• Green hydrogen is produced without carbon emissions and could help to decarbonize heavy industry, steel production, mining and trucking.
• If governments honor their carbon commitments, over a quarter of the hydrogen produced by 2030 could be low-emission.
• The green hydrogen market is potentially global, and international trade is forecast to speed up from 2035, with one-third being traded across borders by 2050.
• Risks and hazards, such as leaks, fires and embrittlement, will be heightened as new players enter the market, existing infrastructure is repurposed and technology evolves.

From the Apollo space mission to Zeppelin airships, human ingenuity has long dreamed up ways to make the power of hydrogen fly. Now, as the world powers up to reach climate goals in the midst of an energy crisis, the universe's most abundant element is once again taking up airtime as debate continues over its usage and feasibility as part of a secure, low-carbon future.

Recent innovations have included French transport giant Alstom's fleet of hydrogen-powered trains in Germany and Siemens' planned rollout of a hydrogen train with Deutsche Bahn in 2024[1]. Rolls-Royce and Airbus are researching the feasibility of hydrogen-powered aircraft[2].

Hydrogen's big selling factor is that, unlike fossil fuels, it produces no carbon dioxide when it is burned, only water vapor. But most hydrogen today is produced using natural gas, or methane, emitting greenhouses gases (GHGs) as a result. This is known as 'gray' hydrogen. 'Green' hydrogen relies on energy from renewable sources like wind or solar and is emissions-free (see chart).

There is potential in green hydrogen to decarbonize high-polluting sectors, such as heavy industry, steel production, mining, and trucking. As well as powering mobility, hydrogen allows energy to be stored, distributed, or transported for conversion to electricity.

Over 70 countries around the world[3] have national hydrogen strategies and it is estimated hydrogen could meet up to 24% of the world's energy needs by 2050. According to the International Energy Agency (IEA)[4], global hydrogen demand reached 94mn tonnes in 2021, and if governments fully honor their climate pledges this could increase to 130mn tonnes by 2030, with more than a quarter being met by low-emissions hydrogen.

In 2021, however, the globally installed green hydrogen capacity was only around 300MW – the equivalent of one gas turbine or less than the globally installed solar PV capacity 20 years ago[5]. Widespread take-up of the technology will require the large-scale building of electrolysis plants with export infrastructure, storage and transportation facilities.

The scale-up is challenged by production costs, land availability, the construction or repurposing of infrastructure, evolving technologies, storage (of hydrogen itself and the energy it generates), and water scarcity. Despite the hurdles, we have seen business interest gathering momentum, with projects around green hydrogen proliferating.

In 2021 Swedish venture Hybrit[6] announced it had supplied Volvo with steel for use in trucks made using green hydrogen, and recently Stockholm-based H2 Green Steel announced it had secured €3.5bn in debt financing[7] from European financial institutions to build a hydrogen-powered plant in northern Sweden. There are more than 100 pilot and demonstration projects for using green hydrogen and its derivatives in shipping, says the IEA, while in the power sector, projects involving the use of hydrogen and ammonia could result in a total capacity of 3.5GW by 2030[8].

A future cross-border trade

We're looking at a potentially global market. The EU is driving green hydrogen and other renewables with its Green Deal. It recently announced the launch of a European Hydrogen Bank[9], which will invest €3bn [over $3bn] to support the hydrogen economy, and under its REPowerEU Plan[10], it aims to import 10mn tonnes of renewable hydrogen by 2030 and produce 10mn tonnes domestically. However, some of the biggest hydrogen plants we've seen in the pipeline recently have been in the US and Middle East.

Growth in green hydrogen is being propelled by stakeholder pressure on business to decarbonize, net-zero commitments and the need to reduce reliance on Russian gas. It is anticipated the costs of production will come down as fossil fuel costs rise, renewables costs continue to fall, higher production capacity creates economies of scale, and governments support development with subsidies.

