|Power firms have had to adapt to fresh risk management challenges in the last decade, but by taking early and appropriate measures they can avoid damage to their reputation and bottom line, writes Adriano Lanzilotto of insurer FM Global.|
|Lanzilotto: a loss can hit both brand and profits|
The process of managing risk is more demanding today than ever before. Lean business models, challenging regulatory landscapes, operational consolidation and extended supply chain networks have become the norm for many industries and can pose a significant risk to business continuity.
When a company is unable to function due to a loss, its customers go elsewhere, its brand evaporates, competitors move in and share value can tumble. When that happens, the fundamental reputation that a company worked so hard to create – and upon which its whole future relies – is at stake. To keep this value secure, it is important to do the right things to make sure you do not get knocked down in the first place: better to prevent a loss than recover from one.
Power generation is one of the largest industrial occupancies insured by FM Global, and our list of clients includes a range of power suppliers, from large public utilities to small privately-owned alternative energy producers. Many of our power generation clients have been with us for more than 30 years, during which time the industry has radically changed.
In the last decade, the industry has entered an uncertain and precarious stage, with ageing equipment driving higher maintenance and replacement costs, increasing concerns over depleting fuel sources, and some of the generating assets being operated with marginal safety factors due to efficiency targets.
On top of this, environmental awareness, a political climate and availability of new technologies mean that renewable energy sources are taking an increasing share of the market.
Many risk managers that operate in the power generation industry have become increasingly concerned with deregulation. In the UK, deregulation was introduced to the power market in 1990 and has always been a highly-debated move.
|Waste-to-energy has a unique set of risk management issues
One thing that is certain is that this change has brought about risk management challenges with the increased competition that has come about from privatisation and a greater commercial pressure on organisations due to a free, more competitive market place.
As a result, generators have changed the way they operate some of their plants. Cyclical operation, driven for example by peaks in spot electricity prices, could be more convenient than baseload, or constant operation. In some cases this could result in operating regimes that are extremely aggressive towards the equipment.
An example of this is seen in ‘two shifting’, the process of shutting down a power plant during periods of low system demand and re-starting it when demand increases. This is becoming an increasingly common requirement for combined-cycle and coal plants, causing headaches for plant owners and operators, whose generating equipment were designed for baseload generation.
Plant cycling can lead to a damage mechanism known as fatigue. Fatigue happens when a component is repeatedly subjected to cyclic loading and it is characterised by failures occurring at much lower levels of stress than would be expected if the stress was applied constantly.
According to recent research undertaken by FM Global, 70 per cent of all industry losses stem from equipment breakdown. In fact, mechanical and electrical failure of equipment and components is the main driver of losses and unplanned outages in power plants across the world.
Part of the problem is because the majority of power generation machinery has a lifetime of somewhere between 30 years and 35 years. Since much of the equipment in the developed regions of the world is now approaching the end of its lifecycle, one challenge power companies face is to extend the life of their existing generating assets, whilst also maintaining the highest levels of safety and asset security.
Longer operations have forced operators to adopt more efficient approaches to maintenance, introducing condition-based regimes rather than a time-based approach. Whilst this may save costs, managing machinery in this way requires a high level of technical expertise and careful planning, especially when also working to maintain the highest levels of safety and asset security. This method of maintenance can be both cost-effective and more efficient at avoiding unplanned outages, but only if business continuity and risk management best practices are engrained into the heart of everyday operations.
Since the introduction of carbon pricing and trading schemes, the power generation industry has been put under increasing pressure to diversify its portfolio of generating assets and reduce its reliance on carbon intensive fossil fuels, such as coal.
With this shift have come new, unknown risks as they plan new technology for industry changes, whilst ensuring minimum disruption to their own operations. Wind farms, solar plants, geothermal installations and other renewable technologies all pose their own, specific risks in terms of reliability, operation and maintenance costs.
In the case of the waste-to-energy (WtE) business, which is a rapidly growing industry worldwide, the incentive was determined by the exhaustion of landfill capacity and the issues linked to the creation of new ones (space, morphology of the territory, public resistance etc.), which in turn created the issue of disposing of our waste.
Waste-to-energy has a unique set of risk management challenges that need to be addressed. For instance, explosions can occur in the bunkers when gas bottles (such as deodorants) containing butane or propane enter the shredders and explode, causing mechanical breakdown. This happens, despite there being existing drives to initially sort and filter the waste.
