SAF Production to Triple in 2024 but More Opportunities for Diversification Needed

July 22, 2024

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(International Air Transport Association) The International Air Transport Association (IATA) announced that its projections for a tripling of Sustainable Aviation Fuels (SAF) production in 2024 to 1.9 billion liters (1.5 million tonnes) are on track. This would account for 0.53% of aviation’s fuel need in 2024. To accelerate SAF use, there are several policy measures that governments could take.

“SAF will provide about 65% of the mitigation needed for airlines to achieve net zero carbon emissions by 2050. So the expected tripling of SAF production in 2024 from 2023 is encouraging. We still have a long way to go, but the direction of exponential increases is starting to come into focus,” said Willie Walsh, IATA’s Director General.

Renewable Fuel Production and SAF

Renewable fuel production is shared by many industries and SAF is a part of renewable fuel production. That is why increasing the production of renewable fuel is key to increasing the potential of SAF.

Some 140 renewable fuel projects with the capability to produce SAF have been announced to be in production by 2030. If all of these proceed to production as announced, total renewable fuel production capacity could reach 51 million tonnes by 2030, with production capacity spread across almost all regions.

Renewable fuel production potential could exceed this estimate as investor interest in SAF grows. With a typical three-to-five-year time lag from planning to production, investment announcements as late as 2027 could be in production by 2030. At the same time, it is also clear that not all announcements reach final investment decisions.

Through the International Civil Aviation Organization (ICAO), governments set an ambition to achieve a 5% CO2 emissions reduction for international aviation from SAF by 2030. To achieve that ambition, around 27% of all expected renewable fuel production capacity available in 2030 would need to be SAF. Currently, SAF accounts for just 3% of all renewable fuel production.

“The interest in SAF is growing and there is plenty of potential. But the concrete plans that we have seen so far are far from sufficient. Governments have set clear expectations for aviation to achieve a 5% CO2 emissions reduction through SAF by 2030 and to be net zero carbon emissions by 2050. They now need to implement policies to ensure that airlines can actually purchase SAF in the required quantities,” said Willie Walsh.

Potential Policy Measures to Boost SAF Production

There are several potential solutions to accelerate aviation’s access to critical SAF quantities:

Diversify feedstocks: About 80% of SAF expected to be produced over the next five years is likely to come from hydrogenated fatty acids (HEFA): used cooking oils, animal fats, etc. Accelerating the use of other certified pathways and feedstocks (including agricultural and forestry residues and municipal waste) will greatly expand the potential for SAF production.
Co-processing: Existing refineries can be used to co-process up to 5% of approved renewable feedstocks alongside the crude oil streams. This solution can be implemented quickly and materially expand SAF production. However, policies must be put in place urgently to facilitate consistent life-cycle assessments.
Incentives to improve the output mix at renewable fuel facilities: The current renewable fuel facilities are designed to maximize diesel production and often benefit from incentives in addition to the long-standing demand from road transportation. As road transport transitions to electrification, policies should be established to shift production toward the long-term need of air transport for SAF. Incentives aimed at SAF can help facilitate the renewable diesel-SAF switch, which requires minimal modifications at existing stand-alone renewable fuel facilities.
Incentives to boost investments in renewable fuel production: The production of all renewable fuels will need to scale up rapidly, and among them, the need for a growing share of SAF production will necessitate strong policy support. One such clearly articulated policy is the US Grand Challenge and the $3 billion of investments it supports. Stable, long-term tax credits would further maximize SAF production capability in both existing and new facilities.

“Incentives to build more renewable energy facilities, strengthen the feedstock supply chain, and to allocate a greater portion of renewable fuel output to aviation would help decarbonizing aviation. Governments can also facilitate technical solutions with accelerated approvals for diverse feedstocks and production methodologies as well as co-processing renewable feedstocks in crude oil plants. No one policy or strategy will get us to the needed levels. But by using a combination of all potential policy measures, producing sufficient quantities of SAF is absolutely possible,” said Walsh.

Passenger Support

A recent IATA survey revealed significant public support for SAF. Some 86% of travelers agreed that governments should provide incentives for airlines to use SAF. In addition, the vast majority of air passengers agree (86%) that leading oil corporations should prioritize the production of SAF.

