As the energy transition accelerates, e-fuels look certain to play a critical role in power critical segments of transportation such as shipping, aviation and road haulage. The latest Horizons report from Wood Mackenzie looks at the challenges and opportunities in the burgeoning global e-fuels sector and gives analysis and insight into what needs to be done for synthetic fuel to become a major player in the coming decades.
Electrification is the key enabler of the energy transition, but some sectors, including segments of transportation, will be difficult to electrify. Batteries are a poor substitute for the energy-dense fuels that currently power ships, long-haul aircraft and heavy-duty commercial vehicles, for instance.
E-fuels, also known as electrofuels, eFuels, synthetic fuels, Power-to-X (PtX), Power-to-Liquids (PtL) and renewable fuels of non-biological origin (RFNBOs), are a synthetic alternative to fossil fuels. They can decarbonise hard-to-abate sectors without the need for the early scrapping of long-life equipment.
E-fuels are produced by combining electrolytic (green) hydrogen, made by electrolysing water using renewable electricity, with captured carbon or nitrogen. An e-fuel can be considered carbon neutral if the emissions released into the atmosphere during its combustion are equal to (or less than) the captured CO2 used to produce it.
Bioenergy investments have gained momentum, but concerns persist over the availability of feedstock. The food-versus-fuel debate lingers. Although primarily considered a long-term disruptor, e-fuels offer companies an intriguing prospect at the intersection of electrons and molecules. The potential to capitalise on existing technical, commercial and marketing capabilities makes it an appealing, if challenging, opportunity for many.
The widespread development and use of synthetic fuels is still at least a decade away and depends on the successful deployment of other technologies, but companies that position themselves now are best positioned for success according to the latest Horizons report by data and analytics company Wood Mackenzie.
The report: ‘Adding fire to e-fuels’ states that e-fuels are a synthetic alternative to fossil fuels and can decarbonise difficult to electrify sectors without the need for the early scrapping of long-life equipment. This means e-fuels can offer a solution to power critical segments of transportation such as ships, long-haul aircraft and heavy-duty commercial vehicles.
“Identifying pathways from legacy fuels into low-carbon alternatives is a perennial challenge for incumbent energy players,” says Murray Douglas, Vice President of Hydrogen Research at Wood Mackenzie. “E-fuels offer companies an intriguing prospect at the intersection of electrons and molecules and the potential to capitalise on existing technical, commercial and marketing capabilities makes it an appealing, if challenging, opportunity for many.”
Challenges abound for large-scale deployment
The report also states that commercial viability is the key challenge in scaling up e-fuel production with green hydrogen production and CO2 capture costs both high. The subsequent conversion process to the final e-fuel product is both energy and capital intensive – and delivery costs must also be considered.
“There is no shortage of offtakers seeking low-carbon fuels, but the gap between cost of production and willingness to pay is sizeable,” Douglas says. “Each e-fuel has an incumbent fuel it aims to displace, all of which are much cheaper and this means their success will be dictated by policy to mandate volumes, place a cost on emissions and lower production costs.”
Douglas adds that current conversion technologies differ depending on the final e-fuel desired, but the key challenge for all of them is in integrating green hydrogen, carbon or nitrogen, and their subsequent conversion in a large-scale commercial e-fuel production facility.
Policy makers will need to wield both carrot and stick
The report states that currently most e-fuel proposals aim to source CO2 from a variety of feedstocks with biogenic sources with a low cost of capture, such as biogas and ethanol plants, dominating. But as the production of e-fuels grows the available molecules from such facilities will become scarcer and more dispersed. Costs will rise as e-fuel producers scour for feedstock while looking to scale.
This means that, in the long-term, global policy makers will have to set the standards for where e-fuel producers source CO2. In Europe, point-source CO2 capture from fossil-fuel power generation will only be permitted until 2036 and from other fossil-fuel industries until 2041. Consequently, large volumes from net carbon dioxide removal (CDR) technologies – direct air capture (DAC) and bioenergy with carbon capture (BECC) – will be required.
“Globally, governments are going to have to take a holistic approach where incentives and penalties are introduced to ensure e-fuel production will be able to ramp up to a scale that will be required,” Douglas says.
The report concludes that producers who can pair low-cost renewables and biogenic CO2 sources will have first mover advantage. However, putting this type of complex and technology-heavy production model in place is a lengthy process that must start now for large-scale production to be in place by the mid-2030s.
