Pure distilled water is an excellent insulator with high dielectric strength that is greater than mineral oil, it is less expensive than oil and conducts heat better. However, the following three important points will favor the use of mineral oil over that of water.

Moisture—All large high-voltage power transformers which are liquid filled use a very high quality kraft paper (cellulose fibers) to insulate the windings.

Any moisture in the oil will transfer to the paper and can cause the dielectric strength of the fibers to degrade and breakdown in addition to producing corona when in the presence of gas bubbles and high strength electric fields. You can think of the mineral oil environment in a liquid filled transformer as being very dry.

Ideally, the mineral oil is completely devoid of moisture. Since the paper insulation will tend to soak up moisture in the oil (it is more hygroscopic than mineral oil), a dry transformer will tend to have an insulation power factor of less than 0.5% and the closer this value is to zero gives an indication of the dryness of the insulation system.

It is very, very, dry like a hot sandy desert. To maintain a dry environment in the oil, the transformer tank is sealed so that moist air does not leak in and expose the oil. If the tank does leak, the oil will absorb the moisture out of the air like a dry paper towel soaks up water.

Over time, the moisture in the oil will migrate to the paper winding insulation where it will soak in and start a reaction process that breaks down the cellulose fibers in the paper. Ultimately, this will lead to the failure of the insulation resulting in an internal fault.

High moisture content in oil can also lead to bubble formation due to the low vapor pressure of water. As bubbles form, the dielectric strength is reduced and corona discharge can accelerate the breakdown of the insulation.

Temperature Range—Water freezes at 0°C and boils at 100°C. Large power transformers in cold regions must operate at temperatures below freezing and may experience temperature rises at the winding hot spot that approach boiling.

Obviously, if a transformer was filled with water and froze, ice expansion would cause damage to the tank and winding insulation in addition to other components like electrical connections.

At the other extreme, if the water started to boil, steam bubbles would be produced and this would cause increased tank pressure, reduce heat conduction, but more importantly, it would result in a lower dielectric strength in the space near the winding where the steam bubbles form.

This would increase corona and cause damage to the winding insulation and ultimately to failure.

Corrosion—Power transformers are constructed with steel tanks and iron cores in addition to other iron components used in the design. Water will corrode iron even when the water starts out as very pure. Over time, impurities will form as the water reacts with other materials and as these impurities increase in concentration, corrosion will result in addition to a reduction in dielectric strength.

For large power transformers like those used in large high-voltage power grids, they are designed to have lifetimes exceeding 40 years. The use of water would lead to corrosion and could drastically shorten the life expectancy.