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EURELECTRIC comments on

EC Working Document of 11/10/2012 on a


Commission Regulation implementing
Directive 2009/125/EC with regard to
small, medium and large distribution and
power transformers
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A EURELECTRIC response paper

November 2012
The Union of the Electricity Industry–EURELECTRIC is the sector association representing the common
interests of the electricity industry at pan-European level, plus its affiliates and associates on several
other continents.

In line with its mission, EURELECTRIC seeks to contribute to the competitiveness of the electricity
industry, to provide effective representation for the industry in public affairs, and to promote the role
of electricity both in the advancement of society and in helping provide solutions to the challenges of
sustainable development.

EURELECTRIC’s formal opinions, policy positions and reports are formulated in Working Groups,
composed of experts from the electricity industry, supervised by five Committees. This “structure of
expertise” ensures that EURELECTRIC’s published documents are based on high-quality input with up-
to-date information.

For further information on EURELECTRIC activities, visit our website, which provides general information
on the association and on policy issues relevant to the electricity industry; latest news of our activities;
EURELECTRIC positions and statements; a publications catalogue listing EURELECTRIC reports; and
information on our events and conferences.

EURELECTRIC pursues in all its activities the application of


the following sustainable development values:

Economic Development
Growth, added-value, efficiency

Environmental Leadership
Commitment, innovation, pro-activeness

Social Responsibility
Transparency, ethics, accountability

Dépôt légal: D/2012/12.105/49


EURELECTRIC Reaction to EC Working Document of
11/10/2012 on a Commission Regulation
implementing Directive 2009/125/EC with regard to
small, medium and large distribution and power
transformers
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SubGroup Network Equipment (WG Standardisation)


Anthony WALSH (IE) Chair

Contact:
Sophie Tielemans, Networks Unit - stielemans@eurelectric.org
TABLE OF CONTENTS

Executive Summary.............................................................................................................. 5
Detailed Response on RIA and second Draft Regulation (20/10/12):................................ 8
Appendix 1: Detailed Commentary on Regulatory Impact Assessment (RIA) ................. 18
Appendix 2 Detailed Commentary on Draft Regulation11/10/2012l .............................. 26
Appendix 3 Discount Rates for use in EcoDesign Impact Assessments .......................... 30
Executive Summary:
EURELECTRIC is in favour of cost effective measures to increase transformer efficiency that can be justified
by reduced generation and transmission avoided Co2 emissions. However Eurelectric is concerned that the
minimum loss levels proposed for Power and Distribution transformers in the proposed Regulation do not
represent the optimum balance between increased investment costs and reduced running costs.

It is critical for society that the overall cost of the extra investment in overall Transformer costs is
justified by the value of the increased energy savings – otherwise the same investment could be
made in other projects that would give better returns in terms of energy savings.

The proposals as currently drafted in the second Draft Regulation (11/10/2012):

 will increase costs to customers over the long term without producing the intended benefits,

 will result in cross subsidies from countries with low electricity prices/high interest rates to
countries with low interest rates/high electricity prices

In particular the economic analysis in the Regulatory Impact Assessment (and in the VITO final Report, the
preparatory study done in 2011) is not of the rigour necessary for the level of monies involved, which are in
billions of euros, and where it would have been expected that an analysis of a level similar to that
prescribed in the EU ‘Guide to Cost Benefit Analysis of Investment Projects’ would have been appropriate.
In our view the EURELECTRTIC comments submitted in May 2012 have not been addressed adequately in
the process.

Virtually all EU Utilities already incorporate the capitalised value of losses into their transformer
procurement decisions so as to buy the most economically efficient and sustainable transformers, using
methodologies similar in principle to the VITO analysis but using national electricity prices and interest
rates. This means that transformers already being purchased by utilities are already quite efficient –
effectively utilities already have a de-facto industry agreement, policed by regulators, on the use of low loss
transformers.

The value of the losses required to justify the level of transformer efficiency now required in the Directive is
considerably greater than that used by EU utilities, and needs to be supported by a more rigorous
economic and technical justification.

Five areas are of particular concern for EURELECTRIC:

(a) The price of electricity used in the analysis is grossly overstated

- This is because as the Eurostat figures used also include fixed 1costs which typically account for
35 – 40% of the price of a kWh. However it is only the energy component of the kWh costs
which are saved.

(b) The discount rate of 4% used is inappropriate for the risk associated with this project, is not backed
up by sufficient economic justification and is applied inappropriately to non-risk adjusted cash
flows

1
Fixed costs include Transmiussion Use of System Costs, Distribution Use of System Costs and Customer Service
Costs

5
In more typical consumer products that have previously been considered by EcoDesign the lifetime
of the product is normally relatively short (<10 years) and the energy component which is to be
optimised is only a small proportion of the total cost of the product. This means that the discount
rate used is not very critical.

In contrast with transformers the lifetime is longer (about 30 years) and the full cost of nearly all
components is affected, so the discount rate is critical, not only it’s level but also how it is applied.

The issue of the correct application of Social Discount Rates is complicated, particularly where
private resources are being used to cover social objectives.

This issue has been looked at in detail in the UK by the Committee on Climate Change 2 who state
that two approaches are appropriate when private sector is delivering on public policy objectives:
- use a social discount rate but adjust cash flows to reflect uncertainty
- OR use a private cost of capital as a proxy for costs associated with uncertainty and opportunity
cost

Simply applying a discount rate of 4% to cash flows which have not been adjusted for uncertainty is
too unsophisticated an approach to be used in the context of such large investments, and not in
accordance with EU Guidelines.

This issue is critical to the correct economic choice of energy efficiency yet has only had one or two
lines of justification in the report, the justification being that ‘4% is the discount rate used in EU
EcoDesign projects.’

(c) The sensitivity analysis neglects the use of ‘Real Options’

– in effect the variation in future electricity prices versus the cost of the transformer could be
offset against each other by opting for a lower initial investment (say A0Ck) as against
A0Ak/AoAk-20%, -whilst both have similar lifecycle costs on the base assumptions, A0Ck
has a considerably lower initial cost is hence more resilient to changes in electricity price,
load factor, discount rate etc..

(d) The Regulatory Impact Assessor has proposed new standards which were not covered in the VITO
report – who is to carry out the RIA on these proposals?

- moreover, the backup for these proposals are transformer purchase costs derived by an
extrapolation of purchase costs cited in VITO. This is not in accordance with sound
methodology – in Vito transformer costs were assessed from designs, not extrapolations.

(e) No allowance has been made in the economic analysis for Installation costs and other costs
associated with larger/heavier energy efficient transformers, yet these are real and significant costs
which materially affect the cost –benefit analysis, and are included in US DOE studies.

In EcoDesign evaluations of other products e.g. boilers, such installation costs were taken into
account, and exceptions made for particular classes of products where excessive costs would have
been involved had such derogations not been made. However installations costs have not been
taken into account in the process to date, although they are a significant issue for utilities, as most
transformers are replacement purchases which have to be installed in place of the existing
transformer.

2
http://hmccc.s3.amazonaws.com/Time%20prefernce,%20costs%20of%20capital%20and%20hiddencosts.pdf

6
It is EURELECTRIC’S view that:

 the current proposals for Distribution transformers are not backed up by a sufficiently sound
economic analysis,
 the Regulatory Impact Analysis is too simplistic/unquestioning, does not consider operating
constraints and also proposes new measures rather than assess existing proposals
 the EU procedures on Cost Benefit Analysis have not been correctly applied
 the high costs will discourage the replacement of existing utility transformers, thus keeping older
transformers with greater losses in service for longer periods and at higher loads

Accordingly EURELECTRIC feels that, because of this and also because of further comments in the
Appendices, the proposed draft Regulation is not mature enough for implementation.

EURELECTRIC recommends:

(a) the Transformer efficiency standards proposed for Distribution transformers should be
fundamentally revised – EURELECTRTIC is willing to propose ambitious transformer efficiency
standards for the Directive taking into account the issues raised above. If such standards are set to
exclude the worst performing transformers then the continuing use of capitalization rates in each
country will then select the most economically optimal transformer.

