Green hydrogen: Part 1 & 2

Part 1

Mark Maroon:

Hey everyone, welcome to Climate Check. This is Mark Maroon, vice president and head of portfolio management and reinsurance for American Modern, a Munich Re company. Today I'm joined by Stefan Riedel, Chief Underwriting Officer for property and specialty insurance at Munich Re. Stefan, thank you so much for joining me today.

Stefan Riedel:

Hi Mark, thanks for having me. It's a pleasure.

Mark Maroon:

Absolutely. So maybe just to start off, could you tell us a little bit about what you do for Munich Re?

Stefan Riedel:

Yes, sure. I'm the Chief Underwriting Officer for property and specialty lines within Munich Re's corporate underwriting division. And together with my team, I'm responsible for supporting the various entities in our group in developing their businesses on a one hand side, and at the same time in making sure that adequate risk appetite is in place and the underwriting risk is kept under control. And in this capacity as CUO, the energy industry that we will be talking about today is currently of particular interest because of the fact that this industry will be changing so significantly in the years to come. Take the ramp up of the hydrogen economy, for example. This is one string of the energy transition, which on the one hand side will create opportunities for us as a group that we certainly want to leverage, but at the same time it will entail risks, partially new risks also, that will need to be managed and kept under control. So these are the topics that belong to our area of responsibility and that my team and I are taking care of.

Mark Maroon:

Sounds good. Thank you for that overview. So today I think we want to talk a little bit about green hydrogen. So maybe for the uninitiated, could you just give a high level overview of what that is?

Stefan Riedel:

Hydrogen is something that's not entirely new to begin with. I think that is very important to understand. It's actually something that's been around for a very, very long time in industries like the oil and gas industry and other heavy industries like steel manufacturers and cement manufacturers and so on and so forth. They all have been using hydrogen for a long time. Hydrogen is something, it's not an energy resource, it's an energy carrier and can be manufactured out of other resources. In the past that was predominantly, almost exclusively, fossil fuel: natural gas and coal predominantly. And the fact why hydrogen came now so much in focus again during the past couple of years is simply because of the fact that most or many, many countries across the world and most governments have committed to net-zero pathways. And for this to be able to achieve, hydrogen will play a key role in the end of the day.

Mark Maroon:

So what's the distinction made when people refer to green hydrogen?

Stefan Riedel:

Yeah, well green hydrogen then in the end is where the renewable energy piece comes in. So that's the way of producing hydrogen which is totally emission-free, at least the production process. And the production is such that on the one hand side you use renewable energy, so green electricity to be more specific, and that electricity can either come from winds, be it onshore wind, be it offshore wind, it can be solar, it can be hydro energy, you name it, anything out of the renewable energy space. And then the core technological component is so called electrolyser that then uses water as an ingredient and splits the molecules, and we don't go into further details here, the molecules of water into, amongst others, hydrogen. That is how it works. And that doesn't release any CO2 emission as long as the electricity is green, is emission-free.

Mark Maroon:

Right, I've seen that you've written and spoken about the ways that insurers can help advance that net-zero economy and grow their businesses by providing risk solutions with green hydrogen energy solutions. And I remember a time when hydrogen was discussed as an alternative fuel for personal vehicles, but I'm guessing that's probably not where you're seeing the potential for today. Does that sound right?

Stefan Riedel:

That sounds very right. And it's really important to have a thorough look into the potential applications. Personal vehicles, as you rightly said, would be one potential application, but it's not the most pressing one. So what do you mean by that? By that I mean that for personal vehicles, there are other alternatives, more viable alternatives like direct electric vehicles. You don't necessarily need to convert electricity first into hydrogen for then hydrogen power the vehicles, but you can use much more efficiently electricity directly. Hydrogen comes into play in other what we call hard to abate industries where electrification is not possible in every step of the industrial process, like in the chemical industry or in the steel industry for steel manufacturers and many others. And now one needs to appreciate that the production of hydrogen for the foreseeable future will have its limitations. Hydrogen will be a scarce resource going forward, which is why it makes it very important to channel it into the right industries where it can best be applied in order to decarbonize those industries and not waste it, to say it bluntly, in industries where better alternatives already exist.

Mark Maroon:

Right, so I guess I would ask, are the efficiencies that we would gain from using hydrogen going to offset what I imagine would be a pretty big cost to actually implement?

