Contents

• Introduction
• The Nature of Transformers and Their Role in the Electric Grid
• Context of This Report
• Report Framework
• Market for Distribution Transformers
• Market Participants
• Recent Supply Picture
• Drivers of Demand
• Maintaining Inventories of Transformers
• Imports and Supply Chain
• Steel and Its Relevance to Transformer Supply
• Supply and International Trade
• Tariffs
• Possible Additions to Domestic Supply of Steel
• Recent Executive Branch Actions
• Changes to Tariffs on Copper and Steel and Its Derivative Products
• Defense Production Act of 1950
• DOE Fact-Finding and Analysis
• Other DOE Activities and Programs on Distribution Transformers
• Energy Conservation Standards and Implications for Supply
• Research and Development
• DOE-Sponsored Transformer Research and Development
• Manufacturing Research and Development
• Government Financial Incentives in Statute
• Internal Revenue Code §48C and Possible Impact on Manufacturing Capacity
• Rebates for Purchase of Distribution Transformers (Expired)
• Selected Policy Options
• Extending or Revising Tax Credits
• Property Eligible for §45X Tax Credits
• Allocation of Funds for §48C Investment Tax Credit
• Possible Outcomes of Changes to IRC §45X or IRC §45C
• Creating a Virtual Reserve
• Using Title III of DPA Authority for Manufacturing
• Investing in Research and Development
• Summary

Summary

Supply of electricity distribution transformers essential to the electric power grid has been strained in the last few years, with implications for post-disaster recovery and plans for grid expansion. Distribution transformers are located near the service connection with residences and commercial buildings or on industrial sites. The price of transformers has increased sharply since 2020, with data from the Bureau of Labor Statistics reporting the prices of both distribution transformers and large power transformers to have risen roughly 40% from 2020 to 2024 (inflation-adjusted). Coupled with the rise in prices is an increase in the time needed for suppliers to fulfill orders for distribution transformers. According to a February 2024 report by the National Laboratory of the Rockies (NLR), orders are reportedly taking two years to be fulfilled, a fourfold increase compared to pre-2022.

The U.S. Department of Energy (DOE) identified 34 original equipment manufacturers in the U.S. market for distribution transformers as of April 2024. They also estimated that 1.5 million units were shipped in 2021. An industry report from 2024 estimated it would take three to five years before sufficient new manufacturing capacity might become operational and alleviate supply issues. NLR estimates roughly half of distribution transformers are over 33 years old and nearing the end of their useful life. The U.S. electric power grid transmission expands at roughly 1% per year, and in 2023, roughly one-third of grid investments went toward distribution infrastructure, implying a need for additional distribution transformers.

The United States imports 25% to 30% of distribution transformers chiefly from Taiwan, Canada, and Mexico. Some domestic transformers are made using imported components such as the electrical core that facilitates the crucial voltage transformation, of which between half and three-quarters are imported for incorporation into assembled domestic transformers. Those cores that are instead made domestically obtain 95% of their steel from one domestic supplier. Importation is possible, but imported electrical "steel articles" are subject to 50% tariffs as of August 15, 2025. There are some flexibilities in the supply picture. Manufacturers could choose to increase their production of electrical steel for cores, if willing to reduce their output of other products. Current federal programs provide incentives for expanding production capacity, and several manufacturers have announced they will be utilizing these incentives—competitively awarded tax credits (Internal Revenue Code Section 48C [IRC §48C]).

Other recent domestic programs or actions include rebates for purchase of a replacement distribution transformer and a 2022 presidential determination which found that distribution transformers and grid components are "critical technology items" essential to the national defense. Bills currently in Congress, S. 448 and H.R. 4128, would expand the scope of a tax credit, Internal Revenue Code Section 45X (IRC §45X), to apply to the production costs of distribution transformers. In 2022, rural electric cooperatives and other organizations signed a letter to the House and Senate Appropriations Committees requesting $1 billion to address the "supply chain crisis."

Congress may choose to constrict, maintain, or expand statutes affecting supply of distribution transformers. Policy options include the following:

• Expanding the scope of the IRC §45X credit, a manufacturer credit of 10% the cost of producing certain electrical equipment, to include distribution transformers (S. 448 and H.R. 4128).
• Modifying the Qualifying Advanced Energy Project Credit (IRC §48C) to reserve a certain dollar amount exclusively for distribution transformers, bypassing the competitive requirement.
• Creating a virtual reserve by authorizing and funding the federal government to purchase distribution transformers up to a predetermined level (quota). If market activity does not reach the quota over a defined period of time, the government would purchase the difference as the buyer-of-last-resort.
• Using Title III of the Defense Production Act of 1950 (P.L. 81-774) to address manufacturing capacity.
• Continuing to fund research and development for new, improved transformers and periodically assessing their technological readiness and adjusting the deployment incentives.

