Guessing Game: How Uncertainty in the Supply Chain Is Affecting Utilities

Standing in the way of any major utility goal or project right now is a low supply and high demand of a technology or piece of equipment. Particularly acute is the availability of distribution transformers – which are necessary for both the ongoing reliability of the existing grid and for communities to grow.

The uncertainty of knowing when critical supplies will be available – and at what cost – is changing how utilities are approaching everything from the procurement process to supply management, standardization of system components, and communication with customers and other key stakeholders. The wide-ranging effects of this issue are why the American Public Power Association has made addressing the problem a priority. In response to a request for information from the Department of Energy in November 2022, APPA stressed that, “until we can address the shortages and supply chain challenges that are directly impacting reliability, we may not be able to accomplish many of the goals this administration has laid out for advancing clean technologies or expanding electrification.”

The response went on to urge DOE to act quickly to alleviate distribution transformer shortages and to establish longer-term efforts to expand domestic manufacturing capacity for large power transformers and other grid components.

Empty Shelves, Canceled Orders

Person standing in front of empty shelves in warehouseIn Washington state, Roberta Cox, who manages the inventory for the electrical side of Tacoma Public Utilities, said that the public power utility’s highest concern is in finding inventory of distribution transformers, but that other specialty utility materials, especially those that rely on plastics and resins such as insulators, can also be a challenge to keep in stock.

“Of particular concern to us is that we’ve reached out to distributors and manufacturers, and in most cases, we’re getting a rejection,” said Cox. The utility’s go-to supplier for transformers canceled an existing contract early and informed TPU it could no longer supply the utility under its existing agreements. As of December 2022, Cox projected that the utility had a sufficient inventory of transformers to last through the first half of 2023, but was still working on securing sufficient inventory for the remainder of the year.

“We have delayed all noncritical work, knowing that we don’t have enough,” she said. TPU has been doing more refurbishment of transformers in its asset management.

Cox said that since the utility’s usual sources for some materials have become unavailable, it is taking a lot of time to focus on sourcing new vendors and researching potential new suppliers. In response, TPU has brought in an additional staff member whose sole job is to source materials.

TPU has also changed up its ordering process, including projecting out needs and ordering items with longer ranges, about three times as long as it used to, said Cox. The shortage of supplies also means that TPU has shifted to purchasing many items as spot buys instead of via contracts.

Chad Edinger, Electrical Services Manager at TPU, said the utility’s standards had also “boxed itself in” to using one manufacturer, and so TPU worked to broaden materials standards to open to the possibility for using other manufacturers.

Growth on Hold

Maria Garcia, vice president of supply chain at CPS Energy in San Antonio, Texas, noted how homebuilders and developers are particularly impacted by the shortage. “When we don’t get transformers, we can’t give them jobs,” she said. A developer might have “millions of dollars just waiting to be energized. We feel the pressure they are experiencing.”

San Antonio is one of the fastest growing cities in the country, and so the delays in energizing new homes affects this growth and puts pressure on an already tight housing market. To size the increase in demand, CPS Energy used about 1,500 single-phase pad mount transformers through the first six months of 2019. By comparison, in the first half of 2022, it used almost 2,200 – a 46% increase, before delivery delays began in the third quarter.

“We were fortunate to only have one hurricane [in 2022]. If we had a strong one, it could have seriously depleted our emergency reserve,” she said. “Regardless, we are now getting into winter weather, so I’m glad we have that reserve set aside.”

And while CPS Energy faces increased demand, it is seeing lead times for key items grow. Before the pandemic, Garcia said a typical lead time for transformers was 10-16 weeks from the date of order to delivery. Now, that time is 48-62 weeks, and even higher for some specialty types of transformers. Wires and cables used to take about 6-8 weeks to deliver, and now the utility waits between 26-43 weeks for those materials. Times to receive wooden poles, insulators, and crossarms have also increased exponentially.

Growing Pressure and Prices

Garcia recalled how in the late 1990s, utilities would manage equipment inventory using a "just-in-time" strategy. Now, with all of the delays, she said utilities are just trying to find and bring items in as quickly as possible and are relying more on salvaging and repurposing older materials.

Adding to the pressure is the influx of funding for all kinds of technology and equipment from the Infrastructure Investment and Jobs Act. While the funding offers opportunities for supporting many types of energy projects, the injection of funding is adding to the demand for already scarce materials, including across different sectors. Garcia mentioned that utilities are in essence now competing with the electric vehicle industry and communications providers for raw materials.

