COVID-19:

the effect to date on the power sector

COVID-19: the effect to date on the power sector

Introduction: managing unprecedented change and challenges
The COVID-19 pandemic has introduced unprecedented challenges for the global power sector across its core commercial, technical, operational and financial functions. The new environment has no rule book to play by but requires immediate and effective decisions to ensure that employee and plant safety are not compromised while managing the many variables required to maintain a viable long-term business.

In the following section we summarise the various challenges faced by the sector primarily from:

a business environment and operational risk perspective, including emerging risks; and

an insurers’ perspective, including potential key concerns and activity needed to address them.

In terms of coverage, the market is now applying as standard broad exclusions in respect of direct and indirect losses arising from communicable infections such as the LMA5393 to protect against potential claims which we continue to challenge, particularly in respect of indirect losses.
The business environment commentary has a US lead; while there are some observations that may be specific to the US, for example due to its own regulations, legislative structure, climate, availability of local suppliers etc., a number of the key challenges outlined are applicable globally.Securing supply in a pandemic The Coronavirus (COVID-19) was identified on 1st January 2020 by the WHO (World Health Organisation). Since then, the global insurance industry, as with other industries, has hurried to adjust their working practices whilst simultaneously adapting to the new challenges and risks they face.

It is tempting to think that after several months living with a global pandemic, and observing countries ‘pass the peak’, things will soon return to normal. Yet as published in the Journal of the American Medical Association, Dr Taubenberger states that, “Every pandemic is completely different, it emerges in a different way.” Dr Taubenberger concludes that even after studying previous pandemics, such as the 1918 flu pandemic and the 2009 swine flu virus, it is difficult to predict the future course of a pandemic¹. However, different countries may have anything up to three waves, with the course or timing of each varying greatly between countries. This is perhaps the biggest indicator of what is meant by ‘the new normal’: significant changes to the daily commute, office hours upended, the staged return of global travel and enforced quarantine periods. The impact on people and businesses globally is likely to continue for the foreseeable future.

With modern technology, many jobs can accommodate flexible working conditions, but a significant share of jobs still requires a physical presence. In many countries businesses that are not considered essential and cannot work remotely have been forced to close under government guidelines. However, for 24/7 strategic industries that span the energy sector, from oil and gas production to power generation, the ability to operate, maintain and repair plants and transmission/distribution systems, including the purchase and supply of goods and services to support those sectors, is essential.

It is also clear from the above and all forecasts that the measures required to counter the current conditions will need to be robust and sustainable in the medium to long term to ensure the continued protection of employees and security of supply.Key power industry exposures
Although insurance quotations are holding up and renewals are being completed, the insurance industry is acutely aware of the workplace and supply chain risks that the pandemic is placing on the power sector.

Absenteeism
Workforce absenteeism could at any time increase dramatically and with little warning, not just from those who fall ill but those who are considered vulnerable and are self-isolating. Whatever the reason, the workforce could significantly diminish with decision makers, subject experts and highly skilled team members incapacitated or working remotely.

Supply chains
The power industry supply chains that that it relies on will, at different times, be under similar levels of workforce disruption. Whilst some businesses remain open, other businesses may be forced to close, or are unable to mobilise their workforce to service their client’s needs. The interconnectivity of the global supply chain is highlighting the strengths and weaknesses of businesses across the world. Most businesses will have already scrutinised their supply chain arrangements, whilst others are for the first time exposed to the known vulnerabilities within their particular chain.Reliance on external OEMs
The power industry is particularly exposed, with a reliance on external OEMs (Original Equipment Manufacturers) and specialist service providers who provide a range of services, from pressure system inspections to planned maintenance and breakdown support. While there is leeway for certain planned activities, there remains an increased risk on the business and their insurers for every deferred activity. Perhaps the worst scenario is an unplanned machinery breakdown where swift action is required to return the equipment and business to normal.

Resource challenges
Today’s power generation businesses do not have vast central engineering departments nor a large team of highly skilled craftsmen and women to carry out inspection and repair activities without OEM participation. Furthermore, with the latest advanced technologies, particularly in gas turbine design, it is almost impossible to carry out outages without OEM technical support, equipment and spares. Clearly, OEMs are critical to a plant’s reliability and availability. Whilst each OEM service hub is dealing with its own unique set of pandemic circumstances, the potential impact will remain real for all power plant owners and operators. This is already playing out across the world, where plant owners and operators are finding slower or delayed OEM support, lack of in country expertise and the inability for OEMs to mobilise their teams who will also face periods of quarantine on arrival at the destination country.

