Part 1: Concepts and approaches
This insight brief is the first in a two-part series exploring the topic of demand aggregation for zero-emission shipping fuels and the role it can play in supporting their early uptake in the sector. It provides an overview of the challenges early movers are experiencing in securing green methanol and ammonia, and how demand aggregation could help overcome them.
The second brief surveys the available approaches to aggregating demand for zero-emission fuels in detail and explores how they can be applied by early movers. It can be found here.
Background and introduction
Following alignment on the need for Paris Agreement-compliant decarbonisation within the industry,1 the International Maritime Organization’s 2023 Greenhouse Gas Strategy set a target for shipping to reach net zero emissions by or around 2050. Several technologies are being considered, but the most cost-effective, just and equitable pathway to reach the IMO’s goals is expected to involve early uptake of zero-emission technologies, with a growing portion of international shipping incentivised to move to zero-emission fuels2 from the late 2020s onwards.3 This expectation is reflected in the Strategy’s target for at least 5%, striving for 10%, zero-emission fuel uptake by 2030.
Figure 1: Two main scenarios for how shipping could reach net zero by 2050
Source: Adapted from Getting to Zero Coalition, ‘Unravelling IMO policy measures towards a just and equitable energy transition’
Green ammonia and methanol are two zero-emission fuels that have seen significant interest in the industry.4 Over the past two years, there has been progress in ordering vessels capable of running on methanol or ammonia, with nearly 300 scheduled to be delivered by 2028, and more expected to follow.5 It has also become clear that substantial amounts of green methanol and ammonia could be available this decade.6
Yet only a handful of shipping companies have so far secured supply of the fuels.7
A key barrier is the substantial cost premium associated with zero-emission fuels. Much attention has been dedicated to this subject, with industry action and research highlighting the importance of an effective basket of regulatory measures at the IMO, national subsidies for zero-emission fuel, and action by cargo owners to close the gap.8 But there is increasing understanding that other factors may also be contributing to the low levels of uptake of these fuels. In this context, demand aggregation for zero-emission fuels was a subject of discussion at the Global Maritime Forum Annual Summit 2023 and again at Singapore Maritime Week 2024, most notably at a roundtable co-hosted by the Getting to Zero Coalition and the US Department of Energy, which brought together 30 representatives from leading governments, members of the Getting to Zero Coalition, and global organisations to share perspectives on the topic.
This insight brief provides an overview of the challenges early movers are experiencing in securing green methanol and ammonia and the role demand aggregation could play in overcoming them. Insights are based on interviews with fuel producers, shipowners, and charterers in the Getting to Zero Coalition, as well as the outcomes of the roundtable discussion at Singapore Maritime Week.
Why aggregate demand for zero-emission fuel?
Kickstarting green methanol and ammonia projects
The markets for green methanol and ammonia are at a nascent stage. While the technologies required to produce green forms of methanol and ammonia are well-known, they have not been widely deployed. In response to the need for climate solutions, several hundred green methanol and ammonia production projects have, however, been announced in recent years.
Due to their nascency, the fuels cannot currently be bought on a spot basis, like conventional marine fuels. To source green methanol or ammonia, shipping companies must instead sign advanced purchase agreements with fuel producers - so-called “offtake agreements”. As large scale - in many cases, multi-billion dollar – investments and with no merchant market for the fuels, these agreements are essential for proposed projects to obtain the financing they need to progress to implementation.
These offtake agreements are currently negotiated on a case-by-case basis, but insights from leading developers suggest there will be several common features and requirements. These requirements will define the terms on which shipping (and other sectors) are able to access green methanol and/or ammonia in the near term.
Figure 2: Ideal parameters for green methanol and ammonia offtake agreements
Requirement | Description |
|---|---|
1. Long-term duration | Offtake commitments need to be long enough to amortise the upfront investment in the fuel plant. A 10 to 15-year period is emerging as standard but can be adjusted based on price, with slightly shorter periods possible at a higher price or, conversely, slightly longer periods at a lower price. |
2. Fixed price | While benchmark-based pricing is considered, fixed price contracts are preferred to provide a steady, predictable revenue stream. |
3. Large volumes | A significant majority (e.g., 65%+) of the plant’s planned capacity must be covered by upfront commitments. |
4. Mix of reputable counterparties | Offtakers need to be creditworthy in the eyes of project investors to provide reassurance they will fulfil their obligations and ensure the project will deliver a return. Up until now, this has generally meant offtakers having an investment grade credit rating. Developers may seek to further minimise risk by having a portfolio of up to three separate offtake contracts for large projects, featuring not only different counterparties, but ideally different sectors. Within this, there is a preference for a sector such as shipping to constitute no more than two of the three offtakes. For expediency and due to the lower investment level, one offtake is generally preferred for smaller projects. |
Source: Expert interviews
To exploit economies of scale, proposed green methanol and ammonia production facilities are also large in size. Of the e-methanol projects seeking to hit operation by 2030, most have a production capacity between pilot scale and 200,000 tonnes per year, while the largest share of potential supply is from projects with a capacity of between 200,000 and 400,000 tonnes per year. E-ammonia projects seeking to hit operation by the same date range from pilot scale up to multi-million tonnes per year in size, with the largest share of potential supply from projects at the one million tonnes per year scale.9,10
Considering the offtake requirements outlined above, a 300,000 tonnes per year methanol plant may need to achieve around 195,000 tonnes of coverage through one to two offtake agreements, while a one million tonnes per year ammonia plant may need to hit around 650,000 thousand tonnes of coverage through three offtake agreements, to reach final investment decision (FID).
