News

FuelEU Explainer: FuelEU builds the dual-fuel business case

Published — June 19, 2024

This is the fifth article of our series on FuelEU Maritime Regulation from the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping (MMMCZCS). We will share the latest analysis, strategic insights, and practical tools for organizations to leverage FuelEU for achieving decarbonization goals.

Subscribe to our newsletter "Countdown to FuelEU" here.


Explore previous articles and understand the basics of the regulation on our FuelEU page.

The big picture

By investing in a dual fuel vessel and using e-fuels, companies that comply with FuelEU and ETS can save up to 10% in total costs of ownership (TCO) over a ship’s lifetime compared to conventional engines burning fossil fuels. This modest improvement in TCO represents a consistent, positive effect on operating margins. Dual-fuel capability can provide a safeguard against the uncertainty of future e-fuel prices and availability, allowing companies to revert to fossil fuels if needed. Put differently, investing in dual-fuel technology allows companies to capture the upside of lower costs driven by climate regulation while capping the downside risk created by uncertainty about e-fuel prices and availability.

We build on previous work which outlined opportunities to use alternative fuels and capture financial benefits of “overcompliance” with FuelEU intensity targets through pooling. We show that the impacts of these benefits can overcome the cost premium of expensive e-fuel vessels such as e-ammonia and e-methanol as early as 2030.

Eliminating the fuel cost premium changes the investment case for fleet expansion. To show how the benefits of pooling create a business case for dual-fuel investment, we present a case study of an 8,000 TEU container vessel.

A dual-fuel vessel is a future-proof vessel

Building on an existing study of the impact of FuelEU and ETS — updated to reflect real-world decision making and voyage data — we explore the case for investment faced by a company comparing one conventional vessel burning fossil fuel with two dual-fuel vessels operating on alternative fuels.

The case: Comparison of three container vessels with operations in Europe
The case study models an 8,000 TEU container vessel sailing 100,000 nautical miles (NM) a year at an average speed of 16 knots, of which 5% is between European Economic Area (EEA) ports, 60% is between an EEA port and a non-EEA port, and the remainder 35% is fully outside the EEA.

Our baseline is a business as usual (BAU) vessel that operates on low sulfur fuel oil (LSFO) and blends just enough biodiesel to stay in compliance with FuelEU. The other two vessels are dual fuel, capable of using key alternative fuels e-ammonia and e-methanol on EU voyages.

The cost projections for e-fuels are taken from our publicly available Fuel Cost Calculator. Find more on our modeling inputs and assumptions at the end.

First scenario: Alternative fuel used on all EEA voyages
A dual-fuel vessel that uses alternative fuel when sailing to EEA ports sees benefits increasing over time. Shown in Figure 1, the TCO for vessels running on e-ammonia and e-methanol drops significantly in the first 15 years. The reduction of TCO is driven by benefits from both pooling and from decreasing fuel costs. Meanwhile, the TCO for a conventional vessel rises consistently after 2030 when these ships must bunker a higher quantity of increasingly expensive biodiesel. Therefore, as early as 2030, the annual TCO for a vessel running on e-ammonia will be less than for a vessel running BAU on fossil fuel.

Figure 2 shows the cumulative costs of the vessel over its lifetime, using a discount factor of 8%. While in 2030, both e-ammonia and e-methanol have a cost gap with BAU of 10% and 28% respectively, that changes by 2038 when e-ammonia drops below BAU. Looking at the net present costs of the vessel over the lifetime, the e-ammonia vessel more than breaks even with BAU as the net present costs are 8% lower.

Ammonia vessels are not currently available; however, current projections are for the technology to be on the water no later than 2027.

Second scenario: Dual fuel optimized
In this scenario, the operator plans to optimize the dual-fuel vessel by using e-fuel only when it is the lower cost alternative. We find that there is significant financial benefit in net present costs over a 25-year lifetime when compared to BAU.

Figure 3 shows that if the operator of a dual-fuel vessel chooses to run their ship on the cheaper fuel option, then an e-ammonia vessel will sail exclusively on LSFO until 2029 and an e-methanol vessel will run on LSFO through 2035. Compared to running a conventional vessel on LSFO, running a dual-fuel vessel on LSFO comes with additional costs due to CapEx, but it is expected to add only 3-6% to the TCO. The additional costs should be balanced with the flexibility to transition to alternative fuels when costs become competitive.

When comparing Figure 2 and Figure 4, we can see that e-ammonia has lower cumulative discounted TCO three years earlier than the first scenario. In the case of e-methanol, we see lower cumulative costs by 2044. Looking across a dual-fuel vessel’s lifetime, e-ammonia has 10% lower net present costs and e-methanol can achieve 3% lower costs.

Flexibility strategies

While some will choose the flexibility of a dual-fuel vessel, others will opt for a more conservative strategy of investing in ‘methanol-ready’ or ‘ammonia-ready‘ vessels. ‘Ready’ is a broad category which includes everything from additional space for equipment to full installation of fuel and safety systems. According to May 2024 data from Clarkson’s, there are over 1800 vessels in the orderbooks that are alternative fuel (excluding LNG), and roughly 25% of them are categorized as ‘ready’.

A 2022 Center study found that ‘ready’ vessels are cheaper than dual-fuel vessels. However, when considering the additional costs of converting the ‘ready’ vessel to a dual-fuel vessel, the total CapEx can be up to 50% higher than the upfront cost of a dual-fuel vessel. The study found that if a ship owner is planning to convert their vessel in the near term (up to three to eight years depending on the fuel type), then they can save money by purchasing a dual-fuel vessel.

