Global Energy Perspective 2023: Sustainable fuels outlook

Across all scenarios, sustainable fuels are projected to see significant growth across sectors, particularly in hard-to-abate transportation segments where electrification is projected to be limited due to infrastructure, weight, or range requirements. Sustainable fuels are projected to play a particularly important role in aviation, with other sectors such as passenger cars, commercial vehicles, and maritime relying largely on electrification, hydrogen, and hydrogen-based fuels (such as ammonia).

The outlook for sustainable fuels between 2019 and 2050 is projected to differ due to segment-specific factors. In passenger cars, battery electric vehicles (BEVs) could gradually become the dominant option. However, sustainable fuels also present a viable alternative, particularly to decarbonize legacy internal combustion engine vehicles. For commercial vehicles, BEVs have varying use cases and are well suited for short-to-medium-range trucks, while hydrogen could see a significant increase after 2030. In aviation, sustainable aviation fuels (SAFs) are considered by the industry as the only option today to replace fossil fuels in wide-body long-distance planes from a technical point of view, as hydrogen and battery options are currently still in early stages of development. In maritime, sustainable methanol, renewable or synthetic natural gas, and non-carbon containing hydrogen derivatives (ammonia) are seen as the alternative energy sources to replace fossil fuels. And in buildings, renewable natural gas can be used interchangeably with natural gas, while the use of electricity for heating and cooking could see a significant increase after 2030.

Road transport is projected to make up the largest share of demand, given that a market already exists, driven by governments supporting biodiesel and bioethanol production and consumption in several countries and regions, alongside existing momentum for decarbonization. The demand variability between scenarios is largely driven by the less mature markets like aviation, maritime, and chemicals.

The long-term contribution of sustainable fuels to decarbonization will likely be determined by government actions (including subsidies, mandates, or tax credits) and technological advancement. Even in markets with deep electrification ambitions, like Europe, sustainable fuel demand is expected to grow as the shift to zero-emission vehicles may not happen quickly enough to meet strong overall decarbonization targets set out by governments. By 2050, the global demand for sustainable fuels is projected to range from approximately 190 million tons¹Metric tons: 1 metric ton = 2,205 pounds. per annum (Mtpa) in the Fading Momentum scenario to 600 Mtpa in the Achieved Commitments scenario, depending largely on net-zero ambition levels across countries and associated legislative support for decarbonization.

Currently, conventional biofuels like ethanol and FAME make up most of the sustainable fuels supply mix. By 2050, however, the share of conventional fuels is projected to drop by between 30 and 60 percent from 2021 levels as country-level technical blend walls limit their potential and fleet electrification decreases demand. Ethanol—no longer serving the road fuels market—may be converted to drop-in kerosene using the alcohol-to-jet conversion pathway.¹Bioethanol can be further upgraded through oligomerization to kerosene and/or diesel utilizing existing bioethanol capacity.

The growth in sustainable fuels demand over the 2040–50 period is expected to come from drop-in fuels that can decarbonize existing fleets. While road fuels are projected to drive short-term growth, aviation and maritime fuels drive growth thereafter. Across scenarios, increasing blending mandates in aviation and greenhouse gas-reduction targets in maritime boost the total demand for sustainable fuels, which is projected to reach around 330 Mtpa by 2050 in the Current Trajectory scenario and 600 Mtpa in the Achieved Commitments scenario.

Meeting the projected rapid growth in demand for sustainable fuels is expected to need substantial increases in installed capacity for their production. In the short-term, HVO is projected to make up most of these investments. Post 2030, once blending walls and lipid-based feedstock limits (for HVO) are reached, large investments into new advanced fuels technologies may be necessary—with between $0.6 trillion and $1.9 trillion of cumulative investment required until 2050, depending on the scenario. Around half of this investment is projected to come from the European Union and North America.

Advanced biofuels from pathways like gasification Fischer Tropsch (FT), alcohol-to-jet, or synthetic fuels like power-to-liquid (PtL) or methanol-to-jet, rely more heavily on upfront capex and will therefore require a higher investment per unit of fuel produced than the more common pathways like HVO and HEFA.¹Hydrotreated esters and fatty acids (synonymous with the hydrotreated-vegetable-oil process). Despite this higher capex, more diverse and available feedstock would, however, allow for lower operating costs over the lifetime of the plant once it is built.

Sustainable fuels production capacity is expected to see substantial growth in the next few years as producers react to proposed mandates and growing demand. Most of the supply is projected to come from both existing and new HVO/HEFA facilities in the short term. Renewable diesel demand is projected to be substantial in the short term, before SAF demand picks up at a large scale around 2030. Producers may therefore need flexibility to switch the product slate mix between diesel and jet to continuously adjust production to meet demand.

New pathways, like methanol, gasification-FT, and PtL, are also entering the market in pilots and are seeing growing capacities. By 2030, they could account for around a fifth of globally announced sustainable fuel production capacity. However, a considerable number of projects have not yet passed the final investment decision, and, as such, the actual supply that can be expected remains uncertain.

Value pools are indicative of what investors need to realize in order to incentivize supply-capacity additions. The long-run margins opportunity is highly subject to regulatory support and customers’ willingness to pay. To estimate the returns that investors in the sustainable fuels space could materialize, fundamentals around supply-demand balance and industry returns in parallel industries could be used as a basis. Extrapolation of historical internal rates of return (IRR) seen in industries like oil and gas and refining, which range from 6 to 17 percent, depending on the market state, with long-term margin profile held constant beyond 2030 when market fundamentals are less certain, could help to understand potential future value at stake in the market.

Shifting from operating expenditure-heavy pathways (like FAME, HVO, and HEFA) to capex-heavy ones (like bio-based gasification-FT, alcohol-to-jet, or synthetic PtL or methanol-to-jet) might require more support for capital recovery—access to low-cost financing and government support could determine the required premium to assure financial viability for capex-heavy suppliers.

Government support could manifest in both supply- and demand-side mechanisms. On the supply side, financial incentives and tax credits linked to pathway maturity in the past have helped to cover the premium costs of new technologies, while sub-mandates designed for specific fuels stimulate demand and guarantee offtakes of more expensive fuels.

Feedstock, required to produce these valuable fuels, is an essential part of the sustainable fuels value chain and accounts for up to between 60 and 80 percent of production costs, depending on the pathway. Currently, most sustainable fuels produced are sourced from edible sugars and oils; however, a fundamental shift to new feedstocks is projected to be required.

Waste biofeedstocks (such as used cooking oil, animal fats, agricultural waste, and municipal solid waste) have constrained availability and have presented challenges in collection and required pretreatment. On the other hand, the longer-term transition to synthetic fuels from renewable power and biogenic CO₂, or direct carbon capture, would require large-scale installations of renewable power capacity and electrolyzers in the right locations. For both fuel types, feedstock is therefore often a bottleneck—causing a substantial part of the value to shift upstream in the value chain.

In addition to accessing new sources of feedstock, producers may need to investigate ways to reduce the inherent lifecycle carbon intensity (CI) of the feedstock to make their fuels more attractive to customers. For example, opting for biogenic CO₂ instead of industrial CO₂ could reduce the CI of PtLs. Accessing harvested crops like corn, sugarcane, and oilseeds grown using sustainable farming practices could benefit HEFA and alcohol-to-jet. Focusing not only on the availability of feedstocks, but also on the CI of feedstocks and associated trade-offs is projected to be critical going forward.