Electrification is transforming transportation, turning gas-guzzling automobiles and light trucks into a clean mode of getting from point A to B. But electric-powered vehicles are only part of the answer if the transport sector is to achieve net-zero emissions by 2050. For areas where electrification isn’t a realistic option—especially hard-to-abate sectors such as aviation and shipping—low-carbon fuels will be essential.
Between biofuels, power-to-X fuels that depend on green hydrogen, and fuels that rely on blue hydrogen made from natural gas, we expect a $40 to $50 billion global market in low-carbon fuels to materialize by 2030, driven by early adopters willing to pay a premium to meet decarbonization pressures and benefit from regulatory incentives.
Transportation accounts for about 16% of global CO2 equivalent emissions, with only industry and power generation being bigger polluters. Curbing these emissions is a huge challenge; since 1990, transportation emissions in the European Union have worsened even as the performance of other economic sectors has improved. And despite increasing efforts from regulators to promote them, fossil-fuel alternatives currently make up just 4% to 5% of transport fuel consumption worldwide.
Several factors are behind transportation’s poor emissions record. Aircraft and maritime vessels require fuels with a high energy density—fuels that produce a large amount of energy per unit volume—which for most applications has ruled out the use of electric power in favor of fossil fuels. And in heavy road transportation, the cost of new charging infrastructure, limits on vehicle range, and excessive charging time have been major sticking points for electric vehicles.
Low-carbon fuels—in particular, biofuels and fuels based on blue and green hydrogen—offer a variety of potential solutions to these challenges. (See “Facts on Fuels.”) Hydrogen can be used as a fuel on its own, but fuels formed by combining it with other molecules have a higher energy density and can be more easily transported and stored. Additionally, some of these variants are interchangeable with fossil fuels; as a result, they can be blended with fossil fuels to reduce overall emissions or they can replace fossil fuels entirely, without requiring expensive changes to existing internal combustion engines, vehicle fuel systems, or fuel distribution networks.
With these advantages come some limitations. Low-carbon fuels today are more expensive than fossil fuels and far less energy efficient than direct battery-based electrification, factors which will determine how they are used in the coming years. (See “A Patchwork of Future Applications.”) Lower production costs driven by efficiency improvements, scale, and favorable policies and incentives—including a carbon tax—are a prerequisite if low-carbon options are to compete against incumbent fossil fuels. Still, we believe the renewable energy boom combined with regulatory incentives (which together can help players derisk and scale fuel technologies) will drive down the cost of hydrogen production and make these fuels competitive early in the next decade.
As the appetite for low-carbon fuels grows, global production hubs will emerge in countries with abundant solar or wind energy, such as Australia, Chile, and the Middle East, and in regions with access to cheap natural gas, such as the Middle East and Russia. We are already seeing power-to-X projects with a generating capacity of 10 gigawatts and above in several of these regions.
For complex fuels like methanol and hydrocarbons, cost competitiveness will depend on producers’ ability to source sustainable CO2 from biogenic sources (for example, using carbon-capture technologies with biomass combustion plants) or directly from the air through emerging direct-air capture (DAC) technologies. Sufficient biogenic feedstock is available in the short term, but shortages will likely emerge as demand grows. As a result, in the longer term we expect sustainable CO2 will mainly need to be sourced using DAC. The costs of the technology will have to come down first, however.
Today, blue hydrogen and fuels that are made out of it are becoming increasingly cost competitive with fossil alternatives, driven by the low cost of natural gas and emerging carbon pricing mechanisms. However, because of hydrogen’s significant transportation costs, low-cost producers are converting hydrogen into low-carbon ammonia, addressing 15% to 25% of global applications and demand in the short term. (See the exhibit.)
Two other factors are key to the creation of a significant global low-carbon fuels market by 2030—customer choice and regulation. Here’s how they are currently playing out:
To play in the low-carbon fuels market, companies first need to weigh the risks and benefits ahead. They will need to take a view on how the new landscape is likely to develop in the coming decades and decide what impact emerging fuels will have on their core businesses. Some players may opt to wait for greater penetration of large-scale renewables or for more efficient generating and electrolyzer technologies to drive down fuel production costs.
Companies that choose to seize the opportunities available today will need to take different steps depending on their position in the value chain and target market.
Power producers. A growing number of utilities and independent power producers are creating partnerships with technology providers and customers to share the risk of developing power-to-x fuels. Before choosing when and how to play, they should do the following:
Integrated oil and gas producers. As with power producers, oil and gas players are assessing their positioning in low-carbon fuels and creating ecosystems that support supply chain development. There are several considerations impacting when and how to play. Oil and gas producers should:
Refineries. As low-carbon fuel consumption grows, refineries will face reduced demand for fossil fuels. This will likely cause them to place bigger bets in other areas, such as petrochemicals, or to switch to using renewable feedstock such as animal fats, plant oils, and used cooking oil for refined low-carbon fuels—provided they can secure volumes at a reasonable price. Refineries therefore need to:
Fuel production OEMs. For providers of production technologies, the ability to act as system integrators, using strong digital and asset rightsizing skills, will provide a key competitive advantage. These capabilities will enable players to participate in leading electrolyzer and fuel synthesis projects. Production OEMs should therefore:
Engine and fuel-cell OEMs. Companies developing fuel cells and engines that use low-carbon fuels will need to closely monitor the trajectory of electric battery technology, as this will have a huge bearing on their success. These OEMs need to:
Fleet owners and operators. Fleet owners and operators play a vital role in reducing risks arising from maturing and scaling the supply of low-carbon fuels through off-take agreements and partnerships. Fleet owners therefore need to: