How To Change Charter Parties To Comply With MEPC 80?

As shipping attempts to chart a course to a zero-carbon future, there is a general acceptance that decarbonization will require all stakeholders to contribute. The regulatory mechanisms are being deployed in full force. At the same time, there are concerns about the vagaries and lack of concrete language in recent announcements. Ultimately, the way the maritime fleet operates today has to change.

While many businesses are looking to ship designs and fuel types to reduce emissions, the reality is that these options are long-term bets. With the first of MEPC 80’s new goals coming up in 2030, there is no time for the whole fleet currently at sea to be retrofitted, adapted to alternative fuels, or replaced with more sustainable new builds.

So, another solution must be found to bridge the gap between today and when retrofitting, new builds, and alternative fuels pay off. That is why owners and charterers need to look at how they operate with approaches such as slow steaming and how they structure charter parties. It is no secret that these agreements are still very much rooted in the traditions of another era; static and penalty-focused, they are relics of a less dynamic time. Quite simply, they are not fit for underpinning modern trade.

Rather than operate in silos, it is time for all parties to focus on collaboration. Granted, that is easier said than done, particularly when considering the inherent distrust and commercial sensitivities that color many relationships in shipping.

So, what is the answer? It lies in re-examining the agreements between charter parties and how they could help maintain commercial competitiveness and enable regulatory compliance. With most of the world’s fleet chartered, these contracts significantly influence how vessels operate. Interrogating their current structure could present an opportunity to better support owners and charterers in achieving sustainability goals.

Doing that requires greater levels of trust, which can only be unlocked by the open access of unimpeachable information. Historically, this might have been hard to achieve, with vessel performance data available in noon reports. That is all changing; more companies have access to high-frequency data generated by sensors that, in many cases, are already in place. When used properly, this data can inform the creation and implementation of more dynamic charter party clauses. These, in turn, could radically reshape how owners and charterers work together and operate vessels in an economically and environmentally beneficial way.

Introduction

With the maritime industry’s environmental impact under ever-increasing scrutiny, it is hardly surprising that more regulations are being introduced to curtail emissions. In 2023 alone, shipping has seen the Energy Efficiency Existing Ship Index (EEXI) and carbon intensity indicator (CII) come into force and new targets from the International Maritime Organization’s (IMO) MEPC 80 ship emissions strategy.

Then there is the issue of carbon pricing. The European Union’s Emissions Trading System (EU ETS) will apply to shipping from January 2024, while 2025 will see the IMO’s carbon pricing plans finalized ahead of a 2027 introduction.

All this must be achieved irrespective of the economic landscape and market performance, and with a 2030 fleet that is likely to be made up of the same vessels the industry uses now.

There are certainly mechanisms that owners and charterers can use to reduce ship emissions, from retrofitting and new builds to alternative fuels and slow steaming. Yet there is no silver bullet; these levers have drawbacks that must be considered.

Is there another way? Potentially, but it requires transformation, access to relevant data, and the ability to act dynamically and decisively.

What does that look like? We have put together this paper to understand what a viable solution could be for owners and charterers attempting to navigate the current regulatory landscape. Covering the impact of new regulations and the advantages and disadvantages of existing levers, we also look at the role of charter agreements, how they might be altered to help all parties, and what needs to be done to make that a reality.

And it is a reality that owners and charterers need to reach. The regulatory landscape will only get more demanding; even with notice, only those who act fast can compete effectively and sustainably.

An uncertain regulatory future

The IMO’s MEPC 80 ship emissions strategy is certainly more ambitious than previous targets, yet the prevailing sentiment is uncertain. In one article, Jan Hoffmann, head of the trade logistics branch at the United Nations Conference on Trade and Development (UNCTAD), said, “The more vague measures and goals are, the less certainty they provide to investors in the public and private sector.”

The new strategy aims for a 20-30% reduction in carbon emissions by 2030 against 2008 levels, growing to 70-80% by 2040. There was also a commitment to ensure that between five and ten percent of global bunker consumption came from energy sources with zero or near-zero emissions by 2030.

This is all part of the goal of reaching net zero at or around 2050, yet there are concerns that the targets still fall short of the Intergovernmental Panel on Climate Change’s (IPCC) Paris Agreement. A summary on MEPC 80 from UMAS, UCL’s maritime consultancy, noted that “a combination of further IMO action, and wider national, regional and industry action” is needed, although the 1.5-degree target is more closely in reach than before.

In addition, the strategy will be revised every five years, with targets likely to become more stringent. Technology advancements, growing climate impacts, and more political pressure could well combine to increase demands on shipping companies to cut emissions faster. The UMAS summary went on to state that “If the 30% ‘striving for’ target is secured as a new floor, then applying the IPCC’s current guidance (which may have changed by 2028), the sector may be faced with needing to achieve ~100% GHG reduction by 2040.”

The options available to owners and charterers

Where does this leave ship owners and charterers? Cutting fleet emissions to meet regulatory requirements will become more demanding in the coming years. The question for many is how they achieve that.