Insufficient waiting periods
A few minor delays may seem inevitable, but for major breakdown events that require loss adjusters - initial OEM fact-finding specialists, followed by a team of OEM service specialists, plus their equipment and replacement parts - the cumulative effect of delay will inevitably consume the waiting period deductible. It is also worth mentioning that OEMs are also reliant on their supply chain for key components such as single crystal blades, which could lead to further unforeseen delays.

US power sector perspective (and other global issues)
While there are levels or areas of impact which are specific to the US, for example due to its own regulations, legislative structure, climate, availability of local suppliers etc., there are a number of key challenges outlined below that are applicable globally.

Unique power sector risks
The US power sector has considerable experience of planning and responding to many natural hazard events, blackouts, and other emergencies. However, the COVID-19 pandemic presents some unique risks to this sector that must be managed to maintain this reliable supply. These risks include:

Electrical demand reductions, affecting marginally profitable plants

Moratoriums on construction projects

Availability of personnel

Travel restrictions, impacting access to operating assets for maintenance

With COVID-19, the past is no guide to the present…
Past catastrophic events in the US have not had the widespread impact of COVID-19, making mutual aid and assistance more challenging; hurricanes, earthquakes and even terrorism attacks have been limited in their geographic footprint. Blackouts have also historically been regional; however, given the widespread effects of the virus across the country, existing contingency plans are being tested and mutual aid capabilities threatened. A post-recovery “lessons learned” review should certainly strengthen planning and recovery time and resiliency for future events.

Impact on electricity demand
With businesses and factories shuttered, electricity demand during the pandemic has dropped, along with a flattening of the peak demand curve. This reduction in demand, also referred to as Demand Destruction², is prevalent throughout the nation’s regional transmission systems, including the New York Independent System Operator (NYISO), The Electric Reliability Council of Texas (ERCOT), the Midcontinental Independent System Operator (MISO) and the Pennsylvania-New Jersey-Maryland Interconnection (PJM). The reduced demand, combined with a normal decrease with the onset of spring weather, has resulted an electricity price decline. Depending on how long the pandemic lasts, this could accelerate the retirement of some financially challenged assets, including coal-fired plants. Merchant baseload generators, which account for approximately 57% of electric generation in the US³ and include coal and nuclear, will be especially challenged as they are more directly exposed to lower market prices, along with some renewables⁴.

In its May 12, 2020 EIA Short-Term Energy Report, The United States Energy Information Agency (EIA) forecasts that coal generation will drop 25% in 2020, and electricity sales will decline in the coming months by 6.5% in the commercial sector, 6.5% in the industrial sector and a modest 1.3% in the residential sector, with increased consumption from stay-at-home workers tempered by the expected milder weather⁵. For 2020, the overall decline in generation is estimated to be 5%; coal consumption will fall 25% in the US while reduced coal exports as a result of the pandemic will also reduce coal consumption in Europe. Overall, all forms of power generation are seeing reduced usage except for renewable energy, which will grow slower than previously projected this year⁶.The impact on wholesale electric prices from the combined effects of lower demand due to COVID-19, along with the seasonal decline in demand, is providing the opportunity for some high cost generators to shut down their generation and instead purchase wholesale power for less than it costs to make, to replace/fulfil their generation commitments. Low natural gas prices are also likely to exacerbate the pressure on higher cost generating units. Older coal generators, as well as some nuclear units, could be affected.Impact on new generation construction projects
While the EIA is predicting renewable energy to be the fastest growing source of generation in 2020, it is forecasting that the effects of COVID-19 are likely to reduce new wind and solar capacity builds by 5% and 10% respectively compared to pre-COVID-19 forecasts⁷; however, RTO Insider reports no delays in proposed US offshore wind projects⁸. Construction of conventional power plants was slow prior to COVID-19 and even slower now, further stressing the financial performance of large OEMs. Experts are wary of the impact of delays and stoppage of construction projects, as well as the need to safely and carefully test equipment on first use and restart following shutdown. Coverage issues with respect to operational and construction policies need to be carefully reviewed with respect to such delays, testing and restarts.

