Report#:DOE/EIA-0554(99)

Introduction

Macroeconomic Activity

International Energy

Household Expenditure

Residential Demand

Commercial Demand

Industrial Demand

Transportation Demand

Electricity Market

Oil and Gas Supply

Natural Gas Transmission & Distribution

Petroleum Market

Coal Market

Renewable Fuels

The NEMS Residential Demand Module forecasts future residential sector energy requirements based on projections of the number of households and the stock, efficiency, and intensity of use of energy-consuming equipment.  The Residential Demand Module projections begin with a base year estimates of the housing stock,  the types and numbers of energy-consuming appliances servicing the stock, and the “unit energy consumption” by appliance (or UEC—in million Btu per household per year).  The projection process adds new housing units to the stock, determines the equipment installed in new units, retires existing housing units, and retires and replaces appliances.  The primary exogenous drivers for the module are housing starts by type (single-family, multifamily and mobile homes) and Census Division and prices for each energy source for each of the nine Census Divisions.  The Residential Demand Module also requires projections of available equipment over the forecast horizon.  Over time, equipment efficiency tends to increase because of general technological advances and also because of Federal and/or state efficiency standards.  As energy prices and available equipment changes over the forecast horizon, the module includes projected changes to the type and efficiency of equipment purchased as well as projected changes in the usage intensity of the equipment stock.

The end-use services for which equipment stocks are modeled include space conditioning (heating and cooling), water heating, refrigeration, freezers, dishwashers, clothes washers, furnace fans, cooking, and clothes drying.  In addition to the major equipment-driven end-uses, the average energy consumption per household is projected for secondary heating, lighting, color televisions, personal computers, and other electric and nonelectric appliances.  The module’s output includes number of households, equipment stock, average equipment efficiencies, and energy consumed by service, fuel, and geographic location.  The fuels represented are distillate fuel oil, liquefied petroleum gas, natural gas, kerosene, electricity, wood, geothermal, coal, and solar (active) energy.

One of the implicit assumptions embodied in the Residential Demand Module is that through 2020, there will be no radical changes in technology or consumer behavior.  No new regulations of efficiency beyond those currently embodied in law or new government programs fostering efficiency improvements are assumed. Technologies which have not gained widespread acceptance today, will not achieve significant penetration by 2020.   Currently available technologies will evolve in  both efficiency and cost.  In general, for the same real cost, future technologies will be less expensive than those available today.  When choosing new or replacement technologies, consumers will behave similarly to the way they now behave.  The intensity of end-uses will change moderately in response to price changes.  Electric end uses will continue to expand, but at a decreasing rate8

Key Assumptions

Housing Stock Submodule

A very important determinant of future energy consumption is the projected number of households.  Base year estimates for 1993 are derived from the Energy Information Administration’s (EIA) Residential Energy Consumption Survey (RECS) (Table 6).  The forecast for occupied housing units is done separately for each Census Division.  It is based on the combination of the previous year’s surviving stock with projected housing starts provided by the NEMS  Macroeconomic Activity Module.  The housing stock submodule assumes a constant survival rate (the percentage of households which are present in the current forecast year, which were also present in the preceding year) for each type of housing unit; 99.6 percent for single-family units, 99.6 percent for multifamily units, and 96.5 percent for mobile home units. Projected fuel consumption is dependent not only on the projected number of housing units, but also on the type and geographic distribution of the houses.   The intensity of space heating energy use varies greatly across the various climate zones in the United States.  Also, fuel prevalence varies across the country—oil (distillate) is more frequently used as a  heating fuel in the New England and Middle Atlantic Census Divisions than in the rest of the country, while natural gas dominates in the Midwest.  An example of differences by housing type is the more prevalent use of liquefied petroleum gas in mobile homes relative to other housing types.

Table 6.   1993 Households

Technology Choice Submodule

The key inputs for the Technology Choice Submodule are fuel prices by Census Division and characteristics of available equipment (installed cost, maintenance cost, efficiency and equipment life).  Fuel prices are determined by an equilibrium  process which considers energy supplies and demands and are passed to this submodule from the integrating module of NEMS.  Energy price, combined with equipment UEC (which is a function of efficiency), determines the operating costs of equipment.  Equipment characteristics are exogenous to the model and are modified to reflect both Federal standards and anticipated changes in the market place.  Table 7 lists capital cost and efficiency for selected residential appliances for the years 1995 and 2005.

