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Voyage index needed for decarbonisation success

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A voyage index could be the next logical step in commercial shipping’s decarbonisation journey, according to the Danish Ship Finance’s latest Shipping Market Review.Likening a possible index to the use of handicaps for golf players, DSF said that the IMO’s EEXI regulations can be seen as “handicaps” for vessels. But the IMO has not yet introduced an index that measures the toughness of voyages. The Carbon Intensity Index (CII) rating for average vessel performance, meanwhile, is difficult to evaluate when the voyage and its sea and weather conditions are unknown, DSF said.

“The introduction of a voyage index would allow better benchmarking and peer reviews. The index could be dynamic across seasons to reflect not only static information but also dynamic factors such as sea and weather conditions,” said DSF.

For now, though, the industry will need to make the best of CII to aid decarbonisation efforts. The CII ratings set an operational cap on emissions by calculating fuel consumption for each voyage divided by cargo-carrying capacity and distance travelled. “Although not a perfect design, the intention of the regulation is clear: low emitters will likely earn the most,” said DSF.

Commercial decarbonisation is a critical process for the shipping industry to increase CO2 efficiency per moved unit. The industry is beginning to measure, audit, and report CO2 emissions, taking the first steps towards achieving environmental and commercial goals. However, individual owners’ ability to achieve energy-efficiency improvements depends on their commercial profile and operational control of their fleets, noted DSF. “Owners that operate their own vessels may invest in long-term efficiency improvements to increase their fleets’ CII ratings and long-term earnings potential. Owners with little (i.e. pool) or no (i.e. timecharter) operational control may find it difficult to optimise their fleets’ CII ratings.”

These players will invest not only in retrofits with longer repayment periods but also in more structural long-term energy-efficiency improvements, including fleet digitalisation and the development of machine-learning models, said DSF.

In the crosshairs

The main goal of CII is to reduce total emissions, but the new regulation targets individual vessels. Critical challenges remain, DSF said, such as the current CII methodology’s possible improvements. “For instance, during a year, it will be possible for a vessel to sail a mix of A-rated and E-rated voyages that translate into an average CII rating for the year. If A-rated voyages dominate the year, the vessel will likely receive a rating better than C, while the opposite is equally possible.

“If a young, high-performing eco-vessel has been employed on ‘difficult’ voyages throughout a year, it will obtain a low CII rating. In contrast, the same vessel could obtain a high rating if it were employed on more CO2-friendly routes.”

All vessels, independently of EEXI ratings and trading routes, can improve their CII ratings by increasing the amount of low-carbon fuels in the fuel mix, DSF added.

“To supercharge the energy-efficiency race, additional commercial levers need to be put into place to support the goals of the new regulation. The main goal is to reduce total emissions, but the new regulation targets individual vessels. How best to structure commercial levers that drive down overall fleet emissions?”

Adding carbon taxes to the mix will likely see the lowest emitters “earn the most and pay the least”, while access to cargo is likely to be increasingly dependent on environmental performance.

“Tonnage providers will only invest in energy-saving initiatives they can capitalise on.”

Split incentives

Ultimately, the shipping industry faces a challenge in complying with environmental regulations due to the split incentives between owners and operators, as well as the industry’s commitment to asset ownership. While the regulations call for long-term energy efficiency planning, it seems unlikely that businesses will be able to make investments in energy-saving technologies with longer repayment profiles without changing their current business models.

“The tonnage provider model seems most exposed,” DSF said. “How do you engage in long-term energy-efficiency planning if you do not have operational control of your vessels and therefore do not benefit from lower future fuel consumption? What happens to the future earnings potential of fleets if they are not upgraded along with those of competitors?”

Environmental ratings and a price on carbon, such as the EU ETS, further complicate the situation.

Despite these challenges, the shipping industry is committed to complying with environmental regulations. But business models may need to change if “their current nature does not allow energy-saving investments with long(er) repayment profiles”, DSF said.


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