When the United Nations’ climate change negotiations failed in 2008, fueling a growing conviction that policy would be unable to lead the charge against climate change, there were wide calls for an entrepreneurial approach. In that context, Sir Richard Branson called a group of Virgin Group CEOs to his Caribbean home at Necker Island, where Carbon War Room was born in early 2009.
Carbon War Room’s idea was to identify and work in industries with significant carbon emissions and market barriers to their reduction. Early industry stakeholder talks included a fortuitous meeting between an investor-banker friend-of-a-friend of Branson’s and a Danish entrepreneur and inventor of a shipping industry air micro-bubble technology that helps ships slip through the water with less friction and thus improves fuel economy. They met in the basement of a private club in London, just off Berkeley Square, and dove headlong into a discussion of the global shipping market.
They noted that one ship — often worth tens of millions of dollars — is the equivalent of a power station on the water, with some of the world’s largest vessels emitting as much SOx, for example, as one million cars. Improve ships, and you could flip a significant amount of carbon and other emissions.
But back in the basement in London, the Danish inventor asserted:
“The market is broken. It’s plagued with market barriers. No one will ever buy my invention. Removing these market barriers will unlock innovation and sales of my technology, making me a millionaire!”
The market barrier message resonated with CWR’s team, recalls Peter Boyd, then CWR’s COO:
“It wasn’t about helping this one entrepreneur sell his technology. It was about fixing the market so that the best technologies — ones that would unlock fuel and carbon savings — would be purchased and succeed.”
Developing the A to G Rating
It quickly became clear that the market was not rewarding vessel energy efficiency; no one cared about efficiency solutions. With most fuel paid for by the cargo owner or charterer — a classic split-incentive — a shipowner couldn’t make a return for investing in clean technologies. Charterers would be stuck with the fuel bill at the end, but had no way of knowing if a better, cheaper choice existed. The closest proxy was a pay-to-play risk-vetting tool from RightShip that included environmental performance.
So, even with proven, available technologies in the marketplace, few retrofits were taking place and a lot of money was being left on the table. Even today, with lower bunker fuel prices, the industry can save tens of billions of dollars per year and reduce emissions by 30 percent by adopting technologies and operational measures, according to the IMO and Dutch consultancy CE Delft.
“In an analysis of retrofit opportunities for over 100 vessels, we found that at $600 per tonne of heavy fuel oil, if the entire fleet were retrofitted with fuel-efficient technologies enabling just a 10-percent efficiency improvement, the industry would save $16.6 billion on fuel costs and reduce greenhouse gas emissions by up to 87 million tonnes of CO2 per year,” says Victoria Stulgis, senior associate of Shipping Efficiency.
At the time, the European Union (EU) was making headway with its Energy Label, which rated appliances with a set of energy-efficiency criteria, ranking them from A (most efficient) to G (least efficient). With this easy-to-use label gaining visibility, CWR pursued a similarly-styled A to G efficiency rating for shipping — it would help industry actors make informed choices based on cost and efficiency that would send market signals of efficiency’s importance in business decisions.
The team began looking for a partner to develop the required data for the rating, even as the Marine Environment Protection Committee of the IMO held its biennial meeting, where it became clear that improving the industry’s efficiency and unlocking significant gains would take decades in this forum. After observing the disheartening meeting, Carbon War Room and RightShip met at a café on the banks of the Thames, down the road from the IMO. A second thing became clear that day: RightShip could create the needed database and CWR could make it widely used.
Soon, ShippingEfficiency.org and the A to G GHG Emissions Rating were born, with a launch by Branson at the UN’s 2010 climate negotiations.
Interest From Fuel Buyers
Simultaneously, CWR began speaking to the charterers who’d benefit most from the rating. Getting charterers to use the rating to avoid the least-efficient vessels would generate demand for energy-efficient vessels and give shipowners a real market incentive to upgrade, thereby addressing the split incentive.
Shipping Efficiency partner RightShip worked with Cargill, Huntsman, and UNIPEC to help them develop policies to exclude ships with the poorest fuel economy. Representing 350 million tonnes of shipped commodities annually, these charterers helped foster momentum in the industry.
As Jonathan Stoneley, then environment and compliance manager of Cargill Ocean Transportation said at the time, “We hope this action will demonstrate to shipowners that they can do more in terms of efficiency, and the market will reward them.”
The A to G Rating has gained substantial traction. One-fifth of the world’s shipped goods are now moved by cargo owners using the rating system, a tripling in the past 2.5 years. Those companies represent 1.95 billion tonnes of cargo and 24,700 vessel movements per year. Recently, incentives offered by other industry players have further bolstered the Rating.
A Lack of Capital
Some companies were using their own money to finance one or two small upgrades that offered two- to six-percent improvements in fuel economy, but industry financiers weren’t willing to supply loans for such a low-percentage return. In addition, such small fuel savings didn’t result in better charter rates for shipowners. And, while blue-chip companies like giant AP Moller-Maersk were willing to finance the retrofits of vessels they chartered (and paid the fuel for) but didn’t own, the majority of charterers didn’t have that kind of capital and continued to suffer from the split incentive. So how to unlock double-digit returns?
Inspired by the property-assessed clean energy (PACE) financing that was then gaining ground in the building efficiency market, and was seen as a solution for landlord-tenant split incentives, CWR entered into a partnership with University College London (UCL) Energy Institute and PricewaterhouseCoopers to develop an energy service company-like, no-money-down finance model that would attract new sources of third-party capital and accelerate efficiency retrofits.
The resulting Self-Financing Fuel-Saving Mechanism looks at applying a bundle of four to seven proven fuel-saving technologies alongside advanced monitoring systems. This technology grouping conservatively boosts the savings from 2–6 percent to at least 10–15 percent. And the monitoring systems facilitate measuring and reporting of that effect. Private equity group EfficientShip Finance has since adopted the model, devoting an initial $25 million to fund such retrofits.
Charting the Course Ahead
RightShip data analysis shows that the average operating life of an A-rated vessel may be up to eight years longer than that of a G-rated vessel, and major shipping banks are acknowledging the existence of a two-tier market.
Carsten Wiebers, global head of maritime industries at KfW IPEX-Bank, comments, “We see a clear trend towards a two-tier market of high- and low-efficiency vessels. More-energy-efficient vessels have an enhanced marketability as well as a higher revenue potential for the shipowner and thus a more favorable risk profile for financiers.”
And, as the market offers increasing rewards to more-efficient ships, technology companies are beginning to gain traction in the market too. After enduring longstanding skepticism of his concept, the Danish inventor who introduced CWR to shipping has seen successful trials of his air lubrication technology with company Silverstream this year, paid for by Shell.
“Silverstream’s success paves the way for new technologies that unlock significant fuel savings, such as modern wind propulsion systems,” says Alisdair Pettigrew, senior advisor to Carbon War Room.
Having a growing number of technologies retrofitted onto ships with rigorous and transparent trials is an essential stepping-stone to greater adoption. As shipowners benefit from earning a premium rate for efficient ships, they can have increasing confidence in technology performance and the returns they can expect. These early retrofitters will be rewarded, and will reinforce, the two-tier market between efficient and inefficient vessels that will become a critical driver of business decisions.
Source and Image Credit: Carbon War Room
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