.09            0.12
SO2 (thousand tons).............................            0.05            0.12            0.20            0.79
NOX (thousand tons).............................              53              86             125             145
Hg (tons).......................................        (0.0004)        (0.0004)        (0.0003)          0.0035
----------------------------------------------------------------------------------------------------------------
                      Present Value of Benefits and Costs (3% discount rate, billion 2023$)
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................             2.6             4.5             6.7             8.6
Climate Benefits * (2023 SC-GHG estimates)......             4.4             7.1            10.2            12.0
Climate Benefits * (2021 interim SC-GHG                      1.0             1.7             2.4             2.8
 estimates).....................................
Health Benefits **..............................             1.6             2.7             3.8             4.5
    Total Benefits [dagger] (2023 SC-GHG                     8.6            14.3            20.8            25.1
     estimates).................................
    Total Benefits [dagger] (2021 interim SC-GHG             5.3             8.9            12.9            15.9
     estimates).................................
                                                 ---------------------------------------------------------------
Consumer Incremental Product Costs [Dagger].....             1.4             1.5             1.8             4.1
Consumer Net Benefits...........................             1.3             3.1             4.9             4.5
    Total Net Benefits [dagger] (2023 SC-GHG                 7.3            12.8            18.9            21.0
     estimates).................................
    Total Net Benefits [dagger] (2021 interim SC-            3.9             7.4            11.1            11.8
     GHG estimates).............................
----------------------------------------------------------------------------------------------------------------
                      Present Value of Benefits and Costs (7% discount rate, billion 2023$)
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................             1.0             1.7             2.4             3.1
Climate Benefits * (2023 SC-GHG estimates)......             4.4             7.1            10.2            12.0
Climate Benefits * (2021 interim SC-GHG                      1.0             1.7             2.4             2.8
 estimates).....................................
Health Benefits **..............................             0.6             0.9             1.3             1.5

[[Page 105276]]

 
    Total Benefits [dagger] (2023 SC-GHG                     5.9             9.6            13.9            16.5
     estimates).................................
    Total Benefits [dagger] (2021 interim SC-GHG             2.5             4.2             6.0             7.3
     estimates).................................
                                                 ---------------------------------------------------------------
Consumer Incremental Product Costs [Dagger].....             0.7             0.8             1.0             2.1
                                                 ---------------------------------------------------------------
Consumer Net Benefits...........................             0.2             0.9             1.5             1.0
    Total Net Benefits [dagger] (2023 SC-GHG                 5.1             8.9            12.9            14.4
     estimates).................................
    Total Net Benefits [dagger] (2021 interim SC-            1.8             3.4             5.1             5.2
     GHG estimates).............................
----------------------------------------------------------------------------------------------------------------
Note: This table presents the costs and benefits associated with gas-fired instantaneous water heaters shipped
  during the period 2030-2059. These results include benefits to consumers which accrue after 2059 from the
  products shipped during the period 2030-2059. Parentheses indicate negative (-) values.
* Climate benefits are calculated using different estimates of the SC-CO2, SC-CH4 and SC-N2O. Climate benefits
  are estimated using two separate sets of estimates of the social cost for each greenhouse gas, an updated set
  published in 2023 by the Environmental Protection Agency (EPA) (``2023 SC-GHG'') and the interim set of
  estimates used in the NOPR which were published in 2021 by the Interagency Working Group on the SC-GHG (IWG)
  (``2021 Interim SC-GHG'') (see section IV.L of this document). For presentational purposes of this table, the
  climate benefits associated with the average SC-GHG at a 2-percent near-term Ramsey discount rate are shown
  for the 2023 SC-GHG estimates, and the climate benefits associated with the average SC-GHG at a 3 percent
  discount rate are shown for the 2021 interim SC-GHG estimates.
** Health benefits are calculated using benefit-per-ton values for NOX and SO2. DOE is currently only monetizing
  (for NOX and SO2) PM2.5 precursor health benefits and (for NOX) ozone precursor health benefits, but will
  continue to assess the ability to monetize other effects such as health benefits from reductions in direct
  PM2.5 emissions. Table 5 of the EPA's Estimating the Benefit per Ton of Reducing PM2.5 Precursors from 21
  Sectors TSD provides a summary of the health impact endpoints quantified in the analysis. See section IV.L of
  this document for more details.
[dagger] Total and net benefits include consumer, climate, and health benefits. For presentation purposes, total
  and net benefits for both the 3-percent and 7-percent cases are presented using the average SC-GHG with 2-
  percent near-term Ramsey discount rate for the 2023 estimate and the average SC-GHG with 3-percent discount
  rate for the 2021 interim SC-GHG estimate.
[Dagger] Costs include incremental equipment costs as well as installation costs.


               Table V.25--Summary of Analytical Results for Gas-Fired Instantaneous Water Heater TSLs: Manufacturer and Consumer Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                            Category                                      TSL 1                 TSL 2                 TSL 3                 TSL 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Manufacturer Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry NPV (million 2023$) (No-new-standards case INPV =          1,171.1 to 1,234.0    1,160.2 to 1,234.4    1,132.1 to 1,217.6    1,119.5 to 1,275.2
 1,193.9).......................................................
Industry NPV (% change).........................................          (1.9) to 3.4          (2.8) to 3.4          (5.2) to 2.0          (6.2) to 6.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Consumer Average LCC Savings (2023$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heater............................                   (1)                   112                    90                    39
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Consumer Simple PBP (years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heater............................                  12.6                   8.9                   8.3                  10.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Percent of Consumers that Experience a Net Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heater............................                  17.5                  15.2                  25.0                  56.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Parentheses indicate negative (-) values.

    DOE first considered TSL 4, which represents the max-tech 
efficiency level analyzed for gas-fired instantaneous water heaters 
with current UEF-based standards. At TSL 4, the design option pathway 
includes the use of high-efficiency flat-plate condensing heat 
exchangers and fully modulating burners. TSL 4 would require extensive 
changes to the way manufacturers currently produce gas-fired 
instantaneous water heaters. At TSL 4, approximately 8 percent of 
shipments are expected to meet the required efficiency levels by 2030 
in the no-new-standards case; therefore, a significant ramp-up in 
manufacturing capacity would be needed to support the market 
transition.
    TSL 4 would save an estimated 1.07 quads of energy, an amount DOE 
considers significant. Under TSL 4, the NPV of consumer benefit would 
be $0.98 billion using a discount rate of 7 percent, and $4.50 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 4 are 54 Mt of 
CO2, 671 thousand tons of CH4, 0.12 thousand tons 
of N2O, 145 thousand tons of NOX, 0.79 thousand 
tons of SO2, and 0.0035 tons of Hg. The estimated monetary 
value of the climate benefits from reduced GHG emissions at TSL 4 is 
$12.0 billion (associated with the average SC-GHG at a 2-percent near 
Ramsey discount rate using the 2023 SC-GHG estimates) or $2.8 billion 
(associated with the average SC-GHG at a 3-percent discount rate using 
the 2021 interim SC-GHG estimates). The estimated monetary value of the 
health benefits from reduced SO2 and NOX 
emissions at TSL 4 is $1.5 billion using a 7-percent discount rate and 
$4.5 billion using a 3-percent discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health benefits from reduced SO2 and NOX 
emissions, and the 2-percent near-term Ramsey discount rate case or the 
3-

