UCL-Energy finds that efficient ships save millions but market fails to reward owners
30 August 2016
Researchers from UCL Energy Institute (UCL) and Carbon War Room (CWR) have confirmed that vessels with high design efficiency leave millions in the pockets of fuel payers.
However, the market often fails to reward owners of efficient vessels by way of premiums or preferential hiring. This does not help the industry’s efforts to meet the challenges of a low-carbon future, and could challenge regulations designed to reduce total industry emissions.
In the most comprehensive research to date, UCL investigated the role of energy efficiency in vessel competitiveness by bringing together data on market dynamics and data on vessel operational patterns derived from the Automatic Identification System (AIS). The research shows that vessels with higher design efficiency, as measured by the GHG Emissions Rating, save more fuel on average than design alone would indicate. This means, for example, that in 2012 the difference in fuel costs between a B-rated and an F-rated Capesize vessel was, on average, $5,500 per day, or nearly $1.5 million annually; a higher difference than would be anticipated based on design.
Despite this, efficient vessels do not appear to deliver significant rewards for anyone other than the fuel payer. In the time charter market, charterers appear to be reaping rewards when they choose vessels with high GHG Emissions Ratings, but owners of efficient ships do not share in the benefits. On average, there should be a fuel saving for charterers choosing vessels with high GHG Emissions Ratings, according to the study. All else being equal, there is an incentive for charterers to hire highly rated ships. However, despite the consistency of these savings, the market does not also incentivise owners of efficient ships with premiums that reflect charterers’ fuel cost savings.
Owners in the time charter market that choose to improve their fleet’s efficiency by investing in efficiency technologies are not seeing a return from either price or preferential chartering. This means that in today’s markets there is little financial incentive for other owners to follow their example.
James Mitchell, Senior Associate, Carbon War Room, commented:
“Prior to the 2008 market crash we saw efficiency premiums in the Panamax time charter market. Those premiums disappeared with the crash, despite record-high fuel costs and record-high fuel savings for owner-operators and charterers of efficient ships.”
“These results are a challenge to the industry, to its business model, and to whether markets can be harnessed to help shipping meet the challenges of a low-carbon economy.” But, Mitchell said, “Robust and transparent market information offers an opportunity to help resolve this challenge. Shipowners, knowing that more efficient ships present a financial advantage, can use free-to-access data on shippingefficiency.org to bolster their negotiations.” What is more, Mitchell explained, “Transparent data on operational efficiency would also help rebalance the power dynamic in negotiations, allowing all parties to profit from efficiency.”
While charterers can play a role by rewarding the owners who help them to save fuel, financiers have the power to decide which ships are built or maintained, and which are not. Banks making investment decisions should consider how to factor efficiency into their decision making so that it can benefit all parties, as well as the environment.
Mark Clintworth, Head of Shipping, European Investment Bank, commented:
“Financiers are in a key position to reshape the makeup of the global shipping fleet through their investment decisions today and in the future. As maritime shipping is a key driver of sustainable economic development, this research represents a crucial first step in identifying how maritime financial institutions can prepare for a profitable low-carbon future and help shape it.”
Tristan Smith, UCL Energy Institute, commented:
“The International Maritime Organization is under increasing pressure to implement policies that will reduce the industry’s total emissions. However, this research demonstrates that market failures present significant challenges to realising emission reductions.” Smith said that “It indicates that policy tools that have contributed to the improvement of other industries, such as carbon prices or fuel levies, would have a greatly decreased impact if applied to shipping unless these observed market failures are addressed.” Smith explained, “This is because these policies work by magnifying existing market dynamics that reward efficiency and we don’t currently see those dynamics in shipping.”
“This work also demonstrates the power of data and analysis,” Smith said. “New insights were achieved using AIS data in conjunction with market data, and revealed excellent potential for advancements and refinements of the methods developed to further improve our understanding of shipping markets.”
CWR and UCL are currently collaborating on further studies into the dynamics of the market. Their next research focus is on understanding stranded asset risks in future carbon-constrained shipping markets, likely to exist within the lifespan of vessels financed today.