While the global energy transition will require electrofuels (e-fuels), their infusion into the alternative electricity grid is still dependant on the successful deployment of other nascent and expensive technologies like hydrogen and carbon capture. As a result of challenging market dynamics, it could be some time before e-fuels become available internationally at scale.

However, bilateral agreements between developers and customers should provide a commercial structure that de- risks early adoption, with innovative approaches to financing projects being explored. In essence, e-fuels – which come under the guise of several names depending on their intended use – are a synthetic alternative to fossil-driven energy sources.

They can decarbonise hard-to abate sectors without the need for the early scrapping of long life equipment, and are produced by combining electrolytic (green) hydrogen, made by electrolysing water using renewable electricity, with captured carbon or nitrogen.

According to Wood Mackenzie, an e-fuel can be considered carbon neutral if the emissions released into the atmosphere during its combustion are equal to (or less than) the captured carbon dioxide used to produce it. Identifying pathways from legacy fuels into low carbon alternatives, though, is a “perennial challenge for incumbent energy players”.

In their report, Murray Douglas, Alan Gelder, Ozzy Jegunma and Rohan Dighe said near term e-fuel proposals aim to harness CO2 from a variety of feedstocks, with biogenic sources with a low cost of capture, such as biogas and ethanol plants expected to dominate the sector.

e-fuel standards

Over the long term, as governments set e-fuel standards, CO2 sourcing needs to expand significantly, and go beyond fossil fuel-powered point-source industrial capture.

In some jurisdictions, this particular practice will only be permitted until 2036, while other fossil fuel-related industries have until 2041 before having to seek regulative-friendly alternatives.

Consequently, large volumes from net CO2 removal (CDR) technologies – namely direct air capture (DAC) and bioenergy with carbon capture (BECC) – will be required.

Unfortunately, the cost challenges to CDR at scale are considerable, with DAC currently exceeding US$800 per tonne and BECC expenses sitting somewhere between US$80- US$150/t, thus limiting market opportunities.

WoodMac said while producers with access to the lowest cost renewable generation will have the edge, they may not be the most advantaged when it comes to sourcing carbon dioxide.

“First movers have found success in pairing low cost renewables and biogenic CO2 sources,” the researchers said. “Consequently, scaling up BECC ahead of an anticipated fall in DAC costs will provide the greatest opportunities.”

According to WoodMac, players which are able to layer subsidies across renewable generation, hydrogen production and CO2 capture – and then move the price towards displacement costs in markets with penalties – appear to be the strongest.

Nevertheless, many developers should be wary of over- reliance on subsidies given the risk of policy shifts in such a nascent market.

“Feedstock cost advantage will be the primary driver of commercial e-fuel success, as it is in other petrochemical conversion processes,” the WoodMac analysts said.

“Subsidy top-ups and other incentives will help, but locations with low cost sources of hydrogen and CO2 will have the edge in e-fuel production.

“Declines in hydrogen production costs remain elusive near term (but) the cost of renewable electricity remains the key determinant of green hydrogen production costs.”

Moreover, inflationary pressures in this arena have increased costs in renewable generation in recent years, although the solar bill fell 14 per cent during 2023.

Economies of scale, however, have yet to be realised in first-of-a-kind green hydrogen projects, while engineering, procurement and construction capacity will take time to develop.

Taking this on board, WoodMac said, commercial viability is the key challenge in scaling up e-fuel production, despite the fact that green hydrogen production and CO2 capture costs remain high.

“There is no shortage of off-takers seeking low carbon fuels, but the gap between cost of production and willingness to pay is sizeable,” the analysts noted.

“Different conversion technologies are used to produce e-fuels depending on the desired final product.

“These processes are largely the same as those that industry uses for equivalent carbon-intensive final products.

“However, new technologies are emerging that promise to lower costs and improve efficiencies, along with alternative routes, such as converting e-methanol into e-jet (e-kerosene).

“As it stands, however, and regardless of the route, the key challenge for all these technologies is in integrating green hydrogen, carbon or nitrogen, and their subsequent conversion in a large-scale commercial e-fuel production facility.”

More challenges

Another challenge most regularly cited by low carbon hydrogen developers is sourcing off-takers willing to pay the necessary premium.

This comes into sharper focus when it involves e-fuels, given the uncertainty as to the direction in which costs are headed, how rules governing renewable fuels of non-biological origin might evolve and what technologies may disrupt the current outlook.

“Developers require long term commitments – from either off-takers or governments,” WoodMac noted.

“It’s unlikely that the former will stretch much beyond five years considering the nascent stage of the e-fuel market, so policymakers will have to step up to cover the cost gap and stand firm against the rules and regulations being signalled today.”

Looking at the bigger picture, e-fuels are undoubtedly one of the longer term plays in the energy transition and companies that set a strategic direction quickest can position themselves to capture the most attractive elements of the value chain and take these learnings forward.

Moreover, the complexity of this evolving power source from production through to marketing suggests that the best capitalised and most sophisticated players are positioned to deliver success.

Nevertheless, they should keep their collective eye on the several smaller, nimbler and more focused players which are emerging in this space as they have “the potential to disrupt”.