[[Page 105277]]

percent discount rate case for climate benefits from reduced GHG 
emissions, the estimated total NPV at TSL 4 is $14.4 billion (using the 
2023 SC-GHG estimates) or $5.2 billion (using the 2021 interim SC-GHG 
estimates). Using a 3-percent discount rate for consumer benefits and 
costs and health benefits from reduced NOX and 
SO2 emissions, and the 2-percent near-term Ramsey discount 
rate case or the 3-percent discount rate case for climate benefits from 
reduced GHG emissions, the estimated total NPV at TSL 4 is $21.0 
billion (using the 2023 SC-GHG estimates) or $11.8 billion (using the 
2021 interim SC-GHG estimates). The estimated total NPV is provided for 
additional information, however DOE primarily relies upon the NPV of 
consumer benefits when determining whether a proposed standard level is 
economically justified.
    At TSL 4, consumers will experience an average LCC savings of $39, 
which includes the cost of purchasing and installing a more expensive 
model with fully modulating burner technology. The fraction of 
consumers experiencing a net LCC cost is 56.2 percent.
    At TSL 4, the projected change in INPV ranges from a decrease of 
$74.5 million to an increase of $81.2 million, which corresponds to a 
decrease of 6.2 percent and an increase of 6.8 percent, respectively. 
The range of impacts is driven primarily by the ability of 
manufacturers to recover their investments. DOE estimates that industry 
would need to invest $60.1 million to comply with standards set at TSL 
4. At this level, given the greater complexity and assembly time of 
max-tech models, most manufacturers would need to add production lines 
to meet demand, which would require large capital investments and 
updates to the factory floor. The investment required to add production 
capacity would vary by manufacturer as it depends on floor space 
availability in and around existing manufacturing plants. Manufacturers 
would also need to upgrade their facilities to accommodate the 
production of models with large, high-efficiency condensing heat 
exchangers and fully modulating burners. DOE understands that 
implementing larger, improved condensing heat exchanger designs would 
add a significant amount of complexity to the manufacturing process. 
Feedback from confidential interviews and public comments indicate that 
it would require notable investment to incorporate fully modulating 
burners into their gas-fired instantaneous water heater designs. Of the 
12 gas-fired instantaneous water heater OEMs, five OEMs offer 19 models 
that meet TSL 4 (which represents approximately 14 percent of gas-fired 
instantaneous water heater basic model listings).
    The Secretary concludes that at TSL 4 for gas-fired instantaneous 
water heaters, the benefits of energy savings, positive NPV of consumer 
benefits, emissions reductions, and estimated monetary value of the 
emissions reductions would be outweighed by economic impacts to 
manufacturers (driven by the ramp-up in scale and offerings needed to 
support max-tech efficiencies), and a majority of consumers would 
experience a net cost (56.2 percent). At TSL 4, most manufacturers 
would need to add production lines to meet demand, which would require 
large capital expenditures. DOE projects that only 8 percent of 
shipments would meet TSL 4 efficiencies by 2030 in the no-new-standards 
case. Consequently, the Secretary has concluded that TSL 4 is not 
economically justified.
    DOE then considered TSL 3, which represents the next highest 
efficiency level analyzed for gas-fired instantaneous water heaters 
with current UEF-based standards and represents efficiencies that can 
meet the current ENERGY STAR specification. At TSL 3, the design option 
pathway includes the use of high-efficiency flat-plate condensing heat 
exchangers. TSL 3 may also require changes to the way manufacturers 
currently produce gas-fired instantaneous water heaters since many 
designs on the market today use tube heat exchangers. At TSL 3, 
approximately 16 percent of shipments are expected to meet the required 
efficiency levels by 2030 in the no-new-standards case.
    TSL 3 would save an estimated 0.85 quads of energy, an amount DOE 
considers significant. Under TSL 3, the NPV of consumer benefit would 
be $1.45 billion using a discount rate of 7 percent, and $4.89 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 3 are 46 Mt of 
CO2, 576 thousand tons of CH4, 0.09 thousand tons 
of N2O, 125 thousand tons of NOX, 0.20 thousand 
tons of SO2, and an increase of 0.0003 tons of Hg. The 
estimated monetary value of the climate benefits from reduced GHG 
emissions at TSL 3 is $10.2 billion (associated with the average SC-GHG 
at a 2-percent near-term Ramsey discount rate using the 2023 SC-GHG 
estimates) or $2.4 billion (associated with the average SC-GHG at a 3-
percent discount rate using the 2021 interim SC-GHG estimates). The 
estimated monetary value of the health benefits from reduced 
SO2 and NOX emissions at TSL 3 is $1.3 billion 
using a 7-percent discount rate and $3.8 billion using a 3-percent 
discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health benefits from reduced SO2 and NOX 
emissions, and the 2-percent near-term Ramsey discount rate case or the 
3-percent discount rate case for climate benefits from reduced GHG 
emissions, the estimated total NPV at TSL 3 is $12.9 billion (using the 
2023 SC-GHG estimates) or $5.1 billion (using the 2021 interim SC-GHG 
estimates). Using a 3-percent discount rate for consumer benefits and 
costs and health benefits from reduced NOX and 
SO2 emissions, and the 2-percent near-term Ramsey discount 
rate case or the 3-percent discount rate case for climate benefits from 
reduced GHG emissions, the estimated total NPV at TSL 3 is $18.9 
billion (using the 2023 SC-GHG estimates) or $11.1 billion (using the 
2021 interim SC-GHG estimates). The estimated total NPV is provided for 
additional information, however DOE primarily relies upon the NPV of 
consumer benefits when determining whether a proposed standard level is 
economically justified.
    At TSL 3, consumers will experience an average LCC savings of $90, 
which includes the cost of purchasing and installing a more expensive 
condensing model. The fraction of consumers experiencing a net LCC cost 
is 25.0 percent.
    At TSL 3, the projected change in INPV ranges from a decrease of 
$61.8 million to an increase of $23.7 million, which corresponds to a 
decrease of 5.2 percent and an increase of 2.0 percent, respectively. 
As with TSL 4, the range of impacts is driven primarily by the ability 
of manufacturers to recover their investments. DOE estimates that 
industry must invest $60.1 million to comply with standards set at TSL 
3. At this level, DOE expects manufacturers would implement the same 
high-efficiency heat exchanger design as at max-tech and increase the 
condensing heat exchanger area relative to lower efficiency levels but 
not to the extent as required at max-tech. Given the greater complexity 
and assembly time of high-efficiency models, most manufacturers would 
need to add production lines to meet demand, which would require 
capital investments and potential updates to the factory floor. The 
investment required to add production capacity would vary by 
manufacturer as it depends on floor space availability in and around 
existing manufacturing plants. Manufacturers would also need to upgrade 
their facilities to accommodate the production of models

[[Page 105278]]

