                                                                               
MEMORANDUM

DATE: 	January 30, 2015

SUBJECT:	Estimated Residential Wood Heater Manufacturer Cost Impacts

FROM:	Jill Mozier, EC/R Inc.
      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 document the estimated nationwide cost impacts on manufacturers of emission limits under the New Source Performance Standards (NSPS) review of residential wood heaters.  

   I. Estimated Research and Development (R&D) Costs
      A. Model Development Costs  -  Room Heaters
         
	Prior to proposal of the draft rules, we heard various estimates of the costs to bring a wood heater from concept to completion, from $200,000 for a single model to $1,360,000 for a 4-firebox model line. For example, a Hearth and Home article estimated the total cost to bring a model from conception to market as $645,000 to $750,000 for steel stoves and over $1 million for cast-iron, enameled wood stoves. The authors indicated that costs would decrease for separate models in the same line by up to 25 percent. Based on this information, we estimated that a 4-model steel line would cost up to approximately $328,000 per model to develop. These costs include marketing, design, developing first generation, second generation and prototype units; NSPS and safety testing, equipment tooling, etc. The manufacturer supplying these figures for the article estimated that the NSPS and safety testing component of these costs would constitute $40,000 per model. Two other manufacturers also provided estimated development costs for a 4-box model line, and based on that information we estimated average costs to develop a new model line, including testing with both crib and cord wood and reporting and recordkeeping, of $356,250 for certified wood stoves and pellet stoves. We also assumed $356,250 for single burn rate stoves, which may be somewhat high if they are as clean as the manufacturers claim. We likewise assumed a development cost of $356,250 for forced-air furnaces and hydronic heaters.   

	Comments received on the proposed rule included information and opinions regarding these wood heater cost estimates. Comments ranged from criticism that the EPA overestimated costs to criticism that the EPA underestimated costs. For example, one commenter stated that the proposal cost estimates were overly generous and did not address input from Woodstock Soapstone Stoves, winner of the 2013 Wood Stove Decathlon, which estimates that the cost of new product development is approximately $200,000, and furthermore that the proposal cost estimates did not address the economies manufacturers realize when they develop functionally identical models from the originally certified model. Other commenters generally stated that the breakdown of cost estimates faced by manufacturers is inaccurately low. 

	One commenter, in particular, provided detailed estimates of adjustable burn rate wood stoves and hydronic heater model development costs. According to this commenter, the proposal cost estimates are deficient because they do not reflect specific emission rates or emission performances.	The detailed wood stove cost estimates are located in Attachment 2 of the Hearth, Patio and Barbecue Association (HPBA) comments and were prepared by NERA Economic Consulting (May 2014). Appendix A of the document, Woodstove Cost Modeling (prepared by Ferguson, Andors & Company) contains the detailed cost estimates we reviewed and adapted for this analysis. According to Appendix A, "...a `bottom-up' approach was used to identify the relevant components of compliance costs and to develop a range of cost estimates for each cost component based on [their] extensive experience in woodstove development, testing and manufacturing. The cost estimates were focused on mid-sized non-catalytic stove models since those models currently represent the biggest segment of the market. In developing the cost estimates, [they] incorporated detailed comments from a review panel consisting of ten industry experts. The range of cost estimates resulting from this process are representative of typical manufacturers and typical woodstove models, but actual costs for particular manufacturers could lie outside the range. NERA used the mid-points (averages) of the cost ranges for the cost-effectiveness analysis."

	The Ferguson analysis provides cost estimates for four categories of emission reductions based on the proposed emission levels, consisting of modifying 7.5 g/hr stoves to comply with a new 4.5 g/hr standard, modifying the 4.5 g/hr stoves to comply with new standards of 2.5 g/hr or 1.3 g/hr stoves, and modifying a 2.5 g/hr stove to a new standard of 1.3 g/hr. The resulting cost components consisted of capital costs per model (R&D, engineering labor, tooling, equipment integration, preliminary testing, and other costs to design and manufacture the modified wood stove model) and other fixed costs per model (certification testing and safety testing, roll-out of the modified products including store display models and burn programs, brochures, user manuals, training and product discounts). The mid-point capital costs presented by Ferguson range from $281,725 to $532,050 depending on the emission reduction range.

