Hydrogen: managing the risks of a leading climate change solution
With the emerging hydrogen industry expected to play a leading role in the transition to a low-carbon future, the sector has the potential to be a notable new area of growth for energy carriers
Hydrogen is predicted to play a leading role in the energy transition with the so-called “green oil of the 21st century” increasingly promoted by governments worldwide.
As an alternative to fossil fuels, it could be a valuable tool for tackling climate change in future, helping many industries to reduce their CO2 emissions. But what opportunities and challenges does this present and how can the insurance industry assist this aim?
The global shift toward decarbonisation has triggered strong momentum in the hydrogen industry.
Hydrogen offers several options for the transition towards a low-carbon economy: as an energy carrier and storage medium for conversion back to electricity; as a fuel for all means of transport and mobility; and as a potential substitute for fossil hydrocarbons in industries such as steel production or petrochemicals.
Hydrogen, produced from low-carbon or even renewable energies, is of growing importance for the substitution of fossil fuels. It has the potential to morph from a niche power source into big business, with countries committing billions to scaling up their infrastructure and with projects being introduced around the globe.
There are more than 200 large-scale production projects in the pipeline and the UK government has said it will unveil a hydrogen strategy in 2021 to help reach its 2050 net-zero goal.
Despite these successes, there are challenges to overcome in order for hydrogen to become a major part of the energy transition, such as the cost of production, supply chain complexity and a need for new safety standards.
Assessing the risk environment
Many of the technologies used for the generation of hydrogen or energy from hydrogen are well known in principle. Today the vast majority of hydrogen is produced and used on site in industry. What is new, is that the type and scale of its adaption is changing fundamentally, with the expectation that there will be rapid growth of plants in future.
From a technology perspective, the following operational risks are a primary focus:
Fire and explosion hazards. The main risk when handling hydrogen is of explosion when mixed with air. In addition, leaks are hard to identify without dedicated detectors since hydrogen is colourless and odourless. A hydrogen flame is almost invisible in daylight.
Industry loss investigation statistics show approximately one in four hydrogen fires can be attributed to leaks, with around 40% being undetected prior to the loss.
An Allianz Global Corporate & Specialty (AGCS) analysis of more than 470,000 claims across all industry sectors over five years shows how costly the risk of fire and explosion can be.
Fire and explosions caused considerable damage and destroyed values of more than €14bn ($16.7bn) over the period under review. Excluding natural disasters, more than half (11) of the 20 largest insurance losses analysed were due to this cause, making it the number one cause of loss for businesses worldwide.
Material embrittlement. Diffusion of hydrogen can cause metal and steel (especially high-yield steels) to become brittle and a wide range of components could be affected, for example, piping, containers or machinery components.
In conjunction with embrittlement, hydrogen-assisted cracking (HAC) can occur. For the safety of hydrogen systems, it is important that problems such as the risk of embrittlement and HAC are taken into account in the design phase.
This is ensured by selecting materials that are suitable under the expected loads as well as considering appropriate operating conditions (gas pressure, temperature, mechanical loading). High-yield strength steels are particularly at risk of hydrogen-related damage.
Business interruption exposures. Hydrogen production or transport typically involves high-tech equipment and failure to critical parts could result in severe business interruption (BI) and significant financial losses.
For example, in case of damage to electrolysis cells (used in water electrolysis) or heat exchangers in liquefaction plants it could take weeks, if not months to replace such essential equipment, resulting in production delays.
In addition, business interruption costs following a fire can significantly add to the final loss total. For example, AGCS analysis shows that across all industry sectors, the average BI loss from a fire incident is around 45% higher than the average direct property loss – and in many cases the BI share of the overall claim is much higher, especially in volatile segments such as oil and gas.
Increased insurance demand expected
To date, standalone hydrogen projects have been rare in the insurance market. However, AGCS, Allianz’s entity for large-scale corporate and specialty risks, has been covering hydrogen production as part of integrated refining and petrochemical facilities and as part of our industrial gas programmes in our property book for many years now.
Given the growing number of projects planned around the world, insurers can expect to see a significant increase in demand for coverage in future, especially for construction and operation of electrolysis plants or pipelines for hydrogen transportation.
This has the potential to be a notable new area of growth for energy insurers, so underwriters will need to stay on top of the potential risks as this develops.
With any energy risk, fire and explosion is obviously a key peril. Business interruption and liability exposures are also crucial to consider. Similarly transit, installation and mechanical failure are important risks.
In response, AGCS is developing a more detailed underwriting approach for hydrogen projects, ensuring that we can serve our clients and brokers globally.
To meet the demands of market growth the insurance industry must examine new products as well as reviewing existing options.
AGCS is already tailoring our product capabilities for this new segment and looking to offer cross-class solutions such as joining energy and construction, marine and liability coverages for smaller hydrogen facilities, if there is demand for a cross-product offering - as we currently do in the onshore wind and solar photovoltaics segments.
There is rightly great enthusiasm around hydrogen solutions as a key driver towards a low-carbon economy. While we must acknowledge that these projects involve complex industrial and energy risks, they present opportunities for our industry where our high levels of engineering expertise and insurance know-how can lead to solutions and coverage needed to help unlock hydrogen’s potential.
Types of hydrogen production
There are various methods by which to produce hydrogen. These can be broadly divided into two groups regarding the fuel to do so – fossil fuels and renewable sources.
• Green: Generated using electrolysis powered by renewable electricity
• Blue: Production is based on fossil fuels but with CO2 emissions captured
• Gray: Made using fossil gas with no emissions captured
• Black: Made using coal
• Brown: Made using lignite
• Turquoise: Heat is used to split fossil gas in a process known as “pyrolysis”
• Purple, pink or yellow: Electricity and heat from nuclear reactors could both be used to produce hydrogen, but there is no widely agreed colour for such methods.
Source: Adapted from Carbon Brief, In-depth Q&A: 'Does the world need hydrogen to solve climate change?', 30 November, 2020