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Plant in dollar

Funding zero-emission technologies.

Industry-wide approach needed to meet IMO 2050 deadline.

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, writes Paul Bartlett. 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. In line with the so-called Paris Agreement, the IMO agreed on carbon reduction targets in April 2018. By 2050, its ambition is to reduce shipping’s carbon emissions by at least 50% compared with 2008 levels.

LR estimates that this is equivalent to a reduction of about 80% in carbon intensity, taking into account growth in trade over the next three decades. 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.

Katharine Palmer is a principal architect of LR’s zero-carbon transition strategy. She 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,” Palmer told Horizons. “And several new low- or zero-carbon fuels are under development. But these are still years away from becoming full-scale 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.”

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 recent initiatives 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.

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.”

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.

Japan’s NYK group also broke new ground when it recently secured a 2 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.

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.

"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.”

Katharine Palmer

Global Sustainability Manager, Lloyd's Register

Horizons December

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