FuelEU | Certification and Fuel Supply Agreements

In a rapidly evolving regulatory regime, the FuelEU Regulation and the Renewable Energy Directive III will introduce a new regulatory framework for the use of alternative fuels. In this newsletter we will take a deep-dive into the fuel certification requirements and the impact on bunker terms / fuel supply / offtake agreements. The stakeholders will need to cater for the new regulation when drafting their fuel supply contracts.

Intro

Effective 1 January 2025, the new FuelEU Regulation[1] will introduce requirements on the greenhouse gas (GHG) intensity of the marine fuels that are used on voyages for cargo- and passenger carrying vessels in the EU and involve financial penalties if certain targets are not met. A way to avoid these penalties is to adopt biofuels or other sustainable marine fuels. The fuel suppliers and their ability to procure sustainable fuels fulfilling the extensive requirements under the FuelEU Regulation will thus be key in helping the shipowners to comply with the FuelEU regulation – and to facilitate the decarbonisation of the industry.

In this newsletter, we will focus on the fuel specific issues from a legal perspective, in particular:

• The GHG intensity targets and the concept of ‘well-to-wake’ emissions;
• The particular requirements on emission reductions for fuels;
• The sustainability requirements for biofuels;
• The new documentation requirements, including in respect of Bunker Delivery Notes (BDN);
• The application of the polluter pays principle in fuel supply contracts;
• The need to adjust or introduce provisions in fuel supply contracts; and
• The FuelEU Regulation’s effect on the ‘allocation’ of sustainable fuels between intra-EU and in-/outbound EU voyages.

For an introduction into the FuelEU Regulation, we refer to our newsletter of 11 March 2024 (link) as well as the newsletters from the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping (link).

Further to this outline, we also refer to the EU Commission’ FAQ on the FuelEU Regulation which was published on 23 July 2024 (link). See further comments on the FAQ on the ‘allocation’ of fuels below.

Greenhouse gas intensity targets

The FuelEU Regulation’s main requirement – on the reduction of the GHG intensity of the fuel used onboard – is based on the principle of “well-to-wake”, taking the fuel’s entire GHG emissions impact into account on a life cycle basis from the extraction, over the processing and transport to the burning of the fuel in the engine. Accordingly it includes the extraction, production, transportation and distribution (‘well-to-tank’ or ‘WtT’) as well as the combustion/conversion of the fuel inside the tank (‘tank-to-wake’ or ‘TtW’):

The difficulty will be to calculate and document the entire fuel pathway. The FuelEU Regulation contains a set of default emission factors for the variety of available fuels. As to CO₂ emissions from fossil fuels, the default values are always to be used when determining the GHG intensity, even though the actual emissions factor may be lower[2]. The FuelEU allows, however, for shipping companies to document, by way of independent certification, the actual values of the fuels which are then applied instead of the default values, leading to potential savings. The mechanism shall incentivise stakeholders to use alternative fuels and procedures to document savings which will thus provide for proven GHG emissions savings[3].

In practice, the shipping companies shall thus ensure to monitor and record the GHG emissions and the savings on an on-going basis. This is to be done in accordance with the approved FuelEU monitoring plan[4], which shall include a description of the procedures for the monitoring and reporting of the fuel consumption and specifically the well-to-tank and tank-to-wake emissions factors.

Requirements for alternative fuels

The FuelEU Regulation promotes the use sustainable marine fuels, if these entail significant GHG savings. The sustainable fuels will be required to meet certain GHG minimum savings and sustainability requirements. The requirements differ based on the type of the fuel and are set out in the FuelEU Regulation, the Renewable Energy Directive (RED)[5], among other EU regulations.

The FuelEU allows for the use of sustainable fuels in blends/mixtures with conventional fuels provided the supporting certification sets out the blend ratio and the sustainable part is duly certified. This may for instance be a “B30” combining a 70% fossil fuel component (such as marine gas oil) and a 30% bio-based component (such as vegetable oil), and the particular requirements on minimum savings etc. will thus only need to be met for the sustainable part of the blend to be eligible for the purpose of FuelEU.

There are three main categories of fuels: Biofuels, Renewable Fuels of Non-Biological Origin (RFNBO) and low-carbon synthetic fuels.

