INTERVIEW: 'Sudden' transformer shortage imperils urgent grid upgrades

A "sudden" spike in transformer demand driven by electrification, AI uptake and renewables has left manufacturers struggling to respond, the head of the world's biggest producer of the vital grid components told S&P Global Commodity Insights.

In an interview on the sidelines of an AI summit organized by the International Energy Agency in Paris on Dec. 5, Andreas Schierenbeck, CEO of Japan's Hitachi Energy, said his company had completely maxed out its supply capacity amid surging demand, despite investing heavily to boost output.

"We are investing $1.5 billion in expanding our capacities. All that capacity is already promised, sold and committed," he said. "To sell it [did not take] very long."

Schierenbeck added that the supply crunch, which could hinder efforts to upgrade aging electricity grids around the world, had given rise to "not a very good situation."

Demand surge

Transformers are huge building-sized components that weigh 450 tons and are used to change electrical voltage to push electricity across large distances and then deliver it safely to end-users. They take time and expertise to make, with skilled engineers physically winding copper wires to create coils.

While they could previously be sourced by utilities in a matter of months during an extended period of sluggish demand, energy companies are now required to wait three to four years for transformers, Schierenbeck said.

"Capacity was ramped down in Europe because there was no demand, and ramping it up is not so easy because the machines have a lead time," he said, adding that demand had surged quite "suddenly."

"In Europe alone, there are 900 GW of renewable projects on hold because they do not get a grid connection because the grid is not ready," Schierenbeck added.

The demand surge has been fueled by a push for sustainability and the uptick in electric vehicle usage, as well as efforts to boost energy security following Vladimir Putin's invasion of Ukraine, which has seen Europe attempt to uncouple itself from Russian hydrocarbons.

"You do not want to be depending on shipping lanes, imported LNG, or pipeline gas from countries you do not want to get molecules from," Schierenbeck said.

Yet renewable energy can be volatile, as it tends to be based on intermittent wind and sun, and tends to require transmission over larger geographical distances than traditional sources, creating the need for serious grid upgrades.

To compound the challenge, colossal data centers are springing up across the world -- especially in the US -- to support an upcoming AI boom. Electricity demand from these facilities is expected to double to 1,000 terawatt-hours by 2026, according to the IEA, equal to Japan's total consumption. Currently, data centers account for 25% and 20% of the electricity usage in the US state of Virginia and Ireland respectively.

Energy bosses warn that grids are years away from being able to absorb that additional demand, particularly with increased renewable adoption and sluggish permit approvals. Tech giants such as Microsoft, Google and Amazon, which say AI could boost efficiencies in electricity transmission, are nevertheless exploring other sources, including small modular nuclear reactors.

"It takes 7-8 years to make a grid project, 5-6 years is permitting," Schierenbeck said. "These regulations are not fit for heavy growth ... I am not saying get rid of regulations at all, I am not saying forget about the environment, just speed things up a little bit."

China is also expanding its transformer sector to build out capacity for its electricity network, but Schierenbeck said that will not impact the wider market as they will largely be used domestically.

Increased transformer demand is set to be a boon for Hitachi's bottom line.

With "double-digit" growth expected in the coming years, Schierenbeck said the Japanese company aims to double its revenues to around $30 billion by 2030.