Document ID: EPA-HQ-OAR-2009-0734-1763
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2015-02-04T05:00Z

MEMORANDUM

DATE: 	January 30, 2015

SUBJECT:	Unit Cost Estimates of Residential Wood Heating Appliances

FROM:	Beth Friedman, EC/R Inc.

TO:		David Cole, EPA/OAQPS 
      Gil Wood, EPA/OAQPS
      Amanda Aldridge, EPA/OAQPS

	The purpose of this memorandum is to present an estimate of the unit costs of residential wood heating appliances under final New Source Performance Standards (NSPS). We present estimates of baseline unit costs for each of the appliance types regulated in the final rule and estimated additional manufacturing costs to comply with the final emission limits. We use this information to estimate the incremental impacts on unit cost based on the NSPS two-step PM emission limit implementation strategy. Note that the majority of cost and shipment data used in this analysis was provided by industry sources. 
 
   I. Baseline Unit Cost Estimates 
      Baseline unit costs for each appliance were estimated using three sources of information. These costs represent the costs based on the manufacturer's price (not the retail price). For pellet stoves, we used the average 2008 base year manufacturer's cost ($1,279), based on Frost & Sullivan (F&S) market research, and converted the 2008 cost to 2013 dollars ($1,384). For units not included in the F&S report, such as single burn rate stoves and forced-air furnaces, we used manufacturer's base cost information, also updated to 2013 dollars.,  Single burn rate stoves unit cost was $250 in 2008 and $271 in 2013. Forced-air furnaces unit cost was $900 in 2008 and $974 in 2013.
      
      In the case of adjustable burn rate wood stoves and hydronic heaters, commenters on the proposed NSPS provided the results of a retail price survey for each of these appliance types. For adjustable burn rate wood heaters, the average (mean) retail price for the full range of medium-size steel models was $1,858 (2012) while the average (mean) retail price for the full range of medium-size cast iron models was $2285 (2012). At proposal, the unit cost estimates were based on production of steel stoves alone. However, based on information provided in public comments that assumed cast iron stoves comprise about half of the market, we estimated an average cost of the two model types to better represent average unit costs ($2,072). Finally, we adjusted the retail price estimate to remove the industry estimate of a 67 percent retail markup for these appliances ($1,241). We also updated the price estimate to reflect 2013 dollars ($1,259).
For hydronic heaters, the retail survey showed that the average (mean) retail price of unqualified heaters was $6,154 (2013) and of EPA Voluntary Program Phase 2 qualified models was $10,193 (2013). We adjusted the retail price estimates to remove the industry estimate of a 25 percent retail markup for these appliances in order to estimate manufacturers' prices. The resulting prices are $4,923 for unqualified heaters and $8,154 for qualified heaters.

II.	Additional Manufacturing Costs
         
	We believe that manufacturers may face additional costs to manufacture complying units in some cases.  We estimated the following additional manufacturing costs per unit based on appliance type:

      * Certified wood stoves and pellet stoves represent a well-developed technology and we could not identify price differences between models with lower emission levels compared to models with higher emission levels. Some stoves with lower emission sell for less than some stoves with higher emissions and vice versa. Therefore, we have assumed no additional manufacturing costs.
      * One manufacturer estimated that it will cost an average of $100 more to manufacture a lower emitting single burn rate product (exclusive of recovering R&D cost), which we updated to 2013 ($), approximately $110.
      * We have limited information that indicates the cost to produce a forced-air furnace that complies with a Step 1 emission standard (see discussion below in section V) is approximately 75 percent more, or $1,700 (exclusive of recovering R&D cost). 
      * As can been seen in the hydronic heater market survey results, the prices of qualified model hydronic heaters ranges from $6,995 to $15,395, with the average retail price of $10,193. As discussed in the previous section, we adjusted this value to exclude the 25 percent retail markup, resulting in a manufacturers' cost estimate of $8,154. We assumed an approximate increase of $3,200 to manufacture a qualified unit compared to an unqualified unit.

III.	Number of Models and Shipment Data

The estimated number of shipments (i.e., units sold per year) was derived as explained in the emissions memo.  We needed to reconcile the data on shipments of individual units with the certification costs associated with model lines. Therefore, we estimated the average number of models produced by manufacturers of each product type. For certified wood stoves and fireplace inserts, we used information provided by HPBA that 125 models are being produced on EPA's list of certified stoves. Because pellet stoves are produced at levels comparable to wood stoves, we estimated that there are up to 125 models being currently produced.  

