Power transformers are the backbone of our electricity grids. However, today, despite being one of the most critical assets of the system, they are also one of the hardest to procure, with limited availability and long lead times. Today, a lead time of less than 30 months to source a power transformer is considered quick, compared to the 12-14 months it used to be a few years back.
But how did we get here?
A big driver of this shortage is the increased demand for power transformers over the last few years. As the power grids are undergoing major transformation due to energy transition and grid modernization, power transformers are needed in larger quantities than ever before. In the next three years, around 4 TW of new generation capacity is expected to be added globally, driven by our increasing electricity needs and the shift towards renewable energy.
Couple that with substantial investments by utilities in grid expansion, upgrade, and asset replacement to evacuate this power, and we are looking at an increasing long-term demand for power transformers. Research by PTR Inc. suggests that the demand for power transformers will grow annually at a rate of 6.3% between 2024- 2027, going from 1.98 million MVA to 2.38 million MVAs within this period.
As the power grids are undergoing major transformation due to energy transition and grid modernization, power transformers are needed in larger quantities than ever before. In the next three years, around 4 TW of new generation capacity is expected to be added globally, driven by our increasing electricity needs and the shift towards renewable energy.
On the flip side of the coin, the situation of power transformers manufacturing and supply is a bit different. PTR’s research indicates that the current global production capacity of power transformers OEMs is around 3.25 million MVAs. This is further expected to increase annually by 2.5% in the next three years between 2024-2027, considering several capacity expansion announcements by power transformers manufacturers around the world.
Contrary to what one might think without looking at the numbers, the production capacity is significantly higher than the demand for power transformers. However, this might be a misleading statement since the actual production from the factories still lags behind the demand by around 2%.
Figure 1.Global Power Transformers Demand (MVA)
Figure 2.Global Power Transformers Production Capacity (MVA)
Due to the complicated vendor approval and supply process, as well as logistical challenges, material and labor shortages, manufacturers in some parts of the world are not able to produce at 100% factory utilization and export power transformers to alleviate this supply gap. The trend that PTR expects will continue over the next 3 years at least.
The key to understanding this underutilization, despite the high demand, lies in understanding the regional supply-demand dynamics. During this research, PTR looked at the production capacity and demand dynamics in each region.
Starting with North America, driven by the strategic shift towards higher renewable share in the energy mix and modernization of the aging grid infrastructure in the US, the region is one of the key demand hubs for power transformers. Between 2024- 2027, the expected cumulative demand for power transformers in North America is 1,044,500 MVA. The region is also emerging as a crucial hub for investments in power transformers production capacity expansions. So far, various manufacturers have announced a total investment of USD 828.9 million in capacity expansions of which US alone accounts for USD 507 million (67%). This includes both greenfield factories, as well as capacity additions to existing factories. However, despite these investments, the region will stay a net importer of power transformers with the expected annual gap of around 100,000 MVAs per year between the demand and production within the region.
Another region that is a net importer of power transformers is the Middle East and Africa. With mega construction projects in the GCC region and growing renewable investments, the demand for power transformers is expected to grow significantly in the region at a CAGR of 7.3% per year between 2024-2027, totaling a cumulative 895,000 MVA over this period. From a supply perspective, the region has a high dependency on imported power transformers with around 90% of the power transformers being imported today.
Figure 3. Global Power Transformers Production Capacity vs. Demand (MVA)
Figure 4. Global Power Transformers Actual Production vs Demand (MVA)
Although this might change in the next couple of years, as there have been greenfield factory announcements from manufacturers like Elsewedy Electric, EIC and Voltamp, which account for 23% of the global capacity expansion announcements in the next three years. However, even with the newly announced capacity, the region is expected to remain a net importer with an annual gap of around 120,000MVA between the regional production capacity and demand.
South America, despite being the smallest market for power transformers today, is still seeing some movement in the industry.
With WEG expanding its production capacity in Brazil and building a new facility in Colombia, according to PTR’s research, power transformers production in the region is expected to grow at a CAGR of 2% between 2024-2027. Leading to a cumulative production capacity of 315,800 MVAs against a cumulative demand of 315,850 MVA in the next three years.
Figure 5. North America Cumulative Power Transformers Production Capacity vs Demand in MVA (2024-2027)
Europe, on the other hand, has always been a net exporter of power transformers. With several key power transformers manufacturers headquartered in the region, we expect further investments of USD 460 million in production capacity expansions leading to an average annual capacity increase of around 6.4%.
The demand, however, is expected to increase significantly too with double digit annual growth, driven by renewable integration, aging infrastructure, and interconnections within Europe (inter-country, urban-rural). This increasing demand would mean that, despite the region overall having excess production capacity, some medium-small manufacturers will have their order books full supplying to local customers, before aiming to increase their export business.
Figure 6. Middle East & Africa Cumulative Power Transformers Production Capacity vs Demand in MVA (2024-2027)
Asia Pacific is the largest demand and production hub for power transformers globally. The expected cumulative demand in the next three years from 2024-2027 is around 5.5 million MVAs. However, despite this huge demand, the region will remain a net exporter of power transformers with an excess underutilized capacity of more than 1.25 million MVAs per year. Almost all the global excess production capacity lies in this region. Moving forward, the utilization rates are expected to improve with more Asian, especially Chinese, manufacturers investing resources in growing their export business to Europe, the US and the Middle East via direct sales as well as white-labelling partnerships.
Figure 7. South America Cumulative Power Transformers Production Capacity vs Demand in MVA (2024-2027)
Figure 8. Europe Cumulative Power Transformers Production Capacity vs Demand in MVA (2024-2027)
Figure 9. Asia Pacific Cumulative Power Transformers Production Capacity vs Demand in MVA (2024-2027)
⊗ First, the demand is sustainable, and the supply-demand gap is here to stay beyond just the short-term. With the current market drivers like renewable integration and aging infrastructure, we can expect the transmission grids needing new power transformers more than ever.
⊗ Second, there are two strategic investment hotspots today when looking at the supply-demand balance: North America and the Middle East (primarily GCC). Both regions with their preference towards local manufacturing, offer significant opportunities to capitalize on by investing in local production.
⊗ Lastly, any investments in OEM capacity expansions need to be considered in conjunction with other constraints, including skilled workforce shortages and raw material/ component supply constraints.
Given all this, the market is still very dynamic, with more strategic investments and partnerships on the horizon. At PTR, we will be tracking these changes in the electrical asset and infrastructure markets and sharing key insights with you in this space via APC Media with you.
Hassan Zaheer is the Partner and Chief Operating Officer at PTR Inc. With more than a decade of experience in the energy transition space, Hassan advises various blue-chip clients in the electrical asset and infrastructure business to sustainably grow their businesses, both through custom consulting work, marketing support services and tailored research by PTR, helping their executive management and boards make data driven decisions. Hassan is also a Member of Executive Editorial Board of APC Media as well as part of the Advisory Board for CWIEME Berlin. Hassan comes from a technical background with a Masters in Power Engineering from the Technical University of Munich (TUM) and a BS in Electrical Engineering from the Lahore University of Management Sciences (LUMS). Additionally, he is also an Alumnus of Center for Digital Technology & Management (CDTM).