	Unlike the proposed rule, the final rule only contains a Step 1 limit of 4.5 g/hr and a Step 2 limit of 2.0 g/hr, with no alternative, three step limits. We maintain that the Step 1 cost for 7.5 to 4.5 g/hr is a reasonable representation of model development costs for all models subject to subpart AAA, with some exceptions, described below. The Ferguson analysis shows that several of the cost components are identical across scenarios. The analysis claims, however, that other cost components vary according to the specified emission reduction scenario. We found these differences to be unsupported. For purposes of this analysis, we used the 7.5 to 4.5 g/hr scenario as a baseline case and modified it to reflect the deletion of cost categories that we deemed inappropriately attributed to the NSPS.

	We did accept the assumptions and logic related to evaluating the tooling cost differences between steel stoves and cast iron stoves, as both are commonly manufactured. Like Ferguson, we used an average of their tooling costs to reflect product differences, even though using an average may overestimate the number of cast iron stoves in the market place. While we recognize the range in capital cost estimates provided both prior to and after proposal of the draft standards leave room for additional cost scenarios, especially the much lower cost scenario for Woodstock Soapstone Stoves, we concluded that the Ferguson costs represent the best documented cost ranges and cost categories available at this time. Table 1, below, is a summary of the estimated wood stove capital costs used in our analyses.

      For the final cost analysis, we used the mean wood stove costs estimated in Table 1. We have assumed that these model development costs represent feasible costs for adjustable burn rate stoves and pellet stoves. For single burn rate stoves, we estimate, as we did at proposal, that additional R&D may be required to bring these stoves to qualifying levels. Therefore we estimated that the R&D/Engineering portion of the total costs would require double the investment in the first 2 years, with "normal" model development proceeding thereafter.

Table 1.  Estimated Wood Stove Capital Costs

                                 Capital Costs
                                Appliance Costs
                                     Notes

                                     High
                                      Low
                                     Mean
2013 dollars; All costs based on HPBA estimates under 7.5 to 4.5 g/hr scenario, with modifications
    R&D/Engineering Costs

Market research, aesthetic design, initial prototype design/construction/testing, formulate design changes, modify/test prototype
                                                                        $45,500
                                                                        $19,000
                                                                        $32,250

Adjust design/test until emission target is met
                                                                        $47,500
                                                                        $30,000
                                                                        $38,750

Construct final prototypes, safety test check, eng. drawings/specs, patent application
                                                                        $27,000
                                                                        $17,000
                                                                        $22,000

Confirm final prototype performance
                                                                             $0
                                                                             $0
                                                                             $0

    R&D/Engineering Total costs
                                                                       $120,000
                                                                        $66,000
                                                                        $93,000



    Tooling

Steel Stove
                                                                        $31,200
                                                                         $9,700
                                                                        $20,450

Cast Iron Stove
                                                                        $62,000
                                                                        $31,000
                                                                        $46,500

    Average tooling cost
                                                                        $46,600
                                                                        $20,350
                                                                        $33,475

                                                                               
HPBA costs for equipment and integration not included because these are considered duplicative of R&D costs, above
Other Capital Cost components
                                                                        $14,000
                                                                         $6,000
                                                                        $10,000



Total Capital Cost per model
                                                                       $180,600
                                                                        $92,350
                                                                       $136,475



Fixed Costs per model
HBPA costs for personnel at lab and travel expenses not accepted as independent third party testing costs
     Certification

EPA testing, Confirmation safety testing or full safety testing, shipping of prototype
                                                                        $19,000
                                                                        $14,500
                                                                        $16,750

Owner's manual, labeling
                                                                         $3,500
                                                                         $1,800
                                                                         $2,650

     Roll-out
                                                                             $0
                                                                             $0
                                                                             $0
Roll-out considered normal business operation and not due to NSPS


Total Fixed Capital Cost per model
                                                                        $22,500
                                                                        $16,300
                                                                        $19,400



Total Costs per Model
                                                                       $203,100
                                                                       $108,650
                                                                       $155,875

Annualized capital cost per model
                                                                        $42,610
                                                                        $22,794
                                                                        $32,702
Annualized over 6 years at 7% 
Annualized cost for development of 4 models
                                                                       $170,438
                                                                        $91,177
                                                                       $130,808


      B. Model Development Costs  -  Central Heaters

      At proposal, we estimated that hydronic heaters and forced-air furnaces would face the same model development costs as room heaters. Some commenters objected to this characterization, particularly based on the detailed hydronic heater cost estimates located in Attachment 3 of the HPBA comments as prepared by NERA Economic Consulting (May 2014). Appendix A of that document, Hydronic Heater Cost Modeling (prepared by Ferguson, Andors & Company) contains the detailed cost estimates we reviewed and adapted for this analysis.  

