No transition without transmission? The grid equipment bottleneck explained

View Full Transcript

Taylor Kuykendall:

Hello and welcome to Energy Evolution, the podcast where we here at S&P Global Commodity Insights dive into a new angle on the energy transition every week. Continuing on last week's supply chains theme, this week we're talking about the equipment needed for electricity grids, transformers, cables, etc. These are not exactly the most glamorous parts of the energy system, but they are clearly an essential part of the clean tech supply chain. Take transformers, the component that transfers electrical energy from one electrical circuit to another circuit, for example. Waiting time speeds have surged in the past couple of years, highlighting just how crucial it's going to be to up the production of these transformers if energy transition goals are going to be met. To learn more, we've got our correspondent Camilla Naschert with us. Hi, Camilla.

Camilla Naschert:

Hey, Taylor.

Taylor Kuykendall:

So, grid supply chains, what do we need to know?

Camilla Naschert:

Yeah, I mean to connect new renewable energy projects to the grid or even to link up new demand like data centers, the energy system needs grid infrastructure like cables and transformers, and it's been perhaps a little bit under-reported in recent years, but the grid supply chain has now really been identified as a key bottleneck in the deployment of renewables. The EU wants to see more than 580 billion euros invested in grids by 2030 to help address this issue. And that's both for new smarter systems to use the grid more efficiently and also in the simple physical infrastructure. But especially when you talk about the manufacturing of large components, it's not so easy to ramp up production. Take transformers, which you mentioned earlier, they're huge building sized pieces of equipment that weigh 450 tons and are used to change electrical voltage to push electricity across large distances and then deliver it to end users. These things take time and expertise to make with skilled engineers physically winding copper wires to create coils.

In today's episode, we'll hear from Andreas Schierenbeck, the CEO of Hitachi Energy, a major global producer of transformers and other grid instruments. But before that, I caught up with Cormack Gilligan, associate director at S&P Global Commodity Insights focused on clean tech research. He'll help us understand more about the market for grid equipment. Cormac, thank you so much for joining us on Energy Evolution. So, this week we'll be talking about grid supply chains. Obviously the issue of grids as a key bottleneck for the electrification drive in Europe and elsewhere in the world is really being talked about everywhere. When we talk about grid supply chain, what are the key components that we need to know about and why are they so important?

Cormac Gilligan:

Yeah, so thanks, Camilla. In terms of the grid at the moment, just going through I would say a very interesting time in terms of, firstly, we have a huge change in terms of energy demand, which has been driven by three things. One, a huge amount of electrification related to let's say, for example, electric vehicles, data-center demand. Two, a lot of these components have been aging, getting older, and three, sustainability is kind of growing in importance, or energy transition, so wanting to put more and more renewables on the grid.

So, these three factors are impacting the demand for various components related to the grid. For example, at the moment, one key component such as transformers, which are integral in the usage of EV charging stations, solar and wind and battery energy storage, they're facing very long lead times due to this growing demand. Other parts like cables, particularly copper related to helping with the transmission and distribution of the growing electrification. And then there's other parts which are more up and coming and being explored, which are topics around what we call grid enhancing technologies. So, these are different pieces of hardware that can help with alleviating congestion on the grid or helping to maximize the use of the existing power cables and transition and distribution.

Camilla Naschert:

You already just mentioned that there are waiting times facing customers, but can you tell us a bit more about what the demand level for this grid equipment has been throughout the energy transition? And does it at all match with supply?

Cormac Gilligan:

Yeah, well that's kind of the focus of a lot of this huge drivers and huge flux and change that's in the market. So, this has been very exciting times for some of these component suppliers that are helping the electrification of the grid in particular. And when we think back maybe as these industries began, maybe 10, 15 years ago, typically the power markets were growing maybe in single digits and in some cases maybe starting to flatline. Recently, of course, we've seen that there's been huge disruption, particularly since COVID times, where we've had increased focus on as mentioned renewables and the build out of data centers. And for example, when I was just looking at some of our recent numbers, the for example, clean energy technology additions are due to grow 9% in 2025 and the reach over 750 gigawatt AC. Put this in comparison, this has nearly double the 2022 additions, and this is just over a few years.

