While the fuel challenges associated with International Maritime Organization’s (IMO) 2020 global sulphur cap may dominate maritime conversations now, IMO 2020 is only the beginning of the journey as the industry must also navigate the impact of global decarbonisation efforts.
The shipping industry’s decarbonisation transition dominated discussions at leading trade show and conference, Nor-Shipping, in June. With Kitack Lim, IMO Secretary-General, setting the agenda by stating that there is a need to make zero-carbon ships more attractive and direct investments towards innovative, sustainable technologies and alternative fuels.

No time to lose Katharine Palmer has a strong message for the world’s shipping industry. LR’s Global Sustainability Manager insists that zero-emission vessels (ZEVs) need to be delivered into shipping’s markets by 2030 at the latest, if there is any chance of achieving the IMO’s 2050 greenhouse gas reduction ambition.

In April last year, the IMO agreed that global shipping will at least halve its greenhouse gas emissions by the middle of the century, even more if possible, compared with 2008 levels. The reduction is required if the industry is to be in line with Paris Agreement decarbonisation targets.

LR estimates that this 50% cut in absolute emissions is equivalent to a reduction of about 85% in operational CO2 intensity (grams of CO2 per tonne nautical mile) after taking into account seaborne trade expansion and world fleet growth over the next three decades. A daunting challenge!

A buy-in from shipping’s main players is essential, Maersk’s December announcement that it has adopted a plan to achieve carbon neutrality itself by 2050 is a welcome development.

Strategies for decarbonisation Together with colleagues and experts at the UK’s University Maritime Advisory Services (UMAS), Katharine has been working on a series of studies, with the latest on low carbon transition pathways, launched at the end of January this year. The study assesses ways in which shipping can address the challenges of energy development and vessel design and operational implications relating to the IMO’s ambition

It stresses the shortage of time and identifies the 2020s as a key decade for piloting and prototyping new fuels and hybrid propulsion arrangements. If these proceed at a fair pace, it is possible that LR’s vision for zero-emission ships being on the water by 2030, now with industry and government support, could be achieved.

The latest study – Zero-Emission Vessels: Transition Pathways – establishes three possible pathways relating to future fuel developments in shipping. The study’s authors stress, however, that these pathways are based on today’s fuel technologies and could change significantly as low or net zero-carbon fuels evolve over the next three decades.

Looking beyond ‘clean’ hydrocarbons as things stand today, however, the study is clear. There is absolutely no time to lose in examining the options and embracing fuel change. Whilst ‘clean’ hydrocarbons – liquefied natural gas (LNG) and methanol produced from fossil fuels, for example, provide significant air quality benefits and gains in energy efficiency, they will not make the IMO’s 2050 ambition possible.

The study’s authors note that until now, global shipping has pursued its own independent fuel strategy, as one of the only major users of high sulphur heavy fuel oil. But the IMO’s decarbonisation ambition means that this must change. Marine fuels of the future will be developed alongside broader decarbonisation initiatives across all energy-consuming sectors. A portfolio of new fuels is likely and will require a ‘holistic’ approach – one to which shipping is perhaps not traditionally accustomed.

Three pathways

The study identifies three possible pathways to meet the IMO’s 2050 ambition. The first is based on one in which renewables dominate the supply of marine fuel. Hydrogen and ammonia produced from renewable electricity, used possibly in fuel cells or combustion engines respectively, could well form a basis for new research and development.

A second approach is based on the development of biofuels. The challenge here, as the study points out, is that the price and viability of biofuels will be driven by the availability of worldwide bio-energy capacity. This, in turn, will require a fundamental change in huge areas of land, which comes with its own challenges. A third pathway sets out an ‘equal mix pathway’ made up of fuels produced from renewable electricity, including hydrogen, ammonia, methanol and batteries; fuels produced from bio-energy such as gas oil, methanol and LNG; and fuels produced from natural gas with Carbon Capture and Storage (CCS). However, the report warns that hydrogen and ammonia produced in this way depends both on a supply of competitively priced natural gas alongside the development of affordable carbon capture and storage technology. Fossil fuels would have to provide a small percentage of the outstanding requirement in this pathway.

Download LR’s Zero-Emission Vessels: Transition Pathways study at www.lr.org/zev

Funding a zero-carbon future

Urgent action is needed to incentivise a global shipping industry that’s reluctant to fund energy-saving technologies that support the IMO’s targets to reduce carbon emissions. New contractual initiatives and innovative funding channels may provide fresh incentives for a zerocarbon future.

“new contractual initiatives and innovative funding channels may provide
fresh incentives for a zero-carbon future”

“History has shown that cost remains the best driver of change,” declared Noah Silberschmidt, CEO of Silverstream Technologies. He was referring to what many expect to be a major hike in bunker bills when the IMO’s sulphur cap kicks in next January and the fact that more than a year has elapsed since the UN agency agreed ambitious carbon-reduction targets. Yet much of the global shipping business continues as though nothing has changed.

The IMO also set out an aim that, as a waypoint, global shipping should aim to cut its carbon intensity by between 40% and 70% by 2030. Nearly a tenth of that 12-year time frame has now elapsed and carbon-cutting initiatives – particularly on existing ships – have been lamentably few.

Palmer, who is the principal architect of LR’s zero-carbon transition strategy, is adamant that achieving the IMO’s ambitions will rely on an industry-wide approach to decarbonisation – in fact, she says, it will require substantial and collaborative input from other industrial sectors too, some of which are already well ahead of shipping in terms of transitioning to low/zero carbon. Palmer stresses that the involvement of the financial sector is essential.

