AN ANALYSIS OF THE ECONOMICS
OF REPLACING EXISTING
RESIDENTIAL FURNACES AND BOILERS
WITH HIGH EFFICIENCY UNITS
Revised
October 1980
Submitted to the
Office of Planning and Evaluation
U.S. Environmental Protection Agency
Contract No. 68-01-5845
ICF INCORPORATED 1850 K Street. Northwest,
Suite 950, Washington, D. C. 20006
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ICF INCORPORATED 1850 K Street, Northwest. Suite 950. Washington. D C 20006 (202) 862-1100
November 4, 1980
Office of Planning and Evaluation
Environmental Protection Agency
401 M Street, S.W.
Washington, D.C. 20460
Gentlemen:
ICF Incorporated is pleased to provide this revised and updated report,
"Analysis of the Economics of Replacing Existing Residential Furnaces and
Boilers with High Efficiency Units."
The analysis performed in this report indicates that early replacement of
existing low efficiency oil and gas heating equipment with new high efficiency
units would reduce oil imports, have environmental benefits, and be a good
investment for both the homeowner and the nation.
We hope that this report will be helpful to you in your efforts to develop
policies which will improve the environment while reducing the nation's
dependence on foreign oil in a cost-effective manner.
Sincerely,
Theodore R. Breton
Principal
TRB/bb
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ANALYSIS OF THE ECONOMICS OF REPLACING EXISTING RESIDENTIAL
FURNACES AND BOILERS WITH HIGH EFFICIENCY UNITS
Revised October 1980
Submitted to the
Office of Planning and Evaluation
U.S. Environmental Protection Agency
Contract No. 68-01-5845
The assumptions, findings, conclusions, judgments, and views expressed
herein are those of ICF Incorporated and should not be interpreted as
necessarily representing the official policies of the U.S. government.
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TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY i
I. Introduction 1
Conservation Can Help the Nation and the Homeowner 3
Many Obstacles have Restrained Conservation in the Past 6
Now is a Good Time to Make Conservation Investments 8
Remaining Problems Affecting Investment Decisions 8
Purpose and Scope of this Project 10
Organization of the Report 13
II. Methodology 14
Specific Assumptions Used in the Analysis 15
Annual Heating Requirements 16
Remaining Useful Life in Units Replaced or Modified 17
Date the Equipment Was Installed 18
Characteristics of Heating Equipment Used in the Analysis 18
Oil-to-Gas Conservation Costs 25
Fuel Prices and Fuel Value 26
Discount Rate 35
III. Results of the Analysis 38
Replacement of Gas Heating Equipment at Normal
Replacement Time 38
Early Replacement of Gas Heating Equipment 39
Replacement of Oil Heating Equipment at Normal
Replacement Time 40
Early Replacement of Oil Heating Equipment 43
Sensitivity of the Results to Higher Gas Prices 46
IV. Conclusions 48
Government Policy Implications 50
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List of Tables
Page
Table 1 Primary Heating Fuel by Type of Housing Structure 2
Table 2 National Average Delivered Price of Heating Fuels
in the Residential Sector in 1980 Dollars 3
Table 3 Characteristics of the Gas Heating Equipment Used
in the Analysis 22
Table 4 Characteristics of the Oil Heating Equipment Used
in the Analysis 23
Table 5 U.S. Gas Consumption 30
Table 6 U.S. Gas Supply 30
Table 7 Fuel Prices Estimated by the Natural Gas
Market Simulator 31
Table 8 Delivered Cost of Residential Heating Fuels
Used in the Analysis 34
Table 9 Payback Period and Present Discounted Value of
Investing in More Efficient Gas Heating Systems
At Normal Replacement Time 39
Table 10 Payback Period and Present Discounted Value for Early
Replacement of Gas Furnaces and Boilers with More
Efficient units 41
Table 11 Payback Period and Present Discounted Value of
Conversion to Gas Units As Compared to Investment
in a High Efficiency Oil Unit at Normal Replacement
Time 42
Table 12 Payback Period and Present Discounted Value for Early
Replacement of Oil Boilers which have 50% and 60%
Seasonal Efficiencies 44
Table 13 Payback Period and Present Discounted Value for Early
Replacement of Oil Furnaces which have 50% and 60%
Seasonal Efficiencies 45
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EXECUTIVE SUMMARY
Now is a very good time for homeowners to change their traditional
patterns and make some investments in home energy conservation:
o Government policy regulating oil and gas prices appears to have
finally stabilized. Significant policy changes are unlikely for
at least four years.
• Heating oil prices are high and will be going higher. Residential
gas prices have increased substantially and over the next 10-15
years will get closer to the price of heating oil.
• Tax credits and both subsidized and unsubsidized loans are
available from a variety of sources for investments in
conservation.
• Energy audit services are now available from electric and gas
utilities and other heating fuel suppliers that can provide
homeowners with good information about home weatherization and
heating system replacement options.
• Very high efficiency oil and gas heating equipment is now being
produced by a rapidly growing number of manufacturers. Little
additional improvement in efficiencies will be made for at least
five years.
• The new DOE equipment efficiency labeling program now makes it
possible for the homeowner to identify those furnaces and boilers
which truly are high in efficiency.
e Investments in conservation no longer are lost to the homeowner
when the house is sold. When the house is offered for sale,
potential purchasers now inquire about annual heating bills.
This report was prepared to analyze the economics of replacing existing
residential oil and gas heating equipment with new high efficiency units in
houses which are at least partially weatherized. Homeowners in houses which
do not have caulking, weather stripping, or insulation should invest in
building weatherization before they consider heating equipment investments.
Potential investment decisions were grouped into the following three
categories for analysis purposes:
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• Investment in high efficiency equipment instead of a "standard"
unit at normal replacement time.
• Early replacement of existing oil or gas heating equipment with
new high efficiency equipment.
o Switching from heating oil to natural gas.
All of the potential investments were examined from both the homeowner's and
the national perspective. For the national perspective, natural gas was
valued based on its best alternative use in the industrial and electric
utility sectors.
The results of the analysis performed in this report are relevant for ~he
entire northern region of the United States, which contain 64% of all
gas-heated housing units and 83% of all oil-heated housing units in the
nation. The most important conclusions which can be drawn from this analysis
are as follows:
• Whenever an existing gas furnace or boiler wears out, the
homeowner should definitely purchase a new high efficiency gas
unit. The incremental investment is very low relative to the
standard gas unit, the payback period is 1-2 years, and the total
savings for the homeowner and the nation are very large over the
life of the investment.
• Early replacement of existing gas heating equipment is
economically desirable under the assumptions used in the analysis,
but the return on investment is not nearly as high as most
homeowners require for conservation investments. However, for
high income homeowners who have a variety of investment
alternatives, early replacement of existing gas equipment with a
high efficiency unit offers a much higher after-tax return than
alternative investments whose return is subject to income tax.
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• Whenever an existing oil furnace or boiler wears out, any
homeowner who already uses gas for non-heating purposes or who has
ready access to a gas main should install gas heating equipment.
The best gas heating equipment is equal to or better than the best
oil heating equipment from an efficiency and cost standpoint, and
even after price decontrol, gas will continue to be cheaper than
heating oil where it is available.As noted above, the new
unit installed should be a high efficiency unit.
e Any existing oil heating equipment which is over ten years old and
has never been upgraded should be upgraded or replaced as soon as
possible.
Homeowners should replace the existing oil unit with a new
high efficiency gas unit if they already use gas for
non-heating purposes or have ready access to a gas main. The
best gas heating equipment is equal to or better than the best
oil equipment from an efficiency and cost standpoint, and gas
will continue to cost less than heating oil where it is
available.^/
Homeowners who do not have ready access to a gas main should
upgrade their existing oil heating equipment if it has twenty
years of remaining useful life. If the remaining useful life
is much shorter than twenty years, the old unit should be
replaced with a new oil unit.
The immediate opportunities for increased energy conservation are clearly
in the houses with oil heating systems. Many of these homeowners are
switching to gas. They should be encouraged to install high efficiency units.
Over the near term as high efficiency gas equipment is produced in greater
volume, programs should.be developed which will provide an incentive for
homeowners to replace existing gas heating equipment with high efficiency
units. Information should be provided to high income homeowners about the
considerable benefit to them ot investing in high efficiency equipment.
Programs to assist moderate and low income homeowners to replace existing gas
1/ See the discussion on Fuel Prices and Fuel Value in the Methodology
section.
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equipment should be developed prior to natural gas price decontrol to help
cushion the impact of higher residential gas prices.
The end result of these programs could improve the average seasonal
efficiency of the heating equipment in the nation's residential housing stock
from about 60% today to about 80% by 1990. This change would reduce oil and
gas space heating fuel consumption in the existing housing stock by 25%, which
is equal to a saving of 725,000 barrels/day of oil.
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I. INTRODUCTION
Since 1973, the way we use energy has become an important national and
individual concern. Our extensive use of imported oil has made us highly
vulnerable to oil supply disruptions. In addition, the increasing cost of
acquiring oil is siphoning off many of the economic resources we formerly used
for other things. As a result, our continued extensive reliance on oil has
adverse implications for our economic well-being as a nation.
The major use of energy in the home is for space heating and cooling. As
shown in Table 1, natural gas and petroleum-based fuels (heating oil, LPG, and
kerosene) are used as the primary heating fuel in over 80% of all housing
units. Rising heating oil and gas prices have greatly increased homeowner
energy bills. In the colder regions of the U.S., heating costs now account
for a sizeable portion of a homeowner's budget.
