A new insight brief series was released this week from the Global Maritime Forum which identifies four actions that maritime and shipping industries can take now to support shipping’s transition to a sustainable and resilient zero-emission future.
The shipping industry is facing a major transformation as it is working towards full decarbonization by 2050. Short-term actions that improve the operational efficiency of existing vessels – saving fuel, money, and time through changes in ship speed and performance – can play a critical role in reducing emissions today, while also preparing for a more manageable long-term transition which will involve more expensive zero-emission fuels and eventually a price on carbon.
Maximizing vessel and fleet performance through operational efficiency can reduce annual fuel costs by $50 billion at today’s prices, according to research done by the GMF. That means up to 20% of fuel costs will be saved up and even more if combined with energy-efficient technologies.
The research also suggests that optimizing operational efficiency has the potential to reduce annual emissions by more than 200m tons of CO². Unlocking this potential is not simple, yet capitalizing fully on operational efficiency will be a prerequisite to achieving 2030 and 2050 emissions reduction targets in line with the Paris Agreement’s 1.5 C° ambition.
This report, result of over a year of industry input, provides an overview of the short-term opportunities and barriers to operational efficiencies and takes systems view to explore the role of operational efficiency measures as enablers of shipping decarbonization in the longer term.
Four types of solutions identified in the brief:
- Better transparency and standardization of performance data
- Scaling up pilots and best practices
- Contractual changes to encourage virtual arrival practices when there is a delay at the discharge port
- Policies and regulations to enable new business models.
What can we do today to reduce greenhouse gas emissions from shipping?
According to the GMF report, while the savings potential can be upwards of 20%, there are many barriers that challenge the delivery of these savings. Through a series of conversations with industry stakeholders over the past 18 months, many ambitions have been identified, which can be placed into four buckets:
• Align incentives within companies to make efficiency a priority and track emissions alongside profit
• Engage with the full supply chain to promote transparency and build trust between charterers and shipowners
• Shift thinking from a bilateral zero-sum game to new business models and multilateral solutions in which all parties can gain through benefit sharing
The table below summarizes the opportunities provided if we cross reference the ambitions to link them with these enablers.
The speed optimization opportunity
Speed optimization is one of the most effective short-term operational measures to cut down on shipping’s GHG emissions, the report states. While owners and operators are considering zero emissions fuels and technology choices this decade, they can reduce emissions now by maximizing operational efficiencies through:
- speed optimization
- advances in data and sensing
- changes in contracts including performance warranties and Just-in-Time (JiT) or virtual arrival (VA) clauses
According to the GMF, research suggests that eradicating SFTW (steam fast then wait) and introducing JiT practices would result in annual emissions savings in the order of 20-25%, or over 200m tons of CO2 . This equates to 64 million tons of potential fuel savings worth $50 billion at today’s prices – a significant incentive for optimization.
Barriers and opportunities
Taskforce members identified four main areas that currently constitute barriers but that become critical enablers of improvement:
- Data, monitoring, and software
- Limited pilot voyages
- Legal or contractual limitations
- Policies and regulation.
- Data, monitoring, and software
Barriers: In the path to decarbonization, owners and operators will quickly realize that they are missing the key information they need to report on emissions, or that they are not getting enough of the right data to fully optimize their vessel. One consequence of inaccurate or insufficient data is that it perpetuates a lack of trust between charter parties. Although the use of real-time sensors and data flow meters is becoming more common, there is no standard way of gathering data from vessels.
The way in which shipping companies currently gather data from ships via noon reports, however, lacks the standardization and sophistication levels that are required to match the modern data. This creates the risk of information gaps and creates a requirement for significant manual intervention to cleanse the data input. It is time for noon reports to transform in line with how the rest of the industry’s data landscape is maturing.
Opportunities: High-quality data can provide a link to voyage and vessel optimizations. Continuous monitoring systems with advanced sensors are another part of the solution, though uptake is currently low and most companies do not have the resources in place to manage and analyze the increased amount of data.
Modern software and modeling can also help speed, route, weather and bunkering optimization. To demonstrate the benefit of such optimization, service providers are doing backtesting on thousands of voyages of anonymized data against historic benchmarks.
To ensure good outputs from such digital services and platforms, data input must be high-quality, standardized, interoperable, and more transparent. A first step towards improving the accuracy of vessel performance would be to improve data collection and reliability. For example, standardizing definitions of terms for noon reports and increasing use of continuous monitoring equipment, including sensors.
Cross-industry collaboration will be necessary to develop standardized data protocols, some of which are under development and are explored in a separate paper. In time-charter parties it is not unusual for the slow steaming/eco speed and consumption warranty to be given “without guarantee”, whereas the general speed and consumption will usually be given on an “about” basis. More accurate vessel performance and weather data can also enable increased tolerances in speed warranties in the charter parties (CP) between owners and charterers.
- Scaling up pilot voyages
Barriers: The weighting of financial metrics and differing incentives across company departments create internal frictions to operational efficiency, limiting the availability of real-world evidence that could be provided by pilot voyages.
Energy efficiency literature indicates complex decision-making processes for ship operations, but has not adequately explored the importance of agency for energy efficiency. For example, there is often a lack of engagement from chartering desks whose aim is to maximize a ship’s time charter equivalent (TCE), influencing priorities both onshore and at sea.
