How Insurance Helps Unlock Capital for Hydrogen Projects Amid Financing Pressures

How Insurance Helps Unlock Capital for Hydrogen Projects Amid Financing Pressures
November 13, 2024 17 mins

How Insurance Helps Unlock Capital for Hydrogen Projects Amid Financing Pressures

Insurance Can Help Unlock Capital for Hydrogen Projects Amid Financing Pressures

Funding challenges due to macroeconomic factors have prevented several green and blue hydrogen projects from getting off the ground. Organizations facing hurdles in accessing capital can work with risk and insurance experts to expedite projects and help make the promise of hydrogen a reality.

Key Takeaways
  1. Producing hydrogen at scale requires significant investment in equipment and infrastructure, but volatility in government funding has prevented some projects from moving forward.
  2. Risk and insurance experts play a crucial role in the success of hydrogen projects by smoothing the necessary path to financial support and project development.
  3. Collaboration between governments, corporations, investors and lenders helps encourage the continued growth of the hydrogen industry.

Table of Contents

  1. Introduction

  2. Global Hydrogen Investments: Accelerators and Brakes

  3. Lessons Learned from Offshore Wind

  4. The Broader Risk Landscape Facing Hydrogen Projects

  5. Securing the Bankability of Hydrogen

  6. How Insurers Help Build a Hydrogen Economy

Renewables are expected to provide more than one-third of total electricity generation globally by early 2025.1 Despite this industry growth, hurdles remain. For one, capital challenges have beset hydrogen’s potential as a clean fuel that is also set to play a vital role in the energy transition.

Producing hydrogen at scale in a lower carbon way necessitates significant investment — either in equipment to strip and capture those emissions, or in electrolysis plants that extract hydrogen from water. The latter process, which produces green hydrogen, could help use excess wind or solar power in future electricity systems and avoid emissions from natural gas drilling.2

Getting hydrogen projects off the ground has proven more difficult than previously thought due to the high costs of projects and uncertain demand for the energy source. The International Council on Clean Transportation forecasts hydrogen production costs of $3.70 per kilogram in the United States and $5.60 per kilogram in the European Union by 2030.3 The current cost of hydrogen production means that many projects remain dependent upon government support to secure the Final Investment Decision (FID).

Making the hydrogen economy a reality will require governments, corporations, investors and civil society to collaborate in building an environment where low-carbon hydrogen technologies can prosper. In this framework, the insurance industry can act as a catalyst to accelerate projects and enable the wide adoption of hydrogen-based energy by using both exclusion and engagement in asset management, underwriting and risk management.

It is also vital that the insurance industry both understands and articulates the risk transfer challenges experienced throughout the lifecycle of hydrogen. In doing so, projects can proceed to execution, lowering companies’ carbon footprint while improving their environmental, social and governance credentials.

+50%

The cost of producing and installing electrolyzers for green hydrogen production in China, the U.S. and Europe has risen by more than 50 percent since 2023. Inflation, which puts pressure on materials, utilities and labor costs, remains a challenge.

Source: BloombergNEF

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Our discussion going forward must include how we create the incentives to match private capital with public interest at a level of investment that will advance technology, encourage companies to take action and accelerate the path to zero carbon.

Greg Case
Chief Executive Officer, Aon

Global Hydrogen Investments: Accelerators and Brakes

Many planned hydrogen projects have yet to come to fruition due to capital issues, demonstrating the challenges in offtake agreements. Just 10 percent of the clean hydrogen capacity planned by 2030 has identified a buyer, according to BloombergNEF’s Hydrogen Offtake Agreement Database. Thirteen percent of the contracted volume is binding, while 7 percent are pre-contractual agreements with a strong chance of becoming binding contracts. The remaining 80 percent are either memorandums of understanding or unspecified.4

Because of the high costs of hydrogen production, governments typically offer subsidies alongside private investments, which has led to billions of dollars of investment in hydrogen. However, when access to funding from subsidies is cut off, projects face uncertainty. “Government subsidies are important for many of the planned hydrogen projects to take shape and without these subsidies, projects are often delayed,” says James Stretton, Aon’s executive director for natural resources.

The super cycle of elections globally — and notably the results of the U.S. election — has brought additional uncertainty to the financing and economic viability of projects, as have geopolitical risks stemming from regional conflicts that can cause the price of natural resources to spike.

