Achieving Net Zero implies the gradual elimination of carbon-emitting fuels, and thus a complete overhaul of the current energy system. Energy savings and efficiency, electrification, and green electricity supply are the first levers to pull for reducing carbon emissions, but they can only get us so far on our path to Net Zero. Green fuels are a necessary solution to help cross the last mile for several hard-to-abate applications, like green steel and ammonia production, high-grade heat, or heavy mobility.
Despite the need for green fuels, the feasibility of producing and distributing them on a large scale has always seemed a long way off. If we are calling attention to them now, it is because Net Zero targets are driving companies to go beyond the low-hanging fruit and tackle the hard-to-abate emissions, and with technological advancements driving down the cost of some clean fuel solutions, increased adoption is seeming closer than ever before.
To build momentum, significant public subsidies are putting a big dent in the green premium paid for these fuels, especially in the US and the EU. Furthermore, new financing mechanisms, including book and claim, are allowing a broader range of actors to invest and share the costs and benefits of clean fuels.
In this first of several articles on green fuels, we introduce their growing potential to impact decarbonization efforts, address some of the barriers to their adoption, and provide suggestions for getting started with these important decarbonization levers.
Green fuels are produced using renewable or low-carbon energy sources and can serve as a substitute for fossil oil sources in the transport or industrial sectors. There are three types of green fuels: bio-based fuels, such as biogas or biomethane derived from organic matter; green hydrogen, made from water electrolysis powered by renewable electricity; and e-fuels, a class of synthetic fuels, such as synthetic ammonia (green hydrogen and nitrogen) and e-methanol (green hydrogen and captured CO2).
These fuels are being more frequently discussed because of their ability to decarbonize the hardest-to-abate sectors.
A variety of bioenergy and hydrogen gases are also interesting applications for industry, either as green feedstocks (e.g., for ammonia and steel production) or to deliver green heat where electrification is technologically challenging and inefficient.
Biofuels and hydrogen-based synthetic fuels are also promising replacements for fossil fuels in the long-distance transport sector – specifically heavy-duty trucking, aviation, and maritime, where direct electrification is technologically and economically challenging.
Finally, these fuels, particularly green hydrogen and its derivatives, are considered viable for long-term storage of renewable energy.
Momentum is being built for the integration of these green fuels into the decarbonization strategies of countries and companies. While green fuels have made modest gains in recent years, there is a consensus that green fuels will experience strong growth until the end of the decade, in line with decarbonization ambitions. Beyond that, according to the IEA (International Energy Agency) Net Zero by 2050 Scenario, green fuels are expected to grow exponentially up to 2050. For example, biogas and H2 are expected to comprise 70% of gas production in 2050 (compared to <1% today).
Growth expectations are bolstered by the fact that both bioenergy and hydrogen feature prominently in high-profile government decarbonization strategies, including the European Green Deal, the European hydrogen roadmap (EU Hydrogen Strategy), as well as the Inflation Reduction Act in the U.S., which earmarks subsidies and tax credits for renewable energy, biomass, and biofuels, and includes massive incentives for hydrogen production. The inclusion of green fuels in these programs indicates there is sufficient institutional interest to develop a robust regulatory environment and subsidies to increase production and use applications.
While promising, however, there are still some fundamental hurdles to overcome to make the necessary progress in the adoption of green fuels, such as availability and cost.
The availability of green fuel supply is still limited. For example, of the 230 GW of hydrogen electrolysis capacity planned, only 700 MW (less than 1%) is operational today, according to a report from the Hydrogen Council. Still, the hydrogen momentum remains strong: more than 1,000 project proposals have been announced as of the end of 2022, of which 795 are expected to be fully or partially commissioned by 2030.
Furthermore, when it comes to biofuels, and in particular biomethane, volumes are still negligible compared to traditional fossil-based fuels. In its World Energy Outlook 2022, the IEA reported that the global demand for biogas reached 35 bcme (billion cubic meters equivalent) in 2021; around one third of this demand (8 bcme) was for biomethane. In comparison, global natural gas demand in the same year was 4,213 bcme. However, global targets for biomethane production remain ambitious, confirming policymakers’ support for such type of biofuel. For example, the EU set a 35 bcm/year target for biomethane production by 2030.
The higher cost of green fuels compared to fossil-based options is a factor affecting the availability of green fuels, even if the cost gap continues to shrink due to improvements in technological efficiency and economies of scale.
