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Transformer Ownership: What is the value of owning your own transformer?

June 25, 2018

June 2018 Edition:  Transformer Ownership: What is the value of owning your own transformer?

Are you the energy manager or decision maker of a large commercial or industrial facility? Then transformer ownership might be something worth considering because, in most cases, it reduces your service voltage rate. By reducing your service voltage rate, this may impact and ultimately reduce your monthly demand charge. In this edition of Customer Insights, we will explore key points to consider before committing to the first step of transformer ownership.


The transformer sitting behind your business is essential to ensuring that power is properly converted to a usable service voltage for your day-to-day operations. Typically, the utility owns the transformer because it is required for the last leg of the trip to distribute power to your business. This puts your service voltage on the secondary, low voltage, side of the transformer. To recover the costs of transformer ownership, the utility charges you a higher demand rate in their tariff.

Alternately, you have the ability to own this transformer yourself, move your service voltage to the primary, high voltage, side and save money for your business. This can be achieved by directly owning the transformation equipment or partnering with a third party, such as AEP OnSite Partners.

Who should consider transformer ownership?

When considering transformer ownership, you want to ensure that your business meets the proper conditions that make transformer ownership worthwhile. There are four key points to consider researching costs.

  • Dedicated Transformer Feed: Does your business currently have a dedicated transformer feeding electricity to your facility? A dedicated transformer is required. If your facility does not have a dedicated transformer, you have the ability to install a new transformer, but this will likely increase your upfront capital investment.
  • Long-Term Business Timeline: Your business should have a long-term plan to stay at your current location. The value of owning your own transformer grows with time. Many transformers used in these applications are expected to have a life of 25 years or longer when operating at full load within their expected environmental conditions. A typical timeline for analysis is 20 years.
  • Sufficient Distribution Tariff: Your distribution charge is based on your demand rate as identified by your local utility. In order for transformer ownership to be cost effective, your local utility tariff should provide a sufficient difference between the demand rates at each service voltage. You need to ensure the difference between the low voltage rate and high voltage rate provides cash flows that sum to a greater value than the total cost of transformer ownership. In other words, you need to consider your demand rate based on actual usage and the transformer ownership costs based on nameplate capacity, the maximum power the transformer is capable of providing.
  • High Transformer Utilization: Transformer utilization is the percent of transformer capacity you actually use for your business. A utilization rate of 50% means your peak load only measures 50% of the transformer’s rated capacity. In this case, the transformer feeding electricity to your business is over sized for your current operations, which may not be an issue if you are planning for load growth. The major takeaway here is you do not want to pay for something you will not use. Higher utilization rates result in better economics for transformer ownership.

What are the major cost components?

When considering the purchase of a transformer there are two key cost components to consider before committing to the investment. Let’s explore how to quantify initial capital costs, as well as ongoing operations and maintenance costs.

  • Capital Cost: You will need to purchase the transformer from the utility or install a new transformer yourself. The utility can provide you a cost estimate to purchase the transformer based on a number of factors including size, age and condition. If the utility does not make the transformer available, or you want to install a new system, you may request quotes directly from vendors. Capital costs can change significantly depending upon your reliability requirements. Customers with larger facilities tend to plan for more reliability, which increases the asset requirements.
  • Operations & Maintenance Costs: Once the utility no longer owns the transformer, they will not provide the periodic operations and maintenance (O&M) activities required to ensure safe and reliable operation. Typical O&M costs include 24-hour-a-day, seven-days- a-week alarm monitoring, monthly preventative maintenance visits, periodic testing, and corrective maintenance visits. All of these items can be performed by you or purchased through third party providers.

Is it a good deal?

Your savings are calculated by weighing the total cost of transformer ownership against the accumulated savings realized by reducing your demand rate. Below, the graph illustrates how everything comes together for three different scenarios. You can see the demand rate required to achieve a net present value (NPV) of zero – the break-even point at 20 years using third party ownership. Notice that it changes significantly with transformer utilization because at low utilization factors you are paying for transformer capacity that your business does not require. This reiterates the fact that it is essential to understand the energy requirements of your business now and into the future. With this information, you can plot the graph below for your business and determine what kind of ownership solution will work best for your business.

Required Demand Rate Difference to Achieve NPV=0 at 20 Years

Note that the 100MVA scenario has higher rate requirements because facilities of this size typically have
additional levels of reliability designed into their power systems, which increase Capital and O&M costs.

 

But … I am not in the energy asset business!     

You may not want to invest your capital dollars in transformation equipment nor internally develop the skillset required to own and operate them. A third party owner, such as AEP OnSite Partners, would provide all of the upfront capital to take ownership of this equipment and move your meter to a higher service voltage. This allows you to save your capital dollars for growing your business while getting the benefits of metering at a higher service voltage.

Interested in learning more about transformer ownership, reach out to AEP OnSite Partners by emailing Dan Smies, Managing Director of Business Development and Strategy, at dbsmies@aepes.com or contact your AEP Energy sales representative to find out if an opportunity is right for your organization.

 


Market Overview – AEP Energy Trading

Natural Gas

  • With above normal temperatures persisting throughout most of May, prices for natural gas and power were generally higher, especially in the front of the curve.
  • Prompt month (June 2018) natural gas at Henry Hub gapped up $0.189/MMBtu to close at $2.952/MMBtu.
  • Balance of the year (July – December 2018) pushed up $0.147/MMBtu to close at $2.980/MMBtu.
  • Beyond that, Calendar 2019 was up $0.075/MMBtu to $2.795/MMBtu, and Calendar 2020 was actually off by a half penny to $2.698/MMBtu.

Power PJM – Ohio

  • Power mostly followed gas as 2018 June and July on peak AEP – Dayton Hub were up $1.45/MWh each to settle at $37.00/MWh and $41.80/MWh, respectively.
  • The balance of the year (July – December 2018) increased $0.65/MWh to $36.79/MWh.
  • In the calendar years, 2019 was up $0.16/MWh to $35.22/ MWh and 2020 was up $0.22/MWh to $34.37/MWh.

Power Illinois:

  • PJM ComEd zone May 2018 day-ahead on peak power actually dropped by $0.75/MWh closing the month at $31.55/MWh.
  • MISO Illinois. Hub May 2018 day-ahead on peak power climbed by $3.65/MWh to close at $38.11/MWh.

Any references made to prompt month natural gas will normally be associated with a range starting the first day of the month through the final settlement of the respective prompt month natural gas contract. Other references to forward natural gas prices and all power prices will be based on a range starting the first day of the month through the final day of the month.

AEP Energy does not guarantee the accuracy, timeliness, suitability, completeness, freedom from error, or value of any information herein. The information presented is provided “as is”, “as available”, and for informational purposes only, speaks only to events or circumstances on or before the date it is presented, and should not be construed as advice, a recommendation, or a guarantee of future results. AEP Energy disclaims any and all liabilities and warranties related hereto, including any obligation to update or correct the information herein. Summaries and website links included herein (collectively, “Links”) are not under AEP Energy’s control and are provided for reference only and not for commercial purposes. AEP Energy does not endorse or approve of the Links or related information and does not provide any warranty of any kind or nature related thereto. Forward-looking statements contained herein are based on forecasted or outlook information (including assumptions and estimations) but any such statements may be influenced by innumerable factors that could cause actual outcomes and results to be materially different from those anticipated. As such, these statements are subject to risks, uncertainties, fluctuating market conditions, and other factors that may cause actual results to differ materially from expectations and should not be relied upon. Whether or how the customer utilizes any such information is entirely its responsibility (for which it assumes the entire risk).

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