INFO DISPARITIES CHALLENGE FOR RETROFIT INVESTMENT

The shipping industry has to invest in energy saving devices as part of requirements to reduce its carbon footprint. As many sectors of the industry have enjoyed rather good freight markets in the recent past, the availability of funds may not be a major problem, but here are other difficulties that affect the investment decision

8 Sophisticated ship owners and operators, such as Wallenius Wilhelmsen, have deep dataled insights in identifying the fuel efficiency savings and payback period for individual investments aboard their vessels, based on expected operational performance improvements. This data gap is creating a significant advantage over less sophisticated competitors

“The situation is a bit the same as in the case of preventive maintenance. If part of the machinery breaks down in the engine room when the ship is in the middle of the Pacific, leading to costs of $200,000 it is easy for the accounting department to establish the cost of the incident. But if preventive maintenance means that such an incident will not happen, it is not quite as easy,” Dr. Martin Stopford, the shipping economist, told The Motorship.

Measuring the results of investments in energy saving devices is, quite often, somewhat complicated. Manufacturers state that their equipment will save an owner so and so many percent in fuel consumption, but in reality the picture can be more complicated than that. One of the reasons is that there is not always enough data to establish the actual savings in case of each ship.

“Hard evidence is difficult to obtain: what tests have been done, it is difficult to get hard facts sand what you do get is not very bankable,” Stopford pointed out. “I would say that You should be able to finance these investments out of your cash flow, this should not be a problem now, given the past few years good (freight) markets. Banks are likely to help you if you can corner them by convincing them them that the investment will generate cash,” he continued.

Part of the challenge in establishing the performance of energy saving devices comes from the fact that these are digital pieces of equipment. Technical staff at shipping companies is often not very strong in this field and recruitment of people with the right skills can be a challenge for a small owner. In addition, the engine room as work environment is not known for excellence in teamwork and improvements here could serve the industry well in various ways.

A practical implication of all this is that defining the payback time of an investment is not always easy. “If the payback time is one year or less, you are quite likely to make an investment. But if it is two years, you may do it, but if it is three years, you kick the proposed investment out,” Stopford said. The payback time of an energy saving investment obviously also depends on the price of energy: the higher the price, the more attractive an investment becomes, and vice versa.

On the other hand, there is evidence that things are getting better. The Carbon Intensity Indicator (CII) index is forcing the industry to measure its performance and to take action in case of ships that perform poorly, Stopford concluded.

Performance data gathering makes good progress

The shipping industry generally speaking makes money by buying and selling ships; due to the volatile nature of the freight markets, returns from operating activities are usually rather meagre when measured over a long period of time. Therefore there is a tendency to operate ships at as low costs as possible.

The question of payback time of investments in energy saving devices needs more study, said Jonathan Chappell, Senior Managing Director - Surface Transportation and Marine Transportation equities at Evercore ISI in New York. “We have done math on scrubber paybacks, but don’t have enough information in fuel saving devices at this point,” he told The Motorship.

The shipping industry is working hard to accrue the hard data that is needed to establish how much various energy saving devices actually reduce fuel consumption and thereby emissions, said Anders Reddish Karlsen, shipping analyst at Kepler Chervreux in Oslo.

“A problem here is that it is difficult to eliminate the effect of other factors (than an energy saving device), such as wind and currents. No two voyages are exactly the same,” he said. The age of there vessel and in which part of the world it is trading also impact energy consumption.

“However, I’m pretty sure that most owners are actively looking for options to reduce their fuel costs and they test various devices,” he continued. Owners will find out which devices work for them and then roll the best options across their fleets, which again means that more hard data regarding the performance of equipment will be gathered over time.

Digitalisation is also helping the shipping industry to progress on this path. “Years ago it was common that the office would hear of a ship once a day. Only in recent years has big data started to make an impact on shipping and now it is possible to monitor the performance of equipment onboard in real time,” Karlsen pointed out.

Looking further into the future, many observers suggest that existing ships will have to start using another, greener fuel later in their lives, which could be an expensive investment in some cases.

“Over 30% of current new builds are designed for dual fuel. Using drop in fuels such as biofuels does not present a problem but high cost conversion of older vessels -10 years plus - are less likely. Purchasing carbon offsets is a more likely outcome with shorter life spans,” said Robin Meech, Managing Director, Marine and Energy Consulting Limited in the UK.

Part of much bigger picture of business transformation

Danish Ship Finance, the Copenhagen based shipping bank, said in a market report dated 22 November that for ship owners, the medium term outlook is about energy efficiency. “Many shipowners may choose simply to wait, retrofit existing vessels and comply with forthcoming IMO regulation. Adopting such a position could work, but not in isolation,” Danish Ship Finance said.

The bank pointed out that shipping has produced low earnings from operations when seen against a long time frame, except for short lived super cycles. This has encouraged owners to look for asset purchases and sales as the principal way of making money. This, however, may not remain a relevant approach in the future.

“Many players are investing heavily in long term efficiency improvements that they hope will introduce radical reductions over time,” Danish Ship Finance said. It warned that those owners that do not follow the path of “their digital competitors” might end up creating less value on the same freight rate than the learners. “The message is clear: transformation is not an option, it is a business imperative,” the bank pointed out.

Rules regarding the Carbon Intensity Index (CII) indicator of IMO will require a 2% annual energy efficiency improvement between now and 2026, but cargo owners may demand more in the form of e.g. larger annual reductions. Owners who operate their own fleet may decide to invest heavily in long term energy efficiency improvements to increase the CII ratings of a fleet will thereby increase its earnings potential.

But investment in commoditised standard solutions that are likely to deliver little more than “table stakes” in order to remain in business. “The winners of the long term energy race are those that operate their fleets at significantly lower costs and with significantly lower emission footprints, but at significantly higher earnings,” Danish Ship Finance concluded.