FuelEU Maritime: a catalyst for bio-LNG market growth and decarbonisation

The European Union's FuelEU Maritime initiative takes effect in 2025. It aims to reduce greenhouse gas intensity of marine fuels through progressively stricter limits. Starting with a 2% reduction in 2025, the regulation targets an 80% reduction by 2050 compared to 2020 levels. Ships exceeding GHG intensity limits face penalties of €2,400 per tonne of fuel consumed in excess.

This regulation presents opportunities for bio-LNG producers. By 2050, FuelEU Maritime could drive demand for over 12 billion cubic metres of bio-LNG. This equals more than half of Europe's projected biomethane production capacity. Bio-LNG's compatibility with existing LNG infrastructure provides advantages over alternative fuels like ammonia and methanol.

Production follows two main routes. Dedicated liquefaction plants co-locate with biomethane production. Gas grid-based production leverages certification systems. Current European dedicated bio-LNG capacity remains limited at approximately 0.15 bcm as of 2024. The gas grid-based route offers greater scaling potential but requires robust cross-border certificate trading and regulatory clarity.

Policy support proves crucial through mandates, tax exemptions, and GHG emission intensity targets. The market faces substantial challenges including scaling requirements and high production costs. Production costs range from $7-50/mmbtu with upside risk around feedstock price shocks compared to fossil fuels. Meeting EU 2030 targets would require building over 1,000 plants annually at an estimated $80 billion investment.

Market fragmentation complicates development, with heavy reliance on subsidies creating compliance complexities. Competition between maritime and domestic industrial consumption will likely support long-term price development. Countries with established biomethane industries and LNG import infrastructure are well-positioned to lead bio-LNG production. Italy and the Netherlands show particular promise.

Bio-LNG production pathways

Bio-LNG production operates through two distinct routes. Dedicated liquefaction involves plants co-located with anaerobic digestion facilities. These produce bio-LNG for nearby road transport or marine fuel applications. Current European capacity remains constrained at 0.15 bcm, though growth reflects increasing market confidence.

Gas grid-based production leverages certification to 'green' grid gas through two mechanisms. Physical liquefaction at terminals uses re-condenser units. These typically process 3-4% of cargo volumes but offer limited scaling potential. Reverse nomination involves pairing regasified flows with green gas certification. This provides greater expansion opportunities but requires acceptance of mass balancing and transparent cross-border certificate trading.

These production methods connect directly to regulatory frameworks. FuelEU Maritime's structure favours bio-LNG development through its emissions accounting approach.

Policy framework and market drivers

FuelEU Maritime establishes maximum annual average GHG intensity limits for ships above 5,000 tonnes calling at European ports. The regulation's well-to-wake emissions accounting approach benefits bio-LNG by recognising low upstream emissions profiles. Demand-side incentives include binding consumption targets and tax exemptions for road transport applications. GHG emission intensity targets through trading schemes provide additional support.

The potential marine fuel demand could absorb more than half of Europe's projected 2050 biomethane supply. This raises questions about optimal allocation across hard-to-abate sectors. These include heavy industry, flexible power generation, and heavy-duty transport.

Market challenges and outlook

Scaling biomethane production faces hurdles. Long project development lead times of three to seven years complicate rapid expansion. Production costs substantially exceed fossil natural gas prices, requiring policy support for competitiveness. However, FuelEU Maritime penalties may help bridge cost-price gaps by increasing maritime sector willingness to pay premium prices.

Market fragmentation presents additional complexity. Current subsidy reliance creates compliance uncertainties with inconsistent member state approaches to certificate trading and EU ETS obligations. Some countries permit traded biomethane certificates for company-level compliance. Others maintain restrictions, hampering coordinated scale-up efforts.

Carbon intensity assumptions vary by feedstock. Manure-based biomethane typically achieves better scores due to avoided methane emissions. Critics argue this incentivises unsustainable livestock farming without considering full lifecycle impacts. Feedstock rules remain subject to policy changes reflecting evolving priorities.

Competitive landscape

Bio-LNG's drop-in compatibility with existing LNG infrastructure provides competitive advantages over emerging alternatives. Competition from ammonia, methanol, and other low-carbon options requires producers to focus on scaling production and cost reduction. The regulation's penalties for non-compliance may help close gaps between biomethane prices and high production costs.

Development patterns vary across Europe based on regulatory environments and policy support. Italy benefits from demand-side mandates whilst the Netherlands leverages existing LNG infrastructure. Meeting FuelEU Maritime's targets requires coordinated efforts to expand liquefaction capacity and streamline regulatory frameworks continent-wide.

Success depends on creating liquid, transparent biomethane markets. These markets are essential for both biomethane and bio-LNG development as governments transition from subsidy-dependent models toward market-driven solutions.

For further information please go to: https://go.woodmac.com/l/131501/2025-08-28/34qtgk