September 2021

GreenerenergyVisit lloyds.com/jointhereset

Introduction

01. Introduction
Alternative energy sources are critical in achieving
a successful global transition to a low carbon
economy, and the insurance industry, Lloyd’s andthe SMI Insurance Task Force all have an importantrole to play in supporting offshore wind, nuclear
and hydrogen with their particular ambitions.
In the last thirty years, Britain’s reliance on coalfor electricity has decreased significantly from
70% in 1990 to less than 3% today. A major partof this transition has been driven by the growthin electricity generation from wind energy,
with 9.9% of the UK’s electricity in 2019 being
generated by offshore wind.
The UK Government has ambitions to increase
offshore wind production to 40GW by 2030,
and other countries in Europe, Asia and North
America also have ambitious targets. To achieve
this growth in the offshore wind sector, supporting
infrastructure must be transformed with significant
investment in larger wind farms, bigger turbines,
cabling and transmission infrastructure. Risk
engineering and risk transfer to the insurance
industry are both vital to enable this investment.
As the second largest source of low-carbon
energy, nuclear energy now provides around 10%of global electricity supply, generated from 440
power reactors across 31 countries. Due to theunique nature of these risks, over the last 70 years
the global insurance industry has established astructure of risk pooling, alongside public-private
partnerships, to insure nuclear projects.
Several barriers exist which limit the expansion of
nuclear insurance capacity, including the inherent
volatility of nuclear insurance claims given the low
frequency and high severity of potential losses.
In recent years technology has evolved to reduce
the risks associated with nuclear energy, therefore
making investors more likely to take on the risksof nuclear and ultimately support the expansionof the sector.

01

Hydrogen produces no direct greenhouse gas
emissions when combusted in a fuel cell withoxygen, and is widely used as a low-carbon
alternative in many industrial applications. Hydrogenis predominantly used today in industrial processes,
however its potential uses span across the entire
value chain from renewable energy generation,
through to transportation, homes and buildings.
Key obstacles to the success of hydrogen include
the costs and risks associated with achieving
scale. Hydrogen itself is costly to produce and theconversion of existing natural gas pipelines to deliverhydrogen requires significant investment. Green
Hydrogen, the form of hydrogen with the lowest
carbon footprint, is the most costly to produce as it
requires significant amounts of renewable energy.
The insurance industry, alongside a long-term
government policy framework, can help tode-risk investment into hydrogen infrastructure
and incentivise private-sector investment. This will
ultimately enable the hydrogen economy to achieve
scale and therefore drive down production costs.
Greener energy focuses on the offshore wind,
nuclear and hydrogen industries, outlining the
global pathway towards a lower carbon footprint
and the challenges on that journey which require
solutions and support from insurance.

Offshore wind

02. Offshore wind

Introduction
Wind energy is central to facilitating a global transition towards
a future-proof energy system. China, Germany and the UK were theworld’s largest offshore wind producers in 2020, and China is leadingon new capacity installations1. In the last thirty years, Britain’s relianceon coal for electricity has decreased significantly from 70% in 1990
to less than 3% today2. A major part of this transition has been driven
by the growth in electricity generation from wind energy, with 9.9%of the UK’s electricity in 2019 being generated by offshore wind3.

Proportion of Britain’s electricity derived from coal70%
in 1990

3%
today

1

02

REVE - World Gets 2.5 GW of Offshore Wind Energy in H1 2020 | REVE News of the wind sector in Spain and in the world (evwind.es)

2

Department for Business, Energy & Industrial Strategy - End of coal power to be brought forward in drive towards net zero - GOV.UK (www.gov.uk)

3

GOV.UK - Wind_powered_electricity_in_the_UK.pdf (publishing.service.gov.uk)

Offshore wind

The future of offshore wind
The global offshore wind market is evolving
rapidly, and technology innovation will be
key to driving growth as the sector matures.
Advancements in floating wind technology are
helping to accelerate growth in areas further
from shore and in deeper waters. This in turnis unlocking wind energy generated in regions
previously considered unsuitable for fixed-baseoffshore wind installations, posing a significant
growth opportunity for the sector.
This is driving the emergence of new offshore
wind markets outside Europe, which previously
dominated the market.

At the end of 2018, 83% of the world’s offshore
wind capacity was produced in Europe; over the
next decade, however, it is anticipated that Asiaand the US will account for 48% and 11% of new
offshore wind development respectively4.
Turbine technology is evolving, with bladescontinuing to increase in size and energy
production from a single turbine also continuing
to increase. New drone technologies are being
tested and are expected to play a vital role in
the inspection and maintenance of these larger
wind turbines, given they are typically positioned
in less accessible locations further offshore.

Europe leads the way for offshore wind capacity

83%
of the worlds
offshorewind capacity

Key commitments to offshore wind development
Significant commitments have been made globallyto increase offshore wind production. The UK
Government, for example, has stated its ambitions
to increase offshore wind production to 40GW
by 2030. This includes 1GW of innovative floating
offshore wind, which is equivalent to over fifteentimes current worldwide volumes of production5.
It is this backdrop of a substantial growth trajectory
combined with a changing risk landscape thatpaves the way for insurers and their distribution
partners to play a critical role in driving the successof the sector.

4
5

03

REY – Which Direction is Offshore Wind Blowing? (www.ey.com)

GOV.UK - New plans to make UK world leader in green energy – GOV.UK (www.gov.uk)

The UK Government,
for example, has statedits ambitions to increase
offshore wind production
to 40GW by 2030.

Offshore wind

Key challenges
Key commitments to offshore wind development
In order to achieve continued growth in the offshore
wind sector, supporting infrastructure must betransformed with significant investment in bigger
turbines, cabling and transmission infrastructure toconnect new wind farms to the onshore electricity
grid. The cost of installing this infrastructure will
be a key barrier to success in this sector.
In order to overcome this, corporates are
increasingly seeking economies of scale bydeveloping turbines with bigger capacities; 15MW
turbines are expected to be standard by 2030,
compared with an average capacity of 4MW ten
years ago6, in turn resulting in increased need forsignificant investment from a breadth of capitalproviders and private investors. These investments
must be backed by insurance programmes that
can help to de-risk these investments and facilitate
the necessary capital flows.

It is also important to reflect on historic windenergy assets currently in operation. The lifespanof wind farms is much lower than coal-fired power
stations, with a wind farm typically considered
to have a design life of 20 years7. A growing
number of turbines are thus reaching the end of
their operational lifetimes, and in 2021 we expect
owners of around 4.8GW of onshore capacity to
be faced with end-of-life decisions on the assets8.
This creates challenges with respect to thedecommissioning and recycling of materials, withthe high price of decommissioning acting as adeterrent for some insurers entering the market9.
This brings into focus the full carbon life cycleof wind farms, including the use of carbon
intensive materials such as concrete for turbine
construction. The carbon payback period, definedas the time for the carbon emissions displacedby wind power to equal the life cycle carbon
emissions of the wind farm, is an average of
0.6 years for an offshore wind farm, therefore
significantly lower than its design life10.

Evolution of wind turbine heights and output
300m

13-15MW
9MW

200m

1.2MW

100m

1-12kW

2MW

4MW

7MW

0.5MW

0
19th C

6
7

1995

2000

2005

2010

2015

2025

ORE Catapult - Delivering 40GW - Accelerating the UK’s Transition to net zero (catapult.org.uk)

ClimateXChange - Life Cycle Costs and Carbon Emissions of Offshore Wind Power (climatexchange.org.uk)

8

Bloomberg NEF - Energy, Transport, Sustainability – 10 Predictions For 2021 | BloombergNEF (bnef.com)

9

Lloyd’s of London Emerging Risk Report 2017 Innovation Series - https://www.lloyds.com/~/media/files/news-and-insight/ risk-insight/2017/stranded-assets.pdf

10

04

1990

ClimateXChange - Life Cycle Costs and Carbon Emissions of Offshore Wind Power (climatexchange.org.uk)

Offshore wind

Evolving risk landscape
As offshore wind farms become bigger and movefurther from shore, the risk landscape in this sector
is evolving. The development of larger wind farms,
both in terms of size as well as turbine capacity,
is likely to result in new claims challenges, including
increased mechanical breakdowns, cable faults
resulting in lapses in power generation, andfoundation-related damage, particularly at deeperwater sites. In addition, there will be heightened
exposure to natural catastrophe risk at deep-watersites, both in terms of physical damage as wellas potential project delays caused by extreme
weather events.
Furthermore, operational floating windfarms indeeper locations could have their own unique risk
profile, one that does not necessarily match any
existing claims data, although it is already clearthat there will be an increased probability of cabledamage due to the longer cables required totransmit energy back to shore.
Claims losses for the offshore wind sector haveso far primarily been driven by cabling andfoundation-related risk events, with analysis
from California-based GCube, a leading insurance
provider in the renewable energy market,
indicating that these accounted for 55% and
35% of total claims respectively over the past
10 months11. There have also been significant
mechanical breakdown losses incurred at all but
one of the worldwide floating wind installations
currently in operation.

1105

Claims losses for the offshore
wind sector as per GCube analysis11

10%

55%

Other

Cabling risk

Past
10 months

35%

Foundation risk

Insurers will ultimately need to understand thechanges to the risk profile of offshore windassets and respond with appropriate insurance
cover that is reflective of the changing risks,
as well as supporting corporates in managing
them. There is an opportunity for the insurance
industry to work closely with energy companies
and share their expertise in modelling natural
catastrophes. This would ensure a consistent anddeeper understanding of risk across the sector,
and establish a successful platform to provide
specialist cover for natural catastrophe andextreme weather events.
This is particularly the case in emerging markets
in Asia-Pacific, which face more volatile weather
conditions combined with less history in the
sector relative to established markets.

