Recent incidents highlight aviation power infrastructure concerns
Discussions about current and future power demand have echoed around the aviation industry for some time. Recent events in the Iberian Peninsula,[1] the U.K.,[2] and the U.S.[3] have underlined the need for robust infrastructure beyond the airport perimeter, the challenges that airports and airlines face in getting back up and running after an outage, and the costs, to both airports themselves and the wider economy, of failing to keep aviation operating.
The economic implications of failing to keep airports operating can be significant. The Heathrow incident is estimated to have led to the cancellation of more than 1,000 flights and had an economic cost of around $26 million per day.[4] With an estimated 500 flights canceled across Spain and Portugal[5] (many of them regional), the cost of the Iberian power outage will be lower, but the ramifications will still have been significant.
There are two aspects to the power challenge facing airports currently: where we are today and where we could be in the future.
According to the International Air Travel Association (IATA), the aviation industry carried 9 million passengers in 1945. Nearly eighty years later, the industry achieves this feat every 16 hours.[6]
Delivering this growth has created an industry comprised of phenomenally lean, efficient, and inter-reliant organizations. Each part of the industry ultimately contributes to making sure that passengers and goods can get from where they are to where they need to be quickly, but without compromising safety.
National power grids support most of this activity. In some parts of the world, power grids are relatively new, but in many other places, they tend to be older and include a mixture of hardware that has been added to over decades. The recent addition of renewable energy capacity has been necessary from a demand, sustainability and a geopolitical perspective. It can bring with it inconsistent supply though, which complicates grids and potentially increases the risk of cascade failure.
Demand looks set to increase over the next few years, so airport power supply is becoming a looming challenge. The Airports Council International (ACI) has projected that passenger numbers could more than double between 2024 and 2053[7], while, as we discussed in a recent article on the potential of microgrids, airports’ power requirements could double by 2030[8] and potentially rise by five to ten times over the next 25 years.[9]
This increase in demand is projected to be driven by the potential electrification of aircraft themselves, demand from passengers getting to and from airports in electric vehicles and from airport suppliers needing to charge both air- and land-side vehicles.
If some airports and their supporting national grids are struggling with current demand, the projected demand increases create the potential for a supply crunch. Meeting it is likely to be well beyond the reach of simple efficiency gains and battery improvements.
Anticipating the risk, several airports around the world are taking steps to enhance their power resilience, often alongside projects to reduce climate impact. For example, Athens International Airport is close to having all power requirements met by onsite generation[10] as part of its project to be net carbon zero by the end of 2025, while JFK International Airport’s new Terminal One project will include a 12-megawatt microgrid.[11]
Reducing reliance on national grids and implementing microgrids could seem like an attractive approach, but it is a considerable investment, not least because for airports, onsite power generation can itself represent a catastrophic risk. As a result, projects need to be approached carefully.
From an insurance point of view, there are challenges when it comes to supporting loss of power supply. Business interruption insurance, for example, tends to be triggered by physical damage, but in the recent incidents, there has not been any damage to aviation assets.
In addition, insurance policies designed to cover property related business interruption may not kick in following an incident such as the Iberian outage. These policies are set to respond after defined periods of disruption, which tend to be longer than the half a day suffered across Spain and Portugal or the 18 hours at Heathrow.
The insurance market does offer coverage for the failure of public supply, but this is often prohibitively expensive. It is also worth noting that while business interruption cover that includes incidents related to electricity supply is available in some parts of the world, it tends to be excluded in U.S. policies.
Incidents have been relatively rare in the past, but insurers appear to be aware that the increased demand for power means that significant outages could become more common in the future. As a result, there is discussion in the market about ways of developing a product that could support the aviation industry in the event of power outages.
Parametric insurance is sometimes suggested as a way of meeting this need. Also known as index-based insurance, parametric insurance covers the probability of an incident occurring, rather than indemnifying the financial loss that stems from an event.
The benefits of parametric insurance are that it does not require extensive claims investigation: if the trigger point is reached, the policy responds, which theoretically makes it an attractive product for both insurers and airports. Triggers can be designed around the business specifics of an airport, such as the number of flights canceled because of dangerous windspeeds or snowfall.
Unfortunately, national grids are large and complicated, and when they go wrong, it can take time to work out why. They also present several different forms of risk, including cyber, weather and natural catastrophe, which means that parametric insurance, which relies on specific definitions as well as trigger points, could struggle to respond. The insurance policy would need to be very clearly and tightly defined. Even with the depth of data that the aviation industry can present, balancing the risk of the aviation organization with the requirements of the insurer has proved impossible for power outage events so far.
The reality is that the insurance sector is unlikely to support a non-damage business interruption policy or parametric insurance policy that does not have a primary trigger or exclusions. Creating one would either be financially prohibitive or unlikely to respond except in a very specific set of circumstances.
The challenge with creating an insurance product to cover a power outage at an airport is that it really doesn’t fit the ‘losses of the few and premiums of the many’ principle of insurance. The limits would need a reasonable number of buyers to enable the pricing to be economically attractive, but the number of entities that would be likely to purchase such a product would make it a very one-sided proposition. As a result, it is unlikely that an insurer could engage at an economically viable premium level.
The aviation industry sits close to the center of a country’s key national infrastructure. Airports need to keep people and goods moving so that economies can function on a day-to-day basis, but they are also a vital conduit for supplies in the event of natural disasters. The growing demand for power potentially increases exposure to the risk of power outages, but there isn’t yet an insurance product available that offers efficient coverage at a reasonable price. The insurance sector is constantly innovating and developing new products to respond to the changing nature of risk though, so if a need is being discussed, a product is likely to be developed.
