WASHINGTON — With federal tax rebates for high-efficiency water heating equipment ending Dec. 31, 2011, all of the incentives to buy more efficient equipment are coming from gas and electric utilities. The incentives can’t be classed as “market leading” and, in some cases, may be counterproductive, according to a new report from the American Council for an Energy Efficient Economy.

Some of the incentive programs are highly cost-effective, the study found, while others are real clunkers. Additionally, low natural gas prices make high efficiency and high-cost gas equipment a hard sell.

The report, Market Transformation Efforts for Water Heating Efficiency, authored by Jacob Talbot and issued in January, also noted that utilities don’t offer incentives for demand controlled hot water recirculation systems and drain water heat recovery systems.

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Demand controlled hot water recirculation systems can save water as well as energy, the report noted, and gas and electric utilities should consider partnering with water utilities to offer rebates on the systems. Drain water heat recovery systems are copper heat exchangers that use shower drain water to preheat incoming water before it enters the water heater. The heat exchangers are most effective in northern climates, but their installation requirements limit their use.

“As a whole, we found that utilities are not maximizing the cost effectiveness of their energy efficiency programs and energy savings are falling short of potential,” Talbot wrote. “By refocusing efforts on higher efficiency water heaters and distribution system improvements, utilities can help increase market penetration of these emerging technologies and maximize savings for their programs. Early experience by utilities currently incentivizing heat pump, condensing gas, and solar thermal water heaters can inform program design for other utilities across the country.”

The report urged utilities to reconsider and reconfigure their rebate programs to make them more effective. As it stands now, utility rebates will be the only encouragement the plumbing industry has to boost sales of more efficient water heating products.

Karen B. Meyers, Rheem Mfg. Co. director of government relations, told CONTRACTOR during the AHR Expo in Chicago that there is talk in Congress about resurrecting the energy efficiency tax breaks and, perhaps, making them retroactive to January 1. Given the deadlock in Congress, however, she clearly wasn’t getting her hopes up.

ACEEE has argued that federal efficiency standards don’t go far enough, although it disagrees with the most ardent environmentalists who want all water heaters to be either gas condensing or heat pumps.

When DOE issued the latest round of water heater rules in late 2009, ACEEE advocated a “middle ground” approach that said efficiencies should be higher for big water heaters larger than 55-gal. (See “DOE proposes new water heater efficiency standards,” January 2010, http://bit.ly/wT1IAc)

“We agree that it's too early to mandate next generation technologies for the entire water heater market,” said Steven Nadel, executive director of ACEEE. “But if DOE required this shift for the very biggest water heaters, the energy, economic, and CO2 savings would increase by about 40% compared to the department's proposal. That would also pave the way for a longer term transition to the best, advanced technologies, which is where the biggest savings can be found.”

When DOE issued its latest set of water heater rules, it cited that law that requires the rules to save energy, be technologically feasible, and be economically justified. The result is an incremental rise in efficiency requirements. Utility rebates are, likewise, incremental improvements.

“The vast majority of utility incentives for water heaters target products with only incremental savings over federal minimum energy efficiency standards,” Talbot wrote in the report. “Most electric utilities provide incentives for units with efficiencies of 0.93-0.94 EF, corresponding to marginal calculated savings (3%-4%) over the 0.90 EF federal minimum efficiency standard for electric storage water heaters. Savings will depend strongly on field conditions, including usage patterns, distance of water heater from fixtures, and even whether the hot water lines are insulated. Incentives for these models are typically $35-$75. Likewise, gas programs typically incent at 0.62-0.67 EF, or 5%-12% increase in efficiency over federal minimum standards. These gas incentives range from $30 up to as high as $200 for 0.67 EF-rated units.

“For electric customers,” Talbot continued, “the incentives offered for 0.93-0.94 EF units essentially moot incremental costs, and create an attractive purchasing decision for consumers in emergency replacement situations. Savings, however, are very low, especially when compared to those achievable with integrated and add-on heat pump water heaters (about 55%).”

ACEEE likes heat pump water heaters, both the integral kind like those produced by Rheem and General Electric, and the add-on types, like a model produced by a company called AirGenerate. ACEEE believes that electric utilities should search out customers that recently replaced an electric water heater and incentivized them to buy an add-on heat pump.

“Add-on heat pump water heaters also offer an attractive economic proposition with a payback period of less than two years and lifetime savings several times larger than their purchase price, when combined with an incentive of $300,” according to the report. “Add-on heat pumps allow utilities to target customers who have purchased a new resistance electric storage water heater in the past few years. These water heaters will have a long life ahead of them, which will help justify the investment of increasing their efficiency.”

One problem with utility programs, the report noted, is that they sometimes incentivize the wrong equipment, taking away sales from higher efficiency units.

“By targeting lower efficiency products, these utility programs actually create a disincentive for customers to purchase a heat pump water heater because the financial incentives widen the cost-effectiveness gap,” Talbot wrote. “To be sure, the 0.93 EF and 0.94 EF products do offer a cost-effective investment, but the lifetime savings potential falls far short of heat pumps. Most 93-0.94 EF units will not meet the 2015 federal energy efficiency standards. Thus, we do not consider utility programs targeting these lower efficiency products ‘market transformation’ programs. In fact, these programs could cause market transformation to stagnate.”

An alternative approach the report suggested would be throwing more money at fewer customers to get them to install higher efficiency equipment. Citing an Australian study, the report noted, “For example, one heat pump water heater could save as much energy as nearly 17 0.93 EF units, and one condensing storage water heater saves as much as three 0.67 Energy Star-rated models. These savings and incentives are consistent with the programs that we found offering $200-$500 for heat pump and condensing gas water heaters.”

Additional information on Report A121 is available from the American Council for an Energy-Efficient Economy, 529 14th Street, N.W., Suite 600, Washington, D.C. 20045, phone 202/507-4000, fax 202/507-429-2248 fax, or online at aceee.org . Jacob Talbot may be reached at jtalbot@aceee.org.