Consultant report
Staying Aloft: Support Mechanisms for ‘Sustainable Aviation Fuels’ in the United Kingdom and European Union
In pursuit of aviation decarbonisation, both the European Union (EU) and the United Kingdom (UK) have adopted mandates on the use of so-called ‘sustainable aviation fuels’ (SAF): under ‘ReFuelEU Aviation’ and the ‘UK SAF Mandate’ respectively. These regulations set ambitious targets to be fulfilled by aviation fuel suppliers; but given the expected high cost of SAF and the immature state of the industry, it is far from certain that sufficient fuel production capacity will be developed in time to hit near-term targets. It is anyway likely that there will be political pressure to reduce long-term targets.
Complementary policies have been developed to provide financial support to SAF on a ‘per litre’ basis, with the aim of facilitating uptake and/or production. The EU’s reimbursement scheme mitigates the cost to airlines for each unit of alternative fuel they consume by reimbursing some fraction of the cost difference compared to fossil kerosene. The UK’s guaranteed strike price (GSP), on the other hand, offers a Government-backed mechanism to shield SAF producers from variability in market prices, thereby establishing certainty over revenues and de-risking investment. The GSP seeks to provide reassurance to investors in early-stage commercial projects, facilitating finance availability in a way that is hoped to be effective in jump-starting production and reducing the cost of capital.
This report examines the SAF policy frameworks in the two regions and reviews their strengths and weaknesses. It finds that while the EU’s and the UK’s frameworks are currently the strongest incentives for SAF deployment in the world, both face challenges and the structure and targeting of their complementary support mechanisms will deliver diverging outcomes. We anticipate that the EU’s reimbursement scheme will primarily benefit airlines and reduce the costs to flyers, it will do little to provide a durable price signal to motivate more challenging second-generation fuel producers to enter the market; in contrast the UK’s GSP delivers clear and stable price certainty to fuel producers and is more likely to stimulate investment in the SAF industry.