Introduction

Electricity distribution transformers are a component of the electric power grid located near the service connection with residences and commercial buildings or on industrial sites.¹ There are between 60 million and 80 million distribution transformers in service in the United States.² A transformer changes the input voltage of power transported via the electric grid to the end user, stepping voltage up or down as necessary to synchronize different components and stabilize the grid.³ The parts of a transformer include a silicon-bearing, iron-alloyed steel core, wrapped by insulated electrical conductors.⁴ The core performs its function by relying on the ability of this iron alloy to react with a magnetic field, a specialized property only possessed by certain materials. The assembled distribution transformers are mounted on utility poles and pads and secured in cabinets or underground vaults, operate continuously, and have lifetimes of several decades.⁵

In 2023, roughly one-third of grid investments went toward distribution infrastructure.⁶ Of this, the Edison Electric Institute estimates, investor-owned utilities invested about one-quarter in component replacement and one-quarter in expansion.⁷ The National Laboratory of the Rockies (NLR, formerly the National Renewable Energy Laboratory [NREL]) estimates between 1.4 million and 2.4 million distribution transformer units are added or replaced each year.⁸ The U.S. electric power grid transmission expands at roughly 1% per year.⁹

Electric utilities firms profess a need for assured access to large numbers of transformers for preventative maintenance, grid expansion, or rapid replacement following natural hazard events.¹⁰

The Nature of Transformers and Their Role in the Electric Grid

Transformers vary in physical size, location in the network's topology, and voltage step they effect (see Figure 1). Distribution transformers are but one type of transformer and one of many types of grid components.¹¹ (See Figure 1, bottom right, circled in red.) Congress has defined distribution transformers in terms of the input voltage (34.5 kilovolts or less), the output voltage (600 volts or less), and the operating frequency (60 Hertz or cycles per second).¹² The definition excludes device-specific transformers that are not general-purpose. The Department of Energy (DOE) has further added electrical capacity ratings for distribution transformers, and the current definitions set this at no more than 5,000 kilovolt-amperes (kVA).¹³ According to DOE, distribution substation transformers, which are the bridge between transmission and distribution, would typically not be included within this definition because the output voltage would exceed 600 volts.¹⁴ (See Figure 1, top right, circled in red.)

Figure 1. Electric Power Grid: Transformers Distribution transformers appear in lower right

Source: Adapted by CRS from U.S.-Canada Power System Outage Task Force, Final Report on the August 14, 2003 Blackout in the United States and Canada: Causes and Recommendations, April 2004, Figure 2.1. CRS Insight IN12048, Electric Power Transformers: Supply Issues, by Paul W. Parfomak.

Distribution transformers do not present the same challenge to electric grid security as large power transformers, which serve many thousands of customers and are a single-point vulnerability, meaning just one component failure can affect a large number of users. The consequence (i.e., extent) of a power blackout due to failure of a single distribution transformer is relatively much smaller.¹⁵ A DOE-funded journal article surmised nonetheless that older distribution transformers were more likely to fail owing to degraded insulation; the article further noted that the heat from wildfires could accelerate such failures.¹⁶ High temperatures can trigger explosions in distribution transformers, as can short circuits or lightning strikes.¹⁷

Context of This Report

The distribution transformers that serve the power grid, while numerous, are vulnerable to periodic failure as they near the end of their useful life or suffer the effects of natural hazards leading to widespread damage or failure.¹⁸ The creation of an assured supply of transformers encounters a tension between the need for sufficient inventory to replace the existing transformer stock and aspirations to expand the power grid.

The supply chain for distribution transformers has certain vulnerabilities or bottlenecks and is experiencing upward pressures on price, leading to either greater importation or longer wait times for delivery of orders. Industry groups representing electric utilities and home builders refer to a "supply chain crisis;"¹⁹ a federal advisory committee foresees the possibility of economic disruption;²⁰ and a DOE-convened roundtable tied a lack of manufacturing capacity to ongoing shortages.²¹ More recently, an industry consultancy estimated that wait times for distribution transformers had decreased to 30 weeks by the second quarter of 2025.²²

Report Framework

This report considers policy options for improving the supply of distribution transformers within a framework of economic costs and benefits, or advantages and disadvantages, and the implications for grid resilience and the price of the components themselves. Other perspectives, not considered in this report, include industrial policy, such as the onshoring of manufacturing capacity, and national security benefits, such as might accrue from maximizing domestic supply of distribution transformers.

Market for Distribution Transformers

Publicly available information on the size of the U.S. market for distribution transformers is limited. DOE estimated that 1.5 million distribution transformers were shipped by manufacturers in 2021.²³ For 2024, an industry analysis estimated the size of the market for distribution transformers in North America to be $12.4 billion annually.²⁴ A second industry analysis estimates the market for distribution transformers in North and South America will reach $27.7 billion in 2028 (2024 dollars).²⁵

Market Participants

The market for distribution transformers includes utilities and commercial and industrial users on the demand side and manufacturers on the supply side. Other market participants, such as parts suppliers and foreign manufacturers, are discussed later. The electric power utility industry includes investor-owned utilities, municipal authorities, electric cooperatives, and other entities. Among electric utilities, over 90% purchase their distribution transformers directly from manufacturers, though rural electric cooperatives are an exception. The remainder, especially rural utilities and electric cooperatives, purchase through distributors, repair shops, and electrical contractors.²⁶ Among commercial and industrial owners, the distribution chain is different and goes through distributors.²⁷ Generally speaking, electric utilities and commercial and industrial customers purchase different types of transformers.²⁸

