Why Distilled Water Didn't Replace Transformer Oil？

Yes. Pure distilled water is an excellent insulator, has a higher dielectric strength than mineral oil, is cheaper than oil, and conducts heat better. However, the following three points will favor the use of mineral oil over water.

Moisture - All oil filled transformers use very high quality kraft paper (cellulose fibers) to insulate the windings. If we use water instead of oil for insulation, it will cause the kraft paper to quickly absorb water, thus losing the insulating protection of the kraft paper and causing current breakdown. The transformer oil we commonly use is ideally free of moisture. Even if there is moisture intrusion, it can also absorb moisture in the air. Over time, the moisture in the oil migrates into the paper winding insulation, where it absorbs and begins the reaction process that breaks down the cellulose fibers in the paper. Eventually, this will cause the insulation to fail, causing internal failure. A high moisture content in oil can also cause air bubbles to form due to the low vapor pressure of water. As bubbles form, the dielectric strength decreases and corona discharge accelerates insulation breakdown.

Physical Form Change - Water freezes at 0°C and boils at 100°C. Large power transformers in cold regions must operate in subfreezing temperatures, and winding hot spots can experience near-boiling temperature increases. Obviously, if a transformer is filled with water and freezes, the ice expansion can damage the tank and winding insulation, in addition to other components such as electrical connections. At the other extreme, if the water starts to boil, steam bubbles are created, which leads to an increase in pressure inside the tank, less heat transfer, but more importantly, it causes a decrease in the dielectric strength of the space near the winding near the steam bubbles form. This increases corona and causes damage to the winding insulation and eventually failure.

Corrosion due to chemical reactions - Power transformers are made up of many metal parts, including steel tanks and iron cores. And water can react chemically with many metal substances, even if the water is very pure at first, it will corrode iron metal. Over time, as the water reacts with other materials, impurities and free metal ions are formed in the water, and as the concentration of these impurities increases, the dielectric strength will gradually decrease. Most of our life requirements for power transformers exceed 40 years. Using water can greatly reduce life expectancy.