Understanding the Electric Transformer Shortage: How Did We Get Here?

The electric utility is no stranger to the wake of supply chain disruptions shaped by trade policy, a heightened demand for goods and services, as well as an industrial boom fueled by onshoring and the continued adoption of ecommerce. The same post-pandemic industrial boom that brought the U.S. real gross domestic product growth of 5.7% in 2021 (Harris & Mehrota, 2022) and historic investments in residential real estate, also necessitated profound infrastructure improvements to the U.S. electric grid. However, as late as October of 2022, a survey by the American Public Power Association (APPA) reported that many utilities were deferring or canceling infrastructure projects because they were unable to procure the additional distribution transformers required for these projects. “Among public power utilities, one in five projects were deferred or canceled” (Ciampoli, 2022).

Utility-grade transformers are now at the center of speed to market location strategies, evolving from a once overlooked line item into a deal closing, tie breaking, location determinant. It begs the question – how did we get here?

A Level Playing Field

Austin, Texas based American Canning began their journey in 2012 as a mobile canning service provider. Today, in addition to supplies distribution, machine manufacturing, shrink-sleeve production and can manufacturing, the company has grown to be an official distributor of Ball Corp’s blank and printed aluminum beverage cans. In February of 2022, the company announced an expansion with a new plant and headquarters planned for Southeast Austin. By November, CEO and co-founder David Racino reported that “business is booming, but this facility is way behind schedule”. “Instead of growing our business, we’re triaging issues we didn’t even know could exist” (Uhler, 2022). One of the obstacles for American Canning – transformer delays.

Transformers are sized to meet the kVA of the electrical load and are positioned to reduce how much energy is lost in the transmission of electricity by increasing or decreasing the electrical current. They improve safety, provide efficiencies to the grid, as well as allow for custom voltages in various industrial and manufacturing applications.

APPA reported that between 2020 and 2022, the average lead time to procure distribution transformers for all voltage classes rose 429%.

“Economic forecasts anticipate that the calculated annual growth rate for distribution transformers in North America will continue to increase and be 9.1% for 2022-2030". As material costs and lead times have increased, so have production costs. Late last year, the U.S. Bureau of Labor Statistics Producer Price Index (2022) reported a year-over-year July 2022 transformer production cost increase of 20%, down considerably from the 36% cost increase in 2021.

Transformer shortages are hamstringing residential construction projects as well. In some of the hottest housing markets around the country, developers have pressed the pause button on new development as they wait for electrical transformer orders to be filled. The National Association of Home Builders (Logan, 2022) recently reported on “historic” twelve-month price increases on housing costs, citing steep hikes in transformers and the raw materials used to make them, including sheet metal, synthetic resins, epoxy adhesives, electrical steel and copper wire and cable. “As the shortage of power and distribution transformers has become increasingly acute, the prices of transformers and parts thereof have increased substantially”.

“The price of distribution transformers has increased 40.1% over the past 12 months and 60.7% since January 2021. Transformer parts (e.g., cores, bushings, windings/coils) prices have climbed 47.4% since the start of 2021” (Logan, 2022).

However, transformers are not the only project-critical equipment in short supply, and trade associations and businesses are speaking up about the issue. “Electric utilities are experiencing shortages of smart meters, conductor materials, skilled labor, and bucket trucks due to the ongoing economic impacts from the COVID-19 pandemic. Delayed investments and expanding lead times for new equipment caused by a lack of materials and labor will continue to compound the problem—possibly for years to come”, according to a June Brief by the APPA (2022).

Out of Sight, Out of Mind

An overreliance on a foreign supply chain, including specialized electrical steel for the transformer’s core and other largely foreign materials, was exposed and exacerbated by the Covid-19 pandemic. According to a study by the U.S. Commerce Department (2022), prior to the pandemic “the U.S. was 82% reliant upon imports to meet its need for large transformers” (p.198). Transformer companies were also among those caught with suddenly unfavorable just-in-time supply chain models. Eight U.S. companies produce some of the country’s largest transformers, supplying just one-fifth of domestic inventories.

Despite a handful of U.S. expansions to increase production capacity, including announcements this year by Central Moloney in Florida and Hitachi Energy in Virginia, the U.S. has not exactly moved the needle on production output. According to the Observatory of Economic Complexity (n.d), U.S. exports and imports of electrical transformers resulted in a negative trade balance of $1.48B as of October 2022.?The U.S. “imported $16.B in electrical transformers in 2020, becoming the 1st largest importer of electrical transformers in the world. In the same year, electrical transformers were the 20th most imported product in the United States. The U.S. imports electrical transformers primarily from: China ($4.13B), Mexico ($3.04B), Germany ($935M), Japan ($917M), and Canada ($774M).

