Power Blackout Risks

7/27/2019 Power Blackout Risks

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Power Blackout RisksRisk Management Options

Emerging Risk Initiative – Position Paper

November 2011



2

Content

1. Summar 3

2. Power blackouts challenge societ and econom 4

3. Blackout risks on the increase 5

3.1. How power market trends inluence blackout risks 5

3.1.1. Liberalisation and privatisation 5

3.1.2. Renewable energies 5

3.1.3. Huge investments in power suppl inrastructure required 6

3.2. Historical power blackout events and uture scenarios 8

3.2.1. Historical blackouts 8

3.2.2. What are the causes o blackouts? 9

3.2.3. Average blackout duration per countr 11

4. Potential blackout scenario 12

4.1. consequences 12

4.2. cost analysis o Historic blackout scenarios 15

5. Considerations or risk management 18

5.1. trends aecting tHe business interruption (bi) risk landscape

and power dependency 18

5.1.1. General impact o blackout in light o changed production processes 18

5.1.2. Specic impact based on car manuacturers 19

5.2. business continuity planning to mitigate power blackout risks 20

5.3. risk transer solutions 22

5.3.1. Principles o insurabilit 22

5.3.2. Current risk transer solutions 23

5.3.3. Future risk transer products 24

5.3.4. Residual risk acceptance 24

6. Conclusion 25

7. Annex 26

ah:

Michael Bruch, Volker Münch, Markus Aichinger (Allianz)

Michael Kuhn, Martin Wemann (Swiss Re)

Gerhard Schmid (Munich Re)

e:

Markus Aichinger (Allianz)

Grateul acknowledgment to all CRO Forum Emerging Risk Initiative member companies

or their comments and revisions.

Title picture: Credit: C. Mayhew & R. Simmon (NAS A/GSFC ), NOAA / NGDC, DMSP Digital Archive

Layout: volk:art51, Munich | Printing: Mühlbauer Druck, Munich



3crobrieng on Power Blackout Risks

1. Summar

Blackouts during the last ten ears in Europe and Northern America have demonstrated an increasing likelihood

o supra-regional blackouts with accompaning large economic losses. The earthquake, tsunami damage and

power shortages that idled thousands o Japan’s actories in 2011 highlighted its role as a ke – and sometimes

the onl – source o auto parts, graphics chips and other high-end components. Man manuacturers are currentl

using up the inventories that the had in stock beore the earthquake. A similar situation could occur as a result

o a larger power outage and this risk ma urther increase in the uture. One reason are insucient incentives to

invest in reliable power suppl inrastructures. But new and smarter grids including storage capacities (e.g. pumped-

storage hdropower plants) are required to handle the uture growth o volatile renewable energies, which are

located ar awa rom the centres o demand. Furthermore the vulnerabilit o the power suppl industr, the

industrial and commercial companies and the public and private sector is high due to the interconnectedness

and dependenc o all areas on Inormation and Communication Technolog (ICT), navigational sstems and

other electronic devices.

Whereas short term power blackouts are experienced requentl on a local or regional level around the world

(e.g. caused b natural catastrophe events like earthquakes, storms, foods or heat waves), societies are not amiliar

with large scale, long-lasting, disruptive power blackouts. Traditional scenarios onl assume blackouts or a ew das

and losses seem to be moderate, but i we are considering longer lasting blackouts, which are most likel rom space

weather or coordinated cber or terrorist attacks, the impacts on societ and econom might be signicant.

So ar insurance companies were not aected signicantl beond taking care o their own business continuit

management in order to mitigate losses ollowing a blackout. Risk transer via insurance has usuall required

phsical damage to either the insured’s assets or the assets o specic service providers to trigger a business

interruption claim. But onl 20% to 25% o business interruptions, such as suppl chain disruptions are related to

a phsical loss1. Thereore insured persons and organisations should be aware that the ma ace huge uninsured

losses. This might trigger an increasing demand or new risk transer solutions related to power blackout risks in

the uture.

The insurance industr can oer well contained event covers which ull the pr inciples o insurance: randomness,

assessabilit, mutualit and economic viabilit whereas utilities and governments have to increase their eorts to

make our power inrastructure resilient against such events.

1 http://pn.advisen.com/articles/article140935191888258975.html



4

2. Power blackouts challenge societ and econom

Electricit is the backbone o each industrialised societ and econom. Modern countries are not used

to having even short power blackouts. The increased dependenc on continuous power suppl related to

electronics, industrial production, and dail lie makes todas’ societ much more vulnerable concerning power

suppl interruptions. A brownout (reduced voltage) o some minutes or a similar blackout (complete ailure o

electricit suppl) ma cause some inconvenience at home such as having the lights turn o. But a blackout

o a ew hours or even several das would have a signicant impact on our dail lie and the entire econom.

Critical inrastructure such as communication and transport would be hampered, the heating and water suppl

would stop and production processes and trading would cease. Emergenc services like re, police or ambulance

could not be called due the breakdown o the telecommunication sstems. Hospitals would onl be able to work

as long as the emergenc power suppl is supplied with uel. Financial trading, cash machines and supermarkets

would in turn have to close down, which would ultimatel cause a catastrophic scenario. I the blackout were to

spread across the border lines, which is more likel toda due to the interconnection o power grids between

dierent countries, the impacts would escalate as a unction o the duration o the interruption.

The ollowing position paper highlights the risks and uture trends linked to power blackouts. It urther explores risk

management options including operational risk management measures, the importance o a high qualit business

continuit management plan and risk transer options. Furthermore it emphasizes the insurance industr’s options

to expand coverage based on phsical damage and to consider new non-phsical damage insurance solutions.

This might be insurance cover or alternative risk transer solutions, which respond and cover emerging r isks such

as power outages, but also political risks, pandemics and/or suppl chain disruptions.

picture alliance/dpa




3.1. How power market trends infuence blackout risks

The worldwide power suppl industr experienced two major changes in the last ten to twent ears:

• Liberalisation and privatisation

• Expansion o renewable energ production capacities

3.1.1. liberalisation and privatisation2

Nowadas, most industrialised countries have 10 to 20 ears experience with privatisation and liberalisation o

electricit sstems. The liberalisation o the market resulted in the separation o power generation and transmission

and distribution (T&D) business. This process has created an additional interace which can adversel impact

communication and coordination activities between operators on both sides. The past blackout events reveal ( see

boxes in 3.2.1 and annex ) that underling causes are also partl linked to the privatisation and liberalisation trends

due to missing incentives to invest in reliable, and thereore well maintained, inrastructures. The discrepanc is

urther described in chapter 3.1.3.

3.1.2. renewable energies3

Eorts to mitigate climate change across the world are ocusing on the expansion o renewable energ production

e.g. onshore and oshore wind arms, solar and biomass power plants. Hal o the estimated 194 gigawatts (GW)

o newl added electric capacit worldwide in 2010 is represented b renewable energies which was an increase o

8% compared to 2009. According to the World Wind Energ Association (WWEA), about 175,000 megawatts (MW)

o energ are now being produced b wind power stations around the world. Leading producers are the United States,

China and Spain. The European Union intends to increase the renewable energ share o total energ production to

20% b 2020.

3. Blackout risks on the increase

2 http://www.psiru.org/reports/2009-12-E-Indon.doc3 http://www.ren21.net/Portals/97/documents/GSR/GSR2011_Master18.pd4 http://www.energies-renouvelables.org/observ-er/html/inventaire/pd/12e-inventaire-Chap02.pd

[TWh]

2010

Total electricity

production

[TWh]

Percentage o

RE [%]

Wind

W o r l d

U . S . A .

