European aviation industry forced to buy greener fuels

Hello and welcome to Energy Source, coming to you today from London, where Wednesday was a tense day for Britain’s changing electricity markets.

The National Energy System Operator — in charge of keeping the lights on — issued a flurry of notices calling on power generators to increase supply as wind speeds dropped and with import cables already running heavily.

Phil Hewitt, director at energy data group Montel Analytics, said it marked the “tightest day so far this year”, with gas-fired power stations asking for extremely high prices to come online — including one asking for £5,750 per megawatt-hour (the day-ahead wholesale price is about £97 per megawatt-hour).

The market responded, and the lights stayed on. At 8pm on Wednesday, Britain was getting 57.7 per cent of its electricity from gas, 8.6 per cent from wind and 11.7 per cent from interconnectors.

The day illustrates the greater complexities of managing the electricity system as it moves towards intermittent renewables — complexities other countries doing the same around the world will also have to manage.

Today’s main item looks at another big step in the energy transition: long-planned sustainable aviation fuel mandates that have come into force in the EU and the UK.

Politicians are hoping they are the push the aviation industry needs to decarbonise. But will it work? Enjoy reading. — Rachel

Europe’s new push to decarbonise flying

For many, January is a time for New Year’s resolutions and belt-tightening. For the aviation industry in the EU and the UK, it means complying with new rules meant to push them away from fossil fuels.

Fuel suppliers in UK and EU airports now have to supply a portion of sustainable aviation fuel (SAF) for departing flights. It could be derived from cooking oil, municipal rubbish or hydrogen — many types will do, so long as they are not fossil-based.  

The mandates in its first year are low: 2 per cent of jet fuel used in the UK and 2 per cent in the EU. But they are set to climb to 10 per cent in the UK and 6 per cent in the EU by 2030, and even further beyond then. 

It marks a new phase of the energy transition, as governments get tough on the aviation industry to try and meet looming decarbonisation targets. The price of carbon dioxide emissions certificates is also set to rise in the coming years, making polluting more expensive.

It will also be a further test of whether the forced use of greener products is a workable strategy, coming at a delicate time for the energy transition, with support for net zero emissions targets under threat in many countries. 

In aviation, sustainable fuels are more complicated and expensive to produce than the fossil fuels currently used, holding back demand and supply. Forcing demand will break that dynamic, policymakers hope.  

“[The mandates] provide confidence to investors, clear market opportunity — a driver to the supply of fundamentally a completely new product to the market,” says Eirik Pitkethly, BP’s vice-president of regulatory affairs for bioenergy. 

Yet omens last year for future supplies were not good. Even with demand mandates on the horizon, several SAF projects were cancelled or paused due to high costs or strained feedstock supplies. For example, Shell paused building of a planned biofuels plant in Rotterdam in July, citing “market conditions”.  

In all, nearly 2mn tons of annual SAF production capacity was cancelled or paused during 2024, according to analysis by consultancy Wood Mackenzie. (To put that in context, the UK mandate for this year is equivalent to about 230,000 tons.)

“Challenging market conditions, availability of competitively priced sustainable feedstock, and changed strategic priorities are among the reasons cited,” notes Ozzy Jegunma, a senior research analyst at the consultancy. 

It estimates that the price of SAF made from used cooking oil in north-west Europe will in 2030 still be up to three times higher than jet fuel.

In later years a portion of the EU and UK mandates will need to be met by synthetic fuels, to reduce pressure on feedstocks for biofuels, such as cooking oil.

Synthetic fuels can be made, for example, by combining carbon dioxide with hydrogen made using green electricity. Yet this is complex and expensive. Shell and Uniper both pulled away from planned projects in Sweden last year.

What it means for airfares

Monika Rybakowska, a policy director at EU industry airline group Airlines for Europe, notes that this is a “learning year” as the industry adapts. But she also worries about the looming “green premium” as the costs of complying with mandates are passed on.

“The point is not to make flying more expensive; the point is definitely not to put a cap on flying,” she adds. “The point is to decarbonise flying — how to make it better and cheaper. We don’t see that necessarily happening with all the regulations we are subject to at the moment.” 

Analysis by the UK government found that the mandates could push average one-way ticket prices £9.40 higher by 2040 — which it said was “in the range of annual variations” in air fares since 2010.

It warned this could rise to £37.80 if insufficient fuel was available and companies paid buyout fees instead. But it added that, in that case, it could “immediately review the mandate and prevent such significant increases in ticket prices materialising”.   

Tim Alderslade, chief executive of UK lobby group Airlines UK, argues that, if the right policies are in place, the impact on passenger airfares from the mandates can be kept to a minimum. “Our priority is that the mandate is a success,” he adds.

The UK government has had to start adjusting policies forcing carmakers to produce a certain portion of electric vehicles, after they complained they were too difficult to comply with. The test of similar mandates in aviation starts now. (Rachel Millard)

Power Points

• Nuclear energy companies are racing to create “microreactors” in a bid to compete with electric batteries as a source of zero-carbon energy.

• Constellation Energy is in advanced talks to acquire Calpine in a deal valued at up to $30bn, in what could be one of the largest takeovers in the power generation industry.

• Shell trimmed its gas production forecast for the fourth quarter and warned that trading in its gas and chemicals divisions would be “significantly lower”.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.