Table 2 presents data on the price of heating oil and natural gas during
the 1974-1980 period in constant 1980 dollars (i.e., what would have been paid
in this year's dollars to buy fuel in each year). The natural gas cost data
is calculated in cents per gallon to present it as if it were heating oil from
the consumer's standpoint. The data show that both heating oil and natural
gas prices have risen significantly in real terms since 1974, but that average
gas prices are still below average 1974 heating oil prices. Natural gas
prices vary considerably between different parts of the country, but where
natural gas is available, it is cheaper than heating oil at the present time.
Greater use of coal, synthetic fuels made from coal, oil from shale, and
nuclear power have all been cited as potential solutions to our oil import
dependence problem. Unfortunately, these solutions are not cheap, they pose
environmental problems, and they will take time to implement.
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TABLE 1
PRIMARY HEATING FUEL BY TYPE OF HOUSING STRUCTURE
(Percentage of Housing Units)
Total
Housing
Units
Natural Gas 55
Fuel Oil, Kerosene 22
Electricity 16
LPG 4
Wood 2
Other 1
Not Applicable -
Total 100
Single Single Building
Family Family With 2-4
Detached Attached Units
55 72 63
23 11 20
13 14 15
4 12
Si-
ll-
- 1
100 100 100
Building
With 5 Or Mobile
More Units Home Other
48 27 85
22 26
27 23 6
19 -
4 -
9
2
100 100 100
Note: Data may not sum to totals due to rounding.
Source: U.S. Department of Energy, Residential Energy Consumption Survey;
Characteristics of the Housing Stock and Households, February 1980, p. 45.
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TABLE 2
NATIONAL AVERAGE DELIVERED PRICE OF HEATING FUELS
IN THE RESIDENTIAL SECTOR IN 1980 DOLLARS
(Cents/Gallon)
Year
Heating Oil
Natural Gas*
1974
1975
1976
1977
1978
1979
1980
56.7
56.4
57.4
61.1
61.0
89.7
97.8**
28.1
31.8
36.1
41.6
45.0
50.9
52.9**
* Converted to cents/gallon from dollars/thousand cubic feet (MCF) using the
relative heat content of an MCF of gas and a gallon of heating oil.
** July 1980
Source: ICF Incorporated adjustment of nominal price data taken from DOE,
Monthly Energy Report, various issues.
Conservation Can Help the Nation and the Homeowner
ICF performed an analysis of energy conservation as an alternative
solution to the oil import dependence problem for the U.S. Senate Budget
Committee.—^ The analysis indicated that oil and gas conservation is a real
bargain for the nation. Conservation of oil and gas can:
• reduce oil imports,
0 reduce environmental contamination, and
• save money
1/ ICF Inc., Oil Import Reduction: An Analysis of Production and
Conservation Alternatives, August 30, 1979
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We found that some of the best opportunities for conservation at low cost are
in the residential sector.
These savings are possible because the existing housing stock is not very
energy-efficient. A very large proportion of the heat produced in most
residential furnaces and boilers currently goes up the flue or chimney and
never reaches the heated portion of the house. The heat which does reach the
heated portion of many houses quickly leaks out through poorly insulated
doors, windows, walls, and ceilings and through cracks and other openings to
the outside.
Oil and gas with an energy content equal to about 3.7 million barrels/day
of oil was used in the residential sector in 1978. We have estimated that if
every conservation investment were made in the existing housing stock which
could reduce oil and gas use at a cost of less than $34/barrel (the current
average cost of imported oil today), the use of oil and gas in the existing
1978 housing stock could be reduced by almost 50% by 1990.—^
Investments to improve the efficiency of existing residential oil and gas
heating equipment and to weatherize houses reduce oil and gas consumption.
Reduced oil use through conservation leads directly to reduced oil imports.
Reduced gas use through conservation makes additional gas available to the
industrial and electric utility sectors. The additional gas enables these
sectors to reduce their consumption of oil which reduces oil imports.
Switching from oil to gas in the residential sector also leads to reduced
oil imports if heating unit efficiencies are concurrently improved. Increased
V Ibid., p. B-10
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use of gas in the residential sector reduces the gas available for the
industrial and electric utility sectors. However, if the efficiency of the
new gas heating equipment is higher than the efficiency of the old oil unit
replaced, switching reduces the total amount of oil and gas used in the
nation. Since gas is generally used instead of oil when it is available, a
reduction in total oil and gas consumption reduces oil imports.
Investments which improve oil and gas heating equipment efficiency also
have environmental benefits. Since less fuel is consumed to heat the
residence, all other things being equal, there is less pollution of the
air.—^ Also, since oil imports are reduced, the danger of oil spills is
also reduced. Consequently, unless the efficiency improvements increase
pollution emissions per unit of fuel burned, efficiency improvements are good
for the environment.
Studies have shown that investments in more efficient oil and gas
equipment and in weatherizing the housing stock will save homeowners and the
nation money over the life of the investment. Unfortunately, homeowners often
do not make energy conservation investments unless they pay for themselves
very quickly. In a survey performed by ICF and Westat, Inc., many homeowners
indicated they were seeking a payback period of four years for their
2/
conservation investments.- A four year pay-back on a twenty year
1/ Recently there has been concern that energy conservation obtained by
reducing air infiltration in residential units may increase indoor
pollution levels. It should be noted that improving furnace or boiler
efficiencies conserves energy without affecting air infiltration rates.
2/ U.S. Department of Energy, Energy Extension Service Pilot Program Report.
The First Year, Vol. 1, pg. 116-117
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investment is equivalent to a very high return on investment (much higher than
makes sense from a national perspective).
Many Obstacles Have Restrained Conservation in the Past
Much can be done to reduce the use of energy in the existing housing
stock, but homeowners have done relatively little to date for many reasons:
• Until recently oil prices were much lower than they are now.
• Price controls have kept natural gas prices at a low level, so
there is less incentive for gas users to invest in conservation.
• Because fuel prices have been low for so many years, homeowners
are not accustomed to making energy conservation investments.
Houses have been weatherized primarily when the house is built,
and new furnaces and boilers have been installed only when the old
ones cease to function.
• Homeowners know that additional weatherization and the
installation of higher efficiency heating equipment will save
fuel, and a wide variety of heating equipment and home
weatherization services are available, but the information on the
potential savings in fuel costs has been inconsistent, sometimes
misleading, and not widely available.
• High efficiency heating equipment has been produced but,
especially in the case of gas equipment, has only recently become
commercially available.
® Some homeowners are unsure whether they should delay their
investment in new heating equipment until even more efficient
units become available.
\
• The high installation cost of a new furnace or boiler and the low
or non-existent salvage value of an old unit can create a
financing problem for the homeowner.
o Homeowners have been uncertain whether the investments they make
to conserve energy will be fully capitalized into the price of the
house if they decide to sell soon after making the investment.
The net result is that while homeowners have made some investments in
conservation, the total effort has been rather disappointing. Homeowners
appear to have focused mostly on minimizing the initial investment cost and
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the pay-back period, instead of the total costs over the life of the invest-
ment; this orientation usually results in the purchase of less sophisticated
equipment which uses more fuel.
The large price differential between heating oil and natural gas has
encouraged a large number of homeowners who heat with oil to reduce their fuel
bills by switching to natural gas. The American Gas Association has estimated
that about 365,000 house heating units converted from oil to gas heat in 1979,
and utility company forecasts indicate that 383,000 conversions will occur in
1980.—^ Since only a small fraction of the gas heating equipment sold in
the recent past has been high in efficiency, it is quite likely that
homeowners heating with oil who otherwise would have invested in conservation
decided to take advantage of controlled gas prices and invested in a low
efficiency gas furnace or boiler instead.
Controlled gas prices can be a liability to the nation's conservation
program. Because gas prices have been kept low, homeowners with gas heating
equipment have less incentive to weatherize their homes and invest in high
efficiency gas equipment. Also, homeowners with oil heat may convert to gas
and install low efficiency units.
However, controlled gas prices also offer the nation an opportunity. High
efficiency gas furnaces and boilers are now available, and the most efficient
gas units are more efficient than the most efficient oil units. Homeowners
with oil heating systems, who probably would not replace those systems if gas
1/ AGA, "An Analysis of Oil-to-Gas Conversion Trends in the Residential Gas
Space Heating Market," September 18, 1980, p. 2
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prices were high, are currently buying new gas units. If these homeowners can
be persuaded to install high efticiency gas units when they convert to gas,
both they and the nation will benefit.
Nov/ is a Good Time to Make Conservation Investments
Now is a very good time for homeowners to change their traditional
patterns and make some investments in home energy conservation:
« Government policy regulating oil and gas prices appears to have
finally stabilized. Significant policy changes are unlikely fcr
at least four years.
• Heating oil prices are high and will be going higher. Residential
gas prices have increased substantially and over the next 10-15
years will get closer to the price of heating oil.
• Tax credits and both subsidized and unsubsidized loans are
available from a variety of sources for investments in
conservation.
• Energy audit services are now available from electric and gas
utilities and other heating fuel suppliers that can provide
homeowners with good information about home weatherization and
heating system replacement options.
• Very high efficiency oil and gas heating eguipment is now being
produced by a rapidly growing number of manufacturers. Little
additional improvement in efficiencies will be made for at least
five years.
• The new DOE equipment efficiency labeling program now makes it
possible for the homeowner to identify those furnaces and boilers
which truly are high in efficiency.
o Investments in conservation no longer are lost to the homeowner
when the house is sold. When the house is offered for sale,
potential purchasers now inquire about annual heating bills.
Remaining Problems Affecting Investment Decisions
Despite these recent events which make it much easier for the homeowners
to make good conservation investment decisions, there is still some confusion
and potential for incorrect decision-making. Homeowners have a variety of
conservation options to choose from including:
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• Weatherizing the housing shell,
• Upgrading existing heating equipment,
• Replacing existing oil and gas equipment with a higher efficiency
unit, and
• Switching from heating oil to natural gas.
These options are not independent of each other. If one conservation
investment is made, it reduces the potential energy saving which can be
obtained from subsequent investments. For example, if an uninsulated house
has a furnace with 50% efficiency and it consumes 100 units of heat,
increasing the efficiency to 75% will save 33 units of heat. If the house is
first weatherized until only 80 units of heat are consumed, then the
improvement in furnace efficiency from 50 to 75% will only save 27 units of
heat.
Consequently, fuel saving investments should not be considered in
isolation. Homeowners in houses which do not have caulking, weatherstripping,
or insulation should invest in building weatherization before they consider
heating equipment investments. However, most houses in the colder regions of
the United States are at least partially weatherized.—^ Homeowners in these
structures should consider heating equipment investments to reduce fuel
consumption.
1/ The Department of Energy has collected data which indicate that only 16%
of all housing units in the colder regions of the country (greater than
4000 heating degree days), have no attic insulation at all.
DOE/EIA, Residential Energy Consumption Survey: Conservation, February
1980, p. 13
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As mentioned previously, controlled gas prices are another potential
obstacle to conservation investments. The current price differential between
home heating oil and natural gas, which results primarily from Federal and
state regulation of gas prices, is now causing homeowners who heat with oil to
consider investments in gas heating equipment which they probably would not
make if gas prices were not controlled. It homeowners replace the burner in
their existing oil heating equipment with a gas burner, no oil or gas will be
saved, and the nation will lose an opportunity to reduce oil imports and
improve the environment at very low cost.
If the efficiency of the heating equipment is not improved during the
switch, the only significant effect of homeowner switching from oil to gas is
to reallocate gas supplies within the nation. The savings homeowners obtain
by switching are largely matched by increased costs somewhere else in the
nation. However, if homeowners replace low efficiency oil furnaces and
boilers which are still in good working condition with high efficiency gas
units, oil imports will be reduced, the environment will be improved, and both
the consumer and the nation as a whole may save money.
Purpose and Scope of This Report
This report was prepared to provide both homeowners and government policy
makers with information about the economics of residential heating equipment
replacement. Potential investment decisions were grouped into the following
three categories for analysis purposes:
• Investment in high efficiency equipment instead of a "standard"
unit at normal replacement time. This analysis examines the
desirability of spending additional money for a higher efficiency
unit once a decision has been made to install a new oil or gas
unit.
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• Early replacement of existing oil or gas heating equipment with
new high efficiency equipment. This analysis examines whether the
higher fuel efficiencies of new equipment warrant early retirement
of old equipment which is still in good working condition.
0 Switching from heating oil to natural gas. This analysis examines
the desirability of replacing existing oil-fired equipment with
new gas-fired equipment both at and before normal replacement time.
All of the potential investments were examined from both the homeowner's and
the national perspective. For the national perspective, natural gas was
valued based on its best alternative use in the industrial and electric
utility sectors.
The report is designed to provide information on the economics of
residential heating system investments in the colder parts of the nation where
annual heating degree days exceed 4000. figure 1 contains a map which
indicates the location of this region. About 64% of gas-heated housing units
and 83% of oil-heated housing units are located in this region.—^
The approach used in the report was to examine a small detached,
moderately weatherized house with an average heating system efficiency of 60%
consuming 94.5 million BTU's/year. Such a house is representative of houses
in Baltimore or Kansas City. Their owners would have heating bills of about
$820 in 1980 if they had old 50% efficiency oil heating systems and about $410
if they had old 60% efficiency gas units.
1/ Calculated from data in U.S. Department of Energy, Residential Energy
Consumption Survey: Characteristics of the Housing Stock and Households,
February 1980, p. 42
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FIGURE 1
UNITED STATES WEATHER ZONE MAP OF HEATING
DEGREE DAYS (HDD) AND COOLING DEGREE DAYS (CDD)
¦Wi:tif
DUD
iH
EE3
~
C3
Wt+Fy ^r'^V,AV.-.v.v
....„< {
V >
f1> *>>
\
Weather Zones
Zone 1 is less than 2,000 CDD and greater than 7,000 I !DD.
Zone 2 is less than 2,000 CDD and 5,500 - 7,000 HDD.
Zone 3 is less than 2,000 CDD and 4,000 - 5,439 HDD.
Zone 4 is less than 2,000 CDD and less than 4,D00 HDD.
Zone 5 is greater than 2,000 CDD and less than 4,000 HDD.
Source: U.S. Department of Energy, Residential Energy Consumption Survey:
Conservation, February 1980, p. 133.
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The annual fuel consumption for space heating used as the basis for the
analysis in this report is lower than average for the northern region of the
country. As a result, the estimates of the return on investment in heating
equipment are conservative for the majority of homeowners in the region.
No comparison was made between heating equipment investments and
weatherization investments in this report,. However, as mentioned previously,
houses which are not weatherized at all (e.g. no insulation) should be
weatherized first. Homeowners should obtain an energy audit to determine
exactly what should be done in their home. For a house which is well
insulated and caulked, heating equipment investments definitely should be
considered if fuel bills are still high.
Organization of the Report
The remainder of the report is organized as follows: Section II explains
the methodology used in the report, including the critical assumptions in the
analyses, such as the cost and seasonal efficiencies of new heating equipment
and fuel prices. Section III presents the results of the analyses. Section
IV contains a discussion of the implications of the results for both the
homeowner and for national policy.
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II. METHODOLOGY
The analysis was organized to correspond to the kinds of decisions the
homeowner has to make when considering heating equipment replacement or
modification. The following investment alternatives were analyzed:
• Normal replacement of worn out gas heating equipment. When gas
heating equipment reaches the end of its useful life, a homeowner
must select a unit to replace it. Switching to oil is not
economically attractive, so the homeowner's choices are between
units with different costs and fuel efficiencies. This analysis
compared the economic desirability of several investment
alternatives.
• Early replacement of existing gas heating equipment with a new
high efficiency unit. Although controlled gas prices limit the
incentive to replace low efficiency existing gas heating
equipment, early replacement with a high efficiency unit may be in
the national interest. This analysis examined the economic
desirability of installing high efficiency gas furnaces and
boilers in 1981 and heat pumps in 1986.
• Normal replacement of worn out oil heating equipment. When oil
heating equipment reaches the end of its useful life, a homeowner
may replace it with a new oil unit, a "standard" gas unit, or a
high efficiency gas unit. This analysis compared the economic
desirability of these investment alternatives.
• Early replacement of existing oil heating equipment. The existing
stock of oil heating equipment that is over ten years old and has
not been upgraded is very inefficient. Homeowners have a wide
variety of investment alternatives which can reduce their home
heating costs, including upgrading the existing unit, purchasing a
new oil unit, and switching to gas. They may switch to gas by
installing a conversion burner or by purchasing a new standard or
high efficiency unit. This analysis examined the economic
desirability of these alternatives.
In this report furnaces refer to forced air heating systems and boilers
refer to hot water heating systems. Steam systems-were not examined.
The analysis was performed to determine the economic desirability of these
investments from both the homeowner's and the nation's perspective. The
approach used for the homeowner's perspective was to estimate 1) the number of
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years required for payback and 2) the present discounted value of the
investment, maintenance costs, and fuel savings over the assumed life of the
equipment. The number of years required for payback was calculated because
homeowners often make investment choices based on this calculation. The
payback period is not a good indicator of the desirability of an investment
because it provides no information about the return on the investment during
the period after payback. The present discounted value of the investment was
calculated because this is a good way to determine the desirability of
investments in different kinds of equipment over the equipment's useful
life.—^ Only the present discounted value was used to assess the
desirability of the investment from the nation's perspective.
In the calculations for the homeowner, the fuel costs were based on an
estimate of the fuel prices the homeowner would actually pay over the life of
the equipment. For a variety of reasons, the price charged the homeowner for
natural gas is not equal to its value to the nation. In the analysis from the
national perspective, the price of gas was set equal to its estimated value to
the nation. All other assumptions used in the analysis were the same for the
homeowner and the nation.
Specific Assumptions Used in the Analysis
The following assumptions were required to perform the analysis:
• The annual heating requirements for the residential unit where the
equipment was installed,
• The remaining useful life of the equipment which was replaced or
modified,
• The date the heating equipment was installed,
1/ See pg. 35 for a discussion of present discounted value.
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e The characteristics of the new and existing heating equipment
being compared, including the installation cost, the annual
maintenance cost, the seasonal fuel use efficiency, and the
expected life,
• Oil to gas conversion costs other than heating equipment costs,
• The fuel prices and the fuel value to the nation,
« The discount rate.
When in doubt about what assumptions to use, we made an effort to specify
conditions which would avoid biasing the results in favor of making early
replacement or oil-to-gas switching investments. The assumptions we made and
our rationale for them is explained below.
Annual Heating Requirements
The amount of fuel and fuel costs which can be saved are directly related
to the amount of heat required to maintain the house at its desired
temperature. The amount of heat required depends on the characteristics of
the house, including its size and degree of weatherization, the climate where
it is located, and the behavior of the occupants.