Stefan Riedel:

Yeah, clearly. I mean there's a really big cost entailed to that to implement it at all steps of the value chain, both in production and then further into transmission and distribution and in the end also on the demand side, on the utilization side. But there is clearly big potential on the decarbonization side that's out there. To give you an example where hydrogen is a very, very viable alternative to fossil fuels is in the heavy transportation sector as well as in a wide range of industrial applications that I've already touched upon: steel and cement and so on and so forth.

And if you look into the CO2 emissions per sector worldwide, you can find out that the transportation sector, so heavy trucks and shipping and aviation for example, makes roughly 20% of global CO2 emissions. And on the industry side, the relevant industries that can potentially be decarbonized using hydrogen make up for another roughly 10% within the direct production steps within those industries. So that already tells us that there is a lot of potential out there. It won't be the only method that will help to decarbonize the entire world and it won't do the trick by itself, but it'll definitely add to the decarbonization of industries.

Mark Maroon:

Do governments and industries have an appetite for green hydrogen?

Stefan Riedel:

Companies, including even oil and gas companies, have commitments authored to turn their businesses into net-zero by 2050. We read that very often. However, whether or not that will ultimately be reality is, in my view, heavily dependent on the economics. They won't ruin their businesses. Those industries that I've mentioned, they are, in simple terms, they are happy to convert their processing steps into greener processing steps using hydrogen, but they can't do that just for the sake of it because they need to remain competitive within the businesses. Comes down to cost. And if that cost would not be an issue anymore, and if that was all offset or even if there would even be a penalty going forward when you stick to the current ways of manufacturing and processing, then clearly there would be a big market out there.

Mark Maroon:

So do you think that hydrogen manufacturers are actually prepared to meet that demand?

Stefan Riedel:

Yeah, that's tricky. That's definitely tricky and I think one needs to be realistic, also, when you look into the ambitions that a range of governments are putting up currently. Most recently, the Inflation Reduction Act out of the US has a certain focus on hydrogen as well. But also in Europe, the European Green Deal has very ambitious goals. In Europe, for example, the most recent goal is that Europe wants to be able by 2030 to produce up to 10 megatons of hydrogen annually. And regardless now of details and in respect of what that means in the EU energy mix, but producing 10 megatons of green hydrogen annually will mean that it had required almost all the green electricity produced from all the EU 27 member states in 2021. So that tells us that there's quite some way to go in order to achieve that ambitious goal. That requires a massive ramp up of renewable energy within a very, very limited timeframe. Only seven years left until 2030. It requires a massive ramp up of offshore wind and solar energy and all the adjacent industries as well.

That's one obstacle. At the same time though, or in addition, much rather, it requires also a lot of natural resource in order to manufacture what is required to manufacture. Because being able to produce those 10 megatons of green hydrogen on an annual basis requires the current electrolyzer capacity, which is the bottleneck and core to producing green hydrogen, and this capacity needs to be increased by a factor of roughly 900 until 2030. In order to be able to do that, a lot of natural resource is needed, nickel, copper, platinum, rare earth and everything, that in turn the mining industry needs to provide. And even if labor and everything, it would not be constrained, but it's a very, very short timeframe in order to deliver that. And it entails then obviously other questions. I mean, in order to be able to do that, you can't rule out certain regions of the world that you may or may not want to work with in all these other aspects that need to be factored into account.

Mark Maroon:

Right. Yeah, I mean that's definitely a significant ramp up in a short period of time. So the pragmatist in me just wants to ask, who pays for this? Is this government, industry, some combination of the two? How do you see that going?

Stefan Riedel:

Yeah, a combination of the two, and ultimately, and I think one needs to be very transparent, you and I and us. I think this energy transition in the end of the day won't come for free. It's important, it's absolutely necessary for society and for humankind, no doubt about that, but it won't come for free. Ultimately, it will be the people who are going to pay for that. But the question is also how will it be financed in the meantime and how will it be an economical viable option in the meantime, in the first place? So again, looking into the details and compare the certain ways of how hydrogen can be produced.

As I said, it's been around for a long time, but in the past created out of fossil fuels: natural gas and coal. This is the so-called gray hydrogen that industries have been using for a long time. And currently, producing one kilogram of gray hydrogen comes at the cost at roughly one US dollar a kilogram roughly. If you turn over to blue, what is called blue hydrogen, blue hydrogen is nothing but gray. It's manufactured out of, again, fossil fuels. But then combined with negative emission technology, carbon capture and storage is something that you may have heard in the past. So in essence, it captures the CO2 that is released in the manufacturing process and the CO2 that we don't want there will be stored underground in whatever kind of storage methodologies. And that comes at a cost again, and that increases the $1 for gray hydrogen up to roughly $2 per kilogram for blue hydrogen, the low carbon hydrogen.

