The recent heatwaves seen in Europe, UK and the USA have all stretched infrastructure to its limit. For insurers it’s worth noting the knock-on effects of any local power grid failures;
The recent US heatwave that pushed the largest wholesale electricity grid in the world to declare grid emergencies should serve as a warning to power generators and their insurers, according to SAMP Risk, the insurtech subsidiary of Asset Performance Partners. Extreme heat events are creating a growing risk of power generation and backup plants being called to generate on an emergency basis. Failures in these situations can become incredibly expensive for power plants. The insurance market needs to respond by monitoring and pricing risk dynamically rather than continuing to underwrite this exposure based on static surveys.
Two emergency orders issued by the U.S. Department of Energy allowed power plants to run at maximum output beyond normal emissions limits and directed large facilities to switch to backup generation at short notice.
Alistair Moodie, Chief Product Officer, SAMP Risk said: “What happened in the US over the July 4th weekend is a preview of a risk the power industry and its insurers need to take seriously. In the U.K. for example, as heatwaves become more frequent, the National Grid ESO (Electricity System Operator) will be looking at how other operators manage extreme summer loads and at the tools available to them, including formally declaring an emergency to bring more generation capacity online.”
SAMP Risk highlights that sustained heat tends to work against supply. Higher temperatures typically bring lower wind speeds, reducing output from wind farms, while conventional power plants become less efficient in extreme heat.
For power generators, the financial exposure is twofold. First, plants miss out on significant revenue during high-demand, low-supply periods when they are unable to increase output to meet demand or experience a failure that stops the plant from operating. Second, and more seriously, if a plant cannot deliver the power it has committed to the grid, it becomes liable for buying replacement power on the open market, at prices that can spike dramatically during a grid emergency.
This is a risk that generators currently carry largely on their own balance sheets or transfer only partially into the insurance market through business interruption and capacity cover.
“This is a real and growing balance sheet risk for power generation businesses, and one the insurance market has an opportunity to respond to properly, through connected insurance” said Moodie. “As power gen operators come under pressure to increase supply during periods of extreme demand, telematics data from the site can give operators and insurers a live view of asset performance, so problems are caught before they become losses, and risk is priced on real operating conditions rather than assumptions. Think black boxes in cars – it’s exactly the same concept but for the energy market. It’s insurance that manages and prevents risk rather than simply kicking in at claim.”
SAMP Risk’s connected insurance platform uses real-time operational data to help identify emerging risk before it results in a claim, an approach increasingly relevant as UK summers bring more frequent extreme heat events and grid operators face closer scrutiny of their resilience planning.
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