Decarbonisation and Alternative Fuels in Marine Insurance P&I Club News

June 13, 2022

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(Hellenic Shipping News) 1. A brief overview of the current situation
The maritime industry is embarking on a major transition from conventional to zero or carbon neutral fuels driven by the pressure to decarbonise. The transition will not take place over night and will have a significant impact on costs, asset values, and earning capacity. The industry participants will need to understand the drivers and implications now to be able to plan accordingly and assess the associated risks.
Whilst regulations will set direct requirements that shipowners must comply with, the public as well as third-party stakeholders (including governments, classifications societies, ports, shipyards, banks and cargo owners) will increasingly have high expectations that will require transparency and promote decarbonisation. Access to finance for newbuilds will also be dependent on shipowners being able to demonstrate that they can meet decarbonisation targets.

2. Why are alternative fuels being considered by the industry?
The International Maritime Organization (IMO) reports that maritime transport is responsible for about 3% of global greenhouse gas (GHG) emissions (IMO Fourth GHG study). To reduce emissions and align international shipping with the temperature goals under the 2015 Paris Agreement,[1] the IMO adopted an Initial Strategy in 2018 on the reduction of GHG emissions from shipping (i.e. emissions including carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O), expressed in CO2e (carbon dioxide equivalent)).

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3. What are GHGs?
GHGs trap heat in the earth’s atmosphere. Whilst carbon dioxide is the dominant GHG for shipping, GHGs include a basket of six harmful gases:
• Carbon dioxide (CO2)
• Methane (CH4)
• Nitrous oxide (N2O)
• Hydrofluorocarbons (HFCs)
• Perfluorocarbons (PFCs)
• Sulphur hexafluoride (SF6)
• Nitrogen trifluoride (NF3)

4. Is the IMO Initial Strategy regime mandatory? If so, how will it be enforced?
The Initial Strategy itself is not mandatory. However, the IMO can adopt measures to implement the Initial Strategy by amending existing conventions which are mandatory in many jurisdictions (such as the International Convention for the Prevention of Pollution from Ships (MARPOL).

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5. Has the IMO adopted measures in furtherance of the Initial Strategy objectives?
Yes. In June 2021, the IMO’s Marine Environment Protection Committee (MEPC) held its 76th session (referred to as ‘MEPC 76’) and adopted measures aimed at the Initial Strategy objectives. These measures include amendments to Annex VI of MARPOL.

The revised Annex VI requires ships over 400 GT and operating internationally to calculate their Energy Efficiency Existing Ship Index (EEXI).

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MARPOL Annex VI also requires ships over 5,000 GT to establish an annual operational carbon intensity indicator (CII) and rating.

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6. What is the timeline for implementation of the EEXI and CII measures adopted by the IMO?
As explained in para 5, the EEXI and CII regulations were adopted in 2021 through revisions to MARPOL Annex VI. The amendments are expected to enter into force on 1 November 2022, with the EEXI survey requirements taking effect in November 2022 and the EEXI and CII certification requirements coming into effect from 1 January 2023. The first annual EEXI and CII reports will accordingly be due in 2023. The EEXI and CII measures will then be reviewed by the IMO for effectiveness in 2026.

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7. What is the EEDI?
The Energy Efficiency Design Index (EEDI) reflects the theoretical design efficiency of a new build ship.[1] EEDI was made mandatory with the adoption in July 2011 of amendments to MARPOL Annex VI.

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8. Are the EEXI, EEDI, and CII measures enough to hit the lower emission targets in the IMO’s Initial Strategy?
Some experts believe the 2030 target can be achieved through the EEXI, EEDI, and CII measures. However, it is widely accepted that much more will need to be done to meet the 2050 targets. In particular, the adoption of alternative fuel technologies is required.

9. Is there a possibility that the IMO’s GHG strategy will be revised?

Yes. Delegates at the 2021 United Nations Climate Change Conference (COP26) called for the shipping community to go further than the Initial Strategy and to aim for net zero by 2050.

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10. Are there regional or national efforts to address GHG emissions and the use of alternative fuels?
Yes, in some regions (i.e., EU) and it is likely more will follow.

The European Union
The EU is moving ahead with its own plan to reduce GHG emissions from the shipping sector.

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In their present form, four of the ‘Fit for 55’ proposals are relevant to shipping:

• Emissions Trading System (ETS):

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• Alternative Fuels Infrastructure Regulation:

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• Energy Taxation Directive:

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• FuelEU Maritime Regulation:

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The United States
President Biden announced in April 2021 that the United States (US) will join the IMO effort to reduce GHG emissions in international shipping.

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However, individual states may pursue their own measures. For instance, California modified a regulation in 2020 which will require every vessel calling at a regulated Californian port either to use shore power or a technology approved by the California Air Resources Board to reduce specified emissions.

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11. Which alternative fuels are being considered for international shipping?

As matters stand, the main alternative fuels being considered include liquefied natural gas (LNG), liquefied petroleum gas (LPG), hydrogen (H2), ammonia (NH3), methanol (CH3OH), and biofuels. However, see also para.

12. What are the advantages & disadvantages of each type of alternative fuel?
The table below provides an overview of advantages and disadvantages of the main alternative fuels being considered for the shipping sector:

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13. What about electricity, wind, or solar power as alternative energy sources?

