UNITED STATES DEPARTMENT OF AGRICULTURE 

Rural Utilities Services 

RUS BULLETIN 1724D-107 

RD-GD-2016-82

SUBJECT: Guide for Economic Evaluation of Distribution Transformers 

TO: RUS Electric Bmrnwers and RUS Electric Staff 

EFFECTIVE DATE: Date ofApproval 

OFFICE OF PRIMARY INTEREST: Distribution Branch, Electric Staff Division 

FILING INSTRUCTIONS: This bulletin is a new bulletin. This bulletin can be accessed via 

the internet on the RUS website http://www.usda.gov/rus/electric/bulletins.htm. 

PURPOSE: This bulletin explains the total owning cost (TOC) method for conducting present 

. worth dollar analysis ofthe cost of owning a transfo1mer over its useful life. An ExcelTM 

spreadsheet for calculating TOC is also included. 

Christopher A. McLean 

Assistant Administrator 

Electric Program 

Disclaimer: The contents of this guidance document does not have the force and effect of law and is not 

meant to bind the public in any way. This document is intended only to provide clarity to the public 

regarding existing requirements under the law or agency policies.
RUS Bulletin 1724D-107

Page 2

TABLE OF CONTENTS

1 INTRODUCTION........................................................................................4

2 HISTORY................................................................................................................................ 4

3 TERMS.................................................................................................................................... 5

4 TOTAL OWNING COST METHOD ..................................................................................... 8

5 ENERGY ESCALATION AND INFLATION....................................................................... 9

6 EXAMPLE ............................................................................................................................ 10

APPENDIX 1............................................................................................................................... 13

EQUIVALENT LEVEL COST FORMULA ........................................................................... 13

APPENDIX 2................................................................................................................................ 14

INDEX:

Total Ownership Cost

Purchase of Distribution Transformers

ABBREVIATIONS

BP Bid Price

CF Capacity Factor

CRN Cooperative Research Network

DC Demand Charge

DOE Department of Energy

EC Energy Cost

FCR Fixed Charge Rate

HPY Hours per Year

LL WattsLL (transformer winding loss)

LSF Loss Factor

NL WattsNL (no load loss)

NRECA National Rural Electric Cooperative Association

PL Peak Load

RF Peak Loss Responsibility Factor

TOC Total Owning Cost
RUS Bulletin 1724D-107

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DEFINITIONS

Average Rate of Inflation – the estimated average rate of inflation per year for the life of the 

transformer

Capacity Factor (CF) - a measure of the average use of the transformer compared to its 

maximum possible usage, calculated by:

capacity factor = kwh sold per year through the transformer/(8760 x nameplate kva)

Demand Charge (DC) - the levelized demand charge in $/kw/year. 

Energy Cost (EC) - the levelized energy cost in $/kwh to produce energy during the life of the 

transformer.

Energy Cost Increase per Year – the estimated average rate of increase in energy cost per year 

during the life of the transformer.

Expected Transformer Life in Years – the estimated number of years the transformer will be in 

service.

First Year Peak (percent of nameplate kva) – the estimated peak load the transformer will 

experience in the first year of installation.

Hours per Year (HPY) - 8760 hours unless the analysis is for a special application or seasonal 

use transformer, such as irrigation or pumping.

Interest Rate for Borrowing Money – the estimated average rate of interest which the borrower 

determines is being paid on loans.

Levelized Cost – the present value of the total cost of owning and operating a piece of equipment 

over its useful life converted to equal annual payments

Peak Load Growth per Year – the estimated yearly rate of increase of the transformer’s peak load 

during its life.

Peak Load Responsibility Factor – the proportion of system peak attributable to the load on a 

transformer at the time of the system peak. The peak load responsibility factor takes into account 

the fact that the peak load on a transformer does not usually occur at the same time as the system 

peak. It is expressed as the ratio of the transformers peak load at the time of system peak to the 

peak load on the transformer. 
RUS Bulletin 1724D-107

Page 4

1 INTRODUCTION

The purpose of this bulletin is to explain the total owning cost method (TOC) for 

conducting consistent and meaningful present worth dollar analysis of the cost of owning 

a transformer during its useful life using the TOC method. This method was devised in 

the 1990s and continues to be widely used because of its simplicity. Transformers are a

major component of a distribution system, and the cost of buying them comprises a large 

part of an annual equipment budget. TOC analysis can be used to compare the various 

manufacturers and their transformer designs on an equal basis and thus determine which 

transformers are the most economical to own and operate on a long-term basis.