About IATA

IATA (International Air Transport Association) represents some 330 airlines comprising over 80% of global air traffic.
In December 2023 IATA reported that some 69 million tonnes of renewable fuel capacity were expected to be available by 2028. The most recent estimate is for 51 million tonnes of renewable fuel capacity to be available in 2030, based on currently announced projects. Several factors have resulted in this reduced estimate. Most significant was an evaluation of projects against more stringent criteria for success and for the potential to meet SAF’s exacting sustainability criteria. Additionally, some projects have progressed at a slower pace towards commercial operations. With the right incentives, the potential for international aviation to reach a 5% reduction in carbon emissions by 2030 through SAF remains, provided policies are in place to increase the share of renewable fuel production allocated to SAF.
The IATA Passenger survey of 6,500 recent (in the last 12 months) airline travelers was conducted between 29 March and 14 April in Australia, Canada, Chile, China, France, Germany, India, Indonesia, Japan, Singapore, Spain, the Netherlands, UAE, UK, and USA. Panels were provided by Dynata with analysis by Savanta.

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How the aviation industry could help scale sustainable fuel production (McKinsey & Company)

Excerpt from McKinsey & Company: In exchanges with chief sustainability officers across the industry, we learned that about two-thirds expect a shortage by 2030, while a third are uncertain or do not expect a shortage (Exhibit 3). Participants unanimously agreed that regulatory interventions are the primary motivator to buy SAF, followed by companies’ own voluntary targets.

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Airlines can use a range of procurement strategies to manage uncertainty and access to SAF

Scaling SAF requires significant funding, from venture capital (VC) to infrastructure investment for building SAF facilities. Investors, however, are hesitant because of uncertainty around future demand and technology readiness. Aviation stakeholders can play a key role by helping create momentum for the further expansion of SAF production capacity.

Theye Veen, chief commercial officer at SkyNRG, a Dutch SAF player active across the value chain, explains that “every innovation needs this ‘explosive money’—venture capital. Just $100 million to $200 million could accelerate four to eight pre-final-investment-decision projects, marking a substantial step forward in sustainable aviation.”9

Apart from airlines that are counting on a future SAF spot market and plan to “wait and see,” forward-leaning aviation players are using a range of strategies to source SAF, from pure offtake agreements to equity investments in suppliers or production (Exhibit 4).

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Industry action follows four main archetypes:

Individual offtake agreements. Individual offtake agreements are the predominant approach to SAF procurement; most airline leaders tell us they intend to use such agreements. For mature airlines, direct procurement is similar to today’s process for procuring airline jet fuel. Although the required up-front capital is minimal, offtakes can create balance sheet risks. The recent 980-million-liter deal between IAG International Airlines Group and Twelve exemplifies the industry’s readiness for substantial agreements.10 A long-term “bankable” offtake agreement with an anchor customer, such as Southwest Airlines’ 20-year arrangement with USA BioEnergy,11 can mitigate risk and help suppliers attract investors. That said, long-term offtake agreements can pose financial risks, especially since the SAF industry is in its infancy and few suppliers have proven track records.
Partnerships and consortiums. Partnerships and consortiums such as the Sustainable Aviation Buyers Alliance (SABA) illustrate how industry stakeholders can collaborate to pool demand or create other synergies. This option is comparable to offtake agreements of individual airlines but involves multiple stakeholders, sometimes including end customers such as corporations seeking to decarbonize their air travel. SABA’s April 2024 announcement involves offtake agreements with four fuel providers, three airlines, and 20 corporate aviation customers, including McKinsey.12
Direct investments. Direct investments of individual airlines into suppliers or selected projects are another option. Norwegian Airlines and Cargolux, for example, invested in Norsk e-Fuel’s power-to-liquid plant in Norway.13 In January 2024, LanzaJet Freedom Pines Fuels opened the world’s first ethanol-to-SAF production facility with investments from multiple stakeholders, including IAG and All Nippon Airways.14 Many of these investments are bundled with offtake agreements with lower SAF-sourcing costs and preferred access to future supplies. Another novel direct-investment approach is the strategic partnership of Airbus and Qantas, which are co-investing $200 million in SAF production projects to foster a local SAF ecosystem in Australia. The companies are blending their expertise in the global SAF market from both OEM and airline perspectives, and combining their knowledge of the Australian market.15
SAF funds. SAF funds are typically set up by partners with a common interest in scaling production. Potential partners include investors and financiers, scaled players in the SAF supply chain, other airlines and airports, engine and aircraft manufacturers, and corporate customers seeking to mitigate Scope 3 emissions. Partners investing together can raise more funds and impact by enabling larger ticket sizes. Given their typical size of less than €0.5 billion, SAF funds initiated by the aviation sector will be able to provide the first rounds of financing to promising projects.