Impact on T&D sector
The mild spring weather, combined with reduced demand during the COVID-19 lockdown, has resulted in increased reserves and reduced prices; grids are now operating without stress.

Whilst there may have been some benefits for the Grid Operators, they have still faced the same employee and operational continuity risks faced by the rest of the power sector and have managed them in much the same way.

Some risks that are more specific to the T&D sector include the effective vegetation management necessary to minimise the risk of wildfires, particularly as we approach the hotter summer months. This activity is tasked with keeping power lines and conductors from contact with trees and other vegetation and requires personnel to work in teams. To protect them, the Tree Care Industry Association and the International Association of Arboriculture has created on online COVID-19 resource for worker protection guidelines.

For critical network assets, the expanded use of remote monitoring/diagnostics and control capabilities of distribution systems help to reduce the need for personnel interaction and also offset the potential impact from the limited availability of healthy field staff.

Regional Transmission Operators (RTO) in the US are studying how the pandemic might affect forecasted generation needs for the upcoming, spring, and summer season. PJM Interconnection LLC, (PJM) is the largest RTO in the US, serving all or parts of 13 states and the District of Columbia. It recently presented a generator availability analysis, to determine the maximum generating loss PJM could handle without curtailing power. For this spring and summer, the analysis considered the impact of an outbreak at one plant, then spreading and disabling a generating company’s entire fleet. It reported it could withstand a 60% loss of installed capacity on a spring day, and a 40% loss of installed capacity on a summer day, in a worst-case scenario where generating units were unable to operate due to an outbreak among plant personnel. These findings will be used develop proactive steps to respond to events as they evolve⁹.

On a more administrative level, Power Gen companies have also noted local Interconnect owners and RTOs completing outstanding paperwork faster and clearing administrative backlogs as construction projects slow and electrical demand declines.

Measures taken by Power Gen companies
Examples of steps taken by generating stations to protect staff and ensure plants can continue to operate safely have included:

Rearranging shifts into dedicated teams, discontinuing overtime and reconfiguring work areas to keep shifts or work crews segregated

Restricting employee access to the plant and control rooms to those required for essential tasks, including routine operations and maintenance and for reception of parts and supplies

Discontinuing visitor access and limiting contractor access to critical needs, including any providing outage support, such as Original Equipment Manufacturers (OEM) personnel

Implementing CDC guidelines e.g. pre-screening, monitoring of staff conditions, PPE, Social Distancing, disinfecting work areas

Developing a contingency plan early in response to overseas reports of virus impact

Moving fall outages to spring while electric demand and pricing are down

Maintaining a strong supply chain (two generating plant managers interviewed indicated no issues yet with their supply chain)

Additional steps taken by nuclear generating stations include:

Stockpiling of meals, disposable tableware, and personal care items for on-site staff

The Nuclear Regulatory Commission (NRC), and the US Department of Homeland Security issuing guidelines to assist plants in coping with the effects of the virus on their workforce

Proactive outage management
Insurance company risk control staff are concerned about the delay or cancelation of risk mitigating maintenance or outage activities during the pandemic due to various isolation restrictions. Several clients suggested adequate measures are being taken to manage any increased risk.

Some clients have actually taken advantage of the decrease in electrical demand and lower pricing to proactively advance scheduled maintenance operations forward, contrary to insurer expectations; furthermore, one client was able to utilize available plant personnel rather than contractors to significantly reduce their maintenance spend. Another plant continues to work through the pandemic with scheduled outages, with adjustments for minimum staff and contractor levels, along with COVID-19 social distancing and PPE needs. Another site worked with their insurer to postpone a scheduled outage from spring to the fall, after a review of the site’s operating history and previous inspection activities verified that no ongoing risk issues or concerns existed, as well as implementing additional operational monitoring and equipment surveillance.

Outages at 97% of US nuclear generating sites in 2020 could be affected by COVID-19. These are typically planned for the spring or fall period, months when electrical demand is typically light¹⁰.