The total owning cost includes all the expenses associated with purchasing, operating and 

maintaining a transformer over the life of the unit. While some expenses are relatively 

stable over the course of the transformer life like installation and removal costs, the 

borrower has little ability to control the level or timing of some expenses, such as 

maintenance, or external factors, such as tax and interest rates. However, the borrower 

can make decisions that balance the first cost of buying the transformer with the cost of 

core and copper losses, a significant portion of operating costs, to minimize ongoing 

costs over the life of the unit.

In general, a transformer with lower losses has a higher purchase price. While lower 

losses serve to reduce operating costs, a higher initial investment cost also results in 

higher tax and interest costs. The transformer with the lowest total ownership cost is 

usually not the one with the lowest price or the lowest losses.

As the cost of energy increases, the cost of losses becomes more significant, further 

justifying the time and effort necessary to perform the TOC analysis.

2 HISTORY

Distribution transformer efficiency, once a utility industry issue, is now regulated by the 

federal government. The Energy Policy Act of 1975 prescribed conservation standards 

for various consumer products. The Energy Policy Act of 1992 directed the Department 

of Energy (DOE) to set minimum efficiency standards for distribution transformers. 

DOE has employed the Public Rule Making procedure to establish Final Rules for the 

minimum efficiency of distribution transformers. The Final Rule must be designed to 

achieve the maximum improvement in energy efficiency that is technologically feasible 

and economically justified and also result in significant conservation of energy. 

The DOE standards apply to medium voltage liquid-immersed distribution transformers 

that are commonly used by electric utilities, including rural electric cooperatives. The 

standards apply to newly manufactured transformers. They do not apply to transformers 

that are already purchased or in service or those that are refurbished.

The first DOE Final Rule, issued in 2007, set minimum efficiency standards to become 

effective January 1, 2010. A review of a Final Rule must be performed every six years to 
RUS Bulletin 1724D-107

Page 5

determine if standards should be changed. The DOE issued a Final Rule in 2013 to 

become effective January 1, 2016.

NRECA has been an active participant in the DOE Ruling Makings for distribution 

transformers. The DOE has recognized that cooperatives buy a significant number of 

transformers and that those transformers may serve consumers with lower load factors 

and thus have longer payback periods than experienced by other segments of the utility 

industry.

It is important for rural electric cooperatives to carefully evaluate transformer purchases 

and transformer operating practices. The economics of purchases and operation can be 

improved by purchasing transformers evaluated under the principles of this Bulletin, as 

opposed to just purchasing transformers with minimum efficiency allowable as 

prescribed by the DOE standards.

3 TERMS

The following terms are found in the proceeding equations and are generally those for an 

electric system. The data obtained would be applicable to all transformers on a system. 

However, when the purchases are for specific applications, such as transformers for 

irrigation systems, the hours of usage or load or the load factor will vary based on that 

particular application. The results obtained will apply to that application only. The data 

used in the following calculations are general, and the results apply to all distribution 

transformers as a group used in an electric system. This Bulletin was written to be used in 

conjunction with the CRN Loss Manual. For a greater understanding of the individual 

terms, use the Loss Manual as a guide.

a Fixed charge rate (FCR). The yearly income necessary to pay for a capital 

investment. FCR is expressed as a percentage of capital investment. The FCR 

includes interest, depreciation, taxes, insurance, operations and maintenance. 

Some typical values for the components of the FCR include:

Interest 5.0%

Depreciation 2.75%

Insurance 0.6%

Taxes 1.00%

Operations & Maintenance 2.76%

FCR 12.11%

b Bid Price (BP). The unit price at which a particular transformer manufacturer 

offers to sell transformers. This price should include transportation costs as well 

as sales tax if applicable.

c WattsNL (NL). The no load power loss in watts of a transformer at rated voltage 

and temperature. This is also called the transformer core loss. The no load losses 

are furnished by the manufacturer for the transformer being considered for 
RUS Bulletin 1724D-107

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purchase. In the calculations in this bulletin, the cost per watt for no load losses is 

represented by the symbol A. 

d WattsLL (LL). The electrical loss in watts due to windings of the transformer only 

taken at full rated load. This is also called the transformer winding loss. The load 

losses are furnished by the manufacturer for the transformer being considered for 

purchase. In the calculations in this bulletin, the cost per watt for losses is 

represented by the symbol B. Note that the “Total Load Losses” is the sum of the 

NL and LL Losses. 

e Hours Per Year (HPY). The number of hours per year the transformer will be 

energized. In general, this value will be 8760 unless it is for a special application 

transformer, such as an irrigation or pumping service.

