Sustainable Fuels 102: Current applications, challenges and future outlook

As global industries seek transformative solutions to reduce emissions, sustainable fuels are emerging as indispensable players across aviation, maritime shipping, and road transport. Demand for these fuels is projected to quadruple by 2050,¹ underscoring their essential role in meeting ambitious net-zero goals. We delve into the sectors currently harnessing sustainable fuels and evaluate their distinct benefits and challenges.

Beyond immediate applications, we examine the regulatory, investment, and technological hurdles to scaling sustainable fuels. We also explore how initiatives such as the Australia Future Made in Australia plan and the Guarantee of Origin (GO) scheme are establishing sustainable fuels as viable, long-term solutions in the clean energy transition.

Current applications of sustainable fuels

Sustainable fuels are already being implemented across various industries, with demand expected to quadruple by 2050 in McKinsey’s most ambitious scenario analysis.² Below are key sectors where sustainable fuels are currently applied:

(1) Aviation

Sustainable aviation fuel (SAF) represents one of the most promising advancements in reducing emissions from the aviation industry, a sector heavily reliant on carbon-intensive fossil fuels and responsible for approximately 2.5 per cent of global emissions.³ As SAF is compatible with existing aircraft engines, it provides a practical solution to reducing emissions without requiring significant changes to current aviation infrastructure. Litre for litre, SAF has the potential to reduce carbon emissions by up to 80 per cent compared to conventional fossil kerosene.⁴

Globally, major airlines have already begun integrating SAF into their fleets as part of their efforts to achieve net-zero emissions by 2050. In Australia, Qantas has pledged to include 10 per cent SAF in its fuel mix by 2030, with plans to increase this to 60 per cent by 2050.⁵

The aviation sector has been recognised as a key driver for accelerating the growth of the sustainable fuels industry. One of the biggest hurdles to achieving commercial viability is securing enough long-term supply agreements with feedstock providers to match the demand for sustainable fuels. This is crucial for justifying the investment needed to establish production facilities. However, Australia’s aviation industry is large enough to create the demand necessary for commercial-scale refineries, provided SAF is broadly adopted as part of the sector’s transition to net-zero emissions.

To learn more about SAF, please read our previous article Ready for take-off – Investment in Australian Sustainable Aviation Fuel with John Sheehy and Rodrigo Arias Lopez – Pottinger.

(2) Maritime shipping

The shipping industry, responsible for three per cent of global CO2 emissions, is also turning to sustainable fuels as a key strategy for decarbonisation.⁶ Sustainable methanol, renewable or synthetic natural gas, and non-carbon containing hydrogen derivatives are being tested to power large vessels,⁷ offering a lower-emission alternative to traditional marine fuels, such as Heavy Fuel Oil (HFO).⁸ The International Energy Agency (IEA) projects that by 2050, ammonia could account for 44 per cent of the shipping industry’s fuel demand.⁹ Leading shipping companies, like Maersk, are embracing this shift by investing in liquefied biomethane and green methanol, with plans to introduce up to 60 vessels powered by these sustainable fuels, signalling a multifuel future for maritime transport.¹⁰

To learn more about maritime shipping and sustainable fuel alternatives, please read our previous article The Future of Alternative Marine Fuels for Sustainable Shipping.

(3) Road transport 

Sustainable fuels are already widely used in road transportation with the sector expected to represent the largest share of future demand.¹¹ This is largely due to the established market, bolstered by government policies that support the production and consumption of biodiesel and bioethanol, alongside the growing momentum for decarbonisation efforts within the industry.¹²

While the road transport sector has ambitious goals for electrification, the demand for sustainable fuels is projected to increase, as the transition to zero-emission vehicles may not occur rapidly enough to meet the stringent decarbonisation targets set by governments.¹³ Consequently, sustainable fuels are anticipated to play a complementary role alongside electrification, particularly in the short to medium term, helping bridge the gap in achieving emissions reductions.

Challenges facing sustainable fuels

While sustainable fuels hold great promise for reducing emissions and contributing to decarbonisation goals, several challenges have been identified to hinder their widespread adoption and production. These key barriers include:

1. Uncertainty of Demand: A major challenge in the sustainable fuels sector is the lack of consistent, predictable demand.¹⁴ Without clear and stable market signals, it becomes difficult for producers to attract long-term investment.¹⁵
2. International Competition and Subsidies: Australia faces competition in attracting production investment for sustainable fuels, particularly from countries that benefit from extensive government subsidies.¹⁶ International subsidies in regions like the United States and Europe make it challenging for Australia to compete for investment, despite its potential to produce some types of sustainable fuels at a lower cost than overseas jurisdictions.¹⁷
3. Policy Clarity and Regulation: Another key barrier to advancing sustainable fuel production is the lack of clarity around enabling policies and regulatory frameworks.¹⁸ In particular, uncertainty regarding how the emissions associated with sustainable fuels will be tracked and verified makes it difficult for industry players to align with long-term government objectives.
4. Support for Emerging Technologies: Many of the technologies needed to produce next-generation sustainable fuels, such as advanced biofuels and e-fuels, are still in the early stages of development. These nascent technologies require significant research, development, and commercialisation support before they can become economically viable at scale. Currently, the level of financial and institutional support available for these emerging pathways is insufficient to drive the innovation needed to bring them to market.¹⁹

The future of sustainable fuels

Despite the challenges, the outlook for sustainable fuels remains promising, bolstered by ongoing advancements in production technologies and growing government support. Under the Future Made in Australia plan, the Government is accelerating efforts to build a robust local renewable fuels industry, supporting the entire supply chain – from farm and feedstock to fuel distribution.²⁰ This initiative aims to make the aviation, heavy vehicle, rail, and maritime sectors more sustainable.

