THE IMPACT OF THE SULPHUR EMISSION CONTROL AREA ON THE SCOTLAND-CONTINENT FERRY SERVICE. Chris Rowland and Chris Wright MDS Transmodal Ltd.

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1 THE IMPACT OF THE SULPHUR EMISSION CONTROL AREA ON THE SCOTLAND-CONTINENT FERRY SERVICE Chris Rowland and Chris Wright MDS Transmodal Ltd. 1 INTRODUCTION 1.1 The history of the service The concept of the Scotland-Continent ferry service first emerged in the early 1980s, but the history of the Rosyth-Zeebrugge ferry service is relatively short - spanning only 11 years - and appears, at least at first sight, to be a story of gradual decline. The concept of a direct service between the east coast of Scotland and the Near Continent was promoted by policymakers in Scotland as a means to allow overseas tourists to travel to Scotland without driving through England and provide Scottish shippers with a direct route to Near Continent markets. From an environmental point of view it was regarded very favourably by policy-makers in Scotland, Brussels and Westminster because it reduced HGV and passenger car miles travelled on the GB road network. Following a public sector selection process organised by Scottish Enterprise in , Superfast Ferries was offered the opportunity to operate the service, with various forms of support being provided by the public sector. In May 2002 Superfast Ferries started a passenger and freight service with two fast conventional ferries (with, by current standards, very high fuel consumption), offering a six times a week frequency and a 17 hour crossing time. In 2005 the service was reduced to three times a week operated using a single ship and in September 2008 Superfast decided to close the service completely, citing continuing losses, particularly due to a lack of freight traffic. However, within a few months, a Rosyth-Zeebrugge service was operating once more. In May 2009 a new operator, Norfolkline, announced that it would re-start the route, again offering a thrice weekly service using a single ship for both passengers and freight but with a longer crossing time of 20 hours. The service was provided with 2 million of short-term operating subsidy from Transport Scotland. At the end of 2009, Norfolkline was bought by DFDS Seaways and, despite the extent of DFDS s existing network of routes between the east coast of Great Britain and the Near Continent, the service continued. About a year later, DFDS Seaways decided to end the passenger service and focus on a freight-only service for unaccompanied freight using two vessels and offering a four times a week service; no doubt, at least in part, this decision was made to protect their longestablished passenger service from Newcastle to Amsterdam. In April 2011 the service quality was reduced once more, with only one ship - Finlandia Seaways being deployed by DFDS to provide a thrice weekly service with a crossing time of 20 hours.

2 1.2 Freight and passenger traffic volumes Overall, the history of the service since 2008 has been one of apparent gradual decline, with the withdrawal of the passenger service, followed by a reduction in frequency and an increase in the crossing time for freight customers. However, this apparent decline has not been reflected in the actual volumes of traffic carried by DFDS Seaways since 2008, as shown in Figure 1 below. The data, which has been drawn from the Department for Transport s Maritime Statistics publications, shows that DFDS has focused increasingly on attracting slower-moving unaccompanied freight carried in containers double-stacked on shipborne trailers, rather than accompanied HGVs or large volumes of unaccompanied trailers. DFDS has chosen to compete with short sea container operators, by offering a service (probably to major shippers in Scotland and on the Continent) that at least matches the frequency of the load-on load-off (lolo) services but with a faster crossing time. Note that the traffic shown in Figure 1 has been calculated in terms of freight units carried, assuming that two containers are transported on each shipborne trailer. The passenger traffic volumes for the service, measured in terms of passenger cars, were relatively healthy until 2006, when the low cost airlines began to add capacity on routes between the continental mainland and Scottish airports (see Figure 2).

