Updated 11.2.2022
Wärtsilä focuses on the marine and energy markets with products, solutions, and services. Our target markets are sensitive to business cycles. However, this is offset by the somewhat different business cycles in the various market segments. Wärtsilä’s manufacturing model brings flexibility to both manufacturing and cost structure through outsourcing and supports profitability independently of the business cycle.
Decarbonisation and digitalisation transforming marine operations
The transition towards decarbonised operations is of paramount importance to the maritime industry, and stricter regulations on ship emissions are expected to come into force worldwide. Over the coming years, industry players must work together to develop economically viable options that meet the International Maritime Organisation’s (IMO) emission targets. The IMO aims to reduce the average CO2 emissions per transport work by at least 40% by 2030 and the total annual greenhouse gas (GHG) emissions by at least 50% by 2050, compared to 2008 levels. Furthermore, the EU is set to include shipping in its emissions trading scheme, while green finance has gained traction with increased attention on green bonds and sustainability linked loans.
Vessel owners must embrace changes in four areas for the transition towards decarbonisation to succeed:
The adoption of alternative fuels is key to the achievement of GHG targets. Significant investments have been made in zero-carbon fuels, such as green ammonia and hydrogen. However, LNG remains the most well-developed alternative, with 3% of the fleet and 26% of the order book fitted or set to be equipped with dual-fuel engines, and more than 120 ports currently providing LNG bunkering services. The abatement of local pollutants is also a key focus area, where the global sulphur cap set by the IMO came into force at the beginning of 2020. This means that ships have either to use lowsulphur fuel or install scrubbers. Currently, 23% of the fleet and 28% of the order book in terms of gross tonnage is fitted with scrubber systems.
Significant leaps in energy efficiency are also possible through the application of innovative technologies, both in newbuild and retrofit projects. These include hybrid systems, hull air lubrication, rotor sails, as well as advanced rudder and propeller designs. The drivers for the implementation of new solutions are balanced between the common effort to reduce emissions and the potential for lowering operating costs. In the context of digitalisation, fleet optimisation solutions are increasingly being acknowledged as central to the global requirement for reducing operating costs, while complying with environmental ambitions. New digital applications and cloud-based remote solutions are gaining traction, while ship-to-port communications, as well as document and data exchange, are increasingly being handled electronically rather than via personal interaction. In parallel, different degrees of autonomous shipping are being explored as a key means for boosting fleet efficiency, safety, environmental sustainability, and overall operational performance.
Marine markets in 2021
The shipping and shipbuilding markets were characterised by mixed activity levels across different vessel segments during 2021. Altogether 1,855 contracts for new vessels were registered in the review period January–December (815 in the corresponding period last year, excluding late reporting of contracts), largely driven by containerships. Growing and pent-up demand, along with logistical disruptions, has resulted in a shortage of available tonnage in the containership, gas carrier, and bulker sectors, and has pushed earnings and newbuild contracting to levels exceeding the pre-Covid era. The surge in newbuild ordering has supported the forward cover of larger shipyard groups, which have managed to mitigate the impact of a rapid increase in raw material costs by increasing the price for newbuild vessels. However, high earnings and tonnage demand have led to postponements of activities that require dry-docking, such as scrubber retrofits. At the same time, the progress in Covid-19 vaccination programmes, and the lifting of travel restrictions in key cruise locations have resulted in further reactivation of the cruise fleet. However, the impact of the Omicron virus variant over time remains an uncertainty. Newbuild cruise activity is still limited, and utilisation rates remain below 2019 levels.
The most attractive vessel segments for Wärtsilä, namely specialised tonnage, have recovered from the turmoil caused by the pandemic to a varying degree. The reactivation of cruise vessels significantly improved during the second half of the year, as operators resumed sailing. As at the end of December, around 70% of the cruise fleet capacity was active, up from around 50% at the end of September, and around 20% at the end of June. The ferry market continues on a positive trend, although passenger travelling is still somewhat limited due to Covid-19 related restrictions. Activity in the offshore oil and gas segment marginally improved, supported by a slight rise in vessel demand and elevated demolition activity. The demand for offshore construction-related vessels, such as wind turbine installation vessels has improved, thanks to strong growth in active offshore wind farms. The LNG (liquified natural gas) carrier sector remains healthy, as inventories have been at record-low levels, thus supporting LNG trade and the demand for tonnage, regardless of a strong increase in gas prices. The container shipping markets have continued to see extraordinary market conditions. Severe port congestion and widespread logistical disruption, alongside firm demand, have led to further new records in freight and charter rates, as well as newbuild ordering. The tanker market continued to face challenges with weak demand, especially in the crude sector.
