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Amazon's loss of power last month was minimal compared with what could happen if the U.S. grid is severely hit by solar storms. What can companies do to prepare?
Caroline McDonald, CFO.com | US
July 23, 2012
When severe storms caused Amazon to lose power to its Virginia data center for the second time last month, its entire chain of clients, including Netflix, Pininterest, and Instagram, were affected. Instagram, a photo-sharing service, was down for more than 15 hours after the incident. Even with major backup generators, Amazon was unable to switch to backup power, according to media reports.
While those setbacks were meaningful to Amazon, they're minuscule compared with what would happen if the United States were hit severely by solar storms, which scientists say can cause massive power outages. A solar storm, or flare, is a sudden, rapid, and intense variation in brightness, occurring when magnetic energy built up in the solar atmosphere is suddenly released.
Solar storms have been viewed as a threat to power grids, causing long-term outages. But what's the magnitude of the risk? "I have heard some overblown statements, such as a worldwide power outage. This is not reasonable in my judgment; more reasonable is a widespread outage in North America, Europe, or Asia - and even then it may be half the continent, not the entire continent," says Nicole Homeier, staff scientist at Atmospheric and Environmental Research in Lexington, Massachusetts.
That's enough to make governments pay attention. "A long-term power outage would be a catastrophe for any country. This is difficult for the average person to prepare for, and the risk is low enough that most would not choose to," she says.
But even if current predictions of an increasing probability of solar storms do prove to be a nonevent, it's still something companies should prepare for, risk-management experts say. Since senior executives can dovetail planning for solar flares with planning for hurricanes and other events that can cause power outages, there's nothing to lose in planning for this risk, they say.
Ashutosh Riswadkar, liability business director for Zurich Services Corp., acknowledges that the effects of solar storms can be benign, such as the Northern Lights or Auroras. But components of them, such as radiation, can damage satellites and cause interruption of telecommunications or the electric power grid. Noting that there have been number of examples of solar storms in the past 100 years, Riswadkar adds that the 1989 event that affected parts of Canada was an eye-opener.
"We dodged a bullet," he says, observing that while the storm affected orbiting spacecraft, it did not cause disruptions in the United States because the power-grid systems of the United States and Canada weren't connected then. But "that has now changed," he says, explaining that a similar solar storm today could cause cascading blackouts. "The threat is real," he concludes.
Companies impacted by power outages stand to lose a great deal. A 2005 study conducted by the Lawrence Berkeley National Laboratory for the U.S. Department of Energy's Office of Electric Transmission and Distribution estimated that in an average year, electric power outages and blackouts cost the nation about $80 billion. Of this, the researchers estimated, $57 billion (70.1%) stemmed from losses in the commercial sector and $20 billion (25%) in the industrial sector.
Linda Conrad, director of strategic business risk at Zurich Services, notes that in a worst-case scenario, much of the damage would be the result of a cascading or domino effect across the power grid. The impact to businesses, communications, and IT systems could be "greater than anyone would imagine," she says. IT systems would be threatened, which could make companies vulnerable to cyber security issues. She observes that supply-chain infrastructures, including all transportation modes, could be hurt as well. Airports and ports might be closed and switches on trains could malfunction. As a result, says Conrad, there could be a major disruption in the supply chain, which would affect multiple industries.
Robert P. Hartwig, president of the Insurance Information Institute, says, however, that while there is "a real risk, so far, so good. I'm not aware of any significant interruptions around the world to power grids or telecommunication networks as a result of this year's elevated solar activity, or damage to satellites in orbit around the earth. So at this point, the world's infrastructure seems to be weathering this fairly well."
How can organizations mitigate the potentially large financial risk? Mostly by making internal preparations, since it's hard to get insurance coverage for the risk related to solar storms.
Cautions Homeier: "If I were running a company, I would have backup plans for several weeks without power in any of my key locations." The risk to organizations is mainly power outage. But "it could also be framed as supply-chain risks, depending on the business," she adds. An outage at the location of a key supplier, for example, can interrupt business flow, even if power is maintained at a company's headquarters or main manufacturing location, she notes.
Hartwig says that most insurers won't cover business interruption from power failures. A utility company for instance, wouldn't be able to get such coverage for this type of event, he says. Insurers typically don't cover outages "for any reason, whether it's thunderstorm events or winter storm events." Companies would be covered if a blackout were the result of a covered cause of loss, such as a tornado. Some firms do buy specialty coverage for utility disruption, if they have, for example, perishable inventories such as ice cream, he says.
While some of the large insurers have specific coverage for space weather-specific risks, Homeier says, "I think the insurance industry is currently trying to get a handle on what to do with this risk."
Conrad adds that cyber security and privacy coverage is an option for protection in the case of data breaches, should company firewalls go down. If this were to happen, there could be a leak of sensitive information. The coverage looks at the cost of protecting and refunding for data breaches that might occur from a security and privacy standpoint, she says.
While a fair amount has been made about this risk, Hartwig believes actual disruptions will be minimal and insurance impacts even smaller. "A lot has been made about the event, because it only happens occasionally and people are less familiar with it, so it sounds scary," he says. "But the reality is that the telecommunications and electric-distribution infrastructure of this country are unlikely to be significantly impacted."