Kathrin Ebner | How reinsurance removes barriers in the H2 industry
It hasn’t been all sunshine and roses in the green H2 industry lately, only 4% of projects announced by 2030 have reached FID. Find out below what key mechanism can help us remove barriers: Reinsurance!!!
Thrilled to launch our 18th episode of the Hydrogen Innovators Podcast with Dr. Kathrin Ebner, working on risk and (re)insurance at Munich Re. Give it a listen and learn more about how Kathrin and her team remove barriers in the green hydrogen world by offering risk transfer solutions for electrolyzers.
Listen on Spotify and Apple.
This article is part of the series: Hydrogen Innovators Podcast
Transcript
[00:00:00.00] [Music Playing]
[00:00:02.78] Karen Baert: To me, it seems like the, I call it, risk responsibility is not yet clearly defined among the different stakeholders. And that leads, in my opinion, to stalemate. I really, truly believe that risk transfer can make a valuable contribution to a further deployment of green hydrogen, as it can provide stability and liquidity, even in the case that the technology is not performing as expected.
[00:00:28.09] [Music Playing]
[00:00:37.70] Welcome back to the Hydrogen Innovators podcast. This is a podcast series is produced by the Stanford Hydrogen Initiative, where we spotlight bold innovators in hydrogen across academia and industry. You can find our podcast series, Hydrogen Innovators on Spotify and on Apple Podcasts.
[00:00:54.93] I'm Karen Baert, entrepreneur, Stanford MBA graduate. And today, I am really thrilled to welcome Dr. Kathrin Ebner. [NON-ENGLISH SPEECH], Kathrin.
[00:01:05.27] Kathrin Ebner: Oh, thank you, Karen. So happy to be here.
[00:01:07.92] Karen Baert: So Dr. Kathrin Ebner is an expert in electrochemical hydrogen technologies at Munich Re's Green Tech Solutions team. She is the tech lead in hydrogen and e-mobility in the area of performance guarantee insurance. While that might sound like Chinese to you right now, we'll talk through that. And it will become much clearer throughout the podcast.
[00:01:32.19] In this role, she's responsible for technical due diligence and risk assessment of the technologies that need to be insured. Kathrin is also a lecturer at the Technical University of Munich. And before joining Munich Re, she acted as a competence domain lead and strategic research coordinator at Bauhaus Luftfahrt, an independent Research Institute, where she also focused on electrochemical energy, uniform conversion and storage in the context of hydrogen production and propulsion applications.
[00:02:01.74] So she has been in the hydrogen world for a while. Kathrin holds a PhD in electrochemistry from the ETH of Zurich. Now, a little bit more on Munich Re's Green Tech Solutions before we get started. This team provides essential protection for green investments through insurance.
[00:02:20.15] For more than 15 years, they've been supporting manufacturers, developers, and investors by absorbing technical risks. So, Kathrin, we are really excited to have you here today and really demystify the role of hydrogen, hydrogen risks, and hydrogen insurance together.
[00:02:38.94] As we all know, hydrogen has long been seen as a vital tool for decarbonization. At the same time, the green hydrogen industry specifically is taking off a bit slower than most industry stakeholders would like. A key element here is risk makes both supply and demand rise a bit slower than expected.
[00:02:58.50] Obviously, new technologies come with risks. Startups, innovators need to convince customers and private and public financing parties of the long-term reliability of their products. And that's really important because we have to build more projects to get down the cost curve and advance this industry. So in that context, what problem are you solving? And what type of risks are you tackling?
[00:03:21.23] Kathrin Ebner: Well, to put it short, we are tackling technology risks, so basically underperformance or failure of the equipment. And, actually, this has been our team's focus already since 2009. And since about 1 and 1/2 years, we are now also offering covers for hydrogen technologies, so electrolyzers and fuel cells.
[00:03:41.52] And when it comes to those hydrogen technologies, as you mentioned already in the intro, there is a perceived lack of trust, as they have not yet been proven over longer periods and at the scales required. So there are really scale-up risks, both at the device level, so basically making the device sizes larger and larger, but also when it comes to the big picture, which is, as you mentioned, decarbonizing via electrification and relying on green hydrogen as a sustainable energy vector to meet emission reduction targets, of course.
