April 2024
POWER TRANSFORMERS:
SUPPLY SHORTAGE AND HIGH LEAD TIMES
Market Dynamics and Supply Chain Update
Contents
Contents
1. Executive Summary .......................................................................................................................................................................... 4
2. Transformer Lead Times – Current State of the Market .................................................................................................................... 5
3. Transformer Pricing & Manufacturers ............................................................................................................................................... 8
4. Projects at Risk ............................................................................................................................................................................... 11
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Supply Shortage and High Lead Times
ABOUT THE ANALYSTS
ABOUT THE ANALYSTS
Sagar Chopra | Research Analyst, Solar
[Link]@[Link]
Aaron Marks | Senior Research Analyst, Storage
[Link]@[Link]
Kevin Jacobs | Director, Supply Chain
[Link]@[Link]
Benjamin Boucher | Supply Chain Analyst, Market Intelligence Group
[Link]@[Link]
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Supply Shortage and High Lead Times
Executive Summary
1. Executive Summary
Transformers are a key component in the supply and distribution of existing and new electrical infrastructure. They are
built of coils of copper windings on a laminated steel core, using principles of electro-magnetism to step up or down
voltages.
They range in size and application and are used to perform one or more of the following tasks:
i. Step-up generation voltage so that current is reduced – allowing bulk power to be transmitted over long distances
with reduced resistive losses.
ii. Step-down voltage to distribution levels near load centers – providing low-voltage power to customers.
iii. Other functions can include:
a) Grounding transformers
b) VAR compensation
c) Phase-shifting
d) Instrumentation
For large-scale renewables development, transformers form the AC side of the plant and, in most applications, the point of
interconnection between the asset and the transmission or distribution network the asset is interfacing through – therefore
making large power transformers a critical piece of equipment to maintain plant uptime. Numerous solar, wind, and
storage projects will require new or upgraded transformers at their points of interconnection, meaning shortages of this
equipment can prevent plants from being brought online and create costly delays.
Key Findings:
• Transformer lead times continue to rise – 115 to 130 weeks on average, making supply chain management of
transformers a critical risk to be addressed in project planning. Lead time for transformers has been climbing for
the last two years. Large transformers, both substation power transformers and generator step-up (GSU) transformers,
have lead times ranging from 120 to 210 weeks. Some manufacturers have already expanded or announced plans to
expand capacity to meet the growing demand.
• Transformer prices have risen 60% to 80% on average since January 2020, depending on the size and
application. Raw material commodity prices such as Grain Oriented Electrical Steel (GOES) have almost doubled
since January 2020 with prices recording significant volatility, while copper prices have increased upwards of 40% over
the same time frame. The production for these commodities was ramped down as manufacturers expected a slowdown
in demand due to the global pandemic and has struggled to ramp back up to meet the ballooning demand.
• Based on conversations with developers and suppliers, as much as 25% of global renewable projects could
be at risk of project delays due to transformer lead times.
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Supply Shortage and High Lead Times
Transformer Lead Times – Current State of the Market
2. Transformer Lead Times – Current State of the Market
Transformers make up an important part of the AC side of any generating asset. After the inverter converts the module
output from DC to AC, the transformer then steps the facility voltage up to the desired voltage for transmission or
distribution. With limited supply and an inelastic market, the lead times for transformers have gone up significantly. As a
result, it is recommended to develop a strategy to mitigate impacts in the project development process.
Source: Wood Mackenzie Supply Chain
As seen in the sample timeline above, elevated transformer lead times of 2+ years can, without proper planning, be the
last element holding up a project’s commercial operation date (COD).
Demand Pressures:
The transformer is an irreplaceable piece of equipment in most generating facilities and substations. Many utilities require
a full spare transformer for critical substation/generation sites, and there have been reports that insurance companies will
require generating facilities to have either spare parts or a true spare transformer on hand to minimize plant downtime,
particularly when the facility is considered a critical load-serving asset.
In addition to demand from new-generation buildouts, the global installed base of power transformers is aging, and active
replacements are underway at most utilities. This is certainly true in the US where a significant transformer installation
period in the 1950s, ‘60s, and ’70s has resulted in a multi-decade replacement program as installed transformers reach
and often surpass their design life (35 to 40-year design life, but life can be extended to 70+ years if operated carefully).
Along with the supply chain imbalance that was brought about due to the global pandemic, transformer lead times are
elevated because most transformers are a special, made-to-order piece of equipment – owners demand custom
specifications with limited alignment across corporations or geography when compared to other major utility equipment.
