Blackout in Spain: what we know and lessons for the future

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Eklavya Gupte:

Hello and welcome to the Energy Evolution Podcast, brought to you by S&P Global Commodity Insights, where we zero in on all things energy transition.

I am your host, Eklavya Gupte. And in this episode we will try to shed some light on an event that shocked the European electricity industry and sparked debates about the reliability of our decarbonized power systems. The incident in question is, of course, the recent power outage on the Iberian Peninsula, which plunged much of Spain and Portugal into darkness for several hours in late April. To discuss this in more intricate detail, I'm joined by correspondent Camila Naschert, who has been closely following not only the event, but also the fallout from the Iberian blackout. Welcome, Camila.

Camila Naschert:

Hi, Eklavya.

Eklavya Gupte:

So, Camila, guess many of our listeners will have closely followed this story, but can you please give us a quick recap of what happened?

Camila Naschert:

Yeah, so the outage happened on April 28th, around 12:30 PM Spanish Time, when data from transmission system operator, Red Electrica, showed a plunge in power consumption from around 25 gigawatts to 10 gigawatts, while there were also reports of a complete loss of load. The blackout disrupted key infrastructure across both Spain and Portugal, think public transportation, traffic signals, hospitals, manufacturing plants, digital payment systems, etc. Banking systems were also interrupted, metros and trains were stopped, and many hospitals had to activate on-site generators and reduced services while power was being restored. Now, by April 29th at 7:00 AM, the power system had recovered 99.9% of its demand. The restart was also helped by imports from France and Morocco. And since then, we've had an investigation by Spanish authorities into the cause of the outage is ongoing. And power plant operators and the TSO are denying responsibility and blaming each other. And the context of that is that whoever is found liable may have to pay hefty fines.

Now, to get into the details of the event and its consequences, let's hear from Kerry Tucker Smith, senior analyst for European Power, and from Alexandre Massé, power and renewables analysts, both from Commodity insights. Kerry, Alexandre, thank you so much for joining us on Energy Evolution. So, today we'll be diving into this Spanish Iberian power blackout that we saw last month. We're now a month on from the event and still asking a lot of questions around the cause and the implications. But do you want to start by describing the event of this outage, also maybe in historical context, how significant was this of an event?

Kerry Tucker Smith:

Yeah, hi, there, and thank you for having us on the podcast. So, what we saw on April the 28th was a cascade of events in the Spanish grid, which over the course of just a few minutes, saw a whole system blackout in Spain, Portugal, as well as parts of Southern France. And as a result, there was widespread disruption. Everything from communication, to payment systems, to transport industry, everything went down.

So, in Western Europe, blackouts of this magnitude are rare. The blackout in Spain is likely the largest of this century so far, but they do happen. The last major blackout in the region was in the UK in August, 2019 with about a million people affected. But it was fairly short in duration, so lasting just a few minutes to about an hour. Further back in 2006, there were blackouts in Western and Central Europe. Now, these again were very short duration, but they were very widespread geographically. You have to go back to Italy and Switzerland in 2003 to get an outage of a similar size where a tree touched a power line leading to a series of grid failures. And almost the whole country lost power for anywhere between an hour to 12 hours.

Alexandre Massé:

But smaller scale blackouts are more common in Eastern Europe. For example, I think just this week North Macedonia experienced a countrywide blackout, which lasted approximately around one hour. And if we're just going back to what happened last year in June, 2024, we have been seeing that the Balkans region has experienced widespread blackouts. And this is a very interesting topic. But going back about the implications of the blackout, I think that we have been seeing multiple impacts in Spain regarding its energy markets. Maybe something we can then show that on afterwards.

Camila Naschert:

Yeah, no, let's get into that. How has the market reacted to this event?

Alexandre Massé:

So, on the day of the blackout, intraday auctions in Spain, which are whole continuously and on the hourly basis, were halted because the grid was obviously managed by the TSO for 24 hours basically. And then basically the auction resumed the day after. But we can summarize the impact on Spanish poor markets with the two following impacts. The first is basically I think since 12th of May, we have been seeing the Portuguese TSO ran just limiting the available interconnection capacity between the countries, between two countries. This means that basically Portugal can import less power from Spain. And something interesting is that limitation has occurred from 9:00 AM on the morning to 7:00 PM on the evening. And usually during this timeframe we are seeing that Portugal is importing power from Spain as solar generation in rising in the country and pressurizing prices. And this time because capacity was lower, we have seen that surplus being kept in Spain. And as a result, the two market coupled.

