Pace of SAF deals slacken in 2023 as policy-induced frenzy wanes

The frenetic pace of sustainable aviation fuel supply deals has slowed this year after an initial surge from policy-driven green pledges outstripped supply and as feedstock concerns continue to hamper the growth outlook.

Recent significant legislative boosts to sustainable aviation fuel production in the EU and US prompted a flurry of production deals through 2021-22, jumping more than tenfold on 2020 volumes, according, according to a survey of announced SAF offtake deals by S&P Global Commodity Insights.

During the first seven months of 2023, however, SAF offtake deal volumes stood at 46% of 2022 levels, the survey found.

The EU, after months of wrangling, in April passed the ReFuelEU aviation initiative which requires fuel suppliers to blend SAF in increasing amounts, from 2% of overall fuel supplied by 2025 up to 70% by 2050.

That did not quite live up to the expectations of some, even though recent production has been paltry. In 2021, SAF accounted for 0.01% of aviation fuel demand in Europe, according to S&P Global data.

"There was a rush to secure SAF deals in 2021-22 ahead of the introduction of the Refuel EU Aviation package as airline companies did not want to be left out from the race," Akman Ozel, biofuels analyst at S&P Global Commodity Insights, said.

Countries including France, Norway, Sweden and the UK introduced SAF blending targets between 2019-2022, leading to a boom. However, that slowed in 2023 and the EU blending target for 2030 was "only" 6%, Ozel said.

Policy push

In the US in 2022, the Inflation Reduction Act was passed as part of President Joe Biden's attempt to woo investments into clean energy projects through tax credits and to implement his pledges to fight climate change.

Following the passage of the IRA, a lot of deals were signed, Jamie Dorner, biofuels analyst at S&P said. They included investment decisions, offtake agreements and memorandums of understanding.

"Recently though, it has become clearer that at that rate offtake agreements were beginning to outpace supply, which has in part contributed to the fever cooling off," Dorner said.

Companies may also be waiting for further clarity from the US Treasury.

Although the IRA names the ICAO's CORSIA standard as an option for measuring emissions, Congress has left the door open for any similar methodology that satisfies the Clean Air Act, Dorner said noting that some senators argue that the Department of Energy's GREET model is the overall better choice when viewing the incentives for SAF to lower aviation emissions.

Also, since some projects lag behind schedule, producers do not want to overcommit, Ozel said.

Tax credits for SAF in the act are expected to help lower the cost of the fuel.

Global SAF consumption was expected to reach 2.1 million b/d by 2050, displacing almost 24% of worldwide jet fuel demand, analysts at S&P Global said August in a SAF Market Outlook.

Europe will be the main driver of SAF consumption growth reaching almost 700,000 b/d by 2050, over 45% of the total share of aviation fuels. North America and Asia were expected to increase to 644,000 b/d and 623,000 b/d, respectively, the analysts said.

Feedstock concerns

Feedstock challenges also play a role in the concerns over project timelines.

SAF trades at a pronounced premium to conventional jet, largely due to calculations surrounding feedstock costs.

Platts, part of S&P Global, assessed Northwest Europe SAF at $1,857.79/mt on Aug. 29, $858.54/mt above CIF NWE jet cargoes.

The International Air Transport Association, an industry body, counts over 130 relevant renewable fuel projects announced by more than 85 producers across 30 countries, it said in June.

Each of the projects has either announced the intent or commitment to produce SAF from a wider slate of renewable fuels. Typically, there is a 3-5 year lag between a project announcement and its commercialization date.

At present, IATA expects 85% of future SAF volume over the next five years to be derived from just one of nine certified pathways -- hydrotreated esters and fatty acids -- which is dependent on limited availability of feedstock such as waste fat, oil and grease feedstocks (FOGs, recognized by industry as second-generation feedstock).

In order to diversify avenues to SAF production the industry needs to scale up already certified pathways, such as alcohol-to-jet and Fischer-Tropsch; accelerate research and development for existing SAF production paths; scale-up feedstock conversion technology, IATA said.

Securing finances

"Sustainable aviation fuel investments involve heavy equipment, chemical processes and large capex, so SAF investments are not for the faint-hearted," Sarah Wilkin, founder and CEO of consultancy Fly Green Alliance, told S&P Global.

There were few with the experience in dealing with SAF, so the consultancy seeks to educate finance providers, Wilkin said.

"We are looking for that group/portfolio to boldly lead the way and begin the wave. It has started but it is not there yet across the energy mix in general. We are not on target but there will be a surge in the next few years. The ripple has begun."

The current slowdown in SAF supply deals may only mark a temporary lull but underscore the dependence of costlier replacements for fossil fuels on incentives and bold green policies.

Despite the headwinds, most market watchers still see SAF becoming a significant tool to curb emissions and hit net-zero targets.