Richard Meyer New DOE Rules Impose New Costs on Consumers for Little Benefit

AGA_2995 Furnace Standard Infographic_web_FINAL_Page_1On March 12, the U.S. Department of Energy (DOE) proposed a new rule that would raise minimum efficiency standard for natural gas fired furnaces. The rule, if finalized in its current form, would mandate the manufacture of furnaces that meet a 92 percent or higher specification for energy efficiency.

On the surface, the rule appears to be a positive step toward achieving greater energy efficiency. However, a closer examination reveals many problems that conflict with DOE’s stated goal of improved efficiency and reduced emissions. These counterproductive and unintended consequences include:

  • An economic burden on consumers required to bear the prohibitive costs of the expensive equipment and installation.
  • The undermining of efficiency programs and the financial incentives that enable consumers to purchase high-efficiency furnaces.
  • Wasted energy and higher emissions because customers are induced to switch to cheaper equipment, such as electric furnaces, which have a much higher full-fuel-cycle energy and emissions footprint.

Natural gas utilities have a demonstrated track record of supporting efficiency and reducing energy consumption, a fact validated by years of improvements in household natural gas use. This rule would impose new costs on consumers but add little in terms of energy or emissions benefits. Here we explore in more detail some of the consequences of DOE’s action.

AGA_2995 Furnace Standard Infographic_web_FINAL_Page_2Billions of Dollars in New Costs Imposed on Consumers

DOE’s proposed rule would lead to monthly bill reductions – for some homes and businesses. Under the rule customers would bear between $6 and $12 billion dollars in new costs associated with higher efficiency furnaces (a dollar amount that AGA believes DOE is underestimating). And these costs are distributed unevenly. According to DOE’s proposal, one out of every four households that currently have a furnace would pay more over the life of a new furnace, an inequity that can have a disproportionate effect on many low- and fixed-income households.

Despite the high costs of implementation, the rule would generate only modest energy and emissions savings. According to data in the proposal, the furnace standard would lead to only 1.1 percent in energy reduction relative to no action. In turn, the rule will achieve only 0.2 percent in carbon dioxide emissions reductions compared to a case without amended standards. For billions in upfront consumer costs, DOE’s proposed energy and emissions savings are scant.

By contrast, natural gas efficiency programs today already achieve 60 percent more annual emissions reductions at far lower cost than DOE’s proposed rule would accomplish after three decades of implementation. And these savings will only continue to grow as utilities continue to invest in their efficiency programs.

Furnace Standard Undermines Efficiency Program Gains and Emissions Targets

Why are DOE’s proposed energy reductions this small? Any declines come on top of a decades-long trend of energy efficiency that has already substantially reduced natural gas use in homes and businesses. The typical American household uses 50 percent less gas than it did in 1970, meaning the US uses the same amount of natural gas to serve 30 million additional residences. This is due in large part to natural gas utilities that promote energy efficiency in homes and businesses. Ignoring this track record of successful energy efficient approaches, DOE has proposed a costly mandate that achieves only modest savings.

Natural gas utilities across the country promote energy conservation measures, including efficient natural gas furnaces. Through 112 established programs in 39 states, the vast majority of utility efficiency programs offer homeowners financial incentives to purchase and install a high-efficiency gas furnace. These incentives include cash rebates, low-interest loans, and low or no-cost upgrades for low income customers. This proven, comprehensive, customer-focused, and cost-effective approach could be threatened by the proposed DOE rule.

State utility regulators evaluate efficiency programs based on the ratio of its costs to its benefit, such as energy savings. A higher minimum efficiency standard for furnaces would elevate the baseline from which all energy savings are calculated, thus reducing the savings that qualify as a direct benefit of the program. This, coupled with the higher costs of purchasing and installing a 92 percent efficient furnace, may disqualify many furnace replacement programs should they fail the cost-effectiveness threshold that state regulators require.

As mentioned, the energy savings from natural gas utility programs are already achieving more than the savings DOE is projecting in its proposed rule. In 2013 alone (based on the most recent AGA data), utility efficiency programs reduced gas usage in participating homes by 18 percent—the equivalence of twelve days of residential gas consumption.

Furnace Standard Will Cause Higher Emissions and Lower Efficiency for Many Households

What would the effect of the rule be on a typical household? Let’s say a home has a furnace at the end of its usable life, and it fails irreparably. A homeowner will be faced with one of two options:

  • Option 1: Purchase a new gas furnace, at DOE’s stricter efficiency standard, and pay the additional costs of the appliance and installation.
  • Option 2: Switch to less costly equipment such as an electric furnace or heat pump, resulting in increased energy use, higher emissions, and larger monthly energy bills in many areas of the country.

Some consumers that choose Option 1 will see lower overall costs, but not all homeowners or businesses will share in this benefit. Even DOE acknowledges that one in four consumers that replace their furnace will pay more over the life of the equipment because of higher installation costs. The energy savings are just too modest to counterbalance the costs.

In other words, homeowners that today could not justify the purchase of a 92 percent efficient furnace (at least not without gas utility and other incentives) would be forced under DOE’s proposal to make the purchase and eat the costs.

Looking at Option 2, DOE says that 10 percent of consumers will instead switch to an electric furnace or heat pump, which increases emissions and energy use due to the inefficiencies of electricity generation and transmission.  To boot, AGA collected data from contractors that suggests that DOE’s estimate is likely too low – even more customers than DOE expects would be compelled to pull out their furnaces and install an inefficient though less expensive electric appliance. The furnace proposal ostensibly lowers energy use and emissions. This unintended outcome, fully acknowledged by DOE, runs counter to that intent.

Ultimately, DOE’s new standard will impose additional costs on consumers, induce some customers to increase their energy use and grow emissions, and negatively impact efficiency programs that already achieve greater savings than DOE’s proposed rule.

It’s time to re-examine this prescriptive approach and apply a comprehensive vision for furnace efficiency, which recognizes the proven gains from local utility efficiency programs and product choices.

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