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The DOE/APGA Furnace Rule Settlement: Avoiding Unintended Consequences

“In theory, higher furnace efficiency standards sound like a good thing …. However, the impact … would lead many consumers to switch from natural gas furnaces to heating alternatives that are less expensive on a first-cost basis, but are ultimately less energy efficient and result in higher consumer costs in the long term.”

Earlier this month, the American Public Gas Association (APGA) reached a mediated settlement agreement with the U.S. Department of Energy on APGA’s petition challenging regional furnace standards adopted by DOE in 2011 via a direct final rule (DFR). While some have called the settlement a “setback” and “cave-in,” the revised increased efficiency standard promises to avoid the unintended consequences that otherwise would dilute or even reverse the efficiency program’s goals.

Background

The new standards mandate an increase in the minimum annual fuel utilization efficiency (AFUE) from 78% to 90% for natural gas furnaces installed in 30 northern states, and from 78% to 80% in the southern states (the “Furnace Rule”). As part of the settlement, DOE agreed to withdraw the gas furnace portion of the Furnace Rule and initiate a traditional notice and comment rulemaking for new gas furnace efficiency standards.

This settlement advances the shared goals of improved energy efficiency, decreased emissions, and reduced energy costs for consumers. What motivated our petition, and was set forth clearly in our briefs to the court, was a belief that this was a poorly crafted rule, enacted in a hasty manner, and without adequate public comment.

Our members, community-owned (i.e., consumer/customer-owned) not-for-profit gas utilities, readily recognized that for many American consumers the Furnace Rule, although intended to improve energy efficiency, would ultimately undermine energy efficiency, increase emissions, and increase the costs to heat their home.

Authentic Energy Efficiency Needed

While APGA supports authentic energy efficiency efforts, we will not support efficiency rules and rulemakings in name only. And, the Furnace Rule was just that— an efficiency rule in name only.

The Furnace Rule, as proposed for 30 northern states, failed to segregate the new market from the replacement market and thus subjected itself to unintended consequences. Rather than improving energy efficiency, especially those in the southern tier of those northern states, and for many consumers in the replacement market, the rule as originally proposed would have:

(1) Produced costs exceeding the benefits;

(2) Burdened consumers that are sensitive to up-front appliance purchase expense (“first-costs’), and;

(3) Driven some consumers to less costly alternatives that, on a full fuel cycle basis, are less efficient, generate higher emissions, and would be more expensive over the life of the heating unit.

In theory, higher furnace efficiency standards sound like a good thing for consumers and for the environment. However, the impact of this Furnace Rule on the replacement market would lead many consumers to switch from natural gas furnaces to heating alternatives that are less expensive on a first-cost basis, but are ultimately less energy efficient and result in higher consumer costs in the long term.

Full-Fuel Cycle

I remember living in a condominium in northern Virginia in the mid-1990s with a heat pump. From December through March, my red emergency heat light would be illuminated for days at a time. My power bill reflected those “red light” days. At the time, more than 50% of the power generated in our service territory came from coal.

Compare the electric heat pump to its natural-gas competition. On a full fuel cycle basis, the direct use of natural gas is one of the most efficient uses of energy (90% compared to 27% for electricity).

This is why APGA is a long-standing supporter of energy efficiency–and why comparative full-fuel analysis is so important, albeit an inconvenient truth for those who do not want to believe that consumers have alternatives with which gas must compete.

Fuel Switching

APGA members are concerned with fuel switching, especially in the replacement market. This switching would occur because only condensing furnaces would have met the proposed 90% AFUE standard.

Many installed furnaces in the northern region are non-condensing furnaces (which meet the current 80% AFUE standard). Extensive and expensive venting modifications must be made to accommodate a 90% AFUE condensing furnace. The Furnace Rule would have caused many consumers to incur an additional estimated $1,500-$2,200 per installation (not to mention the increased purchase price of the higher efficient furnace).