(b) A review between now and 2018 for any more stringent ‘Tier 2’ standards taking into account
experience until 2018, with greater utility and industry involvement, including regulators

(c) The incorporation in the economic analysis for other costs associated with the usage of lower loss
transformers, such as extra installation costs, which can be much more significant in certain cases
than the increased cost of the transformer.

(d) An independent regulatory review of the proposals by consultants with experience in both
economics and network engineering, such as are used by regulators for regulatory price controls.

As always EURELECTRIC is open to provide constructive input and feedback and looking forward to discuss
the proposals with the European Commission and stakeholders.

7
Detailed Response on RIA and second Draft Regulation (20/10/12):
The above points are discussed in more detail below and a detailed critique of the Regulatory Impact
Assessment is given in Appendix 1 and of the second Draft Regulation(11/10/2012) is given in Appendix 2, with
more detailed coverage of Discount Rate issues in Appendix 3.

The points raised in the executive summary will now be developed in more detail:

Use of incorrect price of electricity in cost-benefit analysis:


In any investment the value of the investment is assessed by measuring the changes which result from the
investment.

Higher efficiency transformers reduce the use of energy, which is measured in kWh.

However the Price of a kWh as published by Eurostat also includes costs which will NOT be materially affected
by the use of higher efficiency transformers, and these costs are principally the cost of delivering the power,
set out in the DUoS (Distribution Use of System) and TUOS (Transmission Use of System) costs. Generally the
DUOS and TUOS costs amount to about 35% of the cost of a kWh.

In addition to DUOS a TUOS costs there are also Retail and Generator costs, although these are a lesser
amount.

Eurostat:
“Prices include the basic price of the electricity/gas, transmission and distribution charges, meter rental, and
other services.
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Energy_price_statistics

(This error was alluded to by Eurelectric in the second stakeholder meeting on the VITO Final Report where the
EU representative explained to VITO that electricity prices used for cost/benefit for final customers were
inappropriate in this context. 3)

The reason why TUOS and DUOS costs are excluded is that these are largely fixed costs which will not change
with the volume of kWh saved through transformer efficiency.4

The exclusion of DUOS/TUOS and other costs is all well established and has been covered in more detail in the
MEPS reports for their countries e.g. Australia.
http://uat.pc.gov.au/data/assets/pdf_file/0012/96699/cost-benefit-discount.pdf)

3
See Vito Final Report p 131 “Note (9/2010): At the very end of the study some TSO/DSOs remarked that they paid in the
past much lower prices (0.045€/kWh) and doubte d the economic sense of chapter 7 proposed policy measures.
Nevertheless it is proposed to remain the analysis in this study with those electricity prices that were proposed and
discussed in two stakeholder meetings before (2009, 5/2010). The rationale is that by using the large industrial
consumer’s price a more fair economic comparison between all EU27 energy saving and renewable energy production
options is obtained to achieve EUs 20/20/20 target.”
4
Network costs are driven by kW peaks, not kWh throughput, but for social reasons Regulators allocate the costs
between customers on a kWh basis. Utilities would also evaluate the impact of savings in peak Losses on the Marginal
Investment in Transmission, Distribution and Generation investments, but this has not featured in any EcoDesign analysis
to date, although this omission was noted at VITO workshops by the utilities. However the Marginal T&D costs will be
different for each utility making their inclusion on a pan-European basis more difficult to assess.

8
Table 4 Australian Electricity LRMC 2006/07 (Excluding GST)

Sector $/MWh Shares

Generation $60.0 40%

Transmission $22.5 15%

Distribution HV $31.5 21%

Distribution LV $16.5 11%

Retail $19.5 13%

Total $150.0 100%

In the Regulatory Impact Assessment (RIA) a figure of €0.0935 was taken as the average price for a kWh at the
Distribution level.

A figure of €0.05c was taken for Power Transformers, based on an input by T&D Europe (April 2012), as given
below:

“In the example used below let us consider the price of electricity as 0.05 €/kWh, then the cost of 1 kW of loss
at the end of the first year will be, 0.05 €/kWh*8760 h *1 kW = 438 €. “

So the figure of €0.05 which is referred to in the RIA is simply an example of a kWh price taken from an
illustrative calculation being made by T&D Europe – this does not seem to exhibit the rigor which would be
expected in such an analysis. Essentially the T&D Europe figure used in the RIA is only an estimate of the
energy cost of a kWh on the HV system for the purpose of explaining a calculation! This begs the question as to
whether there is a well established base to other figures which may have been used in the report.

In any case the real price difference between the cost of a kWh of energy sent out from a Generator and that
received by a Domestic customer is about 7-8%, all due to the value of losses, so any difference between the
price of electricity used for Power Transformers and Distribution Transformers must lie in this band. As the
figure of €0.0935 is for industrial customers it is at the MV level, so it includes the Transmission HV losses of
2% and some of the Distribution losses of about another 2%, as the remaining 4 - 5% of losses is on the LV
system.

So it is materially correct to use the €0.0935 less DUOS/TUOS and other Service costs, giving a total of 40%
deductions, and an energy cost per kWh of €0.056 /kWh for ALL Transformers. This also closely matches the
SEEDT figure from an earlier 2008 report5 and the 5.6c/kWh cost of losses in Austria cited in ERGEG Report.6

Obviously this will make a significant difference to the analysis as it is considerably less than the €0.0935 used
in the RIA or the €0.078 used in Vito for Distribution transformers.

It is also important to note that it would be equally incorrect to include the full €0.0935 cost in any assessment
of private Transformers, as whilst a private company will save €0.0935/kWh on any kWh they do not purchase,
the nature of the fixed DUOS and TUOs costs means that their savings will simply be paid by other customers
i.e. there will be no net benefit to society.

5
Strategies for development and diffusion of Energy-Efficient Distribution Transformers in Europe
Seedt WP4 – Deliverable D9 , Analysis of potential for energy savings , June 2008
6
cf Eurelectric May 2012 submission p17 ERGEG Study on Price of Losses 5.6c/kWh Austria

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Use of 4% Discount Rate:

The only justification given in all the documentation for the use of a 4% discount rate are on p132 of Vito Final
Report ‘ The services of the European Commission proposed to use a 4% discount rate (interest minus
inflation)’ and on p119 of VITO Project Report‘ The discount rate is standardised across European
Commission studies and will remain at 4%’.

The EU Guide to Impact Assessment which is cited in some EcoDesign projects mentions use of 4% but
predates the EcoDesign legislation which states that the ‘discount rate to be used will be advised by the ECB’.

However the ‘Guide to Cost Benefit Analysis of Investment Projects’ (2008) and the ‘EC Working Document
No. 4 Guidance on the Carrying out Cost Benefit Analysis’ are not as unequivocal of the use of a fixed discount
rate such as 4%, and where a low discount rate is used, it is in the context of a sophisticated analysis of project
costs using Expected Values, so that the uncertainty in the investment is taken care of by modifying the
probability and risk of cash flows rather than by use of a higher, risk adjusted, discount rate. (- in fact this guide
also suggests that the Social Discount Rate for investments by Cohesion countries should be 2% higher than
the Social Discount Rate used by non-Cohesion countries)

Furthermore, the investments proposed here are financed by Utilities and Private industry, so that the use by
the EU of a 4% discount rate for transformers will mean that better investments in energy efficiency, which
have discount rates of in excess of 4% will not be done, with the funds spent instead on the 4% return
provided by the legislated investment in Transformers.

So the justification for using an arbitrary 4% discount rate in this context is questionable, with other countries
using the utility WACC in their MEPS instead, as this better reflects the opportunity cost of capital. This is
particularly the case where the social objective is not being delivered directly through the use of public funds,
but is instead being delivered through the private sector where extra uncertainty, opportunity costs and
financial costs are also involved.

In Australia this issue was covered in depth and the utility WACC used .
(http://www.eeca.govt.nz/sites/all/files/20101222-proposed-meps-distribution-transformers.pdf
http://uat.pc.gov.au/data/assets/pdf_file/0012/96699/cost-benefit-discount.pdf)

As the transformer investment has a long duration (30 years +) this means that it is significantly more risky and
hence greater consideration should be given to the discount rate used e.g. in Australia a discount rate of c.8%
was used, being similar to utility WACC.

