A nuclear explosion outside the earth's atmosphere produces an electromagnetic pulse (EMP). While there has been recent Hill, media, and fictional attention on the subject, EMPs have been a threat since the nuclear age. The grid does have certain vulnerabilities, and this post outlines what is (or isn't) at risk from EMP damage. While heavy power system assets such as switches and transformers are largely immune to immediate EMP interference, EMP-induced surge currents could overwhelm some protective systems. More importantly, the modern monitoring, communication, and control equipment are vulnerable to damage from an EMP. Such an attack could cripple power system operations. Detailed writeup follows.
Induced voltages will damage integrated-circuit systems
Unless specifically hardened, semiconductor-based control systems are the most vulnerable grid device. Voltages as low as 50V can destroy the semiconductor materials inside a chip. An EMP can induce an electric field in the range of 10-50kV/m, easily damaging unshielded chips. In addition, any wire (such as a power cord, an antenna, or a network cable) aligned with the EMP can carry damaging voltage spikes inside a device.
External grid monitoring and communication equipment are not normally shielded against EMPs. Advanced meters and syncrophasors are examples of new devices whose microprocessors would be destroyed or damaged by an EMP. Even if the underlying power equipment is operational, an EMP will likely cause failures or misoperation of grid control systems. If remote devices are partially damaged, the central control center may not differentiate between grid fault conditions or misreporting sensors. Special protection systems may deploy inadvertently.
Remote device shielding is likely to be expensive and cumbersome. Instead, it may be more cost-effective to harden only select critical facilities and maintain a replacement inventory for others. Operators may choose to install redundant systems, as devices rarely fail in the same manner. Operators could also codify procedures to fall back on older electromechanical controls.
Heavy power equipment will likely survive an EMP
Large power equipment is often already hardened against electromagnetic field (EMF) interference. For example, power transformers are usually enclosed in metal chambers. IEC 60076-1 specifies that power transformers may not emit nor be vulnerable to electromagnetic disturbances.  The chambers that keep in EMFs will also keep out EMPs. 
The substation can also act as an EMF shield. Like transformers, some substations are constructed with metal cages in windowless buildings to reduce EMF radiation, which also protects the control systems inside. However, lead wires could let in surge currents or propagate EMPs. Complete protection would require the same isolation procedures used for computer systems.
Induced currents on long transmission lines can damage power equipment
When aligned with a long transmission line, an EMP induces very high current and voltage for a short duration, on the order of 10-50 nanoseconds. While the crest currents from EMPs and lightning are about the same order of magnitude, the EMP crest voltages rise much faster than a lightning strike. The fastest voltage rise from lightning has been estimated at 10 MV per microsecond, while the EMP rise can exceed 30 MV per microsecond. 
Surge arrestors are the primary protective device that guard against lightning strikes. In the U.S., surge arrestors must meet performance standards as described in ANSI/IEEE C62.11/NEMA LA-1. However, surge arrestors that meet only these standards may not respond to the fast-rising EMP quickly enough to prevent damage to the protected device. If the arrestor cannot dissipate the current, the primary device would be exposed to a surge similar to a lightning strike, with possible consequences being insulation degradation/failure or structural deformation.
Some authors have suggested additions to these standards to withstand most EMPs.  Indeed many companies market such devices today. The cost of surge arrestor hardening is likely to be small compared to the protected equipment (i.e. transformers). In 1989 researchers tested nineteen distribution transformers for susceptibility to an EMP-induced surge current. Every transformer with an onboard arrestor survived the surge, while about half the transformers without self-protection failed. 
If the arrestor fails, the likelihood of power equipment damage is uncertain. Most power equipment can withstand surges under a voltage rating known as the Basic Impulse Level (BIL). While an EMP can create higher voltages than the BIL, the EMP surge duration (nanoseconds) is much shorter than the BIL test wave (microseconds). Because the total dissipated energy is comparable, the insulation in transformers, circuit breakers, switches and other equipment may well survive an EMP surge.
Multiple EMPs may interrupt power system operations
Some EMP warfare scenarios envision multiple blasts over a short duration. Many fault reclosers are designed to "lock out" if several faults occur rapidly, such as four trips in three minutes. Since an EMP affects all devices over a wide geographic area, multiple EMPs could lock out a large number of reclosers, resulting in islanded areas or lost load. Restoration of transmission paths would require cumbersome manual switching, especially if remote communications are also interrupted.
DC ground currents from solar storms can overhead equipment
Every 11 years, a stream of charged particles flows past the earth, inducing a complementary DC current near the planet's surface. These currents can saturate the cores of neutral-grounded power transformers. During previous solar storm cycles, operators found some metallic power equipment glowing red hot. In addition to solar storms, monopole operation of HVDC lines and cathodic pipeline anti-corrosion systems can also cause similar neutral grounding problems.
To prevent core saturation, operators can install a capacitor between the device and ground, which provides AC grounding but interrupts the DC path. Various manufacturers provide pad-mounted capacitors for this purpose, which can cost in the range of $50k, significantly less than the million-dollar transformers that need to be protected.
After an initial EMP blast, there may be residual currents that mimic the solar storm current. However, since these currents dissipate quickly (within seconds), grounding measures for solar storms may be sufficient to guard against the secondary EMP wave.
Because existing EMF reduction and lightning protective measures can also protect against EMPs, the cost of heavy power equipment EMP protection is not likely to be prohibitive. However, semiconductor-based communications and controls will be vulnerable to an EMP. Proper shielding, spare parts, redundant systems, and electromechanical fallbacks will help the grid operate after an EMP attack.
 IEC 60076-1, "Power Transformers
 Conversation with engineers from Waukesha Electric, August 10, 2009
 Marable, Baird, and Nelson, "Effects of Electromagnetic Pulse on a Power System," Oak Ridge National Laboratory, Interaction Note 173, December 1972.
 Marable, Barnes, Nelson, "Power System EMP Protection," Oak Ridge National Laboratory, Interaction Note 246, May 1975.
 Eichler, C., J. Legro, P.R. Barnes, "Experimental Determination of the Effects of Steep Front-Short Duration Surges on 25 kVA Pole Mounted Distribution Transformers," IEEE Transactions on Power Delivery, Vol. 4, No. 2, April 1989, pp. 1103-1109, in IEC TR 61000-1-3, "The effects of high-altitude EMP
(HEMP) on civil equipment and systems," June 2002.