f Demand Charge (DC). A charge designed to reflect the maximum size of 

facilities required to deliver power, expressed in dollars per kilowatt-year. For 

power systems that generate, transmit and distribute power, it is power (kW) at 

peak load from the generator, through the transmission and distribution systems to 

the transformer. For systems that purchase power and distribute it, the annual 

value for DC is the monthly demand charge including escalation, multiplied by 12 

to give $/kw-year. DC′ will be used in both the A and B value calculations and 

indicates a levelized value that includes escalation and inflation. A detailed 

discussion of calculating DC′ will follow in the next section.

g Energy Cost (EC). The cost, in dollars per kWh, to produce energy during the life 

of the transformer, including escalation, estimated inflation and other factors 

which affect energy cost. EC′ will be used in both the A and B value and indicates 

a levelized value that includes escalation and inflation. A detailed discussion of 

calculating EC′ will follow in the next section.

h Peak Load (PL). The uniform equivalent maximum load on a transformer during 

the period of the evaluation. It is an approximation of actual transformer annual 

peak load since it assumes that the annual peak load increases at a constant 

percentage rate. This value is levelized so it can be used in the calculations for the 

entire life of the transformer. 

*PL2 is used in the calculations, instead of PL since PL2 is used in the basic 

formula for A and B

The following is the approximation for calculating the PL2 value for the life of the 

transformer:

(PL)2 = (PLI)2[(1 + ii)nn − (1 + gg)2nn]

(1 + ii)nn[(1 + ii) − (1 + gg)2] ∗ CRFnn

PLI = the anticipated peak load during the first year of installation expressed as a 

decimal equivalent
RUS Bulletin 1724D-107

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g = the decimal equivalent of the estimated annual percentage increase in peak 

load during the life of the transformer

i = the average rate of interest which the borrower determines is being paid on the 

loans

n = the number of years which the transformer will be in service

p = the estimated average increase in energy cost per annum during the useful life 

of the transformer

CRFn = the capital recovery factor used to levelize the total present worth 

evaluation. It converts the sum into a uniform annual series whose total present 

worth is identical to the actual present worth. It is defined as follows:

CRFnn = ii(1 + ii)nn

(1 + ii)nn − 1

i Peak Loss Responsibility Factor (RF). A factor that adjusts for differences 

between the peak load on a transformer and peak load on the distribution system, 

which typically do not occur at the same time. The transformer′s contribution to 

the system peak load is usually only a fraction of the load on the transformer at 

its peak load, so it is therefore most often less than one (1). Since losses vary 

with the square of the load, the peak loss responsibility factor is the square of the 

peak load responsibility factor.

The following is the equation for estimating the peak load responsibility factor:

�

TTTTTTTTTTTTTTTTTTTTTT ll ll aa ss pp pp

TTTTTTTTTTTTTTTTTTTTTT pp pp ll ll �

Then to get the peak loss responsibility factor, square the previous equation:

RF = �

TTTTTTTTTTTTTTTTTTTTTT ll ll aa ss pp pp

TTTTTTTTTTTTTTTTTTTTTT pp pp ll ll �

2

j Loss Factor (LSF). The ratio of the average transformer losses to the peak 

transformer losses during a specific period of time. If the system (or individual 

transformer) load factor is known, the loss factor can be calculated for the system 

of transformers or the individual transformer as follows:

Load Factor = � kkh pp

8760 ∗ pp pp kk�

Loss Factor = 0.2 ∗ (LL FF FF ) + 0.8 ∗ (LL FF FF )2
RUS Bulletin 1724D-107

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4 TOTAL OWNING COST METHOD

The total owning cost of a transformer is the sum of the first cost, or cost of purchasing 

the transformer, plus the cost of losses. Transformers experience two types of losses, 

core losses and winding losses. The core losses are due to the fields that magnetize the 

transformer core and are always present regardless of the transformer loading, which is 

why these losses are referred to as no-load losses. The winding losses are due to the 

normal I2R losses in the windings on the transformer. These vary with the square of the 

load on the transformer, which is why these are referred to as load losses.

A transformer bid typically specifies the bid price, no-load losses in watts, and load 

losses in watts. These loss values should be provided by the manufacturer and should not 

be exceeded by test values of the transformers delivered. A basic method of transformer 

evaluation is to assign a cost per watt in $/watt for each the no-load and load losses. The 

cost per watt for no-load losses is the transformer design A value, and the cost per watt 

for load losses is the transformer design B value. The A and B values help to determine 

the total ownership cost of the losses on any given transformer with a load loss and noload loss value. 

The Total Ownership Cost method is based on the levelized costs associated with owning 

the transformer, including the cost of the transformer, losses, inflation, increases in 

energy costs and increases in demand charges, if applicable. The levelized cost is the 

present value of these costs converted to equal annual payments.