Recent Supply Picture

The price of transformers has increased sharply, with data from the Bureau of Labor Statistics reporting the producer price index of distribution transformers and large power transformers to have risen roughly 40% from 2020 to 2024 (inflation-adjusted).²⁹ For the segment from 2021 to 2023, DOE attributes the rise in transformer prices to increased demand following the 2020-era pandemic slowdown.³⁰

Coupled with the rise in transformer prices is an increase in the time needed for suppliers to fulfill orders for distribution transformers. According to a February 2024 report by NLR, orders were reportedly taking two years to be fulfilled, a fourfold increase compared to pre-2022.³¹ Work by a consultancy, while agreeing with NLR that a two-year wait time prevailed in 2024, estimated that wait times for distribution transformers had decreased to 30 weeks by the second quarter of 2025.³²

In an April 2024 notice, DOE identified 34 original equipment manufacturers in the U.S. market for distribution transformers.³³ An industry report estimated it would take three years to five years before anticipated new manufacturing capacity could come online and be able to alleviate supply issues.³⁴

A study by the Government Accountability Office (GAO) found suppliers of distribution transformers were concerned with two key issues limiting manufacturing capacity: the size of existing factories and the need to hire and train additional workers.³⁵

Drivers of Demand

Electric utilities replace distribution transformers as part of preventive maintenance, grid expansion, and rapid replacement following natural hazard events.³⁶ Regarding expansion, NLR estimates that installed distribution transformer capacity (measured in watts of rated electrical capacity) could more than triple by 2050 to satisfy economy-wide demand.³⁷ Regarding natural hazards, the linkage between demand for transformers and weather events may be illustrated by the after-effects of hurricanes. A utility in Mississippi saw 10,000 transformers and 30,000 power poles damaged and in need of replacement following Hurricane Katrina (2005), according to a report by an industry-affiliated organization.³⁸

Maintaining Inventories of Transformers

According to an industry group, utilities maintain access to inventories of hundreds of transformers for contingency planning and business continuity to mitigate the risk of severe weather events.³⁹ Though the transformers would be held back from normal use, the market would in theory respond to the occasional need to replenish the reserve. From the perspective of a utility, maintaining an inventory of transformers ties up working capital, but, because such inventory may not meet the criterion of "used and useful equipment," the utility may not be able to charge customers and, therefore, may not see a return on investment, depending on its regulator.⁴⁰

The larger entities in the business of supplying electric power keep their own inventories of distribution transformers, using their buying power to negotiate pricing. Entities that are not as large, including electric cooperatives, may band together to form parts-supply cooperatives. For example, United Utility Supply, a supply cooperative formed as a pooled resource to make available large numbers of grid components in a short time frame, is headquartered in Kentucky and maintains an inventory of about 10,000 transformers.⁴¹ The firm shipped several hundred pad- and pole-mounted distribution transformers in the first few days following Hurricane Helene in 2024 and keeps such inventory in five locations.⁴² GAO notes that small utilities may not be able to absorb the administrative burden of participating in equipment sharing.⁴³

Imports and Supply Chain

One firm estimated in 2023 that roughly 25% to 30% of finished distribution transformers (all core types) were imported and that the majority originated from Mexico, Canada, and Taiwan.⁴⁴

Imported parts may include a steel core, made of stacked laminations of thin rectangular steel shapes, wrapped by insulated electrical conductors or "windings" made of copper or aluminum that carry the electrical current.⁴⁵

Imports of finished cores rose significantly between 2016 and 2019, from $29 million to $205 million (inflation-adjusted 2024 dollars), according to a 2021 study by the Department of Commerce; together, Mexico and Canada were responsible for roughly 95% of the 2019 total.⁴⁶ The Department of Commerce noted that this increase in imports had displaced domestic production. An industry analysis, noting the rise in imports of finished cores after 2018, attributed this to efforts to bypass import duties manufacturers might otherwise pay on raw materials in order to reduce their costs for making the assembled transformers.⁴⁷

Another supply chain method relies on using imported specialty steel and then manufacturing the electrical cores domestically. Manufacturers of distribution transformers do not typically use this option. Writing in 2024, DOE suggested this was because of the prevailing tariff on "steel articles," discussed below, which made this steel uncompetitive.⁴⁸ Cleveland-Cliffs Inc., the dominant U.S. maker of the steel used in transformers, recently asserted that manufacturers of cores in Canada and Mexico were "using steel melted and poured outside of North America."⁴⁹