with high-efficiency condensing heat exchangers. Additionally, while 
TSL 3 is technologically feasible using traditional step-modulating 
burner designs, DOE received information from several manufacturers 
indicating that, at this efficiency level, some manufacturers may opt 
to redesign their models to take advantage of alternative burner 
configurations (e.g., down-firing) or even fully-modulating designs--
designs which may provide a benefit of better condensate management at 
such a high efficiency.
    The Secretary concludes that at TSL 3 for gas-fired instantaneous 
water heaters, the benefits of energy savings, positive NPV of consumer 
benefits, emissions reductions, and estimated monetary value of the 
emissions reductions would be outweighed by economic impacts to 
manufacturers (driven by the potential conversion costs for production 
equipment and tooling, as well as the ramp-up in production necessary 
for all model lines to meet this efficiency). At TSL 3, most 
manufacturers would need to add production lines to meet demand. 
Consequently, the Secretary has concluded that TSL 3 is not 
economically justified.
    DOE then considered TSL 2, which represents the next highest 
efficiency level analyzed for gas-fired instantaneous water heaters 
with current UEF-based standards. TSL 2 also aligns with the Joint 
Stakeholder Recommendation efficiency level. At TSL 2, the design 
option pathway includes the use of condensing heat exchangers. At TSL 
2, approximately 62 percent of shipments are expected to meet the 
required efficiency levels by 2030 in the no-new-standards case, which 
is a significant increase from TSL 3 and TSL 4.
    TSL 2 would save an estimated 0.58 quads of energy, an amount DOE 
considers significant. Under TSL 2, the NPV of consumer benefit would 
be $0.87 billion using a discount rate of 7 percent, and $3.06 billion 
using a discount rate of 3 percent.
    The cumulative emissions reductions at TSL 2 are 32 Mt of 
CO2, 398 thousand tons of CH4, 0.06 thousand tons 
of N2O, 86 thousand tons of NOX, 0.12 thousand 
tons of SO2, and an increase of 0.0004 tons of Hg. The 
estimated monetary value of the climate benefits from reduced GHG 
emissions at TSL 2 is $7.1 billion (associated with the average SC-GHG 
at a 2-percent near-term Ramsey discount rate using the 2023 SC-GHG 
estimates) or $1.7 billion (associated with the average SC-GHG at a 3-
percent discount rate using the 2021 interim SC-GHG estimates). The 
estimated monetary value of the health benefits from reduced 
SO2 and NOX emissions at TSL 3 is $0.9 billion 
using a 7-percent discount rate and $2.7 billion using a 3-percent 
discount rate.
    Using a 7-percent discount rate for consumer benefits and costs, 
health benefits from reduced SO2 and NOX 
emissions, and the 2-percent near-term Ramsey discount rate case or the 
3-percent discount rate case for climate benefits from reduced GHG 
emissions, the estimated total NPV at TSL 2 is $8.9 billion (using the 
2023 SC-GHG estimates) or $3.4 billion (using the 2021 interim SC-GHG 
estimates). Using a 3-percent discount rate for consumer benefits and 
costs and health benefits from reduced NOX and 
SO2 emissions, and the 2-percent near-term Ramsey discount 
rate case or the 3-percent discount rate case for climate benefits from 
reduced GHG emissions, the estimated total NPV at TSL 2 is $12.8 
billion (using the 2023 SC-GHG estimates) or $7.4 billion (using the 
2021 interim SC-GHG estimates). The estimated total NPV is provided for 
additional information, however DOE primarily relies upon the NPV of 
consumer benefits when determining whether a proposed standard level is 
economically justified.
    At TSL 2, consumers will experience an average LCC savings of $112 
which includes the cost of purchasing and installing a more expensive 
condensing model. The fraction of consumers experiencing a net LCC cost 
is 15.2 percent.
    At TSL 2, the projected change in INPV ranges from a decrease of 
$33.7 million to an increase of $40.5 million, which corresponds to a 
decrease of 2.8 percent and an increase of 3.4 percent, respectively. 
DOE estimates that industry must invest $20.4 million to comply with 
standards set at TSL 2.
    At higher TSLs, the primary driver of high conversion costs is the 
required capital investment to meet market demand for high-efficiency 
condensing gas-fired instantaneous water heaters. However, at TSL 2, 
industry has extensive experience producing gas-fired instantaneous 
water heater models that meet this level, and, furthermore, this TSL 
was strongly supported by a coalition of industry stakeholders, 
including manufacturers. DOE believes that having major manufacturers 
and the industry trade association sign on to the Joint Stakeholder 
Recommendation is a testament to industry's ability to ramp up capacity 
to produce volumes necessary to support a transition to condensing 
efficiencies at TSL 2. Based on manufacturer feedback, DOE does not 
expect that most manufacturers would need to add production lines at 
this level. All 12 gas-fired instantaneous water heater OEMs currently 
manufacture condensing gas-fired instantaneous water heater models. Of 
these 12 OEMs, 10 OEMs currently manufacture condensing gas-fired 
instantaneous water heater models that meet this level. Collectively, 
these 10 OEMs offer 71 unique basic models that meet TSL 2 (which 
represent approximately 51 percent of gas-fired instantaneous water 
heater basic model listings). Furthermore, these 10 OEMs account for 
the majority of gas-fired instantaneous water heater sales, 
representing over 95 percent of industry shipments.
    After considering the analysis and weighing the benefits and 
burdens, the Secretary has concluded that standards set at TSL 2 for 
gas-fired instantaneous water heaters would be economically justified. 
At this TSL, the average LCC savings for consumers are expected to be 
positive. The FFC national energy savings are significant and the NPV 
of consumer benefits is positive using both a 3-percent and 7-percent 
discount rate. These national benefits vastly outweigh the costs. The 
standard levels at TSL 2 are economically justified even without 
weighing the estimated monetary value of emissions reductions. When 
those emissions reductions are included--representing $7.1 billion in 
climate benefits (associated with the average SC-GHG at a 2-percent 
near-term Ramsey discount rate using the 2023 SC-GHG estimates) or $1.7 
billion in climate benefits (associated with the average SC-GHG at a 3-
percent discount rate using the 2021 interim SC-GHG estimate), and $0.9 
billion (using a 7-percent discount rate) or $2.7 billion (using a 3-
percent discount rate) in health benefits--the rationale becomes 
stronger still. In addition, DOE considered that TSL 2 is 
representative of the Joint Stakeholder Recommendation. More 
specifically, DOE believes the Joint Stakeholder agreement from a 
cross-section group of stakeholders provides DOE with a good indication 
of stakeholder views on this rulemaking and some assurance that 
industry can transition to these levels. And, as indicated by DOE's 
analysis, the market will see significant benefits at this efficiency 
level.
    Accordingly, the Secretary has concluded that TSL 2 would offer the 
maximum improvement in efficiency that is technologically feasible and 
economically justified, and would result in significant conservation of 
energy. Lastly, TSL 2 represents the recommended standard levels 
submitted by Joint Stakeholders to DOE, providing

[[Page 105279]]

further support for standard levels set at TSL 2, a factor the 
Secretary considers significant.
    As stated, DOE conducts the walk-down analysis to determine the TSL 
that represents the maximum improvement in energy efficiency that is 
technologically feasible and economically justified as required under 
EPCA. The walk-down is not a comparative analysis, as a comparative 
analysis would result in the maximization of net benefits instead of 
energy savings that are technologically feasible and economically 
justified, which would be contrary to the statute. 86 FR 70892, 70908. 
Although DOE has not conducted a comparative analysis to select the 
amended energy conservation standards, DOE notes that at higher TSLs, 
larger fractions of consumers experience increased costs greater than 
operating savings, and manufacturer investments to meet consumer demand 
would be significantly higher.
    Therefore, based on the above considerations, DOE adopts the 
conservation standards for consumer water heaters at TSL 2 for those 
product classes where there are existing applicable UEF standards. For 
the remaining product classes, DOE adopts converted standards in the 
UEF metric based on the amended appendix E test procedure. The amended 
energy conservation standards for gas-fired instantaneous water 
heaters, which are expressed as UEF, are shown in table V.26.

           Table V.26--Amended Energy Conservation Standards for Gas-Fired Instantaneous Water Heaters
----------------------------------------------------------------------------------------------------------------
                                          Effective storage
            Product class                volume (Veff) * and          Draw pattern                UEF *
                                             input rating
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heater.  <2 gal and <=50,000 Btu/ Very Small.............  0.64.
                                        h.                      Low....................  0.64.
                                                                Medium.................  0.64.
                                                                High...................  0.64.
                                       <2 gal and >50,000 Btu/  Very Small.............  0.89.
                                        h.
                                                                Low....................  0.91.
                                                                Medium.................  0.91.
                                                                High...................  0.93.
                                       >=2 gal and <=200,000    Very Small.............  0.2534-(0.0018 x Veff).
                                        Btu/h.
                                                                Low....................  0.5226-(0.0022 x Veff).
                                                                Medium.................  0.5919-(0.0020 x Veff).
                                                                High...................  0.6540-(0.0017 x Veff).
----------------------------------------------------------------------------------------------------------------
* Veff is the Effective Storage Volume (in gallons), as determined pursuant to 10 CFR 429.17.