The acceleration of environmental concerns remains the main underlying trend, as the regulatory framework and wider policy announcements are being ramped up from political regulators, cargo owners, and financiers, all of whom are building pressure to move faster than the current targets set by the International Maritime Organisation (IMO). In July, the European Commission adopted a package of proposals (‘Fit for 55’) to cut greenhouse gas (GHG) emissions by at least 55% from 1990 levels by 2030. One of the many proposals is to include shipping in the EU Emissions Trading System from 2023. Another is the FuelEU Maritime Initiative, which aims at increasing the adoption of cleaner technologies and sustainable alternative fuels by imposing a limit on the GHG intensity of energy used by ships. As the global pressure to find solutions to stop climate change builds, ship owners are considering a number of options, including slow steaming, energy saving devices, voyage optimisation solutions, hybrid and full-electric power systems, and alternative fuels. The transition to cleaner fuels has already started, with 384 orders placed globally for alternative fuel capable vessels, representing 21% (17%) of all newbuild contracting in the review period January–December. LNG is the dominant choice and is gaining further traction, although other alternative fuels are slowly emerging. The price differential between high and low-sulphur fuels increased throughout the year to USD 150 per tonne. The interest in scrubber installations continues to be mostly driven by newbuilds, with orders recorded for 231 vessels globally in 2021. Scrubber retrofitting activity continued to be muted.
Focus on energy transition and flexibility
Wärtsilä’s operating environment is influenced by the ongoing energy transition. A more sustainable energy infrastructure is emerging, driven by economics and climate policies. The past decade has witnessed growing investments in solar and wind energy, as these technologies have become the cheapest source for new bulk electricity in two thirds of the world. By 2030, solar and wind technologies are expected to become cheaper than existing baseload generation almost everywhere. The cost of energy storage technology has also plummeted. The storage market is expected to grow rapidly in the coming years, driven by economies of scale and technology development. In parallel, climate policies, such as tightening emissions legislation, are forcing the closure of ageing carbon-intensive energy sources, thus further encouraging the deployment of renewable energy.
The intermittent nature of solar and wind generation is gradually beginning to impact the running hours of conventional thermal capacity designed typically for baseload operation. The role of power system flexibility has thus become a topic of growing importance, as it will be a key enabler of sustainable power systems in the future. Flexible gas-based generation and energy storage are the key solutions for meeting future power system reliability and flexibility needs. Power-to-X solutions will further support reaching the 100% share of renewables in power systems.
In emerging markets, electricity demand is increasing, along with economic growth and improving standards of living. Interest in renewable energy sources is also increasing rapidly as a result of lowering costs, but conventional thermal technology still plays a key role in power production in emerging countries. Demand is the highest for flexible technologies that can adapt to an increasing share of renewables in the future, thus enabling the most sustainable and affordable power systems.
Natural gas continues to be considered as a transition fuel towards more sustainable energy systems. In the developing world, the gas infrastructure is improving and replacing more carbon-intensive energy sources in baseload generation. On a global scale, the role of gas will change, as renewable energy sources will impact the running hour of baseload generation, and more system flexibility will be required. Flexible gas technology will have a key role to play in countries where the energy transition is more advanced, as well as in developing countries seeking future-proof baseload technology.
Hydrogen and synthetic fuels offer interesting possibilities for decarbonised power generation in the future. In a power system that incorporates renewables and battery storage, some of the excess renewable energy could be used in the production of green hydrogen to fuel power plants that balance the power system when cloudy or calm weather reduces the output of solar and wind power plants. Green hydrogen produced via electrolysis could be used as a fuel as such, or could be synthesised to facilitate its handling and use. Hydrogen and synthetic fuels are especially valuable in providing medium and longterm flexibility, as they can be stored and transported when needed. In addition to technology development, wider adoption of hydrogen in power or other sectors, such as industry or transportation, would require extensive investments in infrastructure.
Technological progress, along with increasing power system complexity with intermittent renewable energy sources, is paving ways to use new digital technologies. Remote monitoring, as well as recommendations and forecasting enhanced by artificial intelligence, are becoming more common in power plant operations. New data, along with platformbased business models and solutions, enable system-level integration and asset base optimisation throughout the entire lifecycle of the assets.
Energy markets in 2021
The global liquid and gas fuelled power plant markets were recovering towards the end of 2021, despite the pandemic and the resulting weakening of the investment environment. While the market situation is improving, customers still continue to postpone investments due to the prevailing uncertainty regarding the duration, development, and economic impacts of the pandemic. As vaccination programmes in a large part of our core markets move slowly, full recovery will most likely take time. Additionally, energy and climate policies are being developed and reviewed around the world to drive more ambitious decarbonisation targets, and utilities continue to update their investment strategies, which is causing uncertainty and delays in decision making. The vast majority of global greenhouse gas emissions is targeted by national pledges and net-zero targets, but detailed plans and strategies to cut emissions already during this decade are still in the making. In the energy storage markets, activity has continued at a good level, driven by the increasing need for short-term flexible capacity in power systems with a high share of renewables. Going forward, the increasing amount of intermittent renewable energy in power systems is expected to bring forward the need for various flexible solutions, such as energy storage and balancing power plants.
Financial stimuli by governments and financial institutions to the energy sector are intended to support investments in green energy, but the execution of such plans on a wider scale is still pending. Demand for services was at a good level, and customers continued to show interest in long-term agreements, thus providing stability to the business that is lumpy by nature.
Wärtsilä’s market share in the up to 500 MW market segment decreased to 5% (6), while global orders for natural gas and liquid power plants increased by 10% to 19.2 GW during the twelvemonth period ending in September 2021 (17.4 GW at the end of June). Global orders include gas turbine and Wärtsilä orders with prime movers over 5 MW in size. The data is gathered from the McCoy Power Report.
