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Released March 25, 2024 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--There are several ways that President Joe Biden's efforts to decarbonize electricity generation and the broader economy could be frustrated, including hostile Republican lawmakers in Congress and a federal judiciary that has grown skeptical of government overreach. Less often discussed, but no less of a threat, is the perilous state of the supply chain for distribution transformers.
The COVID-19 pandemic worsened, but did not create, the still-kinked supply chain for these fundamental building blocks of the U.S. electric infrastructure. Over a quarter-century beginning in the 1980s, there was a wave of consolidation among transformer manufacturers, coupled with an offshoring of transformer manufacturing capacity. Now, domestic distribution transformer manufacturers only meet about 20% of demand for this vital equipment, according to a late-2023 report from consultants Wood Mackenzie (Edinburgh, Scotland).
Then, COVID-19 hit, and the one-to-three months it used to take to procure a distribution transformer ballooned into two years or more. Prices have skyrocketed as much as 200% over pre-pandemic costs.
Beyond driving up retail electric prices, a shortage of distribution transformers could lead to longer wait times to restore power after an outage and even delays in building new residential or commercial projects.
The Wood Mackenzie report makes it clear that long lead times have lengthened even further. As of the third quarter of 2023, the firm estimated that it takes a minimum of about 60 weeks, and as much as 150 weeks, to procure a small distribution transformer (up to 12.5 megavolt-amperes [MVA] of capacity).
Click on the image at right to see an estimate from Wood Mackenzie about lead times for small, medium and large transformers as of the third quarter of 2023.
Almost every kilowatt-hour of electricity that is used flows through a distribution transformer. Similar to how a traffic cop manages the flow of vehicles on a road, distribution transformers manage the flow of electricity along the power grid by stepping down high-voltage electricity from transmission lines into low-voltage electricity that is delivered to customers.
Distribution transformers "currently are experiencing an unprecedented imbalance between supply and demand," wrote researchers for the National Renewable Energy Laboratory (NREL) (Golden, Colorado). Those researchers, Killian McKenna, Sherin Ann Abraham and Wenbo Wang, collaborated on a report released last month titled "Major Drivers of Long-Term Distribution Transformer Demand."
"Distribution transformers are a bedrock component of our energy infrastructure," they continued. "But utilities needing to add or replace them are currently facing high prices and long wait times due to supply-chain shortages. This has the potential to affect energy accessibility, reliability, affordability -- everything."
"Based on the transformer data collected, NREL estimates distribution transformer capacity may need to increase 160%--260% by 2050 compared to 2021 levels to meet residential, commercial, industrial and transportation energy demands," McKenna, Abraham and Wang wrote in their NREL report. The report said the projected surge of demand "is largely driven by aging transformers and electrification. NREL is also examining potential demand increases from extreme weather events and utility undergrounding and resilience programs that use various types of transformers."
Part of the challenge is there is no current data available on transformer inventory. The last industry survey of utility-industry transformer inventory was conducted in 2017. Transformers are owned by about 3,000 electric utilities across the country. There is no centralized inventory. In a long-running research series, "Electrification Futures Study," NREL researchers are working to compile more updated data on transformers, to better characterize the scope and scale of the problem as well as outline possible solutions.
But even at the current state of knowledge, the problem is concerning. And the energy transition to low- or no-carbon fuels likely will worsen the supply-demand imbalance for transformers, the NREL predicted.
Many distribution transformers were installed 50 or more years ago, as the U.S. electric grid expanded dramatically in the 1950s, 1960s and 1970s, the Wood Mackenzie report said. Those transformers have an expected lifespan of about 35-40 years, which could be extended through a variety of practices. So the passage of time creates a certain level of organic, age-related demand.
Beyond that, extreme weather and other natural catastrophes, likely made worse by global climate change is a second force driving up demand for transformers. The NREL report noted that in 2005, hurricanes Katrina and Rita damaged 12,600 transformers in the Louisiana service area of Entergy Corporation (NYSE:ETR) (New Orleans, Louisiana). That same year, hurricanes damaged about 2,300 transformers at another utility, Mississippi Power Company (Gulfport, Mississippi), a unit of the Southern Company (NYSE:SO) (Atlanta, Georgia). More recently, Hurricane Laura in 2020 damaged about 4,760 Entergy transformers while Hurricane Ida in 2021 damaged nearly 6,000 transformers for that utility, the NREL report noted.
In addition, wildfires in California, Washington State, Oregon, Hawaii and Colorado, among other states, have ravaged the inventories of distribution transformers stocked by utilities operating in those states. Winter Storm Uri, in February 2021, ravaged the electric distribution systems in Texas and Oklahoma.
To that level of demand is added a third driver of demand for distribution transformers: the energy transition's effort to electrify buildings and transportation.
The NREL report said, "Our preliminary estimates for the overall capacity of distribution transformers that will be needed to serve economywide demand (i.e., residential, commercial, industrial, and transportation) indicate an expected 160%--260% increase compared to 2021 levels due to electrification (driven in part by the Inflation Reduction Act). These estimates are based on initial analysis of the potential non-coincident peak demand that would need to be served by distribution transformers, considering economywide electrification demand from the Electricity Futures Study 'Moderate' electrification scenario."
