Let's break down the situation and address the concerns. You're right to question the setup. There are several factors to consider

Legality and NEC Compliance
Selective Load Pickup vs. Whole House

You are correct in pointing out the issue with the generator's capacity versus the whole-house intent. The NEC does require a proper load assessment when using an Automatic Transfer Switch. If the generator cannot handle the entire connected load, the ATS must have a load management system. The load management system automatically sheds designated loads like water heaters, HVAC compressors, and electric vehicle chargers during generator operation to prevent overloading the generator. This often involves additional contactors and control wiring.

Article 702 (Optional Standby Systems)

Article 702 of the NEC covers optional standby systems like this. It addresses the transfer equipment, wiring, and generator sizing. It generally does not prohibit connecting a generator with less capacity than the full service, but it DOES require proper load management if the generator isn't sized for the full load.

Sizing of Conductors and Overcurrent Protection

The NEC requires conductors to be sized to handle the load they're expected to carry (with proper derating). The overcurrent protection (circuit breaker or fuses) must be sized to protect the conductors, equipment, and load.

Listing and Labeling

If the generator and ATS were sold as a listed package, the listing agency (UL, ETL, etc.) has likely evaluated them as a system, possibly with assumptions about typical residential loads or the presence of load shedding. However, it's the installer's responsibility to ensure the actual installation meets all code requirements and the manufacturer's instructions.

The Deal: What's likely happening and what needs to be done

It's likely that Generac (or Lowe's selling it) is operating under the assumption that the 22kW generator is sufficient for the typical residential load, especially if load shedding is implemented. The 200A ATS is used because it is a common size for many homes and provides flexibility.

Here's the breakdown and steps to take


Load Calculation IS REQUIRED

This is the KEY. Your friend MUST perform a proper NEC load calculation (Article 220) for his house. This will determine the actual expected load.

If the load calculation is LESS than 22kW (or close enough considering startup surges and load shedding)

The generator might be sufficient. BUT proceed to step 2.

If the load calculation is SIGNIFICANTLY MORE than 22kW

He MUST implement load shedding to prioritize essential circuits.2.

Load Shedding Design (If Necessary)

If the generator isn't large enough for the whole house, he must design a load shedding system. This involves:

Identifying Essential Circuits

What must be powered during an outage? (Refrigerator, lights, heating system, sump pump, medical equipment, etc.)

Identifying Non-Essential Circuits

What can be shed? (Water heater, AC, EV charger, electric range/oven, etc.)

Implementing Load Shedding Control

This usually involves using the ATS's load management capabilities (if it has them). Additional contactors (relays) are installed to disconnect the non-essential loads when the generator is running. Generac often sells load shed modules that work with their generators.3.

Conductor Size at the Generator

This is your immediate concern.

You CANNOT simply jam 4/0 cable into a 2/0 lug. That's a code violation and creates a dangerous connection. Several Solutions (Discuss with an electrician for best option)



Taps

The 4/0 can be run to a junction box near the generator. Within that box, use properly sized, listed tap connectors to connect the 4/0 to shorter lengths of 2/0 that then connect to the generator lugs. The junction box must be accessible.

Reducing Bushings/Inserts

Sometimes, lug manufacturers make reducing bushings or inserts specifically designed to allow a smaller cable to be used with a larger lug. Check with the lug manufacturer if such a listed adapter exists. However, this is unlikely with such a large difference in cable size.

Replace the lugs on the generator

If the generator lugs are bolted on, it might be possible to replace them with lugs that accept 4/0 wire. This MUST be done in accordance with the manufacturer's instructions and using UL listed lugs for the equipment.4.

Overcurrent Protection

The generator's output breaker MUST be sized appropriately for the generator's output capacity (around 100A for a 22kW generator at 240V). This may be built into the generator.5.

Manufacturer's Instructions

Follow the generator and ATS manufacturer's instructions exactly. If the instructions specify a particular wiring configuration or load shedding method, those must be followed to maintain the warranty and ensure safety.6.

Inspection

This is critical. Your friend needs to have the installation inspected by a qualified electrical inspector. The inspector will be looking for compliance with the NEC, the manufacturer's instructions, and local codes.

Using the ATS Manually Potentially Acceptable, but Risky

Disconnecting the control cables and manually switching the ATS might be acceptable for inspection purposes, as long as the inspector is aware it is manual and the homeowner understands the risks of overload.

Major Concerns



User Error

Manually switching without understanding the generator's capacity can easily lead to overloads and damage.

Safety

Manual switching introduces the potential for dangerous backfeeds to the utility grid if not done correctly.

In Summary

Your friend's installation is likely legal only if he performs a proper load calculation and implements load shedding if necessary. The immediate issue is the incorrect cable size at the generator, which MUST be addressed before anything else.

He should consult with a licensed electrician to review the load calculation, design the load shedding system (if needed), and ensure the installation meets all code requirements. Flag for review