Power play: could the West's grid crisis be India's opportunity?

A world transitioning

The world is undergoing a profound energy transition, driven by the urgent need to mitigate climate change and reduce greenhouse gas emissions. At the forefront of this transformation is the electrification of various sectors, including transportation, heating, and industrial processes, on top of increased consumer needs (e.g. EVs).

Western markets have been at the forefront of this electrification effort, driven by ambitious climate goals, technological advancements, and a growing demand for sustainable energy solutions. The electrification of the transportation sector has been a significant focus, with the rapid adoption of electric vehicles (EVs) and the development of charging infrastructure. For example, the U.S. government has set ambitious targets for EV adoption, aiming to have half of all new vehicle sales be electric by 2030. This shift towards EVs has significant implications for the electric grid, as it will increase the demand for electricity and require substantial investments in grid infrastructure to support the charging needs of millions of EVs.

Similarly, the electrification of heating and industrial processes is gaining momentum as a means to reduce reliance on fossil fuels and lower carbon emissions. Heat pumps, which use electricity to provide heating and cooling, are becoming increasingly popular in residential and commercial buildings. Additionally, many industrial processes are transitioning to electric-powered alternatives, such as electric arc furnaces in steel production and electric boilers in manufacturing. In Europe, residential heat pump installations grew by 40% in 2022, reaching nearly 3 million units. Countries like France and Germany have implemented incentive programs to accelerate the replacement of fossil fuel heating systems with electric alternatives.

In the transportation sector, the transition extends beyond personal vehicles. Commercial fleets, public transportation, and even aviation are exploring electrification options. For example, major logistics companies like Amazon, FedEx, and DHL have committed to electrifying their delivery fleets, while cities are transitioning to electric buses.

The power grid itself is undergoing significant changes to support this electrification. Smart grid technologies, advanced metering infrastructure, and grid-scale energy storage are becoming essential components of modern electricity systems. The integration of renewable energy sources adds another layer of complexity, requiring sophisticated demand response systems and improved grid flexibility.

However, this transition is not happening without issues. Let's dive.

Old grid, new demands

Here's the problem: electrification is pushing a creaky old grid that can barely keep up as it is, to its limit. The existing grid infrastructure, which was primarily designed for traditional power generation and distribution, is facing significant challenges in accommodating the increased electricity demand and the integration of renewable energy sources.

For example, the growth of distributed energy resources (DERs), such as rooftop solar panels and energy storage systems, is challenging the traditional one-way power flow in distribution grids. These grids were designed for centralized power generation and need to be modernized to accommodate bi-directional power flows and manage the intermittency of DERs.

The integration of renewable energy sources also presents unique technical challenges. Wind and solar power's variability requires sophisticated forecasting systems and advanced grid management tools. Energy storage systems, while crucial for managing this intermittency, add another layer of complexity to grid operations. The National Renewable Energy Laboratory (NREL) estimates that the U.S. will need 280-600 GW of storage capacity by 2050 to support high renewable penetration scenarios.

The rapid adoption of electric vehicles is creating localized stress on neighborhood transformers and distribution lines. A typical home EV charger can double a household's peak electricity demand, and clustering of EVs in certain neighborhoods can overload local infrastructure. Studies by the Electric Power Research Institute (EPRI) suggest that up to 30% of distribution transformers may need to be upgraded or replaced to handle widespread EV adoption.

As a result, many regions are experiencing bottlenecks and congestion on their transmission and distribution lines, limiting the ability to transmit power from renewable generation sites to load centers. To address this, grid expansion is crucial, including adding new high-voltage transmission lines, upgrading existing lines, and establishing new grid interconnections between regions. Upgrading is also crucial because the existing infrastructure is really old: the average transformer in the USA is 38 years old, and 70% of transformers are older than 25 years (the average lifespan should be 40 years). The challenges extend beyond just aging infrastructure. Grid reliability has become a growing concern as extreme weather events become more frequent and severe. The 2021 Texas winter storm highlighted these vulnerabilities, causing widespread blackouts and demonstrating the need for more robust winterization of power infrastructure. Similarly, California's rolling blackouts during heatwaves underscore the strain that climate change puts on electrical systems.

Therefore, upgrading the grid is of utmost importance. According to the International Energy Agency, the annual investments in the energy sector infrastructure and technologies in the USA will need to increase from today's level of more than $1 trillion to $4 trillion by 2030 to achieve net-zero emissions by 2050 - covering both traditional energy delivery assets (e.g. transmission and distribution grid upgrades) as well as new asset classes (e.g. renewables and storage). Princeton estimates that the electricity transmission system will need to expand by 60% by 2030. And permitting and regulatory hurdles surely do not help: the average time to permit and construct a new transmission line in the U.S. is 10 years or more, with some projects taking up to 15 years from conception to completion. The Department of Energy reports that transmission projects worth over $100 billion are currently waiting in interconnection queues across the country.

All in all, the solution seems obvious: modernize our aging grid. But there's a catch.

The great grid bottleneck

Grid expansion is facing a problematic dilemma.

The demand for investment in clean energy infrastructure far exceeds the industry's current capacity and speed of development. According to Lawrence Berkeley National Laboratory, the backlog of large-scale electric generation and storage projects seeking grid connection has been increasing each year, reaching 5,000 by the end of 2020. A survey by the American Public Power Association (APPA) in October 2022 highlighted that many utilities are postponing or canceling infrastructure projects due to the inability to procure the necessary distribution transformers (LPTs). The survey found that one in five public power utility projects were deferred or canceled because of this issue.

The shortage of transformers is also affecting residential construction. In some of the most active housing markets in the US, developers have had to pause new developments while waiting for electrical transformer orders to be fulfilled.

