EU ETS in the maritime sector is marking a significant change: The cost of fuel is no longer defined solely based on bunker delivery notes, but there is an additional cost to each ton of CO2 released that must be accounted for vessels trading in and out of the EU. In essence, during voyages falling under EU MRV’s scope, each noon report becomes an invoice.
This brings several changes for both DOC holders and operators that need to be addressed urgently, as EU ETS is getting in force in just a few months from now. Some considerations are summarized below that ensures a timely management of these changes:
Charter Parties beyond 01st of January 2024 need to include new clauses that define below points (as a minimum):
How the data between Owners and Charterers are exchanged
How is the emission data verified and by whom.
What is the frequency of payments for ETS allowances from charterers to managers and what period they should cover.
What is the process of transferring allowances and how is the rate determined.
What happens when the vessel is off hire for either technical or commercial purposes.
What are the consequences in cases that charterers fail to comply with new clauses.
Data validations becomes even more critical: Reported fuel consumption will be scrutinized to ensure it is as accurate as possible.
Introduction of stricter thresholds: Most noon-data-collection or vessel-performance systems have historically had some sort of out-of-range validations in place, to avoid possible typos. However, the EU ETS brings the necessity for much stricter checks and narrower acceptable ranges. To achieve this, there must be a solid model of the vessel’s performance in place, as well as calculations of external factors impacting on vessel’s propulsion (weather, sea currents etc.)
Measuring equipment considerations: Not all vessels are equipped with mass flowmeters in good working condition, as tank soundings were so far considered sufficient for fuel consumption recording. And in case there was over or under estimation of fuel consumption, that would be identified through ROB checks and would be adjusted in future voyages. However, the need for accuracy has now increased and requires a reconsideration of the process and the equipment available on board. In the future, it is possible that mass flowmeters will become a requirement in contractual agreements as well.
Transparency between owners and charterers will increase: Since each noon report is in reality an invoice going forward, the receivers of such invoices will need to have their second opinion in place, or to have full trust in the tonnage provider. It is expected that both parties need to have full transparency as to the content of each noon report.
Validation against sensor data: Another way to validate the accuracy of a noon report in terms of fuel consumption is to compare it against accumulated figures derived by telemetry datasets, if available. In theory, when this investment of installing sensors and bringing the data ‘home’ is already made, this comparison would be quite straight forward. In practice, when discrepancies are identified between the 2 datasets, it is not so clear whether it originates from a defective signal or from a reporting error. This means that maybe an even more complex validation system for sensor data is required, before considering this process.
Error identification and update of noon reports: It is common practice that a function checks the validity of noon reports received by the vessels and in case that errors are identified, the report gets ‘rejected’ and replaced by an updated one, that has been amended by the vessel accordingly. Previously, the updating process was maybe not so time-sensitive, as the only constraint was the environmental reporting, a few months after year-end. However, by introducing the EU allowances reimbursements on a more regular basis (e.g. monthly), any updates to the data must be completed before ‘Invoicing’. If not, there will be a discrepancy between what the charter has paid for and what the owners owe to the EU at the end of the year. These scenarios must be considered as well when outlining future data validations and updating procedures.
Vessel performance becomes even more key in charter party negotiations.
Claims for underperformance, either for excess consumption or time loss could potentially also include claims of the corresponding ETS allowances that have already been paid out to the owner (or DOC holder) through the process of monthly payments. For cases of excess consumption, the calculation of additional claim for CO2 permits is more straight forward, than for the cases of time loss, where it may be more complex to translate time into CO2.
For long-term charters, it is in the Charterers’ interest to motivate the owner to take further actions, to achieve overperformance. By adding approx. 300 USD to the price of fuel ton, it will be even more in the charterers interest to motivate the owners to maintain vessel’s performance at highest possible levels. Would it be an idea in the future to mutually agree to clean the hull without getting the vessel off-hire, not because of underperformance, but simply to improve efficiency further?
Performance when idling: This may not have been a focus area previously, as in most cases, Charter Party agreements mainly consider sailing. The auxiliary engines and boiler excess consumption is also expected to be checked more thoroughly and the operation to be further optimized.
Considerations on how to best mitigate energy price risks
Emissions trading is a type of flexible environmental regulation that allows organizations and markets to decide how best to meet policy targets. In an emissions trading scheme, a central authority allocates or sells a limited number (a "cap") of permits that allow the discharge of a specific quantity of a specific pollutant over a set period. Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them. Another implication may come from the fact that if a company must lift a certain amount of cargo (COA) over a given period, the company will often hedge the fuel cost for this COA, either fully or partly, to calculate the result of the deal. With EU ETS coming in adding a significant cost, the company will need to hedge allowances as well, as this impacts the bottom-line of the deal. This may not be the area of expertise of VPS, but it seems like many big players in shipping are considering hedging EU allowances and trading with other shipping companies, as another measure to minimize the EU ETS financial impact .
The strong VPS experience on interfacing to many different data collection systems, combined with our experience in validation of operational data, including interfacing to various verifiers for environmental compliance, makes VPS a strong partner to adapt to the new normal (which is not yet really known). If you would like to hear more about how VPS can support your company with EU ETS, please contact us: