Zero-Emissions Shipping:

Contracts-for-difference as incentives for the

decarbonisation of international shipping

Alex Clark, Matthew Ives, Byron Fay, Ronan Lambe, Johanna Schiele,
Lukas Larsson, Jessica Krejcie, Leah Tillmann-Morris, Peter Barbrook-
Johnson, and Cameron Hepburn

June 2021

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Table of Contents
Executive Summary................................................................................................................................. 4
1. The aims of this report ........................................................................................................................ 9
2. The need for zero-emissions shipping .............................................................................................. 11
2.1. Climate goals and the role of international shipping .................................................. 11
2.2. Setting course in time: avoiding stranded carbon assets in the shipping industry ..... 15
3. Zero-emissions shipping technology options.................................................................................... 20
3.1. Batteries ................................................................................................................... 22
3.2. Biofuels .................................................................................................................... 23
3.3. Fossil fuels with carbon capture and storage ............................................................ 24
3.4. Synthetic carbon-based electro-fuels ........................................................................ 25
3.5. Green hydrogen........................................................................................................ 26
3.6. Green ammonia ........................................................................................................ 26
3.7. Nuclear ..................................................................................................................... 27
3.8. Wind and Sail ........................................................................................................... 30
4. Supporting the adoption of zero-emissions solutions in shipping.................................................... 31
4.1 Economic barriers...................................................................................................... 31
4.2 Technological barriers ............................................................................................... 34
4.3 Environmental and Safety barriers ............................................................................. 35
4.4 Regulatory support for overcoming barriers to adoption............................................. 38
4.5. Contracts for difference in net-zero shipping ............................................................. 39
5. Understanding stakeholder views on CfDs for zero-emissions shipping .......................................... 42
5.1 Fuel preferences or technology ................................................................................. 44
5.2 Interim solutions ........................................................................................................ 44
5.3 Policy instruments ..................................................................................................... 45
5.4 Types of CfD: from fuel-only to Total Cost of Ownership ........................................... 46
5.5 Geographical coverage.............................................................................................. 46
5.6 Sectoral coverage...................................................................................................... 47
5.7 Administering bodies ................................................................................................. 47
5.8 Concerns with Cross-subsidisation ............................................................................ 47
6. Designing CfDs for zero-emissions shipping ..................................................................................... 49
6.1 Design options: fuel-only and TCO ............................................................................ 49
6.2 “Net-zero-carbon-emissions” ..................................................................................... 55
6.3 Interim solutions ........................................................................................................ 55
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 6.4 Design parameters: shipping CfDs in practice ........................................................... 56
6.5 Summary of parameters for zero-emissions shipping CfDs ....................................... 60
7. Legal & technical draft CfDs .............................................................................................................. 61
7.1 Fuel-only Contract for Difference ............................................................................... 62
7.2 Total Cost of Ownership Contract for Difference ........................................................ 78
8. Acknowledgements......................................................................................................................... 100
9. Technical Appendix ......................................................................................................................... 101
A.1 Summary of technology options .............................................................................. 101
A.2 Detailed analysis of nuclear options ........................................................................ 105
Background & Overview............................................................................................. 105
Projected Levelized Costs of Electricity (LCOE) from Nuclear Energy ....................... 105
Existing and Future Nuclear Technologies ................................................................. 107
Nuclear Energy for Zero-emissions shipping fuels ..................................................... 114
Conclusions/Recommendations ................................................................................. 118
A.3 Detailed safety considerations for chemical zero-emissions fuels ........................... 120
International Regulation ............................................................................................. 123
GHS Hazard Statements............................................................................................ 124
Quantifying the risks: Insurance and Liability ............................................................. 126
A.4 Fuel-only CfD counterparties ................................................................................... 127
Restricting the CfD counterparty to net-zero-carbon fuel suppliers ............................. 127
Allowing the CfD counterparty to be any entity able to meet qualifying criteria ........... 127
Conclusion ................................................................................................................. 128

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Executive Summary
Pressure is growing from multiple directions for the shipping industry to decarbonise.
Alternative fuels do exist to reduce or remove all emissions from fuel use, but they
are not yet competitive with fossil fuels, and face a range of barriers to entry. Calls for
policy support for decarbonisation are increasing, but it is not yet clear what such
support should entail. Our analysis looks at the feasibility of applying a policy
instrument known as a ‘contract-for-difference’ (CfD), which has seen previous
success in driving down the costs of renewable energy generation technologies in the
electricity sector. We explore the application of this policy instrument to the
decarbonisation of shipping, unpacking the important design and implementation
decisions with feedback from a wide range of stakeholders, and provide initial legal
documentation based on our findings, drawn up by legal experts Pinsent Masons.

The heavy transport sector is moving to the centre of attention for decarbonisation
efforts. Pressure is increasing on governments to decarbonise all forms of transport – road,
airborne and waterborne. The International Maritime Organisation (IMO) has agreed to
reduce total GHG emissions from shipping by at least 50% by 2050 (from 2008 levels) and
consultations are currently under way for the inclusion of shipping in an expansion of the
European Union Emissions Trading Scheme. The shipping industry is looking to decarbonise
with some major shipping firms, notably, Maersk (the world’s largest container shipping line),
announcing zero-carbon targets. Calls for policy support in this effort are increasing.

ES- 1: Current and projected CO2 emissions from shipping for long-term scenarios in which GDP growth tracks
recent projections, and the land-based energy transition is consistent with ‘well below 2 degrees‘, compared with
the requirements of an IPCC 1.5 degrees pathway (Source: IMO 4th IMO GHG Study 2020)

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Marine transportation accounts for an estimated 2.9% of global greenhouse gas
(GHG) emissions. Even accounting for the COVID-19 pandemic, shipping emissions are
expected to stay steady or increase significantly, with the IMO predicting that the sector’s
emissions could reflect 90-130% of 2008 levels by 2050 for the most plausible pathways
identified in its Fourth GHG study (2020). As shown in ES- 1, the emissions gap between the
range of projected shipping emissions and the requirements of the 1.5C pathway under the
Paris Agreement are daunting.

Several potentially viable technologies for decarbonising shipping exist, with each at
different stages of maturity in innovation and implementation. Options include batteries,
biofuels, hydrogen-based fuels, carbon-based synfuels, nuclear, and wind power – although
not all can meet the fuel energy density requirements of larger deep-sea vessels.

Technological advances have reduced the cost of clean fuels but still more progress
will be required for zero-emissions shipping to become economically viable. As shown
in ES- 2 the costs of clean fuels, such as green hydrogen and green ammonia are more than
double their fossil fuel counterparts, even with a modest carbon price of US$40 per tonne.
The key barriers to large-scale private investment and adoption of such clean fuels are well-
known and include high perceived technology risks, lack of supporting infrastructure, lack of
a project pipeline, lack of stable and scalable fuel supplies, and perhaps most importantly
their costs in the absence of carbon pricing (or its equivalent) on existing fuels.

ES- 2: Cost estimates for common shipping fuels (HFO-Heavy Fuel Oil and MGO-Marine Gas Oil) and zero-
emission alternatives green synfuels, green hydrogen, and green ammonia.
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Cost obstacles have been dealt with successfully in other sectors in recent years.
Most notably, in the UK offshore wind industry, a renewable obligations scheme, followed by
three rounds of contract-for-difference (CfD) auctions has seen the ‘strike’ price of wind-
derived electricity reduced to a third of its pre-CfD value and to a price below current
baseload electricity prices (ES- 3). This remarkable result has been achieved at least partly
by using CfDs to promote private sector investment and thereby stimulate technological
progress and accelerate learning rates.

ES- 3: The UK offshore wind strike prices from 3 successive rounds of CfD reverse auctions compared to current
baseload electricity price. Adapted from Grubb, M., Drummond, P., 2018, UK Industrial Electricity Prices:
Competitiveness in a Low-Carbon World.

This report investigates the design and implementation of CfD mechanisms for
international shipping to support the sector’s decarbonisation. The purpose of such
schemes is to incentivise investment in emerging technologies, to accelerate deployment
and reduce costs to the point where they become economically competitive without support.

Incentivising private investment is key to the necessary scaling and adoption of clean
shipping fuels. In its basic form, a CfD can help achieve this by allowing a public sector
entity to meet the difference between the market price for a fuel or technology (the ‘reference
price’), and the ‘strike price’ required for its financial returns to be sufficiently attractive to
developers and private investors. When the strike price is higher than the reference price,
the scheme in effect subsidises the producer of the fuel or technology the difference. When
the reverse is true, the producer repays the subsidy.

The viability of any incentive mechanism depends on both legal and economic
feasibility as well as appetite for uptake by relevant stakeholders. Any CfD solution
must be sensitive to the needs of the shipping community and providers of supporting
infrastructure. Consequently, a key focus of the project was a stakeholder engagement
process aimed at understanding the myriad viewpoints from shipping and energy industries,
government and regulatory bodies, financial institutions, researchers, and civil society. In
designing the CfD we strove to strike the right balance between stakeholder needs, political

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and practical feasibility, the need for technology neutrality and a level playing field, and the
need for specificity in the policy mechanism.

The different technology options for shipping can be characterised as being either
zero-carbon or net-zero-carbon fuels (ES- 4). These solutions each need very different,
and potentially expensive infrastructure, which means it is potentially undesirable for all to
exist at scale simultaneously. Certain technologies have a clear advantage for international
shipping, but technology-neutrality is important to ensure the best long-term solution
succeeds. There is however a trade-off between technology neutrality and the complexity of
the CfDs, given the need to cater for the many and varied segments of the shipping industry.

ES- 4: Carbon-based vs non-carbon-based fuels. Note that production of hydrogen-based fuels from methane
will likely require offsets on top of Carbon Capture and Storage (CCS) to ensure carbon neutrality. Adapted from
ETH Zurich (2019) Towards net zero – comparison of zero-carbon.

We develop a framework for designing CfDs for international shipping, based on

implementation of this instrument in other sectors, the specific features of the
shipping industry, and stakeholder views. We explore two CfD options in detail:

1) A “Fuel-only” CfD, which is the simplest and most popular solution among
stakeholders, providing shippers with zero-carbon emission fuels at the same price as
Marine Gas Oil (MGO) but may not cover 100% of the costs of switching from to zero-
emission shipping or necessarily provide support for infrastructure and retrofitting costs.
This CfD can be applied equally to all shipping segments but does not help promote ‘non-
fuel’, highly capital-intensive options like nuclear-powered or wind-assisted ships.

2) A “Total Cost of Ownership” TCO-based CfD, which covers all costs associated with
building and running a zero-carbon emission ship. This option is administratively much
more difficult to manage and would likely require many variants to cover all shipping
segments but is more technology-neutral, and potentially better for fostering competition,
and for making progress on the cost of non-fuel components required to build and
operate zero-emissions ships.

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To provide industry stakeholders with a tangible legal product for use in taking the
concept forward, the report concludes with draft “Heads of Agreement” for each of
the two CfD options. These documents were drawn up by experienced law firm Pinsent
Masons, based on the findings of the report. They are concise framework documents that
can be used to outline an agreement in principle between parties and counterparties, laying
out how each CfD would work and under what terms it would operate. They are intended to
provide readers with an understanding of how the CfD might work in practice and enable
industry stakeholders to see the concrete details of a basic CfD contract, locate points of
agreement, and uncover issues that may require further negotiation.

In summary, this report provides readers with an in-depth understanding of the

difficulties facing a shipping industry looking to decarbonise as well as a potentially
powerful solution to enable it to do so. It is our hope that readers take from this analysis
the belief that a zero-emissions shipping future is an economically viable possibility.

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1. The aims of this report
An increasing number of large economies are committing to net-zero greenhouse gas (GHG)
emissions by 2050 including major emitters such as the UK, EU, China, Japan, Korea,
Canada, South Africa, Argentina and Mexico1. The shipping industry, under the guidance of
the International Maritime Organisation (IMO), is not yet aligned with these goals. The IMO’s
current target of 40% GHG emissions reductions by 2030 and at least 50% by 2050 (over a
2008 baseline), falls short of these wider ambitions2. The IMO’s Initial GHG Strategy for
decarbonisation also contains a guiding principle of eventual alignment with the Paris
Agreement, although meeting this objective remains some way off. More broadly, economies
committing to net zero are facing increasing attention from the international community on
the emissions of the heavy-transport sector, including shipping.

The decarbonisation3 of international shipping (henceforth ‘zero-emissions shipping’4)

presents a formidable challenge. Electrification is emerging as the solution of choice for light
duty road transport. It may also be appropriate for small, short-haul watercraft. Unfortunately,
the energy density requirements and sheer size of the electric powertrain and batteries
required to power a large ocean-going ship over long distances mean that electric shipping
is unlikely to be a viable option without a series of major unexpected technological
breakthroughs. Several alternative options for net-zero shipping remain. Almost all large
ships currently use liquid fossil fuels to power an internal combustion engine. In principle,
several net-zero-carbon fuel options are feasible for use in ships, including liquid hydrogen
(H2) or ammonia (NH3) generated from electrolysers powered by renewable energy;
synthetic carbon-based electro-fuels such as methanol (CH3OH) or methane (CH4)
generated using renewable energy; hydrogen fuel cells; modular nuclear reactors; and wind
power (in limited circumstances, and as a complement to a primary propulsion source).

All of these technologies are technically viable, but remain some distance away from full
commercialisation, with some more advanced than others. The key barriers to large-scale
private investment and adoption are well-known and include high perceived technology risks,
lack of supporting infrastructure, lack of project pipelines, lack of stable and scalable fuel
supplies, and perhaps most importantly the absence of carbon pricing (or its equivalent) on
existing fuels. These are difficulties that have been faced and dealt with successfully in other

1 Carbon Brief (2020). UNEP: Net-zero pledges provide an ‘opening’ to close growing emissions ‘gap’.
https://www.carbonbrief.org/unep-net-zero-pledges-provide-an-opening-to-close-growing-emissions-gap
2 IMO (2018) Initial IMO GHG Strategy. https://www.imo.org/en/MediaCentre/HotTopics/Pages/Reducing-greenhouse-gas-

emissions-from-ships.aspx
3 ‘Carbon’ is used here as a proxy for greenhouse gas emissions. The Fourth IMO GHG study found that carbon dioxide

accounted for 98% of greenhouse gas emissions from shipping, although upstream and operating emissions of methane,
nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride, and nitrogen trifluoride can also be significant.
4 This terminology is consistent with Getting to Zero coalition’s description of ‘zero carbon energy sources’. It includes zero-

emissions fuels derived from zero-carbon electricity and carbon capture and storage; and fuels derived from biomass in
which emissions from combustion are partially or fully offset in the production process. In all of these cases, there are still
net positive upstream greenhouse gas emissions in most circumstances. This means the resulting fuels are not strictly ‘net
zero’ on a well-to-wake basis unless combined with qualifying offsets, which should only be used subject to strict criteria.
For further details on definitions, see Smith, T. (2019) ‘Definition of zero carbon energy sources’. Getting to Zero Coalition..
For guidance on offset use, see University of Oxford (2020) ‘The Oxford Principles for Net Zero Aligned Carbon Offsetting.’
https://www.smithschool.ox.ac.uk/publications/reports/Oxford-Offsetting-Principles-2020.pdf
9
sectors in recent years, aided by policy and market instruments designed to promote private
sector investment and accelerate technological progress and commercial deployment.
Prominent examples include the use of feed-in-tariffs for solar energy in Germany, and the
use of contracts for difference for offshore wind energy in the United Kingdom (UK).

In its basic form, a contracts-for-difference (CfD) scheme allows a public sector or

administrative entity to meet the difference between the market price for a fuel or technology
(the ‘reference price’) and the ‘strike price’ required for the financial returns to the project
being financed to be sufficiently high for developers and private investors. When the strike
price is higher than reference price, the scheme in effect subsidises the producer of the fuel
or technology the difference, but when the reference price is higher, the producer pays back
the difference to the scheme. A key difference from a typical subsidy is that a CfD has a
fixed time limit, the “contract”, which avoids a common problem with removing subsidies
once they have served their purpose. A CfD can also include a competitive ‘reverse auction’
element whereby suppliers bid against each other to establish the ‘winning’ strike price, and
all bidders who offer a price below this strike price can win a contract with the scheme to
supply the fuel or technology at the strike price.

This report investigates the design and implementation of CfD mechanisms for international
shipping to support the sector’s decarbonisation. The purpose of such schemes is to
incentivise private investment and the scaling of production to establish the emerging
technologies and accelerate any potential for cost reductions. The primary requirements of
such mechanisms are:

• a transparent and effective reference and strike price.

• a robust payment settlement framework able to manage the international dimension
of shipping contracts.
• a credible enforcement mechanism for CfD obligations.
• an appropriate balance between competition, economic efficiency, technology
neutrality, and practical feasibility.
• a clearly defined scope and set of beneficiaries.

This report builds on detailed examination of the technical elements of different zero-
emissions shipping solutions carried out by others, past implementations of CfDs, and
extensive consultation with experts in industry, government, advocacy, and research, to
develop a workable CfD mechanism for promoting zero-emissions shipping.

Section 2 lays out the need for zero-emissions solutions in international shipping. Section 3
surveys the technology options currently being explored for zero-emissions shipping. Section
4 outlines the key barriers to adoption, and how similar barriers in other technologies have
been addressed through CfD mechanisms. Section 5 provides a summary of the stakeholder
engagement undertaken by the team to ensure that recommendations of this report are built
on the experience of industry stakeholders and are cognisant of their views. Section 6
outlines the design features of a CfD for zero-emissions shipping, based on technology
options, barriers to adoption, and the stakeholder engagement, to construct parameters for
workable CfDs. Finally, Section 7 provides a legal blueprint for the implementation of two
CfDs for international shipping, one based on fuel-only solutions and the other on total cost
of ownership.
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2. The need for zero-emissions shipping
2.1. Climate goals and the role of international shipping

The 2015 Paris Agreement sets out a global framework for the world’s governments to limit
the extent and impact of climate change. The Agreement’s stated ambition of keeping global
warming to well below 2°C above preindustrial levels, and to pursue efforts to limit the
increase to 1.5°C, requires a rapid and sustained decline in emissions in the coming
decades, reaching net-zero emissions between 2050 and 2070. To achieve limited
overshoot of the 1.5°C target, global net anthropogenic CO2 emissions will need to decline
by about 45% from 2010 levels by 2030, reaching net zero around 2050.5

In simple terms, by committing to reaching net zero, humans are committing to eventually
removing as much anthropogenic greenhouse gas emissions as they produce each year.
Reducing emissions is one of the more obvious means of achieving this goal but with hard-
to-abate sources of emissions it may be more cost-effective to pull emissions from the
atmosphere, or capture them during energy production from biomass sources, and store
them underground. For example, a viable solution consistent with the aims of zero-emissions
shipping would be to produce decarbonised shipping fuels from fossil fuels combined with
100% carbon capture and storage. It is, however, unlikely that this will be the most cost-
effective path for zero-emissions shipping given the alternative technologies available
(discussed further in Section 3).

Most global decarbonisation effort to date has focused on the power sector, which produces
the largest share of emissions of all sectors and is considered one of the easier sectors to
decarbonise. However, harder-to-abate sectors are increasingly coming under scrutiny as
the next-largest sources of emissions with less clear pathways to net zero. The challenge of
decarbonisation is particularly onerous for sectors that are hard to electrify or are dominated
by long-term assets with lengthy cost recovery periods. International long-distance shipping
falls cleanly into both these categories.

While the industry’s supervisory body and regulator, the IMO, has announced 2050
decarbonisation targets, and some major shipping firms, notably, Maersk (the world’s largest
container shipping line), have done the same, the industry has not yet identified a universally
accepted pathway to decarbonisation. Moreover, with lifetimes often exceeding 25 years,
ships commissioned today are likely to be operating well into the 2040s, making the
deployment of zero-emissions ships in the 2020s an imperative for the sector to align itself
with the Paris goals6. This also means that the transition to true net-zero emissions across
the shipping value chain must be realised within one-and-a-half generations of ships at

5 IPCC (2018): “Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-
industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response
to the threat of climate change, sustainable development, and efforts to eradicate poverty”.
6 ITF (2020) Future Maritime Trade Flows: Summary and Conclusions, ITF Roundtable Reports, No. 178, OECD Publishing,

Paris. https://www.itf-oecd.org/sites/default/files/docs/future-maritime-trade-flows.pdf
11
most.7 The coming decade will therefore prove crucial in developing, piloting, scaling, and
commercially incentivising the uptake of zero-emissions vessels.

Marine transportation8 accounts for an estimated 2.9% of global greenhouse gas (GHG)
emissions9,10. Even accounting for the COVID-19 pandemic, shipping emissions may
increase significantly from this (already high) baseline by 2050. The IMO’s Fourth GHG
Study predicts that under a range of plausible scenarios, the sector’s total emissions could
sit at 90-130% of 2008 emissions by 2050.11 Around 80% of global trade by volume took
place by sea in 2018,12 and shipping is likely to remain the dominant transport mode for
traded products. Its growing contribution to global GHG emissions and lack of commercially
viable decarbonisation options suggest efforts to decarbonise should be urgently
accelerated.

Requirements for decarbonising the various shipping sectors vary substantially between
short-sea, medium-distance, and deep-sea vessels. Since the international deep-sea
shipping segment produces more than 80% of global CO2 emissions from shipping13 and will
be hardest to decarbonise, it is sensible to focus on this sector.

The international container shipping industry and its supporting infrastructure is highly
concentrated both geographically, and in terms of ownership. Trade in containers is often
expressed by volume, in twenty-foot-equivalent units (TEU). In TEU terms, the world’s five
largest ports (all in China) controlled 19.5% of the 793 million TOE in global container freight
handled by ports in 2018.14 Over 60% of world container port throughput was estimated to
have gone through Asia in 2019.15 The top ten ports globally controlled 31% of freight, and
the top 20, 44%.16 The Asia-North America trade route was the world’s busiest in 2017,
followed by the Asia-Northern Europe and Asia-Mediterranean route.17 Five container ship
operators also control more than half of total global fleet capacity.18 As measured by the

7 Lloyd’s Register (2019) “Zero-Emission Vessels: Transition Pathways, https://www.lr.org/en-gb/insights/global-marine-

trends-2030/zero-emission-vessels/
8 Marine transportation includes domestic and international cargo-carrying and non-cargo commercial shipping, and fishing

vessels.
9 International Maritime Organisation (2020): “Fourth Greenhouse Gas Study 2020”. International Maritime organisation,

London:
https://wwwcdn.imo.org/localresources/en/OurWork/Environment/Documents/Fourth%20IMO%20GHG%20Study%20202
0%20-%20Full%20report%20and%20annexes.pdf
10 ETH Zürich, Amplifier (2019): “Towards net-zero. Innovating for a carbon-free future of shipping in the North and Baltic

sea”. https://fe8dce75-4c2a-415b-bfe4-e52bf945c03f.filesusr.com/ugd/0a94a7_47fc75affb6e41768a6c3e5f3a970039.pdf
11 IMO (2020): “Fourth Greenhouse Gas Study 2020.”
12 UNCTAD (2018) Review of Maritime Transport 2018. United Nations, New York. https://unctad.org/system/files/official-

document/rmt2018_en.pdf (p. 23).

13 DNV.GL (2019) “Energy Transition Outlook 2019”.
14 Authors’ calculations, based on World Shipping Council (2021) Top 50 World Container Ports

(http://www.worldshipping.org/about-the-industry/global-trade/top-50-world-container-ports); and UNCTAD (2020)

UNCTADStat Database (https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx?ReportId=13321)
15 UNCTAD (2020) Review of Maritime Transport 2020. (p.17, Figure 1.10).
16 Of the top 10, 7 are in China; the other three are in Singapore, South Korea, and the United Arab Emirates. Of the top 20

ports, 10 are in China, 2 in the US and 3 in Europe (Rotterdam, Antwerp, and Hamburg). The only UK port in the top 50 is
Felixstowe.
17 World Shipping Council (2021) About the Industry: Trade Routes. http://www.worldshipping.org/about-the-

industry/global-trade/trade-routes
18 UNCTAD (2020) Review of Maritime Transport 2018.

12
Herfindahl-Hirschman Index, industry concentration among container ship line operators has
increased steadily since at least 2010, with the sharpest annual increase seen from 2015-
2018 amid a surge of consolidation.19 In 2000, the ten largest container companies enjoyed
a market share of 12%; by mid-2019, this figure was 82%.20 Amid the economic strain
associated with the COVID-19 pandemic, further consolidation may well be expected.

The major non-container shipping segments, notably bulk and tanker shipping, have more
fragmented ownership structures, and voyage patterns that respond more readily to changes
in commodity prices and demand. In terms of physical ships, 43% of deadweight tonnage (a
measure of maximum weight a ship can carry) is in bulk carriers, 29% in oil tankers and just
13% in container ships.21

Two key international regimes currently regulate the environmental effects of shipping: the
IMO’s International Convention for the Prevention of Pollution from Ships (MARPOL), and
the UN Convention on the Law of the Sea (UNCLOS). Further voluntary performance
indicator frameworks have been selectively adopted, including the European Sea Ports
Organization, EcoPorts, Port Environmental Review System and the Green Marine
Environmental Program.22 Some ports, to reduce local pollution (e.g., Vancouver), require
certain berthed ships to use onshore electricity supplies instead of onboard generators,
allowing some degree of electrification (which can be net-zero-carbon if the electricity is
zero-carbon). Nonetheless, current measures to improve energy efficiency, use ‘shore
power’, use cleaner fossil fuels, and to capture some CO2 emissions through onboard
systems, appear insufficient if the industry is to realise net-zero-carbon by 2050.

The voluntary financial sector-led ‘Poseidon Principles’, targeting the container shipping
segment, were launched in 2019, with signatories committing to invest in support of the
IMO’s GHG emissions reduction goal and to revise their targets and expectations over time
in response to technological and policy change.23. In October 2020, the ‘Sea Cargo Charter’
was launched as an equivalent for the bulk charter segment.24

Existing mandatory environmental initiatives in shipping are largely governed by, or tied to,
IMO frameworks. The IMO Initial Strategy on the reduction of GHG emissions from ships25
was first adopted in 2018 and is due to be reviewed in 2023. It includes three components:

19 Charlampowicz, J. (2018) “Analysis of the market concentration of the container shipping markets – selected issues”. SHS
Web of Conferences 58(01005). https://doi.org/10.1051/shsconf/20185801005
20 Lasater, L. (2019, 25 July) “Is Market Concentration Leading to an Oligopoly?” Red Arrow Logistics.

https://www.redarrowlogistics.com/shipping/is-market-concentration-leading-to-an-oligopoly/
21 UNCTAD (2020) Review of Maritime Transport 2020. United Nations, New York. https://unctad.org/system/files/official-

document/rmt2020_en.pdf (p.37)
22 Walker, T.R., Adebambo, O. et al. (2019) “Environmental Effects of Marine Transportation”. In Sheppard, C. (ed.) World

Seas: An Environmental Evaluation, 2nd Ed. Academic Press, pp. 505-530. https://doi.org/10.1016/B978-0-12-805052-
1.00030-9
23 Poseidon Principles (2020). “How did we get there”. https://www.poseidonprinciples.org/about/how-did-we-get-there/
24 Sea Cargo Charter (2021). “About: A global framework for responsible ship chartering”.

https://www.seacargocharter.org/about/
25 IMO (2018, 13 April) “UN body adopts climate change strategy for shipping”.

https://www.imo.org/en/MediaCentre/PressBriefings/Pages/06GHGinitialstrategy.aspx
13
 • Implementation of further phases of the Energy Efficiency Design Index (EEDI),
introduced in 201126, which mandates minimum energy efficiency levels for different
ship types and size segments. As the regulation only affects new builds, and lifetimes
range between 25 and 30 years27, its emissions impact is slow to materialise and
relatively marginal.28
• Reduction of CO2 emissions intensity (per ‘transport work’) by at least 40% by 2030
on average, pursuing efforts to each 70%, against a 2008 baseline
• Reduction of total GHG emissions from international shipping by at least 50% by
2050 against a 2008 baseline, pursuing efforts to decarbonise fully in alignment with
the temperature goals of the Paris Agreement.

As Figure 1 shows, the changes required to achieve even these modest goals for CO2
emissions alone, particularly given projected emissions rises under business-as-usual, are
very substantial. The means by which the remaining 50% of emissions will be mitigated to
bring the sector in line with IPCC pathways is not clear.

Figure 1: Current and projected CO2 emissions from shipping for long-term scenarios in which GDP growth
tracks recent projections, and the land-based energy transition is consistent with ‘well below 2 degrees‘,
compared with the requirements of an IPCC 1.5 degrees pathway (Source: IMO 4th IMO GHG Study 2020)

In 2016, the IMO introduced a data collection system mandating the standardised collection
and reporting of a range of operational and emissions data from all ships exceeding 5,000

26 Marine Environment Protection Committee [MEPC] (2011, 15 July). Resolution MEPC.203(62): “Amendments to the
Annex of the Protocol of 1997 to Amend the International Convention for the Prevention of Pollution from Ships, 1973. As
Modified by the Protocol of 1978 Relating Thereto.”
https://wwwcdn.imo.org/localresources/en/KnowledgeCentre/IndexofIMOResolutions/MEPCDocuments/MEPC.203(62).p
df
27 ETH Zürich (2019) “Towards net-zero. Innovating for a carbon-free future of shipping in the North and Baltic sea”.
28 Technically and commercially mature efficiency measures, such as route and speed optimisation, improved hull and

surface designs, and wind assistance, have all been used to increase the efficiency of the current fleet for largely economic
reasons; these measures are however marginal relative to the ultimate net-zero target, and insufficient to substantially
reduce emissions in the medium term without emissions-free forms of propulsion.
14
gross tonnage from 2019 onwards.29,30 It does not include any requirement to reduce
reported emissions, but by measuring them, supports the tracking and management of
shipping emissions. In addition, IMO sulphur content regulations were introduced in January
2020 to enforce a maximum sulphur content of 0.5% on marine fuels.31 This effectively
prevents shipping from using the dirtiest forms of fuel, notably some forms of Heavy Fuel Oil
(HFO), without on-board scrubber technology. It does not, however, preclude the use of
other widely used oil-based fuels, such as Very Low Sulphur Fuel Oil (VLSFO) and Marine
Gas Oil (MGO).

Since the electricity sector has a clear path towards decarbonisation and the cost of
renewable electricity is likely to continue to fall32, the use of clean electricity to produce fuels
has been identified as a way forward for zero-emissions shipping. Such zero-carbon fuels
include ammonia and hydrogen and battery power generated using zero-carbon electricity
sources such as solar, wind and nuclear. Synthetic methane/methanol are carbon based but
can be “carbon-neutral” or “net-zero-carbon” fuels if direct air capture of CO2 is used in their
production (Figure 2). Biofuels are also a “net-zero-carbon” fuel option and can be used in
existing engines. Other fuel options include nuclear powered ships33, and sail- or sail-
assisted designs34. Few of these options, if any, are currently technologically and
economically viable (see Section 3 for more details), and none are operating at sufficient
scale, raising the need for supporting policies to accelerate progress towards cost parity with
oil- and gas-based fuels.

2.2. Setting course in time: avoiding stranded carbon assets in the shipping
industry

Given its significant contribution to global emissions and projected future growth,
accelerating efforts to achieve zero-emissions shipping is urgent from a climate and
environment perspective. The Getting to Zero coalition and UMAS estimates that enabling
decarbonisation in line with Paris goals would require 5% of the international shipping fuel
mix to come from zero emission fuels by 2030.35 Making progress towards decarbonisation
is also in the long-term interests of the industry in avoiding stranded costs and assets,
particularly as the likelihood of climate policy tightening increases. Some orders for zero-
emissions-capable vessels (primarily ammonia-ready and dual-fuel ships allowing operators
to switch to green fuels only once market conditions allow) are starting to be placed, but the

29 MEPC (2016, 28 October) Resolution MEPC.278(70): “Data collection system for fuel oil consumption of ships”.
https://marsig.com/data/_uploaded/downloads/MEPC.278(70).pdf
30 There are more regulations in place (EEDI, SEEMP) and currently under discussion (EEXI and CII).
31 PWC (2019). “IMO 2020 Regulation.” https://www.pwc.com/ng/en/publications/imo-2020-regulation.html
32 Farmer, J. D., & Lafond, F. (2016). “How predictable is technological progress?” Research Policy, 45(3), 647–665.

https://doi.org/10.1016/j.respol.2015.11.001
33 Liang, L.H. (2020, 4 November) “A nuclear option - Molten Salt Reactor to reduce shipping’s GHG emissions”. Seatrade

Maritime News. https://www.seatrade-maritime.com/environmental/nuclear-option-molten-salt-reactor-reduce-

shippings-ghg-emissions
34 Hellenic Shipping News (2019, 25 October). “Norsepower Rotor Sails Confirmed Savings Of 8.2% Fuel And Associated

CO2 In Maersk Pelican Project”. Hellenic Shipping news. https://www.hellenicshippingnews.com/norsepower-rotor-sails-

confirmed-savings-of-8-2-fuel-and-associated-co2-in-maersk-pelican-project/
35 Getting to Zero Coalition (2021) “Five percent zero emission fuels by 2030 needed for Paris-aligned shipping

decarbonization”. https://www.globalmaritimeforum.org/content/2021/03/Getting-to-Zero-Coalition_Five-percent-zero-
emission-fuels-by-2030.pdf
15
industry as a whole is not yet at the point where regulatory uncertainty outweighs the costs
of investing in relatively unproven, expensive, clean technologies. The current policy
environment - limited regulation and support schemes - further reduces the incentive for
individual shipping firms to act.

