With the price of conventional aviation fuel skyrocketing in the wake of Russia’s invasion of Ukraine, could sustainable aviation fuel (SAF) offer any relief?
For a while now, governments, major airlines, and several aviation organizations have been encouraging the industry to embrace SAF to help achieve net-zero carbon emissions by 2050. This is because SAF burns more cleanly and is made from renewable resources, such as used cooking oil and grain.
OK, but how does it compare on price?
The average worldwide price of jet fuel is about $4.15 per gallon—about 149 percent more than a year ago, according to the International Air Transport Association (IATA). Compare that to the U.S. average price of a gallon of SAF, which is about $8.67, according to GlobalAir, which averages pricing from more than 3,200 FBOs. In fact, IATA estimates SAF in all its iterations generally costs two to four times as much as any aviation fuel.
Typically for airlines, fuel accounts for about 20 to 30 percent of operational costs. The spike has prompted some major airlines to raise fares—passing the pain to their customers.
The industry has been looking for cleaner fuels because, globally, civil aviation produces about 2.1 percent of all human-induced CO2 emissions, according to the Air Transport Action Group. That number is expected to rise significantly by 2050.
To find out if there’s any chance that SAF will be a competitive price alternative to conventional aviation fuels, we need to explore the interlinked dynamics of demand, supply, and production costs.
Demand
As we all know, higher demand for a product often results in higher prices, depending on the available supply. If supply overwhelmingly outweighs demand, prices will drop. The opposite is also true.
Jet-A has been the most widely used aviation fuel for generations, which is why jet-A demand towers over SAF. This is a big reason why SAF prices are higher and likely will remain so until SAF demand increases.
SAF demand is increasing, but slowly. In 2008, Virgin Atlantic airlines performed “the first test flight with biojet fuel,” according to IATA. From 2011 to 2015, 22 airlines flew 2,500 commercial passenger flights with blends of up to 50 percent “biojet fuel” from feedstock. In 2019, during the pre-pandemic economy, more than 215,000 commercial flights burned SAF and 40 airlines reported using it.
Now, according to IATA, SAF is being used for commercial flights every day. Several airlines have made long-term offtake agreements with SAF suppliers. IATA reports that “a number” of airports have agreed to supply SAF through their hydrant systems.
At GA airports across the U.S., SAF is now available for purchase from FBOs, including Signature Aviation, the self-described “leading provider of sustainable jet fuels to the private aviation industry.” Since 2020, the U.S.-based company says it has supplied more than 6 million gallons of SAF to private aircraft operators at 12 locations, including the U.K.Sustainability solutions provider 4AIR has created a global, interactive map showing airports and FBOs where SAF is available.
Supply
For similar reasons, conventional fuel supplies dwarf SAF. Because SAF is relatively new, the industry is still building facilities to scale up production. Less is available. Supply is low, which pushes prices higher.
Currently, global SAF production is a miniscule 26.4 million gallons a year—about 0.1 percent of all aviation fuel. These low production numbers prompted President Joe Biden to set a national goal to produce at least 3 billion gallons a year by 2030.
But increasing production of a new fuel isn’t exactly a quick and easy task. Worldwide, IATA predicts that “by 2025 and with appropriate policy support,” SAF could account for only 2 percent of all aviation fuel. With such low supplies, and rising demand, that number doesn’t bode well for the prospects of lower-priced SAF in the immediate future.
Long Term Hope
In the long term, however, IATA does offer a bit of hope. It projects SAF prices will eventually trend downward as demand rises, opening the door to “price-competitive” SAF offtake purchase agreements between producers and airlines.
Keep in mind that companies have been refining conventional aviation fuel from petroleum in some form since the early 20th century, which means the industrial infrastructure to produce it has been in place for generations. With existing facilities at scale, conventional fuel prices are more attractive because it costs producers less money to refine conventional fuel than it does to make SAF.
Production Costs
By nature, SAF requires a complex supply chain to produce because it requires sourcing of multiple raw materials. Sufficient feedstocks may not always be available. A more complicated supply chain can add to the cost of producing SAF. As in most products, those extra costs are often passed on to the consumer.
Incentive Programs
So, if free-market economics don’t offer much immediate price relief from SAF, what about artificial incentives? Could government programs and policies do anything to make SAF prices more attractive?
SAF is an essential component of the aviation industry’s drive toward decarbonization, and federal tax policies such as a blender’s tax credit are necessary to spur investment in this vital fuel, NBAA and others said in a recent letter to Congress.https://t.co/S2QJ6uMKOQ pic.twitter.com/43CD4eK5B5
— NBAA (@NBAA) April 25, 2022
A bill currently being considered in Congress called the Sustainable Skies Act would create a federal SAF tax credit for SAF producers who blend the fuel as a way to kickstart SAF production.
“This tax policy remains the most effective method to incentivize the production of SAF,” said a statement from National Business Aviation Association president and CEO Ed Bolen. “NBAA is determined to work with all stakeholders to make a blender’s tax credit a reality.”
As the U.S. and other nations agree to embrace policies aimed at cutting carbon emissions, some will include taxes for companies that aren’t fully contributing to goals. For example, Canada has a carbon tax for domestic travel in most regions of 30 Canadian dollars per metric ton of CO2, based on the amount of loaded fuel, according to management and consulting firm, McKinsey & Company.
If you factor in CO2 taxes, experts project that the total cost of using conventional fuel in the coming decades might get so ugly that SAF might end up being a slightly more competitive alternative.
Airlines that choose to use SAF will likely pass higher fuel costs on to passengers. One airline has already started down that road. Air France, KLM, and Transavia have introduced a SAF surcharge between 1 and 12 Euros for flight in and out of France and the Netherlands. Either way, SAF is not looking like a near-term solution to high oil prices in these scenarios.
Another SAF-boosting proposal would offer carbon credits to SAF purchasers, which could offset the higher cost. A recent university study projected that carbon credits could lower SAF prices enough to make them competitive with conventional jet fuel.
In addition to SAF, liquid hydrogen, hydrogen fuel cells, and lithium-ion batteries are also being considered as cleaner fuels for various types of aircraft in the coming decades.
To reach its net-zero goals by 2050, IATA says annual SAF production needs to ramp up to 346 billion liters—which would equal 65 percent of total fuel required across the industry.
Fuel suppliers, IATA says, need to be “held accountable for delivering SAF at cost competitive prices.”
“Whatever the ultimate path to net zero will be,” said IATA director general Willie Walsh in a statement released last October, “it is absolutely true that the only way to get there will be with the value chain and governments playing their role.”
So, at least in the short term, it doesn’t appear that SAF can offer a cost-effective solution to the recent spike in oil prices. But in the future it might—especially if government policies, infrastructure, supply, and demand all align and change the equation to make the economics work.
