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Sustainable aviation fuel a winner as US renewable fuel producers embrace Inflation Reduction Act

Highlights

Increased SAF credit to spur more production

More SAF projects expected online due to increased policy support

USWC SAF prices currently top renewable diesel prices

  • Author
  • Janet McGurty
  • Editor
  • Jim Levesque
  • Commodity
  • Agriculture Energy Transition Oil
  • Tags
  • United States
  • Topic
  • Energy Transition Environment and Sustainability US Policy

To US renewable energy producers, the passage of Inflation Reduction Act of 2022 is a dream come true, containing provisions which will help many undercapitalized companies fund increased biofuel industry growth.

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In a Aug. 17 research note, Corey Lavinsky, biofuels analyst for S&P Global Commodity Insights, said President Joe Biden's signing of the Inflation Reduction Act of 2022 was "undeniably the most favorable legislation for the US biofuels industry since the Renewable Fuel Standard was expanded in 2007."

The Inflation Reduction Act clears up the disposition of the key $1/gal federal blenders tax credit (BTC), extending its expiration from Dec. 31, 2022, to Dec. 31, 2024. The BTC applies to blending of biodiesel, renewable diesel (RD) and sustainable aviation fuel (SAF), and has been a key incentive in encouraging renewable fuel production.

However, one highly anticipated component of this environmental expansion bill is the creation of a standalone blending credit for SAF between $1.25-$1.75/gal, increasing SAF credit values over that of other renewable fuels.

"With the passage of this law, SAF now has a more-valuable credit than biodiesel and renewable diesel starting in 2023," Lavinsky said.

Airlines seek greener fuels

SAF demand was already on an upward trajectory, as airlines continued to sign deals for lower-carbon fuels as they look for ways to lower emissions.

While airlines have set individual goals, the International Air Transport Association has set a goal for the global transport industry to have net-zero carbon emissions by 2050, which has sent airlines on a search for SAF supply as a way to cut carbon emissions.

IATA estimates 26.4 million gallons of SAF, or less than 2,000 b/d, were produced globally in 2021, but executed forward purchase supply agreements total 5.6 billion gallons, or about 365,000 b/d.

According to S&P Global estimates, much of US SAF production is due online in 2025 as new plants come online.

Even before the new credit, strong airline demand catapulted SAF prices over that of RD.

Platts assessments show the price of US West Coast SAF with credits is averaging $8.2837/gal so far in the third quarter, compared with $7.8244/gal for USWC RD.

The spread between the two fuels narrowed before widening slightly again as RD supply fell to 125 million gallons in July, down 17.5% from June, due mostly to a 50% drop in imports, according to JP Morgan's Renewable Diesel Weekly.

Many renewable fuel producers have added SAF production capability to their RD projects, although some were initially hesitant to do so, citing lack of policy support to defray higher capital costs resulting from including SAF production in RD projects.

Included in this group is Valero, a first mover among into the renewable fuel space and the second-largest US refiner.

On results calls, company executives had expressed reservations about including SAF production to their joint-venture Diamond Green Diesel RD facilities in Louisiana and Texas due to higher capital costs for additional equipment and lack of economic policy incentive.

A spokesperson for Valero was not immediately available to comment on whether or not Diamond Green Diesel was considering adding SAF production, given the new SAF credit.

US SAF Offtake Agreements

Fuel Producer

Production Facility

Airline

Location/Airport

​Annual offtake volumes

​Agreement start

​Agreement length

(million gal)

​​World Energy (AltAir Fuels)

Paramount, California

Amazon Air

N/A

6

2020

1 year

​​World Energy (AltAir Fuels)

Paramount, California

Lufthansa

San Francisco

1

2021

N/A

​​World Energy (AltAir Fuels)

