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Marsh’s first-of-its kind hydrogen insurance signals energy market shift

© Shutterstock / Evan El-AminAIG provides hydrogen insurance

Top insurance broker and risk advisor Marsh has launched the first ever insurance facility for green and blue hydrogen projects to back this emerging sector in the clean energy transition. The move signals a shift of the insurance sector amid mounting risks of the fossil fuel industry, but the risks of hydrogen must not be underplayed.

Marsh, Liberty Specialty Markets, and AIG launch new insurance facility for blue and green hydrogen projects.

Mounting risks of the fossil fuel industry have put pressure on insurance brokers to shift to cleaner solutions.

Interest in hydrogen to replace fossil fuels has been growing rapidly across the world, but the risks of this emerging technology need to be acknowledged.

Interest in hydrogen booming

There has been a lot of buzz about hydrogen as an important technology in the transition to a global clean energy transition. While the sector is still in its early stages of development, a flurry of projects, policy and investment announcements have added to the huge interest in this technology.

However, as with any new technology and industry, there are inevitable risks involved in the scaling up of hydrogen globally. Despite estimations that investment in green and blue hydrogen is expected to exceed US$150 billion by 2025, operators have found it challenging to secure adequate insurance market provision for these emerging projects.

Dedicated insurance for hydrogen projects

The new insurance facility announced by Marsh, a business of Marsh McLennan (NYSE: MMC) is the first to provide dedicated insurance capacity for new and existing green and blue hydrogen energy projects. In collaboration with insurers Liberty Specialty Markets, part of Liberty Mutual Insurance Group, and AIG (NYSE:AIG), the facility will provide up to $300 million of cover per risk for the construction and startup phases of hydrogen projects globally.

The facility is backed by a panel of A-rated global insurers, and is designed with flexibility in mind to be available for a wide range of clients, from small operators to multinational organisations. Companies can choose coverage for the construction or startup phase, or a combined risks policy that extends to first year operations.

Marsh’s insurance facility will also provide risk transfer options for all construction and operational phase property damage risks, and includes marine cargo, business interruption, general third party liability , and contingent delay-in-start up insurance.

The insurer’s global head of energy and power Andrew George explains that the new facility is an important move for the insurance industry to enable the acceleration of the global energy transition by mitigating the risk of the emerging technology.

“As the global hydrogen industry, especially green hydrogen, scales up rapidly to meet demand, the facility will reduce the complexity of securing risk transfer options for operators of all sizes and boosts investor and lender confidence in achieving their ambitious project timeframes”, he said.

Mounting risks in fossil fuel industries are pushing insurers to seek new solutions

In a report published by Marsh in April 2022, the insurance broker found that the previous two years were significantly turbulent for the hydrocarbons sector, reporting some of the biggest losses in the history of the sector. The two-year period saw the highest concentration of large losses since 1988 and 1989, when six of the largest ever energy losses occurred.

Marsh attributes these losses to a decline in risk standards over the past decade, with companies in the hydrocarbons sector having a culture and “tunnel vision” that prevents them from acknowledging the prevalence of sectoral risk.

The report also warns that emerging risks such as extreme weather events, the inefficiency of old refineries and petrochemical plants, cyber perils, and policy changes will pose a growing threat to oil and gas assets and the security of supply.

Political risks will also play an increasingly significant role in the oil and gas sector as tensions for sea and land space rise with diminishing resources and increasing focus on mitigating climate risks. Even in the UK there is talk that nationalising the energy industry in response to the cost of living crisis is not out of bounds. 

Ukraine crisis kickstarted a shift in the global energy sector

Marsh Specialty’s head of credit specialties Nick Robson explains that the Ukraine crisis is a “stark reminder” of how geopolitical risks can escalate and have an immense impact on businesses, investors and people around the world, and that businesses and investors need to take this moment to reflect on how their developments related to nature could stoke further geopolitical tensions.

The Ukraine crisis has already caused a major shift in the global energy sector, with the European Union announcing a €210 billion plan to accelerate the continent’s shift to net zero to decrease reliance on Russian gas.