We selected a small single-family house in Baltimore, Maryland as the
prototype for estimating the annual heating requirements used in the
analysis. We reasoned that if the investments looked desirable for the owner
of a house in Baltimore, they would look even better for the owner of a ho-jse
in a colder climate. The house used to specify the heating requirements was a
twelve hundred square foot wood frame house typical of the type built in
1973. This house has some insulation in the walls and ceiling, but it is not
as weatherized as houses being built today. In Baltimore, Maryland this house
requires 56.7 million Btu's of delivered heat from a boiler or furnace each
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year.—^ The amount of fuel required to provide this amount of heat depends
on the seasonal efficiency of the heating unit, if the unit has a 60%
seasonal efficiency, which is typical for existing, installed units, the unit
would consume 94.5 million Btu's per year to provide 56.7 million Btu's of
heat.-/
The results of the analysis are generally valid for any house which has
this annual heating requirement, whether it is a larger, better insulated
house in Baltimore, or a similar-sized townhouse located farther north. The
return on investment in new heating equipment is determined primarily by the
amount of heat required to heat a house, not the characteristics of the house
in question.
Remaining Useful Life in Units Replaced or Modified
In order to assess the desirability of replacement or modification, an
assumption must be made about the remaining useful life in the heating unit to
be replaced or modified. When equipment is replaced before it is worn out, a
capital cost is incurred before it is necessary. The newer the equipment
being replaced, the greater the total capital costs incurred over the life of
the house on an undiscounted or a discounted basis.
To avoid biasing the results in favor of early replacement, the equip-
ment being replaced was assumed to have twenty years of remaining useful
1/ Office of Technology Assessment, Residential Energy Conservation, Volume
I, Washington, D.C., pg. 56-61.
2/ If the unit is gas-fired and has a 60% seasonal efficiency, and gas costs
$4.50/MCF, the annual fuel bill for this house would be $410. If the unit
is oil-fired and has a 50% seasonal efficiency, and heating oil costs
$1.00/gallon, the annual fuel bill for this house would be $815. If the
unit is oil-fired and has a 60% seasonal efficiency, the annual fuel bill
would be $680.
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... 1/
lite. Since the new equipment was also assumed to have twenty years of
useful life, none of the capital cost of the new unit was discounted based on
an assumption that the old unit would have to be replaced anyway. For the
analysis of oil heating equipment modifications the existing equipment was
also assumed to have twenty years of remaining useful life. Since most
homeowners considering early replacement have units with fewer years of
remaining useful life, the economics of early replacement should generally be
better from their perspective and from a national perspective than what is
shown in the analysis.
Date the Equipment Was Installed
A variety of investment possibilities were analyzed, including some
occurring at normal replacement time when the old furnace or boiler was worn
out and some occurring before normal replacement time to take advantage of the
fuel cost savings associated with new units and old unit modifications.
Except for gas heat pump investments, all the investments analyzed were
assumed to occur on January 1, 1981. Gas heat pumps are not commercially
available at the present time. For the purpose of the analysis, investments
in gas heat pumps were assumed to occur on January 1, 1986, five years after
the other investments were made.
Characteristics of Heating Equipment Used in the Analysis
ICF conducted a literature search in an attempt to identify the most
efficient oil and gas furnaces and boilers and the most cost-effective
1/ Except for the gas heat pump analysis where the remaining useful life in
the old unit was assumed to be fifteen years, the same as the assumed
useful life of the new heat pump.
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equipment modifications. We subsequently augmented that effort through
conversations with various manufacturers, installers, and industry
associations. We found that the most efficient gas boilers which are
commercially available are the "low volume" boilers, such as those
manufactured by Teledyne-Lears and NEGEA Energy Products, and the pulse
combustion boiler, manufactured by Hydrotherm. The most efficient furnaces
presently available are condensing flue-gas furnaces incorporating copper heat
exchangers, automatic flue dampers, and spark ignitions. These furnaces are
available from a large number of well-known furnace manufacturers, such as
Janitrol, Carrier, Tappan and Bryant Air Conditioning, but the Janitrol
furnace appears to be somewhat more efficient than the others.
Most new oil furnaces and boilers have seasonal efficiencies between 70%
and 80%, but the Blueray furnace appears to be somewhat more efficient.
Efforts are underway to produce a pulse combustion oil boiler, but these units
are not yet commercial.
In a residential boiler the firebox, the heat exchanger, and the water
must be heated. In conventional boilers, these items constitute a large
thermal mass that is slow and difficult to heat, resulting in the consumption
of large amounts of fuel in the process. Conventional boilers are not only
slow to heat, they are also slow to cool down. But, in most cases, the heat
remaining in the system after the burner goes out is wasted because the water
pump also stops circulating the water through the system. Much of the
remaining heat is simply lost up the chimney or is dissipated through the
walls of the boiler.—^ Low volume boilers counteract these sources of
1/ If the boiler is located in an unheated space, the heat dissipated through
the insulation is wasted. Any heat vented through the chimney is is also
wasted.
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inefficiency by incorporating materials with less thermal mass and by heating
only a small quantity of water in the boiler.
Pulse combustion is not a new technology; it was first employed in World
War ii. in the pulse combustion process, a mixture of air and fuel is ignited
in the combustion chamber, producing rapid, efficient burning and a pressure
pulse. The pulse forces the combustion products from the chamber across the
heat-exchange surfaces where the increased pressure and turbulance increase
the efficiency of heat transfer. This raises the overall efficiency of the
unit.
When flue gases condense, a corrosive residue forms which can damage parts
of the heating system. When home heating fuels were low in cost, an easy
solution to this problem was to keep the gases hot to prevent them from
condensing and vent them through a chimney. Now that home heating fuels are
no longer inexpensive, heating systems are being designed to reduce the amount
of heat lost up the chimney by cooling the gases before they are vented to the
outside. In some condensing flue gas systems, so much heat is extracted from
the gases that no chimney is needed. The cool flue gases which result are
vented through plastic tubing to the outside through a small hole in the wall.
Old furnaces and boilers may be upgraded to some degree by modifying their
design to incorporate some of the features included in new equipment. Since
these modifications cannot change the basic design of the old equipment, the
resulting efficiency improvement can vary considerably.
We examined only one oil unit retrofit package in this analysis, a
combination of a new high-speed flame-retention-head burner and a vent
damper. The flame-retention-head burner improves the firing efficiency of the
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boiler, and the vent damper prevents the loss of the heat up the chimney when
the boiler is not in operation. Other unit modifications are possible, but
these two seemed to be the most cost-effective. To estimate the efficiency of
the retrofit package, we assumed that the existing unit had a 50% efficiency
and that the installation of the flame-retention-head burner and the vent
damper would increase the unit's efficiency to 67.6%.—^
Most existing oil furnaces and boilers can be converted to gas by changing
the burner. The alteration does not significantly affect the efficiency of
the unit. In the absence of any empirical information, we assumed that a
heating unit with a conversion burner had a 55% efficiency.
Tables 3 and 4 show the characteristics of the specific heating equipment
2/
used in the analysis.- Installed costs include both the capital cost of
the furnace or boiler and the labor charged by the dealer. Labor costs are in
the range of $30 to $35 per hour. Most dealers quote an installed price to a
homeowner after an on-site inspection rather than work on a time and materials
basis, but their installed prices are based on these labor rates. Installed
costs and estimated operating and maintenance costs for new equipment were
obtained from dealers and distributors, while seasonal efficiencies were
1/ The estimate of the increase in efficiency was based on the fuel
consumption test results for these devices presented in Popular Science,
"High Efficiency Heating," October, 1979, p. 101 and Consumer Reports,
"Flue Dampers for Oil Furnaces," January 1980, p. 19.
2/ In selecting the size of the units for the installed cost comparisons, no
effort was made to reduce the size (input capacity) of the higher
efficiency units to account for their higher efficiency. As a result, the
assumed installed cost of the high efficiency units may be too high.
However, if homeowners and heating equipment installers do not correctly
downsize the units to account for their higher efficiencies, the costs
shown in Table 3 are representative of what will be paid.
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TABLE 3
CHARACTERISTICS OF THE GAS HEATING EQUIPMENT USED IN THE ANALYSIS
(1980 dollars)
Type
Manufacturer
Installed 0 & M
Cost Cost ($/Yr)
BTU/Hr.
Input
Seasonal Life Commercially
Efficiency Span (Yrs) Available
Source of
Cost Data
Low Volume
Boiler
Pulse Combustion
Boiler
High Efficiency
Gas Furnace
Gas Heat Pump
NEGEA
Energy Products
Hydrotnerm
Jcnitrol
$1,500
$1,950
$1,250
Allied Chemical/ $2,650 *
Philips Engineering
Standard Gas Boiler Dunkirk
Standard Gas Furnace Heil-Quaker
Oil to Gas Wayne
Conversion Burner
$1,450
$1,050
$800 **
$40
$50
$50
$50
$50
$50
$50
89,000
100,000
100,000
90,000
85,000
105,000
100,000
.842
.925
.855
1. 300
. 711
.652
.550
20
20
20
15
20
20
20
1980
1980
1980
1986
1980
1980
1980
Michael Belanger,
Marketing Manager
for NEGEA Energy Products
Apex Plumbing,
Washington, D.C.
E.E. Donaldson & Son,
Baltimore, MD.
Philips E ng i ne e r i ng
Sears
Sears
Alma Heating and Air
Conditioning, Washington,
D.C.
* Reduced from projected Allied Chemical and Phillips Engineering cost of $4,100 to adjust for the cost savings associated with not
having to purchase a separate air conditioning system.
** Includes the $200 which was added to the other installed cost estimates for oil-to-gas conversion.
Sou rce:
ICF survey of manufacturers and Washington, D.C. area installers of heating equipment.
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TABLE 4
CHARACTERISTICS OF THE OIL HEATING EQUIPMENT USED IN THE ANALYSIS
(1980 dollars)
Type
Installed O s M
Manufacturer Cost Cost ($/Yr)
BTU/Hc.