In row houses, townhouses, and multi-family dwellings (types of buildings very common in the northern region) a condensing furnace may not even be an option because the side venting required is either impossible due to physical limitations, illegal due to building code issues, and/or impractical due to prohibitively high cost. The rule offered no alternatives.

These higher first costs would also deter landlords from installing natural gas furnaces in investment properties, resulting in less efficiency and higher heating costs for tenants. Monthly heating costs are borne by the tenant, whereas the landlord only bears the burden of the upfront cost for the furnace.

Unlike a homeowner, a landlord may not see a return on their more expensive furnace and venting costs. Common sense would lead one to believe that a landlord would look to find lower-cost alternatives.

While the operating cost savings of a higher efficient gas furnace may benefit a consumer in the long run, many consumers, especially those in lower income brackets, do not have the luxury of calculating their operating lifecycle costs versus first costs. Their primary concern is whether they can afford the new appliance at all, even without the cost hurdle of new venting.

For these consumers, the higher up-front cost for the installation and purchase of a 90% condensing gas furnace will mean one of two things: either they defer replacing a furnace that is at the end of its useful life (thereby creating other issues) or they switch to an initially less expensive but less efficient alternative.

Failure of Waiver Negotiations

Early in the process, APGA tried to work with other stakeholders on a waiver that might ameliorate the hardship and burden on consumers in the replacement market. APGA entered into that waiver negotiation process in good faith, hoping to avoid the costs and time of a litigation battle. Ultimately, the waiver proposed by the petitioning stakeholders group proved unworkable to other parties in the proceeding.

Assuming an agreement could even be reached on what situations would merit a waiver, a waiver would require that the installers be trained to evaluate whether a building met those agreed-upon requirements. At a minimum, the waiver would create an additional level of training for contractors.

APGA’s suggestion to allow online training was dismissed. For those who do not live in a major metropolitan area, time and travel costs can be expensive. Thus, in many areas, many if not most installers would not be certified to provide the waiver.

Another issue is availability. Even if a consumer was able to find a certified installer and be granted a waiver, a non-condensing natural gas furnace may not be immediately available. If a customer finds himself without a furnace, he needs his contractor to immediately replace the unit. To ship one from the southern region would further increase costs and time delay to when the consumer has their heat restored. Unable to quickly install an 80% gas furnace, many consumers may simply install a cheaper, less efficient alternative.

One Size Does Not Fit All

In some cases, as with furnaces, efficiency is not a goal that can be attained with a one-size-fits-all regulation. The United States is a climate diverse country with heating and cooling needs that vary dramatically by region. What makes sense in Minnesota or upstate New York may not necessarily be the remedy in Missouri or Pennsylvania.

By withdrawing the rule, DOE affords the country and all stakeholders an opportunity to take the time necessary to approach this important rulemaking with a more reasoned, balanced look.

It is our sincere hope that we can work with DOE and all other interested stakeholders on a new set of furnace standards that will meaningfully increase energy efficiency, reduce emissions, and save consumers dollars.

We believe this can be done in a way that does not bring about fuel switching and turn customers away from natural gas. We can move towards a new furnace rule that respects regional differences, different technologies, and the cost pressures faced by U.S. consumers.

—————— 

Bert Kalisch is President & CEO of American Public Gas Association, a nonprofit trade organization representing America’s publicly owned natural gas local distribution companies.

8 comments

1 Eddie Devere { 01.23.13 at 9:46 am }

To the APGA,
According to your website, you are protesting the exportation of US natural gas to countries that don’t have a Free Trade Agreement with the US.
http://www.apga.org/i4a/pages/index.cfm?pageid=3293
So, it seems that you want the DOE to regulate when it helps you, but you don’t want the DOE to regulate when it hurts you. Why don’t you stay consistent and just fight government intrusion into the energy industry?

The real question is why is DOE is allowed to regulate the efficiency of furnaces? What can it do if somebody violates the rules? Does the DOE FE really have the authority to fine somebody like the EPA does?

