Analysis

Decarbonising shipping: We must find new ways to resolve the split incentive

Sector needs to work together on preventing split incentives from being the silent killer of innovation for decarbonisation, writes Founder & CEO of Silverstream Technologies.

Published

3 years ago

March 10, 2022

Admin

By Noah Silberschmidt, Founder & CEO, Silverstream Technologies

Split incentives for technology adoption in shipping have been discussed for years. They arise because of the unique way that the industry pays for fuel for time-chartered ships. While ship owners are responsible for paying for solutions that improve the efficiency of their vessels, it is the charterer that pays for the fuel and thus reaps the rewards of increased efficiency.

This simple problem has until recently been a major barrier to clean technology uptake. There have been many efforts to resolve the split incentive, including updating charterparty agreements to enable the upsides of clean technologies to be shared. However, today, there exists no contractual solution to the challenge that has been conclusively adopted by the industry.

Last year, BIMCO introduced a new clause for time-charter agreements related to the Energy Efficiency Existing Ships Index (EEXI), which comes into force next year. The clause put forward is a clear demonstration of the increasingly close dialogue between owners and charterers regarding environmental performance. But it does not go far enough to solve the structural barrier to uptake of clean technologies that is the split incentive.

In developing the clause, BIMCO chose to focus on Engine Power Limitation (EPL) and Shaft Power Limitation (SHAPOLI), saying they will probably be the measures taken by the majority of ships needing to meet the Energy Efficiency Existing Ships Index (EEXI) regulations entering into effect on 1 January 2023.

The clause states that the charterer “shall not order the vessel to prosecute voyages at a speed which would exceed the new maximum speed” determined by EPL or SHAPOLI adjustments.

The clause also notes that “EEXI modifications other than or in addition to EPL or SHAPOLI shall be subject to the charterers' prior agreement and approval, which shall not be unreasonably withheld or delayed.”

However, neither of these provisions do anything to ease split incentives and the focus on EPL or SHAPOLI must be challenged as short-term thinking.

The uptake of EPL and SHAPOLI as compliance measures fails to address the underlying aim of design efficiency and constrains operational flexibility. It also ignores the reality that EEXI regulations will tighten, as will other regulations over the coming decades.

The split incentive is a fundamental structural challenge and barrier to decarbonisation. It is a problem of our industry’s own making, so it stands to reason that we can also find positive solutions to it.

Still, BIMCO is promoting industry-wide clarification at a contractual level, and this is to be applauded. The entire clause and comments to the clause stress the importance of a close dialogue between the ship owner and the charterer. This, and coming clauses, should therefore be a step in the right direction to level out the split incentive.

The industry needs to work together on preventing split incentives from being the silent killer of innovation for decarbonisation. On a structural level, shipping must forge itself as an industry that supports and rewards radical innovation and places proven clean technologies at the centre of its decarbonisation pathway.

With future, low or zero-carbon fuels still early in their development, the sector must find ways to adapt and evolve its operations today. And, no matter what the fuel, clean technologies have the power to reduce fuel bills and emissions, provide operational flexibility to vessels, and increase profitability for ship owners and charterers.

This is particularly relevant given the simple economics of shipping’s future fuels. They are, and will continue to be, many multiple times more expensive than the fossil default, heightening the context for efficiencies.

With all this in mind, it’s clear that we must now work together to solve the structural challenges that are acting as barriers to the uptake of efficiency solutions. Untangling the split incentive and coming up with a fair model to share upsides is one of the best actions that we can take as we lay the foundations for decarbonisation. It’s time to be bold and act: the sustainable future for our industry depends on it.

Source: steve pb from Pixabay
Published: 10 March, 2022

Research

Yamna identifies five potential global ammonia bunkering hubs

Unlike methanol, ammonia is not constrained by biogenic CO2 availability, and its production process is relatively simple.

Published

3 months ago

December 31, 2024

Admin

Specialised green hydrogen and derivatives platform Yamna in early December identified several potential ammonia bunkering hubs around the world.

The hubs are Port of Rotterdam, Port of Algeciras, Suez Canal, Jurong Port, and Port of Salalah.

“The shipping industry faces an ambitious challenge: reducing emissions by 20% by 2030 (compared to 2008 levels) and achieving net-zero emissions by 2050, in alignment with IMO targets,” it stated.

“Achieving these goals in the medium to long term depends on the adoption of alternative low-emission fuels like green ammonia and methanol.

“Among these, ammonia is attracting growing interest as a viable option. Unlike methanol, it is not constrained by biogenic CO2 availability, and its production process is relatively simple.”

However, the firm noted kickstarting ammonia bunkering on a large scale required four enablers to align:

Ammonia fuel supply
Application technology
Bunkering infrastructure
Safety guidelines and standards

It believed ammonia bunkering hubs will first emerge where affordable and scalable ammonia supply is available.