Broadly speaking, when considering their fleets, most owners and charterers currently turn to four approaches:

• Retrofitting: Retrofitting ships has been a popular choice for a few years. Redesigning hulls, installing propeller boss cap fins and shaft power limitation systems, using scrubbers, wind assistance, and upgrading engines to accommodate alternative energy sources; vessel owners have deployed all over the years to improve fuel efficiency and cut emissions. A quarter of fleet tonnage has been fitted with energy-saving technologies. Yet, while there is an argument that retrofitting adds flexibility to a fleet, there are also significant downsides. First, it is capital intensive. Second, the vessel is idle while being worked on, which adds to the upfront investment. Third, the return on said investment can be hard to quantify. Fourth, retrofitting takes time, increasing the risk that new regulations may render it less valuable than initially thought when the vessel is back in service.
• New builds: Vessels designed and built to meet decarbonization targets will certainly play a significant role in the future of shipping, yet they are not a short-term solution. Global capacity is scarce, with shipyards reportedly being 87.3% full in 2025 and 80% in 2026. This means there is limited space to meet the demand for new ships by 2030 and with rising costs. Research shows that new build prices have increased by over 6% this year.
• Alternative fuels: Thirty-five percent of the tonnage ordered in 2022 was alternative fueled, specifically LNG, methanol, LPG, or battery hybrid, with 10% ammonia-ready. Five percent of the fleet on the water and 47% of the order book in tonnage (GT) terms can use alternative fuels. Yet these energy sources bring with them availability issues and potential safety concerns. There are also questions about their energy density and how much energy a unit of these fuels can store. For instance, a gallon of LPG has a diesel gallon equivalent of 0.66, compared with methanol’s 0.45 DGE. Not all existing vessels can be retrofitted to use new energy sources.
• Slow steaming: Recently, slow steaming has been highlighted as an operational measure that can cut emissions. A 20% reduction in ship speed is estimated to reduce vessel GHG emissions by between 24 and 34%. Yet, the practice has its drawbacks. It limits the potential positives of vessel utilization and can adversely affect other parts of the vessel, such as turbochargers. The overall savings vary from ship to ship, particularly when implementing slow steaming across entire fleets, with inconsistencies in how much individual ships save.

It is also important to note that most of the vessels operational today will still be in use in 2030, with some still going in 2040. There is no capacity to retrofit or replace them all in time to have a measurable impact on the emission reduction targets.

Could the charter agreement be a solution?

The options listed above to improve vessel emissions predominantly focus on hardware changes to improve vessel emissions.

Yet how a vessel operates also plays a huge role in reducing emissions. As UMAS put it in its summary of MEPC 80, “meeting the 2030 target will require either a maximization of efficiency options, or a combination of significant efficiency and some use of alternatives to fossil fuels.” One projection found that 30% of emissions could be eliminated through measures such as logistics optimization and the use of low-carbon energy.

What will drive that optimization? Transforming charter party agreements using technology and data.

Studies have shown that vessels with higher design efficiency save more fuel, yet the structure of time charter agreements means that owners receive little financial benefit. There can be little incentive to make ships energy efficient. Charterers pay for the fuel, so the cost of fuel consumption, and therefore any attendant savings, falls on their shoulders.

Agreements often consist of static clauses with little scope or incentive for performing better than agreed benchmarks. For instance, minimal speed clauses are a common feature in charters. Yet what is agreed and what is optimal for the voyage might be very different. If this is the case, the clause takes precedence. It could lead to operating behavior such as the so-called “hurry-up-and-wait” or “sail-fast-then-wait” (SFTW) model, often resulting in vessels sitting idle and increasing emissions. This, in turn, would leave the charterer with additional expenses, as well as causing the vessel’s CII score to decline faster, impacting the owner.

Such contracts, which could penalize better performance, need to evolve. Their terms and how they are applied must reflect today’s dynamic, agile market. They must be rewritten to align incentives, foster collaboration, and improve bottom lines for all parties.

These inefficiencies have been the norm case for many years. What will accelerate change? The same factors that always propel transformation: push and pull.

In this instance, the push is regulations. Alongside the MEPC targets and the requirements of EETI and CII, owners and charterers will soon have to factor in carbon taxation. First, the EU ETS is being applied to shipping from January 2024, followed at some point by an IMO economic mechanism.

It is clear that owners and charterers have no choice but to comply with these regulations. Even if they are not concerned about sanctions, the fact is that Environmental, Social, and Governance (ESG) is an increasingly important commercial driver. Whether from investors and shareholders, customers directly, or the end-consumer, the entire supply chain is under greater scrutiny, and those owners and charterers who choose to ignore the ESG implications of non-compliance will suffer the commercial consequences.

Yet true change is only sustainable with a clear benefit or pull. In this instance, the pull offers not just an opportunity to be compliant but to do so in a way that provides a competitive advantage.

There is an argument to be made that charter agreements only reflect the slow-moving nature and limited access to trusted, reliable, and accurate information that the maritime industry has struggled with historically. While that may have been the case in the past, the fact is that it has never been easier to generate, gather, analyze, and act upon relevant intelligence or data.