Paramount, California

JetBlue

Los Angeles

1.5

2020

3 years

Aemetis

Riverbank, CA

Delta

N/A

25

2024

10 years

Aemetis

Riverbank, CA

oneworld alliance*

San Francisco

50

2025

7 years

Aemetis

Riverbank, CA

American Airlines*

N/A

40

2025

7 years

Aemetis

Riverbank, CA

Finnair*

N/A

17.5

2025

7 years

Aemetis

Riverbank, CA

Japan Airlines*

N/A

12.86

2025

7 years

Aemetis

Riverbank, CA

Qantas

N/A

35

2025

7 years

Aemetis

Riverbank, CA

International Airlines Group**

San Francisco

3.71

2025

7 years

Gevo

N/A

Alaskan Airlines*

California

37

2026

5 years

Gevo

N/A

American Airlines*

N/A

20

2026

5 years

Gevo

Silsbee, TX

oneworld alliance*

California

200

2027

5 years

Gevo

Lake Preston, SD

Delta

N/A

75

2025

7 years

Gevo

Luverne, Minnesota

Scandinavian Airlines System

N/A

5 (minimum)

2024

N/A

Gevo

N/A

Japan Airlines*

N/A

5.3

2027

5 years

LanzaJet

Soperton, GA

British Airways**

N/A

N/A

2022

N/A

Marathon

Martinez, CA

Southwest

San Francisco

MOU

N/A

N/A

MontaN/A Renewables

Great Falls, MT

N/A

Western Canada

84

2022

Neste

N/A

American Airlines*

San Francisco

N/A

2020

3 years

Neste

N/A

JetBlue

San Francisco

N/A

2020

N/A

Neste

N/A

Delta

N/A

N/A

N/A

N/A

Neste

N/A

AirBP

Europe

N/A

2020-2021

N/A

Neste

N/A

Alaskan Airlines *

San Francisco

N/A

2018

4 years

Neste

N/A

United Airlines

Amsterdam, Europe

2.5, 20, 30

2022

3 years

Northwest Advanced Biofuels

Washington

Delta

Seattle, Portland, San Francisco, Los Angeles

60+

2024

N/A

Par Pacific

Kapolei, HI

Hawaiian Airlines

Hawaii

MOU

N/A

N/A

Phillips 66

Rodeo, CA

Southwest

N/A

MOU

N/A

N/A

SAF+ consortium

Montreal East

Air Transat

Montréal, QB

N/A

N/A

N/A

SG Preston

N/A

Jetblue

NY/EWR

67

2023

10 years

Velocys Renewables

N/Atchez, MS

Southwest

N/A

14.6

2026

15 years

Notes:

*oneworld Alliance is comprised of Alaska Air, American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines and Qatar.

** IAG is parent company of British Airways and AerLingus

Small renewable fuel producers outline direct benefits

On the other end of the spectrum, small renewable fuel producers have welcomed the new policy incentives with open arms. This includes Aemetis, which recently announced a project to convert a former military facility in Riverbank, California, into a SAF and RD production facility.

Speaking on an Aug. 4 Q2 results call, Eric McAfee, CEO of Aemetis, a renewable fuel producer with the goal of making below-zero carbon intensity fuel, heralded the bill prior to it being signed into law, explaining how it would help Aemetis further its goal.

"Though the legislation is not final, a brief summary of the provisions and the potential impact on Aemetis includes the following direct benefits to Aemetis projects: A $1.25 [/gal] to $1.75 [/gal] tax credit for sustainable aviation fuel," he said on the call.

"The proposed sustainable aviation fuel tax credit could result in up to $80 million per year to support the construction and operation of the 90 million gal/year Aemetis Carbon Zero 1 sustainable aviation fuel and renewable diesel plant in Riverbank, California, assuming a 50% SAF production allocation and a 50% renewable diesel production allocation," he said.

Aemetis has contracts for 45 million gal/year of blended SAF to be produced at the Riverbank plant, worth about $3.4 billion. The SAF will be trucked to the San Francisco airport, where Aemetis has contracts with members of the oneworld Alliance, which includes Alaska Air, American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines, Malaysia Airlines, Qantas, and Qatar Airways.

"The new $1.25/gal SAF blending credit applies toward SAF that reduces emissions by at least 50% compared to standard jet fuel. An additional cent/gal will be given for each percentage point over 50% to a max of $1.75/gal," wrote Lavinsky.