Considerations for Addressing the US Transformer Shortage

Executive Summary:

Electrical transformers are critical components of power grids, necessary for the distribution of electricity from power plants to consumers. Since 2020, the market has been experiencing skyrocketing lead times and price spikes as electrification, expansion of renewables, and aging out of current transformer stock place pressure on the market. Without action being taken to resolve this issue, the current state of the transformer market will result not only in delays in reaching our decarbonization goals, but also threatens the country’s energy security as inability to obtain replacement transformers for aging units increases the risk of major power failures. This policy memo seeks to analyze the current factors impacting the transformer market and provide recommendations for addressing the issue through federal financial investment as well as acknowledging the longer term challenge of standardization.

Introduction:

For the last two years, lead times for transformers have greatly increased, going from approximately 50 weeks in 2021 to an average of 120 weeks in 2024. For larger transformers, lead times can be even greater ranging from 120 to 210 weeks. We have also seen significant increases in the cost of transformers, 60% to 80% on average since January 2020. These issues stem from the drastic disparity in supply and demand that exists within the market. Two main factors are driving the elevated transformer demand: replacement of existing transformer stock and increased electricity demand. A Department of Commerce study done in 2020, found that transformers in the US are an average of 38 years old, approaching or even surpassing their 35-40 year lifespan. Transformer demand has also been driven up as the expansion of new renewable energy projects as well as increased electricity demand overall due to factors such as data centers and mass electrification require the construction of new energy infrastructure. Estimates by NREL predict that our current stock of 60-80 million transformers will likely increase by 160%-260% by 2050. 

As demand continues to increase, supply of transformers is hampered by a variety of factors. During the COVID pandemic, commodity production decreased due to expected reduction in demand and has not yet been able to increase enough to meet growing demand. This has resulted in a doubling in the price of Grain Oriented Electrical Steel (GOES) as well as a 40% increase in the cost of copper since January 2020. Many of these materials and components are either not produced domestically or are produced in countries outside of the regulatory reach of the US. These increased costs along with a significant lack of skilled labor have hindered investment in the expansion of manufacturing, especially given that such investments can take years or decades to break-even. On top of these limitations is the lack of technical standardization among transformers. Many large transformers are custom made and require specialized components not produced by all manufacturers. Given the high cost of materials and the inability of manufacturers to predict the nature and demand of utility companies, transformers are not currently constructed in advance and only begin construction once an order is placed which further inflates lead times. 

At present, only around 20% of US demand for transformers can be met by domestic production. If no efforts are made to increase transformer supply to meet demand, up to 25% of global renewable energy projects could be at risk of project delays due to high lead times. Importantly, the advanced age of our current transformer stock poses a threat to our national energy security if our existing infrastructure begins to fail without having replacement transformers available.

Policy Context:

At present, there are no policies in place aimed at resolving the issues plaguing the transformer market. Funding to support domestic transformer production was not directly specified as part of the IRA’s manufacturing tax credits and neither the CHIPS Act nor the 2023 Consolidated Appropriations Act included funding for transformers. Several manufacturers such as Virginia Transformer Corporation and WEG have opened new plants to expand capacity, but high start-up costs and need for skilled labor mean that such efforts will be limited without incentives to support domestic manufacturing.

Recommendations and Implementation Challenges:

Addressing the transformer supply shortage in order to protect the security of existing energy infrastructure and ensure the timely development of renewable energy will require the federal government to make a significant investment in the form of direct monetary grants for transformer manufacturers and tax credits for both manufacturers and utility companies. This investment will serve three goals in expanding production. 

1. Financial investment will allow for manufacturers to acquire raw materials and equipment in advance and in larger quantities. Companies would also be required to place orders on a regular basis in order to more efficiently manage demand for commodities suppliers. This course of action will face challenges largely due to the existing supply shortages with materials and components as well as internal competition between domestic manufacturers. In the US the transformer market is highly consolidated with 50 companies producing nearly 90% of domestic production. These 50 companies will all be competing to acquire similar materials which will inevitably result in them experiencing procurement headwinds. While we are not able to directly influence the largely international commodities market, increased revenue from US ordering as well as a more predictable demand timeline should alleviate the current slump in the commodities market and accelerate production. 

2. Investment will allow for the construction of new manufacturing facilities as well as warehouses to house inventory. This measure serves to not only expand production capacity itself, but also to allow manufacturers the ability to produce inventory in advance of the orders themselves with the expectation that they will be ordered. A limitation of this approach is that anticipatory manufacturing will not be as achievable in regards to new infrastructure expansion due to uncertain design requirements. However, existing transformers have known designs allowing them to be made in advance and the age of our current stock means that the purchase of pre-made units can be expected in the near future. There is ultimately uncertainty overall about the extent to which funding will allow for expansion of production capacity as manufacturers can be limited by non-financial capital constraints such as equipment and land availability.

3. Investment will also be directed at expanding the labor force to support increased manufacturing. Since manufacturing of transformers requires skilled workers, programs will be focused on the training and procurement of personnel who are able to staff and operate the new facilities. Outside of the challenges related to finding people who are willing to take on these jobs, the primary challenge in implementing this measure will be bridging the gap between union and non-union workforces. The government will need to work in collaboration with labor unions to ensure that the allocation of funding for workforce initiatives is appropriate and equitable.

The persisting longer term challenge that will need to be addressed is the issue of standardization. As mentioned previously, many transformers, especially larger transformers, are bespoke and require specialized custom parts not produced by all manufacturers, which results in inefficiencies that hinder production. Ideally, a team of mechanical and electrical engineers should be assembled to develop either a single or limited number of transformer designs that would meet or exceed the efficiency and safety requirements currently in place. By standardizing designs, lead times can be drastically reduced as the manufacturing process is streamlined and companies can better prepare for future transformer demand. This would likely require delaying or amending the efficiency guidelines the DOE plans to enforce in 2027 as it would take several years to develop suitable designs and we cannot risk further burdening this already stressed market by enacting additional guidelines too soon. There may also be obstacles to standardizing designs as it could interfere with patents or other proprietary mechanical design specifications.

Conclusion:

Significant supply-demand imbalances within the market have resulted in skyrocketing lead times and increasing prices for electrical transformers in the past several years. If action is not taken, this issue is currently poised to jeopardize not only our capacity to expand renewable energy projects to meet growing demand, but also the security of our energy infrastructure as our existing transformers begin to exceed their lifespans. Through investments in domestic manufacturing and efforts to standardize design, US transformer manufacturing capacity will be able to expand and mitigate the current threats to our national energy security.