	These costs were prepared with the same methodology and overall assumptions as were used in development of the wood heater costs. The Ferguson analysis provides cost estimates for four categories of hydronic heater emission reductions, based on the proposed emission levels consisting of modifying uncontrolled heaters to comply with a new 0.32 lb/mm Btu standard, modifying the 0.32 lb/mm Btu heaters to comply with new standards of 0.15 or 0.06 lb/mm Btu, and modifying a 0.15 lb/mm Btu heater to a new standard of 0.06 lb/mm Btu. The resulting cost components consisted of capital costs per model (R&D, engineering labor, tooling, equipment integration, preliminary testing, and other costs to design and manufacture the modified wood stove model) and other fixed costs per model (certification testing and safety testing, roll-out of the modified products including store display models and burn programs, brochures, user manuals, training and product discounts). The mid-point capital costs presented by Ferguson range from $1,743,750 to $2,162,300 depending on the emission reduction range. While these estimates are considerably higher than estimates we gleaned from speaking with manufacturers in 2010, we used them in our analysis absent better data and in order to not underestimate costs.

	Unlike the proposed rule, the final rule contains a Step 1 PM emission limit of 0.32 lb/mm Btu and a Step 2 PM emission limit of 0.10 lb/mm Btu, with no alternative three step PM emission limits. We estimate that the Step 1 PM emission limit cost for uncontrolled to 0.32 lb/mm Btu is a reasonable representation of model development costs for all models subject to subpart QQQQ, with some exceptions, described below. The Ferguson analysis shows that several of the cost components are identical across scenarios. The analysis claims, however, that other cost components vary according to the specified emission reduction scenario. We found these differences to be unsupported. For purposes of this analysis, we used the uncontrolled to 0.32 lb/mm Btu as a baseline case and modified it to reflect the deletion of cost categories that we deemed inappropriately attributed to the NSPS.

      For the final cost analysis, we used the mean hydronic heater costs estimated in Table 2, below. We have assumed that these model development costs represent feasible costs for hydronic heaters. For forced-air furnaces, we estimate, as we did at proposal, that additional R&D may be required to bring these heaters to compliance levels. Therefore we estimated that the R&D/Engineering portion of the total costs would require double the investment in the first 2 years, with "normal" model development proceeding thereafter.
Table 2.  Estimated Hydronic Heater Capital Costs
                                 Capital Costs
                                Appliance Costs
                                     Notes

                                     High
                                      Low
                                     Mean
2013 dollars; All costs based on HPBA estimates under uncontrolled to 0.32 lb/mm BTU scenario, with modifications
    R&D Engineering Costs

Market research, aesthetic design, initial prototype design/construction/testing, formulate design changes, modify/test prototype
                                                                       $180,000
                                                                       $115,000
                                                                       $147,500

Formulate design changes
                                                                         $4,500
                                                                         $2,500
                                                                         $3,500

Modify prototype
                                                                        $16,000
                                                                         $9,000
                                                                        $12,500

Test/Retest
                                                                       $615,000
                                                                       $410,000
                                                                       $512,500
App. A (NERA) concludes erroneously $887,000 for high cost and $581,000 for low cost
Construct final prototype, confirm testing, safety testing
                                                                       $133,500
                                                                        $88,500
                                                                       $111,000

Document final changes
                                                                         $8,000
                                                                         $6,000
                                                                         $7,000

    R&D/Engineering Total costs
                                                                       $957,000
                                                                       $631,000
                                                                       $794,000

     Manufacturing/Engineering

Programming and Tooling - Steel parts
                                                                        $22,000
                                                                        $13,000
                                                                        $17,500

Tooling - Refractory
                                                                        $45,000
                                                                        $28,000
                                                                        $36,500

