When I wrote last summer about how supply chain issues had made electrical transformers difficult to come by, I suspected I would be revisiting the topic soon, as this was a wide-ranging problem with no easy answers available. That was confirmed when a colleague sent a notice from a small municipal utility in the middle of the U.S. alerting everyone involved that it could no longer accommodate any projects that required a new distribution transformer because there were simply none that could be gotten.
“We do not have any timeframe of when to expect deliveries of transformers as suppliers are unable to provide a date of when to expect deliveries to re-start,” according to the announcement. “We apologize for the inconvenience and ask for your patience as this issue is affecting electrical utilities nationwide.”
Reaching out to utilities of different sizes, locations and ownership models, it became clear that the issue was deepening — with wait times growing longer, and shortages occurring with all kinds of transformers, not only the large, pad-mounted variety.
A common refrain from respondents was: We still have some transformers in stock, but an unexpected event could change that, and if it did, it is unclear how we would work around the shortage.
Waiting is the Hardest Part
At Otter Tail Power Co., an investor-owned utility providing service to about 133,000 customers in Minnesota and the Dakotas, utility staff are seeing lead times grow by leaps that would have previously been unthinkable.
“We are delaying some of our underground projects due to the lack of pad-mount distribution transformers on-hand. Lead times are extending to lengths never seen before, we are being quoted a lead time of 202 weeks on pad-mount transformers. That’s 3.88 years,” said Gregory Rausch, sourcing manager for Otter Tail.
Previous lead times ran about 16-20 weeks, Rausch said. The situation began to worsen in spring 2020 with COVID-19 shutdowns in full force, and manufacturing has since been unable to dig out of the hole — with demand running as high as 500% more than previous years.
It should be noted that the lead time figures provided by Otter Tail were a bit of an outlier, with some utilities that responded to this story seeing shorter wait times and merely concerned about the possibility of longer ones. However, Otter Tail was not unique in wait times lasting multiple years.
Should these trends continue, Rausch said commercial and industrial customers could be impacted, and some new residential customers are already being told they may have to wait longer than normal to be connected to the power grid.
“We are running out of options, if we can’t get more transformers and we use up our remaining inventory, we’ll need help from somewhere,” Rausch said. “In the meantime, our resourcefulness is keeping us alive, we’re using refurbished transformers when we can get them. We’re using whatever we can get our hands on. But the bottom line is, utilities are using more than what’s being manufactured, and that cannot continue very much longer.”
After hurricane season began in the fall, he said, orders were pushed back 2-4 weeks due to transformer makers needing to respond to the demand for transformers in storm-hit areas.
“We can no longer trust manufacturers order ship dates; we don’t plan any projects around the manufacturing ship date because it’s just too unreliable,” he said.
Manufacturers are doing the best they can to communicate when stock will be available, he said, but added that the stress on the supply chain is such that there is no remaining transformer reserve for many utilities to rely on, so that a sudden event like a hurricane can result in even longer delivery times.
“It’s a very serious issue. The chief procurement officers in the Edison Electric Institute companies have been meeting bi-weekly since this spring about the seriousness of this issue,” he said.
According to the EEI, 75% of investor-owned utilities reported having lower reserves of pad-mounted or pole-mounted distribution transformers last year than in 2018. EEI also found it can take two years or longer to source new transformers.
The Electricity Subsector Coordinating Council (ESCC) found last year that 90 percent of investor-owned electric companies reported a “high” or “medium” risk of running out completely of at least one distribution transformer voltage class. About 60 percent of IOUs have had to cancel or put off planned projects due to the shortage, according to ESCC.
Entities representing the industry have called for several remedies, including making funding available to through the Defense Production Act to boost domestic manufacturing, lowering barriers to entry for critical manufacturing jobs, and loosening efficiency restrictions on using different types of transformers in different configurations along the grid.
The American Public Power Association vented its frustration just before the new year when the omnibus appropriations bill, despite calls from the APPA and other trade groups, did not earmark any DPA funding to help ramp up transformer production.
The National Rural Electric Cooperatives Association and the APPA also asked the Department of Energy to temporarily suspend efficiency rules on transformer manufacturers. This change would lower demand for the specially milled steel that manufacturers say is one of the primary drivers of the current product shortage.
Manufacturer’s Take
Back in 2022, Bill Miller, Senior Vice President of Marketing and Sales for Hitachi Energy’s North American transformer business, said the situation had not improved since 2020.
When asked again, Miller now says the situation for manufacturers is changing, with some supply chain issues improving, but he added that the continued scarcity of specially milled amorphous electrical steel in North America is one of the primary drivers for the scarcity of transformers.
It takes a lot of specially manufactured materials to make transformers, including specifically engineered components, grain oriented electrical steel (GOES) for cores, high-cellulose papers, transformer oils, aluminum and copper wire. Most of these are subject to raw material price volatility or supply disruptions in the global market.