Table 7.   Installed Cost and Efficiency Ratings of Selected Equipment

The Residential Demand Module projects equipment purchases based on a nested  choice methodology.  The first stage of the choice methodology determines the fuel and technology to be used, the second stage determines the efficiency of the selected equipment type.   For new construction, home heating fuel and technology choices are determined based on life-cycle costs assuming a 20 percent discount rate.   The equipment choices for cooling, water heating, and cooking are linked to the space heating choice for new construction.  Technology and fuel choice for replacement equipment uses a nested methodology similar to that for new construction, but includes (in addition to the capital and installation costs of the equipment), explicit costs for technology switching (e.g., costs for installing gas lines if switching from electricity or oil to gas, or costs for retrofitting air ducts if switching from electric resistance heat to central heating types).  Also, for replacements, there is no linking of fuel choice for water heating and cooking as is done for new construction.  Technology switching upon replacement is allowed for space heating, air conditioning, water heating, cooking and clothes drying.

Once the fuel and technology choice for a particular end use is determined, the second stage of the choice methodology determines efficiency.   In any given year, there are several available prototypes of varying efficiency  (minimum standard, medium low, medium high and highest efficiency).  Efficiency choice is based on a functional form and coefficients which give greater or lesser importance  to the installed capital cost (first cost) versus the operating cost.  Generally, within a technology class, the higher the first cost, the lower the operating cost.

The parameters for the second stage efficiency choice are calibrated to the most recently available shipment data for the major residential appliances.  Shipment efficiency data are obtained from industry associations which monitor shipments such as the Association of Home Appliance Manufacturers.  Because of this calibration procedure, the model allows the relative importance of first cost versus operating cost to vary by general technology and fuel type (e.g., natural gas furnace, electric heat pump, electric central air conditioner, etc.).  Once the model is calibrated, it is possible to calculate (approximately) the apparent discount rates based on the relative weight given to the operating cost savings versus the weight given to the higher cost of more efficient equipment.  Discount rates in excess of 30 percent are common in the Residential Demand Module.  The prevalence  of such high apparent discount rates by consumers has led to the notion of the “efficiency gap”¾ that is, there are many investments that could be made that provide rates of return in excess of residential borrowing rates (15 to 20 percent for example).  There are several studies which document instances of apparent high discount rates.9 The efficiency gap literature has been drawn on as the basis for efficiency standards and Federally-Sponsored voluntary programs under the Climate Change Action Plan (CCAP) (see on page 23). Once equipment efficiencies for a technology and fuel are determined, the installed efficiency for its entire stock is calculated.

Appliance Stock Submodule

The Appliance Stock Submodule is an accounting framework which tracks the quantity and average efficiency of equipment by end use, technology, and fuel.  It separately tracks equipment requirements for new construction and existing housing units. For existing units, this module calculates equipment which survives from previous years, allows certain end uses to further penetrate into the existing housing stock and calculates the total number of units required for replacement and further penetration.  Air conditioning and clothes drying are the two end uses not considered to be “fully penetrated.”  

Once a piece of equipment enters into the stock, an accounting of its remaining life is begun.  It is assumed that all appliances survive a minimum number of years after installation.  A fraction of appliances are removed from the stock once they have survived for the minimum number of years.  Between the minimum and maximum life expectancy, all appliances retire based on a linear decay function.   For example, if an appliance has a minimum life of 5 years and a maximum life of 15 years, one tenth of the units (1 divided by 15 minus 5) are retired in each of years 6 through 15.   It is further assumed that, when a house is retired from the stock, all of the equipment contained in that house retires as well; i.e., there is no secondhand market for this equipment.  The assumptions concerning equipment lives are given in Table 8.

Table 8.   Minimum and Maximum Life Expectancies of Equipment

Fuel Consumption Submodule

Energy consumption is calculated by multiplying the vintage equipment stocks by their respective UECs. The UECs include adjustments for the average efficiency of the stock vintages, short term price elasticity of demand and “rebound” effects on usage,  the size of new construction relative to the existing stock, people per household and shell efficiency and weather effects (space heating and cooling).  The various levels of aggregated consumption (consumption by fuel, by service, etc.)  are derived from these detailed equipment-specific calculations.