The levelized cost is not an average. Using energy as the example, with energy costs 

rising, the levelized energy charge is higher than the energy cost in the early years of the 

project and lower than the energy cost in the later years. 

The total ownership cost of a transformer is calculated:

TOC = Bid Price + (A ∗ NL + B ∗ LL)

Where:

A = DC′+(HPY∗EC′)

(FCR∗1000) in $/watt

B = �PL2∗RF∗DC′�+(PL2∗HPY∗LSF∗EC′)

(FCR∗1000) in $/watt

As shown in the following sections, the transformer with the lowest total ownership cost 

is not necessarily the one with the lowest purchase price. The utility typically provides

the manufacturer with the A and B values to be used in the TOC evaluation for use in 

transformer design. 
RUS Bulletin 1724D-107

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5 ENERGY ESCALATION AND INFLATION

Accounting for inflation in economic studies is a difficult and complex issue. The 

purpose of this section is not to provide a comprehensive analysis of the subject but 

rather to provide some general guidelines.

One method of handling inflation is to increase future variable costs, such as the costs of 

losses, by the percentage represented by the general inflation rate. Since the calculations 

for A and B do not have any provisions for costs that increase over the years, an 

equivalent level cost that takes into account future cost increases should be used. This is 

sometimes referred to as the levelized value. The following equation derives such a value 

and can be used to adjust for inflation (See Appendix 1 for derivation):

A′ = A ∗ X ∗

(1 − Xnn)

(1 − X) ∗ CRFnn

Where:

XX = inflation adjustment = (1+rr)

(1+ii) for r ≠ i

A′ = the cost adjusted for inflation

A = the base cost before inflation

n = the number of years in the inflation period, usually the life of the transformer

i = the average rate of interest being paid on loans

r = the average year over year rate of inflation over the life of the transformer

While this method reflects increases in future costs, it fails to take into account that the 

value of money decreases with inflation. Another method of handling inflation is to 

assume that the increase of costs in the future will be balanced out by the decrease in the 

value of money, thus allowing us to ignore inflation all together. The problem with this 

approach is that the assumption does not always hold true, because costs of certain items 

may increase faster than the inflation rate.

A third, more realistic method of treating inflation is to compensate both for the increase 

in costs associated with the generation and transmission of electric power and for the 

decrease in the value of the dollar associated with the generally prevailing inflation rate. 

This compensation can be accomplished calculating an equivalent inflation rate (r′) that 

can be used in the original equation for X. 

′ = (1+PP)

(1+iiii) − 1 for P ≥ ig

Where:

r′ = The equivalent inflation rate
RUS Bulletin 1724D-107

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P = the rate of increase in costs per kwh associated with power generation and 

transmission expressed as a decimal

ig = the inflation rate for the economy as a whole expressed as a decimal

Now the equivalent inflation rate can be used in the original equation for X as follows:

XX = (1+rr′)

(1+ii) for r′ ≠ i

If the equivalent inflation rate r′ and the interest rate i are the same, the cost adjusted for 

inflation and the base cost will be the same as was described in Method 2.

6 EXAMPLE

The following example illustrates the process of determining the total ownership cost for 

a 50 kVA pad mounted distribution transformer including calculating the levelized values 

for peak loading and energy costs. 

Bid Price = $3,000

NL = 94 Watts (from manufacturers 50 kva transformer)

LL = 464 Watts (from manufacturers 50 kva transformer)

DC = $120/kw-Year (the initial demand cost calculated by the borrower)

DC′ = levelized demand cost, to be calculated

EC = $0.05/kwh (the initial energy cost)

EC′ = levelized energy cost, to be calculated

PLI = 80% (the initial peak load)

PL = levelized annual peak load, to be calculated

RF = .81 Peak Loss Responsibility Factor (assuming a peak load responsibility factor of 

.9)

LSF = .3 Loss Factor

FCR = 14.2%

Assumptions:

50 kva transformer

30 year lifespan
RUS Bulletin 1724D-107

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Initial peak load: 80% of rating or .8

Load Growth (g) = 1%/year or .01

Interest Rate (i) = 5%/year or .05

Energy Escalation Rate (p) = 3%/year or .03

General Inflation Rate (ig) = 2.5%/year or .025

CRF30 = . 05(1 + .05)30

(1 + .05)30 − 1 = . 05(4.32)

(4.32) − 1 = .065

(PL)2 = (.8)2[(1 + .05)30 − (1 + .01)60]

(1 + .05)30[(1 + .05) − (1 + .01)2]

∗ .065

(PL)2 = . 64

4.32 ∗

[4.32 − 1.82]

