When COVID-19 shook the global economy in 2020, Ford stopped assembly lines at car plants from Michigan to Mexico. The old textile mill in the central Pennsylvania town of Sunbury, which had survived the last major wave of textile mill closures in the US, closed for good. The Texas oil fields, which had made the United States a competitor to Saudi Arabia in crude oil exports, ceased production.
At ERMCO Inc, a Tennessee-based manufacturer of electrical transformers, the factory halls were humming. Orders from the rural electric cooperatives ERMCO serves came in faster than ever before. The pandemic may have disrupted many manufacturers’ supply chains, but ERMCO’s 10 plants in states such as Illinois, Indiana and Georgia kept pace with record sales.
“In 2020, we produced more transformers than in the history of our company,” said ERMCO CEO Tim Mills. “2021 topped that record year.”
It’s possible this is just the beginning of the boom, and demand could pick up soon as federal money from President Joe Biden’s landmark climate change legislation begins to flow. But Mills said a new regulation designed to make transformers more energy efficient is making it impossible to fully work off the ever-growing backlog of orders.
The resulting shortage has kept builders from completing new homes and driven up the cost of replacing power lines destroyed by storms by double or more. Transformers that used to take weeks to get now have to wait up to a year or more. Utilities say the crisis may worsen, slowing the move away from fossil fuels and increasing the number of blackouts in a country where the average household is already without power for twice as long as it was 10 years ago.
Transformers come in hundreds of shapes and sizes, the most visible being the metal cylinders mounted on electricity pylons. The job of the large transformers is primarily to convert currents of up to 750 000 volts into the 240-volt voltage that most homes are designed to handle. Smaller transformers perform similar functions when the electricity flows over the transmission lines from the power plants to the substations and into the homes and businesses.
Virtually every home is connected to a transformer, which means that demand for transformers has historically kept pace with the construction of new homes.
Things are different now. Extreme storms and wildfires are destroying hundreds of transformers at a time, depleting utility inventories. Now that the US is finally upgrading its power grid, more than a quarter of which was built half a century ago, even fewer are available.
But it’s not just about replacing the existing grid. The US needs to expand its power grid to handle the two fastest-growing sources of electricity – solar and wind power – which require larger distribution grids to balance electricity loads as the output of collectors and turbines fluctuates with the weather. As if that weren’t enough, federal researchers estimate that charging cars and powering heating and cooking appliances with electricity could increase total demand on the grid by nearly 40% over the next 27 years. All of this requires more transformers.
The problem has been growing for years and has attracted the attention of both the Trump and Biden administrations.
“We are certainly concerned about the supply of transformers across the board,” Energy Secretary Jennifer Granholm said at a Senate hearing last month.
Mills would like to ramp up production. But it takes years for new assembly lines to reach full capacity, and it’s hard to predict whether the same machines he can’t produce fast enough today will be allowed to be sold illegally four years from now.
In December, the Biden administration proposed new standards requiring that all transformers sold from 2027 onwards be made from a completely different type of steel. Environmentalists claim the new rule would cut the amount of energy wasted in a transformer’s core by half compared to current models. However, manufacturers say the overall energy savings to the power grid would be minimal and warned that forcing them to change production lines could exacerbate the current transformer shortage and delay the shift away from fossil fuels.
The Department of Energy has not yet released the final version of the regulation, which just completed a public comment period in which opponents far outnumbered supporters.
“If I knew definitively which way it was going to go, I might put more chips in one basket or the other,” Mills said. “All the equipment I buy to ramp up production would go one way or the other.
Policy experts, however, believe that repealing the regulation will not necessarily solve a problem that could be fixed by government assistance in hiring and training more workers and establishing a government-controlled stockpile of transformers.
Up to 2024 and beyond
Due to the patchwork of power grids, regulators and market designs in the United States, trends in this country vary by the size of the continent. HuffPost contacted the ten largest electric utilities in the US and several transformer manufacturers from different sectors, reviewed public records and interviewed representatives from trade associations representing rural electric cooperatives, utilities and homebuilders.
Transformer orders that used to take weeks can now take a year or more. Large power transformers can take more than two years. Projects are delayed. Prices are going through the roof. Supplies needed to rebuild quickly after natural disasters are running low.
The Tennessee Valley Authority, the state’s only electric utility, said the expansion of renewable energy has driven up demand for transformers, resulting in “longer lead times and pricing pressure” due to challenges in the transformer supply chain.
