Gridlocked: Transformer Shortage Choking US Supply Chains
If Trump wants to build, he needs an industrial policy for transformers
Caleb Harding and Lily Ottinger are back with another high-voltage deep dive into grid infrastructure. Their last piece analyzed China’s struggle to electrify AI data centers. Today, they’re sounding the alarm on the transformer shortage — and evaluating America’s options for rewiring industrial policy.
This story starts with a familiar picture: a foundational yet highly unstandardized piece of hardware, supply chain vulnerabilities exposed by Covid-19 and Russia’s war in Ukraine, and rumors of backdoor vulnerabilities placed by overseas manufacturers.
But we’re not describing legacy chips here — we’re talking about transformers.
Transformers perform an essential role in electricity distribution, increasing or decreasing voltage as power is transmitted from power stations to consumers. Electricity is stepped up to a high voltage to minimize losses during long-distance transmission, and then stepped down by one or more substations as it makes its way to the households, factories, and businesses that need power.
There are transformers at every major junction point in the grid. They are essential for nearly all construction.
It doesn’t matter if you want to build housing, AI data centers, renewable energy installations, EV charging stations, semiconductor fabs, or drone factories — you need transformers for all of the above.
Not even the fossil fuel industry is exempt — oil and gas drilling both require special transformers to supply power to rig machinery, compressors, refineries, and more.
Technologically speaking, transformers are relatively simple — they were first invented in the 19th century. And yet, the inability to build transformers is causing US industrial policy to short-circuit. In the words of utility resource planner Ajey Pandey:
The transformer shortage is bad. It’s like, hair on fire, biting my nails, losing sleep levels of bad. If you build new multifamily housing, you could be looking at a two-and-a-half-year wait for a transformer to supply the building — and that’s if the manufacturers are even accepting orders.
The Trump administration has ambitious plans for AI infrastructure, permitting reform, and offshore drilling projects. Without transformers, however, the US is destined to remain a build-nothing country, no matter how many billions of dollars the federal government dishes out. But how did it get so bad?
Surging Demand
“Transformer lead times have been increasing for the last 2 years - from around 50 weeks in 2021, to 120 weeks on average in 2024. Large transformers, both substation power, and generator step-up (GSU) transformers, have lead times ranging from 80 to 210 weeks[.]”
~ Wood Mackenzie, April 2024
Covid-19 impacted transformer supply chains, but a confluence of several demand-side factors has extended the shortage.
First, the US grid is aging. Transformers are typically rated for about 40 years of service, and much of the US grid is reaching the end of its allocated life.1 Replacing and upgrading these transformers is a major source of demand.
Second, overall electrification is increasing nationally. Americans increasingly use electricity instead of natural gas to cook their food, heat their homes, and take hot showers. The National Infrastructure Advisory Council (NIAC) describes this trend as “effectively irreversible.”
Third, and perhaps most obviously, scores of new renewable energy projects and EV charging stations require transformers to come online. Newly leased offshore drilling projects will have a similar effect — transformers for oil and gas production suffered from long lead times even before Trump’s executive order.
But if the demand is there, why hasn’t the supply followed?
Supply-side Blackout
The NIAC identified four structural supply-side challenges in a report released in June 2024.
Labor Shortages: The US does not have an effective pipeline to train and retain the manufacturing talent to build transformers. To be blunt, “I promise it’s worse than you think.”
Historic Industry Cyclicality: In the past, there has been a strong correlation between transformer demand and the housing market. When the housing market took off in the early 2000s, transformer production followed, and when the market crashed, it caused many manufacturers to exit the market. Suppliers were initially wary of repeating the same mistake.
Lack of Standardization: It is difficult to efficiently scale up production with a custom product. Pandey describes the situation:
“Utilities are also very specific about their [transformers]. There’s no standardization, really. Every utility has its own specifications. If you’re a small utility, you’re asking for a very, very small batch of this very bespoke thing.”
Material Shortages: Transformers are made with grain-oriented electrical steel (GOES),2 but there is only one domestic manufacturer, who is unable to meet domestic demand. Contributing factors include the destruction of the Azovstal steel plant in Mariupol and sanctions against Russian steel producers. Rising demand for non-oriented electrical steel, a key ingredient in EVs that comes from the same manufacturing facilities, will also increase supply tension.
The net result is that domestic supply can only meet 20% of transformer demand, and transformer prices have risen 60-80% since January 2020.
Security Implications
This shortage stands in the way of new construction and slows the rollout of energy infrastructure. But the effects are not limited to development — the shortage also poses a serious security challenge. If a foreign actor were able to destroy US transformers through physical or hardware attacks, we would have very limited means to repair the grid.
Such an attack would be considered an act of war and invite US retaliation — but when making preparations to confront the US over Taiwan, for example, this vulnerability might prove too tempting for China to resist.
