Wärtsilä sees collaboration as key to decarbonisation strategy

Wärtsilä expects the increasing complexity of strategic choices facing shipowners and the rapidly evolving range of solutions available to create demand for closer working relationships between the diversified technology company and customers.

In response the company is extending the scope of existing strategic advisory services, which the company has been providing to a number of customers for some years, Andrea Morgante, Vice President, Strategy at Wärtsilä Marine Power said.

The engagement is intended to provide customers with a range of options or scenarios to guide the development of their fleet to ensure that individual assets, and the fleet as a whole meet decarbonisation targets.

While the immediate focus for the many customers is likely to be meeting upcoming EEXI recertification and subsequent annual CII rules, strategic shifts in the fuel environment over the upcoming decade and other technological advances are likely to mean that the industry will undergo a period of sustained change.

Morgante also noted that Wärtsilä was also considering extending the scope of its existing outcome-based agreement to new products, or to new metrics, citing the provision of guarantees for maximum greenhouse gas emissions as one of the services under consideration. As with the strategic engagement, Morgante noted that this was merely an extension of services that Wärtsilä was already offering to customers.

For both the Decarbonisation Pathway and outcome-based agreements, Morgante emphasised that discussions with interested parties had already begun. Some of the discussions for the strategic service were being held with customers with two-stroke vessels from the deep-sea fleet, for whom Wärtsilä supplied different shipboard machinery.

[Box out] The strategic dimension

Wärtsilä as a business has been consistent in identifying decarbonisation and digitalisation as two of the sweeping changes affecting the shipping market.

In a media event on 18 May, Håkan Agnevall, the ceo of Wärtsilä, summarised the challenge facing shipowners who need to navigate the emergence of different alternative fuels, and different operating models.

Push factors driving shipowners to decarbonise include significant regulatory, societal and customer pressures, while the likely transformation of the fuel landscape into one dominated by alternative fuels represents a pull factor.

Decisions around the specification of newbuildings, and their fuel types in particular, are likely to have long-term implications for individual vessels. Agnevall noted such decisions were likely to become a C-suite decision, rather than a decision for the newbuilding department or technical managers.

Andrea Morgante deftly linked these overarching themes to commercial challenges confronting shipowners at the moment, and reduced the techno-economic, financial and regulatory challenges confronting shipowners to four main dimensions.

“The many forces that are pressurising shipowners can be boiled down to four main factors.

Regulation drives firstly cost of compliance, of which is the most pressing example. Secondly it is expected that a variable carbon cost will be introduced, with a direct impact on operational costs, and ultimately on profitability. There is a clear consensus that the cost of fuel oil will rise, regardless of whether the mechanism is a carbon tax or a cap and trade or ETS-type system. On the other hand, if you switch to alternative fuels, the fuels will be more expensive, without taking into account potential higher Capex costs.

The third is how the changing market environment will affect the cost of cargo, and the implications for the beneficial cargo owner. This is interconnected with how CII will potentially affect the freight market. This will also potentially hit owners both at the asset level, because the real value of your asset may well be lower than expected, and also in terms of refinancing. The latter is the expression of the fourth driver: the emergence of green finance.”

[Close Box]

The road to the Decarbonisation Pathway

The evolution of the company’s thinking had been driven by first-hand experience of client requirements, and also by the Group’s work on addressing the challenges facing customers, Andrea Morgante commented.

The Vaasa-based company has already been engaged in detailed discussions with customers around solutions for EEXI. The conversations had broadened in scope from Wärtsilä’s products to the vessels as a whole, and finally out to a fleet perspective.

“At that point, we chose to approach the challenge from our customer’s perspective,” Morgante said, “rather than acting ‘just’ as an OEM”.

Applying a fleet-wide lens to the data that Wärtsilä has developed over time allowed the technology company to derive operational insights, Morgante said. This is based on the development of data sets covering different vessel types and sizes, as well as different operating profiles.