Electronic Control System
                                                                        $10,000
                                                                         $5,000
                                                                         $7,500

Final Production samples/Confirm product. Fit-up
                                                                        $25,000
                                                                        $15,000
                                                                        $20,000

Create QA/QC specs
                                                                         $4,000
                                                                         $2,000
                                                                         $3,000

     Manufacturing/Engineering total costs
                                                                       $106,000
                                                                        $63,000
                                                                        $84,500

     Other Capital Cost components
HPBA costs for equipment and integration not included because these are considered duplicative of R&D costs, above
Purchased parts sourcing
                                                                        $41,000
                                                                        $23,500
                                                                        $32,250

Test first production heaters
                                                                       $200,000
                                                                       $150,000
                                                                       $175,000

Equipment and facilities
                                                                        $75,000
                                                                        $25,000
                                                                        $50,000

     Other Capital Cost components total costs
                                                                       $316,000
                                                                       $198,500
                                                                       $257,250



Total Capital Cost per model
                                                                     $1,379,000
                                                                       $892,500
                                                                     $1,135,750



Fixed Costs per model
HBPA costs for personnel at lab and travel expenses not accepted as independent third party testing costs
     Certification

EPA testing, Confirmation safety testing or full safety testing, shipping of prototype
                                                                        $72,500
                                                                        $36,000
                                                                        $54,250

Owner's manual, labeling
                                                                         $6,500
                                                                         $3,500
                                                                         $5,000

     Certification Total Costs
                                                                        $79,000
                                                                        $39,500
                                                                        $59,250

     Roll-out
                                                                             $0
                                                                             $0
                                                                             $0
Roll-out considered normal business operation and not due to NSPS


Total Fixed Capital Cost per model
                                                                        $79,000
                                                                        $39,500
                                                                        $59,250



Total Costs per Model
                                                                     $1,458,000
                                                                       $932,000
                                                                     $1,195,000

Annualized capital cost per model
                                                                       $305,882
                                                                       $195,530
                                                                       $250,706
Annualized over 6 years at 7%
Annualized cost for development of 4 models
                                                                     $1,223,529
                                                                       $782,119
                                                                     $1,002,824

   II. Estimated Manufacturer Cost Impacts
      A. Final NSPS and Appliances Meeting Stepped Limits
      For proposal, we developed two primary options to evaluate the cost impacts of implementing new or revised NSPS standards for the residential wood heating appliance industry  -  namely, a two-step PM emission limit proposed approach and an alternative three-step PM emission limit approach. Under the final NSPS, all types of appliances would be required to meet a specified Step 1 PM emission limit and then a stricter Step 2 PM emission limit in 2020. Forced-air furnaces will be required to comply with a work practice/operational standard in 2015, a Step 1 PM emission limit for small furnaces (<65,000 BTU/hr heat output) by 2016 and a Step 1 PM emission limit for the remaining large furnaces (65,000 BTU/hr heat output or larger) by 2017. All appliances, including forced-air furnaces of every size, will be required to meet the Step 2 PM emission limits five years after the effective date (2020). It should be noted however that the final Step 2 limits are less stringent than proposed, as discussed below.
      
      Subpart AAA ("room heaters"): 
       
      1. Adjustable burn rate, pellet and single burn rate stoves:  Stepped Limits: Step 1 PM emission limit of 4.5 g/hr upon effective date in 2015; and Step 2 PM emission limit of 2.0 g/hr five years after effective date, i.e., in 2020.  
         Notes on appliances already meeting these limits: The Step 1 PM emission limit is the 1995 Washington State standard for non-catalytic stoves; and the Step 2 PM emission limit is already met by the top performing catalytic, non-catalytic and pellet stove models, according to industry data. This industry data was initially prepared by HPBA and includes the results of an effort to delete models that are no longer manufactured and remove duplicate certifications. Communication from HPBA confirmed that there were 110 non-catalytic wood stoves and 15 catalytic wood stoves being manufactured in 2010 by 34 manufacturers or importers of EPA certified wood heaters. We expect that manufacturers will focus on existing models that meet the Washington State limits in order to comply with the Step 1 standard. 
         
         Furthermore, certification data indicate that 26% of non-catalytic and catalytic stoves combined and 70% of pellet stoves already meet the Step 2 limit. Based on this emission data for adjustable burn rate wood stoves and pellet stoves, for our cost analysis we estimated that while major R&D efforts are not needed to meet Step 1, R&D efforts would be required for some of these appliance models (e.g., approximately 74% of wood stove models and 30% of pellet stove models) to meet the Step 2 limit in 2020.
         
         Although previously unregulated and a less developed technology than adjustable burn rate stoves, single burn rate stove designs have been undergoing R&D in anticipation of the proposed NSPS and cleaner designs are nearly market-ready. However, given the relative lack of previous regulation of these appliance types in the United States, we estimate that manufacturers will have to redesign all single burn rate stove models to meet the final Step 2 emissions limit, and reflected that major re-design effort in our cost estimates.
         
         Our specific cost and implementation assumptions are discussed below in Section B and Section C.
         
      Subpart QQQQ ("central heaters"):
      
      1. Hydronic heaters (both outdoor and indoor):  Stepped Limits: Step 1 PM emission limit of 0.32 lb/mm BTU heat output (weighted average with an 18 g/hr cap for each individual test run), upon the effective date of the final rule in 2015; and Step 2 PM emission limit of 0.10 lb/mm BTU heat output (at each burn rate) five years after the effective date of the final rule in 2020. 
         Notes on appliances already meeting these limits: The Step 1 limit is identical to the EPA "Phase 2" voluntary program limit and is already met by all 50 of the 50 hydronic heater models built by U.S. manufacturers currently participating in the voluntary program. The Step 2 limit is already met by 9 of the 50 (18%) hydronic heater models built by U.S. manufacturers currently participating in the voluntary program, as well as over 100 European manufacturers per test method EN 303-05. It should be noted that cleaner models continue to become Phase 2 qualified until the effective date of the final rule, and additional manufacturers not participating in the voluntary program may also have models meeting Step 1 and Step 2. (19 test reports have just recently been submitted to EPA for review.)
         
         Based on the EPA's experience with the hydronic heater market through the voluntary program, we understand that it is dominated by a few manufacturers in terms of the bulk of sales, and these manufacturers have qualifying units at one or both of the stepped emission limits, as noted above. Therefore, on a sales-weighted basis, only a percentage of the hydronic heater models currently sold in the United States would be required to undertake R&D to meet Step 1, with higher percentages needing R&D to meet the Step 2 limit. For our cost analysis, based on the data cited above from the voluntary program, we estimate that 18% of existing hydronic heater models sold in the United States can meet the Step 2 limit without intensive R&D efforts, so that 82% of models would begin R&D in 2015 to meet the Step 2 standard. Our specific cost and implementation assumptions are discussed below in Section B and Section C.
         
      2. Forced-Air Furnaces:  Stepped Limits: Work practice/operational standards will be required of all forced-air furnaces upon the rule's 2015 effective date. A Step 1 PM emission limit of 0.93 lb/mm BTU heat output will be required by 2016 for small forced-air furnaces (<65,000 BTU/hr models, representing approximately 25% of current sales) and this same PM emission limit of 0.93 lb/mm BTU will be required by 2017 for large forced-air furnaces (>=65,000 BTU/hr models, representing approximately 75% of current sales). A Step 2 PM emission limit of 0.15 lb/mm BTU heat output will be required for all forced-air furnace models five years after promulgation in 2020
         Notes on appliances already meeting these limits: The stepped compliance timelines are based on the infeasibility of testing and certifying approximately 50 untested forced-air furnaces in the 60 days between publication of the final rule and the effective date and industry comments on the proposed rule, explaining the design challenges for small and large forced-air furnaces, respectively. The Step 1 and Step 2 PM emission limits are based on test data from development of Canadian standard B415.1-10 and conversations with industry regarding cleaner forced-air furnace models currently being tested in R&D. Forced-air furnace designs able to meet the Step 2 limit will be based on technology transferred from hydronic heater designs and/or wood stove designs. Given the relative lack of previous regulation of these appliance types in the United States, we assume in our cost analysis that manufacturers will have to redesign all forced-air furnace models to meet the Step 2 PM emissions limit, and reflect that major re-design effort in our cost estimates. Our specific cost and implementation assumptions are discussed below in Section B and Section C.
         
