What’s next for biofuels in commodity shipping?

The global push towards renewable energy has led to a surge in the demand for biofuels. This demand is predicted to grow 28% by 2026, based on a 2021 baseline. Much of this growth is due to government policies such as those mandating that refiners blend biofuels into the fuel mix. These fuel policies are steadily growing in scale, with the US announcing increases over the next 3 years, and 19 countries making the E10 petrol mix containing up to 10% ethanol available at petrol stations.

The state of biofuels in shipping

Uptake of biofuels and blended fuels in shipping has historically been much lower. In 2022, biofuels met less than 0.5% of global international shipping energy demand. However, recent initiatives from the IMO show that this is likely to change, and the change could well be both sudden and dramatic.

Shipping often uses different types of biofuels to those promoted for private transportation. The most common are currently types of biodiesel; fatty acid methyl esters (FAME), biomass to liquid (BTL), or hydro-treated vegetable oils (HVO). Advantages include the fact that these can often be blended or substituted for conventional fuels for use in existing engines.

Additionally, some shipping lines have set their own ambitious net zero targets and are investing in new engine technologies to make use of a broader range of biofuels. For example, Maersk has committed to net zero emissions by 2040, and will have a full fleet of vessels capable of running on either green methanol or conventional fuel by 2027.

But there are several barriers to the general roll-out of these fuels, with price being a key factor – they can cost 50-150% more than conventional fossil fuels. Other challenges include that current supply is insufficient to meet future demand, which affects scalability and pricing. This is especially true as other sectors, including aviation, are competing to purchase these same biofuels, and have their own targets and incentives to meet.

Removing barriers and incentivising uptake

Whilst newer legislation generally promotes the uptake of biofuels, it has also been a barrier in the past. For example, MARPOL regulations that prevent pollution of the marine environment include nitrogen oxide (NOx) emissions, which can be affected by changing the ratio of biofuels to conventional fuels. Before 2022, concerns about blended fuel oils increasing NOx emissions meant that shippers had to prove a biofuel mix didn’t exceed NOx emission regulations or request an exemption from the flag state, which could be onerous.

Now, the IMO has introduced a Unified Interpretation meaning that blends that contain up to 30% biofuel will be treated the same way as fossil fuel oils without the need for the NOx emission assessment. And some vessels can use blends up to 100% biofuel without the need for a further NOx assessment.

And the IMO is further promoting the use of biofuels as part of its decarbonisation drive. In July 2023, IMO Member States adopted the 2023 IMO Strategy on Reduction of GHG Emissions from Ships. This GHG Strategy includes targets of net-zero GHG emissions from international shipping close to 2050 and a commitment to ensure an uptake of alternative zero and near-zero GHG fuels by 2030. The GHG Strategy also aims to reduce average international shipping carbon dioxide emissions by at least 40% by 2030 and the IMO states that alternative fuels are a core component of meeting this target.

What does this mean for shipping?

Despite the challenges, the commitments from the IMO and industry participants are clear – the shipping industry is decarbonising and biofuels are one of the main strategies for achieving this aim. Low-carbon shipping is currently a small and premium offering, but it is likely to expand rapidly before 2030.

And low-carbon shipping may not command a price premium for much longer either. As well as the IMO and individual companies making net zero commitments, a growing number of countries and regions are legislating to support their own net zero agenda.

For example, the EU’s Emissions Trading System will include carbon emissions from all large ships entering EU ports from January 2024, regardless of their flag state. This means that shipping companies will need to purchase emission allowances for each tonne of CO₂ in the scope of these emissions. As the goal of most jurisdictions is to transition to a zero-carbon economy, it is not hard to imagine others following suit in the coming years, and pricing that incentivises low emissions over purchasing offsets.

Why does this matter for commodities?

The first reason why biofuels matter for commodities is that they are still a relatively new commodity, meaning there are opportunities for new players to enter the market. If biofuel capacity is to expand to meet this growing demand, storage and distribution will need to be expanded and optimised, and more robust supply chains will be needed.

And this market growth goes beyond the biofuels themselves. Biofuels can be produced from agricultural and soft commodities, as well as from waste products from their processing, meaning commodity players with a wide range of specialities have opportunities within biofuels.

Another reason why this matters is that more fuel choices mean more optionality. It may be early to be offering low carbon shipping options, but as the industry continues to decarbonise, you may find that clients are willing to pay a premium for lower-carbon shipping. And with legislators incentivising lower-carbon business practices through carbon taxes and charges, this is likely to become the most cost-effective option in future.

Conclusion

Biofuels are currently a small segment of the commodities marketplace and have often been overlooked by those not directly involved in their supply chains. However, with a strong predicted growth trajectory and clear signals from industry and regulators that they are to be encouraged in future, now is the time to start taking biofuels seriously.

Even for organisations not looking to enter the market for biofuels themselves, biofuels are going to play an increasingly important role in how you manage and ship your products over the coming years. Now is the time to begin planning how you can make best use of the optionality these new fuels provide.

 

If your CTRM system doesn’t allow you to manage this additional optionality by providing effective logistics management and carbon pricing, get in touch today to find out how we can help add this flexibility to your technology.