• Biofuels are fuels derived from biomass such as wood, food crops and agricultural waste. The biofuel (or the part of any blend containing biofuels) will need, as a minimum, to have GHG savings of 65% compared to a fossil fuel comparator of 94 g CO₂ eq/MJ. The biofuels also need to fulfil the sustainability requirements as set out below. Finally, certain food- or feed-crop based fuels will also not be eligible irrespective of whether the fuels actually provide savings (due to the negative effects on land use and biodiversity)[6]. The requirements for biofuels also apply to biogas[7].
• RFNBO are defined under RED as liquid or gaseous fuels which are derived from renewable sources other than biomass (also known as ‘power-to-X’ fuels). RFNBOs will, in respect of FuelEU, need to show GHG savings of at least 70%[8]. Certain documentation is also required in respect of the sourcing of the electricity, see below.
• Low-carbon synthetic fuels produced from liquid or solid waste streams (such as waste plastic) from non-biological origin or waste processing gas (such as gasses from manufacturing processes) may also be eligible for FuelEU. The minimum GHG saving threshold is 70%[9]. These fuels are not subject to particular sustainability requirements, unlike biofuels and RFNBOs.

The requirements on GHG minimum savings and sustainability are central to the mechanisms set out in the FuelEU Regulation. If the fuels do not meet these requirements, the fuels are deemed to have the same emissions factors as the so-called “least favourable fossil fuel for that type of fuel”. The investment in a bioproduct will not translate into a FuelEU benefit. As noted by the Mærsk Center for Zero Carbon Shipping, e-ammonia may obtain benefits of 97 % compared to heavy fuel oil, but if it fails the certification requirements, it will have to be counted as fossil-based ammonia with a GHG intensity which is 30% higher than heavy fuel oil[10]. Any such failure to, for instance, obtain the proper documentation may thus be fatal to the calculation.

Sustainability and certification

The shipping industry is not traditionally subject to regulatory requirements relating to sustainability, focusing more on for instance pollution prevention. Sustainability has been a ‘soft’ term. With the FuelEU, RED III and the introduction of biofuels, the industry will now be subject to sustainability and certification requirements which have, for some time, been in place for different biomass products.

Under RED, companies will be required to show that bio-based fuels fulfill a wide set of sustainable requirements in respect of how the fuel – and the sourced products – have been produced. This involves certification on for instance the use of water resources, the agricultural practices and labour conditions. In simple terms, it does not work if the products have been produced by child labour, by cutting protected rainforest or by creating excessive air pollution. Importantly, the certification is to be done strictly in accordance with standards set out by certification bodies approved by the EU Commission such as International Sustainability & Carbon Certification (ISCC) and the Roundtable on Sustainable Biomaterials Association (RSB). It involves extensive paperwork which proves the origin of the products and the manner in which the fuel – or the part of the fuel of biological origin – has been produced.

For RFNBOs, the fuel cannot be considered as fully “renewable” if it has been produced by taking electricity off the grid unless it can be demonstrated that such electricity was produced exclusively from renewable sources. Put differently, it needs to be documented that the fuel is truly renewable.

The EU Commission is currently engaged in a certification workstream under the European Sustainable Shipping Forum which is working on a framework for the certification documentation and procedures which the fuel suppliers and shipping companies will need to follow to satisfy the certification requirements. The EU Commission is expected to later adopt implementation acts which clarify these requirements.

Bunker Delivery Notes and supporting documentation

Bunker fuel suppliers are already today required under MARPOL[11] to provide extensive information in the Bunker Delivery Notes in connection with the fuel deliveries. This includes information on the vessels’ GHG emissions which is to be recorded in the IMO Data Collection System (DCS) for the purpose of calculating the vessels’ CII. Similarly, the BDNs are used for the purpose of calculating the GHG emissions under the EU MRV Regulation which is the foundation for the calculations under the EU ETS.

The FuelEU Regulation and RED will require the suppliers of sustainable marine fuels to enclose certain additional information to the BDNs not required in respect of fossil fuels:

• The GHG intensity of the fuel;
• Guarantees of origin (identifying the fuel pathway) for fuels from renewable sources such as biofuels and RFNBOs; and
• ‘Proof of sustainability’ (with the sustainability requirements), for biofuels.

This documentation is key to the subsequent verification process requiring the DoC holder to prepare a FuelEU Report to be verified by the verifier and, potentially, checked by the national authorities. The EU Commission recently, on 29 July 2024, adopted the guidelines for the verification activities which include extensive obligations on shipping companies and verifiers when reporting under FuelEU[12].

