Long-sought détente on water heaters now going through ‘ordeal’ of legislative process

By Nick Juliano | 02/12/2015 07:28 AM EST

The battle had been raging for months in the staid and little-observed confines of a rulemaking docket. On one side was General Electric Co., which was the first to develop a highly efficient water heater capable of meeting a strict efficiency standard that the Department of Energy had recently finalized. On the other side were rural electric cooperatives and municipal utilities that had come to rely on demand-response programs they said required the use of older, less efficient water heaters.

The battle had been raging for months in the staid and little-observed confines of a rulemaking docket.

On one side was General Electric Co., which was the first to develop a highly efficient water heater capable of meeting a strict efficiency standard that the Department of Energy had recently finalized. On the other side were rural electric cooperatives and municipal utilities that had come to rely on demand-response programs they said required the use of older, less efficient water heaters.

GE said the 2010 rule should be implemented as planned, arguing that manufacturers and utilities had adequate time to prepare for it to take effect, which is scheduled to happen on April 15 of this year. But the utilities were arguing for tweaks they said were necessary to protect the demand-response programs they and their customers had come to rely on.


In the end, the two sides were able to reach a détente — with some influential interest groups helping mediate the discussion. More than a dozen stakeholders — including GE, several other appliance manufacturers, the National Rural Electric Cooperatives Association and the Natural Resources Defense Council — drafted legislation that would allow the demand-response programs to continue for now without opening too wide of a loophole that would risk reversing the efficiency benefits of the underlying DOE rule.

A version of the language those companies and interest groups first drafted in 2013 will be heading to President Obama’s desk soon, tucked into legislation approving the Keystone XL pipeline, which Republicans have made their top priority since winning a majority of both chambers of Congress. The KXL bill is headed for a veto, but supporters of the rural utilities hope the measure’s early consideration during debate over the pipeline legislation can clear a path for quick passage of a standalone bill before DOE begins enforcing the rule on manufacturers in two months.

"Wait is a four-letter word … when we’ve got precious little time to get this done," said Kirk Johnson, NRECA’s senior vice president of government relations.

Sen. Rob Portman (R-Ohio) offered an amendment to the KXL bill sparing water heaters used for demand-response programs from the DOE rule. The amendment, which passed 94-5, also included the so-called "Better Buildings Act," which would establish a voluntary Tenant Star program to promote efficiency efforts between landlords and renters, based on legislation authored by Sens. Michael Bennet (D-Colo.) and Kelly Ayotte (R-N.H.).

Portman and Sen. Jeanne Shaheen (D-N.H.), who have co-sponsored broader efficiency legislation in recent years, are now looking for another legislative vehicle or trying to convince colleagues to "hotline" a standalone version of his amendment via unanimous consent. They tried to hotline a version of the bill last year but ran into an objection from former Sen. Tom Coburn (R-Okla.); however, the five "no" votes on the amendment indicate that objections likely remain.

Opposition to the Portman amendment is focused primarily on the Tenant Star provisions, Republican aides said, suggesting the possibility that a standalone fix to the water heater issue would have an easier time of passing. However, the aides said it was unclear whether "Better Buildings Act" supporters would let just the water heater fix pass without their legislation being included.

The five Republicans who voted against the amendment were Sens. Ted Cruz of Texas, James Lankford of Oklahoma, Mike Lee of Utah, Rand Paul of Kentucky and Ben Sasse of Nebraska.

Meanwhile, there is a perception among some pro-efficiency lawmakers that allowing less-efficient water heaters to be used for demand response would cause a slight increase in overall energy use, said Steven Nadel, executive director of the American Council on an Energy Efficient Economy. Combining it in a single legislative package with the Better Buildings Act allows the energy reductions expected to be spurred by the Tenant Star program to essentially act as an "offset," he added.

Sens. John Hoeven (R-N.D.) and Amy Klobuchar (D-Minn.), who last month introduced S. 259 to fix the water heater rule, also are working their colleagues to try to find a solution in the next two months.

"The one thing I’ve realized in Washington is sometimes deadlines help, and we have a deadline here, and we need to get at least this provision done, if not the rest of the other ones," Klobuchar said in a recent interview. "That’s what Senator Hoeven and I are working on."

DOE moving slowly

DOE has been seen as dragging its feet to address the concerns that arose following its 2010 finalization of the energy conservation standards for residential water heaters. A 2013 proposal to allow for one-year waivers from the rule has not been finalized, and several stakeholders interviewed in recent days say the department appears to have halted its work on the rulemaking in the hopes that Congress can enact the legislative fix. A DOE spokeswoman declined to comment, citing the still-open rulemaking docket.

Leaders at NRECA, the American Public Power Association, which represents state-owned and municipal utilities, and PJM Interconnection, which operates the electric grid in several Midwestern and Mid-Atlantic states, were among those who soon sounded the alarm about the rule. They said it would effectively outlaw production of large volume "electric resistance" water heaters that worked well in electric thermal storage programs utilities used to manage peak loads and incorporate intermittent renewable resources like wind power into the grid.

