SINCE its first use in 2008, development of sustainable aviation fuel has progressed. But how far has it come, and what are the challenges and investment opportunities?
Sustainable aviation fuel is a liquid fuel alternative to fossil-fuel kerosene used for commercial aviation. It can be used in blends of up to 50 per cent with conventional jet fuel, and is produced synthetically from carbon dioxide and hydrogen or from biomass.
There are more than 40 certified feedstocks (raw materials) used for manufacturing sustainable aviation fuel. These range from used cooking oil to municipal waste and forestry biomass. We answer commonly asked questions.
How can sustainable aviation fuel decarbonise the airline sector?
The International Air Transport Association (Iata) and its 300-member airlines have committed to reach net-zero carbon emissions by 2050.
Sustainable aviation fuel is the only short-term option available for decarbonising the airline industry. Unlike other green initiatives such as hydrogen or battery technologies, sustainable aviation fuel is a “drop-in” fuel – meaning it can be used in existing aircraft engines and fuel infrastructure without the need for modifications. Consequently, it is likely to be the most favoured option for airlines seeking to decarbonise.
Electric and hydrogen propulsion are not expected to be commercially viable until at least the mid-2030s. Even then, they account for only 13 per cent of Iata’s emissions reduction strategy. Improvements to make aircraft more fuel efficient are expected to account for 3 per cent of the reduction, with offsets and carbon capture accounting for 19 per cent.
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By contrast, sustainable aviation fuel is expected to account for 65 per cent of the emissions reduction envisaged in the Iata’s strategy. This means that an estimated 450 billion litres of sustainable aviation fuel will be required annually by 2050.
How scalable is sustainable aviation fuel?
In order to meet this demand, the production of sustainable aviation fuel will need to be scaled up significantly. Just 375 million litres of sustainable aviation fuel were produced in 2022, representing 0.1 per cent to 0.15 per cent of global aviation fuel demand. To reach industry decarbonisation goals, sustainable aviation fuel needs to constitute 5 per cent of aviation fuel consumption by 2030, 28 per cent by 2040 and 50 per cent by 2050.
However, the scalability of sustainable aviation fuel depends on the demand/supply dynamics, potential capacity and feedstock limitations. Building new sustainable aviation fuel facilities will be costly. Existing refineries can and are being converted into sustainable aviation fuel facilities. There are 206 existing and announced facilities globally that theoretically could produce such fuel, with a total potential capacity of 71.4 billion litres.
But any refinery conversion will involve significant capital expenditure. Thus, continued incentivisation and policy mechanisms will be required to drive ongoing refinery conversions. Indeed, without subsidies and tax breaks, producing sustainable aviation fuel may often not be profitable.
There are, however, encouraging signs from the offtake market which will be one of the biggest drivers of investment in sustainable aviation fuel capacity. An offtake agreement is an arrangement for a buyer to purchase portions of a producer’s upcoming output. It is normally negotiated before the construction of a factory or facility to secure a market and revenue stream for its future output.
In the last two years, the number of sustainable aviation fuel offtake agreements announced has significantly increased, driven by both technological developments, company decarbonisation targets and industry blending mandates. The total number of agreements announced now stands at 87, having risen from just five agreements in 2020.
On the demand side, in addition to the airline industry’s decarbonisation targets, a number of regions are implementing their own policies. In Europe, the ReFuel EU Aviation agreement includes a sustainable aviation fuel blending mandate for fuel producers, starting at 2 per cent of overall fuel supply by 2025 and moving up to 6 per cent by 2030 and 70 per cent by 2050.
In the US, California has a particularly supportive policy environment for sustainable aviation fuel supply. In August 2022, the state passed a bill for sustainable aviation fuel to comprise 20 per cent of aviation fuel consumption by 2030.
Is sustainable aviation fuel really sustainable?
So far, we have been discussing sustainable aviation fuel as if it were a single product. But there are different types of such fuel derived from different feedstocks and refining processes – each with varying emissions profiles.
The most sustainable forms of sustainable aviation fuel are those produced from waste and cover crops (that is, crops grown for soil protection and enrichment, rather than for food supply). Using edible crops as feedstock puts sustainable aviation fuel production in direct competition for land use with food producers, as well as requiring additional land to grow new feedstock which risks deforestation of carbon sinks.
Sustainable aviation fuel must meet certain sustainability criteria – such as having at least 10 per cent lower lifecycle greenhouse gas emissions than kerosene – to be eligible for the Corsia programme. Corsia allows airlines to reduce their offsetting requirements through the use of sustainable or low-carbon fuels. It was launched by the International Civil Aviation Organization to offset any growth in carbon dioxide emissions from aviation above 2020 levels. It applies to airlines and other aircraft operators, and requires offsetting emissions from in-scope flights.
What are the investment opportunities?
Investing in sustainable aviation fuel can be done by gaining exposure to companies involved in the value chain. Oil and gas refining companies are one such example. US and European refiners are well positioned to lead the industry in scaling up production of alternative fuels. However, in many cases, this will require incremental investment. Supportive policy regimes and/or customer willingness to pay a premium for sustainable aviation fuel would make production more viable.
Another way to invest in sustainable aviation fuel is by considering integrated oil companies that are investing in sustainable aviation fuel growth opportunities.
Other examples of investment opportunities include “enablers” of the transition to sustainable aviation fuel. This includes industrial gas and speciality chemicals companies that can provide gas and chemical feedstocks; or agricultural products companies which provide feedstocks as well as fertiliser technologies.
Samuel Thomas is sustainable investment analyst, and Clara Mallinckrodt is climate change analyst, Schroders
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