Sustainable fuels are derived from renewable materials, offering a cleaner alternative to the fossil fuels that have powered our industries and transportation for centuries. They include biofuels, drop-in sustainable fuels, and hydrogen-based fuels.1
As the global demand for decarbonisation intensifies, sustainable fuels are increasingly regarded as a practical and effective solution to support this transition. Indeed, McKinsey identifies sustainable fuels as one of 12 technologies that, when implemented collectively at scale, have the potential to reduce global anthropogenic greenhouse gas (GHG) emissions by up to 90 per cent.2
As sustainable fuels gain prominence in decarbonisation discourse, the sector’s complexity – arising from the diversity of fuel types, technological pathways, and feedstocks – presents challenges for stakeholders in comprehensively evaluating their potential benefits and limitations.
We explore the sustainable fuels landscape, the different types, their applications and their role in decarbonisation.
Types of sustainable fuel
Sustainable fuels are renewable energy carriers well-suited for transport and industrial applications, offering significant sustainability advantages – particularly in reducing emissions – compared to traditional fuels.3 These fuels come in various forms, including:
(1) Biofuels
Biofuels are renewable energy sources derived from organic matter. They are typically produced in two main forms, though they span across first to fourth-generation biofuels.
(a) First-generation biofuels
First-generation biofuels, primarily bioethanol and biodiesel, are produced using food crops as feedstock, raising important questions about their sustainability and impact on global food supply. Bioethanol is the most widely produced first-generation biofuel, derived from the microbial fermentation of starch-and sugar-rich crops such as corn and sugarcane.4 Commercially used strains, such as Saccharomyces cerevisiae and S. pombe, are employed to ferment the C5 and C6 sugars (mostly xylose and glucose) into bioethanol.5 The bioethanol is then distilled and refined for use as a fuel or fuel additive.
Biodiesel, also known as fatty acid methyl ester (FAME), is produced from food-grade oils or animal fats such as rapeseed, soy, or palm oil. Unlike bioethanol, the production of biodiesel involves a chemical process known as transesterification. In this process, lipids are reacted with short-chain alcohol, typically methanol, in the presence of a catalyst, usually potassium hydroxide, to produce biodiesel.
While both bioethanol and biodiesel offer viable alternatives to fossil fuels, their dependence on food crops and extensive agricultural land use poses significant sustainability challenges.6 These concerns have spurred growing interest in ‘second-generation’ biofuels.
(b) Second-generation biofuels
Second-generation biofuels, in contrast, are derived from non-food biomass, such as agricultural residues (e.g., corn stover or bagasse), forestry waste, and other lignocellulosic materials – plant-based biomass that includes tough, fibrous components like lignin, cellulose, and hemicellulose.7 This type of biofuel is produced using more complex processes, often involving the conversion of fibrous non-edible material called cellulose or hemicellulose into fuel.8 Second-generation biofuels are considered more sustainable, as it utilises waste products and does not compete directly with food production, though it often involves more advanced and expensive technology.9
Biomethanol is another type of second-generation biofuel derived from agricultural residues, woody biomass, or byproducts from pulp mills.10 It is produced through the gasification of biomass to create syngas, which is then converted into methanol.11 Similarly, biogas is produced through the anaerobic digestion of organic waste, including manure, food scraps, and wastewater.12 Microbes break down the organic matter in the absence of oxygen, producing biogas, primarily composed of methane and carbon dioxide.13
Third and fourth-generation biofuels are also in the early stages of development. These next-generation biofuels build on prior advances by utilising new feedstocks, such as algae or engineered microorganisms, and offer the potential for greater efficiency and carbon reduction. These cutting-edge developments will be explored in more detail below.
(2) Drop-in sustainable fuels
Drop-in sustainable fuels are engineered to be fully compatible with existing internal combustion engines (ICE), allowing them to be used without any modifications to current infrastructure.14 These fuels can be produced from either edible biomass or residue biomass sources, using low-carbon hydrogen or synthesising carbon captured from sustainable sources combined with low-carbon hydrogen.15 Their seamless integration with conventional fuel systems has made them viable replacements for diesel, jet fuel, and natural gas, offering a practical solution for industries seeking to lower carbon emissions without overhauling their energy infrastructure.16 Drop-in fuels are particularly valuable in sectors where electrification or alternative energy sources are less feasible, such as aviation, shipping, and heavy industry.
(3) Synthetic or e-fuels
Synthetic fuels, or e-fuels, are produced by combining captured carbon with hydrogen generated from low-carbon electricity sources. The hydrogen used in these fuels, often produced through electrolysis, is referred to as either liquid or gaseous hydrogen, depending on its state. Electrolysis, powered by renewable energy, separates water into hydrogen and oxygen, with the hydrogen being used in the fuel production process while the oxygen is released back into the atmosphere.17
When this low-carbon hydrogen is combined with captured CO2 from the atmosphere or industrial processes, it forms e-fuels such as e-methanol or e-ammonia.18 These synthetic fuels can be used in sectors that are difficult to electrify. While not yet widely available, e-fuels and hydrogen-based fuels are being tested in pilot projects,19 offering a promising pathway for reducing emissions in hard-to-abate sectors and contributing to a carbon-neutral future.