This provides a picture of the commitment associated with offtaking zero-emission fuels; to access supply, shipping companies will need to sign 10-to-15-year contracts for large volumes of green methanol or ammonia, likely in the upper tens of thousands to lower hundreds of thousands of tonnes.
Early mover offtake challenge
Signing commitments of this sort is currently highly challenging for shipping companies, including early movers actively seeking to secure supply. Insights from these early movers and leading green methanol and ammonia project developers suggest that, within the broader context of technology and regulatory uncertainty in the sector, they are facing three main obstacles: financial commitment and capacity, early mover disadvantages, and infrastructure uncertainties and costs.11
Financial commitment and capacity
A fuel offtake of this scale would represent a significant balance sheet commitment. At their anticipated cost points, a 100,000-tonne methanol offtake may cost around $100 million per year, while a 215,000-tonne ammonia offtake may cost $170m per year.12 This could equate to a $1 to $1.7 billion-dollar commitment over the course of a 10-year offtake. As a fragmented industry with highly cyclical market conditions, such a commitment would be difficult for most shipowners to financially accommodate, and a substantial commitment for a charterer, for whom zero-emission shipping may well be a relatively low priority from the perspective of their wider decarbonisation strategy.
For similar reasons, few ship operators are likely to meet stringent creditworthiness requirements. Of the relatively limited proportion of shipowners listed on public markets, very few possess an investment grade credit rating.13 In bulk trades, shipowners will depend on charterers to procure the fuel. While major mining and agricultural charterers do have investment grade credit ratings, they represent a relatively small group of actors.
Early mover disadvantage
There is also a tension between the long-term and potentially fixed price nature of offtake commitments and the expected cost development of green methanol and ammonia.
While green methanol and ammonia are currently multiple times the cost of other fuels, there is a widespread expectation among shipping companies that their cost will fall rapidly as production scales up, and technologies and processes are optimised. This creates a concern among early movers that signing a long-term fixed price offtake will lock them into high prices, putting them at a future disadvantage against later-moving competitors that would benefit from cost reductions.
Infrastructure uncertainties and costs
Finally, in parallel to obtaining volumes of green methanol and ammonia, infrastructure and standards for bunkering the fuels must be established at key ports. Though many ports have some infrastructure for handling the fuels from the chemical trade, new investments will be required. Meanwhile bunkering protocols and guidelines, particularly for safe bunkering of ammonia, remain in development. This creates uncertainties about the availability, safety and cost of bunkering the fuels.
The result is a mismatch between what green methanol and ammonia producers need to kickstart production and the commitments shipping companies are willing and, in some cases, able to make. Where shipping companies do have demand for green methanol or ammonia, it may be small scale, reflecting these risks and challenges.
The role of fuel demand aggregation
Aggregating fuel demand can accelerate and broaden access to fuel by tackling this mismatch.
Demand aggregation refers to platforms, mechanisms, and business arrangements that enable consolidated purchases across multiple actors and/or sectors. It is applied in new or established markets where demand is fragmented. The underlying idea is to enable actors who would not otherwise be able to buy a product or service to do so by combining their demand into a larger and more attractive package.
In the context of green methanol and ammonia as marine fuels, fuel demand aggregation would involve bundling offtake commitments from several companies into a single larger package that meets fuel producers’ requirements.14
This has the potential to respond to many of the challenges blocking commitment by early movers, including:
Flexibility: Enabling access to green methanol or ammonia supply at a scale aligned with shipping companies’ risk appetite and capacity.
Cost: Facilitating access to lower-cost fuel by offtaking larger, more attractive projects and/or achieving better offtake terms through increased bargaining power.
Infrastructure investment: Accelerating the development of new bunkering infrastructure and minimising last mile costs, by increasing levels of throughput at bunker port(s).
Financial feasibility: Making commitments more financially feasible, including potentially taking offtake commitments off shipping companies’ balance sheets and/or boosting their creditworthiness in the eyes of fuel projects’ financiers.
