Investors are left with unanswered questions as there is a push toward sustainable jet fuel.

• The sustainable aviation fuel (SAF) market is seeing a surge in dealmaking as the industry strives to achieve a net zero by 2050 goal.
• Despite the current support for SAF production, investors require further assurance that the government and regulatory bodies will maintain their commitment to subsidies and regulations in the long term.
• The cost of SAF for airlines is higher than conventional jet fuel, which may result in increased expenses for passengers. However, a producer stated that the costs would decrease rapidly as production increases.

Despite opposition and potential higher costs for passengers, the aviation industry remains committed to using "sustainable aviation fuel" (SAF) to meet its decarbonization targets.

In recent months, numerous deals have been struck, including partnering with Neste to provide SAF at Chicago O'Hare International Airport and South Korea's announcement in late August to use a mix of around 1% SAF for all departing international flights from 2027.

The new Labour government in the U.K. established its own target for SAF to fulfill 10% of jet fuel demand by 2030 within its first month in office. Additionally, the government promised to support SAF production through measures such as a revenue certainty mechanism for producers looking to invest in new plants in the country.

An alternative fuel for aircraft engines, known as SAF, can be derived from sustainable sources such as used cooking oil, feedstock, woody biomass, animal fat, crops, or waste.

The carbon footprint of SAF is significantly lower than traditional jet fuel, with some studies estimating a reduction of up to 94%, although this level is dependent on various factors such as the source, production, and transportation of the product to the aircraft.

At the Farnborough Air Show, held in the U.K. in July, the planemaker announced various SAF commitments. The company is collaborating with HIF Global on the development of methane-based fuels and investing in LanzaJet, an alcohol-to-jet fuel producer.

For over a decade, there has been growing excitement about SAF's ability to decrease emissions from air travel.

Since it can be mixed with traditional fuel and used in existing aircraft engines and pipelines, and has a relatively low entry barrier, it is particularly suitable for use. However, regulators have established different blending percentages.

Some argue that the use of SAF is an exercise in "greenwashing" and is unrealistic to deploy at scale, potentially leading to deforestation or taking land away from agricultural uses. Campaign groups and NGOs have flagged concerns that some forms of SAF are problematic.

Supply challenge

The airline's sustainability agenda includes a transition to greater SAF use, which it has been using in its existing aircraft since 2016. However, the challenge is that there is not enough of it, as Chief Sustainability Officer Lauren Riley stated at the Farnborough Air Show earlier this year.

The International Air Transport Association (IATA) agreed in 2021 that SAF was the most effective and practical approach for achieving net-zero carbon emissions from airline operations by 2050, as stated by other industry attendees.

The IATA forecast predicts that SAF production will triple to 1.9 billion liters in 2024, but this will only meet 0.53% of aviation fuel demand for the year.

According to Riley, around 4.25 billion gallons of fuel are consumed annually by the United States alone.

SAF is the priority for United's short- and medium-term targets, while projects such as hydrogen-powered and electric aircraft are on their longer-term radar, she stated.

Investor questions

The main obstacles, as stated by industry experts, are establishing strong regulatory guidelines for SAF and obtaining both public and private funding, with the absence of the former hindering the latter.

Acorn Capital Management's managing partner, Rick Nagel, informed CNBC that the SAF market had experienced a significant increase from almost nothing to approximately one billion dollars in recent years.

The creation of refineries and related infrastructure, obtaining biomass, and regulatory cooperation are among the obstacles, according to him.

The circular reference arises when industry goals and environmental mandates create demand, but government incentives are not always reliable to fill the gaps and make it affordable. Additionally, the years it takes to put all the infrastructure online, and the location of it, must be considered while airlines struggle to maintain competitive pricing.

"To convince investors, there must be a transparent route demonstrating the convergence of all aspects."

HIF Global's chief operations officer, Clara Bowman, expressed confidence to CNBC that the sector would receive funding as long as governments and regulators provided reassurances.

The company HIF Golbal brands its product as an "efuel," which is made with renewable energy from recycled CO2 and hydrogen. They currently have a plant in Chile and plan to develop another in Texas.

Bowman stated that the financing is available, there is significant liquidity in the world seeking to finance green solutions, but the challenge lies in having a well-structured project to capitalize on that financing.

Although regulatory certainty has not been as quick as she desired, measures such as the European Union's Renewable Energy Directive and Japan's 2030 mandate for SAF to make up 10% of domestic airlines' jet fuel usage and its accompanying subsidies are all positive, she stated.

The Inflation Reduction Act signed in 2022 led to "extraordinary" growth in SAF companies and startups, prompting United Airlines to establish a $225 million SAF venture fund with partners including Boeing, Google, Embraer, and other carriers.

Although Riley acknowledged the advancement, banks and investors still expressed their need for more "enduring" policy, with tax incentives lasting for a decade, before they could confidently fund groundbreaking projects.

Riley believed that SAF's progress would remain uninterrupted even with a change in leadership in the White House, as the presidential election was approaching in November. This view was shared by investor Rick Nagel, who stated that it was a misconception that a new administration would reverse all the regulatory measures implemented by the previous one.

If there's a business case, they are looking for infrastructure projects in America, despite the rhetoric saying otherwise.

Higher cost

One issue with SAF projects is that they are initially more expensive than traditional jet fuel. As a result, consumers, particularly those in wealthier markets, may have to pay higher ticket prices to cover the additional cost. The industry recognizes this.

HIF Global's Clara Bowman stated, "Unfortunately, it will be more costly, and there's no way to sugarcoat that."

While a small percentage of fuel is necessary to kickstart the industry, it's the large-scale production of plants that will drive down prices, as seen in solar, wind, and battery technology.

"The global manufacturing scale-up is currently taking place, resulting in lower prices and increased investment. As the scale-up progresses, the efficiency of the equipment improves, which has a significant impact on our cost structure. Consequently, we observe that as production increases, it becomes more efficient."

The full cost of carbon emissions associated with fossil fuels must be considered when evaluating the competitiveness of SAF in the short- to medium-term.