It’s a little-known fact that 129 years ago, a diesel engine was commissioned to run on peanut oil, and what seemed like a small event turned out to be a path-breaking discovery towards greener alternatives to fossil fuels.
It has taken us a century, but today we have arrived at the cusp of this new reality, with the shipping and marine sector among those poised to lead the transition.
Emerging global regulations such as the Energy Efficiency Existing Ship Index, Carbon Intensity Indicator and the European Union’s Emissions Trading System are pushing the international marine industry to decarbonise at scale.
Among the spectrum of clean fuel options, there is increasing clarity on the two fuels which are expected to dominate in the future in terms of marine fuels — e-methanol and e-ammonia (from renewable sources). While ammonia has some practical challenges such as safety (toxicity and handling), technology industrialisation, and establishing processes and protocols before being used as marine fuel, green methanol is currently at pole position to play a significant role in shipping decarbonisation transition over the next decade.
As global shipping leaders like AP Moller Maersk and CMA CGM deploy their muscles behind green methanol, it is expected to achieve commercial readiness at scale anywhere in the next five to 10 years. The green methanol market size is also forecast to reach US$4.4 billion ($6.2 billion) by 2027, growing at a CAGR of 4.2% during 2022-2027. e-Methanol also has its edge in terms of maturity and scalability, technology and safety.
From an infrastructure perspective, port-side post-production facilities such as storage and bunkering can be easily developed. Although there is currently a demand-supply imbalance for e-methanol, equilibrium is likely to occur between 2030 and 2035, as enabling technology matures and capacity builds up to meet demand.
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Both fuels are expected to dominate the marine industry within the next decade, with the industry seeing strong headwinds in that direction. According to engine designers Man Energy Solutions, by 2030, more than half of orders are expected to be dual engines. They offer greater operational fuel flexibility and lower costs of retrofitting to accommodate newer green fuels, such as methanol or ammonia, down the road.
To further accelerate this transition, stakeholders across the marine and shipping value chain are investing in “Green Corridors” (trade routes with zero emissions), which will catalyse technological advances and uptake of green methanol at a greater pace.
Choppy seas or not, the course has been set and the industry must follow
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Several challenges are expected to plague the industry in the transition, mainly in terms of technology, cost and legislation. The technology to produce e-methanol using CO2 captured from renewables such as bioenergy with carbon capture and storage and direct air capture, plus green hydrogen (hydrogen produced with renewable electricity), is still not cost-effective.
Furthermore, making the switch to methanol comes with sizeable, short-term costs, translating to increased unit freight costs by 4%–10%. Although up to a third of these costs can be offset in future carbon taxes, the regulatory environment in Asia will need to incentivise the investment.
At present, carbon taxes in Asia are marginally low or non-existent. Singapore’s carbon tax rate is at $5 per ton of CO2-equivalent. Japan’s is set at just 289 yen ($2.78), while Indonesia has postponed plans to introduce its carbon tax of 30,000 rupiah ($2.70) per ton of CO2-equivalent.
Other Southeast Asian countries, including Malaysia, Thailand and Vietnam, have yet to implement carbon taxes, although plans to do so are in the pipeline. But with legislation in Europe gaining traction, transitioning to greener fuels in Asia is a not a question of if, but when.
Today, shippers find themselves at an “inflection point”. Technological evolution, in addition to regulatory pressure, will drive the case for change, pushing for industry players to adopt green fuels at a faster rate. Shipping stakeholders in Asia will find themselves racing to comply with new regulations or face hefty penalties. Preparation must begin now as newbuilds and retrofits are costly and lengthy exercises that can take up to a year, especially with long queue times.
On the upside, as technology matures and reaches commercial scale, supply costs will fall and customer willingness to pay will increase. Waiting for the inflection point will not reduce investment costs, as the benefits of moving fast will outweigh the benefits of waiting.
Singapore is taking the lead in developing Asia’s methanol ecosystem
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With the pace for transformation at scale looming close, industry stakeholders have a role to play in the development of methanol infrastructure. They have multiple options to participate in the value chain, each with their own risks and opportunities. They can be “market makers”, investing in building the market by driving both demand and supply, or become an “ecosystem partner”, by leveraging strategic collaborations to build offerings in the value chain and focusing on cost-sharing to reduce risks.
Some stakeholders may choose to focus on minimising short-term capital expenditure by letting others bear the cost of development, while others may settle for selling carbon credits, which are tradable certificates that can be bought and sold as a company reduces its overall carbon emissions.
Taking into account the investment risks, asset strategies, supply risks and uncertainties of fuel paths, there is a number of pathways for Asian shipping stakeholders right now. They can build partnerships focused on driving advocacy, industry collaboration, raising awareness across the ecosystem, as well as co-developing innovative decarbonisation solutions.
As a major international bunkering hub, supplying over 50 million tonnes of marine bunker fuel to vessels that ply international shipping routes, Singapore is heavily invested in developing its green marine infrastructure. It is the first Asian nation to take major strides to invest in the production and supply of methanol as a marine fuel. Led by the conglomerate Maersk in partnership with other shipping giants, plans are underway to establish a “Green Methanol Value Chain Collaboration”, kicking off with a green e-methanol pilot plant in Singapore. It is the first of its kind in Southeast Asia.
From a regulatory standpoint, Singapore is showing greater momentum towards meeting EU benchmarks for decarbonisation, with plans to increase its carbon taxes to US$25 per tonne of CO2-equivalent in 2024, and gradually to US$50 to US$80 by the end of the decade. Moreover, the government now allows shipping companies to use high-quality international carbon credits to offset up to 5% of their taxable emissions.
The Maritime Singapore Decarbonisation Blueprint charts long-term strategies to build a sustainable maritime sector, bringing about new areas of green growth, including the development of alternative fuels and green technologies. Singapore’s headway in developing its green fuel infrastructure and regulatory environment signals a key turning point in Asia’s journey towards decarbonisation. It offers its Asian neighbours a pathway to forge their own low-carbon maritime future.
For now, the transition to green methanol seems to be the most viable first step forward in the long voyage towards a fully decarbonised sector. All actors in the value chain should take the necessary next steps to drive the transition.
Dr Sharad Parashar is a principal at Boston Consulting Group, while Peter Jonathan Jameson is a partner at Boston Consulting Group