No time to waste

“New marine fuels with a low-to-zero carbon content are the way forward,” said Palmer. “And several new low- or zero-carbon fuels are under development, but these are still years away from becoming fullscale and commercially available. If we are to meet the 2030 ambition, we must embrace a change in the way ships are operated, including a wide range of carbon-reducing practices and technologies for existing ships. There is no time to waste.” “new marine fuels with a low-to-zero carbon content are the way forward”

Palmer shares the views of others who believe that access to finance is currently a stumbling block, particularly for energy-saving retrofits on existing ships and incentivising the transition to zero-carbon. However, she says that several initiatives unveiled in recent years could potentially open-up new financing channels for ‘green’ initiatives in shipping.

One of these is the Climate Bonds Initiative. It describes itself as an international, investor-focused, not for profit organisation working solely on mobilising the $100 trillion bond market for climate change initiatives. Projects across the transport sector generally, including those in shipping, are likely to feature in its work in the future.

However, traditional maritime lenders are often reluctant to provide funding for green initiatives in shipping, particularly since some have scaled back their exposure to the sector or left it completely. Energy-saving retrofits may well benefit the environment immediately, whilst also contributing to the IMO’s long-term decarbonisation ambitions. Yet they do not fit conveniently into traditional bank-lending models and many ship operators face a challenge in funding such initiatives out of cash flow.

Aerial shoot of a cargo ship mooring in a harbour

Mark Clintworth has a responsibility for shipping at the European Investment Bank, the lending arm of the European Union which is also the world’s largest multilateral lender and the biggest provider of climate-related finance. He insists that funds are potentially available for the right project provided it is eligible under bank lending rules; that it is a proven technology and has a strong business case. This last point constitutes another hurdle, however. Bankers obviously want certainty over payback, but many new energy-saving technologies have no significant track record. It’s not a good start, from a financing point of view.

Progress is also hampered by shipping’s complex contractual relationships and who pays the bunker bill. In the dry and liquid bulk trades, time charters are widely used as the contract between charterer and owner. In such arrangements, charterers foot the fuel bill. Owners, therefore, have little incentive to invest in vessel efficiency gains. “The split incentive between charterers and owners is arguably the most pressing and difficult question to answer when it comes to shipping’s sustainability drive,” observes Silverstream’s Silberschmidt. “Whilst we are beginning to see some contractual changes in the market, further changes are needed.”

Poseidon Principles

In June 2019, LR collaborated with leading shipping banks and organisations, including the Global Maritime Forum, to develop a pioneering set of principles that will integrate climate considerations into lending decisions and will promote responsible environmental stewardship and socially responsible behaviour throughout the maritime value chain.

The Poseidon Principles are consistent with the policies and ambitions of the Initial GHG Strategy adopted in April 2018 by member states of the IMO. The Principles will evolve over time as the IMO adjusts its policies and regulations and when further adverse environmental and social impacts are identified for inclusion.

Speaking about the Poseidon Principles, LR’s CEO Alastair Marsh commented: “Zero-emission vessels must enter the fleet by 2030 at the latest if the maritime industry is to successfully meet the IMO ambitions of at least 50% reduction in greenhouse gases by 2050.”

“The introduction of these industry-first Principles demonstrates that ship finance is determined to support shipping’s decarbonisation challenge across the maritime value chain and also support other factors such as the energy transition,” Marsh said. “As a strategic member of the GMF, LR is committed to working with all the Poseidon Principles partners to support the evolution of this landmark initiative.”

Norwegians and Japanese front runners

The Norwegians have pioneered some of these contractual initiatives. State energy company Equinor, for example, has worked closely with owners to share the benefits of fuel-saving technologies. New time charter clauses set out how any financial upside from fuel savings should be split. Meanwhile, the country’s unique NOx Fund has supported a broad range of energy-saving initiatives across the marine and offshore sectors, underpinning an array of new environmentally favourable technologies.

Last year, Japan’s NYK group also broke new ground when it secured a two billion yen ($18m) ‘green loan’ from the country’s Taiyo Life Insurance Company to finance a 49,000 dwt methanol-fuelled chemical tanker. The 10-year deal, running from December 2018, was assessed by the Japan Credit Rating Agency and achieved the highest green credit rating. However, NYK is one of only a few shipping groups that carry investment grade ratings. Whereas the bond market may be potentially available for investment grade energy companies engaged in the development of offshore renewables, for example, or for sustainable real estate or organic farms, it is not available, so far at least, to shipping companies with a handful of bulk carriers or tankers.

Big ships import/export and business logistic and cranes

These are some of the reasons why Tuomas Riski, CEO of Norsepower Oy, a Finnish clean technology company that has developed a rotor sail system to supplement power from ships’ main engines, is offering ship operators a ‘technology as a service’ financing model. Rather than face a capital cost up-front, clients can install Norsepower rotor sails and pay a monthly fee based on actual fuel savings.

“This approach guarantees that the owner will not pay out unless the technology functions as promised,” says Riski. “Norsepower is essentially de-risking the installation of Flettner rotors for applicable vessels.” Three installations have been made so far – on the 109,647 dwt products tanker Maersk Pelican, the 57,565 gt cruise ferry Viking Grace and the 18,205 gt Estraden, a ro-ro cargo vessel. LR’s Palmer has already highlighted the need for a cross-industry collaborative approach to global shipping’s decarbonisation. Traditional maritime lenders and non-shipping finance institutions have an essential role to play if there is to be any hope of meeting the IMO’s targets. There is no time to lose, sources say. Financiers must bring their expertise to the table and assist the shipping industry with some urgently needed creative financial thinking.