2. Annualized Benefits and Costs of the Adopted Standards
    The benefits and costs of the adopted standards can also be 
expressed in terms of annualized values. The annualized net benefit is: 
(1) the annualized national economic value (expressed in 2023$) of the 
benefits from operating products that meet the adopted standards 
(consisting primarily of operating cost savings from using less 
energy), minus increases in product purchase costs; and (2) the 
annualized monetary value of the climate and health benefits.
    Table V.27 shows the annualized values for gas-fired instantaneous 
water heaters analyzed under TSL 2, expressed in 2023$. The results 
under the primary estimate are as follows.
    Using a 7-percent discount rate for consumer benefits and costs and 
health benefits from reduced NOX and SO2 
emissions, and a 2-percent near-term Ramsey discount rate case or the 
3-percent discount rate case for climate benefits from reduced GHG 
emissions, the estimated cost of the adopted standards for gas-fired 
instantaneous water heaters is $88 million per year in increased 
equipment installed costs, while the estimated annual benefits are $187 
million from reduced equipment operating costs, $349 million in climate 
benefits (using the 2023 SC-GHG estimates) or $98 million in climate 
benefits (using the 2021 interim SC-GHG estimates), and $101 million in 
health benefits. In this case, the net benefit amounts to $549 million 
per year (using the 2023 SC-GHG estimates) or $297 million per year 
(using the 2021 interim SC-GHG estimates).
    Using a 3-percent discount rate for consumer benefits and costs and 
health benefits from reduced NOX and SO2 
emissions, and the 2-percent near-term Ramsey discount rate case or the 
3-percent discount rate case for climate benefits from reduced GHG 
emissions, the estimated cost of the adopted standards for gas-fired 
instantaneous water heaters is $87 million per year in increased 
equipment costs, while the estimated annual benefits are $268 million 
in reduced operating costs, $349 million in climate benefits (using the 
2023 SC-GHG estimates) or $98 million in climate benefits (using the 
2021 interim SC-GHG estimates), and $158 million in health benefits. In 
this case, the net benefit amounts to $689 million per year (using the 
2023 SC-GHG estimates) or $437 million per year (using the 2021 interim 
SC-GHG estimates).

[[Page 105280]]



      Table V.27--Annualized Benefits and Costs of the Adopted Energy Conservation Standards for Gas-Fired
                    Instantaneous Water Heaters at TSL 2 Shipped During the Period 2030-2059
                                    [Veff <2 gal, rated input >50,000 Btu/h]
----------------------------------------------------------------------------------------------------------------
                                                                                Million 2023$/year
                                                                 -----------------------------------------------
                                                                                     Low-net-        High-net-
                                                                      Primary        benefits        benefits
                                                                     estimate        estimate        estimate
----------------------------------------------------------------------------------------------------------------
                                                3% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................             268             249             288
Climate Benefits * (2023 SC-GHG estimates)......................             349             344             355
Climate Benefits * (2021 interim SC-GHG estimates)..............              98              96             100
Health Benefits **..............................................             158             156             161
Total Benefits [dagger] (2023 SC-GHG estimates).................             776             749             804
Total Benefits [dagger] (2021 interim SC-GHG estimates).........             525             502             548
Consumer Incremental Product Costs [Dagger].....................              87              86              89
Net Benefits [dagger] (2023 SC-GHG estimates)...................             689             663             715
Net Benefits [dagger] (2021 interim SC-GHG estimates)...........             437             416             459
Change in Producer Cashflow (INPV) [Dagger][Dagger].............           (3)-4           (3)-4           (3)-4
----------------------------------------------------------------------------------------------------------------
                                                7% discount rate
----------------------------------------------------------------------------------------------------------------
Consumer Operating Cost Savings.................................             187             174             200
Climate Benefits * (2023 SC-GHG estimates)......................             349             344             355
Climate Benefits * (2021 interim SC-GHG estimates)..............              98              96             100
Health Benefits **..............................................             101              99             102
Total Benefits [dagger] (2023 SC-GHG estimates).................             637             616             658
Total Benefits [dagger] (2021 interim SC-GHG estimates).........             386             369             402
Consumer Incremental Product Costs [Dagger].....................              88              87              90
Net Benefits [dagger] (2023 SC-GHG estimates)...................             549             530             568
Net Benefits [dagger] (2021 interim SC-GHG estimates)...........             297             283             312
Change in Producer Cashflow (INPV) [Dagger][Dagger].............           (3)-4           (3)-4           (3)-4
----------------------------------------------------------------------------------------------------------------
Note: These results include consumer, climate, and health benefits that accrue after 2059 from the products
  shipped during the period 2030-2059. The Primary, Low Net Benefits, and High Net Benefits Estimates utilize
  projections of energy prices from the AEO2023 Reference case, Low Economic Growth case, and High Economic
  Growth case, respectively. In addition, incremental equipment costs reflect a medium decline rate in the
  Primary Estimate, a low decline rate in the Low Net Benefits Estimate, and a high decline rate in the High Net
  Benefits Estimate. The methods used to derive projected price trends are explained in sections IV.F.1 and
  IV.H.3 of this document. Note that the Benefits and Costs may not sum to the Net Benefits due to rounding.
* Climate benefits are calculated using different estimates of the global SC-GHG (see section IV.L of this
  document). Climate benefits are estimated using two separate sets of estimates of the social cost for each
  greenhouse gas, an updated set published in 2023 by the Environmental Protection Agency (EPA) (``2023 SC-
  GHG'') and the interim set of estimates used in the NOPR which were published in 2021 by the Interagency
  Working Group on the SC-GHG (IWG) (``2021 Interim SC-GHG'') (see section IV.L of this document). For
  presentational purposes of this table, the climate benefits associated with the average SC-GHG at a 2 percent
  near-term Ramsey discount rate are shown for the 2023 SC-GHG estimates, and the climate benefits associated
  with the average SC-GHG at a 3 percent discount rate are shown for the 2021 interim SC-GHG estimates.
** Health benefits are calculated using benefit-per-ton values for NOX and SO2. DOE is currently only monetizing
  (for SO2 and NOX) PM2.5 precursor health benefits and (for NOX) ozone precursor health benefits, but will
  continue to assess the ability to monetize other effects such as health benefits from reductions in direct
  PM2.5 emissions. Table 5 of the EPA's Estimating the Benefit per Ton of Reducing PM2.5 Precursors from 21
  Sectors TSD provides a summary of the health impact endpoints quantified in the analysis. See section IV.L of
  this document for more details.
[dagger] Total benefits for both the 3-percent and 7-percent cases are presented using the average SC-GHG with 2-
  percent near-term Ramsey discount rate for the 2023 estimate and the average SC-GHG with 3-percent discount
  rate for the 2021 interim SC-GHG estimate.
[Dagger] Costs include incremental equipment costs as well as installation costs.
[Dagger][Dagger] Operating Cost Savings are calculated based on the life-cycle costs analysis and national
  impact analysis as discussed in detail below. See sections IV.F and IV.H of this document. DOE's national
  impacts analysis includes all impacts (both costs and benefits) along the distribution chain beginning with
  the increased costs to the manufacturer to manufacture the product and ending with the increase in price
  experienced by the consumer. DOE also separately conducts a detailed analysis on the impacts on manufacturers
  (i.e., MIA). See section IV.J of this document. In the detailed MIA, DOE models manufacturers' pricing
  decisions based on assumptions regarding investments, conversion costs, cashflow, and margins. The MIA
  produces a range of impacts, which is the rule's expected impact on the INPV. The change in INPV is the
  present value of all changes in industry cash flow, including changes in production costs, capital
  expenditures, and manufacturer profit margins. The annualized change in INPV is calculated using the industry
  weighted average cost of capital value of 9.6 percent that is estimated in the MIA (see chapter 12 of the
  final rule TSD for a complete description of the industry weighted average cost of capital). For gas-fired
  instantaneous water heaters, the annualized change in INPV ranges from -$3 million to $4 million. DOE accounts
  for that range of likely impacts in analyzing whether a TSL is economically justified. See section V.C of this
  document. DOE is presenting the range of impacts to the INPV under two manufacturer markup scenarios: the
  Preservation of Gross Margin scenario, which is the manufacturer markup scenario used in the calculation of
  Consumer Operating Cost Savings in this table; and the Preservation of Operating Profit scenario, where DOE
  assumed manufacturers would not be able to increase per-unit operating profit in proportion to increases in
  manufacturer production costs. DOE includes the range of estimated annualized change in INPV in the above
  table, drawing on the MIA explained further in section IV.J of this document to provide additional context for
  assessing the estimated impacts of this final rule to society, including potential changes in production and
  consumption, which is consistent with OMB's Circular A-4 and E.O. 12866. If DOE were to include the INPV into
  the annualized net benefit calculation (2023 SC-GHG estimates) for this final rule, the annualized net
  benefits would range from $686 million to $693 million at 3-percent discount rate and would range from $546
  million to $553 million at 7-percent discount rate. Parentheses indicate negative ( ) values.


