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(Images: Getty, additional design: Tina Tiller)
(Images: Getty, additional design: Tina Tiller)

PartnersDecember 20, 2021

The future of fuels is on its way

(Images: Getty, additional design: Tina Tiller)
(Images: Getty, additional design: Tina Tiller)

In the wake of new government biofuel mandates, how is one of New Zealand’s largest fuel retailers rising to the challenge of providing more sustainable options? Ben Fahy talks with Z Energy about the future of fuels.

This content was created in paid partnership with Z Energy.

“We hope we’re wrong.”

This is not a statement you hear very often in the business world. Being right about the future is at the core of capitalism and companies and investors spend a lot of time and money trying to figure that out. But Z Energy’s strategy manager Sheena Thomas says it plainly when asked whether her company’s predictions about how long it will take for New Zealand to wean itself off fossil fuels are accurate. 

That’s because she says Z’s report, The Future of Fuel Demand, is “based on what we think will happen under current policy settings, not on what we hope will happen”.

Transport accounts for approximately 43% of the country’s total carbon emissions and in its report to the government, the Climate Change Commission (CCC) called for a near halving of transport emissions by 2035 from 2019 levels. Its “demonstration path” was the best guess on how we would get there and while Z agrees with some of the assumptions and the need to take action now, its own research on the “substitution curve” is less optimistic about the speed of the transition. 

Thomas says that without meaningful policy intervention, fossil fuels are going to be around “for a good couple of decades” and while Z expects annual growth in fuel demand to turn negative by 2026, it believes demand for fuel will be higher than the CCC expects up until 2040. 

That’s because Z’s report suggested EV adoption across the transport sector would be slower than anticipated, especially in heavy transport, although Thomas says there is a chance that uptake for electric passenger vehicles could go faster than predicted. Norway, for example, which is seen as a shining beacon of electrification, wants all new cars on its roads to be EVs by 2025 and it has used its significant reserves of oil money to provide subsidies and build infrastructure to get there. In November, 95% of new cars sold in Norway had batteries, and many believe it will reach its target two years early. 

New Zealand is much further behind but is on a similar trajectory, with 17% of new cars sold in November electrified to some degree, the highest ever number. There was also a 40% increase in new car sales across the board when compared to 2020, so there will still be plenty of Ford Rangers that need filling in the future. 

The feebate scheme launched in July 2021, which offers the carrot of a rebate to purchasers of low emissions vehicles and the stick of a fee for higher-emitting vehicles, has already proven its worth in terms of getting people to make the bigger upfront investment in an EV. It should eventually shift more people away from petrol and diesel vehicles. As such, Thomas doesn’t think there will be a need for a hard ban on internal combustion engine vehicles. 

Modeshifting (AKA using public transport or your legs, rather than the car) is another way to reduce emissions, but Z thinks the CCC’s predictions on that are also a bit optimistic, in large part because it will require both significant behavioural change, as well as a lot more investment from the government in public transport and cycling infrastructure. Again, Thomas hopes their predictions are wrong, but the pace with which some of these projects are currently happening doesn’t inspire great confidence. 

When it comes to road transport, commercial freight contributes disproportionately high emissions. Around a quarter of road transport emissions come from trucks, despite only representing 6% of total vehicle kilometres travelled on New Zealand’s roads. The Ministry of Transport’s Green Freight paper has brought more attention to this area and Z believes hydrogen is a better eventual substitute for heavy, long-haul transport than electric, with the light fleet – passenger vehicles as well as light commercial trucks – more likely to go electric. 

New government biofuels mandates hope to change the fuel landscape in NZ (Image: Tina Tiller)

Appetite and momentum for hydrogen vehicles are building. New Zealand’s first fuel cell heavy-duty truck arrived on New Zealand soil in November, courtesy of Hyundai, and New Zealand’s first green hydrogen plant – a joint venture between Tūaropaki Trust and Obayashi Corporation of Japan – officially opened earlier this month. Meridian and Contact have also proposed building the world’s largest green hydrogen plant at Tiwai Point if the Rio Tinto aluminium smelter closes. 

Waiting for the future to arrive is not a particularly good emissions reduction strategy and Thomas says something needs to be done right now if New Zealand hopes to reach its net zero carbon target by 2050.

“We can’t replace our fleet fast enough to not use biofuels,” she says. “A lot of our customers want to decarbonise. We want to decarbonise. We all believe in climate change and want to do something about it.”

As such, Z has long advocated for a biofuels mandate as a way to reduce the carbon intensity of the fuel that all retailers sell. Europe, the UK, US, Japan and South Korea have had biofuels mandates for years now, as well as production incentives that have helped to create a biofuel industry in those markets. The New Zealand government has now joined them, announcing a biofuel mandate for ground transport in mid-December that will see a set percentage of biofuel – some eventually produced locally, some imported – added to all petrol and diesel. 

