Sustainable Fuels and the Energy Transition: A Comprehensive Breakdown

Sustainable fuels are expected to play an important role in the ongoing energy transition which is propelled by the fight against climate change. This class of fuels offer a net low-carbon pathway for hydrocarbon-based fuels, allowing conventional fossil fuel dependent assets, currently operating with high carbon intensities, to transition towards a net-zero target with minimal infrastructural modifications. Today, businesses across the globe, irrespective of their size, are looking into their carbon footprint to plan their short-term and long-term carbon-intensity reduction strategies. The greater the options available, the more nimble and efficient the strategy. Sustainable fuels, in particular, can help fossil fuel dependent businesses to comply with stricter environmental regulations and promote their social acceptability while maintaining operational continuity, avoiding capital intensive process paradigm shifts in the short-term, which may otherwise route them out of business. Hence, sustainable fuels offer a bridge solution for many industries between the contemporary state and a hydrocarbon fuel-free state in the long-term. For certain sectors, it may be the ultimate option for decarbonization.

The concept of sustainable fuels has existed for a long time. However, it is only recent that governments around the world have started promoting it through their energy and environmental policies and regulations, enforcing the creation of typical supply-demand based markets for these fuels. In their inception stage, these markets are currently volatile, as would be the case for any other commodity. Thus, it is imperative for businesses to understand the interactive policy-market space and its outlook in the regional and global context to navigate the energy transition path in a cost-optimized manner. Businesses should have an accurate and predictable understanding of how these parameters affect their sustainability and profitability vectors.

Despite the globally active discourse on these fuels, the term “sustainable fuel” may be confusing due to multiple overlapping classes of fuels and definitions that are broadly grouped in this category. Generally speaking, fuels that emit significantly lower greenhouse gases (GHG) per unit energy when burnt, as compared to conventional fossil fuels, may loosely be labelled as sustainable fuels. However, for true sustainability index, the carbon-intensity should be measured over the entire life-cycle of the fuel. All direct and indirect emissions involved in its production, transportation, and utilization should be taken into account, though it often makes sense to consider these aspects separately, as the production and transportation processes may be altered. Carbon dioxide and methane are by far the two most dominant GHGs. Thus, sustainable fuels are often called low-carbon fuels due to the lower carbon emission intensity over their life-cycle, even if some may have the same carbon content in their chemical composition as their conventional counterparts. In this regard, International Energy Agency (IEA) ’s terminology “low emission fuels”, also accounting for complete life-cycle, may project better clarity. In recent years, the term “renewable fuels” has also gained momentum, referring to the fact that all materials and energy sources involved in the production of these fuels should be renewable. Though it does not impose any explicit restriction on the carbon-intensity of the fuel, but in practice, it is expected to have a low carbon footprint.????

Ideally, fuel sustainability should also consider other environmental factors, like ecological impacts. Nevertheless, considering global warming as the predominant environmental threat, exclusive focus on carbon-intensity may be justified.

Due to these nuances, taxonomy becomes really important from policy perspective. It should be general enough for the ease of categorization while sufficiently differentiating between the fuels based on their net impact on the environment. This allows for effective policy design to promote the appropriate fuels for a sustainable future. Nonetheless, the ultimate goal is to minimize the carbon emissions and other environmental impacts over the complete life-cycle of the fuel, relative to the usable energy produced in application.

Sustainable fuels may be classified across several parameters like physical state – solid, liquid, and gas, as adopted by the IEA, or by end-use, e.g., sustainable aviation fuel (SAF), more commonly used by the industry and policy makers. However, it may be easier to understand the current landscape of sustainable fuels by categorizing them into the following three classes:

