The challenge of growing electricity demand in the US and the shortage of critical electrical equipment

Electricity consumption in the US remained stagnant without significant growth for the past two decades up until 2021, as a growing emphasis on energy efficiency effectively counterbalanced the increasing demand.

However, in the last few years we have experienced a swift change in demand landscape, pushing electricity demand back into expansion. Load growth, or the increase in power demand over time, has cast a spotlight on the resilience of utility supply chains with crucial electrical equipment, such as transformers and switchgear, already falling into a shortage, resulting in ballooning prices and escalating lead times.  

Catalysts of the load growth 

Substantial investments in the manufacturing sector, particularly in electrical equipment manufacturing, have been the primary drivers of the turnaround in electricity demand. Construction spend in manufacturing surged by 32% year-over-year in February, a staggering 181% versus pre-pandemic levels, stimulating greater demand for the underlying equipment.

This upswing in manufacturing investment can be largely attributed to the Inflation Reduction Act (IRA) and the CHIPS and Science Act, both of which are channeling investment into domestic supply chains for critical energy transition components, with the IRA already accounting for more than 200 planned manufacturing facilities.  

Increasing interest in artificial intelligence (AI) has further amplified the growing electricity demand, with data center electricity consumption projected to escalate from 2.5% of total US consumption in 2022 to 7.5% by 2030, which is roughly 130 terawatts per hour (TWh) to 390 TWh.  

One of the challenges associated with manufacturing and data centers is that they typically require round-the-clock power, something that traditional renewable generation, such as solar and wind, cannot consistently meet. In addition, factors such as the accelerated rollout of electrical vehicles (EVs), the establishment of hydrogen hubs, and heightened peak demand from high temperature and extreme weather events, all contribute significantly to the burgeoning electricity demand landscape. 

Supply chain weaknesses exposed 

The return of load growth comes with many impacts, most notably the heightened stress on the supply chains of key equipment, which are already struggling to fulfill the ballooning demand. Concerns also remain over the capabilities of the existing transmission and distribution (T&D) infrastructure and its ability to handle the expanding capacity.  

Over the past few years, transformers have emerged as a significant bottleneck to utility supply chains as demand outpaces available supply, with only 20% of US demand being met by domestic supply. The shortage is not isolated to the US, but the impacts are more evident due to the lack of local supply chains.  

This scarcity has triggered substantial upward price pressures across the transformer market, with prices rising between 40% and 60% since January 2022, depending on the specification. In parallel, lead times for power transformers have escalated significantly from around 78 weeks in Q1 2022 to 127 weeks by Q4 2023. Switchgear and circuit breaker suppliers are already feeling the impact of the heightened demand as lead times continue to swell, with high-voltage circuit breakers recording an average lead time of 151 weeks in Q4, an increase of more than 130% year-over-year.  

In addition, the competition for available supply has also pushed prices up, with circuit breakers and medium-voltage switchgear prices estimated to have increased by 21% and 26%, respectively, since January 2022. Demand for electrical equipment, especially switchgear and transformers, is anticipated to remain strong as the investment into manufacturing facilities and datacenters continues to ramp up, while utilities are expected to respond to the increasing electricity demand by expanding generation capacity and bolstering the T&D infrastructure. Robust demand is expected to persist for the foreseeable future, keeping both lead times and prices elevated.  

Barriers to meeting rising demand 

The shortage of domestic capacity and the growing lead times for key equipment raises a key question: why is domestic supply not expanding to help meet the growing demand? Ultimately, the technical manufacturing processes that are required create extremely high barriers of entry for suppliers.

Additionally, the surge in demand for electrical equipment may only last for a few years, which makes suppliers hesitant to invest in greater supply capabilities that could result in over-supply conditions when demand eases. This phenomenon mirrors past experiences in markets like semiconductors, where short-term market booms led to increased capacity, only to face challenges when the market dynamics shifted. 

Overall, the rapid expansion of energy-intensive infrastructure is expected to continue fueling load growth over the coming years, putting additional strain on supply chains. These dynamics highlight the importance of fortifying domestic supply for crucial equipment rather than heavily relying on foreign imports.  

The industry could also see increased resistance to clean energy goals due to the lead times to build clean generation sources and transmission interconnection delays, with the increasing demand likely to require pre-existing fossil fuel generation to meet load demand. As the energy landscape continues to evolve, a balance will need to be struck to ensure clean energy infrastructure continues to expand while meeting the expanding energy demand.   

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