What's the most vulnerable part of many businesses? For most, it's the equipment that keeps them up and running. But what if that equipment or the infrastructure that supports it, such as the power grid or a building's electrical system, breaks down? Commerce falters or stops, profits disappear, customers look elsewhere for products and services.
The risks faced by business and industry are exacerbated by four converging trends: Aging infrastructure; demand for equipment in a global economy; rising energy demands and costs, and proliferation of technology. Fortunately, there are ways to mitigate and manage risk. What's needed are innovative strategies focused on engineering, risk assessment, loss prevention and contingency planning.
Aging Infrastructure Meets the Data Explosion
The U.S. infrastructure, including the power grid and the equipment that distributes electricity inside commercial buildings, is being strained by aging equipment and the proliferation of power-hungry new technology. Much of the transmission grid system was developed more than a half century ago. The electrical systems in many buildings were not designed to carry the loads that are necessary today.
Consider these facts:
- U.S. electricity consumption at peak demand times is growing at twice the pace that committed power generation capacity is being added.
- A recent North American Electric Reliability Corporation (NERC) survey of utility industry professionals ranked aging infrastructure and limited new construction as the number one challenge to electric reliability -- both in likelihood of occurrence and potential severity.
- The electric transmission system is increasingly operating close to its capacity margin and many areas of the grid are regularly under stress.
- Construction of new transmission facilities is still slow and continues to face obstacles.
- The average age of transformers used within the utility industry is over 30 years old and many units are nearing the end of their expected life.
- Electrical systems within buildings are often overlooked and under-maintained. Too many building owners don't realize that electrical equipment requires preventive maintenance.
- Estimates on the annual costs to industry from power surges and other related anomalies have ranged from $30 billion to $200 billion.
- Despite reliance on sensitive digital technology, equipment owners too often neglect to install adequate electrical surge protection, placing equipment and business activity at risk.
These trends increase the risk for more frequent and severe blackouts and brownouts, electrical system breakdowns, equipment damage, business interruption and structure fires. In fact, the National Fire Protection Association (NFPA) reports electrical distribution failures each year are responsible for about 9 percent of fires in commercial buildings.
The loss of power or poor power quality presents other exposures. In our information-based society with its explosive data growth, any power interruption can result in a commercial disaster. Data can be lost due to equipment breakdown and it can be expensive, and sometimes impossible, to restore the information due to rapid changes in technology.
Global Competition for Equipment
Demand for equipment and equipment components is increasing around the world. As developing nations' GDP and per capita income have grown, so has their middle class. China and India alone account for around 40% of the population of the planet. Their citizens want what Americans want; reliable electric power and the technology and modern equipment that make life better. Yet worldwide manufacturing capacity for some critical infrastructure equipment, such as transformers, has remained relatively flat. Emerging domestic markets in these and other developing countries are consuming more of that available capacity. The result is an unprecedented competition for equipment as economies expand and standards of living rise.
With more equipment manufactured abroad delivery times for equipment, including spare and replacement parts, have lengthened significantly. Prices also continue to rise, with no end in sight. This fierce competition for equipment creates serious risks for businesses, from supply chain disruptions, to production delays, lost customers, rising operating costs and even legal liability.
Rising Energy Demands and Costs
No business is immune from the increasing costs of power and the threat of power shortages and disruptions. Peak demand for electricity in the U.S., which occurs in summer, is forecasted to increase by 18% in the next 10 years but committed power generation to meet peak demand is projected to rise just 8.4%, according to a study published by the North American Electric Reliability Corp.
As the reliability of the power supply becomes a greater concern, increasingly, businesses and institutions are installing and operating their own power generation equipment to offset costs and ensure the availability of electricity. More businesses are exploring or turning to alternative fuels and renewable energy sources, including wind, solar, photovoltaic, fuel cells and geothermal power.
New equipment and technology is now located in places it never was before, being operated and maintained by personnel who might lack experience and training. Hospitals and schools, for example, might have micro turbines, or office buildings include fuel cells and diesel generators. This trend is adding to the equipment, property and business interruption exposures facing commercial operations.
Proliferation of Technology
The acquisition of new electronic equipment for a range of business applications is on the rise. The result is rapidly increasing equipment values occurring in virtually all types and sizes of businesses and industries. In many cases, however, both a business's property and its contents valuations are underestimated and understated, and therefore underinsured.
Main Street has gone high-tech, with self-checkout and point-of-sale systems and other electronics that track inventory, manage energy systems, and operate fire and security alarms. You might find a sensitive and expensive Magnetic Resonance Imaging (MRI) scanner in medical office located in a strip mall. Auto service centers routinely use digital diagnostic equipment. As Computer Numerical Control (CNC) machines become more affordable, smaller machine shops rely on automation.
This widespread use of electrical and electronic equipment, which is highly vulnerable to power surges and other disturbances, is creating equipment and business risks for commercial operations whose owners may not understand their exposures. Moreover, technology is advancing so rapidly that much of it becomes obsolete quickly, making it difficult to repair or find replacement parts. In many cases, if key components are unavailable, it must be completely replaced.
We are also experiencing a data tsunami, meaning that data loss exposures are severe and growing. Surge-sensitive technology -- critical to every business -- makes today's equipment even more vulnerable to a breakdown. With new technologies and applications that store digital data, business data exposures are growing so fast that the cost of data recovery may easily eclipse the expense of equipment repair and replacement.
Unprecedented Risks Require Innovative Solutions
As these trends emerge, they also converge. For instance, aging utility equipment increases the risk of power blackouts that in turn increase the risk of damage to the surge-sensitive technology that business and industry relies upon.
Faced individually, each trend presents new challenges, but this combination of risks can threaten a business as never before. It is important, therefore, for equipment owners to assess their exposures, improve equipment maintenance and operation, develop business contingency plans, and include appropriate insurance protection, loss prevention and loss control programs.
Much can and is being done to improve the quality and broaden the sources of the energy supply, which is vital to our economic future.
Industries dependent on large transformers, for instance, can maximize the lifespan of their equipment with dissolved gas analysis and other testing that can identify transformer defects and help set priorities about repairing, refurbishing or replacing equipment.
This is more important than ever, since high demand in China and other fast-growing countries has driven up the cost and greatly extended the delivery time for new transformers. Most transformers greater than 20 MVA, the size used in industrial plants, are sold out until 2009. Even smaller transformers that are used in commercial businesses such as shopping malls and office buildings can have delivery times of three to six months.
Electrical Preventive Maintenance is more Important than Eve
Every business, meanwhile, should have an effective electrical preventive maintenance program. It should include a multi-zone surge suppression system for each facility to help prevent breakdowns in the electrical distribution system and protect essential electrical and electronic equipment.
Why is this important? The Institute of Electrical and Electronics Engineers (IEEE) reports the failure rate of electrical components is three times higher for systems where preventive maintenance is not performed. An effective electrical preventive maintenance program also can save energy, reduce the risk of fires, help protect worker safety, and improve power quality which is so important to the operation of electronic equipment and protection of valuable data.
Over the past two decades, there have been increases in the frequency and severity of electrical system breakdowns. Professional engineers can analyze and troubleshoot conditions, while tools such as infrared and ultrasound testing can help spot potential problems. A qualified and experienced contractor can help a business decide how extensive an electrical preventive maintenance program is needed, based on the characteristics of the facility and the vulnerability of the business.
Protect Your Equipment and Plan for Business Contingencies
In a competitive business environment, with just in time delivery systems and maximized productivity, facility up time is not only critical to business, but to maintaining a leadership position in your market. With global competition, increasing demands for power, an aging infrastructure, and the explosion of new technology, business and industry must protect critical equipment and plan for contingencies.
Anthony J. Trivella is executive vice president at The Hartford Steam Boiler Inspection and Insurance Company in Hartford, Conn. One of the world's leading equipment breakdown insurers, Hartford Steam Boiler helps clients reduce risk through a unique combination of specialty coverages, engineering-based risk management strategies and loss reduction services.