Equipment Efficiency

The average energy consumption of a particular technology is initially based on estimates derived from RECS 1993.  Appliance efficiency is either derived from a long history of shipment data (e.g., the efficiency of conventional air-source heat pumps) or assumed based on engineering information concerning typical installed equipment (e.g., the efficiency of ground-source heat pumps).  When the average efficiency is computed from shipment data, shipments going back as far as 20 to 30 years are combined with assumptions concerning equipment lifetimes.  This allows for  not only an  average efficiency to be calculated, but also for equipment retirements to be vintaged—older equipment tends to be lower in efficiency and also tends to get retired before newer, more efficient equipment.  Once equipment is retired, the Appliance Stock and Technology Choice Modules determine the efficiency of the replacement equipment.  It is often the case that the retired equipment is replaced by substantially more efficient equipment.

As the stock efficiency changes over the simulation interval, energy consumption decreases in inverse proportion to efficiency.  Also, as efficiency increases, the efficiency rebound effect (discussed below) will offset some of the reductions in energy consumption by increased demand for the end-use service.  For example, if the stock average for electric heat pumps is now 10 percent more efficient than in 1993, then all else constant (weather, real energy prices, shell efficiency, etc...),  energy consumption per heat pump would average about only 9 percent less.

Adjusting for the Size of New Construction

Information derived from RECS 1993 indicates that new construction (post-1990) is on average roughly 20 percent larger than the existing stock of housing.  The residential module uses similar estimates for each Census Division to model the size of new construction by housing type.  The energy consumption for space heating, air conditioning, and lighting are assumed to increase with the square footage of the structure (all future new construction is assumed to be of the size of the post-1990  vintage stock from RECS and Bureau Census data10).  This results in an increase in the average size of the housing stock of 1,630 to 1,728 square feet from 1993 through 2020.

Adjusting for Weather and Climate

Weather in any given year always includes short-term deviations from the expected longer-term average (or climate).  Recognition of the effect of weather on space heating and air conditioning is necessary to avoid inadvertently projecting abnormal weather conditions into the future.  In the residential module, proportionate adjustments are made to space heating and air conditioning UECs by Census Division.  These adjustments are based on National Oceanographic and Atmospheric Administration (NOAA)  data for heating and cooling degree-days (HDD and CDD).  A 10 percent increase in HDD would increase space heating consumption by 10 percent over what it would have other wise been.  The residential module makes weather adjustments for the years 1993 through 1998.   After 1998, long term weather patterns are assumed to occur.  The residential module uses 30-year averages of HDD and CDD as normal weather conditions.

Short-Term Price Effect and Efficiency Rebound

It is assumed that energy consumption for a given end-use service is affected by the marginal cost of providing that service.  That is, all else equal, a change in the price of a fuel will have an opposite, but less than proportional, effect on fuel consumption.  The current value for the short-term elasticity parameter is -0.25.  This value implies that for a 1 percent increase in the price of a fuel, there will be a corresponding decrease in energy consumption of -0.25 percent.  Another way of affecting the marginal cost of providing a service is through altered equipment efficiency.  For example, a 10 percent increase in efficiency will reduce the cost of providing the end-use service by 10 percent.  Based on the short-term efficiency rebound parameter, the demand for the service will rise by 1.5 percent (-10 percent multiplied by -0.15).  Only space heating and cooling are assumed to be affected by both elasticities and the efficiency rebound effect.  

Shell Efficiency

The shell integrity of the building envelope is an important determinant of the heating and cooling load for each type of household.  In the NEMS Residential Demand Module, the shell integrity is represented by an index, which changes over time to reflect improvements in the building shell.  The shell integrity index is dimensioned by vintage of house, fuel type, service (heating and cooling), and Census Division.  The age, location, and type of heating fuel are important factors in determining the level of shell integrity.  Housing units which heat with electricity tend to be better insulated than homes that use other fuels.  The age of homes are classified by new (post-1993) and existing.  Existing homes are characterized by the RECS 1993 survey and are assigned a shell index value based on the mix of homes that exist in the base year (1993).  The improvement over time in the shell integrity of these homes is a function of two factors—an assumed annual efficiency improvement and improvements made when real fuel prices increase (no price-related adjustment is made when fuel prices fall).  New homes are more efficient than old homes in terms of their building envelope.  Based on RECS data and existing building codes, newer homes are roughly 10 percent more efficient than the existing stock, depending upon the heating fuel and Census Division.  Over time, the shell integrity of new homes improves as the stringency of building codes increases.  The shell integrity index affects the space heating and cooling loads directly, causing a decrease in fuel consumed for these services as the shell integrity improves.

