Driving sustainability: overcoming barriers for technology uptake

As we all know, the shipping industry has endured a torrid time since the start of the global economic downturn in 2008. Low freight rates, high bunker bills, new stringent regulations, and continued charterer scrutiny to name but a few, have all compiled to create a perfect storm that has seen widespread consolidation, a spate of profit warnings and in many cases insolvency. Six years on, we are starting to see some green shoots of recovery but there are many challenges that lie ahead. And, compounded by a significant lack of liquidity and capital in the market, there is a long way to go before recovery is complete.

Faced with these dynamics, it is often difficult to have a conversation with battle-weary owners and operators on the importance of innovation, as well as looking at new technologies and different ways of working. Investment is not a dirty word, it is just seen by many as the luxury of the few. Furthermore, when it is spoken within the same context as ‘sustainability’, for the uninitiated, it may be difficult to visualise the bottom line benefits.

When we talk about sustainability, some see it as an ethereal concept, rather than a central component of enterprise and business decision-making – and increasingly a licence to operate in many sectors. And when it comes to the shipping industry, many see the relationship between technology investment and sustainability as confined to tackling emissions reduction. Nothing could be further from the truth. Harnessing innovation to improve how the industry performs and impacts upon the environment, surrounding communities and the global economy is fundamental to its longevity.

Quite simply, behaving sustainably makes good business sense; those that embrace it will be more profitable, deliver greater value to their customers’ supply chains and will create more enterprise value for their organisations. They will have better businesses.

So in accepting that you can’t run before you can walk, and understanding the real challenges that many owners and operators continue to face, we must tackle issues that are barriers to achieving sustainability one at a time.

CATALYST FOR CHANGE

For the majority of the Sustainable Shipping Initiative (SSI) shipowner members, embracing sustainable practices and looking at different operational approaches were initiated by the high cost of fuel oil, which accounts for the majority of a vessel’s operating costs. Essentially, sustainability started from a clear business objective; the importance of delivering energy efficiency and reducing fuel bills; the positive sustainable impact being that reduced fuel consumption means reduced emissions as well as bunker bills – a clear demonstration that sustainability and environmental stewardship can provide tangible value.

In delivering energy efficiency, a considerable focus by the majority of ship owners and operators has been slow steaming. Over the past few years, we have seen many companies, including SSI members, report significant success with slow steaming; the principle being that by reducing speed by 20%, CO2 emissions are reduced by 40%, although this figure can naturally differ from vessel to vessel.

However, while there are varied opinions within the industry on whether slow steaming will continue in such a widespread way once the economic recovery is in full swing, the consistent trend in the potential for realising energy efficiency has been through technology and innovation.

Over the past decade, there have been spates of technologies that have come onto the market to much fanfare: from kites and air lubrication systems, to boss cap fin propellers and advanced hull coatings, to name but a few. You only have to look through the IMO Greenhouse Gas Report, which lists a host of innovations, to realise that despite everything, when it comes to technology one thing the shipping industry cannot be accused of is a lack of choice. However, we have not yet seen widespread take-up by many owners and operators. And there are clear reasons for this.

Firstly, there is a lack of capital amongst many owners and operators to invest in technology. In conjunction with this, and with shorter time charters, there is little incentive to invest in retrofitting, as the owners and operators don’t recoup the fuel cost savings, which go to the charterers. And finally there is a lack of trust amongst owners and operators in the results that manufacturers claim their technologies can deliver.

OVERCOMING INNOVATION BARRIERS

Technology and responsible growth are intrinsic but it is a long game, which is why the SSI and its members – which include leading companies from many facets of the global shipping supply chain – have outlined a vision for a sustainable industry by 2040.

As part of this, at SSI, we believe that it is vital that the industry works together in a collaborative way, that there is a step-change in mentality and a focus and commitment to long-term partnerships between charterers and owners. And in terms of dealing with the liquidity challenge, we believe the industry must collaborate and be open-minded in creating innovative financing models that ‘de-risk’ investment in technologies, facilitates informed and transparent negotiations, drives efficiency savings and upgrades for owners, and provides attractive returns from fuel savings for financiers.

That is why in 2013, the SSI developed the conceptual financial model Save As You Sail (SAYS), which is designed to overcome the split incentives that are a barrier to the uptake in technology. SAYS enables owners, charterers and financiers to model returns on investment and profits from more efficient vessels, and it also comprises a set of legal considerations for third party financing of the retrofit costs in the short-term time charter market. Using the model, an owner and a charterer can identify the estimated fuel cost savings and ROI associated with different upgrade options. This is then used to negotiate and agree the charter hire rate. The owner has access to a loan to finance the upfront cost that is paid back with a fixed-rate of interest over two or three years. If the first charter is shorter than the loan, SAYS enables changes of charterers during the financing period. The key is that the technologies that are retrofitted provide significant ROI creating the opportunity for all parties to profit from the fuel cost savings.

While SSI is working with its members to further validate the SAYS concept, it is a demonstration of how the industry can take responsibility for understanding and developing new and innovative trends in financing technology uptake, as well as other aspects of sustainable shipping. Not only does it make good commercial sense, for many it is an essential part of business continuity.

For example, the 2015 ECA regulation that stipulates the burning of fuel with a sulphur content of no more than 0.1% is mere months away. For many owners and operators this means using expensive distillate fuel that carries a premium of at least US$300/tonne in ECA zones; therefore the financial incentive to invest in technology that reduces fuel consumption is compelling.

On top of this, the value of a vessel is now not just based on age and deadweight tonnage, but also the operational efficiency of the vessel. In effect by investing in technology that improves a vessel’s performance and reduces fuel consumption, ship owners can actually increase the asset value of their fleets as well. While CO2 reduction is an important by-product of retrofitting, there is a clear business case that demonstrates the commercial viability of sustainability.

The final key barrier to technology uptake is ship owners and operators trusting the ROI and savings that manufacturers claim their technologies can deliver. There is an inevitable amount of cynicism in any industry when new ways of operating and doing things are proposed; it is the harsh reality of change. It is therefore vital that there is transparency within the industry when it comes to proving and validating new technologies as well as collaborating on the measurement and monitoring of their performance.

Progress is being made in that there is work underway within the industry to develop specific standards for certain efficiency generating technologies. However, for any standard to be successful, at SSI we would again encourage collaboration from across the entire industry. If the industry is to trust how the efficiency savings of technologies are measured in a common standard, they must all trust and have a stake in the process.

SHARED EXPERIENCE

For members within the SSI, while there is a collective and individual approach to efficiency generation and the use of technology, we will also be transparent in sharing our experiences of the technologies and innovations that have worked, as well as those that have been less successful. For example, some of our members have found that while the technical capabilities of new innovations are obviously critical, so too is the application of them. In effect the training of the people that will use the technology in operation, so that they have the right skills and behaviours is fundamental in whether the technology performs to its full capability.

It is one example, but it shows our aim is provide the industry with a level of knowledge and insight that can help inspire informed decision making for ship owners and operators.

While the shipping industry is now out of intensive care, it is critical that it continues its recovery in the right way. Delivering 90% of the world’s goods, shipping is fundamental to the way that we live and work. Its health is paramount. In an industry that faces significant challenges ahead through increased regulation and scrutiny, embracing a sustainable future that not just creates a better industry, but also a more profitable one is critical. In achieving this, we must help and inspire each other to visualise the benefits of sustainable shipping, and we must all work together to break down the barriers that conspire to stifle this important change.