Weâve written a lot about clean electrons recently, but electrifying everything only gets us so far. Buckle upâweâre going high-octane eco this week with clean molecules.
The Tank-up of Tomorrow
Transportation accounts for ~16% of global GHG emissions, and while passenger vehicles have likely gone the way of EVs, cleaning up the remaining 55% of hard-to-decarbonize aviation, heavy ground transport, and maritime shipping is stillâwell, hard! As energy demands increase for heavier and longer-distance transport, the energy efficiency equation for fossil based-fuels becomes harder to displace. So far, electrification and hydrogen-based options have struggled to achieve sufficient energy densities.
Kick the (Gas) Can
Moving fewer people and things around isnât a popular option for reducing emissions. In fact, growth in trade and e-commerce, alongside increasing access to personal air travel in developing economies, have helped drive transportation-related emissions up ~2% each year for the past three decades.
These industries now have a mandate to slash emissions even as fuel demands increase, and existing decarbonization solutions for lighter transportation arenât up to snuff. Finding alternative fuel sources is essential (and tricky) for a few reasons:
Existing infrastructure has been developed to store, transport, and utilize hydrocarbons extracted from the Earth.
Price sensitivity is high for fuels in tight-margin industries such as shipping and travel.
Reliance on foreign fossil fuels is a national security concern for many countries, and cleaner alternatives could be sourced domestically.
Fuel for Thought
In the broadest sense, fuels are any material that can go through a reaction with another substance and release energy. Fuels are hydrocarbons, meaning they are long chains of carbon and hydrogen atoms strung together (sometimes along with nitrogen or oxygen). While most fuels are long-chain hydrocarbons, the exact ratio and arrangement of the carbon and hydrogen varies, even within the same types of fuels.
Fossil fuels commonly burned today, such as gasoline and diesel, built their hydrocarbon chains over millions of yearsâalternative fuels need a much more efficient way to lock in the necessary inputs. Mimicking fossil fuels with âcleanâ replacements requires repurposing molecules from sources like biomass, hydrogen, and captured CO2 and accelerating the formation of those chains with catalysts for conversion, microbes for ethanol fermentation, water or steam for electrolysis, and acids or solvents for oil extraction.
Biofuels Bust 1.0
Yes, yes, we knowâyouâve heard this story before! Werenât biofuels the problem poster child of Cleantech 1.0? Oil and gas players invested in biofuels during the early 2000s with unsatisfactory results. Over the last few years, these companies have one-by-one divested from algae-based solutions, for example, with Exxonâs December 2022 exit ending the trend.
Today, most O&G companies are thirsty for alternative fuels like renewable or biodiesel, sustainable aviation fuels (SAFs), and ethanol, which are compatible with existing vehicles and infrastructure. Engines are optimized for fossil fuels. The easiest way to abate the emissions they produce is to recreate a very similar fuel, but thatâs easier said than done.
Take diesel as an example: Renewable diesel is functionally the same as diesel derived from petroleum, but itâs very challenging to make. Biodiesel is made through a different process using biomass, but it requires blending with traditional diesel and is more difficult to incorporate into existing vehicles and infrastructure.
DIY Hydrocarbons
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Biofuels vs electrofuels: Alternative fuels come in two flavorsđž Biofuels are hydrocarbons made from biomass or waste. These include categories like ethanol and biodiesel, which convert solid inputs such as plant matter into liquid fuels.⥠Electrofuels, or e-fuels, are also hydrocarbons, but rather than using carbon from biomass, it comes from CO2âideally sourced through direct air capture (DAC). By mixing CO2 molecules together with water or hydrogen in a reactor powered by clean electricity, these components can become liquid energy carriers.
These lower-carbon fuels are only as good as their ingredients. The prices and emissions profiles of alternative fuelsâ inputs determine the cost-competitiveness and climate impact of both biofuels and electrofuels.
Biomass and waste sources
Biofuels earn their bio-moniker from their biomass inputs. In a perfect world, biomass is a renewable resource. In a land-constrained world, biomass inputs for biofuels compete with the space that food crops need, not to mention that moving large volumes of ag waste is unlikely to be economically viable.
If you canât grow the carbon yourself, store-bought is fine
Where are you getting your hydrogen and carbon from? This is the big question for electrofuels, and it means technologies like green hydrogen production and DAC are critical pieces of the e-fuels supply chain. Being able to deliver these alternative fuels is dependent on scaling up the sources of H2 and CO2.
Delayed emissions from point-sources: Using CO2 from point-source capture still means the carbon has been extracted, burned, captured, processed, and then re-burned in the fuel. It delays the release of CO2 into the atmosphere, but doesnât avoid those emissions, which means using captured CO2 for fuels is always going to be a less effective option from an emissions reductions perspective than storing it.
