2011-12 Critical Loss Control Issues for a Power Generation Business to Consider
During 2011 and 2012, we have seen a growing interest by power generation facilities (and their financing and insurance partners) in revisiting their contingency plans to address critical equipment failures.
While contingency plans for the failure of rotating equipment used by power generating facilities is well studied and often addressed by the Original Equipment Manufacturers (“OEMs”) of this type of equipment, there is growing industry recognition that potential failures of other types of critical/ long-lead time equipment must be evaluated on a more encompassing basis than in the past.
The evaluation issues at hand relate to both the “tactical” (i.e. immediate) need to keep power generation operations up and running and also the often overlooked “strategic” (i.e. longer term) need to make sure that the equipment purchased is the best option for the long term objectives a power generation facility (or the ultimate objectives shared by the owner). Given the usually significant cost of high-voltage generation equipment and the long lead times required to obtain this equipment, an understanding of both these needs and how they might differ is of vital importance.
The observation that there is often a disconnect between tactical needs and longer term strategic needs when considering the unforeseen replacement of equipment might be best illustrated by an example of a GSU transformer failure.
The act of simply replacing a GSU transformer with the exact same equipment (or something close to it) might not be the best option given the strategic goals of the power generation firm at hand for reasons which include:
- The failed transformer might not have been the ideal equipment for the power generation system in the first place;
- The failed transformer might be undersized due to output or efficiency enhancements achieved in other parts of the power generation system;
- The power generation facility might seek to build commonality in its purchases of critical equipment thus allowing many facilities to share a small inventory of like equipment for spares. This may be preferable to each facility holding its own unique spare inventory which makes the aggregate cost of managing and financing of all the spare equipment very high.
Along these lines, high-voltage GSU transformers and related equipment that connect to distribution networks were a focal point of many insurance industry meetings in recent months (AEGIS, Munich Re/ HSB etc). As one would expect from this interest, insurance companies and financing partners are increasingly asking for more detailed information on critical equipment and contingency plans in case of failure.
This interest is driven by a growing appreciation in the marketplace of both the large loss potential (severity) and the perception that frequency of loss will be escalating as a result of:
- the increasing age of installed equipment,
- situations of increased / stressed loading driven by demand, and
- the new analysis of data associated with the key drivers of economic losses from insurance companies that insure the global power generation industry.
Importantly, the above perceptions are in addition to the well recognized issues of the long lead times required to source new equipment and the usually complicated logistics required to move the equipment from a location to where it is needed.
Interviews with experts at insurance companies, insurance brokers, and power plants have made it clear that all parties are increasingly asking for detailed descriptions and documentation of what equipment is in the field and what specific monitoring and contingency plans are in place to address a failure.
It is interesting to note that several recent presentations have highlighted a related concern. Specifically, while many firms might have this information, they do not always keep it in a centralized place that can be readily accessed and transmitted to others to expedite the replacement of a piece of critical equipment.
Accordingly, below are essential considerations for failure planning and risk control:
- Where will all the information pertaining to critical/ long lead time equipment be kept?
- Are there recent high resolution photos of all transformers and related critical equipment on file that show location attributes of the equipment (i.e. surrounded by blast walls or other engineering);
- Are the photos of all transformer (and other equipment) nameplates clear enough so all the information on each nameplate is easily readable;
- Are there updated site plans that show new constructions that might impact the replacement process?
- Can the above information be quickly transmitted by e-mail?
- Who are the decision makers should a piece of critical equipment fail?
- If a piece of equipment fails, do you want to replace the equipment with exactly the same equipment?
- Are all appropriate parties on the same page as respects the calculation of business interruption costs and how these costs will be addressed if a critical piece of equipment fails?
- Who are the internal and external parties that need to be notified?- Who is the quarterback for making these notifications?
The issues at hand go beyond economic self-interest. Rather, there are both life safety and governmental regulation interests to be weighed as well. When power generation is shut down, people can be hurt and commerce and communications impacted.