A stand-off between airlines and energy groups over the production of sustainable air fuel is stalling the transition to net zero flying.
Airlines complain that sustainable aviation fuel (SAF) is too expensive and not enough is being made. But energy companies are reluctant to invest in more production until there are long-term orders.
SAF is a broad term covering jet fuel that is not made from fossil fuels. Almost all the fuel is made from organic material, including crops, animal fat and used cooking oil.
Depending on what it is made from, it can reduce the net carbon emissions from flying between 60 and 90 per cent. But it costs at least two to three times more than standard jet fuel.
The situation is increasingly critical for airlines, which have few alternatives to cut their emissions. Aviation makes up about 2.5 per cent of global greenhouse gas emissions, according to the International Energy Agency.
At the start of this year, rules took effect in the EU and the UK forcing airlines to buy SAF for at least 2 per cent of their total fuel use. In the EU, this rises to 6 per cent in five years’ time and then 70 per cent by 2050. The UK will require 10 per cent by 2030 and 22 per cent by 2040.
But the uncertainty over SAF’s future has seen many energy companies scale back investment plans. Last July, Shell paused construction of a SAF and renewable diesel plant in Rotterdam, which it had given the green light in 2021, when the market had a more optimistic outlook.
In 2023, just 0.2 per cent of total jet fuel was SAF, according to the global airline trade body, the International Air Transport Association (Iata).
Among the oil majors Eni, the Italian group, is investing in the fuel, but at the same time hedging its bets.
It has converted an old oil and gas refinery into a “biorefinery” that can make both SAF and renewable diesel in the southern Sicilian city of Gela.
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At full production, the plant can make enough SAF to supply almost one-third of the fuel that the UK and EU mandates force airlines to use this year — 400,000 tonnes a year or 3mn barrels.
This made it the second-largest facility in Europe, said Stefano Ballista, the chief executive of Enilive, which runs the refinery. But he added the plant would only make to order. “We are going to follow market demand evolution.”
Eni plans to increase its capacity to 1mn tonnes a year by 2026. “In the medium term, we see demand for SAF [between] 15mn [and] 20mn tonnes. First, there is the regulation of the EU, but also transport is one of the faster increases in energy demand that we are experiencing,” Ballista said.
Raffaella Lucarno, the head of biofuels at Enilive, said the plant would switch between making SAF and renewable diesel, which enjoyed a well-established market in Europe. Gela could use half its capacity to make SAF, “but we can also do zero. We can adjust it day by day.”
Over time, however, she expected that more production would be SAF, noting that demand for renewable diesel would fall because of the growing share of electric vehicles, while airlines have no other short-term alternatives if they want to cut their carbon emissions.
Other types of SAF with lower net emissions, including fuels made from hydrogen and carbon dioxide, are even more expensive. They are also produced in smaller quantities, largely by specialist companies.
The global aviation industry’s net zero plan relies on SAFs for 65 per cent of its emissions reductions, with European airlines issuing warnings over the risks of missing this target.
A net zero road map published this month by five aviation trade bodies identified a “growing dependency” on energy companies to deliver SAF as a “substantial risk”, particularly as other technologies such as electric planes are still on the drawing board, while expectations for hydrogen aircraft were this month scaled back by Airbus and some airlines.
“I don’t see any interest from the big oil companies to do anything about it,” said Marie Owens Thomsen, chief economist at Iata, referring to the UK and EU mandates on SAF. “They have all hit the pause button.
“Airlines have bought all the SAF that has been produced and airlines have demand. The market is not a demand-constrained market, it’s a supply-constrained market.
“There’s no SAF. So now you’re in a market without the product, and you’re mandating people to sort of make this product and they clearly don’t want to make it.”
She added: “I’m speculating. But let’s say, hypothetically, you make 5 per cent net profit on SAF and you make 20 per cent on fossil fuel, which are you going to do?”
SAFs have the advantage over other sustainable technologies as they can be dropped into existing jet engines. “We should keep in mind that with SAF we are going to use the same aircraft, same logistics, same infrastructure. So the cost there will not change. With that perspective, the cost position is very solid, compared with the alternatives,” said Ballista.
“The real complaint is about the price. There is enough SAF. They don’t want to pay,” added Lucarno, referring to the airlines.
Iata’s Thomsen noted that airlines, whose balance sheets had been stretched by years of travel disruption because of the Covid-19 pandemic, were not in a position to sign up to long-term contracts for SAF, which energy companies say would lead to greater production.
A pivotal moment may come when EU states reveal the penalties for not using SAF. While the bloc has set out a framework for the fines, exact sums have yet to be published. These may nudge the market one way or the other depending on their severity.
“The theory is that consumers should pay. Airlines would pass it through the cost of tickets. But everyone in Europe is in this paralysis over the costs of the green transition and whether consumers and industry can bear it because of the fear of reducing competitiveness even further,” said Frederick Lazell, an energy lawyer at King & Spalding.
If the EU watered down penalties, it might further undermine the business case for SAF, he warned.