The added demand is contributing to increasing prices for many materials as well. TPU’s Cox estimated that the utility is facing transformers prices that are 40%-60% higher and at least 50% higher for many materials usually stocked in the warehouse. Garcia gave one example of the increasing cost of PVC conduit, which she said has increased from $1.25 to $5 per linear foot – a 340% increase.

Better Coordination

Warehouse getting restocked

Working within this constrained environment requires increased communication and flexibility – across the utility and with suppliers and customers.

“With the developers, if we don’t have a transformer in stock, we have been working with them to install an alternatively-sized transformer in the meantime,” said Edinger. The alternative size could provide developers with the electricity needed to complete construction, with the hope that “by the time the building is ready to occupy, they have the right size transformer.”

Tacoma is also feeling the pinch on its planned deployment of advanced metering infrastructure, and while it had ordered sufficient stock to switch over its commercial customers, is paying close attention to how it can meet the supply needed for its residential customers, particularly for growth areas, such as several multi-family developments under construction. The water side of its operations faced similar struggles in sourcing meters because of the microchip shortage affecting many industries.

Garcia mentioned that the CPS Energy team has a regular cadence of giving updates to customers about the status of various materials so that they are aware of the timelines and any constraints.

The problem, said Garcia, is that “it’s not just one item that is out, it is 10.” While transformers are the items most affected right now, she said that other items, such as poles, surge arrestors, and cables can also be tough to obtain in a timely manner.

Garcia’s team takes weekly snapshots of what items they are having difficulty locating and looks at the status of orders placed to see how delayed they might be. The weekly reporting helps the team identify trends to see if anything has changed or is starting to show a positive trend in availability. They also track deliveries and how often staff are unable to find an item on the shelf in the warehouse. Garcia said that stock outs are occurring five times more often than they did before the pandemic.

Edinger noted how Tacoma historically managed its common stock alongside its maintenance stock, but now has separated the two to better ensure supplies needed for building and growth are fulfilled to match projected lead times. He noted that TPU’s policy has always been to provide transformers based on who is first ready for service, but the utility hasn’t had to explicitly state that policy until now.

“Coordination has been much more necessary,” stressed Edinger, who said his team has set up a more regular cadence of meetings with the warehouse team, engineers, economic development partners and others.

Externally, the CPS Energy team also has more frequent meetings with suppliers and manufacturers – what used to be a quarterly check in is now a weekly meeting to discuss how any issues upstream might affect the utility’s plans and orders.

Garcia’s team is also working with the utility's engineering team on how it might be able to modify specifications to allow for more flexibility in the materials and subcomponents it can use. As such, the number of suppliers and contracts CPS Energy is managing has expanded, with some equipment having three suppliers contracted to try and keep pace with the demand.

Signs of Relief

Some acknowledged that concern about constrained supply has set off a cycle of increased demand, where utilities are placing orders for more, knowing that some items are hard to come by or will take longer to receive, increasing the total backlog of orders.

“The challenge is that everyone panicked … and we don’t have a good sense of how much is because of uncertainty,” said Trish Rhay, who manages the warehouse supplies for the water side of Tacoma Public Utilities. For its part, Rhay said that TPU is “seriously evaluating how much we need on the shelf at any time.”

“Tacoma was fortunate that we recognized the potential issues early, focused on shoring up our inventory, placing strategic orders, and identifying new supply sources. On the customer side, we focused on defining and refining the demand forecast, setting clear priorities, and strategic scheduling of requests,” said Rhay. “As a result, TPU was able to weather through these issues without any major delays or impacts to our customers.”

Garcia is hopeful that the situation will turn around, but believes estimates of relief happening within the next two years might be too optimistic. She noted that there is escalating pressure at the federal level – including from trade associations, manufacturers, and utilities – to address the underlying problems creating the backlog.

“Our hats off to [manufacturers], they are doing their best right now,” said Garcia, who noted that a couple of manufacturers are working on expanding their facilities in an effort to catch up. But, getting a new production center online takes time, from building the physical facility to training staff.

“As soon as we hear relief from manufacturers that they are starting to catch up with orders, then it’s downstream from there,” said Garcia.

“We will eventually see the light at the end of the proverbial tunnel… I just wish we had the crystal ball to say when,” added Garcia. “We need to continue to be proactive. Where we can work together, we have that door wide open.”