[[Page 105281]]

3. Compliance Dates
    As discussed in section II.A of this document, DOE is conducting 
this rulemaking in satisfaction of the lookback review provisions and 
the UEF metric provisions in EPCA. See 42 U.S.C. 6295(m) and 
6295(e)(5), respectively. Per EPCA, an amendment of standards 
prescribed under 42 U.S.C. 6295(m) is applicable to water heaters 
manufactured after the date that is 5 years after the publication of a 
final rule amending standards. (42 U.S.C. 6295(m)(4)(A)(ii)) Hence, the 
compliance date for amended standards pertaining to gas-fired 
instantaneous water heaters is 5 years from the publication of this 
final rule.

VI. Procedural Issues and Regulatory Review

A. Review Under Executive Orders 12866, 13563, and 14094

    Executive Order (``E.O.'') 12866, ``Regulatory Planning and 
Review,'' as supplemented and reaffirmed by E.O. 13563, ``Improving 
Regulation and Regulatory Review,'' 76 FR 3821 (Jan. 21, 2011) and 
amended by E.O. 14094, ``Modernizing Regulatory Review,'' 88 FR 21879 
(April 11, 2023), requires agencies, to the extent permitted by law, 
to: (1) propose or adopt a regulation only upon a reasoned 
determination that its benefits justify its costs (recognizing that 
some benefits and costs are difficult to quantify); (2) tailor 
regulations to impose the least burden on society, consistent with 
obtaining regulatory objectives, taking into account, among other 
things, and to the extent practicable, the costs of cumulative 
regulations; (3) select, in choosing among alternative regulatory 
approaches, those approaches that maximize net benefits (including 
potential economic, environmental, public health and safety, and other 
advantages; distributive impacts; and equity); (4) to the extent 
feasible, specify performance objectives, rather than specifying the 
behavior or manner of compliance that regulated entities must adopt; 
and (5) identify and assess available alternatives to direct 
regulation, including providing economic incentives to encourage the 
desired behavior, such as user fees or marketable permits, or providing 
information upon which choices can be made by the public. DOE 
emphasizes as well that E.O. 13563 requires agencies to use the best 
available techniques to quantify anticipated present and future 
benefits and costs as accurately as possible. In its guidance, the 
Office of Information and Regulatory Affairs (``OIRA'') in the Office 
of Management and Budget has emphasized that such techniques may 
include identifying changing future compliance costs that might result 
from technological innovation or anticipated behavioral changes. For 
the reasons stated in the preamble, this final regulatory action is 
consistent with these principles.
    Section 6(a) of E.O. 12866 also requires agencies to submit 
``significant regulatory actions'' to OIRA for review. OIRA has 
determined that this final regulatory action constitutes a 
``significant regulatory action'' within the scope of section 3(f)(1) 
of E.O. 12866, as amended by E.O. 14094. Accordingly, pursuant to 
section 6(a)(3)(C) of E.O. 12866, DOE has provided to OIRA an 
assessment, including the underlying analysis, of benefits and costs 
anticipated from the final regulatory action, together with, to the 
extent feasible, a quantification of those costs; and an assessment, 
including the underlying analysis, of costs and benefits of potentially 
effective and reasonably feasible alternatives to the planned 
regulation, and an explanation why the planned regulatory action is 
preferable to the identified potential alternatives. These assessments 
are summarized in this preamble and further detail can be found in the 
technical support document for this rulemaking.

B. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
preparation of an initial regulatory flexibility analysis (``IRFA'') 
and a final regulatory flexibility analysis (``FRFA'') for any rule 
that by law must be proposed for public comment, unless the agency 
certifies that the rule, if promulgated, will not have a significant 
economic impact on a substantial number of small entities. As required 
by E.O. 13272, ``Proper Consideration of Small Entities in Agency 
Rulemaking,'' 67 FR 53461 (Aug. 16, 2002), DOE published procedures and 
policies on February 19, 2003, to ensure that the potential impacts of 
its rules on small entities are properly considered during the 
rulemaking process. 68 FR 7990. DOE has made its procedures and 
policies available on the Office of the General Counsel's website 
(www.energy.gov/gc/office-general-counsel).
    DOE reviewed this final rule under the provisions of the Regulatory 
Flexibility Act and the procedures and policies published on February 
19, 2003. DOE certifies that this final rule would not have a 
significant economic impact on a substantial number of small entities. 
As such, DOE has not prepared a FRFA for the products that are the 
subject of this rulemaking. The factual basis of this certification is 
set forth in the following paragraphs.
    For manufacturers of gas-fired instantaneous water heaters, the SBA 
has set a size threshold, which defines those entities classified as 
``small businesses'' for the purposes of the statute. DOE used the 
SBA's small business size standards to determine whether any small 
entities would be subject to the requirements of the rule. (See 13 CFR 
part 121.) The size standards are listed by North American Industry 
Classification System (``NAICS'') code and industry description and are 
available at www.sba.gov/document/support-table-size-standards. 
Manufacturing of gas-fired instantaneous water heaters is classified 
under NAICS 335220, ``Major Household Appliance Manufacturing.'' The 
SBA sets a threshold of 1,500 employees or fewer for an entity to be 
considered as a small business for this category. For manufacturers of 
gas-fired instantaneous water heaters, the SBA has set a size 
threshold, which defines those entities classified as ``small 
businesses'' for the purposes of the statute. DOE used the SBA's small 
business size standards to determine whether any small entities would 
be subject to the requirements of the rule. (See 13 CFR part 121.) The 
size standards are listed by North American Industry Classification 
System (``NAICS'') code and industry description and are available at 
www.sba.gov/document/support-table-size-standards. Manufacturing of 
gas-fired instantaneous water heaters is classified under NAICS 335220, 
``Major Household Appliance Manufacturing.'' The SBA sets a threshold 
of 1,500 employees or fewer for an entity to be considered as a small 
business for this category.
    To estimate the number of companies that could be small business 
manufacturers of gas-fired instantaneous water heaters, DOE conducted a 
market survey using public information and subscription-based company 
reports to identify potential small business manufacturers. DOE 
reviewed DOE's Compliance Certification Database,\196\ Air-
Conditioning, Heating, and Refrigeration Institute's Directory of 
Certified Product Performance,\197\

[[Page 105282]]

California Energy Commission's Modernized Appliance Efficiency Database 
System,\198\ the ENERGY STAR Product Finder dataset,\199\ and 
individual company websites, to create a list of companies that 
manufacture, produce, or import the products covered by this 
rulemaking. DOE then consulted publicly available data, such as 
manufacturer websites, manufacturer specifications and product 
literature, import/export logs (e.g., bills of lading from ImportYeti 
\200\), and basic model numbers, to identify original equipment 
manufacturers (``OEMs'') of covered gas-fired instantaneous water 
heaters. DOE relied on public information and market research tools 
(e.g., reports from D&B Hoovers \201\) to determine company structure, 
location, headcount, and annual revenue. DOE screened out companies 
that do not manufacture the equipment covered by this rulemaking, do 
not meet the SBA's definition of a ``small business,'' or are foreign-
owned and operated.
---------------------------------------------------------------------------

