Shipping’s energy transition provides an opportunity to adopt new circular business models for asset management and radically change ownership structures for the benefit of the entire industry.
By Jon Plate, Emilie Minor Christensen, Line Fryd Hofmansen, Line Pagh (PA Consulting Group)
To date, the development of sustainable fuels has driven the majority of efforts to meet the International Maritime Organization (IMO) target of reducing greenhouse gas emissions by 50% by 2050. However, green fuels alone will not make shipping sustainable. Parallel to these efforts, other drivers for sustainability – such as increasing demand for transparency about product and asset lifecycles, and rising consumer pressures for extended producer responsibility – create an opportunity to consider how circular economy principles can be applied to shipping. In effect, how can we make parts or all of shipping’s lifecycle more environmentally and socially sustainable while still commercially viable?
Shipping’s energy transition will likely lead to either extensive retrofitting or the accelerated scrapping of existing vessels to accommodate new and emerging fuel types. Operating expenses (fuel and maintenance) will play an increasingly important role in the coming years and raw material prices are likely to increase. In the face of these trends, vessels must be able to accommodate changes to mitigate compliance costs and stay competitive.
New circular economy business models can present opportunities to increase revenue, reduce costs, and improve risk management.
This presents an opportunity to review existing practices within the industry and assess the business case for adopting circular economy thinking. For example, introducing modular designs in shipbuilding and standardization of vessel parts could better enable refurbishment, repair, upgrade and recovery of components and resources at end-of-life. Indeed, there can be substantial synergies between circular economy business models and the change to new fuel types.
With circular economy thinking, the process of building a new fleet of zero-carbon vessels can be optimized to minimize waste and secure a circular flow of valuable resources. This can mean resource efficiency and cost savings, as well as reduced environmental impact and improved social working conditions. By rethinking current ship design and operational models, new circular economy business models present opportunities to increase revenue, reduce costs, and improve risk management.
Potential circular business models for shipping
The shipping industry is in many ways defined by an ‘engineer-to-order’ environment, wherein necessary activities to deliver a product (e.g., design, engineering, manufacturing, assembly, etc.) take place after receiving a purchase order. This method of building and designing vessels creates unique and bespoke ship designs, which makes the industry less flexible and less able to retrofit in response to future regulation and demand.
Standardized and modular designs that can easily be retrofitted to operate on new fuel types could enable cost savings and create a competitive advantage. Furthermore, remanufacturing of used maritime components reduces energy, water, and material use by up to 90% and, when remanufactured to the same level of reliability as new components, may lower overall component costs by 50% to 80%.
Looking at capital expenditure (CAPEX) and operating expenditure (OPEX) in combination to estimate the total cost of operations may show that alternative models are more attractive. For example, an ‘access-over-ownership’ model, as seen with leasing schemes utilized in the aviation industry, would allow customers the use of a product without the requirement to purchase it. Such a model could enable the industry to leverage cost savings that make it commercially viable to update and retrofit vessels (e.g., to accommodate new fuel types and regulatory requirements) while also addressing social and environmental consequences at the asset’s end-of-life. A strong capital base may be a prerequisite for the adoption of circular business models in shipping.
Collaboration to ensure transparency and commercial viability
The complex engineer-to-order environment and ownership dynamics of the shipping industry present considerable challenges for the implementation of such circular economy principles. Some shipowners design, own, and operate large numbers of vessels, which often results in repeat orders of the same ship design, while others operate or lease a small number of second-hand vessels. Similarly, some shipowners own their vessels from cradle-to-grave, while others maintain a young fleet and sell vessels for further trading.
Moving towards circularity within the shipping sector requires the involvement of the whole ecosystem to create transparency, set common goals and objectives, and establish the right financial incentives and structures for commercial viability. Such incentives would need, for instance, to shift certain behaviors of shipowners, such as: building when cheap and selling when expensive; building ships to their own specifications; and their inclination to scrap rather than sell vessels to the competition (specifically in container shipping).
As an example, product passports would allow clear incentives for the shipbuilder to maintain and reuse before refurbishing, and to refurbish before recycling. For this to happen, data availability and partnerships across the value chain will need to improve to enable transparency and traceability of materials.
Learning from other industries
As other industries undergo profound transitions from one energy source to another, there is a window of opportunity to raise awareness and engage the shipping industry in developing the thinking around circular economy principles and potential new business models.
Ongoing engagements with the shipping ecosystem indicates a strong willingness to learn from other industries when it comes to circular business models, and to question existing compromises within the industry: Why do we often equate vessel age with quality of the vessel? Why are contracts not standardized? And why is ship design not modular so that retrofitting to the latest technology is easy and vessel lifespans extended?
Recent discussions at the Global Maritime Forum’s Annual Summit in London have shown there is a readiness within the industry to question such ‘compromises’. Summit participants argued that the industry could take advantage of the current momentum and come together to embark on immediate next steps that can seize the benefits of circular economy thinking. Initial suggestions included learning from others such as automotive and airline industries; bringing industry actors together to run innovation sprints to identify concrete opportunities; and running pilots or proof of concepts to test and iterate on learnings.
So, the opportunity is clear – as is the appetite to embrace it. To make change happen, the transition ahead is about more than energy; it’s a transition of models and mindsets. It’s an opportunity that calls for partnership working, bringing the shipping ecosystem together, learning from others, and applying new thinking to a centuries-old industry. In doing so, shipping leaders can meet sustainability demands while protecting profit today and securing their future.
This article first appeared in Global Maritime Forum on December 21, 2021