How Tariffs Could Shock America’s Power System

Old_Joe

Some of you may recall my unease over the years at the fact that we no longer manufacture many types of electrical transformers that are absolutely critical to any large grid system. Many of those transformers are special-order items currently made only in China, and that have lengthy time-frames to design and manufacture.

Following are excerpts from a recent Wall Street Journal report, which goes into some detail on this issue:

Transformers used in power grids are especially vulnerable to trade disruptions

America’s power grid is due for some big investments. Tariffs could now make that much costlier.

As surging power demand from places such as data centers is set to strain the system, transformers, the nuts and bolts of the power system, look particularly vulnerable. These are devices that step up or down voltages as electricity moves from power plants to homes and factories. New ones are also required every time a new source of electricity—whether wind, solar or natural gas—connects to the grid. The lack of these components can therefore hold up more power from being brought online.

The power industry has already been experiencing a shortage of transformers, for which demand is expected to jump even more in the coming years. Suppliers have been reluctant to invest large sums of capital to expand production capacity because such investments have long break-even timelines. The National Renewable Energy Laboratory estimates that about 55% of in-service distribution transformer units are older than 33 years and approaching their end of life.

So far, the Trump administration has imposed 25% tariffs on steel and aluminum, as well as a 10% across-the-board tariff on China. But more could come: The one-month pause on Trump’s proposed 25% tariffs on Canada and Mexico is set to expire in early March. Meanwhile, Trump has ordered federal agencies to explore reciprocal tariffs on trading partners around the world. He has also floated tariffs on copper.

Transformers could become a chokepoint. Only about 20% of transformer demand can be met by the domestic supply chain, according to Wood Mackenzie, which also estimated that transformer prices have already risen 70% to 100% since January 2020 because of inflation for raw materials such as electrical steel and copper.

Mexico, Canada and China are important sources of electrical equipment to the U.S. In 2024, China accounted for over 32% of U.S. low-voltage transformer equipment imports and Mexico accounted for 36% of high-voltage transformer imports. Canada accounted for about 16% of U.S. imports of high-voltage switchgear and 100% of imported utility poles. Utilities typically go through a lengthy process to test the reliability of transformers they are purchasing and tend to require custom specifications, so it isn’t an easy process to switch to a new supplier.

Tariffs will pile new cost pressures on an already-tight grid. The New Jersey Board of Public Utilities said its residential customers’ average monthly bill is expected to increase by 17% to 20% for the 12-month period starting June 2025, partly due to data center-driven demand growth. Nationwide, electricity prices have increased at a compound annual growth rate of 5.7% over the last five years, a considerable acceleration since the preceding five years when prices were roughly flat, according to data from the U.S. Bureau of Labor Statistics.

Also worth watching: If the 25% tariffs on steel and aluminum do result in a reshoring of those energy-intensive industries, that itself would add to long-term power demand.

Comment: How likely is it that the current administration has the slightest idea of what transformers are or how crucial they are to the United States economy and manufacturing capability?

WABAC

I no longer own GRID in the IRA. But I do keep an eye out for opportunities to add to it in the taxable.

At the risk of bringing up another great financial issue that shouldn't be discussed on an investing forum, I think it's worth noting that the WSJ assumes that residential customers will/(should?) pay the rate increases required to develop power for all these new data centers. If the government was taking that money from us to subsidize data centers would we call it a tax?

Crash

Doug Ford decided to pause tariffs on electricity sold to MN, MI and NY. Those people would no doubt pay more to get their "juice" from Ontario. Canadians are unified and stand opposed to the Orange Ignoramus. Carney has sadly announced the end of the longstanding friendship of trust and cooperation.

rforno

CLF is, I think, the only US-based company that makes the metals needed for transformers as one of its (more attractive) business segments. Unfortunately the stock has been an absolute dog for ages and the company's management is hit-and-miss.

I'm still quite bullish on last-mile US domestic utilities, though.

yogibearbull

Transformer production isn't environment-friendly although there are newer green/eco-friendly transformers. So, the transformer production has shifted to countries with less stringent environment protection laws - it wasn't just the typical lower-cost motivation.

Reshoring transformer production won't be easy.

Mark

I bet that dismantling the EPA could help grease the skids though.

Anna

What's the tariff on Australian wool imports? Might need a supply. I don't wanna get too cold.

Mark

It might be cheaper just to fly to Australia. I sure would like to.

sma3

We loved our two months in Australia. Lovely country. Clean. generally happy people with excellent mass transit.