A key component of current industry support is the Australian Government’s $1.7 billion Future Made in Australia Innovation Fund, which offers essential funding to support the deployment of innovative technologies and infrastructure within key sectors, including sustainable fuels.²¹ This investment is specifically aimed at advancing the development and commercialisation of emerging sustainable fuel technologies, addressing a critical challenge in the industry related to insufficient support for nascent technologies.²² By facilitating the exploration of new feedstock sources and fostering advancements in production processes, this initiative seeks to enable the sustainable fuels sector to scale and compete more effectively in the global market.²³ For more information on the first allocation of funding under this initiative, read our recent bulletin Sustainable Aviation Fuel Funding Takes Off.

Moreover, the GO scheme will allow sustainable fuel producers to certify the emissions content of their fuels, increasing transparency and driving demand for these products. This will enable Australian producers to capture a ‘green premium’ for their low-emissions fuels.²⁴ For more information regarding the GO certification scheme, please read our recent article Pressing GO! on Clean Energy Certification: Understanding the Future Made in Australia (Guarantee of Origin) Bill 2024.

The above initiatives provide clear market signals that are essential for driving investment decisions in the sustainable fuels industry. By offering greater clarity and certainty, they boost confidence in the long-term viability of sustainable fuels, making it easier to attract the capital required to scale production. Australia is well-positioned to support a competitive domestic sustainable fuels sector, with its vast landmass, favourable climate, advanced agricultural practices, access to renewable feedstocks, and established supply chains. By 2030, a domestic SAF industry alone could contribute an additional $10 billion to Australia’s annual GDP and generate up to 26,200 jobs,²⁵ underscoring the immense future value at stake in this market.

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.

¹Mikolaj 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>.

²Ibid.

³Deloitte, ‘Catalysing Sustainable Aviation Fuel (SAF) in Australia’ (Report, November 2023) 2 <https://www.statedevelopment.qld.gov.au/__data/assets/pdf_file/0025/85480/SAF-sust-aviation-fuel-report-summary.pdf>.

⁴Ibid.

⁵Ibid.

⁶Takahiro Furusaki and Mette Asmussen, ‘Reducing barriers to maritime fuel projects is key to decarbonising shipping’, World Economic Forum (Online Article, 18 April 2024) <https://www.weforum.org/agenda/2024/04/why-reducing-barriers-for-maritime-fuel-projects-is-key-to-progressing-on-decarbonization/>.

⁷Krutnik (n 1).

⁸Department of Climate Change, Energy, the Environment and Water, ‘Maritime Transport’ (Web Page, 2024) <https://www.energy.gov.au/business/sector-guides/transport/maritime-transport>.

⁹International Energy Agency, Net Zero Roadmap: A Global Pathway to Keep the 1.5°C Goal in Reach (Report, 2023) 94 <https://iea.blob.core.windows.net/assets/4ad26550-05c4-4495-9891-98e588cd0be8/NetZeroRoadmap_AGlobalPathwaytoKeepthe1.5CGoalinReach-2023Update.pdf>.

¹⁰Dominic Ellis, ‘Maersk commits to Bio-LNG and methanol in large order’, Gas World (News Article, 8 August 2024) <https://www.gasworld.com/story/maersk-commits-to-bio-lng-and-methanol-in-large-order/2142549.article/>.

¹¹Krutnik (n 1).

¹²Ibid.

¹³Ibid.

¹⁴Department of Infrastructure, Transport, Regional Development, Communications and the Arts and Department of Climate Change, Energy, the Environment and Water, A Future Made in Australia: Unlocking Australia’s Low Carbon Liquid Fuel Opportunity (Consultation Paper, 12 June 2024) 13 <https://www.infrastructure.gov.au/sites/default/files/documents/low-carbon-liquid-fuels-consultation-paper.pdf> (‘Consultation Paper’).

¹⁵Ibid.

¹⁶Ibid.

¹⁷Ibid 15.

¹⁸Ibid 13.

¹⁹Ibid.

²⁰Minister for Infrastructure, Transport, Regional Development and Local Government, ‘Australia’s Own Renewable Fuels Industry is Forging Ahead’ (Media Release, 30 July 2024) <https://minister.infrastructure.gov.au/c-king/media-release/australias-own-renewable-fuels-industry-forging-ahead>.

²¹Ibid.

²²Consultation Paper (n 14).

²³Ibid.

²⁴Ibid.

²⁵ARENA, Australia’s Bioenergy Roadmap (Report, November 2021) 4 <https://arena.gov.au/assets/2021/11/australia-bioenergy-roadmap-report.pdf>.