4. Increasing global pressure to reduce GHG emissions
•Mandatory regulations to curb the rise in SOx and NOx emissions
•Energy efficiency would fuel the future of shipping
•Ship owners starting to explore various fuel and technology options (LNG as a marine fuel, dual fuel options, solar and wind power, waste heat recovery systems)
•Selection of fuel and technology options is complex, requires long- term planning and is often very costly to make changes
4
http://www.dieselnet.com/standards/inter/imo.php
http://www.dieselnet.com/standards/inter/imo.php
5. How do future IMO regulations influence decision-makers’ selection of marine fuels?
•No easy answers
▫Highly diversified sector (different ship types, varying operating profiles, varying pricing mechanisms)
▫Uncertainty over future fuel prices, infrastructure and regulations
▫Complex interactions between ship owners and operators (split-incentives)
•Very common forms of analysis include cost benefit analysis
•This paper attempts to provide some insights by partially resolving the uncertainty and the various risk- appetitites that affect the decision-making process
5
8. Formulation: A purchase decision with three alternatives
•Three types of ship engines configurations considered
▫Two stroke diesel engine fitted with SOx scrubbers : NPV1
▫Gas fired engine with LNG as a fuel source : NPV2
▫Dual fuel engine that allows a combination of LNG and fuel oil : NPV3
•Decision specifications estimated from publicly available sources (for example)
▫Cost of initial investment
▫Revenue estimates
▫Cost of operating SOx scrubbers
•Defining the boundaries for a more impactful analysis
▫Mid-sized containership between Asia and Europe
8
9. Deterministic Analysis:
Cash flow analysis for each alternative
9
7
3
7
1,2,3 3 k (1 )k k (1 )k i
Fuel Costs
i
Earnings
NPV Initial Costs
Cash flow diagram of NPV1
Cash flow diagram of NPV2/3
Diagrams are for illustrative
purposes only. Actual cash
flow diagrams are varied
10. •Reliability of different engines
▫Downtime experienced : d1 , d2 and d3
•Uncertainty in future prices
▫Price estimates of LNG and Marine Gas Oil (MGO): P LNG and Pdies
•Uncertainty over future LNG bunkering infrastructure
▫Additional distance travelled: D
•Uncertainty over future NOx and energy efficiency regulations
▫Additional cost incurred at a later time frame: I
10
Probabilistic analysis: Uncertain system variables
11. Influence diagram of purchase decision
11
NPV 1
NPV 2
NPV 3
D
d2
I
d3
Plng
Purchase
decision
d: downtime
D: Additional distance traveled
P: Price
l: Additional cost incurred
I
D d3
d1
Pdies
Plng
NPV1
NPV2
NPV3
Purchase
Decision
12. DPL software used to conduct various types of analysis
•Tornado dominance
•Probabilistic decision tree diagrams
•Sensitivity analysis
•Expected Value of Perfect Information (EVPI)
•Risk analysis
12
14. Deterministic policy tree diagram
•LNG as a fuel source was chosen as the optimal solution
14
94.7 [94.7] Diesel 107.8 [107.8] LNG 103.3 [103.3] Dual Decision1 [107.8] Licensed by Syncopation Software for evaluation purposes only.
16. Combined Tornado Diagram
•No tornado dominance among the three alternatives in the deterministic analysis
•Selected variables are deemed sensitive enough for probability assessment
16
17. Probabilistic decision tree diagrams
• Change of optimal decision to select diesel-fuelled
engine
▫ Switch to cleaner fuel is strongly influenced by
probabilistic events
• Risk neutrality assumed
17
I
Diesel [101.5]
D
LNG [100.5]
d3
Dual [100.2]
Decision1
[101.5]
18. Full probabilistic decision tree
18
Low
NPV_1
Base
NPV_1
High
NPV_1
High
b
Pdies
Base
b
Low
b
NOx and EE
a
d1
NOx
a
EE
a
None
a
Diesel
I
Low
NPV_2
Base
NPV_2
High
NPV_2
High
d
Plng
Base
Low
Yes
c
d2
No
LNG
D
Dual
Decision1
Relatively large base model consisting 84
various objective functions
19. Sensitivity Analysis
•Most variables are found to be robust
▫Small changes in value do not change the optimal decision
•Optimal decision changes to LNG for:
▫An increase of $2 for the base price of diesel
▫A reduction of $1 for the base price of LNG
▫An increase of 0.5 weeks of downtime for diesel engines
19
20. Expected value of perfect information (EVPI) analysis
20
Price of diesel
Price of LNG
Optimal decision
Low
Low
Diesel
Low
Base
Diesel
Low
High
Diesel
Base
Low
LNG
Base
Base
Diesel
Base
High
Diesel
High
Low
LNG
High
Base
LNG
High
High
Dual
Limitations in LNG bunkering infrastructure
Optimal decision
High
Diesel
Low
LNG
Future regulations in 2016
Optimal decision
NOx and EE regulations
LNG
NOx regulations
LNG
EE regulations
Diesel
None
Diesel
21. Expected value of perfect information (EVPI) analysis
•Where LNG prices are cheaper than diesel, LNG as a fuel source is the optimal decision
▫Supports market-based measures for emission reduction efforts
•Only when LNG and diesel prices are high, dual fuel engine becomes the optimal decision
•Improving LNG bunkering infrastructure does help promote LNG being chosen as a fuel source
•Future regulations to reduce NOx in ECAs does promote LNG as a optimal decision
21
22. Risk Analysis
22
Increasing risk aversion
Assuming decision-maker has an
exponential utility function and
satisfies delta property
23. Risk Analysis
•With decreasing risk tolerance the optimal decision changes from diesel to LNG and finally to dual fuel engines
▫Seems counter-intuitive since dual-fuel engines are often considered to be the ‘more’ risky option
•While some factors make dual fuel engines risky such as reliability, other factors such as less uncertainty over future fuel prices and regulations tend to make the option less risky
23
25. Summary remarks
•Price uncertainties have the largest impact on the optimal decision
•Optimal decision for a risk neutral decision-maker is to invest in a diesel-fuelled engine
•Future regulations and improvements to LNG bunkering infrastructure promotes LNG as the optimal decision
•Price regulations on diesel also improve the adoption of LNG fueled engines
•Investing in dual-fueled engines in most cases is a sub- optimal decision
•The more risk averse decision makers are, the more likely they would consider LNG as an alternative fuel source
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26. 26
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