Collaborative Business Frameworks to Accelerate Uptake of Energy Efficiency Measures

The Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping (MMMCZCS) has launched a comprehensive initiative focused on de-risking the selection of and investment in onboard energy efficiency technologies (EETs). This initiative supports a faster and more effective adoption of energy efficiency measures in two ways. Firstly, through an end-to-end value proposition for evaluating the technology landscape and identifying suitable EETs for their specific ships or fleets. Secondly, by offering a structured approach to developing compelling business cases that align incentives for all relevant stakeholders through cost-benefit sharing models.

With this project, MMMCZCS aims to enable the maritime industry to:

• Accelerate the uptake of onboard EETs to reduce GHG emissions from fossil-fueled ships.
  
  
• Minimize the industry’s demand for green fuels and renewable energy sources, of which supply will be limited.

The project output will primarily benefit shipowners and charterers (categorized as “conservatives” or “followers” in Figure 2) and allow them to operationalize the process steps outlined in Figure 1 to enhance energy efficiency of their fleet and meet their strategic targets. They can also develop unbiased frameworks that align incentives across stakeholders who influence the installations of EETs on individual ships.

The capital expenses (or cost) to be considered typically cover the procurement of EET hardware, the installation of EETs, and potentially any associated off-hire coverage. The savings are the saved operational expenses derived from the EETs relative to the ‘do-nothing’-scenario of the ship. This is expressed in terms of reduced fuel oil consumption and thus avoided GHG emissions, leading to a reduced cost to fuel-purchase and GHG emission taxation schemes.

A successful cost-benefit sharing agreement requires a collaborative mindset and partnership between the subject stakeholders covering data sharing protocols, maintenance and operation of onboard technologies, and trust in how financial savings are calculated and consequently settled between stakeholders.

The ‘cost-benefit sharing model’ can be implemented in various formats depending on the specific stakeholder relationships (see Figure 3). This includes different contractual clauses that assign risks, liabilities, roles, and responsibilities among the parties involved. The defined relationship between stakeholders will determine the type of cost-benefit sharing model and the most suitable contractual framework to facilitate an agreement.

To succeed in implementing an EET retrofit cost-benefit sharing model, it might be necessary to engage additional impartial parties that are financially or commercially neutral. The parties can be, but are not limited to:

• Shipowner is the asset owner and the primary party investing in and benefitting from a retrofit in terms of hardware upgrade to the ship. The operating shipowner gets to enjoy the financial benefits from fuel and GHG emissions reduction, however, for the non-operating shipowner a cost-benefit sharing model can monetize the energy efficiency upgrades through contracts.
  
  

• Ship Charterer is the direct beneficiary of a retrofitted EET as he pays the fuel cost of the ship.
  
  

• Performance verifiers that conduct independent assessments to verify data quality, technology performance and savings achieved from the EET retrofit. They ensure transparency, accuracy in savings calculations and unbiased reporting.
  
  

• Legal and contractual advisor, a role which is unbiased and neutral in its consideration of the commercial agreement between the Ship Owner and Ship Charterer. A Legal advisor is expected to provide a contract template to a cost-benefit sharing that is fair towards both parties.
  
  

• Other stakeholders in the cost-benefit sharing framework may include; Cargo Owners who are willing to invest or pay a premium for transportation with a lower carbon footprint, Technology Providers (OEM) supplying and potentially financing the technologies, Insurers for technology risk coverage, Financial Institutions offering loans, Project Managers overseeing timely and adequate installation of EET hardware either in dry dock or during service, and finally Green Technology Consultants guiding the selection of EET or packaged technologies
  

The goal of the cost-benefit sharing framework is to enable the adoption of EETs with a reduced upfront financial burden on the Ship Owner or Ship Charterer, while de-risking the investment and variability in returned savings. The working principles of this framework focus on shared incentives between parties wanting to attain improved energy efficiency on a specific group of ships.

Incentives may be motivated by a number of reasons including ESG strategies, regulatory compliance, cost leadership, etc. A cost-benefit sharing framework offers scalability across a Ship Owner’s fleet, offering an opportunity to retrofit multiple ships without large upfront capital expenditures.

The key principles of a cost-benefit sharing framework between a Ship Owner and Ship Charterer or –Operator (or other stakeholder relations as list in Figure 3) can be explained in the following components, but they are not necessarily limited to these:

Cost-benefit sharing agreement

• Cost sharing agreement: An agreement between one who decides to invest in energy efficiency upgrades to one specific or fleet of ship, and its primary stakeholder. It may also include a third-party investor (such as financial institute, energy service company or original equipment manufacturers). The agreement describes the financing for the EET retrofit. This removes the immediate burden on the Ship Owner, or Ship Charterer who otherwise is likely to be reluctant to carry the investment on his/her own.
  
