CERAWeek 2008 - Quest for Security: Strategies for a New Energy Future

Frost: Energy Efficiency Powers N. American Distribution Transformer Markets

February 7, 2008 // Published as a news service by IHS

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The North American distribution transformers market expects stable growth, according to Frost & Sullivan, thanks largely to demand created by additional capacity and the need to replace existing distribution transformers.

Utilities will become highly energy conscious, analysts said, and a large number of existing distribution transformers will be replaced with energy-efficient distribution transformers in the next few years.

Recent analysis from Frost & Sullivan of the North American distribution transformer markets found earned revenues of more than $2 billion in 2006, with estimates to reach $2.95 billion in 2013.

"The North American distribution transformer market is, to a large extent, driven by the utilities," said Frost & Sullivan research analyst Krathika Belliappa.

"Utilities and other industrial and commercial end-users are expected to replace existing transformers, most of which have crossed their average life span, with energy-efficient distribution transformers in order to minimize losses and the total cost of ownership."

Utility spending on the transmission and distribution upgrades hit an all-time high during 2006 and 2007. Analysts said investment in transmission and distribution is likely to exceed $9 billion and $7 billion, respectively.

Investment among investor-owned utilities steadily increases, making up three-fourths of the investment in the transmission facilities in the U.S. Additionally, electric utility revenues continue to increase in all the residential, industrial and commercial sectors.

Despite promising trends, an increase in raw material prices remains a critical restraint to the market's growth, analysts said. As the prices of raw materials - such as copper, steel and aluminum - increase, manufacturers are forced to pass this cost escalation to customers. With only a few suppliers to choose from, the bargaining power of raw material suppliers is very high.

"The distribution transformer market is highly fragmented and competition is intense," said Belliappa. "Considering the minimal differentiation and lack of innovation, pricing becomes the key purchase influence."

Moving forward, it is vital to innovate in order to tackle the challenge of skyrocketing raw material prices. Analysts said with the prices of transformers increasing and competition intensifying, it is imperative for manufacturers to differentiate and strategically position themselves in the market. This will help them retain/increase market share and carve a niche for themselves.

Source: Frost & Sullivan.