Insurance Implications of Green Hydrogen
Legal Development 14 December 2021 14 December 2021
UK & Europe
Energy & Natural Resources
So called “green hydrogen” is hydrogen produced by renewable energy sources. It is widely seen by policymakers as a major contributor to a low carbon future. However, in July 2021, the World Economic Forum reported that green hydrogen accounts for just 0.1% of global hydrogen production.
The current consensus is that the production of green hydrogen on a large scale is possible but technically complex. It will require the development of new technology as well as the incorporation of existing energy production technology. This blend presents significant design, construction and operational challenges. By extension it will present new challenges for Insurers.
What then is different about green hydrogen production from existing renewable energy production and how might this affect Insurers? Below we summarize some of the initial key differences, but it is by no means a comprehensive list.
- An increase in project scope and complexity. In a green hydrogen project, it will no longer be the case that the production of electricity is the end game. Instead, the electricity will be used in the conversion of water (H2O) into hydrogen (H2) and oxygen (O2) in a process known as electrolysis. However, electrolysis has traditionally been inefficient. As a result, the development of new, more efficient, electrolysers will be critical in the expansion of hydrogen as a true fossil fuel replacement. As with any new technology, the allocation of risk for insurers in faulty design extensions (or exclusions) will be key.
- Hydrogen as an output. The risk management of electricity as an output has been developed over decades. On the other hand, hydrogen output on a large scale is still very much in its infancy. Whilst there is no doubt that element analysis and safety protocols are far more sophisticated today than in the days of Thomas Edison and George Westinghouse, it is also true that today’s hydrogen pioneers will not have decades of trial and error to rely on. Recent incidents in South Korea, a major economy that has very much “bet” on hydrogen for energy production and fuel cell technology, has demonstrated just how quickly public opinion can change when serious incidents occur. For insurers, the risks associated with the production of highly flammable products are usually associated with insuring fossil fuel facilities as opposed to traditional renewable facilities. This immediately creates a clear risk profile difference between traditional renewables facilities and green hydrogen facilities.
- Storage and transport. Operators will have to consider the storage and subsequent transportation of the hydrogen that is produced. Again, this requirement mirrors traditional oil and gas production, where storage and transportation of potentially highly flammable substances is critical to the success of any project. For insurers, construction and operational risks associated with on-site storage, safety and processing will require a detailed assessment of facility quality. An added risk is that, as with any new technology, what is regarded as “state of the art” now might develop rapidly. Risk engineers will be critical to this assessment. Whether green hydrogen projects consist of entirely new renewable facilities, or whether they are connected to existing sources of renewable energy, it is likely to be necessary for insurers to utilize their internal risk engineering and underwriting expertise from across business classes.
- Risks of serious incidents. The risk of explosions caused by hydrogen leaks has the potential to be significant. This risk is even greater when considering potential business interruption arising from these explosion-type scenarios.
- The need for consistent power input. A consistent supply of electricity is required for the electrolysis process to take place; however traditional renewable energy sources (such as wind or solar) do not provide consistent power output (i.e. when the wind is not blowing or when the sun not shining). This could have significant consequences for calculating business interruption losses following an insured event. If other back-up sources of electricity generation are required to operate a green hydrogen facility anyway, then to what extent can, say, damage to a wind-turbine be said to result in subsequent business interruption losses for the hydrogen plant? In this circumstance it is likely that some revision to existing business interruption clauses would be required.
There is significant policymaker and government backing to get green hydrogen projects off the ground. Insurers are likely to play a critical role in making such projects commercially viable to investors, however ensuring that insurance products provide a reasonable risk transfer is likely to require insurers to consider their wordings carefully.