Report: IMO’s NZF tilts future in favor of ammonia DF ships, leaves near-term path in limbo

The International Maritime Organization’s Net Zero Framework (NZF) gives ammonia dual-fuel ships a mid-2030s edge—but the near-term race is still wide open and riddled with uncertainty, a new report has highlighted.

According to a study done by the UK’s UCL Energy Institute Shipping, UMAS and Oceans Research Group titled “IMO’s new Net Zero Framework: implications for the competitiveness of different fuel/energy options“, IMO’s vision is a ‘huge’ step in the right direction concerning the challenge of identifying risks and opportunities across the entire shipping value chain. However, it has left some ‘key’ elements exposed, such as how its reward mechanism will be specified.

To conduct the analysis, the tripartite effort involved using a Total Cost of Operation (TCO) modelling approach to assess the relative competitiveness of a range of fuel and ship technology options. The results reiterated a present sentiment in the industry: fuel choice will be dictated by abatement and penalty costs by the mid-2030s; then, it would be narrowed by emission intensity.

While the report underscores that liquefied natural gas (LNG) will retain its competitive advantage for a while (given that it is, presently, the most widely available sustainable fuel source), by the middle of the 2030s, the emission intensity of LNG and conventional biofuels could shift the cost of compliance for vessels that run on this energy source much higher.

This scenario would mean that the ammonia DF ship specification would become the cheaper option. As an e-fuel with the lowest abatement cost, e-ammonia, for instance, demands the least amount of support to mend the cost gap to either LNG or blue ammonia, the report has stressed, thus showcasing the potential of ammonia as a “competitive compliance pathway” as early as 2028 onward.

“Many stakeholders were waiting for ‘clarity’ from IMO in order to make decisions. Although there are significant complexities and uncertainties in what was agreed in April, even conservative projections of how remaining policy details will be finalised result in a ‘no-brainer’ choice for shipowners in dual-fuel ammonia,” Tristan Smith, Professor of Energy and Transport at the UCL Energy Institute, remarked.

However, he added that the same kind of ‘clarity’ is not available for producers of fuels, particularly e-fuels: “This analysis indicates it’s likely that key investment decisions for e-fuels will await a strong outcome from the IMO policy debate on the ZNZ reward mechanism, unless they are supported by other opportunities or governments.”

One of the main reasons why it is believed that ammonia could take the helm is the fact that liquefied natural gas tends to produce relatively high emissions. This presents a ‘critical’ issue: the inability to generate sustainability units (SUs) without onboard carbon capture and storage technology (OCCS). As a result, LNG dual-fuel vessels need to rely on either lower-emission drop-in fuels (like bio-LNG, bio-marine gas oil, or e-LNG) or accept penalty costs.

The dependency, paired with the uncertainty surrounding future gas prices and abatement differentials compared to other alternatives, could enfeeble incentive signals for the utilization of liquefied natural gas. In turn, this could signal to maritime stakeholders to set their sights on other energy sources, one of those being ammonia, the study has shared.

From the perspective of ports, shipowners’ options could reflect fruitful terrain for bunkering and infrastructure investment, UMAS, UCL and Oceans Research Group have noted. Per their analysis, in the near term, there is likely going to be interest in bunkering for at least three different fuel/energy molecules (conventional and possibly bio oils), LNG (potentially bio-LNG) and ammonia (blue or even e-ammonia), albeit from manufacturing pathways that will evolve over time.

That said, the medium-to-long-term landscape suggests that the demand will shift to ammonia, though not exclusively.

As for fuel producers, the study has indicated that they receive the least degree of clarity from the IMO’s Net Zero Framework. Biogenic fuel and LNG producers have, perhaps, a clearer signal, but with future uncertainty over whether there will be a rapid contraction of demand for the latter.

Given the current lack of clarity around the reward mechanism and the veil of mystery that remains over the volume of e-ammonia that could qualify for support from available IMO funds, blue ammonia producers currently receive a more definitive signal from the framework.

Nevertheless, this is unlikely to spur short-term investment decisions. In the near term, uncertainty also lingers around whether shipowners will respond to the Net Zero Framework by investing in ammonia dual-fuel units now or hold off until there are more confident signs of production investment, the report concluded.

A report published by the Getting to Zero Coalition, and the Global Maritime Forum (for whom UCL, UMAS and Oceans Research Group reportedly performed their own study) has mirrored identical conclusions.

The brief, “IMO’s policy measures: What’s next for shipping’s fuel transition?”, IMO’s new policy is ‘ambitious enough’ to drive the transition to scalable zero-emission fuels, but its ‘convoluted’ reward and penalty mechanism mean that shipping can get to net zero only through “meaningful” incentives and much higher penalties for non-compliance.

This analysis also put forward that dual-fuel ships running on LNG and ammonia will be the most cost-competitive option before the mid-2030s, mainly driven by blue fuels.