Z has already invested around $40 million to build a biodiesel production plant in south Auckland but it had to be mothballed in 2020. A small number of businesses were willing to pay more for the fuel, but without an existing mandate or a subsidy, Thomas says the comparative cost was just too high and it wasn’t financially viable to continue production.  

Some believe biofuels are a distraction that let oil companies and big fossil fuel users off the hook and just slow down the transition to other forms of energy, but Thomas says biofuel is a temporary solution – “depending on your definition of temporary”. 

“Over time you want to move your ground transport to electric and hydrogen and save the biofuels for areas that are the most difficult to decarbonise, like aviation. We need to start work on decarbonising these sectors now, otherwise we might get to 2050 and have emissions that we are unable to reduce.”

In 2008, when Air NZ flew its trial flight with a 50/50 mix of jatropha biofuel and standard jet fuel, there was plenty of excitement about the possibilities of sustainable aviation fuel (SAF). Since then, it has basically failed to launch, but Thomas says there is a lot of momentum around it globally right now. As a country that is heavily reliant on aviation networks for trade and tourism, New Zealand needs to progress the decarbonisation of aviation.  

Air NZ and MBIE have recently issued an RFP (request for proposal) for a feasibility study on the creation of a local biofuel industry that would produce SAF. Z hopes to reopen its own biofuel plant in January if the mandate goes through as planned and it is also supportive of the potential for a biofuel facility at Marsden Point. 

While their biodiesel production plant Te Kora Hou remains in hibernation pending the completion of detailed front-end engineering assessment, Z remains committed to continuing to meet demand for biodiesel and its production in New Zealand. Exploring the potential for a biofuel facility focused on SAF at Marsden Point, it intends to respond to the Air NZ/MBIE RFP. 

“From a security of supply point of view it’s a good idea to have our own production,” Thomas says, especially given there is huge demand globally for biofuel and a shortage of supply. 

One of the criticisms of biofuel is that land that could be used for growing food is used to grow fuel. But according to research institute Scion, sustainably produced biofuels made from municipal solid waste, woody biomass from the forestry industry and other “power to liquid” solutions could meet 50% of the country’s SAF needs by 2050. That would be topped up with international biofuel supply. 

New Zealand is in a good position to create the bulk of its transport energy through renewable generation, Thomas says, but we will require a lot more electricity to replace all that black gold. If we have to create that electricity by burning coal, something we’ve done more of in 2021 than in the past 14 years, that’s a false and damaging economy. So increasing renewable generation needs to go hand in hand with the shift away from fossil fuels. 

“Everything is interrelated. We can’t do it in isolation.” 

Of course, a company that sells fossil fuels would try and extend the life of fossil fuels, wouldn’t it? Even the International Energy Agency has consistently underestimated the uptake of renewable energy and overestimated the demand for fossil fuels. Z Energy and many other oily incumbents have a lot to lose from this transition away from their main money spinner and there are countless examples of companies that have faced the innovator’s dilemma and not adapted quickly enough when a new technology comes along. The decline of many oil stocks, Z included, has shown that investors aren’t too confident in their prospects in an era without as much petrol and diesel pumping through the veins of the global economy. So could Z become a stranded asset?  

“That’s a possibility we’ve been trying hard to avoid. We’ve been really conscious of this for years now and I’m confident that won’t happen,” says Thomas. 

“Our stranded assets would basically be tanks. We don’t have oil rigs, we don’t drill for oil. None of those things are holding us back.”

She believes its service station network (80% of New Zealanders are within 5km of a Z or Caltex station) will remain valuable in the future because the existing infrastructure “will be able to provide a variety of fuels for different purposes”. Most of the EV charging will be done at home or at work so travel routes will influence where EV chargers might be placed, hydrogen would need to be available on the main trucking routes, and a percentage of biofuel will be flowing out of all the pumps (pies are expected to remain a staple New Zealand fuel, although there may be a few more vegan options on offer). 

“This is quite a shift from obtaining all your energy from one barrel of oil,” she says. 

Fossil fuels – and the internal combustion engines that rely on them – have played a very important role in the world’s development. But, just as horses were eventually superseded by cars (in part because of all the horse manure on the streets and the associated stench and disease), relying on a series of small explosions to propel our big metal machines while polluting the air and warming the planet is on the way out.  

Major technological shifts rarely happen smoothly or predictably. As Thomas says, “there will no doubt be a messy middle but that is always the way”. There is no perfect solution, but there are plenty of good options. Now it’s about figuring out which ones work best and how they all work together – and hoping that a combination of good government policy, more responsible business decisions and more environmentally aware consumers keep the Green Vortex spinning. 

This content was created in paid partnership with Z Energy.

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