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Research points to added fuel efficiency gains from vessel design

Researchers from UCL Energy Institute (UCL) and Carbon War Room (CWR) have published the results of recent research into the role of energy efficiency in vessel competitiveness, highlighting the fact that vessels with high design efficiency are creating millions in costs savings when it comes to paying for fuel.

{mprestriction ids="1,2"}UCL investigated the issue by collecting data on market dynamics and data on vessel operational patterns derived from the Automatic Identification System (AIS). The research showed 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, the researchers point out that 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 rewarded when they choose vessels with high GHG Emissions Ratings, but owners of efficient ships do not share in the benefits.

On average, the study suggests that there should be a fuel saving for charterers choosing vessels with high GHG Emissions Ratings. 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.

Unfortunately, the researchers note that 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.

“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,” said James Mitchell, senior associate, Carbon War Room

“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. Robust and transparent market information offers an opportunity to help resolve this challenge.”

“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, the researchers also point to the power of financiers 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.

“Financiers are in a key position to reshape the makeup of the global shipping fleet through their investment decisions, today and in the future,” said Mark Clintworth, head of shipping, European Investment Bank.

“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.”

CWR and UCL are hopeful that these different stakeholders in the maritime market can share the benefits of fuel saving in such a way that emissions are lowered across the board, rather than relying on regulation to drive fuel efficiency initiatives.

“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,” said Tristan Smith, UCL Energy Institute.

“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. 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. 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.”

The full research report is available to download at  CWR and UCL say they are currently collaborating on further studies into the dynamics of the market, with their next research to focus on understanding stranded asset risks in future carbon-constrained shipping markets, likely to exist within the lifespan of vessels financed today.{/mprestriction}

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