London has opportunity to take the lead on transition to renewable future? With Andrew George, Global Head of Energy and Power, Marsh Specialty
The successful transition to a sustainable energy future has been identified as vital if the world is to reach its target to reduce emissions. While for the planet the stakes could not be higher, for the global re/insurance sector, the opportunities are projected to be huge. London has built a reputation for its expertise in the traditional energy sectors and as such, has a significant involvement of programs across the globe.
London estimates that the opportunities provided by the shift to net zero are such that they could double the size of the current market. Research by broker association LIIBA earlier this year put the global insurance opportunity created by the transition to be in the region of $125 billion. This compares with the London insurance market’s current estimated value of $110 billion from the 2020 London Matters report.
Data from leading international management consultancy Oliver Wyman on which the estimates were based predict that achieving Net Zero will necessitate $5 trillion of global investment in green energy annually by 2030. LIIBA then worked with its members to establish the average ratio between insurance premium and total investment for relevant capital projects.
It suggests an annual total of $125 billion of additional insurance-related spend by 2030 for the costs of transition alone. A significant part will be the huge investment required to fund the global move to renewable and sustainable energy. However, these new power sources come with different and dynamic risks to those faced by the oil and gas sectors.
While investment is already underway, it has led to a demand for specific insurance coverage that reflects the risks faced in areas such as hydrogen and solar power. It is an opportunity for the London market to steal a march on regional peers and reinforce its leadership role in the energy sector.
This week broker Marsh announced the launch of a first of its kind insurance and reinsurance facility that provides dedicated insurance capacity for new and existing green and blue hydrogen energy projects.
The facility provides up to US$300 million of cover per risk for the construction and start up phases of hydrogen projects globally.
Adrian Bastow, CMO, AdvantageGo
Andrew George, Global Head of Energy and Power, Marsh Specialty says the facility highlights how the industry is innovating to meet the emerging risks around renewable energy. Indeed he believes that there is a huge opportunity for the market given the level of investment that is planned in the hydrogen sector alone.
“According to our estimates, hydrogen projects have an investment potential of over $800 billion; over 400 hydrogen projects have been announced to date globally,” he explains. “The bulk of these projects are in both green and blue hydrogen production, and the conversion of hydrogen to carriers such as ammonia and methanol for hydrogen international trade.
“These investments are global but at present Australia, the UK, Europe, Middle East, and the USA are leading the charge. The projects range in size of $1-5 billion (mega projects) to small projects with small single industrial green hydrogen electrolysers of 1-5MW of $5-10 million each.”
“There is considerable front-end engineering ongoing at present in many of these projects, as the world grapples with energy transition at a time of supply disruption and gas shortages caused by the war in Ukraine,” adds George.
“There is a sizeable opportunity for the energy insurance sector around green and blue hydrogen. Once engineering is complete, we expect to see a surge of enquiries in the timeframe of late 2022 onwards. These are likely to be for traditional project and construction insurance to start with, as well as project cargo and third party liabilities. From 2024 onwards, as these projects are converted into fully operational concerns, we expect to see more interest in property, business interruption and liability cover.”
New energy sources come with new risks and George says despite the benefits that hydrogen power will deliver there are specific risks that have to be addressed.
“While there continues to be demand for traditional project and operational energy insurance, a new feature with hydrogen is that of cross-contingency risk,” he explains.
“In the case of green hydrogen, this relates to renewable power sources and BESS energy storage / green hydrogen electrolysers. For blue hydrogen based on natural gas feedstock, dependencies are emerging between the blue hydrogen production plants (steam methane reformers) and carbon capture and sequestration facilities that remove the greenhouse gases produced in association with the hydrogen.
“New technology applications and scale-ups will also emerge, to increase the efficiency of hydrogen production as will the trade of liquid hydrogen, ammonia and methanol.
This trade will likely feed into the marine insurance sector.” Looking at London and its role, George says EC3 has the capabilities to repeat that leadership role for the renewable energy markets. “Historically, London has always taken the lead on large energy projects and we expect hydrogen will be no different, especially on larger projects.
Our recently launched market facility has capacity based both in London and European market participants; combined they have the ability to insure on a worldwide basis. We expect other energy downstream and upstream insurers globally to add their capacity to this.”
Marsh has enjoyed a strong relationship with the world’s national oil companies (NOCs) and they are playing their part in the funding of current and future hydrogen, solar and renewable energy projects.
“The NOCs and the major integrated oil companies recognise the need to add hydrogen projects to their portfolios in conjunction with their wider advances into renewable power projects,” George explains.
“We are seeing a prevalence in joint ventures and the emergence of new emerging hydrogen companies to explore projects close to renewable sources of power from wind and solar sources.
“These joint company structures typically form special purchase vehicles that require project finance, which in itself will drive the need for comprehensive project and operational insurance. We expect the pattern of investments to be similar to the historical trends in LNG production, where NOCs and oil and gas majors will combine with local country concerns to form discrete companies that focus on hydrogen value chains globally.”