The big picture
In this final FuelEU newsletter, we look ahead at the expected impact of the regulation on the industry. Our analysis finds that in order to meet the 2025 FuelEU targets, the industry will need to reduce 2.4 million tonnes of CO2eq. However, according to our analysis, the existing maritime fuel mix, including LNG and biodiesel will be able to achieve up to go% of the needed reduction. While biodiesel is, in many cases, the most cost-effective compliance option in the near-term, future prices are subject to high uncertainty due to feedstock constraints and competition from other
sectors.
Current fuel mix may satisfy nearly all the 2025 reductions
What does the MRV data show?
To estimate needed reductions, we used reported emissions of all 13.000 vessels sailing to EU ports in 2023, publicly available through the EU Monitoring, Reporting, and Verification (MRV) database.
As shown in Figure 1, we converted 2023 tank-to-wake (TtW) CO2 MRV data into well-to-wake (WtW) GHG emissions regulated by the FuelEU. To do this, we increased the values to include upstream emissions and two other GHGs: nitrous oxide (N20) and methane (CH4). After adjusting to exclude 50% of voyages to or from non-EU ports, we found that 97.9 million tonnes of GHG emissions coming from 26.4 million tonnes of fuel will be subject to FuelEU. Assuming all vessels sail on heavy fuel oil (HFO) as a baseline, this would require 2.4 million tonnes COzeq of abatement in 2025.
How much low-carbon fuel is currently being used?
Biodiesel, which can be blended with fuel oil and used in conventional engines, is increasingly used by companies to meet regulatory requirements as well as voluntary decarbonization goals. In addition, fossil LNG provides emissions reductions, albeit limited, for vessels equipped to operate on the fuel
We use 2023 bunker sales in Rotterdam, Europe’s largest bunkering hub, to understand how much abatement we can expect from the existing use of LNG and biodiesel. B30, a blend of 30% biodiesel and 70% fuel oil, made up 7% of the total 10 million tonnes of bunker fuel sold in Rotterdam: LNG represented 3% of sales and a small amount of bio-methanol was bunkered for the first time by Laura Mærsk
As shown in Figure 2. if we extrapolate Rotterdam’s fuel sales to the 26.4 million tonnes covered by FuelEU, we can expect the industry will demand 0.7 million tonnes of LNG and 2 million tonnes of B30 blend in 2025 (equal to 600.000 tonnes of B100 or 100% biodiesel). Will there be enough biodiesel?
There are several views on whether supply can meet demand for biodiesel Industry experts we spoke to noted that it will be difficult for EU ports to procure and provide 600.000 tonnes of biodiesel in 2025 due to competition from other sectors. Furthermore, concerns over the quality of used cooking oil, which is the primary feedstock for biodiesel, could lead to a tightening of the market
However, the strain on supply could be alleviated as other ports increase volumes to meet demand. For example, Singapore sold roughly 500,000 tonnes of bio-blended fuel oil in 2023. and the Spanish port of Algeciras-Gibraltar started offering a B24 blend in 2023. These developments suggest ports may be able to meet rising demand.
Another consideration is that a significant portion of the biodiesel bunkered in Rotterdam is marketed to customers as emission reductions. Additionality guidelines will likely prevent companies from using biofuel sold to cargo owners as emission reductions towards FuelEU compliance. If companies continue to use biodiesel and sell the emission reductions to customers, then more volumes of biodiesel will be needed to meet both voluntary emission reductions targets as well as FuelEU compliance targets High demand for both FuelEU compliance and voluntary emission reduction markets could strain supply.
How much more abatement is needed?
If you translate the 2023 Rotterdam fuel mix into emissions reductions across the full EU fleet we find that the current use of B30 can cover 1.8 million tonnes and LNG can cover 0.4 million tonnes (2.2 million tonnes in total) of the 2.4 million tonnes of CO2eq required. Shown in Figure 3. this represents 90% of needed CO2eq reductions between 2025 and 2029, but only 35% of reductions in 2030.
Our estimates assume that the reductions from biodiesel and LNG are uniformly distributed across the full fleet of 13.000 vessels. However, some ships are likely to bunker more biofuel than is necessary and bank the surplus instead of allocating it to other vessels through pooling This could initially create a surge in biofuel demand, exceeding the volumes needed to meet the reduction targets. However, as companies use banked surpluses over time, we expect demand to align with the actual reduction requirement.
Alternatively, if other compliance pathways become prominent, Figure 3 may overestimate needed abatement Other compliance pathways include
Biomethane: The current use of biomethane is limited, however, demand is gaining momentum
and could play a significant role in helping LNG-powered vessels meet FuelEU targets. Onshore power. Currently. 10% of ships calling at EU ports are equipped with onshore power, which is considered to have zero emissions for FuelEU compliance, thereby reducing some of the demand for alternative fuels.
Wind-assisted propulsion: The growing adoption of wind technologies, such as rigid and rotor sails, are eligible for a reward factor that can reduce the intensity of energy used onboard Borrowing: We can expect some vessels will borrow a portion of compliance from future years with a 10% penalty added.
