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Carlos has prepared a first rate piece of work in comparing transformer costs 

by efficiency level at current material prices. However, the analysis shows 

more about competition in core materials than about costs of alternative 

MEPS levels. This is because different efficiency levels will result in 

different material prices – in both absolute and relative terms. Conclusions 

first, followed by my assessment and explanation.

• Price competition in core materials is high.

• Costs of transformers are a poor competition index. 

• Current material prices have questionable relevance to price of more 

efficient transformers.

• Current material supplies and capacities should not be the focus.

Price Competition In Core Materials Is High.

Rather than connecting the dots for each core material in Carlos’s least cost 

design graphs, the graphs may be better viewed as a collection of points. 

Primary attention should be focused on dEL0. There is a reasonably tight 

cluster of costs. This reflects the focus of material manufacturers to focus on 

price competition based largely on the current DOE MEPS as the primary 

market, reflecting the reported observation the most investor owned utilities 

buy DOE minimally acceptable transformers. These prices also tend to work 

well for the next higher efficiency.

For additional verification, consider a similar plot based on 2007 material 

prices (including M5 and M6) based on NEMA TP-1 efficiencies and the 

CSLs considered for the 2007 MEPS determination. The result should be a 

similar pattern, shifted back to focus on NEMA TP-1.

Costs Of Transformers Is A Poor Competition Index. 

The computed transformer costs is not a good predictor of what kind of 

transformers will actually sell in the market, or what the final market shares 

will be. Considering 25 kva 1-phase, for example, Chart 3 suggests that 

ZDMH should take the entire market. All other core materials will result in a 

transformer 50% higher in cost. Absent ZDMH, the market should be shared 

equally by M3, M2 and SA1. Yet in reality, M3 dominates the market; 
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which is certainly not the conclusion one would draw from the cost vs. 

efficiency plots.

Weight is a better indicator, as it does not include the misleading indication 

that material pricing based on competition for DOE MEPS units introduces. 

Consider, however, that weights are based on a 50% load factor, and relative 

weights will be different at the lower load factors that Chuck Simmons 

(Progress Energy) suggests may be more common.

Neither weight nor cost, however, can come close to explaining the current 

or past distribution or market shares of transformer core materials. If neither 

is a good predictor of the past, one should not expect them to be a good 

predictor of the future. Relative material weights are only one of the factors 

that material manufacturers will consider in evolving their competitive 

pricing strategy. Most particularly, the consultant forecasts of material 

demands, including relative demands, are not credible. Indeed, review of 

TOC open market bids by small municipal utilities show that M3 and M2 

materials not only successfully compete in but also dominate in cases with 

an apparent $8 A factor.

Finally, the costs that DOE presents, even for the base period, are

substantially higher than those observed for even small quantity open market 

bids available and prices paid by small municipal utilities and published on 

the Internet. These are very small quantities and are therefore expected to 

exceed the prices paid by large IOUs. The results of our limited review are 

shown below.

Comparison of DOE Estimate and Open Market Bid

Transformer Size Winning TOC Bid DOE Estimate

25 kva 1P $ 1,150 $ 1,410

50 kva 1P $ 1,260 $ 2,150

500 kva 1P $ 6,820 $ 10,250

150 kva 3P $ 5,115 $ 6,140

1.5 mva 3P $ 20,660 $ 26,985

In discussions with manufactures and large IOU’s, we found that large 

IOU’s do, in fact, pay less due to significantly larger volumes. For example, 

the DOE estimate for 25 kva transformers overstated the IOU cost by 

between 65 and 70 percent; and overstated the cost of the 50 kva transformer 

by 75 percent. Comparisons were more difficult for IOU purchases of 3-
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phase transformers as they tend to purchase these with substantial “extras” 

for safety purposes. Without attempting to correct for the extras, however, 

we found that the cost of a 1,500 kva 3-phase unit was overstated by 35 

percent; thus the overstatement would be much greater if compared with a 

“vanilla” 1,500 kva 3-phase unit.

We further note that that the open-bid prices we located were all TOC (as

expected) with A factors of between $8 and $9. Thus they would tend to 

substantially overstate the dEL0/CSL0 costs which were reported to 

correspond to an A factor of $4. It should also be noted that the prices 

obtained were all for steel core transformers. We found no successful open 

bids for amorphous or ZDMH core units, even though the cost analysis 

suggests that ZDMH should dominate the market now; or SA1 should 

capture a one-third market share in the absence of ZDMH. We did note that

the unsuccessful amorphous core bids were about on par with the 

unsuccessful steel core bids. Accordingly, we cannot state that the DOE 

overestimates would also apply to amorphous or ZDMH core transformers, 

or even that the cost of using these more efficient materials is overstated at 

all. The open-bid prices also clearly show that much higher efficiencies, 

consistent with $8 TOCs, can easily be reached with the current practice of 

using M3 and M2 grades.

