Commercial, Industrial, and Institutional Discount Rate Estimation for Efficiency Standards Analysis: Sector-Level Data 1998 – 2018

Underlying each of the Department of Energy’s (DOE’s) federal appliance and equipment energy conservation standards are a set of complex analyses of the projected costs and benefits of regulation. Any new or amended standard must be designed to achieve significant additional energy conservation, provided that it is technologically feasible and economically justified (42 U.S.C. 6295(o)(2)(A)). DOE determines economic justification based on whether the benefits exceed the burdens, considering a variety of factors, including the economic impact of the standard on consumers of the product and the savings in lifetime operating cost compared to any increase in price or maintenance expenses (42 U.S.C. 6295(o)(2)(B)).

As part of this determination, DOE conducts a Life-Cycle Cost (LCC) analysis, which models the combined impact of appliance first cost and operating cost changes on a representative commercial building sample in order to identify the fraction of customers achieving LCC savings or incurring net cost at the considered efficiency levels. Thus, the commercial discount rate value(s) used to calculate the present value of energy cost savings within the LCC model implicitly plays a role in estimating the economic impact of potential standard levels.

This report provides an in-depth discussion of the commercial discount rate estimation process.  It is an update to previous reports on estimating commercial discount rates from firm-level financial data (Fujita, 2016). Major topics covered in this report include:

• Discount rate estimation methods and rationale;
• Data sources used and data limitations;
• Discount rate distributions for use in standards analysis;
• Discount rate estimation methods and distributions specific to the small business subgroup analysis.

Going forward, this report will be updated as data allow and analyses necessitate.