Demand for hydrogen reached an estimated 87 million metric tons (MT) in 2020, and is expected to grow to 500–680 million MT by 2050 (opens a new window). The increase is driven by a number of factors such as the potential for hydrogen to decarbonise sectors including long-haul transport, chemicals, iron and steel; and a groundswell of global hydrogen energy initiatives, which seek to better integrate hydrogen into future energy systems.
Power utility companies are seizing the opportunity to reduce the carbon footprint and improve efficiency in power production. Latest gas turbine fleets are designed to run on a mix of hydrogen and natural gas. Mixing hydrogen into the fuel supply means that the exhaust gas produces less carbon, reducing the carbon footprint of the operating companies. This will allow major cities to continue to operate gas turbines as the key source for base load electricity capacity when demand is high.
However, the introduction of hydrogen-to-gas turbines creates demand for large quantities of hydrogen as it burns a lot quicker than natural gas. Consequently, more supply infrastructure is needed in the production of hydrogen as well as the ability to transport hydrogen. Whilst transportation in tankers is available, for power utility companies to successfully operate with hydrogen fuel requires a pipeline network.
To realise this potential a whole new supply chain needs to be built and managed – both to produce and store a growing volume of hydrogen, and in turn, to transport it across increasingly long distances. Inevitably, a race to develop that vital infrastructure is already underway. Especially as projects scale up, risks need to be assessed, monitored and addressed from the outset.
Growing in complexity
Currently, hydrogen is mostly stored as a gas or liquid for small-scale mobile and stationary applications. Gas storage typically requires the use of high-pressure tanks (350–700 bar [5,000–10,000 psi]). Liquefied hydrogen, meanwhile, requires storage at cryogenic temperatures below −252.8 °C to prevent it boiling back into gas.
As hydrogen value chains become larger and more complex, a broader variety of storage methods are emerging. Vehicle refuelling stations are already growing in number, increasing the length of time for which hydrogen is typically stored. To protect customers against mismatches in hydrogen supply, growing demand for hydrogen will require such stations to be built on an ever-increasing scale. The necessity of larger and longer-term storage options is set to increase, particularly if hydrogen is to become a reliable means to bridge season changes in electricity supply and heat demand. Here, geological storage currently offers the most suitable option.
Building these facilities is not without difficulty, however. As storage methods and technology multiply, so will the risks associated with their construction and operation.
During the construction phase of a hydrogen production and storage facility, quality control concerns regarding the equipment being installed, along with the potential for human error, represent two of the primary risks facing owners, contractors, and subcontractors.
Initiation and testing risk, especially with live hydrogen, is another key risk. Hydrogen is highly flammable — its ignition range is approximately seven times wider than that of natural gas — so loss scenarios can arise from leakage, explosion, and fire. Not only is it during this testing phase that mistakes are likely to be made, but it’s also when facilities are at their greatest value, and as such where the impacts of damage are most keenly felt.
Owners should also be mindful of the potential for corrosion and material defects, which can lead to distribution failures and business interruption.
Because hydrogen is an area of intensive innovation, any new equipment, technology and processes involved in its storage also introduces new risk. This is particularly true of green hydrogen, where many aspects are not yet covered by designated safety regulations but are instead being interpreted from pre-existing building codes. As such, requirements are not always explicit; companies must invest more time to understand the rules and ensure compliance.
Further relevant considerations are location based, including likelihood of natural catastrophes, high winds, reliable water supply, or other weather-related threats.
The key risks during the operation of a hydrogen storage facility stem from:
natural catastrophes and environmental exposure,
substandard materials, and
As per the construction phase, being the first users and operators of new technologies and processes continues to pose risks around operational knowledge and execution. The potential for leaks, fires and explosions will also remain, and may become elevated over time due to erosion and weakening equipment integrity.
Ageing facilities also introduce further risks. Owners, contractors, and subcontractors must take the necessary steps to upgrade any equipment in line with changing regulations, thereby maintaining the facility’s right to operate.
Left unaddressed, all these risks can lead to business interruption, potentially putting contracts into breach, as well as damaging reputations and relationships with suppliers, lenders, and regulators.
Thorough planning is vital for owners of hydrogen projects seeking to avoid retrospective actions. Prior to construction, and as part of the negotiations, risks associated with the project should already be clearly apportioned to the involved parties. This is not only necessary to avoid potential conflicts at a later stage but also to assure insurers that risks of the project are well managed. Insurers will carefully assess the risk management processes and practices of each project and the conclusions will dictate the price and terms and conditions of the insurance policies.
Safety considerations are paramount. It’s important for developers to establish a full and clear understanding of the relevant health and safety requirements, and how this relates to factors such as the volume of hydrogen being stored. During construction and operations, it’s essential for companies to adhere closely to best-practice across quality control, monitoring of technology equipment, and installation. All processes must be of the highest order, from well-managed teams to proven technology from top-tier suppliers. Evaluating or conducting quality control at a manufacturer’s factory, performing reviews of equipment, and running tests can further reduce exposure.
Likewise, informing relevant stakeholders of the project’s scope early into its development can help to anticipate disruptions, or resolve them before they become a major issue further down the line.
As a burgeoning sector in the circular economy, with new players and constant innovation, insurance can play a key role by providing risk management and transfer along the value chain. By maintaining a varied insurance stack, owners can de-risk both construction and operation of hydrogen storage facilities, ranging from engineering and construction policies to property insurance, business interruption cover, and public, worker and environmental liability.
Shorter construction periods are advised to mitigate risks – for instance, completing a project within a single wind season. By delivering projects to a high standard within agreed timeframes, companies can also avoid delays and associated cost increases. If lenders or banks are involved in a project, they will usually request delay and start-up insurance (DSU). This policy triggers when a delay is caused by property damage and costs can accumulate very quickly when the project is already at an advanced stage.
Split the risk among all stakeholders and specify where it sits already during contract negotiations for the project
Clear apportionment of the risk will put insurers in a more comfortable situation
Start the preparation process for buying insurance early and get the buy in from all stakeholders
Plan for six months preparation ahead of insurance negotiations
Demonstrate previous experience of manufacturers/suppliers/contractors/sub-contractors
Show risk awareness and mitigating measures and constant monitoring ability
Demonstrate quality control of technology used and equipment throughout the construction process
Consider quality control on the manufacturing site of the supplier if needed
Plan a roadshow to insurers with owners, the project management contracting teams, and manufacturing suppliers
Present concisely highlighting mitigation measures and create an open dialog with insurers
Consider several insurance hubs
For further information, please contact:
Gary Doran, Partner, Lockton Global Energy & Power (LGE)
T: +44 (0)20 7933 2939
Robert Wilson, Senior Vice President, Lockton Global Energy
T: +44 (0)20 7933 2373