Competition appears to have increased as a result of the 2007 efficiency 

standards, not decreased. The relative contribution of SA1 to the US market 

has increased, reflecting an increase in competition at both the transformer 

OEM and material manufacturing levels of the industry. In addition, the 

entry and growth of core suppliers both increases transformer OEM 

competition as well as allows for realization of any economies of scale 

available in production of cores; both of which provide a downward pressure 

on transformer price. Moreover, competition from off-shore core suppliers 

of SA1, adds further competitive pressure on domestic suppliers to keep 

prices low, even in the face of expansion, in order to preserve and protect 

market share. 

Current Material Prices Have Questionable Relevance To Price Of 

More Efficient Transformers.

Based on the above, and upon a review of the experience following the 2007 
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rulemaking, current material prices, even in relative terms, are a poor 

predictor of future prices. As Carlos also cautioned, “analysis of the price 

changes from one efficiency level to another for the DOE designs is that 

they are reasonably representative of what would be achieved in actual 

designs, if one accepts the DOE material price assumptions at increased 

Efficiency Levels. Specifically, the cost differentials are the result if and 

only if material manufacturers and suppliers cease their past competitive 

behavior and commit to current pricing policies regardless of the actions of 

their rivals. This is a very strong and unrealistic assumption. Accordingly, 

transformer prices based on current material prices, and price differentials, 

are likely to represent at most an upper bound on transformer prices.

Implementation of the MEPS established by the 2007 rule caused dramatic 

shifts in materials used for transformer cores. M6 and M5 grades were 

effectively eliminated and replaced with higher efficiency M3 and M2 and, 

to a lesser extent, SA1. Since M6 and M5 still must be produced when 

producing M3 and M2, a substantial realignment of material shipments and 

pricing strategy was required. However, as DOE’s TSD data clearly 

demonstrate, steel prices have fallen despite the shift from M6 and M5 to 

M3 and M2 and ZDMH, and the prices of SA1 cores actually fell by 15% 

between 2008 and 2010. Indeed, SA1 increased capacity between 2007 and 

2010, suggesting that incremental capacity can be increased without 

adversely impacting production costs. Steel prices have fallen since their 

high in 2008 due to economic conditions. However, the shift from M6 to M3 

should have resulted in an increase in the price differential. That the 

differential was a maximum ($0.32) between 2008 and 2009, falling to $0.22 

in 2010 suggests that standards did not adversely impact either the level or 

the spread in steel prices; and that there are viable markets for the lessefficient grades of core steel. This suggests that the long-run supply curves 

for all these materials is probably fairly flat, and that the industry is able to 

ramp-up production and shift output from one grade to another relatively 

quickly and with little or no additional investment consequences, at least 

within the 2+ years DOE permitted for reaction. There is no indication that a 

similar ramp up in efficiency could not be achieved with similar costs. 

Material prices are driven by overall supply and demand conditions in the 

market, with no discernable contribution due to the change in standards. 

As previously stated, assuming current material prices and price differentials 

will hold at increased efficiency levels is tantamount to assuming that 
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material manufacturers and suppliers cease their past competitive behavior 

and commit to current pricing policies regardless of the actions of their 

rivals. There is no reason to believe that any domestic material supplier will 

opt to relinquish market share to a competitor, domestic or foreign.

Current Material Supplies And Capacities Should Not Be The Focus.

Manufacturers do not plan for significant excess capacity. Indeed, except for 

unusually severe economic conditions, firms tend to operate at or near 

capacity, expanding only when the business outlook so warrants. Thus the 

relevant question is not whether a firm or an industry can meet an increase in 

demand out of current capacity, but can capacity be expanded and at what 

cost and in what time frame.

In the case of amorphous, it was stated that Metglas is prepared to expand 

amorphous capability as necessary to meet new demand. Metglas did, in 

fact, significantly expand their US production capacity in response to the 

2007 MEPS rule. Since amorphous is not subject to patent restriction, 

increases in amorphous demand could also be expected to draw new or 

former producers into the market. We note that amorphous for core steel is 

being produced by a major Chinese company and that other major silicon 

steel manufacturers have produced amorphous in the past in a developmental 

capacity and could enter the market with an amorphous product in the near 

future. Similarly, CRGO electrical steel is also sold and produced 

internationally. One would expect US producers would also expand as 

required to maintain market share in a growing US market for more efficient 

core materials.

Finally, it should be noted, again, that the increased demand for more 

efficient core materials following the 2007 MEPS rule, and subsequent 

capacity expansions, were not associated with the sorts of price increases 

feared then or now. There is simply no evidence to suggest that competition 

will not continue to work in the future as it has in the past.