Some maintenance is continuing as originally scheduled. At one nuclear generating station some 1,400 contractors are being utilized for a planned spring reactor refuelling and plant outage that began despite the pandemic. Some workers have complained about social distancing and other safety measures and have voiced fears about contracting the virus; other nuclear sites are considering revising the work scope and duration of a service outage, to adjust for the effects of the virus on the outage resources.¹¹

Impact on insurer risk engineering.
COVID-19 makes conducting insurer loss control visits more challenging, due to travel restrictions and restricted site access. In lieu of physically visiting sites, insurers’ risk engineers have therefore conducted remote desktop inspection reviews. Information gathering comprises a significant portion of in-person field surveys, and this information can be obtained as easily during virtual visits as it can be in person.

Where possible, plant staff provide requested documentation to the risk engineer for review, followed by a conference or video call, with the insurer issuing their inspection report based on the information obtained. Plant personnel sometimes supplement these visits using virtual tours, while they walk the plant showing it to carrier personnel via mobile phone. Virtual surveys can work well for power plants previously visited by the insurer that have no outstanding critical risk concerns and have shown to practice sound risk management. Security and privacy issues would need to be considered when conducting a virtual video tour.

For insurers considering new power generation risks, remote desktop inspection reviews can assist in providing adequate underwriting information for most carriers to fulfil their new business considerations, especially for sites with favorable loss history, for locations they have never visited and/or where site access is restricted. These virtual inspections generally include a documentation review, photographs, and tele or video conference to explain plant property and fire protection and maintenance practices, as well as reviewing equipment risk questions. Clients can provide site overview presentations about their facilities to help familiarize the insurers with their sites during these calls, following the process via slide decks passed along in advance of the meetings, or via Skype or Zoom technology.

Insurers will want to compare originally planned scheduled maintenance dates against the modified schedule for any delayed maintenance and outage activities and will want to fully understand any significant changes in planned maintenance spend.

As the power generation sector and its insurance partners adjust to conducting business during the COVID-19 pandemic, all parties must remain disciplined in assessing and managing risks. Risks that are magnified by the pandemic, including personnel availability of plant and vendor support personnel, and disruption to operation and maintenance tasks, should be managed with the joint goal of ensuring plant reliability. At a time where plant resources might be limited, open and transparent communications with their insurance risk consultants should leveraged to the benefit of all.Risk engineering
So far in this article we have considered the impact of COVID-19 on the power sector. This section now focuses on insurer concerns and the key areas that power companies will have to analyse in every territory to ensure they are well placed to manage these concerns. As part of that process, they will have to ensure that they don’t fall foul of any policy conditions that may be compromised by the operating environment, together with constraints that will apply while COVID-19 restrictions remain in place.

Please note: this process includes areas that have been immediately and noticeably impacted, and other areas that after careful review may be affected in the future. These need to be reviewed with your broker in the context of your policy coverage, conditions and your disclosure obligations so you can assess what actions may be required.

So what areas of interest and information do (re)insurers need to hear about to enable them to assess your changing operations and their risk exposure? Below are some key topics that overlap with the interests of (re)insurers and that need to be considered and potentially communicated.

Travel

Do operations require overseas or in-country technical specialists? Are they able to travel/access country/access site?

What are the potential delays and requirements for overseas specialists? Will travel restrictions and mandatory quarantine periods on arrival slow the necessary steps from breakdown to recovery? Are there measures that can be taken to house and effectively quarantine overseas visitors on site?

Are own business (and other business) travel restrictions likely to have an impact and are there alternatives?

Operations

Have the Operations & Maintenance teams been adequately adapted to cover shift patterns, absenteeism and protect against cross contamination with each other and each shift?

How does the new shift structure compare with minimum safe manning levels?

Are adequate communications between offsite engineering and onsite operations and maintenance staffs taking place?

Are there clear policies for flexible working to reduce the spread of infection? Are there clear guidelines for those who suspect they are ill or suspect they have met with others who are ill?

Will remote equipment condition monitoring, where available, continue to be analyzed to the same levels by plant technical staff, whether on site or while working remotely?

Maintenance

In the next 12 months, are there any safety and/or equipment critical scheduled inspections and maintenance outages planned? If so, is there the potential for resources (personnel, equipment, materials) to be constrained leading to a material delay?

Insurers are very aware of the effect that the downturn in the economy has had on the demand for power and the financial impact of this on Power Gen companies. Certain sub-sectors, such as that of Waste to Energy, will have been affected in more ways than one, their customer base having shifted from commercial businesses’ waste to residential waste. Residential waste generates lower tipping fees but allows the sites to continue to operate. Insurers will seek reassurance that planned risk improvement projects remain funded.