Who could be the winners in the e-fuel race?
Producers with access to the lowest-cost renewable generation will have the edge. Yet, those same locations won’t always have the most advantaged CO2 sources. First movers have found success in pairing low-cost renewables and biogenic CO2 sources.
Biofuel producers: the lowest-cost means of meeting many of the coming aviation and maritime targets will be directly through biofuels. Renewable fuel suppliers, such as Neste, Chevron Renewable Energy Group and Diamond Green Diesel (a Valero and Darling Ingredients joint venture), have developed leading positions. Interest continues to build from new entrants, and these early movers will be looking to price up to the margin against the next low-carbon fuel alternative of e-fuels.
Biomass power generators: globally, there is 73 GW of biomass generation capacity online today across more than 2,200 projects, highlighting just how fragmented the market is. Drax (2,580 MW) and Ferrybridge (2,098 MW) in the UK are the two largest, having converted from coal plant to biomass. Both are planning carbon capture developments where the CO2 could be sold directly to e-fuel producers. There is no shortage of coal generators globally that could follow suit, but biomass feedstock constraints will eventually surface, and these generators often require subsidy support.
Vertical integration: energy producers, including refiners and fuel marketers, who see a long-term future for e-fuels should look to build integrated positions throughout the value chain into renewable generation and biogenic CO2 sources. Although the CO2 can be sourced directly, the privileged few with low-cost biogenic CO2 will look to price as close to the margin of the next scalable CDR or DAC.
Subsidy accumulators: regimes around the world will operate differently. Those who can layer together subsidies across renewable generation, hydrogen production and CO2 capture, then price towards displacement costs in markets with penalties, appear strongest. But many developers will be wary of over-reliance on subsidies given the risk of policy shifts in such a nascent market.
Access to premium offtakers: one of the challenges most regularly cited by low-carbon hydrogen developers is sourcing offtakers willing to pay the necessary premium. This comes into sharper focus when it comes to e-fuels, given the uncertainty as to the direction in which costs are headed, how rules governing RFNBO might evolve and what technologies might disrupt the current outlook.
Developers require long-term commitments – from either offtakers or governments. It’s unlikely that the former will stretch much beyond five years considering the nascent stage of the e-fuel market, so policymakers will have to step up to cover the cost gap and stand firm against the rules and regulations being signalled today, such as ReFuelEU Aviation and FuelEU Maritime.
Technology providers and licensors: the conversion processes are long established across many e-fuels, from which existing licensors are set to benefit, but several technology providers are looking to disrupt the space.
Traders: e-fuels will create a commercial intersection between electrons and molecules across transport sectors that is new to the energy industry. Aviation, maritime and heavy-duty road transport use different incumbent fuels where competition has never existed. These sectors are now competing for the same biofuels and the same green hydrogen and CO2 underpinning e-fuels. Green hydrogen and CO2 will be pitted against biofuels to meet low-carbon demand in these sectors, with biogenic CO2 sought after to produce the most competitive RFNBO-compliant e-fuels. Such uncertainty and potential volatility are what traders seek.
An e-pipe dream or a key role in the transition?
The energy transition requires e-fuels, but they depend on the successful deployment of other technologies that are still nascent and expensive, such as green hydrogen and CO2 capture.
Bilateral agreements between developers and offtakers will provide a commercial structure that de-risks early adoption, and innovative approaches to financing projects are being explored.
“E-fuels are undoubtedly one of the longer-term plays in the energy transition,” says Douglas. “However, companies that set a strategic direction quickest can position themselves to capture the most attractive elements of the value chain and take those learnings forward.”
The report, which can be read in full at https://www.woodmac.com/horizons/e-fuels-unlocking-hydrogen/ concludes that the complexity of e-fuels from production through to marketing suggests that the best capitalised and most sophisticated players are best positioned to deliver success, but several smaller, nimbler and more focused players are emerging in this space, with the potential to disrupt.
Murray Douglas, Vice President, Hydrogen and Ammonia Research and one of the reports co-authors, is responsible for Wood Mackenzie’s global hydrogen and ammonia research. Underpinned by a growing team of experts and the full breadth of energy verticals, the team’s analysis extends across the full hydrogen and derivatives value chain, covering market development, policy, costs and project valuation.
Image credit: Wood Mackenzie
