Commercialising Zero-Emission Vessels for CO₂ Shipping

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This article was originally published in the Carbon Capture Journal (issue 101) on the policies, technologies and economics of carbon capture and storage (CCS).

The maritime industry stands at a point where the transition to zero-emission vessels, like ammonia-powered ships, is not just an environmental imperative but a commercial necessity.

The economic dynamics of this shift affect our ability to scale carbon capture and storage (CCS) infrastructure globally. In this article, we’ll dive into why these ships are critical for CCS, the commercial risks involved, concrete developments in the market, and how these factors can shape the timeline for deploying CCS at scale.

Shipping infrastructure is vital for CCS

Imagine running the world’s greatest chocolate factory without the logistical infrastructure needed to deliver your product. Similarly, capturing CO₂ emissions is pointless without the means to transport them. In 2022, global CO₂ emissions from fossil fuels was about 40 billion tons—enough to cover America’s three largest states (Alaska, Texas and California) in over eight meters of CO₂ gas (Tso, 2023, How much is a ton of carbon dioxide?, MIT). That’s a massive volume, and we need reliable shipping to move it to storage sites. This is where ammonia-powered ships play a critical role.

Why ammonia fuel?

Ammonia is a scalable zero-carbon fuel that is suitable for serving long-distance shipping routes. Its adoption in maritime transport ensures that CO₂ captured from emitters can be moved to storage sites without emitting additional CO₂, aligning perfectly with CCS objectives. Ammonia-powered vessel designs are generally deemed mature for deployment (Global Maritime Forum, 2022, Nordic Green Ammonia Powered Ships: Phase 2).

However, deployment is a challenge. Ammonia vessels are 50-130% more expensive than conventional ships due to their novelty and the economic risks of building a global ammonia-fuel network. With limited capital support, widespread deployment will take time, which creates uncertainty around the practical costs of CO₂ transport for both shipowners and emitters. These logistical uncertainties cause delays in deploying CCS at scale. It also increases the overall cost of CCS to a degree where industrial emitters can loose their incentive to implement CCS despite the significant carbon taxes imposed on their operations.

How can we enhance the willingness of institutional investors to provide capital support for these projects and strengthen the case for quickly rolling out CO₂ transport, ensuring that transport infrastructure does not become a bottleneck?

Commercial risks of deploying ammonia ships

Deploying ammonia ships is costly due to the need for specialised fuel infrastructure making it significantly more expensive than traditional marine fuels. This creates commercial risks in the form of:

  • Market risk: Shipowners bear the initial cost of adopting more expensive fuel technology, with uncertain returns on investment.

  • Credit risk: Financiers are cautious about the long-term viability and profitability of ammonia-powered ships, given their higher operational costs.

  • Infrastructure risk: The lack of a comprehensive fueling network for ammonia adds uncertainty to operational planning and cost structures.

  • Technology risk: Unforeseen technical issues or advancement of newer and more efficient designs could render current work obsolete.

The high costs associated with ammonia as a marine fuel stem from several factors:

  • Lower energy density: Ammonia’s lower energy density requires larger fuel storage on ships and on land, increasing design complexity and capital costs.

  • Advanced engine technology: Developing engines that efficiently use ammonia necessitates heavy investment in research, testing, and certification, adding to the cost burden.

  • Safety equipment: Ammonia’s toxicity and corrosiveness demand specialised safety systems for storage, handling, and fueling, further driving up costs.

Limited capital support for vessel deployment

Currently, the maritime industry’s shift towards ammonia as a fuel source is met with cautious optimism but also with financial hesitancy. Public grants and subsidies (often the lifeblood of innovation in critical infrastructure) are primarily focused on research and development rather than widespread deployment (Global Maritime Forum, 2022).

Capital support for deploying ammonium fuel ships is limited but concentrated in Europe and North Asia. Source: Nordic Innovation and Global Maritime Forum.

This gap in funding underscores a critical challenge: while the technology for ammonia-powered vessels exists, the economic framework to support their commercial rollout is still in nascent stages.

Multi-fuel ships for bridging costs and risks

Given limited capital support and stricter emission regulation, shipowners have sought out solutions for de-risking the transition for themselves, solutions such as multi-fuel engines that can use both conventional fuel and ammonia, which lowers the risks and immediate costs associated with transitioning to ammonia fuel. That means they can run the ships purely on ammonia when the fuel network is ready.

Recently, the Norwegian shipowner, Höegh Autoliners, took delivery of 1 of 12 new ammonia and methanol certified pure truck and car carrier ships (PTCT) in China. Not only is this a significant investment, but when such an industry heavy weight commits to such an order, it not only reduces their own risk during the transition, it signals to the remaining industry that we’re nearing the time to drive capital into global ammonia fuel infrastructure. The fact that Höegh Autoliners has invested so heavily in innovative fuel solutions is not just about compliance, but about setting new standards. With sustainability as a key investment criterion, these initiatives are likely help attract more capital, driving further innovation and adoption.

Multi-fuel ships are a platform for bridging the risk of the transition, while sustainable fuel infrastructure is being scaled up and costs go down.

