OP
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Ok, again thank you yet another diagram. What you said made much more sense with that.The point about the auto-transformer is it must not be directly on the supply L1-N-L2 at any point as any imbalance will cause a huge current as the transformer attempts to maintain it's winding ratio voltages.
When it is on the generator the source of power is only L1-L2 and the resulting transformer current is partly from that magnetising the core (and losses) but mostly it is from the load imbalance. The load in your house is not capable of such a huge current as your incoming supply, as fundamentally it is limited by the generator output.
However, as you are likely to have a transformer that is 50% or so of the generator output it really requires some protection in case of an overload that results in too much current on the transformer. Here a 3-pole MCB could be used to protect it and the generator, though as you have already realised they often just stall if seriously overloaded and don't deliver anywhere like the prospective fault current that a test would suggest (same as many UPS whose regulation suggests 2kA fault but in reality drop at 50A or so load).
So a 10kVA generator is about 42A at 240V. With a 240V-120V transformer for the centre tap at 5kVA is is the same on the 120V end (5000 / 120 = 41.67). Hence something like a 3-pole (linked operation) 45A MCB would provide reasonable protection for long-term thermal overloads, even if a short is likely to just stall the generator.
In terms of switching, in the UK the N-E link is on the supplier's side and it is prohibited to link N-E in the installation, so here we would have another N-E link in the generator and use a change-over switch that swaps neutrals as well as the line conductor(s). That way the E is always connected, but at any one time there is only on N-E link and it is always before the DB (panel).
But you are using USA style rules and there the N-E link is in the panel. In this case it really does not make sense to switch the N as you will have it linked in any case, and the less messing around with supply lines the better. That is why I later though you would be as well just switching the L1/L2 pair between the incoming supply and the 3-pole MCB, but leaving the N & E there all the time.
1. On the neutral topic:
So with your latest diagram, when on generator power, it is fine that the neutral from the auto-transformer is connected to the supply's neutral?
2. On the generator output breaker topic:
Would it make sense to use a 3-pole RCBO (MCB+RCD) instead of just an MCB to make sure that any current imbalance in any non-RCD/GFI protected circuit in the DB panel will cut the generator output and protect the generator, people, and animals?
Also, what I don't understand is if there's already a built-in breaker in the generator that's fairly small, what is the reason of installing MCB's downstream if the generator breaker will be the very first one to trip in case of a fault anyway?
3. On the change-over switch topic:
So my current change-over switch is composed of 2 x 2-pole 200A MCB's (the line side of one connected to the supply and the line side of the other is connected to the generator output) and have that metal strip that only allows one of those breakers to be turned on. The load side of both is connected to the DB panel main circuit breaker.
With the 45A MCB/RCBO that we talked about for the generator output BEFORE the change-over switch, do I need to replace the 200A MCB on the change-over switch to something smaller?