In the case of ESB where Oxera economic consultants were asked to advise on the issue the result was that the
discount rate used for losses should be higher than the T&D WACC but lower than a Generator WACC.

Furthermore, investments now in energy efficient transformers preclude the option of investing in even more
energy transformers in future at lower cost, so more sophisticated investment techniques such as Real Option
pricing might need to be considered, especially in the context of the size of this project, which is in billions of
euro.

These issues are covered in more detail in Appendix 1.

Time period over which discount rate applied:

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The VITO report uses 40 years as the lifetime over which Distribution Transformer losses are evaluated, and
this, combined with a low discount rate, exaggerates the losses. The evidence for 40 year lifetime in VITO
seems to come from ‘survival’ ages of the oldest transformers still in use rather than the actual average age.
References to other Reports by VITO e.g. SEEDT, does not give any greater basis for selecting 40 years.

In the US DOE report the average age of Distribution transformers was calculated at 32 years based on a
statistical modelling of the transformer population, and a lifetime of 30 years is used in the analysis, and in
Japan the latest ‘Top Runner’ documentation refers to an average service life of 26 years for oil immersed
transformers..7

Transformer lifetime is not only affected by deterioration (normally corrosion or replacement for uprating, not
insulation deterioration) but also by technological obsolescence e.g. in Germany EON are replacing existing
Transformers supplying Domestic PV loads with new transformers which have ob load tap changers to cope
with voltage variations due to local generation. Such technological obsolescence affects transformer lifetimes
and limits the period available to give a return.

Hence 30 years rather than 40 would seem to be a more appropriate figure for Transformer lifetime, and
better supported by the evidence.

The effect of varying lifetime and interests rates can lead to over a 30% change in capitalised losses, as shown
in Table below:

Variation in Capitalised Losses with Discount Rate and Transformer Lifetime assumed

Discount Rate 4% 4% 6.00% 6%


Lifetime 40 32 40 32
Losses pa € 1,000 1,000 1,000 1,000
Capitalisation Factor 19.79 17.87 15.05 14.08
Capitalised Losses 19,793 17,874 15,046 14,084

% Change in Value of Losses 100% 90% 76% 71%

This shows the care which must be taken in correctly choosing the appropriate discount rate and the period
over which savings in losses are realised.

It is important to note that whilst Iron losses will be constant over the period the Transformer is in Service, the
Copper losses will vary with the Transformer loading. When network reinforcement subsequently takes place
through the addition of extra transformers, existing transformer loadings will then decrease as the LV (or MV)
network is re-sectionalised and the overall load shared between the transformers.

This will result in copper losses initially rising at a steady rate and then dropping abruptly once a new
transformer is added, and continuing in this manner throughout the service lifetime of the transformer.

In short this means that the real period over which copper losses are fully recovered is less than the nominal
transformer lifetime. This effect has not been included in the analysis to date and is part of the reason why the
Transformer losses for Copper are higher than those normally used by utilities.

Other issues such as load growth can require the replacement of the existing transformer with a larger sized unit, and in
the event that the existing unit is old, then it’s remaining lifetime, installation costs and higher losses will be taken into
account in scrapping rather than reusing it elsewhere on the network. Technological obsolescence can also occur e.g.
where MV/LV Transformers with tap changers for load control need to be installed, and this is another factor in limiting
the service life of transformers.

7
http://www.eccj.or.jp/top_runner/pdf/tr_transformers_dec2011.pdf

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Cross subsidies across Europe:
The Eurostat figures for electricity prices for industrial customers in S2 2011 are shown below:

The reduction in CO2, and the higher energy efficiency which decreases dependency on fossil fuels, are
important benefits to the whole of the EU from the adoption of energy efficient transformers.

However it is also apparent that those countries with low electricity prices or with high discount rates get less
benefit in terms of kWh losses saved than those countries with Low discount rates and high electricity costs, as
the increased costs of the transformers will be the same to all.

Thus we have a large cross subsidy between customers across Europe, and the higher the transformer
efficiency chosen the greater the extra cost and hence the greater the cross subsidy.

Clearly there will be winners and losers here under the current arrangement and consideration might need to
be given toward the payment of subsides to take care of this issue.

12
Use of Risk Mitigation neglected:

In the May 2012 Eurelectric Response Paper it was shown that there were diminishing returns on investments
in transformers of increasingly higher efficiency.

In the example quoted in the paper the following table (now simplified) was provided, and it was shown that
the Total cost (including losses) of an A0Ck transformer was €13,331 and of a more efficient A0Ak Transformer
was
€13,978, i.e. both is of equal value to society.

So in moving from the Base Dock transformer at €6,122 to the more efficient A0Ck an extra cost of c.€1,000 i s
incurred for an expected saving in losses of c.€2,200, and if a further investment of c.€1,700 is now made, an
AoAk transformer can be purchased with a further saving in losses of c.€1,000.

Trafo Type Base D0Ck A0Ck A0Ak

Iron Losses kW 0.75 0.43 0.43


Copper Losses kW 4.6 4.6 3.25
Initial Purchase Cost €6,122 €7,101 €8,693
Capitalised Losses €8,470 €6,230 €5,285

Total Cost €15,592 €13,331 €13,978

It is now apparent that the first investment of €1,000 made double the savings (c.€2,200), whereas the next
larger investment of c.€1,700 produced a smaller return of c.€1,000. i.e. diminishing returns.

Overall the real issue is that if AoAk is chosen the higher initial cost makes the investment much more sensitive
to changes in the price/volume of electricity, whereas if AoCk is chosen it is much less sensitive to electricity
price/volume changes.

In other words, purchase of AoCk provides a more stable better hedged investment than purchase of AoAk.

Consideration of such issues was not in the RIA, and moreover the RIA recommended Tier 1 as A0Ak and Tier 2
as A0-20%, Ak.

There are several problems with the proposal to move to A0-20%, Ak-20% (or A0-20%,Ak)8 :

- The VITO Report itself recommended A0Ck (<=630kVA), A0Ak (>630kVA) in Tier 1 and A0Ak in Tier 2
(p338) and went on to state on p339 that better than AoCk* ‘cannot be done in the medium term (Tiers
1 & 2) are related to the uncertainty on the availability at short term of amorphous material and
transformer production in the EU, maintaining transformer price competition and some small
functional differences of amorphous transformers (compactness etc)”

- The Draft Regulation of 20/3/2012 and 11/10/2012 now differ substantially without explanation :

8
The RIA uses both, recommending A0-20%, Ak-20% but then using A0-20%, Ak in the Tables; The Regulation generally
uses A0-20%, Ak.

13
Draft Regulation (20/3/2012 Draft Regulation (11/10/2012)

Tier 1 Tier 2 Tier 1 & 2

AOCk (<=630kVA) A0-20% Ak (>630kVA) A0-20% Ak

A0Ak (>630kVA) A0(-20%) Ck (<=630kVA) A0-20% Ak

- The RIA is the same as the later Draft Regulation fails to justify the reasons for the change from the
first Regulation and from the conclusions in the Vito report.

Optimising Level of Investment:

In an investment such as Transformer efficiency it is possible to spend more and more money to get less and
less return but with greater risk, as explained above.

Normal investment practice is to look at alternative investments which would give a greater return as Marginal
Return decreases, and this is the practice that Regulators expect utilities to follow in order to maximise
customer benefits.

However in the current proposals, the option of a better return on alternative use of investment funds as been
ignored, resulting in a sub-optimal investment strategy.

In fact in the EU’s Final Report Methodology for EcoDesign of Energy Related Products9 this point is made in a
similar way but goes on to state that:

9
http://env-ngo.eup-network.de/fileadmin/user_upload/Produktgruppen/Lots/Working_Documents/MEErP_Methodology_Part_1_Final.pdf (p136)

14
‘The ‘break-even point’, where the purchasing power of the consumer remains equal to the current
situation. Beyond this point any minimum requirement would usually become socially unacceptable, i.e.
there would be a significant negative impact on consumers in particular as regards the affordability
and the life cycle costs of the product (compare Art. 15.1. (b) (iv) of 2009/125/EC).