Reimbursement for fines

The FuelEU Regulation is based on the fundamental EU principle of ‘polluter pays’. This will impact charter parties[13], ship management agreements and fuel supply agreements. The responsible entity for the payment of the FuelEU penalties is the ‘company’ (the DoC holder). However, the FuelEU Regulation explicitly envisions that the suppliers may, by contractual arrangement, be held liable for the FuelEU penalties incurred by the shipowner (company) if the green fuels are not made available as agreed and/or if the fuels do not comply with the agreed specifications as to the GHG intensity rating.

The contractual implications for bunker contracts

In standard bunker delivery terms and fuel supply contracts for sustainable marine fuels, the parties may consider adjusting the terms to cater for the new FuelEU requirements relating to:

• GHG intensity requirements: The parties should consider including specific requirements for the GHG intensity ratio of the fuel on a well-to-tank and, potentially also, tank-to-wake basis allowing for the buyer (shipowner) to achieve compliance with the FuelEU GHG intensity target.
• Certification and documentation: It is crucial for the buyers of the sustainable fuel that it is duly certified in compliance with the FuelEU Regulation. Terms may be introduced clarifying the seller’s specific obligation to provide the relevant well-to-tank documentation on the fuels.
• Quality and samplings: Whereas many fuel supply contracts rely on “local standards” when determining sampling standards, such wording may not be appropriate for biofuels for which no, local practices have yet developed. In any event, greater clarity can be ensured if the parties agree on the proper sampling methods – as well as quality standards – which are suitable for the particular fuel and which may differ from the standards used for conventional fuels. Parties should consider applying ISO’s new version of its widely applied Marine Fuel Standard, ISO 8217-2024, which includes more detailed requirements on biofuels, blends and testing.
• Seller’s liability: Buyers of fuels may seek to introduce new liability provisions for claims relating to the fuel’s GHG intensity ratio and documentation. Specifically, the parties may consider whether and on which basis the seller should be liable in accordance with the ‘polluter pays’-principle, expressed in the FuelEU Regulation Art. 23 (9), for any losses suffered by the buyer due to a failure of the seller to procure fuel with the agreed GHG intensity ratio or certification.
• Claim notice and time bar periods: Bunker fuel terms often provide for short notice periods. In this case, buyers (shipowners) may, depending on the verification timing, have difficulty obtaining verification of the documentation supporting fuels within the standard notice periods. Buyers may have basis to request separate and longer notice periods for ‘documentation’ claims (e.g. seller’s failures to provide certification in accordance with FuelEU) or at least introduce internal procedures which limit the risk that the verifiers will be rejecting the documentation.

The owners may also consider whether the introduction of alternative fuels require other changes in their contractual setup. As to insurance, the sustainable fuels will typically not be more dangerous than conventional fuels and may thus not have significant consequences on owners’ costs of obtaining insurance cover. As to ammonia for instance, the risks may be significant though safety standards are still be developed. Owners may consider, in any event, to ensure insurers’ approval of the use of alternative fuel types and the bunker terms to safeguard cover and insurers’ recourse claims.

Allocation of biofuels

The FuelEU Regulation, Art. 2, provides that 100% of the energy used on voyages between EU ports count for the purpose of FuelEU whereas only 50% of the energy used on voyages between EU and non-EU ports (in-/outbound voyages) count. On face value, this should entail that owners would ‘lose’ 50% of the benefit from potential over-compliance from the use of biofuels on in-/outbound voyages as 50% of the energy is not counted (as the non-EU country in the other end does not, at present, have a similar system in place).

In its FAQ, the EU Commission nonetheless presents an interesting interpretation of the calculation in the FuelEU Regulation, Annex I, and the term of “average yearly GHG intensity of the energy used onboard” which the GHG intensity calculation is based on. The Commission argues that the biofuel component may be counted up to the full 50% energy falling within the scope of Art. 2. If using B60 (containing 60% biofuel), the bio-component may be used up to 50%-points (disregarding the remaining 10%-points biofuel and the conventional fuel component entirely) and when using B30, the bio-component may be used up to the 30%-points (allowing for 20%-points of energy from the conventional component to be used). It seems that this calculation may significantly impact the use and distribution of bio-blends on the various voyages.

From a legal perspective, the EU Commission’s standpoint leaves room for questions. It is undisputed that  fuel/energy used onboard vessels between non-EU ports does not fall within the scope of FuelEU and that it does therefore  not count when determining the “average yearly GHG intensity of the energy used onboard”. Similarly, based on a strict reading of the FuelEU Regulation, Art. 2 (d), the 50% of the energy used on in-/outbound voyages – and the relating emissions – should also not be counted in for the purpose of FuelEU.  Furthermore, the calculation in Annex I does not provide (as the Commission’s FAQ would imply) that the energy which stems, proforma, from bio-based component in fuels, may be applied in full (up to 50%), thereby prevailing over the energy generated from conventional component in the same blends even though these cannot be separated in reality. It may be an interpretating incentivizing the use of biofuels on international voyages, but it also complicates the calculations and potentially the distribution of biofuels between various ports.

