Reaching net zero in shipping in a resilient manner
Transition rules & change is eminent
The world economy is characterized by a cocktail of trend changes which could significantly reshape value chains, re-industrialize countries, and change underlying trade patterns and the way transportation is performed.
Shipping itself has a history of slow change which was mostly (new) technology driven. Today, regulation is the main driver of change and technology is to follow whereby it needs to cope with a currently increasing urgency/tightening of (regionally different) requirements.
Changes are not limited to vessel operational/technical issues and infrastructure only. Also to be included are ESG (Environmental, Social & Governance) driven requirements like CSRD, CSDDD, CBAM, EU-ETS, FuelEU, EBA requirements like the Green Asset ratio for financial institutions, etc. As a result, most – if not all – maritime players will be faced (in)directly with all sorts of new requirements to comply with.
The net zero journey will not be linear
So far new technology/fuel discussions have been center stage to achieve “net zero”. With a “chicken & egg” discussion on (lack of) availability of new fuels / infrastructure vs demand, and a shift to “well to wake” considerations instead of “tank to wake”. The concept of “green lanes” provides shorter term GHG reduction and – probably as important – a learning curve. The result of these aspects, combined with yard capacity limitations, is that “just replacing” the entire fleet short term is no feasible solution for practical, financial and emission reasons.
Keeping transportation costs, energy security and demand for (limited) available green fuels under control will be a balancing act and the operation of existing assets needs to be optimized considering the specific situation at that moment for that specific trade/region. The period(s) till 2050 will be one of phasing out existing tonnage in combination with using more lean logistics chain concepts improving transportation efficiency in general. Each sub-period will have its own pace depending on the supply/ demand equation at that specific moment (incl potential formation of 2 tier markets) combined with the (regional specific) transitionary pace of the mega trends (in particular: energy and regulatory).
The era of sliding panels at different pace
Energy transition (enabling activities) and energy efficiency (transitional activities) will likely be more regulatory separated, and we recognize a growing interest/usage for more energy efficiency related solutions (CO2-reducing or -capture measurements).
Energy efficiency solutions are beneficial irrespective of the longer-term technical solution – just using less is always good and therefore underlying trade optimization will be part of the focus. Instability will be the new stability and the period to bridge to net zero will be a continuous moving target of opportunities and risks depending on the period-specific circumstances by region.
The mix of ingredients at hand makes both newbuild and retrofit considerations a challenging one. For retrofits it will be a clear function of relative regulatory score (on KPIs like CII and EEXI) whereby it will not be the absolute score that is most important but the relative score in overall sub-sector fleet composition and specific trade circumstances. Understanding the past and translating this to the future is not just a result of pure extrapolation – new elements and developments are to be factored in. This could result in owners and financiers having more misalignment in (price) expectations and the question is already raised whether large lenders may become exclusive lenders to the enabling green activities for large corporates only?
The net zero journey for the coming 10-15 years
Both the enabling-, and transitional activities are required to reach net-zero ultimately. The enabling activities are required to create the best new alternatives for the longer term. At the same time transitional activities (optimizing existing assets by retrofitting and more (emission) efficient operation in general) are required short term. The energy efficiency measures are not a full substitute for transition to low-emission fuels but at the same time have the potential to stay – at least partly – after that period as well as using less energy is never a disadvantage.
Challenges are likely ahead for all stakeholders in the logistics chain. Jumping too early to the “wrong” new technology/fuel for the longer term or making expensive retrofitting investments on existing assets on the wrong basis or market view may both result in your asset becoming qualified as “stranded”. Finding the right balance between something new and something refurbished is required to ensure reliable world trade transportation. V@RR anticipates that views and discussions between all stakeholders on remaining economic life and cashflow generating capacity of assets under discussion will be more interesting and challenging than ever before.
The V@RR services & platform approach – your guide in the net zero journey
Focus on energy efficiency is extensively required to bridge the coming 10-15 years to reach net zero in a resilient manner. Using the existing assets and optimizing trade patterns in the best possible way is crucial. This obviously, in parallel with the longer-term focused activities like new technology, fuels and infrastructure.
Following and analyzing all trends all yourself may be cumbersome given lack of manpower and/or knowledge to do so. The importance though to understand these developments is growing every day given the increased (regulatory) requirements that other stakeholders in the logistics chain face (eg shippers, financiers, large shipping companies, etc).
V@RR assists (small to medium-sized) maritime players in gaining insight into the many developments – and the (financial) feasibility of their investment considerations – that are currently playing a role in the shipping market.
In case you want to learn more about V@RR, its services and approach please reach out to us.
