Skimming the top: SAF prices need more transparency
When Sony launched slim and sleek Bravia flat screens in 2000s, it was the only company producing this technology. Everyone wanted one. Demand went through the roof, and the first Bravia model (the 40-inch variant) was being sold for more than $3,500 (accounting for inflation, that’s $5,800 today). In marketing, they call this price skimming. Something similar is happening in the sustainable aviation fuel (SAF) industry. Currently, SAF commands a premium over fossil jet fuel, with two main methodologies dictating the prices. Co-processed SAF, where sustainable feedstocks are blended with conventional petroleum streams in existing refineries, and neat SAF production, which uses dedicated facilities.
Co-processing typically offers lower production costs since it uses existing refinery infrastructure. In Europe, many of these facilities are also plugged into aviation fuel pipelines supplying key airports. But producers seem to be skimming as availability remains low.
“In theory, co-processing should incur lower costs overall,” says David Elward, pricing director at General Index. That’s because co-processing facilities “require smaller scale upgrades versus building a standalone HEFA plant and many will already be connected to the pipeline network, so additional logistical cost to shipping it through that network should be minimal”.
But the reality is quite different. Airlines are reportedly paying a significantly high premium even for co-processed SAF leading to allegations of price manipulation.
This alleged manipulation has invoked sharp criticism from the International Air Transport Association (IATA). The organisation recently issued a strongly worded release calling out the hefty premiums airlines are paying for SAF.
IATA’s calculation shows airlines paying double the SAF premium compared to what they were expecting to pay. In a statement, IATA revealed that “The fees imposed on airlines translate to being over twice the prevailing market price premium of SAF … the fees average around $54 per tonne of jet fuel, whereas airlines could have expected fees to be closer to $22 per tonne based on the current market price of SAF.” This represents a pricing premium that appears disconnected from underlying production economics and market fundamentals.
IATA raised concerns that “This pricing behaviour works against the development of a global, liquid and transparent SAF market as suppliers avoid contracting for the supply of mandated SAF with airlines.”
The cause can be pinned to lack of transparency around pricing which remains critical issue undermining market efficiency.
“Transparency around pricing typically happens as standardisation is implemented through the supply chain. And at the moment the SAF industry doesn’t have that,” says Elward. The predominance of bilateral contracts over spot market transactions means that a lot of supply is not being priced off single benchmarks.
This opacity becomes particularly problematic when considering the mandated expansion of SAF availability across EU airports. Even though the EU has initially allowed flexibility in delivery locations, the eventual requirement for a more widespread coverage across the continent will result in higher premiums.
This gap between theoretical cost advantages of co-processing and actual pricing reveals a market currently in a state of disequilibrium. Resolution of these pricing anomalies will likely require greater market transparency and more production.
More SAF production would likely narrow the gap between SAF and fossil jet fuel prices.
Sony’s 42-inch Bravia model retails for as little as $500 today.
SAF Premium over fossil jet fuel remains significantly high. Data and graph provided by General Index. Units: USD/MT
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