These customizations not only add time to the build but in some cases can only be provided by specialized manufacturers,
further limiting supply.
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Supply Shortage and High Lead Times
Transformer Lead Times – Current State of the Market
Supply Constraints:
Supply has remained limited as suppliers are reluctant to invest the large sums of capital that are required to significantly
expand production. These investments have break-even timeframes of years and decades, and there is some concern
about how long the current surge of demand will continue. From the 1980s to the late 2000s, the transformer market
consolidated into a smaller group of manufacturers with improved financials and technological abilities. That group has
become the incumbents to utilities – providing reliable equipment to a sector that is incentivized to limit risk. Therefore,
these same manufacturers are now enjoying fully booked production slots and higher margins as a result of increased
global demand, limiting their motivation to expand immediately and risk quality/financial stability. However, some initial
expansions are underway and/or announced.
Major OEMs have continued to cite material, equipment, and skilled labor constraints as driving factors for supply
constraints and therefore increasing lead times.
Further exacerbating supply chain issues is the relatively small size of the domestic transformer manufacturing base. The
US transformer industry has seen business exits and consolidation over the last fifty years and, at present, only ~20% of
US demand can be met by domestic supply. Considering the bespoke nature of many large high-voltage transformers, the
length of the supply chain has impacted the industry more significantly than many other industries which saw similar
disruptions as a result of the pandemic.
In June 2022, President Biden signed executive orders invoking the Defense Production Act to help domestic
manufacturers increase their production. That said, funding for the domestic transformer industry was neither specified in
the manufacturing tax credits of the Inflation Reduction Act (45X and 48C) nor was any funding for transformer
manufacturing included in the Omnibus Appropriations Bill at the end of 2022. 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.
Result:
As large developers and utilities order transformer capacity to increase inventory and act on both existing transformer
replacement and new-build plans, the demand for transformers continues to be inflated and supply remains limited –
resulting in increased lead times.
Lead times for large capacity power transformers and GSUs average 120 - 130 weeks as of Q4 2023 but range from 50 to
210 weeks depending on vendor and specification complexity. Averages continue to rise quarter to quarter with no clear
signs of relief (i.e. new manufacturing capacity) and the extreme growth of grid-tied renewable projects will keep up a
relentless demand for the next decade. For reference, pre-pandemic lead times ranged from 30 – 60 weeks depending on
specifications/size and if the transformer had been regularly ordered over time with a proven design (therefore allowing
the manufacturing process to be streamlined).
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Supply Shortage and High Lead Times
Transformer Lead Times – Current State of the Market
Power Transformer & GSU Lead Time Range: 2023 Q4
250
200
150
Weeks
100
50
0
Power Transformer GSU
Power Transformer & GSU Lead Time Benchmark 2022 Q1 - 2023 Q4
140
120
100
Weeks
80
60
40
20
2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 2023 Q4
Power Transformers Generation Step Up Transformers
Source: Wood Mackenzie Supply Chain
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Supply Shortage and High Lead Times
Transformer Pricing & Manufacturers
3. Transformer Pricing & Manufacturers
The transformer cost is made up of a combination of material costs such as steel, copper, and fuel oils – driven by
commodity indices, and soft costs such as labor, logistics, margin, and overheads – guided by macroeconomic market
drivers.
Below is the estimated cost breakdown of an average transformer. The soft cost makes up 55% of the total cost and the
remaining 45% is material cost.
Cost Model Breakdown
5% Margin Overhead
18%
9%
Grain Oriented Electrical Steel Copper, LME Spot
9% Manufacturing Labour Transformer Parts & Equipment
16%
Professional Labour Light Fuel Oils
11%
General Freight Trucking, Long Distance Hot-Rolled Coil Steel
14% 15%
Aluminum
Recently, extreme demand has led to high margin & overhead
Source: Wood Mackenzie Supply Chain
Grain Oriented Electrical Steel (GOES) prices have surged by more than 90% since January 2020 due to a large market
deficit, while the 2022 energy crisis in Europe exacerbated the issue further as key manufacturers including ThyssenKrupp
and Arnold Magnetic Technology were forced to curtail production. This resulted in GSU Transformers' exposure to GOES
increasing by 4% to 14% over the same period.
The push towards renewable energy sources, including wind and solar power, is expected to further increase demand for
GOES with more transformers required to transfer the energy from the production sites.
