GHG Intensity Management by BSM
BSM and its specialised emission compliance teams developed and implemented all necessary measures for its ship management clients to meet the FuelEU requirements and to support with additional consulting and value-added services:
FuelEU Maritime seeks to reduce greenhouse gas emissions from the shipping sector by promoting the use of cleaner fuels and energy. It aims to decarbonize the maritime transport sector by imposing yearly maximum limits on a ship’s greenhouse gas intensity. These targets will become more ambitious over time, reflecting technological advancements and the increased production of renewable and low-carbon fuels.
The EU-wide mandate is intended to ensure that the market for sustainable maritime fuels expands and shall provide legal certainty for ship operators and fuel producers, stimulating the large-scale production of sustainable maritime fuels and helping to reduce the price gap between fossil fuels and sustainable alternatives.
FuelEU Maritime is part of the European Commission’s ”Fit for 55” legislative package, aiming to deliver on the European Green Deal and make Europe climate-neutral by 2050.
The regulation sets targets for reducing the yearly average greenhouse gas (GHG) intensity of the energy used by a ship, or, crucially, by a fleet or pool of ships.
FuelEU rules mandate that shipping reduces GHG intensity for energy used on board a ship by 2% from 2025, 6% from 2030, 14.5% from 2035, 31% from 2040, 62% from 2045, and 80% from 2050. The reduction targets are all set against 2020 levels.
Additionally, the regulation introduces a zero-emission requirement at berth, necessitating the use of onshore power supply (OPS) or alternative zero-emission technologies in ports by passenger ships and container ships. This will be compulsory in most EU ports from 2030, with some exceptions, and in even more EU ports from 2035. This measure aims to mitigate air pollution emissions in ports, which are often close to densely populated areas.
The new targets will apply to ships above 5,000 GT and to all energy used on board in or between EU ports (100% of intra-EU energy consumption), as well as to half of the energy used on voyages where the departure or arrival port is outside of the EU bloc (50% of extra-EU energy consumption).
The targets will cover CO2, methane, and nitrous oxide emissions on a full Well-to-Wake calculation throughout the fuels’ lifecycle.
There are exceptions to the shore power requirement for:
1.Port stays of less than two hours
2.When ships use zero-emission technologies on board
3.Unscheduled port call due to safety
4.Unavailable OPS connection in port
5.Incompatible equipment in port
6.Risk to grid stability
7.Emergencies
8.When requested by authorities for maintenance/ inspection.
9.There is a limit on exemptions (4), (5) and (6) from 1 January 2035, to 10% of port call or a maximum of 10 port calls during the reporting period, whichever is lower.
FuelEU Maritime takes into account all fuels and energy sources used onboard. The fuels currently mentioned by the regulation are fossil fuels, biofuels, and renewable fuels of non-biological origin (RFNBO).
It will not be possible to comply with FuelEU Maritime through efficiency measures and reduced fuel consumption alone. Instead, new fuels and sources of energy must be used as of 2025. Vessels that continue to exclusively use conventional fuels (LSFO, ULSFO, MGO) for their energy needs will not comply with the FuelEU Maritime regulation and a penalty payment will be enforced on the vessel.
It goes without saying that fossil fuels score worst in the GHG intensity assessment. Blending of low-carbon fuels, especially biofuels (not produced from food or feed crops) and RFNBO, with fossil fuels will therefore be predominant, especially in the beginning.
As is well known, LNG is a fossil natural gas, so it is not climate neutral. Depending on the engine used, LNG can be compliant with initial FuelEU requirements. By adding liquid biomethane (LBM) or liquid e-methane (LEM) to LNG, the carbon footprint can be reduced without having to change the engine technology. Ultimately, vessels running on LNG could run 100% on LBM or LEM without any modifications.
Biofuels are set to become the main alternative fuel choice, replacing liquefied natural gas, according to a survey from 2023. Nearly 60% of around 500 respondents suggested they were considering using biofuels within the next five years, followed by 48% for wind and 48% for hydrogen-derived fuels, compared with 60% for LNG in 2021, according to the surveyed shipowners, charterers and financiers conducted by energy and transport law firm Watson Farley & Williams.
