Which Factors Determine the Payback Period of an ESD Retrofit on a Ship?
The payback period of an Energy Saving Device (ESD) depends on the total additional investment and the annual net saving that the retrofit actually delivers. A Pre-Swirl Stator (PSS), Pre-Duct, Propeller Boss Cap Fins (PBCF) or Rudder Bulb can reduce the propulsion energy required, but its financial value is also determined by the operational profile, fuel price and engine load. Engineering, structural modifications, installation and any additional downtime also affect the investment. During subsequent operation, maintenance costs, changing operating conditions and the remaining service life may limit the return. In charter operations, there is an important additional distinction: the party financing the ESD does not automatically receive the fuel saving. A reliable business case therefore compares the additional costs and benefits of the same technical modification, accounts for uncertainty about the expected performance and makes clear for whom the investment is recovered. The highest calculated power saving does not necessarily deliver the shortest payback period.
Which Costs Must Be Included in the ESD Investment?
The purchase price of an ESD is only one part of the total retrofit investment. Before a device can be installed, ship data, hydrodynamic engineering and a suitable structural design are needed. Depending on the design, additional inspections, geometric measurements, strength calculations and approvals may be necessary.
Costs vary considerably between ships and ESD types. A PBCF suitable for the existing propeller hub may, under favourable conditions, involve a limited modification. For a Pre-Swirl Stator or Pre-Duct, attachments, reinforcements and additional steelwork may be needed. For a Rudder Bulb, the extent of the installation depends partly on the existing rudder structure. The availability of reliable drawings can also affect the project: if the actual geometry first needs to be measured, this entails additional preparation.
For a sound business case, what matters most is which costs would not have arisen without the ESD retrofit. If the ship is already undergoing a scheduled dry-docking, the normal costs of that maintenance do not belong entirely to the ESD investment. Additional yard work, special installation equipment or an extension of the docking period may, by contrast, be caused directly by the retrofit.
This definition of scope requires attention when certain work serves several purposes. If a structural modification is needed for both a new propeller and an ESD, the allocation of costs depends on the alternative against which the retrofit is compared. Costs must not arbitrarily be attributed entirely to the ESD, but must also not remain outside the calculation if they would not have been necessary without the device.
The consequences of additional downtime must also be assessed. If the installation becomes part of the critical path in the dry-docking schedule and the ship is consequently available later, this may be financially more significant than a modest increase in installation costs. The economic loss must be based on actual net earnings foregone, additional contractual obligations or other demonstrable consequences. Total revenue during the downtime is not necessarily a suitable measure of this.
Costs that already represent the same consequences must also not be counted twice. If, for example, contractually payable compensation for additional downtime has already been included in the calculation, it must be checked whether there are any further, separate losses of income.
The appropriate investment basis changes when several measures are carried out at the same time. If a new propeller and Pre-Swirl Stator are installed together, the business case may concern the complete retrofit package. For the additional investment in the stator, what matters is which additional costs and savings arise relative to a suitable version with the new propeller but without a stator. That distinction prevents the entire fuel saving from a jointly optimized propulsion package from being attributed to just one of the devices. Costs and benefits must always be established on the same technical comparison basis.
How Does the Operational Profile Determine the Annual Fuel Saving?
The annual financial return is primarily determined by how much fuel the ESD saves under actual operating conditions. A favourable power difference at a particular cruising speed does not yet say enough about this. The benefit of the device must be capable of being realized at the speeds, draughts and propeller loadings that actually occur during operation.
For a bulk carrier, for example, the balance between laden and ballast voyages may be decisive. The inflow to the propeller and the propulsion energy required differ between the two conditions. An ESD that delivers a greater improvement during laden voyages therefore does not necessarily achieve the largest fuel saving over the full year.
For a short-sea ship, the balance between sailing time and time in port also matters. While the ship is stationary, a hydrodynamic ESD saves no propulsion energy. The fuel used for other ship functions therefore does not necessarily provide a suitable basis to which an ESD saving percentage can be applied.