Key regional developments in hydrogen investments demonstrate the ‘stop-start’ nature of project financing:

  • North America

    The U.S. Department of Energy's Energy Earthshots Initiative aims to accelerate breakthroughs of clean energy solutions within the next decade. The first Energy Earthshot launched in 2021, called “Hydrogen Shot,” seeks to reduce the cost of clean hydrogen by 80 percent to $1 per 1 kilogram in 10 years.5

    Proposed tax credits under the Inflation Reduction Act (IRA) were intended to galvanize hydrogen production, offering subsidies of up to $3 per kilogram. However, the tax credits have strict additionality criteria for renewables and hourly power matching, which industry representatives say could stop the industry in its infancy.6 The results of the recent U.S. election and President-elect Donald Trump’s planned approach to energy spending could also impact the IRA.

    In Canada, around 80 low-carbon hydrogen production projects have been announced since 2020, representing an expression of interest of over $100 billion in potential investment. The majority of those are currently in feasibility/planning stages. Canada’s Clean Fuel Regulations require fossil-based transportation fuels to reduce carbon intensity by 15 percent by 2030. The regulations also establish a credit market for producers and importers, where credits are proportional to the hydrogen project’s carbon intensity.7

  • Middle East

    In the Middle East, blue and green hydrogen facilities plan to meet demand from Europe and Japan. For example, the Abu Dhabi National Oil Company and Mitsubishi are partnering to establish a low-carbon supply chain connecting the United Arab Emirates to Japan.8

    Saudi Arabia’s Public Investment Fund (PIF) is also planning to bolster hydrogen production. In June 2024, PIF announced that it intends to invest around $15 billion in Brazil, specifically in areas that include green hydrogen, infrastructure and renewable energy, according to the country's Minister of Mines and Energy Alexandre Silveira.9

  • Europe

    In the United Kingdom, following the launch of the first hydrogen allocation round (HAR1) in July 2022, the government selected 11 successful projects to be offered contracts, totaling 125 megawatts of capacity. HAR1 represented the largest number of commercial-scale green hydrogen production projects announced at once anywhere in Europe and provided over £2 billion of revenue support from the Hydrogen Production Business Model. This will start to be paid once projects become operational.

    The Dutch government also announced plans for a €1 billion subsidy auction for green hydrogen that was held in October 2024. The auction will support projects that enhance the Netherlands’ position in the green energy sector. The maximum amount a single project could walk away with is 50 percent of the total auction budget.10

    The European Union’s Innovation Fund, one of the largest funding programs for innovative low-carbon technologies, is likewise providing grants to hydrogen-related projects, including Topsoe’s new solid oxide electrolyzer cell manufacturing facility in Denmark. The company expects the clean hydrogen produced by its electrolyzers to reduce more than 40 million metric tons of CO₂-equivalent emissions during the first 10 years of operation.11

    In fact, six European hydrogen projects reached FID in July 2024, collectively representing nearly one gigawatt of electrolyzer capacity to be built by 2030.12

  • Asia Pacific

    The deployment of projects in China is critical for the global hydrogen economy, as together with Europe and the U.S., this market could account for 80 percent of clean hydrogen supply by 2030.13 However, the market can be difficult to forecast. Projects are not announced well in advance, and deployment is driven by policy targets, which are still missing for 2030.

    Meanwhile, Australia has one of the largest pipelines of hydrogen projects in the world. The government aims to encourage renewable hydrogen production by establishing a hydrogen production tax incentive, which will provide a $2 incentive per kilogram of renewable hydrogen produced for up to 10 years.14

Lessons Learned from Offshore Wind

While offshore wind today is a growing industry, it likewise had — and continues to have — growing pains from which the hydrogen sector can learn, especially with its similar development trajectory.

  1. A mature market does not guarantee access to capital.
    The UK’s fifth Contracts for Difference round elicited no bids for new offshore wind farms, though there were deals for solar, tidal and onshore wind projects. Firms had argued the price set for electricity generated was too low to make offshore wind projects viable.15
  2. Without government incentives, renewables projects can stall — and those incentives are vulnerable to change.
    In September 2024, a £1.56 billion renewable energy auction in the UK awarded support for 5.3GW of offshore wind capacity, including a 400-megawatt floating wind farm, 93 solar farms totaling 3.3 gigawatts, 22 onshore wind farms totaling one gigawatt and six tidal pilots. The auction was led by the newly elected Labour government that aims to achieve its election pledge to double onshore wind, triple solar power and quadruple offshore wind by 2030. In fact, the Labour government increased the value of the auction by 50 percent compared to the funds promised by Conservative ministers.16 This change demonstrates the impact of government credits and broader fiscal policy in determining investments made in renewables projects. There is also no guarantee that these deals will end up as final contracts.
  3. Willing buyers for the energy source must exist.
    Profit margins can often be under pressure in both offshore wind and hydrogen. However, if prices are made too high for the end customers, there will be no one to use the energy source, demonstrating the delicate balance of pricing further. In August 2024, the refusal of potential green hydrogen customers to sign binding sales agreements and uncertainty over the price of the product contributed to the collapse of a plan to build a hydrogen project in Germany.17