GCube - Claims: Offshore wind must quickly respond to changing global risk profile : GCube Insurance Services » Renewable Energy Insurance Coverage (gcube-insurance.com)

Offshore wind

Variability in energy generation
As wind energy contributes to an ever-increasing
proportion of global electricity generation, there
are concerns around the variability of electricity
generation from wind and the extent to which thismay complicate the case for further investment.
Part of the solution may lie in expansion of offshore
wind farms to locations further offshore, where windconditions are more consistent. New technologies
are also being explored, such as hydrogen fuel cells,
which harness and store excess offshore windenergy for when generation is reduced.

Financial guarantees will be necessary to solve
the complex issues of variability in electricity
generation; national governments in regions suchas the Nordics, for example, provide availability
guarantees to protect operators in this sector
from the revenue risk associated with thisvariability. For those who do not benefit from suchgovernment guarantees, the insurance market
has taken some steps to provide operators withprotection against variability in wind volumes
in the form of index-based parametric cover,which goes some way to mitigating this risk.

Roadmap for action
Offshore wind projects continue to increase in scaleand complexity, with advances in turbine technology(with respect to foundation depth, distance fromshore and power output of each turbine) evolving
rapidly. The global insurance industry has a unique
opportunity to further expand the coverage it
provides to the offshore wind sector to meetdemands for additional insurance capacity, which
is being driven by the rapid advancement of new
offshore wind technology including turbines andfloating wind technology.
In addition, given the size of many offshore windprojects, a blended financing model is necessary
which typically requires a combination of investment
from private corporates (often large utilities and/or oil and gas companies), overseas investors andlarge institutional investors to achieve success.

To support and accelerate the growth of offshore wind, the SMI Insurance Task Force will:• Convene a workstream focused on supporting and encouraging more sustainable investment,
including into offshore wind projects. In 2021, the workstream will launch a green investment
proposal, outlining the intent and capability of the insurance industry to make resources available
to support green investment, and the regulatory changes required to realise this ambition.
•P rovide a platform to ensure there is co-ordinated action between the insurance industry,
operators in the offshore wind sector and private investors.

In addition, Lloyd’s will:• Commit to expanding its coverage to ensure capacity constraints do not limit the growth of the industry.

06

Nuclear

03. Nuclear

Introduction
Since the origins of nuclear power generation in the 1950s, the global
insurance industry has provided insurance for the unique needs ofnuclear energy projects through risk pooling, alongside public-private
partnerships. Nuclear pools were formed to insure civil nuclear
risks within their national market and provide inter-pool reinsurance.
They were created in the spirit of a trilateral relationship between
the newly forming sector, governments and the insurance market.
As the second largest source of low-carbon
energy, nuclear energy now provides around
10% of global electricity supply, generated fromaround 440 power reactors across 31 countries12.
Predictions from the 2020 World Energy Outlook
suggest electricity generation from nuclear could
increase by almost 55% by 2040 in its sustainable
development scenario13. Nuclear energy provides
many developed and developing countries witha reliable source of energy that complements
more intermittent renewable energy which relies
on external conditions such as weather. A blendof both nuclear and renewable energy sources
therefore enables cities and countries to achievea stable supply of low-carbon power to theirelectricity grids.

12

10%

Globalelectricity

440
Power
reactors

World Nuclear Association - https://www.world-nuclear.org/information-library/current-and-future-generation/nuclear-power-in- the-world-today.aspx

1307

Nuclear energy state of play

The International Energy Agency – The World Energy Outlook Report 2020

31

Countries

Nuclear

Although some scepticism remains as to whether nuclear energy should be a long-term solution,owing to the carbon intensity of the construction and decommissioning of nuclear power plants and thesafety of nuclear waste disposal, emissions during the construction period are typically offset between
18 months and five years of operation. Over the 60 to 80-year lifespan of a nuclear power plant, it istherefore expected to generate a negative carbon footprint.

The carbon lifecycle of a nuclear project
GHG emissions(g CO2 – equivalent / kWh)

30

20

25.1

10

0

Extract,enrich anddeliver fuelPlant
construction

Development of global nuclear capacity
The US is currently leading the nuclear energy
market, accounting for more than 30% ofworldwide nuclear generation of electricity 14,
closely followed by France15. Nuclear power
capacity worldwide is increasing steadily, witharound 50 reactors currently under construction16,
in countries including China and the United ArabEmirates. In the UK, nuclear power stations areamongst the highest performing in the world,
generating 20% of the country’s electricity 17.