         
      A. Estimated Manufacturer Costs  -  General Approach
      We estimated the average annual cost to manufacturers of each appliance type and then extended those costs to nationwide total annual costs. The basic components to each manufacturer's estimated annual cost are:
      
      1.	Annualized R&D costs;
      2.	Ongoing annual Certification cost; and
      3.	Ongoing annual Reporting and Recordkeeping cost.

The underlying assumptions used to estimate these components are discussed below.



      Amortization Period used for annualizing R&D costs:

      Manufacturers have indicated that it takes several years to develop new models. One manufacturer said that development time is 12 to 14 months for non-catalytic heaters and 10 to 12 months for catalytic heaters. Another manufacturer estimated costs over an 8- to 12-month schedule for a relatively uncomplicated product, but added that costs will increase for products that have more sophisticated controls. Two other manufacturers suggested a 14- to 18-month timeframe is required to develop a new firebox, but added that it will take from 5 to 6 years of intensive engineering and R&D efforts to have a model line consisting of 4 boxes ready-for-manufacture, agreeing that knowledge of the process obtained during each firebox development will shorten (somewhat) the time necessary, but not enough to consider within a guiding framework. Given this information and in an effort to not underestimate the time needed for R&D, we amortized R&D costs (shown in Tables 1 and 2 above) over 6 years. 

      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. However, for the purposes of our cost estimate, we amortized model development costs over the 6 year period beginning in 2015 and ending in 2020 (inclusive). We prepared estimates using both a 7% interest rate and a 3% interest rate during the amortization period.

      Annualized R&D costs:

      The annualized R&D costs (shown in Tables 1 and 2) are by far the largest cost component and we have applied these costs to most models in each appliance category  -  especially for previously unregulated appliances and for appliances without a voluntary program  -  in order to avoid underestimating cost impacts. For these appliances (i.e., single burn rate stoves and forced-air furnaces), we estimated that 100% of the existing models will undergo R&D beginning in 2015 to meet the final limits. In cases where we assumed less than 100% of the models would require R&D (e.g., adjustable burn rate stoves, pellet stoves and hydronic heaters), this was based on the percentage of models estimated to already meet the 2020 Step 2 limit, as explained above. 
      
      However, it is important to note that manufacturers will likely consolidate their model lines, focusing on models able to achieve the limit, rather than incur R&D costs for every currently non-compliant model line. Therefore fewer models than we used in our cost estimates will likely undergo R&D, which will decrease cost impacts, potentially significantly. But since we do not have data to suggest the degree of consolidation which may occur, we assumed all non-compliant models would remain in existence and incur R&D costs, in order to avoid underestimating costs. 
	
	Furthermore, for appliances like single burn rate stoves and forced-air furnaces, which were previously unregulated (and also were not pushed technologically by a voluntary program, as hydronic heaters were), we have doubled the R&D/Engineering cost portion of the total costs in the first 2 years (2015 and 2016), as noted above in Sections I.A. and I.B. This doubling of the R&D/Engineering costs represents an intensification of the R&D efforts to meet the Step 1 limits and begin development of models to meet the Step 2 limits  -  R&D efforts which industry has indicated are already ongoing.
      
      Ongoing certification and reporting & recordkeeping costs:

      All manufacturers, except for wood stoves that are subject to the current 1988 NSPS (and therefore already incur certification costs), will face ongoing certification costs above baseline conditions. In the 2015 to 2020 timeframe, we have incorporated these costs as part of the overall R&D expenditures. For the purposes of our analysis, which estimates initial R&D costs from 2015 to 2020 and ongoing costs for bringing a model to market after 2020, the ongoing certification and reporting and recordkeeping costs faced by manufacturers are estimated over the 10-year model lifespan.[,] 
      
      Regarding ongoing certification costs (after initial certification which is estimated in the R&D costs itemized above in Tables 1 and 2), we estimated a continuing cost of $10,000 per model for pellet stoves and single burn rate stoves and a continuing cost of $20,000 per model for hydronic heaters and forced-air furnaces. We distributed these ongoing costs over the 5 year certification life, assuming annual certification costs for one-fifth of the models. For example, compliant (but as yet uncertified) pellet stoves will incur certification costs starting in 2015. As explained in Section II.A, approximately 70 percent of existing pellet stove models are expected to comply with the Step 2 standard without requiring intensive R&D. However, in order to be sold, these pellet models would now be required to demonstrate compliance with the emissions limit, incurring an upfront cost of $10,000 per model to become certified. We have estimated that one fifth of the pellet stove models will certify in any given year.  	
      