Steel and Its Relevance to Transformer Supply

Supply and International Trade

DOE states in a 2024 notice that the manufacturing of distribution transformers entails either the use of imported steel or the purchase of steel from the sole domestic manufacturer.⁵⁰ DOE's May 2023 critical materials assessment identified electrical steel in general as a "near-critical material."⁵¹ Currently, the type of steel used for transformer cores is grain-oriented electrical steel, or "GOES." GOES is a specialty steel with desirable electrical and magnetic properties. Large power transformers, another part of the electric grid, also use GOES.⁵² By one estimate, 95% of transformer cores in the United States are constructed using GOES.⁵³ The supply of electrical steel must satisfy demand for electrical steel from other grid components as well, and all such components can compete with one another for manufacturing capacity from the same plant.⁵⁴

In 2020, two Members of Congress wrote a letter to President Trump urging him to address what they perceived to be "unfairly traded imports" of "minimally transformed" GOES, citing "laminations, cores, and core assemblies" made using steel originating outside the United States.⁵⁵ A subsequent letter, in which the two Members were joined by a further 23 Representatives, requested that the President extend existing tariffs on steel products to cores and laminations (i.e., derivative products) under Section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. §1862), discussed in the next section.⁵⁶

Tariffs

Tariffs levied on imported goods have been used to protect certain domestic industries and as an instrument of foreign policy.⁵⁷ In 2018, President Trump imposed a 25% tariff on electrical steel from most trading partners.⁵⁸ Of the GOES imported into the United States, as of 2020, 85% came from South Korea.⁵⁹ In February 2025, President Trump removed the exemptions from the tariffs for certain countries (e.g., Mexico, Australia, Canada).⁶⁰ The action also eliminated exemptions for South Korean steel that were the result of negotiations between the U.S. and South Korean governments in 2018.⁶¹ By one estimate, the quota, when in place, would have allowed roughly three-quarters of South Korea's steel exports, by weight, to the United States to be free from tariffs, relative to 2017 levels.⁶² DOE found that the rise in price of transformers correlated with the rise in price of GOES, starting in 2021.⁶³

On June 3, 2025, President Trump increased the Section 232 tariffs on steel and aluminum to 50% and expanded the number of derivative products covered by the tariff; for derivative products, the tariff would "apply only to the steel and aluminum contents of imported products."⁶⁴ On August 15, 2025, the Commerce Department announced that the 50% tariff on steel and aluminum imports would include derivative products in distribution transformers, including the electrical core and the laminations.⁶⁵ For certain copper products, President Trump placed a 50% tariff on August 1, 2025; such copper products may be used in the windings of transformers and in other electrical and electronic devices.⁶⁶

Possible Additions to Domestic Supply of Steel

Manufacturers have some flexibility to repurpose existing production capacity toward GOES, as well as other types of electrical steel, and manufacturers have stated in the past to DOE that some GOES capacity was being directed toward electrical steel needed for electric vehicles.⁶⁷ According to a 2022 DOE report, one steelmaker—Big River Steel, owned by U.S. Steel—could upgrade its production to supply GOES.⁶⁸ DOE noted other GOES sources exist in Russia, China, and the European Union.

While GOES is the dominant electrical steel in transformers, another type of steel, known as amorphous steel, has desirable magnetic properties as well. Japanese-owned Metglas has a domestic plant in South Carolina that produces amorphous steel. Hitachi Energy, according to DOE, imports amorphous steel from China to its plant in Quebec, Canada, for use in transformer manufacture.⁶⁹ An industry report listed the major amorphous steel producers outside the United States as being in Japan, China, and the European Union.⁷⁰ (See further discussion of amorphous steel in the section "Energy Conservation Standards and Implications for Supply.")

News of a possible further source of transformer core steel may be gleaned from an announcement by U.S. Steel, in October 2023, of the launch of its new electrical steel product line—InduX, with the ability to produce 200,000 tons annually at its electric arc furnace steelmaking facility in Osceola, AR.⁷¹ The company claims the product line possesses magnetic properties suitable for transformers, although the majority of the capacity would be allocated toward "non-oriented" electrical steels for use in electric vehicles and motors.⁷²

Recent Executive Branch Actions

Changes to Tariffs on Copper and Steel and Its Derivative Products⁷³

As noted above, there is currently a 50% tariff on steel imports that includes electrical steel and derivative products used in distribution transformers, such as the core and laminations.⁷⁴ Certain copper products, including those used in electrical and electronic devices, are also subject to a 50% tariff.⁷⁵

The larger question of how the current tariff regime will affect firms that employ electrical steel, transformer subassemblies, and finished transformers is unknown. A Section 232 investigation by the Department of Commerce found that laminations, stacked cores, and wound cores were being imported "in such quantities and under such circumstances as to threaten to impair U.S. national security."⁷⁶ This finding has not yet led to any trade action. In the course of its investigation, the Department of Commerce surveyed firms who noted supply shortages and increased costs due to tariffs.⁷⁷

Defense Production Act of 1950⁷⁸

The Defense Production Act of 1950 (DPA; P.L. 81-774) provides the President with authority to "shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base."⁷⁹ Title III of the DPA gives the President the means to provide financial assistance to private industry in order to "create, maintain, protect, expand, or restore domestic industrial base capabilities essential for the national defense."⁸⁰

