A new study by UMAS and UCL Energy Institute Shipping and Oceans Research Group shows that poor access to funding and higher costs of capital in developing countries could almost double the prices of e-fuels they produce, compared to developed economies, even when renewable energy resources are superior.
The report titled, “The Cost of Capital Challenge in Delivering a Just and Equitable Transition for Shipping,” compares the costs of producing e-ammonia—a promising low emission shipping fuel—across Australia, Brazil, India, and African nations. The study leverages the wealth of global data available on renewable energy projects to compare the levelised costs of energy (LCOE) across these locations.
Without targeted financial support mechanisms, future e-fuel production could concentrate in already-advantaged economies, and thus risk leaving developing nations behind, despite their favourable renewable resources, in clear contradiction to the “just and equitable transition” that the IMO committed to in its GHG strategy.
The report proposes a solution, which is for a portion of the IMO funds to enable grants and concessional finance to help offset the higher financing costs in low-income countries, thereby to close this “equity of opportunity gap”. This is only one element of the overall needs for revenues for ensuring a just and equitable.
An initial estimate for the scale of initial IMO funds required just for this element is provided as around $50bn – in addition to the funds needed for any reward mechanism and wider just and equitable transition needs.
Key findings
- Large-scale e-ammonia projects in Brazil, India, and Africa are uncompetitive compared to projects in Australia, despite having similar or better renewable energy resources.
- Australia’s advantage is driven by more highly leveraged projects, a lower cost of debt, and a lower target equity return.
- The WACC (Weighted Average Cost of Capital) for Australian e-ammonia projects is below 5%, compared to 8%–10% for Brazilian/Indian projects and 8%–20% for African projects.
- Cost of capital differences outweigh the renewable energy quality differences, making Australian projects more competitive.
- The report highlights a significant gap between the long-run cost of e-ammonia production (~$800/tonne NH3) and the initial offtake prices required for securing project finance ($950 to $1,700/tonne NH3).
- The wide range of offtake prices underscores the importance of policy support for ensuring early adoption and investment in e-ammonia projects.
- The study does not claim to exhaustively assess all potential projects or geographies. Other countries with promising renewable resources may emerge as competitive e-fuel producers in the future.
Access to funding and its cost has a huge impact on the comparative competitiveness of e-fuel projects which require large upfront investment over multi-year lead times. As the cost of capital increases, the relative disadvantage compounds and so very quickly you get to point where projects with better-quality renewable resources cannot out-compete projects with low costs of capital
… said Deniz Aymer, Senior Consultant at UMAS.
Aymer also noted that by adding the steps required to produce hydrogen and synthesise e-ammonia, the impact of changes in costs of capital and project timescales is explored using project financing models. The analysis shows that e-ammonia projects in African countries could require offtake prices 80% higher than equivalent projects in Australia due to these funding constraints, which creates a fundamental barrier to achieving the IMO’s vision of an equitable transition.
Meanwhile, Dr. Tristan Smith, a Professor of Energy and Transport at the UCL Energy Institute, emphasized the critical importance of evidence in ongoing efforts to reach a consensus on mid-term measures by mid-April. He noted that unless the IMO agrees on measures that can generate stable revenues at levels sufficient to fund both the energy transition and a just and equitable transition, the outcome could undermine one or both of its strategic commitments.
The IMO has committed to ambitious emissions reduction targets, requiring the shipping industry to access 200-300 million tonnes of zero (or near zero) emission fuels by the 2040s. This transition is expected to require approximately $1.6 trillion in land-side investment, with $400 billion needed by 2030 alone.
… Dr. Tristan Smith highlighted
The report suggests that if financial barriers are not addressed, investments will likely flow to developed economies, which could exacerbate the existing under-investment in countries with high-quality renewable resources, primarily in the equatorial and global south regions.
