Finance
Power outages – “One second without electricity may be one second too many”
Electricity is the lifeblood of modern civilization. If there’s even a brief power cut, we quickly realize just to what extent we depend on electricity. Home’s no longer cozy, there’s no light in the evenings and dinner has to be eaten cold. But industry depends on a continuous power supply much more than private individuals do, and even short power outages can have disastrous consequences.
There’s now been no power for over an hour. The technical head of the copper-smelting works is starting to get antsy. Inside the vats, the copper is starting to cool down. If the power outage continues for some time, the copper will cool down, solidify and destroy the entire smelting works. Furnaces, vats, pipes: the entire facility would become blocked up with copper and would have to be rebuilt from scratch. “In a paper works, a mini power outage of a single second is enough to put the entire facility out of action for several hours”, explains Michael Bruch, Head of R&D, Risk Consulting at Allianz Global Corporate & Specialty (AGCS). Even if there’s only a brief power cut, this means that the equipment that rolls up the paper no longer works. And this will cause the paper to tear. If this happens, the employee in charge has to stop production and reinstall everything. This can take several hours.
Michael Bruch, Head of R&D, Risk Consulting at Allianz Global Corporate & Specialty“If we cover all losses, no matter how small, things will get too expensive for our customers.”
If entire factories are brought to a standstill that lasts for hours, losses can run into the millions, even resulting in economic ruin. To avoid having to pay any losses out of their own pocket and, in a worst case scenario, having to file for bankruptcy, company owners take out “business interruption insurance”. Depending on the business area and the need for electricity, such an insurance policy can be a real life-saver. Michael Bruch explains why.
allianz.com: Which types of company are particularly dependent on electricity?
Michael Bruch: “The more production is automated, the more vulnerable it becomes to power outages. Manufacturers of semi-conductors or the steel industry are particularly hard hit. Textile or glass production, on the other hand, is at the less vulnerable end of the spectrum. But even here, losses can quickly run into hundreds of thousands. We apply the basic principle of insurance, i.e. we help out when things get really tough. To protect companies against short power cuts, we provide our customers with consultants who can help set up an emergency power supply. If we were to cover all losses, no matter how small, we’d have to raise premiums, but then our policies would no longer be affordable for our customers. So it makes sense to invest more in loss prevention.”
allianz.com: Often major losses are also caused by a variety of severe weather events. Are power outages caused by weather conditions on the rise, too?
Michael Bruch: “Definitely, and there are two reasons for this. Firstly, as the world’s population increases, people also move into higher-risk areas such as regions that are prone to flooding or start building in areas where there are frequent tornados. Ever-expanding mega cities are beginning to encroach on dangerous regions, because they are simply running out of space. Secondly, climate change has an effect. We are seeing an increase of extreme weather situations such as drought and flooding.”
Not everyone is free to choose their own location
Some industries simply aren’t free to choose their head office locations. For instance, marine transport companies have to be based in ports. Manufacturers of raw materials also don’t have the choice to decide where they will mine coil or iron or extract oil. They have to base themselves where the raw materials can be found. “If risks cannot be mitigated by choosing more suitable locations, power outages certainly need planning for. In an ideal case companies will then think through all possible emergency scenarios: What happens if there’s a power cut? But then they also have to think further. Can we then still use the Internet? How long will our fresh water supply last, if all pumps are powered by electricity? During one such role-playing exercise a customer had even saved his contingency plans for power outages on his computers. But of course they didn’t work without electricity”, explains Bruch.
allianz.com: Quite apart from natural catastrophes the increasing use of technology also means that there’s an additional risk that hackers might cause power cuts. How is this possible?
Michael Bruch: “These days, quite a lot no longer happens right at company head offices. Many services, software applications or even employees are no longer based on site. Software is frequently hosted in a cloud, employees work from home or from any location worldwide. This has given rise to many cyber-attacks, with hackers infiltrating the company network, e.g. accessing the control software of a generator and causing it to overheat. This can then create genuine physical damage and could result in a power cut. Domino effects can also mean that areas outside of companies quickly suffer as well.”
“Germany benefits from reserves that predate the liberalization of the electricity markets.”
allianz.com: If you compare how long individual citizens of different countries have to cope without electricity per year, enormous differences emerge. Why is that?
Michael Bruch: “Citizens of countries such as Germany or Switzerland only have to cope with 17 minutes of power cuts a year on average. In some northern European countries or in parts of the US this figure can be ten times as high. So why is this? Germany mainly benefits from reserves that predate the liberalization of the energy markets. Northern European countries have to bridge enormous distances with only one power cable. If this cable is out of action, they’re left without any alternative, whereas countries in the heart of Europe, where the power supply isn’t so centralized, can quickly fall back on alternative supplies from other regions.”
Power outages across Europe in minutes
allianz.com: How long does it take, until things become critical for the population during a power outage?
“This depends entirely on the time and the location of the power outage. If Berlin were without electricity for 24 hours, this could have serious consequences: quite apart from lighting, fridges and ovens, after some time the heating and check-outs in shops and filling stations will shut down as well. So you could no longer go shopping. The water supply would also be at risk, because all pumps are powered by electricity. However, how well people are able to cope with a power cut seems to be key. In countries where people are used to such things, they don’t panic as quickly. For instance, in India in 2012, 620 million people were left without power, which is almost twice the entire population of the US. This was the biggest power cut anyone has ever seen. But in India people have a lot of emergency generators because they have gotten used to coping without power. Over here, things would be quite different, because in our experience power is normally quickly restored.”