As of today, natural gas-based grey hydrogen remains the cheapest form of hydrogen to produce, costing between $1 and $2.5/kg, depending on the geographical area (Bloomberg New Energy Finance data). In comparison, green hydrogen is significantly more expensive, with production costs ranging from $3/kg to $12/kg. However, green hydrogen costs are expected to significantly drop in the coming years – with prices ranging between $1.8/kg and $5/kg by 2030. Again, according to BNEF, “green hydrogen will eventually undercut blue and grey in all markets.” Green hydrogen is expected to become cheaper than grey hydrogen in any country by 2039, when using Chinese electrolyzers.
Biogas and biomethane costs are also projected to decrease over the next decades. Overall, the IEA’s Outlook for biogas and biomethane estimates that in 2040 over 260 Mtoe of biogas could be produced worldwide for less than prevailing regional natural gas prices under its STEPS scenario (the IEA’s most conservative scenario). In several markets, a significant decrease in price is expected as well.
These two hurdles are symptoms of underlying barriers to the widespread adoption of green fuels, particularly the absence of mature markets and value chains.
Developing green-fuel market structures would reduce the risks and uncertainties of investing in green fuels or integrating them into the decarbonization strategies of companies. The policy and regulatory landscapes to help shape green-fuel markets and unlock adoption are rapidly changing across geographies. The various initiatives currently being undertaken or in development mainly aim to achieve one or more of the following goals:
Defining the standards to certify the ‘greenness’ of green fuels is essential to provide clarity to market actors about the sustainability credentials of green fuels, with bioenergy and e-fuels facing different challenges. It is a precondition for a thriving marketplace to have a clear and shared understanding of what qualifies as green fuel.
For bioenergy, sustainability criteria refer mainly to the sourcing of feedstock, taking into account its impact on biodiversity (e.g., wood pellets) or competition with the food chain.
For e-fuels, sustainability refers to the sourcing of green electricity needed to produce green hydrogen, ensuring it fulfills the criteria of additionality as well as geographical and temporal correlation with facilities for green hydrogen production (e.g., EU rules for renewable hydrogen published in February 2023).
To foster demand, the public authorities are considering offering incentives like carbon contracts for difference to compensate companies for reducing CO2 emissions and converting to climate-friendly production or extending carbon pricing to other sectors. Another option is to establish sustainable fuel quotas in specific sectors like mobility.
To boost supply, governments are also providing incentives for producers (e.g., Inflation Reduction Act, EU Innovation Fund renewable hydrogen auction) to take the leap and invest in or expand their green fuel production. They should also support the trade in e-fuels with measures such as building infrastructure for hydrogen or supporting the development of links between producing and consuming countries.
Other interesting initiatives directly target setting up a marketplace for supply and demand to meet. Recent examples include the H2Global Initiative by the German government (grants to cover the difference between supply and demand prices) or the establishment of a voluntary market for sustainable aviation fuel.
Navigating this dynamic, emerging market can be challenging. Nevertheless, a number of forward-looking companies are actively exploring options to capture opportunities in this space and leverage green fuels to de-risk their decarbonization journey. Initiatives are typically pursued across three different levels: specific sites and assets, energy hubs, and company-wide.
When looking at specific sites or assets, one must consider the role green fuels can play to complement more common measures in the emissions-reduction strategy, such as energy efficiency or electrification. Successful companies typically take a systematic approach, defining multiple scenarios to reach Net Zero.
For example, ENGIE Impact is working with a food and beverage company aiming to become Net Zero by 2030. One decarbonization option is to use the biowaste from their production processes to produce and consume biomethane on-site to cover a significant portion of their heat demand, complementing the heat pumps and energy efficiency measures they have taken. Another avenue they are exploring is to produce bio-LNG for their trucks.
At the hub level, companies should explore collaborating with industrial neighbors to create a local infrastructure to match the demand and supply of fuels. For example, we are working on a project where process-related CO2 from limestone processing is captured and combined with green hydrogen to produce e-methanol, which is then used by another industry.
Company-wide, organizations should be asking strategic questions about the role they should carve out in the green fuels space. We recently worked with a major shipping company that operates marine and land terminals worldwide and was considering the role green fuels could play in their operations. Should they simply be an off-taker? Might they also be a producer and provide services to other companies in the logistics field? Which partners should they work with? And could they help users of their facilities procure green fuel to reduce their emissions, which would contribute to their own Scope 3 emissions reduction?
Carbon Neutral Port Brings Green Hydrogen Production to Maritime Shipping. Read Case Study →
For an organization to be positioned to benefit from the advantages of green fuels as they mature, it is critical to start thinking now about a wide range of evolving factors – from technology costs to energy markets or new regulations – in view of creating an actionable decarbonization roadmap. It is important to avoid taking asset decisions that will lock in fossil fuel emissions in the long term.
In the articles to follow, we will take a deeper dive into the various green fuel solutions as well as the salient issues and policies that impact their future adoption.
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