This may effectively mean that owners may benefit from blending in a lesser volume of biocomponents, such as B30, on in-/outbound voyages and  a larger biofuel component on voyages between EU ports. Whether these regulatory features are so significant that they will actually affect the market – and the available of biofuels between various ports – is yet to be seen and may also depend on pricing.

While the EU Commission has no formal authority to interpret the FuelEU Regulation, in practice, the verifiers will likely follow the guidance in the FAQ and as such, the calculation in the FAQ will likely, de facto, be adopted on the calculations. The FAQ generally serve a useful purpose of making the regulation accessible and understandable and it may also in this respect simply just be accepted by the industry.

Looking ahead

While we are only months away from the effective date of FuelEU Regulation, important aspects of the implementation are still outstanding. The outline in this newsletter is merely preliminary and updates will be coming. We could in respect of fuel and certification requirements highlight the following:

• The outcome of the current workstreams to clarify the certification documentation and procedures on sustainability etc. and the EU’s implementation acts which will follow.
• BIMCO is working on Methanol Bunker Annex and Duel Fuel Clause to supplement the existing BIMCO Bunker Terms 2018 (link). These terms will be published by the end of 2024.
• Certain elements of the implementation by the EU Member States are still not clear. For instance, in Denmark, the government’s draft legislative proposal notes that while the FuelEU Regulation hinders the member states from introducing even stricter obligations on the shipowners, this does not apply to fuel suppliers. According to the proposal, Denmark may potentially introduce requirements on the GHG intensity of the fuel that is supplied within its territory[14].

On a longer term, it is worth noting that IMO presented its Guidelines on the lifecycle intensity of marine fuels (LCA Guidelines). In turn, this is based on the principles set out in ISO standards on lifecycle assessment[15]. These guidelines may form the basis for the economic measures which the IMO may be introducing in 2027[16]. How the IMO measures will impact the industry is too early to know. What is clearer is that the industry cannot wait to prepare for and implement the FuelEU. And it won’t be easy.

Gorrissen Federspiel is a knowledge partner of the Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping and provides advice to owners, charterers, fuel suppliers and other industry stakeholders on the implementation of FuelEU Regulation and other decarbonisation initiatives.

[1] Regulation (EU) 2023/1805 of the European Parliament and of the Council of 13 September 2023 on the use of renewable and low-carbon fuels in maritime transport, and amending Directive 2009/16/EC (the “FuelEU Regulation”).

[2] The restrictions on actual values for C0₂ emissions does not apply to the other GHGs (methane (CH₄) or laughing gas (N₂O)) which may thus also be measured.

[3] FuelEU thus allows ship owners to establish and apply actual measurements by way of laboratory testing or direct emissions measurements. These measurements are to be duly certified.

[4] The deadline for the submission of this plan is 31 August 2024.

[5] Renewable Energy Directive (EU) no. 2018/2001 of 11 December 2018 (RED II) as amended by Directive (EU) no. 2023/2413 of 18 October 2023 (RED III), taking effect 21 May 2025.

[6] See however Commission Delegated Directive (EU) 2024/1405 of 14 March 2024 permitting certain such fuels.

[7] On biogas as sustainable marine fuel, see Mærsk Center for Zero Carbon Shipping’s publication of 11 June 2024 (link).

[8] This is against baselines intensity set out in RED.

[9] This is against a baseline of 94 g CO₂eq/MJ in the Gas Directive (EU) no. 2024/1788 of 13 June 2024 and RED. See also Commission Regulation 2013/1185 of 10 February 2023.

[10] See newsletter of 29 May 2024 (link).

[11] The International Convention for the Prevention of Pollution from Ships 1973/78 (MARPOL).

[12] Commission Implementing Regulation (EU) no. 2024/2027 of 26 July 2024.

[13] See our newsletter on time charter parties of 1 July 2024 (link).

[14] See draft legislative proposal of 28 June 2024 (only available in Danish).

[15] ISO 14044:2006 Environmental management — Lifecycle assessment — Requirements and guidelines and ISO 14040:2006 Environmental management — Lifecycle assessment — Principles and framework.

[16] See outline of planned IMO measures in the MEPC framework on IMO’s website.