How climate change, equipment demands affect electrical power plant risk

Most insured losses to power plants are caused by machinery breakdown, but extreme weather, an increased reliance on wind and solar and a push for high-specification material is also affecting risk, suggests a new report by Marsh Inc. 

Marsh announced last week a report, titled Common Causes of Large Losses in the Global Power Industry, which is based on 150 claims. Those claims — from 2004 through 2012 — arose from accounts handled by Bowring Marsh, the exclusive, specialist international placement broker for New York-based Marsh. The report broke down losses by event and dollar value.

“Weather-related events, while comparatively rare at only 12% of the losses sustained, accounted for 22% of the total cost in US dollars,” Marsh stated in the report, published by Marsh Risk Management Research. Of the $1.8 billion in losses during the study period, $394.3 million were related to weather.

“With climate change and the effects of greenhouse gas emissions high on the social and political agenda and the increased frequency of ‘100-year’ events, weather-related catastrophes are taking a significant personal and commercial toll worldwide,” according to Marsh, which noted drought sometimes causes interruption to hydro power plants.

The claims on which the report is based incurred net losses of more than $2 million each to insurers, net of any applicable deductible, excess, or retention. Not all claims have been closed so the final settlement values could be slightly different. Bowring Marsh is Marsh’s exclusive, specialist international placement broker.

While 4% of losses from the claims studied were due to structure, 8% were fire-related and 76% were from machinery breakdown. Those machinery-breakdown losses added up to $1.0274 billion, which is 57% of the total measured by dollar value.

“While machinery breakdown makes up more than three-quarters of the total number of losses, its importance is considerably reduced when US-dollar value is used as the basis of measurement,” Marsh noted. The report broke down machinery breakdown by eight different causes, of which 26% were turbine blade failure, 21% were generator and 24% were transformer.

“The push for efficiency invariably involves using new techniques, technologies, and materials to reduce fuel costs and carbon dioxide emissions,” Marsh noted, adding there is “great pressure” on equipment manufacturers to “maximize tolerances” though high-specification materials. This, Marsh suggested, could result in “decreased corrosion protection with an accompanying increase in susceptibility and reduction in tolerance.”

Other sources of risk include deregulation, privatization and separating the power generation functions from transmission and distribution, which in some cases has “led to a divorce of responsibilities and created obvious challenges around incentives to invest heavily in power infrastructure projects.”

Renewable energy can also introduce risk, Marsh suggested.

“The volatility of supply from these sources may result in blackouts from undersupply or, in the case of oversupply, grid instabilities.”

Climate change can influence risk, Marsh suggested, because an increase in air temperature “may adversely affect the efficiency” of transmission and distribution methods.

“Floods, in particular, affecting plants either directly or more likely their suppliers, as well as windstorms affecting substations and transmission and distribution, are likely to account for a significant proportion of the losses sustained.”

Photo courtesy of Ontario Power Generation