December, 2021 - Avoid EEXI uncertainty with the BIMCO EEXI clause

As the deadline for EEXI compliance moves closer, BIMCO has published a new clause for time charters intended to give owners flexibility in ensuring that their ships are compliant.

The challenge

Many would say that climate change is the greatest challenge facing the world today. The shipping industry, overwhelmingly powered by carbon-based fuels, is a significant contributor to global carbon emissions. Estimates vary, but shipping probably contributes around 3% of global emissions, and that has been projected to grow to 17% by 2050 if left unregulated.

Consequently, the shipping industry (led by the IMO) has been taking steps to reduce its carbon footprint, such as the “IMO 2020” rules that have greatly reduced the allowable amount of emissions from ships (either by consumption of lower sulphur fuel oils, or the use of scrubbers).

However, more needs to be done. Consequently, in November 2020 the IMO approved various amendments to MARPOL Annex VI, which relates to air pollution from ships. One of those amendments introduced an “Energy Efficiency Design Index” for existing ships, known as “EEXI”.

Put simply, all existing ships (that are over 400 GT and fall within Annex VI) will be required to meet a certain level of energy efficiency. In other words, ships must not exceed a certain level of CO2 emissions. This “EEXI target” varies by ship type, and is determined using a complex mathematical formula with numerous variables.

The problem

It is likely that most existing ships will not meet the EEXI targets, which come into force on 1st January, 2023. For example, it has been estimated that only about a quarter of existing bulk carriers and tankers will already be compliant. Consequently, most of the current global fleet will need modification to improve their energy efficiency and comply with EEXI requirements by 1st January, 2023.

This goal could be achieved by way of retrofitting clean technologies such as batteries, waste heat recovery systems, air lubrication technology, wind-assisted propulsion, or using low or zero-carbon fuels. However, a more straightforward (and probably more cost-effective) solution is for ships to undergo engine power limitation (EPL) or shaft power limitation (SHAPOLI) modifications.

Such modifications reduce the engine’s power, since fuel consumption - and therefore emissions - increase as speed increases. Reducing power can produce a disproportionately large benefit – it has been estimated that reducing speed by 20% can reduce CO2 emissions by up to 50%. EPL and SHAPOLI modifications (which can be bypassed in emergency situations) reduce the maximum power/speed of the engine and therefore the CO2 emissions.

However, any modifications (whether EPL, SHAPOLI or otherwise) will require ships to be brought into a port or shipyard so that the necessary work can be carried out. Charterers are unlikely to consent to ships deviating or being delayed for modification works, so will owners be forced to take ships out of charter service (possibly for considerable periods) to carry out the work, and thereby lose their earning capacity?

The solution?

The new EEXI Transition Clause for Time Charter Parties 2021 (the “Clause”) has recently been published by BIMCO. As the name suggests, the clause is designed to ease the transition into the EEXI targets regime, by allowing owners the flexibility to carry out EPL or SHAPOLI modifications.

At the outset, the Clause is clear that ships must comply with the EEXI targets, and that owners will be required to make any necessary modifications to ensure that they do so (sub-clauses (a) and (b)). If modifications other than or additional to EPL/SHAPOLI are required, then the charterer’s agreement is required, although such agreement cannot be unreasonably withheld or delayed (sub-clause (d)).

However, where the EEXI target can be met by way of an EPL or SHAPOLI modification, sub-clause (c) (which makes up the bulk of the Clause) allows owners considerable flexibility as to how such modifications can be carried out:

• Upon request, the charterer must provide the owner with an itinerary for the ship and keep the owner informed of any changes. (sub-clause (c)(iii)).
   
• The owner is required to inform the charterer in writing “without undue delay” of the specification of the proposed modifications and the estimated speed/consumption of the ship following the modifications (sub-clause (c)(i)). The owner is also obliged to give the charterer at least three weeks’ written notice of the anticipated location (and time-frame) for the modifications (sub-clause (c)(iii)).
   
• The owner must use reasonable endeavours to carry out the modifications without interrupting the charter service, but if that is not possible the owner has the right to take the ship out of service in order to carry out the modifications (sub-clause (c)(ii)), although the cost of the modifications themselves (and any loss of time/bunkers as a result of the modifications) shall be for the owner’s account (sub-clause (c)(iv).
   
• Once the modifications are carried out, the owner must “as soon as reasonably possible” notify the charterer in writing of (a) the new maximum speed and corresponding consumption figures of the ship and other consequential changes to the ship’s description; and (b) the date from which the ship’s power is certified to be limited. It is from this date that the new maximum speed and corresponding consumption figures shall (if lower) replace the existing warranted maximum figures (sub-clause (c)(v)).
   
• The charterer may not then require the ship to proceed at speeds higher than the new maximum warranted figures (sub-clause (c)(vi).

The Clause therefore requires owners to carefully plan and bear the costs (including in time and bunkers) of any EPL/SHAPOLI modifications, keep their charterers informed of their plans and then use reasonable endeavours to ensure that the modifications do not disrupt the charter service.

However, “reasonable endeavours” is a relatively low legal test – for example, the owner will not be required to incur unreasonably large expenditure. If avoiding disruption to the charter service would require unreasonably large expenditure, the owner will have the right to take the ship out of service to effect the modifications, without breaching the time charter.

Conclusion

If incorporated into time charters, the Clause should remove much of the uncertainty that currently hangs over owners with regard to ensuring that their ships are ready to comply with the EEXI targets on 1st January, 2023.

Charterers will have a certain amount of protection, in that owners must give advance written notice of their plans, bear the costs caused by the modifications and use reasonable endeavours to avoid disruption to the charter service. However, ultimately owners will have the right to take the ship out of service and ensure the modifications take place.

This appears a fair outcome, as it is in the interests of all parties that ships comply with the EEXI targets. It is therefore hoped that the Clause is widely adopted in new time charters as 1st January, 2023 approaches.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.