The annual return is determined by comparing the expected fuel demand with and without an ESD at each representative operating point. The difference in tonnes per hour is linked to the number of hours in which those conditions occur. The engine's specific fuel consumption at the new load point must also be taken into account. After all, a reduction of a few per cent in shaft power need not cause exactly the same relative reduction in fuel consumption.
Operating points at which the ESD offers little benefit or instead increases power demand must also be included in the calculation. Selecting only the most favourable sailing conditions would overestimate the annual saving. The distribution of operating hours determines how much weight each result receives.
A second choice concerns operation after installation. If the ship continues to sail at the same speed, the hydrodynamic improvement can be used to consume less fuel. If the benefit is used to sail faster, power demand, voyage time and possibly the financial return change. For the business case, it must be clear in advance which operating choice is being compared.
At a higher speed, for example, voyage time can be saved without fuel consumption per hour decreasing to the same extent. The value of that time saving must be assessed separately. A possible improvement in the service schedule or transport capacity must not be included as an additional return without demonstrable commercial consequences.
Historical sailing data provide a useful starting point, but future deployment is ultimately decisive. If a ship is soon to sail on different routes, is consistently operated at a lower speed or develops a different loading pattern, its original use may provide a misleading basis.
An ESD with a modest but reliable improvement over many sailing hours may therefore be more economically attractive than a device that shows a greater saving only at an operating point used infrequently.
How Do the Fuel Price and CO2 Costs Affect the Return?
Once the expected fuel saving in tonnes per year has been established, it can be converted into avoided fuel costs. The value is determined by the price that is actually relevant to the fuel and operation concerned.
At a higher fuel price, the same saving in tonnes yields more money. If the price falls, the annual financial return decreases and the payback period generally becomes longer. A current bunker price is therefore useful as a starting point, but not as a fixed forecast for the entire remaining service life.
For a ship using several fuels, the calculation must correspond to the fuel saved at the relevant operating points. Existing purchasing agreements or price hedging can also affect the economic value of an avoided tonne of fuel. It is therefore useful to examine the payback period at different credible fuel prices.
Avoided emission costs can also represent value. If a ship falls under the European emissions trading system, lower fuel consumption can lead to a smaller quantity of emissions for which allowances must be surrendered. The size of this benefit depends on the ship, reporting year, sailing routes, applicable greenhouse gases and the value of emission allowances.
Not every tonne of CO2 avoided worldwide therefore automatically yields the same ETS saving. For ships within scope, emissions from voyages between the European ports concerned and the relevant port emissions in principle fall entirely within the system. Voyages between a European port concerned and a port outside that area are in principle subject to partial coverage. Specific exemptions and the applicable scope must be taken into account.
It must also be established who receives the financial benefit. The party that must formally surrender emission allowances is not necessarily the same party that bears the ultimate costs. Statutory reimbursement rights and contractual agreements can distribute the economic burden between the shipowner, operator and charterer.
FuelEU Maritime requires a different assessment. This regulation sets limits on the greenhouse gas intensity of the energy used within its scope. An ESD that reduces energy demand without changing the fuel mix used or the relevant emission factors does not automatically lower greenhouse gas intensity per MJ.
However, the total quantity of energy does count in the calculation of the compliance balance. If a ship has a deficit relative to the required greenhouse gas intensity, lower energy demand can reduce the absolute size of that deficit. This can be financially beneficial if compliance costs are actually avoided as a result.
For a ship with a positive compliance surplus, the same reduction in energy demand may instead mean that the absolute surplus becomes smaller. This effect is important when the surplus can be banked or represents economic value through pooling.
Lower energy consumption is therefore not automatically a separate positive FuelEU return. The financial effect depends on the existing compliance position, fuel mix, any pooling or banking agreements and the party that contractually receives the benefits or bears the costs.
For the business case, such effects may only be included as a financial return when it is sufficiently clear which costs are actually avoided or which demonstrable economic value arises. An improved assessment of annual CO2 intensity (CII) or a more favourable technical energy efficiency index for existing ships (EEXI) likewise does not automatically yield a separate monetary return.
