The electric transformer shortage

Podcast Summary

• COVID-19 Pandemic Causes Unprecedented Demand and Long Lead Times for Distribution Transformers: The COVID-19 pandemic caused global supply chain disruptions, leading to increased demand for electrical equipment and prolonged lead times for distribution transformers, making it challenging for startups and other projects to plan and execute on shorter time scales.

  The transformer market, specifically the distribution transformer sector, has experienced unprecedented demand and prolonged lead times since the COVID-19 pandemic. Prior to the crisis, typical lead times for these transformers were much shorter. The shift began when the global supply chain disruptions caused by the pandemic led to increased demand for electrical equipment, particularly transformers. The power generation industry, real estate sector, and startups have all been impacted by this issue. Large power transformers used at power plants to step up voltage for transmission lines have also faced extended lead times, but the most significant stress has been in the distribution transformer market, where demand has surged and manufacturing capacity has struggled to keep up. This situation has made it extremely difficult for startups and other projects to plan and execute on shorter time scales.

• Transformer lead times reached record highs due to housing market demand: The US transformer supply chain faced unprecedented lead times in 2020, with some customers waiting up to 2 years, due to housing market-driven demand outpacing manufacturing capacity.

  The distribution transformer supply chain in the United States experienced significantly longer lead times starting around 2020, with some customers facing wait times of up to 2 years. This was due to the rapid increase in demand for transformers, which outpaced the manufacturing base's ability to keep up. The situation was particularly severe for pad-mounted transformers, both single phase and three phase. The causes of this situation can be traced back to the housing market, with a strong correlation between housing starts and transformer demand. Historically, there have been periods of long lead times and transformer shortages, such as in 2000 and 2007 when housing starts approached 2 million a year. However, the current situation is unique due to the sustained demand and the lack of a corresponding increase in manufacturing capacity.

• Factors driving transformer market demand surge: The transformer market saw a surge in demand between 2020 and 2021 due to infrastructure upgrades, federal investments, and the electrification trend, but manufacturers' cautious approach and supply chain disruptions caused extended lead times.

  The transformer market experienced a significant demand surge between 2020 and 2021, which was driven by various factors including infrastructure upgrades, federal government investments, and the electrification trend, particularly in the automotive industry. However, the industry's response was not immediate due to the long lead times required to change manufacturing output. Previous experiences, such as the housing market crash in 2006-2007, may have also influenced manufacturers' cautious approach. The COVID-19 pandemic and resulting supply chain disruptions further complicated the situation, causing extended lead times that were not seen in other industries. Understanding these factors is crucial to grasping the transformer market's recent challenges and potential future developments.

• Surge in Demand Overwhelms Transformer Industry: The transformer industry was caught off guard by unexpected demand due to infrastructure spending, electrification, renewable energy sources, and severe storms, leading to a supply-demand gap.

  The transformer industry was caught off guard by the surge in demand following the false sense of complacency during the COVID-19 pandemic. The confluence of various factors, including infrastructure spending, electrification, renewable energy sources, and severe storms, overwhelmed the industry's capacity to meet the rising demand for distribution transformers. Despite the awareness of the sustained demand, expanding manufacturing capacity has proven to be a challenge for the industry, which was previously operating at full capacity. The saturation point made it difficult to produce the next incremental unit, leaving a gap between supply and demand.

• Labor, investment, and steel supply challenges hinder US distribution transformer production expansion: Despite labor shortages, high investment costs, long lead times, and limited domestic grain oriented steel supply, only one US manufacturer produces distribution transformers, making expansion difficult and costly

  Expanding the production of distribution transformers in the US is a complex and challenging process. Labor shortages, high investment costs, and long lead times for equipment are significant barriers. Additionally, the specialized steel required for transformer manufacturing, specifically grain oriented steel, is in high demand and limited in supply within the US. The only domestic manufacturer, Cleveland Cliffs, is operating at full capacity. Importing this steel from foreign sources comes with additional costs due to tariffs. Another alternative material, amorphous steel, also faces similar supply chain risks with only one US manufacturer. These factors make it difficult for distribution transformer suppliers to quickly and easily double their capacity.

• DOE's proposed transformer efficiency standard causing uncertainty in industry: The proposed DOE standard could lead to industry-wide transition to amorphous steel, requiring significant investments, process changes, and workforce training, while current supply of amorphous steel is insufficient to meet demand.

  Regulation, specifically the proposed higher efficiency standard by the DOE, is causing uncertainty in the transformer manufacturing industry regarding the use of grain oriented steel versus amorphous steel. Amorphous steel, which has better energy efficiency, particularly during no load conditions, could significantly reduce the need for power generation. However, the transition to using amorphous steel would require significant investments, process changes, and workforce training. Additionally, the current supply of amorphous steel is not enough to meet the demand for transformers. The proposed standard, if enacted, could potentially worsen the existing supply chain challenges. The current situation is complex, but manufacturers are optimistic that the final decision will provide clarity and allow them to adapt accordingly.

• Price increase of distribution transformers: The price of distribution transformers has risen significantly due to supply chain constraints and commodity costs, with projected stability in 2024. Utilities struggle to get rate increases approved, causing market anxiety. Manufacturers expand capacity to ease supply and demand gap, with major acquisitions and expansions underway.

  The price of distribution transformers has significantly increased due to supply chain constraints and rising commodity costs. The average price increase has been around 75 to 100% over the last couple of years, with some stability projected for 2024. Utilities, who ultimately bear the cost, are facing challenges in getting rate increases approved, leading to market angst. Manufacturers are passing through these costs and working to expand manufacturing capacity to alleviate the supply and demand gap. Major acquisitions and expansions are underway, and the industry is expected to see relief in the near term. However, the single phase pole problem may still be ongoing.

• Challenges with transformer supply may last for 12-24 months: Despite infrastructure demands and lack of planning, valuable lessons can be learned from current challenges. Long-term investment in advanced tech like power electronics and solid state transformers could lead to consistent voltage, improved efficiency, and better peak load management.

  The current challenges with single phase and three phase transformer supply, caused by unexpected infrastructure demands and lack of planning, may persist for the next 12 to 24 months. However, this experience may lead to valuable lessons, such as the importance of having US-based manufacturing and better coordination of activities. The technology side is also evolving, with promising advancements like power electronics and solid state transformers. These innovations could lead to more consistent voltage output, improved energy efficiency, and better management of peak load demand. While these technologies are currently more expensive, long-term investment could yield significant benefits.

• Addressing the challenge of distribution transformer supply: Collaboration and innovation are crucial for addressing the challenge of distribution transformer supply in the energy sector, ensuring efficient and effective electricity delivery to consumers.

  Distribution transformers have been a major challenge for companies looking to expand their capacity in the energy sector. Tim Mills, the CEO of Ermco, acknowledged the efforts of his team and utility partners in trying to bridge the supply and demand gap in this area. Shell expressed support for Ermco's expansion plans. This issue is significant because the availability and reliability of distribution transformers are crucial for delivering electricity to consumers efficiently and effectively. The recognition of the hard work and dedication of the teams involved in addressing this challenge is important, as they have been instrumental in ensuring utilities receive the necessary equipment to meet their needs. Overall, the discussion highlights the importance of collaboration and innovation in addressing critical challenges in the energy sector.