Equally, we're seeing huge increases in the amount of electric vehicles in terms of their growth. Some of our colleagues I know on the mobility division have put out some of their expectations for 2025, and we're expecting double-digit growth rates, anything from 30% globally to 43% for example in Europe as more and more electric vehicles are entering into the market. And then in terms of, for example, our data center and demand and how this is going to impact the power markets. For example, some of the colleagues who study, this market is maturing, they're expecting that the market will grow very strongly over the next few years and they do have a range of numbers, but it's anywhere from power demand increasing between 10 and 15% between 2024 to 2030. And so this is going to create, as we mentioned, big disruptions in terms of new components to help push the electrons through the grid and also help bring online some of this new renewable capacity, which is obviously part of the challenge as well as the greening or the transitioning of the grid from maybe more fossil based fuels to more renewable based.

Camilla Naschert:

And getting back to the manufacturing side, what does the global manufacturing space look like for grid technologies? Is it centered in certain geographies or certain big players or how can we picture that as a sort of global industry?

Cormac Gilligan:

Yeah, it's quite varied and there's definitely some major players that people will be familiar with in terms of the likes of Hitachi Energy or the other big multinational industrial players like Siemens Energy or General Electric, ABB. And some of these companies, for example, most of them have a global footprint, which production facilities in different markets across Europe, across Asia, and increasingly via the impact of what was known as the Inflation Reduction Act in the United States and the push and the drive towards on-shoring of local manufacturing within the United States to serve more renewables as well as more automobile production. There's certainly been a number of companies investing, for example in the US market. That all being said, it is fair to say that there are other big manufacturing locations, for example, like in China, but typically a lot of the existing manufacturing that is there is certainly serving the domestic market.

I think it would be fair to say that it would be expected that a number of these suppliers who are active not only in working with local utilities or state-owned enterprises, that as we see increasing amounts of renewables, increasing amounts of electric vehicle manufacturers that maybe are of Chinese background as they export and move abroad, I expect that there will be increasing amounts of Chinese transformer or grid-related component manufacturers expanding abroad. And just one last comment I would make in relation to a lot of the manufacturing and some of the considerations regarding location, it continuously comes up that the one reason for some of these long lead times in the case of transformers for example, has been the ability to source talented and technical labor.

And this has been the case for many of these different industries that we've touched on, data centers, renewables, and the electric vehicle market, but it's definitely very important to the grid component manufacturers. And so a lot of the companies are, as they make announcements, are making advanced hiring decisions in order to make sure that once these new manufacturing plants and new capacity come on stream that they have adequate labor already maybe trained up or almost prepared and ready to go.

Camilla Naschert:

Great. Now, in the wind industry we've seen enormous innovation when it comes to turbine capacity, for example. So, I'm wondering when it comes to innovation, are there similar gains to be made in the grid manufacturing space?

Cormac Gilligan:

Yeah, there's going to be huge opportunities for a number of these players to really bring a lot of innovation into the market, and particularly amongst some of these component suppliers where they're using more new materials, maybe like composites where they're just trying to figure out ways that they can increase the amount of power that can flow within the grid. They are bringing out either technologies that have a mix of materials that help everything from the ability to withstand higher temperatures so that the lines don't sag or fall as low as maybe previous or older generations. So, when there's climate occurrences such as forest fires, they'll be less likely to be maybe impacted. Of course as well typically some of these materials are maybe have longer life durations, they may be able to transmit increasing power flows within the grid.

And I think there's other things that the industry is looking at as well at a broader level, which is like how do we, as increased amount of electrification, for example, high voltage DC like sending large amounts of electricity when renewable assets, wind and solar, often they're located in deserts or in areas where land is maybe a bit cheaper and where there's less populations and it's easier to get planning permission, they may not be near where the load centers are such as cities. So, in that instances, there's lots of investigations and trials and projects underway to figure out how to transmit the electricity faster and more efficiently across large distances.

Camilla Naschert:

Thank you so much, Cormac, for joining us on Energy Evolution.

Cormac Gilligan:

Thanks, Camilla.

Camilla Naschert:

Now with that really useful overview of this key challenge around market demand and lagging supply for some of these components, let's now hear from Andreas Schierenbeck, CEO of Hitachi Energy. Andreas Schierenbeck, welcome to Energy Evolution.

Andreas Schierenbeck:

Thank you for having me.

