When there is a sudden loss in the demand what happens to the transformer and generation?

May be but not sure. there'll not be any harm to the Transformer & nothing to worry about the generation.
In case if there is increament in demand there may be a extra load on the generator & it may damage the transformer.

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When their is sudden loss in demand nothing is happened neither with generation nor with transformer cause while designing transformer and generator the max. load in the area for whichgenerator and transformer are going to used is considered. When tranformer is on no load it will supply only core losses.

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When there is a sudden loss in the demand then there is over-excitation of the generation and the power factor is increased. Also the rotor angle of generator is changed (unstable) for a while.

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When there is a sudden loss of load, The Generator terminal voltage increases due to the fact that the IX drop in the generator winding decreases. The EMF generated being the same the reduced reactance loss leads to a sudden rise in generator voltage..but the AVR (Automatic Voltage Regulator) will act instantly to bring this voltage to the set value by reducing the excitation.
There is practically no effect of this on the transformer barring the reduction in I2R (copper Losses) and reduced IX drop.

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