3 The low cost airlines services are likely to have had two key impacts on the Rosyth- Zeebrugge ferry service; on the one hand they provided a cost effective modal substitute for the ferry service, even if customers may need to hire a car at their destination airport, and on the other hand they provided access to substitute destinations by offering rapid access to the Mediterranean beyond grey skies Europe. 1.3 SECA: the new regulatory threat The next major threat to the commercial viability of the service is likely to come from the introduction of the Sulphur Emission Control Area (SECA), which will affect all shipping within, into and out of the Baltic, North Sea and English Channel from January While the introduction of the SECA is justified by the need to reduce sulphur emissions, which have a significant impact on human health, it is likely to damage the economics of longer distance roll-on roll-off (roro) services that help to remove traffic from the Scottish and GB road networks. This issue was raised in relation to the Scotland-Continent ferry service in the Scottish Logistics Report 2012, which concluded: It is likely that when the North Sea becomes a SOx Emissions Control Area (SECA) the costs of switching to cleaner fuel will force shipping lines to cull their marginal short-sea services. The Rosyth-Zeebrugge service may not survive this cull. This paper will present the results of research carried out by MDS Transmodal on the impact of the introduction of the SECA on freight traffic volumes carried on ferry services between Great Britain and the European continental mainland, including the Rosyth-Zeebrugge service, and therefore seeks to provide some quantified evidence on the potential long-term viability of the service. It will explain the policy background to the introduction of the SECA and the options available to operators to meet its requirements and will then set out the results of freight modelling to show the potential impact of the introduction of the SECA on the Rosyth-Zeebrugge service and the whole GB-Continent freight ferry market using a freight demand simulation model. The article will conclude by providing some conclusions on the future prospects for the Rosyth-Zeebrugge ferry service, taking into account the alternatives available in the market

4 via, in particular, the Tees, Humber and the Dover Straits and will provide some analysis of some of the potential environmental impacts in terms of any increase in HGV kilometres in Scotland and England. 1.4 Methodology The research was carried out by developing input scenarios that could be used to test the impact of SECA using the GB Freight Model (GBFM), which is an established freight demand simulation model that allows changes in input costs for door-to-door freight flows between GB and the Continent to be reflected in changes in mode and ferry route. Some initial desk research was required to establish appropriate assumptions to be included in the input scenarios. The GBFM was then used to assess how the GB-Continent roro market might respond to the changes to the regulatory environment as a result of the implementation of the SECA rules. The road assignment module of the model was then used to estimate the change in volumes of HGV traffic on each road link for each scenario and therefore calculate changes in HGV kilometres. The results for the market as a whole have been used by clients in the UK ports industry and have been discussed at several roro industry conferences and seminars in However, the results specifically for the Scotland-Continent ferry service have not been discussed with any operators in the freight market. 2 THE INTRODUCTION OF SECA IN 2015 The Sulphur Emissions Control Area (SECA) will enter into force in the Baltic, North Sea and Channel from 1st January 2015 and will limit fuel emissions from ships to 0.1% sulphur compared to the current limit of 1.5%. This initiative by the International Maritime Organization and the European Union is justified by the likely positive impacts on human health, but many observers of the maritime industry believe there will be a significant impact on the economics of ferry services operating to, from and within the SECA. This is because Heavy Fuel Oil (HFO), which is the cheapest marine fuel, will be banned unless the ships emissions are cleaned using scrubber technology which requires investment by shipping lines that will have to be paid for by their customers in the medium- to long-term. Marine Gas Oil (MGO), the main existing alternative fuel, is much more expensive than HFO. Liquid Natural Gas (LNG) may provide a cheaper alternative fuel for new ferries in the future, but very few large commercial roro vessels with LNG engines have been built, the retrofit of LNG engines does not appear to be possible and, in any event, the refuelling infrastructure is unlikely to be available in many ports by 1 January Ferry services operate in a competitive environment, where additional costs due to changes in the regulatory environment can only be absorbed by operators in the short-term; in the medium-term any additional costs incurred have to be passed on to their customers through an increase in freight rates. Although all roro vessels will be affected by SECA in the same way from a regulatory point of view, the commercial and economic impacts on individual services will depend upon:

5 The length of the crossing: Ships that operate on longer crossings across the North Sea will incur higher fuel costs per unit carried because the units are carried over a longer distance and any investments required in the ship (in scrubber technology, for example) have to be recouped from customers over a fewer number of units carried per annum. While P&O Ferries Spirit of Britain (with a capacity of 2,700 lane metres) may make up to 12 crossings between Dover and Calais every 24 hours, the current vessel deployed by DFDS Seaways on the Rosyth-Zeebrugge route - Finlandia Seaways - only makes a single crossing over the same period of time and is able to carry 2,000 lane metres of freight. Of all the services between Great Britain and the Near Continent (as opposed to Scandinavia and the Baltic), the Rosyth- Zeebrugge service is the longest and therefore the most vulnerable to an increase in fuel costs. The age of the vessel deployed: Roro vessels have useful economic lives of about 25 years and major capital investments in scrubber technology for existing ships may not be justified if the remaining life of the vessel would not allow the ship to carry enough traffic to justify the investment. Finlandia Seaways is about 12 years old and its remaining life may not justify spending (say) 2.5 million on a scrubber. 3 RESULTS OF MODELLING 3.1 Introduction to scenarios and GBFM The overall approach to the freight modelling carried out for this paper has been to develop scenarios that incorporate the change in costs per freight unit carried by roro vessels on individual routes operating in the GB-Continent unitload freight market as a direct result of the introduction of the SECA and which would need to be passed onto customers through changes in the freight rate charged. These scenarios are as follows: MGO Scenario, where all the roro vessels burn low sulphur (but more expensive) fuel from 1 January 2015; HFO & Scrubber Scenario, where all roro vessels continue to burn high sulphur fuel but the roro operators invest in scrubber technology to clean the exhaust emissions. LNG Scenario, where all roro vessels switch to burning liquid natural gas. A report produced in March 2013 for the UK Chamber of Shipping on behalf of ferry operators across the North Sea and the Western Channel has confirmed that the operators have significant doubts about the efficacy of scrubber technology. Furthermore, the use of LNG does not appear to be a practical alternative before January The lead time for new vessels is at least 18 months and the only operators that have decided to invest in LNG vessels, in an uncertain economic and financial climate where charter rates are currently very low, have been those operating well-established ferry routes in the Baltic and Norway with dedicated vessels. In addition, there is almost no refuelling infrastructure in place at European ports for LNG-powered vessels. The LNG Scenario is mainly valuable therefore in that it provides an estimate of the likely impact of the widespread use of this fuel in the long-term.

6 The scenarios apply the same technical solutions simultaneously to all ships on all routes in order to keep the scenarios reasonably simple and transparent; the alternative would be to seek to second-guess the strategies that will be employed by different operators on each route and taking into account the characteristics of the vessels deployed on each route, which would be very complex and highly subjective. The above analysis of the three technical solutions suggests that the only practical option for the ferry operators to allow them to meet the regulatory requirements on 1 January 2015 is to switch from using HFO to MGO. The MGO Scenario modelled using the GB Freight Model may therefore be the most realistic scenario for The changes in costs that result from each scenario have been calculated for each relevant GB-Continent route and then reflected in changes that are charged accompanied and unaccompanied roro units within GBFM. This model, which forms the freight module of the UK s National Transport Model, is an economic demand simulation model that explains the volumes of domestic and international freight transported on the road and rail networks and on ferry routes based on the generalised costs for road hauliers and logistics providers between origins and destinations in Great Britain, Ireland and the continental mainland. It contains an origin-destination matrix for freight at a county level for road and a terminal level for rail and at a generally regional level for the continental mainland. The freight that is transported between the origins and destinations in this matrix is able to choose the most appropriate route based, in general terms, on seeking to secure the lowest generalised cost and therefore taking into account the financial and time-based costs for the freight transport operator; this means that the model takes into account not just the fixed and variable haulage costs incurred by a Scottish haulier carrying a load between (say) Glasgow and Frankfurt, but also the freight rate for the shipping service that is used.

7 3.2 Assumptions for scenarios In the MGO Scenario we have assumed that each vessel operating between GB and the Continent in 2015 will switch to using marine gas oil at a cost of 610 per tonne. For the HFO & Scrubber Scenario, we have assumed that each vessel operating between GB and the Continent in 2015 will: Continue to use heavy fuel oil at a cost of 442 per tonne; Fit a scrubber with a one-off capital cost of 2.5 million. This capital cost is then amortised over a period of 10 years, so that the cost is added to the relevant freight rate per unit carried over this period. Experience a 1% reduction in effective capacity because of the amount of space that is taken up by the scrubber technology and changes to the stability of the vessel. For the LNG Scenario, we have assumed that each vessel operating between GB and the Continent in 2015 will be LNG-powered and will therefore be able to secure the same power from using LNG rather than HFO or MGO at an equivalent cost of 265 per tonne. These assumptions were used to estimate the impact of each scenario on the cost per unit for each unitload service (roro and lolo) between GB and the Continent for the main types of traffic (i.e. accompanied HGVs, unaccompanied trailers, double-stack containers, lolo containers) using generic cost models. The results for the Rosyth-Zeebrugge service, expressed in terms of a percentage change in total costs per unit carried, are shown below in Table 1. Table 1: Percentage change in cost per unit for SECA scenarios for the Rosyth- Zeebrugge ferry service in 2015 Scenario % change in cost/unit for accompanied HGVs % change in cost/unit for unaccompanied trailers % change in cost/unit for doublestack containers MGO +12% +15% +10% Scenario HFO & +5% +5% +3% Scrubber Scenario LNG -6% -12% -9% Scenario Source: MDS Transmodal The increase in cost per unit (for the MGO and HFO & Scrubber Scenarios) or reduction in cost (for the LNG Scenario) was then added to the freight rates for each service that is included in the GB Freight Model, therefore assuming that the roro operators would be required to pass on the changes in costs to their customers.