Carbon-neutral from DAC: Because alternative fuels are still going to release CO2 when burned, the best case scenario for the planet is creating carbon-neutral fuels. Sourcing CO2 from DAC, which means using CO2 that was already in the atmosphereârather than CO2 from point-source capture emissionsâenables carbon-neutral electrofuels fuels.
Infrastructure
For biofuels, moving large amounts of biomass with low energy density is an inefficient process for feedstocks. For electro-fuels, getting difficult-to-ship inputs like hydrogen and captured CO2 to fuel production facilities is also a major challenge. Transporting these materials over long distances is expensive and can eat into the carbon-footprint math of alternative fuels.
Hydrogen and DAC hubs created by legislation in the US could help establish more infrastructure, such as pipelines, for these inputs. Exxonâs recent purchase of the nationâs largest CO2 pipeline network could indicate the O&G industryâs interest in using fossil fuel expertise to address these hurdles.
Highlights
Tech maturity: Many alternative fuels, particularly electrofuels, are relatively immature technologies, compounding the investor and corporate hesitancy to fund them following major financial losses from biofuels investments during Cleantech 1.0.
Inputs and outputs: Key factors to consider in use-cases and viability for low-carbon fuels include the blending level supported and the cost and availability of inputs like clean energy, biomass, clean hydrogen, and CO2.
Cost conundrum: Cost is a major challenge due to the high prices of low-carbon fuel inputs and the low prices of fossil fuels. Inflation Reduction Act (IRA) incentives for production of clean fuels and their inputs in the US could help catalyze the industryâs growth, but even at scale, itâs unlikely that these alternatives will become cost competitive with fossil fuels without subsidies.
Too late for biofuels?: For biofuels, the track record of investments without satisfying results is causing some to ask, wouldnât we have cracked this the first time around if it was a good solution? The feedstock issues, including competing with food and the expense of transporting biomass, make it a challenging pathway to scale.
Too early for electrofuels?: Conversely, electrofuels are the current industry darling, but the shiny new thing always faces more technical hurdles. The success of e-fuels is reliant on three factors that companies developing this tech have little control overâcheap and widely available green hydrogen, captured CO2, and clean power.
Regulatory landscape: Regulations are important in determining both permission (Are you allowed to use this fuel and at what concentrations?) and price (Are you getting subsidized for producing clean fuels or their inputs, such as carbon sequestration?).
Tech pathways
Within the broader categories of biofuels and electrofuels, there are several common processes for turning the raw materials into hydrocarbonsâeach with its pros and cons.
How it works: Waste oils are usually converted using hydrotreatment, which uses hydrogen to remove impurities and create useful end products. Different forms of hydrotreatment include hydroprocessed esters and fatty acids (HEFA), which is a sustainable aviation fuel, and hydrotreated vegetable oil (HVO), which is a form of renewable diesel.
The tough part: Hydrotreatment is a commercial process thanks in large part to the efforts of cleantech 1.0. The limiting factor is feedstock sourcingâcompanies that want to use waste oils need to find a way to collect and transport them. Alternatively, grow-to-fuel is an option by using high-oil crops like soy and palm, but those face environmental and economic challenges.
Algae biomass
How it works: Algae or seaweeds with a high oil content are grown, usually in a controlled environment, before being harvested for oil extraction. The oils can then be used in the same hydrotreatment processes as vegetable oils.
The tough part: Algae-based fuels have faced a number of challenges, leading to many companies shuttering those programs (e.g. BP, Shell, Chevron and ExxonMobil). These include keeping the algae free from contamination and extracting the oils from the cells in order to be able to process it.
Sugar crop biomass
How it works: High-sugar crops, such as corn or sugarcane, are grown, harvested, and the sugar is extracted. Those sugars are then fermented into ethanol and other alcohols, which can be used as an additive to gasoline directly or processed further. Alcohol-to-jet processes can be used to create SAFs.
The tough part: As with any grow-to-fuel, there are environmental concerns around land use and biodiversity. Cleantech 1.0 was propped up in part by high government subsidies for corn, but production costs and low yields made it uncompetitive.
Cellulosic biomass
How it works: There are a number of different ways to convert cellulosic biomass (such as forestry and agricultural waste or dedicated crops) into fuels. The most popular is pyrolysis, a process in which the biomass is heated in the absence of oxygen until it melts down and converts into biochar, bio-oil, and syngas. Bio-oil and syngas can both be processed further into liquid fuels for transportation.