Amorphous steel and GOES are made by rapidly cooling a molten alloy so that crystals do not form. This makes a thinner electrical steel that enables lower core losses in a transformer thanks to different magnetic properties in the core, according to Jeremy Dunklin of the American Council for an Energy-Efficient Economy’s Appliance Standards Awareness Project.
Dunklin said the annual domestic capacity of amorphous steel would need to be nearly doubled from 45,000 metric tons to 75,000 metric tons over the next two years to meet the majority of the domestic demand for distribution transformer cores.
“Grain oriented electrical steel continues to be pretty stressed globally,” Miller said, with only one supplier left on the continent. “The demand for the material is still very high. We don’t see that the supply has growing in step with demand. So, if there was any scarcity on supplies for transformers, it would be in the GOES category.”
Hitachi is the world’s largest consumer of GOES, Miller said, adding that much of the world’s supply came from Russia, which Hitachi has not done any business with since shortly after the country's invasion of Ukraine.
Meanwhile, China, another of the most important specialty steel makers, is electing not to make as much GOES for export, instead using its own supply domestically.
“China’s zero covid policy was a factor. Over the last 6-12 months, it’s been increasingly difficult to keep the supplies we get from Asia flowing,” Miller said.
Market volatility for transformer oils and copper wire have fallen, providing some relief. Another pressure is now coming from the ongoing chip shortage. The shortage of semiconductor products was a huge pressure on many industries throughout 2022, but now shows some signs of slackening as economic growth plateaus slightly. Miller added that transformers usually do not need semiconductor components unless a customer specially requests them.
Riding the Storm Out
While some utilities are seeing their equipment orders move further down the queue due to severe weather impacts, the situation is also difficult when you are in the path of the storm.
Jay Stowe, CEO and Managing Director of JEA, the municipal utility for Jacksonville, Florida, said his utility is subject to the same long lead times and must plan ahead.
“JEA planned ahead in 2021 to ensure we had transformers for our 2022 storm stock, and we have already placed orders for FY23 storm stock. We also have been able to establish safety stock to make sure we have units on hand for repair and maintenance work. Units received above and beyond those two preventative supply efforts will go to new development projects,” Stowe said.
JEA has also had to look overseas to find the equipment it needs. Among the hard-to-find items are pad-mount transformers, cabling, pole-mounted transformers and associated hardware.
“We have found various creative solutions to these challenges, including turning to overseas manufacturers for transformers and other supplies, an option that is more costly. Transformer lead times for pad-mounted units have grown from 3 to 4 months prior to the pandemic, to 17 months since supply chain disruptions started in early 2021,” Stowe said.
Besides sourcing items overseas, Stowe said JEA is taking some concrete steps to address the shortages, including ordering more materials to compensate for long lead times, temporarily using overhead transformers in undergrounding applications instead of pad-mounted units, refurbishing transformers in house and “harvesting,” which means redeploying underused transformers. Stowe is also co-chairing an ESCC supply chain “tiger team” of CEOs that is pushing for collaboration across the industry as well as the federal government.
Doubt on Federal Action
While trade groups like the APPA, EEI, ESCC, NRECA and others strive to bring attention to this issue, those on the forefront of the issue are worrying whether the shortage is being looked at with the urgency it deserves.
In Roseville, California, a suburb of the state’s capital, Sacramento, the city-owned Roseville Electric Utility might be having an even tougher time if not for an economic slowdown, inflation, climbing interest rates and the utility’s own careful planning, said Dan Beans, Electric Utility Director.
“We have sufficient reserves to cover the loss of transformers for an estimated two years. We have a small amount in addition to our necessary maintenance reserves to support new construction, but these are limited and depend on the size of the transformer,” Beans said. “With our planning, we have procured what we need for the projects that we know about today, but the next project could be a different story.”
Last year, delivery times for equipment climbed from 3-6 months to more than a year, and worse still, manufacturers offered no guarantee on delivery dates even as transformer prices climbed 40%, Beans said.
“Initially, delivery times for smaller single-phase pad-mounted units were the most impacted, with 3-phase units continuing to go to production in a reasonable time. However, by 2022 Q3, 3-phase units appear to be similarly affected,” he said, adding that the supply problem is spreading to affect other power grid components such as wire and meters.
“I personally visited six congressional offices and none of them were aware of the issue back in June,” he said.
Using the Defense Production Act to boost manufacturing is a good idea, he said, but Congress has so far failed to commit any funding to support the idea even after a year of advocacy from utilities, home builders and other stakeholders.
“Without funding, the DPA is just another acronym and does nothing to help the situation,” he said. “It appears that until customers are not able to have power restored, only then will the government act. Sadly, this will come at a high social, economic, and environmental cost.”
Furthermore, instead of relaxing distribution transformer efficiency standards as the APPA, the NRECA and other groups asked, the DOE issued a noticed of proposed rulemaking December 28 to increase the efficiency of transformers by using even more of the already scarce electrical steel — something Beans said will create a lot of issues.
