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.
So far, the development of sustainable fuels has been driving the majority of efforts to meet the International Maritime Organization (IMO) target of reducing 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 – makes it relevant 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 of the current fleet or 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 adapt and accommodate changes to mitigate compliance costs and stay competitive.
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 ship building 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.
Scribing: Circular economy
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 can 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.) are executed after receiving a purchase order. This method of building and designing vessels implies unique and bespoke ship designs, which makes the industry less flexible and ready for retrofitting in response to future regulation.
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%.
Source: Sustainable Shipping Initiative (2021)
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 implementation of such circular economy principles. Some shipowners design, own, and operate large numbers of vessels, which often result 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 to redirect behaviors of shipowners from their current (potential) profit from building when cheap and selling when expensive, as well as address their strategic reasons for building ships to their own specs and 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 refurbish before recycling. Data availability will need to improve to enable transparency and traceability of materials, and partnerships across the value chain.
Learning from other industries
As other industries, such as the automotive industry, undergo profound transitions from one energy source to another, there is a window of opportunity to raise awareness and engage the industry in developing the thinking around circular economy principles and potential new business models.
Ongoing engagements with the shipping ecosystem supports this notion and indicate 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 retrofitting to the latest technology is easy and the lifespan of the vessel can be expanded?
Recent discussions around circular economy held at the Global Maritime Forum’s Annual Summit in London this year have shown that 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 some immediate next steps that can be taken to redeem the benefits of circular economy thinking. Initial suggestions included learning from others such as automotive and airline industries and reflect how these lessons can apply to shipping; bringing industry actors together to run innovation sprints to identify concrete opportunities; as well as running pilots or proof of concepts to test and iterate on learnings.