Combating Risks to the Electric Grid

Electricity is the foundation of society, making the electric grid one of our most critical infrastructures. It is also one of the most vulnerable, and is subject to a number of variables, according to, Lights Out: The risks of climate and natural disaster-related disruption to the electric grid, a study by students of Johns Hopkins University’s School of Advanced International Studies, funded by Swiss Re.

According to the report, in recent years there has been a trend of more natural disasters globally, with 191 natural catastrophes in 2016 and a 24% increase from the level in 2007. In the United States, 43 natural catastrophes caused huge property losses in 2016, almost double those of 2007.

Lights Out focuses on the Pacific Northwest, which is an “illustrative case study in climate and natural disaster related electric grid disruption. The region is prone not only to high-frequency, low-intensity natural disasters such as droughts and flooding, but also at risk of catastrophes like the Cascadian Subduction Zone (CSZ) event, an earthquake-tsunami combination that is expected to devastate the coastline from northern California to southern British Columbia,” according to the report.

As climate change alters the seasonality of water runoffs in the Pacific Northwest, the study found that electricity generation and the operation and maintenance of hydroelectric dams face greater challenges. What’s more, different parts of the grid are vulnerable to different perils. For example, above-ground lines are vulnerable to weather events, while underground lines are susceptible to earthquakes. In Oregon, for example:

More than 50% of substations would be damaged beyond repair in the event of a magnitude 9.0 earthquake. In addition, the vulnerability of the electric grid is highly interdependent with other critical infrastructure systems, including roads, water and sewage treatment, and natural gas pipelines. In the event of a major earthquake, damage to road networks can make it impossible to repair transmission and distribution lines, thereby preventing the restoration of all other electricity-dependent lifeline services (water, sewage, telecommunications).

The costs of outages for construction and restoration of the grid are estimated to be 1.59 times higher in highly populated locations versus flat land areas with fewer inhabitants. Costs are also higher when infrastructures such as emergency roads are destroyed, which would slow down repairs to roads, in turn delaying restoration of electric power and impacting telecommunications, water and sewage services.

There may be long-term financial implications as well, as entire communities would be impacted, leading to a possible migration of residents to areas not effected by the disaster. Following Hurricane Katrina in 2005, for example, the population of New Orleans dropped dramatically, and 10 years later, had only returned to 90% of its pre- 2005 levels.

Total population of New Orleans 2000-2015; Hurricane Katrina hit New Orleans in 2005:

With the increase in natural disasters, the recent destruction caused by Hurricane Katrina and Superstorm Sandy as well as the prospect of a magnitude 9.0 Cascadia earthquake, “It is imperative that public and private sector entities explore potential solutions for combating and mitigating damage to the electrical grid and disruption from power outages.” The report urged utilities to increase the resilience of their systems in a number of ways, beginning with conducting utility vulnerability assessments to identify vulnerable infrastructure and develop resilience plans. While many utilities have taken the initial step of identifying the resilience and mitigation strategies that they intend to implement, their implementations after these assessments vary widely by utility.

Utilities have several options for hardening the resilience of their systems, depending on the specific types of natural hazards they face. For example, checking poles for rot and moving infrastructure out of flood zones and landslide-prone areas helps to maintain distribution and transmission infrastructures, keeping them from going down in regions with heavy rainfall and flood risk. Pruning trees to protect wires from falling branches is also important in regions experiencing higher intensity storms, according to the report.

Highlighted trends:

  • Climate change is causing more severe and frequent natural disasters, meaning power systems face increased strain from catastrophes.
  • The interdependence of systems creates further complications: if the electric grid is down for an extended period, collateral effects can lead to disruptions in other services such as water, sewage and telecommunications.
  • The economic implications are challenging governments and energy providers. Not only do they require pre-disaster financing provided by insurance, they must address how to make their systems more resilient to future flooding, droughts and earthquakes.

Software May Help Oil Companies Determine a Location’s Earthquake Potential

New software for monitoring the probability of earthquakes in a targeted location could help energy companies determine where they can operate safely.

