Manufacturer Impact Analysis: Low Voltage Distribution Transformers

Market Overview

Number of manufacturers : DOE identified 25 domestic manufacturers of low

‐ voltage dry

‐ type

distribution transformer manufacturers. Of these 25 manufacturers, 7 were determined to be

large businesses and 18 were found to be small businesses.

Market shares : Five large manufacturers account for approximately 80 percent of the low

‐

voltage dry

‐ type distri bution transformer market.

Shipments : In the base year of the analysis (2011), DOE estimates low

‐ voltage dry

‐ type

transformers account for 22% of the market by kVA shipped and 24% of the market by units

shipped.

Other Key Factors :

 First

‐ cost driven customer base

 50% of volume outside of DOE scope

 Several exemptions and man y niche markets provide opportunities for small businesses

 Highly fragmented outside of DOE scope

Walk down of Manufacturing Impacts each CSL

DOE focused on the design lines 7 and 8 because they represent 95%+ of industry shipments for

LVDT.

At CSL7 and CSL6, amorphous wound cores would be required to meet the standard. Industry

impacts would be severe as few, if any, transformer manufacturers currently produce these

units and none are sold in meaningf ul volume. Large capital investments would be required to

convert facilities to produce amorphous cores. Additional floor space would most likely be

necessary. Substantial testing, prototyping and R&D resources would also be necessary as the

vast majority of the market produces stacked cores rather than the wound core construction

that would be requir ed at CSL6 and CSL7.

DOE believes it is highly unlikely that any low

‐ volume manufacturers would continue to produce

DOE

‐ covered units at CSL 6 or CSL 7. A combination of the large capital costs, requisite

engineering resources, lack of capital and access to critical materials at compe titive prices would

likely prove too much to overcome. More likely, small businesses would source their cores (or

entire transformers) when necessary to fill out their portfolio of offerings, or exit the DOE

‐

covered market altogether and focus on the exempted or out

‐ of

‐ scope LVDT market, wheremost small businesses currently compete. Most manufacturers expect significant consolidation

if standards were set at these levels.

At CSL5 and CSL4, for both design lines, a mitered HO_AlAl design is modeled as the minimum

cost design for CSL5 when SA1 is excluded from consideration. CSL4 offers manufacturers more

flexibility than CSL5 as mitered M3 and M4 options ar e also near

‐ minimum costs designs,

depending on the pricing of HO relative to those grain

‐ oriented grades. CSL5 would have large

impacts on both large and small manufacturers. Large manufacturer would experience a

significant drop in capacity as the steel gets thinner, units get b igger, and mitering is required, all

of which slow throughput. Even those with mitering capability today would be required to

invest in new core cutting equipment to make up for the reduction in capacity and, potentially,

to standardize around a new design and core steel and production process. Many companies

would requir e additional factory space as well. The additional investment in plant and property

would likely cause those manufacturers with domestic production to at least evaluate the

decision to move facilities to lower labor cost countries to offset costs. Some manufacturers

have concerns about their ability to procure HO at a reasonable pric e, and, particularly for

smaller manufacturers, the quality of the “high

‐ grade” steel they receive. Therefore, CSL 4,

where more core steel options are in play, provides greater manufacturer design flexibility than

CSL5, and mitigates these concerns to some degree.

Low

‐ volume manufacturers, which typically lack mitering capability and room for expansion

within th eir current facilities, would face the difficult decision to either: (1) outsource their

cores, (2) exit the market for DOE

‐ covered transformers, or (3) make large investments that

would have to be depreciated over fewer units than available to larger manufacturers. DOE

believes, based on interviews, that mo st small businesses would source their cores rather than

invest to meet these levels.

CSL3 represents NEMA Premium for DL7 and one level above NEMA Premium for DL8. Mitered

HO and M3 designs meet CSL3 for DL8, while a variety of core steels are cost effective for DL7 at

CSL3. Mo re specifically, DOE models mitered designs with steels ranging from M3 to M6 as the

most cost effective option, which is consistent with designs submitted by manufacturers (most

manufacturers did not consider HO in their optimizations, which OPS shows as cost competitive

at this level as well). Despite greater design flexibility and dimi nished concerns over steel

availability and capacity impacts, large volume players would likely still need to invest to make

up for reduced capacity and to standardize on designs/production processes. As with CSL4, at

CSL3 low

‐ volume manufacturers will likely need to invest in core mitering equipment, source

their DOE

‐ covered cores, or exit th e DOE

‐ covered market. Most manufacturers interviewed,

including large and small businesses, expect small manufacturers to source rather than produce

cores necessary to meet this level.