At present the wider regulatory environment is not conducive to ambitious decarbonisation

efforts. Shipping has so far been excluded both from direct obligations under the Paris
Agreement, and from major regional carbon-pricing systems. However, while the European
Union Emissions Trading System (ETS) has historically excluded marine transportation, the
industry is widely expected to be included in the ETS, with formal proposals to be published
in July 2021. These are expected to clarify whether just intra-EU emissions, or extra-EU
emissions as well (most relevant for international long-haul shipping), will be counted. The
UK’s draft Sixth Carbon Budget commits to reducing national emissions by 78% by 2035
against 1990 levels, including emissions from aviation and shipping for the first time.36 The
UK Department for Transport has also published a ‘clean maritime plan’ laying out its
roadmap for the transition to zero-emission shipping. It does not commit to a new headline
target, instead aligning itself with the IMO strategy of 50% emissions reductions by 2050.37

The adoption of legally binding emission reduction targets – either through regulation by the
IMO or by inclusion of parts of the shipping fleet into regional carbon-pricing systems – has
been on the horizon for some time.38,39 However, whilst the sector is expecting future
regulation (including becoming subject to the EU-ETS), and the IMO Initial Strategy provides
a clear target of at least halving total annual emissions by 2050, there is still no clear outlook
on emission pathways, carbon pricing, or other measures to reach even this, intermediate,
goal in the transition to zero-emissions shipping.40 The absence of clear signals creates
considerable ongoing planning and investment uncertainty that is hampering the
development, commissioning and adoption of non-fossil fuel options.

The multi-decadal lifetime of shipping assets aggravates this problem. Without regulatory
support for green shipping technologies, investors face an unattractive choice. Investing in

36 S&P Global Platts (2021, 20 April). “UK targets 78% cut in GHG emissions by 2035, to include aviation, shipping”.
https://www.spglobal.com/platts/en/market-insights/latest-news/coal/042021-uk-pm-johnson-to-back-78-cut-in-co2-
emissions-by-2035-report
37 Department for Transport (2019) Clean Maritime Plan.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/815664/clean-
maritime-plan.pdf
38 In laying out her 2020 agenda during her successful campaign for President of the European Commission, Ursula von der

Leyen noted “I will propose to extend the Emissions Trading System to cover the maritime sector”. This was repeated in
discussions around a European Green Deal and further details are expected in July 2021. See Von der Leyen, U. (2021). A
Union that strives for more: My agenda for Europe. https://ec.europa.eu/commission/sites/beta-political/files/political-
guidelines-next-commission_en.pdf Accessed 10 July 2020.
39 IMO (2020) “IMO Action to reduce Greenhouse gas emissions from international shipping: Implementing the Initial IMO

Strategy on Reduction of GHG Emissions from Ships”. International Maritime Organisation.

https://sustainabledevelopment.un.org/content/documents/26620IMO_ACTION_TO_REDUCE_GHG_EMISSIONS_FROM_I
NTERNATIONAL_SHIPPING.pdf
40 It is possible in principle to calculate a net-zero pathway in shipping by allocating a portion of the remaining global

carbon budget to the shipping sector and converting this budget into a trajectory for emissions intensity per nautical mile,
or per tonne-mile of freight transport, using a range of possible emissions pathways. Shipping firms would then be
allocated shares based on current activity and projected future market share. However, the utility of this analysis depends
on the assumed carbon budget restrictions being reflected in national and sectoral policies.
16
conventional technology is economically preferable in the short term but heightens stranded
asset risks in the medium term. Meanwhile, investing in new technologies that are yet to be
scaled commercially creates both technology and project delivery risks, and the high cost of
the resulting technology creates market risks for investors, since the alternatives are unable
to compete with fossil fuels. Even if parts of the shipping industry were to fall under regional
carbon pricing systems, uncertainty around the level of future carbon prices remains. Unless
investors take the expected carbon price over the lifetime of the vessel (rather than the
current carbon price) into account, incentives to invest in technology development remain
suboptimal (a phenomenon described elsewhere as “dynamic inefficiency”).41,42 Visibility on
emissions reduction pathways, and support for the implementation and scaling of new
technologies, are therefore in the interest of government, the shipping industry, and its long-
term financial backers.

In 2019, a consortium of five shipping associations including the International Chamber of

Shipping (ICS), which represents ship owners and operators, formally proposed an industry-
wide bunker fuel levy of US$2 per tonne to promote clean fuel use and raise modest
research and development funding for low-carbon vessels.43 In April 2021, a similar group
reiterated this call, and submitted a further proposal to the IMO calling for discussions on the
use of market-based-mechanisms to be brought forward by several years.44 In a sign of
tension between industry bodies and states in which a large number of ships are registered,
the Marshall and Solomon Islands demanded early in 2021 that the IMO impose a universal
levy on emissions starting at US$100 per tonne of CO2 equivalent, both as a price signal to
stimulate decarbonisation, and a source of R&D funds.45

There is considerable variance in ambition across individual firms. Some major shipping
companies, such as Maersk and CMB, have pledged to have commercially viable zero-
emissions vessels operating by 2030, and to be fully carbon neutral by 2050.46,47 Engine
producers like MAN already have approved marine fuel-gas systems for liquified hydrogen
on the market and are currently working on ammonia engines,48 while Mitsubishi has

41 Fankhauser, S. and Hepburn, C. (2010) “Designing carbon markets, part I: Carbon markets in time”. Energy Policy 38(8):
4363-4370. https://doi.org/10.1016/j.enpol.2010.03.064
42 del Rio, P. (n.d.) “The dynamic efficiency of ETS”. Consejo Superior de Investigaciones Científicas.

http://www.unife.it/economia/lm.economia/insegnamenti/economia-e-politiche-ambientali/materiale-
didattico/delrio.pdf
43 Chambers, S. (2019, 13 November). “Decarbonisation levy on bunker fuel under discussion at IMO.” Splash 247.

https://splash247.com/decarbonisation-levy-on-bunker-fuel-under-discussion-at-imo/
44 International Chamber of Shipping (2021). “Shipping bodies call on world leaders to bring forward discussions on global

market-based measures”. International Chamber of Shipping. https://www.ics-shipping.org/press-release/shipping-bodies-

call-on-world-leaders-to-expediate-global-market-based-measures/
45 The Maritime Executive (2021, 12 March) “Marshall and Solomon Islands Demand IMO Set $100/Ton Levy on Emissions”.

The Maritime Executive. https://maritime-executive.com/article/marshall-and-solomon-islands-demand-imo-set-100-ton-

levy-on-emissions
46 See, for example, Maersk (2019), “Towards a zero-carbon future”. Maersk.

https://www.maersk.com/news/articles/2019/06/26/towards-a-zero-carbon-future
47 Hellenic Shipping News (2020, 25 January). “CMB’s CO2 Pledge: Net Zero As From 2020 – Zero In 2050”. Hellenic

Shipping News. https://www.hellenicshippingnews.com/cmbs-co2-pledge-net-zero-as-from-2020-zero-in-2050/

48 Brown, T. (2019, 25 January). “MAN Energy Solutions: an ammonia engine for the maritime sector”. Ammonia Energy

Association. https://www.ammoniaenergy.org/articles/man-energy-solutions-an-ammonia-engine-for-the-maritime-
sector/
17
announced commercialisation of a turbine able to run on pure ammonia by 2025 that may
ultimately see applications in shipping.49

In a two-volume report released by the World Bank in April 2021, green ammonia and
hydrogen are described as having the most promising balance of favourable features relative
to other options for zero-emissions shipping.50 The report also finds that LNG is unlikely to
play a significant role in decarbonisation, including as a transitional fuel.51 In a recent report
published by the Environmental Defense Fund (EDF), “Sailing on Solar”, green ammonia is
presented as the most likely candidate for net-zero-carbon shipping fuel.52 Both reports also
caution that being able to use ammonia for rapid decarbonisation is conditional on the timely
implementation and support of policies promoting the adoption of green ammonia-based
technologies. A 2021 academic study concluded that meeting IMO 2050 goals would require
“a quantum leap in energy saving technologies and alternative fuels” which would require the
proper incentives to facilitate,53 echoing the conclusion of Balcombe et al’s 2019 study,
which finds that “decarbonisation will require stronger financial incentives”.54 This sentiment
was echoed by a majority of those we interviewed across all segments: shipping and energy,
industry bodies, research institutions, financial institutions, and government and NGOs.

In another report developed by the Global Maritime Forum and UMAS, the most effective
decarbonisation pathways for shipping adopted ammonia as the most feasible and cost-
effective fuel to meet the IMO emissions reduction targets.55 Lloyd’s Register and UMAS
have also published recent analysis on zero-emission vessels, weighing up a range of
scenarios, and highlighting pros and cons for all technology options.56,57,58 Finally, the IEA’s
flagship Energy Technology Perspectives report also contains a useful overview for maritime
shipping, including analysis on technology readiness and zero-emissions pathways.59

49 Mitsubishi Power (2021, 1 March). “Mitsubishi Power Commences Development of World's First Ammonia-fired 40MW
Class Gas Turbine System”. Mitsubishi Power. https://power.mhi.com/news/20210301.html
50 Englert, D., Losos, A., Raucci, C., and Smith, T. (2021a). The Potential of Zero-Carbon Bunker Fuels in Developing

Countries. World Bank, Washington, DC. World Bank. https://openknowledge.worldbank.org/handle/10986/35435 .

51 Englert, D., Losos, A., Raucci, C., and Smith, T. (2021b). The Role of LNG in the Transition Toward Low- and Zero-Carbon

Shipping. World Bank, Washington, DC. World Bank. https://openknowledge.worldbank.org/handle/10986/35437

52 Ash, N. and Scarborough, T. (2019). “Sailing on Solar: Could green ammonia decarbonise international shipping?”

London. Environmental Defense Fund and Ricardo Energy & Environment.

https://europe.edf.org/file/399/download?token=agUEbKeQ
53 Psaraftis, H.N. and Kontovas, C.A. (2021) “Decarbonization of Maritime Transport: Is There Light at the End of the

Tunnel?” Sustainability 13(1):237. https://doi.org/10.3390/su13010237

54 Balcombe, P. et al (2019) “How to decarbonise international shipping: Options for fuels, technologies and policies”.

Energy Conversion and Management 182(15): 72-88. https://doi.org/10.1016/j.enconman.2018.12.080

55 Raucci, C., Bonello, J.M., Suarez de la Fuente, S., Smith, T., and Søgaard, K. (2020) “Aggregate investment for the

decarbonisation of the shipping industry”. UMAS. https://www.globalmaritimeforum.org/content/2020/01/Aggregate-

investment-for-the-decarbonisation-of-the-shipping-industry.pdf
56 International Chamber of Shipping (2021). “Shipping bodies call on world leaders to bring forward discussions on global

market-based measures”. International Chamber of Shipping. https://www.ics-shipping.org/press-release/shipping-bodies-

call-on-world-leaders-to-expediate-global-market-based-measures/
57 Lloyd’s Register (2018) “Zero-Emission Vessels 2030. How do we get there?”. https://www.lr.org/en-

gb/insights/articles/zev-report-article/.
58 Lloyd’s Register (2020) “Zero-emission vessels: Transition Pathways”. https://www.lr.org/en-gb/insights/global-marine-

trends-2030/zero-emission-vessels/
59 IEA (2020) Energy Technology Perspectives 2020. https://www.iea.org/topics/energy-technology-perspectives

18
A 2020 ICS report indicated that while the shipping industry is acutely aware of the need to
decarbonise, a technologically neutral financing approach allowing for the development of
multiple zero-emissions solutions is favourable.60 This report looks to the UK offshore wind
industry, which has seen substantial successes in turbine adoption, cost reduction, and
technological innovation through the implementation of CfDs.61 This report seeks to bridge
the financing gap between the potential producers of green fuels and the broader maritime
industry through an approach not dissimilar to that used in the UK offshore wind industry.

60 International Chamber of Shipping (2020). “Catalysing the fourth propulsion revolution”. Marisec Publications.
https://www.ics-shipping.org/wp-content/uploads/2020/11/Catalysing-the-fourth-propulsion-revolution.pdf
61 Jennings, T., Andrews Tipper, H., Daglish, J., Grubb, M. and Drummond, P. (2020). Policy, innovation and cost reduction in

UK offshore wind. Bartlett Institute for Sustainable Resources and Carbon Trust. https://prod-drupal-
files.storage.googleapis.com/documents/resource/public/Policy-innovation-offshore-wind-report-2020.pdf
19
3. Zero-emissions shipping technology options
The shipping industry’s current fuel profile remains almost exclusively dominated by
emission-intensive fossil fuels. The most common marine fuels (HFO, VLSFO and MGO62)
are all used in internal combustion engines (ICEs). More recently, the use of liquified natural
gas (LNG), offering GHG emission reductions of up to ~20%63 has been increasing.64
Switching to less polluting fossil fuels is not, however, is unlikely to achieve the IMO goal of
50% GHG emissions reductions, and extremely unlikely to enable zero-emissions shipping
by 2050.

This menu of alternatives includes technologies at different stages of maturity in innovation

and implementation. All zero-emissions fuels can be characterised as either zero-carbon or
net-zero-carbon (Figure 2). Zero-carbon fuels include ammonia and hydrogen (in
compressed form for use in internal combustion engines or stored in fuel cells) and battery
power given they are generated using zero-carbon electricity sources such as solar, wind,
and nuclear. Other zero-carbon fuel options include nuclear powered ships65, and sail- or
sail-assisted designs66, are feasible in principle, although nuclear powered ships are likely to
face technological, regulatory, and political barriers not faced by other net-zero-carbon
options, and sails would be expected to only operate alongside a complementary means of
propulsion.

Net-zero-carbon fuels contain carbon but do not increase the total anthropogenic carbon
balance in the atmosphere. Examples include synthetic fuels (synfuels) such as
methane/methanol where direct air capture of CO2 is used in their production, and biofuels
which are attractive since they can be used in existing engines. However, synfuels are
expensive considered and biofuels may not scale well in the long run due to the pressures
they could place on arable land needed for food production.

62 Speirs, J., Balcombe, P., Blomerus, P. Stettler, M., Brandon, N. and Hawkes, A. (2019) “Can natural gas reduce emissions
from Transport? Heavy good vehicles and shipping” Sustainable Gas Institute, Imperial College London.
https://www.imperial.ac.uk/sustainable-gas-institute/research-themes/white-paper-series/white-paper-4-can-natural-gas-
reduce-emissions-from-transport/
63 This refers to direct emissions from combustion. Depending on the extraction, refining and supply of LNG, total process

emissions may be more or less than those for standard fuels.

64 DNV.GL (2019) “Energy Transition Outlook 2019” DNV.GL. https://eto.dnv.com/2019/index.html
65 Liang, L.H. (2020, 4 November) “A nuclear option - Molten Salt Reactor to reduce shipping’s GHG emissions”. Seatrade

Maritime News. https://www.seatrade-maritime.com/environmental/nuclear-option-molten-salt-reactor-reduce-

shippings-ghg-emissions
66 Hellenic Shipping News (2019, 25 October). “Norsepower Rotor Sails Confirmed Savings Of 8.2% Fuel And Associated

CO2 In Maersk Pelican Project”. Hellenic Shipping news. https://www.hellenicshippingnews.com/norsepower-rotor-sails-

confirmed-savings-of-8-2-fuel-and-associated-co2-in-maersk-pelican-project/
20
Figure 2: Carbon-based vs non-carbon-based fuels. Note that production of hydrogen-based fuels from
methane will likely require offsets on top of Carbon Capture and Storage (CCS) to ensure carbon neutrality.
Adapted from ETH Zurich (2019) Towards net zero – comparison of zero-carbon

Energy density, safety, and volume requirements limit the range of potential net-zero-carbon
fuels suitable for shipping. Six key approaches or combinations thereof are conceivable for
application in different industry segments:

• Direct use of renewable electricity through batteries (for smaller ships and shorter
distances).
• Indirect use of renewable electricity through carbon-based synthetic fuels
(methanol/methane) with CO2 sourced from atmospheric capture or from the
combustion of biomass/biogas.
• Indirect use of renewable electricity through non-carbon-based synthetic fuels
produced through electrolysis (hydrogen/ammonia); 67
• Bioenergy-derived carbon-based biofuels.
• Nuclear-powered shipping or using nuclear energy to generate clean fuels such as
hydrogen or ammonia
• Carbon-based fuels with 100% carbon capture and storage (CCS)

Figure 3 compares International Energy Agency (IEA) estimates of the total ownership cost
of different fuels, including supporting infrastructure, for a new ship including an estimate for
a nuclear fuelled ship provided in Appendix A2. Based on cost alone (measured in TCO
terms), ammonia appears the most promising option. The analysis also suggests that
ammonia is the cheapest net-zero-carbon option on a TCO basis; and that the storage costs
of hydrogen are very high. The nuclear fuel option is for a ship powered by a nuclear reactor.
An alternative that might be more cost-competitive is to produce ammonia by extending the
life of existing nuclear power plants, which can have a very low cost of electricity since their
capital costs have already largely been recovered (discussed in more detail in Appendix A2).
The cost of synthetic fuels using direct air capture to offset CO2 emitted in combustion
represents the largest cost uncertainty.

67We do not consider hydrogen produced from landfill gas with steam reformation, as it is not scalable to the required
volumes.
21
Even for ammonia a significant cost gap remains between the two fossil fuel options (VLSFO
and LNG) and the net-zero-carbon ones, as shown in Figure 3. VLSFO requires almost no
infrastructure costs, while LNG has similar infrastructure costs but negligible storage costs
and the lowest fuel cost of all currently available options.

80
Total cost of ownership (USD$/km)

70
60
50
40
30
20
10
0
VLSFO LNG ICE Hydrogen ICE Ammonia FC Hydrogen Synthetic fuels

Base ship Fuel cell / engine Storage

Infrastructure Fossil fuel Delivered hydrogen / ammonia
Synthetic fuel (best case) Synthetic fuel (air capture)

Figure 3: Current total cost of ownership of fuel and powertrain alternatives for large bulk carrier ships. ICE =
Internal Combustion Engine, FC = Fuel Cell. Sources: IEA (2019)68

While decarbonisation of the maritime industry will likely be achieved through the
development of numerous technologies simultaneously, including batteries and hydrogen,
ammonia was identified in most reports and by interviewees as the top contender for the
decarbonisation of international shipping. Other solutions including fuel cells and batteries,
nuclear, and to a lesser extent sail or wind-assist, and carbon capture and storage (CCS),
which may play a role in the decarbonisation of the cruise, short-haul, and ferry segments.69

3.1. Batteries

Batteries are electrochemical systems that store electric power with very high
responsiveness. They are technically attractive both because they represent a direct use of
electricity, which is more efficient in terms of propulsion than other technologies, and
because if the electricity source is renewable, they have the potential to be zero-carbon.
Battery power is an established, commercially viable technology, already relatively cheap
with still-declining costs. For short-distance vessels, battery-electric power has already
demonstrated a positive business case and is being deployed in certain niche markets such

68 IEA (2019) “Current and future total cost of ownership of fuel/powertrain alternatives in a bulk carrier ship”.
International Energy Agency, Paris. https://www.iea.org/data-and-statistics/charts/current-and-future-total-cost-of-
ownership-of-fuel-powertrain-alternatives-in-a-bulk-carrier-ship
69 De Beukelaer, C. (2020, 5 November). “Sail cargo: Charting a new path for emission-free shipping?” UNCTAD Transport

and Trade Facilitation Newsletter No. 88. https://unctad.org/news/sail-cargo-charting-new-path-emission-free-shipping

22
as short-distance ferries, tug, and work boats. Near full-electric vessels are increasingly
being used in the Scandinavian short-haul ferry market.9

However, battery propulsion has its limitations: Lithium-Ion batteries have around 1/30th of
the volumetric energy density of MGO (see Figure 4), effectively ruling out any full-battery
system on deep-sea vessels based on weight and space requirements. Since most shipping
emissions come from deep-sea vessels and they are the focus of this report, batteries are
not discussed further as a decarbonisation option.

Figure 4: Relative volumetric energy density of shipping fuel alternatives

3.2. Biofuels

Alongside batteries, biofuels are the only other currently commercially available alternative
for zero-emissions shipping.12 Biofuels are made from organic feedstock such as oils,
sugars, or waste, and include HVO (hydrogenated vegetable oil), BTL (biomass-to-liquids),
bioethanol, biodiesel and LBG (liquefied biogas, mainly methane). Biofuels can be
considered carbon-neutral where enough CO2-equivalent is sequestered in production to
offset emissions from combustion.70 This ignores net emissions from land use change, which
can be significant for fuel crops, and the possibility significant environmental damage such
as biodiversity loss. Studies looking at lifecycle-emissions from manufacturing biofuel further
challenge the assumption of inherent carbon-neutrality.71

70 Svanberg, M. Ellis, J., Lundgren, J. and Landälv, I. (2018) “Renewable methanol as a fuel for the shipping industry,”
Renewable and Sustainable Energy Reviews 94:1217-1228.
71 DeCicco et al. (2016): “Carbon balance effects of U.S. biofuel production and use”. Climatic Change 138>667-680.

https://link.springer.com/content/pdf/10.1007%2Fs10584-016-1764-4.pdf
23
Biofuels are logistically attractive because, as with road transport, they can be easily
integrated into existing systems without significant modifications. As they are compatible with
existing engines, onboard systems, and bunkering infrastructure72 they form part of the
‘bridging philosophy’73 of decarbonised shipping, which holds that it is optimal to invest in the
most decarbonisation-flexible solutions in the short term. So far, high costs have limited the
uptake of biofuels, but several large-scale demonstrations projects are active, including the
CMA CGM White Shark container vessel (bunkered with biofuel in 2019)74; the Van Oord
and Shell marine biofuel pilot (HAM 316)75; and the Norwegian Hurtigruten and Biokraft
commitment to supply biogas at scale by 202776.

Well-founded scalability concerns limit the role of biofuels in the longer term. There is
already steep competition for land between agriculture and fuel-crop production. The many
other useful applications of biofuels (including in road transport, aviation, and industry)
intensify this competition. A 2019 Sustainable Shipping Initiative inquiry concluded that
“there remains no clear consensus on whether there is sufficient sustainable biomass for
shipping as well as other sectors”, “a biomass-based decarbonisation pathway for shipping
comes with considerable supply risks” and that purpose-grown crops would need to be
“certified using leading sustainability standards and […] sourced within regions with strong
land governance, carbon and biodiversity credentials” to be considered sustainable in the
first place.77 While water-efficient plants grown on non-agricultural land78 may loosen these
constraints somewhat, we do not currently consider biofuels a viable long-term and large-
scale solution for decarbonising shipping.

3.3. Fossil fuels with carbon capture and storage

An option with support from several stakeholders interviewed for this report is the use of
hydrogen-based shipping fuels produced from fossil fuels coupled with carbon capture and
storage (CCS). This involves using fossil fuels to convert water to hydrogen (electrolysis)
and then using CCS to pull the CO2 out of the exhaust generated by burning the fossil fuel
use and injecting it into subsurface geological formations for permanent storage. Fuels
produced in this manner are referred to as ‘blue’ hydrogen and ‘blue’ ammonia. They are
mostly considered interim measures, designed to help decarbonise the shipping industry in

72 Ash, N., Sikora, I. and Richelle, B. (2019) “Electrofuels for shipping: How synthetic fuels from renewable electricity could
unlock sustainable investment in countries like Chile”. Environmental Defense Fund and Ricardo Energy & Environment.
https://www.edfeurope.org/file/519/download?token=3VSQ5LR6
73 DNV.GL: (2019) “Energy Transition Outlook 2019”.
74 Bioenergy International (2019, 25 March) “CMA CGM White Shark bunkers green marine biofuel oil in Rotterdam trial”.

Bioenergy International. https://bioenergyinternational.com/storage-logistics/cma-cgm-white-shark-bunkers-with-green-

marine-biofuel-oil-in-rotterdam-trial Accessed 30 July 2020.
75 Van Oord (2019, 19 September) “Van Oord and Shell together in biofuel pilot for vessels”. Van Oord.

https://www.vanoord.com/news/2019-van-oord-and-shell-together-biofuel-pilot-vessels. Accessed 30 July 2020.

76 Biokraft (2019, 24 May). “Hurtigruten partners with Biokraft in record-breaking biogas deal”. Biokraft.

https://www.biokraft.no/press-release-hurtigruten-partners-with-biokraft-in-record-breaking-biogas-deal/ Accessed 30
July 2020.
77 Sustainable Shipping Initiative (2019). “The role of sustainable biofuels in the decarbonisation of shipping”. Sustainable

Shipping Initiative. https://www.ssi2040.org/wp-content/uploads/2019/12/SSI-The-Role-of-Sustainable-Biofuels-in-the-

Decarbonisation-of-Shipping-Full-report.pdf
78 See, for example, Mason, M. (2020, 10 March) “At the Glasgow climate conference, the UK could kickstart a green tech

revolution”. The Guardian. https://www.theguardian.com/commentisfree/2020/mar/10/glasgow-climate-conference-uk-

green-tech-revolution-cop26
24
the nearer term and facilitate a move to truly ‘green’ alternatives, buying time for green fuel
production to grow to sufficient scale to compete economically with conventional fuels.
Several problems have been associated with such an approach including upstream
emissions from the production of fossil fuels generally not being captured, the difficulty of
fully capturing carbon emissions from combustion, and the potential for further investment in
gas & CCS infrastructure diverting investment away from genuine net-zero-carbon energy
technologies (i.e., solar and wind) that have much greater potential for medium-and long-
term cost declines.

A similar option that is technically feasible but not seriously considered by the shipping
industry is for carbon-based fossil fuels to continue as the main source of propulsion energy,
coupled with their emissions being offset by some form of negative emissions technologies
(NET). NETs normally involve pulling CO2 from the atmosphere and injecting it into
subsurface geological formations for permanent storage, as with CCS, but other carbon
offsetting options have been explored including enhanced weathering and nature-based
sequestration. We have mentioned this option here for completeness but there are
significant drawbacks associated with this solution, notwithstanding that such negative
emissions technologies are currently extremely expensive (approx. $600/ton of carbon79)
and have yet to be tested at scale.

3.4. Synthetic carbon-based electro-fuels

Synthetic electro-fuels (“synfuels” henceforth) can be carbon- or hydrogen-based. Carbon-

based synfuels include a wide range of synthetic hydrocarbons produced from hydrogen and
carbon oxides and are made using several different chemical processes.80 These include
synthetic methane, methanol, and diesel (often referred to as e-methane, e-methanol, etc)81.
“Green” synfuels conventionally refer to fuels produced using renewable electricity, and
whereby enough CO2 is captured from the atmosphere to offset emissions from
combustion.82

Like biofuels, e-fuels can generally be directly substituted for conventional petroleum-derived
hydrocarbons. Their volume and energy density are comparable to conventional fuels, and
they can make use of existing bunkering infrastructure. Successful engine conversion from
MGO to (conventional) methanol has been demonstrated in a dual-fuel medium speed
engine application on the “Stena Germanica”, in operation since 201583, although it is not
clear how widely other ship and engine types can be viably retrofitted this way.

79 Tollefson, J. (2018) Sucking carbon dioxide from air is cheaper than scientists thought, Nature News, 07 June 2018,
https://www.nature.com/articles/d41586-018-05357-w
80Ash, Sikora, and Richelle (2019) “Electrofuels for shipping”.
81 Hänggi, S., Elbert, P., Bütler,T., Cabalzar,U., Teske, S., Bach, C., Onder, C., (2019). “A review of synthetic fuels for

passenger vehicles”. Energy Reports 5: 555-569. https://doi.org/10.1016/j.egyr.2019.04.007

82 The Royal Society (2019) “Policy Briefing: Sustainable synthetic carbon-based fuels for transport”. The Royal Society.

https://royalsociety.org/-/media/policy/projects/synthetic-fuels/synthetic-fuels-briefing.pdf
83 Stefenson, P (2016). “Methanol: The marine fuel of the future. Updates from the Stena Germanica”

http://www.methanol.org/wp-content/uploads/2016/07/Updates-from-Stena-Germanica-Per-Stefenson.pdf Accessed 30
July 2020.
25
The major obstacle to synfuels’ use for large-scale shipping decarbonisation is that carbon-
based synfuels generally need to include direct air capture to be carbon neutral, which is
currently only provided at high cost by a handful of companies. Consequently, methane and
methanol synfuels, and direct air capture of CO2 are not yet available in sufficient
commercial quantities or at competitive prices.

3.5. Green hydrogen

Unlike carbon-based synfuels, hydrogen does not emit any CO2 when combusted to
generate power. Green hydrogen production from water (through electrolysis powered by
renewable electricity) uses commercially mature technologies that have been proven at
scale.84 The one-step production process makes it less energy-intensive to produce than
synfuels or ammonia and gives it a cost advantage over ammonia and synfuels on an
energy content basis. Each MWh of energy stored as hydrogen requires around 16% less
input energy than ammonia, and 60-70% less than e-methanol.

The main obstacle for hydrogen is storage and transportation. One representative of the
shipping and energy sector suggested that “transporting hydrogen destroys the business
case for it”. Even liquified or bound to an organic carrier (as LOHC), hydrogen has lower
volumetric energy densities than ammonia and carbon-based synfuels (by a factor of 2-4;
see Figure 4). Liquid hydrogen requires cryogenic storage, greatly increasing the costs of
on-board and onshore storage (see Appendix A3). Hydrogen is also highly flammable, and
safe storage is cost-intensive. Storage demands also reduce the overall process efficiency
on an energy basis. and there is no existing distribution and bunkering infrastructure.

Like all fuels produced using renewable electricity, green hydrogen can be produced without
generating additional GHG emissions. This does not account for the embodied carbon in
renewable electricity generation equipment and infrastructure, however, which can vary
considerably depending on the context.

3.6. Green ammonia

Green ammonia has been identified as a promising long-term net-zero-carbon fuel in the
shipping sector.85 Ammonia is produced from hydrogen combined with atmospheric nitrogen
through the energy-intensive Haber-Bosch process. Although ammonia is already widely
produced and traded for use in fertiliser and other industrial applications, it is predominantly
produced using hydrogen derived from fossil fuels (‘grey ammonia’).

Ammonia has more than double the volumetric energy density of liquid hydrogen and can be
stored in liquid form, at atmospheric pressures and relatively normal temperatures (see
Figure 4). It poses a much lower fire risk than hydrogen and hydrocarbon fuels. Although it is
highly toxic and corrosive, established standards for safe handling, storage, and transport of
ammonia in bulk already exist. It is less energy- and cost-intensive to store and transport
than hydrogen; and, since ammonia supply chains already exist, is supported by an existing

84Ash, Sikora, and Richelle (2019) “Electrofuels for shipping”.

85De Vries, N. (2019). “Safe and effective application of ammonia as a marine fuel”. TU Delft.
http://resolver.tudelft.nl/uuid:be8cbe0a-28ec-4bd9-8ad0-648de04649b8.
26
global logistical infrastructure. Despite its two-stage production process, therefore, ammonia
provides a potentially faster route to decarbonisation than hydrogen. One interviewee
remarked that “ammonia is the best vector for exporting hydrogen” and that that it is the
“most promising due to the scalable market”. Another representative of the shipping industry
concluded that “the hydrogen future we see is actually an ammonia future”, a sentiment
echoed by many interviewees.

Ammonia is not very compatible with existing bunkering infrastructure and cannot be burned
in existing internal combustion engines without modifications. Fully ammonia-burning
engines or fuel cells are estimated to be commercially viable within 3-5 years.86 Ammonia’s
high auto-ignition temperature means it requires co-firing with a ‘pilot’ fuel in both
compression and spark ignition engines. This function could be served by breaking down or
‘cracking’ the ammonia to produce hydrogen using cracking equipment onboard the ship.
Green ammonia shipping fuels can be virtually carbon-free on a lifecycle basis if there is no
embodied carbon in the infrastructure required to produce the energy 87. Although ammonia
is not as dense as synfuels, its energy production efficiency, at 50-60%, is greater than for
synfuels (around 40%), meaning that less renewable input is required per unit of fuel.31

Several green ammonia projects are at development and pilot stages, both in fuel
production, and its use in ships. The Yara Pilbara plant in Australia uses renewable
electricity to produce carbon-neutral ammonia,88 while MAN Energy Solutions is expected to
build an ammonia engine for use by 2022,89 and an Equinor and Eidesvik offshore project
aims to test ammonia fuel cells on deep sea sailing by 2024.90

3.7. Nuclear

Nuclear energy provides two options for zero-emissions shipping. Firstly, as a zero-carbon
energy source for producing green fuels such as hydrogen/ammonia and synfuels, and
secondly as a direct source of energy for propulsion onboard ships. The key benefit of nuclear
is that once a reactor is built it can have a long lifetime with relatively low operating costs,
enabling low-cost generation of clean fuels, or propulsion for vessels that never need
refuelling. However, while maritime nuclear propulsion is technologically mature, the adoption
of nuclear reactors onboard civilian, commercial shipping vessels poses several unique and
significant challenges. The capital costs associated with the implementation of generators are
substantial while the risks pertaining to safety, environment, disposal, public perception, and
regulation are substantial.

