The focus of this newsletter is to offer a general outline on the business interruption/

business income costs that are associated with a GSU transformer failure.
The Basics on Generator Step-Up Transformers
Generator Step-Up transformers step-up generated voltage and reduce generated current
so power can be transmitted over distance with minimal loss. This is the basic principle of
Ohms law. In other words, if the voltage of the secondary is greater than the primary as
noted on the transformers nameplate, then the transformer is a GSU transformer.
Step-down transformers are transformers that perform the reverse so that transmitted
power can be used by equipment that cannot stand higher voltages and require higher
currents.
Size of Transformers
Both GSU and Step-down transformers are measured/ sized by either MVA (1 MVA is
1,000 KVA) or KVA ratings that are based on the simple formula: AMPS X VOLTS = KVA.
This measurement reflects an hourly metric. For example, 176 MVA is 176,000 KVA per
hour.
While there are exceptions, a good rule of thumb is to multiply the transformers highest
MVA rating (the size of a transformer) by its Power Factor (efficiency rating) to determine
the power generation of a power plant in MW.
Common GSU transformers can have material time delays in sourcing typically ranging
from 10-400 MVA. Transformers over 400MVA tend to be rare and therefore fast-track
alternatives are difficult to come by unless transformers can be connected in parallel or the
generating entity can operate at a lower generation output.
Transformer MVA to MW Formula
GSU Transformers highest MVA Rating (size) X Power Factor (usually a figure between
.80 to .98 with .85 a common rule of thumb) = MW of generation capacity by the powergenerating entity.
For example, a 100 MVA transformer supports the generation of 85 MW of power per hour
by a turbine/generator combination assuming a Power Factor of .85. By this math, the
failure of a 100 MVA transformer means that 85 MW of power cannot be sold per hour.
From a real world perspective, 7 FA turbines / generating units are fairly common. The 7 FA
produces 184 MW in simple cycle and might require transformers larger than 200 MVA and
substations designed to match both this generation capacity and the needs of the
transmission system (voltages).
The High Economic Cost of a GSU Transformer Failure
The wholesale price at which power can be sold ultimately depends on both supply and

demand variables. In some cases, power is sold by a power generating entity at spot rates
to the marketplace.
In other cases, power is sold by a prior agreement such as a Power Purchase Agreement
(PPA) or by another form of future contract; both of which might require the power
generating entity to supply power even if it cannot produce it (i.e. the power generating
entity might have to go into the market and buy power at a high spot price and then sell
this same power at a lower price to the counterparty of a PPA). This situation incurs a loss
for the generating company.
The price of power is not universal. The price of power in Ontario will not be the same as
the price of Power in California due to supply, demand and different local levies (including
taxes and surcharges). Moreover, the price of power in each geographic location can also
change quite considerably on a calendar basis due to supply and demand as illustrated by
the following table.

While the above table is in Canadian dollars the important item to note is the variability of
price between months and years. The difference in some cases is well over 100%. The
selection of a lost profit per kw/hour number to use in any business interruption
calculation is not as easy as one might first imagine. One needs to know what the average
sales price per kw/hour is during the period of the failure and the average cost to produce
the power per kw/hour during this same time frame. The difference between these
amounts is a simple way of calculating the lost profit per kw/hour (lost business income
per kw/ hour) due to the failure.
GSU failure history indicates that many transformer failures happen at high demand/price
times when loads on GSU transformers are greatest. usually summer months. Thus, one
might consider reviewing the potential impact of business interruption (lost profits and lost
business income) due to a transformers failure assuming a range of lost profit per
kw/hour estimates ($.01 per kw/ hour; $.0125 per kw/ hour; $.015 per kw/ hour etc.) as
both the sales price and cost of production are independently variable.
There will likely always be strong debate on the appropriate numbers to use when
calculating the cost of producing/sourcing power (only allowing certain variable costs vs.

allowing both variable and fixed costs) in any failure situation. Consequently, a discussion
relating to the cost of power production on a per kw/hour basis is well worth having both
internally and with insurance and accounting advisors who have experience with business
interruption losses before any failure happens.
It should be highlighted that even a small change in the lost profit per kw/hour number (in
cents or fractions thereof) used in a failure situation can make a huge difference in the
ultimate calculation in lost profits when expressed in total dollars (see below). Significant
amounts of stress and litigation costs can be avoided by having all parties to a failure
(including the insured, insurance company and accounting parties) sharing clear
understandings in advance. These understandings should not only relate to the details
pertaining to the calculation of the business income loss, addressing both the variable and
any allowed fixed costs, but to the required reporting procedures and documentation
necessary to file or substantiate a business income or business interruption claim. Such
understandings might even be outlined by agreed hypothetical loss examples.
Moreover, it should be also noted that the existence of any Power Purchase Agreements
(PPAs) between the power generating entity and users can often materially impact the
number used in the calculation of lost profit per kw/hour as the power generating entity
might have to enter the open market to buy power at a very high cost to meet its
obligations. This could mean the full purchase price of power (at open per kw/hour market
terms) less the stated selling price per kw/hour in the PPA would need to be added to the
other costs of the outage by the power producer. In a PPA situation, there is a chance that
the power producer is forced to sell power at a loss.
Consequently, care needs to be taken in understanding any possible insurance business
interruption or business income coverage when there is exposure under PPAs or other
agreements. The situation could be that fuel is supplied to a power-generating operation
under agreed terms that also could increase the cost of an outage for a power producer
(i.e. take or pay gas agreements). Insurance coverage might not fully embrace losses
associated with some or all obligations made under these types of agreements unless
specifically addressed ahead of time.
Given the above, one can build a simple calculation table for the cost of various GSU
transformer failures. In the table below, we are assuming a simple case of a Power Factor
of .85 (per earlier discussion) and a simple lost profit per kw/hour number of $.01.
Again, the difference between the sales price of power and the cost of power production is
unique to each failure. The $.01 used in this table has no basis other than to illustrate a
situation where the power producer might have been selling power at $.05 and with a $.04
cost of power production. $.05 -.04= $.01 etc.

Power-generating businesses that are insured for business interruption or loss of business
income (either by election or due to financing requirements-- investors can require this
coverage as part of their financing terms) often have deductibles with potentially onerous
consequences to the insured. In some cases, these deductibles are noted in dollar
amounts. In other cases, they are stipulated in outage day periods with 30, 45, and 60-day
deductible periods commonly stipulated.
Thus, per the above table, a power generating client with a 200 MVA transformer and a 30
day deductible might have to carry $1,224,000 in net losses before making any insurance
recovery. Small differences in lost profit per kw/hour can mean high costs on a monthly
basis.