Big Tech is betting trillions of dollars on artificial intelligence, with a lot of that to be spent on building the data centers that would power large language models. Stock markets are reflecting this in Big Tech stocks, but that’s not the only industry riding the artificial intelligence wave. Because that wave runs on electricity and the equipment that brings it from generator to consumer.
There have been reports about a chip shortage caused by the AI rush, and higher compute prices overall resulting from AI-related demand growth in electronics. But a more serious shortage is unfolding in power equipment, as the companies pledging hundreds of billions in AI investments want everything ready yesterday if possible. Alas, it is not.
Transformers, a vital component of the grid, have been in increasingly short supply for at least two years. The shortage has been driven by the fast growth in electricity demand, mostly coming from the tech sector, and the inability to respond to that growth with equally fast grid expansion.
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Transformers are used to convert the high-voltage electricity that runs from power plants to substations along transmission lines to a lower-voltage electric current that can be used by end consumers, including data centers. According to Wood Mackenzie, the shortfall in transformers this year is 15%. Yet there is also a shortage of substations, highlighting the essential nature of power equipment. Per Wood Mackenzie estimates, the substation deficit is 8%. This situation will be aggravated further by a recent executive order by President Trump that banned imports of bulk power equipment from China.
“Outside the industry circle, people are talking about (graphics processing units), but within the circle, people most certainly question you about the lead time for generators and transformers,” the chief executive of a digital infrastructure service provider told Reuters.
The publication went on to report order books stretching ahead for years for the world’s biggest transformer makers. “We currently have an order backlog covering more than three years, with a substantial portion of production capacity for major power equipment secured for the coming three years,” South Korea’s Hyundai Electric told Reuters, noting that its order backlog went up by 23% over the first half of the year, hitting $8.5 billion.
In other words, power equipment makers are enjoying the same trends as gas turbine makers, both driven by Big Tech’s race to outdo rivals in artificial intelligence. Both the gas turbine tightness and the transformer/substation squeeze will affect the pace of what many call the AI revolution because both gas turbines and transformers take time to manufacture. So do cooling systems.