[1.05 − 1.02]

. 065

(PL)2 = 12.34 ∗ .065 = .8021

To calculate the levelized demand and energy costs:

′ = (1+PP)

(1+iiii) − 1 for P ≥ ig

′ = (1 + .03)

(1 + .025)

− 1 = .0049

XX = (1+rr′)

(1+ii) for r′ ≠ i

XX = (1 + .0049)

(1 + .05) = .957

DC′ = DC ∗ X ∗

(1 − Xnn)

(1 − X) ∗ CRFnn

DC′ = 120 ∗ .957 ∗

(1 −. 95730)

(1 − .957) ∗ .065
RUS Bulletin 1724D-107

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DC′ = 120 ∗ 16.3 ∗ .065 = $127.30 per kw-year

EC′ = EC ∗ X ∗

(1 − Xnn)

(1 − X) ∗ CRFnn

EC′ = 0.05 ∗ .957 ∗

(1 −. 95730)

(1 − .957) ∗ .065

EC′ = 0.05 ∗ 16.3 ∗ .065 = $0.053 per kwh

To calculate the A and B values:

A = DC′+(HPY∗EC′)

(FCR∗1000) in $/watt

A = 127.30+(8760∗0.053)

(.142∗1000) in $/watt

A = 4.169 in $/watt

B = �PL2∗RF∗DC′�+(PL2∗HPY∗LSF∗EC′)

(FCR∗1000) in $/watt

B = (.8021∗.81∗127.30)+(.8021∗8760∗.3∗.053)

(.142∗1000) in $/watt

B = 1.37 in $/watt

To calculate the transformer’s total ownership cost:

TOC = Bid Price + (A ∗ NL + B ∗ LL)

TOC = $3000 + ($4.169/W ∗ 94 W + $1.37/W ∗ 464 W)

TOC = $4027.56

The total ownership cost should be calculated for each transformer under consideration.

The transformer with the lowest total ownership cost would be the most economical 

lifetime investment. A spreadsheet has been included in Appendix 2 to assist with the 

calculations.
RUS Bulletin 1724D-107

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APPENDIX 1

EQUIVALENT LEVEL COST FORMULA

The following illustration provides a derivation of Equation 9, which is used to adjust cost 

evaluations for inflation. Equation 9 will produce a level cost (or energy charge rate) that will 

yield the same total present worth value as a cost (or energy charge rate) that is increasing at r

percent per year.

The present worth of a cost increasing at r percent per year is:

















+

+ ⋅⋅

+

+

+

+

+ = n (1 i)

n (1 r)

2 (1 i)

2 (1 r)

(1 i)

(1 r) PW A *

where:

i = the time value of money

r = the rate of inflation

A = the cost before inflation

PW = the present worth

n = the time period in years

If we let 















+

+ = 1 i1 r X

then:

) n 1 X 2 PW A *X *(1 X X − = + + 

Algebraic manipulation yields the following:





 





−

− = 1 X

n 1 X PW A * X

Multiplying the above by the capital recovery factor to get an equivalent level yearly cost yields:





 





+ −

+ 



 





−

− = 1 n (1 i)

n i(1 i)

1 X

n 1 X A' A * X
RUS Bulletin 1724D-107

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APPENDIX 2

ECONOMIC EVALUATION OF DISTRIBUTION TRANSFORMERS

This spreadsheet shows a method for calculating the levelized energy cost of producing energy 

over the life of the transformer in $/kwh. The program uses typical values as a starting point. In 

the electronic form of this bulletin, the evaluation formula will be updated as new data is entered.

 Data:

Demand Charge $120.00

Energy Charge $0.05

Fixed Charge Rate 14.2%

Hours per year 8760

Capacity Factor 0.5

Peak Load Responsibility Factor 0.9

Energy Cost Increase per Year 3.0%

Average Inflation 2.5%

Interest Rate for Borrowing Money 5.0%

First Year Peak (%of nameplate Kva) 80%

Peak Load Growth per Year 1.00%

Expected Transformer Life in Years 30

Formula = Price + A* core loss + B* coil loss

A = $4.169

B = $1.378

Loss Factor (LSF) 0.300

PL^2 0.80712

equivalent inflation rate r' 0.00488

Inflation adjustment (X) 0.95703

Inflation adjustment factor 17.0398

levelized inflation adjusted factor 1.06083

CRFn 0.06505

DC' $127.30

EC' $0.0530

An electronic ExcelTM copy of this spreadsheet is available from the NRECA T&D System Planning 

Subcommittee Chair and the Staff Director of the RUS Electrical Engineering Branch.