Camilla Naschert:

Now, in our conversation today about the grid supply chain manufacturing and Hitachi Energy's part in that, I would like to start with your view on the wider grid expansion plans in Europe as the energy transition progresses. There are obviously large ambitions and investment goals set out by the EU towards both the end of this decade and towards the net-zero goal. And at the same time, and that's why we're having this conversation today, we are hearing about the grid supply chains as a bottleneck to this. So, you as an insider in this industry, how do you see the demand and supply in the grid's manufacturing space fitting together currently? Are there maybe any products where manufacturing is lagging in particular?

Andreas Schierenbeck:

I would say maybe we should start at the beginning. The energy transition is in full swing and we see that, but I think we have neglected a little bit in that past to our transition to the grid. We focused on renewables and we have set targets how much renewables we have to create, but that we have to expand our grid infrastructure, well, that was a little bit neglected. I think everybody now has found out that this is an important piece because there is no transition without transmission, actually. You see it in the crop discussion last year in Baku, where actually after we have focused on tripling gas investments and renewables, now we want to invest into the grids heavily and everybody is talking about grids. So, yes, we need a lot of grid infrastructure. We have to expand that. And from my point of view, I think it came a little bit as a surprise.

Nobody has really seen it coming, and that means that the supply chain and the capacity what we have is definitely stretched. And yes, it could be a kind of bottleneck going forward because the cutbacks of many of the players and the TSOs are doubling and tripling. And of course the industry has some issues, too, coping with that. On the other hand, there's a lot of investments going into capacity and expansion, like reinvesting more than $6 billion in the next couple of years alone, $1.5 billion into an expansion of transformer factories. And of course there are a lot of things we can do different as well and probably be coming to that.

Camilla Naschert:

So, you just touched on transformers. Is it fair to say that's one of the components that's in particularly short supply?

Andreas Schierenbeck:

Well, I wouldn't say short of supply, but it's definitely one of the critical pieces in that everybody needs transformers to make the grids work. And the transformers were in the last, let's say 10 to 15 years, not really sought after. So, there was a lot of capacity reduction in the market. And on the other hand, transformers, especially power transformers, not really a commodity to produce them at the complex endeavor. It's a lot of manual work which cannot be automated and you cannot ramp up the production as fast as maybe with other parts.

Nevertheless, I think to ramp up transformer production investments are undertaking anyway, but of course there's a lot what the industry can do. One thing is, for instance, standardization. Because in the past, every transformer, especially the power, high power transformers were actually a kind of unique thing for every customer, which makes it very difficult with long lead times. And of course the industry is changing. It's much easier and much more reliable to produce transformers if we have a kind of capacity with reservations of framework agreement that we know what kind of transformer which customer needs going forward, which was not the case a couple of years ago.

Camilla Naschert:

You just said it's not a commodity. Maybe some listeners don't have an image in their head when we hear the word transformer. Can you maybe walk us through what's involved in making a transformer and how long does that take?

Andreas Schierenbeck:

Well, if you're talking about, especially about high power transformers, these are heavy pieces of equipment. You're talking about 450 tons and then of course there's some oil going into that. These things are bigger than normally a railway container. They're made out of a metal casting and inside, actually there's electric steel. You have three copper wires which are insulated, which are laid by hand. So, we are talking about tons of equipment, a lot of experiences going into that. It's a lengthy production process because the wiring or the winding has to be done by hand, so people have to put the copper wires around some models to create a core. It has to be dried, it has to be put together, it has to be tested insulated. So, that's definitely a heavy production process, which is highly manual skilled work to get a new winder being productive. And normally we need to train our colleagues for one or two years before they can work individually and in good quality, but nothing you can speed up overnight.

Camilla Naschert:

And as you try to speed this up and ramp up the supply of transformers and other pieces of grid equipment, what are the bottlenecks that you're specifically trying to address? And maybe you can give some examples from Hitachi energy factories across Europe and the wider world.

Andreas Schierenbeck:

Yeah, first of all, we are investing into capacity expansions. We are doing brownfield expansions. That means our existing sites getting expanded, so we are making the production sites bigger, increasing testing capabilities, hiring more people and training more people. So, that's the first thing what we can do and that's the fastest to increase capacity. On the other hand, we are putting and collaborating with our customers in a way that we can make the production more predictable because there are a lot of long lead items which can only be ordered if the design of the transformer is completely aligned and agreed with the customer.