86 ETH Zürich, Amplifier (2019): “Towards net-zero. Innovating for a carbon-free future of shipping in the North and Baltic
sea”.
87 If the production of the solar panels and wind farms uses fossil fuel-based energy, then there will be ‘embodied

emissions’, but in the future even this energy can come from renewable sources.
88 Brown, T. (2020, 9 April). “Green ammonia plants win financing in Australia and New Zealand”. Ammonia Energy

Association. https://www.ammoniaenergy.org/articles/green-ammonia-plants-win-financing-in-australia-and-new-
zealand/. Accessed 30 July 2020.
89 Brown, T. (2019). “MAN Energy Solutions: an ammonia engine for the maritime sector”.
90 Equinor (2020, 23 January). “The world’s first carbon-free ammonia-fuelled supply vessel on the drawing board”.

Equinor. https://www.equinor.com/en/news/2020-01-23-viking-energy.html. Accessed 30 July 2020.

27
Nuclear technology appears to be in a state of flux with many of the earlier reactors built for
commercial purposes either retired or nearing the end of their lifetime (i.e., typically ~30 years),
but with a potentially positive future given climate change concerns.91 While a number of
advanced economies with nuclear energy are experiencing near-term closure of a large
number of nuclear plants (the IEA found that 25% of existing nuclear capacity in advanced
economies is expected to be shut down by 2025)92, life-extension to 80 and even 100-years
of lifetime are feasible.93 A few countries have chosen not to build any new reactors, notably
Japan and Germany, but the Asian nuclear industry is in rapid growth, with China’s recently
doubling its nuclear capacity during their 13th Five-Year Plan period from 2016 to 2020.94

To account for the full scope of nuclear options and the evolving nature of the industry, the
following scenarios were considered when evaluating the viability of nuclear energy for green
shipping:

1. Current nuclear reactor technology as a source of indirect energy for production of

hydrogen and/or ammonia
2. New nuclear reactor technology as a source of indirect energy for production of
hydrogen and/or ammonia
3. Current nuclear reactor technology used as a direct source of energy for steam
propulsion within a ship
4. New nuclear reactor technology (small modular reactors) used as a direct source of
energy for steam propulsion

The most viable option at present for the nuclear energy in international shipping appears to
be scenario 1 - the production of hydrogen or ammonia from existing nuclear plants. A certain
subset of current reactor technologies could be used as a cost-effective source of indirect
energy for production of hydrogen and/or ammonia. Specifically, nuclear plants that have
operated for more than 30-years of operation, in certain markets, which are capable of
supplying energy for as low as $25/MWh, making them close to producing hydrogen at a cost
competitive with fossil fuels.95

New nuclear plants, scenario 2, including plants that have operated for less than 30 years
generally have a much higher energy cost (i.e., >$50/MWh and up) and are currently not cost-
competitive with renewable energy unless they can be dedicated to purely generating clean
fuels. It should be noted that the direct or indirect production of hydrogen or ammonia from
nuclear energy is not currently a commercial activity, with only some states exploring
technological development (see Appendix A2). Early research in the US suggested that

91 International Atomic Energy Agency (2021) “Safe Long Term Operation of Nuclear Power Plants.”
https://www.iaea.org/publications/7871/safe-long-term-operation-of-nuclear-power-plants.
92 IEA (2019) “Nuclear Power in a Clean Energy System”. https://www.iea.org/reports/nuclear-power-in-a-clean-energy-

system
93 Bandyk, M. (2021) “How long can a nuclear plant run? Regulators consider 100 years”. Utility Dive.

https://www.utilitydive.com/news/how-long-can-a-nuclear-plant-run-regulators-consider-100-years/597294/
94 Conca, J. (2021). “China Will Lead the World in Nuclear Energy, along with All Other Energy Sources, Sooner than You

Think.” Forbes Magazine, April 23, 2021. https://www.forbes.com/sites/jamesconca/2021/04/23/china-will-lead-the-

world-in-nuclear-energy-along-with-all-other-energy-sources-sooner-than-you-think/.
95 Bakirov, M., A. Cserhati, Y. Dou, Esquivel Estrada, S. Hercberg, J. J. Kwon, Ž. Tomšić et al. (2018) "Economic Assessment of

the Long Term Operation of Nuclear Power Plants: Approaches and Experience.". IAEA Nuclear Energy Series. https://www-
pub.iaea.org/MTCD/Publications/PDF/PUB1813_web.pdf
28
nuclear generation of hydrogen / ammonia might only be competitive in certain applications.96
More recent research has pointed to the fact that advanced nuclear technologies are also
capable of providing high quality steam to newer generations of electrolysers (i.e., Solid-Oxide
Electrolysis Cell (SOEC) technology) potentially supporting higher rates of efficiency in
hydrogen and ammonia production. A 2020 IRENA analysis found that once the costs of
electrolyser technology fall to $130 kW/hr (USD) at 5 TW installed capacity, hydrogen costs
could be less than $5/kg, competitive with fossil fuel-based hydrogen production (see
Appendix A2). However, engineering risks remains with relying on new nuclear for clean fuel
production given that renewables have achieved a much more convincing learning rate
compared to nuclear over the last two decades.97

Nuclear technology ships (scenario 3) are reasonably prevalent today, in the form of nuclear-
powered submarines for military application, with an estimated 150 in operation today.98 There
have been four commercial nuclear surface vessels, one in which remains in operation today,
the Russian Sevmorput. However, as noted in a 2019 assessment from Imperial College
London and University of London, “this ship experiences restrictions in which ports it can visit,
due to civilian evacuation plans and fears at docks.”99 Other commercial ships built using
existing nuclear technology have been retired due to similar restrictions and failure to achieve
economic parity with conventional fuels.

Advanced nuclear technology ships operate more safely, efficiently and, once the technology
is implemented at scale, are expected to have reduced capital costs. As such, they could be
a commercially viable prospect for decarbonising shipping. Ships powered with advanced
nuclear technology (scenario 4) are currently still only in a research and development phase
with newer small modular reactors not likely to achieve cost parity with alternatives, such as
ammonia-powered ships, until at least 2030 (i.e., in comparison to scenarios 1 and 2 above).
Nonetheless, it is reasonable to assume that advanced nuclear technology could be beneficial
in commercial shipping in the future.

While the technical realization and deployment of advanced small modular reactors for nuclear
powered ships unfolds, the regulatory path for operation must also be navigated. Due to
political and environmental concerns, nuclear vessels often are left with a limited number of
ports that they may call upon.100 Widescale adoption of reactors aboard commercial vessels
would require updates to the IMO Code of Safety for Merchant Nuclear Ships and International
Atomic Energy agency agreements consistent with international norms and politics
surrounding the distribution of nuclear fuels and technologies.101 The rapid adoption of

96 Keuter, D. (2010), "Nuclear H2 production–a utility perspective.", Fourth Information Exchange Meeting Oakbrook,
Illinois, USA 14-16 April 2009. p289-298 https://read.oecd-ilibrary.org/nuclear-energy/nuclear-production-of-
hydrogen_9789264087156-en
97
Way, R., Mealy, P. & Farmer, J. D. Estimating the costs of energy transition scenarios using probabilistic
forecasting methods. (2020), https://www.inet.ox.ac.uk/publications/no-2021-01-estimating-the-costs-of-
energy-transition-scenarios-using-probabilistic-forecasting-methods/
98 World Nuclear Association (2021) “Nuclear-Powered Ships”. https://world-nuclear.org/information-library/non-power-
nuclear-applications/transport/nuclear-powered-ships.aspx
99 Balcombe et al (2019) “How to decarbonise international shipping”.
100 Halim, R. A., Kirstein, L., Merk, O., Martinez, L.M. (2018). "Decarbonization Pathways for International Maritime

Transport: A Model-Based Policy Impact Assessment" Sustainability 10(7): 2243. https://doi.org/10.3390/su10072243

101 Ibid.

29
nuclear-based fuels as a means of meeting decarbonisation targets would require rapid
international agreements and treaty amendments that would almost certainly prevent
meaningful adoption before 2030. As a result of the international politics of nuclear energy and
its applications, nuclear shipping may be best managed through bespoke bilateral agreements
where political will already exists.102

In terms of funding nuclear technologies through contracts for difference, clean fuels produced
by nuclear energy could enter into both a fuel-only or total cost of ownership CfD format. As a
nuclear-powered ship would require a very specific build and does not require refuelling over
its lifetime, only a total cost of ownership format of a CfD would work (see section 6 for more
details).

3.8. Wind and Sail

In addition to nuclear, wind propulsion technologies have been proposed and utilised on a
small-scale basis to improve energy efficiency and reduce emissions in the shipping sector.
Wind technologies are estimated to reduce fuel consumption in the range of 10-30% with
CO2 abatement reductions in the range of 10-60% dependent on the wind technologies.103

A variety of wind technologies exist serving multiple functions at various stages of

development ranging in levels of maturity.104 Sails, both soft and rigid as well as kites and
rotors offer an intermittent supply of propulsion requiring the pairing with other technologies
while turbines and rotors support electric propulsion or battery recharge.105

Development and installation costs vary drastically based on technology type and will require
pairing with other net-zero-carbon fuel solutions to meet the energy demands of modern
shipping vessels.106

102 Ibid.
103 Ibid.
104 ClearSeas 2020. “Back to the Future: Wind Power and the Decarbonisation of Shipping.” Accessed 29 March 2021.

https://clearseas.org/en/blog/back-to-the-future-wind-power-and-the-decarbonization-of-shipping/
105 Halim, Ronald A.; Kirstein, Lucie; Merk, Olaf; Martinez, Luis M. (2018). "Decarbonization Pathways for International

Maritime Transport: A Model-Based Policy Impact Assessment" Sustainability 10, no. 7: 2243.
https://doi.org/10.3390/su10072243
106 Bonduelle, A., Métivier, S., and Rynikiewicz, C. (2015). “Sail into a sustainable future: Roadmap for Sail Transport”.

http://www.nsrsail.eu/wp-content/uploads/2015/12/Roadmap-SAIL-Transport-WEB-Bonduelle-WP4.pdf. Accessed 29
March 2021.
30
4. Supporting the adoption of zero-emissions
solutions in shipping
Even as the cost of alternative fuels declines and the technical feasibility of their use rises,
major challenges remain. The shipping industry is used to capital-intensive, long-lifetime
investments, but it is also intensely competitive.107 Although ships themselves are essentially
regulated by a single body, the IMO, the vast complexity of ownership, leasing, financing,
and operation structures complicate efforts to coordinate decarbonisation investments
effectively.

Barriers standing in the way of a fast adoption of green shipping technologies can be broken
down into three main categories – economic, technological, and environmental – all of which
will need to be effectively addressed by regulatory and market-based instruments for net-
zero-carbon fuels to succeed. The UK government commissioned a report on barriers to
commercial deployment of emission reduction options, which is a useful complement to the
analysis presented here108.

4.1 Economic barriers

All net-zero-carbon shipping fuel alternatives described in Section 3 are currently more
expensive than conventional VLSFO and MGO fuels (see Figure 5). HFO, a refinery
residual, generally trades below the Brent crude oil price and remains the most widely used
engine fuel on ships.109 Annex VI of the IMO MARPOL Convention introduced sulphur
content regulation in 2005, leading to gradual, ongoing replacement of HFO by MGO and
other higher quality alternatives requiring minimal operational changes.110 The reduction in
sulphur content limits to 0.5% mandated by IMO 2020 is accelerating this shift.111 MGO has
historically traded around 20% above the Brent crude oil price112 and, with IMO 2020 in
place, is the most appropriate benchmark price against which net-zero-carbon fuels should
be assessed.

107 Monacelli, N. (2018) “Improving maritime transportation security in response to industry consolidation”. Homeland
Security Affairs 14. https://www.hsaj.org/articles/14257.
108 Fitzpatrick, N. et al (2019). “Reducing the Maritime Sector’s Contribution to Climate Change and Air Pollution”. UK

Department for Transport.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/815671/identificatio
n-market-failures-other-barriers-of-commercial-deployment-of-emission-reduction-options.pdf
109 IMO (2020) “IMO 2020 – cutting sulphur oxide emissions”. International Maritime Organisation.

http://www.imo.org/en/mediacentre/hottopics/pages/sulphur-2020.aspx Accessed 27 July 2020.

110 Billing, E., Fitzgibbon, T. and Shankar, A. (2018) “IMO 2020 and the outlook for marine fuels”. McKinsey & Company.

https://www.mckinsey.com/~/media/McKinsey/Industries/Oil%20and%20Gas/Our%20Insights/IMO%202020%20and%20t
he%20outlook%20for%20marine%20fuels/IMO-2020-and-the-outlook-for-marine-fuels.pdf
111 IMO (2019) “Frequently Asked Questions: The 2020 global sulphur limit”

http://www.imo.org/en/MediaCentre/HotTopics/GHG/Documents/2020%20sulphur%20limit%20FAQ%202019.pdf.
Accessed 27 July 2020.
112 DNV.GL. (2018) “Assessment of selected alternative fuels and technologies”. DNV-GL Maritime.

https://sustainableworldports.org/wp-content/uploads/DNV-GL_2018_Assessment-of-selected-alternative-fuels-and-tech-
report.pdf
31
Figure 5: Cost estimates for different brown and green shipping fuels

The cost drivers for net-zero-carbon fuels vary by fuel type and are divided into a marginal
fuel production cost differential, and upfront investment requirements.

For green hydrogen, both the fuel cost differential and upfront investments are cost drivers.
Whilst green hydrogen is the cheapest fuel to produce on an energy-content basis, it is much
less energy-dense and carries additional requirements on board a ship in terms of bunkering
infrastructure and transport. To be used, hydrogen needs to either be liquified (requiring
energy-intensive cryogenic storage) or bound to organic carriers (LOHC). Even in liquid or
organic form, hydrogen is still less energy-dense than the alternatives, requiring fuel tanks
on board to be 4-6 times larger than on conventional vessels (Figure 4). Additional costs are
incurred in onshore transport and bunkering. If used in fuel cells to provide electric
propulsion, hydrogen has the potential to lower operating costs, but competitiveness remains
some way off.

For synthetic carbon-based fuels and liquid ammonia, the fuel itself is the main cost driver.
Whereas carbon-based synfuels can be employed with few changes to bunkering systems
and ship engines, liquid ammonia requires changes to handle its corrosive properties (see
Appendix A3). Ammonia used in fuel cells, like hydrogen, has the potential to lower
operating costs in the longer-term.

32
 Additional fuel Relative costs drivers Additional upfront
costs investments

Figure 6: Relative cost drivers for different net-zero-carbon fuel options.

Fuel-cost ranges are highly uncertain, since they depend on the cost of electricity,
electrolyser technology, methane synthesis technology, carbon capture technology,
transportation, and bunkering cost, with the relative importance of each depending on the
fuel. Costs for green hydrogen, green ammonia and green synthetic methane vary
substantially across studies. The lower bounds of future cost estimates generally reflect
(widely expected) declines in the cost of renewable electricity, as well as more uncertain cost
declines for electrolyser capacity. Upper bounds on future costs of traditional fuels are driven
by carbon prices or equivalent regulation.

By surveying a range of studies on the current costs of alternative fuels, we estimate green
hydrogen energy costs at around $147/MWh58, green ammonia at $181/MWh59, and green
synthetic methane costs of around $244/MWh60, compared to $40-70/MWh for MGO from
2015-2020 (see Figure 5). Costs for green hydrogen are forecasted to drop rapidly in the
next ten years. Price estimates for 2030 range from 30% (IEA) to 60% (Hydrogen Council)
lower than today in real terms, bringing it into a similar range to MGO with no carbon price
on a fuel-only basis113. Green ammonia is expected to see similar declines using similar key
technologies (e.g., electrolysers),114, although by less given the additional steps required.

On a total cost basis, green hydrogen is likely to remain more expensive than MGO and
green ammonia, given the greater need for upfront investment and opportunity costs from
lost storage space. Estimates including crew, engine, storage, fuel, and opportunity cost
could see hydrogen around 30% more expensive than ammonia solutions.115

113 IRENA (2019) Renewable Power Generation Costs in 2018. International Renewable Energy Agency, Abu Dhabi.
https://www.irena.org/-/media/Files/IRENA/%20Agency/Publication/2019/May/IRENA_Renewable-Power-Generations-
Costs-in-2018.pdf
114 Cesaro, Z., Ives, M., Nayak-Luke, R., Mason, M. & Bañares-Alcántara, R. (2021) “Ammonia to power: Forecasting the

levelized cost of electricity from green ammonia in large-scale power plants.” Applied Energy 282, 116009.
https://doi.org/10.1016/j.apenergy.2020.116009
115 ETH Zürich, Amplifier (2019): “Towards net-zero. Innovating for a carbon-free future of shipping in the North and Baltic

Sea”.
33
Regardless of ultimate fuel choice, the adoption of net-zero-carbon fuels in shipping will
raise costs for operators, although industry professionals suggest demand for shipping is
sufficiently inelastic that this will have little effect on demand, and that the primary concern
expressed in stakeholder interviews was with the maintenance of a level playing field in the
transition from one set of fuels to another. A complication for the widespread adoption of
green ammonia and hydrogen, and to a lesser extent synfuels, is the absence of
standardised certification processes, regulatory standards, and large-scale fuel suppliers.
Until these fuels are competitively priced, cohesive standards are essential to support a
market. This in turn requires industry or regulatory agreement on standards for blue, grey,
and green hydrogen, ammonia, and e-fuels such that buyers can be confident in fuels
meeting low- or net-zero-carbon criteria. The international nature of the fuel supply and
bunkering industry is likely to further complicate certification efforts.

Decarbonised shipping also has implications for geopolitics and trade. The sensitivity of net-
zero-fuels to electricity prices incentivises production near high-resource renewable energy
sites. While this does not pose a problem for low-volume production (the UK can, for
example, site hydrogen-producing electrolysers near North Sea offshore wind resources),
space and load factor constraints will emerge as the fuel supply market expands and
becomes more competitive. Regulatory or market instruments for net-zero shipping should
encourage cost-effective production of net-zero-carbon fuels, with potential implications for
existing shipping corridors, which may adapt to allow refuelling or bunkering in locations
where these fuels are cheapest.

A final challenge – and potentially an opportunity – is the structure of the shipping industry
itself. The many stakeholders in a ship’s construction and operational activity mean its
interaction with different sovereign and corporate entities is diverse. The container segment
is highly concentrated among large firms and has a higher proportion of owner-operators,
while ownership structures in the bulk and tanker segments are more fragmented. The
vested interests of dominant shipowners and operators, and oil majors supplying shipping
fuels (particularly large LNG suppliers looking to sell into shipping markets), can slow
progress, but equally, commitments by a small number of large firms, particularly in the
container segment, can accelerate investment in net-zero-carbon fuel supply and
infrastructure and generate positive externalities by lowering cost for smaller players.
Concentration of marine traffic through a relatively small number of major ports presents
similar opportunities for policies and instruments adopted by a small number of individual
governments or ports to have an outsize impact on industry trends.

4.2 Technological barriers

Renewable electricity-powered electrolysis is a key technology for all synthetic fuels, as

green hydrogen is required for both green ammonia and synthetic methane production.
Whilst hydrogen is an established feedstock, only around 4% of global hydrogen supply is
produced via electrolysis.116 Most existing capacity is based on chlor-alkali (ALK)

116
IRENA (2018): “Hydrogen from renewable power: Technology outlook for the energy transition”. International
Renewable Energy Agency, Abu Dhabi. https://irena.org/-
/media/Files/IRENA/Agency/Publication/2018/Sep/IRENA_Hydrogen_from_renewable_power_2018.pdf
34
electrolysers, but prototypes and demonstration projects of solid oxide electrolyser cells
(COEC) and proton exchange membranes (PEM) are being explored.

ALK technology has been in use for decades (albeit in small volumes). PEM electrolysers
have become commercially available in recent years and are gaining market traction117 due
to their flexibility and smaller lifecycle footprint. Flexible operation and higher efficiencies at
lower load factors are helpful in working with intermittent renewable electricity supply. While
further improvements are widely expected, more research and larger-scale operation are
required to fully understand the scope for further cost and material declines, higher
efficiencies, and higher load factor flexibilities.

The step from green hydrogen to green ammonia – nitrogen fixation through a Haber-Bosch
process – has been technologically mature for more than a century, with existing research
focusing on agile Haber-Bosch processes (e.g., at the Thyssen-Krupp Port Lincoln Pilot
project in Australia) to optimise use with intermittent electricity supply. The production of
green synthetic methane (and other, carbon-based e-fuels) from green hydrogen involves
two additional processes, neither of which is established at scale: direct capture of
atmospheric CO2118 and large-scale methane synthesis. Learning curves here are more
difficult to predict than for electrolysers, due to the nascent nature of the technologies and
the lack of deployment to scale.

A range of demand-side technologies are also required in ship engine design, on-board
storage, on-board safety, bunkering and onshore transport. Green hydrogen and ammonia
can be burned in ICEs and fuel cells. As the shipping industry predominantly uses large
diesel engines, ICEs are an easier initial entry point for new fuels. MAN Energy Solutions, a
major ship engine designer, is developing ammonia ICEs.119 Ammonia has a narrow
flammability range with combustion conditions becoming more unstable at very low and high
engine speeds. Increased usage will no doubt promote solutions including the use of
hydrogen as a ignition fuel.120 Hydrogen, in contrast to ammonia, is highly flammable,
potentially creating safety problems on board. In the medium term, hydrogen and ammonia
fuel cells have the potential to reduce overall energy use and operating costs through
electric propulsion (offsetting the additional energy conversions required with the far greater
efficiency of electric motors). ETH Zürich and Amplifier anticipate commercialisation within 5-
10 years.121

4.3 Environmental and Safety barriers

Environmental impact and safety are critical issues for marine fuels. Spills and leakages of
oil, and of hazardous and noxious substances (HNS), pose potentially catastrophic
environmental risks with long-term effects, while fires, explosions and exposure to toxins

117 Ibid.
118 Two companies currently provide commercial direct air-capture (Carbon Engineering in Canada, and Climeworks in
Switzerland), at a cost of approximately US$ 600 per tonne of CO2 https://www.nature.com/articles/d41586-018-05357-w
119 Brown, T. (2019). “MAN Energy Solutions: an ammonia engine for the maritime sector”.
120 Comotti, M.; Frigo, S. (2015) “Hydrogen Generation System for Ammonia–Hydrogen Fuelled Internal Combustion

Engines”. International Journal of Hydrogen Energy 40(33):10673-10686. https://doi.org/10.1016/j.ijhydene.2015.06.080

121 ETH Zürich, Amplifier (2019): “Towards net-zero. Innovating for a carbon-free future of shipping in the North and Baltic

sea”.
35
pose risks to those handling fuels.122 The last decade has seen ten marine fuel spills
exceeding 700 tonnes.123 Measures for reducing the risk of these occurrences, such as the
double hulling of ships, are well established. By contrast, there is a relative
underdevelopment of safety standards for other HNS, including ammonia, despite similar
levels of attributable accidents between such chemicals as cargo and oil-based fuels.124

While standards exist for the transport and treatment of all of the net-zero-carbon fuels under
consideration, each carries distinct environmental and safety concerns (see Technical
Appendix A2 for more information). The IMO’s International Code of Safety for Ship Using
Gases or Other Low-flashpoint Fuels (IGF) and International Code for the Construction and
Equipment of Ships Carrying Liquefied Gases in Bulk (IGC)125 apply to all gaseous and low
flashpoint fuels. The IGF has detailed provisions for natural gas in liquid or compressed form
(LNG, CNG), with regulations for methanol and low-flashpoint diesel fuels under
development. Ships installing other low-flashpoint fuel systems are required to demonstrate
compliance with the IGF Code. Neither hydrogen nor ammonia use, or storage are yet
covered by the IGF, although rules are under development and are expected to feature in its
next amendment.126,127

• Hydrogen is highly flammable and must be stored either under pressure (800 bar),
or at -253°C in cryogenic tanks. Both are potentially dangerous: pressurised gas can
explode when heated, and cryogenic storage can cause burns or injuries. Hydrogen
is not-toxic, however, and spills of liquified or compressed hydrogen are not thought
to have serious environmental consequences. Regulation typically limits the
distribution of hydrogen on land128, and the proportion of hydrogen that can be
deployed in natural gas pipeline systems. There are published guidelines129 on the
use of cryogenic tanks (also used for LNG), but knowledge and legal gaps remain in
hydrogen fuel safety standards, especially measures to reduce the severity and
likelihood of fires and explosions130.

122 See Appendix for a more detailed summary of Hazard Statements from the UN Globally Harmonised System of
Classification and Labelling of Chemicals (GHS) for a range of potential shipping fuels.
123 ITOPF (2020) Oil Tanker Spill Statistics 2019. ITOPF, London.

https://www.itopf.org/fileadmin/data/Documents/Company_Lit/Oil_Spill_Stats_brochure_2020_for_web.pdf
124 Häkkinen, J., & Posti, A. (2015). “Port accidents involving hazardous substances based on FACTS database analysis.” In:

Proceedings of the 38th AMOP Technical Seminar on Environmental Contamination and Response.
125 For further information on the IMO IGF Code, see https://www.imo.org/en/OurWork/Safety/Pages/IGF-Code.aspx.
126 ETH Zürich, Amplifier (2019): “Towards net-zero. Innovating for a carbon-free future of shipping in the North and Baltic

sea”. p.15.
127 DNV.GL (2019) “Energy Transition Outlook 2019”.
128 For example, international regulation (ADR) forbids road transport in certain tunnels.
129 From the EIGA, the ISO, the IMO and CEN.
130 For example, adequate ventilation, explosion venting and suppression, isolation, containment, blast walls and sensing

and means to relieve pressure in closed systems will need to be installed. For further detail on hydrogen safety issues, see
Pritchard, D.K., Royle, M. and Willoughby, D. (2009) “Installation permitting guidance for hydrogen and fuel cell stationary
applications: UK version”. Health and Safety Executive. https://www.hse.gov.uk/research/rrpdf/rr715.pdf. For further
detail on safety issues in using ammonia as a shipping fuel, see De Vries (2019). “Safe and effective application of ammonia
as a marine fuel”.
36
 • Ammonia can be stored at -33°C and is less flammable than conventional oils, but is
acutely toxic and corrosive, making it a high-risk chemical to transport.131 It can
severely damage skin, eyes and lungs and exposure for 10 mins at 2,700 ppm can
be lethal. A spill would have severe environmental consequences, killing most
aquatic organisms in close proximity, with long lasting effects including
eutrophication.132 Although regulatory infrastructure for safe transportation, handling
and storage of ammonia exists, including exposure limits and protective equipment
requirements for those handling it, it cannot currently be used as marine fuel under
the IGC code. Limiting exposure to the environment and handlers would require ultra-
safe designs of tanks, continuous ventilation systems, and flares to burn leakages133.
• Methanol is mildly corrosive, and toxic at high concentrations. However, a methanol
fuel spill would have less environmental impact than ammonia134, and it is not
classified as a marine pollutant by the IMO, meaning it can be carried in tanks along
the length of the hull, unlike conventional fuels135,136,137,138. The flashpoint (minimum
ignition temperature) falls below the minimum for marine fuels in the IMO Safety of
Life at Sea Convention (SOLAS), meaning risk assessment or evaluation must be
carried out for each use of methanol, demonstrating fire safety equivalent to
conventional marine fuels.
• Methane is similar to LNG (as its largest chemical component) and poses similar
hazards when cryogenically stored.139 Methane is not toxic but leakages (fugitive
emissions, also known as ‘methane slip’) into the atmosphere, including from
upstream processes, can substantially reduce its climate benefits. The global
warming potential of methane is 28 times higher than CO2 on a 100-year basis or 84
times higher on a 20 year basis140.

The cost of transport and insurance of different fuels is a partial proxy for the implied
expense and risk associated with doing so and reflects the relative challenges associated
with each potential fuel.141 The differences in costs for different fuels as a percentage of their

131 Ammonia ranks 7th in the IMO list of top 20 chemicals likely to pose the highest risk of being involved in an HNS
incident. See ITOPF (2012). TIP 17: Response To Marine Chemical Incidents. ITOPF Technical Information Paper, 17.
https://www.itopf.org/knowledge-resources/documents-guides/technical-information-papers/; Karakavuz, A., Tokgoz,
B.E., Zaloom, V., Marquez, A., 2020. "Risk assessment of commonly transported chemicals in the Port of Houston,"
International Journal of Critical Infrastructures, Inderscience Enterprises Ltd, vol. 16(1), pages 38-52.
132 Ash and Scarborough (2019) “Sailing on Solar”.
133 De Vries (2019). “Safe and effective application of ammonia as a marine fuel”.
134 Methanol is dangerous to humans, but humans are uniquely sensitive to methanol poisoning.
135 Brynolf, S. (2014). “Environmental Assessment of Present and Future Marine Fuels.” Chalmers University of Technology.

https://core.ac.uk/reader/198036870
136 IRENA (2019) Hydrogen: A Renewable Energy Perspective. International Renewable Energy Agency.

https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2019/Sep/IRENA_Hydrogen_2019.pdf
137 ITOPF (2012). TIP 17: Response To Marine Chemical Incident
138 Svanberg et al (2018) “Renewable methanol as a fuel for the shipping industry”.
139 DNV.GL. (2018) “Assessment of selected alternative fuels and technologies”.
140 The official GWP value for methane has changed between successive iterations of the IPCC Assessment Reports, with

AR4 reporting 25 and AR6 reporting 28. https://www.ghgprotocol.org/sites/default/files/ghgp/Global-Warming-Potential-

Values%20%28Feb%2016%202016%29_1.pdf
141 The OECD data on CIF-FOB (Cost, Insurance and Freight – Free on Board) ratios are an indirect measure of

transportation costs expressed as a percentage of the merchandise trade flow that have been estimated by an economic

37
value (Figure 7) indicates that ammonia, hydrogen and liquified gas products stand out at a
clear disadvantage relative to conventional oil products.

Transport and Insurance

12.00

10.00

8.00
% share of value
(imports to the UK,
average across bilateral 6.00
partners, average 2013-
2017)
4.00

2.00

0.00
Ammonia Hydrogen Crude oil (eg Non-crude oil Gas (eg LNG)
MGO)

Figure 7: Transport and insurance costs for selected fuels as % of value. imports to the UK, average across
bilateral trading partners, average 2013-17. Source: OECD Database. Measure: Cost, Insurance and Freight -
Free on Board (CIF-FOB).

Considering these environmental and safety concerns, supporting regulation (in IGF/IGC
Codes and elsewhere) will be necessary to properly manage the risks and liabilities
associated with the use of net-zero-carbon fuels. Regulation and legislation for the use of
these fuels elsewhere in the supply chain largely already exists, but guidelines specific to
their use as marine fuel will provide essential clarity to operators. The safety of crews is also
a top priority for operators. The shipping industry has substantial experience in moving
dangerous and toxic products, and with the correct training, regulation, and buy in, concern
for crew safety can likely be sufficiently alleviated.

4.4 Regulatory support for overcoming barriers to adoption

While each net-zero-carbon fuel option carries its own technological and safety-related
difficulties, common to all these options is the cost of the fuel as a key barrier to adoption.
Regulatory or market-based support for net-zero shipping should, therefore, seek to address
this issue if it is to encourage private capital to finance scale-up and mass adoption. As
Figure 4 demonstrates, green hydrogen, ammonia, and synfuels are all significantly more
expensive than conventional shipping fuels on a fuel-only basis. Technological progress,
electricity cost declines and carbon price changes are expected to reduce and eventually

gravity model (see Miao, G. & Fortanier, F. (2017) “Estimating Transport and Insurance Costs of International Trade”. OECD
Statistics Working Papers 2017/4, OECD Publishing. DOI: 10.1787/8267bb0f-en). Average CIF-FOB for bilateral trade with
the UK is shown, as an indication of the relative risks.
38
eliminate this cost premium142, but in the short term, high investment risks (including policy-,
price- and market risk) present major roadblocks to would-be investors in the sector.

Policies for promoting net-zero shipping should therefore both address the cost gap, and,
where appropriate, the risks facing investors. Private finance far exceeds government
funding, so it is key that such a policy incentivises private investment. A successful policy
framework should also minimise policy risks by providing a stable, predictable incentive
package that is unlikely to be affected by changes of governments. It should address other
risks within government control (such as decarbonisation targets or CO2 prices) by issuing
positive relative price signals for green fuels and supporting the establishment and
expansion of a core market for these fuels. These goals can be achieved without
undermining competition, and well-designed policy can gradually move towards competitive
markets for net-zero-carbon fuels without causing undue disruption to first-mover suppliers
and users. As with other green technology sectors, technology and project development
risks remain best handled by private sector developers and investors.

Policy support for net-zero shipping is likely to take a number of forms, expressed as a range
of instruments and regulations including the direct provision of early-stage R&D and Capex
support as subsidies or tax credits for developers, capital providers, and early adopters in
the shipping industry including owners and operators. These and other policies may aid
developers and investors in recovering of capital costs, developing storage and transport
infrastructure, and compensate for market risks and uncertainty in the early stages of sector
development. The aim of this report is to investigate the viability of employing a specific
policy instrument, contracts for difference (CfD). The remainder of this report will focus on
developing such a policy instrument for the decarbonisation of shipping.

