Modern Alchemy – Waste into Sustainable Aviation Fuel

Link to article: https://stillwaterassociates.com/modern-alchemy-waste-into-sustainable-aviation-fuel/

April 26, 2021
by Mike Newman, Director of Parhelion Underwriting

As the aviation industry seeks to reduce its greenhouse gas (GHG) emissions, decoupling airline growth from carbon growth, Sustainable Aviation Fuel (SAF) has emerged as the leading approach to further reduce GHG emissions from jet aircraft.

The world’s aviation sector currently accounts for approximately 2-3% of manmade global carbon emissions. Without timely action, though, aviation could consume up to 22% of the global carbon budget by 2050. To maintain growth and at the same time address its environmental impact, the aviation industry worldwide has committed to carbon-neutral growth and reducing net aviation carbon emissions to 50% below 2005 levels by 2050.

And as more carriers take up carbon neutrality goals and mull compliance options for the International Civil Aviation Organization’s planned carbon offsetting program for global aviation emissions, attention on aviation decarbonization has never been greater. Globally, more than 40 airlines already have implemented SAF at some level, with an estimated 200,000 commercial flights using SAF since 2011 and 1.6 billion gallons of SAF committed to forward purchasing agreements.

SAF is a drop-in replacement for conventional jet fuel (CJF) that can significantly reduce full-fuel-cycle GHG emissions from jet aircraft engines. SAF is jet fuel sourced from non-petroleum feedstocks, such as waste oils, alcohol, wood fiber or algae. SAF can be blended at up to 50% with traditional jet fuel and all quality tests are completed like traditional jet fuel. The blend is then re-certified as Jet A or Jet A-1. It can be handled in the same way as a traditional jet fuel, so no changes are required in the fueling infrastructure.

As with renewable fuels generally, SAF is at the center of four dynamics: technology, market forces, government support, and finance.

Technologies like Haldor Topsoe and Fischer-Tropsch convert a mixture of carbon monoxide and hydrogen into liquid hydrocarbons, thereby converting waste into synthetic, clean transportation fuels. The technology has been around for decades, although it has seen continuous improvements, refinements and adjustments. Germany used the Fischer-Tropsch process during World War II to produce synthetic fuels. Being petroleum-poor but coal-rich, Germany relied on Fischer-Tropsch production for an estimated 9% of German war production of fuels and 25% of the automobile fuel.

In the marketplace, SAF is currently more costly than traditional fossil jet fuel. It costs at least twice as much to produce SAF compared to conventional aviation fuel, and SAF has carried a strong price premium over conventional jet fuel, as demand for the fuel has outstripped supply.

SAF is often co-produced with renewable diesel (RD) in the same refining process, which forces renewable fuel companies to make a decision about which fuel to produce. To date, the economics in the U.S. have largely favored RD, prompting several West Coast refiners to announce plans to expand RD production. As such, SAF producers are likely to continue gearing their biofuel production to maximize the yield of RD – the more valuable co-product – unless and until SAF becomes a more highly valued biofuel, which is beginning to happen in the market now. Despite higher production costs, the SAF industry and its airline customers anticipate major growth.

Based on known offtake agreements, at least 350 million gallons per year of neat SAF will be produced and available for dispensing at U.S. airports by 2023. According to a recent market research report the SAF market size is projected to grow from an estimated $66 million in 2020 to $15 billion by 2030.

Governmental support is essential to using SAF to achieve the aviation industry’s climate goals. Initiatives such as opportunity zones and tax reductions on the use of green and clean aviation fuels will drive the growth of SAF over the long term. Indeed, the early adoption of SAF accelerated in 2019 when it was first included as a credit-generating fuel under California’s landmark Low Carbon Fuel Standard (LCFS) program, soon followed by Oregon. States across the U.S., including Washington, New Mexico, Minnesota, and New York, are exploring LCFS programs,

Unlike a number of European countries, the U.S. does not put a volumetric mandate on SAF. Action at the U.S. federal level remains a possibility, however, with Democratic lawmakers recently floating the idea of an aviation sector LCFS. Canada’s proposed clean fuel standard, scheduled to begin at the end of 2022, includes SAF as an eligible credit generator.

The supply-side of SAF includes large companies such as Neste, major oil companies like Shell Aviation and mid-sized World Energy, SKyNRG and AEG Fuels. To those can be added waste-to-renewable fuels projects (at least six that we know of) that are currently in line for project finance. This additional production is strategically important; it is flexible supply because these independent companies can produce the fuels that are most needed at the time.

LCFS credits form a significant share of the projected long-term income from these projects – in fact, the credits are often more valuable than the fuel itself. Many SAF projects would not get financing without the projected revenues from these credits.

The capital market, and the debt market in particular, worries that a change of law or regulation might eliminate the underlying LCFS market, so renewable fuels projects find that lenders want to protect their debt service in the event that the market is wiped out because a law is repealed, amended or terminated.

If the LCFS market were discontinued (as a direct result of a change of law, repeal, amendment, or any other termination of California Global Warming Solutions Act), the revenue-generating ability of many projects would be seriously reduced. Even short of an outright repeal of the legislation, regulatory risk also applies to individual regulations.

Regulatory risk insurance improves project finance transactions (and reduces borrowing cost), so Parhelion has created a pool of insurance capital that underwrites the continued existence of the markets.

The SAF industry’s drivers – technology, market forces, government support, and finance – all come with new risks. Risks often act as barriers to investment in innovative changes in commerce. The huge pool of global insurance and reinsurance capital has traditionally taken risks that other forms of capital (debt and equity) can’t or won’t take. That global insurance pool is required to ensure liquidity in new markets.

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The author of this article, Mike Newman, is a Director of Parhelion Underwriting.

Parhelion Underwriting Limited www.parhelionunderwriting.com is a pioneer and recognized leader in the field of climate risk finance. We deploy the risk capital of underwriting syndicates at Lloyd’s of London to take on the risks facing sustainable energy, continuing the historical function that Lloyd’s has provided to emerging industries, new technologies and first-risk ventures.

Categories: Economics, News, Policy, Technology Development