C h i n a

S p a i n

Hydroelectricity

W o r l d

C h i n a

B r a z i l

C a n a d a

721396 366

Solar Photovoltaic

W o r l d

S p a i n

G e r m a n y

J a p a n

6.9 6.2

2.9

Biomass

55.633.8 27.1

14: th h r e

Geothermal

W o r l d

U . S . A .

P h i l i p p i n e s

I n d o n e s i a

16.510.3

7.0

430

94.750.7 43.0

2.0 2.2 1.2

14.3

3,428

58.1

81.7

16.0 17.1

62.5

0.3 0.4

16.6

4.5

18.2

< 0.1 2.3 1.0 0.3

210

5.95.71.31.0

G e r m a n y

B r a z i l

W o r l d

U . S . A .



6

Alternative Solutions and Grid

Extension Requirements

2: ch

System Security in the Transmission Grid

European E lec tri ci ty Ma rke t Market-Dr iven Ope rat ion o Power Pl ant s

100% Integration o Renewable Energy

Environmental Impact Public Acceptance

Availability & Economic Efciency

Flexible Line Management

High Temperature Conductors

Innovative Transmission Technologies

Islanding & System Restoration

Voltage Support & Short-Circuit Power

System Services

Demand Side Management

Power Storage

Increasing Flexibility

A downside o renewable energ particularl, wind and solar technologies, is the volatile suppl o power. Not onl

ma a scarcit o electricit result in a power blackout, but an oversuppl can also lead to grid instabilities as the

alter the requenc within the network. For example wind energ in East German during strong wind conditions

can provide up to 12 GW, which is more than all German coal and gas red power plants considered together. This

is not critical as long as there is enough electricit demand, but ma lead to grid instabilities in cases o insucient

demand as there is not enough electricit storage capacit available. To get rid o excess electricit, transmission

sstem operators (TSOs) oten have to pa an extra ee to the electricit market (EEX – European Energ Exchange,

Leipzig). Otherwise wind park operators have to be convinced to stop the wind turbines immediatel in order to

prevent grid instabilities and blackouts. Conversel wind turbines must be stopped due to saet reasons i the

wind speed exceeds 30 m/sec. This scenario ma cause, within one hour, power gaps equal to the perormance

o two nuclear power plants. In such cases conventional reserve power plants are required to step in instantl.

In addition, the location o e.g. windarms (onshore and oshore) is oten ar awa rom the centres o demand.

Electricit has to be transported rom sparsel populated regions to large electricit consumers in metropolitan

areas. Thereore, new energ inrastructure (new high voltage transmission lines, transormers and energ

storage capacities such as pumped-storage hdropower plants or thermal storage acilities) are needed.

Grids need to become much “smarter” to handle these enormous technical challenges. Thereore a large-scale

smart grid is needed that integrates and automaticall and ecientl coordinates the activities o all plaers both

on the electricit suppl and the demand side.

3.1.3. Huge investments in power supply inrastructure required5

The ollowing gure rom the grid stud published b dena (German Energ Agenc6 ) shows how man critical

issues have to be taken into account to plan a uture transmission grid that responds to both the increased

proportion o renewable energ production and uture requirements o a modern and sustainable power suppl:

39% Renewable Energy

Sources until 2020

5 EIA, Annual Energy Outlook 2011, http://www.eia.gov/neic/speeches/newell_12162010.pd6 http://www.dena.de/fleadmin/user_upload/Download/Dokumente/Studien___Umragen/Summary_dena_Grid_Study_II_2.pd (November 2010)

Source: dena




The dena grid stud concludes that or German alone an additional 3,600 kilometres o 380 kilovolt lines will

be required b 2020. For comparison, since 2005 just 80 km o new power grids were erected.

For the European Union grids investments o EUR 23-28 bn are needed over the next ve ears. This could onlbe realised i investment and permitting processes are pushed and nancing incentives or TSOs are supported

b the EU members, regulator bodies and industr.

Worldwide an investment o USD 13.6 trillion will be required b 2030 in order to meet increasing demand

(International Energ Agenc, IEA). IEA concludes that 50% o this amount needs to be invested in transmission

and distribution and another 50% in generation o electricit.

One o the most prominent projects that address these requirements is the Desertec project. The below chart

highlights the necessit o long distance transmission capabilities in order to ecientl use and distribute

renewable energies.

Source: Desertec Foundation

CSP: Concentrated Solar Power

Squares indicate the area required to meet the respective power demand

DESERTEC-EUMENA

ConcentratingSolar Power Hydro

Photovoltaics Biomass

Wind Geothermal



8

3.2. Historical power blackout events and uture scenarios

3.2.1. Historical blackouts

th

n Z

20.02.1998

Technical ailure, a chain reaction caused by a line ailure

4 weeks MMM 70,000

bz (70% h )

11.03.1999

Natural event, a chain reaction was started when a lightning strike

occurred at 22h at an electricity substation in Bauru, São Paulo

State causing most o the 440 kV circuits at the substation to trip.

Urban chaos led by huge trac jams and public subway and

suburban trains systems that were out.

5h MMM 97,000,000

u.s.a. (nh-e) + c (c)

14.08.2003 (detailed description see Annex)

A combination o lack o ma intenance, human error and equip -

ment ailures caused an outage that aected large por tions o

the Midwest and Northeast United States and Ontario, Canada.

This area typically has a total electric load o 61,800 MW. The

blackout began a ew minutes ater 4:00 pm Eastern Daylight

Time and power was not restored or 4 consecutive days in

some parts o the United States.

4 days MMM 50,000,000

Economic losses: about USD 6 bn

i ( i, x s)


Technical ailure, a domino eect that ultimately led to the

separation o the Italian system rom the rest o the European grid.

30,000 people were trapped on trains. Several hundred passengers

were stranded on underground transit systems. Many commercial

and domestic users suered disruption in their power supplies or

up to 48 hours. The subway had to be evacuated.

18h MMM 56,000,000 Deaths: 4

i (J i)

18.08.2005

Technical ailure, power ailed along the electrical system that

connects Java, Bali, and Madura, causing outages in Java and

Bali. This led to a cascading ailure that shut down two units o

the Paiton plant in East Java and six units o the Suralaya plant

in West Java.

7h MMM 100,000,000

s

29.11.2004

Human error/technical ailure, overloaded transmission line

5 blackouts within 10 days MMM 2,000,000

sh w e ( g, , i, b,

s p)


Human error, the ault originated rom Northern Germany, rom the control area o

E.ON Netz. On November 04, 2006, a high voltage line had to be switched o to let a

ship pass underneath. Additionally during that time there was a strong wind which ed

into the grid 10,000 MW rom wind turbines to Western and Southern Europe grids.

Insucient communication about this switch-o led to instabilities o the requency

in the grid and to the overloading o lines, which ultimately resulted in the splitting o

the Electricity Transmission network into three zones: West, East and South-East.

The Western zone lacked power and the Eastern zone had too much power. 2h MMM 15,000,000

bz ( ) + p

10.11.2009

Natural event, heavy rains and strong winds caused three transormers on a key high-

voltage transmission line to short circuit, cutting the line and automatically causing all

o the hydroelectric power plant’s 20 turbines to shut-down due the abrupt all o power

demand (the world’s second largest hydroelectric dam).