Double counting must also be avoided. If a fuel price used already includes an emission or compliance surcharge, the same cost component must not be added again in full as a separate saving. The same applies when contractual compensation is already based on the avoided fuel and emission costs.
Fuel savings, avoided emission costs and possible other benefits can therefore all be relevant. However, the returns must be individually traceable to the ESD and actually accrue economically to the party for whom the payback period is calculated.
Who Benefits Financially from the Saving in Charter Operations?
The technical fuel saving from an ESD and the financial return for the shipowner are not always the same. Particularly under a time charter, the party financing the retrofit may differ from the party paying for fuel during operation.
An owner may, for example, invest in a Pre-Swirl Stator while the charterer is responsible for bunker costs during the charter period. Lower fuel demand then provides a direct benefit to the charterer. If the owner receives no compensation or other demonstrable financial consideration for this, the owner does not recover the investment directly from the fuel saving achieved.
This is more than a longer payback period. If no positive net cash flow from the retrofit arises for the investor, no finite payback period can be calculated on the basis of those cash flows.
In an operating model in which the owner bears the fuel costs, the relationship is more direct. The actual outcome remains dependent on the contractual agreements, including the allocation of emission costs, any performance-related payments and the consequences of downtime.
A specific model contractual addendum is now available for ESD retrofits during a time charter. It provides scope for agreements on the investment, implementation, time implications and allocation of operational and environmental benefits. The arrangement does not prescribe a fixed commercial allocation, but allows the parties to conclude a suitable agreement.
If the allocation of benefits depends on the performance achieved, the technical measurement arrangements must also be defined in advance. The model addendum provides for a separate performance protocol for this purpose. In it, the parties can determine which reference is used, how the saving is assessed and which data are needed to establish the result.
The duration of the charter agreement also warrants attention. An ESD may remain technically functional for many years while the current contract ends sooner. It must therefore be clear to the owner whether the benefit can be realized after the charter ends through a new agreement, higher charter hire or operation by the owner. Future commercial added value that is not yet sufficiently substantiated does not belong in the calculation as a guaranteed cash flow.
The allocation of emission costs must also reflect the contractual and legal reality. Responsibility for surrendering emission allowances is not automatically the same as the ultimate economic burden. The payback period may therefore differ according to the agreed cost allocation and reimbursement mechanisms.
The payback period must therefore be assessed from the perspective of the party bearing the investment. A joint business case for the owner and charterer may also be useful to examine how much value the retrofit creates for the ship as a whole. However, that joint value is not automatically available to repay the investment of an individual party.
Which Uncertainties Can Change the Expected Payback Period?
The main technical uncertainty in an ESD business case concerns the saving predicted before installation. Computational Fluid Dynamics (CFD), model tests and existing ship data can support a reliable design assessment, but not every prediction can be confirmed directly at full scale in advance.
The chosen reference can be important, particularly for small power differences. If an ESD is installed during dry-docking and the hull is cleaned or the propeller polished at the same time, a before-and-after measurement may describe the combined improvement. Without additional substantiation, that total saving cannot be attributed entirely to the ESD.
A financial model that overestimates the ESD saving may therefore predict a substantially shorter payback period than is warranted. That risk increases when the annual return is only slightly above the additional maintenance and other operating costs.
Alongside hydrodynamic uncertainty, there are operational uncertainties. The ship may sail for fewer hours in future, sail more slowly or have a different balance between laden and ballast voyages. Fouling, maintenance and subsequent propulsion modifications can also affect the improvement achieved.
Fuel prices, emission allowances and contractual agreements constitute separate financial uncertainties. These must not be confused with the technical accuracy of the performance prediction. An ESD can save precisely the expected quantity of fuel while the payback period still becomes longer because of a lower fuel price or because the investor receives less of the return.