And finally there is the last point on the LCC curve indicating the costs at the maximum technical
potential, the so-called Best Available Technology (BAT) As mentioned, in the context of design options
that have an effect on the running costs, this BAT-point is not intended as a target level for legislation. It
indicates what is technically feasible with the best-performing products and technologies available. And
as such it indicates whether - after the LLCC has been established as a minimum target - there is enough
room for product differentiation on the short term (see also BNAT, par. 7.7., which also looks at the long
term).’

Installation Costs:

The majority of utility Transformer purchases are for replacement of existing transformers10 in situ when they
are either being uprated or replaced. This means that the transformer must meet size and weight limitations
which are set out in specifications before they meet any efficiency criteria. In short the Transformer must fit
through the door of the substation rather than require a wall to be knocked down, it must fit into the space
available in a pad mount substation and must not exceed the foundation weight limits and for Overhead Pole
Mounted transformers it must be capable of being installed without excessive costs such as changing or
reinforcing a pole or having to use a ground mounted transformer instead.

Photo showing door access for Transformer Photo showing Trafo moved from pole to ground

10
US DOE report cited over 80% of transformer purchases for replacement purposes.

15
Neglecting consideration of practical issues such as Installation Costs will mean that old substations become
increasingly valuable as they continue to meet the size and weight restrictions, with these benefits
outweighing and disadvantages from their high levels of losses. So Utilities would be encouraged to recycle old
transformers rather than install new, and this will not result in a decrease in future losses.

These issues have not been properly considered in this Directive, yet in other Directives, such as those for
Boilers, such issues were taken into account and dealt with appropriately.

Typical Size of Packaged Substation

Space available within Packaged Substation for Transformer is very limited – larger transformer may not fit.

16
As an example, a new Transformer (rONT) developed in Germany by Siemens and Reinhausen incorporates an
On Load Tapchanger into the Transformer, so as to be able to cope with larger amounts of renewable
generation on existing networks by dynamically varying the voltage so as to keep within standard, despite
voltage increase from renewable generation exports. However this requires a physically larger transformer
which also has higher losses as the tapchanger itself also uses power, and takes space. The intention was to
replace existing transformers in packaged substations with the new ones, thus solving the voltage rise
problem.

However such Transformers will not meet the Transformer Directive. The alternative solution is to add extra
transformers into the network so as to split the renewable generation between them – this effectively doubles
the existing transformer losses.

Conclusion:

The comments made by Eurelectric in its May 2012 submission and in its earlier inputs to the VITO report have
not been taken into account or answered.

The outcome in the RIA and in the associated Draft Regulation is seriously flawed and must be reviewed, as it
is not based on a sufficiently sound economic or engineering basis for the level of monies (€billions) involved,
and furthermore does not follow EU Methodology for Cost Benefit assessment as set out in the EU ‘Guide to
Cost Benefit Analysis of Investment Projects’.

Accordingly EURELECTRIC feel that because of this and also because of further comments detailed in the
Appendices, the proposed Directive is not mature enough for implementation.

EURELECTRIC would suggest that the following is now required:

(a) the Transformer efficiency standards proposed for Distribution transformers should be fundamentally
revised– Eurelectric are wiling to propose ambitious Transformer efficiency standards for the Directive
taking into account the issues raised above. If such standards are set to exclude the worst performing
transformers then the continuing use of Capitalization Rates in each country will then select the most
economically optimal transformer.

(b) A Review between now and 2018 for any more stringent ‘Tier 2’ standards taking into account
experience until 2018, with greater Utility and industry involvement, including Regulators

(c) The incorporation in the economic analysis for other costs associated with the usage of lower loss
transformers, such as extra installation costs, which can be much more significant in certain cases than
the increased cost of the transformer.

(d) An independent regulatory review of the proposals by Consultants with experience in both economics
and Network engineering, such as are used by Regulators for Regulatory Price controls.

17
Appendix 1: Detailed Commentary on Regulatory Impact Assessment (RIA)
Overview:
The Regulatory Impact Assessment is superficial and does not thoroughly analyse the VITO report and
recommendations on which the proposed Directive is to be based.

It does not take into account inputs made by Eurelectric and uses incorrect prices for electricity in the
calculation of Benefits.

It extrapolates the cost of a new type of Transformer A0-20% Ak-20% and recommends this in the body of the
report, but in the Appendix opts for A0-20% Ak for Tier 1 and 2, quite different to the original Draft Regulation
proposals of 20/3/12.

A regulatory Impact Assessment is supposed to review existing proposals – if it generates new proposals these
also need to be independently reviewed.

In conclusion EURELECTRIC does not have confidence that this Regulatory Impact Assessment supports the
proposals in the Draft Regulation 11/10/2012.

Detailed Review:
Section 1.3 Transparency of the Consultative Process
No mention is made of the paucity of utility representation on the original EcoTransformer design Group
where after a year and a half only ERDF, ENA and ESB were the only utilities involved. This also carried forward
into the current Consultation process where at the first meeting ERDF and ESB/Eurelectric had only become
aware of the process earlier that week, and where UK NG had become involved through an IEC query.

This lack of Utility representation has meant that the deep knowledge of utilities as sophisticated purchasers
and final users of the transformers, and as the representatives of final customers, has been lacking.

In addition, no Utility Regulators, who decide whether funding is justified for all utility investments, have
appeared at any Stakeholder meetings or workshops, yet Regulators are a very important constituency,

Section 2.1 p6 Power Transformer losses


As part of a Regulatory Impact Assessment the assessor should question issues and not simply repeat them
verbatim:

‘The power transformer losses are 55TWh whereas the losses of small industry Transformers are only
0.4TWh (VITO & BIOIS, 2011)’

This was one area where there was close agreement in the VITO Final Report:

P156
Project comments Table 1-4 ‘Power transformer losses appear exaggerated’

18
P169
“ “ PCPM/ECI “ Load Factors for Power Transformers” – we think these are very arguable, Roughly
if the installed capacity of power transformers is ~ distribution transformers and
the load is if factor 2 and 3 how could this be?”

P176
“ “ T&D Europe: ‘Despite a small amount of power transformers in stock these transformers are
responsible for about half of the overall impacts due to power and distribution in
EU. ‘ “Manufacturers are surprised by this conclusion and think that there is a
mistake in the assessment of large power transformers, we think that this impact is
widely smaller than half of the overall impact”
Vito “We are also surprised but could not find any explanation, The stock of power
Transformers (GVA) is precisely known (UCTE)(ENSOE) and transported energy
(eurostat). Taking the base case transformer performance (as put forward by T&D)
this leads to such a result”

Whatever the reason it is clear that there is something wrong with the figures used, probably the assumption
that all Power Transformers are 100MVA – particularly as the definition of Power Transformer used was for
quantities ‘over 36kV’ whereas the definition associated with 100MVA was ‘132/33kV’ (p164).

If an analysis is done for the Irish T&D System:

Irish Transmission and Distribution System

220/110kV
8,939MVA, # 47:
Avg. 190MVA

110/38kV 6,228MVA, # 136


1,269MVA, # 62
Avg 46MVA
20MVA 110kV/MV

4,977MVA, # 819
38kV/MV
6MVA

12,561MVA, # c. 200,000
LV

From the above it can be seen that in the VITO Power Transformer definition there are 1,064 such
Transformers with a combined capacity of 21,413MVA, Average 20MVA as the bulk of the Transformers are
smaller sized lower voltage transformers, with only 47 over 100MVA in size.

So to use 100MVA as an average in the VITO definition of Power Transformers would give an incorrect result,
because the average size of the Power Transformers in this context (>36kV) is far less than 100MVA.

This in turn would suggest that the statement about the relative level of power losses may also be incorrect,
and it would have been better if such statements in the VITO report had been more thoroughly analysed in the
RIA.

19
Finally, the level of losses in Power Transformers per se is not that relevant – it is the level of losses in
Transformers that are open to being reduced that is critical. Power Transformers, particularly at the higher
end, are already at the physical and economic limits of what can be achieved and provide little scope for
further loss saving. This in turn means that the absolute level of losses in Power Transformers as compared to
Distribution Transformers is not particularly relevant – it is where the scope for improving efficiency lies that is
important, which is on Distribution Transformers and smaller Power Transformers.

