The attempts to move away from the use of hydro-carbon fuels for powering freight transport will have an enormous impact on the market for logistics. However, such a move might be described as a ‘leap in the dark’ as there are so many unknowns that it is, in practice, impossible to calculate the impact of the change.
There are two major areas of uncertainty; the engineering and the economics of the fuels.
Of the two, the engineering ought to be the area of lesser uncertainty. The areas of technology such as fuel-cells, hydrogen chemical engineering and battery technology have been well understood for many years. However, the problem is that what is being asked of the engineering is new. The application of new fuel technologies in vehicles such as trucks represents a very different context than, say, the use of fuel-cells on satellites or other space-craft. Simple things, such as the storage and handling of hydrogen in small-scale commercial environments is quite new and faces a number of practical problems. Even in applications such as shipping, where the opportunities for dedicated handling technology are greater, there is significant uncertainty. For example, will easier methods to handle and store hydrogen on board ship be found? If yes, then ammonia as a fuel will become less attractive.
This is also true about batteries. Storing lithium-ion batteries can be quite hazardous, with the potential for intense fires demanding large and expensive storage areas and staff who know how to deal with any potential combustion. So far this has not stopped their adoption, yet it is an undeniable risk in any large-scale roll-out of the technology.
The issue here is that these problems are ‘discrete’. Until large-scale operations are embarked upon, it is unlikely that all of the obstacles will appear. It is not that these obstacles will be insurmountable in engineering terms; however, they may heavily weight the preference between one solution and another.
The engineering of logistics is particularly relevant here. It is frequently overlooked by design engineers more focussed on the theoretical performance of a solution. There is a gap between the engineers who design a product and the logisticians who understand how it is used. The latter however, are rarely involved in the early stage of design. Yet it is a key determinant of the success of any solution. Just by studying the fundamental energy dynamics of a particular fuel will not provide a guarantee that it will be a successful product in the commercial market. Its logistics have to be understood, yet this is often difficult without a large-scale implementation.
The uncertainty is even more severe when estimating the economics of non-hydrocarbon fuels. For example, a key determinant of the price of many non-hydrocarbon fuels is the price of electricity. This is particularly the case with hydrogen and its derivatives. The generation of hydrogen by local electrolysis stations is a highly attractive solution for road freight, for example. However, such electrolysis stations consume electricity in large quantities relative to the energy of the fuel they produce. The cost of electricity is the main driver of the cost of hydrogen fuel. Yet we do not know the cost of fuel. Most electricity in the world today is generated by burning either coal or gas, but it would seem unthinkable to generate hydrogen-based fuels using such hydrocarbon produced electricity. Therefore, electricity for electrolysis will have to be generated through methods such as nuclear, solar, hydro and wind power. Some prices of this electricity are known, especially nuclear power; however much is not. It is unclear if the electricity will be more expensive or less expensive. For example, will hydrogen electrolysis be able to exploit cheaper ‘off-peak’ electricity? If so, this may change the prospects for hydrogen even though the underlying energy dynamics would suggest that hydrogen is inherently more expensive than electric drives.
However, the availability of off-peak electricity is heavily influenced by the type of generating method, with wind-power, for example, being quite inflexible in-terms of the timing of production and thus likely to produce a lot of off-peak power, certainly if compared to gas-powered energy generation. Knowing the answer to this seems very difficult, even unlikely at present in most markets.
Another example is the economies of scale dynamics of different fuels. In particular there are some surprising supply chain forces underlying their application. For example, bio-fuels may seem a very attractive option for both aircraft and trucks. However, their manufacture, of course, relies on various types of organic matter, usually agricultural products, as a key raw material. Very large-scale production of bio-fuels would, in such circumstances, have a very significant impact on food production and would also lead to increases in cost of the raw-material as more land would have to be devoted to its production. At low levels of production bio-fuels can utilise surplus production of raw-material, however at larger volumes more valuable assets would have to be drawn in, certainly driving-up the price. This is an inverse economy of scale but unfortunately describes the use of many types of bio-fuels.
This also applies to hydrogen-based fuels. For example, the availability of carbon-dioxide is an important cost driver in terms of producing certain types of synthetic fuels. If carbon-capture operations can produce large quantities of carbon-dioxide this will reduce the price of synthetic fuels appreciably. Yet, large-scale carbon capture facilities do not really exist at present and their viability and cost is very unclear. Therefore, estimating the practical viability of synthetic fuels requires estimating variables whose value is unknown.
What are the implications for logistics? The main effect is uncertainty. Owners of major logistics assets are likely to face significant problems assessing the impact of changes in fuel technology. Since the price of fuel is uncertain, the level of demand for transport will be harder to estimate. This is not a new situation as the price of oil-based fuels has often varied considerably. However, such uncertainty is likely to increase substantially. This uncertainty will also make investments in fuel-related infrastructure, such as bunkering capabilities, more difficult and create the very significant risk of mis-allocation of investment.
The implication is that the valuation of such assets will have to have a discount applied due to such uncertainty.
The core problem is that there are so many ‘moving parts’ in the issues around new fuel technology that any decision can only be based on guess-work. This will represent a considerable management problem in both the short and long-term with significant effects both on the economics of the firm and macro-economics.
Source: Foundation for Future Supply Chain, August 9, 2021
Author: Thomas Cullen
