UCL: Ammonia is the Cheapest Compliance Option for New IMO Carbon Rules
When the University College London's Energy Institute used detailed modeling to evaluate the IMO's highly complex new carbon price structure, they came to a surprising conclusion: if proven safe, dual-fuel ammonia propulsion will be the least-cost alternative for shipowners who want to comply with the rules in the 2030s and beyond - and it reduces the risk of fuel unavailability, too.
"Although there are significant complexities and uncertainties in what was agreed [at IMO MEPC 83] in April, even conservative projections of how remaining policy details will be finalised results in a ‘no brainer’ choice for shipowners in dual fuel ammonia," said Dr. Tristan Smith, Professor of Energy and Transport at the UCL Energy Institute.
UCL's 40-page study illustrates what owners are quickly finding out: a winning business strategy for carbon compliance is going to require a lot of math.
The IMO is not planning a simple flat tax on bunker fuel. Instead, ships will be expected to meet an emissions intensity standard, which gets more strict over time. If owners meet the standard, they pay the IMO nothing. If they emit too much, they can comply by paying a tax (remedial units) at prices that will rise at a yet-to-be-determined pace. Alternatively, they can overcomply and sell their emissions credits (surplus units) to other owners, and collect yet-to-be-determined subsidies (rewards) for using low-emission fuels.
The details for these factors change over time, so a business plan for the 25-year lifespan of a newbuild has to account for different compliance requirements and cost structures in the 2020s, 2030s and 2040s.
Initially, UCL found, LNG dual-fuel ships will have an edge on cost. But as the emissions intensity standard gets tougher in the mid-2030s, the cost of compliance for LNG will go up. Ammonia dual-fuel ships begin to win out because they can burn blue ammonia, made from cheap natural gas with the added bonus of onshore carbon capture. Running a ship on blue ammonia will generate a lot of IMO surplus units, which can be sold to other shipowners to offset the cost of the fuel.
"Blue ammonia, which also benefits from the low gas price outlook modelled, is the only fuel with an abatement cost lower than the initial [remedial unit] price and the only fuel capable of generating significant volumes of [surplus units] into the mid-2030s," UCL concluded.
This is enough to make the ammonia dual-fuel strategy the winning business case, even before taking expected IMO rewards for zero and near-zero fuels into account, according to UCL.
Optionality adds another bonus in an uncertain landscape. With a dual-fuel ammonia hull, the operator can burn fossil bunker fuel; biofuel; blue ammonia; or e-ammonia, made with green electricity. This means the operator can pick from the best available pricing in the markets for natural gas, oil, biofuel or green power, depending on how the energy market fluctuates.
The study's findings would put LNG in second place, and the authors included a warning that LNG bunkering infrastructure investments could prove unnecessary if ammonia takes hold (a cautionary note that UCL has sounded before). The authors also discounted the possibility of onboard carbon capture, noting cost and infrastructure requirements.
"Despite any early dominance LNG may achieve in the late 2020s, its prospects become more challenging by the early 2030s. LNG's relatively high emissions intensity presents a fundamental constraint—it cannot generate surplus units (SUs) without onboard carbon capture and storage technology," found UCL. "Consequently, LNG dual-fuel (DF) ships must rely on either lower-emission drop-in fuels (such as bio-LNG, bio-marine gas oil, or e-LNG) or accept penalty costs."