Something interesting is that the Spanish market has seen its lowest ever oil prices since then. I think it was minus €15 per megawatt hour. Which is a very interesting topic as only two years ago, those negative prices didn't exist. If we are going to the maybe sink and impact, I think that the Spanish system has been running on a safe mode basis since the end of the blackout, which is something confirmed by the energy ministry in Spain. And this has led to very high reading patch levels in Spain. But this means that basically even still, we are seeing no thermal capacity being selected on the day ahead market. The TSO has lifted that amount of thermal generation since the end of the blackout. And this has no impact on the head prices, nor on futures, but this has profound impacts in terms of electricity bills and gas demand in the country.

Camila Naschert:

Maybe if we can take a step back and look at the Spanish electricity grid and the power mix in Spain. Obviously we've seen huge shifts in that across all of Europe, not just in Iberia. But what can we say about how the power mix and the grid in Spain have evolved in recent years, obviously as the energy transition has gone on? So, what do we know about that?

Alexandre Massé:

I think you're right. Basically the transformation of Spain generation mix really mirrors what is the plan for several European countries in terms of decarbonization of their poor system. Only a decade ago, Spanish generation mix was dominated by coal, gas, nuclear, and only very little by oils. And in 2024, within solar generation only accounted for nearly 45% of its power demand. And when we include hydro, that figure rises to nearly 60%, which is very impressive. And obviously as you pointed out, the shifts has been driven by a fast increase in solar capacity. Basically in 2024, capacity was above 40 gigawatts, which is nine times above its 2015 level. So, yes, very impressive and fast transformation.

I think that key development has been the rise of decentralized energy assets. Just to be clear now, nearly a quarter of the pen solar fleet is installed on rooftops, which is operating outside TSO control. Meanwhile, when the country was retiring, coal plants for instance, those plants were large capacity plants which were grid-connected. So, you have also that shift from large centralized plants to very small, tiny decentralized field plants. And the final point about the transformation of the Spanish energy system is the fact that Spain aims to phase out its 70 gigawatt nuclear fleet by 2035, and it's supposed to be starting in 2027 with the first plant decommissioning. And basically this is the last nuclear phase out policy standing among the big western European countries. And despite the recent intensification of debate around that policy, there are currently no plans to reverse that phase out basically.

Camila Naschert:

And when we now start to think about the causes of this outage, we're seeing obviously an ongoing investigation by authorities in Spain, and then this, I guess, you could say tug of war between the grid operators and the power plant operators. Now, as we speak, clearly this is a fluid situation. What do we know? What can we say for sure, if anything, about the causes?

Kerry Tucker Smith:

Yeah, so at the time of recording on 23rd of May, as you said, the exact cause of the outage isn't known. Lots of investigations underway. In the immediate aftermath, there's been a huge amount of finger pointing. Blaming everything from the amount of renewables in the grid, creating instability and low inertia. Blaming the low levels of nuclear on the system, lack of grid investment, some suggestions of I and cyber attacks. And as you say, just yesterday there were reports from the chair of the Spanish TSO, RE's parent company, blaming large power plants for not doing the job of voltage control, which needless to say is being pushed back on by the major generators.

So, what we do know is that we have a timeline. We know that around 30 minutes prior to the blackout, there were reports of unusual frequency oscillations in the wider European grid. ENTSO-E, the European TSO Association, has said that it dealt with those oscillations that the grid was normal at the time of the blackout. So, it's currently unclear if and how these oscillations were linked. We know that half an hour later, there was a loss of generation at a substation in the Spanish province of Granada, followed by two successive substation failures in other regions. So, these amount to a little bit over two gigawatts loss in generation and resulted in a drop of grid frequency.

In the last week, there has been a lot of talk from the energy ministry in terms of overvoltage on the grid. But we currently do not know what triggered that initial drop in generation. Did it cause the overvoltage or was it reacting to the overvoltage? That generation loss then triggered load shedding. That's an emergency measure designed to stabilize the grid. But that was insufficient. We're not sure why it didn't work. Finally, as the frequency continued to fall in Spain, the Spanish and the French grids, which led to another massive disconnection of generation and led ultimately to the blackout. So, from this initial generation loss, there is a cascade of events triggering the full blackout, all of which happened in just a few minutes. And there's likely to be a whole web of complex interlink factors, which if they didn't set the ball rolling on the blackout, at the very least they contributed to the blackout by making the system more vulnerable.

Alexandre Massé:

I think that just was, Kerry was saying, we know that renewables on the grid were very high at the moment of the blackout. But they were not exceptionally high wind and solar were accounting [inaudible 00:12:31] 70% of the polarity at the moment of the blackout, which is high. But as I said, we have been seeing hours with higher penetration of renewable on the grid. Just in 2024, we have been seeing around thousand hours above that level. And something interesting is that super recently right before the blackout in April 16, the Spanish grid at least met all of its met with renewable, so wind, solar, and hydro, which is basically the all-time high record.