      * Adjustable burn rate stoves  -  125 models
      * Pellet stove  -  125 models  

The single burn rate estimate of 20 different models is based on an internet search of the two major manufacturers (United States Stove and Vogelzang, which is now owned by United States Stove). The actual estimate could be higher if there are a large number of importers of foreign produced units. However, a search of the Northern Tool and Equipment, Tractor Supply Company, Lowes, Home Depot and Walmart websites did not identify any other major producers of single burn rate stoves that are sold in the U.S. Also, public comments did not identify any other major producers.

      * Single burn rates stoves  -  20 models

	The HPBA provided a list of manufacturers by product type. Using this as a starting point, we conducted additional internet searches to quantify the numbers of models offered by manufacturer. We further refined the estimate of hydronic heater models based on EPA's experience with the EPA voluntary partnership program. We understand that a number of manufacturers list products on their website that are no longer manufactured, only sold in limited quantities, and/or are sold under license to another manufacturer.  Furthermore, one manufacturer dominates industry sales, so on a sales-weighted basis there are fewer numbers of models produced than a strict interpretation of web sites would indicate. Based on this process, we estimated the following number of models by appliance type:

      * Forced-air furnaces  -   50 models
      * Hydronic heating systems (outdoor and indoor)  -  120 models

IV.	Incremental Unit Costs of Residential Wood Heaters

	 Our analysis of incremental unit costs is based on the following Adjusted Unit Cost Formulas. Cost Formula 1 is used to estimate incremental unit costs from 2015 through 2020 and states:

((Cost of Amortized R&D * Number of models) / (Number of shipments))
 + Baseline Unit Cost + Additional Manufacturing Cost = Adjusted Unit Cost 	(1)
                                       
The adjusted unit cost (Formula 1) equals the incremental cost of developing a new unit, spread over the number of units expected to be sold in 2015, for the duration of the 6-year model development period (2015 to 2020). The cost of amortized R&D corresponds to an average annual R&D cost amortized over 6 years at a 7-percent interest rate, as explained in more detail in the manufacturer cost impacts memo.  
	We used this cost formula to estimate the incremental unit costs starting in 2015 and ending in 2020.  This is consistent with the assumptions described in section V regarding NSPS implementation timing. Although we assume that many manufacturers have already begun R&D efforts  -  in anticipation of this rule whose initial development was publicly announced by EPA in November 2009  -  for the purposes of our cost estimate, we have amortized model development costs over the 6 year period beginning in 2015 and ending in 2020 (inclusive). In the case of single burn rate stoves and forced-air furnaces, we assume that the first two years of R&D represent intensified research and engineering as explained in the manufacturer's cost memo.[16] Where there are additional manufacturing costs as discussed above, we added these to the unit cost number.  The total incremental cost was added to the base model cost to derive the post-NSPS (adjusted) unit cost. 

      By 2021, we assume that R&D has been completely amortized. Note that from 2015 to 2020, we have incorporated certification costs as part of the overall R&D expenditures, expressed above in Cost Formula 1.
However, starting in 2021, we assume incremental costs associated with ongoing certification testing such that 1/5[th] of models certify every 5 year period. This assumption is reflected in our Adjusted Unit Cost Formula 2:

((Cost of Certification Testing)/5 * Number of models) / (Number of shipments)) 
  + Baseline Unit Cost + Additional Manufacturing Cost = Adjusted Unit Cost (2)
For adjustable burn rate, single burn rate and pellet stoves, we estimate the cost of certification testing a heater design in an EPA accredited lab to be approximately $10,000. And we estimate a certification testing cost of $20,000 per model for hydronic heaters and forced-air furnaces.  

Table 1 is a summary of the unit cost inputs with the exception of the shipment data. See the emissions memo for detailed shipment data.  

Table 1. Summary of Unit Cost Inputs

R&D Annualized Cost ($)* **
# Models
Certification Testing ($)*
Baseline Unit Cost ($)*
Additional manufacturing cost ($)*
Adjustable Burn Rate Wood Stoves
                                                                         32,702
                                                                            125
                                                                         10,000
                                                                          1,259

Single Burn Rate Stoves
                                                                         39,206
                                                                             20
                                                                         10,000
                                                                            271
                                                                            110
Pellet Stoves
                                                                         32,702
                                                                            125
                                                                         10,000
                                                                          1,384

Forced-Air Furnaces
                                                                        306,232
                                                                             50
                                                                         20,000
                                                                            974
                                                                           1700
Hydronic Heating Systems
                                                                        250,706
                                                                            120
                                                                         20,000
                                                                          4,923
                                                                           3200

*Cost estimates are in 2013$.

** Total R&D cost estimates correspond to an average annual R&D cost amortized over 6 years at a 7% interest rate. 

      Table 2 is a summary of the adjusted unit costs of Wood Heaters meeting the final NSPS.