As more and more countries shift away from oil and gas to increase their energy security and meet net zero targets, there is also a significant risk of stranded assets in the sector. 

A recent report from UK financial think-tank Carbon Tracker has warned that around $1 trillion of oil and gas assets are now at risk of becoming stranded due to policy action on climate and the rise of alternative energy sources. 

The analysis also found that the fossil fuel holdings of companies listed on global stock exchanges collectively own three times more coal, oil and gas reserves than can be burned to stay aligned with the Paris Agreement’s 1.5 C global warming target.

Fossil fuel industry risks are mounting

There is also an increasing economic perception of risk in doing business with fossil fuel companies, amid rising public pressures and lawsuits. 

In July 2022, the city of Vancouver in British Columbia, Canada announced it will now contribute CDN$1 per resident to contribute to the ‘Sue Big Oil’ campaign for a class action lawsuit against fossil fuel companies.

Such class action lawsuits have increased the price premium for insuring fossil fuel projects. The controversial Trans Mountain pipeline that is being developed to carry crude and refined oil from Alberta to the coast of British Columbia, asked Canada’s Energy Regulator to keep the names of the project’s insurers confidential

The project argued that disclosure of its insurers would result in “material loss to Trans Mountain and prejudice the competitive position of its insurers”. This is due to the significant public opposition to the project, which have deterred insurance companies and thus hiked up insurance premiums and made it challenging for the developers to maintain adequate insurance coverage.

Altogether, the risks surrounding the fossil fuel industry are mounting, and the launch of insurance facilities for green and blue hydrogen, the technology which many believe could be the low-carbon answer to replace fossil fuels in hard-to-abate sectors, signals that the insurance sector is transitioning to new technologies to mitigate the looming fall out of the fossil fuel sector.

“Building greater resilience to emerging risks in particular is crucial as the energy sector continues to transition and evolve”, explained George.

New facility signals shift in focus for insurers – and the global energy market

Taking into account the physical and transition risks facing the fossil fuel industry, more and more insurance brokers are accelerating their shift away from fossil fuels towards cleaner energy solutions.

In April 2022, Swiss RE (SWX:SREN) unveiled a new policy that the world’s second largest reinsurer would no longer provide insurance for new oil and gas projects, unless developers could demonstrate credible transition plans to achieve net zero, science-based targets.

The move to stop insuring new oil and gas production has also been taken by other major insurers including Lloyd’s (NYSE:LYG), Aviva (LON:AV), General (BIT:GI), Hannover Re (ETR:HNR1), KPC (LON:KPC) and Suncorp (ASX:SUN).

Without the backing of insurers, the fossil fuel industry will face increasing obstacles to obtaining financing for new projects to go ahead, as well as to keep existing projects in operation. 

Insuring hydrogen

The growing shift of insurance companies to prioritise clean energy projects is a key market signal that climate risks are becoming increasingly more integrated into business and investment decisions globally.

However, the move to insure green and blue hydrogen projects also comes with its own set of risks that are more significant compared to more mature renewable energy sectors such as solar PV and wind power. Risks around the production, storage and transportation of hydrogen, namely fire and explosions risks and business interruptions due to the nascency of the technology, can have both economic and climate implications.

Over 30 countries now have hydrogen strategies across the world, and while the technology could be important in replacing fossil fuels, many are still sceptical of the massive boom of interest in this technology and warn we should not put all our eggs in the hydrogen basket for the world’s net zero strategies.

One major point of scepticism is the use of hydrogen development for oil and gas companies to greenwash, by claiming to shift to low carbon energy solutions by investing in hydrogen but only moving forward with “dirtier” grey or blue hydrogen projects instead of the actual low carbon green hydrogen.

Grey and blue hydrogen continue to use fossil fuels to produce fuel, and thus carries the same risks that the fossil fuel industry is faced against. As insurance companies shift towards hydrogen, it will be crucial to acknowledge the continued risks of grey and blue hydrogen and their links to the fossil fuel industry in order not to simply rebrand the risks under a shinier name.

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