                                                                               
MEMORANDUM


DATE: 	February 26, 2013

SUBJECT:	Residential Wood Heater Cost Effectiveness Analysis

FROM:	Jill Mozier, EC/R Inc.
      Beth Friedman, EC/R Inc.

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


	The purpose of this memorandum is to present our cost effectiveness (CE) analyses for emission reduction options being considered for residential wood heaters as part of the New Source Performance Standards (NSPS) review of residential wood heaters.  We analyzed the CE of two options: the proposed NSPS ("Proposal") and an alternative approach ("Alternative") that differ in the number of stepped emission limits and in the phased-in compliance dates.  These options and their underlying emission and cost assumptions have already been summarized in the emissions, unit cost, and manufacturer cost memos.  This memo will explain how we applied the derived cost and emission estimates (based on our already-documented assumptions) in our CE analyses.

   I. Application of Cost Estimates to CE Analysis 
      A. 	NSPS-Related R&D, Certification, and Reporting & Recordkeeping Costs
      As noted in our manufacturer cost memo, under the Proposal scenario, one round of R&D is assumed  -  beginning in 2013 and ending in 2018  -  in order to meet the proposed Step 2 limit.  Under the Alternative scenario, two rounds of R&D are assumed for all appliances except masonry heaters (for which there is only one standard with no additional phased-in standards to meet).  It should be noted that for the second round of R&D (in the Alternative scenario), for purposes of our CE analysis, we adjusted the annualized cost because we assumed that manufacturers would use the same lab equipment purchased for the first round of R&D. Therefore the round two annualized costs exclude the laboratory equipment cost, and consequently are estimated at $61,227 (per year for 6 years) rather than the $63,850 annual estimate for round one, as shown in Table 1. 
      Under both the Proposal and the Alternative, we made assumptions regarding the number of model lines that would undergo R&D and assume the related costs. In cases where we assumed less than 100% of the models would undergo R&D (e.g., wood stoves and pellet stoves), this was based on the percentage of models already meeting the proposed 2019 Step 2 limit/Alternative 2022 Step 3 limit.  In reality, more appliances than we assumed have models meeting the most stringent limit (e.g., hydronic heaters).  Furthermore, manufacturers will likely consolidate their model lines, focusing on models able to achieve the limit, rather than incur R&D costs for every existing non-compliant model line.  Notwithstanding these points, in order to reasonably estimate what might happen in our CE analyses, we assumed the following appliance model lines would incur NSPS-related R&D costs beginning in 2013:
      
 95% of wood stove manufacturers (with an estimated 125 models representing both catalytic and noncatalytic designs);
 70% of pellet stove manufacturers (with an estimated 125 models);
 100% of single burn rate stove manufacturers (with an estimated 20 models) would face a doubling of R&D costs in 2013 and 2014 to represent intensification of R&D efforts for this previously unregulated appliance type;
 100% of forced air furnace manufacturers (with an estimated 50 models) would face a doubling of R&D costs in 2013 and 2014 to represent intensification of R&D efforts for this previously unregulated appliance type;
 100% of hydronic heater manufacturers (with an estimated 120 models); and
 Two large masonry heater manufacturers (with an estimated 4 models) would incur R&D costs beginning in 2013 with 9 other large manufacturer models facing certification testing costs (spread out over the 5 year certification period), and the remaining 8 large manufacturer models and 85 small custom manufacturer models facing software certification costs beginning in 2013.

                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
                                       
        Table 1. Annual Cost Summary: Development of 4 Model Fireboxes
	





	For the Alternative scenario, we made the further assumption that by 2017 all manufacturers (except masonry heater manufacturers who face only one stepped NSPS limit under both the Proposal and Alternative) would begin a second round of R&D for 80% of their models (i.e., we assumed that only 20% of models achieve the strictest limit in the first round of R&D).  This meant that during 2017 and 2018, we assumed an overlapping period of NSPS-related R&D amortized costs.
      As noted in the manufacturer cost memo, all manufacturers, except for wood stoves that are subject to the current 1988 NSPS, will face ongoing certification costs above baseline conditions.  However, in the 2013 to 2018 timeframe under the Proposal scenario and in the 2013 to 2022 timeframe under the Alternative scenario, we have incorporated these costs as part of the overall R&D expenditures.  After 2018 under the Proposal scenario and after 2022 under the Alternative scenario, the ongoing certification costs will be the only NSPS related costs faced by manufacturers besides ongoing reporting and recordkeeping costs.  
	We based reporting and recordkeeping (R&R) costs on the annual average costs derived from development of the Information Collection Request (ICR) supporting statements.  These are annual estimates of the ongoing R&R burden to manufacturers associated with the Proposal and Alternative scenarios.  (We do not expect the R&R burden to differ substantially between the two scenarios.)  

