As the shipping industry turns from IMO2020 to its greatest existential challenge – decarbonisation – much of the debate has been around which new, alternative low carbon fuels will replace the traditional fossil fuels.
The IMO’s 2030 GHG emissions target to reduce CO2 emissions across international shipping by at least 40% by 2030 is nine years away and we could take the view that we can’t really do anything until the future fuels arrive. That would be a very dangerous strategy which would miss these very important points;
- IMO 2030 sets out a series of targets for the worldwide fleet. Those will only be delivered through the aggregation of change in corporate fleets and individual vessels. Many of those fleets will need to deliver greater performance improvement than the global IMO targets may suggest, and
- Most of the 2030 fleet is already in the water. Mass changes in fuels need new supply chains and, in many cases, can only be delivered effectively through newbuilds. Do we really think we are going to build those fuel supply chains and replace a significant proportion of the 55,000 plus worldwide fleet in less than nine years?
- IMO 2030 and compliance with new regulation may not be the biggest driver. Shipping has always had to respond to the demands of its customers but ESG (Environmental, Social and Governance) has already demonstrated that this customer influence now extends way beyond the charter party and the pace of change is quicker than ever before. This pace isn’t going to slow! The need for whole supply chain carbon reporting is already driving a need for greater measurement of actual vessel performance and with that comes the inevitable commercial differentiation between those vessels that score well and those that don’t.
Identifying the risks
Sadly, this isn’t as easy as we may like to think. We come from a heritage of compliance with regulation accompanied by a convenient set of metrics which allow us to score a ships compliance. In today’s rapidly changing world we accept that regulation will change but the debate is open about how much or when.
More importantly the commercial drivers are likely to impact the industry more quickly than new regulations and will often be based on a measurement of actual performance which can be very different to a measure such as Energy Efficiency Design Index (EEDI). Add a Flettner Rotor and the EEDI score can improve but put that vessel on the wrong trading route and the actual performance doesn’t get measurably better. The Marine Environmental Protection Committee of IMO will be holding a session on the 16th to 20th of November to debate requirements to assess and measure the energy efficiency of all ships and measure them against a set of required attainment values. This regulatory change is on its way. However, we have yet to see what the new Energy Efficiency Existing Ship Index (EEXI) will look like.
In the meantime, as fuel economy data collection becomes more sophisticated it will become clear which vessels are more efficient, burn less fuel, have lower costs and produce least emissions. Increasing demand for vessels with a RightShip A-C rating, for example, will inevitably favour those vessels day rates. It’s not hard to work out what will happen for those with lower scores, particularly as fuel costs are hit by measures such as a carbon levy which will further increase Opex differentials.
Identifying the risk means a simple but often challenging and vessel specific three step approach;
- Be clear about current REAL performance
- Quantify the gap between REAL performance and the demands of the market as well as the expected future changes in regulation, and
- Identify the art of the possible and develop a vessel specific plan by applying the most appropriate series of measures over time. Don’t forget that often the biggest improvements can come from operational changes. It’s not always about fitting new smart clean technology to the ship.
Some vessels will offer relatively straightforward decarbonisation strategies others won’t have a realistic solution. Understanding which is which allows a strategy to be developed to invest or divest.
The funding challenges
The shipping market has changed drastically over last 10-20 years, particularly on the funding side. Many traditional shipping banks left the market after the 2008 crash. The shipping sector has underperformed since the financial crash and now faces a need for massive investment to meet the challenges of decarbonisation. So where is the money going to come from?
There is no easy answer to that question. It is, however, clear that funding is increasingly being linked to “green” financing structures. This isn’t just about meeting the criteria for Green Bonds. One of the most important challenges for a funder is to understand and assess downside risk. Ignoring and/or not adequately planning for the impact of decarbonisation is a massive risk for any business. So, in a world where there is already a question over the availability of funding can any ship owner afford to be at the wrong end of that risk assessment?
Life on the other side of that conversation isn’t easy either. It’s a big challenge for any funder to properly assess the risk that decarbonisation presents to their portfolio. Whilst there are a number of high-level measures which can be applied to quickly identify the high-risk assets a portfolio wide assessment needs to start from the bottom up and that inevitably means it will take time to do it. So better to start sooner rather than later and not be tempted to wait for the next set of regulations to be published.
Expect to see churn as owners and funders alike make their decisions on which vessels are fit for the future and which now have a very short operating life left.
So, what should you do?
When the time for change comes, the time for preparation has passed. In other words, get started now with an appropriate assessment of the risk in your fleet or portfolio.
Don’t just stick to the traditional regulation led assessment. Instead recognise that the most rapid change is likely to be driven by changes in the demands of the supply chain to conform to strict ESG measures.
Recognise that improving real performance is not much commercial use if there isn’t a way of communicating it to the market. That’s a challenge for the industry as well as the ship owner or funder. We all need to recognise that this new paradigm means new ways of informing our decisions as well as the courage to make big change.