Input
Seasonal
Efficiency
Life Commercially
Span (Yrs) Available
Source of
Cost Data
High Efficiency Oil
Furnace
Standard Oil Furnace
Oil Boiler
Flame-Retention-Head
Burner/Vent Damper
Modification
Blueray
$1,700
$80
Heil-Quaker $1,150 $80
Dunkirk $1,700 $80
Beckett* $625**
100,000
105,000
115,000
.841
.795
. 795
.676***
20
20
20
20
1980
1980
1980
Rowan Heating and
Air Conditioning,
Washington, D.C.
Scars
Sears
R.E. Michael Co.,
Washington, D.C. and
ICF estimate.
* Flame-Retention-Heaci Burner Only
** Does not account for che value of the 15% conservation tax credit available to homeowners.
*** After modification.
Source: ICF survey of manufacturers and Washington, D.C. area installers of heating equipment.
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obtained directly from the manufacturers. The efficiency estimates are the
Annual Fuel Utilization Efficiency (AFUE) ratings which are based on a
standardized Department of Energy test method.
Installed cost estimates varied widely even for the same equipment, but we
did notice that gas equipment prices have risen considerably since our spring
survey while oil equipment prices have fallen. While the installed costs of
the high efficiency systems in Table 3 and 4 are typical of those which a
homeowner would pay, the installed costs provided by Sears of the standard
furnace and the standard boiler lie at the low end of the estimated cost range
obtained in the survey of Washington, D.C. area installers of heating
equipment. Use of the relatively inexpensive installed cost of standard
efficiency heating equipment rather than a more representative cost lying near
the middle or the upper end of the estimated cost range avoids biasing the
analysis in tavor of investment in high efficiency equipment.
The Office of Technology Assessment carried out a field survey of existing
heating equipment efficiencies and determined that the average seasonal
efficiency of installed oil-fired units was 50% and the average seasonal
efficiency of installed gas-fired units was 61.4%.—^ The average efficiency
2/
of oil heating equipment sold in recent years is much higher.— In the
analysis of oil unit modification, the existing unit was assumed to have a 50%
seasonal efficiency.' Since newer oil heating equipment is more efficient, the
1/ Office of Technology Assessment, Residential Energy Conservation, Vol. 1,
Washington, D.C., p. 39.
"1/ DOE has estimated that the average efficiency of indoor gas heating
equipment sold in 1978 was 65% and that the average efficiency of oil
indoor equipment sold in that year was 76%. Federal Register, Volume 45.
No. 127, June 30, 1980 p. 44003
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analysis of early replacement of oil units was performed for units with both
50% and 60% seasonal efficiency. In the analysis of early replacement of
existing gas units, the existing unit was assumed to have a 61.4% efficiency.
Oil-to-Gas Conversion Costs
The installation costs shown in Tables 3 and 4 are for replacement of
heating equipment with new equipment using the same fuel (except for the
conversion burner in Table 3). There are additional costs associated with
switching from oil-to-gas. They include hook-up costs paid to the utility,
additional costs paid to the installer to run a new gas line within the house
and the loss of any oil which may remain within the oil tank.
Hook-up costs can vary widely depending primarily on the distance from the
house to a gas main. Of course, some houses converting to gas heat may
already have gas service for cooking or water heating. In such cases, the
existing gas line to the house and the meter will usually have sufficient
capacity to service a furnace or boiler. If a new line must be installed,
many utilities do not charge the homeowner anything unless the house is a long
distance (more than 50-100 feet) from the main.—^ If the house is far from
the main, the homeowner usually must pay a substantial hook-up fee.
The cost of a new gas line within the house is included in the installer's
estimate. For most installations, our survey indicated that the cost of
switching from oil to gas was about $100 more than the cost of simple gas unit
replacement.
1/ Although utilities incur an initial hook-up cost when they provide gas
service to houses for the first time, if these houses are located along an
existing main, they recoup these costs through the economics associated
with higher gas main utilization and the low administrative cost of
reading extra meters in areas where there already are other customers.
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Homeowners may incur other costs in the switch. Frequently, the oil tank
contains some oil. The homeowner is unlikely to recoup any of the cost of
this oil and may even have to pay to have it removed. In the analysis, we
assumed that oil-to-gas conversion costs $200 more than simple gas unit
replacement.
Most of the homeowners who will switch to gas have ready access to gas
distribution lines, and many already use gas for cooking or water heating.
Accordingly, the conversion costs used in the analysis should be appropriate
for most homeowners who contemplate switching.
Fuel Prices and Fuel Value
The most controversial assumptions in any analysis of this type are the
heating oil and natural gas price projections and the value of natural gas to
be used when evaluating the investments from a national perspective. The
results of the analysis are sensitive to both the assumed level of crude oil
prices and the assumptions about heating oil and natural gas price
differentials.
The fuel prices used in the analysis were selected to avoid biasing the
results in favor of the early replacement and oil-to-gas switching
investments. The average price of imported crude oil in the U.S. Gulf used in
the analysis was $34/barrel (1980 dollars) in 1980 rising 2% annually in real
terms (i.e., in addition to inflation) to $50.50/barrel (1980 dollars) in the
year 2000. This crude price is equal to the actual average imported crude
price in 1980 and is consistent with Saudi Arabia's plan for future crude oil
price increases. It underestimates the level of prices which could prevail if
political disruptions continue to occur in the Middle East. A low estimate of
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crude oil prices biases the results against investments in higher efficiency
units because the value of the fuel savings is lower.
Average home heating oil prices for the northern part of the U.S. were
generated based on the cost of producing distillate in large U.S. Gulf
refineries plus the average of the transportation cost to Chicago and
Baltimore plus a distributor's cost. The assumed distributor margin was
16.7^/gallon (1980 dollars) which was the actual margin for the first five
months of 1980.—^ The effect of the crude oil entitlements program was
taken into account by reducing the average price of crude oil paid by U.S.
refiners by $1.00/barrel in 1981 (the entitlements program ends on September
30, 1981) . The 1981 delivered price of heating oil used in the analysis was
$1.01/gallon (1980 dollars).
Natural gas prices will be determined by the supply of gas available and
the demand for natural gas, which will be significantly affected by government
price control and boiler fuel use policy during the 1981-2000 time period.
During the next ten years, the most important factor will be the timing of
wellhead price decontrol. Under the current law (the Natural Gas Policy Act),
over half the gas produced domestically is scheduled for wellhead price
decontrol on January 1, 1985 or in the case of reimposition of controls, in
late 1987 or early 1988.
When (and if) decontrol occurs, the price of this gas could increase
considerably at the wellhead. However, since a large amount of domestic gas
production is not slated for price decontrol and since most of this gas is
under contract to the interstate market, the average price of gas in the
1/ DOE, Monthly Energy Report, September, 1980, p. 81
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interstate market will initially remain below the price in the intrastate
markets (primarily New Mexico, Texas, Oklahoma, Louisiana, and Arkansas) after
price decontrol. If natural gas supplies are reasonably plentiful and if
state regulatory commissions continue to require average cost or rolled-in
pricing, the old gas contracts will enable residential consumers in the north
to continue to obtain gas at prices below the price of heating oil on a Btu
basis. Of course, if natural gas prices are not decontrolled, residential
consumers in the north who can obtain gas will also continue to obtain gas at
prices below the price of heating oil on a Btu-basis.
The Powerplant and Industrial Fuel Use Act (PIFUA) also affects natural
gas prices. The Act prohibits that the installation of any new oil and gas
boilers with capacities in excess of 100 million BTU's/hour unless exemptions
are granted. The Act also prohibits electric utilities from using more
natural gas than they used during the 1974-1976 time period and prohibits
their use of natural gas except for peak load after 1990. Because PIFUA
limits gas demand, it helps keep down the market price when wellhead decontrol
occurs.
Natural gas prices from 1981 to 1995 were generated using the Natural Gas
Market Simulator, a computer-based representation of the intrastate and inter-
state natural gas markets developed by ICF for the Department of Energy's
Office of Gas Policy. The model was developed specifically to assess the
effect of price controls and their removal on gas prices in these markets.
Since all the northern parts of the country are in the interstate gas market,
the average interstate residential sector gas price estimated by the model was
used to assess the desirability of investments from the homeowner's
perspective.
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A detailed discussion of all the assumptions used to generate the gas
prices is beyond the scope of this study, but some of the most important are
as follows:
• Industrial and electric utility coal conversion proceeds at a
modest pace with respect to both reconversion of existing coal
capable units and accelerated replacement of existing oil and
gas-fired units.
• The 1974-7 6 base period PIFUA limits on gas use are assumed to
remain in place, but the 1990 prohibition on electric utility use
of gas is eliminated.
• The conventional U.S. gas resource base is consistent with the
"median" estimate contained in U.S. Geological Survey Circular
725, adjusted for subsequent increases in Overthrust Belt resource
potential and decreases in Permian Basin potential.
• No liquified natural gas imports are used in the U.S. during the
period.
• Consistent with current policy, wellhead price decontrol is
achieved permanently on January 1, 1985.
Using these assumptions the model estimated U.S. supply, intrastate and
interstate demand, and intrastate and interstate prices for different classes
of customers. Table 5 shows U.S. gas consumption by sector, Table 6 shows
U.S. gas supply, and Table 7 shows the fuel prices generated by the model.
