Two Insurance Innovations for Energy Transition
Exhibit: Marsh’s Insurance Services Through H2 Project Construction
Source: Marsh
Key Points: Insurers have introduced two products over the last month that can help support private investment in the Energy Transition. Marsh is to cover construction-through-first-year-operations for green and blue H2 projects. Howden is to cover invalidation risk for voluntary carbon offsets.
Marsh’s H2 insurance covers through the early stages of H2 production. In late August Marsh, working with Liberty Mutual and AIG, began offering up to $300 Million cover for construction-through-first-year-operation of green and blue hydrogen production projects. (The “color” of hydrogen denotes its source; green refers to H2 made using renewable energy via electrolysis while blue refers to H2 produced from fossil fuel with the emitted carbon then captured and sequestered to mitigate the environmental impact.) The insurance provides cover for property damage risks, marine cargo, business interruption costs, general third party liability, and contingent delay-in-start up.
Marsh et al avers to be the first provider of this insurance coverage. Reports from other insurers point to ongoing work to develop products and address the risks that are unique to H2 related to increased flammability, embrittlement of steel/blistering of carbon fibers and risk of leakage. For underground storage of H2, small molecule size makes it more mobile than methane or CO2 and thus applicable cavities may be limited to salt caverns and some aquifers or depleted hydrocarbon fields. These issues would appear to make it more challenging for the insurance industry to provide ongoing/operational coverage.
Howden introduces insurance for voluntary offsets. In early September, Howden Group introduced carbon credit invalidation insurance for the voluntary carbon market (VCM). The insurance is to cover third party negligence and fraud against credits that are deemed to be “high quality” and have had independent verification. It is intended to give buyers an extra measure of confidence in the value and validity of their carbon offset purchases. The insurance initially covers a specific portfolio of projects that have been (further) verified by carbon finance firm Respira International; the related offsets are being sold as a combined lot to diversify the risk. If fraud or negligence is discovered after the offsets have been sold, Respira can make a claim on the insurance and compensate the buyer.
The voluntary cover is modeled on related company’s compliance offset product for the California markets. Howden-sponsored insurer Parhelion, which served as an adviser in development of this VCM insurance, offers invalidation insurance for offsets used as part of California’s cap-and-trade market and this may provide some additional insight on the terms of the VCM cover. Terms of the cap-and-trade offset product include: coverage for three years after issuance, for errors that result in overstating the greenhouse gas (GHG) benefit by more than 5%, for non-compliance with applicable regulations and for any double-issuance (i.e. an offset issued for the same project/boundary in another offset market).
For more detail on the role of offsets in this California cap-and-trade program, please see our recent Payne Financial Flow post.
9/16/2022