[00:04:18.62] All of this will require infrastructural changes, a drastic scaling of renewable electricity generation, and electrolysis capacity. And this, all of this in a comparatively quite short amount of time. So there are lots of ifs involved. And we can see that by looking at the numbers.
[00:04:36.53] So while there are many projects announced, financing is often unclear. And according to the end of 2023 reports by the International Energy Agency, only about 4% of projects announced for 2030 have an FID, so a final investment decision. And the reasons for that, of course, are diverse.
[00:04:58.59] But when coming back to this topic of technology risks that we are focusing on, I think it's important to note that, on the one hand, performant and reliable technologies are, of course, a key target of the OEMs in the field. But, as mentioned, the experience data is still missing. And when we consider what impacts the levelized cost of hydrogen, so basically the economic indicator of a hydrogen project, if you will, we will see that many of the influence factors there are directly linked to the technology, its performance, and durability.
[00:05:36.56] So these aspects are critical to electrolytic hydrogen production projects and to the business case of those. So with that, I think, generally thinking about those technology risks is of high relevance for project developers, financing parties and offtakers, not just for the OEMs.
[00:05:57.83] Karen Baert: Very helpful introduction. OK, you've been talking about a lot of different stakeholders in the hydrogen value chain. You've talked about the OEMs. So for our listeners, these are the equipment manufacturers, so in this specific example, the electrolyzer manufacturers. You've talked about the project developers, the financiers, the offtakers. Could you maybe describe what their perspective is and what their needs are in this hydrogen value chain?
[00:06:24.80] Kathrin Ebner: I can definitely try my best to summarize that. So we've had really many conversations with the different stakeholders. And yeah, maybe I will start with my perceived perspective of the OEM.
[00:06:35.22] So basically, in the field, OEMs are kind of expected to provide warranties on the technology they are producing. But providing warranties on technology, of course, requires research on the OEMs balance sheet over long periods of time. And that ties up capital that could be used for commercial operations, but also R&D, and decreases liquidity, decreases financial flexibility, essentially.
[00:07:04.01] And as a result to avoid those aspects, the offered warranty durations are often relatively short compared to the planned lifetimes of the equipment in the projects. Another topic that OEMs are facing is that it's hard to convince investors to provide capital if they do not trust the innovative tech that is produced there. So that's maybe more on the OEM side.
[00:07:31.38] But when we are going out to the project developers, we hear that they often find it challenging to find equity and debt providers to finance the projects they are thinking of. And this is specifically in the context of technological uncertainty. And also, once they have secured offtake agreements, which is often the key requirement for financiers to come in, upholding those offtake agreements, of course, also requires to reliably produce hydrogen within the project. So that's kind of a different position that the project developers are in.
[00:08:06.26] Offtakers, of course, require a reliable hydrogen supply because they typically also directly use it further down the line. And lastly, the perspective of the financing parties is often that out of the warranties that the OEMs are providing, if any, the risk of underperformance of the emerging technology is really part of the financing party's own risk. So if the technology doesn't perform as promised, the revenue stream is lower, which provides a lower return for the project and potential issues, then, for repaying the debt.
[00:08:39.81] So you can see you have diverse interests here. And it's a young field. So, to me, it seems like the, I call it, risk responsibility is not yet clearly defined among the different stakeholders. And that leads, in my opinion, to a stalemate.
[00:08:55.34] So, yeah, to stalemate and also to an overall bankability issue for hydrogen projects. And again, that kind of ties back to the comparatively low number of final investment decisions reached, as I mentioned beforehand.
[00:09:09.56] Karen Baert: That's a really helpful overview. So there's a lot of different risks across the different pieces of the value chain. As you mentioned, it's not clearly defined how the risk responsibility should be structured and so that holds the industry back.
[00:09:24.56] Can you now tell me a bit more about what your team offers? What is the actual product or vehicle to which stakeholders and how does that solve this problem?
[00:09:35.32] Kathrin Ebner: So what we offer are risk transfer solutions, are actually a warranty insurance product, which is called Hysure. And that can help free up the balance sheet and enable a flexible use of assets. And how it basically works is that we offer performance and product covers, so that means for underperformance of the technology or also failure of the technology, and, on a case-to-case basis, also availability warranty.