4.5. Contracts for difference in net-zero shipping

The main purpose of a CfD, like any subsidy mechanism, is to create incentives to close the
cost gap between an old technology and a new one. Unlike other support mechanisms, CfDs
can in principle achieve this objective without unduly distorting the market and do so at
limited cost to government. A CfD mitigates the market risks faced by suppliers of a new,
high-cost commodity by paying the supplier the difference between a predetermined
reference price reflecting the old technology (in this case, the cost of MGO shipping fuel) and
a ‘strike price’ set at the value required for the new technology to be viable. The strike price
can be determined either administratively or through a competitive auction in which bidders
submit prices and the lowest bid(s) is awarded the contract, subject to meeting specified
conditions. When the reference price is lower than the strike price, the supplier is paid the
difference. This ensures that the supplier receives a guaranteed minimum price for the
duration of the CfD. In most CfD mechanisms, if the reference price exceeds the strike price,
the supplier repays the subsidy. The contracting parties are typically a private
developer/investor and a government, or government-backed, counterparty responsible for
making and receiving payments.143 The private party to a CfD would normally be the supplier

142 Ives, M. C. et al. (2021) A new perspective on decarbonising the global energy system. Oxford University Smith School of
Enterprise and the Environment. https://www.energychallenge.info/report/
143 In the UK’s case, the counterparty is a government-owned independent body, the Low Carbon Contracts Company

(LCCC). The LCCC administers the establishment, auctioning, and settlement of CfD schemes.
39
of the fuel, infrastructure or and/or service being subsidised. CfD can be combined with other
policy measures, including measures to help developers and investors recover fixed (capital)
costs, and carbon pricing regimes.

CfDs have been used successfully to promote investment and accelerate learning rates for
renewable energy.144 In the UK, the Contracts-for-Difference scheme for supporting low-
carbon electricity generation, implemented as part of wider electricity market reforms, is
generally viewed as a success. It covers a range of low-carbon technologies and started in
2014 with an ’administered’ first round offering relatively generous strike prices for different
technologies. Uptake was high and considerable criticism was focussed on the generous
nature of the scheme to suppliers. However, later rounds moved to a reverse auction
process (in which suppliers bid for support providing the lowest strike price they believed
they could operate under) which saw strike prices drop considerably. Nonetheless, the cost
of the scheme remained high, since producers supplied more electricity than expected (and
were paid on the basis of electricity supplied, not for capacity built), and the reference price
fell with wholesale electricity prices, increasing the size of the ‘difference’ being covered.
Despite these potential inefficiencies, support for the scheme continued as industry lobbied
for stability, and the success of the scheme in delivering low-carbon electricity and lowering
costs of technologies became clearer 145. For offshore wind in particular, the scheme has
been credited with success in attracting significant private investment into the sector and
contributing to a dramatic decline in levelized costs, while also hedging market risks to
investors at an appropriately low cost to government compared to other financial tools such
as direct subsidies and feed-in-tariffs.

Despite this positive experience, it is important to keep in mind the dependencies and
potential adverse impacts of CfD schemes. For the UK energy market, its success was
heavily dependent on the policy landscape that proceeded it, namely the Renewables
Obligation (RO). The RO placed an obligation on electricity suppliers to source an increasing
proportion of their electricity from renewable sources. This came into effect in 2002 (for
England, Wales, and Scotland, and 2005 for Northern Ireland) and meant the CfD scheme
had an emerging renewables industry at its start. Had the scheme started with a less mature
industry it is far from certain it would have delivered as successfully. This points to a wider
issue around the potential impacts on competitiveness of CfD schemes. In a reverse auction
mode, incumbents and larger companies will have a clear economies-of-scale advantage
allowing them to bid with lower strike prices, meaning the scheme could reinforce or raise
barriers to new entrants in an industry. Uncertainty on costs can also be an issue depending
on how a scheme is designed. If the reference price is variable, and is lower than expected
on average, the scheme will be more expensive to the government; if suppliers are able to
supply more than expected, the costs can rise too.

Translating the CfD concept from renewable energy projects to net-zero shipping requires
careful consideration of a number of complicating factors, including the potential for
regulatory leakage to other jurisdictions, the need to develop substantial supply chain

144 Grubb, M. and Newbery, D. (2018). "UK Electricity Market Reform and the Energy Transition: Emerging Lessons". The
Energy Journal, International Association for Energy Economics 0(6).
145 Ibid.

40
infrastructure, and perhaps most importantly, the lack of a stable transport market for most of
the net-zero-carbon fuels. This was a point made quite clear by some interviewees who
expressed concerns that the shipping industry was too complex for a CfD to succeed.
Shipping industry stakeholders interviewed expressed an aversion to anything that might
disrupt the “level-playing-field” as it had with a fluid, market constrained product like
electricity.

To function optimally, a CfD should be developed around a reference price that is well-
established, as liquid as possible, and sufficiently well-understood for government and the
private sector to develop reasonable estimates of upside and downside risks associated with
entering a CfD contract. For renewable applications, this is usually the wholesale price of
electricity or a variant thereof. For shipping, the design of a reference price depends on what
exactly the CfD is subsidising.

Section 5 summarises the views of stakeholders across several different groups on the
viability and design features of a hypothetical CfD for net-zero shipping. Section 6 combines
these findings with independent research to propose workable designs for a net-zero-carbon
shipping CfD. Template legal documents for each CfD option are outlined in Section 7.

41
5. Understanding stakeholder views on CfDs
for zero-emissions shipping
A clear aim for this report was for the recommendations to be built on the experience, views,
and concerns of industry stakeholders. Accordingly, we conducted almost forty semi-
structured online interviews with stakeholders from the shipping industry and industry
bodies, government, regulators, energy providers, academics, non-governmental
organisations, and academia. All interviews were conducted under Chatham House rules,
such that any views and statements are associated only with the group to which the
respondent belongs. These stakeholder groups are summarised in Table 1.

Table 1: Interview Subjects by Stakeholder Group

Group Code Number Description

Company representatives from the shipping

and energy industry – those most likely to be
Shipping & Energy Ship 8
the first party in a contract-for-difference
agreement.

Shipping industry representative institutions

and regulatory bodies, such as the
Industry Bodies Ind 5
International Maritime Organisation and the
International Chamber of Shipping

Members of government, primarily civil

servants in the Ministries and agencies with
Government Gov 7
responsibility for transport, energy, and the
environment.

Financial industry representatives with

Financial Institutions Fin 5 expertise in investment, funding, and
monitoring of the shipping industry.

Representatives of academic institutions,

think tanks, and international bodies that
Research Institutions provide research and analysis on the
Res 11
& NGOs shipping industry. Non-governmental
organisations with interests in the
decarbonisation of shipping.

During the exploratory semi-structured interviews with each stakeholder, a range of themes
addressed within this report were discussed, with notes on the views expressed by
42
respondents transcribed to computer files by two or more interviewers. Table 2 provides a
summary of the general sentiment (either positive or negative) towards various components
within each theme. The percentages shown are not intended to be taken as a precise
indicator of the sentiment of each stakeholder group as a whole but rather as merely
indicative of potential contrast in views between groups. The themes discussed are
necessarily limited, and not all themes were discussed in each interview, but the sentiment
analysis provides a guide to the popularity of certain features of shipping decarbonisation
pathways among the groups represented. Each theme is discussed below, along with
broader insights drawn from the interviews as a whole. In combination with the research
summarised in Section 2-5, these insights and sentiments provide the basis for the design
considerations and CfD draft documents presented in Sections 7 and 8.

Table 2: Summary of sentiment (positive or negative) towards major themes in decarbonisation pathways of
the shipping industry and particulars of shipping-related CfDs. The first column provides the themes and key
choices. The second and third columns provide the number of respondents that expressed a positive or negative
opinion regarding these choices. The remaining columns provide this breakdown by percentage of respondents
expressing a positive or negative sentiment within each stakeholder group (group codes match those shown in
Table 3).

positive negative positive negative

All All Ship Ind Gov Fin Res Ship Ind Gov Fin Res
Fuel Preference
Ammonia 17 1 63% 20% 43% 60% 45% 13%
Hydrogen 4 4 20% 27% 25% 18%
SynFuels 5 1 13% 20% 40% 9% 14%
Nuclear 1 0 9%
Biofuels 2 1 13% 14% 20%
Interim Solutions
Dual Engine 6 0 40% 14% 40% 9%
Grey/Blue Hydrogen 5 3 13% 20% 14% 20% 9% 27%
LNG 3 1 13% 18% 13%
eFuels 2 0 13% 20%
Policy Instruments
CfDs 15 3 38% 40% 71% 45% 13% 20% 9%
Carbon Tax 7 3 13% 40% 14% 40% 9% 13% 14% 9%
FITs/Ros/Innovation Grants 2 0 13% 20%
Emissions Standards 4 1 25% 20% 9% 13%
Bilateral agreements 2 1 18% 13%
Type of CfD
Fuel Only 18 0 75% 60% 71% 20% 27%
TCO 3 3 20% 18% 25% 20%
Route specific 9 0 25% 40% 14% 20% 27%
Spatial coverage
Global 8 1 57% 40% 18% 13%
Regional 15 3 13% 100% 43% 55% 13% 20% 9%
Start with Specific Segment?
All 7 2 20% 14% 60% 18% 13% 9%
Container 9 0 13% 40% 14% 60% 18%
Tramp 0 1 9%
Bulk 1 0 20%
Ferries 2 0 13% 20%
Cruise 4 0 13% 20% 14% 9%
Administering Body
IMO 5 8 25% 14% 40% 18% 38% 40% 29% 9%
EU / EC 15 3 25% 40% 57% 64% 13% 14% 40% 9%
Cross subsidising
Agriculture 1 3 20% 29% 20%
Power/Energy 3 2 25% 20% 20% 20%
Other Transport 1 0 13%

43
5.1 Fuel preferences or technology

positive negative positive negative

All All Ship Ind Gov Fin Res Ship Ind Gov Fin Res
Fuel Preference
Ammonia 17 1 63% 20% 43% 60% 45% 13%
Hydrogen 4 4 20% 27% 25% 18%
Synfuels 5 1 13% 20% 40% 9% 14%
Nuclear 1 0 9%
Biofuels 2 1 13% 14% 20%

In the words of one financial institution respondent the question of fuel technology would not
be answered by the shipping industry but by fuel producers - “the ship owner will make
decisions on what ship to build based on the fuels available, and not take a risk on a new
fuel if they don’t know what the fuel of the future will be”. However, most respondents did
have an opinion on which technologies were most likely to succeed. Hydrogen, although
easiest to produce due to the smaller number of steps, was considered by many to be
problematic due to the difficulty and expense of storage and transport. The vast majority
favoured green ammonia as the net-zero-carbon fuel of choice, despite the safety concerns
associated with handling it. As one energy supplier stated, “the hydrogen future we see is
actually an ammonia future”. Few respondents mentioned synfuels, and those who did
mostly saw them as an interim measure allowing existing ships to run on green fuels with
few modifications. Very few saw nuclear as an option, except potentially as a source of clean
energy for green ammonia.

5.2 Interim solutions

positive negative positive negative

All All SE IB GR FI RI SE IB GR FI RI
Interim Solutions
Dual Engine 6 0 40% 14% 40% 9%
Grey/Blue Hydrogen 5 3 13% 20% 14% 20% 9% 27%
LNG 3 1 13% 18% 13%
eFuels 2 0 13% 20%

Most interviewees took the view that interim fuels or technologies were likely to be needed to
bridge the gap between the status quo and genuine net-zero shipping. Among industry
bodies, engines capable of running on multiple fuels were the preferred option, reflecting
uncertainty in future regulation and increasing the ability to continue running on MGO or its
equivalents except under jurisdictions with stricter requirements.

Significantly, given the majority saw hydrogen-based fuels as the most likely fuel in the
longer term, both industry bodies and financial institutions favoured initial flexibility in the
production of hydrogen i.e., from fossil fuels, with (blue) or without CCS (grey) to support
more rapid development and uptake of hydrogen or ammonia-fuelled engines and maximise
fuel supply. As one finance representative stated, the “costs of new infrastructure were too
high for ship owners and ports” for anything but a gradual phase-in of new fuels. Although
one researcher felt that only “a few design changes to ships could make a big difference to
prepare for hydrogen or ammonia”. The higher committed upstream emissions from blue or
grey hydrogen interim solutions also drew opposition from some research institutions, who
along with some financial institutions, preferred an interim path through LNG to reduce the
44
use of more polluting fuels prior to an inevitable switch to green hydrogen-based fuels
(although this wisdom of this path, particularly for firms and countries providing the
supporting infrastructure, is contested by the World Bank146).

5.3 Policy instruments

positive negative positive negative

All All SE IB GR FI RI SE IB GR FI RI
Policy Instruments
CfDs 15 3 38% 40% 71% 45% 13% 20% 9%
Carbon Tax 7 3 13% 40% 14% 40% 9% 13% 14% 9%
FITs/Ros/Innovation Grants 2 0 13% 20%
Emissions Standards 4 1 25% 20% 9% 13%
Bilateral agreements 2 1 18% 13%

Most respondents, particularly public sector bodies and NGOs, believed CfDs were a viable
policy instrument for incentivising net-zero shipping. Most expressed a preference for CfDs
for green fuels, although only a small minority had direct experience with them. A fuel
provider with CfD experience who favoured the use of CfDs cautioned their use with
auctions at very early stages of technology development as they could discourage
competition, with new players likely to have difficulty competing without existing
infrastructure, experience, and established buyers. This has also been a concern for
renewable CfDs147, addressed by gradually shifting from administrative to competitive strike
price discovery. Other supporting instruments that are accessible to a wider pool of players
and that can address other parts of the supply chain, such as innovation grants for capital
expenditure, carbon pricing, emission standards, and feed-in tariffs, can also help the new
technologies to develop. While their absence does not rule out the use of CfDs,
complementary instruments in the initial phases can help to build up the number of viable
players before competitive CfD auctions can function properly.

Another concern identified with the use of CfDs was in allocating limited fuel supplies among
demand from several players: fuel providers, logistics, shippers, ports; and in managing
technology risks, particularly for financial institutions. For green hydrogen-based fuels in
particular, interviewees noted that production costs are sensitive to fluctuations in the price
of electricity and this potential volatility would need to be carefully considered.

Respondents from across all groups saw a carbon price or tax as inevitable but expressed
concern over getting the price level right. Consistent with ongoing developments within the
IMO and the slow pace of change, several expressed concern that protracted debate on
appropriate price levels (such as the US$2/tonne fuel levy currently being considered) would
delay the required action and associated investment. A number of respondents saw CfDs as
a viable solution to current (and future) lack of progress. Most saw CfDs and carbon pricing
as complementary.

Some respondents suggested CfDs could begin as bilateral agreements between countries,
ports, or other jurisdictions, smaller trade regions, or major trade routes, to test their viability

146Englert et al (2021b). The Role of LNG in the Transition Toward Low- and Zero-Carbon Shipping.
147Peñasco, C., Anadón, L. D. & Verdolini, E. (2021) “Systematic review of the outcomes and trade-offs of ten types of
decarbonization policy instruments.” Nature Climate Change 11:257–265.
45
and iron out potential problems before moving to encompass larger, more complex trade
route patterns. One respondent suggested starting with routes in which fuel prices were
higher, to reduce the cost of funding a CfD.

5.4 Types of CfD: from fuel-only to Total Cost of Ownership

positive negative positive negative

All All SE IB GR FI RI SE IB GR FI RI
Type of CfD
Fuel Only 18 0 75% 60% 71% 20% 27%
TCO 3 3 20% 18% 25% 20%
Route specific 9 0 25% 40% 14% 20% 27%

Among interviewees who saw CfDs as an option, almost all envisaged a fuel-only CfD as the
best, or the only viable, CfD solution. “Keep it simple” was a sentiment repeated by a
number of interviewees, that such a policy should be enough to incentivise ‘first movers’ to
begin the transition. Very few respondents saw the advantage of a CfD covering cost
elements other than fuel due to the limited additional cost coverage (fuel costs make up the
majority of operating costs) and significantly greater complexity, although one industry expert
was sceptical about whether the industry could be impartial on this question given
commercial shipping overwhelmingly uses liquid fuels.

A TCO option was seen as potentially better for competition and for making progress on
non-fuel components of the industry. One industry body respondent felt the TCO option was
problematic as many shipyards already received significant local government support – so
the playing field was already not level. If some were positive on the TCO option there was
usually a caveat on the size of ships, or the segments, with prolonged contracts necessary
to ensure repayments could be finalised.

5.5 Geographical coverage

positive negative positive negative

All All SE IB GR FI RI SE IB GR FI RI
Spatial coverage
Global 8 1 57% 40% 18% 13%
Regional 15 3 13% 100% 43% 55% 13% 20% 9%

Respondents within government bodies appeared to be the most disposed to starting with a
global solution, although this was less than half of this group and their views were not shared
by the other groups. Most felt that starting with a single, commonly managed region as a
pilot was the approach that was most likely to succeed. One government body considered
the domestic benefits of a CfD for incentivising the development of competitive industries
required for net-zero shipping to be sufficiently high to justify its use in subsidising
companies domiciled outside the region it covers.

46
5.6 Sectoral coverage

positive negative positive negative

All All SE IB GR FI RI SE IB GR FI RI
Start with Specific Segment?
All 7 2 20% 14% 60% 18% 13% 9%
Container 9 0 13% 40% 14% 60% 18%
Tramp 0 1 9%
Bulk 1 0 20%
Ferries 2 0 13% 20%
Cruise 4 0 13% 20% 14% 9%

Most interviewees thought a CfD that could apply to all shipping segments equally was the
optimal approach to avoid creating an ‘unlevel playing field’. Most also saw a fuel-only CfD
as a means of achieving this. Having said that, many expressed an opinion on which
segments were most suitable for pilot CfD programmes. One sentiment was that it made
most sense to start with those segments for which fuel costs were the largest. The container
and cruise segments were identified as forerunners due to the relative predictability and
stability of routes and prices.

5.7 Administering bodies

positive negative positive negative

All All SE IB GR FI RI SE IB GR FI RI
Administering Body
IMO 5 8 25% 14% 40% 18% 38% 40% 29% 9%
EU/EC 15 3 25% 40% 57% 64% 13% 14% 40% 9%

Very few saw the IMO as the most likely party to move quickly on introducing a CfD, mostly
due to institutional constraints and the slow pace of change and low ambition of its policies.
However, many also believed that if CfDs were shown to be successful by other national or
regional bodies, then ultimately the IMO would need to take on this role to ensure the
principles of creating a level playing field. The general sentiment was to “start with EU and
move to IMO”. However, at least one NGO interviewee expressed concern with the politics
of the IMO and whether starting with the EU would hinder or help its adoption on a global
basis, including by the IMO. To counter a government representative felt that the "EU would
be open to paying other countries to help decarbonise shipping as long as they would be
using EU ports, even if they refuel elsewhere".

5.8 Concerns with Cross-subsidisation

positive negative positive negative

All All SE IB GR FI RI SE IB GR FI RI
Cross subsidising
Agriculture 1 3 20% 29% 20%
Power/Energy 3 2 25% 20% 20% 20%
Other Transport 1 0 13%

The risk of shipping CfDs cross subsidising other industries (directly or through learning
rates) by enabling green hydrogen or ammonia to be sold for industrial, road transport, or
agricultural applications, was discussed with a number of interviewees. Combining the
shipping and energy industry interviewees is misleading for this question as the two groups
were divided in their opinions. From the perspective of the fuel suppliers having other
markets to sell their green fuel product into was a positive, affording them greater certainty of

47
demand and greater likelihood of committing to the fuel production. However, the “shipping
industry is keen to have any fund reinvested into the sector”. It was therefore seen by some
shipping industry and financial institution representatives as problematic for funding taken
from the shipping industry to enable net-zero shipping being inadvertently used to subsidise
other industries.

48
6. Designing CfDs for zero-emissions shipping
In the preceding sections, a summary of technology options and barriers to their adoption
has been laid out, along with opinions on the best way to apply CfDs to net-zero shipping.
This section discusses the amalgamation of this information into the design features we
believe to best navigate the many issues and opinions to frame viable CfDs for shipping.

6.1 Design options: fuel-only and TCO

There are two primary variants of design options for a shipping CfD, each with a different
reference price structure, ranging from covering only the incremental costs associated with
the production green fuels, to covering all incremental total ownership costs associated with
building and operating a net-zero capable vessel, as compared to a standard MGO-fuelled
vessel.

• Fuel-only CfD for the supply of net-zero-carbon fuels, for use in a deep-sea ship, in
which case the reference price is the market price of MGO. Bidders are required to
prove that the net-zero-carbon fuel has been supplied and used for propulsion on a
qualifying ship in order to receive CfD funds. In principle, bidders could aim to secure
a strike price that allows them to recover costs beyond fuel, but this would depend on
how competitive the bidding market is, and whether guaranteeing a price for green
fuel would be sufficient to motivate the development of vessels able to use them. The
scheme administrator could explicitly rule out non-fuel-related costs, or permit them,
depending on the budget available for funding the CfD and the amount of uncertainty
over costs (and associated risk) that the administrator is willing to accept. The
identity of the counterparty in a fuel-only CfD could take at least two forms. The first
restricts bidding to fuel suppliers, conditional on securing an offtake agreement for
the fuel supplied to ensure it is used on board a ship. This has the advantage of not
requiring shipping companies to participate directly in the CfD, but simply to be the
offtaker for fuel suppliers that do participate. The second allows any firm to bid,
conditional on proving that qualifying net-zero-carbon fuel has been used on a
qualifying vessel. While both options are viable, the second is chosen here since it
offers greater flexibility and scope for application at IMO level (see Appendix A.3 for a
detailed comparison).
• TCO CfD for the total cost of ownership (TCO) of a ship running on net-zero-carbon
fuel, in which the reference price is the TCO of an MGO-fuelled ship. Bidders can be
any company but must provide proof of delivery and operation of a net-zero-carbon
fuel-capable vessel to receive CfD funds. Bidders may operate the ship themselves,
or subcontract operation to a third party.

Figure 8 provides a stylised example of a fuel-only CfD. The shaded area represents the
cost to government of meeting the difference between the reference price (MGO in this
case) on an energy basis, and the strike price for a green fuel. In this representation, the
strike price happens to reflect the cost of producing green hydrogen, but this could equally
reflect the cost of producing other fuels. A TCO version would look much the same, except
with a more complicated (and likely less variable) reference price.
49
Figure 8: A stylised example of what a fuel-only CfD for net-zero shipping would have looked like between the
years of 2013 to 2020 with a reference price based on the historic price of MGO and a strike price equal to the
price for green hydrogen.

Each of these options has benefits and drawbacks (see Table 3). As confirmed repeatedly in
interviews, fuel costs represent the majority component of TCO and the lion’s share of
operating costs for ships. Moreover, the high cost of net-zero-carbon fuels is a major barrier
to both the financing and construction of ships able to use the fuel, and to their deployment
in these ships. There are clear limitations to a restrictive fuel-only contract in that it would not
necessarily extend to the incremental costs associated with running a ship on a net-zero-
carbon fuel, nor would it allow for non-liquid-fuel ship designs. A less restrictive contract, in
which bidders are permitted to submit strike price bids on the basis of both fuel and non-fuel
costs, would loosen some of these limitations and allow a fuel-only CfD to capture some of
the advantages of a TCO version.

On the other hand, while a TCO-based contract is more comprehensive and would allow ‘no-
fuel’ solutions, such as nuclear ships, and for the recovery of non-fuel-related infrastructure
costs in a manner cost-efficient to government. It would be more complex to benchmark and
administer, and the mechanism for setting and tracking reference prices would be harder to
establish and justify. The potential risk for the administering body would be greater with a
TCO-based contract due to the larger range of costs considered. The components of a TCO
CfD would explicitly include incremental fuel costs, but also retrofitting costs (where
applicable) for engines and fuel tanks, bunkering costs, transport and delivery costs, and
additional crew and safety requirements. These incremental costs would vary by ship type
and size. In practice, establishing a reasonable reference price for each of these
components is fraught with subjectivity and complexity. Even where some components (such
as operating costs) can make use of proxy indexes, such as the Baltic Dry Index for dry bulk,
and freight charter indexes for container ships, these would still vary by segment.
Developing separate CfDs for different ship types would be necessary to reflect the very

50
different business models and cost structures in each segment and to ensure CfD funds.
Although ideal in principle, a fully comprehensive TCO CfD may not be workable in practice.

Table 3. Comparison of fuel-only and TCO variants of a net-zero shipping CfD.

CfD Advantages Disadvantages

• Transparent and straight-forward

contract structure requiring supply of
net-zero-carbon fuel and offtake • Not fully technology-neutral:
agreement for its use in a ship. subsidises fuels based on cost of
• Agnostic on who the bidders are: production, rather than
Allows, but does not require, direct contribution to TCO. Favours fuels
participation of ship operator in bid. in which incremental costs are
In principle, any firm can participate if biased towards production rather
they can prove the fuel is used. than storage, such as synfuels
• Addresses gap in funding (see
landscape by targeting operating • Figure 6)
costs, where most existing funding • Excludes, in practice, capital-
targets capital expenditure (e.g., EU intensive technologies capable
Innovation Fund) of reducing fuel costs (e.g.,
• Allows the entity offering the CfD to nuclear)148
Fuel- simultaneously support the • May incentivise incrementalism
only development of green fuel industries by not requiring the construction
and directly mitigate international of dedicated net-zero-capable
shipping carbon emissions ships and (if permitted under the
• Clear, liquid reference price (MGO) CfD) allowing the blending of
• Single contract can be accessible by a conventional and net-zero-carbon
range of ship types and routes fuels
• Retains level playing field, helping • Does not prevent reversion to
build support from across the shipping standard fuels where engines are
industry dual-fuel capable
• Aligned with industrial strategies of • Requires robust certification
potential funders (e.g., UK, EU) with processes to reliably exclude
existing expertise in renewable energy fuels produced from non-
CfDs renewable sources (e.g., blue
• Lower risk of failure due to hydrogen)
insufficient participation
• Lower risk of cost overruns for
government

148A fuel-only CfD would be simplest to administer if offered for liquid fuels only but can be adapted to include non-liquid
fuels like batteries, fuel cells, or nuclear fuels, by requiring that the fuel be purchased by a ship operator. These options,
particularly nuclear, are likely to have significantly higher capital cost, but may see lower operating costs, allowing them to
bid into a fuel-only CfD competitively if capital expenditures are subsidised separately.
51
 • Difficult to identify transparent,
liquid reference price. Requires
considering multiple variable
CapEx and OpEx inputs
• Requires setting different
reference prices for each ship
types and sizes, and for new
builds vs retrofits, diluting
• Technology neutral competition and increasing
complexity
• Subsidises all incremental costs -
CapEx and OpEx costs • Multiple beneficiaries of CfD
payments where ship owner and
• Incentivises innovation and avoids
operator are different entities
picking winners
(although CfD need only include
TCO • Incentivises capital stock turnover.
ship owner)
CfD less likely to be used to keep
• Advantages larger firms more
older, inefficient ships afloat
than a fuel-only CfD due to higher
• Lower risk of reversion to MGO.
risk of bidding on TCO and capital
New-build ship financing generally
requirements for new build ships
conditional on contracts with
• Bidders would have to estimate
operators being in place
multiple costs in industries they
are not familiar with (e.g., fuel
storage, bunkering) and engage
with multiple entities in order to
bid for CfD
• Moderate to high chance of
insufficient bids and/or failure due
to complexity

A third option that combines some of the fuel-only simplicity with the technology neutrality
benefits of TCO is a hybrid mechanism with separate contracts for CapEx (a direct subsidy
or regulated return mechanism allowing for recovery of fixed costs) and OpEx (a fuel-only
CfD) ) components, and with the reference price being the cost of building and operating an
MGO-fuelled ship, respectively; or an OpEx (fuel-only) CfD with a completely separate
competitive subsidy allocation mechanism for CapEx. Under this structure, different entities
may bid for the CapEx and OpEx components, which may be helpful in the (fairly common)
case where the ship owner and operator are different companies. In addition, a CapEx +
OpEx CfD may help high fixed-cost, lower operating-cost fuel options, like fuel cells and
nuclear reactors, to bid more competitively.

However, a CapEx + OpEx CfD would also retain many of the inherent difficulties of a TCO
CfD, still requiring dedicated reference prices for different ship types and sizes, with the
attendant issues of increasing transaction costs and diluting competition within each price
‘bucket’. There are also reasons why technology neutrality may not be desirable, where
52
committing to two or three different sets of supporting infrastructure ultimately raises overall
costs and limits the pace and direction of technological progress (see Box 1).

The optimal solution may be a fuel-only CfD complemented by sufficient CapEx support.
This would incentivise coordination between the – often different – entities responsible for
commissioning and operating ships, respectively, helping the incremental CapEx spend on
net-zero-carbon fuel capable ships to be at least partly recovered through long-term
operation contracts. As one interviewee noted, “If you are looking for impact, then you
should do [the CfD] on fuel-only". This is consistent with the majority of respondents.

In a nascent market with few producers of net-zero-carbon fuels and ships, fully competitive
auctions may not be appropriate for initial price discovery. Unsuccessful bidders depending
on the CfD to finance a pilot project may find themselves with no market to sell to, risking
potential insolvency. An initial strike price, set administratively based on relatively generous
cost estimates, may entail higher costs to government and higher private profits in the short-
term, but reduces the risk of unintentionally punishing early movers. As technology improves
and competition intensifies, the use of auctions becomes more appropriate in encouraging
competition, favouring lower-cost producers, and enabling price discovery over successive
rounds. A well-designed CfD would also incentivise producers to maximise the market price
they can obtain and reduce the cost to government (the difference between the CfD strike
price and market price) over time. The reference price can be indexed to relevant variables
(which may include input prices (MGO fuel), adjustments for volatility (e.g., moving
averages) and inflation).

53
Box 1: Technology neutrality and green shipping: carbon and non-carbon-based fuels

A technology-neutral demand-side policy for green shipping is difficult to design, and it may
also not be desirable. For long-distance shipping, the competition is essentially between
carbon-based and non-carbon synthetic fuels. The very different infrastructure
requirements for each system and the high costs associated with the transition from fossil
fuels make it unlikely – and costly – for both to exist simultaneously.

The figure below (adapted from ETH Zurich) illustrates this point. Carbon-based fuels
power ships with methane (CH4) molecules, releasing CO2 which is then recaptured and
used to synthesise more methane. By contrast, a hydrogen economy uses electricity (for
batteries, green hydrogen and then ammonia) and CH4 (blue hydrogen and then ammonia)
as inputs to power ships. A fleet operating on a mixture of both would imply higher
investment costs associated with two sets of supporting infrastructure.

Figure B1.1: Carbon-based vs non-carbon-based fuels. Note that production of hydrogen-based fuels from
methane will likely require offsets on top of Carbon Capture and Storage (CCS) to ensure carbon neutrality.
Adapted from ETH Zurich (2019) Towards net zero – comparison of zero-carbon

Technology neutrality between carbon- and non-carbon-based fuels is likely to raise costs
and slow the growth of both. This suggests that a choice should be made between carbon-
and non-carbon-based fuels, rather than committing public resources to both. Neutrality
between hydrogen and ammonia is more justifiable, although ammonia is more likely to be
the ultimate winner for practical reasons and appears to be the only viable option for long-
distance, deep-sea ships. Both technologies are at an early stage and there are
considerable unknowns over future cost trends. Ammonia-powered shipping is not
fundamentally different to MGO, save for higher input fuel costs and greater space
requirements. The costs of hydrogen shipping are driven by the infrastructure cost of fuel
cells and storage tanks. Since these are both expected to decline significantly, and
maintenance costs are lower than for combustion engines, technology neutrality is still
appropriate between hydrogen and ammonia propulsion.

54
6.2 “Net-zero-carbon-emissions”

Decarbonization is often used as a term for reducing all greenhouse gas emissions but with
a focus on the main greenhouse gas carbon-dioxide. Carbon-dioxide is responsible for 82%
of the increase in warming over the past decade across all economic sectors149, with virtually
all international shipping emissions coming from carbon dioxide150. For the development of
the CfD Heads of Agreement we therefore focused on achieving “net-zero-carbon-
emissions” for international shipping to avoid the complications associated with including
other greenhouse gases in our analysis. This is a practical choice, rather than a suggestion
that the other greenhouse gases that can be emitted over the life cycle of fuels should not be
included. Not accounting for upstream emissions of methane, for example, may give natural
gas-derived fuels an artificial advantage over those derived from renewable electricity. The
implications of this simplification will need to be tested before a CfD scheme is implemented
in full.

6.3 Interim solutions

It is beyond the scope of this report to test the cost effectiveness of all the many routes to
zero-emissions shipping that might be generated through the CfD instruments that are the
subject of this report, in combination with the many other policy instruments and
technological developments that might come into play over the next few decades. We were
advised by industry stakeholders that an interim solution in which clean shipping mixes with
non-clean shipping within segments, routes, and companies is inevitable. However, given
the IMO timeline for decarbonisation (2030-2050) and those commercial ships typically have
a multi-decadal lifespan, the ships being constructed today will have to comply with IMO
targets at some point during their service.

Some transition plans currently consider short-term solutions, such as increased usage of
liquified natural gas (LNG), however it is likely that decarbonising shipping using LNG could
lead to stranded assets and investment in infrastructure unsuitable for carrying net-zero-
carbon fuels.151 Carbon-based green synfuels, although currently expensive, offer a viable
decarbonisation pathway. At present, orders are starting to be placed for new dual-fuel ships
capable of running on synfuels and ammonia/hydrogen, although in some cases retrofits of
the engine and fuel storage on existing ships to allow for use of alternative fuels might be the
cheaper option. Ammonia also offers a flexible pathway that could start with grey ammonia
(produced from steam reforming of fossil fuels), to cleaner blue ammonia (with added CCS),
and end with zero-carbon green ammonia (produced from air, water, and renewable energy).

