Thousands of completed homes are sitting empty as builders impatiently await the delivery of distribution transformers, a backlog exasperated by a lack of domestic manufacturing capabilities.
The chronic shortage comes as the industry struggles to overcome the supply chain issues caused by the pandemic. And as the conversation around the housing crisis heats up, the shortage is an unexpected roadblock to an industry struggling to get more homes to market.
“Coming out of the pandemic, we were experiencing significant shortages and delays in getting distribution transformers necessary to build communities,” says Alex Strong, NAHB senior federal legislative director. “I think that problem has only gotten worse. Frankly, we haven’t been able to catch up as a country.”
Distribution transformers lower the voltage from power lines to an appropriate level for a home. Without them, builders are left with finished homes without certificates of occupancy, developed lots awaiting construction, and stalled new master plan developments.
The NAHB has been on the forefront of this issue, along with other building and utility trade groups, as backlogs of transformers have become depleted and worries over other potential delays arise.
At the end of last year, the organization sent a joint letter urging Congress to act on the shortages. Those conversations have continued throughout 2023, with home builders noting the shortage as a significant challenge.
In Houston, Strong says the NAHB has received reports of several thousands of homes being finished but powerless because of the shortage. He is seeing the story replaying in many areas of the country as the delays are much longer than expected, and manufacturers turn to refurbishing units to try and speed things up.
According to KB Home’s earnings call last week, electrical equipment issues are causing delays in some of the builder’s community openings.
“We’ve got a number of communities that we know are coming, we just don’t know when. They’re generally ready to go outside of waiting for [transformers] to be installed and energized,” executive vice president and co-chief operating officer Rob McGibney said during the question-and-answer portion of the call.
KB Home isn’t alone. The NAHB notes that 80% of builders and apartment developers are reporting shortages. While the obvious answer is to produce more transformers, the U.S. relies heavily on foreign manufacturers for production and the steel used to build the units, according to a report from The Conference Board.
“We need to produce more here domestically, and if we can’t domestically, then we need to import more or more components that go into them,” Strong says. “Second, Congress needs to be appropriating funds and doing everything in their power to encourage additional production and also shouldn’t be doing anything to disrupt the existing supply chain or otherwise slow down the production of distribution transformers.”
Shad Schmid, president of the Greater San Antonio Builders Association and co-founder and partner of King Fish Development, says last year he saw delays of 12 to 18 months to get transformers. Still, as interest rates have risen, the lowered demand in his market has cut the delay to roughly five months. He commends the local energy provider for finding additional transformer sources.
“As long as we’re planning, I would say we’re OK right now,” Schmid says. “However, if the Feds start dropping rates and activity picks up, we could be back in the same situation again.”
He said he worries about a repeat of early 2022 when King Fish was set to develop 80 lots on the west side of San Antonio and knew of the potential transformer delay.
“As soon as we got our design done and the contract and invoice for the installed power, we paid that bill right away because we knew it would get us in the queue. We were ready for power in late summer, around July, but our transformers didn’t get installed until April or May of this year.”
With heightened nervousness surrounding natural disasters, including hurricanes and wildfires, some building groups and electric providers are additionally speaking out against the proposed new efficiency standards for distribution transformers from the Department of Energy (DOE).
The ruling would require all transformers to be produced under a new standard, including amorphous steel cores that are considered more energy efficient. The DOE estimates that the proposed standards, if finalized, would reduce carbon dioxide emissions by 340 million metric tons over the next 30 years.
“Over the last three years, average lead times to procure distribution transformers went from eight to 12 weeks to up to three years,” says Peter Ferrell, director of government relations at the National Electrical Manufacturers Association (NEMA). “These long lead times have an impact on national security, grid reliability and resilience, and new-home construction.
"NEMA, along with utility and home builder groups, have implored the DOE to withhold unnecessary regulations on these already extremely efficient products, 99.55% efficient in some cases, which could further exacerbate this production timeline. Instead, the DOE should work with manufacturers to reduce lead times so that home construction and grid modernization can continue without further delays.”
While a clear answer isn’t in sight for addressing the shortage, Strong recommends builders encourage the administration and Congress to prioritize it.
He says, “Just as the housing shortfall and housing affordability issues are very important nationwide, this particular challenge should be just as important because it’s cutting into the ability to address the need for additional housing supply.”