Climate Change and Renewable Energy in the Maritime Industry

Frederick M. Lowther

There are few industries—indeed, few activities of any kind—that are not impacted by the increasingly intense debate on climate change. Whether by force of law or by voluntary action, all major sectors of the world economy must adapt to changing perceptions of how to reduce adverse impacts to our climate. The maritime industry is no exception. As the industry transitions to cleaner fossil fuels for vessel propulsion, there remains the question as to how the industry can best move toward greater use of emission-free renewable energy.

Dating Back

The maritime connection to renewable energy dates back thousands of years, with the transition from oars to sails likely occurring more than 5,000 years ago. Indeed, wind propulsion of large vessels was the norm until the mid-1700s, when the evolution of the steam engine resulted in the gradual transition to motive power. While commercial vessel propulsion will never revert to wind, the use of renewable energy sources in other (shore-based) aspects of the industry is clearly possible. Any shore-based activity that uses electric power has the ability to source that power—directly, indirectly, or “virtually” —from renewable energy generation.

Maritime Port Operations

Focusing first on maritime port operations, it is unlikely that the industry can connect directly to a local renewable energy source (e.g., a solar or wind installation). From the standpoint of both land availability and optimal access to wind and sun, few onshore wind or solar farms will be built proximate to port facilities. Rooftop solar installations have become more efficient and cost-effective, and may have limited application to structures in a port complex or perhaps a building away from the port itself. However, the utility systems that supply power to port facilities are connected to transmission grids that increasingly accept renewable energy into the power mix. It is possible, therefore, for a port facility to contract with a wind, solar, or other renewable project, and then arrange with the transmission/distribution operators to deliver that power. While it is not likely that the renewable energy electrons will actually be reaching the port facilities, that is of no consequence so long as the renewable electrons are consumed somewhere on the system.

Offshore Wind Installations

An interesting development affecting proximity to renewable energy sources is the renewed focus on offshore wind installations. Conceptually, offshore wind projects involve very large windmills a considerable distance from the shore (positioned to optimize wind capture with minimal impact on shipping lanes and commercial fishing). Those structures must be tied together to a cable that carries the power to shore where it interconnects with the most proximate transmission/distribution grid. It is conceivable that port facilities could tie directly to the cables to bring wind power ashore, although it is more likely that the connection would be indirect, as is the case with onshore resources.

Virtual Power Purchase Agreements

Beyond the direct or indirect connection of renewable energy resources to maritime facilities, there is a relatively recent development referred to as the Virtual Power Purchase Agreement (“VPPA”). The VPPA is a financial tool and, despite its name, is not a “power purchase” agreement. It does, however, permit the VPPA “buyer” to claim that it supports (and can even say “uses”) renewable energy. The VPPA works as follows:

  • the VPPA “seller” is the developer of a renewable energy project (typically wind, solar, or hydro, or a combination thereof);
  • the VPPA “buyer”—a maritime company, in this context—commits to pay the seller a fixed price for megawatt hours (“MWh”) generated by the project over a long period of time (typically, 12–20 years);
  • the fixed-priced commitment becomes the revenue foundation for the financing of the project—a single VPPA need not cover 100 percent of a facility production (one facility can have multiple VPPAs, or part of the capacity can be retained by the seller as merchant capacity); and,
  • in return for the fixed payment per MWh, the buyer receives all the renewable energy credits (“RECs”)—well-recognized, regulated instruments—for the MWhs covered by the VPPA.

While RECs generated by a renewable energy project NOT supported by a VPPA can be sold into a REC trading market, the RECs generated pursuant to a VPPA are given to the buyer and used to support the buyer’s claim that it is “green” (i.e., supports or uses renewable energy). A VPPA REC must be retired and cannot be sold or traded. The buyer also gets the benefit of the sale of the MWhs into the transmission grid, so that a sale price exceeding the fixed-price commitment generates positive revenue for the buyer, and a sale at less than the fixed price is credited against the fixed-price obligation. Again, the buyer gets none of the electrons generated by the project—only the right to claim support for/use of renewable energy—and still must purchase the power it uses from its traditional source(s). Hence, the “virtual” tag attached to the process.

VPPAs are treated legally as “fixed for floating swaps” and are regulated under the Dodd-Frank banking laws. The claims regarding support or use of renewable energy are regulated by the Federal Trade Commission, which publishes “green guides,” which in substance require that claims (such as Bud Light’s claim that it is “brewed with 100% wind beverage companies (Anheuser-Busch), service providers (Google, Facebook), retailers (Amazon, Walmart), telephone companies (AT&T, Verizon, T-Mobile), pharmaceutical companies (Novartis, Merck), bakeries (Bimbo Bakeries, General Mills), manufacturers (Crown Holdings), and accounting firms (Ernst & Young)—all of whom are very public in their claims to being/going “green.”

Committing to Renewable Energy

The development of utility scale renewable energy projects is burgeoning nationwide, and thus a decision to commit to renewable energy should not be limited by availability of options. Whether to access renewable energy directly, indirectly, or virtually is a critical decision, of course, but the opportunities are easily identified by consultation with industry associations, financial institutions, and utility companies—many of which have subsidiaries active in the development of renewable sources. A determination of the economic viability of renewable energy commitments is relatively straightforward, but does require professional analysis of comparative costs, reliability, and, in the case of VPPAs, the incremental value of claiming to be “green.”

While there are a wide variety of views on climate change, including its causes and cures, on the political spectrum, there can be no doubt that the overwhelming trend is toward increased reliance on renewable energy sources—and the maritime industry is clearly in a position to follow that trend.

%d bloggers like this: