The push toward sustainable jet fuel leaves investors with unanswered questions

The aviation industry still sees so-called “sustainable aviation fuel” (SAF) because the only viable option to achieve its decarbonisation goals, although resistance to the fast-growing sector and potentially higher costs for passengers remain obstacles.

In recent months, various deals have been concluded, from United Airlines Partnership with major supplier Neste to offer SAF at Chicago O'Hare International Airport, South Korea's destination Announced at the top of August From 2027, a SAF mixture of around 1% is for use on all outgoing international flights.

Within its first month in office in July this 12 months, the brand new Labour government laid down its own mandate The company has set a goal of meeting 10% of jet fuel demand from SAF by 2030 and pledged to support production through measures that include a revenue security mechanism for SAF producers looking to speculate in recent plants within the country.

SAF is a broad term for fuel burned by aircraft engines but derived from more sustainable sources relatively than kerosene. These can include feedstocks equivalent to used cooking oil, animal feed, wood biomass, animal fat, crop products or waste.

While SAF still produces emissions, proponents argue that its greenhouse gas footprint is far lower over the product’s life cycle – by as much as 94%, based on a reportThis value is dependent upon the source, production and path to the aircraft.

airbus announced several SAF commitments at this 12 months's Farnborough Air Show, certainly one of the biggest aviation events held within the UK in July. The aircraft manufacturer said it was working with manufacturer HIF Global to develop methanol-based fuels and Investment in alcohol-based jet fuel manufacturer LanzaJet.

For greater than a decade, there was speculation that SAF has the potential to cut back emissions from aviation.

This is especially because it could actually be blended with conventional fuel and utilized in existing aircraft engines and pipelines and subsequently has relatively low barriers to entry; nevertheless, regulators have set different limits on the permissible mixing percentage.

But it stays controversial in some circles. Campaign groups and NGOs have raised concerns that some types of SAF are problematic, potentially resulting in deforestation or the withdrawal of land for agricultural purposes. Some argue it’s an exercise in “Greenwashing” whose use on a big scale is unrealistic.

United Airlines sees the transition to greater use of SAF as certainly one of the core parts of its sustainability agenda. The airline has been using it on its existing aircraft since 2016, but “the challenge is that there just isn't enough of it,” Lauren Riley, the airline's chief sustainability officer, told CNBC on the Farnborough Air Show earlier this 12 months.

Other industry participants also said that SAF stays essentially the most effective and realistic option to work towards net-zero carbon emissions from aviation by 2050 – the goal agreed by the International Air Transport Association (IATA) in 2021.

But IATA predicts that SAF production will triple to 1.9 billion liters by 2024, which might only cover 0.53 percent of annual aviation fuel demand.

According to Riley, United alone consumes about 4.25 billion gallons of fuel annually.

Projects equivalent to hydrogen-powered and electric aircraft are United's longer-term goals, but SAF is a priority for its short- and medium-term goals, she said.

The biggest challenges, based on the industry, are creating sound regulatory frameworks for SAF and securing each private and non-private funding – with the dearth of private and non-private funding hampering private funding.

Rick Nagel, managing partner at private equity firm Acorn Capital Management, told CNBC that the dimensions of the SAF market has grown from nearly zero to about $1 billion lately.

However, there are obstacles starting from the development of refineries and associated infrastructure to the procurement of the biomass needed to make sure regulatory cooperation, he said.

“There's this circular argument between the demand created by industry targets and environmental mandates, between government incentives that not everyone can always count on to fill in the gaps and make it all affordable, between the years it will take to get all the infrastructure online and where it's going to go – all while airlines are still figuring out how to maintain competitive prices,” he continued.

“For investors to really get on board, there needs to be a clear path for how everything comes together.”

Clara Bowman, chief operations officer of Porsche-backed SAF company HIF Global, told CNBC she was confident money would flow into the sector so long as governments and regulators provided the mandatory assurances.

HIF Golbal calls its product “e-fuel,” which is produced using renewable energy from recycled CO2 and hydrogen. The company currently operates a plant in Chile and plans to construct one other in Texas.

“I think the funding is there. There is tremendous liquidity around the world to fund green solutions. The problem is that we have a well-structured project to be able to leverage that funding,” Bowman said.

Regulatory certainty has progressed more slowly than she would have liked, but measures equivalent to those of the European Renewable Energy Directive and Japan Mandate 2030 The indisputable fact that SAF covers 10 percent of domestic airlines' kerosene consumption and the associated subsidies are all encouraging, she said.

In the U.S., the Inflation Reduction Act signed by the Biden administration in 2022 has sparked “extraordinary” growth in SAF corporations and startups, said United's Lauren Riley, which in turn encouraged the airline to ascertain a $225 million SAF enterprise capital fund with partners including Boeing, Google, Embraer and other airlines.

Despite this progress, Riley said banks and investors would proceed to indicate that policies needed to be made more “sustainable”, equivalent to tax breaks for many years, before they might trust in financing recent earthworks.

However, Riley expressed confidence that SAF's momentum would withstand a change in leadership within the White House, with a presidential election looming in November. Investor Rick Nagel echoed that sentiment, saying it was a “misconception” that an administration would reverse all the last administration's regulatory actions.

“Even though the rhetoric may say otherwise, if there is a business model, they are looking for infrastructure projects in America overall,” he added.

Many working on SAF projects indicate that it would be dearer than conventional jet fuel within the initial phase. Consumers – especially in wealthier, less price-sensitive markets – could have to bear a few of that cost through higher ticket prices, the industry also acknowledges.

“The truth is, it’s getting more expensive, there’s no sugarcoating that,” said Clara Bowman of HIF Global.

“On the other hand, we're talking about a very small percentage of fuel that you need to really jumpstart this industry and get it to produce at scale. When you start producing plants at scale, you can see what's happened with solar and wind and batteries. That's really the key to driving prices down,” she continued.

“The global expansion of production is a process that is happening right now. With the expansion comes lower prices, more investment and an increase in the efficiency of these plants, because that is where a really big part of our cost structure is today. And so we see that production becomes more efficient with the expansion.”

Added to this are the prices of carbon emissions from fossil fuels, she noted. “When you take that into account, we believe that in the short to medium term, taking into account the total costs, [SAF] will be competitive.”