Airlines, corporates willing to pay the SAF premium

opinion

by Fayaz Hussain

September 23, 2024

Sustainable aviation fuel (SAF) is expensive. It comes at a premium. Costly feedstocks, high capex requirements and risk premiums on credit are key cost determinants. Producing SAF alone costs more than the current spot price of jet kerosene. Add to it the margins from producers, suppliers and others and it becomes even more costly. Until SAF producers achieve significant scale, and the technologies to harness low-cost feedstocks mature, this gap will remain.

But this hasn’t deterred buyers from purchasing SAF. A recent survey by Rocky Mountain Institute (RMI) found that airlines and logistics providers are willing to pay (WTP) the premium.

“Airlines and logistic service providers showed an average WTP of $6 per gallon for SAF – almost three times the current price of fossil jet fuel, which at the time of writing sits at $2.29 per gallon [September 17th, 2024]. This willingness to pay a significant premium for SAF reflects airlines’ commitment to sustainable practices, even when it comes at a higher cost,” reported RMI in its survey findings.

Corporates, who buy SAF certificates to reduce their Scope 3 emissions, also don’t mind absorbing the SAF premium.

“Corporate buyers demonstrated an average WTP of $300 per ton of CO2 emissions abated for SAFc. Interestingly, we found that WTP varied across sectors in our sample, ranging from $298 to $325 per ton of CO2. Industrial companies had the lowest WTP, while corporate travel and consulting firms were willing to pay the highest,” it said.

But all SAF is not the same. Respondents showed a preference for SAF made from waste-based feedstocks (like animal or waste fats) over crop-based alternatives and shorter contracts. This preference is due to concerns about competition with the food sector and broader sustainability challenges associated with crop-based feedstocks. Shorter contracts can be attributed to buyers’ concerns about locking in high prices for SAF, as they anticipate prices to decrease as the market develops.

This willingness to pay has major implications for the SAF project developers and the overall market. The survey found that since corporate buyers purchase SAFc to reduce their Scope 3 emissions, willingness to pay for SAFc effectively represents the price of abatement.

RMI said that consumers are willing to pay a premium of $2.34 to $3.93 per gallon for SAF, which could make it cost-competitive with traditional jet fuel, especially for the HEFA production pathway.

This green premium could attract private equity funds, seeking 15-20% returns, to invest in SAF production. This is encouraging news for SAF producers and investors exploring this market.

But this demand is only expected to rise as companies set ambitious carbon reduction targets and with corporates and airlines willing to pay the premium, it incentivises producers and investors.

“It sends a strong signal to producers, investors and policymakers that the demand for sustainable aviation alternatives is here – and it is growing due to regulation and voluntary airline commitments, with about 40 airlines already committed to use some 13m mt of SAF by 2030,” said RMI.