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In recent years, pure battery-electric propulsion, using lithium ion (Li-ion) batteries, has been successfully applied on small, short-sea vessels. Presently, range limitations on the use of electricity make it unsuitable for most ocean-going applications. The potential for batteries in combination with a two-stroke main engine in a hybrid system is being evaluated for larger ocean-going vessels.

Wind and solar technologies are also being considered in conjunction with the use of other technologies.

14. Which fuel(s) is/are likely to become the main alternative fuel?
There is no one-size-fits-all solution. Various factors will have to be considered in selecting an appropriate fuel type based on vessel type, age of the ship, trading area, retrofitting costs, operating budget, fuel price/availability, infrastructure development, etc.

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15. What are owners doing in terms of new buildings and what is the outlook?
The industry reports there is an increase in newbuilds on order that have alternative fuel systems or dual-fuel capabilities. Except for electrification in the ferry segment, the alternative fuels being used are still mainly fossil based and are dominated by LNG.

There will be demonstration projects for onboard use of hydrogen and ammonia by 2025 paving the way for zero-carbon ships, and these technologies may be ready for commercial use in four to eight years. Methanol technology is more mature and has already seen first commercial use.

A range of new technologies are emerging including fuel cells, carbon capture, and storage (CCS), as well as wind power.

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16. What about safety?

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Ensuring safety is of paramount importance in achieving the successful and timely roll out of new fuels such as hydrogen and ammonia. The development of safety regulations and guidelines will be necessary to evolve from large scale demonstration models to commercial use.

IMO’s International Code of Safety for Ships using Gases or other Low-flashpoint Fuels (IGF Code) addresses standards for ships using low-flashpoint fuel in general, but the current version focuses on regulations to meet the functional requirements for gas fuel (LNG). During the 7th session of the IMO Sub-Committee on Carriage of Cargoes and Containers (CCC-7), which was held from 6 to 11 September 2021, a work plan was agreed for the development of provisions for new low-flashpoint fuels under the IGF Code, including hydrogen, ammonia, LPG and methyl/ethyl alcohols.

17. Are some alternative fuels better suited for certain ship types or trades?
For a fuel to become widely used, it must have adequate scalability, i.e., both the infrastructure and the demand must be there, and it must be generally price competitive for take up. This may be easier to achieve for ships on regular liner routes. Those travelling between ports (i.e., bulk vessels on tramp trades) will have a difficult time sourcing the scarcer options.

18. Are alternative fuels presently available in key world ports? It not, when will they be?
LNG is presently the most readily accessible alternative fuel but is still not easy to source and certainly not carbon free. LNG (Bio-LNG and E-LNG) and Biofuels are good options for transitional fuels.

Methanol is only available in limited areas and is not yet in sufficient quantities to satisfy the requirements of the industry.

For the other alternative fuels under consideration, testing, development and creation of associated infrastructure is still on-going and they are not yet readily available.

19. What are the overall risks and impact to vessel operations associated with the use of alternative fuels?
A myriad of risks and costs considerations arise when selecting and using an alternative fuel. Some of these are identified in the table above. The principal risks and challenges concern crew safety, energy output compared to storage requirements onboard, and the availability of bunkering facilities.

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Biofuels bring technical challenges concerning oxidation stability, cold flow properties, risk of microbial growth, clogging of filters, and increased engine deposits. They thus require careful handling.

During the 9th session of the IMO’s Sub-Committee on Pollution Prevention and Response (PPR-9), held on April 2022, it was agreed clarity on the use of biofuels on board ships is required. The Unified Interpretation provides a definition for the term “biofuel” and indicates that a fuel oil which is a blend of not more than 30% by volume of biofuel should meet the requirements of regulation 18.3.1 of MARPOL Annex VI, while a fuel oil which is a blend of more than 30% by volume of biofuel should meet the requirements of regulation 18.3.2 of MARPOL Annex VI. This will be presented for approval by MEPC-78 (scheduled to be held in Jun-2022).

Gases in liquid form typically require storage at cryogenic temperature and specific safety standards will need to be satisfied. Hydrogen, for example, has a wide flammability range, while ammonia is highly toxic. Stringent measures will be required to protect crew from harmful exposure, and training will be required.

Hydrogen is a clean fuel, however, manufacturing it is energy-intensive and may have carbon by-products.

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20. Considering the current lack of alternative fuel infrastructure, and the absence of a present clear ‘winner’ amongst the alternative fuel options, is there another fuel option to consider in the interim?
Possibly. A transitional fuel created by using additives or blending other products with traditional fuel or LNG (which is more readily available now than other alternative fuels) might be an option for reducing vessel GHG emissions while more permanent solutions are considered. An example is LNG with 20% hydrogen. Different transitional fuel choices are likely to be available depending on the vessel and trade. Such transitional fuels may require modifications to the vessel and carry their own risks.

21. What are some of the technologies or vessel modifications that shipowners can consider in addition to or apart from the use of alternative or transitional fuels?
Many emerging technologies and potential vessel modifications are being considered including the following:

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22. Should shipowners consider contractual clauses to address carbon emissions regulations and alternative fuels?
The EEXI/CII regulations, the use of alternative fuels, and other environmental regulations towards shipping’s decarbonisation are likely to impact the performance of both existing and future contracts and the traditional rights and obligations of the parties involved. READ MORE