Legislation and Other Federal Programs

Energy Policy Act of 1992 (EPACT)

The EPACT contains several policies which are designed to improve residential sector energy efficiency. The EPACT policies analyzed in the NEMS Residential Demand Module include the sections relating to window labeling programs, low-flow showerheads, and building codes.  The impact of building codes is captured in the shell efficiency index for new buildings listed above.  Other EPACT provisions, such as home energy efficiency ratings and energy-efficient mortgages, which allow home buyers to qualify for higher loan amounts if the home is energy-efficient, are voluntary, and their effects on residential energy consumption have not been estimated.

The window labeling program is designed to help consumers determine which windows are most energy efficient.  These labels already exist for all major residential appliances.  Based on analysis of RECS data, it is assumed that the window labeling program will decrease heating loads by 8 percent and cooling loads by 3 percent.  Approximately 25 percent of the existing (pre-1994) housing stock is affected by this policy by 2015.

The low-flow showerhead program is designed to cut domestic hot water use for showers.  It is assumed that these showerheads cut hot water use by 50 percent for shower use.  Since showers account for approximately 30 percent of domestic hot water use, total hot water use decreases by 15 percent.  It is further assumed that these showerheads are installed exclusively in new construction.

National Appliance Energy Conservation Act of 1987

The Technology Choice Submodule incorporates equipment standards established by the National Appliance Energy Conservation Act of 1987 (NAECA).  Some of the NAECA standards implemented in the module include: a Seasonal Energy Efficiency Rating (SEER) of 10.0 for heat pumps;  an Annual Fuel Utilization Efficiency (energy output over energy input) of 0.78 for oil and gas furnaces; an Efficiency Factor of .88 for electric water heaters; and refrigerator standards that set consumption limits to 976 kilowatt-hours per year in 1990, 691 kilowatt-hours per year in 1993, and 483 kilowatt-hours per year in 2002.

Climate Change Action Plan

The Climate Change Action Plan (CCAP) contains many policies which are designed to reduce carbon emissions in the United States to the 1990 levels.  The CCAP strategies which directly affect the residential sector are Actions 8 through 11.  The Residential Demand Module for AEO99 includes effects from  Action Items 6, 7, 8, 10, and 11 (the House and Senate appropriations included no funding for Action 9).  Specifically, these sections relate to Federal Efficiency Standards for several household appliances, stricter building codes, and the expansion of “Golden Carrot” demand-pull type programs.  Analyses relating to CCAP programs are on an ongoing basis, as funding changes over time.

Action Item 6 includes voluntary programs sponsored by the Department of energy (DOE) and the Environmental Protection Agency (EPA) aimed at market-pull partnerships with industry.  Among the programs in Action Item 6 are DOE’s R&D efforts to commercialize advanced energy-efficient technologies and  EPA’s Energy Star Programs for residential homes, air conditioning, ductwork and lighting.

CCAP Action Items 8, 10 and 11 are policies designed to reduce energy consumption by strengthening building shell efficiency and promoting energy efficient mortgages.  In AEO99, the shell integrity (efficiency) of new construction increases relative to 1993 levels as stricter building codes, energy-efficient mortgages, and home energy rating systems become more widespread.  The combined energy savings due to CCAP Actions 6 through 11 results in  approximately 1.2 MMT of carbon emissions savings in the year 2000 and 11.5 MMT in 2010.

Residential Technology Cases

In addition to the AEO99 reference case, three side cases were developed to examine the effect of equipment and building standards on residential energy use—a 1999 technology case, a best available technology case, and a high technology case.  These side cases were analyzed in stand-alone (not integrated with the supply modules) NEMS runs and thus do not include supply-responses to the altered residential consumption patterns of the two cases.

The 1999 technology case assumes that all future equipment purchases are made based only on equipment available in 1999.  This case further assumes that building shell efficiencies will not improve beyond 1999 levels. In the reference case,  the 2020 housing stock shell efficiency is 7 percent higher than in 1993 for heating (5 percent for cooling).

The high technology case assumes earlier availability, lower costs, and/or higher efficiencies of more advanced equipment than the reference case.  Equipment assumptions were developed by engineering technology experts, considering the potential impact on technology given increased research and development into more advanced technologies.11  In the high technology case, heating shell efficiency increases by 33 percent and cooling shell efficiency by 30 percent, relative to 1993.

The best available technology case assumes that all equipment purchases from 2000 forward are based on the highest available efficiency in high technology case in a particular simulation year, disregarding the economic costs of such a case.  It is merely designed to show how much the choice of the highest-efficiency equipment could affect energy consumption.  In this case, heating shell efficiency increases by 40 percent and cooling shell efficiency by 38 percent, relative to 1993.