November 15, 2011

Energy Conservation for Furnaces, Heat Pumps, and AC

Proposed Rule

Score: 39 / 60

Key materials
Additional details
Department of Energy
Regulatory Identification Number
Agency Name
Department of Energy
Rule Publication Date
Comment Closing Date


The Energy Policy and Conservation Act of 1975 (EPCA), as amended, prescribes energy conservation standards for various consumer products and certain commercial and industrial equipment, including residential furnaces and residential central air conditioners and heat pumps. EPCA also requires the U.S. Department of Energy (DOE) to determine whether more stringent, amended standards for these products would be technologically feasible and economically justified, and would save a significant amount of energy. In this notice, DOE proposes energy conservation standards for residential furnaces and for residential central air conditioners and heat pumps identical to those set forth in a direct final rule published elsewhere in today’s Federal Register. If DOE receives adverse comment and determines that such comment may provide a reasonable basis for withdrawing the direct final rule, DOE will publish a notice withdrawing the direct final rule and will proceed with this proposed rule.

For a copy of the Regulatory Impact Analysis, visit the Department of Energy's website.


There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

Criterion Score


1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
The NPRM turns up easily in with a RIN search, but a keyword search produces a large number of documents to wade through. The NPRM refers the reader to the direct final rule for more details on DOE's analysis. The direct final rule has an extensive discussion of the analysis and a link to a place on DOE's web page where one can find the technical support document. Could not find current regulation rule using the keyword search found on Department of Energy website, though the 2000 rule turned up. A keyword search on the Energy Efficiency and Renewable Energy Departments website was successful. The RIA (labeled as the Technical Support Document) is available online, though not easy to find. A Google search on the RIN turns up the relevant documents.
2. How verifiable are the data used in the analysis?
Data are extensive but well described. Hard to replicate in terms of work involved. Data are sourced, sometimes linked, and reproduced in appendices. Other sources were cited, such as the Residential Energy Consumption Survey: Quality Profile, 1996, that were not online but verifiable.
3. How verifiable are the models and assumptions used in the analysis?
Many assumptions/models are based on academic or DOE research that is cited and often linked. The vast set of supporting documents give the reader full details of the surveys or research studies on which the assumptions or estimations are based. Moreover, it uses FUND, DICE, and PAGE models that are frequently used in the literature on climate change. Some assumptions, like "factory parameters," are based on "internal expertise and manufacturer feedback" without further documentation. They are listed. Some heuristic assumptions are not sourced but seem reasonable, e.g., rapid growth rate in adoption of efficient equipment between 2006 and 2009 was due to tax credits. Spreadsheets used for calculations are available online.
4. Was the analysis comprehensible to an informed layperson?
The results and summary are quite clear. The analysis is extremely detailed. Unfortunately, this results in an excessive use of jargon and acronyms, so much so that the Technical Documents include a two-page list of acronyms for the reader. Therefore, a lay person may be overwhelmed by the analysis. A table in the NPRM translates some of the arcane analysis into benefit-cost results.