The international hydrogen trade is set to pick up speed from 2035, according to a report from IRENA[11] (International Renewable Energy Agency), which envisages two-thirds of green hydrogen production in 2050 being used locally, and one-third traded across borders. The agency sees green hydrogen competing on cost with blue by the end of this decade. Countries such as Chile, Morocco and Namibia are poised to become green hydrogen exporters, while fossil-fuel exporters such as the UAE, Australia, Oman, and Saudi Arabia have the potential to pivot to green hydrogen production as well as blue. Hydrogen importers are likely to include Japan, South Korea, and parts of Europe and Latin America. China is the world's biggest consumer and producer of hydrogen, using 24mn tonnes a year, followed by the US, which pledged $9.5bn in its 2021 infrastructure bill for the country's fledgling clean hydrogen sector.

Assessing new risks and hazards

So what does the scale-up of a relatively new industry mean for risk managers and insurance?

Many larger companies investing in hydrogen are known to us from their oil and gas activities. AGCS risk consultants have extensive experience of the hazards of fossil fuel production as well as hydrogen. But we are now dealing with an industry preparing for rapid growth. Hydrogen can be produced almost anywhere, and it can be centralized or decentralized. Along with the established oil and gas players, there will be new, less experienced, operators in the market and some will operate remotely, using remote monitoring technologies, perhaps in repurposed facilities. It is essential robust risk-management protocols are in place.

As with other energy industries, fire and explosion is a major peril. The Allianz Risk Barometer 2022 shows it to be the third highest risk in the oil and gas sector after business interruption and natural catastrophe.

Hydrogen gas is a very small molecule, so it is easy for it to escape. You can't see or smell it, it's highly flammable, and when ignited the flames are almost invisible. Around 25% of hydrogen fires are the result of leaks, so proper handling is essential. The appropriate fire safety and detection equipment should be available, and care must be taken with the design of electrical installations, including reducing ignition sources, and buildings, to minimize gas confinement and subsequent explosions.

Risk consultants will consider how accessible a site is and whether it is a greenfield or brownfield site. It's a given plants should not be built in flood zones and should avoid hurricane zones – if possible. The layout should avoid congestion, such as electrolyzers placed without adequate spacing. The use of firewalls to divide up spaces can mitigate large losses.

Green hydrogen plants also need to ensure consistent sources of renewable energy or risk business interruption losses if they lose power.

With new players entering the industry, new risks will enter the value chain. The reputation of suppliers and manufacturers must be assured, particularly as the production of green hydrogen is developing new technology and materials to reduce costs. Some electrolysis technologies use scarce materials such as iridium and platinum and high technological membranes, which can result in long lead times and incur business interruption costs.

The right choice of materials is key to avoiding embrittlement – a material degradation caused by hydrogen to metal structures, not only in large machinery but also valves, piping, and components. Materials should be selected according to their expected loads and operating conditions such as gas pressure and temperature.

Adapting to an evolving market

Green hydrogen is an emerging industry, so AGCS has seen few major insurance losses to date. But there have been losses in the marketplace related to hydrogen fueling stations and hydrogen escaping followed by explosion because flanges were not assembled and tightened correctly.

The production of hydrogen has long been an inherent part of the refining process, and AGCS is a well-established insurer of this. Historically, hydrogen has mainly been produced by steam reforming, but a few years ago, there was a lot of discussion about 'Power to Gas' – where excess electricity is generated by renewables. AGCS took a deep dive into the potential and pitfalls of hydrogen power. It was the right step because the sector is now growing rapidly, as well as its attendant risks.

AGCS recently deployed capacity for the construction of one of the world's largest renewable energy hubs, to produce, store, and deliver hydrogen in the US. It will be built on the site of a coal-fired plant, which will be dismantled to make way for a cleaner, greener fuel.

Given the innovative nature of such facilities, the underwriting and risk consulting teams in North America worked closely with their counterparts in Munich. We got to know the insured and understand their construction methodology. There was close communication between the AGCS energy and power generation practice groups. Cross-collaboration allowed the teams to confirm the project was technologically sound, used reliable equipment, employed experienced staff, and was overseen by reputable management.

AGCS will continue to develop our underwriting for projects of this kind so we can serve global clients and support their energy transition in line with risks as they evolve.

Our expert

Robert Ter Morshuizen | robert.termorshuizen@allianz.com