The Broader Risk Landscape Facing Hydrogen Projects

Risks related to macroeconomic and political hurdles can pose further challenges to companies operating in the hydrogen industry and influence project financing and approvals.

These include:

  • Technology Risk

    When hydrogen projects are going to developers to seek financing and approvals, the cost of capital can grow by the perception of increased technology risk. Although the fundamental processes of renewable energy and electrolysis plants are relatively well understood, the technology behind building large electrolyzers and incorporating hydrogen-producing electrolysis plants into existing renewable power infrastructure is still relatively new. This also compounds complexities of insurance protections such as output and performance guarantees, which almost invariably need to be bespoke and require significant lead times to put in place.

  • Regulatory Landscape

    Potential risks associated with local jurisdictions and environmental understanding of the proposed sites are emerging and can vary widely between regions. In the UK, for example, operators wishing to produce hydrogen in England will need an environmental permit from the Environment Agency, which published guidance in March 2024 on emerging techniques for hydrogen production using electrolysis. The guidance will help businesses meet strict requirements that protect the environment and communities before they are granted a permit.18 In the U.S., federal and state regulations for hydrogen production are still in development. In 2023, the federal government launched the Hydrogen Interagency Task Force to further advance a regulatory approach to clean hydrogen.19

    A highly regulated marketplace might make it easier for an insurer to develop a new product. In contrast, a less regulated marketplace that enables investments to proceed more rapidly can make projects riskier. Regulations thus influence the financial models of hydrogen projects. It is the insurance market’s role to understand any consequent impact and help clients navigate through bespoke insurance policies that can deliver a more secure return on investment.

  • Transportation and Storage

    Hydrogen has the highest amount of energy per unit weight of any substance, but its low density complicates unit energy transportation costs. Hydrogen is flammable, explosive, odorless and colorless. If not stored properly, it can escape through minuscule leaks, especially when high pressure storage is required. Hydrogen also has the potential to embrittle steel pipes and welds.

  • Export Challenges

    Export and import hydrogen hubs will be needed globally, disrupting the balance of current oil and gas energy hubs. Countries with large swaths of undeveloped land and abundant renewable energy are developing strategies to produce green hydrogen and export excess, introducing the possibility of significant political and cyber risks, among others.

  • Energy Supply

    Uncertainty around the supply of hydrogen energy remains. While annual low-carbon hydrogen supply could grow 30 times by 2030, only approximately 30 percent of all currently announced supply for commissioning by the end of the decade is likely to be built, according to BloombergNEF.20

An Innovative Solution to Support Clean Energy Projects and De-risk Energy Transition

An Innovative Solution to Support Clean Energy Projects and De-Risk Energy Transition

Aon’s Clean Energy Product has the ability to support many green and low carbon hydrogen projects. Our solution has the capabilities to address the following under one policy form: Construction and Property, Delay in Start-Up and Business Interruption, Project Cargo, Operator’s Extra Expense and Third Party Liability.

Securing the Bankability of Hydrogen

Project finance is a complex process. Financiers conduct comprehensive due diligence and want a holistic view of the risks of a hydrogen project. Technical risks and financial exposures, mainly due to business interruption, are most acute in new projects seeking to innovate. This is why hydrogen — and renewables projects more generally — can struggle. The equipment and technology are still largely untested in real-world conditions.

Beyond the business risks, lenders need to understand the entire stakeholder picture, which includes governments, sponsors, suppliers, contractors and any other influential parties that could prompt a change in circumstances. This also includes understanding the challenges in each stage of the project, such as project development, model design, negotiation, signing, project management and control, which can be spread out over years.

Tax equity investors face various tax risks that can jeopardize their expected returns. These risks may arise from issues such as the investment structure not being upheld, the projects failing to qualify for anticipated tax benefits — potentially due to changes in the qualified basis — or the loss of tax advantages through recapture.

