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6 November 2024

SkyPower estimates €15-25bn investment needed for SAF – FREE TO READ

A new consortium of companies has estimated that SAF (sustainable aviation fuel) will require around €20 billion in capital investment to scale up in Europe where it has gathered the most momentum off the back of ReFuelEU and the UK SAF mandates. The total investment is expected to be split 90-10 between the EU and the UK. The consortium is made up of airline operators, banks, and SAF producers amongst others (Air France, KLM, DHL, easyjet, ING).

The report from SkyPower highlights four critical building blocks that need to be addressed in order for the sector to mature: regulatory certainty on the SAF mandates, adequate public funding via existing industry-generated tax or carbon pricing revenues (e.g. via the ETS), long-term offtake agreements, and appropriate de-risking measures to reduce first-of-a-kind project risk.

The main goal of the consortium is to ensure the first large scale plant will have reached FID by the end of 2025 and then build on that. The report acknowledges the recent cancellation of SAF plants from the oil giants and proceeds to list a 10-point action plan that revolves around ways to reduce project risk, raising capital, securing off-take agreements, and providing clarity within the regulatory framework.

The most important point raised by the report is that the countries that would have the most suitable landscape for large-scale SAF production are seeing the fewest planned projects. These include Norway, Iceland, Finland and Sweden. These countries have a predominantly renewable grid already and no rules regarding additionality, hourly matching or geographic correlation when it comes to the green energy required by SAF plants.

This circles back to what the main challenge of climate change actually is. Decoupling economic growth from carbon emissions. The most developed economies are so entangled in fossil fuel usage that the shift to green energy risks destabilization.

Next on the list are countries like Denmark and France which either have a carbon intensity of under 65 grams of CO2 per kWh of electricity generated or a sizable nuclear baseload which should be enough to counteract hourly matching and geographic correlation.

Third on the list are the rest of the Western European countries including the UK where the grid is majority made out of fossil fuels and there are strict additionality rules. These are a necessity here since any new renewables that get brought online can’t be immediately used up by SAF plants, or hydrogen facilities, or even electric charging points, and in the process leave the grid as it is. Electricity prices are also a problem here.

Another important point raised by the report is the need to lower the risk when it comes to buyers. A bankable 10+ year offtake commitment means a long-term deal where a buyer (like an airline or fuel supplier) agrees to buy a set amount of green fuel, like e-SAF, from a producer. These deals help secure funding for the project by giving producers a guaranteed income for many years, which makes investors more willing to back the project. However, buyers often want short-term deals to avoid being stuck with prices or volumes that could change, while producers need long-term stability to make the project financially viable.

To address these conflicting needs, some new models are being explored. One option is using a government-backed middleman, like H2Global, which helps balance the risks by using public funds to stabilize prices and cover potential financial issues, making it safer for both the buyer and the producer. Another approach is a “collective offtake,” where multiple smaller buyers team up to share the costs and risks, making it easier for them to commit without huge individual risk. Lastly, a “diversified supply” model would pull fuel from multiple plants, lowering the chance of supply problems for buyers.

Certain early adopters are likely to lead in buying e-SAF, particularly those able to afford a price premium. These include high-end customers, government sectors, and companies committed to sustainability. The public sector, premium airlines, and private jet users are good candidates to support e-SAF because they are willing to pay extra to reduce carbon emissions and support green aviation.

The report also touched on what the UK is specifically doing well and what it needs to further promote SAF. After the UK SAF mandates will enter operation in 2025, the UK Government is looking at introducing the RCM (revenue certainty mechanism). This will work very much like CfDs (contracts for difference) do.

The RCM sets a “strike price,” which is essentially a minimum guaranteed price per ton of e-SAF. If the market price for SAF falls below this strike price, the government (or a similar authority) pays the producer the difference to cover the gap. This way, the producer always receives a minimum revenue, which reduces the financial risk for investors and encourages them to back e-SAF projects.

The UK government plans to introduce the RCM by the end of 2026. But since this is still a few years away, other short-term solutions, like long-term purchasing contracts (offtake agreements), are being explored to provide revenue stability until the RCM is in place.

In other aviation news

Qatar Investment Authority (QIA) led a $318 million funding round for Beta Technologies, a US electric aerospace company. This funding, part of Beta’s Series C, will support the production, certification, and commercialization of its electric aircraft, including fixed-wing and eVTOL models. With over $1 billion raised to date, Beta has secured orders from major clients like Air New Zealand and UPS. The company is working with the US FAA to certify its aircraft and is manufacturing charging systems. Beta Technologies has also secured a deposit-backed order for up to 20 of its electric vertical take-off and landing Alia A250 aircraft from medical operator Metro Aviation. Metro plans to integrate these aircraft into its existing fleet for air medical operations, such as inter-hospital and scene transports. Beta also secured a $20 million contract with the US Department of Health and Human Services to support emergency response in rural areas.

Cathay Pacific has made strides in its Corporate Sustainable Aviation Fuel (SAF) Programme, achieving substantial growth in 2024. The program, launched in 2022, now includes 15 partners, with major contributors like DB Schenker, Kuehne+Nagel, and EQT. These partners have committed to using 2,650 tons of SAF, cutting approximately 8,060 tons of carbon emissions. Cathay’s 2030 SAF target is to reach 10% SAF for its total fuel use, and it remains a critical component of the airline’s decarbonisation efforts.

Hill Aircraft has expanded its partnership with World Fuel Services to provide a consistent supply of Sustainable Aviation Fuel (SAF) to business aviation customers in Atlanta, making it the first Fixed Base Operator (FBO) in Georgia to offer dedicated SAF. The agreement ensures Hill Aircraft will receive a steady supply of SAF, along with an exclusive jet truck for fuel delivery. Located at Fulton County Executive Airport, Hill Aircraft is a key player in Atlanta’s aviation sector and has been a participant in carbon offset programs since 2020.

Natilus, a California-based startup, is progressing with its development of a blended wing body passenger aircraft, building on its previous Kona Cargo project. The company aims to take advantage of the efficiency benefits of the blended wing design, which has gained interest from airlines looking for alternatives to traditional aircraft configurations. The Horizon model, designed with vertical tails and unique engine positioning, aims to provide noise shielding while improving aerodynamics. This follows a growing trend of startups exploring innovative aircraft designs to meet the evolving demands of the aviation industry.