Prudent Risk Management Strategies

APPLYING RISK MANAGEMENT STRATEGIES PRUDENTLY Paper No 192 Presented At 2011 ICHS Conference September 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 Technologies Environmental Markets Total Cost Of Risk Regulatory O & M Financial/Insurability Community Design/Constriction/Testing

Project / Operation Risks Risk Timeline OPERATION TEST (OEM) CONSTRUCTION CONCEPT Financial Closure I/O CO - Decom- mission Warranty Design Higher Costs Delays Sourcing EPC Wrap Site Remediation Dynamic Test Reliability Test Repair/Redesign LDs Reputation Margins Tech Obsolescence. Environmental Competitiveness O&M Environmental Community Rel. Contracts Development Fuel Permitting Project Funds Purchase Agmts. Debt Service Cash Flow

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 Scope) Retain Risks Avoid Transfer Prudent Business Decisions Based On Knowledge Of Maximum Exposures

S E V E R I T Y Risk Regions $1000 m High L o s s P e r E v e n t Unacceptable Risk $100 m Marginal Risk $10 m Acceptable Risk $1 m Low .1 1 10 100 1000 Annual Events Low High FREQUENCY 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.

S E V E R I T Y Impact of Risk Uncertainties $1000 m High L o s s P e r E v e n t N1 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. L1 O7 N5 F7 $100 m N2 L7 O5 L6 F8 N3 F4 E3 L4 L12 O11 O3 F3 O12 $10 m E4 O6 N4 O10 O9 E1 L9 F2 L10 F5 L8 E2 $1 m Low .1 1 10 100 1000 Annual Events Low High Denotes uninsured or underinsured FREQUENCY Denotes partially insured Denotes insured

Risk Management - Avoidance Identify the risks Quantify the risks Technical hurdles Commercial sensitivities Mitigate the risks Best industry practices Safety training of ALL personnel Hydrogen Safety Specialist professional On-going Management Commitment

Risk Management - Retention Function of: Financial Wherewithal Deductibles Resources to Manage Exposures R&D Commitments Corporate Strategies Mitigate the Risks

Risk Management Transfer Problems 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 Site Questions 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 Site Findings 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.