Yanma Why use ammonia for bunkering fuel

Photo credit: Yanma
Published: 31 December 2024

Research

Port of Long Beach releases Clean Marine Fuels White Paper

Document intended to prepare and position the port and its stakeholder for adopting low carbon alternative fuels.

Published

3 months ago

December 26, 2024

Admin

Clean Marine Fuels Port of Long Beach (December 2024)

The Port of Long Beach (PLB) in late December released the Clean Marine Fuels White Paper as part of efforts to identify solutions capable of reducing emissions from ships.

“To understand the opportunities and challenges related to the adoption of clean marine fuels, the Port of Long Beach hired ICF Consulting to develop this white paper as an educational resource and guidance document,” stated PLB

“This document is also intended to prepare and position the port and its stakeholder for adopting low carbon alternative fuels.

“The white paper provides high level information on the array of currently available low carbon marine fuels, along with an exploration of the potential infrastructure needs for their deployment.”

The document covers the use of different types of clean bunker fuels such as green hydrogen, green methanol, green ammonia, renewable LNG and biofuels for shipping.

“The shift to clean marine fuels is no longer optional but a necessity for the sustainability of the maritime industry,” stated PLB in its closing remarks.

“This transition, while presenting challenges such as high costs, limited fuel availability, and the need for extensive infrastructure development, is advancing due to evolving policy frameworks and growing industry commitment.

“Addressing these obstacles will require targeted initiatives and robust collaboration between public and private sectors. Continued policy support, government funding, and sustained industry commitment will be essential to driving this progress and ensuring the long-term sustainability of maritime operations.”

Editor’s note: The 123-page Clean Marine Fuels White Paper may be downloaded from the hyperlink here.

Photo credit: Clean Marine Fuels White Paper
Published: 26 December 2024

Port & Regulatory

Clyde & Co: FuelEU Maritime Series – Part 6: Legal issues

Bunker purchasers should consider the wording of their bunker supply contracts carefully and ensure that they are comfortable with the contractual provisions.

Published

3 months ago

December 26, 2024

Admin

Global law firm Clyde & Co on Thursday (19 December) released the final instalment of its six-part series uncovering the FuelEU Maritime Regulation.

In it, the firm looked at the legal issues that could potentially arise between various parties, such as owners, charterers, ship managers, bunker suppliers, and ship builders, as a result of the compliance requirements imposed by the Regulation.

The following is an excerpt from the original article available here:

Bunker supply contracts - legal issues

Both vessel owners and bunker purchasers will want to ensure that they are able to take advantage of the preferential treatment provided under the FuelEU Regulation for consuming renewable fuels, including biofuels and renewable fuels of non-biological origin (RFNBOs) (such as methanol and ammonia).

Article 10 of the FuelEU Regulation states that such fuels must be certified in accordance with the Renewable Energy Directive (RED) 2018/2001. If the fuel consumed by the vessel does not meet the applicable standards or have the appropriate certification, then it “shall be considered to have the same emissions factors as the least favourable fossil fuel pathway for that type of fuel”[1].

In order to confirm that the fuel complies with greenhouse gas (GHG) intensity and sustainability requirements, the vessel owner and bunker purchaser will want to ensure that the bunker supplier provides the appropriate certification required under the FuelEU Regulation. The EU has required certification of such fuels, with the aim of guaranteeing “the environmental integrity of the renewable and low-carbon fuels that are expected to be deployed in the maritime sector.”[2]

The FuelEU Regulation provides that the GHG intensity of fuel is to be assessed on a “well-to-wake” basis, with emissions calculated for the entire lifespan of the fuel, from raw material extraction to storage, bunkering and then use on board the vessel.

Vessel owners and bunker purchasers will, therefore, need to be mindful of the importance of establishing how “green” the fuel actually is, and of the risk of bunker suppliers providing alternative fuels that will not allow for preferential treatment under the FuelEU Regulation.

It would, therefore, be advisable for bunker purchasers to consider whether the wording of their bunkering supply contracts is sufficient to ensure that the fuel is properly certified under the FuelEU Regulation. This could include contractual provisions that require the supplier (i) to provide a bunker delivery note (BDN), setting out the relevant information regarding the supply (such as the well-to-wake emission factor), and (ii) to provide the necessary certification under a scheme recognised by the EU.

Bunker purchasers should also be mindful that bunkering supply contracts often contain short claims notification time bars and provisions restricting claims for consequential loss. Issues could therefore arise where a purchaser tries to advance a claim against the supplier for consequential loss due to a lack of certification, but the bunker supplier argues that such losses are excluded under the terms of the bunker supply contract.

Bunker purchasers should therefore consider the wording of their bunker supply contracts carefully and ensure that they are comfortable with the contractual provisions.

Photo credit: CHUTTERSNAP from Unsplash
Published: 26 December 2024