3 “easy” steps to finance SAF?
Sustainable Aviation Fuel scale-up lacks funding and trips on CAPEX
Nothing in this article should be construed as legal or financial advice.
Sustainable Aviation Fuel (SAF) is lauded as the solution to near-term decarbonisation for aviation.
It is one thing to talk about saving the planet.
It is another to talk about how to keep aviation afloat as a viable business model.
So far it looks like we are trying for both to happen. For growth in air travel to significantly de-couple from emissions increases.
Based purely on CORSIA, even in its mandatory form, airlines are not sufficiently incentivised to offset emissions by buying SAF. Why? Buying SAF sufficient to result in 1 tonne of CO2 savings will cost about US$876.
Calculations here:
Assuming (optimistically) that SAF saves 80% of carbon emissions (in reality, current levels are up to 80% of GHG emissions), to save 1 tonne of carbon from SAF usage will need to be compared against the amount of jet fuel used to produce 1.25 tonnes of carbon.
CO2 emissions from conventional jet fuel are about 3.15 grams per gram of fuel .
This means saving 1 tonne of CO2 using SAF has to be compared with conventional jet fuel that produces 1.25 tonnes of CO2 (or 396,825 grams of fuel). Using an equivalent amount of SAF by weight (currently US$6.69 per gallon) (to result in 1 tonne CO2 saving) will cost about US$876.
Contrast this to the price of carbon in voluntary markets (specific for aviation industry offset) which is currently between $1 to $2 per tonne of CO2. Under the EU ETS scheme, the price is roughly EUR 65 per tonne of CO2.
Why would airlines fork out for a solution that is roughly 700 to 10 times more expensive than the low cost option? SAF purchases could be due to upcoming SAF mandates now getting implemented around the world, or where ETS schemes apply for an airline’s flight routes. Either way, likely due to foreseeable increase in mandated SAF demand drivers pushed out by governments, SAF off-takes are healthy and 40 forward thinking airlines have already committed to using 5% SAF (increasing to 30% SAF by 2030).
I am guessing the remainder 4000+ airlines around the world have not made such commitments, and will be looking to rely on the significantly cheaper voluntary carbon credits to achieve compliance with CORSIA requirements instead?
Surprisingly, even at COP28 in Dubai (Nov / Dec 2023), representatives of major international airlines were still asking (publicly) - for some kind of magic bullet financing to help them afford the cost of purchasing SAF.
I’ve been asked the same by airlines in the APAC region since 2022, and can’t believe this question is still making its way into sustainability forums on the global stage.
All of 2023, I harnessed the full power of my IQ of 146, my law and economics degrees and more than 10 years of structuring novel financing arrangements for Wall Street.
Today I have the answer.
There are no 3 easy steps. No (easy) help is coming.
In other words, the 3 “easy” steps to financing SAF for airlines, is not to provide financing to airlines at all. It is:
#1: invest in development of more SAF production pathways
#2: project finance the building and commercialisation of more SAF production
#3: trust that increase in SAF supply will drive SAF prices down
Not that this is easy either. Though it is “easy” for airlines in that airlines cannot do much about it, and may simply have to wait. Perhaps while things are as they stand it is more practical for airlines to purchase CORSIA eligible Carbon Credits as early as possible to benefit from any anticipated increase in price of such credits.
Nothing in this article should be construed as legal or financial advice.
Although, see SAFOne (from Novus Aviation Capital) and VietJet’s collaboration (here) for ideas. Since airlines often have to work closely with aviation regulators who are all studying solutions for the decarbonisation of aviation, airlines can play a coordinator role.
The valley of death in financing the production of SAF
SAF production has been successful in attracting early stage financing, but once the large cost of funding production facilities (capital expenditure) come into the picture, financial markets falter.
The US Department of Energy is now funding GEVO’s Bio-Jet SAF Fuel plant to the tune of US$950 million after GEVO walked away from potential project financing options from private players. This signals the difficulties in financing the construction of SAF production facilities.
However, one of the largest SAF producers in the world, Neste, which built the largest SAF refinery in Singapore which went live in May 2023 has been able to access a variety of financing options (see Neste’s credit programme consisting of green term loans, sustainability linked revolving credit facilities and EMTN programme), possibly due to their already profitable HEFA pathway plants, but it does not appear that even Neste has been able to access limited recourse or non-recourse project financing for SAF production.
The problem with applying project financing to the construction of a SAF plant is that airlines do not often purchase jet fuel with a commitment to long off-take arrangements at fixed prices (also echoed by Lauren Riley, Chief Sustainability Officer of United Airlines here). Banks like to see fixed price and revenue streams before agreeing to fronting money to build the SAF plant so that they can be assured that the money they have advanced can be repaid on time.
Some solutions have already been proposed.
UK’s SAF revenue certainty mechanism will likely be helpful, but how the mechanism will work in practice is still under consultation. All we know is, NGOs are already envisioning it to be government backed (and therefore financed by the general tax paying populace), and have submitted a response (reported here) supporting the position of the aviation industry itself paying for the revenue certainty.
Banque de Montreal - sustainable financing guarantee risk-sharing 50% of the risk up to USD 60 million on loans
It would also be interesting to track the development of the following transportation energy transition commitments, which do not yet specify how they will solve the “bankability” problem.
Climate Green Fund - USD 11.3 billion committed to energy and transport
Bank of America - USD 2 billion in SAF production and low carbon aviation solutions
First Abu Dhabi Bank - USD 75 billion by 2030 with aviation being a key theme
This article was inspired from the corn fields of University of Illinois - Urbana Champaign which was surrounded by corn fields, which may be redeployed towards SAF production very soon!
Nothing in this article should be construed as legal or financial advice.