However, the data-driven insights were vastly enhanced following direct engagement with the customer. “The beautiful thing was when we engaged at a deeper level, and customers shared with us more detailed information about the fleet,” Morgante said. This allowed the customer and Wärtsilä to gain a broader fleet-level perspective, taking into account the age and operational profile of the vessel as well as the ROI and timeline of upgrades for the respective assets.

CII as a variable

Another important factor for customers to take into account was the likely impact of CII regulations upon the freight market, which is already seeing the emergence of different environmental tiers. “We just don’t know enough about the CII today to be able to predict what the impact is likely to be upon the freight market,” Morgante said.

“What is clear is that both EEXI and CII are coming, and will come into force in 2023.”

Morgante speculated that one of the potential effects might be to create a multi-tier freight market, with premiums for environmental performance.

Morgante was interviewed on 20 May. The Motorship notes that this was before the Intersessional Working Group on Reduction of GHG Emissions from Ships (ISWG-GHG 7) was due to meet to decide whether the chosen metric for assessing CII would be the energy efficiency operational indicator (EEOI) or the annual efficiency ratio (AER).

This was also likely to have an impact on fleet management decisions, Morgante noted. “Customers might want to look at upgrades for EEXI and CII at the same time for assets with a much longer lifetime ahead, for example.” Conversely, from a fleet perspective, ship owners may choose to restrict the scale of investment in a certain number of vessels.

However, Morgante warned against focusing solely on EEXI, which he described simply as a ‘go/no go’ approval. In some ways, the decisions after EEXI become more complex, particularly if shipowners factor in the likely emergence of a regionally fragmented market, with the potential that different regions or even countries may be dominated by different fuel types, reflecting differing national strategic objectives. The impact on vessels and fleets would vary according to their operational profile, and whether they operated within a single region, or across different regions, which may well be pursuing different paths to decarbonisation.

In order to help customers address and resolve questions around investments in vessels and their sequencing, Morgante suggested that a process of developing scenarios might help ship owners crystallise their plans. Such a scenario-building exercise was likely to form a core part of the Decarbonisation Pathway offering.

Technology and the pathway

Morgante noted that as part of the pathway, Wärtsilä would look at a range of different potential solutions to help customers respond to the evolving landscape. The technologies come from three different technological lenses, and include fuel-flexibility, electrification and energy saving devices.

“Given the likelihood of the emergence of a multifuel scenario, we believe flexibility is the key,” said Morgante. Morgante added that while fuel flexibility was typically a consideration for newbuilds, “we believe that pure retrofits will also play a big role, and we are working on that also.”

But the real advantage of the wide array of products is that it means that the mix of solutions can be tailored to a vessel’s specific operational circumstances. Other products may enter the company’s portfolio in the future as well, Morgante said, referring to company’s collaborations on fuel cells, as well as ongoing research into new fuels for its engine products.

Outcome-based agreements

Alongside the focus on the Decarbonisation Pathway, Morgante discussed Wärtsilä’s plans to extend its outcome-based agreements to a wider number of customers.

The introduction of a risk-sharing business model is intended to help address the uncertainty that some owners feel around eventual operating costs when planning newbuilds, for example.

“We see a clear link between shipowner risk appetite and our ability to mitigate that risk by sharing part of the operational risk,” Morgante said, adding that in return “Wärtsilä shared the benefit with the customer if we achieved or bettered an agreed improvement path”.

While Wärtsilä’s existing outcome-based agreements have been based on either fuel consumption or uptime, the former feels particularly relevant as the engine’s carbon footprint is a function of its fuel consumption. “As we are already doing this, I fully expect to see discussions around a first emissions-based agreement in the near future.

The solution has encountered interest firstly among larger customers, with whom Wärtsilä has a deep relationship, attracted by optimized asset operations, improved TCO and cash-flow and the opportunity of risk-sharing in an increasing complex technological and regulatory environment

“We are already in discussions with a number of customers about such agreements, building on our experience and collaboration since 2017 with Carnival Group, and more recently with an unnamed customer in January 2021.”