All the interim pathways described above are compatible with the CfDs developed for this
report which have been designed to be as solution and technology neutral as possible,
including the use of a TCO CfD that might enable the co-evolution of infrastructure with
clean energy. However, the use of a strict definition for zero-emissions shipping in the CfDs

149 World Meteorological Organization (2019), “Greenhouse Gas Bulletin”, No. 15, 25 November 2019,
https://library.wmo.int/doc_num.php?explnum_id=10100
150 Although methane leakage has been growing in recent years with the increase of LNG-powered vessel

https://www.professionalmariner.com/imo-emissions-report-raises-new-concerns-about-methane-slip/
151 Englert et al (2021b). The Role of LNG in the Transition Toward Low- and Zero-Carbon Shipping.

55
will mean that not all the pathways described above will be incentivised as well by this policy
instruments. This is unavoidable as the strict zero-emissions requirements are necessary to
align the two CfDs to enable them to be used concurrently, and ultimately this initiative is
aligned with the end goal of achieving zero-emissions shipping, for which net-zero-carbon is
an implicit requirement.

6.4 Design parameters: shipping CfDs in practice

Who would administer the CfD?

As discussed above, the IMO is unlikely to adopt a CfD mechanism in the short term, given
both the institutional constraints of the organisation, and the novelty of CfDs to the shipping
industry. While the IMO could, and indeed should, ultimately become the body to administer
a global CfD mechanism if uptake is to expand to the extent required, initial applications are
more likely to succeed in jurisdictions and regions where sufficient political will and
institutional capacity already exists to craft, fund, and reliably implement the mechanism.
However, the IMO could benefit from taking the initiative on trialling CfD-like mechanisms
with funding from industry. Price inelasticity of demand for shipping (due to limited price-
competitive rivals and transport costs being a small proportion of value of traded goods) may
allow innovators in the industry to recover some of the costs of proposed levies on fuel
through CfD support. The remaining costs could be passed on to consumers without
significantly affecting demand. International shipping makes use of a relatively small number
of high-volume routes linking key ports. The world’s largest port by container volume is
Shanghai, with most of the remaining top 10 predominantly in China, and other Asian ports
in the top 20 in Singapore, South Korea, Dubai, Malaysia, and Thailand.152 These ports
serve largely as the origin, or transit points, for goods being transported. Most container
shipping flows to destinations in Western and Southern Europe (Rotterdam, Antwerp,
Hamburg, Bremen, Algeciras, Piraeus), and the United States (Los Angeles, Long Beach,
New York).

The European Union (EU) and United Kingdom have clear, well-established climate policy
trajectories. The ambition of decarbonisation policies not only in the United States following
the change in administration, but also in China, Japan, and South Korea, has risen
substantially in recent months. In principle, any of these jurisdictions could pilot the
implementation of a shipping CfD. In practice, the EU is likely best placed to do so, partly
due to its prominence as a shipping destination and its access to fiscal resources for funding
the mechanism (including by recycling potential ETS revenues from shipping), and partly
because the political will for taking active steps to decarbonise shipping, and the technical
expertise for administering a CfD, are already present.

A combined IMO-governmental financing approach supported by a fuel levy or carbon price

may also be workable.

152Authors’ calculations, based on World Shipping Council (2021) Top 50 World Container Ports
(http://www.worldshipping.org/about-the-industry/global-trade/top-50-world-container-ports); and UNCTAD (2020)
UNCTADStat Database .
56
Which companies would be eligible?

A political challenge that all non-IMO CfDs encounter is whether the companies that interact
with a given jurisdiction but are not domiciled within it are eligible for CfD funding (either
directly or as beneficiaries of funding paid to intermediaries such as fuel suppliers).
Restricting the CfD to ‘domestic’ firms would likely diminish its scope considerably and risk
distorting the international playing field, strengthening potential industry opposition. Whether
funding external companies is worthwhile would depend on whether the costs (financial and
political) of doing so outweigh the strategic benefits accruing to the funding jurisdiction of
developing zero-emissions technologies and supply chains for shipping to exceed the costs.

Which routes would be eligible?

A third consideration is which routes would be eligible. Container and cruise shipping
segments tend to operate along a relatively stable set of routes, meaning that in these
segments, a CfD could be limited to funding operations along these routes. However, since
bunker prices change constantly, and shipping operates in a competitive landscape, in the
absence of good reasons to the contrary it may be preferable not to constrain the CfD to
specific routes. In tramp shipping and bulk shipping segments, in which routes are more
sensitive to commodity prices and can change frequently, a route-specific approach would
be less suitable.

A national or regional entity may not be willing to fund shipping activity lying entirely outside
their jurisdiction, particularly where the shipping company is also not domiciled within it.
Restricting CfD funding to routes exclusively within territorial waters would likely prove too
restrictive and would be of limited relevance to long-distance international shipping, the
target of this report. An appropriate balance between the two might make eligible all routes
that include a stop at a port within the jurisdiction funding the mechanism.

Which technologies and costs would be eligible?

Although the strong preference from stakeholders was for a fuel-only CfD we have
endeavoured to develop the design elements for both fuel-only and TCO CfDs, with the legal
blueprints for both provided in Section 7. In the fuel-only case, the cost of fuel would be
eligible for the CfD, which would pay out the difference between a reference price (tied to a
standard shipping fuel, with MGO the most likely) and a strike price determined
administratively or through competitive auction. For a TCO CfD, all incremental costs
associated with both building and operating the zero-emissions ship would be eligible,
including fuel, additional staff, engines, fuel tanks, and so on. In this case, the reference
price would be based on benchmark costs for all these elements, in addition to a reference
price on fuel.

57
How would the reference price be determined?

For a fuel-only CfD, the most obvious choice of reference price is MGO. Since ships can
refuel only in specific places and MGO is a specific oil product, there is no single analogy to
international benchmarks (e.g., Brent crude). To determine a reference price, an average of
MGO bunker prices across a number of ports (within or outside the implementing
jurisdictions) could be used. To reduce volatility and uncertainty for both parties, a moving
average over a period of time (e.g., two weeks) and/or a floor and ceiling on the reference
price could be used.

For a TCO CfD, the reference price would be more difficult to determine. Benchmark prices
for each component of TCO would need to be estimated, based on the cost of each
component for a standard MGO-fuelled ship (e.g., fuel tanks, engine, staff) in addition to fuel.
However, since both fixed and variable costs vary by ship type and size, separate
benchmark estimates would be needed for different-sized ships in each segment.

How would the strike price be determined?

The fuel-only CfD would fund the use, on a ship, of a predetermined amount of net-zero-
carbon shipping fuel. Depending on the circumstances, it could be organised such that a
single entity could receive a 100% allocation, or caps could be set on maximum allocation
per supplier to ensure a minimum number of potential suppliers receive an allocation (unless
there is insufficient interest).

As discussed above, in the early stages of net-zero technology development and the initial
rounds of CfD allocations, the strike price may be set administratively to avoid the risk of
bankrupting bidding firms that do not receive an allocation or otherwise damaging the
prospects of emerging players. As the market for fuel supply (or supply of zero-emissions
ships) becomes more competitive, setting the strike price through a competitive reverse
auction would be more appropriate, with the resulting strike price being the market-clearing
price at which 100% allocation is reached. All participants would be paid based on this
clearing price.

From the perspective of potential bidders, estimating fuel production and supply costs would
be relatively straightforward. For a TCO-based CfD, a much broader range of costs would
have to be estimated, with correspondingly greater uncertainty. This may raise barriers to
the participation of potential bidders. It would also be more difficult for the administrator to
determine when the market is sufficiently mature/competitive for competitive auctions to be
appropriate.

Which technologies would be (in)eligible?

At this juncture, the long-term fuel source for shipping is not certain. However, both
independent research and stakeholder engagement suggest it is very likely to be hydrogen-
derived, either for internal combustion or as fuel cells. Synthetic fuels, such as e-methanol
and e-methane, require green hydrogen as an input. A fuel-only CfD could designate as
58
eligible any fuel produced from green hydrogen that also meets net-zero-carbon emissions
criteria. This could, as an interim measure where sufficient green hydrogen supplies cannot
be quickly brought to market, be expanded to include nuclear-derived electricity and blue
hydrogen (using fossil fuels with CCS), at least in the short term. In the case of blue
hydrogen, the benefits of greater short-term supplies in the short term should be carefully
judged against the risks of greater committed emissions and potential stranded asset risks in
the medium- and long-term.

How would cross-subsidisation be avoided?

Consider a fuel-only CfD for green hydrogen-based fuels, in which any firm able to meet the
fuel use requirement is eligible: from shipping companies to upstream fuel suppliers. If the
shipping industry ultimately funds the CfD (through carbon pricing or other measures), it
would probably also be helping to meet R&D and infrastructure costs and contributing to
lower financing costs for fuel production through, e.g., offtaker agreements, that will help the
industry develop and benefit other users of net-zero-carbon fuels, such as agriculture,
transport, and heavy industry.

Some positive externalities accruing to other industries are unavoidable – and likely very
desirable for policymakers looking to scale hydrogen-related industries. To prevent bidders
from using CfD funds to scale up production and selling to higher-value markets, the fuel-
only CfD would require clear proof that fuel is actually used in a qualifying ship in order for
the corresponding CfD payment to be made, to prevent price arbitrage behaviour.

Who are the parties?

In general terms, the first party to a CfD is an entity able to administer the settlement of CfD
payments. In the UK’s case, a dedicated entity, the Low Carbon Contracts Company (LCCC)
exists for this purpose. If a CfD mechanism were to reach the IMO, a new organisation
would likely need to be established, although if the proposed fuel levy is implemented
(requiring a means of collecting revenues and reallocating them to R&D projects), a CfD
settlement mechanism could make use of this infrastructure.

In the fuel-only case, counterparties’ participation would be conditional on being able to

prove that the fuel is used on a qualifying ship. The CfD administrator may elect to prioritise
bids that have a credible set of provisional agreements in place to ensure this occurs. In the
TCO case, the counterparty would most likely be a shipping firm, a financial
institution/broker, or a dedicated company willing to take responsibility for delivering and
operating a ship capable of using net-zero-carbon fuel.

How are obligations enforced?

In the event that the counterparty to a CfD is unable to meet its obligations (to supply fuel, to
supply a ship, and/or to operate a ship), the administrator may choose to cancel the CfD
contract and offer it to the next available bidder, in ascending order by bid price if allocated

59
competitively. This wastes time and resources, however. To avoid the situation from arising
in the first place, it may also be helpful to include deterrent measures such as a
‘performance bond’ in the design of the CfD. This would require the bidder to lodge a
payment with the administrator that would be incrementally forfeit in the case of delay,
under-delivery, or non-delivery of the CfD requirements.

Given that a CfD for shipping is likely to ultimately be applicable to parties operating in many
jurisdictions, a legal framework must be agreed in advance that can work across them. In
international commercial agreements covering multiple jurisdictions, it is standard practice to
state that a contract is bound by the law of a specific country with which international parties
are typically very familiar (e.g., English Law or Irish Law for the EU).

6.5 Summary of parameters for zero-emissions shipping CfDs

In the following section, draft Heads of Terms (HoT) agreements for fuel-only and TCO CfDs
are presented. A CfD has many variables, and the ultimate configuration will depend on the
circumstances, including who the parties are, the position of industry, the stage of
development of zero-emissions technologies, and so on. In the two HoT blueprints
presented below, the following assumptions are used, based on the preceding discussion:

1. The CfD is administered by the European Union (EU). This may easily be adapted
to other national or regional bodies, or the IMO. All references to the EU below are
placeholders that can be substituted as needed.
2. Any shipping route is eligible for the CfD, provided that it includes a port within the
EU.
3. The obligations to which the CfD counterparty agrees are:
a. (for fuel-only) To prove the use of a specified amount of hydrogen-derived,
net-zero-carbon shipping fuel for each year the CfD is active, and to submit a
performance bond to be returned on successful execution of these
obligations.
b. (for TCO) To deliver a fully seaworthy (i.e., registered, and certified) vessel
capable of running on net-zero-carbon fuel, including nuclear fuel or sail-
based technology, by a specified date, and to operate it using such fuels for a
minimum number of tonne-kilometres for each year the CfD is active, and to
submit a performance bond to be returned on successful execution of these
obligations.
4. The penalties for non-delivery are to forfeit of a proportion of the performance bond:
a. (for fuel-only) for each unit of fuel use below the annual requirement.
b. (for TCO) for each tonne-kilometre travelled below the annual requirement.
5. The reference price for each day in which the contract is operational, is determined
as follows:
a. (for fuel-only) the two-week rolling average of MGO bunker fuel prices in the
largest 5 EU bunkering ports, with a ceiling and floor based on the 5-year
maximum and minimum price.
b. (for TCO) a benchmark total cost of ownership calculation including all capital
and operating costs, including fuel, associated with an MGO ship, with
different benchmarks for each ship type and size.

60
7. Legal & technical draft CfDs
In this section, Heads of Agreement for a fuel-only and TCO CfD, developed by international
law firm Pinsent Masons, are presented. These documents are not the CfDs themselves:
they are more concise legal documents that can be used to define the terms of an
agreement in principle between parties and counterparties, laying out in sufficient detail how
the CfD would work and under what terms it would operate. In this case, the Heads of
Agreement are set to expire a year after signature or upon entry into a full CfD, whichever
comes first.

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7.1 Fuel-only Contract for Difference

HEADS OF AGREEMENT

This heads of agreement is made on the date of the last signature below.

BETWEEN

[Bidding Entity X]153 (First Party)

- AND -

[Directorate-General for Climate Action, European Commission] (Second Party),

(each a Party and together the Parties)

Background

A. The First Party and the Second Party are interested in entering into the Proposed
Agreement to support (i) the use by the First Party of Net-Zero Carbon Shipping Fuel in
its vessels, or (ii) where the First Party is a fuel supplier, the use by the First Party’s
customers of Net-Zero Carbon Shipping Fuel in their vessels.

B. This heads of agreement sets out, at a high level, the key terms and conditions of the
Proposed Agreement.

1 Definitions

1.1 For the purposes of this heads of agreement:

"Affiliate" means in relation to the Second Party, another person, firm,

company, corporation, government, state or agency of a state, or any
association, trust or partnership (whether or not having separate legal
personality) that controls, is controlled by, or is under common control with the
Second Party;

153The bidding entity may be a ship operator or another entity involved in the ownership or operation of ships, or supply of
fuel to ships, which can demonstrate the use of Net-Zero Carbon Shipping Fuel in such vessels (which are not already
supported by a CfD from the Second Party).
62
"Business Day" means a day on which banks are open for business in [●]
(excluding Saturdays, Sundays and public holidays);

"Ceiling Price" means the highest two-week average price for [marine gas oil
(MGO)] trading at the 5 largest bunkering ports [in the European Union] in the
five (5) years immediately preceding the date on which the Reference Price is
calculated, adjusted on the date on which the Reference Price is calculated
(each such date, the Indexation Date) in accordance with the following
formula:

𝐶𝑒𝑖𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝐶𝑃𝑏𝑎𝑠𝑒 × 𝐼𝑁𝐹

Where:

CPbase is the highest two week average price for [marine gas oil (MGO)] trading
at the 5 largest bunkering ports [in the European Union] in the five (5) years
immediately preceding the date on which the Reference Price is calculated;
and

INF is calculated in accordance with the following formula:

𝐻𝐼𝐶𝑃𝑡
𝐼𝑁𝐹 =
𝐻𝐼𝐶𝑃𝑏

Where:

HICPt means the Harmonised Index of Consumer Prices for the month
immediately prior to the month in which the Indexation Date falls; and

HICPb means the Harmonised Index of Consumer Prices for [for the first month
of the year preceding the Indexation Date];

“CfD Reverse Auction” means a reverse auction process run by or on behalf

of the Second Party in accordance with rules determined by the Second Party,
pursuant to which eligible users of Net-Zero Carbon Shipping Fuel may bid to
receive pricing support with respect to the use of Net-Zero Carbon Shipping
Fuel, pursuant to an agreement such as the Proposed Agreement;

"Change in Law" means the coming into effect of any law after the date of the
Proposed Agreement, and/or the modification, repeal or replacement of any law

63
after the date of the Proposed Agreement, and/or in the case of a judgment of a
competent authority any binding change in the interpretation or application of
any law after the date of the Proposed Agreement by a competent authority;

"Difference Amount" has the meaning ascribed to it in paragraph 3.2.

"Dispute Notice" has the meaning ascribed to it in paragraph 6.2.

"EMIR" means the European Regulation on OTC Derivatives, Central

Counterparties and Trade Repositories (Regulation 648/2012);

"Expert" has the meaning ascribed to it in paragraph 6.3;

"Floor Price" means the lowest two week average price for [marine gas oil
(MGO)] trading at the 5 largest bunkering ports [in the European Union] in the
five (5) years immediately preceding the date on which the Reference Price is
calculated, adjusted on the date on which the Reference Price is calculated
(each such date, the Indexation Date) in accordance with the following
formula:

𝐹𝑙𝑜𝑜𝑟 𝑃𝑟𝑖𝑐𝑒 = 𝐹𝑃𝑏𝑎𝑠𝑒 × 𝐼𝑁𝐹

Where:

FPbase is the lowest two week average price for [marine gas oil (MGO)] trading
at the 5 largest bunkering ports [in the European Union] in the five (5) years
immediately preceding the date on which the Reference Price is calculated;
and

INF is calculated in accordance with the following formula:

𝐻𝐼𝐶𝑃𝑡
𝐼𝑁𝐹 =
𝐻𝐼𝐶𝑃𝑏

Where:

HICPt means the Harmonised Index of Consumer Prices for the month
immediately prior to the month in which the Indexation Date falls; and

HICPb means the Harmonised Index of Consumer Prices for [for the first month
of the year preceding the Indexation Date];
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"Force Majeure" means, in respect of a Party, any event outside the
reasonable control of that Party affecting its ability to perform any of its
obligations under the Proposed Agreement and which could not have been
prevented or avoided by a reasonable and prudent operator, including acts of
war, natural disaster, national strikes or other industrial action, threat of war,
terrorist act, blockade, revolution, riot, insurrection, civil commotion, public
demonstration, sabotage, lightning, fire, storm, flood, earthquake, or acts or
omissions of competent authorities otherwise than in accordance with laws
and/or directives (except that lack of funds or strikes only of a Party’s own
employees and/or those of its contractors shall not constitute Force Majeure);

"Guarantees of Origin" shall have the meaning given to the term in Directive
2009/28/EC;

“Net-Zero Carbon Shipping Fuel” means (i) hydrogen or hydrogen

derivatives, such as methanol and ammonia, produced from renewable energy;
(ii) nuclear energy or (iii) fuel which is produced with complete carbon capture
and storage of any Scope 1 & 2 CO2 emissions and which complies with PAS
2060. The First Party must ensure the fuel supplied meets any certification
requirements set by the Second Party (e.g., Guarantees of Origin), or be
subject to forfeiture of Performance Security provided pursuant to paragraph
4.2.3;

“Performance Security” means a cash payment made by the First Party that
is equal to [€X]/metric tonne of Net-Zero Carbon Shipping Fuel the First Party
commits to utilise in paragraph 3.1;

“Proposed Agreement” means an agreement, the form of which will be

provided to the First Party if the Second Party notifies it that it has been
successful in its bid into a CfD Reverse Auction, with a term scheduled not to
exceed [x] years, pursuant to which the Second Party agrees to pay the
Difference Amount to the First Party where the circumstances described in
paragraph 3.2 arise;

“Reference Price” means a two week moving average price for [marine gas oil
(MGO)] trading at the 5 largest bunkering ports [in the European Union] on the
day the Net-Zero Carbon Shipping Fuel is purchased by the First Party,
provided that where this value is below the Floor Price, the Reference Price
65
shall equal the Floor Price and where this value exceeds the Ceiling Price, the
Reference price shall equal the Ceiling Price;

“Specified Purpose” means use of the Net-Zero Carbon Shipping Fuel in a

ship traveling on an international shipping route that includes any port in [the
European Union];

"Start Date" means the next Business Day to occur after the day on which the
Second Party notifies the First Party pursuant to the Proposed Agreement that
the Second Party considers that each of the conditions precedent to the
effectiveness of the Proposed Agreement (as such conditions precedent are
set out in the Proposed Agreement) have been satisfied or waived in writing by
the Second Party;

“Strike Price” means the price either (i) administratively-set by the Second
Party, or (ii) the price bid by the First Party in response to reverse auction held
on [DD/MM/YYYY]. The Strike Price shall be adjusted on each anniversary of
the Start Date during the Term (each such date, the Indexation Date) to an
amount calculated in accordance with the following formula:

𝑆𝑡𝑟𝑖𝑘𝑒 𝑃𝑟𝑖𝑐𝑒 = 𝑆𝑃𝑏𝑎𝑠𝑒 × 𝐼𝑁𝐹

Where:

SPbase means the Strike Price as at the Start Date; and

INF is calculated in accordance with the following formula:

𝐻𝐼𝐶𝑃𝑡
𝐼𝑁𝐹 =
𝐻𝐼𝐶𝑃𝑏

Where:

HICPt means the Harmonised Index of Consumer Prices for the month
immediately prior to the month in which the Indexation Date falls; and

HICPb means the Harmonised Index of Consumer Prices for [insert date]; and

66
 "Term" means the period commencing on the Start Date and continuing until
the day prior to the [tenth (10th)] anniversary of the Start Date, subject to earlier
termination of the Proposed Agreement in accordance with its terms.

2 Status of heads of agreement154

2.1 This heads of agreement is not exhaustive and is expressly ‘subject to contract’
until a final written agreement has been entered into. Except with respect to
paragraph 7 and otherwise where specifically stated, the terms of this heads of
agreement are not intended to be legally binding between the Parties.

3 Basis of the Proposed Agreement

3.1 Under the Proposed Agreement, the First Party’s primary obligation will be to
utilise (or, where the First Party is a fuel supplier, procure the utilisation by its
customers of) [xxx] metric tonnes of Net-Zero Carbon Shipping Fuel annually
between [DD/MM/YYYY] and [DD/MM/YYYY] for the purposes of ship propulsion
in its vessels (or, where the First Party is a fuel supplier, the vessels of its
customers) on international routes including European ports, in compliance with
the Specified Purpose and provide the Second Party with evidence which is
acceptable to the Second Party that it has done so . For the avoidance of doubt,
where the First Party is a fuel supplier, no Difference Amount will be payable
where the customer(s) whose vessels the First Party relies on to satisfy its
obligations under this paragraph 3.1 also benefit from an agreement with the
Second Party pursuant to which the Second Party agrees to pay such
customer(s) a difference amount calculated as the difference between the
Reference Price and a strike price awarded to such customer(s) following the CfD
Reverse Auction.

3.2 Under the Proposed Agreement, the Second Party’s primary obligation will be
to pay the First Party the difference between the Reference Price and the Strike

154Depending on the governing law, local law advice on the status of these heads of agreement and in particular, the
extent to which it is possible to agree that certain provisions are not legally binding, may need to be taken.
67
 Price, where the Strike Price exceeds the Reference Price (the Difference
Amount). Settlement will be as follows:

3.2.1 the First Party will provide the Second Party with a statement detailing
the date and quantity of Net-Zero Carbon Shipping Fuel by the First
Party (or the First Party’s customers, where the First Party is a fuel
supplier) for use in ship propulsion in the previous calendar quarter;

3.2.2 the Second Party shall, within [ten (10)] Business Days, provide the
First Party with details of the cumulative Difference Amount due to the
First Party based on the information provided by the First Party
pursuant to paragraph 3.2.1, together with details of the applicable
Reference Price used for the purposes of calculating the Difference
Amount;

3.2.3 the Second Party shall, unless the First Party has indicated in writing
that it disagrees with the calculation of the cumulative Difference
Amount set out in the notice referred to in paragraph 3.2.2, pay the
First Party the cumulative Difference Amount within thirty (30) days of
the date of the notice issued by the Second Party to the First Party
pursuant to paragraph 3.2.2; and

3.2.4 late payment interest will be payable on any payments made by the
Second Party after the due date indicated in paragraph 3.2.3.

4 Conditions precedent

4.1 To participate in the CfD Reverse Auction (if applicable), the First Party must:

4.1.1 comply with any CfD Reverse Auction rules determined by the Second
Party and notified to the First Party in advance of any CfD Reverse
Auction; and

4.1.2 not (at the time the CfD Reverse Auction is held) appear on the last
published consolidated list of asset freeze targets designated by any
of the United Nations, European Union and [insert any other relevant
bodies / jurisdictions] under legislation relating to current financial
sanctions regimes (or, in the event that any such list ceases to be

68
 published, an equivalent list produced by the [●] government in
respect of the same).

4.2 If the First Party is successful in a CfD Reverse Auction, it will be invited to
enter into a Proposed Agreement, the Start Date under which will commence
upon the satisfaction by the First Party (or waiver in writing by the Second
Party) of certain conditions precedent, which will include:

4.2.1 provision to the Second Party of a legal opinion addressed to the

Second Party, in form and content satisfactory to the Second Party
(acting reasonably), from the legal advisers to the First Party
confirming that the First Party: (i) is duly formed and validly existing
under the laws of the jurisdiction of formation; and (ii) has the power to
enter into and perform, and has taken all necessary action to
authorise its entry into and performance of, the Proposed Agreement;

4.2.2 provision to the Second Party of evidence, in form and content

satisfactory to the Second Party, acting reasonably, of compliance by
the First Party with “know your customer” or similar identification
procedures or checks under all applicable laws and regulations
pursuant to the transactions contemplated by the Proposed
Agreement; and

4.2.3 provision of Performance Security to the Second Party. The First Party
will forfeit an amount equal to [€X]/metric tonne of Net-Zero Carbon
Shipping Fuel it fails to utilise (or procure the utilisation of, where the
First Party is a fuel supplier) in accordance with paragraph 3.1. Any
undrawn Performance Security which is held by the Second Party
shall be returned to the First Party upon expiry or early termination of
the Proposed Agreement.

5 Rights and remedies

5.1 Each Party agrees that damages alone would not be an adequate remedy for
any beach of a legally binding obligation of this heads of agreement by the
other Party. In such an event, the non-defaulting Party shall be entitled to the
remedies of an injunction, specific performance or other equitable relief (or any
equivalent reliefs which may be available) in addition to any other remedy

69
 including damages for any threatened or actual breach of any legally binding
obligation of this heads of agreement.

5.2 This heads of agreement is for the benefit of the parties to it and is not intended
to benefit, or be enforceable by, anyone else.

6 Governing law and jurisdiction

6.1 This heads of agreement shall be governed by the laws of [XXX].

6.2 If any dispute of a technical or financial nature arises between the Parties
under this heads of agreement or the Proposed Agreement, either Party may
issue a notice of such dispute to the other Party (Dispute Notice). If such
dispute has not been resolved within twenty (20) Business Days of issue of the
Dispute Notice between such Parties’ representatives with day-to-day
responsibility for the administration of the heads of agreement or Proposed
Agreement (as applicable), it shall first be referred to the senior executive of
each such Party who shall be supplied with all information which the Parties
consider pertinent and shall endeavour to resolve the dispute within ten (10)
Business Days of the referral of the dispute to them. This paragraph 6.2 and
any discussion between senior executives which takes place pursuant to it shall
be without prejudice to any right or remedy which any such Party may
ultimately have, should the matter in dispute fail to be resolved by such
discussions. If any such dispute is not resolved within ten (10) Business Days
of its referral to the senior executives of the Parties, either Party may refer such
dispute to an expert in accordance with paragraph 6.3 below. Disputes which
are not of a technical or financial nature shall be determined by the courts in
accordance with paragraph 6.8 below.

6.3 Any dispute which is of a technical or financial nature and is not resolved
pursuant to paragraph 6.2 above or is otherwise provided in this heads of
agreement or the Proposed Agreement to be subject to determination in
accordance with paragraph 6.2 shall be determined by an expert with
appropriate professional qualifications, independent of the Parties and with no
interest in the dispute (an Expert) in accordance with this paragraph 6.3.

70
6.4 In the event that the Parties are unable to agree whether a dispute is of a
technical or financial nature or not then the matter shall be referred to [●] for
determination of that question.

6.5 Either Party may initiate the reference of a dispute described in paragraph 6.3
to an Expert by proposing to the other Party the appointment of a named
individual as the Expert.

6.6 The Expert shall be selected by agreement between the Parties or, if they have
not agreed within fourteen (14) days after the date of the request to refer by
one of the Parties, by [●] on the application of either Party. The Parties shall
use reasonable endeavours to procure that the Expert shall accept his
appointment within five (5) days of selection. If the Expert has accepted
appointment but is unable to complete the reference due to severe ill health,
death or resignation or for other insuperable objectively justifiable reason,
another Expert shall be appointed by the Parties, or if they have not agreed on
the appointment within fourteen (14) days after the request to do so by one of
the Parties, by the [●] on the application of either Party.

6.7 The Expert shall act as an expert and not as an arbitrator. The Parties shall
each have the right to make representations to the Expert. There will be no
formal hearing (unless the Expert otherwise determines) and the Expert shall
regulate the procedure as he sees fit. The Expert shall have the power to open
up, review, and revise any certificate, opinion, requisition or notice and to
determine all matters in dispute. The Expert shall reach a decision within 28
days of their appointment or such longer period as is agreed by the Parties
after the dispute has been referred to the Expert. Save in the case of fraud or
manifest error, the decision of the Expert shall be final and binding on the
Parties and can include orders that one or both of the Parties are to pay his
costs, stating the proportion, and that one Party is to pay the other Party’s
costs. The Expert may take such advice and assistance from professional
advisers or other third parties as he reasonably considers appropriate to enable
him to reach a determination of the dispute, and the costs of such advice and
assistance shall be included within the Expert's costs for the purposes of the
immediately preceding sentence.

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 6.8 Subject to paragraphs 6.2 – 6.7 above, the courts of [●] shall have exclusive
jurisdiction to settle any dispute. The Parties agree that the courts of [●] are the
most appropriate and convenient courts to settle disputes, and accordingly no
Party will argue to the contrary.

6.9 Subject to paragraphs 6.2 – 6.7 above, nothing in this heads of agreement or
the Proposed Agreement shall in any way restrict any Party’s right to refer a
dispute to such courts.

7 Confidentiality

7.1 This paragraph 7 is legally binding.

7.2 Each Party undertakes that it shall not for a period of three (3) years after the
date of this heads of agreement disclose to any person any confidential
information concerning the business, affairs, customers, clients or suppliers of
the other party or of any member of the group of companies to which the other
party belongs, except as permitted by paragraph 7.3.

7.3 Each party may disclose the other party’s confidential information:

7.3.1 to its employees, officers, representatives or advisers who need to

know such information for the purposes of the negotiation of the
Proposed Agreement. Each Party shall ensure that its employees,
officers, representatives or advisers to whom it discloses the other
Party’s confidential information comply with this paragraph 7; and

7.3.2 as may be required by law, a court of competent jurisdiction or any

governmental or regulatory authority.

7.4 No Party shall use the other Party’s confidential information for any purpose
other than the negotiation of the Proposed Agreement.

8 EMIR Reporting

8.1 The Proposed Agreement will contain appropriate provisions dealing with
compliance with applicable obligations to report details of contracts that are
concluded, modified or terminated in accordance with Article 9 of EMIR.

72
9 Costs

9.1 Each Party shall pay its own costs incurred in connection with negotiation of
this heads of agreement and any Proposed Agreement or other documents
contemplated by it.

10 Entire Agreement and Counterparts

10.1 This heads of agreement constitutes the complete agreement of the Parties
pertaining to the respective subject matter and supersedes the Parties’ prior
related agreements, understandings and discussions.

10.2 This heads of agreement may be executed electronically and in counterparts,

each of which (including signature pages) is an original, but all of which
together is one and the same instrument.

11 Term and Termination

11.1 This heads of agreement shall terminate automatically upon the earlier of (i) the
First Party entering into a Proposed Agreement or (ii) the Second Party
notifying the First Party in writing that one or more third parties have entered
into agreements with it following the conclusion of a CfD Reverse Auction
pursuant to which the Second Party agrees to pay such third party(ies) a
difference amount calculated as the difference between the Reference Price
and a strike price awarded to such party(ies) following the CfD Reverse
Auction.

11.2 The Proposed Agreement shall commence on the date of the Proposed
Agreement and, subject to the provisions for earlier termination set out in the
Proposed Agreement, shall continue in full force and effect until the end of the
Term.

11.3 This heads of agreement and any Proposed Agreement shall automatically
terminate upon the insolvency of either Party.

11.4 The Second Party shall be entitled (but not obligated) to terminate the
Proposed Agreement if:

11.4.1 the First Party fails to maintain the required Performance Security in
place or the full amount of Performance Security has been drawn
73
 down by the Second Party in accordance with the terms of the
Proposed Agreement;

11.4.2 the First Party fails to satisfy the conditions precedent thereunder by
any long-stop date for their satisfaction set out in the Proposed
Agreement (unless the Second Party has waived such conditions
precedent); or

11.4.3 the First Party defaults in the performance of any of its other material
obligations under the Proposed Agreement and such default is either
not capable of remedy or if capable of remedy, remains un-remedied
after thirty (30) days from the date of notice from the Second Party
requiring such default to be remedied.