A sensitivity analysis is therefore useful. It shows how the payback period changes when, for example, the fuel saving, number of sailing hours, fuel price or net maintenance costs differ from the base scenario. The assumptions must reflect credible technical and commercial developments, rather than arbitrarily chosen percentages.
It is also important to recognize relationships between assumptions. A changed operational profile can affect both the number of relevant operating hours and the ESD performance at each operating point. These consequences must not be treated as entirely independent changes without assessment.
A useful additional check is to work backwards from the desired payback period. What minimum number of tonnes of fuel must the ESD save annually to cover the additional investment and recurring costs within that period? That break-even point can be compared with the technically substantiated saving expectation.
If even a favourable but credible technical scenario does not achieve the required annual saving, the intended payback period is not convincingly substantiated. If the break-even point lies well below the conservatively estimated saving, the financial outcome is less dependent on small deviations.
A strong business case makes clear which assumptions have the greatest influence on the result and how the investment performs under less favourable conditions. A scenario in which the annual net saving becomes very small or negative warrants particular attention. In that case, the simple payback period may become extremely long or be absent altogether. The purpose of this analysis is not to eliminate uncertainty through calculation, but to determine whether the investment decision is sufficiently robust for the risks that actually relate to the ship and retrofit.
How Do Maintenance, Dry-Docking Schedules and Remaining Service Life Affect the Payback Period?
Expected costs after installation form part of the economic assessment. Although the ESD types discussed generally operate without a separate active drive, inspection, cleaning and any structural repairs may remain necessary. The costs depend on the geometry, attachment and the possibilities for carrying out the work.
For a readily accessible device, certain checks may be combined with existing maintenance work. If a critical connection is fully accessible only during dry-docking, this may call for a different schedule and possibly additional costs. The same applies to a design in which certain components cannot be replaced separately if damaged.
These possibilities must already be known when the design is selected. An ESD with a slightly higher purchase price may be more attractive over the period of operation if installation is simpler or maintenance costs remain more manageable. Conversely, a limited maintenance requirement is only a benefit when it can be linked to the specific design and operating conditions.
The dry-docking schedule primarily affects initial costs and possible downtime. If the ESD can be installed within an already scheduled dry-docking, the additional costs may remain limited. A separate dry-docking or an unexpected extension of the planned downtime may, by contrast, substantially increase the investment.
The remaining operating period is also decisive. An ESD may remain technically functional for years, but the ship must be used for long enough in a suitable configuration and under sufficiently profitable conditions to recover the investment.
For a ship scheduled to undergo propeller replacement or another major propulsion modification soon, the timing warrants particular attention. An ESD developed for the current propeller may be less well matched after that change. It may then be more economically attractive to design and install the ESD together with the planned modernization.
Not all maintenance costs recur at the same level every year. A major inspection or repair may take place only after several years. For a simple payback period calculation, a representative annual provision may be used for this under suitable conditions. In a more accurate cash flow model, the expenditure belongs in the year in which it is actually expected to occur.
When the ship is sold, better energy efficiency may add value. However, that possible residual value is only a useful financial assumption when there is a sufficiently substantiated expectation to support it.
The economic life of an ESD is therefore not determined solely by the structural service life of the device. Future operation, technical compatibility and the ability to receive the financial benefits also determine how long the investment can generate returns.
How Do You Calculate the Simple Payback Period of an ESD?
The simple payback period is calculated by dividing the total additional investment by the expected annual net financial saving. The result indicates how many years are needed to recover the investment from the savings, if annual returns and costs remain approximately the same throughout that period.
For the calculation, it is first established how much fuel the ESD is expected to save annually. That quantity is multiplied by the relevant fuel price. Any additional financial benefits may be included, insofar as they are actually attributable to the investment and have not already been accounted for elsewhere.
The additional annual costs of inspection, maintenance and other relevant work are then deducted. This gives the net saving available to recover the investment.
Suppose that a bulk carrier uses 3.000 tonnes of propulsion fuel annually under the relevant sailing conditions. If a ship-specific assessment predicts a fuel saving of 3 per cent, this corresponds to 90 tonnes per year. With a lower achieved saving of 2 per cent, 60 tonnes remain. The annual fuel saving then decreases by a third, while the original investment remains unchanged.
This hypothetical example shows why the reliability of the predicted ESD performance matters to the payback period. A lower achieved saving percentage reduces the annual financial return and generally extends the period over which the investment is recovered. If certain maintenance costs remain the same, the net saving may decrease proportionally more than the fuel saving itself.
The actual payback period can only be established when the investment specific to the project, expected fuel saving and relevant operating costs are known. The costs of an ESD retrofit depend on, among other things, the ship configuration, engineering required, structural modifications and installation conditions. A general investment figure therefore does not provide a reliable basis for an individual ship.
The simple payback period can only be calculated directly when a positive annual net saving is available to the party investing. If the savings accrue entirely to another party, or the additional annual costs exceed the returns, no finite simple payback period arises for the investor concerned.
The simple payback period also remains an initial financial assessment. If fuel prices, operating hours or maintenance costs change during operation, it must be established when the accumulated net cash flows have actually recovered the initial investment. For a more comprehensive investment assessment, the time value of money and the remaining operating period can also be taken into account.
When Is a Longer Payback Period Still Acceptable?
A longer simple payback period does not automatically mean that an ESD retrofit is economically unattractive. Particularly for a ship with a long remaining operating period, the total value of future savings may be more important than the point at which the original investment has been recovered according to a simplified calculation.
A retrofit may, for example, have been paid back after six years and then deliver net savings for several more years. To assess how much value this represents, a cash flow model can be prepared in which the expected annual returns and costs over the remaining operating period are included separately.
With net present value, those future cash flows are discounted back to their present value, taking an appropriate discount rate into account. A fuller picture of the economic return and the time value of money then emerges.
Such an analysis can also take account of changing fuel prices, later maintenance expenditure, any residual value and a planned sale or conversion of the ship. The assumptions must be sufficiently substantiated and must not be chosen solely to achieve a favourable outcome.
Financing and discounting must also be handled consistently in the financial modelling. A cash flow model for the economic value of the complete project is not automatically the same as a model for the cash flows of the owner financing only part of the investment. Financing costs, contributions from own funds and any reimbursements must fit the chosen assessment basis, without counting the same costs more than once.
A longer payback period may be acceptable when the net present value is positive under realistic conditions, the cash flows are sufficiently certain and the risks fit the investment strategy. Conversely, an apparently short payback period may be unconvincing when the financial benefit depends heavily on optimistic fuel prices or an uncertain saving percentage.
Comparison with other investment opportunities is also important. An ESD with the highest predicted hydrodynamic saving need not be the most favourable financial choice if extensive additional steelwork, docking time or maintenance is needed for it. A less extensive modification may offer a better balance between investment and net return despite a smaller absolute fuel saving.
In charter operations, it must also be assessed whether the party investing has sufficient certainty about future cash flows. A positive economic value for the ship as a whole is not the same as a positive value for the owner when most of the savings contractually accrue to the charterer.
The final investment decision therefore requires more than a payback period in years. The technical saving must be reliably substantiated, the costs must be fully and appropriately defined, and the financial benefits must be capable of being realized over a realistic operating period.
The payback period of an ESD retrofit is determined by the relationship between the additional investment and the net returns that arise during operation. The actual operational profile and fuel price determine the value of the hydrodynamic improvement, while installation, maintenance, any additional downtime and remaining service life also affect the financial outcome. In charter operations, the allocation between investor and beneficiary is an additional factor. A sound business case therefore assesses not only the expected fuel saving, but also its reliability, the costs that would not arise without the retrofit and the cash flows that can actually recover the investment.
This Article Within the Series
The annual return from an ESD starts with the conversion of lower power demand into fuel savings, in which engine load and the operational profile are decisive. For the investment decision, what then matters is how uncertainty about the expected ESD saving affects the financial assessment, particularly when a small deviation can substantially change the payback period. Both topics form part of the economic assessment of ESD investments.