Physical Attack
A 2014 analysis by the Federal Energy Regulatory Commission identified 30 critical high-voltage substations in the national grid (the list was not released) and predicted that losing just nine of these substations as the result of a coordinated attack could cause a nationwide blackout lasting for weeks or even months.
Obviously, that report is 10 years old. But according to an NPR interview with Richard Mroz, former president of the New Jersey Board of Public Utilities, the situation today is not substantially different. When asked about the FERC report, Mroz said that “knocking out those high-impact facilities is probably harder than everyone would think” — but he did not say that the underlying grid infrastructure had become less centralized.
What kind of security measures are in place to protect these high-impact facilities exactly? According to Politico, protections include “armed security staff, bullet-resistant fencing or video monitoring.” But these measures may not be enough to protect against a major blackout. In 2022 alone, there were a total of 1,665 security incidents involving the US power grid, including 60 incidents that led to outages. Notable cases include the 2013 Metcalf sniper attack and the 2022 attack on substations in Moore County, North Carolina. In both cases, the perpetrators were never caught.
As Pandey pointed out:
“If you extrapolate [those shootings] further, and you look at the FPVs that are being used to great effect in the Ukraine war… you start to wonder whether a coordinated team with five FPV drones could just knock out Boston3…
I think utilities are just now coming to terms with the fact that we are extremely straightforward civilian infrastructure targets…
Municipal utilities are smaller organizations. From an outside perspective, we’re at the intersection of poorly resourced and high costs for damage. It would kind of be dumb not to target me.”
Physical attacks on grid infrastructure in the US have primarily been conducted by disgruntled extremists looking to sow social unrest. But a state-sponsored physical attack on transformers is not inconceivable, especially given the mounting evidence of Chinese espionage and policing operations on US soil.
Hardware Attack
Importing transformers from China to help satisfy demand introduces additional attack vectors into the system.
China is the world’s largest exporter of transformers, with a total value of $54.1 billion in 2022.
In 2023, China was the USA’s third largest supplier of transformer components by value, selling American customers $375 million worth of “parts of electrical transformers, static converters.” Only Mexico ($508 million) and Canada ($395 million) outranked China by value. Chinese-made components represent 15% of America’s imports in this category. That might not sound like much until you remember that this is a calculation by value — since the RMB-to-USD exchange rate is kept artificially low, China likely provides a disproportionate volume of these components compared to other trade partners.
The picture gets worse once you consider imports of whole, completed transformers. The OEC reports that China was the USA’s number one supplier of transformers and transformer components in 2022, exporting $5.47 billion worth of product to the USA.
However, for the Large Power Transformers (LTPs) that are most critical to the grid, China is the 6th largest exporter to the US, according to a USITC report publicizing the ranking but redacting the power capacity and percentage of total imports.4
A report surveying public US International Trade Commission data found that, “Since 2006, USITC data shows that the US has imported 366 ‘liquid dielectric transformers having a power handling capacity exceeding 10,000 kVA’ from China.” Additionally, among Chinese-made transformers imported in 2020, “54 of these were classified as ‘having a power handling capacity exceeding 100,000kVA.’”
The iron core and copper coils inside of transformers do not constitute a threat — iron is not hackable. However, digital monitoring devices and sensors in large transformers could potentially come with built-in backdoors, which could be manipulated remotely. Such controls could theoretically be used to make a transformer overheat.
How plausible is that threat? It is difficult to quantify, but the DOE appears to have some suspicions. In the summer of 2019, federal officials seized a large power transformer from the Port of Houston and took it to Sandia National Laboratory. The Department of Energy did not comment on the incident or what they found. However, the initial WSJ piece that broke the story reported that, “Mike Howard, chief executive of the Electric Power Research Institute, said that the diversion of a huge, expensive transformer is so unusual — in his experience, unprecedented — that it suggests officials had significant security concerns.”
The following summer, in May 2020, President Trump issued an executive order on securing the United States bulk-power system. Operating on that authority, the DOE issued a “prohibition order” in Dec 2020 that banned some utilities5 from buying transformers of 69 or more kV from China.
In the FAQ document attached to that order, the DOE said it “has reason to believe, as detailed in the Prohibition Order, that the People’s Republic of China is equipped and actively planning to undermine the Nation’s bulk power system.”
However, the order was revoked in Apr 2021 “while the Department conducts a Request for Information to develop a strengthened and administrable strategy to address the security of the US energy sector.”6 It’s plausible that the new Trump administration will reinstate this executive order (and the proposed tariff regime could collapse demand for China-manufactured transformers anyway), but in the meantime, it appears the US does not yet have a comprehensive strategy to deal with the hardware vulnerabilities.
