Retrofit fund ties lease payments to performance

For the shipowner, engagement with FEET starts with a specific retrofit proposal. Mr Balani explained that a shipowner approaches FEET with a candidate vessel and technology. The fund then assesses the ship and project and finances up to the full retrofit cost of the equipment and the sensor package needed to monitor fuel consumption, wind conditions and power savings, among other parameters. Vessel performance after the retrofit is continuously tracked, with data verified against agreed methodologies by an independent third party. Lease payments are then linked to this verified performance, rather than to a pre-agreed theoretical saving.

"The credibility of the pay-as-you-save structure depends on the quality of measurement"

The structure is illustrated in a theoretical case study developed by GCMD and ING for a five-year-old product tanker retrofitted with a wind-assisted propulsion system. In this example, the lease tenor is set with reference to the expected payback period of the technology; the parties suggested a seven-year term as an illustration. Under FEET, the shipowner makes fixed quarterly lease payments alongside an annual performance-based payment, calculated from verified fuel and regulatory savings. For an ocean-going vessel assessed for the fund, the team indicated an expected range of 1,000 to 5,000 tonnes of CO2 abated per year. Using a fuel price assumption of US$500 per tonne, they translated this into fuel savings of US$0.15M to US$0.75M per year, before considering any further savings due to regulatory carbon costs on fossil fuel consumption.

High-frequency data from on/off testing are used to quantify that performance. Mr Balani said sensors “collect data at least once every 30 seconds during on-off tests to isolate exactly how much the wind-assisted propulsion system is contributing to propulsion.” In periods with favourable winds, verified savings increase, a share of which goes to the annual performance-based lease payment. In less favourable conditions, the performance-based component falls, so the cost of capital recovery tracks realised savings, rather than modelled scenarios.

The way gains and shortfalls are shared between fund and shipowner rests on this pay-as-you-save mechanism, and the way projects are pooled is key to FEET’s attractiveness. ING managing director, transport & logistics APAC, Jens Van Yperzeele, noted that “shipowners’ payments to FEET are governed by a pay-as-you-save mechanism, which ensures that financial outcomes are tied to real-world performance, rather than theoretical projections.”

There are several safeguards: high-frequency data collection using strict protocols; portfolio diversification across technologies and vessels; collaborative screening of trading patterns and age; and the use of four capital layers - catalytic equity, commercial equity, preferred equity and senior debt - to balance risk and pricing. GCMD acts as the decarbonisation adviser, modelling assumptions about routes and operating profiles before any agreement is signed, as well as calculating annual savings.

The position of charterers was identified as a structural constraint that FEET is intended to address. GCMD noted that the long-standing “split-incentive” problem leaves shipowners bearing capex while charterers enjoy most of the fuel savings. Mr Balani said: “FEET is specifically designed to help address the ‘split-incentive’ between shipowners and charterers,” shifting the charterer from a “passive beneficiary to a collaborative partner.”

Although the unsecured lease sits between FEET and the owner, charter arrangements are reviewed in project development because the operational profile dictated by the charterer strongly influences the retrofit’s performance. FEET funds the sensor package and does not require capital contributions or performance guarantees from charterers; instead, verified savings on the charterer’s fuel bill form the basis for calculating performance-linked lease payments.

The credibility of the pay-as-you-save structure depends on the quality of measurement. GCMD’s earlier performance pilots on energy efficiency technologies feed directly into FEET’s approach to data collection and analysis. Mr Balani noted that GCMD “installed high-frequency sensors and data collection systems to capture detailed vessel operational parameters, including shaft power, fuel consumption, and navigational conditions,” and that on newer ships only modest adjustments to existing shipboard sensors were required.

Conducting on/off tests onboard operational vessels is complex, due to the inherent variability in the marine environment. Small fluctuations in wind, waves or ship handling can obscure the signal of interest. In addition to intentional tests carried out by the crew, the data may also capture unintentional on/off transitions resulting from the sails’ control systems.

"Smaller owners have struggled to access energy efficiency retrofits under conventional financing models"

GCMD considers a transition valid only when both operational and environmental parameters are stable, ie wind direction and speed do not change markedly throughout the transition. The pre-screened datasets are then analysed using protocols designed to measure differences in performance due to the retrofit, rather than to external variability.

FEET is positioned to close what it has described as the data-financing gap for energy efficiency technologies. Mr Balani said that, following the fund’s first closing, “our immediate next phase is to begin investing in multiple projects across a range of technologies, vessel owners and manufacturers,” supported by a pipeline of projects already developed. He added that GCMD has “additional pilots aimed at quantifying energy savings from different types of EETs,” which would in turn support the fund’s aim to diversify its portfolio. The ambition, reiterated in both the original fund launch and subsequent responses, is to reach US$500M by 2030 and support up to 200 ships while building a library of performance data under wider conditions and reducing financing costs.

Scaling from an initial pool of about US$35M to US$500M would require FEET to expand by around a factor of 14 in five years. Mr Balani argued that the potential demand exists, noting that there are thousands of shipowners worldwide and that about 60% of them operate fleets of fewer than 20 vessels. In his view, many of these smaller owners have struggled to access energy efficiency retrofits under conventional financing models. By separating retrofit funding from vessel mortgages, grounding capital recovery in verified performance and sharing risk across a blended pool of capital, FEET’s backers contend that it offers one framework through which those owners can take forward projects such as wind-assisted propulsion and air lubrication at scale.

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