Q&A: Power-to-X and E-fuels – the future of energy?
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Rocky Mashi from the engineering reinsurance team at Swiss Re looks at key questions for insurers on Power-to-X and E-fuels, and whether they could be future of energy.
Renewable energy sources seem to be one of the best candidates to decarbonize the electricity sector, but they can't easily be used in all industrial segments. For example, aviation, maritime, or steel industry rely heavily on fossil fuels. We call these "hard-to-abate" industries because they cannot be fully decarbonized just by consuming renewable electricity (directly or through batteries). One solution being explored is converting renewable electricity into fuels. These new pathways are called "Power-to-X", meaning that the renewable electricity ("Power") is converted to a final use ("X").
The energy industry is changing very quickly, and many new projects will emerge in the next years, as investments are expected into this segment. New projects could be potentially translated into new premiums for insurers, but understanding the risk landscape is key.
Q: Rocky, before we get too into the details, could you help us understand the difference between E-fuels and traditional fuels?
The main difference between traditional fuels and Electrofuels (or "E-fuels") is the production process. Traditional fuels are mainly obtained from fossil fuel extraction and refining processes, while E-fuels are obtained from processes that combine renewable electricity with water and nitrogen/carbon dioxide present in the air.
It's important to understand that the end-product is the same. Simply speaking, one kilogram of Methanol is equal to one kilogram of E-Methanol. They have the same chemical composition and physical properties as traditional fuels have.
Q: E-fuels are not completely new – why is there so much attention now?
The interest is driven mainly by three factors: high fluctuations of natural gas price, decrease in the price of renewable electricity, and an increase of renewable energy capacity.
Conflicts and political instability have caused the price of natural gas to vary dramatically over the past years, making countries aware of the importance of being as energy independent as possible.
Moreover, over the past decade the levelized cost of electricity (LCOE) produced by renewable energy sources has fallen, making it comparable to the cost of electricity generated from fossil fuels.
Therefore, the renewable energy sector became more competitive to attract large investments.
With the increase of global electricity production from variable renewable energy (VRE) like solar or wind power, a problem arises when the power output is higher than what is consumed through the electrical grid. That's because to balance the grid, electricity in production must be equal to electricity in consumption. E-fuels are seen as a potential pathway to store excess renewable electricity and use it when needed. There are some significant advantages over batteries too, as fuels can store energy for longer periods and at higher densities.
Q: Could you tell us a bit more about the key E-Fuels in the market?
- E-Hydrogen is produced using an electrochemical device called "Electrolyzer". It converts water to hydrogen (and oxygen) by applying electricity from renewable energy. Today hydrogen is mainly obtained via steam reforming of methane.
- E-Ammonia uses the Haber-Bosch process. As feedstock (the raw material inputs) it requires E-hydrogen and Nitrogen obtained with an Air Separation Unit (ASU) driven by renewable electricity. Today ammonia is obtained from the same process, but using hydrogen produced via steam methane reforming and electricity from the grid.
- E-Methane is acquired via the Sabatier Reaction. As feedstock it requires E-hydrogen and carbon dioxide captured via Direct Air Capture (DAC) technology driven by renewable electricity. Today methane is obtained from fossil fuel extraction and processing.
- E-Methanol is created via the Methanol Synthesis. As feedstock it requires E-hydrogen and carbon dioxide captured via DAC technology driven by renewable electricity. Today methanol is obtained from fossil fuel extraction and processing.
Q: Couldn't we just use the renewable electricity directly, wouldn't that be more efficient?
Sectors like aviation, steel and the maritime industry run on fuel. At the moment, that's mostly fossil fuels. Conversion of renewable electricity into E-Fuels could be a possible solution to decarbonize these sectors. E-Ammonia and E-Methanol could play a significant role in decarbonizing the maritime segment. E-Hydrogen could be used to decarbonize aviation, steel industry and mobility (mainly heavy vehicles). While E-methane could be an alternative to natural gas.
Q: Despite being a potential fuel on its own, E-Hydrogen is also a raw material, or feedstock, needed to obtain all the other E-fuels. Why not use E-hydrogen only?
Hydrogen is a very powerful molecule, but its storage and transportation are very challenging.
Hydrogen has the highest "Lower Heating Value" (LHV) among all the fuels - meaning that one kilogram of hydrogen releases the highest amount of energy of any other fuel. The problem is that hydrogen is a gas at ambient conditions, with a very low density. To increase its density for storage and transportation, hydrogen must be compressed (up to 700 bar) or liquefied (-253°C), and both processes are very energy intensive.
And even if you could increase its density, there's no hydrogen transportation infrastructure on a global scale -it's only consumed where it is produced.-. We can't use existing gas pipelines because danger of "hydrogen embrittlement" – where metal is damaged when in contact with hydrogen.
On the other hand, ammonia, methanol, and methane are chemical compounds already widely produced and transported around the world, Therefore, the conversion of E-hydrogen into other E-fuels would make transport and storage much easier as existing infrastructure can be used.
Q: Which are the risks associated with E-fuels and their production?
Because the end-product is the same, the existing underwriting approach regarding storage, transportation, fire, or explosion hazards does not have to be changed.
Instead, the focus is on product risks, in particular E-hydrogen because it has high risks across its supply chain and its production is completely different from traditional methods. Despite being a potential fuel on its own, E-hydrogen is also a feedstock needed to obtain all the other E-fuels. Meaning particular attention should be paid when performing its risk assessment because it underpins the other E-Fuels.
One of the major risks related to E-hydrogen production is a membrane failure. Electrolyzers are characterized by membranes that are essential components used for separating hydrogen from oxygen during the electrolysis process.
Hydrogen can react with oxygen if there is a membrane damage leading to potential fire and explosion; hydrogen explosion can be very dangerous in case of confined space and high working pressures, due to its high flammability, low ignition energy, wide range of explosive mixtures and high energy content. Regular maintenance and observation of the membranes to identify any indications of damage are necessary to avert such an incident. Emergency shutdown mechanisms should also be in place to isolate the impacted region, combined with gas detection systems.
As mentioned before, another risk is related to hydrogen embrittlement, that is a phenomenon that can result in microfractures when hydrogen is in contact with metals. Since it is more difficult to detect than normal wear and tear, it is necessary to choose the right materials for the components that are in contact with hydrogen (e.g., pipes, valves, compressors), and constant monitoring is essential. Accidents can be avoided by putting strict safety procedures into place and giving plant operators the necessary training on handling E-fuels plants.
Q: What are the key underwriting considerations when assessing an E-fuels plant risk?
The London Engineering Group recently provided the market with 8 hydrogen endorsements (LEG/HE) regarding diffusion media, refractory lining, manufacturers, protection devices, feed quality, power quality, feedstock and product, material properties. A proper understanding of these endorsements is fundamental to deal with E-fuels projects.
To date, only few projects reached final investment decision and are under construction at large scale. Thus, they can be considered prototypical projects and experienced underwriters from the petrochemical industry and electrochemical industry must combine their knowledge to properly assess each project. Indeed, in E-fuels projects both expertise is required.
The Maximum Probable Loss (MPL) scenario will depend on many factors, such as the size of the plant, type of electrolyzer, final E-fuel product, operating conditions, storage conditions, distance between production site and storage, contractors, and manufacturers.
Power-to-X configurations to obtain E-fuels can play a key role in decarbonization strategies of governments. Nevertheless, as they are still at a pilot stage, factors like costs and efficiencies must be addressed if they are to play a meaningful role.
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