On June 6, 2022, then-President Biden made a determination pursuant to Section 303 (50 U.S.C. §4533) stating that "transformers and electric power grid components are industrial resources, materials, or critical technology items essential to the national defense."⁸¹ In August 2022, Section 30001 of P.L. 117-169, known as the Inflation Reduction Act of 2022 (IRA), appropriated $500 million to carry out the DPA. There is no evidence that any of this funding has been allocated to transformers and electric power grid components. DOE allocated $250 million of the funding appropriated in P.L. 117-169 to electric heat pumps,⁸² and the remaining $250 million was allocated to the Department of Defense (DOD). (DOD is "using a secondary Department of War designation" under Executive Order 14347 dated September 5, 2025.) DOD stated that the funding would be allocated to expand capabilities for critical minerals production for large-capacity batteries and other purposes.⁸³

DOE Fact-Finding and Analysis

Following the presidential determination under the DPA, DOE began a series of outreach activities including a request for information (RFI), posted in October 2022, "to inform how the Defense Production Act (DPA) authority provided to DOE through Presidential Determinations could best be used."⁸⁴ In summarizing this outreach, DOE noted that industrial participants favored government incentives to increase production capacity of GOES and of electrical steel generally.⁸⁵

DOE has also joined with industry CEOs "to identify the challenges facing the energy sector and what solutions could help to address this issue."⁸⁶ For example, DOE formed a Supply Chain Tiger Team with the Electricity Subsector Coordinating Council (ESCC), a contact group for CEOs from the electric power industry.⁸⁷ The team determined that distribution transformers were a crucial supply constraint for the electric power system.⁸⁸

One DOE assessment of large power transformer devices, which have some parts and materials in common with distribution transformers, suggests that a domestic market that can meet at least 50% of demand would be secure.⁸⁹ However, there is no universally agreed upon level of importation of distribution transformers that would be considered too risky.

Other DOE Activities and Programs on Distribution Transformers

Various federal programs and incentives have either addressed, impacted, or analyzed the supply of distribution transformers in terms of its adequacy and reliability.

Energy Conservation Standards and Implications for Supply

DOE regulates the energy efficiency of distribution transformers using authority under the Energy Policy and Conservation Act (P.L. 94-163), as amended. Congress first required DOE to set legally binding energy conservation standards for distribution transformers in the Energy Policy Act of 1992 (P.L. 102-486), requiring that such standards "would be technologically feasible and economically justified, and would result in significant energy savings."⁹⁰ DOE makes periodic revision to its standards, and, in the case of distribution transformers, initiated this with a request for information on June 18, 2019, and concluded with final revisions to the distribution transformer standards on April 22, 2024.⁹¹ This rulemaking sparked a discussion on the adequacy of supply of electrical steel, the material needed for the transformer's electrical core.

At the proposed rule stage, DOE issued a notice on January 11, 2023, that, if finalized, would have raised the minimum efficiency standards to a degree that might require switching to a new type of "amorphous" steel for the electrical core, according to DOE.⁹² Forty-seven Senators wrote a letter to Energy Secretary Granholm on June 1, 2023, urging DOE to "finalize a rule that does not exacerbate the shortage in distribution transformers."⁹³ At an April 20, 2023, hearing of the Senate Committee on Energy and Natural Resources, Senator Hyde-Smith asked Secretary Granholm about the impact of the proposed standard, asking whether users might expect "long lead times, up to 2 to 4 years and more," owing to "more expensive and limited types of steel" needed to comply with the standard.⁹⁴

The standards DOE finalized on April 22, 2024, were less stringent than in the January 11, 2023, proposed rule and are not expected to necessitate switching to amorphous steel but, at the same time, would not address any issues with the current supply of GOES.⁹⁵ Certain firms have cited supply chain challenges related to the availability of GOES.⁹⁶ As discussed above, GOES has been the dominant material in distribution transformer cores.

H.R. 4626, the Home Appliance Protection and Affordability Act, would prevent DOE from revising the regulations for distribution transformers.⁹⁷ H.R. 4856, the Revitalizing America's Housing Act, included a section 103, "Relieving strain from shortages of transformers," that would have restricted DOE's choice of proposed efficiency levels to the two least stringent levels contemplated in the January 11, 2023, proposal.⁹⁸

Research and Development

Research and development (R&D) could lead to improvements related to distribution transformers in two ways: by improving the distribution transformer itself, or by improving the manufacturing processes, with the latter leading to enhanced supply through greater productivity.

R&D on the transformer can lead to a few outcomes. If the R&D leads to a new commercial product, then the device could be less expensive than the incumbent it replaces, or it could perform better (e.g., be more reliable, more durable, more energy-efficient), or both. In the first outcome, the benefit of the R&D could be as simple as the before-and-after situation in which a utility pays less for a service (transformed voltage) than it would have before.⁹⁹ Prior to the advent of the new, improved transformer, the utility had been willing to accept a higher market price. Consumers would benefit to the extent the utility passes along any savings in its rates.

