Alternative Jet Fuels: Final Destination, or Holding Pattern?
Contents
Introduction
Bridging the Low Emissions Gap
Market Trends
Facts, figures, forces
Investment Outlook
Risks and opportunities
Market Movers
Heavy Hitters, Fast Followers
Investors
VC / PE / Funds
Final Thoughts
Cautions, downsides
Sustainable Fuel May Bridge the Low Emissions Gap
Electric, Hydrogen Jets Seen Far in Future
When governments restricted travel to slow the spread of the coronavirus in March 2020, the passenger flight industry cratered. Airlines in 2020 were hammered with economic losses of $168 billion, according to estimates.
The industry’s losses were the environment’s gain. As flight capacity was slashed by about 75% in April 2020 compared to the year before, emissions fell to levels last seen in 1997.
The declines in emissions, and subsequent cleaner air, are temporary. The aviation industry is expected to return to emitting its pre-pandemic share of about 3% of all U.S. greenhouse gas (GHG) emissions.
With that forecast for a return to dirty skies, the industry in 2021 set a goal to achieve net-zero carbon dioxide emissions by 2050. Alternatives to fossil-based jet fuels is a keystone in reaching this target.
“Electric and hydrogen-powered aircraft may play a role in helping aviation cut emissions. But large-scale development, if it does come, won’t be here for at least another decade.”
Electric and hydrogen-powered aircraft may eventually play a role in helping the industry achieve its goals. Still, commercial, large-scale development isn’t guaranteed and if it does come, it won’t be for at least another decade. For example, Airbus said it plans to develop the world’s first hydrogen commercial aircraft by 2035, and developers of electric planes are still trying to overcome the challenge of creating a battery system powerful enough to lift a plane while being light enough for long flight.
One solution to the industry’s growing emissions problem that may be in reach is alternative jet fuels. These fuels may present the transitional solution the industry and the planet desperately need.
President Joe Biden’s administration in September 2021 signaled its support for so-called sustainable aviation fuel (SAF) as a main pillar in a plan to clean up aviation’s emissions problem. The administration laid out several initiatives to boost SAF, including a tax credit (pegged by some news outlets at $1.25 a gallon) for SAF that cuts emissions by at least 50%.
They also unveiled the SAF Grand Challenge, which seeks to boost alternative jet fuel production to 3 billion gallons annually by 2030.
“We need bold partnerships to spur the deployment of billions of gallons of sustainable aviation fuels quickly,” the administration’s statement read.
SAF are made from different components, known as feedstock, including corn grain, algae and various waste product. In March 2022, a test Airbus A380 flew for three hours in Europe with one its engines powered entirely by SAF made of used cooking oil.
Rising Jet Fuel Consumption
“We need bold partnerships to spur the deployment of billions of gallons of sustainable aviation fuels quickly,” The White House said in September 2021 when it announced tax credits and other initiatives to boost SAF.
Market Trends: Facts, Figures & Forces
Market Forces
Demand for alternative fuels is rising as governments and airlines seek to curb emissions blamed for rising temperatures, extreme weather and health problems like premature deaths and asthma caused by particulates and nitrogen oxide. While governments, corporations and non-governmental agencies put decarbonization plans in place, other factors driving include fuel prices rising around the globe, the war in Ukraine and Russia’s control of fuel supplies. The U.S. Energy Department says benefits to boosting supplies include:
Domestic energy security
Diversity of fuel supplies
Less fuel price volatility
Lower long term fuel cost
Environmental and sustainability benefits
Burning SAF reduced emissions of certain harmful chemicals like sulfur oxides and carbon monoxide, according to a 2022 study that also said production of SAF emitted fewer greenhouse gasses than petroleum-based fuel production The study also suggested burning SAFs may reduce premature deaths slightly.
““We have to do something now — and what we can do now is SAF.”
SAF commercial production requires significant scaling up. The U.S. produces about 4.5 million gallons a year, the White House said when it announced its fuel initiative last year. That’s a drop of the 1.6 billion gallons commercial airlines burned in the month of December 2019, before the pandemic, according to the U.S. Bureau of Transportation Statistics.
Most of today’s jet turbines can take blends of up to 50% biofuels.
The White House’s 2021 plan to boost clean jet fuel output included a number of other steps in addition to the tax credit:
As much as $4.3 billion in what it called “funding opportunities” for SAF projects and producers.
Increase in R&D for new technologies to improve fuel efficiency by at least 30%
Studying ways to improve air traffic and airport efficiency, cut lead exposure and clean the air in and around airports (small, piston-powered planes run on jet fuel and contribute half of the lead pollution in U.S. skies).
Market Facts & Figures
The International Energy Agency (IEA) anticipates SAF reaching around 10% of aviation fuel demand by 2030, and close to 20% by 2040
As of February 2020, six methods for producing SAF were approved by the American Society of Testing and Materials (ASTM), with several other fuels in the approval pipeline.
