Water may originate from the atmosphere or be produced by the deterioration of the insulating materials. At comparatively low water content, the water remains in solution and does not alter the appearance of the oil. Dissolved water shall therefore be detected by chemical or physical methods. Dissolved water may or may not affect the electrical properties of the oil.
The solubility of water in transformer oil increases with increasing temperature and neutralization value. Above a certain water content (i.e. the saturation water content), all the water cannot remain in solution and free water may be seen in the form of cloudiness or water droplets. Free water invariably results in decreased dielectric strength and resistivity and increased dielectric dissipation factor. In a transformer, the total water content is distributed between the paper and the oil in a ratio that is predominantly in favour of the paper. Small changes in temperature significantly modify the water content of the oil but only slightly that of paper.