OceanScore Models Price Scenario for FuelEU as Alternative to Penalties

[By: OceanScore]

Shipping companies are pursuing the lowest cost of compliance under the FuelEU Maritime regime as they face rising penalties for falling short of carbon intensity reduction targets. And OceanScore is providing first price indications on compliance surpluses available under the FuelEU’s pooling mechanism to determine both the relative costs of compliance and potential earnings from generating surpluses.

Compliance deficits incurred for failing to meet the greenhouse gas intensity targets set by FuelEU Maritime can be reduced by burning biofuels or, if possible, LNG/LPG. To mitigate potential penalties for non-compliance, one of the more commercially viable options is pooling, whereby vessels that overachieve on intensity targets can compensate for underperforming vessels.

However, OceanScore Managing Director Albrecht Grell says: “A significant number of shipping companies we have spoken to - especially smaller ones - currently are not considering pooling but simply intend to pay the penalty. But this, as well as pushing compliance deficits into future years through borrowing that will incur interest, will prove increasingly costly in the long run.”

He points out the current penalty of €2400 per tonne of VLSFOe in excess of intensity targets will effectively rise by 10% with each successive year of compliance default to reach €3360 in 2029 in the case of continuing non-compliance - before the next tightening of targets kicks in that will hike penalty costs even further.

Evaluation of compliance options

FuelEU mandates progressive reductions in the average well-to-wake greenhouse gas (GHG) intensity of energy used by vessels, increasing from an initial 2% at implementation in 2025 to 6% from 2030 and then at five-yearly intervals to reach 80% by 2050, versus a 2020 baseline of 91.16g C02e per megajoule of energy.

Grell believes it is incumbent on companies to explore burning biofuels as well as examine pooling options as alternatives to simply paying penalties, as these represent “commercially attractive opportunities” to reduce deficits and compensate for remaining compliance deficits.

Other options entail more cost and effort, such as cold ironing that may require retrofitting and wind-assisted propulsion, which requires a heavy investment and only makes sense for certain vessels and trades.

Grell says companies therefore need to understand the complex market variables driving availability of surpluses, with supply and demand determining the price of pooling slots.

FuelEU’s pooling mechanism allows a shipowner to use compliance surpluses to offset deficits within its internal fleet or to monetise these surpluses by sharing them with third-party vessels that can be included in the pool.

Generating compliance surpluses through the use of low-carbon fuels such as bio-diesel and bio-methanol, and then using these surpluses to pool own vessels with compliance deficits and offer them for sale to compliance pools with other shipping companies therefore should be a commercially sound option, according to Grell, even compensating for significantly higher costs of these types of fuels and for their lower calorific values (LCVs).

Giving price clarity on pool surpluses

Maritime technology and data firm OceanScore has analysed the likely development of prices for compliance pools to provide the industry with the necessary guidance on the prospective prices for compliance balances in pools.

The company sees practical limits for pool surplus prices within a range of between €1300 and €2300, in which the lower limit is driven by the cost of alternative fuels - mainly biofuels costing around €1200 per tonne - to generate this surplus and the upper limit determined by the FuelEU penalty. This assumes a €100 pool transaction cost, factored in at either end of the price range.

Within these limits, demand and supply will determine the price for compliance pool slots. If there is more surplus than deficit in the compliance market, prices will be at the lower end of the range. If there is more deficit than surplus, prices will be closer to the upper end, Grell explains.

OceanScore sees a compliance deficit in Europe of 560,000 tonnes of VLSFOe, partly offset by a surplus of 280,000 tonnes, based on 2022 figures, but forecasts the resulting deficit will soon balance out with increasing uptake of biofuels. Biofuels will then generate more than half of surpluses.

Around 650,000 tonnes of biofuels, which can reduce CO2e emissions by up to 50% versus conventional fuels, are needed to bring Europe into balance. This volume could be somewhat reduced by the growing LPG/LNG trade into Europe. Waste cooking oil-based fuels provide particularly low emissions as per the FuelEU regulation and their increased use could further reduce the volume of biofuels needed to balance the market.

En route to balanced market

Grell believes this is “absolutely possible”, given shipping would need around 4% of Europe’s annual biofuel production of 16 million tonnes, and that “we can assume a balanced market sooner rather than later”.

OceanScore expects that, rather than broadly spreading biofuels and respective blends evenly across fleets, managers and owners will select the best-suited vessels to accumulate surpluses to use in their fleets. At the same time, some managers will opt for simply paying penalties rather than, initially at least, bothering to manage the complex related compliance processes.

While many shipping companies will initially focus on creating a balanced compliance situation for their own fleets, only additional compliance surpluses will become available for external pooling. LNG/LPG volumes will mostly be pooled externally. Consequently, the volume of pooled surpluses is expected to grow to between 400,000-500,000 tonnes of VLSFOe. 

Increased availability of surpluses from wider adoption of biofuels will tend to push prices down for pooling slots.

Nevertheless, OceanScore foresees prices for compliance pools staying in the upper half of the indicated range, even if surpluses can be generated by using biofuels at a reasonably low cost and if compliance markets balance: “Everyone knows that the years 2025 to 2029 only represent a phase-in into FuelEU. Staying compliant will be much harder after 2030 with target carbon intensities being adjusted downwards and many LNG-fuelled vessels ceasing to generate surpluses then. If the prices drop too low, surplus owners will simply start to bank them,” Grell explains.

Solution to tackle price uncertainties

Nevertheless, Grell believes, given the expected price range for surpluses, that pooling will be advantageous versus paying penalties, due to longer-term penalty escalation, as well as versus borrowing.

OceanScore will be offering its FuelEU Marketplace to provide the transparency and liquidity needed to secure fair and transparent market prices to counter pricing uncertainties under pooling arrangements, as part of its suite of FuelEU solutions to be launched on September 4 during SMM.