Case gives clarity on the incorporation of standard terms. Credit: 3D Animation Production Company, Pixabay

DNV takes a deep dive into compliance strategies

 

By Carly Fields

 

The FuelEU Maritime regulation is set to reshape the shipping industry, imposing stringent targets for reducing greenhouse gas (GHG) emissions from vessels operating within the EU and EEA. This regulatory landscape presents both challenges and opportunities for shipping operators. 

A white paper from DNV considered the complexities of FuelEU Maritime compliance, analysing the various strategies available to ship operators. Using the case study of an 80,000 dwt bulk carrier, DNV explored the financial and operational implications of different approaches, from paying penalties to embracing low-GHG fuels and leveraging the regulation's flexibility mechanisms.

“Simulating outcomes for a theoretical case-study vessel demonstrates how different approaches impact expenses and FuelEU compliance over a 20-year period,” said Ola Gundersen Skåre, consultant, environment advisory at DNV and lead author of the paper. 

The regulation mandates a reduction in well-to-wake GHG emission intensity for energy used on board ships within its scope, effectively pushing the industry towards the adoption of low-emission technologies and fuels. FuelEU Maritime also introduces mechanisms like banking, borrowing, and pooling compliance balances, designed to offer operators strategic flexibility.  

DNV’s case study focused on an 80,000 dwt bulk carrier operating exclusively in EU and EEA waters from 2025 to 2044. The simulations explored three primary strategies: paying penalties for non-compliance, using low-GHG-intensity fuels and energy sources, and utilising FuelEU flexibility mechanisms. Each of these options presents a trade-off between cost, GHG reduction, and operational feasibility.

DNV found that the most straightforward, albeit costly, approach is to continue using marine gas oil (MGO) and simply pay the penalties for exceeding the GHG intensity thresholds. However, this strategy is the least economical.

“Over the case-study vessel’s lifetime, this strategy incurs cumulative costs of nearly $230 million, making it the least economical option,” the study noted. The financial burden of this approach only intensifies as regulations tighten in later years, particularly after 2035.

 

Blending fuels

The study also looked at the adoption of low-GHG-intensity fuels and energy sources. Blending bio-MGO with conventional MGO, while achieving compliance, drives up fuel costs progressively, totalling more than $130 million over the vessel’s lifetime. “Using liquefied natural gas (LNG) with bio-LNG emerges as the most cost-effective strategy ($120 million),” the study found. LNG offers compliance surpluses until 2035 due to its lower GHG intensity compared to MGO. Alternative fuels like e-methanol and blue ammonia ensure compliance but come with higher lifetime costs, nearly $170 million and $150 million, respectively. These fuels require a gradual increase in usage, especially as regulations become stricter after 2035.

Energy efficiency improvements, such as adopting wind-assisted propulsion systems (WAPS), offer another avenue for reducing fuel consumption and compliance costs. “For instance, WAPS cuts the case-study vessel’s lifetime costs by $7 million compared with the basic bio-MGO strategy,” the study said. Shore power also presents a cost-effective solution for achieving FuelEU compliance, improving GHG intensity and potentially reducing fuel expenditure in the early years.

FuelEU Maritime's flexibility mechanisms, including banking, borrowing, and pooling, offer innovative cost-saving opportunities.

“LNG-fuelled vessels can bank early-year surpluses to offset future deficits, potentially ensuring compliance throughout the vessel’s lifespan without switching to expensive lower-GHG fuels,”

explained the report. Operators can also temporarily offset deficits by borrowing compliance balance from the following year, although interest and penalties apply. Pooling allows vessels using green fuels, such as e-methanol, to generate compliance surpluses that can be traded, offsetting the deficits of conventional oil-fuelled vessels within the pool.

The study revealed significant cost disparities among the various strategies. “For example, adopting bio-LNG saves up to $21 million (16%) compared with the bio-MGO baseline (Figure 3), mainly because the vessel is allowed to run on fossil LNG for the first years until 2035,” the study showed. The penalty-only strategies consistently emerge as the most expensive due to the accumulating fees over time.

“Energy-efficiency technologies reduce fuel consumption, improving the economic feasibility of strategies like blending in bio-MGO. However, except for WAPS, they do not independently ensure compliance with GHG intensity targets,” Skåre said. The integration of flexibility mechanisms, such as pooling, allows vessels to maximize green-fuel capacities while distributing compliance costs across fleets. “This approach is particularly advantageous for operators with access to low-GHG fuels – for example e-methanol,” Skåre added.

The study acknowledged that the results are sensitive to input assumptions like fuel price, fuel availability, and the well-to-wake GHG intensity of the fuels. For the case vessel, given the assumed fuel prices and GHG intensities, a vessel capable of running on LNG, combined with energy efficiency upgrades, ensures long-term cost savings and compliance.  

 

Brokers’ role

Brokers need to be aware that in time charter contracts – where the charterer typically covers fuel costs and selects the fuel to be used by the vessel - clauses defining requirements to meet the GHG intensity target and use of compliant fuels over the charter party period should be added to the charter party.

Plus, there needs to be terms to address compensation for a compliance balance surplus or deficit. 

Additionally, “since the charterer covers the fuel cost, for long-term charters of one year or more it may require obtaining the right to decide on any pooling arrangement,” the white paper said. “The shipowner may give the charterer an obligation to cover any deficit in a pool, or it may require coverage of any deficit based on the penalty cost.” 

For shorter time charters of less than a year, DNV noted that closing a compliance deficit using the penalty cost might be preferable as the actual cost may not be seen before the reporting period is completed. Also, multiple charterers would be involved during a reporting period.

The report noted that an adjustment may be needed for vessels with dual-fuel capability or installing a wind-assisted propulsion system, “where in case of compliance surpluses the shipowner may require some compensation for additional capital expenses”.

For voyage charters and Contracts of Affreightment (CoA) – where the shipowner typically covers fuel costs and selects the fuel to be used by the vessel – brokers should note that shipowners are expected to include FuelEU compliance costs in the charter rate. 

“To keep compliance costs under control, it will be important for shipowners to predict, with a sufficient degree of accuracy, the compliance costs of single voyages in advance of accepting charter parties,” noted DNV.