Sustainable Aviation Fuel is at the Center of 4 Dynamics

May 24, 2021 |

By Mike Newman, Director of Parhelion Underwriting

Special to The Digest

A transition to carbon-neutral flying is possible and sustainable aviation fuels are the most promising decarbonization pathway in the near term.

As the aviation industry aims to reduce its Greenhouse Gas (GHG) emissions, decoupling airline growth from carbon growth, Sustainable Aviation Fuel (SAF) has emerged as the leading approach to further reduce GHG emissions from jet aircraft.

The world’s aviation sector currently accounts for approximately 2-3% of manmade global carbon emissions. Without timely action, though, aviation could consume up to 22% of the global carbon budget by 2050. To maintain growth and at the same time address its environmental impact, the aviation industry has committed to carbon-neutral growth and reducing net aviation carbon emissions to 50% below 2005 levels by 2050.

Looking ahead, the airline industry is facing even more stringent regulations as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) will become mandatory globally in 2027. There are now 82 countries which will take part in the first, voluntary, phase of CORSIA and it is anticipated that about 80% of the growth in international aviation CO2 will be covered by the program from the end of this year.

SAF is a drop-in replacement for conventional jet fuel (CJF) that can significantly reduce GHG emissions from jet aircraft engines. These fuels don’t have sulfur, and particulates are significantly less.

SAF is jet fuel sourced from a broad range of (non-petroleum) feedstocks from waste oils, alcohol, wood fiber or algae; to industrial waste gases, gasified municipal solid waste, gasified biomass, and now also direct air capture. The good news is that feedstock supply is plentiful!

SAF can be blended at up to 50% with traditional jet fuel and all quality tests are completed like a traditional jet fuel. The blend is then re-certified as Jet A or Jet A-1. It can be handled in the same way as a traditional jet fuel – so there are no changes required in the fueling infrastructure.

In common with renewable fuels generally, SAF is at the center of four dynamics: technology, market forces, government support and finance.


The technology is modern day alchemy, but instead of converting base metals into gold, this technology can convert waste into synthetic fuel. Technology like Haldor Topsoe  and Fischer Tropsch process a collection of chemical reactions that convert a mixture of carbon monoxide and hydrogen into liquid hydrocarbons., thereby creating clean transportation fuels.

This modern technology, though, has been around for decades, albeit with continuous improvements, refinements and adjustments. The Fischer–Tropsch process was used by Germany during World War II to produce synthetic fuels. Being petroleum-poor but coal-rich, Germany relied on Fischer–Tropsch production for an estimated 9% of German war production of fuels.

Market Forces

In the marketplace, SAF is currently more costly than traditional fossil jet fuel. It costs at least twice as much to produce SAF compared to conventional aviation fuel and SAF has carried a strong price premium over conventional jet fuel, as demand for the fuel has outstripped supply.

SAF is often co-produced with renewable diesel in the same refining process, which forces renewable fuel companies to make a decision about which fuel to produce. To date, the economics in the US have largely favored renewable diesel, prompting a number of west coast refiners to announce plans to expand production.

Renewable fuels producers will continue gearing their biofuel production to maximize the yield of the more valuable renewable diesel unless SAF becomes a more highly valued biofuel – and that is exactly what is happening in the market now. Despite higher costs to produce, the SAF industry and its airline customers anticipate major growth.

Based on known offtake agreements, at least 350 million gallons per year of SAF will be produced and available for dispensing at U.S. airports by 2023. And, according to a recent market research report the Sustainable Aviation Fuel Market size is projected to grow from an estimated $66 million in 2020 to $15 billion by 2030.

Government Support

Governmental support is crucial to sustainable aviation fuels achieving the aviation industry’s climate goals. Initiatives such as opportunity zones and tax reductions on the use of green and clean aviation fuels will drive the growth of sustainable aviation fuel over the long term. Indeed, the early adoption of SAF accelerated in 2019, when SAF became eligible as a credit-generating fuel under California’s landmark Low Carbon Fuel Standard (LCFS) program, soon followed by Oregon. States across the US, including Washington and New York, are exploring LCFS programs,

Although, unlike a number of European countries, the US does not put a volumetric mandate on SAF, the Biden Tax Plan is proposing to provide a BTC tax credit for SAF which should enable “the decarbonization of a key portion of the U.S. transportation sector”, the Treasury said. Canada’s proposed clean fuel standard, scheduled to begin at the end of 2022, includes SAF as an eligible credit generator.

The supply-side of SAF includes large companies such as Neste and Shell Aviation, mid-sized World Energy, SKyNRG, AEG Fuels and recent entrants like Fulcrum BioEnergy and Velocys.

To those can be added several upcoming waste-to-renewable fuels projects (at least six that we know of) that are currently in line for project finance. This additional production is strategically important; it is flexible supply because these independent companies can produce the fuels that are most needed at the time.

The markets for these carbon credits were enabled by government policy. These are regulatory driven markets, and pen-stroke is the critical risk to understand.


LCFS and RIN credits form a significant share of the projected income of these projects – in fact, the credits are often more valuable than the fuel itself. Many projects would not get financing without the revenues from the credits.

The capital market, and the debt market in particular, worries that a change of law or regulation might eliminate the market, so renewable fuels projects find that lenders want to protect their debt service in the event that the market is wiped out because a law is repealed, amended or terminated.

If the LCFS market doesn’t continue because of a change of law, repeal, amendment or any other termination of the enabling Act the forecast income of many projects would be seriously reduced. Even short of an outright repeal of the enabling legislation, regulatory risk also applies to individual regulations. Examples might include regulatory interference with demand by reducing the definition, number or volume requirements of Obligated Parties.

… regulatory risk is key to many project finance transactions …

The SAF industry’s drivers – technology, market forces, government support and finance – all come with new risks that can be barriers to investment in innovative changes. And since, regulatory risk is key to many project finance transactions, Parhelion created a fund of insurance capital that underwrites the continued life of the markets.

The huge pool of global insurance and reinsurance capital has traditionally taken risks that other forms of capital (debt and equity) can’t or won’t take and it is that insurance pool that now guarantees liquidity in new markets .and enables emerging industries and first-risk ventures.

About the Author

The author of this article, Mike Newman, is a Director of Parhelion Underwriting. He can be reached at (323) 459-5346 and [email protected].

Parhelion Underwriting Limited is a pioneer and recognized leader in the field of climate risk finance. We deploy the risk capital of underwriting syndicates at Lloyd’s of London to take on the risks facing sustainable energy, continuing the historical function that Lloyd’s has provided to emerging industries, new technologies and first-risk ventures.



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