The power transformer supply chain was unprepared for the surge of demand from renewables, leading to an over 40% increase in average unit prices and a doubling of lead times since 2019. Lead times are often the primary constraint as buyers are willing to absorb higher costs to avoid project delays, with step-up transformers typically making up 2-4% of solar and wind project costs.

Equipment sourcing is becoming key for procurement strategies

Power grid equipment supply chains are scaling up in response to unprecedented strain amid accelerating global electrification. The grid, a crucial enabler of the clean energy shift, faces increasing procurement risks for critical equipment like transformers. Supply chains have lagged, particularly in regions where the deployment of renewables has outpaced infrastructure development. While global low-carbon investments overtook those in oil and gas in 2023, Rystawed Energy projects grid investments will surpass them by 2032. As a result, procurement strategies are evolving to adapt to the long-term high-demand environment unleashed by the energy transition, with equipment sourcing becoming increasingly reliant on international markets.

The transformer industry is undergoing a resurgence after more than a decade of challenging market dynamics. Suppliers benefit from strong market fundamentals, reflected by a record volume of order intakes and increased margins. Obstacles remain, however, to developing a sustainable and balanced supply chain. Original equipment manufacturers (OEM) must proactively invest in expanding capacity. At the same time, developers need to revisit sourcing strategies to limit the impact on project execution and adapt to the industry's ongoing permanent transformation.

The power transformers market faces an undersupply

Power transformers are among the most severely undersupplied grid components. Global demand for transformers has outpaced capacity additions since achieving a relatively balanced market in 2019. Comprehensive end-market demand for units with power ratings above 10-mega volt-amperes (MVA) has increased by 23% since 2019, while nameplate production capacity for such units has grown by less than 5%. While the supply of transformers remains tight, other renewable equipment, such as solar PV modules, batteries and wind turbines, face global oversupply.

China, which holds the largest transformer production capacity, is already increasing exports to serve undersupplied regional markets. In 2023, its $2.5 billion in oil-immersed transformer exports reached an all-time high, with nearly 30% destined for Europe and North America. While Asia’s capabilities can help alleviate some of the regional supply crunch, logistical challenges, technical specifications, geopolitical considerations and maintenance requirements remain significant barriers to overhauling well-established supply chains and buyer-seller relationships. Consequently, even with substantial capacity expansion, the impact of Asia-based supply on Western supply chains will remain limited.

Supply constraints are set to persist, as most announced substantial plant expansions are still 1-2 years from commissioning. Global demand for power transformers is expected to grow steadily at a rate of 5.3% annually over the next decade, expanding from today’s $49 billion annual market size. Manufacturers must overcome labor shortages and proactively ramp up capacity to meet growing order volumes. OEMs are targeting framework agreements and high-volume commitments to secure backlogs. Additionally, circularity strategies such as transformer refurbishment and lifecycle extension offer supply chain mitigation yet remain constrained by technical complexity.

The road ahead

By riding the technology wave, the industry could leverage the current market upswing to invest in research and development and technical talent. While some major manufacturers have started exploring AI solutions, external deployment remains limited.

The power grid equipment supply chain faces significant challenges in meeting the growing demand for low-carbon energy. Building a sustainable supply chain and mitigating prolonged disruptions will require visibility into the supplier landscape, long-term project pipelines and end-sector demand evolution. This will help enable the strategic decision-making needed to address the supply chain challenges that lie ahead.

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