If you now move over to green hydrogen, currently the cost level is at roughly $5 per kilogram hydrogen, which in the end is something that all businesses, industries, again, the chemical industry, the steel manufacturers, all of them, they need to remain competitive within their markets and they will definitely factor that in. And whilst they certainly appreciate that there's a social requirement and then an overall requirement to decarbonize businesses, but ultimately they also need to remain competitive. And with that discrepancy, this is difficult to be achieved, which is in the end where the role of policy makers ultimately kicks in.

Mark Maroon:

I'd like us to pause here and ask you to explain why this is the case in the second part of our conversation. So listeners, please tune in for part two of my conversation with Stefan Riedel and go to munichre.com/climate for more information on this topic.

Part 2: 

Mark Maroon:

Welcome to Climate Check. This is Mark Maroon, vice president and head of portfolio management and reinsurance for American Modern, a Munich Re company.

We're continuing my conversation with Stefan Riedel, chief underwriting Officer for property and specialty insurance at Munich Re. Stefan, in our last episode, you walked us through the potential for green hydrogen. You shared how it could accelerate net-zero energy supplies and make some types of industry and transportation more climate friendly. So where do you see the biggest hurdles moving forward to get greater investment into this technology?

Stefan Riedel:

Yeah, well Mark, I mean the commitment for large investments are certain, or certainly out there. I think the Hydrogen Council, there's a stat out there that it has roughly 500 billion US dollars of investment are needed in the foreseeable future. And if you reconcile that with the commitments of certain governments and companies out there, that is something that's very likely to happen. However, the question why it doesn't happen so quickly is that, or the reason why it doesn't happen so quickly is that there is a lot of unknowns still out there as to how this hydrogen economy will ultimately look like.

A large part of investments in the beginning are focused on the production side of hydrogen and the willingness to invest is certainly there. However, the production side also needs to have a clear roadmap of where the produced hydrogen will ultimately go. And this is where the demand side comes into play. So we can't only where we're one-sided for the foreseeable future only focus on the production side with ignoring the demand side entirely. So that's then if you do that, that certainly won't unlock the entire 500 billion or whatever number you put up, but it'll certainly slow the process down.

If the demand side would be convinced that hydrogen is something that is ultimately economically viable option for them, then certainly the willingness to also hear change the manufacturing processes and then all the industrial process steps such that they are green hydrogen ready would be higher and that would then unlock investments on that end. So it's something that needs to be done at the same time, more or less, and not one after the other if we want to unlock the entire potential quickly.

Mark Maroon:

So you've mentioned a couple times here, some of the large scale hydrogen technology at play. So bringing this maybe a little bit closer to home, do you think insurers and re-insurers like Munich Re should be wary of assuming some of the risks associated with this large scale technology?

Stefan Riedel:

Well, I mean, as insurers we always need to be wary, assuming risks, that's our general business definitely. But I'm absolutely convinced that we as an insurers, we can be very, very supportive in order to make this hydrogen economy a reality in the end of the day.

Why am I saying that? I'm saying that because of the fact again, that hydrogen is something that's been around for a long time. It's nothing entirely new. The use case and the scale will be different going forward. But the substance as such is relatively well known. It's relatively well understood by predominantly insurance carriers like us who operate in large energy teams, who play a big role in the energy industry and the insurance market, and who have the right people on board, the underwriting engineers, and also on the claim side and all the supporting units, the right engineers, process engineers, chemical engineers and so on and so forth on board that will all be able to assess the risk properly and adequately in respect of the substance as such.

That is well understood for insurance products going forward in the beginning, the products will focus most likely more on the production side because this needs to be ramped up in the beginning. Construction risks will play a big role, but the policies that are already existent and that have been existing for a long time, they're almost fit for purpose. Some tweaks might be required, fine, but in general that should do it. And then once production and plants, we go operational and typical operational policies in respect of property will also do the chop. We're talking about fire and explosion risks, business interruption, business interruption. That's all well understood. Nevertheless, and that said, we need to be very cautious and wary about the risk that we potentially assume and also within the property space, because again what I said, the scale is new and some use cases are definitely new, particularly then also in the transportation sector and in the aviation sector, there's definitely new risks out there.