According to IATA:
Since 2016, more than 370,000 flights have been made using blended regular fuel with small amounts of SAF.
SAF emits at least 80% lower lifecycle GHG emissions than traditional jet fuel.
Aviation companies have engaged in forward purchase agreements for approximately 14 billion liters of SAF.
Increased number of airlines, more than 45, are already using SAF for their aircraft.
Despite the benefits, alternative jet fuel faces significant hurdles when it comes to production, demand and price:
According to the International Council on Clean Transportation, other transport industries such as trucking, are also interested in biofuels, and are competing for feedstock, or raw material. The group estimates that producers will be able to supply only 6%-9% of alternative fuel demand by 2050.
SAF can be 2-to-8 times the price of regular petroleum jet fuel. Global demand for jet fuel is expected to increase from 106 billion gallons in 2019 to 230 billion gallons in 2050. Most sources of low cost feedstock required as fats, oil, and grease are not currently available in enough volumes to meet SAF demand.
Analysis of Future Domestic and International Aviation CO2 Emissions
Investment Outlook - Risks & Opportunities
Opportunities
“We have to do something now — and what we can do now is SAF,” Rolls-Royce outgoing CEO, Warren East said in April 2022. By the end of 2023, Roll-Royce hopes to have all of its engines tested on 100% SAF.
While SAF costs are expected to decline with further innovations and as production increases, they’re expected to remain more expensive than fossil fuel. They may become equivalent to fossil fuels by 2030 if penalties for carbon emissions are raised, McKinsey & Co. wrote in a 2020 report.
Risks
The market may hit a brick wall if production worries materialize. Refineries require construction, while feedstock lines from crops and waste oil must be developed and steadily resupplied. At the same time, crops used for raw materials are also needed by people and farm animals. Growing crops for biofuels may boost farm and fertilizer pollution and possibly cause higher food prices.
Market Movers: Heavy Hitters, Fast Followers
Leaders & Fast Followers
Venture founded by KLM and several other partners, based in Netherlands, supplying “advance waste” biofuels to airlines.
Fuel is made from waste-generated ethanol, which is converted into jet kerosene and sustainable diesel for trucks
Microsoft invested $50 million in LanzaJet in early 2022. Investors also include Royal Dutch Shell and the U.S. Department of Energy.
The company is finishing a plant in Georgia with a planned 10 million gallons per year capacity.
It can be blended up to 50% with fossil fuel jet without any modification to engines, aircraft and infrastructure.
LanzaJet to supply British Airwayswith at least 7,500 tons of fuel additive a year.
Producing bio-ethanol for more the past 10 years through the Raízen joint venture in Brazil
Fuel Costs
While SAF costs are expected to decline with further innovations and as production increases, they’re expected to remain more expensive than fossil fuel. They may become equivalent to fossil fuels by 2030 if penalties for carbon emissions are raised, McKinsey & Co. wrote in a 2020 report.
Joint venture by U.S. companies to produce up to 500 million gallons of SAF per year.
Alder Fuels, Honeywell International Inc, United Airlines Inc.
Major U.S. airline and jet engine maker in 2021 agreed to invest in Alder Fuels, which will make SAF using a combined Alder/Honeywell process. United committed go buying 1.5 billion gallons.
Operates two 190,000 tonne per annum plants in Finland and two 800,000 tonnes per annum plants in Singapore and Rotterdam, producing diesel fuel.
Other major players in the market:
Fulcrum Bioenergy (US)
World Energy (US)
Total Energies (France)
Preem (Sweden)
Red Rock Biofuels (US)
Atmosfair (Germany)
OMV (Austria)
Wastefuel (US)
Venture Capital/Private Equity
Currently investors have their focused-on electrification and hydrogen-powered technologies as they are looking for highly scalable investments. A number of funds however are investing in SAF:
Final Thoughts
Airlines are in a tight spot with respect to climate change. As one of the world’s biggest emitters of greenhouse gasses, pressure on the industry to cut emissions is growing. Yet options to replace the carbon-intensive power required to lift airplanes are limited. Batteries — which are changing the automobile industry — are years from being able to get jets off the ground and fly passengers thousands of miles. Hydrogen technology for planes is probably decades away. No guarantees exist that either will ever be available.
This is why that until a cleaner, commercially-viable breakthrough technology is developed, airlines are eyeing alternative fuels, or SAF. These aren’t 100% clean fuels, and at least in the near term will be blended and burned with jet kerosene. The goal, it appears, is to try to not make things worse, and get some reductions in place while the hoped-for breakthrough technology is developed.
Challenges persist in securing the raw materials needed to make fuel. Other long-haul industries like trucking are competing for alternative fuels. And this is where impact investors may find opportunities, because demand for alternative fuels is rising as the industry seeks to achieve net-zero emissions by 2050. While the challenge of overcoming these difficulties and helping companies and researchers develop an alternative jet fuel industry is daunting, and the payoffs in terms of cleaner air and profits may be larger.