    \196\ U.S. Department of Energy's Compliance Certification 
Database is available at regulations.doe.gov/certification-data 
(last accessed July 19, 2024).
    \197\ Air-Conditioning, Heating and Refrigeration Institute's 
Directory of Certified Product Performance is available at https://ahridirectory.org/search/searchhome?Returnurl=%2f (last accessed 
July 23, 2024).
    \198\ California Energy Commission's Modernized Appliance 
Efficiency Database System is available at 
cacertappliances.energy.ca.gov/Pages/Search/AdvancedSearch.aspx 
(last accessed July 19, 2024).
    \199\ ENERGY STAR Product Finder is available at 
www.energystar.gov/productfinder (last accessed July 22, 2024).
    \200\ ImportYeti, LLC. ImportYeti is available at: 
www.importyeti.com/ (Last accessed July 30, 2024).
    \201\ The Dun & Bradstreet subscription login is available at 
app.dnbhoovers.com (last accessed July 30, 2024).
---------------------------------------------------------------------------

    DOE identified 12 OEMs of gas-fired instantaneous water heaters 
subject to more stringent standards. Of these 12 OEMs, DOE did not 
identify any domestic OEMs that meet SBA's definition of a ``small 
business.'' Given the lack of small, domestic OEMs with a direct 
compliance burden, DOE concludes that this final rule would not have 
``a significant impact on a substantial number of small entities.''
    DOE has transmitted the certification and supporting statement of 
factual basis to the Chief Counsel for Advocacy of the SBA for review 
under 5 U.S.C. 605(b).
    In response to the July 2023 NOPR, the Gas Association Commenters 
and NPGA, APGA, AGA, and Rinnai submitted comments noting that DOE 
identified only two small businesses, neither of which produce gas-
fired water heaters. As a result, these commenters stated that DOE has 
no data on small businesses that produce gas-fired water heaters 
relative to redesign costs, product availability, or whether the 
proposed efficiency levels could cause small businesses to exit the 
market. (Gas Association Commenters No. 1181, pp. 38-39; NPGA, APGA, 
AGA, and Rinnai, No. 441 at p. 5) NPGA, APGA, AGA, and Rinnai asserted 
that the July 2023 NOPR fails to comply with Executive Order 13272, 
``Proper Consideration of Small Entities in Agency Rulemaking,'' and 
must be addressed. (NPGA, APGA, AGA, and Rinnai, No. 441 at p. 5)
    For the IRFA conducted in support of the July 2023 NOPR, which 
proposed standards for covered consumer water heaters, DOE identified 
one small domestic OEM of oil-fired storage water heaters and one small 
domestic OEM of electric storage water heaters. For this certification, 
DOE refreshed its product database to include up-to-date information on 
gas-fired instantaneous water heaters marketed for the United States. 
Based on its comprehensive review of the gas-fired instantaneous water 
heater market, DOE maintains its finding from the IRFA that there are 
no small, domestic OEMs that manufacture gas-fired instantaneous water 
heaters. As such, DOE does not expect that the standards adopted in 
this final rule would directly impact small businesses that manufacture 
gas-fired instantaneous water heaters.
    DOE did not receive written comments in response to the July 2024 
NODA that specifically addressed the potential impacts on small 
businesses.

C. Review Under the Paperwork Reduction Act

    Manufacturers of gas-fired instantaneous water heaters must certify 
to DOE that their products comply with any applicable energy 
conservation standards. In certifying compliance, manufacturers must 
test their products according to the DOE test procedures for gas-fired 
instantaneous water heaters, including any amendments adopted for those 
test procedures. DOE has established regulations for the certification 
and recordkeeping requirements for all covered consumer products and 
commercial equipment, including gas-fired instantaneous water heaters. 
(See generally 10 CFR part 429). The collection-of-information 
requirement for the certification and recordkeeping is subject to 
review and approval by OMB under the Paperwork Reduction Act (``PRA''). 
This requirement has been approved by OMB under OMB control number 
1910-1400. Public reporting burden for the certification is estimated 
to average 35 hours per response, including the time for reviewing 
instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information.
    Notwithstanding any other provision of the law, no person is 
required to respond to, nor shall any person be subject to a penalty 
for failure to comply with, a collection of information subject to the 
requirements of the PRA, unless that collection of information displays 
a currently valid OMB control number.

D. Review Under the National Environmental Policy Act of 1969

    Pursuant to the National Environmental Policy Act of 1969 
(``NEPA''), DOE has analyzed this rule in accordance with NEPA and 
DOE's NEPA implementing regulations (10 CFR part 1021). DOE has 
determined that this rule qualifies for categorical exclusion under 10 
CFR part 1021, subpart D, appendix B5.1 because it is a rulemaking that 
establishes energy conservation standards for consumer products or 
industrial equipment, none of the exceptions identified in B5.1(b) 
apply, no extraordinary circumstances exist that require further 
environmental analysis, and it meets the requirements for application 
of a categorical exclusion. See 10 CFR 1021.410. Therefore, DOE has 
determined that promulgation of this rule is not a major Federal action 
significantly affecting the quality of the human environment within the 
meaning of NEPA, and does not require an environmental assessment or an 
environmental impact statement.

E. Review Under Executive Order 13132

    E.O. 13132, ``Federalism,'' 64 FR 43255 (Aug. 10, 1999), imposes 
certain requirements on Federal agencies formulating and implementing 
policies or regulations that preempt State law or that have federalism 
implications. The Executive order requires agencies to examine the 
constitutional and statutory authority supporting any action that would 
limit the policymaking discretion of the States and to carefully assess 
the necessity for such actions. The Executive order also requires 
agencies to have an accountable process to ensure meaningful and timely 
input by State and local officials in the development of regulatory 
policies that have federalism implications. On March 14, 2000, DOE 
published a statement of policy describing the intergovernmental 
consultation process it will follow in the development of such 
regulations. 65 FR 13735. DOE has examined this rule and has determined 
that it would not have a substantial direct effect on the States, on 
the relationship between the national government and the States, or on 
the distribution of power and responsibilities among the various levels 
of government. EPCA governs and

[[Page 105283]]

prescribes Federal preemption of State regulations as to energy 
conservation for the products that are the subject of this final rule. 
States can petition DOE for exemption from such preemption to the 
extent, and based on criteria, set forth in EPCA. (42 U.S.C. 6297) 
Therefore, no further action is required by Executive Order 13132.

F. Review Under Executive Order 12988

    With respect to the review of existing regulations and the 
promulgation of new regulations, section 3(a) of E.O. 12988, ``Civil 
Justice Reform,'' imposes on Federal agencies the general duty to 
adhere to the following requirements: (1) eliminate drafting errors and 
ambiguity, (2) write regulations to minimize litigation, (3) provide a 
clear legal standard for affected conduct rather than a general 
standard, and (4) promote simplification and burden reduction. 61 FR 
4729 (February 7, 1996). Regarding the review required by section 3(a), 
section 3(b) of E.O. 12988 specifically requires that Executive 
agencies make every reasonable effort to ensure that the regulation: 
(1) clearly specifies the preemptive effect, if any; (2) clearly 
specifies any effect on existing Federal law or regulation; (3) 
provides a clear legal standard for affected conduct while promoting 
simplification and burden reduction; (4) specifies the retroactive 
effect, if any; (5) adequately defines key terms; and (6) addresses 
other important issues affecting clarity and general draftsmanship 
under any guidelines issued by the Attorney General. Section 3(c) of 
E.O. 12988 requires Executive agencies to review regulations in light 
of applicable standards in section 3(a) and section 3(b) to determine 
whether they are met or it is unreasonable to meet one or more of them. 
DOE has completed the required review and determined that, to the 
extent permitted by law, this final rule meets the relevant standards 
of E.O. 12988.