Meanwhile, legal counsels have stated that “anything can be done as long as the contracts are not changed”, while external legal experts have indicated that nothing can be changed without changing the contracts.
Opportunities: Within companies, it is already clear that there is an opportunity to align incentives and key performance indicators (KPIs) while increasing connectivity and alignment across business units.
The capital expenditure needed to optimize the speed will be relatively low, especially when compared to the opportunities that can be gained. While incentives to remove some of these internal frictions have been historically insufficient, higher fuel costs, a price on carbon, and new environmental regulations are providing additional impetus.
Once companies acknowledge the opportunity offered by operational efficiency measures, they can start to shift their contracts and their operations accordingly. This includes engagement in pilots to learn firsthand about the various frictions and obstacles that must be removed to capture the speed optimization and energy efficiency opportunity.
- Legal changes
Barriers: It has become clear through conversations with stakeholders that amending contracts, or fundamentally shifting contractual architectures, will be necessary to substantially reduce emissions.
However, it was also noted that there are existing contractual clauses that could be used more. Several of the large charterers involved in this work have tracked at most dozens of instances in a given year in which vessels were able to slow down, compared to hundreds of voyages.
Also, because existing contractual clauses are bilateral, any change requires that the whole supply chain be included, not only charter parties.
How to increase uptake of virtual arrival clauses is more challenging. There are several barriers to this, the most important being that the profit maximization and the contractual architecture that is strongly linked to this does not allow for a broader uptake. More transparency across the value chain would help the process and uptake of virtual arrival.
Opportunities: Using best practice in contracts and addressing split incentives. Clauses that try to alleviate split incentives have been tested between cargo owners and ship-owners with success, but very little uptake.
Multilateral contracts are part of the solution, and ultimately there is a need for new business models and a new contractual architecture to support them. The emergence of Green Corridors may provide the testing grounds for such new contracts, as the legal frameworks for such corridors will need to be built from the ground up.
Efficiency measures must be built into the contractual architecture for Green Corridors, as wasting 20% of the (initially) much more expensive zero emission fuels will not be in the interest of any party involved.
Such changes to the contractual architecture, however, are not short term actions, but rather fundamental changes to the industry that will require long-term commitment and action. Nevertheless, any insights gained from improvements in operational efficiency in the short term will be useful learnings for the broader long-term changes towards decarbonization.
- Policies and regulations
Barriers: The measures imposed by the IMO do not take into account the complexity of interests along the value chain. The simple description of what the company plans to do that is currently mandated through the IMO SEEMP (Ship Energy Efficiency Management Plan) is not sufficient.
The IMO has made several attempts to benchmark individual ship performance for over a decade now. So far, the EEOI (Energy Efficiency Operational Indicator) is the only indicator that represents the carbon intensity of the actual transport work done.
All other indicators approximate transport work done in some way, but do not evaluate the performance of a ship as the EEOI does.
Opportunities: Improving operational and technical efficiency on a much larger scale will require more ambitious and robust regulation on how to monitor and report data regarding fuel consumption and transport work.
A stronger IMO ambition on short-term measures would help unravel the carbon tangle. It will be interesting to further explore how scope three emissions, carbon intensity improvements, carbon credits, and other regulatory measures could incentivize the use of virtual arrival.
One new opportunity is the positive impact that speed optimization has on the Carbon Intensity Indicator (CII) rating of a ship. Despite controversy around CII, it will factor into decision making and the whole sector can use operational efficiency to make progress towards these ratings.
Ships will get a better CII from reducing speed, but the CII regulatory regime on its own will not sufficiently incentivize ships to reduce their speed and make more use of virtual arrival clauses, nor does the CII bring insight on the actual performance of a ship. EEOI and CII both serve as key metrics to evaluate performance, but they remain disconnected under the IMO umbrella.
Regardless of its flaws, however, the CII will challenge the priorities of shipping companies and affect their operations and help them to decarbonize. While awaiting progress at the IMO, the EU has implemented GHG regulation for ships calling EU ports.
The EU ETS (accompanied by the EU MRV for benchmarking) will have an impact on operations, costs and contractual agreements. It is designed to encourage shipping companies to reduce emissions through measures such as operational efficiencies, investments in low-carbon technologies and adopting alternative fuels.
We need to clean up shipping supply chains and optimize our operations. To do this, we must collaborate, standardize, and be transparent.
…said Eman Abdalla, Global Operations & Supply Chain Director at Cargill Ocean Transportation
The International Maritime Organization (IMO) is expected to adopt a revised greenhouse gas emissions strategy at the MEPC 80 meeting in July – the most important climate meeting for shipping this year. While the industry is unsure whether the outcome of MEPC 90 will result in the adoption of a low-ambition or high-ambition strategy, in either case, the need for short-term operational efficiencies will be crucially important for the transition.
the operational performance of vessels and entire fleets presents a huge opportunity to the shipping industry, but it will require unprecedented levels of disruptive thinking to break through from dialogue to action.
…said Randall Krantz, Senior Adviser on Decarbonization at the Global Maritime Forum