Worldwide nuclear generation of energy

USA

30%

Plant
operation

12

9.2
Spent fuelconditioning
and storage

Deconstructplant andreclaim landThis impressive output provides carbon savings
equivalent to taking one third of all cars off UK
roads. This nuclear power capacity is being
further developed through new large-scale
nuclear projects, including Hinkley Point C,
the first nuclear power station to be built in
the country in over two decades18.
The future of nuclear technology
The next generation of nuclear technology is also
being actively explored. For example, the Advanced
Reactor Demonstration Program in the US provides
initial funding to develop, test, licence and build
advanced nuclear reactors. These technologies
potentially address several challenges of larger
nuclear power plants, by reducing upfront capital
investment and build time while simultaneously
enhancing efficiency and maintaining high levelsof safety standards and protection.
Nuclear applications also extend beyond
its direct use as a low carbon energy source.
There is a potential future role for nuclear
technology in powering the production of greenhydrogen, which could act as a key enabler infacilitating decarbonisation across a range ofsectors. In addition, nuclear technology has
potential applications in the maritime industry
through the use of low carbon nuclear propulsion
on ships using liquid fuelled micro-reactors.

14

International Energy Agency - Nuclear - Fuels & Technologies - IEA

15World Nuclear News - Macron stresses importance of nuclear energy for France : Nuclear Policies - World Nuclear News (world- nuclear-news.org)

16
17

World Economics Forum - Where are the world’s 449 nuclear reactors? | World Economic Forum (weforum.org)

World Nuclear Association - Nuclear Power in the United Kingdom |UK Nuclear Energy - World Nuclear Association (world- nuclear.org)

18

08

11.6

8.2

Nuclear Industry Association - Fortyby50_TheNuclearRoadmap_201009.pdf (niauk.org)

Nuclear

Key obstacles and roleof the insurance industry
The nuclear insurance landscape
Nuclear insurance typically includes first-party
liability covering property, machinery and businessinterruption, and third-party liability covering site
and transit liabilities. The complex, large-scale andcatastrophic risks that nuclear projects present
have meant that commercial insurance markets
have not been able to provide the net capacity toinsure civil nuclear industry risks.
In addition, since the formation of the sector in the
1950s, general insurance policies have applied anuclear exclusion clause to exclude damage causedby nuclear or radiatio19. These two factors combined
have created the need for bespoke and innovative
coverage solutions.

Globally, there are 28 government insurance pools
for nuclear risks, 19 of which are in Europe20.
These offer reciprocal reinsurance capacity
to reach the required level of cover for nuclear
power plants (NPPs) and the wider civil nuclear
industry fuel cycle (see infographic below), andenable both governments and the insurance
industry to work together to provide accessible
solutions for the civil nuclear industry. In doing so,they can protect the communities in which NPPs
are situated and provide a large part of the social
licence for nuclear operators to operate.
This is an example of the insurance industry
collaborating to create a successful insurance
solution to a regionally systemic risk, somethingwhich Lloyd’s has been involved in from theestablishment of the British Insurance (Atomic
Energy) Committee in 1956, the forerunner of NRI.
Lloyd’s is aiming to replicate this approach more
broadly through Futureset, its global platform
and community to create and share risk insight,
expertise, and solutions to our most challenging
insurance problems.

Simplified artistic view of the typical nuclear fuel cycle
Enrichment
Enrichment

Milling

MiningMiningConversion
Milling

Fuel fabrication

Conversion

MOX fuel
fabrication

Fuel fabrication

MOX fuel
fabrication

Reprocessing

Reprocessing

Key:

Power plant

Power plantKey:

Raw materials being processed

Raw materials being processed

Electricity

Electricity

HLW HLW

Recycling Recycling
Spent fuelSpent fuelfuel disposal
SpentSpentfuel disposal

19

LMA5202 Nuclear Risk Exclusion Clause (Property Reinsurance) (lmalloyds.com)

20

09

Nuclear Risk Insurers - Nuclear Pools

Spent
fuel
storageSpent
fuelstorage

Electricity

Electricity

Nuclear

The other major sources of insurance capacity for nuclear risks are through captives and mutual
insurance entities of which there are several operating today – providing nuclear first and third-party
liability capacity in partnership with commercial insurers, of which the Lloyd’s market is the global leader.
The nuclear industry has traditionally been excluded from the mainstream insurance markets of mostcountries, creating the specific need for bespoke coverage. A significant proportion of this is provided
through the Lloyd’s market, with a number of syndicates providing specialist coverage for civil nuclear
installations, property damage, machinery breakdown, business interruption, nuclear third-party
liability, nuclear transit liability and construction. The Lloyd’s market remains involved in the provisionof insurance on new projects such as Hinkley Point C in the UK and other builds internationally, during
construction through to operation and eventual decommissioning.

