Push for sustainable aviation fuel leaves investors with unanswered questions

The aviation industry still sees so-called “sustainable aviation fuel” (SAF) as the only viable way to achieve its decarbonization goals, although opposition and potential rising passenger costs pose obstacles to the fast-growing industry.

A series of deals have been struck in recent months United Airlines Working with key supplier Neste, SAF will be provided at Chicago O’Hare International Airport to meet South Korea’s goal announced in late August to use approximately 1% SAF on all departing international flights from 2027.

Within its first month in office in July this year, the new Labor government set its own mandate for the SAF to meet 10% of aviation fuel needs by 2030, while pledging to support production through measures, including for the SAF seeking investment. Producers establish revenue-determination mechanisms for new factories in the country.

SAF is a broad term that describes the fuel burned by aircraft engines, but instead of using kerosene from a more sustainable source. This may include feedstocks such as waste cooking oil, feedstock, woody biomass, animal fats, crops or waste.

SAF still produces emissions, but proponents argue that its greenhouse gas footprint is much lower over the product’s life cycle, up to 94 percent according to one report, although that level depends on the source, production and its journey to the aircraft.

airbus A number of SAF’s commitments were announced at the Farnborough Airshow in the UK in July this year, one of the aviation industry’s largest trading events. The planemaker said it is working with producer HIF Global to develop methanol fuel and investing in alcohol-based jet fuel maker LanzaJet.

For more than a decade, there has been buzz about the SAF’s potential to reduce air travel emissions.

This is especially because it can be blended with conventional fuels and used in existing aircraft engines and pipelines, so the barrier to entry is relatively low; although regulators have set different levels on the percentages that can be blended.

But it remains controversial in some quarters. Campaign groups and NGOs have expressed concerns that some forms of SAF are problematic and could lead to deforestation or the removal of land from agricultural use. Some people think this is an act of “greenwashing” and that large-scale deployment is impractical.

United Airlines Sees increased use of SAF as one of the core parts of its sustainability agenda. The airline has been using the technology on its existing aircraft since 2016, but “the challenge is that it’s not enough,” Lauren Riley, the airline’s chief sustainability officer, told Farnborough Airways earlier this year. Zhan told CNBC.

Other industry participants also said SAF remains the most effective and realistic way to achieve net-zero carbon emissions from airline operations by 2050, a target set by the International Air Transport Association (IATA) in 2021.

However, IATA itself predicts that SAF production will triple to 1.9 billion liters in 2024, which will only meet 0.53% of that year’s aviation fuel demand.

According to Riley, United alone uses about 4.25 billion gallons of fuel a year.

Projects such as hydrogen-powered and electric aircraft are United’s long-term goals, but in terms of short- and medium-term goals, the Singapore Armed Forces is the top priority, she said.

Industry insiders say the core challenge is to ensure that the SAF establishes a rigorous regulatory framework and secures state and private funding – a lack of the former hampering the development of the latter.

Rick Nagel, managing partner of private equity firm Acorn Capital Management, told CNBC that the SAF market has grown from near zero to about $1 billion in recent years.

However, he said obstacles include the construction of refineries and related infrastructure, access to biomass for refineries and regulatory cooperation.

“This circular reference happens when industry goals and environmental mandates create demand, government incentives not everyone can count on to fill the gaps and make it affordable, it takes years to install all this infrastructure online, you have to Where to put it – and airlines still have to figure out how to maintain competitive prices,” he continued.

“In order for investors to really get involved, there needs to be a clear path for all of this to come together.”

Clara Bowman, chief operating officer of HIF Global, a Porsche-backed SAF company, told CNBC that she is confident money will flow into the industry as long as governments and regulators provide the necessary guarantees.

HIF Golbal calls its product “e-fuel,” produced with renewable energy that recycles carbon dioxide and hydrogen. The company currently has a factory in Chile and plans to build another in Texas.

“I think the financing is already there, there is tremendous liquidity in the world that is looking to fund green solutions, the question is to have a well-structured project to leverage that financing,” Bowman said.

She said regulatory certainty was slower than she had hoped, but measures such as the EU’s Renewable Energy Directive and Japan’s requirement that SAF account for 10% of domestic airlines’ jet fuel use by 2030 and its associated subsidies were Encouraging.

In the United States, the Inflation Reduction Act signed by the Biden administration in 2022 has spurred “extraordinary” growth in SAF companies and startups, said Lauren Riley of United. This in turn encouraged the airline to establish a $225 million SAF venture fund with partners including Boeing, Google, Embraer and other airlines.

Despite the progress, Riley said banks and investors continued to feedback that the policy needed to be more “durable” and that the tax credits would have to last as long as a decade before they could feel confident funding shovels.

However, Riley believes SAF’s momentum can withstand a change in White House leadership as the November presidential election approaches; a sentiment echoed by investor Rick Nagel, who said he believes It is a “misconception” that one government will completely change all the regulatory measures of the previous government.

He added: “While the rhetoric may say one thing, if there is a business case, overall they are looking for infrastructure projects in the United States.”

One thing that many people involved in the SAF program noticed was that, in the early days, it would be more expensive than conventional jet fuel. The industry also acknowledges that consumers – especially those in wealthier, less price-sensitive markets – will ultimately bear some of the costs through higher ticket prices.

“The fact is, it’s going to be more expensive and you can’t sugarcoat it,” said Clara Bowman of HIF Global.

“On the other hand, we’re talking about a small fraction of the fuel needed to really jump-start the industry and make it mass-produced. When you start mass-producing factories, you can see what’s happening with solar, wind and batteries. In this case, that’s really the key to keeping prices down,” she continued.

“Manufacturing is scaling up around the world, and that’s what’s happening now. As scale increases, prices will come down, investment will go up, and equipment will become more efficient, because that’s a large part of our cost structure today. So we see that as production scale expands and efficiency improves.

Fossil fuels also have a carbon cost, she noted. “If you think about it, we think in the short to medium term, taking into account all costs, [SAF] will be competitive.