SHARING THE BENEFITS OF CLEAN TECHNOLOGY

Split incentives between charterers and shipowners remain a barrier to clean technology uptake, but not an insurmountable one, says Simon Potter, director of sustainability advisory at independent design and engineering consultancy, Houlder

The decarbonisation transition is driving unprecedented change in shipping, and with it comes risks but also great opportunities. Those who can manoeuvre multi-decade assets forward through the decarbonisation maze will not only survive but thrive. This year, it will be critical to maximise the opportunities brought about by the European Union’s Emissions Trading System (EU ETS) and the International Maritime Organization’s Carbon Intensity Indicator (IMO CII).

While the CII rating system has aptly been described as ‘having teeth made of jelly’, the commercial impact may yet be significant. Depending on the demands of cargo owners, a favourable CII rating may become a ‘licence to operate’ – or at the least vessels with strong CII ratings will likely be more attractive on the long-term charter market and demand higher rates.

Clean Technology

With all of this in mind, you would expect shipowners to jump at the opportunity to adopt energy efficiency, renewable propulsion and auxiliary (clean) technology solutions. There is an abundance of effective clean technologies available, and investments offer a clear opportunity to reduce emissions and operating costs by reducing fuel use.

At the same time, it becomes increasingly clear that alternative fuels will be expensive and less energy-dense than current fuel, meaning the necessity for investment in clean technologies alongside alternative fuels only strengthens further.

Whilst technology is also often cost and time efficient to fit and can often be scheduled to coincide with an existing drydocking period, it’s important not to wait too long. Not only should the benefits of the retrofit be delivered as soon as possible, it’s also important to notice that often these additional works will mean an extension to the dry-docking period. With that comes increasing pressure on shipyard slot availability, so if too many wait, slots may prove more expensive or non-existent.

If shipping is to meet its emissions reduction targets, it must not overlook the existing fleet. That’s over 50,000 ships worth around $1.8 trillion. Proven clean technology can also be integrated into newbuilds and the vessel design from the outset. So, what is stopping shipowners from picking this ripe, low hanging fruit?

Split Incentives

In some ownership models, such as a liner type model, the owner and operator receive the benefits of a technology that improves efficiency and reduces fuel consumption. However, in other models, such as a time charter, the cost and the benefit hit different pockets. This is a key barrier to clean technology uptake.

Here again we see the gap between large and small organisations. The dialogue between larger charterers and larger ship owners is often more ESG-driven and has the potential to align the investment in the ship and the rate paid by the charterer. By contrast smaller owners may find it difficult to achieve this alignment in the short term. However, in the medium term CII should differentiate the fleet between the more and less fuel efficient ships and higher day rates should follow those with the best performance.

Updates to BIMCO’s CII Operations Clause for Time Charter Parties should help address this complex issue and allow shipowners and charterers to share the cost and benefits of clean technology adoption. In practice any change in the commercial arrangements will rely on charterers and shipowners having symmetric, accurate and verified data on the fuel savings and improved scoring of vessels benefiting from clean technology and/or fuel changes.

Accurate data

To support the decarbonisation transition, and as part of its sustainability and advisory work, Houlder recently undertook a qualitative survey of senior executives from large and small shipowners from across the container, tanker, bulk, cruise and ferry sectors. A key theme consistently raised in its interviews was access to accurate, reliable, verified data.

Owners identified a lack of good quality, relevant operating data as a key barrier to the uptake of clean technology. There is also a perceived shortage of independent corroboration for the claims made by some technology vendors. None of

8 Simon Potter

the participants accused technology providers of suggesting deliberately misleading results but did highlight that the data in a brochure will inevitably relate to another ship. So the results (and the unintended consequences) of any technology intervention need to be recognised as a retrospective, and sometimes fundamental, design change.

It is much easier to demonstrate a case for clean technology investment in the liner trade with long term charters than on the voyage/spot market. In the latter case many technologies such as wind assist will have highly varied and unpredictable benefits and in a market which is over supplied its often the cheapest ship that wins. As with large and small owners there is a potential gulf between the liner and tramp trades in the ability to trial and assess clean technologies. Better collaboration between owners is essential to bridging this knowledge gap.

Proactive Collaboration

Houlder’s whitepaper also identified the reliance on ad hoc collaboration as a major barrier to the decarbonisation of shipping. The senior executives interviewed confirmed their willingness to collaborate However, collaboration is less evident in practice, as owners focus on achieving emissions reductions while safeguarding competitive advantage.

Collaboration is more than just shipowners sharing technical data on a new technology. It encompasses all stakeholders and often supply chains. Collaboration needs to be a proactive process with a wide range of stakeholder involvement if its to become more than a buzzword.

Effective collaboration needs proactive convenors to