Why are sustainable fuels important?
Sustainable fuels are set to play a pivotal role in reaching decarbonisation targets.20 The benefits of sustainable fuels lie in their ability to recycle carbon in a closed loop system, absorbing carbon during production and releasing it upon use, thus minimising net emissions. By contrast, fossil fuels, which have sequestered carbon underground for millions of years, release previously stored carbon into the atmosphere when burned, thereby introducing additional CO2 and contributing to an overall increase in atmospheric carbon levels.21
Their importance is particularly pronounced in sectors where electrification is not yet feasible or efficient due to infrastructure, weight, or range requirements.22 These sectors include high-energy industries such as aviation, maritime transport, and heavy manufacturing which demand energy-dense fuels that are difficult to replace with electrification. In these hard-to-abate sectors, sustainable fuels emerge as vital alternatives, enabling emissions reductions without compromising the energy output required for large-scale operations.
Moreover, sustainable fuels offer the distinct advantage of being compatible with much of the existing supply infrastructure. Biofuels, for example, can be blended with conventional fuels and used in current combustion engines,23 while SAF can be utilised in jet engines without requiring any significant modifications. Additionally, the production and distribution of these fuels can leverage existing industrial facilities and rely on locally sourced raw materials, further supporting the circular economy.24 This high level of compatibility facilitates a smoother transition to cleaner energy sources, avoiding the need for costly infrastructure overhauls, and positioning sustainable fuels as an immediate and practical solution in the ongoing shift toward decarbonisation.
Where to next?
Even as sustainable fuels solidify their role as essential to decarbonisation, new feedstocks and production pathways are emerging, sparking innovation across the sector. Third and fourth-generation biofuels, like those derived from genetically modified microalgae, embody the latest advancements. These biofuels offer a high-yield, carbon absorbing option that does not compete with food production, as microalgae can be cultivated in non-arable regions and thrive in water unsuitable for other crops.25 Advanced genetic modifications are also being used to enhance algae’s photosynthetic efficiency and lipid content, making them a high-potential feedstock for biofuel.26
Next-generation sustainable fuels require significant investment and policy support. With large-scale deployment goals by 2050, the pathway forward includes both technological breakthroughs and new regulatory frameworks to ensure cost-effective, large-scale production. The next article in this series will delve into these developments, exploring current applications, remaining challenges, and the outlook for sustainable fuels as they shape the decarbonisation landscape.
The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.
1McKinsey & Company, ‘What are sustainable fuels?’ (Online Article, 8 October 2024) <https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-are-sustainable-fuels#/>.
2Bernd Heid et al, What Would It Take to Scale Critical Climate Technologies? (Report, December 2023) 2, 5 <https://www.mckinsey.com/~/media/mckinsey/business%20functions/sustainability/our%20insights/what%20would%20it%20take%20to%20scale%20critical%20climate%20technologies/what-would-it-take-to-scale-critical-climate-technologies.pdf?shouldIndex=false>.
3Australia’s Economic Accelerator, ‘Sustainable Fuels’ (Fact Sheet, 2023) <https://www.aea.gov.au/download/378/aea-focus-area-sustainable-fuels/224/aea-focus-area-sustainable-fuels/pdf#:~:text=Sustainable%20fuels%20are%20renewable
%20energy,when%20compared%20to%20traditional%20sources>.
4Philipp Cavelius et al, ‘The potential of biofuels from first to fourth generation’ (2023) 21(3) Plos Biology 1, 3.
5Ibid.
6Ibid.
7Amy Nagler and Selena Gerace, ‘First and Second Generation Biofuels: What’s the Difference?’, Montana State University (Working Paper) <https://waferx.montana.edu/documents/fact_sheets/1st%20v%202nd.pdf>.
8Ibid.
9Ibid.
10McKinsey & Company (n 1).
11Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping, ‘Bio-methanol’ (Web Page, 2024) <https://www.zerocarbonshipping.com/energy-carriers/bio-methanol/?section=regulation>.
12What are sustainable fuels (n 1).
13Mohammed Khaleel Jameel et al, ‘Biogas: Production, properties, applications, economic and challenges: A review’ (2024) 7 Results in Chemistry 1, 5.
14McKinsey & Company (n 1).
15Ibid.
16Ibid.
17Repsol, ‘What are Renewable Fuels?’ (Web Page, 2024) <https://www.repsol.com/en/energy-and-the-future/sustainable-mobility/renewable-fuels/index.cshtml>.
18McKinsey & Company (n 1).
19Repsol (n 17).
20Mikolaj Krutnik et al, ‘Global Energy Perspective 2023: Sustainable fuels outlook’ (Online Article, 10 January 2024) <https://www.mckinsey.com/industries/oil-and-gas/our-insights/global-energy-perspective-2023-sustainable-fuels-outlook>.
21Ibid.
22Krutnik (n 20).
23Repsol (n 17).
24Ibid.
25Min Wang et al, ‘Microalgae biofuels: Illuminating the path to a sustainable future amidst challenges and opportunities’ (2024) 17(10) Biotechnology for Biofuels and Bioproducts 1, 2-4.
26Ibid 10-13.