Another possibility could occur when an innovative, improved product provides additional utility beyond the incumbent product and thereby increases demand, leading to greater sales volume.¹⁰⁰ For example, smart distribution transformers, though not currently in deployment, would offer control and optimization of other services, such as the charging load of an electric vehicle.¹⁰¹

R&D could lead to new products which, while having a lower cost of ownership or better lifetime and reliability, have a higher purchase price ("first cost") that can deter buyers. In such cases, governments or utilities can offer incentives (e.g., taxes, rebates) to induce consumers and firms to purchase the newly developed device.¹⁰²

DOE-Sponsored Transformer Research and Development

In March 2024, DOE's Office of Electricity issued a funding opportunity announcement (FOA) for up to $18 million in awards for research on "Flexible Innovative Transformer Technologies." At the time, DOE stated it would support concepts for "advanced distribution transformers," including flexible, modular, scalable, hybrid, or solid state transformers. In December 2024, DOE announced nine award finalists for a total of approximately $20 million, with DOE's Office of Cybersecurity, Energy Security, and Emergency Response contributing $2 million toward the total.¹⁰³ DOE funded projects on solid state transformers, which could increase reliability and "put intelligence" on the grid in support of next-generation transmission and distribution concepts.¹⁰⁴

Manufacturing Research and Development

R&D on manufacturing can expand supply by increasing productivity, that is, achieving greater output with the same inputs or factors (e.g., energy, raw materials). Increases in productivity can be an incremental improvement to an existing process (e.g., making it use less energy) or a new method of production that may use smaller quantities of materials.¹⁰⁵ A report by the National Infrastructure Advisory Council,¹⁰⁶ a DOE advisory committee, called for such improvements in transformer manufacturing efficiency.¹⁰⁷ Even if available, however, manufacturers might delay changes to production until they renew the production line; so long as a production line is still within its book life or recovery period, the manufacturer would not want to forgo revenues by prematurely closing it down. More likely is that a manufacturer would incorporate new technology when making new capital investments.¹⁰⁸ The House Appropriations Committee called for increasing the efficiency of the manufacture of distribution transformers in H.Rept. 119-213, which accompanied the Energy and Water Development and Related Agencies Appropriations Act, 2026 (H.R. 4553).¹⁰⁹

Government Financial Incentives in Statute

Internal Revenue Code §48C and Possible Impact on Manufacturing Capacity

The Qualifying Advanced Energy Project Credit (Internal Revenue Code Section 48C [IRC §48C]) is a competitive tax program providing up to 30% credit for investments in qualifying advanced energy projects. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5), Section 1302(b), created IRC §48C and authorized a program for "investment in advanced energy property."¹¹⁰ ARRA provided $300 million in credit authority.¹¹¹ IRA Section 13501(a) expanded the credit authority by $10 billion.

Several categories of property are eligible for the credit, including Clean Energy Manufacturing and Recycling Projects for "grid equipment for electricity delivery," which includes distribution transformers.¹¹²

The Internal Revenue Service (IRS) released allocations for the first round of credits provided by the IRA totaling $4 billion on March 29, 2024.¹¹³ The IRS awarded the second round of allocations, $6 billion, on January 10, 2025.¹¹⁴ Any applications for §48C credits for transformer projects would have competed with applications for all types of qualifying advanced energy projects, with the "most meritorious projects" receiving an allocation of some of the tax credit.¹¹⁵

Four transformer makers who received some of the credit allocation have disclosed details of their §48C proposals.¹¹⁶ The voluntarily disclosed projects related to distribution transformers include the following:¹¹⁷

• Eaton Corporation (credit allocation: $13,278,300) will address, among other purposes, increasing the production at its Waukesha, WI, facility of medium voltage liquid-immersed transformers for distribution utilities.
• Prolec GE USA (credit allocation: $7,980,000) is expanding its Shreveport, LA, facility to produce substation and pad-mounted distribution transformers for industrial and renewable energy applications and has plans to add a third production line.

An additional two projects concern transformers more generally:

• Eaton Corporation (credit allocation: $1,326,060) is investing $22 million at the Waukesha, WI, facility for increased production capacity of three-phase transformers for utility and other applications.
• Siemens Energy (credit allocation: $18,311,511) is investing $150 million in the construction of a large power transformer production facility.

The above projects could increase the ability of the manufacturer to produce more transformers, though any change in market price and quantity would be subject to demand for the transformers, tariffs on imports including of components and steel, and other factors as discussed above.

Rebates for Purchase of Distribution Transformers (Expired)

Division J of the Infrastructure Investment and Jobs Act (IIJA; P.L. 117-58) appropriated $10 million to provide rebates for the replacement of distribution transformers, a program authorized in Section 1006 of the Energy Act of 2020 (Division Z of the Consolidated Appropriations Act of 2020, P.L. 116-260). The categories eligible for rebates included two of the three transformer categories DOE regulates.¹¹⁸ DOE implemented the program up until December 31, 2023, when the authorization provided in Section 40555 of the IIJA expired.¹¹⁹ The program offered rebates toward the purchase of new transformers provided that (1) the old, to-be-replaced transformer was less efficient than (i.e., did not comply with) the energy conservation standards that were in effect as of December 27, 2020 (see "DOE Fact-Finding and Analysis" above); and (2) the old transformer was manufactured during certain years.¹²⁰ The payout was determined by the savings in power consumption (watts) of a new transformer relative to the installed transformer and could range from roughly $60 to over $10,000 per transformer.¹²¹

