Public Power - July/August 2008 - (Page 38)

Curbing Costs of OUTAGES BY WILLIAM AT KINSON Buying insurance togeneration outages curb the cost of forced and unplanned makes sense for some utilities, depending on the profile of the energy provider. Today, insurance coverage for generation outages is available to providers across the spectrum, from cooperatives to wholesale power suppliers to municipal utilities. However, to many public power utilities and cooperatives that tend to distinguish themselves from investor-owned utilities by focusing on continuous service, rather than Verbeski. Other tools include futures and call options. Outage insurance is designed to provide contingent unit protection and to match the protection specifically to what a utility is looking to be protected against—an unforeseen or unplanned forced outage or forced capability de-rate at a time when, perhaps, the replacement power markets are trading at higher than expected levels. “Generation outage insurance provides immediate protection,” he said. “If the mar- outage,” he said. “The insurance company then starts monitoring the market to determine whether the second trigger, which is the price you are insured against, is active or not.” The other is a long-term outage product, which insures against a major piece of equipment, such as boiler. “You can’t replace that within a week,” said Goudarzi. “It could take several months to determine how much damage has been done. There is a waiting period before this cov- “You notify the insurance company when you have an outage,” he said. “The insurance company then starts monitoring the market to determine whether the second trigger, which is the price you are insured against, is active or not.” revenue or earnings protection, the concept may be new. “Public power utilities rarely overbuild their generating capacity,” said Steve Verbeski, senior vice president, utilities and power generation practice for AON Risk Services. “They build just enough to serve their native load, rather than having excess to sell on the market. This may mean having to go out to the energy marketplace to purchase replacement power on a spot market basis if existing capacity is curtailed.” To qualify for outage insurance coverage, a utility needs an electric generating unit to tie the coverage to, as well as an insurable interest in the capacity that is put out by that unit, said Verbeski. “ACE was one of the first insurers to offer this kind of coverage about 10 or 12 years ago,” he said. “Today, other providers include Swiss Re, XL Weather & Energy and AEGIS.” Outage insurance is just one of several techniques a utility can use to provide protection against unplanned outages, said 38 JULY-AUGUST 2008 ket pricing to which the policy is indexed is above the policy strike price, the coverage is immediate, subject to a dollar or megawatt deductible. In other words, it is a real-time product.” This is different than if the utility were to try to structure coverage as an element of its property insurance coverage. Normally, business interruption insured through a property insurance policy requires a specified waiting period before coverage applies from between 45 to 90 days. OnLocation, an energy systems consulting service in Vienna, Va., helps private companies and government agencies determine appropriate energy policies. The company also helped an insurance company develop and market a forced outage insurance policy. There are two types of coverage, said Less Goudarzi, the company’s founder and managing director. One is a short-term outage product, which can be triggered the hour the event occurs. “You notify the insurance company when you have an erage applies.” The value of outage insurance depends on the size of the utility, the diversity of its portfolio, and how good its financial condition is, said Goudarzi. “If you’re a very large utility with a lot of assets, then your exposure to an outage at a single power plant is probably limited,” he said. “While it may cost millions of dollars, you may be able to absorb that amount. The smaller you are, though, the more difficult it will be for your financial statements to absorb that.” If you ask most small public power utilities and cooperatives how long they can survive if they lose their largest unit and have to pay $50 to $100 a megawatt-hour for replacement power, most of them will say they don’t have enough short-term capital to last a week, he said. “These policies came into existence during a time when prices were spiking the power market to hundreds, if not thousands, of dollars per megawatt-hour. Very few utilities could sustain themselves if they PUBLIC POWER

Table of Contents Feed for the Digital Edition of Public Power - July/August 2008

Public Power- July/August 2008 Contents Perspective 10 Questions Solar Energy Rising Sacramento's Solar Shares Gainesville Crowns a Conservation Idol By the Numbers Curbing Costs of Outages Reliability Green Energy Hometown Connections Customer Service Parting Shot

Public Power - July/August 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.