11.5 The First Party shall be entitled to terminate the Proposed Agreement if:

11.5.1 the Second Party fails to pay any amount due under the Proposed
Agreement on the due date for payment and the same is not remedied
within twenty (20) days of the First Party giving the Second Party
notice of the default; or

11.5.2 the Second Party defaults in the performance of any of its other
material obligations under the Proposed Agreement and such default
is either not capable of remedy or if capable of remedy, remains un-
remedied after thirty (30) days from the date of notice from the First
Party requiring such default to be remedied.

12 Force Majeure

12.1 Subject to paragraph 12.2, neither Party shall be in breach of the Proposed
Agreement, or otherwise liable to the other, by reason of any delay in
performance or non-performance of any of its obligations under the Proposed
Agreement to the extent such delay or non-performance is caused by Force
Majeure.

12.2 A Party may only rely upon paragraph 12.1 to the extent that it:

12.2.1 notifies the other Party of the matters constituting Force Majeure as
soon as reasonably practicable following its occurrence;

74
 12.2.2 keeps the other Party fully informed as to the matters relating to the
Force Majeure; and

12.2.3 uses its reasonable endeavours to minimise the effects of the Force
Majeure on the performance of its obligations under the Proposed
Agreement.

12.3 The Party not affected by the Force Majeure may terminate the Proposed
Agreement at any time while the Force Majeure is continuing by written notice
to the Party affected by the Force Majeure if the Force Majeure prevents the
affected Party from fulfilling its material obligations under the Proposed
Agreement for a continuous period exceeding [twelve (12)] months.

13 Change in Law

13.1 The Proposed Agreement will contain provisions which provide that if a Party
reasonably considers that there has been a Change in Law which materially
affects the subject matter, the operation, or the interpretation of the Proposed
Agreement (including situations in which the provisions of the Proposed
Agreement become inconsistent with any applicable law), that Party shall be
entitled to serve notice on the other requiring the Parties to meet and seek to
negotiate in good faith (both acting reasonably) such amendments to the
Proposed Agreement as are necessary to achieve (in so far as possible) the
same overall balance of benefits, rights, obligations, costs, liabilities and risks
as applied immediately prior to the relevant Change in Law.
13.2 If the Parties fail to reach agreement within thirty (30) days of the first meeting
referred to in paragraph 13.1, either Party may refer the matter to an Expert
(acting as expert not as arbitrator) to determine such amendments as are
necessary to achieve (in so far as possible) the same overall balance of
benefits, rights, obligations, costs, liabilities and risks as applied immediately
prior to the relevant Change in Law.
13.3 Neither Party will be liable to the other Party for a failure to perform any
obligation under the Proposed Agreement which has become prohibited or
impossible to perform by reason of a Change in Law.

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14 Representations, Warranties and Covenants

14.1 The Proposed Agreement will contain standard representations and warranties,
made by each Party, covering (inter alia) the following: (i) due organisation and
valid existence; (ii) powers to execute the Proposed Agreement and perform
the Party's obligations thereunder; (iii) non-violation of law or constitutional
documents by entering into or performing obligations under the Proposed
Agreement; (iv) confirmation that obligations under the Proposed Agreement
constitute legal, valid and binding obligations; (v) no litigation and (vi) no events
of default or potential events of default have occurred at the date of the
Proposed Agreement.

14.2 The Proposed Agreement will contain covenants binding on the First Party,
covering (inter alia) the following: (i) compliance with applicable law; (ii)
provision of information to the Second Party where reasonably required by the
Second Party in connection with the subject matter of the Proposed
Agreement; (iii) evidence in form and substance satisfactory to the Second
Party (acting reasonably) that the First Party has actually utilised or supplied
(as applicable) the Net-Zero Carbon Shipping Fuel in respect of which it claims
any Difference Amount for ship propulsion; (iv) maintenance of appropriate
insurance in respect of the use of Net-Zero Carbon Shipping Fuel during the
term of the Proposed Agreement and (v) [●].

15 Transferability

15.1 Neither Party may assign or novate its rights under this heads of agreement or
the Proposed Agreement without the prior written consent of the other Party
(not to be unreasonably withheld or delayed), except that the Second Party
may transfer, assign or novate all or any of its rights or obligations under this
heads of agreement or the Proposed Agreement to an Affiliate.

16 IP Rights

16.1 The Proposed Agreement will contain provisions pursuant to which each Party
reserves any IP Rights developed by or on behalf of it prior to or during the
term of the Proposed Agreement. Provision for non-exclusive, royalty-free, non-
transferable licences to be issued by each Party to the other if required during

76
 the term of the Proposed Agreement will be included in the Proposed
Agreement.

17 Direct Agreement

17.1 Upon written request from the First Party, the Second Party agrees to enter into
negotiations in respect of a direct agreement in respect of the Proposed
Agreement, with or for the benefit of any lender providing financing or
refinancing to the First Party in connection with the use or supply (as
applicable) of Net-Zero Carbon Shipping Fuel, such direct agreement to be on
terms acceptable to the Second Party (acting reasonably).

18 Commencement and signature

The Parties have signed this heads of agreement on the dates(s) below:

Agreed by (First Party): Agreed by (Second Party):

Signature Signature

Print Name Print Name

Date Date

77
7.2 Total Cost of Ownership Contract for Difference

HEADS OF AGREEMENT

This heads of agreement is made on the date of the last signature below.

BETWEEN

[Bidding Entity X]155 (First Party)

- AND -

[Directorate-General for Climate Action, European Commission] (Second Party),

(each a Party and together the Parties)

SUBJECT TO CONTRACT

Background

C. The First Party and the Second Party are interested in entering into the Proposed
Agreement to support the First Party’s supply and operation of a Zero-emissions Deep
Sea Shipping Vessel, as defined below.

D. This heads of agreement sets out at a high level, the key terms and conditions of the
Proposed Agreement.

1 Definitions

155 The bidding entity may be a ship operator or another entity involved in the ownership or operation of ships, which can
supply and operate a Zero-emissions Deep Sea Shipping Vessel, and use Net-Zero Carbon Shipping Fuel in the vessel (which
is not already supported by a CfD from the Second Party).
78
1.1 For the purposes of this heads of agreement:

"Affiliate" means in relation to the Second Party, another person, firm,

company, corporation, government, state or agency of a state, or any
association, trust or partnership (whether or not having separate legal
personality) that controls, is controlled by, or is under common control with the
Second Party;

"Business Day" means a day on which banks are open for business in [●]
(excluding Saturdays, Sundays and public holidays);

"Ceiling Price" means the highest two-week average price for [marine gas oil
(MGO)] trading at the 5 largest bunkering ports [in the European Union] in the
five (5) years immediately preceding the date on which the Reference Price is
calculated, adjusted on the date on which the Reference Price is calculated
(each such date, the Indexation Date) in accordance with the following
formula:

𝐶𝑒𝑖𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝐶𝑃𝑏𝑎𝑠𝑒 × 𝐼𝑁𝐹

Where:

CPbase is the highest two-week average price for [marine gas oil (MGO)] trading
at the 5 largest bunkering ports [in the European Union] in the five (5) years
immediately preceding the date on which the Reference Price is calculated;
and

INF is calculated in accordance with the following formula:

𝐻𝐼𝐶𝑃𝑡
𝐼𝑁𝐹 =
𝐻𝐼𝐶𝑃𝑏

Where:

HICPt means the Harmonised Index of Consumer Prices for the month
immediately prior to the month in which the Indexation Date falls; and

HICPb means the Harmonised Index of Consumer Prices for [for the first month
of the year preceding the Indexation Date];

79
“CfD Reverse Auction” means a reverse auction process run by or on behalf
of the Second Party in accordance with rules determined by the Second Party,
pursuant to which eligible suppliers and operators of the Vessel may bid to
receive pricing support with respect to the supply and operation of the Vessel,
pursuant to an agreement such as the Proposed Agreement;

"Change in Law" means the coming into effect of any law after the date of the
Proposed Agreement, and/or the modification, repeal or replacement of any law
after the date of the Proposed Agreement, and/or in the case of a judgment of a
competent authority any binding change in the interpretation or application of
any law after the date of the Proposed Agreement by a competent authority;

"Difference Amount" has the meaning ascribed to it in paragraph 3.2.

"Dispute Notice" has the meaning ascribed to it in paragraph 6.2.

"EMIR" means the European Regulation on OTC Derivatives, Central

Counterparties and Trade Repositories (Regulation 648/2012);

"Expert" has the meaning ascribed to it in paragraph 6.3.

"Floor Price" means the lowest two week average price for [marine gas oil
(MGO)] trading at the 5 largest bunkering ports [in the European Union] in the
five (5) years immediately preceding the date on which the Reference Price is
calculated, adjusted on the date on which the Reference Price is calculated
(each such date, the Indexation Date) in accordance with the following
formula:

𝐹𝑙𝑜𝑜𝑟 𝑃𝑟𝑖𝑐𝑒 = 𝐹𝑃𝑏𝑎𝑠𝑒 × 𝐼𝑁𝐹

Where:

FPbase is the lowest two week average price for [marine gas oil (MGO)] trading
at the 5 largest bunkering ports [in the European Union] in the five (5) years
immediately preceding the date on which the Reference Price is calculated;
and

INF is calculated in accordance with the following formula:

80
 𝐻𝐼𝐶𝑃𝑡
𝐼𝑁𝐹 =
𝐻𝐼𝐶𝑃𝑏

Where:

HICPt means the Harmonised Index of Consumer Prices for the month
immediately prior to the month in which the Indexation Date falls; and

HICPb means the Harmonised Index of Consumer Prices for [for the first month
of the year preceding the Indexation Date];

"Force Majeure" means, in respect of a Party, any event outside the

reasonable control of that Party affecting its ability to perform any of its
obligations under the Proposed Agreement and which could not have been
prevented or avoided by a reasonable and prudent operator, including acts of
war, natural disaster, national strikes or other industrial action, threat of war,
terrorist act, blockade, revolution, riot, insurrection, civil commotion, public
demonstration, sabotage, lightning, fire, storm, flood, earthquake, or acts or
omissions of competent authorities otherwise than in accordance with laws
and/or directives (except that lack of funds or strikes only of a Party’s own
employees and/or those of its contractors shall not constitute Force Majeure);

"Guarantees of Origin" shall have the meaning given to the term in Directive
2009/28/EC;

“Gross Tonnage” means the gross tonnage (GT) of the ship as defined in
Regulation 3 of Annex 1 of The International Convention on Tonnage
Measurement of Ships, using the following formula:

𝐺𝑇 = 𝑉 × 𝐾

Where V is the ship’s total volume in cubic metres, and

𝐾 = 0.2 + 0.02 × log10 𝑉

“Net-Zero Carbon Shipping Fuel” means (i) hydrogen or hydrogen

derivatives, such as methanol and ammonia, produced from renewable energy;
(ii) nuclear energy or (iii) fuel which is produced with complete carbon capture
and storage of any Scope 1 & 2 CO2 emissions and which complies with PAS
2060. The First Party must ensure the fuel supplied meets any certification
81
requirements set by the Second Party (e.g., Guarantees of Origin), or be
subject to forfeiture of Performance Security provided pursuant to paragraph
4.2.4.

“Performance Security” means a cash payment made by the First Party that
is equal to [€X]/Tonne-kilometres (“tkm”) of freight transport that the First Party
commits to supply in 3.1;

“Proposed Agreement” means an agreement, the form of which will be

provided to the First Party if the Second Party notifies it that it has been
successful in its bid into a CfD Reverse Auction, with a term scheduled not to
exceed [x] years, pursuant to which the Second Party agrees to pay the
Difference Amount to the First Party where the circumstances described in
paragraph 3.2 arise;

“Reference Price” means the Benchmark Total Cost of Ownership as defined

by the Schedule in Appendix 2 and is defined in EUR/Tonne-kilometres
travelled;

“Specified Purpose” means use of a Vessel subject to the conditions in 2.1.1

and 2.1.2 on international shipping routes that include any port in [the
European Union];

"Start Date" means the next Business Day to occur after the day on which the
Second Party notifies the First Party pursuant to the Proposed Agreement that
the Second Party considers that each of the conditions precedent to the
effectiveness of the Proposed Agreement as such conditions precedent are set
out in the Proposed Agreement have been satisfied or waived in writing by the
Second Party;

“Strike Price” means the price either (i) administratively-set by the Second
Party, or (ii) the price bid by the First Party in response to reverse auction held
on [DD/MM/YYYY]. The Strike Price shall be adjusted on each anniversary of
the Start Date during the Term (each such date, the Indexation Date) to an
amount calculated in accordance with the following formula:

𝑆𝑡𝑟𝑖𝑘𝑒 𝑃𝑟𝑖𝑐𝑒 = 𝑆𝑃𝑏𝑎𝑠𝑒 × 𝐼𝑁𝐹

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Where:

SPbase means the Strike Price as at the Start Date; and

INF is calculated in accordance with the following formula:

𝐻𝐼𝐶𝑃𝑡
𝑆𝑡𝑟𝑖𝑘𝑒 𝑃𝑟𝑖𝑐𝑒 =
𝐻𝐼𝐶𝑃𝑏

Where:

HICPt means the Harmonised Index of Consumer Prices for the month
immediately prior to the month in which the Indexation Date falls

HICPb means the Harmonised Index of Consumer Prices for [insert date];

"Term" means the period commencing on the Start Date and continuing until
the day prior to the [tenth (10th)] anniversary of the Start Date, subject to earlier
termination of the Proposed Agreement in accordance with its terms;

“Tonne-kilometres” (“tkm”) means the actual distance travelled by the Zero-

emissions Deep Sea Shipping Vessel, multiplied by the weight of its cargo in
tons for each kilometre travelled; and

“Zero-emissions Deep Sea Shipping Vessel” means a shipping vessel

meeting the following requirements: 1. ‘Zero-emissions’ means that zero
carbon dioxide emissions are emitted in the generation or use of the energy
that powers the ship’s propulsion. The same requirement does not apply to ship
construction (if applicable), onboard power consumption or ignition. The First
Party is not permitted to purchase carbon offsets, i.e. the propulsion source
must itself produce zero carbon dioxide emissions. This is not limited to liquid
fuels. 2. ‘Deep Sea Shipping Vessel’ means that the vessel being supported
under the Proposed Agreement must be registered for international travel with
the International Maritime Organisation (IMO) and be certified according to
international maritime, safety, quality and environmental standards as required
by the IMO and national regulation such that it can legally operate along its
intended operational routes.

83
2 Status of heads of agreement156

2.1 This heads of agreement is not exhaustive and is expressly ‘subject to contract’
until a final written agreement has been entered into. Except with respect to
paragraph 7 and otherwise where specifically stated, the terms of this heads of
agreement are not intended to be legally binding between the Parties.

3 Basis of the Proposed Agreement

3.1 Under the Proposed Agreement, the First Party’s primary obligations will be:

3.1.1 to complete full registration and certification of a Zero-emissions Deep

Sea Shipping Vessel by [DD/MM/YYYY]; and

3.1.2 to operate, either directly or through a third party, said Zero-emissions

Deep Sea Shipping Vessel (“Vessel”) for a minimum of [XXX] tkm
annually between [DD/MM/YYYY] and [DD/MM/YYYY] on international
routes including European ports, in compliance with the Specified
Purpose.

3.2 Under the Proposed Agreement, the Second Party’s primary obligation will be to
pay the First Party the difference between the Reference Price and the Strike
Price, where the Strike Price exceeds the Reference Price (the "Difference
Amount”). Settlement will be as follows:

3.2.1 the First Party will provide the Second Party with a statement detailing
the dates and quantities of tkm travelled by the Vessel in the previous
calendar quarter;

3.2.2 the Second Party shall, within [ten (10)] Business Days, provide the
First Party with details of the cumulative Difference Amount due to the
First Party based on the information provided by the First Party
pursuant to paragraph 3.2.1, together with details of the applicable

156Depending on the governing law, local law advice on the status of these heads of agreement and in particular, the
extent to which it is possible to agree that certain provisions are not legally binding, may need to be taken.
84
 Reference Price used for the purposes of calculating the Difference
Amount;

3.2.3 the Second Party shall, unless the First Party has indicated in writing
that it disagrees with the calculation of the cumulative Difference
Amount set out in the notice referred to in paragraph 3.2.2, pay the
First Party the cumulative Difference Amount within thirty (30) days of
the date of the notice issued by the Second Party to the First Party
pursuant to paragraph 3.2.2; and

3.2.4 late payment interest will be payable on any payments made by the
Second Party after the due date indicated in paragraph 3.2.3.

4 Conditions precedent
4.1 To participate in the CfD Reverse Auction (if applicable), the First Party must:

4.1.1 comply with any CfD Reverse Auction rules determined by the Second
Party and notified to the First Party in advance of any CfD Reverse
Auction; and

4.1.2 not (at the time the CfD Reverse Auction is held) appear on the last
published consolidated list of asset freeze targets designated by any
of the United Nations, European Union and [insert any other relevant
bodies / jurisdictions] under legislation relating to current financial
sanctions regimes (or, in the event that any such list ceases to be
published, an equivalent list produced by the [●] government in
respect of the same).

4.2 If the First Party is successful in a CfD Reverse Auction, it will be invited to
enter into a Proposed Agreement, the Start Date under which will commence
upon the satisfaction by the First Party (or waiver in writing by the Second
Party) of certain conditions precedent, which will include:

4.2.1 provision to the Second Party of a legal opinion addressed to the

Second Party, in form and content satisfactory to the Second Party
(acting reasonably), from the legal advisers to the First Party
confirming that the First Party: (i) is duly formed and validly existing
under the laws of the jurisdiction of formation; and (ii) has the power to

85
 enter into and perform, and has taken all necessary action to
authorise its entry into and performance of, the Proposed Agreement;

4.2.2 provision to the Second Party of evidence, in form and content

satisfactory to the Second Party, acting reasonably, of compliance by
the First Party with “know your customer” or similar identification
procedures or checks under all applicable laws and regulations
pursuant to the transactions contemplated by the Proposed
Agreement; and

4.2.3 entry into an agreement for the operation of the Zero-emissions Deep
Sea Shipping Vessel referred to in paragraph 3.1 for the Specified
Purpose and provision of a copy of same to the Second Party, where
the counterparty to the agreement can be either the Second Party
itself or a third party;

4.2.4 provision of Performance Security to the Second Party. The First Party
will forfeit an amount equal to [€X]/tkm that the vessel fails to travel
below the annual minimum specified in paragraph 3.1.2. Any undrawn
Performance Security which is held by the Second Party shall be
returned to the First Party upon expiry or early termination of the
Proposed Agreement.

5 Rights and remedies

5.1 Each Party agrees that damages alone would not be an adequate remedy for
any beach of a legally binding obligation of this heads of agreement by the
other Party. In such an event, the non-defaulting Party shall be entitled to the
remedies of an injunction, specific performance or other equitable relief (or any
equivalent reliefs which may be available) in addition to any other remedy
including damages for any threatened or actual breach of any legally binding
obligation of this heads of agreement.

5.2 This heads of agreement is for the benefit of the parties to it and is not intended
to benefit, or be enforceable by, anyone else.

6 Governing law and jurisdiction

6.1 This heads of agreement shall be governed by the laws of [XXX].

86
6.2 If any dispute of a technical or financial nature arises between the Parties
under this heads of agreement or the Proposed Agreement, either Party may
issue a notice of such dispute to the other Party (Dispute Notice) and if such
dispute has not been resolved within twenty (20) Business Days of issue of the
Dispute Notice between such Parties’ representatives with day-to-day
responsibility for the administration of the heads of agreement or Proposed
Agreement (as applicable), it shall first be referred to the senior executive of
each such Party who shall be supplied with all information which the Parties
consider pertinent and shall endeavour to resolve the dispute within ten (10)
Business Days of the referral of the dispute to them. This paragraph 6.2 and
any discussion between senior executives which takes place pursuant to it shall
be without prejudice to any right or remedy which any such Party may
ultimately have, should the matter in dispute fail to be resolved by such
discussions. If any such dispute is not resolved within ten (10) Business Days
of its referral to the senior executives of the Parties, either Party may refer such
dispute to an expert in accordance with paragraph 6.3 below. Disputes which
are not of a technical or financial nature shall be determined by the courts in
accordance with paragraph 6.8 below.

6.3 Any dispute which is of a technical or financial nature and is not resolved
pursuant to paragraph 6.2 above or is otherwise provided in this heads of
agreement or the Proposed Agreement to be subject to determination in
accordance with paragraph 6.2 shall be determined by an expert with
appropriate professional qualifications, independent of the Parties and with no
interest in the dispute (an Expert) in accordance with this paragraph 6.3.

6.4 In the event that the Parties are unable to agree whether a dispute is of a
technical or financial nature or not then the matter shall be referred to [●] for
determination of that question.

6.5 Either Party may initiate the reference of a dispute described in paragraph 6.3
to an Expert by proposing to the other Party the appointment of a named
individual as the Expert.

6.6 The Expert shall be selected by agreement between the Parties or, if they have
not agreed within fourteen (14) days after the date of the request to refer by
one of the Parties, by [●] on the application of either Party. The Parties shall

87
 use reasonable endeavours to procure that the Expert shall accept his
appointment within five (5) days of selection. If the Expert has accepted
appointment but is unable to complete the reference due to severe ill health,
death or resignation or for other insuperable objectively justifiable reason,
another Expert shall be appointed by the Parties, or if they have not agreed on
the appointment within fourteen (14) days after the request to do so by one of
the Parties, by the [●] on the application of either Party.

6.7 The Expert shall act as an expert and not as an arbitrator. The Parties shall
each have the right to make representations to the Expert. There will be no
formal hearing (unless the Expert otherwise determines) and the Expert shall
regulate the procedure as he sees fit. The Expert shall have the power to open
up, review, and revise any certificate, opinion, requisition or notice and to
determine all matters in dispute. The Expert shall reach a decision within 28
days of their appointment or such longer period as is agreed by the Parties
after the dispute has been referred to the Expert. Save in the case of fraud or
manifest error, the decision of the Expert shall be final and binding on the
Parties and can include orders that one or both of the Parties are to pay his
costs, stating the proportion, and that one Party is to pay the other Party’s
costs. The Expert may take such advice and assistance from professional
advisers or other third parties as he reasonably considers appropriate to enable
him to reach a determination of the dispute, and the costs of such advice and
assistance shall be included within the Expert's costs for the purposes of the
immediately preceding sentence.

6.8 Subject to paragraphs 6.2 – 6.7 above, the courts of [●] shall have exclusive
jurisdiction to settle any dispute. The Parties agree that the courts of [●] are the
most appropriate and convenient courts to settle disputes, and accordingly no
Party will argue to the contrary.

6.9 Subject to paragraphs 6.2 – 6.7 above, nothing in this heads of agreement or
the Proposed Agreement shall in any way restrict any Party’s right to refer a
dispute to such courts.

7 Confidentiality
7.1 This paragraph 7 is legally binding.

88
 7.2 Each Party undertakes that it shall not for a period of three (3) years after the
date of this heads of agreement disclose to any person any confidential
information concerning the business, affairs, customers, clients or suppliers of
the other party or of any member of the group of companies to which the other
party belongs, except as permitted by paragraph 7.3.

7.3 Each party may disclose the other party’s confidential information:

7.3.1 to its employees, officers, representatives or advisers who need to

know such information for the purposes of the negotiation of the
Proposed Agreement. Each Party shall ensure that its employees,
officers, representatives or advisers to whom it discloses the other
Party’s confidential information comply with this paragraph 7; and

7.3.2 as may be required by law, a court of competent jurisdiction or any

governmental or regulatory authority.

7.4 No Party shall use the other Party’s confidential information for any purpose
other than the negotiation of the Proposed Agreement.

8 EMIR Reporting

8.1 The Proposed Agreement will contain appropriate provisions dealing with
compliance with applicable obligations to report details of contracts that are
concluded, modified or terminated in accordance with Article 9 of EMIR.

9 Costs

9.1 Each Party shall pay its own costs incurred in connection with negotiation of
this heads of agreement and any Proposed Agreement or other documents
contemplated by it.

10 Entire Agreement and Counterparts

10.1 This heads of agreement constitutes the complete agreement of the Parties
pertaining to the respective subject matter and supersedes the Parties’ prior
related agreements, understandings and discussions.

89
 10.2 This heads of agreement may be executed electronically and in counterparts,
each of which (including signature pages) is an original, but all of which
together is one and the same instrument.

11 Term and Termination

11.1 This heads of agreement shall terminate automatically upon the earlier of (i)
the First Party entering into a Proposed Agreement or (ii) the Second Party
notifying the First Party in writing that one or more third parties have entered into
agreements with it following the conclusion of a CfD Reverse Auction pursuant to
which the Second Party agrees to pay such third party(ies) a difference amount
calculated as the difference between the Reference Price and a strike price
awarded to such party(ies) following the CfD Reverse Auction.

11.2 The Proposed Agreement shall commence on the date of the Proposed
Agreement and, subject to the provisions for earlier termination set out in the
Proposed Agreement, shall continue in full force and effect until the end of the
Term.

11.3 This heads of agreement and any Proposed Agreement shall automatically
terminate upon the insolvency of either Party.

11.4 The Second Party shall be entitled (but not obligated) to terminate the
Proposed Agreement if:

11.4.1 the First Party fails to maintain the required Performance Security in
place or the full amount of Performance Security has been drawn
down by the Second Party in accordance with the terms of the
Proposed Agreement;

11.4.2 the First Party fails to satisfy the conditions precedent thereunder by
any long-stop date for their satisfaction set out in the Proposed
Agreement (unless the Second Party has waived such conditions
precedent); or

11.4.3 the First Party defaults in the performance of any of its other material
obligations under the Proposed Agreement and such default is either
not capable of remedy or if capable of remedy, remains un-remedied

90
 after thirty (30) days from the date of notice from the Second Party
requiring such default to be remedied.

11.5 The First Party shall be entitled to terminate the Proposed Agreement if:

11.5.1 the Second Party fails to pay any amount due under the Proposed
Agreement on the due date for payment and the same is not remedied
within twenty (20) days of the First Party giving the Second Party
notice of the default; or

11.5.2 the Second Party defaults in the performance of any of its other
material obligations under the Proposed Agreement and such default
is either not capable of remedy or if capable of remedy, remains un-
remedied after thirty (30) days from the date of notice from the First
Party requiring such default to be remedied.

12 Force Majeure

12.1 Subject to paragraph 12.2, neither Party shall be in breach of the Proposed
Agreement, or otherwise liable to the other, by reason of any delay in
performance or non-performance of any of its obligations under the Proposed
Agreement to the extent such delay or non-performance is caused by Force
Majeure.

12.2 A Party may only rely upon paragraph 12.1 to the extent that it:

12.2.1 notifies the other Party of the matters constituting Force Majeure as
soon as reasonably practicable following its occurrence;

12.2.2 keeps the other Party fully informed as to the matters relating to the
Force Majeure; and

12.2.3 uses its reasonable endeavours to minimise the effects of the Force
Majeure on the performance of its obligations under the Proposed
Agreement.

12.3 The Party not affected by the Force Majeure may terminate the Proposed
Agreement at any time while the Force Majeure is continuing by written notice to
the Party affected by the Force Majeure if the Force Majeure prevents the

91
 affected Party from fulfilling its material obligations under the Proposed
Agreement for a continuous period exceeding [twelve (12)] months.

13 Change in Law

13.1 The Proposed Agreement will contain provisions which provide that if a Party
reasonably considers that there has been a Change in Law which materially
affects the subject matter, the operation, or the interpretation of the Proposed
Agreement (including situations in which the provisions of the Proposed
Agreement become inconsistent with any applicable law), that Party shall be
entitled to serve notice on the other requiring the Parties to meet and seek to
negotiate in good faith (both acting reasonably) such amendments to the
Proposed Agreement as are necessary to achieve (in so far as possible) the
same overall balance of benefits, rights, obligations, costs, liabilities and risks as
applied immediately prior to the relevant Change in Law.
13.2 If the Parties fail to reach agreement within thirty (30) days of the first meeting
referred to in paragraph 13.1, either Party may refer the matter to an Expert
(acting as expert not as arbitrator) to determine such amendments as are
necessary to achieve (in so far as possible) the same overall balance of benefits,
rights, obligations, costs, liabilities and risks as applied immediately prior to the
relevant Change in Law.
13.3 Neither Party will be liable to the other Party for a failure to perform any
obligation under the Proposed Agreement which has become prohibited or
impossible to perform by reason of a Change in Law.

14 Representations, Warranties and Covenants

14.1 The Proposed Agreement will contain standard representations and

warranties, made by each Party, covering (inter alia) the following: (i) due
organisation and valid existence; (ii) powers to execute the Proposed Agreement
and perform the Party's obligations thereunder; (iii) non-violation of law or
constitutional documents by entering into or performing obligations under the
Proposed Agreement; (iv) confirmation that obligations under the Proposed
Agreement constitute legal, valid and binding obligations; (v) no litigation and (vi)
no events of default or potential events of default have occurred at the date of the
Proposed Agreement.

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 14.2 The Proposed Agreement will contain covenants binding on the First Party,
covering (inter alia) the following: (i) compliance with applicable law; (ii) provision
of information to the Second Party where reasonably required by the Second
Party in connection with the subject matter of the Proposed Agreement, including
but not limited to the information specified in Appendix 1; (iii) provision of copies
of any offtake agreements for supply of Zero-CO2 Shipping Fuel in respect of
which the First Party claims any Difference Amount under the Proposed
Agreement, together with evidence in form and substance satisfactory to the
Second Party (acting reasonably) that the First Party has actually supplied the
Zero-CO2 Shipping Fuel in respect of which it claims any Difference Amount to
an international shipping operator for use in ship propulsion; (iv) maintenance of
appropriate insurance in respect of the sourcing and supply of Zero-CO2 Shipping
Fuel during the term of the Proposed Agreement and (v) [●].

15 Transferability

15.1 Neither Party may assign or novate its rights under this heads of agreement
or the Proposed Agreement without the prior written consent of the other Party
(not to be unreasonably withheld or delayed), except that the Second Party may
transfer, assign or novate all or any of its rights or obligations under this heads of
agreement or the Proposed Agreement to an Affiliate.

16 IP Rights

16.1 The Proposed Agreement will contain provisions pursuant to which each
Party reserves any IP Rights developed by or on behalf of it prior to or during the
term of the Proposed Agreement. Provision for non-exclusive, royalty-free, non-
transferable licences to be issued by each Party to the other if required during the
term of the Proposed Agreement will be included in the Proposed Agreement.

17 Direct Agreement

17.1 Upon written request from the First Party, the Second Party agrees to enter
into negotiations in respect of a direct agreement in respect of the Proposed
Agreement, with or for the benefit of any lender providing financing or refinancing

93
 to the First Party in connection with Zero-CO2 Shipping Fuel, such direct
agreement to be on terms acceptable to the Second Party (acting reasonably).

18 Commencement and signature

The Parties have signed this heads of agreement on the dates(s) below:

Agreed by (First Party): Agreed by (Second Party):

Signature Signature

Print Name Print Name

Date Date

94
Appendix 1

Information to be provided by the First Party to the Second Party pursuant to the
Proposed Agreement

The forms and documents that the Second Party may demand from the first party are listed
in the ‘Convention on Facilitation of International Maritime Traffic, 1965’ (FAL), Standard 2.1.

The documents include:

• IMO General Declaration (FAL form 1)

• Cargo Declaration (FAL form 2)
• Ship’s Stores Declaration (FAL form 3)
• Crew’s Effects Declaration (FAL form 4)
• Crew List (FAL form 5)
• Passenger List (FAL form 6)
• Dangerous Goods (FAL form 7)

In addition to FAL the following declarations entered into force 1 January 2018 and include
relevant listed documents:

• Security-related information as required under SOLAS regulation XI-2/9.2.2

• Advanced electronic cargo information for customs risk assessment purposes
• Advanced Notification Form for Waste Delivery to Port Reception Facilities

In addition, under FAL the Second Party may demand two further documents under the
Universal Postal Convention and the International Health Regulations.

The Second Party may demand relevant flag State documents listed under FAL.2/Circ.131.

95
Appendix 2

Schedule for Benchmark Total Cost of Ownership

The ‘Benchmark Total Cost of Ownership’ is a is a measure of the Total Cost of Ownership
of a benchmark shipping vessel representative of those predominantly in use today in
different vessel categories. Its purpose is to establish a reference cost for such a vessel such
that the amount paid by the Second Party to the First Party reflects the cost premium
associated with construction, operation and maintenance of a Zero-Emissions Deep Sea
Shipping Vessel as compared to the benchmark vessel.

The benchmark is expressed in EUR per Tonne-kilometre travelled, using assumptions that
are based on typical operating conditions for a carbon dioxide-emitting ship using the
dominant fuel in each category. How a ship is categorised depends on its Gross Tonnage,
the Vessel Type and the Build Type (whether it is a New Build, or a Retrofit of an existing
vessel).

