Creating a SAF Action Plan: An Industry-led Solution to a Global Regulatory and Financing Challenge
Brought to you by King & Spalding
John Clay Taylor
Partner
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King & Spalding
The aviation industry is one of the most difficult industries to decarbonise. Sustainable aviation fuel (“SAF”) is considered the aviation industry’s best option to reduce or eliminate emissions. Governments and industry recognise and support this conclusion with the consensus goal for SAF to provide ten percent of global fuel supply by 2030. Nevertheless, announced projects fall well short of reaching even half of this goal. Scaling SAF production to meet even modest aspirational goals requires a more integrated regulatory environment, innovative financing mechanisms and a coordinated effort within the industry.
Regulatory Environment
The global regulatory environment for SAF is a patchwork of incentives and mandates. The EU has one of the best developed regulatory frameworks for SAF, with its RefuelEU aviation initiative that plans to increase both demand for and supply of SAF while ensuring a level playing field across the EU air transport market. This initiative mandates that all fuel made available to aircraft operators at EU airports contains a minimum share of SAF from 2025 and, from 2030, a minimum share of synthetic fuels, with both shares increasing progressively until 2050. Other countries, such as Japan, have proposed similar SAF and low carbon fuel mandates. In the United States, SAF production benefits from generous subsidies under Section 45Z (Clean Fuels Production Credit) of the Internal Revenue Code.
The differing regulatory approaches highlight the fact that not all SAF is created equally. It can be produced through multiple feedstocks and technological pathways. Each pathway may have a different life cycle emission and carbon footprint. Some production pathways are significantly more costly than others, leading to price disparities as well.
Many pathways are adapted to the production locality. This can lead to what some term “green colonialism” where rich European countries tell the rest of the world what is good and what is not, leaving poorer countries with feedstocks different than the EU to suffer. For example, sugar cane may be a viable SAF feedstock in many countries, but it does not qualify as SAF under the RefuelEU aviation initiative.
Lack of a global harmonized SAF definition poses a real issue for scaling production. CORSIA has a critical role to play in lifecycle analysis and its sponsoring organization, the UN’s ICAO, is likely to play a key role in harmonizing regulatory regimes. Without a comprehensive and favourable SAF regulatory environment, there may be more focus on greening existing fossil refineries and producing lower-carbon aviation fuel instead.
Finance
SAF production projects are large scale industrial projects requiring supporting infrastructure. Scaling SAF production means creating multiple “bankable” projects to meet rising demand. This should also help bring down production costs and begin to close the green premium between SAF and conventional aviation fuel.
Project finance is critical to capital formation in the industry and that approach imposes certain requirements on projects seeking finance. Lenders need visibility over the stability and predictability of costs and revenues to evaluate a project’s cash flow. Ideally project lenders are looking for long term secured offtake agreements at a fixed or indexed price to give cash flow stability. However, long term offtake agreements are not typical in aviation. Further, projects face technological uncertainty that could impede their ability to secure commercial long term offtake agreements. In some instances, there is an early mover disadvantage for many production pathways.
Regulatory uncertainty affects every project’s bankability to some degree. Due to the green premium, the SAF market exists largely due to regulatory incentives and mandates. If these are substantially curtailed or changed it could impact a project’s viability.
Some in the industry argue that regulatory and technological risks for SAF are similar to the position renewable electricity held 15 to 20 years ago. However, the scale of single SAF projects is much larger and that concentration of risk in fewer projects may create more need for certainty than traditional renewable projects.
Industry
The aviation industry needs to coordinate its efforts to bring increasing amounts of SAF to market. Some customers can take the lead in covering SAF’s green premium cost to enable economies of scale to benefit everyone in the future. Increased appetite for longer term offtake agreements may provide a strong incentive for regulators to stay the course and not step back from prior commitments.
Producers are also exploring a wider array of industry practice to better improve their project’s bankability. Some projects are exploring a tolling structure for SAF production to address potential feedstock volume and price volatility while others are diversifying their production base to provide more consistent cash flows.
Original equipment manufacturers must ensure compatibility of future engines, fuel systems and aircraft with increasing levels of SAF. Industry lobbying for government incentives should also focus on supporting technological innovation for SAF production as well as end use. Industry commitment to SAF can also better empower SAF’s support from governments.
There is increasing willingness by the airlines and airports to support projects in various ways. Airlines are more willing to enter into memorandums of understanding or even invest in projects. Because the aviation industry is truly global there is a growing recognition of their need to lead from the front and engage more actively with SAF producers to create a more supportive environment for these types of projects. Airports can act as impartial matchmakers, encouraging SAF partnerships, driving public awareness and promoting SAF uplift through their own incentives such as direct subsidies or reduced landing fees. This engagement helps reduce project risk and hopefully increase bankability for many SAF projects.
Summary
The key message from the Sustainable Aviation Futures EU Congress is that SAF is here to stay. The biggest challenge in scaling SAF production is creating an ever more cooperative government/industry environment globally that supports the type of stability needed to make more and more projects eligible for project finance. As part of this approach care must be taken to ensure that the regulatory policies in developed nations do not unduly prejudice the scale-up of SAF production in less developed nations.