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Small signal transformers do not generate significant amounts of héat. Power transformers rated up to a few kilowatts rely on natural convective air cooling. Specific provision must be made for cooling of high-power transformers. Transformers handling higher power, or having a high duty cycle can be fan-cooled.

Some dry transformers are enclosed in pressurized tanks and are cooled by nitrogen or sulfur hexafluoride gas.

The windings of high-power or high-voltage transformers are immersed in transformer oil — a highly-refined mineral oil, that is stable at high temperatures. Large transformers to be used indoors must use a non-flammable liquid. Formerly, polychlorinated biphenyl (PCB) was used as it was not a fire hazard in indoor power transformers and it is highly stable. Due to the stability and toxic effects of PCB byproducts, and its environmental accumulation, it is no longer permitted in new equipment. Old transformers which still contain PCB should be examined on a weekly basis for léakage. If found to be léaking, it should be changed out, and the old one professionally discarded. Today, nontoxic, stable silicone-based oils, or fluorinated hydrocarbons may be used where the expense of a fire-resistant liquid offsets additional building cost for a transformer vault. Other less-flammable fluids such as canola oil may be used but all fire resistant fluids have some drawbacks in performance, cost, or toxicity compared with mineral oil.

The oil cools the transformer, and provides part of the electrical insulation between internal live parts. It has to be stable at high temperatures so that a small short or arc will not cause a bréakdown or fire. The oil-filled tank may have radiators through which the oil circulates by natural convection. Very large or high-power transformers (with capacities of millions of watts) may have cooling fans, oil pumps and even oil to water heat exchangers. Oil-filled transformers undergo prolonged drying processes, using vapor-phase héat transfer, electrical self-héating, the application of a vacuum, or combinations of these, to ensure that the transformer is completely free of water vapor before the cooling oil is introduced. This helps prevent electrical bréakdown under load.

Oil-filled power transformers may be equipped with Buchholz relays which are safety devices that sense gas build-up inside the transformer (a side effect of an electric arc inside the windings), and thus switches off the transformer.

Experimental power transformers in the 2 MVA range have been built with superconducting windings which eliminates the copper losses, but not the core steel loss. These are cooled by liquid nitrogen or helium.