Thousands o people were trapped in elevators, subways and suburban trains. Road

trac was also chaotic as the power outage darkened trac lights, and the police were

put on high alert as an outbreak o crime was eared. Only large oce buildings and

hotels with generators were lit. The country’s largest airports were also using generators

and providing limited emergency service, they said. Brazil’s phone network largely

collapsed, but its mobile-phone network was still operating.

25min to 7h MMM 87,000,000

bz ( 8 h: a, bh, cá,

pí, p, p, r g n s)

04.02.2011

Technical ailure, a ailure in an electronic component that was part o protection

system o the concerned substation.

16h MMM 53,000,000

i

02.01.2001

Technical ailure, ailure o substation in Uttar Pradesh.

Some major hospitals were able to unction using back-up generators but others were

paralysed and some major surgeries had to be cancelled. The water supply also brokedown ater treatment plants and pumping stations stopped unctioning. Millions o

people were unable to draw water rom underground wells because the pumps were

not working. The northern rail system was in chaos as electric trains halted blocking

the lines. More than 80 trains were stranded or about 15 hours across the region.

Railway authorities used diesel engines to pull the electric trains to their destination

but there was a shortage o diesel locomotives. Major cities including New Delhi

rapidly clogged with trac as the trac signals went out. Land and mobile phone

services were severely aected. Airline computers ailed, stopping the reservation

procedures. Although Delhi international airport was able to avoid major fight

disruptions by using stand-by generators, most o the airpor t was in darkness.

12h MMM 226,000,000

Economic losses: USD 110 m




3.2.2. wHat are tHe causes o blackouts?

Tpicall power blackouts are not caused b a single event but b a combination o several deciencies. There is

no outage known where a aultless grid collapsed completel due to a single cause. The ollowing preconditions

are the basis or a high power outage risk:

• High grid utilisation or high power demand

• High power plant utilisation

• Deects due to material ageing

I the ollowing events occur in combination with the above mentioned conditions there is a ver high likelihood

or a power blackout to occur:

• Power plant shutdown or revision or due to suppl ailures (e.g. cooling water shortage during heat waves)

• Unoreseen simultaneous interruptions o several power plants

• Human ailure during maintenance work or switching operations

•Simultaneous grid interruption e.g. short circuit caused b tree contact, excavation work, balloons driting intopower lines, cars hitting utilit poles, provisional shutdown due to electrical overloading risk

• Sudden simultaneous high power demand, e.g. simultaneous usage o air conditions during hot summers

• Power line collapse or electrical equipment breakdown due to natural hazards (e.g. wind, earthquake, snow

or ice load, food, lightning, space weather, extreme temperatures)

• Insucient communication between transmission/distribution sstem operators (TSO/DSO) and power suppliers

• Cber attacks

3: p

Solar storm Lack o investment,ageing inrastructure

Increased volatility due tosolar and wind power

Mega cities

Blackout

Increased demand

Economic upswing

• Lack of cooling water• Lack of hydro capacity

Climate change

• Ice storm• Snow storm• Wind storm• Lightning• Flood

Failure o transmission Failure o production

• Terrorism• Earthquake• Construction defects• Operating Errors

Heat waves



10

p

Power suppl industr is classied as a critical inrastructure. These are organisational and phsical structures

and acilities o such vital importance to a nation’s societ and econom that their ailure or degradation would

result in dramatic consequences.

For this reason, power suppl sstems have alwas been militar targets and can also be in ocus or terrorist

groups which want to undermine economic and social stabilit.

BOMBING:

Acts o war, terrorism and sabotage ma ocus on dams, power plants, substations and high voltage

transmission lines.

During the Korean 1952 war U.S. militar attacked several dams and power plants to wipe out roughl 90% o

North Korean electricit generation.

In April 1995 anti-nuclear energ activists bombed the main 380 kV suppl line or Vienna in Ebergassing

(Austria). Two o the our bombs detonated too earl because o the electric induction too earl and killed theactivists without causing damage to the line.

In Januar 2005 a high voltage line was damaged b terrorists in Georgia.

Several terrorist groups have threathened to destro dams in the U.S., leading to high securit eorts and the

closure o man dams since 9/11.

CyBER ATTACKS:

During the last decade the likelihood o so-called cber attacks increased. Such attacks tr to shut down

or destro critical power suppl components, e.g. large generators or transormers, via the Internet.

Vulnerabilit or cber attacks has risen substantial l due to the ongoing move rom propriet sotware to

IP-(internet protocol) based sstems that use commercial sotware, which can be attacked b intruders.

The U.S. Aurora test in 2007 showed how a generator room at the Idaho National Laborator was remotel

accessed b a hacker and a USD 1 m diesel-electric generator was phsicall destroed.

Another example, the sx virus which was developed to obtain control over the operation o Iran’s nuclear

power plants, demonstrates new possibilities in cber attacks used not onl b individual criminals or terrorists,

but also b oreign states.

HEMP AND IEMI ATTACKS:

It is well known that nuclear bombs emit a strong electromagnetic pulse. I detonated at high altitudes (> 100 km)

above the earth’s surace such bombs are called a HEMP (high altitude electromagnetic pulse) weapon. Alread

in 1962 a militar test 400 km above the Pacic proved the power o such an attack.

As an unintended side eect the power and telephone inrastructure o Hawaii was aected despite the small

bomb (1.4 Mt) and the ar distance (1500 km) rom the point o detonation.

IEMI (Intentional Electro Magnetic Intererence) attacks use special high power electromagnetic weapons without

an o the side eects o a classic explosion and with limited impact area.

Both such weapons have the capacit to cause similar tpes o damage, such as severe solar storms ( see

separate box ). HEMPs or IEMIs can lead to severe phsical damage to all unprotected electronics and transormers

b inducing several 100 to 1000s o volts. Tpicall microchips operate in the range o 1.5 to 5 volts and are

thereore not capable o withstanding such voltages. The impact area can be in the range o several hundred

meters to an entire continent.

In the U.S. the c a h th h u s e p

a (http://www.empcommission.org) researches the eects and mitigation measures to such attacks.




Reliabilit o power suppl varies signicantl across regions (Figure 4 ). Even within OECD countries the qualit o

suppl is not uniorm and power outages quite severl impact econom. The United States, as an example, has an

average o nine hours o disruptions each ear or ever consumer. Those interruptions are estimated to result in

economical losses o least USD 150 bn each ear. Compared to other industrialized countries the reliabilit o the

U.S. grid is 5-10 times less than in major European countries. The average electricit consumer in U.S. has to

cope with approx. 30 times more service interruptions each ear than in Japan or Singapore. U.S. grid stabilit

will decrease in the uture i there are not enough investments in the inrastructure.

The October 2007 stud, “2007 Long-Term Reliabilit Assessment,” o NERC (North American Electric Reliabilit

Corporation) came to the ollowing conclusions:8

• Long-term capacit margins on the nation’s transmission sstems are inadequate to protect these sstems

rom interruptions such as brownouts or blackouts. Absent immediate investments, this condition will worsen

over the next decade;

• Projected increases in peak demand or electricit exceed projected additions o generation capacit;

•

The areas o greatest concern are Caliornia, the Rock Mountain states, New England, Texas, the Southwest,and the Midwest.

• In total, the U.S. will require about 120 GW o new generation just to maintain the minimum 15 percent

capacit margin required or sstem reliabilit.