The data in Table 7 show that prices fly up in the intrastate gas market
in 1985 when decontrol occurs. Prices also rise in the interstate market, but
more gradually due to the existence of old gas contracts. The market clearing
price for gas is set by the value of gas to industrial customers who choose
between gas and petroleum boiler fuels, depending on which cheaper. After
decontrol under the conditions specified, the model indicates that the natural
gas market clearing price will be the price of low-sulfur residual fuel in the
intrastate market. Since residual fuel is priced below distillate (heating
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TABLE 5
U.S. GAS CONSUMPTION
(Tcf/year)
1980
1982
1985
1988
1990
1995
, Total
Residential/Commerc ial
7.3
7.8
7. 8
7.7
7.5
7.8
Industrial
7.1
7.1
7.2
8.0
8.3
8.6
Electric Utility
3.0
2.8
2.1
2.4
2.4
i.3
LPTD Uses*
2.4
2.4
2.4
2. 5
2.5
2.5
19.8
20.1
19.5
20.6
20.7
20.2
Source: ICF Incorporated estimates made using the Natural Gas Market
Simulator developed for the U.S. Department of Energy's Office
of Gas Policy.
* Lease, gas processing plant, and fuel use and losses in transmission and
distribution.
TABLE 6
U.S. GAS SUPPLY
(Tcf/year)
1980
1982
1985
1988
1990
1995
Lower-48 Conventional
18.4
17.8
16.8
16. 5
16.3
15.3
Unconventional
0.1
0. 3
0. 6
0. 8
1.1
1.9
ANGTS *
—
—
—
0.8
0.8
0.8
Coal Synthetic
—
—
0.1
0.1
0.1
0.1
SNG**
0.2
0.5
Imports
Canada
1.0
1.4
1.6
1.7
1.7
1.5
Mexico
0.1
0.1
0.4
0.7
0.7
0.6
Total
19.8
20.1
19.5
20.6
20.7
20. 2
* Alaska Natural Gas Transportation System
** Synthetic Natural Gas
Source: ICF Incorporated.
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TABLE 7
FUEL PRICES ESTIMATED BY
THE NATURAL GAS MARKET SIMULATOR
(1980 Dollars/Million BTU)
1980
1982
1985
1988
1990
1995
Interstate Natural Gas
Residential
4.24
4.82
6.85
7.47
7.87
8.65
Commercial
3.96
4.53
6.56
7.18
7.59
8.36
Exempt Industrial
3.41
3.98
6.01
6.63
7.03
7.81
Non-Exempt Industrial
3.41
4.16
6.01
6.63
7.03
7.81
Electric Utility
3.41
3. 98
6.01
6.63
7.03
7.81
Intrastate Natural Gas
Residential
3.21
3.54
7.03
7.22
7.63
8.22
Commercial
2.92
3.24
6.73
6.92
7.33
7.92
Exempt Industrial
Electric Utility
2.55
2.55
2.87
2.87
6.37
6.37
6.55
6. 55
6.96
6.96
7.55
7.55
U.S. Gulf Refinery Gate
Distillate
Low-Sulfur Residual
High-Sulfur Residual
5.61
4. 67
3.44
6.11
5.57
4.51
6.84
6.29
5.47
7.23
6.66
5.81
7.51
6.92
6.07
8.25
7.63
6.72
Interstate Heating Oil
7.01
7.51
8.24
8.63
8.91
9.65
Source: ICF Incorporated estimates made using the Natural Gas Market
Simulator developed for the U.S. Department of Energy's Office
of Gas Policy.
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oil), the price of natural gas delivered to interstate residential customers
remains below the price of heating oil throughout the 1980-95 period even
though the price differential narrows as old gas contracts expire.
The model currently only generates gas prices through 1995. Gas prices
for 1996 to 2000 were generated by keeping the 1995 price differential between
heating oil and natural gas constant, under the assumption that the clearing
price for natural gas continues to be set by the price of low sulfur residual
fuel.
These prices can be compared to official Department of Energy forecasts.
The Energy Information Administration (EIA) develops annual forecasts of
energy prices. In their most recent published medium price forecast, natural
gas prices are between the price of high-sulfur residual fuel and coal. The
EIA gas prices are very low because they assume that rapid conversion of
industrial boilers to coal and electric utilities to coal and nuclear power
will greatly reduce gas demand.—^ As a result, in ElA's projection, the
residential price of natural gas remains far below heating oil prices even
after gas wellhead price decontrol. ICF's gas price projections are higher
because we assume slower conversion to coal in the industrial and electric
2/
utility sectors, which we believe is a more realistic assumption.— The
effect of ICF's higher gas price assumption in the analyses is to reduce the
estimated homeowner savings associated with oil-to-gas switching.
1/ EIA, Annual Report to Congress 1979, Volume Three, p. 93
2/ For example, in ICF's projection the residential gas price is
$1.04/million BTU less than the heating oil price in 1990. In EIA's
projection the residential gas price is $3.11/million BTU (1980 dollars)
less than the heating oil price in 1990. Ibid., pg. 103.
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The fuel costs used in the investment analyses from the consumer's
perspective (the actual prices for heating oil and natural gas, in
dollars/million Btu) and the national perspective are shown in Table 8.
As mentioned previously, the value of natural gas from a national
perspective is not the same as the price the homeowner pays. The value to the
nation is the cost incurred by the nation when homeowners use additional gas
or the costs saved when homeowners reduce gas consumption. If homeowners are
already hooked up to gas distribution lines, the costs or savings are the
same. For the homeowners who require a new gas line from the main to use
additional gas, the additional capital cost must be added to the estimate of
the nation's costs when a new gas heating unit is installed.
In the forecasts for natural gas supply and demand over the time period,
gas use remains below 1972 levels. As a result, little new infrastructure is
required, and changes in gas consumption by residential customers only
reallocate gas use within the existing pipeline system. Since this system
would have to be maintained anyway, little or no additional cost to the nation
beyond hook-up costs is involved in conversions to gas.
ICF's Natural Gas Market Simulator was used to estimate the value of gas
to the nation within this framework. All customers were allowed to bid for
available natural gas without any price controls in place. Fixed costs (e.g.,
pipeline depreciation) were allocated annually to all customers using natural
gas. The resulting estimate of the value of natural gas to the nation is
shown in Table 8. A hook-up capital cost must be added, if relevant. To be
conservative in the analysis from a national perspective, we assumed that all
oil-to-gas conversions involved a new hook-up. We assumed that all oil-to-gas
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TABLE 8
COST OF RESIDENTIAL HEATING FUELS
USED IN THE ANALYSIS
(1980 dollars/million Btu)
Natural Gas
Year
Heating Oil
Homeowner
Nation*
1981
7.25
4. 52
5.56
1982
7.51
4.82
5.87
1983
7.80
5.12
6.19
1984
8.11
5.50
6.50
1985
8.24
6.85
6.63
1986
8.36
6.99
6.65
19 87
8.50
7.29
6.77
1988
8.63
.7.47
6.90
1989
8.77
7.64
7.01
1990
8.91
7.87
7.14
1991
9.06
8.01
7.25
1992
9.20
8.24
7.46
1993
9.35
8.30
7.54
1994
9. 50
8.47
7.70
1995
9.65
8.65
7.86
1996
9.81
8.80
8.13
1997
9.97
8.96
8.29
1998
10.14
9.13
8.46
1999
10.31
9.30
8.63
2000
10.48
9.47
8.80
* Does not
include any capital costs
incurred to hook up
new
customers
or to increase existing
gas service capacity
to
existing customers.
Source: ICF Incorporated estimates made using the Natural Gas
Market Simulator developed for the U.S. Department of
Energy's Office of Gas Policy.
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conversions cost the nation $356 (1980 dollars) for a new hook-up.—^ This
estimate included installation of 50-75 feet of gas line and new metering
equipment. In fact, many homeowners already use gas and can install gas
heating equipment without causing the gas utility to incur any additional
costs.
For comparability, the cost to the nation of supplying heating oil to the
homeowner should be used in the analysis from the national perspective.
However, since the fixed costs of supplying heating oil are not very large, we
decided to use the market price as an estimate of the real cost to the nation
of using heating oil.
Discount Rate
Money saved in the future through reduced fuel consumption is not worth as
much to a homeowner as money which must be invested today. As a result, when
two competing investment options with different cash flow patterns must be
compared, the value of the future savings is discounted, and the present
discounted value of the two income streams is calculated. This method makes
it possible to compare all of the costs and benefits of the two options on a
life cycle basis.
The choice of the discount rate is an important determinant of the outcome
of the analysis. An investment in efficiency which has a large initial cost
will not look very attractive if a very high discount rate is used because the
present value of future savings will be very small.
1/ Department of Energy, Natural Gas Hook-Ups: Real Resource Cost Analysis,
January 23, 1979, p. 19 (hook-up cost was multiplied by 1.19 to change
1978 to 1980 dollars).
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Th e discount rate used in investment analysis has two components, the
risk-free rate ot return expected by investors and the additional return they
expect if asked to take on some risk. Clearly, investing in heating unit
efficiency has some risk because the future savings will depend on the actual
efficiencies of the unit in practice and the future price of fuels. Addition-
ally, if the homeowner sells his house, he may not receive a price for the
house which completely compensates him for the increased investment in the
heating unit.
In order to bound the rate which is appropriate for the analysis, the cost
to the homeowner of investing money in a residential heating unit must be
calculated. This cost varies considerably depending on 1) whether the
homeowner must borrow money or only give up an alternative investment and 2)
the marginal income tax bracket of the homeowner.
The highest cost ot funds is incurred by a low income homeowner who must
borrow money and who pays no income tax; he/she will pay a high interest rate
which cannot be deducted from taxable income. If the interest rate paid is
18% in nominal terms and the inflation rate is 9%, the real cost of the loan
to the low income homeowner is 8.2%-^
The lowest cost of funds is incurred by a high income homeowner who gives
up an alternative investment which provides a return which is subject to a
high income tax. It the (risk-free) investment returns 12% in nominal terms,
the inflation rate is 9%, and his/her marginal tax rate is 50%, then the real
2/
cost of giving up the investment is -2.8%(— i.e., after tax the high income
homeowner is losing money on his alternative investment.