Mother Nature is Always on Time

Severe weather around the country has a significant impact on transformer inventory levels. Emergency preparedness for fire, floods, storms, extreme temperatures, and other disasters require these components to be on standby. According to the Billion-Dollar Disasters Report published by the National Centers for Environmental Information (NOAA, 2022), there have been 15 weather/climate disaster events within 2022 (as of Oct 11) with losses exceeding $1 billion each to affect the United States. “The 1980–2021 annual average is 7.7 events (CPI-adjusted); the annual average for the most recent 5 years (2017–2021) is 17.8 events (CPI-adjusted)” (p. 1 website) While the current lack of inventory delays these recovery efforts, the increased frequency of weather disaster events only places additional strain on the demand for more units. Factor into this chain of circumstances that the average age of installed large transformers in the U.S. is about 40 years, the end of their expected operational life, and a more ominous tale begins to unfold.

Stepping Up the U.S. Transformer Game

Numerous Presidential and Congressional initiatives have been thrown around to ease supply chain constraints, including Biden’s Presidential Memorandum under the Defense Production Act (DPA), and a requirement under the Infrastructure Investment & Jobs Act that the Department of Energy assess the state of the transformer crisis. The DPA was invoked to accelerate domestic production of key energy technologies, including transformers and electric grid components, pointing out in no uncertain terms that traditional industrial efforts were no longer sufficient to meet the needs of domestic energy infrastructure and domestic energy security.

“Independent estimates indicate that we need to expand electricity transmission systems by 60% by 2030 and may need to triple it by 2050 to meet the country’s increase in renewable generation and expanding electrification needs” (Energy.gov, 2022).

As of late last year, Democrats in Congress were still leaning on the DPA to stimulate the production of transformers, asking for $2.1 billion in emergency funding to bolster the supply chain. Nevertheless, even with industry and government scurrying to the rescue, a resilient U.S. transformer supply chain is still a way off and these headwinds will no doubt present themselves beyond 2023. ?

A Race to the Grid

With no clear end in sight to today’s transformer supply constraints, and the emergence of countless power-intensive U.S. manufacturing projects, 2023 looks to be a race to the grid. Industrial site selection endeavors will be given their best chance for a successful launch when electric utility representatives are engaged early in the planning process. The impetus – ensure from the outset that real estate due diligence is spent on locations that offer optimal capacity, minimal upgrades, and maximum speed.

American Public Power Association. (2022, June). Critical Infrastructure and Supply Chain Constraints. Public Power. Retrieved December 2022, from https://www.publicpower.org/policy/critical-infrastructure-and-supply-chain-constraints-0.

Ciampoli, P. (2022, October 12). APPA survey of members shows distribution transformer production not meeting demand. APPA Survey of Members Shows Distribution Transformer Production Not Meeting Demand | American Public Power Association. Retrieved December 12, 2022, from https://www.publicpower.org/periodical/article/appa-survey-members-shows-distribution-transformer-production-not-meeting-demand

Doe launches new initiative from President Biden's Bipartisan Infrastructure Law to modernize National Grid. Energy.gov. (2022, January 12). Retrieved January 10, 2023, from https://www.energy.gov/oe/articles/doe-launches-new-initiative-president-bidens-bipartisan-infrastructure-law-modernize#:~:text=Independent%20estimates%20indicate%20that%20we,of%20the%20Bipartisan%20Infrastructure%20Law.

Electrical transformers in United States. OEC. (n.d.). Retrieved January 10, 2023, from https://oec.world/en/profile/bilateral-product/electrical-transformers/reporter/usa?redirect=true

Harris, B., & Mehrotra, N. (2022, October 4). Measuring the strength of the recovery. U.S. Department of the Treasury. Retrieved January 9, 2023, from https://home.treasury.gov/news/featured-stories/measuring-the-strength-of-the-recovery#:~:text=The%20U.S.%20economic%20recovery%20from,of%205.7%20percent%20in%202021.

Logan, D. (2022, September 14). Gypsum products, transformers, and concrete prices post historic 12-month increases: Eye On Housing. Eye On Housing | National Association of Home Builders Discusses Economics and Housing Policy. Retrieved January 10, 2023, from https://eyeonhousing.org/2022/09/gypsum-products-transformers-and-concrete-prices-post-historic-12-month-increases/

NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2022).?https://www.ncei.noaa.gov/access/billions/, DOI:?10.25921/stkw-7w73

Parfomak, P. W. (2022, November 16). CRS reports - Electric Power Transformers: Supply Issues. CRS Reports. Retrieved December 12, 2022, from https://crsrephttps://crsreports.congress.gov/product/pdf/IN/IN12048orts.congress.gov/

PRODUCER PRICE INDEXES – NOVEMBER 2022. (2022, November). Retrieved January 10, 2023, from https://www.bls.gov/news.release/pdf/ppi.pdf.

U.S. Department of Commerce Bureau of Industry and Security Office of Technology, THE EFFECT OF IMPORTS OF TRANSFORMERS AND TRANSFORMER COMPONENTS ON THE NATIONAL SECURITY, (2020). (rep) (p. 198).

Uhler, A. (2022, November 14). A shortage of electrical transformers holds back utilities, businesses. Marketplace. Retrieved January 10, 2023, from https://www.marketplace.org/2022/11/14/a-shortage-of-electrical-transformers-holds-back-utilities-businesses/?