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The transformer deficit
America’s energy sector has a problem. Electricity demand is rising for the first time in a generation, and the supply chain behind the grid cannot keep pace.
Power transmission pylon at sunset.
For almost two decades, demand for electricity in the U.S. was flat, rising only 0.1% annually between 2005-2020.
Then suddenly the “flat-demand era” was over. A rebound in power consumption after the COVID-19 pandemic has been followed by the “great electricity surge” of the past two years, with record consumption driven by a revival in American manufacturing and the booming AI sector’s dependence on energy-hungry data centers. The current supply chain is ill-prepared to meet these needs. The decades of flat demand have created two profound bottlenecks that are constricting energy flow and limiting the ability to bring new power generating assets onto the U.S. power grid. In particular, years of under-investment have caused severe shortages of the gas turbines that generate power, and transformers that safely move that power through the grid.
Research by Wood Mackenzie, an analytics and insights company specializing in the energy and natural resources industry, has identified a 30% deficit in the supply of power transformers that efficiently step up voltage from power plants to the grid. Additionally, Wood Mackenzie estimates a 6% deficit in the supply of the distribution transformers that step-down voltage for safe distribution to electricity end users. The causes of this supply shortfall are multiple. Ben Boucher, principal analyst, supply chain, at Wood Mackenzie, talks of a “perfect confluence of factors” that have come together to ramp up electricity demand and reduce the energy sector’s ability to meet it. He points to a “huge renaissance” in industrial demand for power, driven by a combination of “the growing emphasis on reshoring manufacturing in the U.S.,” coinciding with the new energy needs resulting from massive and rapid data center expansion. Wood Mackenzie is currently tracking the proliferating U.S. data center project pipeline at 331 GW total capacity. Utilities face competition for scarce resources. “These [data centers] are becoming probably the biggest strain on supply chains at the moment because they are consuming so much electrical equipment,” says Boucher. “They're so dependent on a lot of the same equipment that utilities procure on a regular basis.”
High-tech data center with illuminated network cables.
Neatly arranged network cables in a server rack.
“We didn't see electrical load growth for a 20-year period and we hadn't seen investment into the supply chains for transformers for that whole time,” says Boucher. The U.S. Department of Energy reported in 2024 that over half (55%) of the 60-80 million distribution transformers in service are more than 33 years old and are exceeding expected lifespans. Extreme weather conditions, such as heatwaves, hurricanes and severe storms, have also damaged and depleted transformer stocks. “Suddenly demand is outpacing the supply side,” says Boucher. “The manufacturing facilities for transformers are extremely high tech and have long lead times. It’s very hard to ramp up supply quickly to meet that demand.” Wood Mackenzie works closely with utilities companies and original equipment manufacturers (OEMs) in order to analyze the energy and natural resources sector and understand the challenges it faces. OEMs frequently complain of difficulties in finding workers with the highly technical skills required in the transformer manufacturing process. “I think we're going to continue to see long lead times to get facilities up and running, due to limited labor resources,” says Boucher. “That's been one of the really big bottlenecks we've seen in expanding capacity.”
Grain-oriented electrical steel (GOES) is a key component of transformers, and the U.S. has only one domestic supplier, Ohio-based Cleveland-Cliffs. The U.S. has had to look overseas, with 80% of its large power transformers and 50% of its distribution transformers coming from imports, according to Wood Mackenzie. But ever-changing U.S. trade policy and the imposition of tariffs are putting further strain on the transformer supply chain. Import duties on copper, another key component of transformers, have further increased prices, while a section 232 provision enforces a 15% tariff on all transformer imports. Tariffs reduced the import of GOES by 54% in 2025, driving up costs for domestic transformer manufacturers. Utilities are having to bear the burden. “We just don't have any alternatives, so this price has been directly handed down to the utilities,” says Boucher. “People are being forced to import units regardless of cost.” Those costs continue to rise across the entire transformer market. Large scale transformers can exceed $2M today after escalating over 60% in price in the past three years. “That's becoming a very big challenge for project planning and budgeting,” says Boucher. Transformer lead times are growing longer. Buyers of distribution transformers have a wait of around 25 weeks, while the lead time for larger power transformers can be three years or more.
Raw materials present a further challenge
A second bottleneck in U.S. energy supply is the result of a chronic shortage of gas turbines
Industrial metal pipelines at a processing facility.
Once again, the energy sector is facing the consequences of a failure to invest in infrastructure during a period of stagnation. “The gas industry was all but dead in the U.S., and in the early 2020s we were seeing minimal orders for new gas plant facilities,” reflects Boucher. Manufacturers turned their attention to overseas markets and were then surprised by a “massive spike” in demand at home. “We just couldn't meet the demand,” says Boucher. “The level of demand growth we've seen in gas turbines has been unprecedented.” With most gas turbine manufacturers fully booked for orders through 2032, utilities are facing extreme levels of competition. “If you don't have a gas turbine ordered at this point, you're not getting a facility on for the next six or so years,” says Boucher. “The big concern facing utilities right now is whether they lose production spots to data centers that are willing to pay significantly above the market for turbines to ensure they can get their facility online.” With large-scale gas turbines so hard to come by, utilities are looking at alternative solutions, including reciprocating (piston) engines, aeroderivative turbines adapted from aircraft jet engines and refurbished turbines.
Maintenance being performed on an aircraft engine.
Detailed view of an industrial gas turbine.
“Investment is coming,” he says, pointing to new manufacturing facilities being built to supply the U.S. market in both power and distribution transformers. With lead times being slowly reduced and more attention being paid to the supply deficit by policymakers in some U.S. states, he is hopeful of seeing “a more balanced market by 2030”. Yet the shortfall in gas turbines remains a “big, big concern” and he fears a long-term deficit in the larger step-down substation power transformers which are critical to America’s data center buildout. “If we see this growth continue, it's going to make it very difficult to see a balanced market in the near term,” he says. The challenge is no longer just one of generation; it's ensuring that power can be delivered where and when it's needed. As AI, manufacturing, and electrification continue to increase demand, finding a way to resolve supply-chain constraints is likely to be just as important as bringing new generation online.
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Transformers: the backbone of electricity transmission and distribution
"[Data centers] are becoming probably the biggest strain on supply chains at the moment because they are consuming so much electrical equipment"
Ben Boucher Principal analyst, Supply chain, Wood Mackenzie
The energy sector did not anticipate this demand surge and did not make the infrastructure investments necessary to cater to it
"The manufacturing facilities for transformers are extremely high tech and have long lead times. It’s very hard to ramp up supply quickly to meet that demand"
Ben Boucher Principal analyst, Supply chain, Wood Mackenzie
Steel coils stored in a warehouse.
Reduction in Grain-oriented electrical steel (GOES) imports due to tariffs in 2025
Increase in large-scale transformer prices over the past three years
54%
60%