Human behaviour is another key factor driving losses in the power industry: operator errors, wrong decisions, inadequate training and procedures, poor management of change and miscommunication could negate any physical equipment safeguards or protection devices, causing large losses or worsening the consequences of a loss.
Due to the economic environment in which businesses now operate, many companies may be forced into downsizing in order to cut costs. This would not only stretch labour resources and increase workload, but would also increase the level of outsourcing that companies carry out, often bringing in employees with a limited power generation experience. External companies, contractors and suppliers may not have the same attitude, culture or level of commitment when it comes to loss prevention, which puts all parties at risk.
|Business resiliance is about cutting risks before a crisis occurs
Addressing the challenges
What has become increasingly clear is that at this time of heightened uncertainty and fragility, to ignore risk management procedures could have dire consequences. Given this, organisations operating in the power generation industry must embed loss prevention into their corporate strategy, by taking a long term approach to protect their assets and the continuity of their business.
Below are some of the steps that companies can take to build business resilience:
Bespoke insurance coverage programme
Power disruption comes in all forms and durations, and they are not always predictable or preventable. One very simple step that power generation companies can take to ensure they are protected from these disruptions is to make sure that they have a tailored insurance coverage in place that addresses their unique business model.
In the power industry, companies generate revenue in extremely complex ways and a standard Gross Profit Business Interruption cover will usually be too generic and not acknowledge the complexities of the business. Therefore, when a company comes to make a claim, they may not be compensated correctly because the complexities of the business were unknown by the insurer.
But by having a bespoke plan in place, power companies should be able to recoup any losses from business disruption regardless of how they generate revenue: be it from being available on stand-by, selling power directly to the national grid at spot market price, benefiting from tax credits or receiving gate fees for converting waste material into energy. Increased cost of working, Take-or-Pay fuel contracts and penalties for unplanned outages need also to be taken into account.
Day-to-day operational activities
From a day-to-day operational point of view, there are many simple procedures that can be adopted to improve the quality of a site’s risk and help mitigate damages, should a disruption occur. These include:
- Good emergency response procedures for potentially dangerous situations, calling for quick action when, for example, equipment shows signs of stress;
- Training operators to recognise dangerous situations and implement the correct procedures;
- A well-equipped and trained fire response team;
- Strict contractor management and ignition source control procedures;
- Making sure equipment maintenance programmes strictly follow the original equipment manufacturer’s specifications;
- Active and passive fire protection systems in the areas of the plant where oil is circulated.
An engineering approach
Most power generation losses are from mechanical or electrical breakdown of major components, such as boilers, turbines or generators. FM Global has a Research Campus where its scientists conduct power industry research. Currently, we are involved in research projects including steam turbine reliability, network data analysis related to transformer life, the impact of boiler burner design changes and turbine generator safety shutdown.
An industry as challenging as power generation requires collaboration. To influence plant design and construction in the most dramatic and economical way, we strive to have our standards and recommendations incorporated into the specifications for as many yet-to-be-built plants as possible. This ensures a new facility coming on line will have superior protection – even if the plant is not owned by an FM Global client. To help both clients and others in the power industry, we have made available on line its entire library of data sheets. Any power producer or its engineering firm, whether a client or not, can access FM Global’s data sheets on the company’s website at no charge.
In addition to providing power producers with loss prevention advice and encouraging the inclusion of FM Global’s standards in their specifications for new facilities, we are also helping to improve power plant protection and reliability by working with OEMs to develop standardised fire protection specifications for combustion turbine installations.
The future outlook for the power generation industry looks uncertain. Whilst ageing equipment is becoming a serious issue, and the fleet of generation assets continuing to be driven harder, the result will be increased stress on assets and a reduced life for some components. On top of this, renewables are taking an increasing share of the market, even though traditional fossil fuels are likely to remain the main focus for the industry in the absence of a clear alternative.
In today’s globalised, competitive world, power generation companies must look to build business resilience so that they can retain market share and reputation during these times of uncertainty. Business resilience is about more than getting back on your feet following a loss; it is also about doing the right things to make sure you do not get knocked down in the first place.
Adriano Lanzilotto is account manager for Northern Europe operations at FM Global. For more information visit www.fmglobal.com.
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