Nuclear development costs
While nuclear power generation offers significant
benefits in providing low-carbon and consistentenergy to the grid, the lifecycle of a nuclear projectis a costly endeavour which requires both significant
up-front investments to fund the design andconstruction of a plant, together with the eventual
and time-consuming decommissioning of the site
once the reactor has reached its useful limit.
Currently, the majority of decommissioning costsin the UK are met by the Government through the
Nuclear Liabilities Fund, however this approachdiffers by country. In France, for example,
decommissioning costs are primarily met by
the nuclear industry.

21

10

The significant cost of capital represents a
key challenge for the expansion of the sector,
requiring an appropriate funding model for new
nuclear capacity that drives a better return on
investment. The high upfront costs of new nuclear
and long construction timelines mean that new
financing models have been required to makeprojects more viable – notably the regulated asset
base (RAB) model of financing, which the UK
Government has backed as a “credible model
for large scale nuclear projects”21.

Department for Business, Energy & Industrial Strategy - Regulated Asset Base (RAB) model for nuclear - GOV.UK (www.gov.uk)

Nuclear

Another related issue is the extent to whichinvestors are willing to take on the unique risks
that nuclear power brings, such as the potential
to cause long-term, catastrophic health andenvironmental impacts, for example as a resultof improper disposal of nuclear waste. A key
dependency will be on whether nuclear energy
is included in the EU’s sustainable financetaxonomy, a decision on which is expectedsoon by the European Commission, which will
impact whether nuclear energy is considereda sustainable investment. The global insurance
industry via the nuclear pools has a role to playin providing sufficient coverage to ensure private
investors are comfortable with the residual risk towhich they are exposed.

Nuclear operators’ third-party liabilities are governed
through a number of international conventions.
Under revisions to the Paris Convention that are
expected to come into force from January 2022,
third-party liability limits will increase significantly
for operators in participating countries.

Attempts to minimise construction risks andcosts are also being actively explored by the
nuclear sector, for example through replicationof existing designs as well as increasing theuse of Small Modular Reactors. In the UK, theGovernment is targeting a 30% reduction in thecost of new nuclear projects by 203022. Nuclear
energy providers are also working to reduce theenvironmental impacts of the construction anddecommissioning phases by reducing volumes ofmaterials used, reducing and reusing waste, andeffectively managing water resources.

In the UK,
the Governmentis targeting a 30%
reduction in thecost of new nuclear
projects by 203022.
Nuclear liability capacity
Several barriers exist to limit the expansionof insurance capacity, including the inherent
volatility of nuclear insurance claims, given the
low frequency and high severity that losses canpresent. Despite strong safety and performancerecords of the nuclear industry, the perceived
risk of nuclear energy remains a key barrier
to entry for many insurers and investors, anda greater level of education will be required toaddress these existing concerns.

11

The amended Paris Convention will cover a broader
range of damage than it does today, and the claims
period for nuclear damage in relation to life andpersonal injury will be extended from ten to 30
years23, significantly increasing the scope andcomplexity of claims and impacting some insurers’
appetite to offer the increased insurance coveragethat many operators will be seeking.
In particular, an increase in the mandated claims
period could significantly increase the loss of lifeand personal injury claims incurred by nuclear
operators, as an extended claims period willconsequently capture claims from those sufferingfrom longer term illnesses or the delayed effectsof harmful nuclear exposure.

22

Nuclear Industry Association - Fortyby50_TheNuclearRoadmap_201009.pdf (niauk.org)

23

Nuclear Energy Agency – 2004 Protocol to Amend the Paris Convention

Nuclear

Losses due to nuclear site accidents are generally
covered by very few policies, with liability
channelled through the site operator, creating
further concentration risk and increasing thevolatility of outcomes for insurers. In addition,
despite a few significant nuclear accidents inrecent years, the availability of comprehensive
actuarial data from the nuclear industry is low
because of the low incidence of losses.
However, there is an opportunity for insurers to
support the future development of low carbon
nuclear projects through the provision of coverfor tranches of construction risk relating to new
nuclear capacity. With statutory third-party
liability cover for the nuclear industry expected toincrease substantially due to a pending change
in regulations, combined with new nuclear
capacity being developed, there is demand on
the non-mutual insurance market to alleviate
some of these pressures by providing therequisite additional capacity. Given the scale of
the risks, this will likely need to be in parallel withgovernment support packages.

Insuring the future of nuclear technology
Nuclear power technologies have been evolving
in recent years and new innovations such as
passive safety systems and digital continual plant
assessment are significantly reducing nuclear
risks. Small Modular Reactors also contribute tolowering risks, as they contain smaller quantities
of radioactive materials and are designed to rely
more on inherent safety characteristics rather thanoperational measures and human intervention.

12

There is an opportunity
for insurers to support
the future developmentof low carbon nuclear
projects through theprovision of cover fortranches of construction
risk relating to new
nuclear capacity.

Another emerging technology is nuclear fusion
which, in contrast to nuclear fission, carries norisk of nuclear reactor meltdown (as it produces
no chain reaction) or high activity, long-lived
nuclear waste. As a result, the type and level ofthird-party liability insurance will inevitably need
to be tailored.
Critically, there will be a need in the immediate
term for innovation and customised solutions toprovide protection for such new technologies,
from construction through to operation.