Also, the person who cares about the efficiency of a boiler is the person paying the bills. Let them decide whether to upgrade or not. Why does the government need to get involved?) If this is really about CO2 emissions, then by what authority does the DOE FE have to regulate CO2 emissions? (which is a global, not local, problem.) It’s not allowed to fine large power plants, so why would it be allowed to fine small furnaces?

2 JavelinaTex { 01.23.13 at 10:23 am }

Thanks for this posting. This is the first I have read that actually explained the underlying issue. I had suspected this, based on my knowledge of HVAC systems, but had found virtually all reporting and commentary essentially criticizing your organization as unreasonable.

I myself went through some issues with water heaters a few years back and looked at all gas fired technologies from tankless to all the varieties of “high efficiency” and the costs in a retrofit were beyond ridiculous – and I was willing to pay a significant premium for more efficiency. Yet the minimum efficiency non-condensing water heaters cut my usage by 50%.

3 Ed Reid { 01.24.13 at 8:51 am }

US DOE apparently continues to have difficulty crafting evenhanded appliance efficiency regulations and giving sufficient weight to installation issues, especially in retrofit installations.

First, let’s look at proportionality of performance levels. The most efficient gas furnaces currently available in the US market have an AFUE of 98.5%. The 90% AFUE requirement for gas furnaces in the DFR required that the minimum efficiency gas furnace achieve 91% of the performance of the most efficient furnace currently available in the market.

The most efficient electric heat pump currently available in the US market has an HSPF of 13. The DFR does not have a revised northern regional HSPF requirement. The HSPF requirement remains at 8.2, or 63% of the maximum HSPF heat pump currently available in the US market. The HSPF 13 heat pump is available from only a single manufacturer. However, multiple manufacturers offer heat pumps with HSPFs of 9.6. Compared to these relatively high efficiency heat pumps, the DFR requires only 85% of the efficiency of these widely available heat pumps.

Second, lets look at proportionality of technology. The DFR for gas furnaces required the elimination of a class of technology – atmospherically vented gas furnaces. The installation issues resulting from this requirement are discussed in Bert Kalish’s post.

The DFR might have required similar elimination of classes of technology, such as single compressor heat pumps or the use of electric resistance coils for emergency heating. However, it did not do so. A requirement for gas furnace use for emergency heating with electric heat pumps would have resulted in installation issues similar to those cause by the DFR for northern gas furnaces, particularly in retrofit installations. It would also have resulted in a tripling of the resource efficiency of emergency heating operation, which occurs frequently in northern climates.

Rather, the DFR established separate southeastern and southwestern cooling efficiency requirements, ignoring increased heating efficiency requirements for northern installations. The most efficient heat pump currently available in the US market has an SEER of 20.5, while several other manufacturers offer SEERs of 19. However, the DFR requires a SEER of only 14, or a mere 74% of the performance of the best available heat pumps.

It is often said that two things you do not want to see made are law and sausage. As a former participant in the DOE appliance efficiency rulemaking process, I would add it to the list. It is a rent seekers roundtable.

4 Mark { 01.24.13 at 9:33 am }

The following link is to the consensus agreement “fact sheet”
http://www.aceee.org/files/pdf/1009hvac_fact_0.pdf
Note that the implementation date for electric heat pumps happens two years later than furnaces. This alone represents a major bias in addition to those mentioned by Ed.

There were also numerous analytical choices within DOE’s “Technical Support Documents” which further biased DOE’s ostensible findings against gas and for heat pumps. One of the more blatant choices was DOE’s decision to use marginal electric costs for heat pumps but average gas costs for furnaces. I could go on but won’t for the sake of brevity.