But I think the figure pointing needs to be taken with very cautionary. There have been a lot of commentary suggesting that there is a lack of inertia. That topic has reverted back to voltage control recently. But there is a lot of conflicting arguments, as said Kerry, and there is not a clear single reason behind the explanation of the blackout. As said, Kerry, it's massively complex. Just maybe opposing what we're seeing at the moment in Spain versus what happened last year. So, as I said previously, last year we saw a blackout, widespread blackout in the Balkans in June, and we only got the report of the explanation of the causes back in February, 2025. So, this, I think, underlines well the complexity of those events. As said Kerry, it's a cascade of very localized and complex power system defaults. In the case of the Balkans, the coast was something very different to what has been discussed previously. For instance, initial short-circuit has been triggered by vegetation growth, which has been too close from the power lines. So, this is even interesting to see how those events are being analyzed basically.

Kerry Tucker Smith:

Yeah, in this case we simply don't know yet. But we can say that a renewable-led future needs a modernized grid and a way of managing the grid in a modern, clean, fast-response way. And other markets have been perhaps a little bit more forward-thinking in this area. So, just yesterday, California's system operator approved a €4.8 Billion transmission plan to support the grid against rising demand to integrate renewables and batteries to provide upgrades for grid-enhancing technologies to enhance transmission capacity. Similarly, in the UK, which is like Spain, a renewable island, the grid operator NISO has been working to decarbonize its grid balancing and enhance stability using its Stability Pathfinder projects.

So, just in March, GB's first of five grid-forming batteries was connected to the grid in Scotland under this initiative. So, those are batteries that they're an advanced battery storage system that can independently stabilize and support the grid. GB in general has been able to integrate a lot more batteries onto its grid relative to Spain. And a lot of those are active in frequency services and in system balancing. So, we estimate over eight gigawatts of batteries on the GB grid compared to just over two gigawatts in Spain. Which by 2030 is expected to rise to 30 gigawatts in GB compared to just 11 gigawatts in Spain. And batteries are crucial to the markets for helping them integrate the rollout of renewable power.

Alexandre Massé:

And I think the final point about this is that just looking at Spain's position in Europe, you can see that Spain is very isolated, both from a geographical point of view and this has direct consequences on how the market is operating. At the moment, Spain has only one connection linkage, I would say with continental Europe through France basically. And despite having this interconnection, this interconnection cannot mitigate that isolation as it's represents basically less than 10% of its peak demand. We are seeing that in contrast to European countries such as Germany, Poland, which can rely on several other neighbors in case there is an imbalance in their markets. Spain has very limited support from its neighbors. In the case of the blackout, the interconnection just tripped. At the moment, frequency dropped below safety measures. But then it means that if we were keeping that interconnection online, the frequency drops would have basically safety issues on electrical devices in France and Spain, and could potentially transfer that blackout in France more widely.

And ultimately the support from neighboring countries during the blackout was very limited. Obviously Morocco and France helped during the reconstruction of the grid, but this remained very limited. And looking at how fast the Spanish grid can reconstructed, it means that for the support will have been basically a great help. Just looking at what is happening also, there is a new line in construction at the moment between France and Spain, but it'll be only commissioned by 2028. And despite seeing the interconnection capacity doubling by then, we're seeing that this isolation within Europe will not be fully compensated. And it's an area where we could see both blackout potential changes as maybe more political appetite for new interconnection projects could emerge basically.

Camila Naschert:

That's really interesting. And I mean if there's listeners out there like me who are just frantically taking notes, because there were so many interesting points just raised by you both, there will be a report by your team the same week as we are launching this podcast, the early June. So, subscribers to the Commodity Insights Analytics Services will be able to read a little bit more with the caveats that you just laid out around ongoing uncertainty. So, maybe the final point is around the discussion that you just raised already about grid security. We've seen reactions across Europe, executives at every utility being asked about potential repercussions or similar events happening in other markets even as far as the US. Why was this so impactful that it really prompted this wider debate in other markets? And do you think that is the right conclusion, the right concern to take away from this?

Kerry Tucker Smith:

Yeah, so gosh, why did Spain make the headlines? It's a really good question. I think it's a combination of a location and impact. Unlike most blackout events, it was a countrywide event which lasted for over 12 hours from start to finish and led to a significant amount of disruption. Any event like this just highlights how dependent we are on our electricity networks in our modern world. And it's something that we probably take for granted, particularly in Western Europe. We expect this perfect supply of electricity. It also comes at a time when there's a lot of discussion around the electrification story. So, the electrification of industry, of heating, of transport around the build out of data centers, which have got really high electricity demands and need this 24/7 power. So, we forecast electricity demand in Western Europe to increase by 13% by 2030 relative to 2025, by 55% by 2040. And of that we're going from around 35% of that demand being met by renewables to over 50% by 2030, nearly 70% by 2040.

