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Hydrogen in the UK: Increasing insurability of a project

In this article — the third in a three-part series on hydrogen in the UK — we discuss how developers can help increase the insurability of their projects.

27/11/2022 · 4 minute read

In April 2022, the UK doubled its commitment to developing hydrogen as a secure, low carbon replacement for fossil fuels, targeting 10 gigawatts (GW) of hydrogen productive capacity by 2030. The government aims for at least half of this capacity to come from electrolytic — also known as “green”— hydrogen, and projects UK investment potential to reach £9 billion by 2030.

With 59 hydrogen projects across the UK currently, the benefits of hydrogen as an energy source are widely recognised. However, the production, storage, and transport of hydrogen, as well as any by-products, is not without risk.

In this article — the third in a three-part series on hydrogen in the UK — we discuss how developers can help increase the insurability of their projects.

Although hydrogen production is not a new concept and is well known to insurance markets, the number of projects and their scale is. There are many associated risks affecting the availability of cover. However, there are ways to increase the insurability, and thus bankability, of a project. These include:

1.    Mitigate against business interruption (BI) and delay in start-up (DSU) risks

Successful clean hydrogen production, storage, and transport depends on an ever-evolving value chain that combines new and existing energy infrastructure.

For instance, green hydrogen is produced from electrolysers that use renewable energy, namely wind, solar, or hydro. Hydrogen converted using these power sources can be stored in hydrogen storage facilities or converted to ammonia or other hydrogen storage vectors. Conversely, blue hydrogen production converts energy from fossil fuels and requires integration with carbon capture and storage (CCS) facilities. These renewable energy sources, gasification plants and electrolysis facilities, and storage facilities often have many stakeholders.

Some project participants, such as industrial gas companies, already appreciate the risks and hazards associated with hydrogen production and have process safety management systems in place. Businesses new to the hydrogen landscape and process safety management, like current power companies, may be at a disadvantage.

Before seeking insurance, developers and investors should enlist the advice of risk engineers to better understand their facility’s unique risk profile. Using a risk workshop, developers and investors can better assess potential property damage, business interruption, and liability losses.

The insurability of a hydrogen project depends mostly on the design of the facility and redundancy of equipment. Potential insureds may be able to limit their BI risks by having redundant equipment, such as step-up and step-down transformers, rectifiers, electrolysers and other equipment. By having these redundancies readily available and outlined in a technology risk management plan, companies may be able to limit their estimated maximum BI loss.

It is crucial for developers to understand that BI insurance does not typically respond to non-damage related events, even though BI and DSU costs might not always be damage related. Reviewing contractual documentation and insurance policy specifics with a risk adviser can help companies ensure that appropriate risk allocations and insurance specifications are in place.

2.   Reduce risk in prototyping technology

Some of the technology and design for the electrolysers used in green hydrogen production has not been used at a very large scale. There are currently two main types of technology for green hydrogen electrolysers: alkaline and proton exchange membrane (PEM.)

Large-scale alkaline electrolysers have been used in the chlor-alkali industry for decades. PEM electrolysers may ultimately have an advantage over alkaline as they do not require a liquid electrolyte, such as potassium hydroxide; however, due to their lack of use at the same scale as alkaline electrolysers, they can be more difficult to insure.

Businesses will need to demonstrate insurability of their projects via detailed development plans, feasibility studies, and risk analysis. Developers hoping to secure insurance for projects with PEM electrolysers might need to establish the lifetime of their electrolysers by providing evidence that they can run for a specific amount of time without needing significant unplanned maintenance between planned outages. Companies that can demonstrate their intention to gradually build up the scale of their hydrogen production using recognised technologies will have an advantage.

3.   Control risks associated with carbon capture

Although the UK government aims to have half of its hydrogen derived from green sources, much of it will still be blue hydrogen, which is produced from non-renewable fossil fuels. Blue hydrogen production generates CO2, directly or indirectly, which then needs to be captured. The captured CO2 must then be compressed, transported, and, typically, injected into geological formations at least one kilometre underground, or it needs to be used. For more information regarding the risks associated with carbon capture, utilisation, and storage (CCUS) in the UK, please read our CCUS series.

Frequently, the hydrogen production facility and carbon capture plant are combined and owned and operated by one organisation. However, the CO2 transportation and storage facilities are often owned by separate entities. Blue hydrogen project developers must consider the infrastructure required to integrate with a CCUS facility as well as any downstream CO2 applications. Dependence on third parties for CCUS leads to increased BI and contingent BI (CBI) risk exposure.

If the carbon cannot be captured, the hydrogen production facility will need to start venting the CO2 into the atmosphere or stop production. These actions may cause developers to suffer contract penalties for delay and the loss of carbon credits. Additionally, UK businesses in energy intensive sectors are subject to the UK Emissions Trading Scheme, which requires companies to pay a large sum for each tonne of CO2 emitted and not captured, with prices recently reaching £90 per tonne.

Traditional BI/CBI policies typically are not designed to address emissions related BI exposures. For hydrogen project developers to secure coverage that would enable them to recover value lost due to CO2 emissions, it is critical to involve specialised risk and insurance advocates who can assess these exposures, and design and place enhanced BI insurance solutions.

Conclusion

With a structured risk management framework, developers and investors can better position themselves to understand and mitigate the risks associated with hydrogen projects, which in turn helps them make their facilities safer, more reliable, and better able to secure appropriate insurance coverage. Additionally, by incorporating robust risk analysis into the project’s design from the beginning, developers can increase the ultimate bankability of their projects.

Marsh Specialty is the only broker to offer a unique hydrogen insurance facility, backed by a panel of top rated global insurers, providing pre-agreed coverage, uniform terms, and risk engineering services. The facility secures 100% insurance capacity for construction and operational risks up to US$300 million, and is available for any hydrogen project, globally.

For more information about hydrogen risk, contact your Marsh adviser.

Meet the authors

Placeholder Image

Andrew Herring

CEO, Energy and Power, Marsh Specialty UK

  • United Kingdom

Paul Nicholson

Paul Nicholson

Managing Director, Energy and Power

Prakash Patel

Prakash Patel

Global Hydrogen Risk Engineering Leader

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