P6 ‘...electricity distribution utilities who are responsible for purchasing a large number of transformers are
not motivated to invest in more efficient distribution transformers’

This is a general statement which is generally incorrect. In some states e.g. France, Belgium, the utility must
buy the losses that their network produces, so they are incentivised to minimise losses to an economic level. In
other jurisdictions losses are controlled by Regulators who provide incentives for loss reductions and allow the
extra costs of more efficient transformers.

Most utilities include loss capitalisation in their Tenders, and if utilities were generally disregarding losses then
the average loss levels on transformers would be much higher.

P11
‘... and single phase transformers are not generally used in Europe’
This should be qualified by adding ‘except in Ireland, the UK, and parts of Eastern Europe’. In Ireland there
are nearly 200,000 Single Phase Pole Mounted transformers, about 85% of total Transformer stock.

P13 Exemptions
- These are not in line with the Exemption list agreed at the last Stakeholder meeting.

Section 2.3.1 Energy Price Evolution

P18
As mentioned above, use of Eurostat Price figures without adjusting for DUoS, TUOs and other costs is
incorrect.

The graph shown in Fig 5 which purports to predict the future price of electricity in Europe is too simplistic to
be used in this analysis. It uses actual prices from Eurostat which, of course, also include inflation, so that part
of the rising price trend is general price inflation coupled with real increases in energy costs and Network
costs.

Mention is made of new wind and solar generation which would be expected to decrease the actual kWh
energy costs, but also to decrease load on transformers, in which case copper losses would decrease sharply as
these are proportional to the square of load on the transformers. This would actually reduce the case for use
of more efficient transformers.

A much more sophisticated analysis of the future price of electricity in Europe had been produced through
very detailed economic modelling in an earlier SEEDT11 study, and this suggested stable or decreasing real
prices for electricity in Europe, with the marginal cost of kWh at about €0.055/kWh, as also calculated above.
However despite this report being passed on directly to the Regulatory Assessor it is not cited, nor is the figure
of 5.6c/kWh used in Austria for the value of losses and cited in EURELECTRIC’s May 2012 submission.

11
Strategies for development and diffusion of Energy-Efficient Distribution Transformers in Europe
Seedt WP4 – Deliverable D9 , Analysis of potential for energy savings , June 2008

20
P21
“For applications where weight is a concern, aluminium may be the better choice, approximately half the
weight of copper.”

Aluminium is indeed lighter than copper but more of it is needed to achieve the same losses. So the volume of
winding material increases, as does the quantity of oil as does the amount of core steel (as the current density
of aluminium is less than that of copper), resulting in a larger tank. So use of such simplistic statements about
the relative weights of copper and aluminium is not helpful.

P 26
“More recently new 2007 standard , closely based on the DOE proposal, has been introduced which will
apply to all transformers manufactured for sale in the USA or imported into the USA on or after 2010, The
requirement of the standard is very close to A0Bk.”

So it is proposed that European companies will go beyond AoBk to Ao -20% Ak-20%, resulting in much more
expensive transformers in Europe, and putting European industry at a disadvantage compared to the US?

It is also puzzling as to why the US with over $6m spent on Transformer efficiency analysis has only come up
with A0Bk, when the Regulatory Impact Analysis can justify much more onerous standards in a few months
than Vito could in the years of their study, or that the well funded DOE have now come up with?

21
Section 5 Impact Analysis
Base case price of electricity used is incorrect, so conclusions are invalid.

‘Since the trend in electricity prices is clearly upward as shown in Figure 5, the A0-20%, Ak -20% level seems
a robust choice for all types of distribution transformer’

What is involved here is the prediction of the price and quantity of electricity that will pass through a
transformer over a period of 30 years, and discounting this back to it’s present value today.

To suggest that ‘Figure 5 shows a rising trend and this means that A0-20%, Ak-20%is a robust choice’ is
clearly farfetched and raises serious questions about the quality and sophistication of the analysis.

Furthermore, a new standard has now been introduced – A0-20%, Ak-20% - and repeated in Table 9.

Is this an error?
The discrepancy between Vito feeling that A0-20% AK were unrealistic standards and the suggestion in RIA
that A0-20% Ak-20% is justified needs to be explained.

There are also unintended consequences of such a radical change in losses which have not been expressed e.g.
with the levels proposed for transformers with dual voltages on the same winding (P0+15% et Pk+10%), from
2018 onwards it is impossible to maintain transformers with dual voltages on the secondary winding. This will
have a very large impact on the DSO’s for which a large amount of the network still needs dual voltages
(230V/400V). For example, in Belgium the 230V networks represent 30% of the LV-networks. In order to
harmonize the network, the majority of the networks will need the installation of new electricity cables
(change from three to four conductors); this represents a major cost impact for the DSO’s (see also previous
remark). Therefore the present transformers will stay longer in use, instead of being replaced by low loss
types. The practical risk of the constraint of such low losses can be the use of two transformers per substation,
with twice the no load losses.

In terms of impact analysis the extra cost which will be paid for Transformers has not been made clear in
either the VITO Final report or the RIA, being combined I n a total cost including electricity used, but is of the
order of €500m + pa moving from the VITO Base case toward the Directive proposals. 12

P40
Where are the cost prices of the A0-20%, Ak-20% transformers and other combinations provided? – These
were not in the VITO report.

On Page xxviii it is stated that the purchase price of the transformer is extrapolated from a polynomial curve fit
and this suggests that the costs of transformers which are not explicitly stated in the VITO report are
extrapolated from those which were, the upshot being that recommendations to use A0-20% Ak-20%
transformers are based on the supposition that such a curve fitting exercise correctly predicts the transformer
price.

In the VITO report a lot of work was invested in trying to establish the cost and price of transformers from
individual designs. It is not appropriate in a Regulatory Impact Assessment to derive different designs using an
unproved methodology. Who is then to assess the proposals coming from the RIA?

12
The VITO Spreadsheets which should be available to provide such information are online but corrupted, so evidently
they have been consulted little.

22
P46
Life cycle costs for Base Case 1 a 400kVA Oil Filled Transformer

Although the price of electricity used is incorrect and the costs for the most efficient transformers only
established by extrapolation, what these graphs indicate is that there are fast diminishing returns to scale as
extra investment is made. This is clearly seen in the first graph ‘Annual Energy Losses for Different Load Factors
– BC1’ , where making allowance for the fact that the graph starts at 3,000 kWh which exaggerates the
differences, the relative difference between say A0Bk and A0-20%, Ck or A0-20% Ak-20% is very small.

Now looking at the Life Cycle costs it is seen that again there is little difference between these options.

In summary this indicates that there are considerable cost differences in initial price between AOCk and (say)
A0-20% Ak-20%, and that if the assumptions on load factor or price of electricity or discount rate do not match
the values chosen in the model, then there will be a considerable risk that the investment will lose money.

In other words a more robust decision would be to pay less money up front for A0Ck rather than a lot more
for A0-20% Ak-20% which will only give a slightly better return but with more upfront cost and more risk.
P59
Section 5.8 Pole Mounted Transformers

23
“Pole transformers are less reliable and sensitive to damage, and also to theft. Thus, they are being
increasingly replaced by transformers mounted on the ground in safe compartments.”

“Aluminium windings may be an option to decrease weight and make theft less attractive. Heavier weight
means that the specification for sturdier poles and installers (cranes and transport) need to be modified,
which can take some time to implement in tender specifications. The time horizon of 2014 seems
appropriate for this purpose. Therefore the reinforcement of a pole and related costs should not be an
argument to waste energy during the transformer lifetime.
In summary, discarding the creation of a sub-category for pole mounted transformers avoids the risk of
creating loopholes for future regulation”

These statements do not agree with ESB’s experience where 85% of all transformers in Ireland are pole
mounted.

The reliability of Pole Mounted Transformers is not an issue as outages are determined by the many km of
overhead line connecting them to the networks. The reliability of these transformers is good and as smaller
ones (majority) contain little aluminium (except for the HV winding) theft has not been an issue to date. In
regard to their sensitivity to damage the only cause that ESB has found to be material is Lightning, and this is
largely eliminated through the use of surge arrestors and good earthling.

