Hydrogen economy: Opportunities and risks in the energy transition
As an alternative to fossil fuels, hydrogen has the potential to morph from a niche power source into a big business.
Hydrogen is predicted to play a leading role in the energy transition, with the “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 the future, helping many industries to reduce their CO2 emissions.
Allianz Global Corporate & Specialty (AGCS) just released a new risk bulletin that highlights some of the opportunities and challenges of a trend at the forefront of the energy industry and also assesses the risk environment of technologies associated with the production, storage and transportation of green hydrogen.
Global promotion
Driven by climate change, the possibilities of energy storage, use as a fuel, and the long-term intention to replace reliance on coal and oil, many countries around the world have already launched significant hydrogen funding programs. As of the beginning of 2021, over 30 countries have produced hydrogen roadmaps and governments worldwide have committed more than $70B in public funding, according to consulting firm McKinsey.
Governments have also included new capacity targets and sector-level regulations to support these hydrogen initiatives. The German government, for example, is betting on hydrogen as part of its decarbonization strategy and has recently announced that it will fund hydrogen projects in the billions of euros. One of the most significant announcements has been the European Commission’s “hydrogen strategy for a climate-neutral Europe,” released in July 2020, which includes an ambitious target of 40 gigawatts (GW) of European electrolyzer capacity to produce “green” hydrogen by 2030.
In the U.S., more than 30 states have already adopted action plans to promote hydrogen technology. The goal is to build a broad-based hydrogen industry that will generate $140bn in annual income and employ 700,000 people by 2030.
$300 billion in projects
Such government initiatives mean that project activity is picking up speed around the world. According to an analysis from McKinsey, there are more than 200 large-scale production projects in the pipeline and, if all projects come to fruition, total investments will exceed $300B in hydrogen spending through 2030 — the equivalent of 1.4% of global energy funding.
In analyzing private investments among Hydrogen Council members, which represent over $6.8 trillion in market capitalization and more than 6.5 million employees, McKinsey sees a clearly accelerating trend. Members expect to increase investments six times through 2025 and 16 times through 2030, compared with 2019 spending. Europe leads the way, accounting for more than half of these projects, with Australia, Japan, Korea, China and the U.S. also seeing strong growth.
Hydrogen uses
Hydrogen offers several options for the transition to a renewable economy: as an energy carrier and storage medium for conversion back to electricity; as fuel for all means of transport and mobility, and as a substitute for fossil hydrocarbons in different industries, such as steel production, petrochemicals and refineries.
In industry, gas turbines, reciprocating engines and fuel cells are currently being further developed for the use of hydrogen. Its use in the petrochemical industry is also being tested. Furthermore, hydrogen in fuel cells can be used for heavy transport in trains, airplanes or ships. Hydrogen not only makes it possible to drive without CO2 emissions but also helps to cover longer distances and refuel faster than battery-powered vehicles.
Assessing the risk environment
Work is underway worldwide to further develop technologies in the fields of hydrogen electrolysis, storage and transport. The vast majority of hydrogen today is produced and used on-site in industry. The production of ammonia and oil refining are the prime purposes, accounting for two-thirds of hydrogen use. Ammonia is used as nitrogen fertilizer and for the production of other chemicals. At petroleum refineries, hydrogen is added to heavier oil for transport fuel production.
Below is an outline of the risk environment associated with green hydrogen production, storage and transportation:
Fire and explosion hazard: The main risk when handling hydrogen is an explosion when mixed with air. In addition, leaks are hard to identify without dedicated detectors since hydrogen is colorless and odorless. A hydrogen flame is almost invisible in daylight.
Loss investigation statistics show that many hydrogen fires result from the self-ignition of sudden hydrogen release through rupture of disks and pressure relief valves. About 25% of the losses were attributed to leaks. Of these leaks, 40% were undetected before the loss. Contributing factors were inadequate ventilation and inadequate purging. The data shows the advantage of locating hydrogen equipment outdoors. Hydrogen has been accidentally released many times outdoors without ignition. Almost all indoor releases have ignited. Indoor releases resulted in more than three times as many explosions as fires, whereas outdoor releases have resulted in an approximately equal number of fires and explosions.
Material embrittlement: Diffusion of hydrogen can cause metal and steel 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. This is done by selecting materials that are suitable under the expected loads. The choice of materials is as important as the consideration of the operating conditions (gas pressure, temperature, mechanical loading).
Handling hydrogen and business interruption in liquefaction plants: The main risk in liquefaction plants is the handling of the explosive hydrogen, which requires sufficient protective measures.
To date, only single-line production plants have been built. This means a high risk of business interruption costs may ensue in case of failure of individual components. Spare parts for some process equipment, such as compressors, can easily be kept in stock, but larger equipment, such as heat exchangers, are unique and therefore critical with respect to business interruption.
Storage and transportation techniques: Storage of pressurized hydrogen in large caverns is already successfully done. The risks associated with the storage of pressurized hydrogen in tanks are well understood, as this form of storage has been used for decades. With liquefied hydrogen, there has been significant improvement in the durability and quality of tanks used, with incidents of damage being rare.
Health and safety: Hydrogen is not toxic, and the end product of combustion is clean water. However, careful occupational health and safety measures are necessary, not least because of the flammability of hydrogen/air mixtures.
Insurance outlook
Given the numerous projects planned around the world, insurers can expect to see a significant increase in demand for insurance in the future to construct and operate electrolysis plants and pipelines for green hydrogen production and transportation.
While this has the potential to be a notable new area of growth for energy insurers, underwriters will need to stay on top of the potential downsides. Insurers will need to develop a more detailed underwriting approach to this segment and apply the same rigor in risk selection and underwriting as they do on existing energy construction and operational business.
These are complex industrial and energy risks involving partly prototypical technologies, which require high levels of engineering expertise and insurance know-how in order to be able to provide coverage. However, many of the risks, such as the risk of fire, are well known to insurers from many years of insuring the oil and gas sectors. While fire and explosion are key perils, as with any energy risk, business interruption and liability exposures are also important. Transit and installation issues and mechanical failure exposures are also present.
For an insurer, the growth of the hydrogen sector represents another crucial step in its efforts to support society and industry alike in the journey to a carbon-neutral future.
Chris van Gend is global head of energy and construction, chief underwriting officer at Allianz Global Corporate & Specialty (AGCS) based in Munich. He was previously AGCS’ regional manager engineering Asia and has more than 20 years of experience in the insurance industry.
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