• Hydrogen-based fuels: Hydrogen is the primary active component in this class of fuels which oxidizes to form water, releasing energy in the process. The oxidation process may be designed in several ways to control the rate of energy release, e.g., direct combustion or fuel cell reactions. No carbon is emitted in this process. However, the production of hydrogen itself may have significant carbon-intensity depending upon the process, typically represented by an array of colors ranging from black to green. The sustainability of hydrogen depends heavily on the production route with grey (from natural gas steam reforming), blue (from fossil fuels, but with carbon capture), and green hydrogen (from electrolysis of water using renewable energy) being the most discussed forms hydrogen in the current energy transition landscape. While green hydrogen is the most environment friendly option, grey is the most dominant form of hydrogen, with a market share of over 90%, which has been traditionally used as a feedstock in the petrochemical industry rather than a fuel. Ammonia and methanol are two other most common fuels in this category acting as hydrogen carriers from which hydrogen may be extracted prior to its oxidation. However, these are also often used for direct combustion. It should be noted that when methanol is burnt directly, it should not be treated as a hydrogen-based fuel, but rather a traditional fossil fuel or synthetic fuel, depending upon its production route.?????
• Synthetic fuels: These are artificial fuels produced from syngas (CO+H2) through a series of catalytic chemical reactions known as Fischer-Tropsch synthesis (FTS). Traditionally, syngas is artificially produced from various sources, including steam reformation of natural gas and gasification of coal, biomass, or other hydrocarbon-containing species, which, when converted into synthetic fuel, leaves a carbon footprint equivalent to that of of the primary source. Hence, synthetic fuels derived from fossil fuels are never sustainable, while those from waste biomass may be categorized as sustainable, also depending upon the net energy balance, the source of energy, and the utilization of released heat in the production process. In recent years, a new category of sustainable synthetic fuels, called electro-fuels (e-fuels), has also emerged and gained traction due to their net carbon neutrality. The carbon for e-fuels is derived from Direct Air Capture (DAC) of CO2, and the hydrogen comes from the electrolysis of water using renewable energy (green hydrogen). The captured CO2 is first catalytically reduced by the hydrogen to produce syngas, which is then converted into fuel using FTS. E-fuels are carbon-neutral, as when burnt, they release the same amount of CO2 that was initially captured. This intrinsic carbon neutrality and the demand boost for green hydrogen are driving their popular outlook in the energy transition landscape, albeit their negligible market share at present. Currently, e-fuels also include production pathways sourcing CO2 from carbon capture processes (CCUS), which is considered as negative emissions process and, thus, as carbon-neutral for those fuels. This can lead to double-counting if both the CCUS and e-fuel projects claim emission avoidance for the same CO2 molecule. Therefore, e-fuels should be classified as carbon-neutral only when the feedstock CO2 would not have been captured otherwise.
• Biofuels: As the term suggests, any fuel derived from biomass is categorized as biofuel. The sustainability principle comes from the fact that the biomass upon serving its primary purpose may be labelled as waste, which ultimately degrades under natural processes to release methane and carbon dioxide into the atmosphere. However, if converted to biofuels, it serves a secondary purpose as useful source of energy, which releases the same volume of emissions as the waste biomass. Hence, the fuel may be considered carbon-neutral or low-carbon, condition to a minimal carbon-intensity associated to the transformation process. Biofuels may be produced through traditional small-scale routes like digestive autoclaves relying upon bacterial action or large industrial-scale routes. In the latter context, one may increasingly come across the term “biorefinery”, designed to transform biomass into compositionally conventional grade of fuels like gasoline, and other biochemicals. It is similar to a conventional refinery in terms of its output but differ in the feedstock, i.e., biomass instead of crude oil. Consequently, the processes involved in a biorefinery differ significantly from those of a conventional refinery. Ideally, biofuels are excellent means to valorize waste while reducing GHG emissions. However, there is growing concern about producing biofuels from non-waste biomass dedicated primarily for biofuels. This practice undermines sustainability and can be more harmful than fossil fuels in terms of emissions. It also competes for land resources, causing adverse ecological and social impacts. Hence, there is a growing consensus to shift away from biofuels derived from food sources. For example, the emerging SAF industry is moving towards advanced SAFs derived from non-food feedstocks.

The choice among these categories of next-generation fuels is not straightforward. These are not primary sources of energy existing in nature and require significantly energy-intensive transformations. Hence, both energy and carbon accounting over the entire life-cycle of the fuels are equally important for environmental considerations. Consequently, the source of transformational energy and process efficiency become critical, with waste heat recovery and utilization playing an important role. Moreover, there are many overlaps to be mindful of. For example, methanol may be produced as a fossil fuel by-product from conventional refining process, or as a biofuel from a biorefinery, or as a synthetic fuel, or even more specifically as an e-fuel. On the application side, it may be used directly as a fuel or as a hydrogen carrier. Hence, a holistic understanding of the entire case-specific process, including energetics and carbon accounting, is necessary for comparison across sustainable fuels and conventional fuels to make the optimal choice for a particular application from a sustainability standpoint.