Replacement of Pole Mounted Transformers with Ground Mounted Transformers would be excessively costly
and not yield any worthwhile benefits; hence it is not being pursued. Overhead Pole Mounted Transformers
are used in areas with low population densities, and of their nature these tend to be remote. Ground mounted
transformers would require a concrete base which means one visit to prepare the base and a second to install
the transformer when this has set, both involving long travel times.

In addition to the concrete base an equipotential zone must also be established by burying several metres of
copper in the ground and then testing the impedance so as to ensure operator safety during switching.

Moreover the land on which this work is being carried out must now be purchased from the owner, a process
with long delays and potentially high costs.

Ground Mounted Transformers in a ‘safe compartment’ alone are significantly dearer even just on initial
purchase price (e.g. 30% for a 50kVA 3 phase unit) than Pole Mounted Transformers for the same level of
losses.

In relation to the use of Aluminium instead of Copper to decrease weight, this is flawed because whilst
Aluminium is less dense than Copper, more of it is needed resulting in a larger tank ,c .45% more oil, and c.20%
more core weight.13 A larger tank also means more wind loading. In any case the core is twice as heavy as the
copper windings and is the most significant weight driver.

More directly, asking a transformer manufacturer their view, it was that the use of Aluminium generally leads
to a larger and heavier transformer.

It must be stated that the proposed regulation would have a very adverse impact on emergency operating
issues. In case of failure of an existing pole mounted transformer, the regulation would prevent the operator
from replacing it with a similar unit due to the aforementioned issues. This would lead to important delays
before replacement, during which the substation would have to be replaced with a fuel based mobile
generator. Network users and neighbours would suffer from lower power quality, noise and pollution.

So the proposal to substitute Aluminium for copper in the Windings is not a feasible solution.

13
IET Electr.Power Appl. 2010, Vol.4 Iss. 6, pp474-485

24
In relation to not having a separate class for Overhead Pole Mounted Transformers the justification provided
does not stand up – other countries which use MEPS and have Pole Mounted Transformers e.g. US, Australia,
New Zealand, all provide separate loss requirements for Pole Mounts.

Part of the reason is that the Load factor on a Pole Mounted Transformer is far below that for a ground
mounted transformer, and this is because with less customers on a pole mount the diversity is much greater
and hence the justification for reduced levels of copper losses does not exist.

Attempting to require the same level of performance from Pole Mounted Transformers as for Ground Mounts
is incorrect.

Furthermore, no loss levels have been provided for Single Phase Pole Mounted Transformers in the analysis,
only for three phase units.

P xvii Table 1.2 for liquid immersed Medium Power transformers

Tier 2 now calls for Ak-20% unlike the original Draft Regulation.

There are some errors in the Tier 1 Figures e.g. the value for 100kVA given as Bk (1250) whereas 1250W is the
Ak value for 100kVA. The Bk value for 100kVA is in fact 1475W. Greater care needs to be taken about the
accuracy of the figures used in what is intended to feed into an EU Regulation.

25
Appendix 2 Detailed Commentary on Draft Regulation11/10/2012l
Overview:
This second Draft Directive (11/10/2012) differs substantially from the earlier Draft Directive (20/3/2012) on
which EURELECTRIC had made inputs.

The inputs made by EURELECTRIC have not been taken on board and decisions agreed at Stakeholder meetings
are not apparent e.g. it was agreed at the last meeting that definitions of transformers and exemptions were
to be taken from IEC

The standards proposed in the new Draft Regulation are more stringent than in the original Draft Directive of
20/3/2012 and appear unexpectedly. No explanation is provided for the RIA coming up with new standards,
and no explanation is offered as to conflicts between VITO’s view that such standards were unsuitable.

The RIA is not sufficiently rigorous to support the Draft Directive, and the Draft Directive is not drafted well
enough for issue.

Detailed Comments:
As much of the Regulation is similar to the previous version of 20/3/2012, many of the original comments in
the Eurelectric response of May 2012 still apply.

Much of the stakeholder inputs from earlier meetings on the original Draft Regulation, which was thought to
have been agreed, does not appear.

It is also difficult to interpret the Directive as the wording is ambiguous and with poor use of terminology.

The likely result of the Regulation will be increased costs to customers and a poor return on the investment
made in terms of energy efficiency reduced CO2 emissions.

P2 Item 1 As outlined in the introduction whilst Stakeholders have had some involvement in the process their
input, and in particular that of utilities, has not been fully taken into account. There was very little utility
involvement in the original study and even then only at a late date, and the inputs made were not
incorporated. Indeed some of the proposals on which comment was invited were not even published on the
EcoTransformer website, as was noted in some of the utility comments.

In particular Regulators do not seem to have had any involvement, yet it the Regulators who decide the
utilities funding.

P2 Item 7 Transformer purchasers make decisions on which transformers to purchase taking into account
capitalized losses. In doing so they use the discount rate appropriate to their business, the current and
expected price of electricity in the country where they will buy electricity, the expected loading pattern on the
transformer and the economic lifetime of the unit. This gives rise to different capitalisation rates. Wholesale
electricity prices are only one input into the capitalization factor, which spans a period of 25 – 40 years, so that
current wholesale rates only have a very minor role in the decision.

26
P7
Subject Matter and Scope:

At the last meeting it was proposed and agreed that definitions for transformers and exclusions would be from
IEC transformer standards, yet the text and mistakes present in the first Draft of the Directive are now
repeated.

Typically transformers are characterised by either power or voltage level, with larger power levels generally
coinciding with higher voltages.

However here a typical reference is to ‘Medium Power Transformer’ meaning a power transformer with a high
voltage winding with a rated voltage higher than 1kV , but not exceeding 36kV’

This definition is unique to this Directive and has never been seen in the Transformer or utility industry, where
such a Transformer would be classed as a ‘Medium Voltage Transformer’. This is an important distinction
because power losses should be related to the rated power of the Transformer, so classifying Transformers
according to voltage and then according to Power is dysfunctional and confusing.

Again, at the last meeting it had been agreed that all such definitions would be taken from IEC standards, and
furthermore that Medium Voltage Transformers would be in the range up to 24kV, not 36kV, so that
Transformers above 24kV would be rated on efficiency rather than specific levels of Copper and Iron Losses.

Further confusion is caused on p3 where attempts are made to define Load and No Load losses in short
paragraphs, where whole areas of the IEC standards are devoted to such measurements – inevitably this will
lead to a conflict between the measurements of Load and No Load losses made in the factory to international
standards, and the levels measured according to the new definitions.

P6
Specific requirements for Medium Power transformers

There are a number of issues here, principally that two different classes of transformers with different load
factors and hence different usage patterns have been lumped together, so that the wrong Iron and Copper
losses are then applied.

Furthermore no distinction is made between single phase and three phase transformers.

The distinction between Ground Mounted transformers and Pole Mounted Transformers is ignored.

Rural areas have low density populations and use Overhead Pole mounted transformers- if density were higher
Ground Mounted Transformers would be used instead. The nature of rural load is such that the Transformers
have vey low peak loads because there is little coincidence for demand from the customers connected... This
means that copper losses are much less significant than Iron losses, So a utility using Pole Mounted
Transformer would typically have low Iron losses and higher copper losses, as the energy consumed by the
Copper (Load) losses will be low, whereas the Iron losses will be much more significant..

In contrast in this Table 1.2 the opposite is the case, with Copper losses being unrealistically low and Iron
losses comparatively high.

The layout of the Table is poor in that an impedance value is associated with each Rated Power but no
explanation is given for situations where the impedance may be different. Does this mean that for any other
value of impedance the Table is undefined?

The Transformers listed are all three phase units – although this is not stated in the Directive.

27
Furthermore no values for Transformer losses for small single phase units are provided, yet 15kVA is the
predominant transformer size in rural areas in UK and Ireland.
The Level Bk (1250) for 100kVA is actually the Ak level, which is presumably due to a mistake.