Capital structures to scale up institutional investment

Achieving commercial viability for ammonia-powered ships requires significant investment, particularly in developing a global ammonia fuel network. Institutional investors must play a central role in this process because deep-sea shipping is integral to the global economy. By pooling resources, these investors can collectively lower the costs of developing the necessary fuel production and distribution infrastructure, making large-scale adoption feasible. However, institutional investment hinges on several factors. For one, investors must see a clear path to profitability, which includes ensuring that the infrastructure for ammonia is robust and that ammonia-powered ships themselves are financially viable. The Nordic Green Ammonia Powered Ships (NoGAPS) project proposes four key levers to reduce financial burned on shipowners and lower risks for institutional investors:

  1. Cost-efficient, dual-fuel vessel design: This lever (reflecting our previous multi-fuel ship examples ) focuses on minimising both capital and operational costs while mitigating residual value risks (depreciation of asset values like ships). Dual-fuel engines allow vessels to switch between conventional and ammonia fuels to make them adaptable to a developing market.

  2. Competitive financing arrangements: Securing cost-effective financing is crucial for the business case of ammonia-powered ships. This includes traditional bank loans and sustainability-linked loans, where interest rates decrease if environmental targets are met.

  3. Public sector de-risking measures: Governments can play a significant role by offering capital expenditure (CAPEX) grants and export credit guarantees, which directly reduce the financial burden on shipowners and make investments in ammonia-powered vessels more attractive.

  4. Premium long-term charter agreements: Securing long-term contracts with reputable charterers provides stable revenue streams, reducing credit and residual value risks for lenders and investors.

How do these levers work in practice? Let’s look at two capital structures proposed by the NoGAPS project for deploying ammonia-powered ships.

Equity capital structure

In our first example, the ship is owned by a special purpose company (SPC), also known as an SPV, a legal entity created solely for owning and operating the vessel. The SPC utilises funds to secure a shipbuilding contract to ensure construction. This structure is designed to manage the risks associated with deploying new technology while providing sufficient capital to bring the vessel to market:

NoGAPS equity capital structure. Diagram by OTE based on original report by Global Maritime Forum, 2022, NoGAPS Phase 2.
  • Equity from the shipowner: The shipowner provides a significant portion of the equity, which is crucial for securing additional financing.

  • Sustainability-linked loan: A bank offers a loan to the SPC, tied to specific sustainability targets. Meeting these targets could result in improved loan terms, reflecting the ship’s lower environmental impact.

  • Government grant: A government grant helps offset the high initial costs associated with building an ammonia-powered ship, bridging the cost gap between traditional and zero-emission vessels.

  • Debt or loan guarantee from an export credit agency (ECA): An ECA provides a guarantee for the loan, reducing the financial risk for the bank and encouraging investment by securing more favorable loan terms.

  • Long-term charter agreement: The shipowner secures a long-term charter agreement, which provides stable revenue but can be challenging due to the costs associated with ammonia-powered ships.

Leasing capital structure

Our second example presents a leasing capital structure, designed to reduce the upfront capital requirements for the shipowner and mitigate risk during the transition:

NoGAPS leasing capital structure. Diagram by OTE based on original report by Global Maritime Forum, 2022, NoGAPS Phase 2.
  • Equity from investors/leasing companies: Unlike the previous model, equity is provided by a group of investors or leasing companies, which spreads the risk across multiple parties. This equity, combined with contributions from the shipowner, is directed to the SPC.

  • Bank loan: A bank provides a loan to the SPC, similar to the previous model, but this time the loan is directly associated with the leasing arrangement.

  • Government grant and ECA guarantee: As in the first model, a government grant and a loan guarantee from an ECA are crucial to reducing financial risks and securing more favorable loan terms.

  • Leasing agreement with the SPC: The ship operator enters into a leasing agreement with the SPC. This arrangement allows the operator to use the vessel without the need for significant upfront capital investment, making it an attractive option for operators who are cautious about the financial risks of new technology.

  • Long-term charter agreement: As in the previous model, the operator also secures a long-term charter agreement with a charterer, providing stable cash flow and further reducing the financial risk.

Market readiness

The maritime sector’s move toward ammonia as a zero-carbon fuel is not just an environmental milestone; it’s a foundation for advancing CCS. Currently, Clarksons’ (world leading maritime consultancy) data shows a combined ammonia-ready fleet and orderbook of about 430 ships (Splash, 2024, China Merchants Inks 10 Tanker Newbuilds at DSIC), and with the Viking Energy’s conversion into the world’s first ammonia-powered offshore support vessel by 2026 (Eidesvik, 2024, Viking Energy makes history as first ammonia-powered offshore vessel), the market indicates a tangible shift towards ammonia.

The Viking Energy offshore support vessel being converted to an ammonia-powered ship. Photo courtesy of Equinor.

These developments highlight both technological readiness and a general commitment to reducing emissions through new fuel solutions. The inclusion of shipping under the EU Emissions Trading Scheme (EU ETS) from 2025 will also continue to drive the adoption of ammonia and contribute to CCS advancement by:

  • Accelerating infrastructure development, which will also support CO2 transport and storage.

  • Stabilising or reducing transport costs for CCS, making it more financially viable.

  • Encouraging long-term carbon management projects through predictable costs and operations.

However, to fully anchor this development, it’s imperative that institutional investors actively participate in the transition. Their capital is key to scaling the infrastructure to a point where CCS and zero-emission shipping are not just feasible but fundamental to our global environmental strategy. Imagine that our oceans can be more than highways for global trade but also a venue of environmental stewardship on an industrial scale.