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Policy

Strong decarbonization commitments has led to a rapidly evolving policy landscape in many parts of the world. In a comprehensive approach, most jurisdictions are rolling out multiple policies with certain aspects of sustainable fuels as one of their many focal points, collectively creating a cohesive roadmap for these fuels. For instance, in the EU, initiatives like Fit for 55, the Emissions Trading System (ETS), the Renewable Energy Directive (RED), RefuelEU, and the Alternative Fuels Infrastructure Directive, along with several other policies, jointly drive the market uptake of sustainable fuels. This has led to mandating aviation fuel suppliers to blend increasing levels of SAF and synthetic fuels at EU airports, starting with 2% SAF by 2025, 6% by 2030, and 70% by 2050, and synthetic fuels from 1.2% in 2030 to 35% in 2050, along with complimentary demand-side regulations for aircraft operators. The regulations also detail the eligibility criteria for these fuels. Such comprehensive policy frameworks are essential to promote the development, production, and adoption of sustainable fuels. Equally important is for stakeholders to understand these regulations and their implications. Businesses in this domain must be able to anticipate the long-run policy roadmap to plan accordingly.

In general, policies broadly rely on regulatory standards, market-based economic instruments, and often a mix of both. Regulatory standards involve setting stricter specifications on products, production paths, and sometimes consumers in a top-down approach, enforced by the government on the market. While these are often useful, especially in the early stages of an endeavour, there are limitations with respect to cost and pace of implementation, flexibility, and economic dead-weights, as the government can never fully capture individual preferences and abilities to maximize gain. On the other hand, market-based economic instruments? operate through a system of tax and subsidies, thereby allowing the market to adjust through price mechanisms and find the most efficient equilibrium. Though subsidies and taxation are economically equivalent, the former is often politically favoured. However, market-based economic instruments have lower certainty to meet the required goal if the financial incentives are not sufficiently strong. Hence, most recent policy frameworks adopt a mixed approach synergizing? both regulatory standards with economic instruments in driving the transition to a low-carbon world.

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Market Outlook

The market for sustainable fuels is expected to grow significantly in the coming decades, driven by increasing environmental awareness, regulatory pressures, and technological advancements. As illustrated in the figures below, the demand for these fuels, particularly in sectors like aviation, shipping, and heavy industry, is projected to rise as these industries seek to reduce their carbon footprints. Ongoing innovations in the production technologies for hydrogen, synthetic fuels, and biofuels are likely to reduce costs and improve the efficiency and sustainability of these fuels. Both public and private investments in technologies and infrastructure associated to these fuels are increasing, signalling strong market confidence in the future of these fuels. Different regions are adopting sustainable fuels at varying rates, with Europe and North America currently leading in policy support and market development. However, growing environmental policies in Asia and other parts of the world are expected to boost their global adoption.

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Business Considerations

For the supply side, policy continuity is crucial to guarantee a growing market that justifies investments in R&D and production of sustainable fuels. Currently, production costs for these fuels are too high, necessitating new business models and comprehensive technoeconomic analyses accounting for the future scenarios. A comprehensive understanding of the policy landscape is essential for this purpose. Moreover, adapted technical skillsets, especially in process engineering and asset integrity, also need to be mobilized in the new generation of professionals. From operations perspective, versatility and consistency of the feedstock, and yield quality and efficiency are going to be key determinants for large-scale operations.

On the demand side, fuel costs and upfront infrastructure investment considerations limit adoption. This results in a typical supply-demand circular dependency issue, highlighting the importance of policy-making in establishing a robust market and supply-chain. At present, sustainable fuel supply is limited by volume and by region. The small- and medium-sized enterprises (SMEs), even if motivated to switch,? are especially restricted in their options due to lack of capital and the limited ability to make long-term agreements in partnership with suppliers. However, upcoming regulatory policies, like that of ETS-2 in the EU, will significantly impact SMEs, pushing them for stronger decarbonization measures. Consequently, it is not only important for businesses to make progressive decisions towards sustainable choices but the timing and pace will also have a significant bearing on their financial performance. The operational ease of switching to the sustainable fuel in consideration and its energy content are key factors for large-scale adoption.

Awareness, education, and training on these key issues are vital across the stakeholder chain, depending upon the role in this value chain. Follow us on LinkedIn to stay updated on this topic, and connect with us for corporate training on sustainable fuel market developments and adoption strategies tailored to your needs.

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