So, that's a really big ask on the electricity grid. And it's the same ask that other grids across the world are having to deal with. So, it is of the exact cause or causes of the Iberian event, enhancing and investing in our grid systems, modernizing them, adapting them for renewable penetration is really something that we need to be doing more of. We need to be putting the right value on what is really a critical piece of infrastructure.

Camila Naschert:

That's a great final word. Thank you both, Kerry and Alexandre, so much for joining us on energy evolution. We, the reporters and analysts here at Commodity Insights will obviously continue to keep tabs on this story. So, look out for the latest updates as this evolves. Thank you both.

Eklavya Gupte:

In the reactions to the outage, we've also heard an emphasis on the need to shore up energy security, at the same time as pursuing decarbonization. And to give more details into this perspective, we spoke to Alberic Mongrenier who serves as the executive director of the European Initiative for Energy Security. They're a think tank and a campaign group, which is focused on building support for energy and national security across the European continent.

Camila Naschert:

Welcome to Energy Evolution. So, you had the European initiative for energy security. And I'm interested to hear how this event, this blackout fits into this theme of energy security that has of course been high on the agenda in Brussels and other EU capitals in recent years. Can we already draw any conclusions from the blackout? And would you say this is a one-off event? Or do you advocate for seeing this as a systemic energy security issue?

Alberic Mongrenier:

Well, it's not the first blackout in the recent history of Europe. You won't be the last one either. In Western Europe, we had a big one in 2006, which was caused by some routine work. Before that, there was another one in Italy in 2003, which was caused by a tree. In the US, you certainly remember the 2021 Texas freeze, which was provoked by a very strong winter storm. And more recently and more consequently in Europe, there's obviously the regular blackouts all over Ukraine, which are caused by Russia's missile and drone attacks on the country's energy infrastructure.

The point I'm trying to make here is that these events, they don't happen often at least in peacetime, but it can happen again, and the causes can be many. It can be weather events, human error, technical failure, often all of three combined, or it can even be deliberate attacks, whether physical or cyber on infrastructure, which Europe sees more and more of. That said, it's not a fatality for Europe. What it shows is that we need to be better prepared to deal with the increasing complexity of our energy system. And the best way to avoid and prepare for this is to invest in grids, interconnectors, storage redundancy, especially with so much renewables in the mix. Storage is very important. But we also need to invest in cyber and physical resilience solutions, and components that meet certain requirements in terms of security resilience.

Camila Naschert:

Do you think policymakers are aware and companies are aware of this investment need that you're calling for? Or do you think there's more to do on that front?

Alberic Mongrenier:

I think we already knew that we under-invest in the European grid, so this is in a way helpful, but dangerous and costly reminder. I think we saw estimates that show that this cost the Iberian economy at least €2 billion, maybe somewhere between €2 and €4 billion. So, it will force politicians to prioritize the grid in the next few years, and it will also push experts and technicians to find new methods to contain potential disruption. The thing is energy security today means a lot of different things. It's security of supply the traditional way that we all know, but it's also material supply chains, whether we're talking about minerals or components. It's also infrastructure security. I've mentioned physical and cyber attacks before. And all of these dimensions offer huge challenges at the moment. And they all get a fair amount of attention in the media and they get attention from politicians also, whether it's Chinese mineral export restrictions, hybrid attacks by Russian and Chinese ships on undersea infrastructure in the Baltic Sea, the industrialization caused by high energy costs all over the European continent, et cetera.

So, the problem is less that the issue is not getting attention, but rather than that there are many different and very serious risks that the private sector and policymakers must prioritize at the moment. And it's been constant crisis mode in the world of European energy since 2022. Another issue is that such events also take place in a context of political polarization and debates on the energy transition, and some pundits are quick to comment and politicize the debate and certain energy technologies, which doesn't help with the rational assessment of what happened in this case to the Iberian grid and why this blackout happened in the first place.

Camila Naschert:

Yeah, I mean you just touched a little bit on what I was going to ask next, which is about this, I guess, you could say finger pointing, or at least it's very high profile nature of the discussion around this incident. Maybe even getting worse, but through the fact that this is a complex multifaceted event that takes time to resolve and to explain. But when this kind of thing happens, do you think this is a good reminder or do you think it's maybe also a distraction from other issues that maybe occur under the radar and are less dramatic? And if so, what are those things that you think are maybe being forgotten?

Alberic Mongrenier:

Well, as I said before, I think there's plenty of things happening in the world of energy security at the moment, and they're getting a lot of attention. It's multidimensional, so I don't think it's a distraction. It does point to the fact that we need serious investment in the grid. I think that's probably one of the most important dimensions of energy security for Europe going forward. Electricity security specifically.

