Dutch multinational banking and financial services corporation ING on Monday (15 May) published a report on ‘Synthetic fuels could be the answer to shipping’s net-zero goals, but don’t count on them yet’; it was written by economists Gerben Hieminga and Rico Luman.
The report studies the business case of synthetic shipping fuel as a technology fix to reduce carbon emissions. It elaborates on four reasons not to hype synthetic fuels in shipping, green synthetic fuels can be nearly ten times more expensive and the indirect cost of synthetic fuels as less cargo can be shipped, amongst others.
The following are excerpts of the report:
Green synthetic fuels can be nearly ten times more expensive
So, it is clear by now that synthetic fuels can radically ‘green’ the hard-to-abate shipping sector and put it on a pathway to net-zero emissions. The necessary condition is that the required hydrogen is produced with few carbon emissions, so with blue or green hydrogen.
The obvious questions then are, why hasn’t it already happened? And why aren’t we using synthetic fuels in ships already?
The answer is pretty simple. The technology is still in its infancy, and the production process is very energy intensive compared to conventional fuel, even with mature technology. Therefore, production costs of synthetic fuel are much higher. Currently, the green options increase fuel costs by 4 to 9 times compared to fossil-based fuels, the blue options increase fuel costs by 2 to 5 times.
Green synthetic fuels are currently a lot more expensive compared to fossil fuels
Indicative unsubsidized cost of shipping fuels in euro per dead weight tonnage per 1.000km (euro/DWT/1.000km)
ING research based on energy prices from Refinitiv and fossil fuel prices in shipping from Clarkson. Fuel costs for a 82.000 deadweight tonnage ship with 230 sailing days per year at an average speed of 17 knots. Fossil fuels costs are based on market prices as of early April 2023. Synthetic fuels costs are calculated based on a gas price of €45/MWh, a power price of €140/MWh, CO2 price of €100/ton, an oil price of $80 per barrel and a euro/dollar exchange rate of 1$=0.926€. Note that this represents the Northwest European energy market as of early April 2023. It also represents (more or less) market expectations on energy prices for 2023 and 2024 in future markets as of early April 2023. The CCS capture rate in the production of blue hydrogen is assumed to be 80%. Green hydrogen is assumed to be fully produced with renewable electricity (solar, wind or hydropower) or with zero carbon sources such as nuclear power. Note that these numbers only represent the fuel costs of shipping, not the total cost of shipping which would include all capital and operational expenses of ships. We are not able to calculate the total cost of ships that run on the respective synthetic fuel as most of these technologies are still in the pilot phase and not available for large ships. Also, most synthetic fuels in shipping cannot be blended with fossil fuels as easily as in aviation.
This price differential is very important for ‘dual fuel vessels’ that can run on synthetic fuels like methanol or ammonia and fossil fuels with minimum adjustments. For these ships, it remains an option to switch to burning fossil-based bunker fuel if it is not during a trip, then at least between trips.
There are two ways of looking at this large price difference:
One way is to say that synthetic fuels are currently too expensive. This can partly be solved with subsidies and innovation, as hydrogen production costs could come down. There are many studies out there that predict large cost declines for green hydrogen. But these only emerge if capital costs for electrolysers decline strongly, power prices reduce and carbon prices increase further. That’s not unthinkable, but also not yet a done deal. It might also be that clients are willing to pay a premium for green shipping, but it remains to be seen to what extent container shipping rates will be impacted.
One could also say that fossil-based fuels are currently too cheap and synthetic fuels are not in a ‘fair fight’. The EU Fit for 55 package starts to address this point by extending the EU Emissions Trading System (ETS) to maritime transport. This pricing of carbon emissions will narrow the cap between fossil fuels and synthetic fuels, in particular the green and blue ones. And the EU carbon border adjustment mechanism might trigger other regions in the world to tax carbon in shipping, too, so that they can use the tax revenues themselves instead of paying the carbon cost to Europe, for instance.
But the price of fossil fuels will also heavily depend on the pricing strategies of oil-producing countries. And we don’t know how these countries will respond during the energy transition. Will they flood the market with oil in anticipation of lower oil demand, making it harder for synthetic fuels to compete with fossil fuels (the green paradox)? Or will they be able to keep prices high by reducing production in a coordinated way, which is needed to close the price gap with synthetic fuels?
Given these big uncertainties, it is almost impossible to predict the future competitiveness of synthetic fuels in shipping. And those routes which do exist shouldn’t necessarily be relied on to guide as to what may happen many years from now. Shipping companies will be watching these developments closely and should be thinking in price scenarios rather than exact forecasts.
The indirect cost of synthetic fuels as less cargo can be shipped
Synthetic fuels also pose a not-so-nice trade-off between fuel costs and freight revenues. While synthetic fuels could have a positive climate impact in terms of lower CO2 emissions, they come with lower energy densities, especially on a volumetric basis.
The poor volumetric physics of synthetic fuels means that ships that run on them have to install bigger tanks to travel the same distance, but that implies less space for cargo and lower revenues. Or they could ship the same amount of cargo with a similar tank size, but then they have to refuel more often. And since the ship is docked while refuelling, it does not make money by shipping cargo around the world.
Our calculations indicate that vessels that run on methanol would have to tank 2 to 2.5 times more often compared to vessels that run on HFO, MGO or VLSFO (14 times during the year compared to 6-7 times). Note, however, that the number is pretty similar to ships that run on LNG.
The picture is even worse for vessels that run on ammonia or hydrogen. Due to the chemical characteristics, they have to tank about five times more often if they install a similar tank size compared to vessels which run on oil-based fuels. But tanking around 30 times a year is not a realistic option, so the tank size for ammonia and hydrogen-propelled vessels needs to be larger, which implies less space for cargo if the ship size stays the same.
Synthetic fuels require ships to refuel more often given a certain tank size
Indicative number of yearly refuels*
*Number of yearly refuels for our reference ship of 82.000 deadweight tonnage with 230 sailing days per year at an average speed of 17 knots. The benchmark ship runs on HFO and needs to refuel 6 times a year given its tank size. We have calculated the amount of refuels for this tank size for every fuel type. The tank size holds less energy if it is filled with synthetic fuels and therefore needs to refuel more often. Note that all synthetic fuels are liquified.
4 reasons not to hype synthetic fuels in shipping
It’s important not to get carried away. Synthetic fuels clearly will be part of a net-zero pathway, in particular for hard-to-abate sectors such as shipping and aviation especially as the ‘easy technological solutions’ such as electrification and end-of-pipe solutions such as Carbon Capture and Storage hold little promise. But we can’t take it too easy, there are downsides as well.
Note: The full ING report ‘Synthetic fuels could be the answer to shipping’s net-zero goals, but don’t count on them yet’ can be found here.
Photo credit and source: ING
Published: 16 May, 2023
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