Nuclear

Roadmap for action
The global insurance industry has a unique opportunity to further expand the coverage it provides
to the nuclear industry in order to meet demands for additional insurance capacity, which is being driven
by anticipated regulatory changes, the introduction of new technologies and the development of new
nuclear capacity.
The Lloyd’s market provides significant capacity to nuclear risk specialists NRI (the British Nuclear
Insurance Pool) and Northcourt (an independent MGA), who take an active lead in identifying how toincrease insurance capacity for the sector, and what combination of government support, risk pooling,
and mutual arrangements is needed to ensure adequate protection is available.

As global leaders in providing insurance for the nuclear energy sector,
Lloyd’s will support the increase in nuclear insurance capacity through:• Providing a platform to ensure there is co-ordinated action between the insurance industry,
civil nuclear sector and government, and to ensure that nuclear operators are able to meet
the additional liability required by regulations.

13

Hydrogen04. Hydrogen
What is hydrogen?
Hydrogen is a fuel that produces no direct GHG emissions orother pollutants when combusted. Its lightness and energy density,
combined with its ability to act as an energy carrier that canbe used to store, move and deliver energy produced from othersources, makes it a key enabler in accelerating the decarbonisationof a range of sectors, including metals and mining, chemicals,
domestic and international freight, heavy transportation, cement
and agriculture. In addition, as a liquid fuel, hydrogen has key
advantages in storage and transportation.

Simplified artistic view of the typical nuclear fuel cycle
Transportation of hydrogen

End usesorHydrocarbon fuels
e.g. natural gas,coal, biomass

Conversion of hydrogen to ammonia for transportation

Steam reforming/
gasification

H2

Conversion to hydrogen for use+N2 (Haber-Bosch process)

INFOGRAPHIC

EElectricity generated
via renewable sourcesoror

Combined with CO2 to create synthetic methane
Water electrolysis+CO2/CO (methanation)

EWater electrolysis

Key:*Alternative transport methods like methanol will be assessed at IHS Markit fall 2019 workshops
Source: IHS Markit

HydrogenAmmonia

Synthetic methane

E- Electricity

H2 Hydrogen*Alternative transport methods like methanol will be assessed at IHS Markit fall 2019 workshopsSource: IHS Markit

14

Hydrogen

How is hydrogen produced?
Hydrogen can be produced from a variety of sources, such as natural gas, biomass, and renewable power,
and this in turn informs its classification – grey, blue or green. Currently, the majority of hydrogenis grey hydrogen, which has a high carbon footprint and is often produced using fossil fuel inputs.
Blue hydrogen, on the other hand, has a lower expected carbon footprint and uses natural gas
and carbon capture and storage as feedstock for its production; it is typically generated at historic oil
and gas production sites.

Green hydrogen goes one step further and has an even lower carbon footprint than blue hydrogen. It is
produced by splitting water by electrolysis using electricity that has been produced using excess energy
from renewable energy sources such as wind and solar. The most critical factor driving the cost of greenhydrogen is the price of the renewable energy used as an input; in the first instance, it is likely that the
majority of growth in clean hydrogen production will be driven by blue hydrogen until renewable energy
achieves sufficient scale to make production of green hydrogen economically viable24.

24

15

IEA - The clean hydrogen future has already begun – Analysis - IEA

HydrogenGreen hydrogen
Green hydrogen is produced by using electricity
to split water (H₂O) into its component parts– hydrogen and oxygen. If the electricity is
produced by renewable power, such as solar
or wind, the resulting hydrogen is carbon-free.

Green hydrogen has the potential to play aparticularly prominent role in the storage andtransmission of excess energy output fromintermittent renewable energy assets, which canthen be redeployed globally for heat, electricity
and as a key energy input for industry.

Hydrogen process
O2+H2

RenewableenergyElectrolysis

Green hydrogen

O2+H2

Grid energy

Carbon captureand storage

Electrolysis

Blue hydrogen

Carbon captureand storage

Natural gas

Steam reforming

How can hydrogen be used
to support decarbonisation?
Hydrogen is widely used as a low-carbon
alternative in many industrial applications as afuel which is burned with oxygen. It can be usedin fuel cells, internal combustion engines andindustrial heating processes.
Hydrogen use today is mainly dominated byindustry, however its potential uses span acrossthe entire value chain from renewable energy
generation, through to transportation, and homes
and buildings. Hydrogen fuel cell technology canbe used to power anything that uses electricity,with applications across transportation suchas electric vehicles and aviation, and offers thebenefit of higher energy efficiency than traditional
combustion engines.

