U.S. Sustainable Aviation Fuel Production Target Faces Cost, Margin Challenges

by Sourasis Bose (Reuters) The United States' goal of rapidly ramping up production of sustainable aviation fuel (SAF) may encounter strong headwinds as producers balk at the low margins for the biofuel and some airlines flag concerns over the costly switch, experts said.

President Joe Biden, who has made tackling climate change a central pillar of his administration, launched a challenge in 2021 to supply at least 3 billion gallons of SAF annually by 2030, a steep jump from the current 15.8 million gallons as per U.S. government data.

U.S. production of SAF will be 2.1 billion gallons by 2030, S&P Global Commodity Insights has estimated, based on upcoming projects.

"A lot of additional investment (is) needed to hit that (3 billion) target," said Wood Mackenzie analyst Gordon McManus.

A lot is riding on SAF as the U.S. Energy Department has said alternative sources, such as battery technologies and hydrogen, are not expected to contribute to substantially reducing aviation emissions until after 2050.

Corey Lavinsky of S&P Global Commodity Insights said the goals were for domestic production and not consumption.

"As things stand now, an airline may choose not to use SAF because it believes it's too expensive compared to traditional jet fuel. Mandating the use of SAF would eliminate that option," Lavinsky said.

U.S. jet fuel currently retails at around $2.85 per gallon while SAF prices are at $6.69 per gallon, as per data from commodities and energy pricing agency Argus Media.

Rising costs and supply issues are among the biggest hurdles and the industry needs more support to reach the goal of net zero emissions by 2050, a survey commissioned by GE Aerospace ahead of the Paris Airshow in June suggested.

European regulators introduced a mandate to ensure SAF constitutes 2% of fuel available at EU airports by 2025, rising to 6% in 2030, 20% in 2035 and gradually to 70% in 2050.

SAF producers are currently eligible for a tax credit of up to $1.75 per gallon under the Inflation Reduction Act (IRA), but this might not be enough to offset poor margins, analysts said.

"At the moment, it's maybe a hard decision for producers to put additional capital in to produce SAF rather than renewable diesel," said McManus. Renewable diesel can be made from the same feedstocks as SAF.

Project costs for SAF also remain high as additional processing is required for the biofuel and supply of feedstocks such as cooking oil are tight.

Meanwhile, the Biden administration is divided over ethanol's role in the aviation fuel subsidy program, and likely will delay until December a decision on whether to make it easier for SAF made from corn-based ethanol to qualify for IRA subsidies. READ MORE

Excerpt from DTN Progressive Farmer: While soybean oil is still the primary feedstock for renewable diesel production, there are a few other fast-rising stars. From June to August of 2023 an average of 297 million pounds of canola was used each month to make biofuels, up 128% from the same three-month period in 2022. Also in the same period, an average of 544 million pounds of yellow grease per month was used, up 30% from the previous year, and 320 million pounds a month of beef tallow was used, up 78% from its previous summer.

Complicating matters, the feedstocks are not all domestically sourced. USDA's October issue of Oilseeds: World Markets and Trade (https://apps.fas.usda.gov/…) explained U.S. imports of Animal and Vegetable Fats and Oils, including used cooking oil, roughly tripled in 2022-23 to 882,000 tons, valued at near $1.2 billion. The total is increasing again in 2023-24.

There is one other piece of the puzzle, regarding falling RIN prices this fall and that is Singapore. The Neste company has exported renewable diesel from Singapore to the U.S. for several years, long before U.S. production became popular. In the first eight months of 2023, the U.S. imported roughly 238 million gallons of renewable diesel from Singapore, up 39% from the same period last year.

According to the private firm, StillWaterAssociates.com, imported renewable fuel is not eligible for the Clean Fuel Production Tax Credit in the Inflation Reduction Act (https://stillwaterassociates.com/…). However, Singapore's renewable fuel does have a pathway for California's low-carbon credit and, according to the U.S. Energy Department, every gallon of imported renewable fuel is eligible for a RIN certificate: (https://afdc.energy.gov/…). In other words, renewable imports, including the fuel from Singapore, count as part of the Environmental Protection Agency's annual mandate of 20.94 billion gallons of renewable fuels in 2023.

Unfortunately, the world of biofuel markets and production is entangled in complicated layers of rules and regulations, which make it difficult to sort out at times. Without getting any deeper in the weeds, I simply want to point out, while the incentives remain in place for renewable diesel production to keep expanding in the U.S. and while U.S. soybean oil continues to enjoy strong demand growth in 2023, the competition for alternative feedstocks and other sources of renewable fuels are rapidly encroaching on soybean oil's bullish turf. It is going to be interesting to see how this market progresses in 2024. READ MORE