Such a setup unlocks a number of benefits: a synergistic consortium of investors provides the portfolio company with expertise and support along the value chain, and the fund structure mitigates risks for each participant while maximizing the overall investment budget. Some investors may seek carbon credits for offtakes generated by the SAF that is produced and sold. Co-investors, such as other airlines, can also secure more-flexible terms and lower prices.

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Based on our research and experience serving clients in aviation, investment, and other industries, we’ve identified three best practices in designing and setting up SAF funds.

1. Set clear investment objectives and targets

Management teams are more effective when they’re aligned on what success looks like. For example, getting access to sustainable fuel isn’t the only reason why airlines drive such funds. Airlines typically also aim to build internal capabilities and demonstrate their commitment to sustainability to the public, including customers, legislators, and regulators. Leaders within the airline need to be in alignment, of course, but the entire consortium of stakeholders and potential target companies should also agree on overarching goals and success metrics. These companies need to understand the extent to which the consortium supports and accelerates the business. Management teams can help improve clarity and drive alignment by making early decisions on objectives, expectations, and governance. A well-designed decision grid can guide their choices (Exhibit 5).

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Although most aviation players consider the fund to be strategic, they do negotiate hard-to-get financial benefits from them. Some even have clear IRR targets—often around market rates of around 12 to 16 percent—and want general partner status and board seats where they believe their expertise can help advance projects.

2. Engage the right partners to enable synergies and support for portfolio companies

Although some funds are set up by a single company, working across a consortium of partners can provide synergistic benefits beyond scale—such as uniting stakeholders throughout the ecosystem, raising awareness and impact, and allowing partners to jointly advocate for supporting policies.

Some funds bring in partners from across the aviation value chain, including airlines, corporate customers, financiers, OEMs, travel management companies, and airports. Ultimately, the fund should create “pull” from the SAF supplier side, seeking an environment of supportive investors who can enable their effective incubation.

From the start-up perspective, a financial institution might seem to be a more attractive partner than an airline, which may not be able to provide cash as quickly with minimal interference. But airlines can significantly boost a portfolio company’s attractiveness with its name, network, industry insights, and attention from the public and other investors. A collaboration like this can include detailed data exchanges and close cooperation; for example, research teams from the portfolio company can work with operational teams from the airline to gain insights into operational efficiencies to benefit the start-up and investors.

3. Shape governance to move quickly, focus on returns, and involve experts

In a fund incorporated as a CVC, the investment committee typically includes aviation company leadership, and, in some cases, representatives of investment partners. Since these funds compete against faster-moving VC funds that have more flexibility and less overhead, they need an effective independent governance structure that allows for quick decisions. The corporate governance, legal, and procurement processes of airlines may not permit the speed of decision making that VC investments require; an airline may require a three-year profit and loss statement, for example, which new start-ups typically lack.

Best practices for these funds, therefore, include establishing a governance structure similar to those of independent VCs, with independent investment decision making within the agreed mandate of the fund. This independence can speed execution, but it can also create tension with the airline organization—for example, when a sustainability team is the “center of expertise” of SAF.

In addition to the choices outlined in Exhibit 5, some funds seek to attract the right talent by implementing performance-based compensation models and management fees, which differ significantly from traditional airline-employee remuneration.

Next steps

Advances are being made in the science and industry of SAF production—but not quickly enough for the aviation industry to meet its ambitious decarbonization goals. As more aviation players start to catalyze the ecosystem through investments in the SAF supply chain, even more capital is needed to meet global demand in the next decades. Beyond the first seed investments to accelerate start-ups and immature projects, trillions of dollars for post-FID capital will be required to build enough capacity to meet global demand by 2050.21

Long-term infrastructure investors may need to step in and finance capacity development. This is likely the next challenge for the sector, as demand is uncertain and technology unproven. To reduce this risk, the regulatory environment can be key, particularly when globally coordinated.

In short, beyond fuel and energy suppliers, a wide range of industry stakeholders will need to play much larger roles in expanding and strengthening the SAF ecosystem to help the world reach its climate targets. An airline’s SAF fund can drive innovation, but other investors will need to step up to fund the infrastructure that will decarbonize the industry. READ MORE