APPLYING RISK MANAGEMENT STRATEGIES PRUDENTLY

Paper No 192

Presented At

2011 ICHS ConferenceSeptember 13, 2001

By

Michael Pero, P.E. – Director of Risk Management

Hydrogen Safety, LLC

&

Douglas Rode, P.E. – Managing Director

Hydrogen Safety, LLC

Agenda

• The Total Cost of Risk• Commercialization Barriers• Risk Management Strategies • Conclusions

The Total Cost of Risk

Financial/Insurability

Regulatory

Markets

Community

O & M

Environmental

Technologies

Total Cost

Of Risk

Design/Constriction/Testing

DevelopmentFuel PermittingProject FundsPurchase Agmts.Debt ServiceCash Flow

DesignHigher CostsDelaysSourcingEPC WrapSite Remediation

Dynamic TestReliability TestRepair/RedesignLDsReputation

MarginsTech Obsolescence.EnvironmentalCompetitivenessO&M

EnvironmentalCommunity Rel.Contracts

FinancialClosure

I/O CO -Warranty

Decom-mission

CONCEPT CONSTRUCTION TEST (OEM) OPERATION

Risk Timeline

Project / Operation Risks

Commercialization Barriers• Project Agreements with the Participants:

Adequacy of risk sharing between all participants Limits of technical and commercial support by project

owners and equipment suppliers Track record for participants for success projects and

ones that failed

• Technology Design: Too many innovations in one project - scale-up of size Combined with integration complexity, unusual

equipment designs, untested global sourcing Lack of comfort level or familiarity with process,

technology, long-term maintenance costs, external costs

Commercialization Barriers• Operating Risks:

Under-estimated up front capital costs and life-cycle costs

Margin or Uncertainty Risk (the fear of ‘Murphy’s Law’ – “What will go wrong, will”)

Country or Political Risk including such risks as inflation, unstable new environmental regulations (Carbon Tax), labor markets

Environmental Risks (whether from site pre-conditions or impacts during construction and operation)

Change-in-Law Risks, affecting the political or environmental risks

Basis For Effective Management Of Total Cost of Risk

Quantifying Risks Pro-Active Actions

(Comprehensive Avoid

Scope) Retain Risks

Transfer

Prudent Business Decisions Based

On Knowledge Of Maximum Exposures

S E V E R I T Y

Annual Events

$1 m

$10 m

$100 m

$1000 m

1 10 100 1000 .1

L o s s P e r E v e n t

High Low

Low

High

Risk Regions

Unacceptable Risk

Acceptable Risk

Marginal

Risk

Risk Management Strategy

Acceptable Risk - Risk controlled through cost effective risk reduction investments.

Marginal Risk - Risk reduction aggressively pursued. Systematic review identifies opportunities for risk management investments.

Unacceptable Risk - Risk reduction pursued on urgent basis through all available means.

FREQUENCY

S E V E R I T Y

E4

E3

E2

E1

L7

L8

L9

L10

L12

L6

L4

L1

N1

N2

N5

N4

N3 F8

F7

F5

F4

F2

O9

Annual Events

$1 m

$10 m

$100 m

$1000 m

1 10 100 1000 .1

L o s s P e r E v e n t

High Low

Low

High

Denotes uninsured or underinsured

Denotes insured

Denotes partially insured

Impact of Risk Uncertainties

O12

O11

O10

O3

O7

O6

O5

F3

The frequency and severity of risks may be uncertain. Uncertainties can result from limitations on the statistical predictability of risk producing phenomena, or from an incomplete understanding of the phenomena and their interrelationship.

FREQUENCY

Risk Management - AvoidanceIdentify the risks Quantify the risks

Technical hurdlesCommercial sensitivities

Mitigate the risksBest industry practicesSafety training of ALL personnelHydrogen Safety Specialist professionalOn-going Management Commitment

Risk Management - Retention

Function of:Financial Wherewithal

DeductiblesResources to Manage ExposuresR&D CommitmentsCorporate Strategies Mitigate the Risks

Risk Management – TransferProblems with Traditional Outlets Lack of Technical Understanding

Requires dedicated internal resources that can not be funded from current premiums earned

Very limited actuarial basis for loss history “New” Industries Do Not Fit Existing Models

Minimum track record to base claims High deductibles essentially self-insuring Coverage exclusions Excess high premiums Fear of “blimps & bombs” Few insurers doing “high risk” business High rejection rate of applications by insurers

Case Study – Hospital as SiteQuestions Raised• Hospital’s current power needs? in 5 /10 years?• Hospital’s current need for waste heat? in 5 / 10 years?• Hospital’s current contracts for power & fuel and when do

they expire?• Fuels available and pricing thresholds?• Hospital’s “green” position?• Value of land resources?• Internal resources available for project development?• How does the Energy Actions of the Hospital impact the

Greater Community?• Hospital’s overall future expansion plans? 

Case Study – Hospital as SiteFindings

a) The hospital did not have any technology risk exposures,

b) The project risk exposures seemed to be financially mitigated

c) If the hospital wanted a share of the revenue from the sale of power to the local utility, then they would have to participate in the risk sharing currently being borne solely by the developer.

Conclusions

1. Both new and existing uses of hydrogen and hydrogen related technologies can benefit from an effective Risk Management Strategy.

2. The Strategy needs to address all the elements associated with the Total Cost of Risk model.

3. By mitigating risk exposures, the prospects of successful project significantly increase especially if they are identified and incorporated early in the design process.