[00:10:05.60] And since, again, the field is not yet very standardized, we do work with our clients individually to really find tailor-made solutions there that works well for them. And the general concept, though, is always the same, which is a warranty backstop concept. So basically, an entity provides a warranty, for example, an OEM, and we will backstop that warranty and cover for excessive warranty costs.
[00:10:31.94] So then, you're protected against the unexpected, so excessive degradation, unexpectedly high failure rates, serial losses, et cetera. And this product can then support different parties in the value chain and the OEMs. I've already mentioned that developers also benefit from that.
[00:10:51.50] Plus, they could also be an entity giving out warranties that could be backstopped with our product. But also, of course, financing parties benefit from such a warranty cover, that it's relying on the technology, it's mitigating the risk, and also it's avoiding OEM insolvency in that context.
[00:11:10.06] And, of course, there are also other aspects, such as reliable offtake agreements, to consider. I really, truly believe that risk transfer can make a valuable contribution to a further deployment of green hydrogen, as it can provide stability and liquidity, even in the case that the technology is not performing as expected.
[00:11:32.20] Karen Baert: Does this ensure your customers against technology risk mainly or also other types of risks, such as market risks, policy risks, et cetera.
[00:11:42.97] Kathrin Ebner: No. So we are really focusing on the technology risk here. So it's one puzzle piece. I don't think there is one Holy Grail to solve the whole issue.
[00:11:52.40] But the performance risk piece, this puzzle piece can really make a valuable contribution and take away, let's say, one worry of the different stakeholders in the field.
[00:12:02.63] Karen Baert: Absolutely. Couldn't agree more, especially in a field where there's a lot of new technologies. And I think green hydrogen is the perfect example of that. So is your product only for startups? Or is it mainly for established companies that deal with new technologies? Or do you work with both types of companies?
[00:12:22.22] Kathrin Ebner: So basically, one of our main criteria is the technological readiness level to be equal or above eight. So that means the system is tested, demonstrated, illustrated, and qualified in a relevant operating environment. This is the one part.
[00:12:36.77] And the other part is that the technology, the company that we are working with has to pass our technical due diligence process. And maybe if we have time, we can talk a bit about that later.
[00:12:48.77] So while that may sound like a hurdle to many companies, I would still highly advise companies whose products haven't reached that maturity level yet to think about the topic of insurability, and early on, and keep the testing requirements in mind already in the development phase, as it will help accelerate the process and facilitate the process later on.
[00:13:13.75] Karen Baert: So, Kathrin, as I'm sure you know, I've been working in the hydrogen industry for a while and talking to a lot of people. And this is the first time that I hear about this solution, which, to me, seems like a game changer. Why haven't I heard about this before?
[00:13:28.21] Kathrin Ebner: Well, first of all, I'm really happy that you think that. Thanks for the support. And actually, I couldn't agree more with you.
[00:13:35.51] But I think the field is really quite in an early stage. So we are in an early scale-up phase. that is characterized by a lack of standardization, by a lack of general practice.
[00:13:48.65] So I would say that is maybe not yet standard practice in the field. The topic of interoperability, as I mentioned, often comes up late for the OEMs, for the project developers, et cetera. And we also have to think that this kind of performance warranty solutions that I'm talking about also represent a challenge at the insurers end.
[00:14:08.45] And we mean we are talking about emerging technologies with a comparatively limited experience in field data availability, which is usually what we like to use for our pricing and modeling efforts. And that means that we follow a technical underwriting approach, really trying to understand the technology and model the risk. And with that, we need necessary expertise and training also on the insurers end.
[00:14:34.00] And maybe I should also mention the PV industry as an example of how that can change. Because, as I mentioned, I think our team started in 2009 with covers for the PV industry. And now, it's basically industry standard in many markets that modules are sold with long-term performance warranties. And that is, of course, an enabler in that field. And maybe when the green hydrogen field is also moving down that maturation process, we will also see something similar appear.
[00:15:08.53] Karen Baert: Interesting. So you see this as an instrument or a vehicle that is not only needed in the first years when the technology is really still being developed, but something that is also needed as a technology becomes more mature and later in its life cycle.