China’s transformers are hopefully not a part of the crucial 30 substations across the US power grid. However, if China could exploit hardware backdoors and cause Chinese-made LTPs to self-destruct, it could still deal a significant blow to the US grid.
Solutions for a Brighter Future
The NIAC report outlines a robust toolbox of policies that could provide some reprieve from the shortage. These include tax breaks and technician training programs, incentives to standardize transformer design, trade deals to strengthen supply chains (particularly for grain-oriented electrical steel), and even a strategic transformer reserve.
Regarding the issue of skilled labor, Pandey told ChinaTalk that US universities are failing to teach relevant electrical engineering skills. In his words,
A lot of domestic manufacturers are starving for talent and pulling in foreign staff to plug gaps. Manufacturers particularly call out the lack of college graduates who know industrial manufacturing or three-phase power engineering. Speaking from experience, I went to a very large flagship state school, and there was literally no one in the electrical engineering department who could teach three-phase power engineering.
If the Trump team is thinking about retooling education pipelines, this is something for them to consider.
To secure greater access to grain-oriented electrical steel, there is one obvious solution. US Steel does not currently have the infrastructure to produce GOES — but Nippon Steel does. If the new administration allows the highly publicized acquisition deal to proceed, perhaps some of Nippon Steel’s pledged US investment budget could go toward expanding domestic production capacity for GOES.
As far as productive trade policy is concerned, tariffs on allies that produce transformers and transformer components would be counterproductive. Even with massive unmet demand, the domestic transformer industry has been unable to ramp up production to clear backlogged orders. There are already, structurally, too many sticks in this sector. Given the similarities with semiconductor manufacturing, we believe some carrots are in order.
By supplementing the 2020 transformer executive order with real industrial policy, the Trump administration has a huge opportunity to jumpstart the construction of housing, factories, and energy infrastructure in the United States.
To close, we’ll leave you with the full list of policy recommendations from the National Infrastructure Advisory Council:
“The NIAC recommends the Federal government craft policies and designate funding targeted at increasing domestic capacity, such as tax credits, grants, accelerated depreciation, funding for new working apprentice and/or training programs, and other incentives, using the CHIPS Act as a model…
The NIAC recommends convening all parties who drive demand to achieve greater accuracy in transformer demand forecasting that will provide a more precise outlook across the next 10 to 15 years…
The NIAC recommends encouraging long-term contracts/customer commitments between transformer suppliers and the sectors driving demand…
The NIAC recommends establishing a strategic reserve of transformers, with the US government as the buyer of last resort…
The NIAC recommends the Federal government promote collaboration between design engineers from utilities, trade associations, and domestic manufacturers with the goal of standardizing transformer design and reducing complexity associated with customization…
The NIAC recommends the Federal government ensure a sufficient supply of electrical steel by coordinating incentives for supply, governmental efficiency standards, and trade policy…
The NIAC recommends the Federal government grow the pipeline of qualified workers by partnering with universities, community colleges, and trade schools on training programs, while working with federal, state, and local governments to craft tax incentives for workers who enter the field.”
This 2014 report by the Department of Energy estimated that, “The average age of installed LPTs [Large Power Transformers] in the United States is approximately 38 to 40 years, with 70 percent of LPTs being 25 years or older.”
A newer and slightly more efficient material known as amorphous steel can also be used, but there is very little being produced.
For example, the popular DJI Air 3 drone has a maximum horizontal flying speed of 47 miles per hour and a range of 19 miles. An explosive payload would reduce speed and range by some amount.
See the table below, which ranks the sources of US transformer imports by voltage (MVA) other than South Korea, which ranks first and is the subject of this report. Specific figures redacted. Source: USITC.
Sonal Patel reports that the ban applies “specifically to utilities that own or operate Defense Critical Electric Infrastructure (DCEI) and actively serve a CDF—which the DOE defines as a facility that is ‘critical to the defense of the US and ‘vulnerable to a disruption of the supply of electric energy provided to such a facility by an external provider.’”
President Biden suspended President Trump's executive order for 90 days on 20 Jan 2021. By extension, this also temporarily suspended the prohibition order. To create a stable policy environment and conduct an RFI, the DOE decided to simply revoke the prohibition order.
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I feel like we have to be talking about really small dollar amounts for there to be no significant regulatory barrier, a 2 year backlog, and prices rising 50-80%.
Indeed, asking o3, it says 50+ Mva transformers go for $3-5M and 100+ go for $5-8M, and if you're only buying 500 of those a year, the whole US transformer industry is ~$2-4B in spend, aka a Congressman's sneeze routinely causes more spending than that.
But with overall spend so low and strategic importance so high, I don't understand why we can't just guarantee a price for any domestic transformers that's twice as high as anywhere else, and wait for somebody (Palmer Luckey, probably) to take that opportunity and produce them domestically.
Fabulous write up! Keep up the good work!