First movers who opt for dual-fuel vessels upfront may also see an advantage as the increased demand for green fuel retrofits in the latter half of this decade is expected to lead to constraints in shipyard capacity.

What this could mean for the transition

While dual-fuel technology lowers companies’ risk of locking into a new fuel type, flexibility shifts risk upstream to fuel producers who typically require offtake agreements to move forward with FID. Put differently, this exacerbates a coordination failure between suppliers and consumers, frequently referred to as the chicken-or-egg dilemma, in which upstream and downstream players wait for the other to invest.

While this problem remains unsolved, dual-fuel vessels represent an appealing compromise that hedges the risks of unavailable or unaffordable alternative fuels for shipowners. This can then improve the business case for potential fuel producers, albeit not as much as investments in a purely sustainable fuel vessel might.

Companies with the ability to use sustainable fuels and which have the financial resources to secure supply and lock in lower ownership costs can engage in offtake agreements, strategic partnerships with suppliers, or even get into the fuel production business themselves. These arrangements can secure the companies a competitive edge in a market with increasing mandates for sustainable fuel use but with persistently uncertain supply.

Are we there yet?

A June 2024 overview of European clean fuel projects from Transport & Environment shows that we will likely fall short of the supply of green fuels needed in the EU. More policy may be needed to de-risk fuel production, perhaps with governments incentivizing demand or intervening in supply.

The Mid-term measures being considered by IMO Member States are one such opportunity. These regulations are poised to be decided in 2025 and would come into force in 2027. For vessels operating in the North Atlantic, e-fuels subsidized by USA’s Inflation Reduction Act could provide a nearer-term opportunity to transition.

The most important shift that FuelEU and EU ETS may trigger is a prevailing mindset for companies doing business in the EU. Shipping companies that isolate sustainability decisions outside their core business strategy may find that green investments are now integral to their long-term viability. Those with the right assets and access to sustainable fuels will be well-positioned for a changing market.

More on methods and assumptions

Fuel cost versus price: Our analysis employs a mix of fuel prices and costs from publicly available data. LSFO and biodiesel prices are based on projections, while alternative fuel costs are taken from our bottom-up production cost projections, which include a 5.5% return on capital.

Business-as-usual baseline: Our BAU case represents an industry average monofuel ship, designed for a single fuel type. Based on our pooling analysis, we assume the vessel blends just enough FAME to meet the increasing FuelEU intensity reduction targets.

Two dual-fuel ‘what-ifs’: We assume the two e-fuels (e-methanol and e-ammonia) achieve the lowest GHG emissions intensity possible. Due to their lower energy content, these fuels require pilot fuel for combustion. Following industry guidance, we assume an average of 10% pilot fuel for methanol and 7.5% for ammonia.

Vessel profile: The power requirements and engine efficiency values are derived from aggregated partner data for an 8,000 TEU Post Panamax vessel.

Vessel costs: CapEx for vessels is based on newbuild prices from Clarkson’s 2023 World Shipyard Monitor. We use straight-line depreciation over 25 years and a financing mix of debt and equity. For dual-fuel vessels, we apply a CapEx premium of 11% for e-methanol and 16% for e-ammonia, based on a 2022 Center study. Net present cost calculations utilize a WACC of 8% over a 25-year vessel lifetime.

Non-fuel OpEx: Average OpEx, including crew, insurance, administration, repairs, and maintenance, is sourced from the Moore Maritime Index. We anticipate higher OpEx for alternative fuels due to increased safety and technical requirements, using the CapEx premiums as a proxy for additional OpEx costs.

Policy costs: FuelEU costs are based on the additional expense of blending waste-based biodiesel to achieve annual reduction targets. Biodiesel prices are projected from the 2020 Lloyd’s Register and UMAS report. We also factor in the additional cost of the EU ETS, using allowance price forecasts from a 2021 peer-reviewed study. More details on policy cost assumptions can be found in our newsletter on pooling prices.

A big thank you to Jasper Ploog and Ratna Nataliani from Hapag-Lloyd for their contributions to the analysis and to Jens Johannes Keppler and Philipp Niesing from MPC Container Ships for their review.

What are we reading

  • T&E’s market outlook of green fuels shows the anticipated supply is far less than what is needed to meet 2030 targets
  • The latest Shipping Market Review from Danish Ship Finance provides a holistic outlook of investment under transition
  • S&P Global give their take on the future of onshore power in the maritime sector
  • DNV reports that more than half of newbuild ship orders in the first five months of 2024 were for methanol-powered ships
  • Gard reminds us that monitoring plans must be ready by 31 August 2024
  • Plus the wave of updates from Posidonia including a BIMCO panel and a sobering take on low ambition in the industry

Latest from the Center

  • New series launched on biogas as a source of sustainable fuel for shipping
  • ABS and Lloyd’s Register award Approval in Principle (AIP) to new ammonia vessel design created by a cross-industry taskforce led by the Center

Resources

The European Commission has a dedicated helpdesk for EU ETS and FuelEU: fitfor55@emsa.europa.eu

Feedback or suggestions for future explainers? Reach out:

Contact Us

Joe Bettles & Jenny Ruffell Smith
fueleu@zerocarbonshipping.com