[00:15:24.56] Kathrin Ebner: So I think here, at the early phase, it can really help as a strong enabler, but also later on, simply as a means of defining risk responsibility, as we talked about before, and allowing a risk transfer, and freeing up the balance sheet, it will also be an enabler later down the line. The details of the products may look different. The coverage durations, for example, may look different in different types of this maturation cycle. But I think there is performance warranty have a valid place in all of these different stages.
[00:16:03.79] Karen Baert: Does Munich Re have competitors in this field, maybe players that had certain solutions for the PV industry that are now applying it to the hydrogen industry as well or not?
[00:16:16.39] Kathrin Ebner: So we do have competitors for the topic of performance warranties, generally. But when it comes to the green hydrogen field, we really consider ourselves the thought leader in terms of technical capabilities and also as a first mover in providing substantial insurance coverage.
[00:16:35.35] Karen Baert: And do you offer these warranty insurances specifically for the hydrogen field only? Or do you also go a step upstream, which could mean renewables, or downstream, which could mean end products that use hydrogen as an input stream? Thinking about e-fuels, alternative aviation fuels, or ammonia, or other chemicals.
[00:16:59.54] Kathrin Ebner: Yes. So we do offer products for several of the components you mentioned. I mean, PV we've already talked about, but also stationary energy storage, which is, of course, a very important puzzle piece. Then, electric vehicles, we offer coverages, but also projects that use green hydrogen as an input, basically, for the process, as you mentioned, for example, for producing carbon based energy carriers from waste products, such as captured carbon or organic residues. These are all projects that can seek coverage from our team.
[00:17:30.65] Karen Baert: Great. OK, so you talked about the fact that your team assesses technical risks for hydrogen technologies through a technical due diligence. Why do you do that technical due diligence in the first place? And how do you approach it? I'd be very curious to learn how different or similar it is to a technical diligence that an investor would do, for example, for a new technology.
[00:17:55.90] Kathrin Ebner: Yes. So I think this is my favorite question because this is really where my expertise comes into play in the whole project or in the whole process basically. So, first of all, I think it's really important to, and I don't think everybody in the field is always aware of that, that an electrochemical system really entails a complex interplay of kinetics, mass transport, electron transport, and ion transport. And that's only on the cell level.
[00:18:23.72] So to basically keep all of the cells in the system happy and maintain their functionality, you, in addition to that, also have a number of valence of plant components that are required in the system. So to put the risk on our shoulders, we need to have a good understanding of the specific technology and the factors that can impact it, again, especially because there is no long-term data yet available on those system sizes, system scale. And so, basically, this in-depth technical due diligence is key for offering this risk transfer.
[00:18:59.18] And while I cannot directly compare, of course, to what an investor would do, and likely the process also differs, I would consider our approach quite in-depth. So we actually have a two-fold approach. So, first, we work on our, so-called, desktop analysis.
[00:19:16.94] So basically, we will ask questions on the technology setup, testing data that is available, monitoring concepts, et cetera. And this can be an iterative process in close exchange with the client. Once again, I mean, this is a young field. And there are things that are new on both ends.
[00:19:35.54] So it can be an iterative process. And there will be several sets of questions. And then, only as a second step, we conduct a site visit to see the production and the approach to quality control.
[00:19:48.25] And once we have learned about all of that, we can gather all the information and use it, basically, as an input for our modeling efforts. And they then allow us to determine a price for the requested insurance cover. And, yeah, as you can imagine, this entire process requires contributions from various fields. Me personally, I'm an electrochemist, but I work with engineers and mathematicians to really work on those models and be able to assess that risk well.
[00:20:22.54] Karen Baert: That sounds like a very interesting work to do. So project developers, when they select an OEM, they also do a certain diligence, right? Do you share some of your learnings with these project developers? Is this a similar process, or is this completely separate?
[00:20:38.83] Kathrin Ebner: So, of course, the data that we work with is usually highly confidential. So we will only use that data that a company submits to us for actually working on their case. But there could, of course, also be cases where an OEM and a project developer approach us together to work together on one specific project and mutually agree that this would be trilateral way of working on the data. So that could be an option there.
[00:21:07.67] Karen Baert: That makes sense. And then, I assume, based on this assessment, you get a sense of the level of risk. And then, there's some kind of differential pricing of your insurance based on that.