        Table 2.  Unit Costs of Wood Heaters meeting Final NSPS (2013$)
 
                                     2008*
                                      ...
                                     2014
                                     2015
                                     2016
                                     2017
                                     2018
                                     2019
                                     2020
                                     2021
                                     2022
                                     2023
                                     2024
                                      ...
                                     2029
Adjustable Burn Rate Wood Stoves
                                                                         $1,259
                                                                         $1,259
                                                                         $1,259
                                                                         $1,307
                                                                         $1,307
                                                                         $1,307
                                                                         $1,307
                                                                         $1,307
                                                                         $1,307
                                                                         $1,261
                                                                         $1,261
                                                                         $1,261
                                                                         $1,261
                                                                         $1,261
                                                                         $1,261
Single Burn Rate Stoves
                                                                           $271
                                                                           $271
                                                                           $271
                                                                           $410
                                                                           $410
                                                                           $410
                                                                           $410
                                                                           $410
                                                                           $410
                                                                           $382
                                                                           $382
                                                                           $382
                                                                           $382
                                                                           $382
                                                                           $382
Pellet Stoves
                                                                         $1,384
                                                                         $1,384
                                                                         $1,384
                                                                         $1,430
                                                                         $1,430
                                                                         $1,430
                                                                         $1,430
                                                                         $1,430
                                                                         $1,430
                                                                         $1,387
                                                                         $1,387
                                                                         $1,387
                                                                         $1,387
                                                                         $1,387
                                                                         $1,387
Forced-Air Furnaces
                                                                           $974
                                                                           $974
                                                                           $974
                                                                         $3,225
                                                                         $3,225
                                                                         $3,225
                                                                         $3,225
                                                                         $3,225
                                                                         $3,225
                                                                         $2,680
                                                                         $2,680
                                                                         $2,680
                                                                         $2,680
                                                                         $2,680
                                                                         $2,680
Hydronic Heating Systems
                                                                         $4,923
                                                                         $4,923
                                                                         $4,923
                                                                        $10,287
                                                                        $10,287
                                                                        $10,287
                                                                        $10,287
                                                                        $10,287
                                                                        $10,287
                                                                         $8,154
                                                                         $8,154
                                                                         $8,154
                                                                         $8,154
                                                                         $8,154
                                                                         $8,154
Step 1 (2015)

Step 2 (2020)

*Note: The average 2008 base year cost per appliance was converted to 2013$ for this analysis. 

   II. 
V.	NSPS Requirements

      For the final rule, we evaluated the cost impacts of implementing new or revised NSPS standards for the residential wood heating appliance industry. The cost analyses reflect the final rule's phase-in schedules where most appliances would be required to meet a specified Step 1 emission limit upon promulgation in 2015 and then a stricter Step 2 emission limit 5 years later in 2020, as detailed below. It is important to note that the unit costs presented above in Table 2 for years 2015 through 2020 are for a unit required to make changes to comply with the NSPS.  In reality, some units will not require changes and not incur the related R&D costs because some model lines already meet the final emission limits. The following summary describes the specific emission limits under the rule for affected appliance types under each subpart. 

Subpart AAA ("room heaters"): 
 
      * Adjustable burn rate, single burn rate, and pellet stoves:  Step 1 limit of 4.5 g/hr upon the effective date in 2015; and Step 2 limit of 2.0 g/hr 5 years after the effective date, i.e., in 2020.  
Subpart QQQQ ("central heaters"):

      * Hydronic heaters (both outdoor and indoor):  Step 1 limit of 0.32 lb/mm BTU heat output upon the effective date in 2015; and Step 2 limit of 0.10 lb/mm BTU heat output 5 years after the effective date, i.e., in 2020. 
         
      * Forced-Air Furnaces:  Work practice/operational standards will be required of all forced-air furnaces upon the rule's 2015 effective date. The Step 1 PM emission limit of 0.93 lb/mm BTU heat output will be required by 2016 (1 year after the 2015 effective date) for small forced-air furnaces and by 2017 (2 years after the 2015 effective date) for large forced-air furnaces. The Step 2 PM emission limit of 0.15 lb/mm BTU heat output for all forced-air furnaces will be required 5 years after the effective date, i.e., in 2020. Note: For the purposes of this unit cost analysis we have estimated incremental cost increases to the manufacturer beginning in 2015, similar to other appliances, because costs are amortized beginning in 2015 in our analysis. However, retail cost increases may not occur until 2016 and 2017, depending on the forced-air furnace model.
VI.	Other Cost Information

      The HPBA market surveys referenced above contain additional information on other factors that affect the retail price of stoves such as discounting off the manufacturer's suggested retail price (MSRP), freight costs, installation costs, taxes and regional pricing. Commenters also provide an analysis of hearth retailer gross margin survey results. Other than information described above regarding retail price markups, this information was not used in the analysis of adjusted unit costs described herein.