      B.	Model Design Lifespan
      
	We assumed a 20-year model design lifespan. We made this assumption to best characterize the actual model design lifespan given that many models developed for the 1988 NSPS are still being sold (after 25 years), and many "new" models still have the same internal working parts with merely exterior cosmetic changes.  Therefore, beyond the 6-year amortization period of the round(s) of R&D, we estimated the certification and reporting and recordkeeping costs to be incurred by manufacturers for the full 20-year model design lifespan.  Under the Proposal, we estimated costs from 2013 through 2038  -  that is, 20 years after the 2019 compliance year marking the beginning of the model lifespan designed to meet the Proposal Step 2 limit.  Under the Alternative, we estimated costs from 2013 through 2041  -  that is, 20 years after the 2022 compliance year marking the beginning of the model lifespan designed to meet the Alternative Step 3 limit.

   I. Application of Emission Estimates to CE Analysis
      A.	Baseline and NSPS emission estimates
      
      As noted in our emissions memo, we multiplied our tons/appliance emission estimate by the estimated number of shipments in each year to calculate total emissions from each appliance category per year.  We made this calculation under baseline conditions (i.e., in the absence of an NSPS) and under each NSPS scenario (Proposal and Alternative).  The emission estimates assume that the total number of shipped units meet the standard in the year the standard is implemented.  This simplifying assumption means that we underestimated how soon emission reductions will happen under both NSPS scenarios.  In reality, some models will meet the NSPS limits prior to the NSPS compliance year and will therefore be emitting less than baseline levels prior to that year as well.  Our emission estimates represent the assumption that models do not come into compliance until the year they are required to; therefore we do not claim emission reductions from either NSPS scenario until each compliance year.  Furthermore, based on available data for wood stoves and pellet stoves, we assumed that baseline emissions for both of these appliance types are already at the Step 1 level.  We therefore claimed no emission reductions for wood stoves and pellet stoves until the 2019 Step 2 under the Proposal and the 2017 Step 2 under the Alternative.
      
      B.	Appliance Emitting Lifespan
      
      As noted above, we assumed a 20-year model design lifespan for estimating costs.  We also assumed a 20-year appliance emitting lifespan.  This assumption was made to best characterize the actual use lifespan given that most stoves in consumer homes emit for at least 20 years and often much longer.  Our CE analysis therefore tracks emission reductions out through 2057 for the Proposal and through 2060 for the Alternative, assuming a 20 year design life for a model meeting each phased-in limit, and assuming that stoves shipped in the 20[th] year of design life will be emitting in homes for another 20 years.  Note that our CE analysis incorporates "trailing emissions" as part of our 20 year lifespan assumptions. For example, our analysis assumes that a stove shipped in 2014 will emit in homes for 20 years  -  or until 2033 (inclusive of both 2014 and 2023).  We therefore drop emissions from this stove in our analysis in year 2034.  Likewise, we drop emissions for a stove shipped in 2015 in year 2035, and so on.
      
   II. Resulting CE Tables
      Tables 2 through 9 show the results of our CE analyses based on PM2.5 reductions under the Proposal for each appliance, for appliances grouped by subparts AAA (Room Heaters) and QQQQ (Central Heaters), and for Subparts AAA and QQQQ combined.  Tables 10 through 17 show the results of our CE analyses based on PM2.5 reductions under the Alternative.  Each table shown is based on a 7% interest rate applied to the amortized costs during the R&D periods.  We also prepared tables based on a 3% interest rate.  Finally, we prepared both sets of tables based on VOC emissions and based on CO emissions.  
      
      Note that, as of the date of this memo, we did not calculate the CE for masonry heaters because we were unable to estimate the tons of emissions per appliance for this appliance type; so while we estimated the NSPS-related costs we did not estimate baseline or NSPS related emissions.
      
      











                                          




      
