Canadian Underwriter
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Storm Surge


August 1, 2013   by Neil Smith, Emerging Risks & Research Manager, Exposure Management Team, Lloyd's of London


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Neil Smith, Emerging Risks & Research Manager, Exposure Management Team, Lloyd's of London

It took less than two minutes for a 1989 geomagnetic storm to collapse the Hydro-Quebec power grid. The storm resulted in the loss of electric power to more than six million people for nine hours, with an estimated total economic cost of approximately $13.2 billion, notes a study published in 1998 in Advances in Space Research. The Canadian government has since invested $1.2 billion in protecting the grid infrastructure.

While the Quebec storm was not the most powerful on record – that distinction goes to the 1859 storm called the “Carrington Event,” so named for observations made by solar astronomer Richard Carrington – the economic cost demonstrates the destructive power of geomagnetic storms.

Geomagnetic storms are severe disturbances in the upper layers of the earth’s atmosphere caused by intense solar activity. These disturbances induce currents in long conductors on the earth’s surface, such as power lines. The additional currents can overload the electric grid system and trigger voltage collapse, or worse, damage the extra-high voltage transformers through which as much as 90% of consumed power passes, notes information posted on the U.S. Department of Homeland Security’s website.

With the aging of the North American electric infrastructure and our dependence on electricity, geomagnetic storms have the potential to create long-term, widespread power outages.

The economic costs of such events would be catastrophic. In the United States, the system of generation, transmission and distribution facilities was built over the course of a century. The American Society of Civil Engineers notes that centralized electric generating plants with local distribution networks were started in the 1880s and the grid of interconnected transmission lines in the 1920s. The majority of the distribution system was built between the 1930s and 1970s, adds a press release from the University of Pittsburgh, issued this past April.

The risk of intense geomagnetic storms and their destructive effects are elevated at the peak of a solar cycle. Solar activity follows an 11-year cycle.

For the current cycle, the geomagnetic storm risk is projected to peak in early 2015. While the probability of an extreme storm occurring is relatively low at any given time, it is almost inevitable that one will occur eventually.

Historical records suggest a return period of 50 years for Quebec-level storms and 150 years for very extreme storms, such as the Carrington Event, which occurred 154 years ago.

MILLIONS OF PEOPLE, BILLIONS OF DOLLARS AT RISK

Weighted by population, the highest risk of storm-induced power outages in the U.S. is along the Atlantic corridor between Washington, D.C. and New York City. Other high-risk regions are Midwest states, such as Michigan and Wisconsin, and regions along the Gulf Coast.

Throughout the United States, the total population at risk of extended power outage from a Carrington-level storm is between 20 million and 40 million, with potential durations ranging from 16 days to one to two years, notes Lloyd’s 2013 report, Solar Storm Risk to the North American Electric Grid. The duration depends largely on the availability of replacement transformers.

If new transformers need to be ordered, the lead time is estimated to be between five and 12 months for domestic suppliers, and six to 16 months for international suppliers, suggest estimates from U.S. government and U.S. international trade sources. If spares are readily available, the total transportation and set-up time for a large power transformer can range from a few weeks to months, depending on distance and logistical issues, adds Large Power Transformers and the U.S. Grid, a June 2012 report from the Office of Energy Delivery and Electric Reliability.

The total economic cost for a modern-day Carrington-level solar storm is estimated at between $600 billion and $2.6 trillion. (The economic costs of the outage scenarios are estimated by calculating the percentage of residential, commercial and industrial customers without power by state, and using the average amount of electricity consumed by each segment in each state per hour. The total amount of electricity “lost” for each sector in each state is then the product of these items.)

But smaller solar storms also have the potential to be highly disruptive and costly. Storms weaker than Carrington could result in fewer damaged transformers (about 10 to 20), but the total number of damaged transformers is less relevant than their concentration. The failure of a small number of transformers serving a highly populated area is enough to create a prolonged outage.

MAJOR IMPLICATIONS FOR INSURANCE

A severe geomagnetic storm or other space-weather event that causes major disruption to the electricity network in North America would have major implications for the insurance industry. If businesses, public services and utility companies are without power for sustained periods of time, insurers could be exposed to significant business interruption claims, particularly as back-up supplies are likely to last only for a limited period.

Typically, business interruption coverage under standard property policies will require physical damage. However, in the event of a major space-weather event, transformers could be damaged, leading to a physical damage trigger and potential claims from energy companies. Even in a case of pure voltage collapse without equipment damage, the incapacity of the grid itself could be deemed “physical damage” because it is unable to perform its essential function.

Business interruption is likely to be only one aspect of potential insurance exposure. A major space-weather event could disrupt supply chains and this might trigger contingent business interruption coverage. Again, there could be issues relating to physical damage triggers.

Major disruption to the power network is also likely to lead to wide-scale cancellation of events, such as entertainment and sporting events, which could affect insurers offering this type of coverage.

It is conceivable, as well, that major power outages could result in liability claims if, for example, employees’ safety was compromised or the public was put at risk. Furthermore, if companies and other organizations affected by a space-weather event were viewed as not taking appropriate preventive action, they could be vulnerable to directors and officers claims.

On the more extreme end of the spectrum, loss of power for a period of several weeks – as a result of a Carrington-type event – would cause major disruption to transport, food supplies and emergency and hospital services, to name just a few sectors. For example, if pumping operations had to be suspended, that would quickly affect water and fuel supplies, sewage systems and flood defences.

The absence of such fundamental services could lead to major and widespread social unrest with ramifications for the insurance industry as well as for society in general.

It is also likely that financial markets (especially given the concentration of financial services in northeast U.S. – one of the regions most at risk) could be significantly disrupted by a severe space-weather event, which would have major impact on global financial flows.

PREPARATION AND MITIGATION

The insurance industry can play a key role in helping businesses and communities better understand the potential risks they face from geomagnetic storms and assist in mitigating these risks. The industry can play an important role, also, in working with energy and utility companies, governments and others on strengthening preparation and mitigation efforts.

Better forecasting is essential. There are currently several space satellites in operation that can provide warnings of incoming bursts of plasma from the sun, which are termed coronal mass ejections. These warnings, which could arrive hours to days in advance, could allow grid operators to take preventive measures, such as switching off parts of the system, befo
re the storm hits.

However, magnetic field strength and orientation of incoming plasma – key ingredients in forecasting earth impacts – can only be measured with a lead time of 15 to 30 minutes. Additionally, these satellites are all past their mission lives and replacements are essential for monitoring solar activity in the near future.

Improvement in forecasting earth impacts will only be made by funding research targeted at providing timely predictions and continued investment in the infrastructure needed to measure impulsive space-weather events.

The electric grid can be hardened against the flow of geomagnetically induced currents (GIC) in regions with the highest risk of outage. Current blocking capacitors and GIC monitors can be installed to protect transformers and regulate power flow. While these measures represent additional costs to grid companies, the cost of prevention is much smaller than the price of damage that a single storm can create.

RISK INCREASES WITH SOLAR CYCLE PEAKS

Given the essential role electricity plays in society today, it is crucial to understand how natural hazards impact the reliability of the grid. The hazard posed by geomagnetic storms is one of the most troubling given the potential for long-term, widespread power outages.

The question is not if a geomagnetic storm will occur, but when. As the infrastructure ages and society becomes more and more dependent on electricity, the risk of a catastrophic outage increases with each peak of the solar cycle.