  
• Benefit sharing agreement: The Ship Owner and Ship Charterer agree on how the financial savings resulting from the installed EETs (based on verified energy / fuel / emission reductions) are distributed between the parties. This may also include a third-party investor (such as financial institutes, OEM etc.). In its simplest form, the benefit sharing agreement would span over several years allowing Ship Owner and Ship Charterer to enjoy the financial upside of improved energy efficiency of the ship(s). The benefit sharing agreement could have an agreed expiry date in the form of a hard-stop or a gradual stop either by date or by amount of achieved financial savings.

As the direct beneficiary of the EETs is the Ship Charterer (generally the owner of the fuel bill) the repayment is linked to the actual savings in energy or fuel consumption of the ship relative to an expected energy or fuel consumption of the ship if it had not received the energy efficiency upgrade. The Ship Charterer uses a portion of the savings attained to repay the cost of the technology retrofit to the Ship Owner. Another repayment structure would be an adjustment of the day-rate according to a pre-agreement expectation to monetary savings from the enhanced energy efficiency of the ships. This will limit the financial risk-exposure on the Ship Owner who becomes dependent on the operational decisions of the Ship Charterer.

Measurement and verification

• Baseline definition: An unbiased and fair baseline is established, representing the ship’s energy performance “before” or “without” the installation of EETs. This baseline becomes crucial for quantifying savings post installation during ship operation.
  
  
• Post-installation performance monitoring: After installation, the energy efficiency savings (normally expressed in energy -, fuel -, or emission reductions) should be carefully monitored and verified to ensure that the savings are ‘real’ and sustained over time. The Ship Owner (or any third-party investor) recoups his investment based on these verified savings.
  
  
• Transparency: All parties must agree on the benefit tracking methodology including monitoring and verifying the savings, which is recommended to be conducted by a third-party and independent verifier to ensure transparency, accountability and build trust. The independent verifier must put mechanisms in place to capture data quality issues, sub-optimal operation of the EETs, and unintended exploitation of a monetary distribution framework. Clear roles and responsibilities across stakeholders are needed to ensure the energy reduction potential of installed EETs is maximized.

Shared risk and rewards

• Risk sharing: The risk associated with underperformance of installed EETs or unexpected disruption to operational patterns of the retrofitted ship(s) are shared between the Ship Owner and Ship Charterer and / or a potential third-party investor. Depending on a specific risk sharing model, if savings are lower than expected or below a pre-agreed threshold, the Ship Charterer may not make repayment for a particular performance assessment period, which would incentivize the Ship Owner to ensure optimal maintenance and operation of the technologies to maximize performance.
  
  
• Reward sharing: Both Ship Owner and Ship Charterer benefit financially from the attained energy or fuel consumption reductions. The Reward Sharing structure can be designed in many ways e.g. fixed ratio of verified savings, steps approach to sharing ration based on the magnitude of verified savings, a time dependent sharing ratio of verified savings etc. The Reward Sharing structure is agreed upon before a cost-benefit sharing agreement is formalized.
  
  
• Technology downtime: Any EETs may be subject to unintended breakdowns or operational downtime where no savings are generated. To ensure fairness for the Ship Owner and Ship Charterer it can be beneficial to establish pre-agreed terms for lead time on rectifying downtime by arrangement of technical service crew or shipment of critical spare parts. Such terms should aim at distributing the lost savings between stakeholders within a suitable window and eventually place the lost cost coverage with the rightful party. Placing this responsibility on the Ship Owner incentivizes a shorter lead time on bringing the technology back into optimal operation.

Contractual flexibility

• Time dependent contract: Successful cost-benefit sharing agreements are commonly and easily made as addendums to long-term time charter agreements, lasting for the period of expected payback of the technologies and within the fixture duration of the time charter. Other flexible terms can be considered in the contract to accommodate variation in operational activity of the ship, fluctuation in fuel price or emission taxation, or other external factors. It would also cover clear provisions for terminating the contract if certain conditions are met, which could be, but not limited to, poor technology performance or significant change in the market. An early termination could in some cases lead to a re-payment of capital invest by the Ship charterer by the Ship owner.
  
  
• Technology ownership: Commonly, the technology hardware will be owned by the Ship Owner as uninstallation after end of time charter is not feasible in most cases. This also means that the Ship Owner is incentivized to collaborate with the Ship Charterer as a cost-benefit sharing agreement is a profitable way to enhance the competitiveness of the ship once it returns to the charter market. This could be in the form of a review of the EEXI (energy efficiency design index for existing ships) caused by a major retrofit package or types. Cutting dates of ownership of the technology could vary depending on repayment amount attained with time.

Figure 4 illustrates the process flow of EET selection for a ship or fleet that can be financed through a cost-benefit sharing model between a Ship Owner and a Ship Charterer, but not necessarily limited to this stakeholder relationship or commercial agreement structure. The principle can be applied between Ship Owner together with either Cargo Owner or OEM or Financial Institutions etc. The steps in the process are:

1. Initiation
   
   The process begins with an initiator, who could be a Ship Owner, Ship Charterer, or Ship Operator. The initiator sets a strategy aimed at enhancing the energy efficiency of a ship or fleet. The motivation behind this strategy can include goals such as reducing greenhouse gas (GHG) emissions, complying with regulations, achieving fuel savings, or responding to customer demand for more environmentally friendly services.
   
   
2. Fleet screening and technology identification
   
   Following the establishment of the strategy, a thorough screening of the fleet or specific ship(s) is conducted to identify candidates for energy efficiency retrofits or upgrades. This step is crucial for understanding which vessels are suitable for the intended improvements.
   
   Based on the screening results, appropriate EETs are identified. This involves evaluating various technologies to determine which ones are best suited to the specific needs and conditions of the selected ships or fleet. It also concludes consideration about the initiators appetite for risk when it comes to innovative technologies, demand for confidence in expected GHG emission and fuel consumption reduction or financial savings.
   
   
3. Initial business case
   
   This step is the creation of an initial business case for one or multiple EETs design solutions. It provides early indication of the potential from the EET(s), impact on GHG emissions, company strategy, expected return on invested capital, exposure to carbon taxation and regulatory compliance (e.g. EEXI and CII). The initial business cases drive the prioritization for which owner and ship(s) to focus on first.
   
   
4. Stakeholder engagement
   
   This step is where the initial business case is presented to the relevant stakeholder. In case the initiation comes from a Ship Owner then the Ship Charterer or Ship Operator or Cargo Owner can be the stakeholder. It sets the scene for those in the stakeholder landscape who are interested in collaborating to enhance fleet or ship energy efficiency by investing in EETs financed by a cost-benefit sharing model.
   
   
5. Business case refinements
   
   With clear indication from the relevant stakeholder a more detailed cost-benefit analysis is performed to assess the financial viability of implementing the identified technologies. This step considers the potential savings in fuel consumption, the costs of technology implementation, and the expected payback period. It often includes more refined methods with higher fidelity level in prediction of future ship performance, fuel savings, GHG emission reduction and financial savings. And these refined methods are typically associated with a higher cost.
   
   
6. Contractual agreements
   
   With the refined business case analysis in hand, the next step is to structure a cost-benefit sharing agreement between the involved parties—typically this is between Ship Owner and Ship Charterer. This agreement outlines the terms of sharing the financial benefits and costs associated with the energy efficiency technologies. This agreement can take many forms related to cost-splits as well as how verified benefits are distributed between the parties. Commonly, it is a parallel settlement to the charter rates, if between Ship Owner and Ship Charterer, or as a pay-as-you-save concept where settlements are made towards a financier (e.g. financial institute or bank) with an amount determined by the magnitude of the verified fuel savings. In capital lease or technology as a service agreements payment can be fixed or a function of verified savings with introduction of a minimum amount. Typically, the benefit sharing component of a cost-benefit sharing agreement involves a time expiry date or once a certain amount is reached. This is pre-defined once the agreement is made.
   
   
7. Hardware purchase and installation
   
   Once the agreement is in place, the selected energy efficiency technologies are installed and implemented on the chosen ships. This step may involve retrofitting existing vessels or integrating new technologies into the design of new ships, procurement of technologies from original equipment manufacturers, Yard arrangement and service crew to execute the installations.
   
   
8. Performance monitoring and verification
   
   After implementation, the performance of the installed technologies is closely monitored and verified. This step ensures that the expected energy savings and efficiency improvements are being realized and allows for adjustments, if necessary. The performance improvements are converted to equivalent reduction in GHG emissions and/ or savings in fuel cost, GHG emission taxations, improvement on carbon intensity index rating etc.
   
   
9. Re-occurring benefit distributions
   
   The process in (8) is systematically repeated to capture the generated savings, which depend on the operational profile, sailing activity, and the achieved performance improvements from retrofitted EET(s). Regular performance reviews of the technologies help ensure optimal performance. Benefits are calculated, and financial settlements are reviewed regularly in accordance with the contract's defined period.