Demand for SAF – No doubt
There was a consensus view across all panelists that sustainable aviation fuel (SAF) is the only viable way to decarbonise aviation. Global crude consumption currently is around 100mb/d, of which jet fuel is ~6mb/d. SAF is currently around 0.2% of that, or a “rounding error”, meaning there is a runway from almost 0 to 6 mb/d of demand potential. Longer-term, jet fuel consumption is seen growing by 80% by 2050, and that includes notable progress on other aircraft engineering dimensions, including engine efficiency, cited as an additional decarbonization lever for the aviation industry.
Policy approach – stick vs carrot, cost of living and level-playing field considerations
In the carrot vs stick debate, the latter – or mandates – was generally seen as the preferred approach across most panellists, as it creates security of demand for SAF. Interestingly, the topic led to lively debates between airlines over level-playing field considerations.
Fuel costs being a major source of competitive advantage and EU mandates can create important imbalances and distortions. This includes a significantly higher compliance cost for within-Europe – given the requirement to pay carbon / EU ETS costs on intra-European flights – vs. long-haul flights – typically subject to CORSIA, seen as less constraining and cheaper. Ryanair expects 90% of its flights to be impacted by mandates but may be better off than WizzAir operating out of regional Eastern European airports, with no SAF supply. This also helped illustrate the importance of flexibility mechanisms (e.g. book & claim), in ensuring the sustainability of SAF when production and delivery are far apart.
Policy stability is crucial
Infrastructure funds seem to be of the view that Europe has managed to bring down the risk by establishing a longer-term market for SAF. On the other the hand, there is significant uncertainty in the US around the future of federal and state incentive programmes and the volatility of credit prices (i.e. RFS RINs and LCFS credit prices), which makes it very difficult to build in revenues in a SAF investment case. While praising the LCFS for boosting the adoption of biofuels to “mind blowing” levels in California – renewable and biodiesel representing ~55% of fuel currently distributed in the state – bp’s Nigel Dunn stresses the need for governments to “stay on top of carrots”, noting the US EPA has capped out of credits and the market is “constipated” again.
All in all, policy reliability is crucial and u-turns or instability phases, as seen in the US and Nordics recently, may strongly discourage SAF investments. Recent biofuel mandate cuts in Sweden and Finland have resulted in the removal of 1mt/a of renewable diesel demand from the market. From a financing standpoint, cost of living and interest rates are detrimental for SAF projects and imply a longer payback time, also suggesting equity might be a preferred option over debt for the time being.
Feedstock and cost considerations
According to bp, right now SAF would typically represent a small 10 kb/d unit in a 300kb/d refinery, is very expensive to run and is therefore faced with a scale issue in this nascent market. SAF typically costs $2,200/t right now (according to bp), or almost 3x jet fuel at around $800/t. With UCO costing as much a $1,100/t, no matter how efficient one’s refinery is, SAF has to be more expensive than jet fuel. On the producers’ side, Haffner Energy targets a production cost of $1,500/t, with the biomass-focused supplier stressing that energy transition has a price.
On the feedstock and pathway fronts, HEFA is seen dominating through the decade but is facing obvious feedstock limitations, while one infrastructure fund notes it refuses to invest in any project using this pathway due to food vs fuel considerations. Views vary on which pathways may dominate next, although alternatives such as alcohol-to-jet, power to liquid (PtL or “e-SAF”) or waste-to-jet are described by most as either very expensive or exorbitant. Until technology has been proven at scale, the public sector has a key role to play, e.g. by co-funding studies. On the financing side, the timeline is a major issue, with a common complaint that the cost of SAF in 15 years can’t be known, and models assuming declining SAF costs over the years are flawed, because feedstock scarcity will offset learning and scale effects. All in all, the panellists expect that target returns on SAF investments will be commensurate with the enhanced risk of the industry and developers should not expect private equity to provide a “green premium” to valuations. Investment decisions will require several elements of de-risking, with the main ones cited being offtake visibility and EPC wraps.
Terms:
- EPA: Environmental Protection Agency,
- EPC: Engineering, procurement and construction,
- ETS: Emissions trading scheme,
- HEFA: Hydrogenated esters and fatty acids,
- LCFS: Low carbon fuel standard,
- RFS: Renewable fuel standard,
- RINs: Renewable identification numbers