1/ 1.18 v 1.09 = 1.082 or 8.2%.
2/ 1.06 t 1.09 = 0.972 or -2.8%. ICF INCORPORATED
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A 10% real discount rate was used to assess the desirability of the
investments examined on a life cycle basis. A 10% real rate is equal to a
nominal after tax interest rate of 19.9% for the homeowner if inflation is 9%
(no tax is paid when the homeowner increases disposable income by reducing
total heating costs). This rate provides a substantial amount of risk premium
for the average homeowner and for the nation. Clearly, this assumption poses
a severe test for the desirability of the investments considered. Obviously
this test is far too strict for a high income homeowner.
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III. RESULTS OF THE ANALYSIS
Homeowners considering replacement or modification of existing residential
heating equipment fall into the following four categories:
• Homeowners who must replace worn out gas heating equipment,
• Homeowners considering early replacement of gas heating equipment
which is in good working order,
• Homeowners who must replace worn out oil heating equipment, and
• Homeowners considering early replacement or modification of
existing oil heating equipment which is in good working order.
The presentation of the results of the analysis is organized so that the
investment options available to homeowners in each of these categories can be
readily compared. The results are based on the projected average interstate
residential oil and gas prices used in the analysis. Since there is
considerable variation in residential gas prices in the interstate market, the
sensitivity of the results to higher gas prices is discussed after the
presentation of the results.
Replacement of Gas Heating Equipment at Normal Replacement Time
When an existing gas furnace or boiler wears out, a homeowner must
purchase a new unit. The cheapest unit available is a low efficiency
"standard" unit. In the first set of investment options examined, we
calculated the return on the incremental investment which is required to buy a
high efficiency unit instead of a standard unit. The results of the analysis
are shown in Table 9.
In every case the homeowner and the nation are best served when the
homeowner buys a high efficiency boiler or furnace rather than a standard
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TABLE 9
PAYBACK PERIOD AND PRESENT DISCOUNTED
VALUE OF INVESTING IN MORE EFFICIENT
GAS HEATING SYSTEMS AT NORMAL REPLACEMENT TIME
High Efficiency
Gas Unit Compared
to Standard Unit
Low Volume Boiler
Pulse Combustion
Boiler
High Efficiency
Gas Furnace
Seasonal
Efficiency
.842
.925
.855
Homewoner's Perspective
Present
Discounted
Value
Payback
Period
(Years)
(1980 $)
792
619
1,052
National
Perspective
Present
Discounted
Value
(1980 $)
781
609
1,041
unit. Despite low gas prices, the payback on the incremental investment cost
of the low volume gas boiler relative to the standard boiler is only one year,
and the payback on the high efficiency gas furnace is only two years. The
pulse combustion boiler is somewhat more efficient than the low volume boiler,
but it is considerably more expensive. For the annual heating requirement
used in the study, the low volume boiler is the preferred investment, and it
is used to represent the high efficiency gas boiler in the other analyses.
The higher efficiency of the pulse combustion boiler makes it more appropriate
for houses with higher heating requirements than the one used in the study
because there is a greater opportunity to save fuel when more heat is required.
Early Replacement of Gas Heating Equipment
Early replacement of gas heating equipment is desirable only if the much
higher efficiencies of new equipment can provide substantial fuel savings.
The economics of early replacement of gas heating equipment with high
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efficiency units is shown in Table 10. The results of the analysis indicate
that over the life of the investment homeowners can save a modest amount of
money by replacing their existing unit in 1981 with a high efficiency unit,
but the payback period is 8-10 years. With a payback period this long, few
homeowners are likely to make this investment without government
encouragement. For homeowners with higher heating requirements or with
heating equipment which has less than twenty years of remaining useful life,
the investment would be better than shown in Table 10.
The analysis also indicates that the economic desirability of early
replacement of an existing unit with a gas heat pump in 1986 is not much
better than early replacement with a high efficiency furnace in 1981. Once
the high efficiency furnace is installed, it clearly is not economically
desirable to replace it when the gas heat pump becomes available in 1986.
Replacement of Oil Heating Equipment at Normal Replacement Time
When the existing oil unit wears out, homeowners with access to natural
gas can choose either a new oil unit or a new gas unit. Table 11 contains the
results of a comparison of the economics of 1) conversion to gas or 2)
installation of a high efficiency oil unit to installation of a standard oil
unit. Unlike the situation with gas equipment, however, there is not much
difference in efficiency between standard and high efficiency oil equipment.
The results of the analysis are that the slightly higher efficiency of the
high efficiency oil furnace does not overcome its higher installed cost. For
the heating requirement used in the analysis, the homeowner does not save
money with the higher efficiency unit. The most interesting results are that
for homeowners near a gas main, conversion to gas is far superior to investment
in a new oil unit. Also, as already shown in Table 9, installation of a high
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TABLE 10
PAYBACK PERIOD AND PRESENT DISCOUNTED
VALUE FOR EARLY REPLACEMENT OF GAS
FURNACES AND BOILERS WITH MORE EFFICIENT UNITS
Gas Unit
Used to Replace
Existing Gas Unit
High Efficiency
Low Volume Boiler
Unit
Replaced
Existing
Boiler*
Year of
Replacement
1981
Homeowner's Perspective
Present
Discounted
Value
Payback
Period
(Years)
(1980 $)
105
National
Perspective
Present
Discounted
Value
(1980 $)
109
High Efficiency
Furnace
Existing
Furnace*
1981
328
332
Gas Heat Pump
Existing
Furnace*
1986
465
217
Gas Heat Pump
High
Efficiency
Furnace**
1986
15
-1,199
-1,314
* .614 seasonal efficiency.
** .855 seasonal efficiency.
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TABLE 11
PAYBACK PERIOD AND PRESENT DISCOUNTED VALUE
OF CONVERSION TO GAS UNITS AS COMPARED TO INVESTMENT
IN A HIGH EFFICIENCY OIL UNIT AT NORMAL REPLACEMENT TIME
Unit Used Instead Seasonal
of Standard Oil Unit Efficiency
Blueray Oil Furnace
Standard Gas Furnace
High Efficiency
Gas Furnace
Low Volume Boiler
Standard Gas Boiler
.841
,652
.855
.842
.711
Homeowner's Perspective
Present
Discounted
Value
Payback
Period
(Years)
11
1
Immediate
Immediate
(1980 $)
( 56)
507
1,559
1,559
897
National
Perspective
Present
Discounted
Value
(1980 $)
( 56)
137*
1,192*
1,232*
528*
Assumes a new hook-up is required. If a new hook-up or an increase in gas
service capacity is not required, the value from a national perspective is $356
higher.
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INCORPORATED
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efficiency gas unit is a much better investment for the homeowner than
investment in a standard unit.
The results also indicate that conversion from oil to gas is economically
desirable to the nation. Little is saved when the homeowner installs a
standard gas unit instead of a standard oil unit if a new hook-up is
required. However, if the homeowner is already hooked up and the existing gas
line capacity is sufficient to service a furnace or boiler, then the savings
/
to the nation from switching are substantial even if only a standard gas unit
is installed. The savings when a high efficiency gas unit is installed are
considerable.
The results o£ this analysis are not valid for houses which are located a
long distance from an existing gas main. The results are sensitive to the
assumptions about the price of natural gas relative to home heating oil. The
effect of higher gas prices on these results is discussed below.
Early Replacement of Oil Heating Equipment
Tables 12 and 13 present the results of the analysis of the modification
and early replacement alternatives for existing oil boilers and existing oil
furnaces. The results indicate that every alternative considered is better
than continuing with the existing equipment in its present state. For the
homeowner with access to natural gas, the best alternative is to replace the
existing oil unit with a new high efficiency gas unit. If a new hook-up is
required, the low efficiency gas conversion burner modification is about equal
to the oil unit upgrading package from the homeowner's perspective after the
value of the 15% conservation tax credit for the upgrading devices is taken
into account.
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TABLE 12
PAYBACK PERIOD (IN YEARS) AND PRESENT DISCOUNTED
VALUE FOR EARLY REPLACEMENT OF OIL BOILERS
WHICH HAVE 50% AND 60% SEASONAL EFFICIENCIES
Unit Used to
Replace or Modify
Existing Oil Boiler
Flame-Retention-Head
Burner/Vent Damper***
New Oil Boiler
Gas Conversion Burner
Standard Gas Boiler
Low Volume Gas Boiler
Homeowner's Perspective
Payback Period
(Years)
50%** 60%**
3 N/A
6
3
4
3
9
4
5
4
Present
Discounted Value
(1980 $)
50%** 60%**
1,710****
1,494
1,826
2,391
3,183
N/A
60
391
956
1,748
National
Perspective
Present
Discounted Value*
(1980 $)
50%**
1,616
1,494
1,453
2,022
2,816
60%**
N/A
68
19
588
1,381
* Assumes a new hook-up is required. If a new hook-up or an increase in
gas service capacity is not required, the value from a national
perspective is $356 higher.
** Existing boiler seasonal efficiency.
*** The flame retention burner/vent damper option does not replace the oil
boiler. These units improve the seasonal efficiency of the existing
boiler.
**** Assumes the 15% tax credit increases the return on this investment by $94
from the homeowner's perspective.
