With modern society's ubiquitous reliance on the electricalgrid, “space weather”—such as a severe solar storm—can wreak havocon the electric-power supply and trigger losses from businessinterruption and damaged physical assets.

While power outages from spaceweather are low-frequency events, they have the potential to causecrippling long-term damage.

In fact, the risk of grid-power outages due to space weatherfits the profile of a market-changing catastrophe such as Katrina,the 9/11 attack, or the Japanese earthquake and tsunami. Each wasunprecedented and believed to be very unlikely—until it occurred. 

LOW-LIKELIHOOD— BUT EXTREMELYHIGH-SEVERITY 

The most-severe space-weather event in recorded history happenedin 1859. Intense solar flares were accompanied by huge coronal-massejections (CMEs) that created the largest geomagnetic storms onrecord. Telegraph operators received electric shocks, and telegraphlines melted. Auroras were seen all over the globe. 

If an event of similar magnitude were to occur today, expertsestimate it would take down more than half the power grid anddamage so many transformers that it would take years torecover.

Such catastrophic events are rare, but how rare? According torecords of past events, Earth experienced an occurrence in the lastapproximately 150 years. Therefore, the yearly chance of occurrenceis 1 in 150.

But this estimate ignores the physical details. A rigorousanalysis may show that we have simply been lucky (or unlucky) inthe past. And it does not take a repeat of the 1859 event to causecatastrophic loss.

In fact, severe space-weather events have occurred much morerecently, giving a hint of what could happen again.

At 2:44 a.m. on March 13, 1989, the Hydro-Quebec power grid washumming along smoothly while most grid customers slumbered. Lessthan two minutes later, however, the entire Quebec power grid hadcollapsed in a rapid cascade of events.

On the same day throughout North America and the United Kingdom,electrical disturbances barraged power grids for several hours. Onthe Hydro-Quebec grid, a number of pieces of equipment sustaineddamage, including two transformers that had to be removed fromservice. 

In New Jersey, a $12 million generation step-up transformer atthe Salem nuclear plant suffered permanent insulation damage.

The cause? A powerful geomagnetic storm triggered by a blast ofmagnetized plasma from the Sun. 

The magnetic storm spawned electric currents in the ground andin power lines—currents which rapidly incapacitated key power-gridcomponents. As a result, schools and many businesses were closedfor the day, and grid customers tried to stay warm at home.

Luckily, within nine hours, power was restored to most customersin Quebec. The Salem nuclear plant also was fortunate. They wereable to install a spare transformer within a “short” six-monthtimeframe.

Over the next two years there were 12 transformer failures inNorth America suspected to be related to the storm. The outage wasa chilling reminder of our reliance on electrical power—and thevulnerability of our grid to geomagnetic storms.

In the 22 years since the Quebec grid was damaged, globalcompanies and regional economies have increased reliance on theelectrical grid dramatically, meaning the impact today of a similarsolar event would be even more drastic.

RISK-MANAGEMENT PREPaRATIONS

Quantifying financial exposure to space-weather events ischallenging. When doing so, risk managers should consider plans forboth short-term and long-term power outages. 

In this context, short-term means hours to a day, with arecurrence interval of a few years. Power-outage-mitigation planscould include back-up generators for critical systems, redundantand co-located software and data systems (especially for revenue,customer-facing and customer-service operations), or a contingentbusiness-interruption policy that covers utility outage. Wheresupply-chain risks are important, a tailored contingentbusiness-interruption policy should be in place. 

A long-term, space-weather-caused outage could last for a week,a month or even a year without electricity. There is no way toprevent it from striking your company; the risk lies in our powergrid.

A mitigating strategy, pre-approved and ready for implementationafter such an event, should include alternative locations to beused for business operations.

Consider that neighboring companies will be searchingfrantically for similar locations and services. The risk of aspace-weather outage is lower in certain places in the UnitedStates than others. Therefore, a company with multiple locationscould have a business-continuity plan that includes relocation ofcritical functions when it becomes clear the outage will lastlonger than a specified time period. Data access at new locationsshould also be considered. 

Beyond financial exposure, another non-trivial aspect iscommunication—how will management communicate with each other,employees, partners and customers? Corporate reputation andemployee morale should be addressed within the company'srisk-management plan.

Companies that communicate proactively are viewed as trustworthyleaders by their customers, employees, the media and localgovernment. Organizations that appear to change their spokespersonor alter their plans every few days, however, are perceived asunprepared. When the problems continue for days or months, publicpatience can dissolve into a feeding frenzy. 

While the chance of a space-weather-caused long-term outage issmall, it cannot be disregarded—if such an event does occur, thecost would be staggering.