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UMAS: Early movers are vital in setting up a zero-emissions shipping market

December 31 ------ There will be a range of costs expected from switching to zero-emission containerships in deep-sea and coastal routes, a recent report from UMAS finds. The report titled ‘Cost of zero emission container freight shipping: A study on selected deep-sea and short-sea routes’ shows that there is initially a significant cost gap between conventional fossil fuels and scalable zero-emission fuels (SZEF) and there are differences across the scalable zero-emission fuels considered. 


Released at the margins of COP28, the study details the annualized total costs of zero-emission container vessels and the cost difference on a per container basis for transpacific and coastal ships under different fuel pathways. For example, in 2030 on the transpacific route, under the best-case fuel price scenario, the cost difference can be $150/TEU for green ammonia and $210/TEU for green methanol, and as high as $350/TEU for green ammonia and $450/TEU for green methanol in a high fuel price scenario. However, with the right demand signals and willingness to pay the cost difference in the next few years which initiates the scaling up of production of the scalable zero-emission fuels and policy support that follows in the diffusion phase, the cost gap is expected to narrow out to 2050, according to UMAS. 


The role of early movers including cargo owners, and their willingness to pay is therefore vital in setting up a zero-emissions shipping market, the UK-based commercial advisory service said. “The fuel cost gap is now acknowledged as the main blocker for shipping’s transition and tackling it requires a frank conversation about the dimension of the challenge. We need “numbers on the table” and more visibility on how stakeholders can help to cover it,” Camilo Perico, Consultant at UMAS, author of the report, commented. “This report contributes to that dialogue by providing examples of baseline additional cost per container required to bridge the cost gap considering only technological savings. It shows the room that cargo owners, governments and other stakeholders have to contribute.” 


The Total Cost of Operation (TCO) approach, which considers both the capex investment in the vessels and operational expenditure (including fuel prices), shows that by 2030, in the best-case scenario, to get a single vessel running on SZEF on the transpacific route would require an additional $20 to $30m per annum (of which $18m to $27m is fuel costs) and an additional $4.5m to $6.5m per annum (of which $3.6 to $5.2m is fuel costs) on the coastal route. This indicates the magnitude of freight purchase commitments required in the early stages of the emergence phase. “The analysis shows fuel costs are a major component of the overall cost and therefore the primary driver of the total cost of operation. With the right demand signals and corporate action during the emergence phase, production and supply of zero emission fuels and freight services can make a head start in lowering the cost gap that this work has shown,” Nishatabbas Rehmatulla, Principal Research Fellow at UCL and co-author of the report, explained. 


In 2030, TCO for vessels on a transpacific route operating on green ammonia and methanol is two to four times that of a reference vessel operating on low sulphur heavy fuel oil (LSHFO). Over time, the cost differential is expected to narrow due to declining SZEF fuel costs. In 2050, most scenarios show a TCO that is 1.5 to 2 times that of conventional fuel. 


Early movers in the transition who are willing to pay an additional cost for lower GHG transport have a choice to make: to go for cheaper but non-scalable fuels such as bio-methanol, which will become more expensive as demand outstrips supply, or invest in fuels with a higher capital expenditure, thus stimulating a more likely long-term solution that will become cheaper as production ramps up and demand grows. 


There could be an argument to deploy a methanol pathway that begins with bio-methanol in the emergence phase (on the grounds of lower cost relative to SZEF), which gradually moves to Direct Air Capture (DAC) methanol. However, whilst this pathway is cheaper in the short-run, the initial use of bio-methanol does not significantly improve the long run costs of DAC-methanol. This is because they use different production pathways meaning that any early investments, learning and advantages of scale translate poorly from bio-methanol to DAC-methanol. 


The cost burden can appear to be high during the emergence phase but there are already policy supports appearing that can close the gap between conventional fuels and SZEF, such as the US IRA and the EU ETS have the potential to cover much of the current cost difference along specific routes of US-EU routes. Furthermore, the revision of the GHG strategy at MEPC 80 commits the IMO to adopt a policy package and a target of 5-10% zero and near zero emission fuel use by 2030. Both are mechanisms that can help to create a business case for early action. The window of opportunity for corporate action before regulation increasingly closes the gap is now only around a handful of years. 



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