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Q&A: What is sustainable aviation fuel and can it decarbonise the airline industry?

Our research specialists tackle key questions about sustainable aviation fuel (SAF) covering the outlook for demand, scalability and investment opportunities.

09/11/2023
Photo of plane on runway

Authors

Samuel Thomas
Sustainable Investment Analyst
Clara Mallinckrodt
Climate Change Analyst

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? We dig into some commonly asked questions.

What is sustainable aviation fuel?

Sustainable aviation fuel (SAF) is a liquid fuel alternative to fossil fuel kerosene used for commercial aviation.

It can be used in blends of up to 50% 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 SAF. These range from used cooking oil to municipal waste and forestry biomass.

What is the role of sustainable aviation fuel in decarbonising the airline sector?

The International Air Transport Association (IATA) and its 300 member airlines have committed to reach net zero carbon emissions by 2050.

SAF is the only short-term option available for decarbonising the airline industry. Unlike other green initiatives such as hydrogen or battery technologies, SAF 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 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 only account for 13% of the IATA’s emissions reduction strategy. Improvements to make aircraft more fuel efficient are expected to account for 3% of the reduction, with offsets and carbon capture accounting for 19%.

By contrast, SAF is expected to account for 65% of the emissions reduction envisaged in the IATA’s strategy, meaning an estimated 450 billion litres of SAF will be required annually by 2050.

Chart showing demand for SAF under net zero scenarios

How scalable is SAF?

In order to meet this demand, the production of SAF will need to be scaled up significantly. Just 375 million litres of SAF were produced in 2022, representing 0.10-0.15% of global aviation fuel demand. To reach industry decarbonisation goals, SAF needs to constitute 5% of aviation fuel consumption by 2030, 28% by 2040 and 50% by 2050.

However, the scalability of SAF depends on the demand/supply dynamics, potential capacity, and feedstock limitations. Building new SAF facilities will be costly. Existing refineries can and are being converted into SAF facilities. There are 206 existing and announced facilities globally that theoretically could produce SAF, with a total potential capacity of 71.4 billion litres.

But any refinery conversion will involve significant capital expenditure. As such, continued incentivisation and policy mechanisms will be required to drive ongoing refinery conversions.  Indeed, without subsidies and tax breaks, producing SAF 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 SAF 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 SAF 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 SAF blending mandate for fuel producers, starting at 2% of overall fuel supply by 2025 and moving up to 6% by 2030 and 70% by 2050.

In the US, California has a particularly supportive policy environment for SAF supply. In August 2022 the state passed a bill for SAF to comprise 20% of aviation fuel consumption by 2030.

Is SAF really sustainable?

So far we’ve been discussing SAF as if it were a single product. But there are different types of SAF derived from different feedstocks and refining processes - each with varying emissions profiles.

The most sustainable forms of SAF are those produced from waste and cover crops (i.e. crops grown for soil protection and enrichment, rather than for food supply). Using edible crops as feedstock puts SAF 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.

In the table below, the green shading indicates the most sustainable forms of SAF, with red indicating the least sustainable. The focus needs to be on waste and/or residue-based feedstocks. However, the challenge is whether the supply of these feedstocks is sufficient to satisfy the growing demand for SAF.

Chart showing carbon footprint of different types of SAF

SAF must meet certain sustainability criteria – such as having at least 10% lower lifecycle GHG emissions than kerosene – to be eligible for the CORSIA programme, which allows airlines to reduce their offsetting requirements through the use of sustainable or low-carbon fuels. CORSIA was launched by the International Civil Aviation Organization (ICAO) to offset any growth in CO2 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 SAF can be done by gaining exposure to companies involved in the SAF value chain. Oil & 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 SAF would make production more viable.

Another way to invest in SAF is by considering integrated oil companies that are investing in SAF growth opportunities.

Other examples of investment opportunities include “enablers” of the transition to SAF. This includes industrial gas and specialty chemicals companies who can provide gas and chemical feedstocks; or agricultural products companies who again provide feedstocks as well as fertiliser technologies.

Authors

Samuel Thomas
Sustainable Investment Analyst
Clara Mallinckrodt
Climate Change Analyst

Topics

Sustainability
Market views
Global
3D Reset
Decarbonisation
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