4: o , 20097

7 World Bank study, http://siteresources.worldbank.org/EXTESC/ Resources/Approach_paper_annexes_14_October_2009.pdf8 http://www.oe.energy.gov/DocumentsandMedia/Attachment_1_Nextgen_Energy_Council_Lights_Out_Study.pdf.pdf

Source: World Bank

Countries grouping

Average du ration

o each outage

in hours

Average nu mber

o outages

per year

3.2.3. average blackout duration per country

1400 9

8

7

6

5

4

3

2

1

0

1200

1000

800

600

400

200

0 A v e r a g e d u r a t i o

n o f e a c h p o w e r o u t a g e ( h o u r s )

A v e r a g e n u m b e r o f p o w e r o u t a g e p e r y e a r

Allcountries

East Asia& Pacifc

EasternEurope &

Central Asia

Latin America &Caribbean

Middle East& North Arica

OECD Sub-Saharan Arica

South Asia



12

4. Potential blackout scenario

A regional blackout lasting more than several das alread could be considered as a “worst case” scenario.

Most back-up and securit sstems will ail ater a longer period without electric power, leading to an almost

complete ailure o most critical inrastructures.

As shown beore such a scenario could be caused b a wide range o events.

For example, during the European heat wave o 2003, generation o electricit o power plants, incl. nuclear

plants, had to be reduced due to the scarcit and high temperatures o the adjacent water bodies which are

substantial or cooling purposes. Almost all rivers had record low water levels leading to reduced hdroelectric

generation. Due to the massive lack o wind even wind generation capacit was down signicantl. Prolonged

heat waves ma additionall result in a drop in biomass production due to reduced growth o plants.

I such preconditions coincide with a high electricit demand and increasing instabilit in the power grid, there

is the potential or a supra regional collapse.

A comparable collapse can also be caused b a severe geomagnetic storm or an HEMP attack, due to the simul-

taneous damage to several ke transormer locations and/or high voltage transmission lines. (OECD report 2011.9 )

4.1. Consequences

Most critical sstems such as hospitals, rst responder acilities, water and sewage sstems and stock

exchanges have backup power generation in place. However, these tpicall have onl enough uel or several

hours to a maximum o a ew das.

Immediatel ater a blackout, it is not possible to purchase an goods without cash as no electronic pament

is possible. The 2003 blackout illustrated that ater 3 to 6 hours without power most uel stations and the

reneries had to close down, leaving the public without uel or cars or backup generators as the pumps did

not operate. Aluminium melting urnaces will alread sustain irreversible phsical damage ater 4-5 hours without

electricit.

Governments have tpicall, however, implemented emergenc uel storages to keep most critical acilities

alive or several weeks up to a month.

Ater one month with no electrical power, water, transportation, emergenc services, critical manuactur ing,

and chemical sectors can ace widespread outages within the aected region. The loss o water sstems due

to a power outage leads to man cascading eects. Hospitals, schools, nursing homes, restaurants, and oce

buildings all rel on water to operate. Water is used or drinking, sanitation, and heating and cooling sstems

in those acilities. Man manuacturing operations either use water as an ingredient in their processes or rel on

wastewater sstems to remove and process their manuacturing waste. Fire ghters depend on water to carr

out their emergenc response, and access to sae water is necessar or providing mass care services and

preventing the spread o disease. Without electricit most heating sstems do not operate. During winter tpical

homes can cool to below reezing level within ew das. It must be expected that people will tr to heat their

homes using open res, leading to man homes burning while there is no water or emergenc response teams.

9 http://www.oecd.org/dataoecd/57/25/46891645.pd




s h

The term space weather summarizes dierent astrophsical eects the earth is exposed to. Constantl emitted

clouds o electricall charged particles (plasma) rom the sun into space are called solar wind. Large eruptions

o plasma rom the sun‘s corona are known as coronal mass ejections (CME) and create solar storms. The sun

ollows an 11 ear ccle o changing solar activit with the next maximum expected in 2013. During a solar

maximum 1 CME reaches the earth’s orbit ever 5 das on average, while during a solar minimum onl 1 CME

reaches our planet ever 45 das.

A solar storm that reaches earth, generates intensive showers o particles and gigantic cur rents in the ionosphere

(producing bright auroras) and induces major alterations in the geomagnetic eld resulting in a geomagnetic storm.

Large scale electric conductors in the changing magnetic eld, whether cables or pipes, run currents called geo-

magneticall induced currents (GIC). Depending on the underneath geolog long power lines connect (or short

circuit) regions o dierent geoelectric potential. This can trigger GIC (up to 200 Ampere or more over time spans

o more than 10 seconds) to enter the power grid through transormer grounding cables. The electromagnetic

induction is higher the longer the transmission line and more severe or east-west directed transmission lines.

While power grids normall work with alternating currents the are not designed to handle direct currents (like GIC)

induced b a geomagnetic storm. Those currents aect the electricit inrastructure, in particular high-voltage

regulating transormers and substations, but also telecommunication networks and even pipe lines are exposed.

GIC could hold the power to not onl cause tripping o transormers but also damage or even destro transormers,

resulting in a dierent qualit o power outage, i.e. not onl large-scale but also long-lasting.

The rst historical event where GIC appear to be linked to a large loss was a telegraph breakdown on September 2,

1859 – the so-called Carrington event. The da beore, scientists detected a spectacular solar fare that had

triggered a series o CMEs, ollowed b the largest aurora ever reported. At the same time, the extreme geo-

magnetic storm overloaded telegraph lines worldwide, causing short circuits and res in telegraph stations and

ultimatel a breakdown in service.

More recentl on March 13, 1989, during a large magnetic storm accompanied b vivid auroras visible as ar

south as Hawaii and Cuba, GICs hit power lines rom the Hdro-Québec power network. This led to a blackout

aecting 6 million people and losses o more than CAD 10 million. The increasing dependence o societ on

electricit and electronics, and o course satellites (e.g. GPS timing signals), leads to a growing exposure to

strong space weather events, amplied b over-aged or sometimes degraded high-voltage equipment. >






Direct costs o blackouts are lost production, idle labour and acilities, damage to electronic data, spoiled ood

and damaged products, damage to equipment or customer reunds. Indirect costs are looting, accidental

injuries, legal costs, loss o water suppl. In general indirect costs exceed direct ones b up to 5 times.

4.2. Cost analsis o historic blackout scenarios10

Analses o historic blackout events in U.S. show average electric customer interruption costs or medium and

large industrial clients o between USD 15,709 or a 30 minute blackout and USD 93,890 or an 8 hour interruption.

There is a wide range o costs depending on the industrial sector (medium & large clients). For an 8 hour event

agricultural rms have the lowest costs with USD 41,250 per event, whereas construction rms have costs o

USD 214,644 – a actor o 5.11

It is dicult to get a clear picture o the incurred costs linked to blackouts. Other studies show much higher

losses per event:

i f

Semiconductor production EUR 3,800,000

Financial trading EUR 6,000,000 per hour

Computer centre EUR 750,000

Telecommunications EUR 30,000 per minute

Steel works EUR 350,000

Glass industry EUR 250,000

5: c

10 http://www.leonardo-energy.org/webm_send/279311 Estimated Value of Service Reliability for Electric Utility Customers in the United States, Lawrence Berkeley National Laboratory 2009

Stock market bust

Bank runs

Road trafc restrictionsBusiness interruption in manufacturing process

Restricted operation o medical acilities

Business interruption inmanuacturing process

Mass litigation

Production decline in manuacturing sector


Telephone network collapse Restricted operation o medical acilities

Cruise restrictions

Sharp decline in tourism

Air trafc res trictions Decrease in retail and wholesale turnover

Consumption decrease

Stock market bustInternet breakdown

Payment transaction restrictionsLoss o trust in banks

Mass litigation

Rail/Marine trafc restrictionsBusiness interruption in manufacturing process

Consequences of

Blackout

Mortality increase

Morbidity increase

Health care and treatment insufcient




16

The well known 2003 blackout in U.S. and Canada seems to be the highest economical loss ever during an

outage with an estimated total cost o USD 4 bn to USD 8 bn. But even short blackouts which occur several times

during a ear in the U.S. sum up to an annual economic loss between USD 104 bn to USD 164 bn.