Power shortages are not a theoretical risk. Americans have experienced prolonged power outages in recent years. In 2021, the average American household was without power for a total of eight hours, compared to less than four hours in 2013. Excluding extreme weather events from the latest available federal statistics, the country still spent an average of more than two hours in the dark, a 12% increase over 2013 and more than twice as long as is common in Europe and East Asia.
Rising Demand, but production expansion is a Risky Bet
In 2021, ERMCO has announced plans to take over an abandoned Caterpillar factory near its headquarters in Dyersburg, Tennessee, and build a new 200,000-square-foot manufacturing facility to meet growing demand.
However, it is not yet clear how much of that space Mills will use for transformers, which are manufactured in the current way, using so-called “grain-oriented electrical steel. Under the new Department of Energy rule, transformers produced in four years would have to contain cores of amorphous electrical steel, commonly used in electric vehicles and motors.
In the 1980s, utilities discovered that the magnetic properties of amorphous steel reduced energy loss by up to a third as it travelled through the transformer core. However, transformers made of this type of steel were more expensive because the brittle metal made it difficult to manufacture.
Amorphous steel was more expensive per kilogram and forming cores from this metal required much more labour, which drove the price up further. However, the Trump administration concluded in a 2020 Department of Commerce report that “the material has the potential to reduce utility costs over the life of the transformer due to lower core losses over the long term”. There were about 600,000 amorphous metal transformers in the US, compared to over 1 million in China and 1.3 million in India.
“It is more economical in countries with low labor costs,” the report stated.
For years, the markets for each type of electrical steel looked more or less the same, each with a single domestic producer in the US and a handful of exporters overseas.
However, US energy regulators believe that demand for amorphous steel for electric vehicles will lead steelmakers to shift production away from the grain-oriented electrical steel transformers used today. Agency officials cited talks with steelmakers in the US, South Korea and Germany, all of which agreed to increase production. With environmentalists now claiming that amorphous steel can cut energy waste in transformer cores by half, the Biden administration felt this was the right time to order a change.
“I think it’s important to continue to move towards efficiency,” Granholm told a Senate Energy and Natural Resources Committee hearing last month. “But we are having conversations with industry”.
Mills participated in some of those conversations. During public comments on the new federal rule in recent months, he encountered few, if any, industry supporters of the regulation.
“Is this the right time to throw another disruption into what’s already a very strained supply situation for increased demand for transformers for what you’re gaining in efficiency? I’d say it’s pretty clearly no.”
– Jim Matheson, CEO of the National Rural Electric Cooperative Association
Jim Matheson, chief executive officer of the National Rural Electric Cooperative Association, said it was a question of timing.
“Is this the right time to add another disruption to an already very tight supply situation because demand for transformers is increasing in return for efficiency gains? I would say clearly no,” he said in an interview on Zoom. “If there is a long-term value in increasing efficiency, then it is time to talk about the right time to do it. This is not the right time.”
Maximum efficiency gains from amorphous steel cores depend on power flowing smoothly – cores are less efficient with fluctuating loads, such as those found in renewable energy, according to the National Electrical Manufacturers Association. Industry representatives have repeatedly claimed that the regulation would only improve overall efficiency by a meagre 0.2%.
“There’s a difference of opinion on how much more efficient they are,” Granholm said when Senator Cindy Hyde-Smith (R-Miss.) cited the figure at the April 20 hearing. “We want both types of steel to be available”.
She stressed at least twice that the rule was only a proposal and that the Department of Energy was in constant discussion with the industry.
In the meantime, Mills said, “the most important thing I’m doing is hedging”.
Other priorities for funds from the Defence Production Act
Industry associations representing utilities, manufacturers and home builders are lobbying.
In October, the National Association of Home Builders sent a letter to three senior Biden administration officials warning of “grave concerns” about what the builders’ association twice called “severe shortages”. They pointed in particular to places like Duval County in Florida, where a major hurricane last year swallowed up an already limited supply of transformers for contractors trying to keep up with the construction boom in Jacksonville.
“The severe shortage of transformers and other electrical components is spreading across the country, adversely affecting efforts to implement your administration’s infrastructure plan, complete construction projects, provide affordable housing, and ultimately jeopardizing the national and economic security of the United States,” the 17 October letter to Granholm, Commerce Secretary Gina Raimondo and US Trade Representative Katherine Tai reads.
Last year, Democrats in Congress earmarked $250 million for direct federal purchases of strategic equipment in President Joe Biden’s landmark Inflation Reduction Act. Authorized under an obscure Korean War-era law, the Defense Production Act, the administration promised last June to use the money to accelerate domestic production of five key technologies: solar panels, transformers and power supplies, heat pumps, insulation, and hardware to make and use carbon-free Hydrogen.