5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
Identified outcomes include net cost savings to consumers and environmental benefits from reduced emissions that result from reduced energy use. Energy savings are considered an outcome in their own right without much explanation why. "Energy security" is also mentioned but not defined well. Reduced need for generating capacity sometimes seems to be counted as an outcome.
Does the analysis identify how these outcomes are to be measured?
DOE is required to develop test procedures to measure the energy efficiency, energy use, or estimated annual operating cost of each covered product. Analysis calculates life-cycle cost to consumers - the net effect of energy cost savings (based on marginal electricity prices) and higher initial purchase costs. It also provides an estimate that includes monetized benefits of emission reductions. "Energy security" is not defined or measured.
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
Mandated efficiency levels will generate energy savings, consumer cost savings and environmental benefits by removing the option of buying less efficient equipment. Explicitly assumes 100-percent compliance. No consideration of a "rebound effect" because greater efficiency reduces the cost of operating the equipment.
Does the analysis present credible empirical support for the theory?
The analysis lists adoption rates of previous improvement in energy standards for heating/cooling systems. National energy savings chapter presents graphs with data suggesting that upward shifts in efficiency occurred following previous efficiency standards in 1992 and 2006. This is not explicitly cited as evidence that the regulation will work. Efficiency appears to grow at a faster rate prior to standards, but this may be an illusion because there are only a couple pre-1992 data points. For the policy alternatives, results are estimated based on studies of similar policies.
Does the analysis adequately assess uncertainty about the outcomes?
Probability distributions used for consumer discount rates. Analysis reflects variability of energy prices and consumption across households. Monte Carlo analysis used to calculate life-cycle cost savings. The analysis includes uncertainty based on climate, type of structure, discount rates, etc, when calculating the Life-Cycle Cost and the Pay Back Period. An appendix shows how different assumed learning rates affect energy savings results. Chapter that monetizes environmental benefits acknowledges significant uncertainty about the social costs of CO2 and NOX and uses a range of values, including both domestic and global values.
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
Does the analysis identify a market failure or other systemic problem?
The NPRM for the direct final rule asserts in three paragraphs that consumers lack information about energy efficiency, there is asymmetric information and transaction costs, and there are external benefits from energy efficiency that the consumer does not capture. These are all recognized forms of market failure, but they are not really explained. The presentation gives the impression that these were just listed to satisfy a requirement in EO 12866. The analysis assumes that customers are not using a heating/cooling system that is optimal. Not clear why consumers are not already buying equipment that apparently saves money.
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
The first two market failures mentioned above under 6A are just asserted. The third explains that prices do not reflect the effects of pollutant emissions. Implicitly recognizes that emissions are social costs and therefore customers may not bear these costs. However, electricity cost may or may not include the costs of emission now or in the future. It also assumes that other means of reducing CO2 emissions, such as at the power plant, are not viable. There is also an assertion about energy security not being incorporated into prices, which is not explained.
Does the analysis present credible empirical support for the theory?
The research cited on the social cost of carbon might be interpreted as evidence that there are environmental externalities, though this is not linked to definition of the systemic problem. The analysis uses integrated assessment models (IAMs) commonly used to estimate the SCC: the FUND, DICE, and PAGE models to determine the social cost of emissions. These models translate emissions into changes in atmospheric greenhouse concentrations, atmospheric concentrations into changes in temperature, and changes in temperature into economic damages. No evidence is presented to support the claims about information, transaction cost, or energy security problems.
Does the analysis adequately assess uncertainty about the existence or size of the problem?
The problem is assumed to exist with certainty. The analysis does address the uncertainty of the problem of emission costs by using five different social costs of CO2 emissions. The regulation also discusses whether the social costs should be estimated globally or only domestically.
7. How well does the analysis assess the effectiveness of alternative approaches?
Does the analysis enumerate other alternatives to address the problem?
Multiple alternative standard levels plus a variety of other policy options: No New Regulatory Action Consumer Rebates Consumer Tax Credits Manufacturer Tax Credits Voluntary Energy Efficiency Targets Early Replacement Bulk Government Purchases
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
The seven alternatives listed above are broad and include no new regulation as well as tax credits of various types, and voluntary efficiency targets. It does not, however, address ways to ensure that the price of electricity reflects the social cost. Nor does it mention other techniques that might also reduce energy consumption. All alternatives focus on reducing energy use by inducing people to buy more efficient furnaces and air conditioners, rather than some other means. On the plus side, these appliances are a major source of energy use.
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
Energy savings, life cycle costs, and environmental benefits estimated for alternative standard levels. The analysis lists the rate of market penetration of the higher efficiency heating/cooling systems under alternative approaches and the net present value of each. Only energy savings are calculated for the seven policy alternatives. Why the particular amounts for rebates, tax credits, etc. are appropriate isn't clear; one could generate larger affects by assuming a larger amount.
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
Trial standard levels are a fair attempt in this area. Analysis projected base case market shares of equipment of different efficiencies in 2016 using growth rates from recent past years. This is better than assuming no growth but still assumes the future will be like the past with little justification. Calculation of energy savings uses Energy Information Administration price projections.
8. How well does the analysis assess costs and benefits?
Does the analysis identify and quantify incremental costs of all alternatives considered?
The analysis does quantify costs for the seven main alternatives (trial standard levels). It does not list incremental costs, but they can be calculated. For alternative policies, costs are not calculated.
Does the analysis identify all expenditures likely to arise as a result of the regulation?
Additional expenditures appear to be pretty thoroughly documented -- both for consumers and for businesses. The analysis looks at the manufacturing costs of the new heat pumps and furnaces and includes the retail markup faced by customers. It also looks at the costs of installation, including the variation due to state costs and differences between new and replacement costs. It is not clear how the effects on consumers and on manufacturer cash flows are related, since the assumption that consumers bear the full cost of high-efficiency equipment would presumably imply that manufacturers pass all the cost on to consumers.
Does the analysis identify how the regulation would likely affect the prices of goods and services?
The analysis includes the costs of the new more efficient furnace, AC, or heat pump as well as the cost of installation in both new and old structures. It is not clear if the crude accounting measures will turn out to be accurate. Assumes the price of energy-efficient appliances will fall over time to reflect a "learning curve" and cites a DOE working paper that summarizes relevant literature.
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
Shipments analysis allows price increases to affect consumer decision to repair old appliances rather than replace with new. The shipments model divides the population of appliance users into specific market segments and estimates the shipment of new equipment to each of these segments under each candidate standard level (CSL). The model starts from a historical base year and calculates, for each year of the analysis period, both shipments and retirements by market segment. This approach produces an estimate of the total equipment stock, broken down by age or vintage, in each year of the analysis period. The product stock distribution is calculated for the base case and for each efficiency level for each product class. The shipments model allows for the price increase associated with a CSL to influence the consumer decision to repair, rather than replace, broken equipment. The extended repair stock category represents equipment that has been repaired after failure. This component of the stock is accounted for separately because it is further assumed that equipment that has undergone one extended repair will last another six years and then be replaced. This category is referred to as extended repair because it models major equipment failures; minor repairs are accounted for in the annual maintenance costs and determination of equipment lifetimes. An elasticity is calculated for "total price" which includes present discounted value of operating costs discounted at a 37 percent rate to reflect actual consumer discount rates. Also considered possible substitution between heat pumps and electric furnace/AC combo. No discussion of the incentive for consumers to keep their homes warmer in winter and cooler in summer because the marginal cost of a more efficient heating/cooling system is lower.
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
Probability distribution used for purchase prices of new equipment
Does the analysis identify the alternative that maximizes net benefits?
Technical support document calculates life-cycle cost to consumers for each proposed standard, which is sort of a net benefit to consumers, and adds monetized environmental benefits. It is not clear how the calculated effects on manufacturers are related, so this is not quite the same thing as calculating net benefits. A table in the NPRM translates this information into more standard benefit-cost terms, counting operating cost savings and emissions reductions as benefits and increased product costs as costs. But this is done only for the standard chosen.
Does the analysis identify the cost-effectiveness of each alternative considered?
Chapter 17 assesses net effect on consumers, which could be interpreted as an attempt to opine on cost-effectiveness. Cost-effectiveness in terms of dollars spent per unit of energy savings was not calculated. Since the analysis estimates energy savings and costs, presumably this could have been done.
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
The analysis does look at the impact on consumers, manufacturers, and employment of those in the industry and how they would be affected in terms of number of jobs and costs. The analysis also looks at the disparate impact on those living in the north versus the south, those living in hot-humid climates versus hot-dry climates versus those living in other parts of the country, elderly households, households who are living in poverty, as well as those with nine different types of heating/cooling systems. Also performs similar regional calculation for wholesalers and distributors. Tables show percentages of customers who experience net savings, net costs, or no impact, nationally and by region, for each alternative efficiency level. DOE identified several small AC manufacturers but determined they are unaffected because the standards for their products will not be raised. The department asserts that the effect on a small number of small oil furnace manufacturers would be small because the majority of their sales meet the new standards.
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
For each alternative efficiency level, life-cycle cost savings (or cost increases) are calculated nationally and for 3 climate regions. A separate chapter calculates this for senior-only households, low-income households, multi-family households, and new construction vs. replacement households. It also calculates the global benefit of lower CO2 and Nox emissions. Recognizes reductions in other emissions, such as Hg, but does not calculate a dollar value estimate.


9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
The NPRM and RIA present much of the evidence the DOE used in the analysis -- from regional weather, to tear downs of various types of heating/cooling systems, to market penetration of various alternatives. Rule was issued pursuant to 2 court orders. Legislation also requires DOE to review these standards periodically. This proposed rule is identical to a direct final rule that reflects the result of stakeholder negotiations. Thus, it is likely that the analysis mostly assesses the results of decisions made by stakeholders when the rule was negotiated. But it appears some of the findings were necessary before DOE could sign off on the proposal: "DOE applies the same principles to any consensus recommendations it may receive to satisfy its statutory obligation to ensure that any energy conservation standard that it adopts achieves the maximum improvement in energy efficiency that is technologically feasible and economically justified and will result in significant conservation of energy."
10. Did the agency maximize net benefits or explain why it chose another alternative?
Analysis calculates net cost or savings to consumers, environmental benefits, and cost to manufacturers, and the NPRM shows a table calculating net social benefit for the standard chosen. Legislation requires DOE to weigh these factors and several others that constitute "benefits" and "burdens." The NPRM claims that the decision on the standard level was driven by these comparisons and maximizes net benefits.
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
No commitment to goals or measures, but the predicted energy savings and cost savings in the RIA could be used to set goals.
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
No commitment to retrospective analysis, but some of the graphs showing energy efficiency trends suggest that DOE has access to data that could be used to measure results. Given the Energystar program, the department could track how many furnaces, AC, or heat pumps of each SEER efficiency are sold each year and thus could track the population of newly installed equipment to determine whether the number of new installations is similar to the estimated number. The regulatory analysis could be used as a template. DOE does not appear to have ways to measure the level of emission reductions.
Total 39 / 60