How to optimize regulations and get through the transition period

Let’s delves deeper into the field of green shipping, examining best practices and their challenges, as well as strategies for shipping companies to overcome these obstacles. To set the stage, let’s consider the driving forces behind this change. An intriguing aspect is the potential divergence of markets resulting from the implementation of different regulations around the world.

What is driving this change? An interesting dynamic is the type of potential market impact we will see in maritime transportation based on the implementation of various regulations around the world.

What I mean by market maneuvering is essentially that shipping companies need to answer the question of which market they would like to play in at a low level. Basically it’s about complying with international regulations and just having a sort of ticket to international trade, but as you move up the levels you can adapt to more stringent goals and regulations and gain access to these markets.

A great example is the EU having the EU ETS and FuelEU, where essentially these regulations will create a dynamic where EU trade will need the most efficient ships and dual-fuel ships, so shipping companies have to sort of decide whether they want to to ensure that their fleets and assets have access to this market, and that raises the question as shipping companies consider this challenge, what kind of balance is there between kind of short-term positioning and long-term positioning. So what do you do with your existing assets to keep them attractive to the market and then, in the long term, choose the right fuels etc. to ensure your fleet remains attractive for charters?

As part of these challenges, we always talk about shipowners who have four levers at their disposal to reduce emissions and help decarbonization. The first is speed optimization, which means reducing the speed of ships and reducing their wear and tear. The trade-off is that of course if you reduce the speed of the vessel it may be less attractive for a charter, so you will have to sail at a slower speed, which may not be in line with market conditions, but it is obviously a slightly easier first port of call in terms of reduction emissions.

Then we have energy-saving devices. Everything is aimed at improving the efficiency of the ship at standstill to improve emission intensity. Then we have the fuel transition, which includes everything from adding biofuels to upgrading the main engine to switch to burning alternative fuels. Of course, there are significant challenges to the investment case.

There are high investment options. What impact will this have on assets? Will it extend its life? What effect will this have on the final value of this ship? And then, of course, new designs, so find a replacement to get more efficient ships on the water, of course there’s also the issue of fuel, but given the composition of the fleet, do we need to move to larger asset sizes, for example? , switch to a more efficient form of transport or even look at future energy markets to see what future ship fleets will load?

How can we maximize the life of our existing assets?

The most responsible thing that can be done is not to simply replace every ship and begin expanding and replacing the fleet extensively; in fact, it is about extracting as much value and life as possible from existing ships and then replacing them with appropriate technologies and fuels.

So we see this as a short solution chain where you take these levers and look at them together to find the most cost-effective way to achieve your emissions reduction target. This could be a combination of implementing speed optimization technology, some reduction in the use of biofuels, and ultimately fleet replacement. This is just an example of some of the work we have done for shipowners.

This is, of course, a highly fragmented market with a huge number of technologies available that can be installed on ships, but in reality their effectiveness is relatively unknown or difficult to quantify. So there are two ways to deal with this challenge: either take a bottom-up approach where you evaluate individual technologies and their feasibility and then determine whether they are the right choice for a particular ship or actually what we think is quite useful, it involves reverse engineering. We are working to find the relationship between capital investment in technology and fuel savings, taking this relationship into account by understanding how it affects emissions intensity reductions and payback periods.

This basically allows us to say that a particular ship needs x% reduction in carbon intensity plus a 3-year payback period, which will equate to a certain technology package and we can take that technology package, look at what represents good value versus bad value and then conduct dedicated feasibility studies on this topic. Thanks to this, we can work on a potential solution faster and more effectively.

The second major challenge is the assessment of fuels, both from the point of view of main engine modernization and new designs. Of course, when shipowners have evaluated new build projects in the past, a simple exercise has been to understand the very well-known technology side and then understand the revenue potential of that asset. We are now at a point where there are many more variables in the fuel regulation process and the dynamics of market segmentation have been clarified.

Therefore, the approach to this problem is based on the use of a kind of total cost of ownership model, i.e. modeling the operational profile of a ship using different technologies and fuels, comparing them with each other, and then looking at the total costs over the entire life of the ship, i.e. fuel, but also regulatory fines and technology costs, but also looking at the emissions profile over the life of the ship and understanding what needs to be done to bring the ship into compliance. Essentially you look at these vessels from the perspective of both the owner and the charterer, so this is a very useful way for the owner and their client to choose the right fuel.

In the end, there remains one challenge that must be faced. This is a multi-faceted problem that needs to be solved and this is something we always recommend to our clients. This is done sort of through a kind of coherent energy transition strategy where you do this kind of bottom-up modeling at the ship level to understand what we need to do on each individual ship in the fleet to stay compliant, but also this kind of top-down strategic element to select the appropriate fuel.

The above article was edited based on Jack Spyros Pringle’s presentation at the GREEN4SEA Singapore 2024 forum.

Learn more by watching his video presentation below

The views expressed are solely those of the author and do not necessarily reflect the views of SAFETY4SEA and are for information exchange and discussion purposes only.