Such short term outages or even just dips in voltage seem to be harmless, however, the can have severe

impacts in case production and suppl chain depend on accuratel snchronised production processes.

Paper manuacturing is a prominent example o such a business, but also the production o semiconductors.

Apart rom the reduced output and the waste o raw materia ls, the inabili t to suppl the customer is critical due

to the ever increasing interdependencies o suppl chains.

Costs per customer dier signicantl between residential, commercial, and industrial customers. The costs can

be described as the Value o Lost Load (VoLL), which is the estimated amount that customers would be willing to

pa to avoid a disruption in their electricit service. Highest costs accrue during the rst hour and then declining

slowl thereater, but the additionall dier according to various elements:

• Industr sector

• Size o the enterprise

• Duration and requenc o past events

• Time o da and b season o the ear

• Proportionate to household income




12 The Economic Impacts of the August 2003 blackout, prepared by the Electricity Consumers Resource Council (ELCON) – February 9, 200413 http://www.policyholderperspective.com/2009/06/articles/frst-party-property/2003-blackout-held-to-involve-property-damage-sufcient-

to-support-claim-under-property-policy/

s x f h 2003 u.s.

c.12/13

• d ch: lost production at 14 o its 31 plants. 6 o those plants were assembl plants with paint

shops. The compan reported that, in total, 10,000 vehicles were moving through the paint shop at the time

o the outage had to be scrapped.

• m c: at Ford’s casting plant in Brook Park, Ohio, the outage caused molten metal to cool

and solidi inside one o the plant’s urnaces. The compan reported that a week would be required to clean

and rebuild the urnace.

• mh o c’: the blackout was responsible or triggering emergenc shutdown procedures

at the Marathon Oil Corporation’s Marathon Ashland rener about 10 miles south o Detroit. During those

procedures, a carbon monoxide boiler ailed to shut down properl, causing a small explosion and the release

o a mixture o hdrocarbons and steam. As a precautionar measure, police evacuated a one-mile strip

around the 183- acre complex and orced hundreds o residents to seek shelter elsewhere.

• n ch c: reported that plant outages resulting rom the August 14 blackout reduced

third-quar ter earnings b USD 10 m or 12 cents per share. The power outage hit production at its Corunna,

Moore Township, Sarnia, and St. Clair River, Ontario, and Painesville, Ohio, acilities.

• d r i.: the largest drug store chain in the metropolitan New york Cit area reported that the

August 14 blackout orced the closure o all o the compan’s 237 stores. The compan estimates that lost

sales as a result o the interruption totalled approximatel USD 3.3 m.

• a: were closed in Toronto, Newark, New york, Detroit, Cleveland, Montreal, Ottawa, Islip, Sracuse,

Bualo, Rochester, Erie, and Hamilton. Together the cancelled over 1,000 fights.

• n y c: the comptrol ler’s oce estimated that losses topped USD 1 bn, including USD 800 m in gross

cit product. The gure includes USD 250 m in rozen and perishable ood that had to be dumped. The Restaurant Association calculated that the cit’s 22,000 restaurants lost between USD 75 m and USD 100 m

in wasted ood and lost business. Broadwa lost approximatel USD 1 m because o cancelled perormances.

New york Cit’s maor estimated that the cit would pa almost USD 10 m in overtime related to the outage.

• m: the lights went out ater 4 p.m., which meant that the major U.S. stock exchanges had

alread closed – limiting the impact on nancial markets. All the major exchanges and markets were up and

running on Frida, but man trading companies were still without power as the trading da began.



18

5.1. Trends aecting the BI risk landscape and power dependenc

5.1.1. general impact o blackout in ligHt o cHanged production processes

Manuacturers embraced “just in time” production in the 1990s, imitating Japan’s auto makers. The cut stock-

piles o parts and won discounts b buing more parts rom a smaller group o suppliers. But that let them

without a cushion o raw materials to ride out even small disruptions.

As an indicator o the above vulnerabilit, the Earthquake, Tsunami damage and power shor tages that idled

thousands o Japan’s actories in 2011 highlighted its role as a ke — and sometimes the onl — source o auto

parts, graphics chips and other high-end components. In act, toda, man manuacturers are currentl using

up the inventories that the had in stock beore the earthquake. A similar situation could occur as a result o a

larger power outage.

5. Considerations or risk management

6: J’ h (% )

Source: IHS Global Insight

Silicon Waers

60% 23%

TFT LCD Panels Semi-conductors

Japan

World

12%

c h 2011 J th eh h &

• a: some parts o iPad (e.g. the fash memor, the super-thin batter, the built-in compass, the glass

overlaing and the touchscreen) are produced exclusivel b Apple Japan. That is wh Apple had diculties

obtaining these components (logistical disruptions), even months ollowing the event.

• th: has shut 1 o its 2 LCD (liquid crstal displa) plants to recalibrate sensitive equipment knocked out

b the earthquake. Hitachi too has shut its LCD Toko actor because o damages and power cuts. Indeed,

LCD used in mobile phones and satellite navigation ma be in short suppl.

• s: has shut down 5 o its 6 laptop batteries actories in Japan. Other computer-makers ma be hit b

shortages o these batteries.

c

Japan represents 60% o the global silicon waer suppl. The silicon waers are used in man integrated circuits

and other micro devices, which are ke parts used to make a wide range o electronic equipment. Some o the

biggest silicon manuacturing units in Japan have been damaged b the earthquake and tsunamis and shortages

ma appear in a short time. Even i there are still alternative sources or these components, alternative suppliers

might also be acing shortalls because o the increasing demand, making it dicult or the manuacturers to nd

supplies elsewhere.




5.1.2. speciic impact based on car manuacturers

The vulnerabilit o automotive manuacturers to the power outages is ver pronounced, as the automotive

industr has been the rst industr to appl just-in-time production. A long suppl interruption means a signicant

risk o stock shortage, resulting in a high risk o production loss.

According to the site www.automotive-index.com, the majorit o the automotive suppliers are still located in

developed countries (Canada, German, U.S., etc.). However, man suppliers are also increasingl located in

developing countries. The energ suppl in these countries is less reliable, as can be seen in Figure 7. When

comparing the map o electrical power suppl b countr with the map o car manuacturing (Figure 8 ) and their

suppliers, it becomes obvious that the spread o locations show a signicant production in countries with lower

power reliabilit, such as Turke, India, Malasia and Indonesia.

7: q , 2010

Source: World Economic Forum

8: n 2009

Source: OICA

1 = insufcient and suers requent interruptions 7 = sufcient and reliable



20

5.2. Business Continuit Planning to mitigate power blackout risks

A well organised and implemented business continuit plan (BCP) is v ital or the survival o a compan

in case o a power blackout, as well as to gain access to insurance solutions or such risks. The holistic structure

o BCP includes both a compan’s internal actors, such as organisation, inrastructure and inormation and

decision-making channels, and external actors, such as technolog, customers, suppliers, environment, nature

and social setting.