Benchmark TCO schedule

Container

Gross Tonnage Build Type Benchmark TCO Lifetime Reference

(EUR) utilisation Price
(tkm) (EUR/tkm)

0-x New Build

0-x Retrofit

x-y New Build

x-y Retrofit

Wet Bulk

Gross Tonnage Build Type Benchmark TCO Lifetime Reference

(EUR) utilisation Price
(tkm) (EUR/tkm)

0-x New Build

0-x Retrofit

x-y New Build

x-y Retrofit

96
Dry Bulk

Gross Tonnage Build Type Benchmark TCO Lifetime Reference

(EUR) utilisation Price
(tkm) (EUR/tkm)

0-x New Build

0-x Retrofit

x-y New Build

x-y Retrofit

Cruise

Gross Tonnage Build Type Benchmark TCO Lifetime Reference

(EUR) utilisation Price
(tkm) (EUR/tkm)

0-x New Build

0-x Retrofit

x-y New Build

x-y Retrofit

Calculations for TCO schedule

The TCO schedule is based on the sum of the total expected costs of construction and
operation of a benchmark ship in each category, assuming a given utilisation rate. These
costs are calculated differently for each ship size, class, and build type.

CapEx

• New builds: Cost of building an MGO-fuelled ship, for each type. Includes
chassis/structure, internal fittings and equipment, engine, fuel tanks, fuel delivery
system, transmission, pollution control systems.

𝐶𝑎𝑝𝐸𝑥𝑁𝐵 = ∑(𝐶ℎ𝑎𝑠𝑠𝑖𝑠, 𝐹𝑖𝑡𝑡𝑖𝑛𝑔𝑠, 𝐸𝑛𝑔𝑖𝑛𝑒, 𝑇𝑎𝑛𝑘𝑠, 𝐹𝑢𝑒𝑙𝑆𝑦𝑠𝑡𝑒𝑚, 𝑇𝑟𝑎𝑛𝑠𝑚𝑖𝑠𝑠𝑖𝑜𝑛, 𝑃𝑜𝑙𝑙𝑢𝑡𝑖𝑜𝑛𝐶𝑡𝑟𝑙)

• Retrofit: Cost of replacing the engine with an MGO-compatible engine and fuel supply
system for an existing ship

𝐶𝑎𝑝𝐸𝑥𝑅𝐹 = ∑(𝐸𝑛𝑔𝑖𝑛𝑒, 𝑇𝑎𝑛𝑘𝑠, 𝐹𝑢𝑒𝑙𝑆𝑦𝑠𝑡𝑒𝑚)

97
OpEx

• This is the same for new builds and retrofits

• Expected nominal cost of fuel (using the same measure as the fuel CfD; paste
relevant paragraphs here) multiplied by the fuel used per kilometre at average load
(e.g. for a ship of 100,000 DWT the average load might be 80,000 DWT), multiplied
by years in service (e.g. 30)
𝑂𝑝𝐸𝑥𝐹𝑢𝑒𝑙 = 𝐹𝑢𝑒𝑙𝑃𝑟𝑖𝑐𝑒 × 𝐹𝑢𝑒𝑙𝑃𝑒𝑟𝐾𝑚𝑎𝑣𝑔 × 𝐾𝑚𝑃𝑒𝑟𝑌𝑒𝑎𝑟𝑎𝑣𝑔 × 𝑦𝑒𝑎𝑟𝑠

• Cost of maintenance, insurance, crew salaries, any cost associated with securing
access to bunkering fuel, multiplied by years in service (e.g. 30)

𝑂𝑝𝐸𝑥𝑁𝑜𝑛−𝑓𝑢𝑒𝑙 = 𝑦𝑒𝑎𝑟𝑠 × ∑(𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒, 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒, 𝐶𝑟𝑒𝑤, 𝐵𝑢𝑛𝑘𝑒𝑟𝑖𝑛𝑔)

TCO

Once the total CapEx and OpEx for a given ship type are calculated, they are added together
to arrive at a figure for Total Cost of Ownership.

𝑇𝐶𝑂 = ∑(𝐶𝑎𝑝𝐸𝑥, 𝑂𝑝𝐸𝑥𝐹𝑢𝑒𝑙 , 𝑂𝑝𝐸𝑥𝑁𝑜𝑛−𝐹𝑢𝑒𝑙 )

Reference Price

Then, using the same average load (in tonnes) and distance (in kilometres/year)
assumptions used to calculate average fuel cost per kilometre, this figure is divided by
average tonnage, times the number of kilometres travelled by year, times the number of
years in service, to arrive at the Reference Price (in EUR per tkm):

𝑇𝐶𝑂
𝑅𝑃 =
𝑇𝑜𝑛𝑛𝑎𝑔𝑒𝑎𝑣𝑔 × 𝐾𝑚𝑃𝑒𝑟𝑌𝑒𝑎𝑟𝑎𝑣𝑔 × 𝑦𝑒𝑎𝑟𝑠

98
Appendix 3

Gross Tonnage

The reference price determination of Gross Tonnage (GT) may be the most effective choice
in the majority of cases. The simplistic nature of GT as a volumetric measure of capacity is
an effective choice, through limiting in practice for open-top (“hatchless”) vessels such as
containerships. In this scenario, Twenty-foot Equivalent Unit (TEU) capacity may be an
effective approximation as GT refers to enclosed space. Regardless, GT would be a useful
approach to many sectors including bulk carriers (dry/wet), tankers, and LNG/LPG vessels.
The relationship between GT and TEU is well correlated157. This may simplify the number of
measures we would need to employ in the initial version of the CfD proposal:

The usage of FT as a measure for other segments correlates relatively well with ship shove
(calculated: length x beam x (D)Depth of (d)draft), with a few notable exceptions. These are
primarily cruise vessels where LBd is a stronger overall calculation as determined in
Vasudevan, 2010158. Therefore, the usage of GT and TEU are both considered effective
choices within the reference schedule.

157 Abramowski, Cepowski, and Zvolensky, 2018, Determination of regression formulas for key design characteristics of
container ships at preliminary design stage, New Trends in Production Engineering, vol 1 issue 1, pp. 247-257
https://sciendo.com/downloadpdf/journals/ntpe/1/1/article-p247.xml
158 Vasudevan, A., 2010, Tonnage measurement of ships: historical evolution, current issues and proposals for the way

forward, World Maritime University https://commons.wmu.se/cgi/viewcontent.cgi?article=1213&context=all_dissertations

99
8. Acknowledgements
Thank you to all the interviewees that gave of their time and valuable insights during what
have been difficult times. A special thanks to Ronan Lambe and Pinsent Masons for their
valuable advice and support in drafting the legal documentation. Finally, thanks to Petrissa
Eckle from ETH for providing advice and valuable costing information and Zac Cesaro for his
expert input on hydrogen and ammonia fuels, and to Kasper Søgaard of GMF, Isabelle Rojon
of UMAS, Aoife O'Leary of EDF, and Ruth Herbert and Tahir Majid from LCCC for their
invaluable expert feedback on the draft report.

100
9. Technical Appendix

A.1 Summary of technology options

Table A4 provides a brief summary of the technologies being examined to replace
conventional fossil fuels, comparing their technical applicability given variance in volumetric
energy density, relative impact on total cost of ownership (TCO), storage properties, safety
risks and potential for integration into existing infrastructure.

Table A4. A summary of the pros and cons of some of the technology options available for decarbonising
transport

Existing
Fuel Advantages Disadvantages
Examples/Pilots

• Low energy density (7.5x • “Northern Lights”

• Cheaper and less storage volume of SMR+CCS project
electricity-intensive MGO)162 • CMB developing
than ammonia and • Lack of global logistical mono- and dual-fuel
synfuels159 infrastructure hydrogen engines
• No toxic by-products • Liquefication technology • Norwegian Electrical
Hydrogen • Does not require co- and capacity still Systems fuel cell
firing of another fuel immature retrofit, operational
(for ignition • Expensive to transport by 2023
engines)160 (cryogenic) • EU FLAGSHIPS
• Engines commercially • Low compatibility with project to deploy two
available in 3-5 existing bunkering commercial vessels
years161 infrastructure (France & Norway)
• Highly flammable

• Equinor/Eidesvik
• Toxic to human and
• Usable in ICE engines ammonia pilot vessel
Ammonia aquatic life, corrosive 168
with minor adaptation, • MAN/Samsung
• Fuel cells commercially
commercially /Lloyd’s
available in 5-7+ years169
Register/MSC joint

159 Electricity required to produce enough fuel for one day’s sailing of a Panamax container vessel: 1.2 GWh for H2; 1.4
GWh for NH3; 1.6 GWh for biogas source; 1.8 GWh for synthetic methanol. See Ash, Sikora, and Richelle (2019)
“Electrofuels for shipping”.
160 Ibid.
161 ETH Zürich and Amplifier (2019) “Towards net-zero – Deep Dive Comparison of Zero Carbon Fuels”. https://fe8dce75-

4c2a-415b-bfe4-e52bf945c03f.filesusr.com/ugd/0a94a7_0980799ebca344158b897f9040872d36.pdf
162 Ash, Sikor and Richelle: “Electrofuels for shipping” (EDF, 2019)
168 “Since ammonia is currently shipped around the world in significant quantities, there are established risk mitigation

measures available, but these would need to be formalised into industry regulations and more research undertaken into
protocols for use as a fuel before ammonia could be widely adopted.” (Ash, Sikora, and Richelle (2019) “Electrofuels for
shipping”).
169 ETH Zürich and Amplifier (2019) “Towards net-zero – Deep Dive Comparison of Zero Carbon Fuels”.

101
 available in 3-5 • Requires co-firing with project for ammonia-
years163 another fuel (compression fuelled tanker
• More energy dense, and spark ignition (available 2022)
less burden on TCO engines) • Yara Sluiskil
than • Low compatibility with (Netherlands) and
hydrogen/ammonia164 existing bunkering Pilbara (Australia)
165 green ammonia
infrastructure
• Established global • N2O emissions plants
market and logistical comparable with current
infrastructure fuels
• Less price uncertainty • 4.1x storage volume of
relative to other fuels MGO170
(electrolyser
technology, electricity
prices)
• Low SO2, particulate
matter, metal, and
polycyclic aromatic
hydrocarbon
pollution166
• Less flammable than
hydrogen or synfuels.
Safe handling
expertise already
exists167

• Synthetic diesel (from • Methanol ship “Stena

• Low efficiency, high cost:
electrolysis) works Germanica” in
requires hydrogen
Carbon- with existing operation since 2015
production, CO2 capture,
based infrastructure (Sweden/Germany)
and e-fuel synthesis171
synthetic • Compatible with • Green Maritime
• 95% of engines would
electrofuels existing bunkering Methanol consortium
have to be replaced to
(synfuels) infrastructure selected 9 research
use e-methanol
• No co-firing required and pilot ships in
• 2.3x storage volume of
in spark ignition 2019 (Netherlands)
MGO172
engines

163 Ibid.
164 IEA (2019) “Current and future total cost of ownership of fuel/powertrain alternatives in a bulk carrier ship”.
165 Middlehurst, C. (2020, 30 March). “Ammonia flagged as green shipping fuel of the future”. Financial Times.

https://www.ft.com/content/2014e53c-531f-11ea-a1ef-da1721a0541e
166 Ash and Scarborough (2019) “Sailing on Solar”.
167 Ibid.
170 Ash, Sikora, and Richelle (2019) “Electrofuels for shipping”.
171 “Synthetic Diesel would cost approximately twice as much as green hydrogen in terms of energy on a MJ-per-MJ basis”.

(Deign, J. (2020, 21 May) “Marine Sector Turns to Ammonia to Decarbonize Shipping”. GreenTech Media.
https://www.greentechmedia.com/articles/read/marine-sector-looks-to-ammonia-to-decarbonize-shipping).
172 Ash, Sikora, and Richelle (2019) “Electrofuels for shipping”.

102
 • Lifecycle emissions reflect
source of CO2 used in
production173
• Locational flexibility
limited by CO2
source174,175
• Sensitive to cost
projections for direct air
capture of CO2,
representing half of TCO
under best-case
scenario176
• Large-scale methane
synthesis not currently
available

• Most efficient use of

energy • Soby-Fynshav ferry
• Battery costs low and (Denmark)
• Low energy density
Batteries still declining. Already • Helsingor-
• Require replacement
cost-effective for short Helsingborg ferry
every 8-12 years179
distances177 (Denmark, Sweden)
• Lower maintenance
costs178

• Compatible with
existing
engines/powertrains180 • “CMA CGM White
Shark” container
• High energy density,
• Not scalable due to vessel, 2019
low storage volume
Biofuels competition for land use (France/Netherlands)
• High compatibility with
and with other • Van Oord/Shell
existing bunkering
applications marine biofuel pilot
infrastructure
(Netherlands)
• No co-firing required
in spark ignition
engines

173 To produce methanol with zero-emissions emissions over the lifecycle, CO2 must be removed directly from the air or
seawater with green energy”. Hänggi et al (2019) “A review of synthetic fuels for passenger vehicles”.
174 Pérez-Fortes, M. Schöneberger, J. C., Boulamanti, A. and Tzimas, E. (2016) “Methanol synthesis using captured CO2 as

raw material: Techno-economic and environmental assessment”. Applied Energy 161:718-732.

175 Svanberg et al (2018) “Renewable methanol as a fuel for the shipping industry”.
176 IEA (2019) “Current and future total cost of ownership of fuel/powertrain alternatives in a bulk carrier ship”.
177 ETH Zürich and Amplifier (2019) “Towards net-zero – Deep Dive Comparison of Zero Carbon Fuels”.
178 Ibid.
179 Ibid.
180 Ash, Sikor and Richelle: “Electrofuels for shipping” (EDF, 2019)

103
 • For Molten Salt
• Few nuclear ships have
Reactors (MSR) with
ever been built for
enriched fuels no
commercial purposes
Nuclear refuelling is required • NS Savannah, 1959
• Enriched fuels for MSR
for the ship’s 30-year
have proliferation issues
lifetime.
• Spent reactors must be
• Reduces uncertainty
disposed of eventually
regarding fuel costs

104
A.2 Detailed analysis of nuclear options
Background & Overview

Nuclear technology is an attractive option to consider for the decarbonization of the shipping
sector because of its capability to supply a large, dependable, carbon-free source of energy
with relatively low fuel costs. However, despite low, relatively stable fuel costs, there is
considerable capital investment required along with higher decommissioning expenses and
additional operating costs due to the unique attributes associated with managing a radioactive
source material.

Projected Levelized Costs of Electricity (LCOE) from Nuclear Energy

The IEA estimate the average Levelized Costs of Electricity (LCOE) of nuclear power in the
United States for new nuclear build in 2040 is expected to be >$100 USD/MWh. In contrast a
plant that has been in operation more than 30 years (i.e., had a lifetime extension) has costs
closer to $40 USD/MWh. The cost benefits achieved from life extension are even more evident
in the European Union where the costs of new nuclear build are expected to be more than
$100 USD/MWh. 181

Figure 9: Levelized cost of electricity in the United States in 2040. Source: Sadamori 2020182

181 Sadamori, K. (2020) "Nuclear Power in a Clean Energy System." In Annales des Mines-Responsabilite et environnement,
no. 1, pp. 122-126.
182 Ibid.

105
 Figure 10: Levelized cost of electricity in the European Union, 2040. Source: Sadamori 2020183

This is consistent with similar estimates of LCOE in the US from Lazard’s Asset
Management group, which show the vast majority of the costs associated with new nuclear
build are capital expenditure, whereas only marginal costs exist with existing plant operation.
The Lazard LCOE costs of existing nuclear generation range from an estimated $25-
$32/MWh.

Figure 11. Generated using data from Lazard’s Levelized Costs of Energy Analysis Version 14.0 184

183Ibid.
184Lazard (2020) “Lazard’s Levelized Cost of Energy Analysis - Version 14.0”.
https://www.lazard.com/media/451419/lazards-levelized-cost-of-energy-version-140.pdf
106
Advancements in nuclear capabilities and construction is predicted to reduce costs long-term.
OECD countries which have continued to invest in nuclear development are expected to
benefit from established supply chains and faster learning rates. As stated by the OECD’s
Nuclear Energy Agency Outlook (2020), “with several projects near completion that have
served to establish industrial capabilities, future projects could take advantage of the
experience gained and be more competitive.”185 Based on assumed advancements in learning
and cost reductions, the projected overnight costs (i.e. capital costs without interest) of new,
large Generation III/III+ nuclear plants from 2025 to 2030 is shown in Figure 12, suggesting a
20% decline from 2020.

Figure 12:Trend in projected cost of new nuclear in OECD countries. Source IEA, NEA 2020 186

Existing and Future Nuclear Technologies

The cost estimates shown in Figure 12 are for large commercial nuclear reactors (i.e., > 300
MWe). As of December 31st, 2019, there were 443 nuclear power reactors in operation around
the world. There are an additional 186 reactors permanently shut down. In 2019 there were
six new reactors added to the global electricity grid with an average construction time of 118
months (i.e., ~10 years).187 All reactors that started construction and that were added to the
grid in 2019 are of the Pressurized Water Reactor (PWR) type, light-water reactor utilizing a
thermal neutron fuel cycle.

Nuclear Reactor technologies have evolved since the first simple demonstration project at
Chicago Pile 1 in 1942. Figure 13 shows how the nuclear energy community classifies the
different technology advances over time:188

185 IEA, NEA (2020) Projected Costs of Generating Electricity, https://iea.blob.core.windows.net/assets/ae17da3d-e8a5-

4163-a3ec-2e6fb0b5677d/Projected-Costs-of-Generating-Electricity-2020.pdf
186 Ibid.
187 Cobb, J. (2020), “Highlights of the World Nuclear Performance Report.”
188 U.S. Department of Energy, Office of Nuclear Energy (n.d.) “Generation IV Nuclear Energy Systems: Program Overview”

Department of Energy. http://nuclear.energy.gov/genIV/neGenIV1.html.

107
 Figure 13: U.S. Department of Energy, Office of Nuclear Energy 189

While the distinctions between generations are somewhat arbitrary, improvements in reactor
technology include better safety and lower overall costs. The majority of reactor technologies
in service today are Generation II technologies.190 New nuclear plants are generally
Generation III or Generation III+ technologies. A key feature of Generation III+ is incorporation
of passive safety features that do not rely on electricity back-up or operator actions to shut
down in the event of an emergency. As with most previous generation systems Generation III
reactors use light-water as their moderating source.

Generation IV reactor technologies utilise different materials, such as gas, lead, or salt to
provide cooling for sustaining the nuclear reaction. The key aspect of Generation IV reactors
is their closed fuel cycle design which makes use of spent fuel and allows for sustainability in
reprocessing. The world’s first and only generation IV reactor is a Chinese demonstration
reactor completed in January 2021. The reactor was produced by China’s Chinergy, a
consortium between the China Nuclear Engineering Corporation (CNEC) and Tsinghua
University's Institute of Nuclear and New Energy Technology.

Small Modular Reactors (SMRs)

SMRs are generally defined as producing power outputs of less than 300 MW(e) per module
and can be produced in a factory and transported to site.191 SMRs are generally Generation
IV designs which include advancements in capabilities that may be able to provide a cost

189 Ibid.
190 Goldberg, S., and Rosner, R. (2011). "Nuclear reactors: Generation to generation." Cambridge: American Academy of
Arts and Sciences.
191 IAEA (2021) "Small Modular Reactor (SMR) Regulators' Forum”. https://www.iaea.org/topics/small-modular-

reactors/smr-regulators-forum.
108
advantage in production. Specifically, due their smaller size and modularity, they can address
many of the construction challenges that have occurred in recent nuclear plant construction.192
While larger (i.e., > 300 MW(e)) nuclear reactors are typically deployed to gain efficiencies in
economies of scale, a small modular plant can reportedly make up for these efficiencies in
plant design simplification, modularization and factory build, and general harmonization in the
licensing and siting process (Figure 14).

Figure 14: Stylised representation of how advocates of small modular reactors propose to overcome the
economies of scale evident in the build of nuclear reactors. Source: Berthelemy et al. 2020193

The Chinese Chinergy unit is the first advanced technology small modular reactor (i.e.,
Generation IV) and was in construction for nearly ten years.194 Efforts by western countries
to develop small modular nuclear have relied on private financing initiatives that have only
recently been backed by government initiatives in the US, Canada, and the UK.195 Further
funding hinges on successful demonstration projects. As the NEA states, “completion of first
prototypes during the 2020s will therefore be essential in the demonstration of the expected
benefits of SMRs.”196

Globally, there is an estimated 25+ private companies currently developing over 72 different
designs of small modular reactors, however no plant has yet to achieve commercial

192 Reuters (2021). “Southern Targets Dec Start for New Georgia Vogtle 3 Nuclear Reactor,” April 29, 2021.
https://www.reuters.com/business/energy/southern-targets-dec-start-new-georgia-vogtle-3-nuclear-reactor-2021-04-29/.
193 Berthelemy, M., Vaya Soler, A., Bilbao y Leon, S., Middleton, M., Piette, C., Hautojaervi, J., Bard, O. et al.

(2020) Unlocking Reductions in the Construction Costs of Nuclear: A Practical Guide for Stakeholders. OECD NEA--7530.
194 CNNC (2021) “Hot functional testing of HTR-PM reactors starts” (WNN). http://en.cnnc.com.cn/2021-

01/05/c_579757.htm
195 U.S. Department of Energy (2021) “Advanced Small Modular Reactors (SMRs).” https://www.energy.gov/ne/advanced-

small-modular-reactors-smrs
196 OECD (2020) Projected Costs of Generating Electricity 2020.

109
operation.197 Different designs are at different levels of technical development and
demonstration. The industry has called for increased government and public cooperation to
determine a new framework for harmonization of licensing regimes.198 Since no SMRs are
functionally operational, costs are unknown, and all references are based on assumptions
about hypothetical development and deployment of SMRs.

SMR Nuclear Propulsion

It is estimated that there over 100 nuclear reactors today in maritime use.199 Exact figures
are not retrievable since the majority of applications is military use. Nuclear maritime
propulsion has been in use since 1955 with the American submarine, USS Nautilus, first
launched in 1955.200 In addition to nuclear submarines, other military application of nuclear-
powered boats includes above water ships and aircraft carriers. Interest and evaluation of
nuclear applications in maritime use grew from the initial USS Nautilus deployment through
the early 1970s. Everything from smaller simpler freightliners to large shipping vessels,
heavy oil tankers, to high-speed nuclear-powered ocean liners were evaluated and
studied.201 However, initial costs, insurance costs and operating costs were too high to justify
the cost and further efforts to study and build ships were abandoned. Furthermore, there is
only one demonstration of a nuclear ship in operation for commercial shipping, the USS
Savannah which was in commercial operation from August 1965- August 1968. The USS
Savannah was decommissioned due to higher operational costs than anticipated. 202
Specifically, it was deemed unviable due to higher operating costs (i.e., up to $2M per year
higher in 1970 USD or ~$14M in 2021 USD per year higher than a non-nuclear merchant
ship).

As of 2019, four nuclear powered commercial vessels had been constructed, but only one
remains active.203 The ship is owned by the Russian Federation and while initially
constructed for commercial shipping, it has primarily been used for government transport of
equipment for the establishment of military infrastructure in the arctic204. Russian nuclear-

197 NEA and IFNEC (2021), Financing of Small Modular Reactors (SMRs) event. Panellists: Diane Cameron, Head of the
Division of Nuclear Technology Development and Economics, NEA, Jeff Harper, Vice President, Strategy & Business
Development, X-Energy, United States, Kalev Kallemets, CEO, Fermi Energia, Estonia, Erick Ohaga, Director, Nuclear Energy
Infrastructure Development, Nuclear Power and Energy Agency, Kenya.
198 NEA and IFNEC (2021, 18 May) “Small Modular Reactors NEA-IFNEC Nuclear Financing Webinar Series”. Presenter:

Diane Cameron Head of Nuclear Technology Development and Economics Division OECD Nuclear Energy Agency.
199 Jenkins, V. and Haskell, C. (2021) “How Can Nuclear Support Shipping’s Route to Zero-Carbon?” https://www.lr.org/en-

gb/insights/articles/how-can-nuclear-support-shippings-route-to-zero-carbon/.
200 United States General Accounting Office (2018). Nuclear-Powered Ships: Accounting for Shipyard Costs and Nuclear

Waste Disposal Plans. North Charleston, SC: Createspace Independent Publishing Platform.
201 ANS (2021) “Nuclear Merchant Ships: Five Fast Facts.” https://www.ans.org/news/article-2010/nuclear-merchant-ships-

five-fast-facts/.
202 Comptroller General of the United States (1970, 26 June). “Report to the Congress: Costs of Operating the Nuclear

Merchant Ship Savannah, B-136209”. https://www.gao.gov/assets/b-136209.pdf

203 Balcombe et al (2019) “How to decarbonise international shipping”.
204 Navy Recognition (2017, 20 May) “Focus: Russia beefing up its ice-rated vessel fleet in the Arctic - Part II“. Navy

Recognition. http://www.navyrecognition.com/index.php/focus-analysis/naval-technology/5223-focus-russia-beefing-up-
its-ice-rated-vessel-fleet-in-the-arctic-part-ii.html
110
powered ships rely on fuel that is 45-90% enriched205. By contrast, existing commercial
nuclear power reactors (i.e., electricity generation) utilize fuel that is only 3-5% enriched.
Newer, advanced small modular reactor designs, like ships, rely on highly enriched fuel206.
Fuel at higher than 20% enrichment is typically only used in military applications, due to
proliferation concerns. There are no civilian facilities currently licensed within the United
States to provide greater than 5.5% enriched fuel, and the United Kingdom does not have
plans to develop fuel manufacturing for advanced reactor designs until after 2030207,208. In
the past, nuclear-powered commercial vessels have relied on lower enriched fuels, such as
NS Savannah (launched in 1959). They were, however, deemed commercially unviable due
to high operating costs over conventional ships (up to US$2 million per year higher in 1970
USD, or ~$14 million in 2021 USD) covering crew, supplies and maintenance and were
decommissioned after only a few years of use209.

Existing nuclear reactor ships are powered through steam generated by the reactor.
Although steam propulsion is not particularly sophisticated, including a nuclear reactor in the
design of a ship still requires the ship to be built specifically to accommodate a nuclear
reactor. This type of energy propulsion would therefore require a contract for difference
based on total cost of ownership.

It would also be reasonable to assume that any future use of nuclear power for shipping will
utilize new generations of reactor technology (i.e., SMRs). This is because advanced
generations of reactors are needed to provide the savings and added security of no
refuelling. A typical nuclear power plant requires refuelling every 18-24 months whereas a
small modular reactor using higher energy dense fuel will be capable of operating for 30+
years without refuelling.

Advanced nuclear technologies making use of small modular reactors have the capability to
provide economies of scale in production and operations that greatly reduce the initial
investment and operating costs210. The inherent safety features of these technologies also
reduce risk and improve prospects for deployment. Globally, there are an estimated 25+
companies currently developing small modular reactors (defined as less than 300 MWe), but
no plant has yet entered contracts for commercial operation, and a dominant standard plant
design has yet to emerge. In January 2021, Chinergy, a consortium representing China
Nuclear Engineering Corporation (CNEC) and Tsinghua University's Institute of Nuclear and
New Energy Technology, completed final testing of an advanced small modular reactor in

205 Ma, C. and von Hippel, F. (2001) “Ending the production of highly enriched uranium for naval reactors”. The
Nonproliferation Review, 8:1, 86-101, DOI: 10.1080/10736700108436841.
206 Ibid.
207 World Nuclear Association (2021) “US Nuclear Fuel Cycle”. World Nuclear Association. https://world-

nuclear.org/information-library/country-profiles/countries-t-z/usa-nuclear-fuel-cycle.aspx
208 HM Government (2013). Nuclear Industrial Strategy: The UK’s Nuclear Future.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/168048/bis-13-627-
nuclear-industrial-strategy-the-uks-nuclear-future.pdf
209 Comptroller General of the United States (1970, 26 June). “Report to the Congress: Costs of Operating the Nuclear

Merchant Ship Savannah”.

210 Energy Information Reform Project (2017). “What will advanced nuclear power plants cost? A Standardized Cost

Analysis of Advanced Nuclear Technologies in Commercial Development”.

https://www.eenews.net/assets/2017/07/25/document_gw_07.pdf
111
Shandong province. Construction took nearly ten years211. Western countries’ efforts to
develop small modular nuclear reactors have relied on private finance, only recently backed
by government initiatives in the US, Canada, and the UK 212. Funding hinges on successful
demonstration projects, which are not expected to reach completion until the late 2020s or
early 2030s213.

When are SMR ships likely to be cost competitive?

Small modular reactors are an attractive new technology to fit the size of reactor needed for
a nuclear ship. Nuclear plant costs are typically inclusive of four categories: initial capital
costs, operations, and maintenance (O&M), fuels cost and decommissioning costs. The
same is expected for nuclear shipping along with the cost of the actual ship itself. Since the
cost of the ship is expected to remain reasonably similar to a ship that relies on other
sources of fuel214 we only consider the cost of deployment of the SMR.

There is no standardized approach to estimating the cost of small modular reactor. The
industry developed two standardized methods for consideration of costs, 215 a bottoms-up
approach which estimates costs of individual components, or a top-down approach which
scales existing known costs of production down to the projected size of a small-modular
reactor. However, a systematic literature review of the economics and financing of small
modular reactors identified considerable variation in costs and cost estimating techniques.
The levelized costs of electricity showed as a wide range of estimated costs, from
~$50/MWh to greater than $100/MWh.216

Key assumptions of the lowest cost estimate (i.e., ~$50/MWh) include: a 335 MW plant, 60
years lifetime, 95% capacity, construction time of 5 years, and a discount rate of 5%. This
analysis used a “top-down” approach to cost estimating that is generally seen as a less
reliable method of estimating the true cost.217 Additionally, 60 years of plant operation is
unlikely as existing plants operate for 30 years and at most, receive an extension to operate
for 50 years in total. Furthermore, reactor lifetime without substantial maintenance after 30

211 China National Nuclear Corporation (2021, 5 January) “Hot functional testing of HTR-PM reactors starts”. CNNC.
http://en.cnnc.com.cn/2021-01/05/c_579757.htm
212 Deign, G. (2021, 4 January) “Nuclear Enters 2021 With Buoyant Global Outlook for Small Modular Reactors”. GreenTech

Media. https://www.greentechmedia.com/articles/read/nuclear-enters-2021-with-buoyant-global-outlook-for-small-
modular-reactors
213 United States Office of Nuclear Energy (2021) “Advanced Small Modular Reactors (SMRs)”.

https://www.energy.gov/ne/advanced-small-modular-reactors-smrs
214
A conceptual design for a SMR ship was made by Hirdaris et al. and due to the size and weight of the SMR, the overall
ship length would increase by over 25m along with the length between perpendiculars. Hirdaris, S. E., Y. F. Cheng, P.
Shallcross, J. Bonafoux, D. Carlson, and G. Sarris. 2014, "Concept design for a Suezmax tanker powered by a 70 MW small
modular reactor." Trans RINA 156: A1.
215
GenIV International Forum. 2007. “Cost Estimating Guidelines for Generation IV Nuclear Energy Systems@.
https://www.gen-4.org/gif/upload/docs/application/pdf/2013-09/emwg_guidelines.pdf
216 Mignacca, B., and Locatelli, G. (2020) "Economics and finance of Small Modular Reactors: A systematic review and
research agenda." Renewable and Sustainable Energy Reviews 118: 109519.
217 Locatelli, G, and Mancini, M. (2010) "Small–medium sized nuclear coal and gas power plant: A probabilistic analysis of

their financial performances and influence of CO2 cost." Energy Policy 38(10): 6360-6374.
112
years is unlikely in a shipping environment due to salination in operation. Therefore, a more
realistic cost estimate is likely closer to the ~$60 USD/MWh.

A 2016 report by commissioned by the UK Department of Energy and Climate Change

(DECC))determined that price parity of SMRs with large nuclear reactors could be achieved
by manufacturing 10 units/year at 5 gigawatts electrical (GWe) of total deployment.218 The
key to achieving the decrease in LCOE is through higher learning rates. As shown in Figure
15, cost parity could be achieved at 2 GWe if a strong learning rate of 10% is assumed.
Without a strong learning rate, the LCOE for the SMR technology could remain above
$100/MWh.

Figure 15: Learning rates expected for SMR technology as a function of reactor deployment. Source: Lewis et al.
2016219

Previous estimates of SMR costs (i.e., ~$50/MWh predicted in 2010220), do not appear to
reflect the actual deployment rates today or the expected future schedule of deployments. If
we assume ships containing SMRs could be commissioned in the next few years (only one
SMR technology could get close to meeting this target221), and given an 8% learning rate, the
goal of cost parity rate (i.e., 10 units/ year) is not likely to be achieved until between 2030 and
2040.

Critical to achieving these costs by 2030 is achieving the 8% learning rates. The industry rate
prior to the DECC 2016 report was 3% but DECC assumed a rate of 8% following recent
successes in Japan and South Korea. It is not unreasonable to assume that with
standardization of design and factory modularization such rates could be achieved.

218 Lewis, C., R. MacSweeney, M. Kirschel, W. Josten, T. Roulstone, and G. Locatelli. (2016) "Small Modular Reactors: Can
Building Nuclear Power Become More Cost-Effective." National Nuclear Laboratory: Cumbria, UK.
219 Lewis, C., R. MacSweeney, M. Kirschel, W. Josten, T. Roulstone, and G. Locatelli. "Small Modular Reactors: Can Building

Nuclear Power Become More Cost-Effective." National Nuclear Laboratory: Cumbria, UK (2016).
220 Ma, C. Von Hippel, F. (2001). "Ending the production of highly enriched uranium for naval reactors." The

Nonproliferation Review 8(1): 86-101.

