Cipher News Cipher News

MUMBAI, India — This nation’s clean-energy goals are getting caught up in a supply-chain crisis prompted by tension with its northern neighbor — and fellow global superpower — China.

The story centers on transformers, machines that adjust electricity voltages, but it offers lessons for how the global energy transition writ large is intricately affected by geopolitics, economics and even extreme weather.

Let’s break it down.

As record-breaking heatwaves ravaged most of India earlier this year, thousands of overloaded transformers on power lines throughout the country were damaged and caught fire, causing 12-hour-long blackouts even in big cities.

Many people might associate the word “transformers” with the popular toys, TV series and movie franchise. But those sentient robots got their name from the less exciting, though arguably far more important, electrical device.

Transformers take powerful, high-voltage currents from the electric grid and “transform” them into substantially lower-voltage currents suitable for most consumer and business applications. These electromagnetic devices, which can be as small as a few centimeters or as big as a car or a building, curtail energy loss across power systems. The larger kind connecting long-distance transmission lines play a critical role in phasing out fossil fuels because they allow clean energy from new solar and wind-energy farms to be added to the grid.

But during the 2024 Indian heat wave, just as electricity distribution companies were frantically trying to replace damaged transformers with new ones, the government made several political decisions that abruptly stopped trade of a key transformer component from China. The crucial devices are now rapidly becoming much harder to manufacture.

“There is now a little bit of panic setting in, even among large Indian transformer manufacturers,” said Saif Qureishi, chief managing director of KRYFS Power Components, a Mumbai-based transformer core manufacturing company.

Caught in the crossfire

In India, demand for transformers has been skyrocketing since the 2010s, following huge investment surges in data centers, electric vehicles, housing construction and, most importantly, renewable energy projects. Within just the last year, renewables generated more than 70 percent of the 26 gigawatts of new power produced in the country.

At the heart of most transformers is an electrical steel called Cold Rolled Grain Oriented (CRGO) steel, known for its distinct magnetic properties that help minimize energy loss as electricity moves throughout the power grid.

Globally, 15 steelmakers in China, Japan, Europe and the United States possess the technical know-how to produce specialized electrical steel like CRGO, but thus far they have been unwilling to share the patented technology with other markets, including India.

India has only two domestic CRGO steel producers, both owned and operated by the Indian subsidiaries of foreign companies. Four China-based steel mills supplied close to half of the 300,000 tons of CRGO steel India needs annually until April 2024.

At that point, the government-run Bureau of Indian Standards abruptly stopped two Chinese mills from exporting the electrical steel to local traders. It also refused to renew the license of a third Chinese steel manufacturer and this summer it deferred the license renewal of a fourth major China-based steel mill.

Industry sources say this boycott of Chinese mills could be due to growing border tensions with China in the Indian Himalayas.

“Unfortunately, CRGO steel is caught in the crossfire of geopolitical tensions between India and China, even though the power sector heavily relies on this commodity,” said Qureishi.

“The government dictates that we have to reduce imports from China, which may be logical, but reducing imports of materials that are unavailable (in bulk) elsewhere will hurt us,” he said.

Panic within the industry

To fill in the gap, many large transformer manufacturers have been buying more CRGO steel from Japanese mills in recent months. Other manufacturers are attempting to procure the raw material from other sources. The situation is bleakest for the country’s small and medium-sized transformer manufacturing companies.

In Rajasthan, a desert state in Northwestern India bordering Pakistan, temperatures shot up to 122 degrees Fahrenheit this summer and over 122 heat-related deaths were reported. Blackouts became the norm in May and June after transformers functioning 200% to 300% over capacity burned out, said Vikas Gupta, owner of a transformer manufacturing company, Vikas Transformers, based in Jaipur, Rajasthan’s capital city.

“We set up our first manufacturing unit in 1983 and never faced serious problems in sourcing CRGO steel until the recent past,” said Gupta, an executive council member of the Indian Transformer Manufacturers Association. “Now, we do not have enough CRGO steel to manufacture transformers.”

Cold Rolled Grain Oriented (CRGO) steel. Photo by Vikas Gupta, owner of Vikas Transformers.

The supply-chain crunch is adding more pressure on manufacturers already squeezed by economic demands. In recent years, the ranks of manufacturers in Rajasthan have shrunk from 130 companies to 20. “Slowly, transformer manufacturers are vanishing,” said Gupta.

Both Qureishi and Gupta warned that if nothing changes, most manufacturers, irrespective of their size, will run out of their existing inventory of CRGO steel in less than a month.

If that happens, they say, desperate small and medium-sized manufacturers could turn to illicit purchases of lower-quality, scrap-grade CRGO steel, which could lead to more transformer failures. The illicit trade of CRGO steel has long been an issue in the country and is one of the many reasons transformer failure rates are much higher in most Indian states (7% to 18%) than in wealthy countries (2% to 3%), according to the Ministry of Power’s Central Electricity Authority.

Struggling toward self-reliance

While Indian Prime Minister Narendra Modi has popularized the phrase “Atmanirbhar Bharat,” which translates to “self-reliant India,” the country has historically been far from self-reliant in producing electrical steel.

The two facilities in the country producing CRGO steel have limited capacities and can produce less than half of the amount of steel Chinese mills were selling to India.

Decreased availability of CRGO steel is causing prices to surge, putting immense pressure on transformer manufacturers, many of whom recently expanded operations to help meet the country’s growing demand for power.

“The prices have shot up by more than 50% within a short period,” said Gupta. “We are stuck.”

Some manufacturers have been canceling existing orders for transformers because they don’t have access to the steel they need, said Prashant Shah, owner and director at Vardhman Stampings Pvt Ltd, a CRGO transformer lamination company in Gujarat.

“Ultimately, these unsustainable price hikes in raw materials like CRGO steel will be borne by utility companies and state government-run electricity distribution companies,” said Shah. This is a total loss for the government because it is the biggest buyer of transformers across India, he said. If CRGO steel shortages persist, it might eventually result in cash-strapped electricity distribution companies struggling to procure decent-quality transformers on time.

Relief may be a long way off. In 2021, the Modi government approved a $1 billion scheme to boost domestic electrical steel production. And a new CRGO steel manufacturing plant is being planned in South India following a joint venture between an Indian and a Japanese steel company. But that plant will not be up and running until at least 2027.

“Until then, all we can do is wait for a miracle,” said Gaurav Bhatt, chief marketing officer of Mangal Electrical Industries Pvt Ltd, an exporter of CRGO steel transformer cores in Jaipur.

At present, several commissioned renewable energy projects in remote parts of India have been put on hold due to delays in installing new transmission lines. Industry experts warn transformer shortages in the near future will threaten the government’s ambitious plans of expanding the national grid.

“CRGO steel has a direct impact on a country’s economic growth,” added Bhatt. “At this rate, most power projects will continue to get delayed, and this shortage will slow down India’s decarbonization drive.”