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. 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 low-sulphur fuel or install scrubbers.
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 2022
The weakening macroeconomic outlook driven by Russia’s invasion of Ukraine and the economic slowdown in China, had an increasingly negative impact on the shipping and shipbuilding markets as the year 2022 progressed. Coupled with surging inflation and the energy crisis in Europe, these factors had serious implications to fuel prices and seaborne trade. Consequently, the demand for tonnage in certain cargo segments eased from previous highs, energy trade flows were altered while prices remained volatile, and passenger traffic picked up at a varying pace globally following the relaxation of Covid-19 related restrictions. Some vessel segments were better positioned than others, but all segments were impacted by these factors to varying degrees. Prices for bunker fuels began to decline in the second half of the year to the benefit of shipowners and operators. Due to various supply and demand related issues, the price spread between high- and low sulphur fuels remained at around $300/tonne on average over the latter part of the year. This improved the business case for scrubbers, although the demand for scrubber systems has remained focused mainly on newbuilds.
Simultaneously, the investment appetite for new ship capacity moderated due to full orderbooks at many shipyards, especially those in China and South Korea. This has forced owners to wait longer and pay a substantially higher price for their new ships. This, coupled with shipowners` uncertainty regarding the timing and selection of the right technologies, as well as future demand for tonnage, resulted in 1,538 contracts for new vessels being registered in the review period January–December (1,855 in the corresponding period last year, excluding late reporting of contracts). Ordering activity was supported by record-high orders for LNG carriers, especially in terms of order value.
In the key vessel segments for Wärtsilä, market sentiment continued to improve despite growing concerns on the macroeconomic outlook. In the cruise sector, the focus shifted towards managing capacity growth and occupancy levels in a profitable way and on mitigating the impact of rising operating costs. In the ferry sector, fleet reactivation has continued with operators reporting encouraging progress in traffic volumes especially for passenger traffic that is crucial for the profitability of operators. Market sentiment across the offshore segment continues to be positive as the solid demand for oil & gas provided support for prices and drove activity and investments in offshore projects, resulting in further gains for utilisation rates and day rates across the offshore fleet. The demand for offshore wind vessels has remained solid with contracting volumes, especially for Wind Turbine Installation Vessels (WTIV), exceeding expectations. The situation in the Liquified Natural Gas (LNG) carrier sector has remained extraordinary, with vessel contracting and spot freight rates reaching new record levels. Vessel contracting has been largely supported by orders linked to the capacity extension of the Qatari LNG export terminal, but also as other LNG supply projects have progressed especially in the USA. The container shipping markets eased rapidly in the second half of the year as high inflation caused demand for containerised cargo to drop. As the congestion at key container ports eased, more vessel capacity became available.
Despite growing concerns on the macroeconomic outlook and
energy independence and security raising its profile,
decarbonisation remains the main underlying trend within the
shipping and shipbuilding markets. Introduced as short-term
measures of the IMO GHG strategy, the Energy Efficiency Existing
Ship Index (EEXI) and the Carbon Intensity Indicator (CII) came
into force on 1 January 2023, helping the industry to develop a
mindset of ongoing improvement, where both smaller and more
extensive modifications can ultimately drive down onboard carbon
emissions. The regulation requires all ships to calculate their
attained EEXI to measure their energy efficiency and to initiate the
collection of data for the reporting of their annual operational CII
and the associated CII rating. Depending on the actual CII rating,
the ship might need to submit a corrective plan to show how the
required carbon intensity level will be achieved. As global pressure
builds to find solutions to abate climate change and become more
environmentally friendly, ship owners are considering a number of
options. These include slow steaming, energy saving devices,
voyage optimisation solutions, hybrid and full-electric power
systems, carbon capture and storage, exhaust gas scrubbers, and
alternative fuels. The transition to cleaner fuels has continued to
gather pace, with 466 orders placed globally for alternative fuel
capable vessels, representing 30% (21%) of all contracted vessels
and 60% of vessel capacity in the review period January–
December. Despite the currently high price for LNG, it continues to
represent over 80% of all alternative fuel capable vessel orders,
although shipowners’ interest in other alternative fuels, such as
methanol, has clearly emerged in 2022.
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 2022
The war in Ukraine, related sanctions, and the Covid-19 pandemic have together contributed to global cost inflation and price volatility. This has resulted in higher quotation prices, slower customer decision-making and considerable uncertainty in the investment environment for liquid and gas fuelled power plants and energy storage during 2022. Supply chains and trade routes are in turmoil as inflation, exchange rate fluctuations and trade restrictions shadow global business. Covid-19 related uncertainty has mostly eased with the exception of China, where the pandemic, related restrictions and their recent release have continued to disrupt supply chains.
The energy crisis has brought a clear need and ambition for a structural change in the energy sector, especially in Europe. The global markets for liquified natural gas (LNG) are being transformed as the plummeted pipeline gas flows from Russia to Europe place new constraints and demands on gas trade. Beyond some short-term setbacks, the energy transition outlook has never been stronger. Advancing the renewable energy build-up strengthens the security of supply while at the same time reducing the dependency on imported fossil fuels. Energy and climate policies around the world continue to evolve towards more ambitious decarbonisation targets. Utilities continue to update their investment strategies accordingly, which can speed up or cause delays in investment decisions. A notable step forward in climate policy was the Inflation Reduction Act in the U.S., which allocates substantial incentives for renewables, battery energy storage, and other clean energy technologies. Going forward, the increasing levels of intermittent renewable energy in power systems are expected to further accelerate the need for various flexible balancing solutions, such as energy storage and grid-balancing power plants. Demand for services continued at a good level, and customers are showing interest in long-term agreements, thus providing stability to the business, which is lumpy by nature.
Wärtsilä’s market share in the up to 500 MW market segment increased to 8% (7), as global orders for natural gas and liquidfuelled power plants increased by 13% to 26.7 GW during the twelve-month period ending in September 2022 (23.5 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.