Dunklin from ACEEE said GOES and amorphous steel each have only a single domestic supplier: Cleveland-Cliffs for GOES and Metglas for amorphous steel. DOE’s proposed rule states that Cleveland-Cliffs does not have the capacity to manufacture high-grade GOES to serve the entire U.S. transformer market, meaning the U.S. is dependent on foreign steel mills. Further, the domestic GOES market is under pressure from the electric vehicle (EV) market as lower grade non-GOES electrical steel is used in EV motors.
Because GOES production can be shifted to non-GOES products at modest cost, many manufacturers have converted GOES production lines to non-GOES to serve the rapidly growing, and more lucrative EV market, meaning that the burgeoning EV market may be in a raw materials competition with the power grid that EVs need to function.
DOE’s proposed standards would essentially require that new distribution transformers use amorphous metal cores starting in 2027, Dunklin said. Absent standards, purchasers would need to start making more purchasing decisions based on total ownership cost and efficiency rather than upfront cost. Dunklin also notes that large transformers are not regulated by the DOE and would not be affected by this rule.
This concept may be a difficult sell for utilities, who are forced to weigh theoretical total ownership cost of equipment against a power grid that can’t be repaired due to transformers being scarce.
“As a department, they appear not to understand or believe the seriousness of this issue. One group from DOE is trying to work with industry to find solutions while others are doing the exact opposite,” Beans said. “It looks like things are going to have to get really bad before the feds will take meaningful action.”
A Storm Strikes
Shortly before the new year, Peter Rossi, COO of Vermont Electric Cooperative was facing down a severe winter storm that would blow through the East Coast and New England that dumped lots of heavy, wet snow on the coop’s service territory.
“The storm was very powerful, about two times stronger than a very similar South/Southeasterly wind event from 2017,” Rossi said. “And it was emotionally draining working long hours through the entire holiday weekend.”
“We were able to stand our system back up in 5.5 days which was a real testament to our preparation, management, and effort by all employees,” Rossi said. “Lots of things went right, and as always, we are analyzing areas for improvement. But a success story is the investments we made in resiliency in certain areas of our system were not affected by outages on this storm. Storm hardening is real and can have a profound impact.”
“But we certainly depleted our stock of overhead transformers that are typical (e.g., 10 KVA and 15 KVA),” Rossi said. “If we have another event this winter, we could be in trouble.”
Building a Way Out
In addition to the de-industrialization of North America that resulted in fewer steel mills, the transformer market itself has changed, Bill Miller with Hitachi said.
“North America is the most active market, depending on who you talk to, for transformers. What’s happening in this market? About 90% of what we sold 10 years ago was to a utility company. Today, only about 60% goes to utilities and the rest will go to others, such as renewable energy developers or property developers who buy directly from the manufacturer,” Miller said.
The customer makeup has changed in the past decade, with much of the growth happening in new areas: Data center hyperscalers, renewable energy projects and the oil, gas and chemical industries, each of which require transformers for their operations.
On the West Coast, the drive for undergrounding to protect the grid from foliage intrusion or sparking wildfires, also requires more transformers. The hurricane-prone East Coast states also have a growing need for transformers as storms intensify, he said.
Hitachi is expanding the manufacturing range and capacity of several of its plants, spending $10 million to modernize its Jefferson City, Missouri factory. More expansions will be announced in the future, Miller said.
T&D equipment manufacturers have to be concerned with how the power grid is holding up, he said, meaning the industry must act as a unit in the common interest of keeping the lights on.
“When [Lee County, Florida] was hit by [Hurricane Ian], we had to reconfigure some of our operations to serve that need. We do prioritize those kinds of disaster conditions to help the area recover from storms, and we don’t charge any extra for that. We do it because it’s the right thing to do,” he said.
Larger utilities often have longstanding relationships with manufacturers, giving them allocated “slots” held for those companies based on their forecasts.
“Now that’s a reliable way to book business. You have a repeat customer with a set rate of growth, you can project the growth of your business,” he said.
Materials shortages caused a lot of jumps in pricing and in delivery scheduling, which makes everything less predictable.
“We used to quote a firm price and ship date. That was during times of more predictable inflation. With the volatility in commodity costs, shipping costs, we moved to variable pricing. For us, we use price adjustment calculation that is typically calculated three months prior to shipping, or about the time we purchase those commodities we need to manufacture it,” he said.
It didn’t used to be necessary to try to predict what a transformer was going to cost in three years, he said. However, now it’s a full-time job trying to keep utility customers informed of these changes.
“That price adjustment method that we use increases transparency for the customer. We are seeing some commodities that are stabilizing in cost,” he said. “So, they can see we aren’t gouging. Some customers get credits if commodity costs fell.”
Markets and geopolitics are difficult to predict reliably, but the industry can rely on two things: People will continue to need electricity and transformers will still be needed to deliver it.
“You can’t trick the physics. We have had these transformers built a certain way for many years, and they were built that way for a reason. You need a certain amount of steel to step up electricity, and you can’t trick the physics,” he said.