[00:21:19.21] Kathrin Ebner: Absolutely. So we will, basically, work on the model after learning about the technology. And as you can imagine, there is, at the moment, again, a lack of standardization, so there is lots of differences, even when we are talking within one type of technology, such as PEM and alkaline. Oftentimes, people only make a difference between the two.
[00:21:39.77] But even within those larger groups, and, of course, there are also even other approaches to that, but even within those larger groups, you have many different technological approaches. And you can also see many different approaches to manufacturing, quality control, monitoring the system. And all of that plays a role in our risk assessment and will be considered when we are doing our technology and pricing modeling.
[00:22:07.81] Karen Baert: Interesting. So in case some of the OEMs are listening today, what could they do to make your life easier or facilitate your work?
[00:22:17.08] Kathrin Ebner: Yeah, so, basically, as I mentioned, I think, already, it's just really important to think about the topic of risk transfer early on. So degradation and stress testing, for example, is really something that takes time, but it is a key instrument in this context. And so what I have been noticing is that topic in our discussion, both on the OEM and the project developer side, may come up comparatively late.
[00:22:42.50] And then, it will take a while to acquire the data. And it prolongs the entire process, especially the first part, the iterative process on the data that we have discussed about, the desktop analysis I was referring to. So, yeah, this would really be my recommendation, even though being super passionate about the tech, which I fully understand, also to keep these other aspects in mind, such as insurability.
[00:23:05.29] Karen Baert: Absolutely. And do you see a big difference between the types of hydrogen technologies from a risk perspective?
[00:23:13.48] Kathrin Ebner: Yes, definitely, definitely. So as mentioned before, even within these pillars of PEM, alkaline, and so on, you have quite different realizations of these technological approaches. And then, what's also really important to think about is really the production approaches.
[00:23:31.73] And, I mean, just think about the fact that there are thousands of cells in one of these systems. And they all kind of have to work together to make it a fully functional and long-lived system, right? So consistency and reproducibility is really important in that context. So this is why also the production approach and the quality control there is important for us.
[00:23:53.72] And last but not least, we shouldn't forget about the fact that electrolysers are also applied to different applications. And same is true for fuel cells, by the way. So depending on how they are used, how the load profile is, or what the input quality is, et cetera, the risk can also differ quite a bit.
[00:24:11.51] So, yeah, I would definitely say that the risks differ quite significantly. And what makes it a bit even more difficult is that there is still a lack of standardized testing, so accelerated stress tests, et cetera. There are protocols out there, of course.
[00:24:27.77] But there is really a lack of good understanding on which protocols to apply, for what technology, for what application case, and what we can learn from what protocols. So once that standardized testing approaches will mature more and more, maybe we will also alter our process a bit in how we look at technologies. But at the moment, I really want to highlight that we need to look at every single client's technology in quite a bit of detail to really put the risk on our shoulders, as mentioned.
[00:24:59.33] Karen Baert: Mm-hmm. And that makes a lot of sense. The risk profile is not just inherent to certain type of technology or even the technology provider. It's really linked to how the technology is used in a certain application, so what the input is, how it's being run, et cetera.
[00:25:18.30] Kathrin Ebner: Absolutely, absolutely.
[00:25:20.40] Karen Baert: Now, I like to ask our guests on this podcast what their perspective is on what's been holding the hydrogen industry back recently. And particularly, I'm curious to hear your answer, since you're looking at it really from the technology and the risk perspective, and so very different perspective than most of our guests on the podcast.
[00:25:43.35] Kathrin Ebner: So, yeah, as you can imagine, I think quite a lot of the hesitation is really directly correlated with these uncertainties that I perceive throughout the value chain. And some of these uncertainties are real uncertainties. Some are just perceived uncertainties but, nevertheless, they affect on how the different stakeholders are dealing with the topic.
[00:26:06.16] And some things to mention are definitely change of regulation, the green hydrogen market volatility, supply chain scaling, but definitely also the limited experience with the technologies involved play a role. And this is why I think it's really important to emphasize again and again that really a broad range of stakeholders, of course, research and technology development, but also all the way to finance are required to really overcome this hesitation and accelerate the deployment.
[00:26:39.51] Karen Baert: What gives you hope on the other side that the energy transition with green hydrogen will happen and will happen soon?