The overall levels of transformer losses have risen however, having been defined as A0Ck for < 630kVA in
the original Draft Regulation to A0Bk in the current one. However no explanation has been provided for
such a change? – what new cost benefit analysis has been conducted to justify it?

Even more puzzlingly, the post 2018 figures for <630kVA were A0 (-20%) Ck, whereas now they are A0-20%
Ak which is an even more dramatic change, again with no justification offered.

Finally there are columns for ‘Pole Mounted ‘transformers with the column for Tier 2 (2018) stating that ‘Pole
Mounted sub-category disappears’. This had been discussed at one of the meetings where it was explained
that the problem with having very low losses for Pole Mounted transformers was that it meant that the Trafo
could be too heavy for the pole and would also have extra installation costs, none of which had been taken
into account in the cost –benefit analysis for reduced losses. It was also explained that transformers are
usually installed on existing poles which have existing limitations. These factors will still be the same in 2018 so
it is not clear why it is proposed that such a category should disappear.

In the US legislation on Transformer efficiency there is a specific category for Pole Mounted Transformers and
the extra costs of installation are also included in the cost benefit analysis.

The clarification on p7 that Pole Mounted Transformer should include a visible display ‘For Pole Mounted
operation only’ also arose in discussion and it had been explained that only utilities use Pole Mounted
Transformers and that it was practically impossible to use them anywhere except on a pole because they have
open connections at 24kV and at LV which are only allowable when the transformer is several metres out of
reach of anyone who could ever come in contact with it. However this does indicate a basic lack of familiarity
with Transformer technology which is worrying when critical Directives such as this are being drafted.

Treatment of Transformers which are restricted in allowable physical size:


No allowance has been made for transformers which must be limited in size due to some physical constraint.
Such constraints can only be overcome economically by increasing the power density of the transformer i.e.
running it hot with increased losses. It is not physically possible (and certainly not in any way economic) to
solve the problem in any other way. Importantly, in the VITO analysis, the RIA and the Directive, no allowance
is made for extra costs of installation which can be associated with larger or heavier transformers. These are as
much a cost as the extra Iron and copper in a Transformer, yet have been completely neglected in the analysis,
and whilst some discussion on Pole Mounted Transformer occurred (which has now been ignored) none of the
points made neither at Stakeholder meetings, nor in the Eurelectric May 2012 submission. regarding Ground
Mounted Transformers have been addressed.
Essentially if the Ground Mounted Transformer does not fit through the door of the substation, or has to have
excessive costs to keep within size limits, this is not addressed. Recently some figures from a Transformer
manufacturer were received which showed that for 800kVA and 1000kVA units, keeping to Tier 2 Losses and
existing dimensions, required over 100% increase in purchase price.

Obviously where size is not restricted the costs should be more in line with VITO report, but in the US over
80% of all transformer purchases are retrofits/upgrades in the same location, so the historic limitations will
also apply to the new transformer.

Similarly in the US DOE documentation on Energy Efficient Transformers special categories are provided for
transformers which have to be installed where space or weight is limited.
Other areas where size matters is in regard to Planning Legislation – in Ireland any structure over 11m3
requires Planning Permission, so for the 20kV conversion (which saves 75% of MV Network losses) special

28
20/10kV Transformers are used. These are rated up to 4MVA to allow for standby, but must be no more than
11m3 in volume. Inevitably these will not meet the Regulation, yet they are only on full load on standby.

It must be stated that the proposed regulation would have a worse impact on emergency operating issues
than in case of pole mounted transformers as described earlier in this document. In case of failure of an
existing transformer in a restricted physical area, the regulation would prevent the operator from replacing it
with a similar unit due to the aforementioned issues. The operator would have to use a lower capacity unit,
while looking for a new place to create an additional substation which can be quite difficult in urban areas.
Moreover, adding a new substation implies changes to the LV and MV networks. This would lead to important
delays before replacement, during which the substation would have to be replaced with a fuel based mobile
generator. Network users and neighbours would suffer from lower power quality, noise, works and pollution.

In relation to Wind Turbines special Slimline Turbines are made so that the transformer fits inside the tower or
nacelle, and these have high losses which cannot be reduced. It would be possible with extra structural and
civil costs, far in excess of the value of the transformer, to accommodate the transformer elsewhere, but this is
uneconomic, and the whole purpose of the Directive is have a solution where the extra costs involved are
compensated by the losses saved.

Accordingly some dispensation must be made for such units.

P 8 Table 1.5 It is interesting that this Table covers Transformers of 24kV/LV with power of up to 40MVA
because at higher powers it is much more economical to use higher voltages. However coverage of such an
unusual range indicates a lack of familiarity with the range and types of transformers used in Europe and
makes the Directive less meaningful and applicable.

P9 Table 1.7 ‘One winding with Um= 36kVand the other one with 1,1kV<Um. 36kV’’
- Why must one winding specifically equal 36kV ? what if it were at the more common 33kV? This seems to be
poorly drafted in a restrictive fashion.

P10 Specific requirements for Large Power Transformers (>36kV)

Again, at the last meeting this had been agreed to be >= 24kV, yet now appears unchanged at 36kV.

Overall EURELECTRIC is of the opinion that the Draft Directive as it stands now is not mature enough to form
a sound basis for implementation.

29
Appendix 3 Discount Rates for use in EcoDesign Impact Assessments

Assessment of proposed Discount Rates for use in EcoDesign Directive of Transformer efficiency.

Overview:
The proposals to use more energy efficient transformers are based on the calculation that the savings in
energy produced will offset the increased costs involved.

The calculations have been performed for Distribution Transformers on the basis of a 40 year life, a 4% real
interest rate, neglecting the consideration of installation costs and using an electricity price incorporating a
substantial amounts of fixed costs (TUOS and DUOS).

The use of the 4% discount rate in particular has received little attention in the analysis to date, yet it is
critical to a correct evaluation of the appropriate efficiency levels – the single most significant factor in
deciding the appropriate level of transformer efficiency is the Discount Factor chosen.

It is suggested that a real discount rate of 6% or above is more appropriate and has better provenance than
the 4% used.

Issues:
The proposed efficiency levels will increase initial purchase costs by about 47% from 2014 for small
Distribution Transformers.

The overall cost increase in the EU based on VITO report would be more than €500m pa, which is a significant
amount and which would suggest that a considerable degree of care should be used in deciding what
discount rate was appropriate in the particular case of utility transformers.

However there are only two one line reference in the report to the use of 4%, on the basis that it is the
standard rate that is always used in EcoDesign Impact assessments.

As the amounts are so significant and because the circumstances in which the 4% is being applied to utility
Transformers are so different, Eurelectric feel that a more detailed justification of the appropriateness of the
4% rate is required, and would suggest that a figure in excess of 4% would be more appropriate.

However if 4% is indeed to be used then a more sophisticated analysis of cash flows is required in the project
evaluation, with appropriate , probability adjusted distributions used for the variation in electricity
prices and costs over the investment period.

Reasons why 4% is inappropriate for use with Utility Transformers:


The following points apply:

1. Resource allocation between energy efficient investments by utilities will be sub-optimal

Utilities make investments for periods of 30 – 40 years, and these investments are assessed using the WACC
agreed with the Regulator. Typically the real rate WACC is around 6%, and utilities require that all
investments would make at least this return.

By calculating transformer efficiency at 4%, given a fixed price for electricity, the utilities will now find that
investments in (say) voltage uprating which would produce a very significant decrease in electrical losses,
with returns of over 6% , will now be displaced by Transformer investments at 4%. This will drive
dysfunctional investments by the utility and reduce the value to society of these investments.

30
The use of 4% in typical EcoDesign Impact Assessments is in the context of the consumer having no other
energy efficiency investments that are required to be done, so that there is no displacement of investments
from more productive uses – all other consumer products covered by EcoDesign are also being assessed at
4%.

However in the context of utilities this is not the case, so use of 4% drives a sub-optimal use of the customers
money and reduces the levels of energy efficiency on the networks.

2. Use of a risk free rate of 4% in assessing an investment with a high level of volatility

The benefits from more efficient transformer depend on predicting the volume of electricity that will be
saved and the value of the electricity, for the 30 – 40 year investment period.