Historically, when we speak about energy security, we used to think about getting enough gas and oil into the system. But as we electrify and digitalize our energy system, which is both our mega trends, and they're important mega trends and essential for Europe's energy security, but that means we need to take into account the risks that we have neglected in the past. And that's why we have under-invested in the European grid. We've invested a lot in renewable production, we've invested a lot in other aspects of energy security over the past decades. But we can say that we are overprepared on the grid front, otherwise, a blackout of this scale would not have happened. These investments must happen now because the cost of inaction is very high, both for the European economy and for collective security.

Camila Naschert:

Now, your organization is lobbying for more energy security, obviously also from a geopolitical perspective. You were started in 2022 amid the war in Ukraine, where energy, of course, has been such a core issue. Aside from the grid investments that you just mentioned, what are some of the other key measures that you're asking for on that front, especially on a policy level?

Alberic Mongrenier:

Yeah, good question. So, we are actually on a number of fronts. So, grid and energy infrastructure, generally speaking is one aspect, but we're also very much focused on supply chains. The supply chains that power electrification. So, I'm thinking here about critical minerals, but also critical components that go into grids, but also vehicles. Well, the transport sector, generally speaking. What we see now is that, okay, Europe is moving towards electrification, which is great. Can be great for Europe from an energy security perspective, given that the continent is largely oil and gas poor outside of a couple of countries. But that creates new dependencies primarily to China, which has a very dominant position in, well, critical mineral value chains, but also batteries, solar, increasingly in wind, which is an area where Europe has historically been stronger. And so, these are the dependencies that we need to be aware of.

And in order to manage them, we need to be able to protect European industry from Chinese overcapacity in a number of sectors, in the sectors that I mentioned before. And also to support them financially, to make sure that we can develop the supply chains, not just in Europe, which is important, but also that we develop ex-China supply chains with other partner countries. And again, all along the value chain from critical minerals to batteries and wind turbines. And that's one area where we call the European Union and European leaders more broadly, and countries including Norway and the UK, to prioritize, to make sure that we're in a position to French-shore these supply chains as much as possible. So, we're not as exposed one single supplier like we were to Russian gas, which was not the single supplier of gas to Europe, but the largest supplier and is still a very large provider of gas to the European continent.

So, it's all things that European leaders, the European Commission national leaders are aware of. But it's very difficult to execute in a context of limited national budgets, higher interest rates, the era of free money is over, at least for now. And so, that means that we need to prioritize strategic materials and technologies that are critical for Europe's energy security and industrial competitiveness. And that's not an easy exercise, but that's something that can and should be done as part of the new European Union budget cycle to invest in the supply chains that will allow us to move towards more energy independence.

Camila Naschert:

Great. Thank you so much for joining us on Energy Evolution.

Alberic Mongrenier:

Thank you. Pleasure.

Eklavya Gupte:

So, that is all for this episode. We hope you enjoyed it. As this story is evolving, we will be keeping a close eye on this event. So, please check out our various news, pricing, and analytics platforms, and also go to our website, www.sp global.com/commodity-insights. Now, do stay up to date with upcoming episodes and be sure to subscribe to Energy Evolution on Apple, Spotify, or wherever you prefer to listen in. If you have ideas for guests or topics, please email energyevolution@spglobal.com. Now, before we sign off, I want to just give a shout out to our other podcast team members. That includes my co-host, Taylor Kuykendall, Dan Testa, Camilla Naschert, Christopher Coats, and Karen Willenbrecht. Also, a huge-shout out to our agency partner The 199, and the Commodity Insights digital content team. Thank you for listening.

Eklavya Gupte:

Welcome to the Energy Evolution Podcast, where we explore the critical moments shaping our energy future.

I'm your host, Eklavya Gupte. In this episode we will be discussing the outcome from the recent International Maritime Organization meeting, where parties approved new regulations aimed at charging for greenhouse gas emissions from ships. This move will have a rippling effect on not just the maritime sector and its decarbonization initiatives, but also on global trade and the broader energy transition.

After weeks of tense, high-pressure talks with strong opposition from several countries, notably some key oil and gas producers, draft regulations that set a mandatory marine fuel standard and a mechanism for greenhouse gas emissions pricing for shipping were agreed, but getting to this decision was not without contention. The US withdrew from the discussions, citing concerns that the regulations would impose an economic burden. Saudi Arabia, alongside other fossil fuel dependent nations, also opposed the rules, but the vote ultimately passed with a significant majority, which can be viewed as a triumph of multilateralism.

To speak with us in more detail on the complexity of these regulations, we have Max Lin, a senior journalist in our EMEA news team. Welcome, Max. Now, you've been following these IMO meetings for several years now, so it would be great to find out what were some of the achievements from this session, and what do they mean for the maritime sector?