8 3.3 Results of scenarios: the GB-Continent market Figure 3 shows the results of the modelling from GBFM for the whole market for 2015 by shipping mode and by corridor for each of the three scenarios and in comparison with the Base Case included in the model. The modelling includes all roro and short sea lolo services operating between the range of ports including the Forth and Plymouth in GB and between Scandinavia and Western France on the continental mainland. It also includes rail freight services through the Channel Tunnel and the Eurotunnel Freight Shuttle services that compete head-to-head with the Dover Straits ferry services; we assumed in the modelling that, although the Eurotunnel Shuttle services would not be directly affected by the SECA regulations, Eurotunnel would act as a price taker and change its freight rates in line with those charged by roro services to/from Dover. The results of the modelling suggest that, if all shipping lines switched to MGO or installed scrubbers so they could continue to use HFO, then some traffic would switch to the shorter crossings of the Dover Straits. The services that would be most affected would be the longer distance roro services across the North Sea ( minute crossings, including the Rosyth-Zeebrugge service), which would see their overall market share fall from 13% (Base Case) to 9% for the MGO Scenario and 12% for the HFO Scrubber Scenario. This is explained by the short distance routes being able to spread the additional cost of fuel or the capital cost of the scrubber technology over a larger number of units carried because of the greater number of crossings that can be achieved by the vessels. Given that the MGO Scenario is most likely to be adopted by the shipping lines by 2015, the introduction of SECA is likely to lead to a reduction in traffic on the longer distance (and more environmentally sustainable) routes; this means that a change in the regulatory environment, with the admirable objective of reducing emissions from ferries engines, is

9 likely to lead to the ferries customers travelling longer distances by road and increasing their emissions of particulates and greenhouse gases. However, the modelling also suggests that a radical switch to the use of LNG by all operators would lead to the long distance routes increasing their market share from 13% to 16%. In the longer term, the appropriate commercial response by the ferry operators on longer distance routes may be to gradually replace their existing vessels with LNG-powered ships. However, the current economic and financial climate is not conducive to such a switch. 3.4 Results of scenarios: the Rosyth-Zeebrugge service The modelled impact on the traffic volumes of the Rosyth-Zeebrugge service for each scenario is shown in Table 2 below. Table 2: Results of modelling for SECA scenarios for Rosyth-Zeebrugge ferry service in 2015 Scenario Total traffic (freight units p.a.) Absolute change from Base Case (freight units p.a.) % change from Base Case Base Case 45,300 N/A N/A MGO Scenario 36,500-8,800-19% HFO & Scrubber 43,300-2,000-4% Technology Scenario LNG Scenario 50,700 +5, % Source: MDST GB Freight Model, February 2012 The modelling suggests that if the Rosyth-Zeebrugge service switched to using MGO (along with all other services), it would lose almost 20% of its traffic. However, if the service continued to use HFO after fitting a scrubber to Finlandia Seaways (along with all other services), then the impact would be much less significant. In the longer term, the service would be able to increase its traffic by 12% compared to the Base Case if all roro services switched to using LNG. 3.5 Results of the modelling: environmental impacts While recognising that the SECA regulations will reduce the emissions from ferries, which will therefore have an environmental benefit, this section of the article considers only the environmental impacts from the switching of freight traffic between ports as a result of SECA changing the operators costs on individual routes. In order to estimate the environmental impacts of SECA in both Scotland and the rest of GB, we assigned the freight units that switched to or from the various roro services under the three scenarios to the road network that is included within the GBFM to produce outputs in terms of changes in HGV kilometres (Table 3).