In the next 12 months, are there any statutory/ jurisdictional inspections that may be deferred due to mobilisation issues?

Will deferrals of the above affect plant safety, machinery breakdown exposure, operating licensing, or insurance preconditions? How have deferrals been assessed against safety and machinery breakdown exposure? Do the delays lead to an increase in risk/ or potential for loss?

Will there be any delays in completing insurance company recommendations?

Breakdown and indemnity periods

Have the consequences of a major breakdown during the COVID-19 pandemic been assessed? What is the current status of ‘in-country’ and other country OEM support? Could a major equipment breakdown be overcome with internal engineering and maintenance teams or standby power generation?

Emergency response

Has the number of on-site emergency response team members reduced across any of the shifts? Has the capacity of external emergency response services been impacted? Can fire systems be maintained in a fully operable condition

BI exposure/lead times

Are strategic spares available and have manufacturers’ supply chains and transportation routes been affected? To what extent could this extend previously considered Indemnity Periods and can anything be done to mitigate this?

Vacancy and security

For any plants that shut down, are appropriate measures being taken, such as implementing a proper lay-up plan, developing a safe restart program, and alerting insurers before restarting operations, as well as keeping fire protection and security intact throughout the shutdown?

Conclusion: take the time to communicate

Although the pandemic is unlikely to have an impact on Machinery Breakdown and associated Business Interruption claims coverage and settlement, it is clearly a unique situation which is presenting immediate challenges and new risks to plant operations. Taking the time to communicate the impact on operations and providing information about the measures taken to mitigate the risks is therefore essential for (re)insurers to be able to understand this.

As in the run up to a policy renewal, the output of engineering surveys is vital for (re)insurers. A lack of information, particularly in the current market, can often have the effect of penalising clients with adverse terms and conditions. The time spent preparing a response may seem wasted, lacking any real gains in managing the immediate challenges to your business. However, the quality and timeliness of information is perhaps the greatest indicator that your business is proactive and able to make the adjustments needed to meet the challenges and risks presented by the global pandemic. Perhaps now it is more critical than ever to foster insurance relationships and take the time to differentiate your risk and highlight the strong leadership, adaptability and resilience of the business.

Paul Watson is a Power Risk Engineering specialist, Willis Towers Watson Natural Resources, London.
Paul.D.Watson@willistowerswatson.com

Jamie Markos is Senior Principal Consultant - Power Generation and Machinery Risk, Willis Towers Watson Philadelphia.
james.markos@willistowerswatson.com

Michael Perron is Power Generation Leader, North America, Willis Towers Watson New York.
Michael.Perron@willistowerswatson.com

Carlos Wilkinson is GB Head of Power, Natural Resources, Willis Towers Watson London.
carlos.wilkinson@willistowerswatson.com

¹https://jamanetwork.com/journals/jama/article-abstract/184362
² https://www.powermag.com/wp-content/uploads/2020/04/covid-19-power-market-report.pdf
³ https://www.washingtonpost.com/business/2020/04/19/electricity-new-york/
⁴ https://www.world-nuclear-news.org/Articles/US-economists-study-COVID-19-energy-industry-impac
⁵ https://www.eia.gov/outlooks/steo/
⁶ https://brattlefiles.blob.core.windows.net/files/18557_impact_on_covid-19_on_the_us_energy_industry.pdf And https://www.bloomberg.com/news/articles/2020-05-04/nuclear-is-getting-hammered-by-green-power-and-the-pandemic
⁷ https://www.eia.gov/outlooks/steo/ and https://www.greentechmedia.com/articles/read/eia-forecasts-coronavirus-to-push-down-u.s-electricity-demand-lower-renewables-buildout
⁸ https://rtoinsider.com/international-partnering-forum-2020-160997/

⁹ https://rtoinsider.com/pjm-analyzes-potential-covid-19-generation-losses-161933/ and https://pjm.com/~/media/committees-groups/committees/mc/2020/20200501-corona/20200501-covid-19-analysis-presentation.ashx10 ¹⁰ https://www.powermag.com/covid-19-threatens-outages-scheduled-at-97-of-u-s-nuclear-plants-in-2020/
¹¹ https://www.neimagazine.com/features/featurecovid-19-impacts-nuclear-industry-worldwide-7839553/