Now, when I am talking about delays and disruptions, I am not referring to a couple of weeks. We are talking months, even years. To give you a better idea: the wait times for some transformers have extended from weeks to over a year, and the costs for finished transformers have surged, in some cases, by more than 400% since 2020. For example, pad-mounted transformers, commonly seen in residential neighborhoods, have seen their prices jump from $3-4k each in 2020 to around $20k in 2022. The pricing for 5kVA pad-mounted transformers rose nearly 400% per unit, and 50kVA units saw a 900% increase since 2020. Similar price hikes and lead time extensions have affected pole-mounted transformers. Lead times for single-phase pad mount transformers could be up to 142 weeks in 2022, or approximately 2.7 years, creating significant delays in infrastructure and development projects.

The opportunity is large and seizable. The U.S. imported $16.B in electrical transformers in 2020 (the 20th most imported product in the country), primarily from China ($4.13B), Mexico ($3.04B), Germany ($935M), Japan ($917M), and Canada ($774M), effectively becoming the 1st largest importer of electrical transformers in the world. But the supply chain crisis extends beyond just transformers: the entire electrical equipment manufacturing sector is experiencing unprecedented strain. In fact, similar dynamics can be extended to other fundamental grid components such as circuit breakers, switchgears, protection relays, communication and control systems, wires and cables. Indeed, the Department of Energy reports that the global semiconductor shortage has also impacted the production of smart grid components and control systems, further complicating modernization efforts.

The obvious question is: how did we get here? Let's try to understand the reasons behind this shortage, taking the US as an example.

The perfect storm: material shortages meet worker shortages

Ultimately, shortages are due to two causes: limited material availability and labor constraints.

On the material side, the limited domestic production of grain-oriented electrical steel (GOES), a vital component in transformers, significantly impacts availability. The U.S. has only one GOES manufacturer, which struggles to meet domestic demand - their production capacity is about 250,000 metric tons annually, less than half of current U.S. demand, and in being price-competitive against imported GOES. Additionally, the manufacturing equipment for GOES can also produce non-oriented electrical steel (NOES), which is in higher demand due to its applications in electric vehicles, appliances, and HVAC systems. In 2021, 85% of imported GOES in the US came from South Korea, 6% from Brazil, and 4% from Russia. Copper and aluminum face volatile commodity markets, further complicating material availability. Resolving these material constraints could potentially boost production by around 10%.

Labor shortages also represent a significant challenge for transformer production. Manufacturers consistently report difficulties in attracting and retaining a sufficient workforce, with high turnover rates around 10%. The skill levels required for positions such as welding, coil winding, and transformer testing are not widely taught in high schools, and few universities offer relevant engineering programs in power electronics, electrical design, and quality assurance. For example, a skilled coil winder needs 3-5 years of training to become fully proficient. Quality control technicians must understand complex electrical testing procedures and safety protocols. The industry's aging workforce compounds these challenges. The average age of a skilled transformer manufacturing worker is over 50. Many key positions are held by employees with 30+ years of experience who are approaching retirement. The knowledge transfer to the next generation isn't happening fast enough. Meeting the electrification goals set by the Biden administration would necessitate tripling the current workforce of approximately 15,000. Manufacturers indicate that increasing labor inputs, through additional shifts and expanding headcount, could boost production of distribution transformers by 10-25% or more.

With these challenges come massive opportunities. The U.S. needs manufacturing capacity and skilled labor. India has both. But what exactly are these opportunities?

Startup opportunities?

The problem is real and pressing: the demand for electrification is outpacing the availability of crucial infrastructure components, leading to significant delays and increased costs. Now, the key question is, how can this challenge be effectively tackled? And is there an opportunity to build a generational business from India?

Possibly. There are 2 main themes businesses tackling the problem can fall into.

First, B2B marketplaces (for materials/components). I would cross out an opportunity for a cross-border B2B marketplace of raw materials (e.g. GOES, metals) given the industry structure (e.g., supply is not fragmented enough). But a B2B marketplace sourcing infra grid components is definitely doable: the Indian manufacturing base for infrastructure grid components like transformers, switchgears, electronic components, etc. is quite fragmented, with numerous SMEs (incapable of serving international markets). Fertile ground for a marketplace! Also, while many components are standardized (e.g. standard distribution transformers for residential/commercial use, common circuit breakers, utility poles, cables, and conductors, meters and other metering equipment), others (specialized transformers or switchgears, custom-designed substations or control systems, tailored power transmission line components (e.g., towers, insulators) are more complex and require a great degree of design and engineering before production. This could potentially become a core offering of a managed B2B marketplace, which could effectively act as an asset-light, D&E-driven manufacturing partner for cross-border clients.

Second, solutions centered around skilled labor shortages. The skilled shortage is a substantial problem for both blue-collar (e.g. welders, coil winders, transformer testers, electric line workers and installers, renewable energy technicians, construction, maintenance and repair workers, etc.) and white-collar jobs (e.g. engineers in power electronics, electrical design and quality assurance). By far and large, the biggest problem is on blue-collar jobs, so an upskilling/reskilling play of blue-collar workers in India then sent to Western markets could be an interesting play. What to nail down: monetization/BM (how to make this something beyond a traditional recruiting agency?), upskilling/reskilling at scale (correct identification of what trade to double down into, proprietary curriculum, tech as upskilling enabler). Perhaps, a playbook would entail upskilling in India, employing workers on own payroll in Western markets (likely Europe, which has significantly less stringent immigration policies when compared to the US), act as a subcontractor to monetize. A cloud installer model could also be explored, e.g. for transformer monitoring, repair, and maintenance.

So if you're a founder building in the space, do reach out: I'd love to chat!

Well, that's it! Feel free to reach out if you want to share thoughts, or leave a comment - I'll be happy to get your perspective.

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