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The nascent market for sustainable aviation fuel faces a number of significant challenges including policy support, technical innovation and an infrastructure buildout, if air travel is to meet 2050 decarbonization goals, attendees at the 2024 Clean Fuels Conference in Fort Worth Texas said this week.
Fastmarkets captured some of the main challenges that could deal a significant blow to the realization of ambitious plans to decarbonise the aviation sector and hold up the pursuit of widespread production and adoption of sustainable aviation fuels.
Traditional debt financing may currently be closed to aspiring SAF market participants due to the lack of transparency around pricing.
One company that spoke to Fastmarkets said they will soon lose financing for a new production plant if they can’t prove SAF pricing to the bank before a fast-approaching deadline.
In the US, virtually all SAF has so far entered the supply chain through offtake agreements between producers and airlines. These offtake agreements are stretching as long as twenty years into the future, said John Briere, Director of Fuel Supply for Southwest Airlines, as a long-term investments in SAF production.
That means the prices involved in offtake agreements don’t represent open market conditions, even if they were publicly known.
“New producers are probably limited to corporate and private investment and offtake agreements for now,” Briere acceded.
The downside to offtake agreements, besides creating an opaque pricing environment, is that many are open-ended and represent an airline’s right to purchase, rather than a firm agreement to purchase SAF over time.
The open-ended nature of these agreements could mean producers are left without buyers if the airline industry faces another downturn like Covid-19, participants said.
Alongside that, a lack of a physical spot market – the traditional way that pricing agencies such as Fastmarkets capture values – means that SAF prices are typically dependent upon production cost-based formulas, rather than market-based, methodologically rigorous assessments.
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Policy support is key for affordability for airlines, panel participants said Feb. 6.
Offtake agreements “all involve airlines paying way more for SAF than conventional jet fuel,” said Jill Blickstein, Vice President of Sustainability for American Airlines. “Airlines don’t have deep enough pockets to promote and support getting a whole industry off the ground.”
Nancy Young, Chief of Sustainability for GEVO, an aspiring SAF producer, said that stable policy towards SAF is critical to increasing SAF production and funding the development of new plants and new technologies. “Finance,” meaning investments and loans for SAF production, “won’t fully commit because the government hasn’t committed to tax credits,” Young said.
Young pointed out that the 2023 and 2024 tax credit known as 40B, established by the 2022 Inflation Reduction Act, is still not implemented pending an update to the GREET calculation model for greenhouse gas emissions reduction. The tax credit that will replace 40B in 2025, known as 45Z, is also still unclear in its implementation, Young said.
The current credits have a very short duration, Young said, compared to the length of time needed to finance, develop, build and bring SAF production plants online.
“I wouldn’t invest in this environment,” one ethanol CEO said privately. “Getting a production plant off the ground would take a minimum of seven years, and all we have now are a few credits that aren’t even clarified yet and only last for a few more years.”
“We need both state and federal incentives,” Briere said, “and we need East Coast adoption, incentives from high-demand airports across the country. This can’t all be California.”
Currently, most SAF in the US is delivered to Oakland or Los Angeles airports.
“Europe is doing it wrong,” Young said, by using mandates for SAF usage.
“We don’t want to see mandates in any form,” Blickstein concurred. “You can’t mandate something that doesn’t exist.”
American Airlines recently faced difficulties acquiring enough SAF in Europe to meet mandates, Blickstein said, narrowly avoiding paying a penalty. “It becomes a tax,” Blickstein added, because of the lack of supply.
Europe does not have enough slated production coming online by 2025 to meet the next mandate for two percent of all jet fuel to be blended SAF, a representative for Neste, the world’s largest SAF producer, said Feb. 7. “We need more companies investing in SAF alongside Neste,” the representative said.
When discussing the current 50% limit for blending SAF with conventional jet fuel in the US, Blickstein commented on the overall dearth of SAF in the US, saying, “I wish the blending wall was our main concern.”
When asked how incentives alone could keep momentum for SAF from fizzling out during difficult economic times, Briere said that airlines have invested very publicly, and haven’t done that lightly.
The momentum for SAF will continue, the ethanol plant CEO said, but a true open trading market is still a few years away. The UCO trader agreed. “There’s no spot market for SAF because there isn’t any available to buy or sell,” the trader said.
Most SAF in the world is currently produced using the HEFA pathway, which uses oils as a feedstock. Many companies depend on used cooking oil as a feedstock to maximize tax and environmental credits, but availability and variability can be an issue.
“Every batch of UCO is unique,” Henri-Jean Bardon from the trading platform ACX said Feb. 5. “The plant has to adjust for every single new batch they receive.” Additionally, the volume loss from HEFA production is 25-30%, which drives up SAF production costs significantly over the cost of the feedstock, Barden said.
On top of variability, accusations of fraud and even child labor have plagued the UCO market, requiring companies like Marathon to be exceedingly cautious about suppliers and spend time and resources to perform in-depth research on every batch, the representative said.
This difficulty has given new life to ethanol producers and the alcohol-to-jet pathway for SAF production – but lifetime greenhouse gas emission reduction is too low for full tax credits without added improvements like carbon capture and sequestration.
“We’re still several years out on that,” was the refrain repeated by multiple industry participants regarding carbon sequestration pipelines. One project has been tentatively approved in Wyoming, while several projects face an uphill battle in states like South Dakota, where Gevo’s plant is delayed due to carbon pipeline permit denials.
“We’re still short on 2050 goals even with all currently available methods,” Briere said. “We’re not wed to any tech. We’ll take all of it to meet goals.”
“The airline industry is so cautious as to sometimes be glacial,” Blickstein added. “Our air traffic control software is decades old. We could save 10% on fuel efficiency gains with updated air traffic control technology,” which would help reduce congestion and how long airplanes are forced to circle before landing, Blickstein said.
“We will have to offset in other ways,” Blickstein said. “We can’t fully reduce carbon emissions directly.”
Near the end of a panel Blickstein said, “if America is truly dedicated to carbon emissions reduction, it may have to rethink its commitment to air travel.”
“The question that keeps me up at night is how to integrate SAF into the supply chain,” Briere said.
If ethanol becomes the largest feedstock in the future for the alcohol-to-jet production pathway, as many in the industry seem to expect, moving SAF from the “corn states” to high-demand airports remains a challenge to be solved.
“We typically look at changes to fuel prices in fractions of a cent per gallon,” Briere said. “For SAF we are currently looking at 25 cents per gallon to move it from the middle of the country to the coasts. That price could reach 60 cents per gallon by 2050.”
A trader for UCO disagreed with Briere’s assessment that SAF delivery from the middle of the country could piggyback on existing ethanol infrastructure. “Renewable diesel can’t even do that right now. No one can receive it.” The trader cited building issues in California, where city and county restrictions impede the construction of facilities to receive and store biofuels, in opposition to state incentives.
Eventually, Briere said, new pipelines will be needed to ship SAF from the middle of the country to high-demand areas. Unlike ethanol, which is corrosive, SAF can then travel on existing fuel pipelines, either blended with conventional jet fuel or neat, throughout the US.
A final challenge for airlines and SAF adoption is customer appetite for reducing carbon emissions.
“Sustainability is very important to our corporate customers,” Blickstein said. “And investors care. Retail and leisure customers care a bit less.” Blickstein said that American Airlines saw a ten percent uptake for higher fares that are more “green.”
Briere said that uptake from retail customers at Southwest is very small, but that corporate customers were more interested.
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