This trend is already clearly evident. The uptake of biofuel-blended marine fuels has increased in recent years, with volumes at the Port of Rotterdam reaching 790,000 tonnes in the past year, up from 301,000 tonnes in 2021, according to figures from the port authority.
The GHG intensity of each fuel is calculated based on the emission factors determined for the Well-to-Tank and Tank-to-Wake parts, respectively, and the sum of those values is the GHG intensity of the fuel.
Important documents to support FuelEU regulation are the Bunker Fuel Delivery Note (BDN) along with the Proof of Sustainability Document of the fuel which confirms to the RED (Renewable Energy Directive) compliance as per the “Fit for 55” package.
Indeed, the availability and scalability of low-carbon fuels will be a challenge. While alternative fuels such as biofuels are increasingly being used in shipping, the production and distribution infrastructure for these fuels is still underdeveloped.
To counteract this, the EU climate protection package “Fit for 55” includes the Alternative Fuels Infrastructure Regulation (AFIR). This regulation requires EU ports to develop shore power and infrastructure for alternative fuels.
The EU commission has acknowledged that the increased costs of sustainable fuels are a key factor affecting the competitiveness of shipping and has committed to considering regulatory measures to foster the production of these fuels.
To reduce competition for sustainable fuels, it is planned to give shipping priority access to low-emission fuels such as advanced biofuels and e-fuels over sectors that have access to other decarbonisation solutions.
In this context, it is expected that international shipping will move from “spot bunkering” to “fuel supply contracts” for the supply of fuel products with specific GHG intensity. It is not expected that all ports will have each required fuel available “on spot”.
With EU ETS, the registered owner is indeed the responsible party on a company basis. However, the ship manager (ISM company, DoC holder) can take over the responsibility of compliance from the owner through a mutually signed mandate agreement.
FuelEU Maritime is different, as the ISM company/ DoC holder is always the responsible party on a vessel basis. This means that if a ship is managed by a third-party ship manager, he is invariably responsible for FuelEU Maritime compliance management.
Ship managers are tasked with verifying that the fuel delivered to vessels adheres to the specifications outlined by owners or charterers. They, along with their crews, are responsible for ensuring proper fuel handling and using the correct fuel at appropriate times when different qualities are on board.
However, FuelEU Maritime focuses not only on the verification and handling of fuel once it's on board but also on the fuel's origin, lifecycle, and the supplier and procurement decisions that lead to its delivery to the vessel. Ship managers have no influence over these aspects, as fuel is typically ordered by charterers or ship owners.
The same applies to other FuelEU Maritime-relevant measures. Ship managers have no influence on the type of propulsion installed on board the managed vessels, whether that be sail, solar, fuel cell or other installations. This decision rests solely with the ship owner.
Despite this questionable regulation, it is not to be expected that the responsibility will be adapted in near future. FuelEU Maritime is an EU Regulation that cannot simply be changed, as was the case with EU ETS, which is an EU Directive. Nonetheless, industry stakeholders, including the ship manager association InterManager, BIMCO, and national shipowners' associations, are currently lobbying EU regulatory bodies to align FuelEU Maritime with EU ETS. However, this process is expected to be protracted. It's important to note that ship managers will become the responsible party under FuelEU Maritime as of 1 January 2025. Thus, preparations are crucial.
In conclusion: Ship managers must implement a suitable risk management to avoid being stuck with penalties for non-compliance. The BIMCO is currently focusing on developing a clause for SHIPMAN and another clause for time charter parties, while also considering bunker supply terms and possible clauses related to the pooling mechanism introduced by the regulation.
The FuelEU Maritime has the potential to significantly impact the shipping industry, even more than EU ETS, and requires stakeholders to take measures to align their contractual frameworks even before the regulation comes into force in 2025.
The FuelEU Maritime regulation requires a revision of contracts to address responsibilities and financial risks. This is not only the case for charter parties. A revision of ship management contracts is necessary to address the new challenges introduced by the FuelEU Maritime regulation.
