Land

Grid Block: How A Transformer Shortage Impacts Affordability

Grand Oak Builders president and CEO Dave Erickson lays out the domino effect of an acute shortage of distribution transformers needed to bring new homes and communities onto the grid.

Land

Grid Block: How A Transformer Shortage Impacts Affordability

Grand Oak Builders president and CEO Dave Erickson lays out the domino effect of an acute shortage of distribution transformers needed to bring new homes and communities onto the grid.

October 3rd, 2023
Grid Block: How A Transformer Shortage Impacts Affordability
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A Catch-22 is a damned-if-you-do-damned-if-you-don't trap so absurd that only human beings are capable of creating them.

Like this business of trying to let the hot air out of inflationary forces while at the same time making it harder and more expensive to build and buy homes.

A related wild card – and one that's been around for a couple of years – concerns distribution transformers, a critical path to connecting newly developed and built homes to the grid. A verging-on-crisis supply constraint on transformers – likely to get worse before it gets better as demand for them explodes – is hitting close to home everywhere.

A recent Wall Street Journal column notes:

Demand for transformers is growing worldwide as low-income countries develop their power grids and wealthier ones go green. The U.S. now finds itself in the difficult position of having to compete with other countries for transformers and electrical steel at the same time as the Inflation Reduction Act subsidies supercharge demand.
But forget about building out the grid. We can’t even maintain the one we have. An Energy Department report last year warned that most large power transformers will soon need to be replaced. The average age is 40 years, and normal life expectancy under ideal conditions is 20 years. Aging transformers “cause higher failure risk,” the report notes. – Allysia Finley, Wall Street Journal

Finley's piece adds: "According to the American Public Power Association, 1 in 5 housing projects has been delayed or canceled owing to shortages. The pandemic dearth of semiconductors, appliances and cars eased as demand ebbed and supply increased, but don’t expect this one to let up anytime soon."

One regional operator, Grand Oak Builders president and CEO Dave Erickson, describes how the falling dominos impact not just 2023 closings but the entire value chain – including investing in and developing land positions necessary to "feed the machine" of continued inventory.

Our 2023 has been reasonably successful, especially given the higher interest rates that we've been running into," Erikson tells us. "As we're ramping up and getting ready to produce for 2024 and planning into 2025, we are looking at both acquiring lots from developers, and in some cases, being a developer of our own property to feed our pipeline. So are there are legitimate concerns we're running into. A developer says those lots will be platted in December, but we're a little skeptical about whether transformers will be there ready to go at the same time. And then for our own development – planning for things that are going to be showing up in late '24 – we're trying to be proactive to make sure that we have land, and we're going to spend a couple million dollars to get some lots in the ground. We want to make sure that we're not held up by you know, $40,000 worth of transformers that are mothballing the whole thing for an extra six months before we can go."

A Conference Board briefing – published this past Summer – highlights three macro buckets around the transformers shortage:

  • Wait times for some transformers have gone from weeks to over a year,1 and costs for finished transformers have soared in some cases by more than 400 percent since 2020,2 placing residential and commercial construction projects—including those that support electrification and clean energy goals—at risk and impeding the resilience of the grid, particularly in the case of natural or man-made disasters.
  • Supply shortages that affect US utilities and their business and residential customers are the result of two main issues: 1) the US produces almost no grain-oriented electrical steel (GOES), a key transformer material, and 2) the country relies too heavily on foreign manufacturers for production of large power transformers (LPTs).
  • Strategies to boost domestic production and capabilities are being explored by the electric and construction industries as well as by the federal government—including use of the Defense Production Act—as transformers are critical during this time of grid modernization and electrification. – The Conference Board

From Erickson's perspective, and that of many other local and regional operators, the matter was on the radar as far back as early 2022, but its intensity and sweep have caught some off-guard.

It cropped up noticeably in the Wake Forest area about six months ago, on hearing that Duke Power was was having to really scramble to keep up with sourcing," says Erickson. "And Duke Power should have some serious buying power. Then, just recently, over in Greensboro, North Carolina, where I am today, there's a discussion that you need to be planning no less than two years out to get transformer, so it's increasingly become a nationwide problem."

Supply chain strategist and author Ken Pinto, founder of Kenzai USA and a TBD Dream Team member, adds context to understanding what's ahead.

Those who are developing land know that these lead times have been this way for years now," says Pinto. "They know that they have to order their transformers three or four years ahead of time. And they may have a pretty good conceptualization of what that community is going to look like and what the demand is going to be and estimate what the electrical capacity calculations are.
However, as you get closer and closer to breaking ground, we builders keep changing and changing things. By the time it comes time to develop the land, you may have ordered the wrong transformers or not enough of them or the wrong sizes or something. So I think that's causing part of the problem. We keep changing things as we're as we're going along. The same thing as the same thing is occurring with transformers has has been occurring with say, a shortage, a shortage on appliances, where you need to close a home so you'll go steal the appliances from another one of your inventory houses and put them in that house to get to closing and you're begging and borrowing from inventory houses to do the same thing with transformers. So they'll beg and borrow from different parts of the area in order to get their certificate of occupancy or to get approvals to proceed. And that's creating more work than it would be if you just had the right materials at the right time."

Pinto has observed that the predicament has weighed on initiatives to find expense reductions, and thereby ratchet back asking prices:

The price of those transformers probably went up four times in past five years," says Pinto. "It makes it more difficult to get to the buying strategy of purchase-in-advance-of-need, which means that you're gonna have to stock up and store them somewhere. So, now you're leasing space, you've expended capital to purchase them. All that added cost in order to  be able to close homes on time, and not hold up your job."

To operators, the whole issue feels like a Catch-22.

I don't think we're at a crisis level, but it certainly is a negative drag on the availability of housing," Erickson says. "When local officials and national officials are talking about the price of housing, well, you know, supply meets demand. If a supply of houses is constrained, wherever there's demand, price is gonna go up and that just ripples through the whole system causing artificially higher prices. We just haven't got the right national infrastructure to feed fundamental electrical components to go into modern subdivisions."

ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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