The heating of the transformer is due to both the heating effect of current and hysteresis loss, and are cooled by circulating oil.

Transformers heat up due to a phenomenon known as core losses, which include hysteresis losses and eddy current losses. Hysteresis losses occur because the magnetic domains in the transformer's core resist changes in magnetization, causing energy to be converted into heat. Eddy current losses happen when the changing magnetic field induces currents in the core material, leading to resistive heating. Both of these processes contribute to the overall temperature rise in transformers.