If interested, most of the fil;ed comments can be reviewed at regulations.gov by searching for:
Docket Number EERE–2011–BT–STD–0011
or
RIN 1904–AC06

5 Mark { 01.24.13 at 1:55 pm }

PS:

speaking of tables, Ed, some one said if you’re not at the table you’re probably on the menu. And with that in mind check out this news I just got from AHRI:

DOE Schedules First ASRAC Meeting

On January 17, the Department of Energy (DOE) announced the first meeting of the Appliance Standards and Rulemakings Federal Advisory Committee (ASRAC). The purpose of the meeting is to provide advice and recommendations to DOE on the development of standards and test procedures for residential appliances and commercial equipment, certification and enforcement of standards, and product labeling. The first ASRAC meeting is scheduled for Tuesday, February 26, from 9:00 am to 5:00 pm at DOE headquarters in Washington, DC. The tentative meeting agenda includes an overview of the appliance standards program, a discussion on the committee’s purpose and structure, and a discussion of appliances and equipment best suited for the negotiated rulemaking process. The committee is comprised of the following individuals:
• Co-Chair: Mr. Andrew deLaski, Appliance Standards Awareness Project
• Co-Chair: Mr. John Mandyck, UTC Climate, Controls & Security
• Ms. Ashley Armstrong, U.S. Department of Energy
• Mr. John Caskey, National Electrical Manufacturers Association
• Mr. Timothy Cassidy, Best Buy Co., Inc.
• Mr. Thomas Coughlin, National Grid
• Mr. Steven Cousins, The Coca-Cola Company
• Mr. Thomas Eckman, Northwest Power and Conservation Council
• Dr. David Hungerford, California Energy Commission
• Ms. Kelley Kline, General Electric, Appliances
• Mr. Kent Peterson, P2S Engineering, Inc.
Members of the public interested in attending the meeting should contact DOE no later than February 15. Contact: Karim Amrane.

6 Wheaton Hammermill { 01.28.13 at 7:16 am }

I surely do appreciate those of you who can read between the lines and see that this is more about CO2 emissions, and less about energy savings by shining a light on the lack of electric heating requirements.

I also think the climate zone segregation is unfair and should be equal from state to state. If a state wants to adopt a more restrictive requirement that should be their right to do so. The federal government should not have the right to impose stricter standards on different states. A great comparison would be earth quake standards or hurricane standards. They allow local jurisdictions to adopt these standards if they choose to. I think there should always be an option to apply for an exemption if design is prohibitive, or hardship is inevitable.

These isues should be decided at a local level. I saw all of these problems come to light as California implemented their duct sealing standards for existing HVAC replacements and exemptions were required. Asbestos presence was the easiest to claim an exemption.

7 Ed Reid { 01.28.13 at 8:33 am }

Wheaton Hammermill @6

One could argue, persuasively I believe, that DOE established virtually identical Southeastern and Southwestern standards for electric equipment to avoid having to set more rigid standards for northern installations, since the enabling law permits only two regional standards.

The manufacturers prefer national standards to state standards because they effectively limit the number of “specials” the manufacturers have to produce to satisfy unique state requirements.

It is important to note here that what DOE was attempting to do with these standards was not to correct a market failure, since the manufacturers were already producing a range of products and the consumers were choosing from that range of products. Rather, DOE was attempting to correct the failure of the FTC appliance labeling program and the DOE/EPA Energy Star program to convince consumers to buy what DOE, EPA and FTC wanted them to buy. Those pesky consumers just kept doing what they believed was in their own best interests. That behavior simply cannot be tolerated.

8 Jason Flinders { 03.06.13 at 11:52 am }

When I first heard of the new mandatory standards for 2013 my first though was we are going to have a massive amount of our new customers change over from gas to electric just becouse there is an incentive to do so.

Efficiency of a 97%-98.2% gas furnace can actually be much higher in efficiency than that of the new minimum standards for heat pump systems. Some leeway was given for gas package units that can not be condensing furnaces and due to structural limitations of a given dwelling will not allow for a true split system.

The highest efficient packaged heat pump is not very efficient and if the home does not have the electrical potential to feed the 90 amps necessary for a heat pump, the owner is in a real spot. Upgrade of amperage to a home from 100 amps to 200 amps is upwards of 8-$10,000. Not an option.

This was not well thought through as in most political “environmental” issues.

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