Max Lin:

Thank you, Eklavya. Yes, indeed as you say, this is a landmark achievement by the International Maritime Organization because this is going to be a regulation that will be imposed by more than 100 countries on international shipping. This is the first sector-wide greenhouse gas emission rules on international maritime transportation.

What we are going to see is that shipping companies will need to use marine fuels with lower greenhouse gas emissions intensities, and that this is because the International Maritime Organization has set decarbonization targets for 2030, 2040, and then all the way to a net zero by 2050. We are going to see the bunker industries struggle to prepare all those low carbon fuels because right now, those low carbon fuels are very scarce, and they cost much more, two or three times more than conventional fuels. This is a very significant development for shipping and the bunker companies, and obviously, as you mentioned, there have been contentious debates among older member states of the IMOs. We are still going to look to whether the US and Saudi Arabia will do something more to prevent the adoption of this regulation in the IMOs next meeting in October.

Eklavya Gupte:

Thanks, Max. Some of the reaction so far has been centered around the complexity of the regulations and also on the fact that these regulations will still need to be adopted. What is your take on that?

Max Lin:

Yes, Eklavya. I think in my 10 years of reporting on this topic, this is probably the most complex regulation that I have ever accounted. We are going to have two sets of greenhouse gas emission standards for marine fuels at any given year. At the same time, the ship operators that could meet the highest standard, which means if they're burning zero emission fuels, they will even be able to generate something called surplus unit, which is kind of like a carbon equity, for the shipping industry. They can sell those to under-compliant ship operators.

We are going to see the shipping company face a very difficult choice between which fuels to use. This is something that they have been thinking over for the past few years because they are trying to figure out whether they should stay with oil, or they should shift to LNG or ammonia or even methanol. We are going to see the shipping company putting more money into studying what kind of fuels is the best for them economically. I think, more importantly, we will also need to recognize that this is a significant achievement in terms of environmental protection, especially as they are trying to make a move in countering climate change. This is a very big change from industry that has been criticized for being a laggard in low-carbon transition.

Eklavya Gupte:

Thanks a lot, Max. Max and I were lucky to speak to two experts on their reactions from this landmark decision. First, we spoke to Edmund Hughes, the IMO representative at the International Bunker Industry Association. Edmund, welcome to Energy Evolution. To kick things off, it would be great to get a sort of insider view into some of the drama that unfolded at the recent MEPC meeting, in what looked like quite tense negotiations, but with a successful outcome in the end, some would say.

Edmund Hughes:

Yes, and thank you very much indeed for inviting me. Indeed, it was tense, but then that's a result of when you get 176 or so member states coming together to negotiate international global rules for international shipping.

Really, the two-week process that we had in London recently was the culmination of nearly two years work following the adoption of the IMO strategy in 2023 that set the levels of ambition including to reach net zero by around 2050. The fact is that international shipping and these rules that have been agreed will impact not just shipping, but have a knock-on effect at the production of fuels and technologies to support the net-zero goal as we go forward.

This, again, has significant geopolitical issues because trade also has an impact on many countries. All these were at play really in terms of the consideration of the governments who made the decisions. As I said, I think it really demonstrates, ultimately, a positive for both IMO and international shipping, but also multilateralism, which is a very good outcome.

Eklavya Gupte:

Definitely, especially in a time where you're having so many geopolitical tensions and the sort of tariff drama that we're seeing unfold. In terms of the reaction from the shipping industry, I know it's a bit too early to tell, but what have been some of the immediate reactions from the sector?

Edmund Hughes:

Yeah, indeed. I mean the industry itself and the individual companies within the industry are very much still digesting the outcome and working out the implications on a company basis across the sector. I think in general, most players within the sector are very happy with the outcome because, importantly, what it does is give certainty to the future. One thing that many were calling, including myself, was the need for certainty because without the regulatory certainty, whilst we had the goals, they were understood, without the regulatory certainty, it gives certainty to the investment decisions that are going to be needed, whether that be a fuel producer, an equipment manufacturer, a shipbuilder, a ship owner primarily who are making the investments, but also the investors as well who support the sector and the producers.

Ultimately, it was a clear signal to them that we are able to move forward now on the basis of mandatory requirements. That is a significant difference, and why, again, going back to your first question, why there was a lot on this meeting. Those mandatory requirements give that certainty, but if they hadn't been agreed to this session, then frankly, we had real risk of missing not just the 2030 target, but likely the 2040 and the 2050 target. This is why it was such a big meeting.

Max Lin:

Hi, Edmund. I was also thinking because we have a rather complex regulatory piece. We have two tiers of penalty. We have a carbon trading mechanism. Do you think that bunker companies will also need to adjust their commercial strategies to face this kind of new business environment?

