Fuel-specific equipment choices are made for both new construction and replacement purchases.  For new construction, initial heating system shares (taken from the most recently available Census Bureau survey data covering new construction, currently 2005) are adjusted based on relative life cycle costs for all competing technology and fuel combinations. Once new home heating system shares are established, the fuel choices for other services, such as water heating and cooking, are determined based on the fuel chosen for space heating. For replacement purchases, fuel switching is allowed for an assumed percentage of all replacements but is dependent on the estimated costs of fuel-switching (for example, switching from electric to gas heating is assumed to involve the costs of running a new gas line). 

For both replacement equipment and new construction, a “second-stage” of the equipment choice decision requires selecting from several available efficiency levels. The efficiency range of available equipment represents a “menu” of efficiency levels and installed cost combinations projected to be available at the time the choice is being made. Costs and efficiencies for selected appliances are shown in Table 3 below, derived from the report Assumptions to the Annual Energy Outlook 2009.¹² At the low end of the efficiency range are the minimum levels required by legislated standards. In any given year, higher efficiency levels are associated with higher installed costs. Thus, purchasing higher than  the minimum  efficiency  involves  a trade-off between higher installation costs and future savings  in  energy expenditures. In RDM, these trade-offs are calibrated to recent shipment, cost, and efficiency data. Changes in purchases by efficiency level are based on changes in either the installed capital costs or changes in the first-year operating costs across the available efficiency levels. As energy prices increase, the incentive of greater energy expenditures savings will promote increased purchases of higher-efficiency equipment. In some cases, due to government programs or general projections of technology improvement, increases in efficiency or decreases in the installed costs of higher-efficiency equipment will also promote purchases of higher-efficiency equipment.

Shell integrity is also tracked separately for the existing housing stock and new construction. Shell integrity for existing construction is assumed to respond to increases in real energy prices by becoming more efficient. There is no change in existing shell integrity when real energy prices decline. New shell efficiencies are based on the cost and performance of the heating and cooling equipment as well as the shell characteristics.  Several efficiency levels of shell characteristics are available throughout the projection period and can change over time based on changes in building codes. All shell efficiencies are subject to a maximum shell efficiency based on studies of currently available residential construction methods.

Distributed generation equipment with explicit technology characterizations is also modeled for residential customers. Currently, three technologies are characterized,  photovoltaics,  wind, and  fuel  cells.  The submodule  incorporates  historical  estimates  of photovoltaics (residential-sized fuel cells are not expected to be  commercialized until after 2005, the base year of the model) from its technology characterization and exogenous penetration input file. Program-based photovoltaic estimates for the Department of Energy’s Million Solar Roofs program are also input to the submodule from the exogenous penetration portion of the input file. Endogenous, economic purchases are based on a penetration function driven by a cash flow model that simulates the costs and benefits of distributed generation purchases. The cash flow calculations are developed from NEMS projected energy prices coupled with the technology characterizations provided from the input file. 

Potential  economic  purchases  are  modeled  by Census division and technology for all years subsequent to the base year. The cash flow model develops a 30-year cost-benefit horizon for each potential investment.  It includes considerations of annual costs (down payments, loan payments, maintenance costs and, for fuel cells, gas costs) and annual benefits (interest tax deductions, any applicable tax credits, electricity cost savings, and water heating savings for fuel cells) over the entire 30-year period.  Penetration  for  a  potential  investment  in  either photovoltaics, wind,  or fuel cells is a function of whether it achieves a cumulative positive discounted cash flow, and if so, how many years it takes to achieve it. 

Once the cumulative stock of distributed equipment is projected, reduced residential purchases of electricity are provided to NEMS.  For fuel cells, increased resi- dential natural gas consumption is also provided to NEMS based on the calculated energy input requirements of the fuel cells, partially offset by natural gas water heating savings from the use of waste heat from the fuel cell.