Consequences of Power Failure
The 2011 Allianz report — Power Blackout Risks: Risk Management Options — determined that a 30-minute power outage could result in an average $15,079 loss for medium and large industrial clients. For an eight-hour blackout, that number jumps to $94,000. In all, it was estimated that U.S. businesses suffered an annual economic loss of $104 billion to $164 billion due to power outages.
Geography can play a major role in the level of risk. The Edison Electric Institute states that 70 percent of power outages in the United States are caused by weather. Cities along the Gulf and Atlantic coasts, e.g., New Orleans, Miami, Mobile, Jacksonville, and Tampa, regularly deal with hurricanes and are at a heightened risk of extended power outages through the hurricane season. So too are cities in the Northeast that deal with annual ice storms or blizzards.
Larry Hunter, risk engineer for Allianz, says there really isn’t anywhere that is entirely protected from power outages: “You have hurricanes, ice storms, earthquakes, floods. And even in high population areas you have a lot of connections to the grid with a ground fault point that you can get disconnected from.”
Even an outage of a short duration can cause tremendous problems. Though it only lasted a day, the blackout of 2003 was one of the most widespread in history and impacted 10 million people in Canada and more than 45 million people in eight U.S. states. It affected water supply, transportation, communications, and business operations. A large number of factories had to close, and the auto industry was reportedly not able to resume full production for a week.
Adding to Utility Robustness
In the South, hurricanes knock out power to millions of homes and businesses almost every summer. Joseph Shorter, III, is executive director of the 7,000-acre New Orleans Regional Business Park. It is home to more than 80 different business entities, including the Michoud Assembly Facility, which until 2010 was used by Lockheed Martin for the construction of the Space Shuttle’s external fuel tanks.
Although New Orleans took the brunt of Hurricane Katrina, the business park was situated in the 20 percent of the city that did not flood. It temporarily lost power in 2005 for Katrina, but when Hurricane Isaac struck the city in August 2012, the business park stayed online.
Shorter says one of the primary reasons for the park’s utility robustness is a major power-generating facility that is located in the vicinity. That puts the business park close to the power source and well up the line when the utility company starts to restore power after a storm. “We are well situated close to the power-generating facilities and [even if we do lose power], there’s a greater chance that we’ll get it back on quickly,” says Shorter.
At the Central Florida Research Park in Orlando, dual feeds from the utility company have been a backbone in increasing utility robustness, says Executive Director Joe Wallace. Having convinced the local utility company to provide those two feeds when the park was built, the park is now home to 115 companies and more than 10,000 employees housed in 56 buildings. The benefit of multiple feeds is that if one power station goes down, they can still get power from another.
“It was something we looked at in the master-planning stage,” Wallace says. “After the hurricanes of 2004, we also looked at what types of upgrades we could do to [make it more robust].”
Wallace says 20 percent of the businesses in the park also have a backup generator power supply. In 2004, Orlando was hit by three hurricanes within the course of one season. In total, eight hurricanes Category 3 or higher hit Florida in 2004 and 2005. It was a devastating summer but Wallace says it didn’t quite deter businesses or make them change their minds about their location.
“When you look back historically, that’s not something that happens every year. We’re not hit every single year and a [bad storm] might only be once a decade,” explains Wallace.
Cost Vs. Benefit of
Backup Power Supply
As backup generator systems can be quite expensive, businesses often have to weigh the risk of being out of power for a week every couple of years versus the cost of the generators. Hunter says the impact a power outage has on a business is dependent on the duration of the blackout and what business the company is engaged in. Those in industries such as glass, concrete, plastics, or food processing require at least enough backup power to clear their lines, tanks, and move product through the system before they can shut down. Failure to do so could lead to critical equipment damage.
“They try to look at what they need [in terms of power generation] to get it off the floor without causing serious damage. You can just shut down an assembly line, but if you have process tanks with stuff in them, you may need power,” Hunter explains.
At that point, it’s less about business continuation than minimizing damage to the system or equipment. A contingency plan might include just enough backup power supply to run engines or other equipment for just enough time (measured in hours or days) to clear the system.
Hunter says it’s not uncommon for some manufacturing facilities to make a certain part or product only two weeks out of the year. Having their entire line shut down for two weeks can create a major loss in revenues for that business and a loss in product or parts for the one they’re supplying. This could represent a “whole year of production” for that part. In critical situations like that, manufacturers either need tremendous power generators or an alternate location.
“They might have a contingency plan to shift over to another plant on the other side of the country because the loss of that time is just too valuable,” says Hunter.
Shorter says most businesses that are highly dependent on a continuous power supply already have backup sources. Large “anchor” tenants or businesses with high power demands, such as the Michoud Assembly Facility, have positive “trickle down” effects to other businesses in a park.
Hunter notes that while most organizations feel the likelihood of a power outage is beyond their control, they should still assess the potential impacts to help mitigate the risk. That includes backup power supply (if necessary and cost-effective), the designation of an alternative location, and effective business interruption insurance. He further says businesses need to include their various risk scenarios for power failures in their business continuity management strategies and ensure that those solutions are regularly tested. This should not be limited to emergency backup generators but should factor in what an outage could mean for their supply chains, he says.
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