[00:26:46.57] Kathrin Ebner: Well, I think, first of all, there's really lots of activity in the field. And there is a relatively broadly shared understanding that green hydrogen, as an energy carrier, will need to play a key role in our decarbonization efforts. Additionally, I want to say that among students and young professionals, I really see lots of fresh ideas, strong motivation for the energy transition to happen, but also for green hydrogen specifically. And this is probably the biggest aspect giving me hope.
[00:27:15.61] Karen Baert: I couldn't agree more.
[00:27:16.75] [LAUGHTER]
[00:27:18.74] Now you have a very strong technical background, Kathrin. You have a PhD in electrochemistry. I could imagine that you have a rather unique profile in a team that is focused on insurance. What motivated your change from academia and very technical work to work in the industry?
[00:27:38.16] Kathrin Ebner: There have been a number of reasons, but I think one big motivator was the thought on how I could best use my skills to contribute to ongoing decarbonization efforts. And for green hydrogen, so, in my opinion, for green hydrogen to actually play the role that has been carved out for it, in many of the low-emission scenarios published, a massive scale-up with way above standard growth rates is required.
[00:28:05.98] And to put this into realization, I think technical skills and, specifically, also electrochemical expertise are not only needed in research efforts, but can also really enable the participation of relevant players, for example, in the field of finance, in the field of regulation, standardization, and similar in this transition. And I really strongly believe that risk transfer is a significant lever in this context. And it's really a continued motivation for me to work on that and to work with our clients on that.
[00:28:40.35] Last but definitely not least, of course, Munich Re provides an excellent work environment with lots of highly-skilled people around collaborating and co-creating, which motivated me to come and also to stay. And I want to mention that one of the biggest surprises actually, for me, was how many engineers you can meet at Munich Re, how many people with a technical background. Because, actually, not just in the hydrogen field, of course, but also in various other fields, it is of key importance to model and understand risks well, to have the tech expertise also on board.
[00:29:14.29] Karen Baert: Mm-hmm That's so cool. And you mentioned before that you're really passionate about that interdisciplinarity. Why is that? And how do you see that relevance for your work on a day-to-day basis?
[00:29:27.33] Kathrin Ebner: I mean, first of all, I really am a strong believer in the fact that interdisciplinary creativity is key for progress. And investing time into building a foundation of common understanding, and that can mean terminology, understanding fundamental principles, but most importantly, have a common understanding of the relevant challenges to be tackled within a field, definitely pays off in the long-run, in my opinion.
[00:29:54.88] And more specifically, to my work at Munich Re, I want to emphasize that, again, obtaining really a holistic picture and perspective of a new technology, its market relevance, and also the risks involved, and, most importantly, of course, also quantifying the risks with the various skill sets and various expertise is needed. And that can only be achieved by an interdisciplinary team.
[00:30:19.60] And I think this is also really recognized by our clients, who benefit from the broad competence, and who, it seems, enjoy the discussions and the diverse discussions on the topics as much as I do.
[00:30:33.51] Karen Baert: Well, Kathrin, this has been both energizing as well as informative conversation. I want to circle back to something you mentioned, the importance of separating real from perceived uncertainties. I think you and your team play a key role in doing so to make sure that we manage the real risks effectively and, at the same time, make sure that the perceived risks or uncertainty don't hold us back.
[00:31:01.09] I want to end, Kathrin, with the question that we ask every guest on the podcast. I have this belief that we all stand on the shoulders of giants that came before us. And these giants help us to see further. In that context, who inspires you most and why?
[00:31:17.52] Kathrin Ebner: So, yeah, the first thing really that comes to my mind are the many experts that contribute to the work of the IPCC, so the Intergovernmental Panel on Climate Change. Their work really is key for enhancing the understanding of the impacts of man-made emissions, but, most importantly, also communicating these results to a broader audience. And this understanding is, in my opinion, what finally motivates all the efforts towards net zero emissions.
[00:31:45.21] Karen Baert: What a strong way to end this podcast. Kathrin, I feel very confident that a lot of technologies, electrochemists, and broader industry stakeholders that were listening today are leaving this session more inspired and more educated. So thank you so much for your time today. Thanks for educating us. And we continue to follow you and your team at Munich Re and excited to continue to see your progress.
[00:32:12.97] Kathrin Ebner: Thank you so much for having me. It was a pleasure.
[00:32:15.63] [Music Playing]