A successul BCP bases on a r isk analsis which consists o

• Risk Identication Analsis (RIA)

• Risk evaluation

• Risk mitigation/adaption

• Risk Control

Once the risks have been identied and evaluated, it is advisable to draw up a list o measures. This will showthe energ compan specic areas o weakness o an business interruption in a sstematic wa. Examples o

all our risk management steps are outlined in the ollowing table:

9: r m . x

r if r e r r r c

n. w c a p

m e p c r

1. Power supply

inrastructure o

the company

Age over

60 years

Power outage

o acility and

production

estimate:

EUR 20 m a day

Twice a year Replacement by

new equipment

and machines

including

maintenance

program

Prevention o

power outage

Prio 1 EUR 15 m

one o costs

CEO

2. Blackout risk o

main suppliers

due to depend-

ency o public

power supply

Main

suppliers

without

own or

emergency

power

supply

Stop o single

production line

EUR 10 m loss

a year

Five times

a year

Main suppliers

install own power

supply

Prevention o

production

stop

Prio 1 EUR 5 m to

8 m

CEO o main

supplier

3. Loss o public

power grids due

to wild re

Wild re

caused by

heat and

drought

Power outage

o acility and

production

estimate:

EUR 20 m a day

Several times

especially

during the

summer time

Underground

installation o the

high voltage

power lines and

additional power

backup

No exposure

to loss or the

power lines

Prio 2 Falls under

responsibility

o the power

supplier

volunteer

nancing/ participation

o the manu-

acturing

company

CEO o public

supply com-

pany and CEO

o manuactur-

ing company




At the end o the threat analsis, the ollowing ke questions ar ise regarding business continuit management.

• Are the critical unctions and processes in the compan dened?

• Does useul documentation exist concerning requenc, scale and causes o business interruptions?

• Do comprehensive disaster recover plans exist where the necessar strategies, data and operating

resources are laid down or business recover?

• Are the IT and communication sstems sucientl protected, so that the can resume operation within

the required time ollowing incidents?

• Are there plans which are tested and updated regularl b means o practice drills?

description o business continuity planning (bcp) elements

b

concerns all divisions o the compan and requires cooperation at all hierarch levels. Onl a clearl structured

business continuit organisation can ensure that strategies are developed, established, maintained and properl

implemented in an emergenc.

People involved in preparing and maintaining the business continuit plan need to be acquainted with the

compan’s inrastructure and processes and suited to the tasks in question. Responsibilities within the BC

process as a whole need to be clearl dened at all times.

The top position in the BC management should be held b a representative o the highest compan level to

ensure high strategic priorit within the compan. A crisis team could operate locall and objectivel in the

closest possible proximit to the emergenc while emergenc service teams were saeguarding the inrastructure

and recover teams were alread starting with specic disaster recover activities.

b i a (bia)

is the cornerstone o BCP, as it orms the basis o the urther recover strateg. In order to determine the relevant

business processes at risk o ailure and describe them in detail in terms o their importance and impact, questions

are put to the senior management. Based on the inormation received, an analsis is carried out to ascertain how

long the compan can continue to operate without its existence being jeopardised i areas identied as being at

risk ail. Here, an interdependenc and contingenc losses arising rom the power outage must also be taken

into account.

The business impact analsis results in statements about:

• Loss potentials

• Restart times or critical business unctions, and also

• Emergenc sta, inrastructure and contingenc workplaces

d

la down, step b step, the procedure to be ollowed – rom the alerting routine to resumption o the business

unction.

The result should be a group-wide business continuit guideline that denes the ke data o the BCP and which

the entire Board o Management approves as a binding requirement. The BC guideline will include the business

continuit organisation, the business continuit master plan and all the measures or maintaining, exercising,

auditing and developing the BCP.



22

t h bcp

The best business continuit planning can ail in an emergenc i it is not constantl adapted to current

conditions and regularl practised. Tests, training, audits and simulations are the supreme discipline o business

continuit planning.

Internal and external audits are also used to ensure the qualit o BCP. To this end, as part o its responsibilities,

the BC management checks whether the rules agreed beorehand are complied with in the individual business

units and whether the BC organisation and BC set-up tall with the planning in everda lie.

As a result o the increased reduction o redundancies and the outsourcing outlined beore, the BCM Manager

has to include power suppl as one o the business critical processes into the BCP.

This could be addressed in var ious was:

• Ensure, that or business critical processes multiple sources are available

• Ensure, that the impact o a power outage is reduced b investing in technical backup units (e.g. emergenc

power suppl)

• Ensure, that cost benet analsis relocating or outsourcing business critical processes take the additional risk

o power outages into account, which might lead to the decision to locate the process in another countr than

originall planned.

5.3. Risk transer solutions

5.3.1. principles o insurability

Insurance clients benet rom protection against unexpected losses and peak risks as well as reed up capital

which can be deploed otherwise. The insurance industr enables thereore economic growth and innovation b

reducing volatilit and providing capital relie. Depending on their needs and the insurance markets’ productrange, coverage extent and conditions var. In order to transer risks to the insurance industr a set o criteria

has to be considered:

• r: The time and location o an insured event must be unpredictable and occurrence itsel must

be independent o the will o the insured (i.e. accidental).

• a : The requenc that an event will occur and severit o the resulting damage can be estimated

and quantied within reasonable condence limits.

• m: A large number o endangered parties must join together to build a risk pool in which risk is

shared and diversied at economicall air terms.

• e : Insurers must be able to charge a premium that corresponds to the underling risk

including capital costs and expenses.




5.3.2. current risk transer solutions

Thereore, blackout related risks can be separated into insurable versus not insurable r isks.

i

• Propert damage (PD), business interruption (BI ), insurance or utilities

• BI extensions insuring ailure o power suppl or commercial and industrial enterprises

• PD insurance or private households

n

• Unlimited and uncontrolled covers or generall insurable exposures

• Frequent losses (e.g. short term power blackouts)

• Operational risks

Electricit producers, distributors and consumers o electricit have various options to insure risks arising rom

power outage.

e

Producers usuall bu propert damage and business interruption insurance. These covers cushion or prevent

nancial loss due to a reduction in turnover, i such reduction is due to material damage to insured propert

on the insured premises. Covered perils are re, explosion, social perils and natural perils in re business

interruption insurance and various tpes o machiner ailures in respect o machiner breakdown insurances.

In general, distributors o electricit have the same options or business interruption coverage as producers.

Since the distribution net with its transmission and distribution lines is usuall heavil exposed to natural perils

such as wind, ice storm and earthquake, insurance coverage ma be limited regarding both propert damagewhich triggers BI and insured perils.

BI insurances or both producers and distributors usuall avoids requenc losses b respective monetar

deductions. These provide or sel-insurance b the insureds in case o minor interruptions in electricit suppl.

Some airl new insurance products oer nancial income protection against adverse weather conditions.

These normall appl to reduced electricit consumption ar ising in connection with warmer than expected winter

seasons, i.e. do not depend on accidental loss events. Oten such covers are determined b indexes – so-called

parametric covers – rather than b the actual loss sustained as is the rule in Propert and Casualt insurance.

