SAF in the IRA Era – How Do the Incentives Stack up?

by Megan Boutwell (Stillwater Associates) The Inflation Reduction Act of 2022 (IRA) provides for a two-phased approach to incentivize sustainable aviation fuel (SAF) production. The first phase, 2023-2024, expands the biomass-based diesel blenders tax credit (BTC) to include a separate per-gallon incentive for SAF. In the second two-year phase, 2025-2027, the tax credit is enhanced so that renewable fuels including SAF will be eligible for the clean fuel production credit (CFPC). We detailed the structure of each incentive in our article Inflation Reduction Act Sustainable Aviation Fuel Credit. Until the IRA passed, renewable diesel (RD) production was incentivized over SAF production due to RD’s higher energy density. Most volumes of both fuels have been directed to the California market, drawn by financial incentives available under the state’s strong Low Carbon Fuel Standard (LCFS) program. In this article, we’ll examine how the value of SAF is changing given new incentives and whether greater SAF volumes will begin to flow beyond California’s borders.

Right now, the SAF on the market is a byproduct of the hydroprocessed esters and fatty acids (HEFA) process used to make RD. In the HEFA process, in which renewable fats, oils, and greases are used to produce fuel, RD is the most economic fuel to produce. To produce more SAF, producers must accept some refining and commercial trade-offs. We discuss the trade-offs for increasing SAF production in detail in The Social Cost of Carbon Part 3: What Does it Cost To Reduce Carbon in California’s Jet Pool. To summarize: RD facilities which also produce SAF require additional capital costs to fractionate the jet from the diesel cuts. If the facility is designed to maximize jet fuel yield, the total yield of the most valuable products (jet and diesel) declines. This makes the whole product mix less valuable to the producer.(2)

But the HEFA process is not the only way to produce SAF. With stiff competition for renewable fats, oils, and greases feedstocks, technologies that use alternative feedstocks like alcohol-to-jet fuel (ATJ) and waste-to-SAF processes using Fischer Tropsch (FT) technology may be able to create an advantage if they can achieve commercial scale. ATJ companies like LanzaJet and waste-to-SAF companies like Fulcrum Bioenergy are working to develop these alternatives.

A final hurdle for SAF is the regulatory environment which has created a higher value for RD than for SAF because of RD’s higher energy density. The federal RFS; state low carbon fuel (LCF) programs like those in California, Oregon, and Washington; and Cap & Trade programs like those in California and Washington add costs to the petroleum diesel fuel but not to petroleum jet fuel. Since RD is worth roughly petroleum diesel value in the retail market, adding to the costs of petroleum diesel increases the value of RD.

Like all renewable fuels in the U.S., SAF gains the most value when it benefits from the full incentive stack including federal and state incentives. The table below details the advantages and disadvantages for SAF in the current and upcoming incentive stack.

While spot prices and credit values will vary depending on market location and fuel CI, the table above offers a simplified view of the SAF/RD differential as the IRA and state incentives evolve. As can be seen, based on the sample spot price and credit values, RD enjoyed a healthy premium to SAF before the IRA was signed. With the introduction of the IRA SAF Tax Credit this year, the incentive stacks are close to parity, with RD having a slight advantage. When the CFPC is introduced in 2025, the calculation shows RD’s advantage growing slightly. If an additional state tax incentive is added to the stack, like the one proposed by Washington state, SAF sees a healthy premium over RD. Note that the Illinois SAF Tax Incentive will create a $1.50 premium for SAF over RD in the state, unless or until they pass an LCF program which will add value to RD that isn’t currently available in that market.

The provisions in the IRA give SAF a fighting chance in the competition with RD.

(1) Airlines are extremely price sensitive because their customers are price sensitive. Any increase in cost pass through to ticket price will cost the airlines in seat mile revenue.

(2) It should be noted that Montana Renewables recently announced that their HEFA process, using the latest technology from Haldor Topsoe, “has the capability to offer SAF at price parity” with RD. READ MORE