MARPOL Annex VI: EEXI and CII – can your contracts cope?
Amendments to MARPOL Annex VI aimed at improving the technical and operational efficiencies of all types of ships were adopted by the IMO in June 2021. These amendments will enter into force on 1 January 2023. The amendments introduce the Energy Efficiency Existing Ship Index (EEXI), a technical measure concerned with a ship’s design, and the Carbon Intensity Indicator (CII), an operational measure concerned with a ship’s trading and operation.
The EEXI is a one-time requirement to improve the energy efficiency of a ship’s design. The regime applies to all existing ships above 400 GT falling under MARPOL Annex VI, and will therefore cover the majority of vessels in the commercial fleet worldwide. The relevant ship will be ascribed an “attained EEXI” which will demonstrate the ship’s energy efficiency compared to a baseline. The attained EEXI will then be compared to a “required EEXI” for that particular ship type. If the attained EEXI is less efficient than the required EEXI, Owners will need to take steps to ensure compliance.
Implementation and compliance with the EEXI
To comply with the EEXI, a Technical File will need to be prepared for most ships (excluding those built in accordance with the already existing Energy Efficiency Design Index (EEDI) Phase 2 or 3 requirements). The Technical File will record the calculation of the attained EEXI, which must be below the required EEXI value.
Once completed, Owners or managers of a ship must submit the Technical File to its classification society for approval and also carry it on board. A verification process for the attained EEXI as recorded in the Technical File will then take place during the first annual survey in 2023, and, if verified, a new International Energy Efficiency Certificate (IEEC) will be issued by the classification society on behalf of the relevant flag state. The IEEC will need to be presented to port authorities, though the consequences of failing to do so are not yet clear.
Whilst there are no formal requirements for Owners to make technical modifications to the ship (e.g. by installing energy saving devices or making propeller improvements), it may be the most realistic way to achieve compliance. Owners may also wish to limit engine power.
Ensuring continuous improvements to a ship’s energy efficiency
Where the EEXI is a one-time certification, the CII regime will ensure continuous improvements to a ship’s energy efficiency by enforcing increasingly stricter emission targets for existing ships year on year. This will apply to almost all vessels above 5,000 GT, including cargo, tankers and cruise ships.
The actual CII attained will be documented (in most cases measured in grams of CO2 emitted per cargo-carrying capacity and nautical mile) and verified against the required CII. This gives a rating on a scale from A to E.
The attained CII should improve annually. Ships rated E, or ships which for three consecutive years are rated D, will have to submit a corrective action plan showing how the required CII will be achieved. To promote continuous improvement of attained CII for all ships, it is expected that incentives will be provided by administrations, port authorities and other stakeholders to ships rated A or B.
Implementation and compliance with the CII
Before the CII enters into force, all ships covered by the regulation will need to have an approved Ship Energy Efficiency Management Plan (SEEMP) in place. The SEEMP will include a plan showing how the CII targets will be achieved.
Significant reductions in a ship’s CO2 emissions can be achieved in various ways, including by slow steaming, installing and implementing new energy efficiency technologies, using alternative fuels and by operational changes (e.g. rerouting or limiting cargo intake).
Impact of the new regulations
The new regulations will have a profound impact across all sectors of shipping, and Owners in particular will need to act early in order to understand what measures are required to comply. This will involve reviewing existing charters and drafting future charters with the requirements acutely in mind.
There will be a heightened need to cooperate between Owners and Charterers to strike a balance between Owners’ interests in adjusting to the CII regime and Charterers’ interests in the vessel’s employment and their obligations towards third parties.
Impact on existing charters
In relation to the EEXI framework, Owners and Charterers should begin negotiating their existing charters as early as possible in order to address the various challenges. If Owners intend to conform by modifying the ship, the costs of modification will most likely be for Owners’ account. Owners may however wish to seek an agreement from Charterers that Charterers contribute not only with their expertise but also by covering the direct costs of modification or by accepting increased hire. The parties will also need to discuss when and how the ship should deviate to dry dock for the modification.
BIMCO’s EEXI Transition Clause for Time Charter Parties 2021
On 7 December 2021, BIMCO published its EEXI Transition Clause for Time Charter Parties. The clause aims to assist Owners and Charterers under both existing and future time charters by allocating the responsibility and costs for ensuring compliance with the EEXI requirements.
The clause stipulates that it is Owners’ responsibility to ensure that any ‘EEXI Modifications’ (defined therein as any physical or technical modifications required to bring the subject vessel in compliance with the EEXI regulations) are completed prior to the vessel’s next annual, intermediate or renewal survey, whichever comes first, on or after 1 January 2023.
If the EEXI Modification relates to an Engine Power Limitation (EPL) or Shaft Power Limitation (SHAPOLI), Owners must determine and inform Charterers about the specification of the modification, the estimated new maximum speed and the corresponding consumption figures of the vessel. Owners are responsible for the time and costs of these modifications, including procurement, purchase, payment, installation and any required trials, but are allowed to take the vessel out of service to effect such modifications. After the modification is completed, the vessel’s new maximum speed and corresponding consumption figures as well as any other consequential changes shall be updated in the vessel’s description.
Some Owners may choose alternative energy efficiency solutions for their vessels than EPL or SHAPOLI. In such cases, the clause provides that any such other modifications are subject to agreement by Charterers which shall not be unreasonably withheld or delayed.
What to take into account when drafting new time charters
The EEXI is not expected to cause any difficult challenges for Owners once the ship has received the certificate of compliance. The CII, however, will have a serious impact on commercial contracts because it affects fundamental rights of Owners and Charterers in traditional charters. Key areas of impact on future charters which will need to be considered are:
- Utmost despatch: Most charters require the ship to proceed using “utmost despatch” or similar. Because Owners may be required to slow steam or sail longer routes in order to meet the CII targets, Owners should have the right to proceed with the most fuel-efficient route. Charterers should also ensure that, by doing so, Owners are not in breach of their utmost despatch obligation nor their obligation to meet Charterers’ orders.
- Wrongful deviation and off-hire: Sailing longer routes may constitute a wrongful deviation and accordingly put the ship off-hire. Owners should negotiate appropriate language to allow for sailing longer routes where doing so is necessary in order to comply with the CII.
- Speed adjustments: Most charters allow Charterers to slow steam. If Owners intend to reduce the ship’s speed in order to meet the CII, Owners should ensure that new charters also give them the right to do so.
- Speed and performance warranties: Owners usually warrant a certain fuel consumption at certain speeds. Owners should ensure that such warranties cover the potential need to deviate from this in order to meet the CII requirements.
BIMCO are also drafting a CII clause, which is scheduled for publication in May 2022. BIMCO have described this aspect as “more challenging” than the EEXI Transition Clause, and that the CII Clause aims to address the annually narrowing emissions “corridor” in a way that balances the operational restrictions imposed on Owners by the low carbon regime against allowing Charterers to optimise the ship’s commercial activity during the charter period. We recognise that this is a challenging exercise, and it will be very interesting to see the balance struck by the drafting committee.