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TABLE 13
PAYBACK PERIOD IN YEARS AND PRESENT DISCOUNTED
VALUE FOR EARLY REPLACEMENT OF OIL FURNACES
WHICH HAVE 50% AMD 60% SEASONAL EFFICIENCIES
Unit Used to
Replace or Modify
Existing Oil Boiler
Flame-Retention-Head
Burner/Vent Damper***
New Oil Furnace
Gas Conversion Burner
Standard Gas
Furnace
High Efficiency
Gas Furnace
Homeowner's Perspective
Payback Period
(Years)
50%**
3
4
3
3
60%**
N/A
7
4
4
Present
Discounted Value
(1980 $)
50%** 60%**
1,710****
1, 347
1,326
2,354
3,405
N/A
412
391
919
1,971
National
Perspective
Present
Discounted Value*
(1980 $)*
50%** 60%**
1,616
1,847
1,453
1,984
3,039
N/A
412
19
549
1,604
* Assumes a new hook-up is required. If a new hook-up or an increase in gas
service capacity is not required, the value from a national perspective is
$356 higher.
** Existing boiler seasonal efficiency.
*** The flame retention burner/vent Damper option does not replace the oil
boiler. These units improve the seasonal efficiency of the existing
boiler.
**** Assumes the 152 tax credit increases the return on this investment by $94
from the homeowner's perspective.
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If the existing oil heating equipment has a 60% efficiency, the equipment
upgrading package is not applicable, and the conversion burner will not save
the nation much money over the life of the investment. Investing in a high
efficiency gas unit is optimal, but all the other investments are economically
desirable, including replacing the existing oil equipment with high efficiency
oil equipment. If the homeowner is already hooked up to a gas line which has
enough capacity to service gas heating equipment, a reconversion burner is
superior to upgrading the existing oil unit, but far inferior to replacing the
old unit with a new high efficiency gas unit.
For a homeowner without access to natural gas from a nearby main,
modifying the existing oil heating equipment is superior to early replacement
with a new oil unit if the existing equipment has twenty years of remaining
useful life. If the existing oil unit does not have many years of remaining
useful life, early replacement is better than modifying the old unit.
Sensitivity of the Results to Higher Gas Prices
If the same heating oil prices and higher residential gas prices are used
in the analysis, the results do change somewhat. Higher gas prices make early
replacement of gas equipment with high efficiency units more desirable.
Higher gas prices also make incremental investment in higher efficiency more
desirable when gas units are replaced at normal replacement time.
Higher gas prices also reduce the desirability of switching from oil to
gas at or prior to normal replacement time. After 1984 residential natural
gas prices are projected to be $1.00-$l.50/million BTU (1980 dollars) below
the price of home heating oil. If the assumed price of natural gas is
increased by $1.00/million BTU (1980 dollars) over the entire period, the
results would change in the following ways:
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• The present discounted value of switching to a high efficiency low
volume gas boiler instead of buying a new oil burner at normal
replacement time falls from $1,559 to $986, but it is still a
highly desirable investment.
• The present discounted value of switching to the standard gas
furnace instead of buying a new oil furnace falls from $507 to
-$232.
• The present discounted value of the gas conversion burner falls
$877, which makes it much less desirable than simply upgrading the
existing oil unit.
This sensitivity analysis indicates that investments in high efficiency gas
equipment will be highly desirable to the homeowner even if natural gas prices
rise substantially above ICF's forecast.
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IV. CONCLUSIONS
This report was prepared to analyze the economics of replacing existing
residential oil and gas heating equipment with new high efficiency units in
houses which are at least partially weatherized. Homeowners in houses which
do not have caulking, weatherstripping, or insulation should invest in
building weatherization before they consider heating equipment investments.
The analysis was based on annual heating requirements of 56.7 million
BTU's/year. An existing heating system with 60% seasonal efficiency would
consume 94.5 million BTU's/year to provide this amount of heat. An average
homeowner with this efficiency unit and this heating requirement would have
paid about $410 for natural gas and $680 for heating oil in 1980. As
discussed in the introduction, this heating requirement is typical for
homeowners in Baltimore or Kansas City with moderately weatherized homes wnere
heating degree days exceed 4,000 per year. Homeowners farther north typically
have significantly higher heating requirements.
The results of the analysis performed in this report are relevant for the
entire northern region of the United States, which contain 64% of all
gas-heated housing units and 83% of all oil-heated housing units in the
nation.—^ Figure 1 contains a map which indicates the location of this
region. The most important conclusions which can be drawn from this analysis
are as follows:
• Whenever an existing gas furnace or boiler wears out, the
homeowner should definitely purchase a new high efficiency gas
unit. The incremental investment is very low relative to the
standard gas unit, the payback period is 1-2 years, and the total
1/ Calculated from data in U.S. Department of Energy, Residential Energy
Consumption Survey: Characteristics of the Housing Stock and Households,
February 1980, p. 42.
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savings for the homeowner and the nation are very large over the
life of the investment.
• Early replacement of existing gas heating equipment is
economically desirable under the assumptions used in the analysis,
but the return on investment is not nearly as high as most
homeowners require for conservation investments. However, for
high income homeowners who have a variety of investment
alternatives, early replacement of existing gas equipment with a
high efficiency unit offers a much higher after-tax return than
alternative investments whose return is subject to income tax.
• Whenever an existing oil furnace or boiler wears out, any
homeowner who already uses gas for non-heating purposes or who has
ready access to a gas main should install gas heating equipment.
The best gas heating equipment is equal to or better than the best
oil heating equipment from an efficiency and cost standpoint, and
gas will continue to be cheaper than heating oil where it is
available. As noted above, the new unit installed should be a
high efficiency unit.
• Any existing oil heating equipment which is over ten years old and
has never been upgraded should be upgraded or replaced as soon as
possible.
— Homeowners should replace the existing oil unit with a new
high efficiency gas unit if they already use gas for
non-heating purposes or have ready access to a gas main. The
best gas heating equipment is equal to or better than the best
oil equipment from an efficiency and cost standpoint, and gas
will continue to cost less than heating oil where it is
available.
Homeowners who do not have ready access to a gas main should
upgrade their existing oil heating equipment if it has twenty
years of remaining useful life. If the remaining useful life
is much shorter than twenty years, the old unit should be
replaced with a new oil unit.
These conclusions are sensitive to changes in the assumptions used in the
study. However, the assumptions were selected to avoid biasing the
conclusions in favor of new investment, so changes in the conclusions are
unlikely. The benefits of replacing worn out gas heating equipment and old
oil heating equipment with high efficiency gas units are so large from both
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the homeowner's and the national perspective that major changes in the
assumptions would not affect these conclusions.
Government Policy implications
A review of the data on the use of heating fuel by type of housing
structure indicates that 11.4 million single-family homes and 2.2 million
units in buildings with 2-4 units were heated with fuel oil or kerosene in
1978.—^ These data suggest that there are about 12 million residential-type
oil furnaces and boilers installed in the U.S. Data on manufacturers
shipments of oil furnaces and boilers indicate that about four million new oil
2/
units have been installed since 1970.—
These data suggest that there are about 8 million residential oil heating
units in the U.S. which are over ten years old. Some of these units have been
upgraded, but the majority probably have not. Data collected by the
Department of Energy suggest that most homeowners have not made heating
equipment modifications.—^ Since 83% of all oil heating units in the U.S.
are located in the region covered by this analysis, over 6 million oil units
may be in need of modification or replacement.
The AGA Gas Househeating Survey indicates that there are almost 4 million
residential gas customers (44% of all customers) in the Middle Atlantic and
1/ Department of Energy, Residential Energy Consumption Survey:
Characteristics of the Housing Stock and Households, 1978, February 1980,
p. 44.
.2/ Oak Ridge National Laboratory, Buildings Energy Use Data Book, Edition 2,
December 1979, pp. 2-70 and 2-71.
3/ Department of Energy, Residential Energy Consumption Survey:
Conservation, February 1980, p. 55.
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New England regions which currently do not use gas for heating.-^ Some of
these customers are undoubtedly apartment dwellers who do not have their own
heating unit, but clearly there are a vast.number of homeowners in this group
with old oil heating equipment who are already hooked up to a gas main. Many
other homeowners may have ready access to an existing gas main, although they
are not hooked up. These homeowners should be encouraged to replace their
existing oil heating equipment with high efficiency gas units.
The immediate opportunities for increased energy conservation are clearly
in the houses with oil heating systems. Many of these homeowners are
switching to gas. They should be encouraged to install high efficiency
units. The required Federal role in this process is minimal. The economic
incentives are clear; the homeowner can save a great deal of money if he/she
is just given the correct information.
Over the near term as high efficiency gas equipment is produced in greater
volume, programs should be developed which will provide an incentive for
homeowners to replace existing gas heating equipment with high efficiency
units. Information should be provided to high income homeowners about the
considerable benefit to them of investing in high efficiency equipment.
Programs to assist moderate and low income homeowners to replace existing gas
equipment in their homes should be developed prior to natural gas price
decontrol to help cushion the impact of higher residential gas prices.
The end result of these programs could improve the average seasonal
efficiency of the heating equipment in the nation's residential housing stock
1/ American Gas Association, Gas Facts 1978, 1979, p. 76.
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from about 60% today to about 80% by 1990. This change would reduce oil and
gas space heating fuel consumption in the existing housing stock by 25%, which
is equal to a saving of 725,000 barrels/day of oil.—^
1/ (X t .8) - (X f .6) = -.25X, where X is fuel consumption. Oil and gas
consumption for space heating was 6.0 quadrillion Btu's in 1977. See ICF,
Oil Import Reduction: An Analysis of Production and Conservation
Alternatives, August 30, 1979, p. B-l.
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