CSL2 represents NEMA Premium for DL8 and a step below for DL7. For DL7, butt lap designs

with higher grade steels could be used to mee t the standard, although mitered designs with M6

are modeled as the most cost effective designs. For DL8, OPS models mitered M5

‐ M3 designsamong the most cost competitive, consistent with manufacturer submitted designs. Because

CSL 2 for DL7 does not necessarily require mitered core construction for all KVA ranges nor does

it have the same impact on current production capacity, DOE expects manufacturer investments

to be somewhat lower at these level. Some investments will be r equired to re

‐ standardize and

meet additional mitering needs. For DL8 and some KVA ranges in DL7, low

‐ volume

manufacturers will likely have to source their cores or focus only on exempt portions of the

market. However, some manufacturers expect that butt lap construction can be used to meet

the sta ndard with better steel grades, mitigating the pressure this level would put on low

‐

volume players.

CSL1 can be met with a variety of steels and construction techniques. DOE expects minimal

investments will be necessary as butt lap designs can cost competitively meet the standard.

Mitered cores may be the lowest cost desig n for some large manufacturers who will need to

make incremental investments. DOE believes most small businesses currently producing DOE

‐

covered units will continue to do so.

Estimated Capital Conversion Costs

CSL1 CSL2 CSL3 CSL4 CSL5 CSL6* CSL7*

Capital

Conversion

Costs $3.0 M $5.3 M $8.0 M $11.4 M $14.3 $23.75 M $23.75 M

Product

Conversion

Costs $1.0 M $3.0 M $4.0 M $5.0 M $5.0 M $8.0 M $8.0 M

*Conversion to SA1 lines

Small Business Impacts

As DOE understands the market, the typical small business in the LVDT market often generates

most of its revenue from a combination of products other than transformers and transformers that are

either exempted or out of DOE

‐ scope (below 15KVA). Small businesses or low

‐ volume manuf acturers

do not typically employ mitered construction, instead relying on buttlapped cores. A mitering machine

is a substantial investment that is difficult to justify with low volume production. While larger

manufacturers in the market typically already have mitering capability, smaller manufacturers usually do

not and would have to spread the cost of a new machine over far fewer uni ts than a large manufacturer,

putting them at a variable cost disadvantage on top of the higher per lb pricing they typical pay.

DOE believes few, if any, low volume manufacturers will invest in sophisticated core mitering

machines and additional factory space that would be requir ed at CSL3 and higher. More likely, small

businesses that choose to remain the DOE

‐ covered market will elect to source their core production.Based on interviews, there appears to be more uncertainty over how small manufacturers may

respond to CSL2. Buttlap designs with higher grade materials may be used in some cases, although DOE

expects mitered construction to be the norm. In that case, small manufacturers would again be likely to

source their core production or exi t the DOE

‐ covered space.

DOE does not expect CSL1 to have significant impacts on small manufacturers.

Small businesses have also raised concerns about the availability and quality of the steel they

receive from steel suppliers. They are concerned that if a standard required M3 or better, they would

be un able to procure quality steel. Depending on the extent of the problem, this factor may push small

businesses towards sourcing cores subject to the DOE standard.

Domestic Employment Impacts

DOE estimates they are between 1,500 and 2,500 employees associated with DOE

‐ covered LVDT

production. Most of these employees are located o utside of the U.S. Typically, high volume units are

made in Mexico, taking advantage of lower labor rates, while custom designs are made closer to the

manufacturer’s customer base or R&D centers. DOE does not expect large changes in domestic

employment to occur due to a standard. Most p roduction already occurs outside the U.S., and, by and

large, manufacturers agreed that most design changes necessary to meet higher efficiency standards

would increase labor expenditures, not decrease it. If, however, small manufacturers began sourcing

cores, there could be a small drop in employment at these firms, presumably transferred to the core

makers, some of whom are domesti c and some of whom are foreign. In summary, DOE does not expect

significant changes to domestic industry employment levels as a result of the standard.