The tough part: As for other waste-to-fuels, itâs difficult to economically collect and process large amounts of waste. Once collected, a large amount of energy is required to conduct the pyrolysis, which makes the end products very expensive compared to their fossil fuel counterparts.
Electrofuels
Ethanol electrofuels
How it works: Similar to the process for sugar crops, fermentation is used to produce alcohols. Rather than use biomass, however, pure CO2 is converted into ethanol and other chemicals by bacteria, which can then be used directly or processed via alcohol-to-jet technology. CO2 is often sourced from point-source capture, but can also come from DAC, which is generally regarded as more environmentally friendly.
The tough part: This technology is still in development, and there are very few real-world facilities, particularly at commercial scale. In addition to the technology risk, it is extremely CO2 and energy-intensive. Captured CO2 is still commercially rare, and much of the current market is being sequestered or used for enhanced oil recovery. The energy intensity makes the cost of power extremely important for the overall production cost, which coupled with the need to use renewables to preserve low emissions can be a problem.
Syngas electrofuels
How it works: Syngas is a mixture of carbon monoxide (CO) and hydrogen (H2). In order to generate it, CO2 and H2O are each put through an electrolyzer to take off their respective oxygen atoms, leaving CO+H2. Syngas can then be processed further, usually by the Fischer-Tropsch method, to create low-carbon fuels whose primary feedstocks are green hydrogen, captured CO2, and renewable energy.
The tough part: Energy costs are extremely important, as with any electrofuel, as well as sourcing hydrogen and CO2. The process itself isnât cheap, particularly since syngas, like any gas, is annoying to deal with and inefficient to transport unless your F-T process is onsite.
Fuel outputs
The end products from these processes have drastically different characteristics that make them best-suited for particular use-cases. Some hydrocarbons are difficult or impractical to use directly and require further processing to convert them into a viable form. Even final fuel types have important differences, usually around their energy density, purity, behavior, and ignition conditions.
SAFs: Sustainable aviation fuels are a type of fuels designed to have similar properties to Jet A, the primary commercial fuel for aircraft.
Diesel: Diesel is a heavier fuel that can be ignited by compression, rather than a spark. It is used in diesel engines, which are designed for heavier-duty applications such as trucking and maritime vessels.
Biodiesel: Chemically distinct from traditional diesel, biodiesel is derived from biological feedstocks and can only be blended at 5-10% with fossil diesel. This is different from renewable diesel, which is interchangeable with the fossil fuel.
Syngas: Syngas is a mix of molecules containing mostly methane and hydrogen, as well as carbon monoxide, carbon dioxide, and water vapor. It is an intermediate product that can be converted into different types of lower-carbon fuels, including SAFs, renewable diesel, and renewable gasoline.
Weâve optimized our engines to eat fossil fuels and now weâre trying to change their diet. Industries interested in buying low-carbon fuels must determine whether existing vehicles can run on biofuels or e-fuels or whether compatibility with clean fuels requires engineering and building new types of aircraft or sailing vessels. It may be operationally cheaper to power a ship with methanol, for example, but the upfront capital cost of building a ship that can run on a new, cheaper fuel is often prohibitively high (much more on maritime decarbonization coming soon).
Case study: Aviation
Major airlines are acting as strategic corporate partners, investing in the companies developing SAFs and striking agreements to purchase millions of gallons in order to support production as the tech begins to scale.
United Airlines and a slew of corporate partners put together the $200M Sustainable Flight Fund earlier this year, which has invested in eight startups working on SAFsâmost recently participating in Series A rounds for OXCCU and Viridos.
Making SAFs widely available for airline routes will take this level of collaboration to ensure planes can be refueled with low-carbon alternatives no matter where theyâre taking off or landing.
The economics of fuel switching
SAFs and other fuels compete in what is effectively a commodity marketâthe fuels are functionally identical to traditional fossil-derived fuels. As a result, the first barrier to adoption is price. Over time, process improvements could drive down the cost of production and supply chain improvements could lower the cost of key inputs, such as CO2, H2, and biomass.
Offtakers like airlines may be willing to pay more and accept a âgreen premiumâ for the low-carbon fuels in order to decarbonize their operations. Some industries are hoping to pass that higher price onto consumers and others may cover the cost to meet regulatory requirements or sustainability goals.
Government policies and subsidies also directly impact the final price of alternative fuels. In the US, a slew of tax credits from the IRA provide incentives for the production and supply chains of clean fuels.
SAF Blenders Credit (40B, 2023-2024): A new, two-year incentive that provides $1.25/gal for blending SAFs that reduce emissions by at least 50% compared to standard jet fuel, with an additional 1 cent/gal for each percentage point over 50% to a max of $1.75/ gal. The credit excludes any SAFs dispensed outside the US or derived from palm fatty acid distillates or petroleum.
