# 1 COMMENTS ON PROJECTED US DEMAND FOR CORE MATERIALS

1. SUMMARY
We are concern ed about the lack of analysis on replacement transformer demand in DOE ’s projection of the US distribution transformer market in the technical support document (TSD) of 23 August 2011 1



# . In Tables 4.1 through 5.2 of the TSD , a d emand projection for core materials from 2016 -2045 was provided

. The data (page 6) was extracted to study the demand growth pattern for the dEL-0 market

. DOE’s forecasting method appears to consistent with recent market conditions as the “base case” with growth thereafter following DOE’s EIA 2011 forecast of electricity base capacity growth ( 0.7 -0.8% per year)

. However, the TSD does not separate the information such that demand for truly “new” (growth) and replacement (obsolete equipment ) can be compared over time span for the LCC analysis

. AK Steel’s analysis procedure uses different assumptions to project demand based on (i) housing starts , (ii) foreclosure activity , (iii) transformer obsolescence, and, (iv) electrical base load demand growth. AK Steel’s model projects that presently the US distribution transformer market is 75 -80% replacement units

. Assuming housing construction returns to its historic norm of 1.5MM units per year by 2015 , the model projects that obsolescence of the installed fleet will be such that replacement transformers will comprise about 50% of market demand through 2045

.

Given present economic conditions and expected weak market conditions through 2014, there is sufficient time for a large-scale “refurb” industry to be established. If so, transformers once presumed obsolete (scrapped) would refurbished for return- to -service en mass. We are concerned that large increases in first-cost of transformers will significantly reduce the demand for new high efficiency transformers as well as high efficiency core materials. This would reduce benefits from the existing efficiency standards or enhancements to those standards being discussed. The information presented regarding growth in transformer refurbishment activity is not anecdotal. This activity is a normal market response to the rising “first-cost” of new transformers owing to (1) the rising materials cost prior to the 2010 standards and (2) the effect of the current standard on first-cost

.

1

# http://www1.eere.energy.gov/buildings/appliance_standards/pdfs/dt_results_for_negotiation_090811v3.pdf

# 2

DEMAND MODEL AK Steel developed proprietary internal models to forecast core material usage trends by market sector

. The model for the US distribution transformer sector is based on historical data for installations from 19 50-1995 which was subsequently correlated to the following variables: Demand for “ new” transformers based on hou sing construction activity 2 

# : Impact of home foreclosures on short-term demand 3 

# ; Demand for replacement s based on a statistical obsolescence model

. AK Steel’s failure model i ncludes all modes (catastrophic, obsolescence, etc.) with a “repair- and -return- to -service” rate of 1.3% of annualized failures (which we believe is a reasonable assumption); AK Steel’s internal estimates of the impacts of the 2010 rulemaking and the potential impact of the current rulemaking (pounds of core material per kVA). This model was developed for AK Steel’s internal use using information and insights gathered in a century of service to the US electrical equipment industry.

2. ANALYTICAL CONSIDERATIONS FOR NEW-VERSUS-REPLACEMENT TRANSFORMER INSTALLATION DEMAND MODEL The primary drivers for “new” transformer installations are residential housing construction activity which, simply broken down, is population growth and new household formation. Using a 5-year weighted average to smooth year- to -year fluctuations, we assumed housing construction at a rate of 1.5MM unit s per yea r which has been the case since 1950 (see Appendix I Figure 1).

2

# Housing statistics from http://www.forecast-chart.com/forecast-housing-starts.html 3 

# http://www.mbaa.org/newsandmedia/presscenter/64769.htm

# 3

AK Steel considers the 2007-2011 period to be abnormal owing to the high rate of home foreclosures (see Appendix I Figure 2). However, the current downturn has been so significant and different from the historical norm 4

# that we needed to incorporate a foreclosure impact into the analysis to better capture mark et housing conditions. The 2017 -2025 forecast simply assumed a return to the historical housing construction rate of 1.5MM units per year (Appendix I). AK Steel’s model was modified to incorporate IHS-Global Insight ’s foreclosure forecast . F igure 1 shows how this influenced AK Steel’s analytical methodology and view of the market. The second component in AK Steel’s model is transformer installation and aggregate fleet size. The base data relies on reported transformer installations from 1940 to 2000. Beyond 2000, the aggregate fleet was projected from this experiential data overlaid by a “ mix of designs in the market” borrowed from the prior DOE rulemaking to account for non-residential distribution transformers (i.e., LV and MV dry types). Appendix II summarizes the transformer and core material demand by design line and standard level from that prior rulemaking. This same data was distributed to the committee in an e-mail sent out on November 17 th



# . The “replacement” calculation , proj ected using industry data, incorporated 50%-failure at about 38 years and 100%-failure at about 60 years, uses a more conservative obsolescence model than DOE. Base load demand growth was projected at 0.8% per year based on the 2011 report from the Energy Information Agency.

3. NEW-VERSUS-REPLACEMENT TRANSFORMER MARKET PROJECTION Figure 2 is AK Steel’s input projection for size of the transformer fleet for 2010-2025.

4 

## Prior to 2006, foreclosures were at a historical norm of 0.75MM units per year and exerted little effect on construction. The present economic downturn differs substantially owing to the sheer number of foreclosures which created an “excess inventory” situation. This resulted in both declining valuations for existing property inhibits home construction activity. Construction markets are, simply, adjusting for market conditions. While short-term home construction activity is unclear, the IHS-Global Insight forecast for 2010- 2020 projects a “foreclosure hangover” extending through 2020 with foreclosures running at 0.4MM units per year above the historical norm.

# 4

Figure 3 shows the breakdown by “new” versus “replacements” units in the market assuming a housing recovery to historical norms by 2017.

AK Steel’s forecast indicates that the market will be driven by the need for replacement transformers

. T he model forecast ed 2008- 2011 transformer replacements comprised 75 -80% of total deliveries and our expectation for beyond 2015 is that replacements will comprise over 50% of total deliveries

.

4. CONCLUSIONS We believe that a replacement transformer refurbishment issue needs to be given very serious consideration. By our analysis, replacement s will comprise 50% of the transformer deliveries from 2015 -2045

. Under the “principle of unintended consequences”, the first-cost-benefit of refurbishing these units will become ever more attractive as first-cost of new units rise. Refurbishment represents a potentially “lower-cost lower-efficiency” alternative to manufacturers of transformers and core materials both and would substantially diminish life cycle, energy savings and environmental benefits of higher efficiency standards.

5. CLOSING COMMENTS We believe that the prospect for refurbishment of the many transformers in the fleet approaching obsolescence will represent a cost-effective option for a very large portion of industry needs. There are literally tens of millions of units coming out of service which could be rebuilt and returned to service

. While refurbishment on this scale is not a normal industry practice at this time , comments in earlier meetings f rom Mr. Patterson of ABB, Mr. Rosenstock of EEI and others point ed out that utilities are studying refurbishment owing to high cost or unavailability of specific designs at dEL-0 and that companies presently involved in this business are experiencing record growth in demand for their services

.

# 5

Submitted by: Jerry W. Schoen Principal Engineer Research & Technical Services AK Steel Corporation

# 6 Table 1 Summary of Usage of Various Core Materials at dEL-0 Extracted from Section 4 (Estimated Core Steel Demand for Certain Steel Grades) of the August 31, 2011 Technical Support Document

Table 2 Summary of % Transformers in Compliance from 2007 Rulemaking

Data from DOE Survey

# 7 AP PENDIX I



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