Preparing for more frequent blackouts

A number of recent power outages have disrupted business operations in several countries, causing alarm and prompting a discussion about the resilience of power generation and distribution.

As society takes the constant availability of electricity for granted, blackouts affecting large areas can be a shocking experience and there are several reasons to believe that such events will happen more frequently in the future.

A continuously rising energy consumption and a lack of investment in the electrical grid are partly to blame for the increasing risk of blackouts, but a broader shift to rely more on renewable energy is also expected to make energy supply more complex. Furthermore, natural catastrophes such as storms, floods and fires are set to disrupt energy supply more frequently due to climate change.

Recent blackouts

In June 2019 a failure in an electrical grid left much of Argentina and Uruguay without power for about a day. Parts of Paraguay and Chile were also affected. In total the blackout left an estimated 48 million people without power.

Buenos Aires, the Argentine capital, was particularly badly hit. Train and subway services were suspended; thousands lost water access because the city’s water system relies partly on electrical pumps. Elevators in apartment blocks stopped working, leaving elderly and less mobile people unable to move in and out of their homes.

At the beginning of August, a major power cut caused by a lightning strike and a sudden loss of two large electricity generators affected large parts of England and Wales. The outage resulted in the cancellation of hundreds of trains, the suspension of procedures in hospitals and in significant financial losses for businesses.

More recently, at the beginning of October, California's largest utility, Pacific Gas & Electric (PG&E) cut off power to parts of 22 counties in northern California affecting roughly 500,000 customers. With the shutdowns the utilities firm intended to avoid sparking a wildfire as high winds swept across Northern California. PG&E faced billions in lawsuits and filed for bankruptcy due to its role in the catastrophic wildfires that occurred in Northern California in 2017 and 2018.

The October blackout shuttered businesses, forced schools and universities to close, disrupted home health services and upended daily home life. The cost to California’s economy could exceed $2 billion, according to some estimates at the time. Nevertheless, wildfires spread fast in many areas driven by strong gusts and more people had their energy supply cut. At the last October weekend alone more than 2.4 million people were left without power.

The causes of blackouts

As recent events show there are multiple potential triggers for power cuts. Weather conditions are a common driver. Heatwaves can cause a blackout because of a sudden surge in electricity demand due to widespread use of air conditioners while floods or earthquakes can have a similar effect. Furthermore, a cyber-attack can shut down the power supply. Even solar storms have been known to cause fluctuations in grids and electronic infrastructure, for instance destroying transformers.

At the same time, insufficient incentives to invest in reliable power supply infrastructure is substantially reducing the grid stability. In addition, the grid today has to cope with new challenges. Demands to shift to renewable energy sources while providing more power to charge electric vehicles to combat climate change are adding pressure to the network.

Energy supply from solar or wind farms is less reliable than for example from nuclear or coal-fired power stations. The shift away from coal and gas as baseload suppliers towards multiple smaller and more intermittent renewable sources makes the task of managing the power system more complex.

In electricity, an increase in renewable generation such as wind, solar and tidal power, together with a decrease in more conventional generation such as coal and gas, is leading to greater variability and uncertainty, UK-based electricity and gas utility company National Grid warned in its 2018/2019 annual report.

Furthermore, as more and more grids are interconnected, a blackout in one region can trigger a domino effect. Ageing infrastructure only makes that situation more critical.

The impact of blackouts

While most power failures last only a few hours, some can last days or even weeks, regardless of the cause.

Blackouts usually impact critical infrastructure such as communication and transport, heating and water supply and halts industrial production processes and commerce.

Costs to businesses from a power outage may vary according to size and business model. Direct costs of blackouts are lost production, idle labour and facilities, damage to electronic data, spoiled food and damaged products, damage to equipment or customer refunds. A power loss in 2013 is estimated to have caused Google losses of £100,000 per minute. 

Indirect costs to businesses are looting, accidental injuries, legal costs and loss of water supply. An increasing reliance on high-tech data and communications systems makes the economy more vulnerable to even short energy interruptions.

Protecting businesses against blackouts

Mostly, power outages are beyond the control of consumers but there are measures businesses can take to reduce their impact. They can, for example purchase a UPS (uninterruptible power supply) which allows a computer to keep running for a short time while the main electricity has gone off. Usually, an alert will notify the user that a power cut has occurred, giving employees time to save any unfinished work.

Businesses can also purchase a standalone generator, which can be used in emergencies. Either way, companies should have a contingency plan that includes informing customers that there is a power outage or that queries cannot be answered.

Companies should also regularly test their preparedness for blackout events, their own vulnerability and that of their critical suppliers as part of their business continuity plan (BCP), which may be vital for the survival of a company in case of a power blackout, as well as to gain access to insurance solutions for such risks.

Traditionally the insurance industry has focused on providing coverage for physical damage losses resulting from blackouts impacting their assets and causing business interruption losses. In addition, tailored insurance policies can compensate businesses for lost income due to service interruption as part of their property cover. A so-called revenues insurance can indemnify a client for a certain amount of days without power. Generally, two weeks of service interruption cover typically suffice, as within this period power supplies are expected to return. Furthermore, companies can protect themselves from loss of stock due to lack of refrigeration under a cargo policy.

For further information, please contact:
Gary Doran, Partner, Lockton Global Energy
Tel:  +44 (0) 207 933 2939

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