Such analyses can be done using a risk free rate provided that the risk is built into the cash flows, which is
quite difficult as it depends on the ability to model the variation in the price of energy (oil, gas , electricity)
over a long period into the future.

This has not been attempted in the current analysis, yet the 4% rate has been applied.

An alternative would be to incorporate such risk by increasing the discount rate by a suitable amount, -
certainly above the utility WACC - as the nature of an investment in loss reduction is akin to an investment in
new generation, which requires a higher rate to compensate for the higher risk (see attached Oxera paper).

3. Use of a 4% Social Discount Rate where Public Policy Objectives are to be achieved through
Private Sector investment:

The use of Social Discount Rates is in economic justifications of project s is very complex, particularly where
the objective is to be achieved through Private Sector investment and without subsidies.

In the direct use of public funds to achieve a social investment there is no ’crowding out ‘ – extra Public Funds
can be raised to meet the requirement rather than displace other investments, and in the economy as a
whole any individual gains and loss will be netted off.

The application of a Social Discount Rate in the context of achieving similar Public Policy Objectives but
through the use of Private Sector delivery is much more complex, because extra issues are involved such as
the financial risk to the companies of raising the extra funding, the ‘crowding out’ of better investments as
capital is rationed and other opportunity and uncertainty costs.

These issues are being looked at in detail by the UK Government’s ‘Committee on Climate Change’, who have
carried out a significant amount of work with sophisticated economic consultants such as Oxera, and
engineering consultants such as Mott McDonald and PB Power.

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14
In their paper ‘Time Preference, Costs of Capital and Hidden Costs : A committee on Climate Change Note’
they suggest the following:

As can be inferred from the very detailed and elaborate analysis of the use of Social Discount Rates in
Investment Appraisals, it can be seen that a consequence of using a risk fee social rate is that the underlying
risk must now be incorporated explicitly in the cash flows. This is not a simple sensitivity analysis of just using
high and low figures, it involves the use of probability distributions of prices of energy and associated volumes
over a 30 years period, but is a requirement in using a Social Discount Rate where the size of the investment
is significant.

Instead Eurelectric would recommend that the alternative of using a private cost of capital as a proxy for costs
associated with uncertainty and opportunity costs should instead be used, and this in turn will reduce the
likelihood of ‘crowding out’ of good investments within the utility portfolio, as the discount arte for
transformers would not be about 6%, much closer to the actual WACC used for evaluating other utility
investments (which also have 30 year + horizons and are also being pursued for public policy objectives).

In fact this is close to using the Utility WACC which is what was done in Australia/New Zealand.

14
http://hmccc.s3.amazonaws.com/Time%20prefernce,%20costs%20of%20capital%20and%20hiddencosts.pdf

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4. Provenance of the “4% “figure:

In the EcoDesign Directive (31/10/2009) it states ‘The life cycle cost analysis method uses a real discount rate
on the basis of data provided from the European Central Bank and a realistic lifetime for the product;” but
does actually not state the figure.

The Final Report (Nov 2011) ‘Methodology for Ecodesign of Energy‐related Products MEErP 2011 ‘ states ‘The
discount rate will be standardised at 4%, in line with the impact assessment guidelines of the Commission’.

However the Commission’s ‘ IMPACT ASSESSMENT GUIDELINES (15 January 2009)’ cites the 4% as
‘ 64This rate broadly corresponds to the average real yield on longer-term government debt in the EU over a
period since the early 1980s. For impacts occurring more than 30 years in the future, the use of a declining
discount rate could be used for sensitivity analysis, if this can be justified in the particular context.’
Yet the ‘Impact Assessment Guidelines ‘ predates the EcoDesign Directive and does not cite the European
Central Bank discount rate.

The EU ‘Guide to Cost Benefit Analysis of Investment Projects (July 2008) ‘ has not yet been superseded and
suggests a discount rate of 5% for the opportunity cost of capital in the period 2007-2013 and that where a
Social Discount rate is to be used it would be 5.5% for Cohesion countries and 3.5% for others, as the higher
discount rate reflects the need to invest in project which are more profitable in order that such countries can
achieve a higher growth rate.

Using a low rate such as 4% in simple product analyses may not be materially significant for typical EcoDesign
Consumer products, but in the case of Transformers this is not the case.

The reason is that in most EcoDesign consumer products the cost of the components influencing energy
efficiency is only a small fraction of the overall price, and the lifecycle of the product is short, less than ten
years. In contrast virtually the whole of the Transformers costs is associated with energy efficiency, and the
lifecycle is around 30 years.

Accordingly, it is suggested that a figure of 6% or above would be more appropriate for use as a real discount
rate for Distribution Transformers. This would take into account the recommendation to be at least 5.5% for
Cohesion countries, and also allow for the Beta factor for this investment being closer to Generation than
Networks. It would also mean that utilities would be comparing investments on a like for like basis.

5. Other countries use of Discount Rates in evaluating Transformer Losses:

A quick review of discount rates yields the following overview:

 Australia and New Zealand use the WACC in evaluating Transformer losses ‘the discount rate
used to calculate net present value is 8.82% (which is the current Weighted Average Cost of
Capital as recently determined by the Australian Energy Regulator for distribution
utilities).(P16)’15

 In the US there are two rates used in the evaluation of transformer losses, 7%16 and 3%17,
where the 7% represents the return to private capital and 3% is the Social Discount Rate. In

15 http://www.eeca.govt.nz/sites/all/files/20101222-proposed-meps-distribution-transformers.pdf
16
Circular A- average before-tax rate of return to private capital in the
U.S. economy. It is a broad measure that reflects the returns to real estate and small business capital as well as corporate

33
the US DOE Transformer Loss Evaluations, both rates were used in the analysis and a positive
but marginally positive NPV at 7% was found for Distribution Transformers at 7% with
(obviously) a higher return at 3%. However what this meant was that the extra investment
was seen to at least break even at&% from the utility viewpoint i.e. it was a worthwhile
investment.

 Ireland uses 7% for discounting losses based on the WAC plus a premium to allow for the
greater level of uncertainty in such investments compared to traditional regulated
investments determined by non-discretionary needs, following a review by the UK economic
consultants, Oxera.

 In the UK losses are generally discounted at the WACC.

In addition, T&D Europe presented data to the EU showing the capitalisation values used by different
utilities in Europe, and these tended to group at about €7,500/kW for Iron Losses and €2,200 for
copper losses. However analysing the capitalisation rates which would be required to justify the loss
levels currently proposed would require about €16,000/kW for Iron and €400/ kW for copper – not
alone are the absolute levels different, so are the ratios between Iron and copper losses. This
suggests something unusual is being done in the calculations.

All in all, discounting private sector investments which are being used to deliver public sector policy
objectives may be related to the Social Discount rate used in Public Sector investments, but on
translation into the Private Sector the Social Discount Rate has a premium added to allow for
Opportunity Cost, Uncertainty and Finance issues.

This further reinforces the Eurelectric view that the appropriate discount rate to be used is similar to
the utility WACC or above circa 6%+.

capital. It approximates the opportunity cost of capital, and it is the appropriate discount rate whenever the main effect
of a regulation is to displace or alter the use of capital in the private sector.‖ (P. 33). Circular A-4 is available at:
http://www.whitehouse.gov/sites/default/files/omb/assets/regulatory_matters_pdf/a4.pdf.
17
Circular A-
When regulation primarily and directly affects private consumption (e.g., through higher consumer prices for goods and
services), a lower discount rate is appropriate. The alternative most often used is sometimes called the ‗social rate of
time preference.‘ This simply means the rate at which ‗society‘ discounts future consumption flows to their present
value. If we take the rate that the average saver uses to discount future consumption as our measure of the social rate of
time preference, then the real rate of return on long-term government debt may provide a fair approximation. Over the
last thirty years, this rate has averaged around 3 percent in real terms on a pre-tax basis.(P. 33).

34
Union of the Electricity Industry - EURELECTRIC aisbl
Boulevard de l’Impératrice, 66 - bte 2
B - 1000 Brussels • Belgium
Tel: + 32 2 515 10 00 • Fax: + 32 2 515 10 10
VAT: BE 0462 679 112 • www.eurelectric..org

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