While efforts could focus on aggregating demand for the fuels within the shipping industry, green methanol and ammonia are expected to play a role in decarbonising multiple industries, including chemicals, fertilisers, and potentially plastics and power. In this context, demand could be aggregated across sectors, with particular opportunities where these industries are located near ports and/or part of cargo owners’ stakeholder networks.
Demand aggregation has the potential to play an important role in supporting individual early movers seeking to secure the fuels. But it is likely to be especially relevant for green shipping corridor initiatives.15 With these collaborations aiming to kickstart the deployment of zero-emission solutions at scale this decade, finding ways to harness participants’ joint demand is likely to be important in realising the full potential of green corridors.
How can demand for zero-emission fuel be aggregated?
Overview of potential approaches
There are multiple ways to approach aggregating demand for green methanol and ammonia fuel, with opportunities for different actors in the operational value chain and beyond to take the lead. These can be divided into a) supply-led measures, undertaken by fuel producers; b) demand-led measures, headed by shipowners, charterers, and cargo owners; and c) third party-led measures, spearheaded by ports, traders, or governments.
Figure 3: Overview of fuel demand aggregation measures in shipping
Source: Based on desktop research and expert interviews
A distinction can also be drawn between commercial and pre-commercial fuel demand aggregation measures. While most measures focus on the procurement of fuel, several seek to lay the groundwork for future offtakes through the sharing of information about the supply of the fuels, signalling demand and/or creating stakeholder networks. Such pre-commercial measures are likely to complement commercial demand aggregation measures.
Each of these measures is likely to come with pros and cons in terms of practicality and effectiveness. As such, what is most suitable will, to some extent, be context-specific, with geography, the shipping segment, the involved stakeholders, and prevailing regulatory framework all influencing the best approach for specific actors.
Identifying near-term opportunities for action
At the same time, it is important to note that green methanol and ammonia plants can take between two and five years to move from FID to operation.16 This means that if 5% of vessels are to run on zero-emission fuels by 2030, per the IMO’s goals, progress is needed in the coming few years. This makes it relevant to assess which measures provide opportunities for near-term impact.
Supply-led
Within supply-led measures, efforts by project developers to build a portfolio of offtakes that will enable them to reach FID are ongoing today. As reflected by the limited number of offtakes signed to-date, however, this has so far generated limited progress. Solutions to help aggregate infrastructure demand, while rapidly aligning the preferences, volumes, and potentially willingness to pay among groups of diverse offtakers would be needed for these efforts to play a leading role.
The potential for supplier-led action to significantly accelerate progress is instead likely to depend on “time stacking”. The idea is for the fuel producer to split the conventional 10-to-15-year offtake into shorter tranches that can be signed by different offtakers, before aligning or “stacking” the tranches to cover the 10-to-15-year offtake period. This is a novel approach that has not yet been put into practice. As such, there remain unknowns about its near-term feasibility, most crucially whether it will be acceptable to fuel project financiers, given that the conventional offtake requirements largely stem from their preferences.
Demand-led
Demand-led measures include joint fuel procurements, joint ventures, and buyers alliances. They represent perhaps the most obvious way shipping could engage in fuel demand aggregation, with interested shipping companies coming together to aggregate their demand for the fuels.
A key near-term challenge for demand-led action is likely to be the collaboration itself. Given the commercially sensitive nature of fuel contracts and potential implications of action on freight costs, care will need to be taken to ensure the full compliance of demand-led aggregation efforts with competition law. Solutions are likely to be available, but evidence from pools, alliances, and other forms of commercial collaboration employed within the sector today suggests that it may take some time to operationalise demand-led measures in a way that is legally acceptable, in the range of several months to years. Green corridors may be well-placed to serve as test cases, leveraging their collaboration structures and alignment on specific fuels and routes to identify the most effective approaches, which can then be rolled out to the wider sector.
Third party-led
Third-party measures involve a port, government, international institution or trader either connecting buyers and sellers or buying and re-selling fuel in smaller tranches themselves.
Third-party measures may present the best near-term means of supporting demand aggregation for green methanol and ammonia in shipping, for two reasons.
First, the involvement of third parties can be expected to provide multiple benefits while sidestepping competition issues. These include aggregating large volumes across shipping and land-based industries, taking offtake commitments off shipping companies’ balance sheets, facilitating and streamlining the logistics around the fuels’ delivery, and even closing the cost gap.
Second, third-party schemes already exist that could be leveraged or replicated to serve shipping’s needs. Two of the clearest examples in this regard are the H2Global instrument being employed by the German government and the expressions of interest (EOI) for methanol and ammonia supply launched by the Maritime and Port Authority of Singapore.