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December 15, 2014

Voyager News

A short trip around the valley of death

“Don’t be scared, it’s not really a war,” joked the Carbon War Room shipping operations consultant and senior advisor Alisdair Pettigrew at the start of his presentation to the recent Fathom Ship Efficiency event in London. You get the impression he rolls that one out a lot and not without good reason.

 

In its short life, the Carbon War Room has been a misunderstood and even a maligned initiative. This is despite – or perhaps because of – some slick marketing of the kind that co-founder Richard Branson revels in and a liberal application of spin.

In attempting to drive a shift in attitudes towards climate change, the CWR focusses on accelerating business-driven solutions to carbon emissions with a strongly for-profit focus. Or to put another way, it feels the industry should stop seeing carbon as a cost and a burden and rather see its reduction as an opportunity for profit – with an accompanying feel-good factor.

This combination of innovation and attitude has raised some industry hackles as well as provoking debate. Most notable was the decision to adapt the IMO’s EEDI energy efficiency rating for newbuildings to existing ships. Rebranding it the EVDI with an A to G efficiency rating, in partnership with vetting agency RightShip (itself none too popular among those on the wrong end of its assessments) seemed almost deliberately provocative.

It was also seen to go against the spirit of the IMO’s efforts to embed the EEDI and Ship Efficiency Management Plan and then build a platform for a carbon reduction scheme through emissions taxation or trading.

From the perspective of just a few years however, it seems more like the kind of disruptive thinking that the industry needed, especially since the IMO process seems little further forward, while the European Union is pressing onward with its MRV programme.

The focus on existing tonnage is interesting too since in terms of need, this is where the challenge really lies. While market forces and the EEDI should take care of making newbuildings more efficient, the reluctance of owners to scrap older vessels demonstrates a resistance to change without an incentive to do so.

“The theory is simple,” says Pettigrew. “There is a technology bottleneck between shipping and innovative clean technology. We see it in other sectors too and it’s not about policy, it’s about capital.”

Unjamming that bottleneck means tapping the huge latent efficiency in shipping, which the IMO puts as high as 25-75% by providing bridge funding. Pettigrew says the EVDI is an attempt to drive transparency by developing a tool that it could use with charterers, ports and banks, enabling them to make better-informed decisions and incentivise the use of efficient ships.

Controversial or not, he says 30 charterers now use the EVDI as a policy and will not charter ships with the lowest F or G ratings, saving both fuel costs and carbon. The system is dynamic too; as new more efficient tonnage enters the market, so the less efficient slips lower down the scale. Pettigrew says the difference between a B and F-rated vessel could be as much as $350,000 of fuel savings and a CO2 differential of 1,400 tonnes for a Capesize transiting China to Brazil (at $600 per tonne).

The next stage is how to unlock the finance needed to fund retrofitting of the bulk carrier and tanker fleet, potentially improving asset values and charter rates. Two programmes are underway, one focussing on proven efficiency technology, the other, Shipping Innovation Fast Tracker (SHIFT) focuses on immature technologies such as wind power and air cavitation.

“These are technologies you don’t see on more than one or two ships and the fact that they are unproven makes them appear more risky for charterers. But when you look at the savings potential of these type of technologies the potential to closer to 10-20% compared to the typical 3-5% of proven approaches,” he says.

The problem, as CWR and researchers at University College London have determined is that the companies manufacturing them are usually small and often rely initially on private backing. They struggle to get their technologies onto commercial ships and without sponsors they risk slipping into the ‘valley of death’, where good ideas that lack funding go to die.

“We’re working on finance projects where the charterers have funded the retrofitting and we’ve worked with class to ensure the systems and the vessels are safe. The result can be savings of more than 10% compared to the average of 2 to 3%,” he adds. “It is a challenge for owners and charterers but the opportunity is there.”

The CWR’s plan is to ‘plagiarise the good work done in the US building space by applying some big data and escrow finance. The SHIFT programme gathers a historical data set over a six month period prior to dry dock.

Finance partner, New York-based EfficientShip Finance (efficientshipfinance.com) funds the fitting of up to five or six new technologies whose providers are paid upfront. The resulting improvements are monitored post dry dock and the differential fuel savings paid to ESF to cover capital costs and interest payments.

It’s a model well-proven in the building environment, which also faces the challenge of shipping’s landlord-tenant anomaly: an owner could invest but not the see the benefits in asset value or charter rates as the charterer pays for the bunker fuel in around 70% of cases. As a result CWR is talking in the near term to owner-operators who can see the impact on their operations. ESF are ‘finance experts who understand shipping’, with an initial fund of $25m of working capital for retrofits and Pettigrew says there is plenty of headroom.

“Markets tend to be sceptical but we can prove the model works and the plan is to retrofit more vessels. Most of the owners we are talking with have a fleet of between 10 and 50 ships in our sweet spot, older than three or four years and less than 10 years. There are as many as 5,000 ships we could potentially apply this model to and the loan period is tied to the five year dry dock cycle so there is a good period of time to judge the benefit.”

The second phase of the programme will see ESF establish a green fund of $500m able to retrofit up to a further 300 ships and he thinks the momentum will roll from there, even if the laggards get left behind.

“This is very much a programme of change that we think can improve efficiency of the leading edge but also encourage the whole industry to see that there are solutions available. For that reason it’s very important that not just owners but charterers are fully engaged and in the room. The opportunities we see are significant but any cost saving that can be passed on, when scaled up, can make a significant difference.”

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