300
Indexed (Jan 20 = 100)
250
200
150
100
50
0
2020 2021 2022 2023 2024 2025
Grain Oriented Electric Steel (GOES) Copper
Source: Wood Mackenzie Supply Chain
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Supply Shortage and High Lead Times
Transformer Pricing & Manufacturers
US GOES production remains limited with only one domestic supplier in AK Steel despite the growing demand for the
material. Big River Steel recently commissioned a 200,000 tonne/year NOES facility in Arkansas and has left the door
open to starting GOES production, but no plans are currently in place. As it stands, the US is estimated to only be able to
address 20% of its transformer demand with domestically produced products, with the rest being imported from abroad.
Concerns around the transformer's dependence on GOES have incentivized utilities to explore an alternative option
that leverages amorphous core transformers. Amorphous cores utilize more readily available commodities including
Silicon and Iron but typically come at a price/operational trade-off.
GOES prices saw increased volatility over the past 12 months amid growing demand from the transformer sector, contract
renewals with key industry players, and an uncertain economic outlook in key economies such as China and the USA.
Prices reached as high as 180% higher than January 2020 in Q4 2023 before falling to the lowest level since May 2022 in
February. Overall, we have seen both GOES and Copper prices ease by 9% and 2% respectively over the past 12
months, although the outlooks for both materials remains bullish due to the strong demand and expected economic
recovery. Despite the prices for the underlying materials easing transformer prices have continues to escalate, with
distribution and substation transformers increasing by 14% and 25% respectively in 2023 as suppliers pad margins due
demand outpacing the available supply.
210
INDEXED (JAN 20 = 100)
190
170
150
130
110
90
2020 2021 2022 2023
Distribution Transformer (+80%) Power Transformer (+80%) Substation Transformers (+59%)
Source: Wood Mackenzie Supply Chain
Renewable developers are taking steps to reduce exposure to transformer procurement risk. In many cases, asset owners
are removing GSU transformers from the EPC scope entirely, opting to procure transformers before an EPC is selected in
order to protect against lead times. Some other strategies that can be employed to alleviate pricing and lead time
pressures are:
• Review Internal Demand Plan: Early review of demand plans such as new builds, replacements, and spares is critical
when potentially facing 2 to 3-year lead times. Capital must be committed early to hold a production spot and projects
must be prioritized to ensure on-time delivery.
• Simplify Specifications: Owners must be willing to review technical specifications with suppliers and adjust where
possible to allow the supplier to minimize production time. Additionally, reducing the total number of SKUs can help
avoid retooling of manufacturing lines and further streamline assembly.
• New Supplier Discovery / Qualification: Consider alternative or less established suppliers that may be able to provide
shorter lead times. Traditionally, quality has been the primary evaluation factor, but price and lead time may eclipse
quality if trends continue.
• Establish long-term supplier MSAs to optimize contract terms and streamline delivery.
• Use market data and benchmarking to level-set cost expectations upfront and avoid revisiting of budget and delays
in project approval.
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Supply Shortage and High Lead Times
Transformer Pricing & Manufacturers
Manufacturers:
Manufacturers are aware of the growing demand and the shortage of transformers that utilities and developers are facing
for new and existing assets. Players like Virginia Transformer Corporation and WEG have already opened new
manufacturing plants to meet the demand and other manufacturers like Prolec GE and Hitachi have announced plans to
expand manufacturing capacity.
Players like Sunbelt Solomon have made investments to set up facilities that support the repair and recycling of
transformers. They offer new and refurbished transformers which can be customized to meet asset needs and reduce
downtime.
Tier 1 transformer vendor taxonomy:
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Supply Shortage and High Lead Times
Projects at Risk
4. Projects at Risk
The global demand for standalone PV, wind and grid scale storage are all expected to grow as illustrated below, which will
continue to put pressure on transformer lead times. If lead times continue to increase and/or if project planning is not
appropriately front-loaded to account for transformer lead times, many projects could be delayed.
600
500
500 479
461 460
427
Global Demand (GW)
405
400 168
153 152 160
111 133
300 47 50
30 39 46 48
200
264 254 262 260 272 282
100
0
2023 2024 2025 2026 2027 2028
Global PV demand Global wind (on- & offshore) demand Global grid-scale storage demand
Source: Wood Mackenzie
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Supply Shortage and High Lead Times
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Disclaimer
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