Hydrogen is of growing importance for the substitution of fossil fuels in the fields of energy, supply, mobility and industry. Hydrogen has the potential to morph from a niche power source into big business, with countries committing billions to scale up their infrastructure and with projects being introduced around the globe. But there are challenges to overcome for hydrogen, such as the cost of production, supply chain complexity and a need for new safety standards.
Allianz Global Corporate & Specialty (AGCS) just released a risk bulletin that highlights some of the opportunities and challenges of a trend at the forefront of the energy industry and assesses the risk environment of technologies associated with the production, storage and transportation of green hydrogen.
Backed by governments: Over 30 countries have produced hydrogen road maps
The global shift toward decarbonization has triggered strong momentum in the hydrogen industry. Hydrogen offers several options for the transition toward 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.
Around the world, there is strong governmental commitment for hydrogen initiatives, backed by financial support and regulation: As of the beginning of 2021, over 30 countries have produced hydrogen road maps, and governments worldwide have committed more than $70 billion in public funding, according to McKinsey. There are more than 200 large-scale production projects in the pipeline.
In the U.S., more than 30 states have already adopted plans to promote hydrogen technology. The goal is to build a broad-based hydrogen industry that will generate $140 billion in annual income and employ 700,000 people by 2030. China is also planning to invest several billion yuan in the promotion of fuel cell technology over the next four years, which should result in innovative hydrogen production facilities throughout the country.
Assessing the risk environment
Many of the technologies used for the generation of hydrogen or energy from hydrogen are well-known in principle. AGCS risk consultants have considerable experience with handling hydrogen projects in a number of different areas. From a technology perspective, the operational risks include:
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 because hydrogen is colorless and odorless. 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.
Fire and explosion protection needs to be considered on three different levels. Preventing the escape of inflammable gases as much as possible. Ensuring safe design of electrical and other installations in areas where ignition sources cannot be excluded. Constructing buildings and facilities to withstand an explosion with limited damage.
Proper handling of hydrogen gas is critical, and any emergency requires appropriate fire safety equipment.
An 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 €14 billion ($16.7 billion) over the period under review. Excluding natural disasters, more than half (11) of the 20 largest insurance losses analyzed were due to this cause, making it the #1 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 add significantly 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.
See also: How Insurers Can Step Up on Climate Change
Significant increase in demand for insurance expected
While standalone hydrogen projects have been rare in the insurance market to date, hydrogen production as part of integrated refining and petrochemical facilities, and as a part of AGCS’ coverage of industrial gas programs in its property book, has long been a staple of AGCS’ insurance portfolio. Given the numerous projects planned around the world, insurers can expect to see a significant increase in demand for coverage to construct and operate electrolysis plants or pipelines for hydrogen transportation.
As with any energy risk, fire and explosion is a key peril. Business interruption and liability exposures are also key, as are transit, installation and mechanical failure risks. We are developing a more detailed underwriting approach for hydrogen projects, ensuring that we can serve clients globally. There is rightly great enthusiasm around hydrogen solutions as a key driver toward a low-carbon economy, but we shouldn’t overlook that these projects involve complex industrial and energy risks and require high levels of engineering expertise and insurance know-how to be able to provide coverage. We will apply the same rigor in risk selection and underwriting for hydrogen projects that we do on our existing energy construction and operational business.
For the full overview of loss prevention measures for the hydrogen economy, download the new risk bulletin here.