16

Grey hydrogen

Hydrogen can also be blended into existinggas networks to provide power to homes andpublic buildings.
In addition, hydrogen can be a leading option forstoring renewable energy when converted into a
carrier such as ammonia, helping to manage boththe variable output from renewables as well as
the transportation of renewable energy over long
distances, such as from offshore wind farms.

HydrogenGreen steel
Steel is traditionally produced using iron ore and/or scrap metal as a basic material, together with a reducing
agent which removes oxygen from the iron ore. Traditional manufacturing uses coke as a reducing agent,
which emits carbon dioxide when it reacts with the oxygen in the iron ore.
Green steel is produced using hydrogen instead of coke as the reducing agent. While hydrogen also reacts
with oxygen in the iron ore, the result is water vapour rather than carbon dioxide.
Plans are underway to build a green steel production facility in Sweden, using a fossil-free manufacturing
process which will be powered by the world’s largest green hydrogen plant. The size of H2 Green Steel’shydrogen plant is expected to be around 800 megawatts, with its end-product replacing coal and cokein the steel manufacturing process. Steel production is expected to begin in 2024, and by 2030 the aim
is to have the capacity to produce 5 million tonnes of steel per year.

Hydrogen strategies
The EU has put hydrogen at the heart ofits green recovery, with a target of 40GW
of electrolyser capacity by 203025. It also
has ambitions to strengthen the hydrogentransportation network in the region, working
with gas grid operators to develop the ‘European
Hydrogen Backbone’ which leverages existinggas transmission pipelines to connect thedemand and supply of hydrogen.

The EU’s hydrogen ambition

40GW
Electrolysis capacity

25

2030

The Sustainable Markets Initiative has establisheda Hydrogen Taskforce to support and accelerate
the deployment of hydrogen globally as one of thedecarbonisation tools critical to facilitating net zero
emissions. The Task Force, chaired by Shell, hascommitted to a number of actions ahead of COP
26 in November 2021 including: creating a template
for a hydrogen ecosystem to act as a basis fora hydrogen energy-based economy, developing
formal pledges with participating companies
committing to the use of clean hydrogen in their
supply chains, and identifying policy and regulatory
levers needed to accelerate the adoption ofhydrogen fuel cells in transportation.

Environment Analyst - Environment Analyst Global | Environment Analyst Global (environment-analyst.com)

26

17

By year

Similarly, the UK Government has identified thegrowth of hydrogen as a strategic imperative andaims to develop 1GW of low carbon hydrogenproduction capacity by 2025 (increasing to 5GW
by 2030). It also plans to launch a £240m net zerohydrogen fund to promote low carbon hydrogenproduction in the UK, and will release its formalhydrogen strategy later in 202126.

HM Government - The Ten Point Plan for a Green Industrial Revolution (publishing.service.gov.uk)

Hydrogen

Key challenges
Hydrogen infrastructure networks
A key obstacle to the success of hydrogen is
the infrastructure required to achieve scale.
Though the technology to use hydrogen for heat,electricity and as an input for industry has existed
for some time, infrastructure is essential to enable
the hydrogen economy to operate across its fullvalue chain from upstream production, to midstream
storage and transmission to downstream fuellingand distribution.
Any development should enable hydrogento be transported at scale through the existinggas transmission network or via the use of
specialised vehicles that can transport hydrogensafely. The conversion of existing natural gas
pipelines to deliver hydrogen is a significant
and costly undertaking as hydrogen’s potential
to embrittle steel pipelines above a certain
concentration threshold will result in the needfor pipeline modification.

Green hydrogenproduction costs could
fall by up to 30%
by 2030 according
to some projections.
In addition to the cost of any hydrogentransportation infrastructure modification or
introduction, hydrogen itself is currently costly
to produce. Green hydrogen production costs
could fall by up to 30% by 2030 according to someprojections, however such a reduction would be
dependent on a decline in the cost of renewableenergy, an increase in production to benefit from
economies of scale, and significant investment
to achieve economic viability27.
The production of low-carbon hydrogen is in
its early stages, with less than 0.7% of hydrogenproduction globally currently “clean” (i.e. blue
or green hydrogen)28. There is an expectationthat this proportion will grow significantly should
national governments achieve the ambitions
contained within their respective hydrogenstrategies, however it remains to be seen whether
these obstacles to success can be overcome
collectively by industry, insurers and government.

27

International Energy Agency - The Future of Hydrogen – Analysis - IEA

28

18

EUI Florence School of Regulation – Clean hydrogen

The insurance industry can help to de-risk
investment into hydrogen infrastructure andincentivise private-sector investment. This will
ultimately enable the hydrogen economy to achieve
scale and therefore drive down production costs.
This will, however, require a long-term government
policy framework to give investors the certainty theyrequire, connectivity between individual projects
and a broader infrastructure network to ensure thehydrogen economy can operate across its entire
value chain, and a clear risk allocation mechanism
between governments, the private sector andinsurance providers where such risks are too greatfor one stakeholder to carry alone.