"Increased load due to electrification is a result of increased electric vehicles, heat pumps, and electric cooking, among other drivers," the NREL report continued. "Demand growth for the residential sector across states is highly heterogenous; the largest increases in demand are expected in cold-climate states where both electric vehicle adoption and adoption of heat pumps will likely significantly drive demand."
The NREL report noted that there are expected to be large variations in electric demand growth trends, and thus demand for distribution transformers, among different utilities. For example, three Massachusetts investor-owned utilities cited in the report have projected peak electric demand growth rates of between 193% and more than 400% by 2050.
Utility officials have said the federal government has moved too slowly to rectify the distribution transformer supply-demand imbalance. The November 2023 Wood Mackenzie report, "Power Transformers: Supply Shortage and High Lead Times," noted that President Biden signed executive orders in June 2022 invoking the Defense Production Act to help stimulate domestic manufacturing of transformers. But "funding for the domestic transformer industry was neither specified in the manufacturing tax credits of the Inflation Reduction Act (sections 45X and 48C) nor was any funding for transformer manufacturing included in the Omnibus Appropriations Bill at the end of 2022."
To make matters worse, the U.S. Department of Energy in early 2023 released a draft rule to increase the efficiency of transformers, which already were very efficient. Higher efficiency standards put manufacturers on the horns of a dilemma: manufacture transformers according to current specifications or wait for several years until the new standards were finalized and mandated.
Meeting these new standards might require manufacturers to stop using grain-oriented electrical steel (GOES) for the steel core of the transformer. In issuing its draft rule, the DOE suggested, but did not mandate, switching from GOES to amorphous steel, which is more expensive.
The draft rule was sharply criticized by a variety of stakeholder groups. In mid-2023, 47 U.S. senators asked Energy Secretary Jennifer Granholm to finalize a rule that "does not exacerbate the shortage of distribution transformers," according to a January 2024 report from the Congressional Research Service. The DOE's draft rule currently is in a state of limbo.
Despite industry pressure, the federal budget bill approved March 8 did not include $1.2 billion of federal funding to boost production of distribution transformers. The Senate version of that spending bill included that measure.
The Wood Mackenzie report predicted that, "given the high start-up cost and skilled labor requirements of transformer manufacturing, it is unlikely that we will see any reshoring or expansion of the domestic manufacturing base absent incentives."
Industrial Info is tracking 11 active transformer manufacturing projects in North America collectively valued at about $262 million. Most of these projects are scheduled to be built in the U.S., but at least one is scheduled to be built in Canada and another is slated to be built in Mexico. Three of these projects are under construction now, five are in the engineering stage and three are in the planning phase.
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).
The COVID-19 pandemic worsened, but did not create, the still-kinked supply chain for these fundamental building blocks of the U.S. electric infrastructure. Over a quarter-century beginning in the 1980s, there was a wave of consolidation among transformer manufacturers, coupled with an offshoring of transformer manufacturing capacity. Now, domestic distribution transformer manufacturers only meet about 20% of demand for this vital equipment, according to a late-2023 report from consultants Wood Mackenzie (Edinburgh, Scotland).
Then, COVID-19 hit, and the one-to-three months it used to take to procure a distribution transformer ballooned into two years or more. Prices have skyrocketed as much as 200% over pre-pandemic costs.
Beyond driving up retail electric prices, a shortage of distribution transformers could lead to longer wait times to restore power after an outage and even delays in building new residential or commercial projects.
The Wood Mackenzie report makes it clear that long lead times have lengthened even further. As of the third quarter of 2023, the firm estimated that it takes a minimum of about 60 weeks, and as much as 150 weeks, to procure a small distribution transformer (up to 12.5 megavolt-amperes [MVA] of capacity).
Almost every kilowatt-hour of electricity that is used flows through a distribution transformer. Similar to how a traffic cop manages the flow of vehicles on a road, distribution transformers manage the flow of electricity along the power grid by stepping down high-voltage electricity from transmission lines into low-voltage electricity that is delivered to customers.
Distribution transformers "currently are experiencing an unprecedented imbalance between supply and demand," wrote researchers for the National Renewable Energy Laboratory (NREL) (Golden, Colorado). Those researchers, Killian McKenna, Sherin Ann Abraham and Wenbo Wang, collaborated on a report released last month titled "Major Drivers of Long-Term Distribution Transformer Demand."
"Distribution transformers are a bedrock component of our energy infrastructure," they continued. "But utilities needing to add or replace them are currently facing high prices and long wait times due to supply-chain shortages. This has the potential to affect energy accessibility, reliability, affordability -- everything."
"Based on the transformer data collected, NREL estimates distribution transformer capacity may need to increase 160%--260% by 2050 compared to 2021 levels to meet residential, commercial, industrial and transportation energy demands," McKenna, Abraham and Wang wrote in their NREL report. The report said the projected surge of demand "is largely driven by aging transformers and electrification. NREL is also examining potential demand increases from extreme weather events and utility undergrounding and resilience programs that use various types of transformers."