G. Review Under the Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (``UMRA'') 
requires each Federal agency to assess the effects of Federal 
regulatory actions on State, local, and Tribal governments and the 
private sector. Public Law 104-4, sec. 201 (codified at 2 U.S.C. 1531). 
For a regulatory action likely to result in a rule that may cause the 
expenditure by State, local, and Tribal governments, in the aggregate, 
or by the private sector of $100 million or more in any one year 
(adjusted annually for inflation), section 202 of UMRA requires a 
Federal agency to publish a written statement that estimates the 
resulting costs, benefits, and other effects on the national economy. 
(2 U.S.C. 1532(a), (b)) UMRA also requires a Federal agency to develop 
an effective process to permit timely input by elected officers of 
State, local, and Tribal governments on a ``significant 
intergovernmental mandate,'' and requires an agency plan for giving 
notice and opportunity for timely input to potentially affected small 
governments before establishing any requirements that might 
significantly or uniquely affect them. On March 18, 1997, DOE published 
a statement of policy on its process for intergovernmental consultation 
under UMRA. 62 FR 12820. DOE's policy statement is also available at 
www.energy.gov/sites/prod/files/gcprod/documents/umra_97.pdf.
    DOE has concluded that this final rule may require expenditures of 
$100 million or more in any one year by the private sector. Such 
expenditures may include: (1) investment in research and development 
and in capital expenditures by gas-fired instantaneous water heater 
manufacturers in the years between the final rule and the compliance 
date for the new standards; and (2) incremental additional expenditures 
by consumers to purchase higher-efficiency gas-fired instantaneous 
water heaters, starting at the compliance date for the applicable 
standard.
    Section 202 of UMRA authorizes a Federal agency to respond to the 
content requirements of UMRA in any other statement or analysis that 
accompanies the final rule. (2 U.S.C. 1532(c)) The content requirements 
of section 202(b) of UMRA relevant to a private sector mandate 
substantially overlap the economic analysis requirements that apply 
under section 325(o) of EPCA and Executive Order 12866. The preamble 
section of this document and the TSD for this final rule respond to 
those requirements.
    Under section 205 of UMRA, DOE is obligated to identify and 
consider a reasonable number of regulatory alternatives before 
promulgating a rule for which a written statement under section 202 is 
required. (2 U.S.C. 1535(a)) DOE is required to select from those 
alternatives the most cost-effective and least burdensome alternative 
that achieves the objectives of the rule unless DOE publishes an 
explanation for doing otherwise, or the selection of such an 
alternative is inconsistent with law. As required by 42 U.S.C. 6295(m), 
this final rule establishes amended energy conservation standards for 
gas-fired instantaneous water heaters that are designed to achieve the 
maximum improvement in energy efficiency that DOE has determined to be 
both technologically feasible and economically justified, as required 
by sections 6295(o)(2)(A) and 6295(o)(3)(B). A full discussion of the 
alternatives considered by DOE is presented in chapter 17 of the TSD 
for this final rule.

H. Review Under the Treasury and General Government Appropriations Act, 
1999

    Section 654 of the Treasury and General Government Appropriations 
Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family 
Policymaking Assessment for any proposed rule or policy that may affect 
family well-being. When developing a Family Policymaking Assessment, 
agencies must assess whether: (1) the action strengthens or erodes the 
stability or safety of the family and, particularly, the marital 
commitment; (2) the action strengthens or erodes the authority and 
rights of parents in the education, nurture, and supervision of their 
children; (3) the action helps the family perform its functions, or 
substitutes governmental activity for the function; (4) the action 
increases or decreases disposable income or poverty of families and 
children; (5) the proposed benefits of the action justify the financial 
impact on the family; (6) the action may be carried out by State or 
local government or by the family; and whether (7) the action 
establishes an implicit or explicit policy concerning the relationship 
between the behavior and personal responsibility of youth, and the 
norms of society. In evaluating the above factors, DOE has concluded 
that it is not necessary to prepare a Family Policymaking Assessment as 
none of the above factors are implicated. Further, this proposed 
determination would not have any financial impact on families nor any 
impact on the autonomy or integrity of the family as an institution.
    DOE has considered how the benefits of this final rule compare to 
the possible financial impact on a family (the only factor listed that 
is relevant to this proposed rule). As part of its rulemaking process, 
DOE must determine whether the energy conservation standards enacted in 
this final rule are economically justified. As discussed in section 
V.C.1 of this document, DOE has determined that the standards enacted 
in this final rule are economically justified because the benefits to 
consumers would far outweigh the costs to manufacturers. Families will 
also see LCC savings as a result of this final rule. Moreover, as 
discussed further in section V.B.1 of this document, DOE has determined 
that for low-income households, average LCC savings and

[[Page 105284]]

PBP at the considered efficiency levels are improved (i.e., higher LCC 
savings and lower PBP) as compared to the average for all households. 
Further, the standards will also result in climate and health benefits 
for families.

I. Review Under Executive Order 12630

    Pursuant to E.O. 12630, ``Governmental Actions and Interference 
with Constitutionally Protected Property Rights,'' 53 FR 8859 (March 
18, 1988), DOE has determined that this rule would not result in any 
takings that might require compensation under the Fifth Amendment to 
the U.S. Constitution.

J. Review Under the Treasury and General Government Appropriations Act, 
2001

    Section 515 of the Treasury and General Government Appropriations 
Act, 2001 (44 U.S.C. 3516, note) provides for Federal agencies to 
review most disseminations of information to the public under 
information quality guidelines established by each agency pursuant to 
general guidelines issued by OMB. OMB's guidelines were published at 67 
FR 8452 (February 22, 2002), and DOE's guidelines were published at 67 
FR 62446 (Oct. 7, 2002). Pursuant to OMB Memorandum M-19-15, Improving 
Implementation of the Information Quality Act (April 24, 2019), DOE 
published updated guidelines which are available at www.energy.gov/sites/prod/files/2019/12/f70/DOE%20Final%20Updated%20IQA%20Guidelines%20Dec%202019.pdf. DOE has 
reviewed this final rule under the OMB and DOE guidelines and has 
concluded that it is consistent with applicable policies in those 
guidelines.

K. Review Under Executive Order 13211

    E.O. 13211, ``Actions Concerning Regulations That Significantly 
Affect Energy Supply, Distribution, or Use,'' 66 FR 28355 (May 22, 
2001), requires Federal agencies to prepare and submit to OIRA at OMB, 
a Statement of Energy Effects for any significant energy action. A 
``significant energy action'' is defined as any action by an agency 
that promulgates or is expected to lead to promulgation of a final 
rule, and that: (1) is a significant regulatory action under Executive 
Order 12866, or any successor order, and is likely to have a 
significant adverse effect on the supply, distribution, or use of 
energy; or (2) is designated by the Administrator of OIRA as a 
significant energy action. For any significant energy action, the 
agency must give a detailed statement of any adverse effects on energy 
supply, distribution, or use should the proposal be implemented, and of 
reasonable alternatives to the action and their expected benefits on 
energy supply, distribution, and use.
    DOE has concluded that this regulatory action, which sets forth 
amended energy conservation standards for gas-fired instantaneous water 
heaters, is not a significant energy action because the standards are 
not likely to have a significant adverse effect on the supply, 
distribution, or use of energy, nor has it been designated as such by 
the Administrator at OIRA. Accordingly, DOE has not prepared a 
Statement of Energy Effects on this final rule.