There will be new players to a certain extent who might be less capable in that space. When it comes to hydrogen, that creates an additional risk. But also in the more traditional space, the scale is new and we need to be cautious of that. And then certainly new risk pools when it comes to the casualty side of things will certainly be also out there. Environmental liability when it comes to carbon capture and storage, for example, is something that needs to be looked into very carefully. And as of now comes with a certain question mark in respect of what sort of solutions can be developed in respect of that. But also then if you look more into other casualty lines of business or product lines, product liability for example, it will play a big role going forward when you look into electrolyzers. Electrolyzers, as I said, is a super important component to green hydrogen, the bottleneck more or less and there's not hundreds of manufacturers out there, but a handful. And if we run here into troubles in respect of the product, then that's certainly better risk to product liability.

In general though again, nothing that couldn't be assumed by the insurance industry and all the opposites. I would even say that we are in a very good position, if not even comfortable position, that the underlying topic is not new, but to a certain extent, very well understood from a technical perspective, so that everything else around it and then all the new risks that arise related to the substance as such, can be well handled by insurers.

And there is a lot of, as I said, barriers out there when it comes to regulatory issues, when it comes to norms and standards within the industry. But ultimately, this is nothing that the insurance industry could not handle and where the insurance industry could not create bespoke products in order to still be able to assume that risk. That might be a bit of a cautious approach in the beginning, and that might then be a broad approach as we move along and gain more experience clearly. But it's something where we are well positioned to provide insurance solutions to the industry right away. And this will then hopefully also add to the acceptance of the technology as such across wide parts of the industry, be it at the producing sites, be it the transmission and distribution side of things, or be it the final demands and utilization side.

Mark Maroon:

Yeah. So do you think moving forward that our industry might get a little bit more involved with the manufacturers and the transportation of this, just given the scale involved?

Stefan Riedel:

What do you mean by our industry involved with the manufacturers?

Mark Maroon:

Yeah, I guess in terms of just working with the individual manufacturers and trying to identify ways to mitigate some of the risks associated with this from a scaling perspective.

Stefan Riedel:

Yeah, certainly. I mean, this is again where particularly for us as insurers who've been active in the energy space for a long time and who always operated such that we have people on board in the underwriting teams and in the adjacent teams who either come out of the industry or have the capabilities to assess risk within those industries have an advantage here because these are the people who understand that the manufacturing processes out there and can speak on eye level and with our client base and together identify additional risk or new risk that is out there and also help mitigating it.

And in general, there's also a role then for insurers and manufacturers or the demand side out there, plus then policy makers also to create norms and standards which are currently not there yet. So there's little regulation out there in respect of hydrogen and the norms and standards.

I'll give you a concrete example, the midstream part of it. So the transmission and distribution sector, which your needs because hydrogen once produced needs to be shipped somewhere or transmitted somewhere via short distance or medium distance via pipelines, for example. And in order to achieve this to a certain extent, existing gas pipelines can use when hydrogen is blended into natural gas. That's possible technically, which is a great advantage because not everything needs to be built up newly. But in respect of the blend rate here, then the ratio naturally gas to hydrogen, there is a broad understanding of what's feasible and what's potentially too much in order for pipes to crack, but it's only a broad understanding, but there are no rules and regulations and norms as to the maximum, what this plan could look like. And that's important as an understanding to have for us as insurers to create our clauses and wordings and insurance product as such so that we can carry that risk and take it onto our books or identifying the spots as from which it is too much, and as from which this was something that's not insurable anymore.

Mark Maroon:

That's a lot to think about, Stefan. I'm glad you're out in front of this for us.

Stefan Riedel:

Definitely a lot to think about. Yeah.

Mark Maroon:

Awesome. Well, thank you so much for coming on today to speak with us about the potential for green hydrogen and the role that we can play as insurers in advancing this technology.

Stefan Riedel:

Sure, Mark. It was an absolute pleasure. Thanks for having me. And yeah, look forward to talking to you again.

Mark Maroon:

We'd love to have you back though. Listeners, if you'd like to hear more about the insurance industry's role in advancing climate change solutions, please subscribe to our podcast. And for more information, head on over to munichre.com/climate. We'll speak with you next time.