Hydrogen

The nature of hydrogen risks
As the hydrogen economy continues to grow,there will likely be significant changes to the risklandscape of the industries looking to utilise thisenergy source, which may naturally give rise to
additional safety risks, for example due to its
flammability and explosive properties. These risks
exist across the entire hydrogen value chain,including during transportation and storage at the
point of use, where leakages can be catastrophic.
The insurance industry therefore needs tounderstand, and then help companies operating
across the hydrogen economy to better understandthe changing risk profile and subsequent coverage
requirements. The insurance industry is uniquelyplaced to support this centrally, using its experience
across multiple industries to create global
best-practice guidelines.

The Lloyd’s market is already providing specialist
insurance cover for safety risks associated withthe transportation of hydrogen. Such cover
will likely need to be scaled, particularly as
the modification of existing gas transmission
pipelines continues to gather pace.
Insurance cover is already relatively well established
for offshore wind projects involved in greenhydrogen production (recognising that thissubset of the offshore wind market is still in earlystages of development). There is a precedent
on which the insurance industry can build toprovide broader coverage to other segmentsof the hydrogen economy and its value chain.

Roadmap for action
Hydrogen is a vector of change and facilitator of
decarbonisation for several sectors and significant
investment will be required to develop hydrogen
infrastructure. The use of hydrogen also introduces
unique safety implications which will need to beappropriately identified, measured, monitored andmanaged, and insurers are well-placed to support
customers across multiple industries with this.
Insurers should enter dialogue with corporates
operating across the hydrogen value chain tobetter understand the challenges they are facingin obtaining specialist insurance cover, andconsider how cover may need to be segmented orconsolidated across components of the hydrogenvalue chain to prove effective.

To help facilitate the development of hydrogen, the SMI Insurance Task Force will:•W ork closely with the SMI Hydrogen Task Force to open up discussion with customers operatingin this space on the specific challenges they are facing to develop insurance coverage forinnovative or prototypical hydrogen technologies and infrastructure.

To support this, Lloyd’s will:• Lead research through Lloyd’s Futureset into the specific risks posed by hydrogen, including its
flammability, and how these risks might emerge in different ways according to how this fuel is used
at a sectoral level. This will help corporates and private investors to understand how these risks canbe managed and where specialist coverage may need to be introduced or expanded, for example
in relation to the transportation of hydrogen.

19Committing to action

05. Committing to action
Lloyd’s and the global insurance industry are uniquely positioned
to facilitate efforts across communities, businesses andgovernments around the world to drive a transition to a lower
carbon economy.
We have engaged with a range of insurers, Lloyd’s market
participants and corporates to assess the scale and complexity ofdecarbonisation ambitions across the energy sector (offshore wind,
nuclear and hydrogen energy). The actions taken by the insurance
industry today to support the scale and pace of ambition from bothgovernments and businesses will be critical in driving positive,
long-term change.

Action the global (re)insurance
industry should takeOﬀshore wind

NuclearHydrogenInsurers have a unique
opportunity to further expand
the coverage they provide to
the oﬀshore wind sector tomeet demands for additional

Insurers should expand thecoverage they provide to
the nuclear industry to meetdemands for additional
insurance capacity, which is

Insurers should also enter
dialogue with corporates
operating across the hydrogenvalue chain to better understandthe challenges they are facing

insurance capacity, which
is being driven by the rapid
advancement of newoﬀshore wind technology
including turbines andbeing driven by regulatorychanges and the developmentof new nuclear capacity.

in obtaining specialist insurance
cover and consider how cover
may need to be segmented
or consolidated acrosscomponents of the hydrogen

floating wind technology.

20

value chain to prove eﬀective.

Actions that will bedelivered throughthe Sustainable
Markets Initiative
InsuranceTaskforce

The SMI Insurance Task Force
has convened a workstream
focused on supporting andencouraging more sustainable
investment, including into
oﬀshore wind projects.
The Task Force will also ensure
there is co-ordinated action
between the insurance industry,
operators in the oﬀshore wind
sector and private investors.

N/AWork closely with the SMI
Hydrogen Task Force to open
up discussion with customers
operating in this space on thespecific challenges they arefacing to develop insurance
coverage for innovativeor prototypical hydrogentechnologies and infrastructure.

Actions that Lloyd’s will takeCommit to expanding its
coverage to ensure capacity
constraints do not limit thegrowth of the industry.

Provide a platform to ensure
co-ordination between theinsurance industry, civil nuclear
sector and government andensure that nuclear operators
are able to meet the additional
liability required by regulations.

Lead research through Lloyd’s
Futureset into the specific risks
posed by hydrogen. This
research will help corporates
and private investors tounderstand how these risks
can be managed and where
specialist coverage may need
to be introduced or expanded.

Discover how we are guiding our customers towards a greener future.
Visit lloyds.com/jointhereset