The program thus targeted existing stock. Utilities would replace distribution transformers that, while not end-of-life, could still be replaced and save energy.¹²² The rebate policy's criteria singled out installed units that were less energy-efficient. The rebates did not apply to the purchase of distribution transformers to expand a utility's physical distribution network. Purely from an energy consumption perspective, the replacement of transformers could be beneficial. A 1998 DOE study estimates that replacing all transformers at 35 years could save 1% of electricity.¹²³ A disadvantage of the rebate is that the induced purchases would reduce the stocks available for replacement, post-hurricane, or for grid expansion, making it unlikely the rebate policy would address adequacy of supply.

A potential benefit of extending this policy could accrue from reduced peak load—that is, a reduction in the amount of electric power generated at the most intense time of day.¹²⁴ Over time, planners could see the improved efficiency of the grid as an opportunity to forgo capital costs of additional power plants or energy storage.¹²⁵ A congressionally mandated study by the National Research Council on the benefits of energy R&D characterized such a reduction as a security benefit because it would reduce the probability of disruptions in supply.¹²⁶ A United Nations study finds improved distribution and large power transformers could reduce the need for electric power plants by 5%.¹²⁷

Selected Policy Options

If Congress finds urgency in the issues related to adequacy of supply of distribution transformers, Congress could choose from among several legislative options. Congress may choose to constrict, maintain, or expand statutes affecting price and supply of distribution transformers. This section presents some selected policy options Congress could pursue. The section discusses the possible outcomes of these selected policies within a framework considering the advantages and disadvantages, including economic and fiscal benefits and costs.

Extending or Revising Tax Credits

Property Eligible for §45X Tax Credits

The Advanced Manufacturing Production Credit, created by Section 13502 of the IRA (P.L. 117-169), located at IRC Section 45X (§45X), applies to components of energy systems including wind and solar power; the inverters necessary for converting electricity into the alternating current needed for synchronizing with the grid; batteries; and certain critical minerals.¹²⁸ The beneficiaries of the tax credit include persons who produce the eligible components. The IRS issued final regulations for implementing the credit on October 28, 2024.¹²⁹

S. 448 and H.R. 4128, both titled the Credit Incentives for Resilient Critical Utility Infrastructure and Transformers Act, or CIRCUIT Act, would expand the scope of §45X to include distribution transformers. In common with inverters, which are covered by §45X, distribution transformers provide grid services to electric utilities.

The persistent backlog discussed in "Recent Supply Picture" could indicate that utilities want to purchase a greater number of distribution transformers than manufacturers are able to produce. Utilities thus maintain access to inventories of distribution transformers as a means of ensuring they can restore power after storms. One disadvantage of maintaining these inventories, in certain regulated markets, is to tie up working capital. Further, as noted above, because such inventory does not meet the criterion of "used and useful equipment," the utility cannot charge customers, depending on the regulator. By advancing S. 448 and H.R. 4128 or similar legislation, and thereby expanding the §45X-eligible projects to include distribution transformers, Congress could help address the backlog by encouraging manufacturers to add more capacity.

Allocation of Funds for §48C Investment Tax Credit

The Qualifying Advanced Energy Project Credit (IRC §48C) is a competitive tax program providing up to 30% credit for investments in qualifying advanced energy projects. Section 48C defines certain categories of qualifying projects (IRC §48C(c)) and authorizes DOE to award certifications to qualifying energy project sponsors (IRC §48C(e)). IRA Section 13501 also sets a program cap of $10 billion. The certifications are competitively awarded, and applications for tax credits for distribution transformers must compete with a number of other type of projects. The §48C program had allocated credits up to its $10 billion cap as of January 2025.¹³⁰

Congress could authorize a new round of awards for the credits by raising the $10 billion cap. In addition, Congress might consider reserving a certain dollar amount or percentage of the total credit cap and directing those funds exclusively toward distribution transformers, though the certification requirement would still apply.

Possible Outcomes of Changes to IRC §45X or IRC §45C

A manufacturing production tax credit, such as IRC §45X, and an investment tax credit, such as IRC §48C, could increase the quantity of goods supplied. The tax incentives—whether by increasing the return on sales of the product (§45X) or increasing investment in new or improved production lines (§48C)—could induce manufacturers to increase production capacity and ideally reduce the time necessary to fulfill orders placed by utilities. The benefit of such a supply expansion would be to reduce the risk of any possible disruption in supply of distribution transformers due to manufacturing shortfalls. Further, increased domestic supply could reduce risk of disruptions in supply by actors with market power, who might be offshore suppliers of raw material (steel) or components (electrical cores). The time needed for the supply to expand to pre-2020 levels could be three to five years.¹³¹

