Sky-High Cost of Compliance: EU’s SAF Mandate Prices Unveiled

Bottom Line Up Front: Last week the European Union Aviation Safety Agency (EASA) published the 2024 reference prices report for aviation fuels, and the prices have caused some turbulence for sustainable aviation fuel (SAF) market observers.

What is this report?
The EU SAF mandate (ReFuel EU Aviation) requires the EASA to publish a technical report each year containing, amongst other things, information on SAF prices in Europe, and the development of European SAF capacity. The report published last week is not the full technical report required by ReFuel EU Aviation; that will be published in September. Instead, this is rather a pre-publication. Importantly, however, the price information in the 2024 reference report will not differ to the full technical report. While seemingly rather dry and innocuous, this report and its successors appear set to create shock waves through the European aviation sector. The price information cited will be used to set penalties for failing to meet the SAF targets under the EU SAF mandate, which in turn will play a pivotal role in determining SAF prices under the legislation.

Back up: What is the ReFuel EU Aviation mandate, and how does it work?
Enacted in 2023, ReFuelEU Aviation sets mandates (% targets) for SAF and synthetic SAF (eSAF)[1] starting from 2025 extending out to 2050 (see Figure 1) on aviation fuel suppliers supplying fuel to any airport in the EU. Airports are obligated to facilitate the access to SAF/eSAF, and airlines have reporting obligations. There are provisions that aim to prevent circumvention of the mandate by “tankering” aircraft outside the EU. Failure to comply with targets in any one year, will incur a penalty of twice the price difference between the SAF or eSAF and conventional jet for the shortfall in volumes. This shortfall in volume also carries over into the following year.

Figure 1: ReFuelEU Aviation Targets and Estimated VolumesSources: EU’s impact assessment (European Commission Directorate-General for Mobility and Transport) and Study supporting the impact assessment of the ReFuelEU Aviation initiative.

The funds EU member states raise from the penalties are meant to be used to support the further deployment of SAF, including SAF research and development as well as eSAF production and price bridging mechanisms. However, details on this are yet to emerge.

ReFuelEU Aviation runs parallel to the Renewable Energy Directive (RED) III, the EU’s overarching biofuel regulation, with SAF volumes qualifying under both. ReFuel EU requires SAF to be produced from advanced (i.e., Annex 9) feedstocks, so SAF produced from food-based crops would not qualify, but unlike the RED III it makes no distinction between Part A or Part B feedstocks[2].

What do the prices in the 2024 reference report reveal?
Table 1 below summarizes the main prices. These data reveal that HEFA SAF, the SAF technology commercially available today, is still pricing at a significant premium (2.7x) to conventional jet. These premiums, on a cost basis, increase significantly when you consider future SAF technologies (e.g., advanced SAF (3.6x jet) and eSAF (10.1x jet). While expectations would be that costs, hence price, would come down as these technologies commercialize and scale, it does underline the challenge of the cost hurdles that are still to be addressed.

Table 1: EASA Summary 2024 Aviation Fuel Reference Prices[3] 

In terms of cost penalties for aviation fuel suppliers, and by extension airlines assuming any such cost is transferred along the value chain, this indicates that failing to fulfill the 2025 SAF target would incur a penalty of $8.24 per gallon of shortfall (double the price delta between HEFA SAF and Conventional Aviation Fuel). If there was an eSAF mandate in place in 2025, and using the current cost estimates, the penalty would increase to a staggering $34.78 per gallon.

All other things being equal, obligated fuel suppliers would therefore be willing to pay up to jet plus these penalties for qualifying volumes to avoid such penalties. This suggests max willingness to pay price levels of ~$10.60 per gallon for HEFA SAF, and ~$37.10 per gallon for eSAF (assuming an eSAF target was in place for 2025).

What about future compliance costs?
Using the SAF/eSAF projections, it is also possible (with suitable caveats) to project the possible cost of the EU SAF mandate assuming the 2024 reference prices and associated penalties considering two scenarios:

1. A 100% compliance scenario, considering only the incremental price/cost premiums, and
2. A scenario considering 100% compliance to the SAF target but zero compliance with the eSAF targets.

Figure 2 shows the trajectory of these two scenarios, and where the EU lands by 2035.

Figure 2:  Projected EU SAF Mandate CostsSources: EASA 2024 Reference Price Report, EU’s impact assessment (European Commission Directorate-General for Mobility and Transport), Study supporting the impact assessment of the ReFuelEU Aviation initiative, and Stillwater analysis.

As shown in the figure, the impact of the EU SAF mandate really kicks in from 2030 onwards in terms of the overall cost of the program and the cost implications for jet. This is due to the increase in the SAF target to 6% and the start of the eSAF mandate.

Assuming full compliance, and prices/costs remaining at 2024 levels, while the overall cost and associated per-gallon premiums remain modest at $1.3 billion and 8 cents per gallon (cpg) cost premium out to 2029, in 2030 the full incremental cost of the program jumps to ~$8 billion and adds ~50 cpg or ~20% to the price of jet. Assuming the same price basis, this would increase by up to ~$30 billion, adding $1.90 per gallon (a >80% increase to the price of jet) in 2035!

In the scenario where the eSAF targets are not met, and the 2x penalties kick-in, the overall cost in 2030 is ~$12 billion, jumping to $47 billion by 2035, with associated cost premiums of 0.76 cpg (33% increase) and $2.98 per gallon (127% increase) respectively! Moreover, this does not consider the cost of meeting the deficit volumes carried over to the following year.  Given that fuel typically represents 20-40% of an airliners total operating costs, this level of penalty, if passed on in full to the airlines, would be significant and have potential implications for the cost of air travel.

So what?
The obvious caveat here is that no cost reduction assumptions for SAF and eSAF have been made, nor for that matter a price increase in conventional jet. By way of example, the EU impact assessment assumed by 2035 HEFA SAF pricing below jet parity, and eSAF pricing at 2.2x jet – both significant reductions from current levels. However, this relatively simplistic analysis does point to a number of conclusions:

1. The level of these penalties is sufficient to make obligated fuel suppliers highly motivated to comply with the SAF target first and take any shortfall within the RED III, or the EU’s marine fuel mandate.[4]
2. The EU will become a price setter for SAF globally and seek to arbitrage SAF volumes into Europe to ensure compliance.
3. The EU is likely to price out the U.S. Renewable Fuel Standard, 45Z tax credit, and other low carbon fuel program incentives, to draw such material away, but in so doing is likely to cause upward price pressure to those competing markets’ credit prices.
4. The ambitious nature of the EU SAF targets, and the associated penalty mechanisms are predicated on significant cost reductions being delivered most notably for eSAF. If these are not delivered, it is likely that the targets and/or penalties are at risk of downward revision.

Conclusion
Ultimately, Europe is shaping up to become the major hub for SAF and eSAF globally over the next 5-10 years. SAF producers, irrespective of their global location, would be well served in developing and maintaining a close understanding of that market as it develops.

If you’re looking for transport fuel market insights from industry insiders steeped in the details, contact Stillwater!