New regulation leaves owners and operators holding fuel liability risks
Greater regulatory demands and penalties for non-compliance - affect shipowners and shipmanagers from January 2025 in the shape of Europe's FuelEU Maritime.
Implementation brings an accountability dilemma for shipping as it is the Document of Compliance (DoC) holder who will be responsible for fuel selection, and could therefore face penalties - contrary on the ‘polluter pays’ principle.
Shipping companies, according to Hamburg's maritime technology company OceanScore, now face an August 31 deadline to submit a monitoring plan to track the fuel type and consumption for each EU voyage for each vessel as required by FuelEU.
Said OceanScore co-managing director Albrecht Grell: "FuelEU seeks to incentivise measures to reduce the carbon intensity of fuels used in shipping
FuelEU intended to promote uptake of zero and low-carbon fuels, as well as adoption of sustainable technologies like wind power for fuel efficiency."
This, he said will be accomplished by mandating progressive reductions in the greenhouse gas intensity of energy used by ships of over 5,000 gross tonnes compared with a 2020 baseline, rising from two per cent next year to 80 per cent by 2050, with penalties for non-compliance.
Said Mr Grell: "The default responsible entity for FuelEU compliance remains the DoC holder - typically the technical manager - that has operational responsibility for the ship and handles compliance with a wide range of EU regulations relating to maritime safety under the IMO’s ISM Code."
The DoC holder is also responsible for reporting of emissions and other voyage data under the EU’s MRV regime that will underpin FuelEU, which apparently makes this entity well-placed to manage data collection and reporting processes for the new regulation, he said.
But the EU’s director-general for mobility and transport has stated “the responsible entity will not change” as the EU Commission’s powers to make such a change by an implementation regulation are limited under FuelEU.
Said Mr Grell: “The DoC holder does not have any influence or control over the type of bunkers used on a vessel or investments made and therefore, based on the EU’s overarching ‘polluter pays’ principle, should not be held accountable for the financial impact of those decisions."
“Rather, the consequences in terms of penalties should be allocated to the parties making such decisions, with either the shipowner or charterer responsible for fuel choice depending on the charter party, so this would require a similar mechanism to the EU ETS.”
But as things stand, the most pressing task is to put in place responsible reporting and verification procedures for each ship affected by FuelEU, giving priority to submission of the monitoring plan.
As well as costs incurred due to under compliance with FuelEU intensity targets, or compliance deficit, there is also surplus from overachieving these targets that can either be banked and carried over for future use or shared with other vessels that have deficits under a pooling arrangement - different from commercial pooling - including non-owned units, to gain compliance for all pooled vessels provided there is a combined surplus.
Consequently, contractual arrangements need to be in place both to ensure costs accountability for the appropriate parties in the case of a deficit and to assign the benefits of surplus to the entities responsible for fuel procurement, whether this is the charterer or registered owner - with data quality a key factor. This will require amendments to the charter party to assign FuelEU costs and benefits, as well as to ship management contracts to align responsibility and costs.
Structural measures can also be implemented by shipowners to mitigate potential penalties and gain competitive advantage, such as wind-assisted propulsion and readiness for onshore power supply.
Respective investment assessments should be prepared, including a technical assessment of the suitability for the specific vessel and trading area as well as the availability of onshore power at likely ports of call. An additional FuelEU requirement for zero-emission at berth will be compulsory from 2030 for container and passenger vessels.
Identifying sources of alternative fuels and running the respective business plans should be part of the same preparations from an operations perspective, according to OceanScore.
“However, the immediate priorities for shipping companies are to familiarise themselves with the complexities of the new regulation and understand how it might impact their operations and costs. This can be done by simulating decisions in areas such as investments, vessel deployments and alternative fuel usage to decide on the optimal way forward,” said Mr Grell.
He believes it is necessary to set up a management solution to track the compliance balance, emerging penalties and determine accountability, so these costs can be allocated through automated invoicing. Smart simulations can also be conducted to ensure the respective clauses in charter parties are correct, and that there is full transparency around these processes and resulting penalty exposures by the time FuelEU is implemented from January 2025.
While shipping awaits final adjustments to the regulation and BIMCO clauses to clarify the contractual side, OceanScore has developed a new solution to support shipping companies with planning for the impact of FuelEU on a per-vessel and fleet-wide basis, assessing the current exposure, simulating the effect of different fuel and investment strategies, and planning for how to handle remaining compliance balances, including through pooling. This is aligned with OceanScore’s market-leading ETS manager, including data on vessel, charterer and charter parties as well as bunker consumption.
Once FuelEU enters into force in January, tracking the development of compliance balances and resulting penalties will become of paramount importance, planning future operations and bunker procurements need to be covered, and charterers invoiced based on charter party clauses and incurred compliance deficits.
OceanScore’s FuelEU Planner will help, along with engagement between the three main parties in relation to FuelEU transactions - owners, charterers and managers - to secure accountability. As well as assessing the initial FuelEU compliance balance given today’s operational patterns, the new solution will be able to simulate optional scenarios for 2025 to assess their implications for compliance balance and costs.
“FuelEU will also require a new level of collaboration in the industry, given compliance pools can be formed beyond current fleets of owners and managers, while alternative fuels must be matured and onshore power options explored,” Mr Grell said. |