But of course, if you would go for standardization or if you would go for capacity reservation that we know what we have to produce when, you can of course pre-order long lead items, which would definitely speed up the production for special equipment, for cooling, and for other things are very long lead times and there are only a handful of suppliers where we have to buy from. And if you can look ahead and plan better, then of course it shortens the lead times as well.

Camilla Naschert:

What does the supply chain, your global supply chain look like? Also, your upstream suppliers, is it really a global world or is it all fairly localized just based on the size of these things? I'm asking because of course we have a push also in the EU to increase our attention to potentially third-party imports and looking exactly where imports of critical infrastructure equipment is coming from.

Andreas Schierenbeck:

Well, we have a global supply chain. We'll be producing bits and pieces globally, and it depends where we have specialized factories and we trying to optimize that. I think during COVID we have learned how to sturden and harden our supply chain. So, actually we are quite flexible and resilient in that. And of course we have external suppliers as well where we are purchasing from. I wouldn't see it that critical and be dependent or that we have risks there. It's just that certain parts just take a long lead time to produce and especially if you start production, say from a different world. If we know what the customer wants, this is a moment where we can start to order and reproduce the parts. If you would know ahead of the time what the customer exactly wants from the design, of course we can pre-order. It's like in the car industry, if you know what kind of type of car you order, of course 80% probably can be pre-ordered that you are much faster than just the 20% customization then of course you're doing on the fly. So, that's actually the tricky part to optimize supply chains. You need predictability and we have to have a kind of foresight what is needed when to really speed it up.

Camilla Naschert:

I wonder how you look at the question of innovation. Maybe there are still things where you and the wider industry is pushing ahead at efficiencies or maybe the reduction of resource intensity of the construction. I'm just thinking from, for example, the perspective of the wind industry where we've seen this constant drive to increased turbine ratings ever bigger, ever better. Are these incentives there for your industry as well despite this demand backlog? And what are the areas that your teams are looking at there?

Andreas Schierenbeck:

I think from the innovations point of view, we are a little bit limited. Yes, we can look into innovations, how we produce more on the production method, and that's actually what I would say I would consider our supply chain as an innovation, that we have feeder factories, that we have different piece and parts coming from different parts of the world to configure and build the transformer. Innovations in a way to make the transformers bigger or more efficient are limited because the physical limitations we have already reached, though from that point of view, you have a lot of limitations from the physics, but as well from the size of transportation because whatever we transport has to be shipped, transported by road rail to the end location of our customers, and that gives you a lot of restrictions how big could it be, though actually we have in Sweden and one of our main hubs, a transformer which was produced from China, which was so big by design that it couldn't be transported. So, it was left actually there in Sweden and ran around the world and the product was then produced in China. So, there's not much leeway for us to make innovations in the way of efficiency or size.

Camilla Naschert:

That's really interesting. So, this is really a kind of industry where you also need to be geographically close to your customers and your off takers.

Andreas Schierenbeck:

Yeah, definitely. We try to produce as much local as we can. Of course we specialize, but yes, shipping a 450 ton piece of equipment around the world, that is something we try to avoid.

Camilla Naschert:

And you just mentioned Sweden, I live in Sweden as well, and I've seen your advertisements for hiring across all kinds of different specialties. How are you finding it to recruit the teams that you need to ramp up your manufacturing in the pace that you were hoping to do?

Andreas Schierenbeck:

Of course hiring is always a tricky thing, but surprisingly I have to say, we don't have so many issues to find the right people for our businesses. And Sweden, for instance, we hiring every day more than three colleagues every day, even the weekends. So, actually we are able to find colleagues, and I was just yesterday in Sweden and in Ludvika, it's a kind of startup culture there as well. We have a lot of young people, everybody is motivated. You see growth. It's a special environment that helps us hiring people. And of course we have the middle of the energy transition. So, I think that helps with that. I wouldn't exclude that we will run into issues maybe later because we have to add one around 15,000 people in the next three years, but at the moment I have to say we are doing it very well. This is not the bottleneck at the moment.

Camilla Naschert:

And when it comes to inflation costs increases throughout the many manufacturing sectors, how are you coping with that? Are there any components and raw materials that you're watching?

Andreas Schierenbeck:

Of course, we're looking at the commodity prices for copper, electric steel, pipe and paper and other things. But since the lead time and production times are now a little bit long out, if you haven't really booked a slot, then of course it could be that you're waiting nearly three years or more to get your product. And then of course the price is becoming unpredictable. So, actually we have changed our approach to our customers and said, "Look, we actually agree on a kind of fixed price block for our design work, etc." And all the raw materials are kind of flexible based on algorithms. So, if this raw material is becoming more expensive, the price is going up, and if the price is becoming more cheaper, the price is going down. So, we don't want to make any extra profits or margins or even gambling on commodity prices. So, we try to be as transparent with our customers as possible and say, "Look, this is what the price of copper has done here. We started now the actual price or it's becoming cheaper, more expensive," that we actually have it in a kind of controllable way for both sides because it is an issue because raw materials are going up for these kind of products.

Camilla Naschert:

And I guess the product itself in turn as well, is there anything you can say about the price of a transformer and how that behaved in the last few years compared to now?

Andreas Schierenbeck:

The price of course have definitely gone up, but it has gone up basically because of the commodity prices have gone up, so labor and inflation and all these things. From that point of view, the biggest price impact is actually now best that we have in the last year seen a lot of inflation and raw material and energy prices going up. And of course since the production time or the lead times under we can deliver a product has been more extended. Of course you see the impact even more because delivery times of some transformers have been the range of eight to 12 months, and now we are talking sometimes about years, and that of course has an effect. But overall, yes, you can say the prices have gone up.

Camilla Naschert:

If you look at the installation targets and renewables deployment goals for Europe, do you feel like the realities on the ground for the grid supply chains are fully factored in or are we up for surprise when it comes to this?

Andreas Schierenbeck:

I don't think we are up for a surprise. If you look at the situation at the CapEx, I think we as an industry, I mean customers and suppliers and regulators, we're just starting to accept and to adjust to the new conditions. It is a different market now. Yes, we have constraints, but of course we can manage that if we work together as an industry, as we standardize and we come to agreement about visibility and booking slots. That the whole industry is becoming more predictable, I think we can definitely cope with that. On the other hand, we can or we have to use our installed base much better with compensations, power quality, service approaches to extending the lifetime or using the installed capacity much better. I think you'll find a way to keep pace with the energy transition. So, I'm definitely optimistic about it.

Camilla Naschert:

Maybe final sort of summary. Obviously we have goals towards 2030, towards 2050 for net zero. That's what we think about when we say the term energy transition. How long in your view will this energy transition have to take when you take into consideration the investments and the realities of the supply chains?

Andreas Schierenbeck:

I think you address it already a little bit in your timeframe. If you're mentioning 2030, this is for our industry already tomorrow, 2050 is probably already a different horizon. If you're looking at a lot of very intelligent people like IEA, et cetera, they're talking about the age of electricity though they forecasting at the super cycle, this lasting for a very long time. Because if you just look at the investment horizons of our customers, grid planning is now expanding from 10 to 15, sometimes to 20 years. And if the plans are good for 20 years, and of course we would see growth and demand for our products as an industry at least for the next 50 to 20 years.

Camilla Naschert:

Andreas Schierenbeck, thank you so much for joining us on Energy Evolution.

Andreas Schierenbeck:

Thank you very much.

Taylor Kuykendall:

All right, such a fascinating look at this industry. Thanks, Camilla, for bringing us these interviews. Readers of S&P Global Commodity Insights news and analysis can certainly expect a whole lot more coverage on this crucial part of the clean tech supply chain going forward.

Camilla Naschert:

For sure. Take care, Taylor.

Taylor Kuykendall:

Thank you again, Camilla. And I want to encourage all of our listeners to join us at CERAWeek by S&P Global. The conference is going to be taking place over March 10th through the 14th in Houston and it's going to be jam-packed with all kinds of sessions and panels with some really incredible speakers. I'm looking forward to seeing you all there. Now. the Energy Evolution Podcast is hosted by me and Eklavio Gupta, and I would like to give special thanks to some of our other wonderful podcast team members you didn't hear today, Dan Testa, Christopher Coats, and Karen Woollenbrecht. This series is produced by our stellar agency partner, The 199, and the Commodity Insights digital content team.