This could allow owners and charterers to comply with current legislation and ensure they can respond to future regulations in a way that gives them a significant competitive advantage.

What would that look like? Dynamic terms could include:

• Collaborative CII management: Management of both operational and technical
• performance of the vessel to maintain peak efficiency and agreed-upon CII scores
• Time charter fouling: Encouraging corrective actions once thresholds have been crossed, ensuring both parties are proactively managing the technical performance of the vessel to reduce excess emissions and fuel consumption
• Performance-based time charter clauses: Establish a dynamic speed and consumption curve based on accurate predictions of actual performance instead of a fixed description.
• These clauses support improved speed ranges, assess performance beyond certain speeds, and update performance profiles that reflect true vessel performance
• Just-in-time (JIT) arrival: Support virtual arrival with dynamic speeds to arrive at port at an agreed-upon date and time based on simulations
• Flexible speed: Eliminate speed restrictions of voyage charters and unlock optimal speeds based on models and simulations

What would be the result if these sorts of clauses were built into charter party agreements? Greater collaboration between owners and charterers which would support the achievement of aligned, mutually beneficial commercial goals. And, most importantly, deliver the emissions reductions needed.

The enabler for transforming agreement is the ability to generate and access high-frequency data (HFD). Many of those improved clauses rely on accurate modeling and simulation. This requires the creation of digital twins, solutions that are only possible with data. That means sharing information, historically a contentious issue in the shipping industry.

Rather than relying solely on a daily noon report, compiled using a spreadsheet with input from multiple sources and based on averages, sensors across the vessel capture accurate data and transmit it constantly. This is not just theoretical, either: a study found that predictions on vessel performance using HFD were consistently more accurate than those using noon reports.

These are not necessarily new installations. Many vessels are already equipped with sensors that can be used to gather the data needed to provide a complete overview of vessel operations and performance.

The continuous nature of data transmission means owners and charterers have access to greater granularity, generating more detailed insights. The same approach to gathering and sharing data underpins financial instruments such as the stock market.

With HFD, owners and charterers can:

• Create digital twins: Using HFD to create highly accurate digital twins based on specific vessels can be used in multiple ways. First, to predict voyage outcomes based on weather forecasts, fuel costs, and trade routes. Second, to generate a benchmark for optimal performance, allowing operators to identify when quality drops and take action, such as through improved maintenance schedules. Digital twins can support clauses covering flexible speed, JIT arrivals, and performance-based times.
• Manage and monitor fleets: Businesses need an accurate picture of their carbon footprint to identify reduction opportunities. With HFD, accurate, real-time information on vessel performance is now available at a more granular level. So rather than guess based on generalized assumptions and theories, owners and charterers can make data-informed decisions with a clear understanding of the economic and emissions implications. As well as optimizing fleets, HFD used in this manner can inform clauses around collaborative CII management and time charter fouling.
• Optimize voyages: Using digital twins to simulate and optimize voyages can not only help reduce emissions through improved fuel consumption but, with the onset of carbon pricing, reduce EU allowance (EUA) expenditure. These are carbon credits that, under EU ETS, all owners of vessels of 5,000 GT or greater on voyages involving EU ports must pay out of a dedicated carbon account for each tonne of in-scope carbon dioxide (CO2) emitted.
• Share information: An absence of reliable, unimpeachable data is often a barrier to collaboration, but with HFD coming directly from sensors, all parties can access the same information (while ensuring privacy standards). In doing so, they can start to make mutually beneficial decisions, agree on new clauses, and trust each other.
• Determine joint measures and performance indicators: This source of information can also be used through joint KPIs to hold all parties accountable. This incentivizes owners and charterers to improve vessels’ technical and operational performance and support each other to achieve regulatory and commercial goals.
• Reduce claims: With access to the same data and insights, transformed charter parties can radically reduce the opaque nature of many agreements. For charters, this helps limit the risk of multi-million dollar contracts, while owners can realize the value of their vessels without being exposed to claims.

Using HFD to create charter party agreements that better reflect the nature of today’s markets would not just support regulatory compliance or fuel efficiency. It would help charterers and owners maximize the investments they have made in vessels and contribute to safeguarding the profitability of specific routes. In addition, these transformed agreements would lay the groundwork for capitalizing when longer-term initiatives, such as new builds and retrofits, are ready for deployment.

Act now to capitalize on the opportunities of transformed charter party agreements

Shipping’s regulatory environment will only become more complex, with ever greater targets, as the years progress. There are several ways in which owners and charterers can improve fleet energy efficiency and reduce emissions. Still, with many of those options only providing long-term fixes, there needs to be a way to bridge the gap and provide a sustainable operating model for the future.

Transforming charter party agreements is that solution. By improving the underlying structures of the relationship between owner and charterer, businesses will have a stronger understanding of true vessel performance and can continue their efforts to reduce their emissions today. This, in turn, provides a foundation for the future that will enable them to capitalize on the introduction of longer-term solutions, such as alternative fuels and new builds.

In short, those companies that act now to transform charter party agreements will ensure regulatory compliance and be better placed to capitalize on the opportunities a zero-carbon future holds.
Source: Nautilus Labs