Financing shipping’s future requires connecting capital with clean technology. Peter Boyd, COO of Carbon War Room, explains how new financing concepts may coincide naturally with ›eco‹
Capital and credit are scarce within shipping, as owners and operators strive
to remain competitive in a tough market, where[ds_preview] profit is the key concern. However, today the industry has to contend with the very real issue of becoming more sustainable and reducing its emissions, as it faces increasing pressure from tightening regulation and sustained high fuel costs. Capital is the key to enable shipping to do this effectively.
There is a wealth of clean technologies available now that are increasingly proven to deliver tangible returns. Unlocking capital flow to accelerate take-up of these technologies is therefore crucial not only to improving shipping’s sustainability and reducing its emissions, but also to strengthen the market and provide the much-needed fuel efficiency improvements and associated cost savings.
Massive savings by green technology
Industry-wide 30 % efficiency savings through the adoption of clean technologies and operational measures, at current bunker fuel prices, would equate to a 70 bill. $ saving across the industry (according to ICCT, CE Delft, Navigistics). Reducing fuel burn would not only give way to substantial carbon and fiscal benefits, but SOx, NOx and particle emissions would also be significantly reduced.
This message is hitting home, reflected in an increasing appetite for building ›eco‹ ships at newbuild stage and to a lesser extent retrofitting older vessels with ›clean‹ technology. However, there remains a lack of coordination between charterers (who pay for 70 % of the world’s shipping fuel) and shipowners in terms of securing the capital required to install the technology.
As a result, there is a real need for innovative financing to cut through the rhetoric and enable shipowners to take action with efficiency technology that is readily available and currently underutilised. Whilst there is a greater appetite for financing newbuild »eco« vessels at the moment, the market conditions all point to retrofitting as a stronger and more beneficial and sustainable solution for the industry as a whole, offering low cost, high value alternative to bolstering an international fleet already at overcapacity.
Barriers to financing »eco«
Despite the many benefits that retrofitting opportunities present, today’s shipowners are facing several barriers to raising capital to retrofit energy efficiency solutions. There remains reluctance for banks to lend to shipowners seeking to apply retrofit technology. But while the banks’ formula for investment may be based on a wider policy of not lending to the shipping sector, there are increasingly strong signals that a relatively small investment in retrofit technology would prove fruitful for lenders.
The University College London (UCL) Energy Institute’s recent shipping efficiency report pointed to a correlation between the vessels scrapped in the last year and their efficiency levels – those that aren’t making the grade are being sent to ship breaking yards prematurely. Increased asset value is another incentive. The Carbon War Room has learnt of a bank that increased the asset value of a vessel by 20 % based on an efficiency improvement of 10 %. Moreover, the Carbon War Room’s initiative with Rightship, the »A to G« GHG emissions rating (hosted on www.shippingefficiency.org), now has more than 22 % of the world’s non-container charterers using the tool as a policy to choose more efficient vessels and save fuel. Ports are also offering incentives to higher rated vessels, an initiative that is only set to increase as we enter 2014.
In other words, the banks should be interested in financing the retrofits for at least four key reasons: extended asset lifespan, increased asset value and increased opportunities in securing charter parties and swifter, incentivised port access.
Challenges to retrofitting
There is a second challenge to securing finance for retrofitting. The split incentive, whereby the charterer pays for the fuel in the majority of instances, removes any incentive for the owners operating the vessels to improve efficiency. UCL’s report confirmed that, despite the progress made through the introduction of the »A to G« rating and other indexes, efficiency is not consistently being factored into daily rates, which presents another barrier to changing mindsets, increasing proactivity and incentivising efficiency – all of which are desperately needed to realise a sustainable shipping industry.
In addition to fuel bills, charterers face environmental pressure from governments, lobby groups and the general public on a greater and more direct scale than many within the shipping industry. For this reason, some charterers are actively looking to save money and mitigate their environmental impact.
The key to overcoming the current barriers to clean technology investment lies in the workings of the finance mechanisms themselves. There are several innovative schemes, many developed in other sectors such as the building environment, in the pipeline, including the Sustainable Shipping Initiative’s »Save as You Sail«. The Carbon War Room is developing with its partners a finance model whereby a third party financier pays for clean technologies that are retrofitted in standard drydock, and the return on investment (ROI) from the fuel cost savings is then shared between the financier and the shipowner or charterer (whoever is paying for the fuel).
At the right yield, the Carbon War Room has found that funding is available to the market. In fact, securing capital is less of an issue than ensuring that the finance model is robust, and that the measuring and monitoring processes are in place to prove the savings to investing parties. The pilot project for this is currently on the way, which we believe will demonstrate this financing model as a scalable solution for the market.
As has been demonstrated in the building sector with energy efficiency retrofits, there is always finance available for good projects with high yields; not least projects in which payback periods extend little more than two years as we are discovering within the shipping sector. The good news is that you don’t need to care about the environment to reap the rewards of investment.
