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

10 Mar 2022

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

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