Penalty. For some, the simplest compliance option is to pay the penalty. However, the penalty’s cost is designed to be a disincentive for inaction and is typically more expensive than other options.
Given the range of compliance options and the existing fuel mix, we do not expect.compliance to be a significant burden in the first five years. However, by 2030, companies will face significantly higher costs and will benefit from strategies to source potentially scarce low- carbon fuel
Money well spent?
We estimate the total cost of 2.4 million tonnes of abatement is $350 million in 2025 and growing to $1.7 billion in 2030. We assume LNG has no cost premium and biodiesel prices are in line with an LR and UMAS price projection. Spending on FuelEU is relatively low compared to what companies will pay for ETS allowances. If we assume a $100 per tonne for 60 million tonnes, and factor in the 70% phase-in, then the EU fleet can expect to pay a total of $6 billion in 2025. However, unlike the ETS, compliance spending can be paid directly to ships that use alternative fuels through the pooling mechanism.
The FuelEU regulation is structured to encourage investments in more advanced alternatives -such as e-fuels-through mechanisms like pooling and the multiplier for renewable fuels of non-biological origin (RFNBO). A pooling market which allows companies to buy and sell credits can redirect some of $350 million estimated for biofuels to more advanced alternatives such as e-fuels. If enough e-fuel vessels receive compliance spending through pooling, then it can create a business case for locking-in supply of e-fuels through offtake agreements, which producers often require to build a facility.
Uncertain biofuel prices will be a growing challenge for conventional vessels
With a wide-range of supply and demand estimates, projections of the future prices of biodiesel vary from 25% to 300% costlier than fossil fuels in 2050. This variation is due to the uncertainty around the availability of bio feedstocks, which are the most expensive component of biofuel production costs. This uncertainty is further driven by the need for sustainability and GHG requirements, which limit the supply to certifiable waste-based feedstocks such as used cooking oil and waste animal fats.
Recent data highlights that by 2027, the supply of used cooking oil is expected to be approximately 13.6 billion liters per year, with animal fats contributing another 10.5 billion liters Assuming a 10% conversion loss, this is equal to roughly 21.6 million tonnes of biodiesel annually or 19.7 million tonnes of HFO equivalent. Even if all the 19.7 million tonnes are dedicated to shipping, it would only equate to roughly 7% of the 300 million tonnes of oil needed by the shipping industry globally.
With other sectors such as aviation, industry, and heavy-duty trucking expected to increase consumption of biofuels, we can expect supply of biofuels to be further constrained. The transport sector alone consumes 10 times the energy of shipping, straining the available supply of waste oils and fats
Practical challenges of using biodiesel at higher concentrations on the operation side could also add costs to using biodiesel not accounted for in our calculations. There are ongoing challenges with engine equipment, fuel quality and stability, as well as potentially higher insurance premiums.
For companies who expect costly biodiesel or who want to protect investments from the volatility of an uncertain biodiesel market, the optionality of e-fuel through a dual-fuel vessel looks like a prudent investment
Industry reflections on biodiesel availability
Jasper Pongs. Sustainability Manager for Hapag Lloyd, finds that a lack of available feedstocks for EU-compliant biodiesel and the wide range of uses across sectors, will push prices to the higher end of current projections.
Shuyi Pu. Decarbonization Manager for Swire Shipping, notes that in the near-term, biodiesel is the most cost-competitive alternative but that in the long term, competition for feedstocks with other sectors, particularly aviation, could drive up its price
Luke Shu. Technical Advisory Manager for Lloyd’s Register, indicates that there are other bio- feedstocks, such as Cashew Nut Shell Liquid (CNSL), which have potential to support the industry in tackling the challenges due to limited feedstock and high prices. However, CNSL- based marine biofuel must be adopted with caution and the industry must gain sufficient knowledge before wider application to mitigate the risk of operational uncertanties at sea
The new risk in shipping: standing still
While shipping companies must contend with a lot of uncertainty, there are two global trends of which they can be certain. First, the impacts of climate change will intensify, thereby accelerating the political will to act Second, innovation and learning curves will lower the costs of advanced technologies and alternative fuels. FuelEU creates a business case today that may only improve as these uncertainties are resolved tomorrow.
From sail to steam and from steam to internal combustion engines, winners in shipping are those who successfully navigate technological disruption. Those who embed decarbonization in business strategies early on will be well positioned in a rapidly evolving landscape.
Thank you to Olena Mubako and Ujval Maddula from Mærsk, Jasper Pongs from Hapag Lloyd. and Luke Shu from Lloyd’s Register for their review.
With this being the final FuelEU Countdown (cue music), we want to thank the Center team who worked on this newsletter series: Anders Kongstad, Risiana Levie, Karoline Andersen, Elizabeth Petit Gonzalez. Didde Welin, Theo Talbot, Daniel Barcarolo, Pernille Palmelund Sørensen, Sara Nandin de Carvalho, and our editor Asha Mahadevan. Finally, thank you to everyone who read and shared this newsletter. We look forward to continuing to share knowledge on the potential turning point for maritime decarbonization with IMO mid-term measures
Source: Mærsk Mc-Kinney Møller Center
