Americans are no strangers to supply chain strains after what we faced during the COVID-19 pandemic. Empty shelves in the toilet paper aisle and empty lots at car dealerships were very visible signs of supply chain strains that impacted us all. They also served as a wake-up call to Americans as to how vulnerable and dependent we are on China for raw materials and manufactured products to sustain our modern economy. However, there is one supply chain strain that has persisted into 2023 that you never hear about, which threatens the reliability of the electric grid. It is a growing concern but lives quietly in the shadows and out of the public eye.
This last year, I have been serving as the Chairman of a national team to evaluate this supply chain risk. In March, I flew to Washington, D.C., for an in-person meeting with officials from the Department of Energy (DOE) and the White House to discuss the continuing supply chain strain on transformers. Yes, those things that you see on the pole outside your house or on a concrete pad near your subdivision or business. They sit very quietly outside your home or business, transforming voltage from the higher levels used to transport electricity to the lower levels that members need.
Three years ago, if a utility wanted to purchase a new transformer, it could pick up the phone, place an order and have it delivered in four to six weeks. Today if you make that call, you will hear the following: “We are sorry, we cannot fill your order,” or “It will be over two years from now before we can get you that transformer.” Imagine going to your local car dealership and being told it will be two years before they get the part needed to fix your vehicle. That is exactly what is happening across America to electric utilities; they cannot purchase enough transformers to support their members/customers. This means projects get delayed or canceled. In some cases, utilities are recycling equipment to get the power flowing until a more permanent solution can be implemented.
Why is this happening? It would be easy to jump to the conclusion that the transformer manufacturers have failed to keep up production during the pandemic and post pandemic, but that would be a wrong assumption. The truth is that the supply of transformers has been steady and increasing over the last three years. What has fundamentally changed is the demand for this equipment. Every new solar project, wind farm, electric vehicle (EV) charger, new home or business requires either a new transformer or an upgrade to a larger one. This growth has been fueled by natural economic trends and supercharged by national energy policies promoting conversion to wind and solar, and electrification of the transportation sector.
Manufacturing capacity of distribution transformers is limited, and increasing that capacity is a long-term challenge that hinges on availability of labor, electrical steel and other factors. Simply stated, demand has significantly exceeded supply, and now increased prices and scarcity have resulted.
One thing that you may not realize, as a member-owner in the Electric Cooperatives of Arkansas system, is that we own the largest distribution transformer manufacturing company in America. That company is Tennessee-based Electric Research and Manufacturing Cooperative, Inc. (ERMCO). Last year, ERMCO produced nearly 425,000 transformers and still could not meet the growing demand.
Why don’t companies like ERMCO invest more money to increase supply to keep pace with the demand that is being fueled by economic growth, government spending and policy? Well, ERMCO did invest in increasing manufacturing capacity last year, but did so in a very conservative way by acquiring another transformer manufacturing company. The integration of these two companies will result in synergies that will overall increase total output. However, it is not enough. ERMCO, like all other distribution transformer manufacturers, needs to add staff, but there are not enough people available to hire. Lack of labor willing to work in manufacturing is the No. 1 challenge facing ERMCO and other transformer manufacturers. If they could hire and retain all the people needed, the next bottleneck would be electric steel. There is only one company in America that produces electrical steel; talk about a serious single point of failure.
There is also a lot of uncertainty as to the future of the grid and transformers. This uncertainty makes it more difficult for manufactures to invest hundreds of millions of dollars to build factories when they fear that they may not recoup that investment. For example, the DOE recently proposed rules that would increase efficiency standards for transformers. This sounds noble, however, the DOE already mandates distribution transformers be manufactured to incredibly high efficiency standards. Currently, transformers are about 95.5% efficient, and new standards may increase by a few fractions of a percent — so not much juice for the squeeze.
National energy policy has been solely focused on reducing greenhouse gases at any cost. To incentivize these actions, a lot of money has been doled out in the form of production tax credits (wind), investment tax credits (solar) and tax credits to purchase electric vehicles. This trend is set to continue, with over $500 billion of new funding from the Inflation Reduction Act and the Bipartisan Infrastructure Law pouring into “clean” energy programs. This investment most likely will increase demand and further strain the supply chain, so shortages and extreme pricing will continue unless something is done to balance supply and demand. We are all about balance here, as our Balance of Power campaign clearly states.
There is nothing wrong with adding more sustainable energy resources to the grid or integrating electric vehicles into the transportation sector — if done at a pace that doesn’t create rolling blackouts or supply chain shortages that jeopardize the grid. Energy is only one-sixth of the national economy, but it is the first one-sixth that shows up to work every day, and if it doesn’t, no one else can work. The economy comes to a standstill without electricity — it is too important of a resource for us to risk.