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IN-DEPTH RESEARCH INSIGHT: No ROI for Shipowners Favouring Efficiency Despite Fuel-Payers Saving Millions

By James Mitchell, Senior Associate Shipping Operation, Carbon War Room

In the wake of the Paris Agreement and with potential IMO regulation to support its ambitions, the shipping industry cannot afford to ignore its emissions, either commercially or in terms of compliance. New research released by Carbon War Room (CWR) and UCL Energy Institute (UCL) reveals the critical roles that shipowners, operators, financiers and regulators must play in order to incentivise and reward efficiency given current market conditions.

CWR and UCL analysed fixtures data (2005-2015) and AIS data (2012-2015) to obtain a clear picture of market dynamics and operations. UCL and CWR investigated the role that energy efficiency has played in vessel competitiveness in past markets. It is the first study to use AIS data to better understand the relationship between efficient design and operation. This will inform a similar study on future carbon-constrained markets to be released later this year.

The report revealed that vessels with high design efficiency save more fuel than expected on design alone, as they were operated more slowly on average, putting millions into the pockets of fuel payers. The results were confirmed both at the annual level for VLCC and Capesize fleets and at the route-specific level for both ballast and laden voyages. For example, it was shown that the difference in fuel costs between a B-rated and F-rated Capesize vessel on the GHG Emissions Rating was $6,000 per day in 2012, or nearly $1.5 million annually on average.

The net fuel savings for charterers choosing vessels with high GHG Emissions Ratings is always positive, so, all else being equal, there is a clear incentive for charterers to hire more efficient vessels. Troublingly however, the time charter market fails to reward owners of efficient vessels with premium rates or preferential hire, despite the added value of consistent fuel savings. This means that owners favouring efficiency in the time charter market are making good choices for the environment and for fuel payers, but are not seeing a return themselves.

The research also suggests that this dynamic is a relatively recent development. Prior to the market crash of 2008, the findings do show efficiency premiums in the Panamax time charter market. Those premiums disappeared with the crash, despite record-high fuel costs and record-high fuel savings for owner-operators and charterers of efficient ships.

Charterers get to ‘have their cake and eat it too’ and without better information and greater transparency, it is unlikely that the market will be unable to rebalance this unfavourable dynamic. However, since it’s proven that efficient design can create very real financial rewards, owners can use this knowledge to their advantage to bolster their negotiations.

Financiers could play a critical role in incentivising efficiency, steering the industry towards successful, profitable decarbonisation. Financiers have the power to control the capital that flows towards, or away from, inefficient or efficient vessels. They can influence which vessels are built, which vessels are acquired second-hand, and which vessels are retrofitted.

Some banks have already altered their decision-making policies to reward efficiency and promote decarbonisation. Last year HSH Nordbank and KfW IPEX Bank became the first banks to announce the use of vessel efficiency data in every financing decision. CWR believes that all shipping banks and vessel financiers should follow this lead and develop investment policies that will allow the shipping industry to decarbonise effectively and reward all players for it.

The study also suggests that current market conditions present even greater challenges concerning the design of IMO regulation. The predicted emissions trajectory of the global shipping industry outlined in the Third IMO Greenhouse Gas Study means that any regulation will need to be wide-ranging and comprehensive to contribute effectively to a well-below 2-degree future.

If the market does not reward shipowners for efficiency investments, policy tools that have contributed to successful environmental reform of other industries, such as carbon prices or fuel levies, would have a greatly decreased impact in shipping if the IMO attempted to leverage them. These policy tools work by magnifying price signals and incentivising the design of more efficient ships. An innovative approach to environmental policymaking, designed not only to reduce emissions but also to overcome the unbalanced dynamic between charterer and owner, will help the industry to avoid a ‘false start’ on the path to decarbonisation.

This research has demonstrated just how far the industry must go to contribute to a well-below 2-degree future. Innovation, leadership and transparency are going to be fundamental. CWR has long worked to identify and overcome market barriers in shipping and we will continue to offer tools, information and profitable solutions to support the industry in its transition to a low-carbon future.

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To contact the reporter responsible for this article, please email editor@fathom-mi.com

 

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