       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 final rule compliance. We estimated that R&R costs are incurred beginning in 2015 in our analysis.   

	As noted above, the certification and reporting and recordkeeping costs were estimated to be incurred by manufacturers for the full 10-year model design lifespan, for models designed to meet each final limit. We therefore estimated costs from 2015 through 2029  -  that is, 10 years (inclusive) after the 2020 compliance year marking the beginning of the lifespan for a model designed to meet the Step 2 limit.  
      
      B. Estimated Manufacturer Costs  -  Specific Assumptions & Resulting Costs
      Tables 3 and 4 show the estimated annual cost per manufacturer under the final NSPS for all appliances, as well as the nationwide annual costs. Tables 3a and 3b are based on a 7% interest rate during the 6-year amortization period; while Tables 4a and 4b are based on a 3% interest rate. Cost estimates are based on 2013 dollars ($). Note that costs vary by appliance type based on the estimated number of models. Our estimates of the number of models for each appliance type are described in the unit cost memo.  For numbers of manufacturers, we started with HPBA data and modified those numbers as needed, based on internet searches of manufacturers of the major appliance types. The final estimates for numbers of models and number of manufacturers are shown in Tables 3 and 4.

      The footnotes associated with Tables 3 and 4 (included in our cost spreadsheets but not included with the tables below due to space limitations) explain the details we assumed for the cost analysis and are listed below. 	

      1. Nationwide Annual Cost assumes R&D investment is amortized over 6 years (2015 through 2020). Ongoing certification and reporting & recordkeeping costs are incurred through 2029 (based on a model brought to market in 2020 with a lifespan of 10 years).												
      2. Since certification is required every 5 years, it is assumed that certification costs will be spread out so that one-fifth of the models certify each year. 
         
      3. This analysis considers additional costs resulting from the NSPS. For wood stoves, the analysis assumes that 26% meet Step 2 already so that 74% of the models will undergo re-design to meet the Step 2 level. The costs modeled for years 2021 through 2029 exclude the ongoing certification and reporting & recordkeeping costs incurred by wood stove manufacturers who already had to certify and report under the existing 1988 NSPS.
         
      4. For pellet stoves, the analysis assumes that 70% meet Step 2 already so that 30% of models undergo R&D re-design to meet Step 2. The R&D budget includes certification costs. The analysis also assumes that the 70% of the pellet stove models which already meet Step 2 will certify in an ongoing basis starting in 2015. The analysis reflects the certification costs beginning in 2015 for the 70% of models meeting Step 2, and beginning in 2020 for the remaining 30% of models which underwent R&D re-design. The analysis also reflects ongoing reporting & recordkeeping costs for 100% of the models beginning in 2015.
         
      5. Based on conversations with industry, single burn rate stoves and forced-air furnaces have been undergoing R&D prior to 2014 to develop cleaner models. Because these devices were previously unregulated and may need to transfer technology from adjustable burn rate stoves and hydronic heaters (respectively) this analysis assumes that these efforts will intensify in 2015 and 2016. Therefore estimated R&D costs are doubled in 2015 and 2016 to reflect model development to meet the more stringent 2020 Step 2 PM emission limit. 
         
      6. For single burn rate stoves and forced-air furnaces, the analysis assumes that only a small percentage meet Step 2 so that approximately 100% of the models undergo R&D re-design to meet Step 2. The R&D budget includes certification costs. Ongoing certification costs for the re-designed models are reflected in this analysis beginning in 2021. Ongoing reporting & recordkeeping for all models are estimated beginning in 2015.
         
