Power Industry Presents Evolving Risks

By Denise Johnson | September 19, 2014

The power industry requires a lot of underwriting expertise due to its unique risks and complex supply chain.

According to Aon Risk Solutions’ CEO, the power industry is rapidly developing.

“Power is one of the fastest growing segments in the U.S,” said Tom Fitzgerald, CEO of Aon Risk Solutions U.S. retail operations. “Between rapid expansion and growth, legislative regulations and supply chain complexity, power and utility operators need a partner with an intimate understanding of the unique risks they face every day.”

Just this year, Aon Risk Solutions created a global committee to address the unique risks related to the power industry.

During a podcast interview with Claims Journal, Mark Fishbaugh, the recently-appointed practice leader for Aon Risk Solutions’ national power practice group explained the different risks among coal, nuclear, gas and renewable energy and why the supply chain in the power industry is more complex than in other industries.

Listen to the podcast: Understanding the Risks Within the Power Industry

“It [the power industry] creates a very complex underwriting process that requires expertise specific to this industry,” said Fishbaugh.

He said that while they all share the goal of generating power, the risk profile differs among coal, nuclear, gas and renewable energy.

“You have to have the loss engineers, claims handling experts and loss preventions services to understand this risk well,” said Fishbaugh.

Each type of power has its own unique risks such as the physical size and location of the plant, regulations, use of potentially unproven technology, regulated versus non-regulated companies, project finance arrangements and ownership structures.

“When you develop something new, the less history you have on it, the greater you have for the uncertainty of loss in the short term and the long term,” said Fishbaugh.

Risks associated with:

Coal – Aging fleet, regulatory pressures, impact of low gas prices.
Gas – New technology, unknown exposure.
Renewable Energy – Very new and fast moving technology, no long term historical track record, uncertainty of tax credit.
Nuclear – Built in hazard as well as disposal, which is highly regulated.

The power industry has to manage the transmission and distribution grid to get the power where it needs to go, said the Aon practice leader.

“The risks here is really the disruption of the interconnection,” said Fishbaugh.

Fishbaugh said that as a result of the variety of risk associated with the power industry, decisions on rates, retentions and limits are typically made on a case by case business.

The risk type doesn’t change much from year to year, the Aon practice leader said. The day to day operational management is very complex and extreme weather conditions, periods of high demand or fuel cost fluctuations add to the risks. In addition, there is frequently no long term historical track record.

The degree of risk is what really changes, said Fishbaugh. Companies and insurers are focusing on the aging infrastructure and modeling natural perils, such as flood surge.

Additional focus is being placed on new generation technology intended to generate more megawatts more efficiently, vegetation management, ash ponds and dams.

The focus on ash ponds is appropriate given recent news stories published in the past few years.

North Carolina legislators introduced a coal ash pollution bill this year to address the massive 35 million gallons of coal ash spilled at a Duke Energy plant into the Dan River and a Tennessee utility agreed to pay $27.8 million to settle claims associated with property damage caused by a huge coal ash spill in 2008.

Asset security and cyber-risk are also concerns.

“It’s been specifically noted in this sector,” Fishbaugh said. “Not only for personal information protection, but also the potential terrorism threats or other threats to the grid.”

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