A disadvantage is the policy could be indifferent to the supply chain and national origin of components and raw materials. The §45X credit, for example, is awarded to the U.S. firm that is final assembler of the distribution transformers. Components and raw materials may be sourced from outside the United States, and these offshore suppliers might indirectly benefit from the credit. In a March 12, 2024, hearing of the Senate Finance Committee, Senator Brown expressed the concern that some of the §45X credit was going to China. Senator Brown stated that a tax credit should apply from the beginning of the supply chain, to include parts or raw materials.¹³² In the 118^th Congress, the American Tax Dollars for American Solar Manufacturing Act (S. 4873), sponsored by Senator Brown, would have prohibited the allowance of a §45X tax credit for components produced by a "foreign entity of concern."¹³³

Creating a Virtual Reserve

DOE suggested the idea of a virtual reserve mechanism in a 2022 publication, reporting on discussions with stakeholders involved in the market for grid components.¹³⁴ Congress could create a virtual reserve by authorizing and funding the federal government to purchase distribution transformers up to a predetermined level (quota). If market activity does not reach the quota over a defined period of time, the government makes up the difference, becoming in effect the buyer-of-last-resort. A DOE advisory committee conjectures that government purchases would be triggered if the lead time required to fulfill orders were to become unacceptably long.¹³⁵

The impact of a virtual reserve could be to increase annual production volume, the reasoning being that manufacturers would be more likely to invest in capacity expansions knowing there is a buyer. When making such purchases, the government would need to maintain and administer a physical reserve for a time until it could be depleted. The 2025 Report Card for America's Infrastructure also recommended a national transformer inventory be kept.¹³⁶

The benefit of a virtual reserve is that it could eventually lead to stable and even expanded supply and transformer reserves. This, in turn, could mitigate the sort of disruption that might occur were an actor with market power to affect price or supply of raw materials or components. As in the case of the tax credits, the increased production would be expected to lower the market price, benefiting utilities by extending them a lower (i.e., better) price than they had been willing to accept previously. The manufacturers would likely benefit from selling the additional production units, since these units could be produced at a lower unit cost than the market price. The fiscal cost to the government arising from the transformer purchases could be weighed against the benefits to utilities and manufacturers.

Using Title III of DPA Authority for Manufacturing

Congress could appropriate money for the Defense Production Act of 1950 (DPA; P.L. 81-774) to be used to address manufacturing capacity of distribution transformers.¹³⁷ The National Infrastructure Advisory Council has called for use of DPA money to convert the U.S. manufacturing base for distribution transformers to more efficient production methods.¹³⁸ Among other purposes, the DPA allows the President to provide incentives to expand "industrial base capabilities" using tools such as loan guarantees, loans, purchases and purchase commitments, and other methods.¹³⁹ The impact of invoking the DPA and associated financial assistance, specifically for distribution transformers, would be to add new manufacturing capacity. Assuming no existing manufacturing capacity is retired or repurposed, the benefit might be increased supply and shorter wait times for fulfillment of orders for distribution transformers.

In the 118^th Congress, H.R. 6747, the Clean Electricity and Transmission Acceleration Act of 2023, would have authorized $2.1 billion under authority of Title III of the DPA to address domestic manufacturing capacity of transformers and grid components and the steel needed to construct them.

Investing in Research and Development

Research and development could support distribution transformers in two ways: by improving the distribution transformer itself, or by improving the manufacturing processes, leading to enhanced supply through greater productivity. Congress could continue to fund R&D for new, improved transformers in a grants-making DOE program.¹⁴⁰ Congress could request periodic reports from DOE on the technological readiness of these new distribution transformer concepts. When the new types of distribution transformers reach the appropriate level of technological readiness, Congress could consider demonstration programs for early adoption of these devices by utilities and/or provide investment tax credits to manufacturers for new or modified production lines.

The impact of improved distribution transformers could be greater reliability of the electric grid, greater durability, and improved energy efficiency. New types of distribution transformers could enable improved electricity distribution concepts by remotely monitoring and controlling electric loads such as a charging electric vehicle in the vicinity of a particular distribution transformer.¹⁴¹ Further benefits could be peak load reduction, discussed above in "Research and Development," which might lead to lower capital costs for utilities as planners foresee less need for new power plants. Another possible benefit could accrue if the new technology is easier to manufacture. A disadvantage is that government-funded R&D may not lead to a commercial product to justify the government expenditure.

Summary

The benefits of government policies discussed above could be more assured supply of distribution transformers, lower prices, and a more energy-efficient power grid that might reduce the need for new power plants. Table 1 summarizes the selected policy options. The table describes the benefits to electric utilities from increased manufacturing capacity and, where applicable, lower market prices for distribution transformers. Consumers would benefit to the extent the utilities pass along any savings in the rates they charge.

For the policy options listed, success is not assured, as outcomes would depend on utilities adopting a new technology and suppliers taking the capital risk to expand manufacturing capacity.¹⁴² Unforeseen geopolitical events or shifts in supply of raw materials or components (electrical cores) could occur as well. The effect of policy options designed to increase additional manufacturing capacity would be latent and experience a delay of several years while the new or expanded production lines were completed.

Footnotes