2023 sees the introduction of the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) regulations following amendments to MARPOL Annex VI.
The EEXI is designed to reduce the greenhouse gas emissions of ships and relates to the technical design of a ship. EEXI approval has to be attained once in a ship’s lifetime. This must be done by the first periodical survey in 2023. The EEXI applies to all vessels above 400 GT that fall within MARPOL Annex VI (Prevention of Air Pollution from Ships).
Whilst the EEXI is a once in a lifetime requirement, the CII is an ongoing operational efficiency indicator applying to ships over 5000 GT which measures a vessel’s carbon intensity over time. Ships will be graded A-E. Those achieving a D grading over 3 consecutive years, or an E grading in any one year, which will take place during each ship’s annual review, will need to implement significant operational improvements or design upgrades. This means that shipowners will need to determine their ships’ carbon intensity profiles by the end of 2022.
A general overview of the new regulations can be found in our article here:
Various options are available to meet the EEXI regulations. From a shipowner’s perspective, Engine Power Limitation (EPL) or Shaft Power Limitation (SHAPOLI) are likely to be the most popular options as they are relatively simple and cost-effective and should cause minimal disruption to the vessel.
Retro-fitting ships with energy-efficient technology is another option. For instance, Overridable Power Limitation systems which limit the main engine power when the pre-set limit is reached, helping ship operators control their ships’ emissions. These systems can be overridden to secure the safety of the ship/crew or saving life at sea.
Other options include reducing speed, new propulsion techniques, for instance wind power, switching to green, low-carbon fuels and using the latest anti-fouling coating.
Legal and Contractual considerations
BIMCO has introduced an EEXI Transition Clause, and a CII Compliance Clause is expected soon.
Modifications in the BIMCO EEXI clause have been split into (1) EEXI Modifications that are limited to EPL or SHAPOLI and (2) EEXI Modifications that are not, or are in addition to, EPL or SHAPOLI.
With modifications relating to (1), owners do not need charterers’ permission to take the ship out of service to make the modifications, although owners do need to use reasonable endeavours to avoid causing a loss of time to charterers if possible. With modifications relating to (2), charterers’ prior agreement and approval must be obtained but this cannot be unreasonably withheld or delayed.
The clause makes clear that the costs of the works is for owners’ account, and this will include any deviation, associated bunkers and hire.
Once the works are done, owners will notify charterers in writing of the new speed and performance criteria for the ship. If these are lower than in the charterparty, then the new, lower figures will replace the older ones. Sub-clause (vi) makes clear that charterers are not to order the ship to exceed the maximum speed.
The clause does not allow charterers to terminate the charterparty as a result of the reduced speed. Charterers need to be aware that if the speed drop is significant, the likelihood of delays to cargo arise and with them the potential for associated disputes. Of concern to charterers will be how long the ship will be out of service for the modifications and what speeds are achievable post-modification. An issue with the potential to cause significant disputes will be when it is reasonable for charterers to refuse certain modification works. On the other hand, if there is no clause relating to the changes to the ship that need to be made, then there is significant scope for dispute around owners taking the vessel out of service for extended periods to carry out the modifications and the resulting contradictory speed and consumption warranties.
A possible alternative way of improving the CII rating would be to reduce the cargo intake. However, this raises the possibility of breach of cargo capacity clauses and/or depriving charterers of the use of the whole vessel. There could be a knock-on impact on charterparty rates. A further consideration is that if cargo intake is reduced, then potentially there will be reduced freight/earnings due to less shipments. On the other hand, if ships reduce cargo capacity to improve CII but the demand for the traded cargo remains the same or increases, then the likely outcome is more shipments which of course generates more emissions which arguably has exactly the opposite of the intended effect of these new restrictions!
Whilst the EEXI clause is applicable to time charterers, there may be some impact on voyage charters and bills of lading.
For instance, generally owners are under an obligation to proceed with due despatch. A single clause in the charterparty, which may set out the obligations between owners and charterers, is unlikely to be carried over to the bill of lading holder who may decide to bring a claim for failing to proceed with all due despatch if the vessel is slow steaming to meet MARPOL requirements. Therefore, owners are likely to want to include in the charterparty clauses under which charterers include the same clauses in bills of lading or have to indemnify owners for claims if charterers fail to do so.
It may also become the case that, rather than the vessel steaming to port and waiting at the anchorage accruing demurrage, vessels slow steam and arrive ‘just in time’ for berthing, thereby making CO2 savings but depriving charterers/disponent owners of extra income otherwise obtained as demurrage. No doubt voyage charterers will be much happier with this outcome than charterers/disponent owners! BIMCO already have a ‘just in time’ clause for voyage charterparties that charterers may wish to consider.
This net result is likely to be that it will be increasingly costly to run older or non-compliant ships with the EEXI modifications and CII corrective actions. If this leads to the scrapping of tonnage, then depending on the rate of replacement, it is possible that hire and freight rates will increase. A further complication, depending on how many ships need modifications, may be whether there is the availability of berths in shipyards to carry out all the modifications needed in the applicable time frame? If not, then a potential shortage of ships may also exacerbate an upward trend in hire and freight.
Of course, at this stage, it is speculative to consider potential disputes which may arise, but prudent charterers would do well to check their charterparty clauses very carefully before entering into any charters lasting longer than 2022 and to seek our input in drafting or amending clauses relating to the needed modifications to ensure that an undue burden is not placed on charterers.