WISTA UK has recently hosted an event to challenge its members to address the major issues affecting the shipping industry which focused on the part the maritime sector plays in the climate change agenda. The subject of the debate was the divisive emissions problem, with the panel exploring potential solutions to curtail shipping’s emissions.
First to stimulate thoughts was David Donnelly, Partner at Mazars, who looked at his experience as an expert in energy efficiency in buildings and how techniques could be transferred across into the maritime sector. Members learned that there has to be a financial justification in undertaking any investment in retrofitting environmental-efficiency technologies to vessels.
Where financial gains could be realised fairly quickly after initial CAPEX, it was explained, as in insulation and lighting systems, then retrofitting could be undertaken with relative ease. Other technologies, however, may not be retrofitted so easily because of the longer return on investment or simply because their commercial benefits cannot be monitored – in the maritime sector this is illustrated by ballast water treatment systems. In such cases in other sectors, said Donnelly, the energy efficient investment is deferred until the normal lifecycle replacement of the particular equipment.
There is an element of corporate social responsibility or corporate goodwill which has led to some businesses leading these changes and the UK’s National Health Service and developments in social housing are starting to adopt a number of the low risk, quick return energy efficient elements to newbuild programmes. But for real change to happen then there needs to be financial incentives or a legal obligation to drive the change, said Donnelly.
Donnelly said that, similar to real estate, it may be difficult for the maritime sector to make a financial case for some energy-efficiency technologies as the shipowner usually has to pay for the retrofit but it is the charterer that makes all the savings. This means that the relationship between the owner and charterer will need to change, with a revision to charter rates and charter party agreements the likely way forward if the industry is to fully embrace clean shipping.
WISTA UK member, the Carbon War Room’s Phoebe Lewis emphasised the significant energy-efficient technologies available to the shipping industry, which could give real financial savings to both charterers and shipowners. She also explained that adapting the ESCO (Energy Service Company) or MESA (Managed Energy Service Agreement) model could offer an innovative way to finance ship retrofits. Carbon War Room’s Self-Financing Fuel-Saving Mechanism (SFFSM) adapts this model such that financiers take on the upfront cost of a group of technologies and are repaid through the fuel savings.
One of the key aspects of this financing model is the potential to apply a suite of energy efficient technologies, usually at least three, that are all retrofitted together, meaning only one dry docking but which collectively afford significant benefits of 10-15% fuel savings per vessel. New York-based private equity financier EfficientShip Finance has an attractive finance model for funding ship retrofits in which they cover the upfront cost and are repaid by the charterer through the energy savings.
The industry itself has undertaken some great initiatives with the RightShip Greenhouse Gas (GHG) Emissions Rating scheme, a systematic and transparent framework for comparing the relative efficiency of the world’s existing shipping fleet. Based on this rating, charterers representing 20% of global shipped tonnage have implemented policies in which they refuse to charter inefficient vessels, commonly F and G rated vessels.
Further, as a two-tier market in which efficient vessels garner price premiums, banks are increasingly involving energy efficiency in their lending decisions to reduce the risk of their assets prematurely losing value. In reality retrofitting ships can actually be more attractive financially than retrofitting commercial buildings.
Other financial incentives are entering the industry. The Port of Prince Rupert and Port Metro Vancouver became the first ports in the world to offer discounted harbour dues to the most efficient vessels calling on their ports based on various environmental ratings. Port of Rotterdam has also expressed interest in looking at this.
Carbon War Room recognises it is challenging to stimulate shipping efficiency investments and in September 2015, released a request for proposal for a $200,000 grant for performance monitoring equipment to be installed when a vessel retrofits with their SFFSM model. Applications for this award have now closed and the winning project will be announced in due course.
Krispen Atkinson, Principal Maritime Analyst at IHS then addressed the subject from an industry perspective. The key forces behind the changes, he said, are being driven by the UN on the IMO.
Emission Control Areas (ECA) in North America and parts of Europe have seen sulphur levels capped at 0.1% since 1st January 2015 and ECAs will continue to grow in number with China likely to be the next one. This will bring in far more ships that will have to comply, with serious fines for non-compliers. And although to-date only a small number have been fined this will grow, he said.
To place this in context, compliant fuel costs $220/250 per ton and a vessel uses 30-40 ton a day. But will emissions regulations push more owners to seek alternatives to using compliant fuel? There is still conjecture as to whether the global sulphur cap of 0.5% will happen in 2020 or if it will be delayed.
Looking to the future, Atkinson asked will costs reduce? It is unlikely for retrofits as they need a bespoke solution – with every ship requiring its own answers. However time out of service will be reduced as newbuild designs will incorporate “off the shelf” solutions. Plus new entrants into the market will further competition, forcing prices down or we could see a consolidation of existing manufacturers bringing in cost savings.
To end the debate Atkinson asked us to think about future fuels. Methanol fuel, biofuels, hydrogen and batteries are all being talked about, so this is an interesting time for the maritime world, he said. Certainly there are great opportunities for low carbon, energy efficient technology solution providers.
Source & Image Credit: WISTA UK