Edmund Hughes:

Undoubtedly. I think one of the things that came out of the event, and I represent IBIA, the International Bunker Industry Association, at the IMO. One thing that IBIA's membership is very aware of is the change that this whole regulatory framework will bring to the marine fuel supply chain, in that we are moving away from where we just focused on tank-to-wake emissions. That is once the fuel is supplied to the ship, it's just the emissions that come out of the stack of the ship. All the way now, we're now looking at a world-to-wake governance regime whereby we also have to take into account the upstream emissions from the production of the fuels and energy sources, and those have to be incorporated into the calculation of the attained fueling intensity for the ship. That involves, therefore, a whole process of information flowing from upstream through the bunker supplier or the energy supplier through to the ship.

That will change the governance regime, not just for the ship owner, but also the supplier of the fuel, but also the fuel producer and IBIA and its membership, and we represent stakeholders across that whole marine fuel supply chain, are going to have to understand the implications for them because many of them will have to now be certified by recognized certification bodies for these fuels, for the sustainability aspects of these fuels and for the ability to provide that information that's going to be needed. The whole supply chain is going to have to be reconfigured to enable and ensure this information can be received by the vessel.

Max Lin:

Obviously, those new rules are going to implement from 2028. How do you see that between now and the 2028, how should the industry start to prepare for these rules?

Edmund Hughes:

I think at this stage, people are assessing the rules and their implications. We still have a hurdle to overcome in October with the adoption of the rules, and that, I would imagine, will end up with another vote because that is the nature of these things. We know that it's already been signaled by countries that that's likely to happen. Again, the dynamic slightly changes in October because whereas this decision was made on Friday was by all the members of the Marine Environmental Protection Committee of IMO, any government who was in attendance could vote, when it comes to adoption of these rules, it'll only be the parties to the Annex VI, which is where these rules will sit under.

At the moment, there's 108 parties to MARPOL Annex VI, and of those parties do you require a two-thirds majority for them to be passed, which would effectually means 72 of working majority to get these rules passed. Now, if you think on Friday, 63 governments supported approval, I haven't done the analysis, by far, the majority of them were parties to Annex VI, so there's still a few states short, but then there were a lot of abstentions on Friday, I think about 20 abstentions from the vote. Frankly, it wouldn't take many of those states who, and I fully expect several of them to recognize that this framework is one they can work within in terms of achieving the net-zero goal and therefore, would support them come October. That's the next stage.

For industry itself, obviously, that then will help provide, again, the signal and certainty that we are looking for, which I've already alluded, to move forward in terms of investment decisions. Again, this is why I say people are having to sit down now and really understand the implications because they're going to have to work out a strategy frankly. If you're a ship owner, you're going to have to look at your fuel strategy. If you are a fuel supplier, it may now enable you to go forward with investments [inaudible 00:12:44] fuel production. All these things, over the next few months, will come to fruition, and we'll see greater clarity, but I think at this stage, people are still just getting over the fact that we've made this great movement forward.

Max Lin:

Thanks a lot. Obviously, the regulation needs to also involve two standards of greenhouse gas emission intensity at any given year. Just wondering whether this is also going to make the fuel procurement strategy more difficult because you don't really know when can you have achieved the lowest complying cost at any given time. You need to take your precision on any fuel.

Edmund Hughes:

No, you're right. It's a very good question, and this is, frankly, that we're going to move into an age where we're probably going to have to employ fuel managers and strategists to enable sort of understanding. I think initially, to be frank, we don't have, particularly, the net-zero fuels in great supply at scale globally. For many, it's going to be a case of dealing with the fuels we have today, working with those to achieve optimal compliance.

The reality is there will be costs involved, increased costs, because many ships and many will not necessarily be able to achieve compliance. However, one option, certainly in the shorter term, is if you have a ship owner and you have several ships, is for maybe have a ship that's gone beyond compliance, beyond the direct compliance threshold, you can accrue surplus units, which is what the mechanism enables you to do. There's this flexible compliance within it, and those surplus units can be then shared with other ships within your fleet, or you can take a strategy where you can have a ship that even goes beyond that, but this is to be seen. We know that may be one option for companies, particularly if, as I said, they have more than one fleet. There may be pooling as well, that will be happening. That's again, permitted under the rules, whereby ships will share their compliance options.

Max Lin:

Thanks. Just great to have you with us today and just sharing the insights from bunker industry. Obviously, it's a quite landmark piece, and we will watch out for how the shipping and bunker industries are going to react.

Eklavya Gupte:

Now, we hear from Georgios Kasimatis, the director of regulatory affairs at DNV Maritime, which is a ship classification society, who gives us some more details on some of the regulations that were agreed at the recent meeting. Hello, Georgios, welcome to Energy Evolution. Thank you very much for joining us today. Obviously, we've had some really big news for the shipping sector, but some of these regulations agreed by the IMO look like extremely complex, so I just wanted your views on that.