Part of the challenge is there is no current data available on transformer inventory. The last industry survey of utility-industry transformer inventory was conducted in 2017. Transformers are owned by about 3,000 electric utilities across the country. There is no centralized inventory. In a long-running research series, "Electrification Futures Study," NREL researchers are working to compile more updated data on transformers, to better characterize the scope and scale of the problem as well as outline possible solutions.
But even at the current state of knowledge, the problem is concerning. And the energy transition to low- or no-carbon fuels likely will worsen the supply-demand imbalance for transformers, the NREL predicted.
Many distribution transformers were installed 50 or more years ago, as the U.S. electric grid expanded dramatically in the 1950s, 1960s and 1970s, the Wood Mackenzie report said. Those transformers have an expected lifespan of about 35-40 years, which could be extended through a variety of practices. So the passage of time creates a certain level of organic, age-related demand.
Beyond that, extreme weather and other natural catastrophes, likely made worse by global climate change is a second force driving up demand for transformers. The NREL report noted that in 2005, hurricanes Katrina and Rita damaged 12,600 transformers in the Louisiana service area of Entergy Corporation (NYSE:ETR) (New Orleans, Louisiana). That same year, hurricanes damaged about 2,300 transformers at another utility, Mississippi Power Company (Gulfport, Mississippi), a unit of the Southern Company (NYSE:SO) (Atlanta, Georgia). More recently, Hurricane Laura in 2020 damaged about 4,760 Entergy transformers while Hurricane Ida in 2021 damaged nearly 6,000 transformers for that utility, the NREL report noted.
In addition, wildfires in California, Washington State, Oregon, Hawaii and Colorado, among other states, have ravaged the inventories of distribution transformers stocked by utilities operating in those states. Winter Storm Uri, in February 2021, ravaged the electric distribution systems in Texas and Oklahoma.
To that level of demand is added a third driver of demand for distribution transformers: the energy transition's effort to electrify buildings and transportation.
The NREL report said, "Our preliminary estimates for the overall capacity of distribution transformers that will be needed to serve economywide demand (i.e., residential, commercial, industrial, and transportation) indicate an expected 160%--260% increase compared to 2021 levels due to electrification (driven in part by the Inflation Reduction Act). These estimates are based on initial analysis of the potential non-coincident peak demand that would need to be served by distribution transformers, considering economywide electrification demand from the Electricity Futures Study 'Moderate' electrification scenario."
"Increased load due to electrification is a result of increased electric vehicles, heat pumps, and electric cooking, among other drivers," the NREL report continued. "Demand growth for the residential sector across states is highly heterogenous; the largest increases in demand are expected in cold-climate states where both electric vehicle adoption and adoption of heat pumps will likely significantly drive demand."
The NREL report noted that there are expected to be large variations in electric demand growth trends, and thus demand for distribution transformers, among different utilities. For example, three Massachusetts investor-owned utilities cited in the report have projected peak electric demand growth rates of between 193% and more than 400% by 2050.
Utility officials have said the federal government has moved too slowly to rectify the distribution transformer supply-demand imbalance. The November 2023 Wood Mackenzie report, "Power Transformers: Supply Shortage and High Lead Times," noted that President Biden signed executive orders in June 2022 invoking the Defense Production Act to help stimulate domestic manufacturing of transformers. But "funding for the domestic transformer industry was neither specified in the manufacturing tax credits of the Inflation Reduction Act (sections 45X and 48C) nor was any funding for transformer manufacturing included in the Omnibus Appropriations Bill at the end of 2022."
To make matters worse, the U.S. Department of Energy in early 2023 released a draft rule to increase the efficiency of transformers, which already were very efficient. Higher efficiency standards put manufacturers on the horns of a dilemma: manufacture transformers according to current specifications or wait for several years until the new standards were finalized and mandated.
Meeting these new standards might require manufacturers to stop using grain-oriented electrical steel (GOES) for the steel core of the transformer. In issuing its draft rule, the DOE suggested, but did not mandate, switching from GOES to amorphous steel, which is more expensive.
The draft rule was sharply criticized by a variety of stakeholder groups. In mid-2023, 47 U.S. senators asked Energy Secretary Jennifer Granholm to finalize a rule that "does not exacerbate the shortage of distribution transformers," according to a January 2024 report from the Congressional Research Service. The DOE's draft rule currently is in a state of limbo.
Despite industry pressure, the federal budget bill approved March 8 did not include $1.2 billion of federal funding to boost production of distribution transformers. The Senate version of that spending bill included that measure.
The Wood Mackenzie report predicted that, "given the high start-up cost and skilled labor requirements of transformer manufacturing, it is unlikely that we will see any reshoring or expansion of the domestic manufacturing base absent incentives."
Industrial Info is tracking 11 active transformer manufacturing projects in North America collectively valued at about $262 million. Most of these projects are scheduled to be built in the U.S., but at least one is scheduled to be built in Canada and another is slated to be built in Mexico. Three of these projects are under construction now, five are in the engineering stage and three are in the planning phase.
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).