Clean Fuel Production Credit (45Z, 2025-2027): The three-year credit replaces 40B for an additional three years and provides $1.75/gallon for fuels that reduce carbon intensity by at least 50%.
Carbon Capture, Utilization and Sequestration Credit (45Q, 2022-2033): This tax credit provides payment for storage or use of captured CO2. For facilities built between 2026 and 2033, the IRA increased the credit for storage from $50/tonne of CO2 to $85 and the credit for use from $35/tonne of CO2 to $60. The credit provides $180/tonne for storage of CO2 captured through DAC or $130 for use, such as in e-fuels.
Clean Hydrogen Production Credit (45V, 2023-2033): A new production tax credit for low carbon hydrogen provides $3/kg for hydrogen with the lowest carbon intensity. Green and bio-hydrogen, as well as very clean blue-hydrogen, projects are expected to be eligible for this credit.
Some of these credits are stackable, but not all of them. For example, the existing wind production tax credit, 45V, and the SAF blenders credit could be combined to secure large subsidies for SAF producers. But the clean fuel production credit cannot be combined with 45Q.
Regulations
The second major barrier to adoption is regulatory: Are industry players allowed to use these fuels, and if so, at what percentage? The regulatory landscape is especially critical for fuels, which need approval from agencies that oversee industries like air travel or maritime shipping.
While low-carbon versions of jet fuel, diesel, and gasoline are very chemically similar to their fossil counterparts, there are still restrictions on the amount that can be used in engines designed to run on fossil-derived fuels. Some of the impurities or other compounds within fossil fuels actually produce useful characteristics that can be lost when fuels are synthesized from biomass or captured CO2. For safety reasons, blending limits are in place while sustainable fuels are tested in a wide range of applications and operating conditions. In other cases, such as with biodiesel and ethanol, the fuels are chemically quite different, so stricter limits are in place.
There are already regulations that promote the adoption and blending of sustainable fuels, including:
Competing on cost: The high costs for low-carbon fuel production, driven by expensive inputs and extremely high energy demands, makes it very difficult to compete with low-cost commodity fuels (though the volatility of fossil-derived fuel prices could drive investor and corporate procurement interest if those prices spike).
Feedstock supply: The availability of both bio-based feedstocks for biofuels and cheap, clean CO2, hydrogen, and electricity for electrofuels remains a major limiter for scaling these technologies.
Tech readiness: Relatively early-stage tech for electrofuels means that breakthroughs in multi-step energy conversion processes will be key to unlocking these climate tech solutions.
Energy demand: Converting electricity into cleaner fuels requires a lot of renewable energy (the UK would need as much as 3.4x its total 2020 wind and solar generation to produce enough green hydrogen to meet just existing aviation demand, for example). Affordable clean energyneeds to become more available, either from the grid or via power purchase agreements (PPAs) with electricity generators.
Geographic considerations will be crucial for electrofuels, Itâs hard to ship a gas and itâs especially hard to ship hydrogen. Co-location of CO2, H2, and clean energy, along with infrastructure development and hydrogen hubs, can increase efficiency and lower both costs and emissions from transportation.
Why it's still (probably) going to work
Government incentives. All of the above is true without subsidies. Introducing 45Q, federal hydrogen funding, and renewable energy creditsâplus incentives for renewable fuels and willingness of customers to pay more for sustainable travel or shippingâmakes the economic equation more viable.
Regulatory progress. The regulations are evolving, both in terms of improving sustainable fuel cost-competitiveness and allowing for greater blending or usage of alternative fuels
Technical breakthroughs. New methods for treating biomass and direct hydrogenation technologies that convert CO2 and H2 directly into drop-in compatible fuels would reduce costly frictions and energy losses associated with multi-step conversion processes.
Changes to combustion engines. Engineering vehicles to be more compatible with alternative fuels would allow for higher blending percentages, particularly in aircraft.
Strategic partnerships. Offtake agreements and joint ventures for low-carbon fuels from airlines, shipping companies, and other offtakers is moving adoption forward.
SAFs first. With higher prices and accepted premiums above traditional Jet-A fuel, SAFs are the first target for low-carbon fuel producers. Companies will likely expand into other renewable fuels once SAF production is scaled
Are you gassed up on electrofuels? Or adding fuel to the fire for bio-based alternatives? Let us know if your view of lower-carbon fuels includes something weâve missed here. And stay tuned for a deep dive on fuels and other climate technologies decarbonizing maritime transport soon.
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