Energy Conservation for Furnaces, Heat Pumps, and AC

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

Probability distribution used for purchase prices of new equipment

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.

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.

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.

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.