L. Information Quality

    On December 16, 2004, OMB, in consultation with the Office of 
Science and Technology Policy (``OSTP''), issued its Final Information 
Quality Bulletin for Peer Review (``the Bulletin''). 70 FR 2664 (Jan. 
14, 2005). The Bulletin establishes that certain scientific information 
shall be peer reviewed by qualified specialists before it is 
disseminated by the Federal Government, including influential 
scientific information related to agency regulatory actions. The 
purpose of the Bulletin is to enhance the quality and credibility of 
the Government's scientific information. Under the Bulletin, the energy 
conservation standards rulemaking analyses are ``influential scientific 
information,'' which the Bulletin defines as ``scientific information 
the agency reasonably can determine will have, or does have, a clear 
and substantial impact on important public policies or private sector 
decisions.'' 70 FR 2664, 2667.
    In response to OMB's Bulletin, DOE conducted formal peer reviews of 
the energy conservation standards development process and the analyses 
that are typically used and prepared a report describing that peer 
review.\202\ Generation of this report involved a rigorous, formal, and 
documented evaluation using objective criteria and qualified and 
independent reviewers to make a judgment as to the technical/
scientific/business merit, the actual or anticipated results, and the 
productivity and management effectiveness of programs and/or projects. 
Because available data, models, and technological understanding have 
changed since 2007, DOE has engaged with the National Academy of 
Sciences to review DOE's analytical methodologies to ascertain whether 
modifications are needed to improve DOE's analyses. DOE is in the 
process of evaluating the resulting report.\203\
---------------------------------------------------------------------------

    \202\ The 2007 ``Energy Conservation Standards Rulemaking Peer 
Review Report'' is available at: energy.gov/eere/buildings/downloads/energy-conservation-standards-rulemaking-peer-review-report-0 (last accessed August 29, 2024).
    \203\ The report is available at: www.nationalacademies.org/our-work/review-of-methods-for-setting-building-and-equipment-performance-standards.
---------------------------------------------------------------------------

M. Congressional Notification

    As required by 5 U.S.C. 801, DOE will report to Congress on the 
promulgation of this rule prior to its effective date. The report will 
state that the Office of Information and Regulatory Affairs has 
determined that the rule meets the criteria set forth in 5 U.S.C. 
804(2).

VII. Approval of the Office of the Secretary

    The Secretary of Energy has approved publication of this final 
rule.

List of Subjects in 10 CFR Part 430

    Administrative practice and procedure, Confidential business 
information, Energy conservation, Household appliances, Imports, 
Intergovernmental relations, Reporting and recordkeeping requirements, 
and Small businesses.

Signing Authority

    This document of the Department of Energy was signed on December 
16, 2024, by Jeffrey Marootian, Principal Deputy Assistant Secretary 
for Energy Efficiency and Renewable Energy, pursuant to delegated 
authority from the Secretary of Energy. That document with the original 
signature and date is maintained by DOE. For administrative purposes 
only, and in compliance with requirements of the Office of the Federal 
Register, the undersigned DOE Federal Register Liaison Officer has been 
authorized to sign and submit the document in electronic format for 
publication, as an official document of the Department of Energy. This 
administrative process in no way alters the legal effect of this 
document upon publication in the Federal Register.

    Signed in Washington, DC, on December 16, 2024.
Treena V. Garrett,
Federal Register Liaison Officer, U.S. Department of Energy.

    For the reasons set forth in the preamble, DOE amends part 430 of 
chapter II, subchapter D, of title 10 of the Code of Federal 
Regulations, as set forth below:

[[Page 105285]]

PART 430--ENERGY CONSERVATION PROGRAM FOR CONSUMER PRODUCTS

0
1. The authority citation for part 430 continues to read as follows:

    Authority: 42 U.S.C. 6291-6309; 28 U.S.C. 2461 note.


0
2. Amend Sec.  430.32 by revising paragraph (d)(3) and adding paragraph 
(d)(4) to read as follows:


Sec.  430.32  Energy and water conservation standards and their 
compliance dates.

* * * * *
    (d) * * *
    (3) The uniform energy factor of water heaters manufactured on or 
after December 26, 2029 shall not be less than the following:

                                          Table 15 to Paragraph (d)(3)
----------------------------------------------------------------------------------------------------------------
                                          Effective storage
            Product class                volume (Veff) * and          Draw pattern                UEF *
                                             input rating
----------------------------------------------------------------------------------------------------------------
Gas-fired Instantaneous Water Heater.  <2 gallons (``gal'')     Very Small.............  0.64.
                                        and <=50,000 Btu/h.     Low....................  0.64.
                                                                Medium.................  0.64.
                                                                High...................  0.64.
                                       <2 gal and >50,000 Btu/  Very Small.............  0.89.
                                        h.                      Low....................  0.91.
                                                                Medium.................  0.91.
                                                                High...................  0.93.
                                       >=2 gal and <=200,000    Very Small.............  0.2534-(0.0018 x Veff).
                                        Btu/h.                  Low....................  0.5226-(0.0022 x Veff).
                                                                Medium.................  0.5919-(0.0020 x Veff).
                                                                High...................  0.6540-(0.0017 x Veff).
----------------------------------------------------------------------------------------------------------------
* Veff is the Effective Storage Volume (in gallons), as determined pursuant to Sec.   429.17 of this chapter.

    (4) The provisions of paragraph (d) of this section are separate 
and severable from one another. Should a court of competent 
jurisdiction hold any provision(s) of paragraph (d) of this section to 
be stayed or invalid, such action shall not affect any other provision 
of paragraph (d) of this section.
* * * * *

    Note: The following letter will not appear in the Code of 
Federal Regulations.

October 12, 2023
U.S. Department of Justice: Antitrust Division, Ami Grace-Tardy, 
Assistant General Counsel for Legislation, Regulation and Energy 
Efficiency, U.S. Department of Energy, Washington, DC 20585, Re: Energy 
Conservation Standards for Consumer Water Heaters DOE Docket No. EERE-
2017-BT-STD-0019
Dear Assistant General Counsel Grace-Tardy:
    I am responding to your August 23, 2023 letter seeking the views of 
the Attorney General about the potential impact on competition of 
proposed energy conservation standards for consumer water heaters.
    Your request was submitted under section 325(o)(2)(B)(i)(V) of the 
Energy Policy and Conservation Act, as amended (ECPA), 42 U.S.C. 
6295(o)(2)(B)(i)(V), which requires the Attorney General to determine 
the impact of any lessening of competition that is likely to result 
from the imposition of proposed energy conservation standards. The 
Attorney General's responsibility for responding to requests from other 
departments about the effect of a program on competition has been 
delegated to the Assistant Attorney General for the Antitrust Division 
in 28 CFR 0.40(g). The Assistant Attorney General for the Antitrust 
Division has authorized me, as the Policy Director for the Antitrust 
Division, to provide the Antitrust Division's views regarding the 
potential impact on competition of proposed energy conservation 
standards on his behalf.
    In conducting its analysis, the Antitrust Division examines whether 
a proposed standard may lessen competition, for example, by 
substantially limiting consumer choice, by placing certain 
manufacturers at an unjustified competitive disadvantage, or by 
inducing avoidable inefficiencies in production or distribution of 
particular products. A lessening of competition could result in higher 
prices to manufacturers and consumers.
    We have reviewed the proposed standards contained in the notice of 
proposed rulemaking (``NOPR'') (88 FR 49058, July 28, 2023) and the 
related Technical Support Document. We have also reviewed public 
comments and information provided by industry participants and have 
reviewed the transcript and information presented at the Webinar of the 
Public Meeting held on September 13, 2023. Based on this review, we do 
not have an evidentiary basis to conclude that the proposed energy 
conservation standards for consumer water heaters are likely to 
substantially lessen competition.

Sincerely,

David G.B. Lawrence,

Policy Director.

[FR Doc. 2024-30369 Filed 12-23-24; 8:45 am]
BILLING CODE 6450-01-P`