As Russia’s invasion of Ukraine sent the price of heating oil soaring and Europeans in rich countries turned to burning wood and rubbish to get through the winter, the Biden administration signalled its intention to spend the entire budget on manufacturing heat pumps that effectively replace gas or oil furnaces with two-way air conditioners.
In a letter dated 19 October, two trade groups representing municipal and cooperative electric utilities appealed to Granholm to save at least some of the funds allocated for transformers under the Defense Production Act, warning of an “unacceptable risk” of blackouts due to “this unprecedented situation”.
“While we support long-term investment in domestic heat pump production capacity, if we do not act today, we risk not being able to recover from a storm tomorrow,” the letter from the American Public Power Association and the National Rural Electric Cooperative Association said.
Exactly two weeks later, the Department of Energy officially announced its plans to spend the entire quarter billion dollars on heat pumps. Less than two months later, the agency proposed its new efficiency standards for transformers.
In March, the Biden administration asked Congress for another $75 million to spend on Defense Production Act priorities.
When Granholm appeared before the Senate Energy Committee to justify the White House’s latest budget request, she encouraged lawmakers to provide more funding to “open up more manufacturing projects.”
“We have $75 million under the DPA for these purposes,” Granholm said. “That’s not enough to build new factories.”
Three other senators – Republican Steve Daines of Montana and Democrats Martin Heinrich of New Mexico and John Hickenlooper of Colorado – joined Hyde-Smith to call Granholm out on the transformer shortage. But the Mississippi Republican devoted all her time to the issue and whether the energy secretary would consider delaying the rule for up to two years to alleviate the current crisis.
“It seems to me that the White House and your department are putting the cart before the horse with these new efficiency standards, rather than meeting current needs,” Hyde-Smith said.
“We are in discussions,” Granholm said.
“Is there a possibility that you will postpone this?” asked Hyde-Smith.
“Many things are possible,” Granholm replied.
“Thank you for not answering me,” the senator snapped back.
Poor or weak Trades?
The lack of federal funding is hardly the only policy measure frustrating transformer manufacturers.
In 2018, President Donald Trump imposed tariffs on imports of electrical steel. Two years later, his own Department of Commerce concluded in a report that this “has increased material costs for laminate and core manufacturers and impaired their competitiveness, as electrical steel accounts for a large share of the cost of these products”.
Still, the report found that the US depends on imports for 35% of its electrical transformers – and as much as 80% for the large power transformers that form the backbone of the electricity grid.
Tariffs could help manufacturers of certain types of electrical transformers that “don’t have to be as competitive in the world market,” said William Dull, president of Triad Magnetics, a Perris, California-based maker of transformer components for electronics. But Dull said, the US Trade Representative eventually extended the levies to all other types of transformers, which are primarily transformers that are incorporated into electrical or electronic equipment.
But none of that matters if there aren’t enough transformers to deliver power consistently regardless of how it’s generated, said Matheson, who served as a Democratic congressman from Utah before joining the leading trade association of rural electric cooperatives. When he first heard complaints about shortages in late 2021, they were coming from high-growth areas outside Atlanta and other parts of the South. Now they’re coming from everywhere, and it’s about more than just “the price increase and the lengthening of delivery times.”
“It used to be that you could order a unit and get it within 70 days. Then all of a sudden it became 350 days, a fivefold increase,” Matheson said. “That’s when we said to ourselves, ‘Uh-oh, somehow the system can’t keep up.'”
Because amorphous steel is more expensive and more difficult to process, the federal government could provide funding to make up the difference for manufacturers and pay for training. That’s according to a report released earlier this year by the Niskanen Center, a Washington-based think tank that promotes moderate policy solutions to both parties. Another solution would be to develop programmed at the Department of Energy and the Department of Homeland Security to stockpile transformers that could be released during shortages to keep prices down, similar to the way the federal government sold off some of its Strategic Petroleum Reserve when oil prices spiked.
“We’re going to have a fast-growing grid, ideally for years into the future,” said Johan Cavert, a transmission policy analyst at the Niskanen Center who wrote the report in January. “So, we need a longer-term strategy”.
But the short-term bottleneck needs to be addressed, Matheson said. An influx of new heat pumps, for example, would have a “pretty big impact” on emissions, far more than improving transformer efficiency, he surmised.
“But that also means we have to make sure there are distribution transformers, so these heat pumps actually work,” Matheson said. “We shouldn’t forget the bigger picture. At the end of the day, the consumer wants them to work and heat their home.”