                                                                               
MEMORANDUM


DATE: 	January 30, 2015

SUBJECT:	Wood Stove 10-year Amortization Period, Sensitivity Analysis of R&D Costs

FROM:	Jill Mozier, EC/R Inc.

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

	The purpose of this memorandum is to document a sensitivity analysis based on varying the amortization period for wood stove R&D costs. For both proposal and for final rule support, we amortized R&D costs over a 6-year period in order to spread R&D costs over a 6-year model development timeframe. For the final rule this 6-year period extends from the Step 1 compliance date (2015) to the Step 2 compliance date (2020, inclusive). Before proposal, two manufacturers noted 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.  However, the Hearth, Patio and Barbecue Association's (HPBA's) economic consultant, NERA, used a 10-year period for amortizing costs in their wood stove analysis (May 2014) submitted as Attachment 2 of HPBA's comment on the proposed rule.  We therefore amortized our estimated final rule costs for wood stove R&D over 10-years, as a sensitivity analysis. 

	For comparison, the 6-year versus 10-year annual amortized costs are shown in the final two rows of Table 1, both at a 7% interest rate. The components of the tabulated cost estimates are discussed in the Manufacturer Cost Impacts memo. Tables 2a and 2b show the average annual cost per wood stove manufacturer and the nationwide annual costs using the 10-year amortization period. For comparison, Tables 3a and 3b show the same using the 6-year amortization period. 

Finally, Tables 4 and 5 show the cost effectiveness (CE) of reducing PM2.5 from wood stoves based on the 10-year and 6-year amortization periods, respectively. Over the 20-year emitting lifespan, the estimated CE is $587 per ton based on the 10-year amortization period versus $519 per ton based on the 6-year amortization period. The CE calculations based on using the 10-year amortization period, entitled Revised Final Wood Heater NSPS PM25 CE 7% 1-23-15 Woodstove 10yr Amortization.xls, are provided with e-mail transmittal of this memo.
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 (6-year)
                                                                        $42,610
                                                                        $22,794
                                                                        $32,702
Annualized over 6 years at 7% 
Annualized capital cost per model (10-year)
                                                                        $28,917
                                                                        $15,469
                                                                        $22,193
Annualized over 10 years at 7%


      Table 2a. Average Annual Cost per Manufacturer under the Final NSPS using a 10-year Amortization Period (2015-2024)
      
      
      
      
                                          
      
      
      
      Table 2b. Nationwide Annual Costs under the Final NSPS using a 10-year Amortization Period (2015-2024)
      
      
      
      
      Footnotes:
      
      [1] Nationwide Annual Cost assumes R&D investment is amortized over 10 years (2015 through 2024). The analysis extends to year 2029 (based on a model brought to market in 2020 with a lifespan of 10 years), but because woodstoves already incur certification and reporting & recordkeeping costs under the existing 1988 NSPS, no additional costs are modeled after the 10-year amortization period.																							
      [2] 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. 																			
      Table 3a. Average Annual Cost per Manufacturer under the Final NSPS using a 6-year Amortization Period (2015-2020)
      
      
                                          
      
      Table 3b. Nationwide Annual Costs under the Final NSPS using a 6-year Amortization Period (2015-2020)
      
      
      
	Footnotes:

      [1] Nationwide Annual Cost assumes R&D investment is amortized over 6 years (2015 through 2020).	
																		
      [2] Since certification is required every 5 years, it is assumed that certification costs will be spread out so that 1/5 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.
Table 4. Cost Effectiveness of Wood Stoves Based on 10-year Amortization Period




                                       

Table 5. Cost Effectiveness of Wood Stoves Based on 6-year Amortization Period

                                       
                                       
 

                                          