In addition, special BI extensions exist which cover nancial loss in connection with ailure to produce or deliver

electricit ollowing malunction o data that was not caused b a phsical loss or damage. Insured perils include,

data corruption or malunction o data due to operating errors, hacker attacks or data malware.

c

Consumers range rom industrial and commercial enterprises to public authorities. Industrial and commercial

enterprises bu insurance against both material damage and BI due to ailure o electricit. Usuall or both tpes

o covers material damage on the premises o the insured is required. Such coverage onl exceptionall includes

the transmission and distribution lines as the accumulation potential is considered to be high. In case the eared

event does not occur at the insured’s location but at a supplier’s site, this tpe o BI extension is called dependent

BI or contingent BI.



24

5.3.3. uture risk transer products

Phsical damage to premises or distribution lines o electricit producers and distributors are likel to remain

the main exposures. Contingent BI exposures remain the most important eature or electricit consumers.

Subject to an increasing trend or electricit interruptions, consumers’ preparedness to bu specic insurance

coverage is likel to increase. The insurance industr ma be able to include the most requent ailures due to

damage to transmission and distribution lines and consequentl manage the increased accumulation potential.

Nonphsical damage business interruption insurances, like coverage or fuctuations in the weather pattern,

volcanic ash clouds or pandemics, will hardl become more than complementar. Reasons or this are the

accumulation potential, the low number o insurers prepared to oer coverage, high premiums, scarce capacit

and a small number o interested parties to bu such coverage. However, additional elements o nonphsical

damage coverage ma be designed to cater or specic needs o industrial and commercial clients. Perils that

could suit such purpose are a lack o cooling water or power plants due to extended periods o drought or

interruption o electricit production due to saet measures required b public authorities. Interruptions due to

saet concerns have recentl taken place in Japan as a consequence o earthquake damage to the Japanese

power and distribution industr.

BI insurance not based on phsical damage ma, in addition, move awa rom the indemnit principle. Fixed sums

insurances or BI loss could use parametric triggers such as the number o hours or das o electricit ailure.

5.3.4. residual risk acceptance

The risk that remains with the threatened subject is the residual risk. It is either not insured or not entirel

insured:

• One o the main reasons or not insuring an insurable exposure is the amount o premium required

or coverage.

• Insurers accept onl a part o insureds’ exposures. The introduce sub limits, risk or loss retentions.

• The boundaries between insurable and noninsurable risks are not clear cut. In some instances seemingl

noninsurable risks can be made insurable (high risk retentions and exposure limitations). Furthermore, the

insurance market is developing and extending the limits o insurabilit. However, insurabilit generall ends

where the occurrence o the eared event or the date o occurrence (e.g. in lie insurance) is not ortuitous

anmore.

Potential insureds need to customise their insurance protection considering the above mentioned restrictions

and accept some residual risk.




6. Conclusion

The power blackout risk is generall underestimated. Blackouts during the last ten ears in Europe and Nor thern

America have demonstrated an increasing likelihood o supra-regional and long-lasting blackouts including high

economical losses. Due to the increasing interconnectedness in combination with rather old inrastructure we

expect this risk to increase in both requenc and severit.

Politics have to establish clear rameworks or the governance o power suppl inrastructures. This is a necessar

step to enhance resilience o power grids. The main responsible stakeholders who have to take care o a reliable

power suppl are public and private utili ties as well as sstem / network operators.

Insurance buers have to be aware that the ma suer during a blackout noncovered losses which require pre-

cautions against damages. For the insurance industr this might trigger an increasing customer demand not onl

or power blackout risk solutions, but also or suppl chain and nonphsical business interruption risks in general.

It presents a great challenge, however, to handle those intangible risks while also oering a great opportunit to

invest in the development o tailored insurance products (potentiall combined with busines continuit management

services) which ull customer demand and the requirements or insurabilit. Furthermore insurers need to review

their own BCM capabilities concerning blackout risks to make sure that the can provide services even in the case

o long-lasting blackouts.

When risk management is done well and risks can be reliabl quantied, insurance is an important mechanism

or risk transer. All parties, insurers, electricit industr and consumers should engage in risk dialogues to pro-

activel address and manage related power blackout risks with the aim to maintain one o the most important

goods in a civilized societ, a reliable suppl o electricit.



26

7. Annex

b 2003, u.s./c14/15/16

wh h?

On August 14, 2003, large portions o the Midwest and Northeast United States and Ontario, Canada,

experienced an electric power blackout. The outage aected an area with an estimated 50 million people and

61,800 MW o electric load in the states o Ohio, Michigan, Pennslvania, New york, Vermont, Massachusetts,

Connecticut, New Jerse and the Canadian province o Ontario. The blackout began a ew minutes ater

4:00 pm Eastern Dalight Time and power was not restored or 4 das in some parts o the United States.

Parts o Ontario suered rolling blackouts or more than a week beore ull power was restored.

c:

The blackout had several causes or contributor actors:– Inadequate vegetation management (line contact b trees);

– Failure to ensure operation within secure limits;

– Failure to identi emergenc conditions and communicate that status to neighbouring sstems;

– Inadequate operator training;

– Inadequate regional-scale visibilit over the power sstem;

– Inadequate coordination o relas and other protective devices or sstems;

– Inadequate interregional visibilit over the power sstem;

– Dsunction o a control area’s sstem;

– Lack o adequate backup capabilit to that sstem.

i:

In Canada, gross domestic product was down 0.7% in August, there was a net loss o 18.9 million work hours,

and manuacturing shipments in Ontario were down USD 2.3 bn. The losses were mainl related to perishable

goods spoilage, production and computer equipment shut down and business income losses.

In United-States, Anderson Economic Group estimates the likel total cost to be between USD 4.5 bn and

USD 8.2 bn. This includes:

– USD 4.2 bn in lost income to workers and investors;

– USD 15 m to to USD 100 m in extra costs to government agencies (e.g. due to overtime and emergenc service

costs);

– USD 1 bn to USD 2 bn in costs to the aected utilities;

– between USD 380 m and and USD 940 m in costs associated with lost or spoiled commodities. >

Source: NOAA

14 U.S.-Canada Power System Outage Task Force Final Report on the August 14, 2003 Blackout in the United States and Canada: Causes and Recommendations15 The Economic Impacts of the August 2003 Blackout, prepared by the Electricity Consumers Resource Council (ELCON) – February 9, 200416 http://www.policyholderperspective.com/2009/06/articles/frst-party-property/2003-blackout-held-to-involve-property-

damage-sufcient-to-support-claim-under-property-policy/




The U.S. Department o Energ (DOE) has published a total cost estimate o about USD 6 bn. This number is

the most requentl cited cost estimate in press coverage o the blackout.

A post-blackout stud underwa b CrainTech (a business news publisher) , Case Western Reserve Universit’s

Center or Regional Economic Issues and Miriex Sstems LLC has produced some preliminar results based

on a surve o businesses in Ohio, New york, Pennslvania, Michigan, Wisconsin and Southern Canada.

These ndings include:

– A quarter o the businesses sur veed (24%) lost more than USD 50,000 per hour o downtime

(i.e., USD 400,000 or an 8-hour da). And 4% o the businesses lost more than USD 1 m or each hour o

downtime.

– Almost 11% o rms sa the blackout will aect their decision-making with regards to either growth at the

current location or relocation to another.

An impor tant indirect—and impossible to quanti—cost o the blackout was the “cascading” consequences

on regions outside o the blackout ootprint created b manuacturers’ just-in-time (JIT) production scheduling.Deliver times or parts and materials to assembl plants are timed to meet scheduled production and thus

minimize or eliminate the cost o inventor.