Utilities were able to control the operation of residents’ water heaters — which are among the largest power users in the home — essentially running them at night when demand was low and storing the resulting energy as hot water.

"This is the biggest battery system we have — you’re storing energy in the form of heat," Johnson said.

The type of large water heaters, typically in excess of 55 gallons, that were used for demand-response applications represent a relatively small part of the overall market. But they had to be large in order to be useful in demand-response applications while still providing an adequate supply of hot water when it is needed.

In 2012, DOE sought more input from utilities, manufacturers, environmentalists and other stakeholders, and in 2013 the agency proposed a new rule that would authorize one-year waivers from the water heater standard. In response to the 2012 request for information, only two of 127 comments — from GE and Farmers Electric Cooperative — argued against making any change to the rule, according to DOE. Conversely, 120 commenters recommended at least some change. Utilities told DOE they were able to reduce peak load by a total of 145 megawatts and realized $60 million in annual cost savings using the water heaters to store energy for demand response purposes.

"Heat pump water heaters are great when they’re used in the right application; they do not lend themselves to load control very well," said Jim Deichert, division manager for off-peak heating at Steffes Corp., a North Dakota-based company that makes controls to connect water heaters to utilities for use in demand management programs.

GE has argued that modifying the rule could risk delaying the technology advances and efficiency improvements it is meant to bring about, and the company says it makes water heaters using heat pump technology that can function as needed in demand-response programs. The company has cited studies from the Oak Ridge National Laboratory and Northwest Energy Efficiency Alliance demonstrating that heat pump systems can perform as needed in demand-response programs. The appliances also have electric resistance units that can be used only when necessary for demand-response or thermal storage purposes while relying on the more efficient heat pump the rest of the time.

"Our position on this is very clear; that is these products can perform the functions of electrical products used for both of those kind of programs," said Earl Jones, GE’s senior counsel for government relations, in an interview this week.

GE Appliances & Lighting, which manufactures the water heaters in Louisville, Ky., began developing efficient water heaters about a decade ago as part of CEO Jeffry Immelt’s "ecomagination" initiative aimed at developing more energy-efficient products. The GeoSpring line became the first class of water heaters to be certified as part of U.S. EPA’s voluntary Energy Star program, and the company just last month announced the launch of an 80-gallon model capable of complying with DOE’s soon-to-take-effect rule.

While GE was first to market with water heaters that could achieve DOE’s standard, several other manufacturers, including Rheem and AO Smith, have since come out with comparable products.

Jones said the company’s resistance to changes to the DOE rule was not motivated by a desire to protect its market share. Because it is only large water heaters affected by the heat pump requirements, a relatively small part of the overall water heater market is affected. Most homes are fitted with units below 50 gallons.

"It’s not as if this is something that is going to be disruptive of this entire category," Jones said. The point is to emphasize the value of heat pump technology for a wide variety of applications and to ensure "that consumers and policymakers are not misled into thinking that progress in technology affecting this very significant energy user is somehow out of bounds."

Some companies seek relief

With DOE’s waiver rulemaking apparently stuck and uncertainty around a legislative solution, some companies have reached out to DOE’s Office of Hearings and Appeals seeking relief from the efficiency standard. Vaughn Thermal Corp. submitted one such application in November, citing its manufacture of specialty water heaters that rely on electric resistance technology to be deployed for storage or grid management purposes. NRECA, NRDC and ACEEE filed joint comments supporting Vaughn’s waiver request.

GE opposed the request, arguing that heat pump water heaters can be used for those purposes and provide a superior economic benefit to customers — saving about $368 dollars per year off a homeowner’s energy bills compared to an average $58-per-year benefit from demand-response programs, according to a letter from Jones to OHA. The comments also argue, essentially, that companies do not deserve to be bailed out for failing to prepare for regulations that have been in the works for years.

"DOE’s and EPA’s focus on [heat-pump water heaters] played critical roles in GE’s decision to develop its first model," which was the first to qualify for the Energy Star program in 2008, Jones wrote.

Noting that the DOE rulemaking process for large water heaters began in 2006, Jones writes, manufacturers have had nearly a decade to prepare for the potential need to manufacture or purchase more efficient products. "Yet, Vaughn has provided no evidence or information of research, product development or sourcing activities," Jones says.

While the company would not like to see OHA offer waivers from the standard, GE supports the legislative approach because it is narrowly tailored to provide temporary relief while directing DOE to more fully analyze the performance of conventional and high-efficiency water heaters in demand-response programs before beginning a new rulemaking to update the standard, expected to begin by 2017.

With a broad coalition of environmentalists, industry groups and competing manufacturers on board, proponents remain optimistic about their chances of getting legislation enacted somehow. A similar bill passed the House last year, 375-36, but that doesn’t mean the road to enactment will be smooth.

"What you have established is solid, broad support for it in the House and in the Senate," said Rep. Peter Welch (D-Vt.), an efficiency champion who co-sponsored last year’s bill. "Now we just have to go through the ordeal of figuring out a mechanism by which to get it through both bodies in a way that it can land on the president’s desk. And that’s always a puzzle."