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Companies in Europe and the US underestimate power blackout risks

  • High economic losses for businesses
  • Space weather may cause large-scale blackouts in 2012/13

PRESS RELEASE - Munich. November 23, 2011

The emerging risks of power blackouts

Companies in Europe and the US generally underestimate the risk of supra-regional power blackouts with high economic losses, says a joint study by Allianz Global Corporate & Specialty (AGCS) and The Chief Risk Officer Forum. Blackouts are expected to increase in both frequency and severity because of aging power infrastructure, a high dependence on information and communication technologies, and a lack of preparedness on the part of businesses. Further, high-voltage transformers could be severly affected by solar storms resulting in large-scale blackouts. There is also the potential risk of cyber attacks on power infrastructures. Further information is available at: http://www.agcs.allianz.com/insights/white-papers-and-case-studies/

The 2003 blackout in the US and Canada is well remembered and caused an economic loss of between 4 and 8 billion US dollars. Shorter blackouts are very common and can still cause economic losses from lost production, inactive labor and facilities, or damage to electronic data and products. Even a limited outage also has significant economic impact – equivalent to an estimated loss of about 350,000 euros per event in steel works, about 6 million euros per hour in financial trading and 30,000 euros per minute in telecommunications.

Companies in Europe and in the US may face severe blackouts more often as grid stability will decrease without substantial investments in power supply infrastructures. The existing energy infrastructure is not ready to cope with the rise in renewable energies such as wind or solar power which are volatile supply sources and often produced far from the centers of demand. “Smart grids with metering, communication and control technologies and new storage and transport capacities are needed to handle the growth of renewable energies,” says Michael Bruch, risk consultant for AGCS. Moreover, existing grids need to be expanded to link decentralized sources of power generation and enable cross-border trading of power and grid services.

The Allianz study confirms that power blackouts are a systemic risk. “Major blackouts, most often, are not caused by a single event, but by a combination of several deficiencies,” explains Markus Aichinger, Senior Risk Manager at Allianz SE. He says a common situation is high power demand along with high grid utilization which, in combination with faulty switching operation, can easily cause a blackout. Further, aging supply infrastructures can trigger knock-on effects, which may result in blackouts in neighboring grids, too.

Another potential trigger for large-scale blackouts within the next two years may be space weather events. Geomagnetic induced solar flare storms follow an 11-year cycle and are expected to peak again in 2013. Particularly in the northern hemisphere, space weather events could severely damage high-voltage transformers whose repair can take days or even weeks.

Reducing power blackout risks

Companies ought to prepare better for blackouts to mitigate losses, say the Allianz risk experts. First of all, companies should invest in emergency power supply equipment. This would at least bridge a limited outage and prevent business interruption. Secondly, a core risk management measure is a properly managed business continuity plan that takes power blackouts into account. The existence of such a plan is also a prerequisite for making such risks insurable at all. Traditionally, covered blackout losses require a direct physical loss or damage as trigger for a business interruption. However, blackouts may lead to business interruption without any physical loss. This demands new risk transfer solutions. “Covering non-damage business interruption is unknown territory for most insurers,” says AGCS expert Bruch. “But in response to these new risks, we will offer highly customized solutions to support our multinational clients.”

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