The free tool, developed by Stanford University’s School of Earth, Energy & Environmental Sciences, helps operators estimate how much pressure nearby faults can handle before rupturing, by combining three important pieces of information:

  • Location and geometry of the fault
  • Natural stresses in the ground
  • Pressure changes likely to be brought on by injections

“Faults are everywhere in the Earth’s crust, so you can’t avoid them. Fortunately, the majority of them are not active and pose no hazard to the public. The trick is to identify which faults are likely to be problematic, and that’s what our tool does,” said Mark Zoback, professor of geophysics at Stanford, who developed the approach with graduate student Rail Walsh.

Fossil fuel exploration companies have been linked to the increased number of earthquakes in some areas—Oklahoma in particular—that have been determined to be the result of fracking. According to the Dallas Morning News:

Only around 10% of wastewater wells in the central and eastern United States have been linked with earthquakes. But that small share, scientists believe, helped kick-start the most dramatic earthquake surge in modern history.

From 2000 — before the start of America’s recent energy boom — to 2015, Oklahoma saw its earthquake rate jump from two per year to 4,000 per year. In 2016, its overall number fell to 2,500, but its quakes grew stronger.

Five other states, including Texas, Arkansas and Kansas, have seen unprecedented increases in ground shaking tied to the wells, although North Texas had no earthquakes strong enough to be felt last year.

The insurance industry has also been monitoring the rise in temblors. A Swiss Re report concluded, “It’s highly likely that this dramatic rise in earthquake occurrence is largely a consequence of human actions.”

According to the report:

Along with the increase in seismicity, Oklahoma has seen a growth in its oil and natural gas operations since 2008, specifically hydraulic fracturing (often referred to as “hydrofracking” or “fracking”) and the disposal of wastewater via deep well injection. Both hydrofracking and deep well injection involve pumping high-pressure fluids into the ground. A consensus of scientific opinion now links these practices to observed increases in seismic activity. Earthquakes where the cause can be linked to human actions are termed ‘induced earthquakes,’ and present an emerging risk of which the insurance industry is taking note.

ILS Roars into 2017 as Maturities Loom

Alternative capital markets continue to see robust activity and at least one major carrier is bullish for the future of insurance-linked securities (ILS), even as the added capacity continues to pressure rates overall.

The insurance-linked securities market saw $5.9 billion of issuance in 2016 and is off to a strong start in the first quarter of 2017 with more than $500 million of new issues already on the books for January, according to a new report from Swiss Re, which sees continued potential upside.

“Market conditions are extremely favorable at the moment and pipelines appear to be swelling, therefore it would not be entirely surprising to see the market challenge record issuance,” the company said in its new report, Insurance Linked Securities Market Update, Volume XXVI, February 2017.

The report also notes that the first half of 2017 will see the largest-ever amount of maturities for a half-year as some $6.4 billion in bonds mature, which could have the effect  of reducing the overall total market outstanding depending on how robust issuance continues to be during the first half of 2017.

“To put it in perspective, the approximately $6.4 billion of bonds set to mature in first half 2017 is larger than all but the four largest historical full-year issuances,” Swiss Re said in its report.

2016 was an unusual year for the ILS market in that the patterns of issuance by quarter differed from most years, according to the report.

“New issuance volumes were atypical,” said the report, with third quarter issuance larger for the first time than that of the second quarter, usually the busiest quarter for new issuance due to the U.S. wind season.

Further, fourth quarter issuance was the largest of the four quarterly totals. Total bonds outstanding remained at just around the record level of $24.1 billion, due largely to the outsized fourth-quarter levels of new issues.

In yet another market anomaly, the 20 new transactions in 2016 was the lowest number of new deals brought to market since 2009.

The average size of those deals, however, at approximately $300 million, was second only to 2014, which included the largest-ever catastrophe bond, the mammoth $1.5 billion Everglades Re from Citizens Property Insurance Corporation (Florida Citizens). The 2016 average deal size of $300 million was also 20% larger than that in 2015, according to Swiss Re.

