The wave of AI combined with grid upgrades, Morgan Stanley declares: The U.S. transformer super cycle will continue until 2030.

Ask AI · How can transformer manufacturers respond to capacity bottlenecks while maintaining high margins?

The U.S. is in the middle of a transformer supercycle driven by a combination of grid upgrades, the renewable energy transition, and explosive growth in data centers.

According to material from Follow the Wind Trading Desk, a research report co-authored by Morgan Stanley Mexico Division analyst Jens Spiess together with teams across multiple global regions concludes that the U.S. power grid is experiencing a supply-demand mismatch and that the severe imbalance will persist at least through 2030. The market size for large power transformers (LPT) is expected to expand at an annual compound growth rate of about 14%, creating a sustained window of above-average profits for related manufacturers over the next several years.

From both the supply and demand sides, U.S. electricity demand has returned to a growth trajectory after nearly 20 years of stagnation. Outdated infrastructure urgently needs to be replaced, the large-scale grid interconnection of wind and solar brings new transmission demand, and explosive data-center expansion adds further pressure. Together, these forces are driving a surge in demand for high-power transformers (LPT), while domestic capacity in the U.S. cannot keep up. Since 2021, the apparent consumption of large power transformers in the U.S. has grown by more than three times, while domestic production over the same period has increased by less than 60%. Import dependence has risen from about 70% in 2021 to 85% or more.

The highest earnings leverage is for “pure transformer” manufacturers. In a bull-market scenario, driven by LPT market growth, by 2027 the per-share earnings (EPS) forecast upside for Modern Electric, GEV, WEG, LS Electric, and Sanyuan Electric is expected to be 8%, 6%, 5%, 4%, and 4%, respectively. Each company uses price adjustment clauses in orders to lock in profits at high levels. With current order backlogs of roughly 3 to 5 years, the high-profit environment is expected to last until at least 2030.

Demand side: It’s not just grid aging

Aging U.S. power grids are the starting point of the problem, but not the whole story. Data from the U.S. Department of Energy in 2024 shows that about 55% of in-service distribution transformers have exceeded 33 years—beyond their normal service life.

A bigger variable comes from a fundamental shift in the structure of electricity demand. U.S. electricity demand previously was almost flat for the prior 20 years (annual compound growth of about 0.4%). Morgan Stanley now forecasts that annual growth will reach 2.6% before 2035, and this forecast figure has already been raised multiple times over the past two years.

About 78% of incremental demand comes from data centers, whose electricity consumption is expected to grow at roughly 30% per year over the next five years. Their share of total U.S. electricity consumption will rise from about 6% in 2024 to about 18% in 2030. It is expected that from 2025 to 2028, U.S. data centers will add about 74GW of power demand, creating a power supply gap of 9 to 18GW.

The rapid expansion of renewable energy pushes transformer demand from another dimension as well. Distributed, multi-site generation requires step-up transformers at each connection point. The larger the installed capacity, the more transformers are needed. It is expected that by 2035 the share of renewables in the U.S. generation mix will rise from about 23% in 2024 to about 32%, with wind and solar accounting for about 53% of total newly added installed capacity of 759GW.

Capacity can’t catch up with demand: New factories may only be up and running by 2027

How severe is this supply-demand mismatch? In 2024, U.S. domestic LPT output was only about 200 to 300 units. To support newly added generation installed capacity from 2025 to 2030 alone would require about 4,300 LPT units—2 to 3 times U.S. domestic production (assuming capacity does not expand). If you include needs for grid modernization and microgrid upgrades, this figure could be about four times higher.

Companies such as Siemens Energy, Modern Electric, Eaton, Hitachi Energy, and Prolec GE have already announced capacity expansions across North America, with investment amounts ranging from several tens of millions to more than $1 billion. But building a new transformer factory typically takes 1 to 3 years to come online. Even the lead time for manufacturing equipment can be as long as 6 years. The highly customized nature of many products further extends production cycles. Most new capacity will only be able to land by 2027 to 2029, when the market is still likely to remain dominated by suppliers.

Transformer prices have increased by about 80% over the past five years, but the momentum of price hikes is slowing. WEG, GE Vernova, and Siemens Energy management have all mentioned in recent earnings call transcripts that pricing is moving toward stabilization. This is not a turning point for profit margins. Instead, manufacturers have already locked in high profits through price adjustment mechanisms in orders (covering impacts from raw materials, inflation, and tariffs), keeping the high-profit window extending at least through 2030.

In addition, Morgan Stanley upgraded the ratings for seven companies including Modern Electric. Among them, Modern Electric has the highest North America exposure, with orders covered through 2028, and its operating profit margin in the fourth quarter reached a record 27.6%. GE Vernova has a $30.5 billion order backlog with visibility extending to the end of the decade. Eaton’s electrical business backlog hit an all-time high of $15.3 billion, and capacity expansion projects are rolling out in dense clusters. Siemens Energy’s Grid segment backlog is 21.4 billion euros, with margin expansion still not fully reflected. Sanyuan Electric benefits from global supply constraints; overseas orders are growing rapidly and continue to penetrate mature markets. CG Power plans to expand large transformer production capacity to five times the current level and has already secured large multi-billion-dollar orders from U.S. data centers. LS Electric benefits from AI data-center distribution demand; it expects EPS compound annual growth of about 45% from 2025 to 2028.