Mandates needed for sustainable aviation fuel to resolve supply impasse

SUSTAINABLE aviation fuel suppliers and users are at odds over how much of the renewable fuel the industry needs and how much should be produced, resulting in an impasse that may require regulatory intervention to resolve.

Some market players suggest demand is falling short of both supply and capacity, limiting refineries’ appetite to invest and hindering the industry’s growth. Carriers, however, think more supply is needed so that prices can come down.

Sustainable aviation fuel capacity doubled in 2023, as did output. Yet, producers have been very cautious because demand for the fuel remains low.

Output is merely 18 to 50 per cent of capacity, however, depending on whose estimates are used.

The total capacity of sustainable aviation fuel producers was 2.7 million tonnes a year in 2023, compared with 1.4 million tonnes in the previous year, according to Independent Commodity Intelligence Services (ICIS), which provides market intelligence to the chemical, fertiliser and energy industries.

Meanwhile, S&P Global’s estimate of sustainable aviation fuel output in 2023 was 1.3 million tonnes – more than enough to meet demand of 1.2 million tonnes.

The International Air Transport Association (Iata) estimates that sustainable aviation fuel output doubled last year, but it has a much lower estimate of 480,000 tonnes.

The industry body, which represents some 320 airlines, has asserted that sustainable aviation fuel production volume needs to rise so that prices will fall. The cost of this fuel is anywhere from three to five times that of conventional jet fuel.

S&P Global estimates global sustainable aviation fuel supply will reach 2.1 million tonnes in 2024; demand is projected to be 2.2 million tonnes. Iata’s projection is for the supply of this fuel to hit 1.5 million tonnes, but it said that amount represents only 0.5 per cent of the aviation industry’s total fuel needs.

Divergent views of sustainable aviation fuel requirements could stymie industry development.

Finnish refiner Neste, which is among the world’s major producers of sustainable aviation fuel, said that the world could have excess production capacity by 2028.

Neste has a sustainable aviation fuel capacity of 1.5 million tonnes – including the world’s largest sustainable aviation fuel plant of 1 million tonnes capacity in Singapore – and plans to ramp up the production to 2.2 million tonnes by 2026.

This would be enough capacity to single-handedly meet the initial amount of sustainable aviation fuel mandated by the European Union from 2025 to 2029. The company said governments must offer suppliers more certainty about long-term demand to justify corporate investment.

It is crucial that suppliers see “a pathway to demand growing beyond that”, including from passengers, Neste vice-president of renewable aviation Jonathan Wood told an aviation sustainability conference in November last year.

“To make any further investments, we need to have demand certainty... We have to find other mechanisms to help stimulate demand further, because only then will it be possible to justify the internal investments.”

Neste is cutting 400 roles globally to prepare for increasing competition in renewable fuels.

The job cuts at Neste are not insignificant, as they represent around 7 per cent of its 2022 workforce, said Mabel Kwan, a managing director at Alton Aviation Consultancy.

Provided the cuts do not result in production challenges, however, she believes the efforts to drive operational efficiency could position Neste competitively in the longer run.

With greenfield and capital-expenditure-heavy infrastructure projects, there is generally a ramp-up period in performance profile prior to commercialisation, she added.

Neste shares have fallen 27.9 per cent in the past year in spite of a strong financial performance.

Competition is a legitimate concern for Neste, said Tse Man Yiu, a senior analyst at ICIS.

There are three other producers, each with a capacity of at least 1 million tonnes a year, Tse noted. They are Phillips 66 in the United States, SGP Bioenergy in Panama, and Oriental Energy in China.

Other than the EU, only Brazil and Indonesia have mandated some level of sustainable aviation fuel use, he added.

Brazil’s requirement is modest, at 1 per cent reduction of the sector’s 2026’s total emissions, and will take effect only in January 2027. Indonesia mandates 5 per cent of sustainable aviation fuel use by 2025, which amounts to about 240,000 tonnes.

The EU mandate requires at least 2 per cent of aviation fuel supply at EU airports to be sustainable aviation fuel in 2025, 6 per cent in 2030, 20 per cent in 2035, 34 per cent in 2040, 42 per cent in 2045, and 70 per cent in 2050.

India, Japan, the United Kingdom and New Zealand have proposed mandates, but these have yet to be legislated.

The US, Canada, the United Arab Emirates and China have also set consumption or production targets, but these are mostly modest. Tse noted, for instance, China has a target of just 50,000 tonnes of cumulative sustainable aviation fuel use by 2025.

“Targets are not binding, and hence the certainty is not there,” Tse said.

If governments stick to their commitments, however, a lot more sustainable aviation fuel will be needed within the decade.

Member states of the 193-strong International Civil Aviation Organization are supposed to reduce carbon emissions from international aviation by 5 per cent by 2030 through the use of sustainable aviation fuel, low-carbon aviation fuels and other clean energy sources.

ICIS expects jet fuel demand to reach above 390 million tonnes in 2030, and around 24 million tonnes of sustainable aviation fuel will be needed to meet the 5 per cent emissions reduction goal.

“We will need a lot more capacity than today,” Tse said.

Producers have committed to add 24.4 million tonnes of capacity through 2030, although ICIS considers only 5 million tonnes of this as definite. Total sustainable aviation fuel capacity in 2030 will be 27.1 million tonnes a year if all announced capacities materialise.

The uncertainty comes from the need to fund these capacity increases.

Executives from Norwegian Air, British Airways-owner IAG and Icelandair have asked the EU to help fund production so that the price gap between sustainable aviation fuel and fossil fuel can be narrowed. Unless prices fall, they say, mandated usage would put them out of business.