BIMCO is still working on creating a FuelEU Maritime Clause for the Shipman Agreements. The outline clause in its present form acknowledges that for the purpose of FuelEU Maritime, the DOC holder serves as frontend towards the EU authorities. It will describe the contractual task basket between ship manager and vessel owner as follows: The ship manager will be in charge of handling the fuel and perform monitoring and reporting tasks according to vessel owners’ needs. The vessel owner will be in charge of ensuring compliance through the above means e.g., by sourcing compliant biofuel, pooling the vessel, banking or borrowing. Where owners decide to trade the vessel uncompliant, the penalties are on owners with sufficient security to be granted to the DOC holder.
Renewable and low-carbon fuels directly reducing the GHG intensity of the energy used
The responsible party is in charge for comprehensive monitoring and reporting, which are the basis for compliance balance calculations, and responsible for the payment of penalties.
Monitoring and reporting are based on MRV approach, with some additional data requirements and processes.
The FuelEU DoC is a compliance document valid for 18 months after the end of the reporting period (effectively 1 year from the day of issue). It is an obligation to hold a valid FuelEU document of compliance. When not holding a valid FuelEU DoC for two or more consecutive reporting periods, the vessel is threatened an expulsion order for EU ports and the detention in its home port, if it’s in the EU.
There are severe financial penalties in case of non-compliance with GHG intensity targets. Separate penalties are set in case of non-compliance with additional zero-emissions requirements at berth (currently mainly shore power).
Sample calculation: In 2025, an average intra EU trading vessel with an annual fuel consumption of 5,000 MT of conventional fuel will be penalised 200,000 to 310,000 euros at the end of the year depending on the fuel grade if no alternative energy options are used. With every year of continued non-compliance, penalties will increase by an additional 10%. Furthermore, when the GHG intensity limits of FuelEU become more stringent in 2030, penalties will dramatically increase. In addition, failure to comply with the shore power requirements for container and passenger vessels will result in huge penalties, making non-compliant port calls financially unviable.
Apart from using low-carbon fuels and compliance technologies, the EU has implemented further flexible options.
Pooling
There is the potential to offset an entire fleet or pool’s penalties with just a few over-performing vessels. This opportunity arises from the EU’s decision to allow vessels with verified emissions to be pooled together. This can be done regardless of shipping companies, meaning it applies to the company’s fleets or to pools of vessels owned/chartered by several companies.
The ability to pool emissions penalties and surpluses has important consequences. For example, according to Lloyd’s Register, a pool of ten boxships could avoid around €277m ($301m) in FuelEU Maritime penalties in the five years from 2030 to 2034 if they are joined by a single vessel fuelled with e-methanol, a saving that far outweighs the likely cost of building the methanol-fuelled containership.
Thus, one low emissions vessel could more than cover the penalties from a whole fleet or pool of conventionally fuelled ships – leaving a tidy profit on top of newbuild costs and the potential for operators or charterers to sell their surplus carbon performance. It is also possible to bank the remaining surplus for the following year.
Banking and Borrowing
Flexibility mechanism via banking and borrowing enables surpluses and (small) deficits to be carried over to the next year.
In the event there is a compliance surplus, the company may bank (save) it to the ship’s compliance balance for the following year. In case of a compliance deficit, the company may borrow from the next reporting period. However, the amount that may be borrowed is limited to 2% of the required GHG intensity energy and is not allowed in multiple continuous periods.
In accordance with the above mentioned timeline FuelEU Monitoring Plans and FuelEU Reports should include the following information:
FuelEU Monitoring Plan
The FuelEU Monitoring Plan is required to be updated and assessed by a verifier when changing responsible parties or using new types of fuel, etc.
FuelEU Report
Based on the information provided in the FuelEU Report, the verifier makes necessary calculations, including:
In the event of a change in the ship's owner or ship manager during a monitoring year, the previous shipping company should promptly submit the necessary data for the period under its control to the verifier. The verification is then completed by the verifier within one month after the change, and the data is recorded by the verifier in the FuelEU Database. However, the responsibility for compliance with FuelEU Maritime requirements for the entire monitoring period rests with the shipping company that manages the ship as of 31 December of the year.
Revenues from the penalty of the FuelEU Maritime will be used to support the introduction and promote the use of renewable and low-carbon fuels in the maritime sector. It is envisaged to encourage the production of more renewable low-carbon fuels in the maritime sector, facilitate the construction of on- shore power supply facilities in ports and support the development, testing and implementation of innovative technologies to achieve significant GHG emission reductions.
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