The cost of power outages to SA and the world

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That uncertain electricity supply in South Africa has the potential to damage our own economy is stating the obvious. Not so obvious, however, is the impact of South Africa’s interrupted power supply on the global economy.

Debbie Geraghty, head of Alexander Forbes Risk Services’ Metals and Minerals division, says, “Eskom has announced that load shedding, up until now occurring in four to six hour periods, will for certain industries, be increased to between three and six weeks downtime per interruption. This has sobering implications for both the national and international economies.”

Explains Geraghty, “Most insurers have a cap or sub-limit, that is, the maximum amount that policy holders can claim under their business interruption cover. Furthermore, this sub-limit usually includes a time limitation.”

For example, “Businesses can generally only claim up to, and no more than, R 250 million per interruption. This is also usually subject to a 30 day time limit. In other words insurers will provide a maximum of 30 days cover (per interruption) or R250 Million whichever is the lesser.”

Despite these limitations, if hundreds of South African mines were each to claim up to ZAR 250 million for business interruption caused by power outages, the impact on the local and international insurance markets would be profound.

Given that South African mining and industrial debt is re-insured globally, in this worst case scenario, the potential sums called upon to cover South African power-related loss could cause a global re-insurance shock.

Either way, the cost of re-insuring South African risk going forward is likely to increase – driving up the cost of investing in South Africa.

Global insurance concerns aside, the industrial impact of power shortages in South Africa pose further threats to the industrialised world.

Says Geraghty, “Smelters, or any kind of business that operates furnaces can’t simply be switched off. If they are switched off this needs to happen slowly over a number of days, ensuring that molten metal does not solidify in the furnace and destroy the whole plant. Similarly, once switched off, furnaces need weeks to be restarted as they heat up in several stages, slowly building up temperatures along with volumes. If things are instantly switched on again there is a high risk of explosion.”

The same applies to underground mines. If a mine is closed for three or six weeks it is often very dangerous to re-enter and expensive to re-start.

Explains Geraghty, “While Eskom has provided most mines with sufficient electricity to keep pumps going, if this power were to fail mines would flood. Furthermore, mines abandoned for a number of weeks need to be made safe with additional supports to prevent collapses resulting in injury, damage, production interruption – and further claims.”

If one looks at other industries like shipping, says Geraghty, “Power outages preventing efficient loading and unloading of vessels could cause extensive demurrage costs. If these were caused by deliberate power interruption, like load shedding, insurers would not make good the extra expenses incurred.”

Blackouts would also compromise the ability of South Africa’s rail system to deliver coal and other ores and minerals. Explains Geraghty, “If trains, which run on electricity, or mines stopped producing due to electricity failure, South Africa would run through its limited stockpiles of coal and other ores within weeks. Mines would lose sales and receiving smelters and other industries the world over experience supply shortages, rising input costs, production interruption, decreased sales, and reduced profits.

Says Geraghty, “Ores and metals critical to certain economies, like coal to China, or chrome, palladium, platinum and gold to the entire industrialised world will be produced in smaller quantities, become harder to procure and more expensive.”

Increased costs will, ultimately, be passed on to consumers in South Africa and the world – driving inflation and disinvestment locally, while increasing production costs, prices and supply uncertainty globally.

And much of this cannot be covered by insurance. While most insurers will cover loss resulting from unplanned mechanical interruption, planned breakdowns, like load shedding, are generally not covered. Similarly if power failures are found to have been caused by an interruption in the fuel supply to power stations, any damage caused by the resulting power interruptions will not be covered by insurers.

Hence the importance of companies closely examining the details of their cover at a time like this cannot be over emphasised. Given that insurers look at the cause of any power failures that prompt a client to lodge a claim, industrial policy holders need to be 100% sure of what they are covered for. If not properly covered, policy holders should have the relevant clauses of their policies rewritten even though this may increase their premiums.

Source: Alexander Forbes Risk & Insurance Service, February 4, 2008.

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