U.S. wind and earthquake were as usual the most frequently secured perils, but they were joined by a slate of newer and diversifying perils including Canada earthquake, Europe windstorm, Japan typhoon and earthquake, Australia cyclone and earthquake, extreme morbidity, and for the first time since 2005, motor third party liability, according to the report.

The 2016 insurance-linked securities market also differed from other recent examples as it was momentarily roiled by the first Category 5 hurricane since Dean and Felix in 2007.

As Hurricane Matthew roared towards the Florida coast during the first days of October, it touched secondary trading, particularly among those bonds “focused in the state of Florida, especially Blue Halo, Laetere, First Coast and Everglades,” said the Swiss Re report.

“As we have observed in the past during hurricane events, notably during Hurricane Odile and Hurricane Patricia in 2014 and 2015 respectively, the ILS secondary market quickly responded to the threat of Hurricane Matthew in October,” according to the report. “Following the formation of the hurricane, bonds with large wind exposure in Florida and the Gulf traded at a significant discount as the hurricane approached the Florida coast.”

Trading quickly returned to normal, however, as Matthew eventually made landfall on Oct. 8 southeast of McClellanville, South Carolina, as a Category 1 hurricane with 75 mph winds.

Total alternative capital levels in the sector are now pegged at some $78 billion.

Earthquake Spike in Oklahoma Linked to Fracking

ok-earthquake-shake-map
A magnitude 5.0 earthquake that rocked Cushing, Oklahoma, on Nov. 6 damaged part of the city’s downtown district, but left no major damage to bridges or highways.

Early reports indicate the damage is not insignificant. A 16-block area in the hard-hit downtown has been sectioned off because of the danger posed by unstable structures and broken glass. No serious injuries or fatalities have been reported, however. Power in Cushing was out for less than an hour following the quake, and several gas leaks were taken care of.

The city, which has a population of 7,900, is noted as the world’s largest oil storage terminal and has experienced 19 earthquakes in just the past week, raising safety concerns. As of last week, the town’s tank farms held 58.5 million barrels of crude oil, according to the U.S. Energy Information Administration. The number of earthquakes in the area has also risen exponentially. During the first half of this year, 618 temblors of M2.8 or greater have shaken Oklahoma.

eq-activity

Swiss Re noted in its September 2016 report The Link Between Hydrofracking, Wastewater Injection and Earthquakes: Key Issues for Re/insurers:

Since 2008 the number of magnitude 3.0 earthquakes per year has grown from roughly 2 per year to an average of nearly 3 per day. This now makes Oklahoma the most seismically active of the lower forty-eight states. It’s highly likely that this dramatic rise in earthquake occurrence is largely a consequence of human actions. Along with the increase in seismicity, Oklahoma has seen a growth in its oil and natural gas operations since 2008, specifically hydraulic fracturing (often referred to as “hydrofracking” or “fracking”) and the disposal of wastewater via deep well injection.

A number of states that have increased wastewater injection activity have seen increases in the number of induced earthquakes, the study said, but the reason for such a large increase in Oklahoma is still unclear. Because of the large amount of crude oil storage in the Cushing area, strong shaking is worrisome and has led some to proclaim that induced earthquakes are a national security threat.

According to AIR-Worldwide, it is not clear whether the occurrences of the small and intermediate size earthquakes being seen, and the stress changes from wastewater disposal could trigger larger and more damaging earthquakes. As a precaution, the Oklahoma Corporation Commission ordered four new Arbuckle disposal wells to be shut and 10 to reduce their volume by 25%. In Osage County, 32 wells will have reduced volume.

Experts believe limiting injection volumes is helpful because of the link between high-volume injection and earthquakes, but Swiss Re’s report concluded that while, most companies participate in the suggested reductions following a detected earthquake, economic pressure to continue wastewater injection often prevails. “Changing regulations, and how the oil and gas industry respond, remain the biggest contributor to uncertainty of how the risk will change in the future,” Swiss Re said.