10 Table 3: Impact of SECA, change in HGV km in Scotland and the rest of GB in 2015 Million HGV km Scenario Change in HGV km in Scotland Change in HGV km in England & Wales Total change in HGV km MGO Scenario HFO & Scrubber Technology Scenario LNG Scenario Source: MDST GB Freight Model, February 2012 Table 3 above suggests that SECA would lead to quite significant increases in HGV kilometres on the GB road network under the MGO Scenario and the HFO & Scrubber Scenario, but that only about 2% of those HGV kilometres would be in Scotland. However, the additional HGV kilometres in Scotland would be concentrated on a few key routes, notably the motorway and trunk road network in the Central Corridor and the M74 between the Central Corridor and the English border. The changes in HGV tonne kilometres were then converted into theoretical net external costs or benefits using the Modal Shift Benefit valuations per lorry km that are used by the Scottish Government to evaluate freight grant applications (Table 4). The value applied was the average weighted value of 0.27/HGV kilometre. Table 4: Impact of SECA, value of environmental costs & benefits in Scotland and the rest of GB in 2015 m benefits or ( m costs) Scenario Change in HGV km in Scotland Change in HGV km in England & Wales Total change in HGV km MGO Scenario ( 0.4) ( 19.1) ( 19.4) HFO & Scrubber ( 0.2) ( 8.9) ( 9.1) Technology Scenario LNG Scenario Source: MDST GB Freight Model, February IMPLICATIONS FOR THE ROSYTH-ZEEBRUGGE FERRY SERVICE The results of our research suggest that the ferry operators on the Dover Straits could meet the requirements of the SECA regulations on 1 January 2015 by simply switching to burning MGO and would increase their traffic at the expense of longer distance routes. However, by adopting the same approach, our modelling suggests that the Rosyth-Zeebrugge route would risk losing 20% of its traffic. None of the ferry operators in the GB-Continent market has chosen to respond so far to the SECA regulations by ordering new LNG-engined ships and there is almost no LNG refuelling infrastructure in place. It is therefore highly unlikely that there will be any LNG vessels operating in this market on 1 January 2015.

11 The decision for DFDS is therefore whether it is worthwhile installing a scrubber on the vessel operating on the Rosyth-Zeebrugge route. The current vessel, Finlandia Seaways, was built in 2000 and so will have about 10 years of remaining useful economic life in Based on six crossings a week and carrying about 80 units on each crossing, the investment of 2.5 million in a scrubber would add a cost of over 10 per unit carried over the vessel s remaining useful economic life. In the current economic environment where charter rates are very low, this investment may not be attractive for DFDS. In the long-term, however, LNG provides an opportunity for operators of long distance routes such as Rosyth-Zeebrugge because it reduces variable costs per nautical mile and would, based on our modelling, allow the route to increase its traffic by 12%. There would need to be LNG refuelling facilities in at least one of the two ports and it would be very surprising if the Port of Zeebrugge, which is a major European roro port and also developing its deep sea container traffic, did not have LNG refuelling facilities by (say) There would also need to be a more developed market for the construction of LNG-powered ferries; two large vessels have already been delivered for an operator in the Baltic and the SECA regulations are likely to provide a boost to this market s development. In conclusion, our analysis tends to confirm the view on the potential commercial prospects for the Rosyth-Zeebrugge that were expressed in the Scottish Logistics Report Our research also suggests that the SECA regulations could lead to an additional 71 million HGV kilometres per annum of road freight on the GB road network from In these circumstances the SECA regulations would have created a degree of market failure, which might justify investment by the public sector in Scotland to encourage rapid take-up of LNG technology on the Rosyth-Zeebrugge route. This could involve facilitating the development of LNG refuelling infrastructure on the Forth and even investing in an LNG-powered vessel that could then, following a further tender process, be chartered to an operator. However, any such initiative could fall foul of competition rules because DFDS is carrying containers in competition with short sea load-on load-off (lolo) shipping services. Furthermore, the competition issues cannot easily be restricted to the short sea market between Scotland and the continental mainland because the lolo operators are also carrying deep sea containers for transfer to mainline container services from ports such as Rotterdam to deep sea locations around the world. Policymakers, ports and ferry operators need to react quickly to try to mitigate the unintended but entirely predictable consequences on the routing of freight between Scotland and the continental mainland as a direct result of the increasingly imminent implementation of the SECA.

12 BIBLIOGRAPHY AMEC Environmental & Infrastructure UK Limited (2013), Impact on Jobs and the Economy of Meeting the Requirements of MARPOL Annex VI, report prepared for the UK Chamber of Shipping McKinnon, A., Piecyk, M. (2012), Scottish Logistics Report, report prepared for the Freight Transport Association