What's on the SAF Horizon? Meeting the Challenges to Growing Global SAF Capacity
Brought to you by King & Spalding
Partner, Dubai
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King & Spalding
Saiesh Kamath
Paralegal, London
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King & Spalding
For sustainable aviation fuel (“SAF”) to realize its considerable decarbonization potential, a significant build-up of global production capacity is required. In 2024, global production capacity is around 1.5 million metric tons or 32,000 barrels per day, which is less than 1% of the SAF required according to IATA estimates. The availability of SAF is driven by demand and supply-side forces, with the strength of demand and supply largely dictated by SAF policy, manifesting in a combination of mandates and incentives to stimulate demand for, and supply of, SAF. Mandates are creating demand for SAF, alongside voluntary commitments by aircraft operators to operate their aircraft using SAF. However, there is a concern within the aviation industry that, in spite of the hundreds of SAF projects that have been announced around the world in recent years, the progress in developing global SAF production capacity has been slow and there is a risk that, by as soon as 2030, there will be insufficient SAF capacity to meet projected demand. This raises the question – what are the major challenges to the growth of SAF production capacity and how could they be overcome?
Recovering true costs of SAF production
While there are currently 11 different ASTM-approved SAF “production pathways”, the technology is still maturing, and the benefits of scale have not yet been realized. This means the costs of SAF production are still, in general, far in excess of the production costs of conventional aviation fuel (“CAF”). Conservative estimates are that SAF is three times more expensive than CAF, resulting in a SAF cost premium that aircraft operators are hesitant to pay. Although demand-side SAF mandates are coming into effect and the voluntary take-up of SAF by aircraft operators is growing, the level of demand cannot yet sustain a fuel price that reflects the true costs of SAF production. While it may be possible, to an extent, for aircraft operators to pass-through higher fuel prices to passengers, other mechanisms to fund or otherwise address the SAF cost premium need to be developed by the aviation industry and policymakers. Encouragingly, there are numerous examples of policy-makers around the world developing incentive mechanisms (e.g. state and federal tax credits and other supply-side initiatives in the United States, which are necessary given the absence of a demand-side SAF mandate). Additionally, various revenue certainty and contracts for difference mechanisms designed to reduce the SAF cost premium in other jurisdictions around the world are in place or in development. These mechanisms must continue to evolve over the coming years if a future SAF capacity shortfall is to be avoided.
SAF producers may also look to address the SAF cost premium by optimizing how their capital is deployed. One approach may be to optimize existing fuel production facilities rather than looking to build true greenfield SAF production facilities. Another approach would be for SAF producers to design their facilities with maximum production flexibility that would allow them to produce different, but related in terms of how they are produced, types (or grades) of fuel which may have lower costs of production than SAF (or attract higher prices, thereby offsetting the high cost of production) and provide better returns, as market conditions fluctuate.
In at least the early years of production, SAF producers could look to sell SAF certificates to companies looking to reduce their carbon emissions, including Scope 3 emissions. Aircraft operators or fuel suppliers would still purchase the SAF but the price would be based upon CAF, meaning that the purchaser would not be able to claim any credits attached to the environmental attributes of the SAF. When the premium reduces over time as demand increases and drives the prices up, SAF, complete with its environmental attributes, could be sold to aircraft operators or fuel suppliers. One recent example of this is Formula One’s newly announced partnership with Qatar Airways, which enables Formula One, a business enterprise with significant carbon emissions, to effectively claim carbon credits.
Regulatory Uncertainty
Incentive mechanisms are not still without challenges and uncertainty. For example, there is uncertainty as to what will happen to the federal incentives in the United States when the new President takes office in January 2025, which could mean that state incentive programs become more critical. In addition to the uncertainty for SAF producers in the United States, if tariffs are imposed on imported feedstocks, the costs of SAF production would be negatively impacted. There is also inconsistency as to what constitutes eligible fuel under the various global regulatory regimes (e.g. ReFuelEU Aviation, CORSIA and the U.S. Inflation Reduction Act). For example, the most popular feedstocks for U.S.-produced SAF – corn and soybean oil – result in SAF that is not eligible under the European Union and United Kingdom mandates, thereby limiting their potential for export to Europe. This is also an example of the need for a harmonized, global SAF specification which recognizes that SAF should be a tradeable commodity and able to be produced from a variety of feedstocks. It is difficult to see how setting a gold standard SAF specification is beneficial if it ends up limiting the availability of compliant SAF capacity in the world’s aviation markets.
Feasibility of SAF Projects
The feasibility of SAF projects depends upon many factors, including availability of feedstock, the degree of technology risk, sufficiently robust offtake commitments and the availability of sufficient project funding. The challenges of obtaining long-term supplies of feedstock and using technology that is still to be commercially proven are not unique to SAF projects – there are always workarounds. However, regulatory uncertainty impacts decisions as to whether the SAF produced from certain feedstocks will be eligible in key export markets. In relation to offtake and funding, these issues can be solved together if offtakers, such as aircraft operators and fuel suppliers, double as investors and offtakers of SAF projects (i.e. “equity lifters”). There are many examples of SAF projects being structured in this way (Norsk e-Fuel’s power-to-liquids plant in Norway and LanzaJet’s Freedom Pines fuels project, claimed to be the world’s first ethanol-to-SAF facility) and we expect this trend to continue. SAF projects are still being developed on the basis of conventional long-term offtake arrangements, however, the uncertainties related to SAF that we have already discussed and the existence of the “SAF cost premium” make developing SAF projects on the back of long-term offtake agreements challenging, when there is less alignment of interest between investors and offtakers. A potential source of early funding for SAF project development to help projects reach their final investment decision is the establishment of SAF investment funds comprising entities with a common interest to reduce their Scope 3 emissions. This is an area that we expect to develop over the coming years.
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