221 Subki, Hadid. "Advances in small modular reactor technology developments." (2020).

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Nuclear Energy for Zero-emissions shipping fuels

Nuclear energy can also be used to produce clean fuels such as hydrogen, ammonia or
synfuels. This could be through existing ports which could provide fuelling stations, or,
through the development and deployment of nuclear barges that could provide a stop along
shipping routes for refuelling of hydrogen or ammonia fuel.222 For simplicity, the below
analysis refers to land-based nuclear energy to produce hydrogen which is an output of
several potential nuclear cycles and can be synthesized to produce synfuels or ammonia
using air capture and the Haber Bosch process (Figure 16).

Figure 16: Nuclear to Hydrogen and Ammonia synthesis223

The cycles shown in Figure 16 which utilize the Copper Chlorine cycle, require use of
Generation IV nuclear plants as the Cu-Cl cycle with is fed with heat and electricity, both of
which are produced by a gas-cooled fast nuclear reactor (a Generation IV reactor).224 The
other two options for producing hydrogen outlined by the Nuclear Industry Association
include:

1. Cold-water electrolysis using existing operating reactors (i.e., nuclear electrolysis)

2. High temperature reactors (i.e., Advanced modular reactors operating between 600-
900°C which could split water into hydrogen and oxygen without electricity) (i.e.,
nuclear high temperature electrolysis)225

222 Neimagazine (2021) “Akademik Lomonosov Begins Commercial Operation.”

https://www.neimagazine.com/news/newsakademik-lomonosov-begins-commercial-operation-7938482/.
223 Bicer, Y., and Dincer, I. (2017) "Life cycle assessment of nuclear-based hydrogen and ammonia production options: A

comparative evaluation." International Journal of Hydrogen Energy 42(33): 21559-21570.

224 Al-Zareer, M, Dincer, I. and Rosen, M.A. (2020) "Analysis and assessment of the integrated generation IV gas-cooled fast

nuclear reactor and copper-chlorine cycle for hydrogen and electricity production." Energy Conversion and
Management 205: 112387.
225 NIA (2021) “Hydrogen Roadmap.” https://www.niauk.org/wp-content/uploads/2021/02/Nuclear-Sector-Hydrogen-

Roadmap-February-2021.pdf
114
It is important to note that available hydrogen technologies that are coupled to nuclear power
reactors greatly depend on the type of the nuclear power plant itself. Specifically, Option 1,
which is conventional electrolysis, requires only electric power.

Option 2 relies upon higher temperature heat and a thermochemical cycle driven by process
heat from the nuclear reaction occurring at elevated temperature values not currently
available in existing nuclear technology (i.e., option 2 relies on Generation IV reactors, as
shown above in Figure 5). Therefore, option 2 reactors are not further considered since
nuclear technology development is the same as presented above for SMRs, which do not
show cost parity (i.e., conservatively assumed at $70/MWh) until at least 2030. 226

There are two main cost components that determine the price of hydrogen available: the
price of electricity to drive the electrolysis and the electrolyser itself. Error! Reference s
ource not found., from IRENA, shows how the two determine costs projections out to 2050.

Figure 16: Cost of Hydrogen as a function of electricity prices and electrolyser prices 227

As shown in Error! Reference source not found., utilizing nuclear energy to drive h
ydrogen electrolysis can be cost competitive with fossil fuel-based approaches (i.e., <$2/ kg

226 IRENA (2020), Green Hydrogen Cost Reduction, Scaling Up Electrolysers to meet the 1.5°C Climate goals, Accessed June
21, 2021. https://irena.org/-/media/Files/IRENA/Agency/Publication/2020/Dec/IRENA_Green_hydrogen_cost_2020.pdf
227 IRENA, 2020, Green Hydrogen Cost Reduction, Scaling Up Electrolysers to meet the 1.5°C Climate goals, Accessed June

21, 2021. https://irena.org/-/media/Files/IRENA/Agency/Publication/2020/Dec/IRENA_Green_hydrogen_cost_2020.pdf

115
hydrogen) if: 1) electrolyser costs decrease, as expected228 and 2) the cost of the electricity
is approximately $20/MWh.

The levelized cost of electricity (LCOE) of various technologies is shown in Figure 17.
Existing nuclear in LTO (Long Term Operation) is shown to have a global average LCOE
value at less than $50 USD/MWh with a 7% discount rate. The technology costs vary by
region, with the cost of existing nuclear plant operation lowest in India.

Figure 17: Current minimum, median and maximum LCOE values at a 7% discount rate. Source: IEA, NEA,
2020229

As noted by the IEA and NEA: “while requiring extensive refurbishments and replacement of
some key components, LTO long term operation constitutes currently the least cost option
for low-carbon electricity generation [emphasis added].”230 While the normal lifetime of an
operating plant is 30-years, long-term operation beyond 30 years results in the lowest cost of
carbon-free electricity, as shown below with a range from a low of ~$26/MWh for an
extended 20 years of operation (i.e., 50 years in total) with a capacity factor of 85% and a

228
Cesaro, Z., Ives, M., Nayak-Luke, R., Mason, M. & Bañares-Alcántara, R. (2021) “Ammonia to power:
Forecasting the levelized cost of electricity from green ammonia in large-scale power plants.” Applied Energy
282, 116009. https://doi.org/10.1016/j.apenergy.2020.116009
229 IEA, NEA, 2020 Projected Costs of Generating Electricity, https://iea.blob.core.windows.net/assets/ae17da3d-e8a5-
4163-a3ec-2e6fb0b5677d/Projected-Costs-of-Generating-Electricity-2020.pdf
230 Ibid

116
discount rate of 3%, to a maximum of ~$48/MWh for 10 years of life extension (i.e., 40 years
operation in total) using a discount rate of 10%.

Figure 18: LCOE for LTO nuclear reactors as a function of lifetime extension period (i.e., 10-20 years) and
discount rate. Source: NEA 2020 231

The LCOE for LTO nuclear electricity are competitive with alternative clean technologies
such as solar PV (i.e., $26/MW), however, it important to note that there are no current
commercial projects that link electrolysers to long-term nuclear plants in operation. The US
Department of Energy, the UK government and others have been studying this issue for
some time and projects exist at the demonstration level. In these scenarios, the link to
nuclear power is “indirect” as it is only through an agreement between the electrolyser owner
and the nuclear generating company which provide the electricity needed to power the PEM
or alkaline electrolyser.

As described by the OECD/NEA, “Hydrogen costs in these scenarios are largely a function
of the electricity cost and although various modelling scenarios utilizing “off-peak” power to
drive electrolyzers have been considered, no clear business case has emerged.” The study
went on to state that “the use of existing nuclear technologies with conventional electrolysis
will likely be economically viable only in selected niche markets or forecourt applications.”232

Table 5 shows the status of research and development into the use of electrolyser
technology with existing, long-term operations nuclear plants. An existing electrolyser (PEM
or alkaline) be coupled with an existing, long-term operating reactor in the right geographical
location should be able to produce cost competitive hydrogen. However, since a
demonstration has not yet been achieved at scale, it is likely that scaled operation is at least
5-10 years away. By 2030, the LCOE of solar power is estimated to be $19.10 suggesting

231 Ibid.
232 Keuter, Dan. (2010). "Nuclear H2 production–a utility perspective.", Fourth Information Exchange Meeting Oakbrook,
Illinois, USA 14-16 April 2009. p289-298 https://read.oecd-ilibrary.org/nuclear-energy/nuclear-production-of-
hydrogen_9789264087156-en
117
even LTO nuclear will have competition.233 Furthermore, electrolysers coupled with solar
energy are already under demonstration with plants expected in operation this year. 234

Conclusions/Recommendations

The existing nuclear fleet is capable of supplying carbon free electricity. As the second
largest source of carbon free energy, plants in operation today offer production cost benefits
as compared to other sources of energy. As-is, nuclear plants in advanced economies
currently have a reactor fleet that is on average, greater than 35 years old.235 To work as a
consistent source of clean shipping fuel generation the US DOE identified four key
conditions:

1. “A consistent, reliable, and low-cost energy is available throughout the life of the
project.” Only large, long-term operation nuclear plants can produce hydrogen for
less than $2/kg.
2. “The capital and operating costs of electrolysis stacks are reduced to around
$100/kWe for high-temperature steam electrolysis solid-oxide stacks and less than
$86/kWe for polymer-electrolyte membrane stacks.”
3. The market for hydrogen in industrial centres is large and can be supplied from a
central hydrogen-production plant to reduce application to niche uses and,
4. “Policy and regulatory conditions spur the transition from electricity production to
nuclear electricity/hydrogen hybrid operations”236

In addition to nuclear as an energy source to produce clean fuels for shipping, newer SMR
reactors hold potential as a source of clean ship propulsion that requires no refuelling.
However, the technology is not yet commercially ready and not expected to achieve cost
parity with large nuclear until at least 2030. In addition, the Maritime regulatory system would
likely need to be adjusted to permit the operation and porting of nuclear ships.
Improvements in international cooperation and deployment of SMRs could increase the
learning rate and thus, reduce the time the technology would take to achieve cost parity.
Increased modularization and greater proportion of factory build (i.e., 60%) could reduce the
learning rate to 10%, which may slightly reduce the time to achieve cost competitiveness.
Unfortunately, the learning rates of nuclear have historically been poor compared to
renewables, despite recent improvements witnessed in Japan and South Korea. 237

233 Cesaro, Z., Ives, M., Nayak-Luke, R., Mason, M. & Bañares-Alcántara, R. (2021) “Ammonia to power: Forecasting the
levelized cost of electricity from green ammonia in large-scale power plants.” Applied Energy 282, 116009.
https://doi.org/10.1016/j.apenergy.2020.116009
234 Largue, Pamela. (2021) “BayWa Advances SinneWetterstof Green Hydrogen Project.” PowerEngineeringInt.com. June

14, 2021. https://www.powerengineeringint.com/hydrogen/baywa-advances-sinnewetterstof-green-hydrogen-project/.

235 Sadamori, Keisuke. 2020. “Nuclear power in a clean energy system.” Annales des mines - Responsabilité et

environement N°97 (1): 122.

236 OSTI (2019), “Evaluation of Non-electric Market Options for a Light-water Reactor in the Midwest, Light Water Reactor

Sustainability Program”. INL/EXT-19-55090, https://www.osti.gov/biblio/1559965-evaluation-non-electric-market-options-

light-water-reactor-midwest
237 Samadi, Sascha. "The experience curve theory and its application in the field of electricity generation technologies–A

literature review." Renewable and Sustainable Energy Reviews 82 (2018): 2346-2364.

118
 Table 5: Current status of R&D in nuclear-based hydrogen production around the world

Country Status More details Reference

United States Under development. Projects in consortium with the DOE are being developed at four U.S. https://www.powermag.com/hydrogen-may-be-
nuclear generators—Energy Harbor, Xcel Energy, Exelon, and a-lifeline-for-nuclear-but-it-wont-be-easy/
Arizona Public Service (APS) to demonstrate hydrogen production at
nuclear plant. The utilities will this year embark on a two-year pilot
project to demonstrate hydrogen production using a 2-MWe low-
temperature electrolysis (LTE) polymer electrolyte membrane (PEM)
technology that will be integrated with Energy Harbor’s 925-MWe
(2,817 MWth) Davis-Besse Nuclear Power Station, a pressurized
water reactor (PWR) in Ohio. Hydrogen usage will be for either on-site
application or nearby industry uses.

France Under study A published report says to meet the European objective of installing https://www.neimagazine.com/news/newsfrenc
6GW of electrolysis for the production of 1m tonnes of renewable h-parliamentary-office-looks-at-hydrogen-
hydrogen by 2024 and then 40GW for 10m tonnes by 2030 would 8766389
represent 400 new nuclear reactors of 1GW each, “which is an unreal
prospect, especially at a time when several countries including ours
are reducing the share of nuclear power in their energy mix”.

Russia Under Study In October 2020, the Government approved an action plan https://www.bakermckenzie.com/en/insight/publ
(Roadmap) for hydrogen development until 2024, including hydrogen ications/2021/02/Russia-taking-a-stand-in-
from nuclear power plants global-hydrogen-race
UK Under study EDF-led Hydrogen to Heysham (H2H) consortium completed a https://www.rechargenews.com/transition/edf-
feasibility study in 2020 to install an initial 2MW system, comprising a plans-vast-hydrogen-production-at-uk-nuclear-
1MW alkaline and 1MW proton exchange membrane (PEM) plants/2-1-763048 and
electrolyser, capable of producing up to 800kg of hydrogen per day https://www.niauk.org/wp-
and testing the performance of the two main electrolyser content/uploads/2021/02/Nuclear-Sector-
technologies at the Heysham nuclear power plant. In November Hydrogen-Roadmap-February-2021.pdf
2020, Sizewell C issued an Expression of Interest (EoI) seeking
partners to develop its hydrogen demonstrator project, which may be
powered by Sizewell B. Current steps also
include an Innovate UK funded study on transitioning from a diesel to
a hydrogen fleet of vehicles
at Sizewell.

119
A.3 Detailed safety considerations for chemical zero-
emissions fuels
Understanding and anticipating the current and future international regulations and
associated costs for safety of fuels is important when considering which fuels are viable
clean energy alternatives. Each proposed alternative fuel has potential hazards beyond
those associated with conventional fuels. (See ‘Hazard Statements’ below). Minimising
environmental damage must address emissions (including CO, SOx, NOx, particulate matter,
black carbon) but also the possibility of major accidents, spills and leakages of oil and
hazardous noxious substance (HNS); while minimising human damage includes mitigating
the risk of explosion, fire and health hazards encountered by people handling the fuel.
Important for bunker operations and bargemen, including workplace safety and national
health and safety regulations. There are potential risks at every stage in the life-cycle of a
fuel: production, storage, distribution (by ship, by truck or by pipeline), bunkering and usage,
and the most shipped chemicals are the ones most likely to be involved in an incident 238.
Exposure is a common hazard in the industry as many employees work in confined spaces,
including bunker barges.

As above, it is useful to compare the alternatives with a conventional fuel that is currently in
use. All conventional fuels produce carbon emissions and non-carbon emissions, although
MGO is a low-sulphur fuel, which complies with the 0.1% limits permitted within the Sulphur
Emissions Control Areas (SECAs). Conventional oil spills threaten seabirds and marine
mammals and are toxic to other marine organisms. Mitigating this risk, such as the double
hulling of ships (which has been the single biggest cause of reductions of spills) is well
established in the breadth of regulatory, technological and procedural mechanisms. By
contrast, there is a relative underdevelopment of safety standards for other Hazardous and
Noxious Substances (HNS), and even though oil and oil products are transported in larger
amounts, transportation of chemicals causes similar numbers of accidents239.

Hydrogen is a highly flammable gas at atmospheric conditions, that needs cryogenic storage
for shipping.

Hydrogen has wide flammability bandwidth of 4% to 74% and must be stored under pressure
of ~800 bar or at a very low temperature of -253 degrees in cryogenic tanks. Both require
considerable energy, and both carry dangers: gas under pressure can explode when heated,
and cryogenic storage may cause cryogenic burns or injuries. Liquefication/cooling has the
highest energy requirements and would consume 25-45% of the energy content of H2.
Hydrogen can be stored long term in geological salt caverns, of which there are three in the
UK240. However, hydrogen is non-toxic, and a spill of large liquified or compressed hydrogen
is not thought to have serious environmental consequences, other than in circumstances of

238 Purnell, K. (2009). “Are HNS Spills More Dangerous Than Oil Spills?” In: Interspill Conference & the 4th IMO R&D Forum.
https://www.hnsconvention.org/wp-content/uploads/2018/08/whitepaper.pdf
239 Häkkinen, J., & Posti, A. (2015). “Port accidents involving hazardous substances based on FACTS database analysis.”
240 IEA (2019). The Future of Hydrogen: Seizing today’s opportunities. International Energy Agency, Paris.

https://www.env.go.jp/earth/g20karuizawa/assets/pdf/The%20future%20of%20Hydrogen.pdf

120
fire or explosion.241 Today, compressed gas trailer trucks are most common for hydrogen
distribution under 300km242. The distance of established hydrogen pipelines globally is quite
small at just over 5,000 km including 2,600 km in the US, 1,500 km in the EU and 300-400
km in China. In the UK, the H21 Leeds City Gate project aims to demonstrate the feasibility
of delivering blended hydrogen through the gas distribution network. Pipelines carrying pure
hydrogen are technically feasible and have operated in the US, Germany, the Netherlands,
France, and Belgium for decades243 (although without a basis for rapid upscaling). The extent
to which pipeline systems would need to be adjusted is unclear, but today standards limit the
amount of hydrogen that can be deployed in natural gas pipeline systems. Although not
currently heavily transported by sea, it is anticipated that initial restrictions regarding storage
quantities and locations will be put in place244. Hydrogen is non-polluting and produces only
water if used in fuel cells, however the life cycle performance depends on production,
distribution, and storage, which as discussed have high energy demands.

Hazard Mitigation and Regulation: Additional safety to reduce severity and likelihood of
fires and explosions will be needed; including for bunkering and distribution. This would
include adequate ventilation, explosion venting and suppression, isolation, containment, blast
walls and sensing,245 and means to relieve pressure in closed systems will need to be
installed.
There remain limitations for hydrogen distribution on land (for example, the ADR tank
transport is forbidden in certain tunnels.) There are published guidelines from the EIGA, the
ISO, the IMO and CEN on the use of cryogenic tanks (because cryogenic storage is used for
LNG), but there remain knowledge and legal gaps in the hydrogen safety code: for example,
there is uncertainty regarding whether hydrogen in double piping should be recommended,
or whether double piping might actually add dangers of captured gas.246

Ammonia is a highly toxic, corrosive, colourless gas under atmospheric conditions.

Ammonia is less flammable than conventional oils and can be easily stored at -33.4 degrees
and 1 bar, meaning the risk of explosion is low. Although its lower flammability requires a co-
firing fuel for ignition in ICEs, only small amounts of the co-firing fuel are required. (In a zero-
carbon ship, this could by hydrogen derived from the ammonia or a biofuel - the cracking
step is still a challenge and currently under development.)247 Despite its lower flammability
ammonia is classified as acutely toxic and corrosive, which makes it one of the most highest-
risk chemicals transported: ammonia ranks 7th in the IMO list of top 20 chemicals likely to

241 Liquid organic hydrogen carriers (LOHCs), such as MCH and ammonia, that are reversibly hydrogenated and
dehydrogenated can be used to store and transport hydrogen. The IEA recommends that for distances above 150km,
shipping hydrogen as ammonia or an LOHC is likely to be more cost effective. However, conversion and reconversion into
LOHCs or Ammonia requires 15-40% of energy content. Using ammonia directly as a fuel would avoid this inefficiency.
242 IEA (2019). The Future of Hydrogen: Seizing today’s opportunities.
243 IRENA (2019) Hydrogen: A Renewable Energy Perspective. International Renewable Energy Agency.

https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2019/Sep/IRENA_Hydrogen_2019.pdf
244 NCE Maritime Cleantech. (2019). Norwegian future value chains for liquid hydrogen. Norwegian Centres of Expertise.

p.84. https://maritimecleantech.no/wp-content/uploads/2016/11/Report-liquid-hydrogen.pdf?
fbclid=IwAR3uqivsh0dF3_VBQd8UB_0cgVtnf3XIM1of2xG7Y2WAS07e3OHzoTT-_9Q
245 Pritchard, D.K., Royle, M. and Willoughby, D. (2009) “Installation permitting guidance for hydrogen and fuel cell

stationary applications: UK version”.

246 NCE Maritime Cleantech. (2019). Norwegian future value chains for liquid hydrogen.
247 IRENA (2019) Hydrogen: A Renewable Energy Perspective.

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pose the highest risk of being involved in an HNS incident.248 249 ( . This will be important in
across the entire industry– ship docking companies, bunker corporations, and ports etc will
want to ensure this is well handled before they will offer their services to a ship that
transports a novel, dangerous product. It is corrosive to skin, eyes and lungs and exposure
for 10 mins at 2,700 ppm can be lethal. A spill would have very severe environmental
consequences: liquified ammonia would float on the water surface, rapidly dissolving into the
water as ammonium hydroxide and at the same time releasing gaseous ammonia, which
would kill most aquatic organisms in close proximity, with long lasting effects including a
eutrophication process which would reduce availability of oxygen in the water250 If
combustion is not optimised, ammonia can be a source of NOx emissions. If uncombusted
ammonia escapes into the atmosphere it can lead to the formation of atmospheric particulate
matter and acidification.251 252

Hazard Mitigation and Regulation: Since ammonia is so toxic, storage and handling must
limit the likelihood and effect of exposure to humans and the environment. This demands a
safe design of the tank to withstand collision (e.g., external frames, level indicators, gas
alarms). Fuel lines will need to be routed sufficient distance and located in separate
unmanned spaces. To mitigate leakages in an enclosed space, remote shut-off valves,
detectors, and either a continuous ventilation system, water spray to dissolve ammonia or a
flare to burn a large release would be needed.253 Although ammonia is currently not
permitted to be used as marine fuel by the IGC code, regulatory infrastructure for the safe
transportation of ammonia is better developed than for hydrogen. Since ammonia already
has industrial uses, safe handling and storage procedures have been developed for its
production, storage, and distribution; including exposure limits and protective equipment
requirements for those handling it. Selective catalytic reduction equipment will be needed to
reduce potential NOx emissions, similarly to vessels complying with Tier III requirements of
Emission Control Areas.254

Synfuels, such as methanol and methane, are mildly hazardous flammable gases at
atmospheric conditions.

They have a similar flammability and associated fire regulations to conventional fuels255.
Some synfuels, e.g., methanol, are also mildly corrosive. Methanol can be stored easily as it
is a liquid at ambient conditions. It is less corrosive than ammonia and can be integrated
easily into existing infrastructure. Methane is very similar to LNG (it is the largest component
of LNG) and poses the same hazards when stored in cryogenic conditions.256 Methanol is
toxic at high concentrations and water soluble, and its use has been banned in several
countries including the US. However, a methanol fuel spill would have lower environmental
impact than ammonia because it does not persist in the environment as it biodegrades
quickly. Methanol is not classified as a marine pollutant by the IMO, so it can be carried in
tanks next to the hull (by comparison, conventional oil fuels must be stored in double bottom

248 ITOPF (2012). TIP 17: Response To Marine Chemical Incidents.

249 Karakavuz, A., Tokgoz, B.E., Zaloom, V., Marquez, A., 2020. "Risk assessment of commonly transported chemicals in the
Port of Houston," International Journal of Critical Infrastructures, Inderscience Enterprises Ltd, vol. 16(1), pages 38-52.
250 Ash and Scarborough (2019) “Sailing on Solar”.
251 Brynolf (2014). Environmental Assessment of Present and Future Marine Fuels.
252 IRENA (2019) Hydrogen: A Renewable Energy Perspective.
253 De Vries (2019) "Safe and effective applications of ammonia as a marine fuel"
254 Ash and Scarborough (2019) “Sailing on Solar”.
255 Svanberg et al (2018) “Renewable methanol as a fuel for the shipping industry”.
256 DNV.GL. (2018) “Assessment of selected alternative fuels and technologies”.

122
tanks). Nevertheless, it ranks 12th in the IMO’s top chemicals likely to pose the highest risk
in HNS incidents257,258,259,260. Emissions remain a concern: all carbon-based synfuels produce
CO2 emissions. Pure synfuels such as methanol contain no sulphur will not produce carbon-
based soot and produce NOx emissions 30% lower than diesel oil.261 Methane poses the
additional risk that leakages (fugitive emissions/ ’methane slip’) into the atmosphere
(including from upstream processes) can substantially reduce or even outweigh its climate
benefits given that methane has a global warming potential 28-36 times higher than
CO2262,263.

Hazard Mitigation and Regulation: Some synfuels, including methanol, have a flashpoint
below the minimum for marine fuels specified in the IMO safety of Life at Sea Convention
SOLAS, meaning risk assessment or evaluation must be carried out for each case
demonstrating fire safety equivalent to conventional fuels for marine use. As with ammonia,
selective catalytic reduction equipment will be needed to reduce potential NOx emissions,
similarly to vessels complying with Tier III requirements of Emission Control Areas.

International Regulation

Regulation relating to the prevention of major incidents involving dangerous substances,

health and safety, industrial emissions, environmental impact assessment and pressurised
equipment remains a barrier to rapid development, and there is safety regulation which
applies for each level of the value chain.264 However, for each of the fuels discussed, there
are gaps in knowledge and/or legal guidelines regarding safe handling of fuel.

For example, relevant regulation includes the IMO’s IGF265 and IGC Codes266 which together
apply to all gaseous and other low flashpoint. The IGF currently has detail provisions for
natural gas in liquid or compressed form (LNG, CNG), with regulations for methanol and low-
flashpoint diesel fuel under development. Ships installing other low-flashpoint fuel systems
need to individually demonstrate that the design is compliant with the IGF Code. Neither
hydrogen nor ammonia use and storage are covered by the IGF, although the rules for their
use are under development and expected to be included in the next amendment 267,268.

257 IRENA (2019) Hydrogen: A Renewable Energy Perspective

258 Brynolf (2014). Environmental Assessment of Present and Future Marine Fuels.
259 ITOPF (2012). TIP 17: Response To Marine Chemical Incidents.
260 Svanberg et al (2018) “Renewable methanol as a fuel for the shipping industry”.
261 Ibid.
262 DNV.GL. (2018) “Assessment of selected alternative fuels and technologies”. pp.1–12.
263 EASAC (2019). Decarbonisation of transport: options and challenges. European Academies’ Science Advisory Council.

EASAC Policy Report 37.

https://easac.eu/fileadmin/PDF_s/reports_statements/Decarbonisation_of_Tansport/EASAC_Decarbonisation_of_Transpor
t_FINAL_March_2019.pdf
264 For example, Pressure Equipment Directive (PED) and ATEX apply at every level of the Hydrogen value chain.

Relevant international regulatory bodies and standards include the EIGA, IMO, CEN/TC, IGC, IMDG, ECE, UNECE ADR, SAE,
ISO, SECA and UNCLOS. See NCE Maritime Cleantech. (2019). Norwegian future value chains for liquid hydrogen.
265 IMO IGF Code: The International Code for the Construction and Equipment of Ships Carrying Liquified Gases in Bulk. See

http://www.imo.org/en/OurWork/Safety/Cargoes/CargoesInBulk/Pages/IGC-Code.aspx
266 Ibid.
267 ETH Zürich and Ampliifer (2019). “Towards net-zero: Funding support and regulatory incentives.” https://fe8dce75-4c2a-

415b-bfe4-e52bf945c03f.filesusr.com/ugd/0a94a7_2e539772009b429e9c62125c5093f43c.pdf
268 DNV-GL. (2019). Comparison of Alternative Marine Fuels. Report No. 2019-0567.

123
GHS Hazard Statements

Under the UN Globally Harmonized System of Classification and Labelling of Chemicals

(GHS), comprehensive information such as the chemical and proper shipping name, hazard
identification, physical and chemical properties, emergency response information, and
toxicological and ecological information must be provided269.

Hazard Statements, part of the Globally Harmonised System of Classification and Labelling
of Chemicals, GHS.

Synfuels

H2 (comp)
H2 (liquid)

Methanol

Methane

Ethanol
Diesel
MGO

HVO
LNG
NH3
Hazard Statement

H220 Extremely flammable gas x x x x

H221 Flammable gas x x

Flammable

H225 Highly flammable liquid and vapour x

H226 Flammable liquid and vapour x x

H227 Combustible liquid x

Contains gas under pressure - may

Press/Temp

H280 explode if heated x x

Contains refrigerated gas may

H281 cause cryogenic burn or injury x x

H301 Toxic if swallowed x

May be fatal if swallowed and

H304 enters airways x x x

H311 Toxic in contact with skin x

Health

H313 May be harmful in contact with skin x

Causes severe skin burns and eye

H314 damage x

H315 Causes skin irritation x x x

269 Purnell, K. (2009). “Are HNS Spills More Dangerous Than Oil Spills?”

124
H319 May cause eye damage/irritation x

H320 Causes eye Irritation x

H331 Toxic if inhaled x x

H332 Harmful if inhaled x x

H335 May cause respiratory inflammation x

H336 May cause drowsiness or dizziness x

H350 May cause cancer x

H351 Suspected of causing cancer x

May damage fertility or the unborn

H360 child

Suspected of damaging fertility or

H361 the unborn child

H370 Causes damage to organs x

may cause damage to organs

through prolonged and repeated
H373 exposure x x

H401 Toxic to aquatic life

Very toxic to aquatic life with long

Env

H410 lasting effects x

Toxic to aquatic life with long

H411 lasting effects x x

125
Quantifying the risks: Insurance and Liability

Insurance costs can be a useful proxy to help identify the implied risks of transporting goods.
The OECD data on CIF-FOB (Cost, Insurance and Freight – Free on Board) ratios, an
indirect measure of transportation costs that have been estimated by an economic gravity
model270. In the past, there have been concerns about errors in the use of CIF-FOB for
information about cross-commodity variation, but this has become more adapted to this
purpose 271. Figure 19 provides estimates of international transport and insurance costs
expressed as a percentage of the merchandise trade flow, as an indication of the relative
dangers.

Transport and Insurance

12.00

10.00

8.00
% share of value
(imports to the UK,
average across bilateral 6.00
partners, average 2013-
2017)
4.00

2.00

0.00
Ammonia Hydrogen Crude oil (eg Non-crude oil Gas (eg LNG)
MGO)

Figure 19: Transport and insurance costs for selected fuels as % of value. imports to the UK, average across
bilateral trading partners, average 2013-17. Source: OECD Database. Measure: Cost, Insurance and Freight -
Free on Board (CIF-FOB).

270
Miao and Fortanier (2017) “Estimating Transport and Insurance Costs of International Trade”.
271
Hummels, D., and Lugovskyy, V. (2006). Are matched partner trade statistics a usable measure of transportation costs?
Review of International Economics, 14(1):69–86. https://doi.org/10.1111/j.1467-9396.2006.00561.x

126
A.4 Fuel-only CfD counterparties
Restricting the CfD counterparty to net-zero-carbon fuel suppliers

If the CfD is designed such that only fuel suppliers may bid into the CfD, they would simply
need to provide proof that qualifying net-zero-carbon fuel has been produced and further that
a shipping company has agreed to purchase it through an offtake agreement. The potential
advantages of this approach are as follows:

• It is straightforward to administer, since the CfD administrator need only deal with
the fuel supplier, with the latter responsible for negotiating and securing offtake
agreements with shipping companies.
• Fuel suppliers are better placed than shipping companies to estimate fuel production
costs and manage associated construction and operation risks, particularly with a 10-
15 year horizon. Auctions may therefore be more competitive and see more efficient
price discovery.
• There are clear incentives for suppliers to scale up the production of net-zero-
carbon fuels for other industrial applications. Fuel suppliers may be able to use the
CfD funding to increase their production for non-shipping customers, lower financing
costs, and realise returns to scale. If so, they have a more direct incentive to
participate in the CfD than shipping companies because they can use the subsidy to
accelerate their development.

A fuel supplier-focused CfD may be most appropriate for national or regional governments
for whom large-scale production of net-zero-carbon fuels is a major component of industrial
strategy. Subsidising fuel production can both support the shipping industry by reducing the
cost of these fuels, while also investing in the development of immature domestic industries
vital to decarbonisation in agriculture, heavy industry, and transport.

Allowing the CfD counterparty to be any entity able to meet qualifying criteria

The CfD could also be designed to allow any firm to participate, as long as they can prove
that net-zero-carbon fuel has been used on a ship. This allows for a broader range of
potential participants and does not predetermine the contractual arrangements required for
the fuel to be supplied. Bidders may be shipping companies, financial institutions leasing
ships, or (as in Option 1) fuel suppliers with offtake agreements in place. The potential
advantages are as follows:

• This design simpler to monitor and enforce. The counterparty must meet only one
requirement regardless of what type of institution they are, or how they obtain the
fuel: to prove that net-zero-carbon fuel is being used on a ship.
• It favours whichever bidder is in the best position to coordinate fuel supply chains
and has the capacity and experience necessary to set up contracts with fuel
suppliers, offtakers or intermediaries. The CfD design does not determine in advance
whether this would be a shipping company, bunkering fuel provider, fuel supplier or
other intermediary. This has the additional benefit of broadening the suite of potential
bidders and increasing the likelihood that the CfD will attract sufficient interest.
• It can easily be adapted for international implementation via the IMO. This may
require the restriction of bidding to shipping companies that are IMO members (which

127
 can make their own contractual arrangements via intermediaries as needed), to
ensure that CfD funding is being directed to the shipping industry.
• It is more technology neutral. Bidders need not specialise in a specific fuel but bid
for a mixture of fuels based on the needs of the company (if an individual shipper) or
the market (if a fuel supplier or intermediary).

Conclusion

Allowing the counterparty to be any entity meeting the criteria is preferable for the following
reasons:

• In the initial application of a shipping CfD, efficient price discovery is less important
than ensuring there is sufficient interest from bidders. The risk of paying slightly more
than necessary for fuel is outweighed by the risk of the CfD failing to attract qualifying
bids and losing credibility as a mechanism. Option 2 allows for a much wider group of
potential bidders.
• Option 2 is more technology neutral (allowing multiple fuels to be produced
depending on requirements) and allows bidders flexibility in determining the
contractual arrangements required to meet the CfD requirements.,
• Option 2 provides a blueprint for implementation at the IMO, which will ultimately be
required for wholesale uptake by the shipping industry even if initial applications are
restricted to specific national

128