      7. Reporting and recordkeeping costs (R&R) are based on the annual average costs derived from the ICR and are estimates of the ongoing R&R burden to manufacturers associated with the NSPS. The annual average nationwide R&R burden estimated to manufacturers for Subpart AAA is approximately $179,000 for years 2015 through 2017 and $352,000 for years 2018 through 2020. For Subpart QQQQ, the R&R burden to manufacturers is estimated to be $141,000 for years 2015 through 2017 and $197,000 for years 2018 through 2020. Although the 2018 through 2020 costs are carried forward to 2029 for this analysis, actual R&R costs from 2021 through 2029 may vary slightly. These R&R costs do not include the R&R burden to laboratories and certifying entities, which have been calculated separately [and provided in the ICRs and spreadsheets in the docket].
         
      8. For hydronic heaters, the analysis assumes that 18% of models meet Step 2 already so that 82% must undergo R&D to meet Step 2 in 2020. The R&D budget includes certification costs. Ongoing certification costs for the re-designed models are reflected in this analysis beginning in 2021. Ongoing reporting & recordkeeping for all models are estimated beginning in 2015.
Cost Tables 3 and 4 are included after the sample calculation provided below in Section D.

      A. Sample Calculation for Deriving Nationwide Annual Cost to Manufacturers
   The following provides a sample calculation showing how we derived nationwide annual costs to hydronic heater manufacturers in the year 2019, based on costs being amortized over 6 years at a 7% interest rate. It may be helpful to refer to Tables 3a and 3b while reviewing the sample calculation steps.
   1. We derived the annualized capital cost per model, for R&D related costs including certification, based on industry-supplied cost components as described in Section I. The estimated annualized capital cost to bring a hydronic heater model through R&D, based on an amortization period of 6 years and an interest rate of 7%, is $250,706 as shown in Table 2 of Section I. 
   2. To derive the average annual cost to each hydronic heater manufacturer, we multiplied the annualized capital cost of $250,706 by the estimated number of hydronic heater models in the nation, 120, divided by the estimated number of hydronic heater manufacturers, 30. 
   3. To refine the average annual cost further, we estimated the percentage of hydronic heater models that already meet the Step 2 limit  -  and therefore would not need to incur R&D costs, but only certification and R&R costs. As described in Section II, we estimated that 18% of current hydronic heater models can meet Step 2 without additional R&D. Therefore 82% of models will incur R&D, certification and reporting & recordkeeping costs; while 18% of hydronic heater models will incur only certification and reporting & recordkeeping costs.
   4. We estimated ongoing hydronic heater certification testing (outside the R&D process) to cost $20,000 per certification. Since a certification is good for 5 years, in order to determine an annual certification cost, we assumed that manufacturers will choose to spread out certification costs by certifying one-fifth of their models each year. (Note again that the certification cost for models undergoing R&D is included in the $250,706 R&D cost.)
   5. We estimated ongoing R&R costs based on Information Collection Request (ICR) assumptions, which were calculated for the first 3 years and then for the 3 years following, respectful of changing reporting & recordkeeping costs to meet a 2-Step standard. The annual average reporting & recordkeeping burden estimated for hydronic heater manufacturers is $3,300 per manufacturer for years 2015 through 2017 and $4,635 per manufacturer for years 2018 through 2020. 
   6. Based on the above costs and assumptions, the annual cost to a hydronic heater manufacturer in year 2019 is:
      (120/30) * [0.82*$250,706 + 0.18*($20,000/5)] + $4,635 = $829,830 per manufacturer
   7. To derive the total nationwide annual cost to all hydronic heater manufacturers in the U.S. market, we multiplied the above average annual cost to each manufacturer by the total number of manufacturers (30). Therefore, the total estimated nationwide annual cost to all hydronic heater manufacturers in year 2019 is:
      $829,830 per manufacturer * 30 manufacturers = approximately $24,895,000

It should be noted that the estimated cost to each hydronic heater manufacturer drops significantly after the investment required during the R&D period. In years 2021 through 2029, we estimate that ongoing certification and R&R will cost approximately $21,000 per manufacturer, or $619,000 nationwide, annually.

      Table 3a. Average Annual Cost per Manufacturer under the Final NSPS *




                                       
      Table 3b.  Nationwide Annual Costs under the Final NSPS*




      
      *Model development costs amortized over 6 years at a 7% interest rate
      Table 4a. Average Annual Cost per Manufacturer under the Final NSPS *
      


                                       
                                       
      Table 4b.  Nationwide Annual Costs under the Final NSPS*




      
      *Model development costs amortized over 6 years at a 3% interest rate