Georgios Kasimatis:

Thank you for having me here. I understand that this is a question that people wonder about. I guess we will go into the details of what we call the net-zero framework. We might as well start with discussing some of the basics of the new measures. We have, as you mentioned, the carbon intensity in the core of a combined technical measure, the GFI, as we call it, which is also linked with an economic measure. GFI stands for greenhouse gas intensity of the fuel. That's GFI for short. The GFI gives us a metric for evaluating the intensity of the carbon emission, the carbon footprint if you want, of the energy used on the ship. Of course, we can foresee that there will be some complexity with respect to operations, with respect to, let's say, administrative procedures and also the economic complexities around ensuring compliance with the net-zero framework requirements.

On the other hand, I can also say that the concept itself is fairly simple, perhaps the most straightforward to implement for governments. it is simpler for governments perhaps because it enforces penalties against failing to reach a certain performance, as opposed to imposing a tax on every ton of CO₂ produced. That would be the case for the other alternatives that many had anticipated. The LLevy as we call it, a flat levy mechanism. It also creates a more, how can I say, a more straightforward, a simpler perhaps, signal for investing into new fuels, zero or near zero-emission fuels, as we call them, the ZEFs.

These are all also things we must bear in mind when we think about complexities around the requirements. Of course, the picture gets more nuanced once we start looking into the details of implementation.

Max Lin:

How do you think a shipping company should comply with, because obviously, as you mentioned that there's a high level of complexity in both. There's different sets of greenhouse gas emission standard for marine fuels at any given year, and what's your suggestion for a shipping company?

Georgios Kasimatis:

Looking closer into the regulation, understanding which technology fits your compliance strategy best is important, and also bringing the competence of the company up to speed with more technical and operational needs. The administrative and commercial realities related to the GFI, securing enough fuel that is low emission or zero or near zero-emission technologies. All these things are important to have under control. Once this is under control, the GFI is designed to make it easier for ships to comply. There are two elements that have, let's say, the GFI requirement to do this. Namely, there is a two-tier compliance approach and also a built-in flexibility in the requirement itself.

Max Lin:

Yes, indeed. Especially, I think you just mentioned a keyword, it's two tiers. Obviously, a ship owner can have a very strong ambition, just go directly to zero-emission fuel. It can be have lower ambition, or you can have no ambition at all, and they pay a hefty fine. Do you think it's actually creating a quite interesting but also complicated fuel procurement environment because you can obviously aware that there are so many potential options there for ship owners?

Georgios Kasimatis:

The GFI has two tiers of compliance, and this is also something that is different from the fuel EU. Then the annual greenhouse gas intensity of the fuel used by the ship is required to meet a base target and a direct target. The direct compliance target is more stringent than the base one. We keep in mind that the higher the attained GFI, the worse it is for the ship. The base target is below the reference line of 2008, and the direct target is even lower. The lower the GFI, the better.

Now, all ships must meet with the direct target, the most stringent target, but there is a difference on how, let's say, the deficits are handled, depending on which tier the annual GFI of the ship lies in.

If the annual attained GFI is below the direct targets, then the ship over complies. Then, as you said, if we have access to low carbon fuels, then surplus units are generated, or as we call them, SU. If the annual GFI is above targets but below the base, then the ship has Tier One deficits and then we need to buy what we call remedial units or RUs. If the GFI of the ship is above base as well, then the ship has a compliance deficits in both tiers, and it has to buy remedial units for both Tier One and Tier Two or trade with surplus units, as we call them, from over-compliant ships. It's important to note that the Tier One and Tier Two remedial unit prices are different. Tier One is lower, it's about, or not about, it's at $100 per ton of CO₂ equivalent, while the RU for Tier Two is much higher, at $308 per ton of CO₂.

You see that then we have different compliance options, and of course for some, it might be easier to have access to low-carbon fuels, but for others it will be harder. If you have access to low-emission fuels and can go below direct, then you might as well go for it and trade it after, trade the over compliance as surplus units or bank those surplus units for using at the later point where the emission reduction requirement will be stricter.

Max Lin:

Thank you very much, Giorgios. It's great to have you with us.

Eklavya Gupte:

All right. That's going to do it for this episode. Please stay up to date by subscribing to Energy Evolution on Apple, Spotify, or whatever you prefer to listen in. If you have ideas for guests or topics, please email energyevolution@spglobal.com.

Now, before we sign off, I want to give a shout out to our other podcast team members that includes Taylor Kuykendall, Dan Testa, Camilla Naschert, Christopher Coats, and Karen Willenbrecht. Also, a huge shout out to our agency partner, the 199 and the Commodity Insights Digital Content Team. Thank you all for listening.