MMMCZCS: Dual-fuel ships are future-proof ships

By investing in a dual fuel vessel and using e-fuels, companies that comply with FuelEU and ETS can save up to 10% in total costs of ownership (TCO) over a ship’s lifetime compared to conventional engines burning fossil fuels, according to the latest findings of the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping (MMMCZCS).

MMMCZCS’s report reveals that dual-fuel capability can provide a safeguard against the uncertainty of future e-fuel prices and availability, allowing companies to revert to fossil fuels if needed.

Put differently, investing in dual-fuel technology allows companies to capture the upside of lower costs driven by climate regulation while capping the downside risk created by uncertainty about e-fuel prices and availability.

Eliminating the fuel cost premium changes the investment case for fleet expansion.

To show how the benefits of pooling create a business case for dual-fuel investment, the center presented a case study of an 8,000 TEU container vessel.

The case study models an 8,000 TEU container vessel sailing 100,000 nautical miles (NM) a year at an average speed of 16 knots, of which 5% is between European Economic Area (EEA) ports, 60% is between an EEA port and a non-EEA port, and the remainder 35% is fully outside the EEA.

Our baseline is a business as usual (BAU) vessel that operates on low sulfur fuel oil (LSFO) and blends just enough biodiesel to stay in compliance with FuelEU. The other two vessels are dual fuel, capable of using key alternative fuels e-ammonia and e-methanol on EU voyages.

According to the zero carbon center, the TCO for vessels running on e-ammonia and e-methanol drops significantly in the first 15 years. The reduction of TCO is driven by benefits from both pooling and from decreasing fuel costs.

Meanwhile, the TCO for a conventional vessel will rise consistently after 2030 when these ships must bunker a higher quantity of increasingly expensive biodiesel. Therefore, as early as 2030, the annual TCO for a vessel running on e-ammonia will be less than for a vessel running business as usual (BAU) on fossil fuel.

While some will choose the flexibility of a dual-fuel vessel, others will opt for a more conservative strategy of investing in ‘methanol-ready’ or ‘ammonia-ready‘ vessels.

‘Ready’ is a broad category that includes everything from additional space for equipment to full installation of fuel and safety systems.

According to May 2024 data from Clarkson’s, there are over 1800 vessels in the order books that are alternative fuel (excluding LNG), and roughly 25% of them are categorized as ‘ready’.

A 2022 Center study found that ‘ready’ vessels are cheaper than dual-fuel vessels.

However, when considering the additional costs of converting the ‘ready’ vessel to a dual-fuel vessel, the total CapEx can be up to 50% higher than the upfront cost of a dual-fuel vessel.

The study found that if a shipowner is planning to convert their vessel in the near term (up to three to eight years depending on the fuel type), then they can save money by purchasing a dual-fuel vessel.

According to the report, while dual-fuel technology lowers companies’ risk of locking into a new fuel type, flexibility shifts risk upstream to fuel producers who typically require offtake agreements to move forward with FID.

Put differently, this exacerbates a coordination failure between suppliers and consumers, frequently referred to as the chicken-or-egg dilemma, in which upstream and downstream players wait for the other to invest.

While this problem remains unsolved, dual-fuel vessels represent an appealing compromise that hedges the risks of unavailable or unaffordable alternative fuels for shipowners.

This can then improve the business case for potential fuel producers, albeit not as much as investments in a purely sustainable fuel vessel might, the center concluded.

To remind, a June 2024 overview of European clean fuel projects from Transport & Environment shows that we will likely fall short of the supply of green fuels needed in the EU.

More policies may be needed to de-risk fuel production, perhaps with governments incentivizing demand or intervening in supply.

The mid-term measures being considered by the International Maritime Organization (IMO) Member States are one such opportunity. These regulations are poised to be decided in 2025 and will come into force in 2027.