RoPax owners must take stock of decarbonization right away
Looming emissions regulations and commercial pressures represent a major challenge for the RoPax ferry sector, with major adverse financial impacts possible if owners fail to act. Owners need to focus on decarbonization pathways urgently, with DNV on hand to help.
Decarbonization should be top of the strategic agenda for RoPax companies in view of upcoming regulations, including the IMO’s Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII), both of which come into force at the start of 2023, and the EU’s “Fit for 55” package of measures designed to reduce emissions by 55% by 2030.
Almost half of RoPax fleet may fail to stay compliant if no one acts now
DNV analysis of EU MRV data shows that a significant portion of the existing RoPax fleet will already have challenges meeting IMO requirements within the next two to five years – 47% with CII ratings of D and E. This is not the case just for old ships; we have seen vessels 10 years of age already rated E.
The CII will rate ships based on actual emissions in five tiers (A to E), with the boundaries becoming stricter year by year to 2026. Given uncertainties over enforcement, non-compliers may not immediately lose their license to operate, but we still believe CII is highly relevant as an indicator of wider decarbonization sentiment.
The EEXI is a one-time technical exercise to adjust emissions to the required level for specific ship types. As a “ticket to trade” requirement, owners should be aware that it has the potential to impact vessel earnings if major improvements are required.
It is also imperative that European owners understand the P&L implications of “Fit for 55”. Although not ship-specific, it reflects a growing trend, with the US and UK announcing similar ambitions. If it was a reality right now, it would almost certainly wipe out profits.
Environmental performance impacts financing options
The same logic is evident in finance, namely the Poseidon Principles, increasing ESG expectations on the part of investors (shareholders and bond holders) and potential carbon taxes.
Only three of the first 15 signatories to the Poseidon Principles were compliant with their own trajectory. Banks naturally want to improve. Consistently low CII ratings will likely hamper owners’ ability to access funds while also increasing the cost of capital. Likewise equity value may be hit as investors snub companies that are weak on ESG.
Changing market preferences
The changing expectations of revenue-generating passengers and cargo owners are also important to assess, especially as it becomes fashionable for manufacturers to emit the least CO2 possible in product life cycles. Imagine in a decade or so when as many as 80% of vehicles on the road are electric; will motorists and cargo owners really choose a CO2-belching ferry to get from A to B? Low CII attractiveness is sure to impact earning capacity and by default asset values, which fast becomes a balance-sheet risk.
Such market drivers are together far stronger than current IMO targets. Our conclusion is you have to fall into line to protect your business, regardless of compliance with IMO regulations. Poorly CII-rated ships may also be penalized in other ways such as losing out on beneficial port fees.
Find the right solution to stay compliant and efficient
What will you do to get non-compliant ships back sailing? Significant reductions in CO2 emissions require an equal reduction in fuel consumption. Can you adjust schedules for slow steaming? Will adding shore power and batteries be enough? What are the fuel alternatives? When will you be forced to do upgrades? Harvesting 1% energy-efficiency improvements here and there will not help much.
We urge owners to first measure the emissions performance of their entire fleet to get a clear “as is” overview. Following that, you should review what kind of performance is required in light of current and estimated regulations. Then take time to clearly define what CII rankings you desire based on what you think is “good for business”. What is required to meet those levels?
Upgrades, shore power and alternative fuels will depend on where vessels are trading. Ferry operations differ from the main deep-sea segments in having one or several port calls per day, with fixed routes and schedules. Schedules form the main boundary for decarbonization. An expected measure for the main segments is to reduce speed or to eliminate high-speed elements. However, slow steaming so old ships score better is not easy for RoPax, since it can result in reduced sailings. Cutting three sailings to two will cut your revenue by a third.
The advantages of fixed routes in the choice of fuel
On the other hand, fixed routes and frequent port calls are beneficial in terms of alternative fuels. RoPaxes need power from A to B, not for two weeks at a time or longer. If you can source alternative fuels at either end of a route you could be home free. What are the options? You could use a drop-in fuel like biodiesel or convert the ship to use maybe LNG, methanol, ammonia or another kind of synthetic. If you can’t find an alternative, you may need to slow steam, but then we are back to the revenue squeeze.
We also see more local opportunities for batteries. Shore power will help a lot if a vessel can charge frequently, as the CAPEX element becomes incrementally more lucrative.
Design flexible newbuilds to adapt more easily in the future
The age profile of the worldwide RoPax fleet means there is a significant need for newbuilds, which companies need capital for. Ships with a good CII rating will get better financing. But you have to plan now for a 30-year lifespan. A drop-in fuel will not be for life, so you need to model the ultra-low/zero-carbon alternatives. The risk is investing in an option that might not materialize. Flexibility is key.
We expect to see more vessels tailored to specific fuel supplies at different ports. Here, decarbonization is not only the owner’s responsibility; it is also up to stakeholders to create predictability. It will be important to provide a long-term horizon for investment, for example when concessions are awarded for specific ferry routes. Awarding relatively short-term contracts will not produce the results everyone wants.
In the Ro-Ro sector, 100% of new car carriers are dual-fuel LNG, while cruise is making big investments in the next generation of ships for delivery before 2030, including options such as hydrogen, bio-LNG and green methanol. For RoPax, we expect battery uptake to increase while LNG will play a key role in the short to medium term. The key factor in the next two to five years will be “Ready For” designs to accommodate greener fuels. Ammonia may also be a solution in the long term, but we would need to see a proven track record in terms of toxicity and odour issues.
Fit for future purposes with DNV’s Ready notations
DNV is working hard with the industry to address decarbonization. For existing ships, we can help define the “as is” and required future performance based on your commercial prerogatives. This involves identifying measures and developing ship- and fleet-specific plans.
We are also working closely with ship designers to find “Ready For” newbuild solutions that are fit for purpose. Our key contribution is that we have developed class rules and regulations to enable future fuel strategies, both switching to low-carbon fuels and designing hybrid vessels. We are ready to help owners make better decisions, running scenarios to specify what solution is optimal for a given operational profile. Flexibility will likely provide the best return.
We do not advocate implementing measures right away, but to start planning now. We urge owners to be prepared and also to introduce more radical measures faster if necessary. Taking no decision is also a decision – but just as in other sectors, if you need finance and much of your fleet is E-rated, dialogue with banks will be uncomfortable. Positioning for the future is already happening, and we are well placed with our knowledge and capability to support you on that journey.
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