Everyone we talked to could not comprehend what is happening to the USA and felt very sorry for us. this was before the tariff wars.

Interestingly, the 33 year old son of our friends is the only Trump supporter we met. He wants to move to the US so he can own guns without all the rules in Australia. Refused to admit he got anything for their higher taxes ( 40% rate starts at $120,000 salary)

They are very worried about the Chinese, but their economy depends on selling cheap coal to China, in addition to exporting lots of wool to USA.

Sven

@yogibb is spot on. Historically transformers use dielectric liquids as cooling fluids. The more common one is PCB, which is a highly toxic substance and has phased out in US. That is the reason why China is manufacturing these transformers, and they have little or no environmental protection for their citizens.

Due to the fire hazard, there are few alternatives that are fire resistant, low cost, and environmentally compliant.
https://en.wikipedia.org/wiki/Transformer_oil

Old_Joe

Everything that @yogibearbull and @Sven mentioned is true. General Electric was a major manufacturer of these large transformers, and poisoned/destroyed a significant area near Schenectady, NY. Approximately between 1947 and 1977, GE released 1,300,000 pounds of PCBs into the Hudson river¹.

As an eventual result GE terminated production and China, having little regard for environmental issues, then became the most significant manufacturer of these types of transformers.

Since electrical transformers are universally present in different types of equipment I should note that only the larger types of transformers use a liquid cooling fluid. Until the late 1970's PCBs were the coolant of choice. Now other (hopefully safer) chemical coolants are used. However, if you take a look up near the top of many electric utility poles, you will easily spot a huge number of the older type transformers still in use. These are being replaced by safer types as they fail, but there is still a huge number of them out there.

¹: per Wickipedia

rforno

sma3 said:

Everyone we talked to could not comprehend what is happening to the USA and felt very sorry for us. this was before the tariff wars.

I was down there the week after the 2016 election consulting to a uni in Melbourne. In every cafe, coffee shop, store, and place I went, I was giving civics lessons about WTF the 'Electoral College' is, how this could happen, omgwearesosorry, and more. (Holding a doctorate from an Australian uni pretty much got me treated like a permanent resident when talking to the locals, which was nice)

In the Quantas lounge at SYD, I was t-h-i-s close to walking out the door and crashing with friends in the city, thinking I could (at the time) very easily walk into a nice faculty job at the place I was consulting to. I'm not kidding .... I remember freshening up in the mens', putting my head against the wall, and letting out a large sigh of despair before boarding the flight back.

I have a dinner this week at the Australian embassy, coincidentally. Going to try real hard not to prostrate myself before the ambassador and beg for asylum.....lol

JD_co

Australia is not cheap, but at least the language is English.

About that visa for American retirees....hmmm......the options seem limited. A few of us might be begging for asylum at some point soon.

racqueteer

Old_Joe said:

Everything that @yogibearbull and @Sven mentioned is true. General Electric was a major manufacturer of these large transformers, and poisoned/destroyed a significant area near Schenectady, NY. Approximately between 1947 and 1977, GE released 1,300,000 pounds of PCBs into the Hudson river¹.

"Near Schenectady, NY" doesn't really cover the true impact. Firstly, the pollution extends at least 200 miles downstream. In the 70s, fish consumption was formally banned (assuming one could catch anything and was stupid or desperate enough to eat it). I was born in 1947, and it was better than four decades before striped bass returned in significant numbers. We are, I believe, the largest Super Fund site in the nation. The river, in my childhood, was essentially dead.

Old_Joe

Thanks, @racqueteer. I try to be reasonably conservative in my posts (despite what FD1000 might think). You are absolutely correct, and I also didn't mention that GE had a number of other manufacturing sites which poisoned significant territory. One of those was in Oakland CA, across the bay from SF.

Crash

The river, in my childhood, was essentially dead.
Don't forget:
https://en.wikipedia.org/wiki/Cuyahoga_River


Western New England: the shad run up the Connecticut River was non-existent for years and years. There had been a GE plant in Pittsfield. I think it's closed. Dunno just what they did there. Tariffs sucks, anyhow.

rforno

If Tariff Baby's tantrum on Wednesday is as bad as folks think, how long before China and Russia retaliate by starting a coordinated dump of Treasuries in large numbers to royally destabilize the dollar and US role in the world economy? IMO that'd be a nuclear option, financially-speaking.

(Of course, FOTUS is already blowing up the US' role in the world anyway...)