Tax insurance serves as a strategic tool to mitigate these uncertainties, providing a safety net that enhances the stability of financing for hydrogen projects. By offering protection against these risks, tax insurance can help investors gain greater confidence in their investments, ultimately fostering a more secure and attractive environment for funding hydrogen initiatives.

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The sooner that risk and insurance experts are involved in a hydrogen project, the better. This will lead to an earlier understanding of project risk, technology challenges, any performance requirements and project financial models.

Euan Nicolson
Chief Commercial Officer, Global Energy

How Insurers Help Build a Hydrogen Economy

Risk transfer plays a key role in enabling hydrogen projects. An effective insurance strategy will address many lender and investor concerns through the identification and removal of many risks that could impact a project. “An appropriately sourced insurance strategy can help to reduce the cost of capital and financing costs, and proactively contribute to bringing down the overall cost of hydrogen projects,” says Joe Chivers, executive director for international construction at Aon. “This occurs in tandem with other initiatives that reduce project cost and consequently facilitates project approval with the delivery of an acceptable return on investment.”

Unlike traditional oil and gas companies, which often have balance sheets that can withstand fluctuations in insurance pricing, new entrants to the hydrogen industry need competitive insurance solutions to derive as much benefit from their balance sheets as possible. These companies also have unique exposures to capital changes compared to sovereign wealth funds and established players in the energy industry, and are looking to reduce the costs of their financial models.

Working with risk experts can help to de-risk and facilitate hydrogen projects that face sector challenges and broader macroeconomic hurdles. “Aon offers expertise and solutions based on data that will help unlock insurance capital, which in turn will help contribute to lowering the overall project cost,” says Stretton. By bringing lenders and insurers on the journey from the project’s outset, hydrogen leaders can foster alignment between parties, as well as gain additional security in what is proving to be a volatile marketplace.

Early engagement with risk and insurance experts, and the resulting insurance solution, can help increase the attractiveness of a project to investors and accelerate FIDs.

To help navigate this evolving risk landscape, renewable energy companies can benefit from more mature risk management strategies and guidance. Learn more about a holistic suite of solutions that can optimize financing and delivery of future projects.

Tax Insurance for Renewable Energy Transactions

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Aon’s Thought Leaders
  • Adam Beardmore
    Offshore Construction Broker & Engineer, UK
  • Gary Blitz
    CEO, M&A and Transaction Solutions, Global
  • Joe Chivers
    Executive Director, International Construction
  • Euan Nicolson
    Chief Commercial Officer, Global Energy
  • James Stretton
    Executive Director, Natural Resources, UK

1 Electricity 2024 Analysis and forecast to 2026 | International Energy Agency
2 Green hydrogen: ‘cause for optimism’ even as the hype fizzles | Financial Times
3 The price of green hydrogen: How and why we estimate future production costs | ICCT
4 Hydrogen offtake is tiny but growing | BloombergNEF
5 Hydrogen Shot™: Reducing the Cost of Clean Hydrogen | Office of Energy Efficiency and Renewable Energy
6 Bright spots for hydrogen project development emerge amid investment delays | S&P Global
7 Hydrogen Strategy for Canada: Progress Report | Government of Canada
8 Top Ten Cleantech Trends in 2024 | S&P Global Commodity Insights
9 Saudi Arabia's PIF plans to invest $15 billion in Brazil, says Brazilian minister | Reuters
10 Dutch government to hold €1bn green hydrogen subsidy auction in October | Hydrogen Insight
11 Topsoe’s new SOEC factory: A pioneering effort at hydrogen production comes online | Hydrogen Council
12 Walking the talk: Six European projects reach FID in one month | Hydrogen Council
13 Hydrogen Supply Outlook 2024: A Reality Check | BloombergNEF
14 Growing Australia's Hydrogen Industry | Department of Climate Change, Energy, the Environment and Water
15 No bids for offshore wind in government auction | BBC
16 Renewable energy auction secures enough power for 11m UK homes | BBC
17 ‘No firm customers’ | Failed hydrogen project leaves €10m hole in city’s accounts amid spiralling costs | Hydrogen Insight
18 Environment Agency publishes guidance on production of green hydrogen | Environment Agency
19 U.S. National Clean Hydrogen Strategy and Roadmap | Energy.gov
20 Hydrogen Supply Outlook 2024: A Reality Check | BloombergNEF

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This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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