On April 22, 2009, the Appellate Division o the New Jerse Superior Court published its March 9, 2009 opinion

holding that the massive August 14, 2003 electrical blackout o the eastern United States and portions o Canada

inficted “propert damage” sucient to support a propert insurance claim. The court held that the loss o

unctionalit that resulted when protective saet equipment shut down the power grid and caused the blackout

qualied as “phsical damage” or propert insurance purposes. As a result, insurers were not entitled to

summar judgment in their avour on claims (e.g. or ood spoilage and business interruption) resulting rom

the blackout.

blackout 2003, italy/swiss17/18/19

wh h?

• 28th September 2003: Italian power sstem aced its worst disruption in 50 ears, which also aected

parts o Switzerland with 56 million people in total

• Electricit was restored ater 1.5 hours (CH) and 18 hours (Ital)

c:

• Inabilit o the Swiss sstem operator to reclose the Mettlen-Lavorgo line ater its initial ailure.

•

Ineective communication and subsequent slow and ineective emergenc responses b the Swissand Italian sstem operators.

• Angle and voltage instabilit in Ital just prior to its collapse.

• Insucient tree cutting under the power lines.

i:

• Beside Switzerland and Ital, the networks in France, Slovenia, and Austria were aected and the blackout

led to a domino eect that ultimatel resulted in the separation o the Italian sstem rom the rest o the

European grid. >

17 Project Understand, White Paper on Security of European Electricity Distribution, 20.6.2007

(http://www.understand.se/docs/White_Paper_EN.doc)18 http://www.solarstorms.org/Italy2003.html19 http://www.semissourian.com/story/121022.html



28

• 30,000 people were trapped on trains.

• Several hundred passengers were stranded on underground transit sstems.

• Signicant knock-on eects across other critical inrastructures, commercial and domestic users which

suered disruption up to 48 hours.

• Subwa had to be evacuated.

• Cost to restaurants and bars in spoiled products and lost sales totalled up to USD 139 m.

blackout 2006, germany incl. western europe 20/21/22/23

wh h?

• On November 4, 2006 the German TSO E.ON Netz had to switch o a high voltage line to let a ship

pass underneath.

• Simultaneousl there was a high amount o wind electricit which ed into the grid 10,000 MW rom

wind turbines to Western and Southern Europe grids.

• Insucient communication about this switch-o led to instabilities o the requenc in the grid and

to overloading o lines.

• Devices had to switch customers o in the countries aected to cope with this lack o power in the

Western zone automatic.

• The blackout lasted up to two hours.

c:

• Ater manual disconnection o the high-voltage line the n-1 criterion o process securit was not ullled.

N-1 criterion means that an component ma ail and all other components are still below their limit.

As a result, even a relative l small power fow deviation could trigger the cascade o line tripping.

• Insucient co-ordination between transmission sstem operators.

• No access to real-time data rom the power units connected to the distribution grids.

• Lack o joint simulation training with neighbouring transmission sstem operators.

• Lack o coordination between operators’ internal procedures regarding grid-related, market-related and

other adjustments.

i:

• In France 5 million customers were cut-o.

• In German millions o customers were aected and in Belgium, Netherlands, Ital and Spain some

hundreds o thousands o customers were without electricit.

• Long delas in rail transport, aecting about 100 trains mainl in German.

• Subwa had to be evacuated.

• Costs to restaurants and bars in spoiled products and lost sales totalled up to USD 139 m.

20 Project Understand, White Paper on Security of European Electricity Distribution, 20.6.2007 (http ://www.understand.se/docs/White_Paper_EN.doc)21 http://europa.eu/rapid/pressReleasesAction.do?reerence=IP/ 07/11022 Final Report System Disturbance on 4 November 200623 http://www.worldenergy.org/ocus/blackouts/393.asp




nuclear catastropHe ollowing an eartHquake and tsunami triggered

station blackout, Japan 2011 24/25/26

The complete power suppl cut o o the nuclear power plant in Fukushima Dai-Ichi, Japan in March 2011

led to severe damages in the reactor units 1, 2 and 3 and resulted in signicant emissions o radiation into the

atmosphere. The tsunami which fooded the emergenc diesel generators caused the on-site power blackout

so that the operator was unable to keep the cooling sstems running. This power outage is a so called station

blackout (SBO). The impact was tremendous:

• Fukushima is rated as serious as the Chernobl catastrophe – magnitude 7 event, the worst on the

international nuclear event scale though Fukushima released onl 5 to 10% o the radiation released

b Chernobl.

• Mandator evacuation zone or all residents within 20 km.

•

Voluntar evacuation o all residents between 20 and 30 km.

• Agricultural products including milk and vegetables rom the region got contaminated.

• Decades will be required or cleanup and containment.

• Estimates on reinsurers’ share o losses rom the Japan disaster could be between USD 20 bn and USD 30 bn

out o the disaster’s total gross loss estimated at USD 40 bn to USD 65 bn. These estimated losses would

exceed the 20 bn to USD 25 bn in losses ceded to reinsurers rom the 9/11 terror ist attacks, and the USD 18 bn

to USD 24 bn incurred b reinsurers rom Hurricane Katrina in 2005.

As a consequence o the earthquake and tsunami three other nuclear plants, six coal-red plants and 11 oil-red

power plants were shut down. This is 11 percent o Japan’s total power. As a consequence actories had to

operate at reduced levels, which will have a signicant impact on Japans’ econom. JPMorgan Securities Japan

estimates that the countr’s gross domestic product will shrink in the second quarter b about 3% on anannualised basis, with about hal o that decline resulting rom the power shortage.

24 http://mrzine.monthlyreview.org/2011/lochbaum300311.html25 http://perspectives.mvdirona.com/2011/05/31/WhatWentWrongAtFukushimaDai1.aspx26 http://www.insurereinsure.com/?entry=3533

picture alliance/dpa



30




cro

Tom Grondin

Chie Risk Ocer

AEGON

Emmanuel Van Grimbergen

Group Risk Ocer

Ageas

Tom Wilson

Chie Risk Ocer

Allianz

Robin Spencer

Chie Risk Ocer

Aviva

Jean-Christophe Menioux

Group Chie Risk Ocer

AXA

Marco Vet


Eureko

Steano Ferri


Generali

Rene Cado

Head o Internal Audit & Actuarial Division

Groupama

Eberhard Müller


Hannover Re

Jeroen Potjes

Chie Insurance Risk Ocer

ING

Jo Oechslin


Munich Re

John Fole


Prudential

David Cole


Swiss Re

Axel P. Lehmann


Zurich Financial Services Group

d:

The material and conclusions contained in this publication are or inormation purposes onl and the editor and

author(s) oer(s) no guarantee or the accurac and completeness o its contents. All liabilit or the accurac and

completeness or or an damages resulting rom the use o the inormation herein is expressl excluded. Under no

circumstances shall the CRO Forum or an o its member organizations be liable or an nancial or consequential

loss relating to this publication.

© 2011

CRO Forum



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The CRO Forum’s Emerging Risks Initiative

The Emerging Risks Initiative (ERI ) was launched in 2005 to raise awareness o major emerging risks relevant to societ

and the (re)insurance industr. In 2011 the initiative is chaired b Markus Aichinger (Allianz SE) and consists o nine

members representing AIG, Allianz, AXA, Generali, Hannover Re, Munich Re, RSA, Swiss Re and Zurich Financial Services

Group. This initiative pursues the ollowing goals:

– Raising awareness and promoting stakeholder dialogue.

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