For SAF’s Take-off, look to India’s policies

By Eric McAfee, CEO, Aemetis
Special to The Digest

The political question is simple: Is fighting climate change a war?  Or is appearing to “fight” climate change, improve air quality and create domestic jobs merely a way to raise some campaign funding from major oil companies in exchange for doing nothing?

We win wars by issuing Cost Plus contracts to defense contractors so they can build new production capacity to produce the weapons of war.

SAF is just such a weapon, but our leaders have not been willing to enforce firm mandates of SAF blends with clear incentives in order for airlines and industry to work together to build renewable fuels to fight the war against climate change and for cleaner air.

SAF is not the first renewable fuel that has been proposed and then developed successfully. Please note the informative experience of the Government of India as it responded with a plan to replace imported petroleum diesel with domestic renewable biodiesel – in the year 2007 National Biofuels Policy of India.

The Cost-Plus model

To avoid delay for busy readers, the India government has now mandated that the three large companies that own 70% of the oil refineries in India must purchase biodiesel on a “Cost Plus“ basis. Thereby, the price of biodiesel offered by the three oil marketing companies in India considers all of the input costs and then adds a profit margin in order to increase the production of renewable fuel, while transferring the risks and benefits of incentives to the customer.

The airline industry should do the same in order to rapidly grow the production of sustainable aviation fuel in order to decarbonize aviation. Airlines are much better positioned than startup renewable fuels producers to influence the creation and expansion of government and private industry incentives such as Scope 3 emissions credits, IRA production tax credits, LCFS credits, and federal RFS RIN credits.

Airlines already have mechanisms to collect additional revenue from passengers, including corporate frequent flyer programs and increased ticket prices, to offset the higher cost of blending SAF into petroleum jet fuel.

Now, back to the story in India of how the rapid adoption of increased amounts of renewable fuel is working well at massive scale in a major economy – and why it took 15 years to figure out and then just two years to demonstrate ongoing success.

India is a country that runs on diesel, consuming approximately 25 billion gallons of diesel per year. Gasoline is consumed at the rate of only about 5 billion gallons per year in India. Unlike the U.S., India does not have domestic crude oil reserves from which to draw and produce petroleum fuel products for transportation. India is dependent upon importing crude oil and diesel for transportation fuel, gradually depleting the economic strength of the country as its exports of IT services and garments creates U.S. dollars which are then immediately sent to foreign countries to purchase crude oil and petroleum products.

In 2007, the India rupee traded at approximately ₹50 to one US dollar, which has now depreciated to more than ₹80 per one US dollar. That reduction in national value is what happens when more than $100 billion per year of U.S. dollars are needed to purchase petroleum for the operation of the India economy.

This dependence on imported crude oil was made clear when Russia, facing an international outcry due to the invasion of Ukraine, was able to sell crude oil to India by accepting rupees and a price discount. India faced global criticism, but avoided exporting dollars by using rupees and benefited from cheaper transportation fuel while the rest of the world suffered increased fuel prices.

Why hydrogen transport doesn’t work

In 2007 and still today, India does not see battery operated trucks or hydrogen powered trucks as a wide-spread solution to the country’s problem of buying imported crude oil to produce petroleum diesel.

As California is learning, mandating trucking companies to pay 100% to 400% more to purchase battery-operated trucks that are loaded with batteries instead of cargo, then charging trucks for many hours every day at nonexistent charging stations at truckstops which would draw massive amounts of electricity from an over-loaded electric grid, is not a solution for anyone other than a small, heavily subsidized group of demonstration vehicles that drive short distances with light cargo.

India also knows that hydrogen is a highly pressurized, expensive fuel that does not exist at any meaningful commercial scale for use in transportation. According to CARB, almost all hydrogen vehicles in California are the forklifts that received $1 billion of California LCFS funding in the past ten years.  Hydrogen can be moved only a few miles (using trucks since no one will allow a hydrogen pipeline near their kids school), does not have fueling stations (Shell just shut down all seven of its hydrogen stations in California), and there are no commercially viable hydrogen trucks.  And, hydrogen is more expensive as a fuel than any renewable biofuel alternative.

Using renewable electricity to power the splitting of water to make hydrogen which then cannot be moved even short distances, then converting hydrogen back into electricity to power “hydrogen”-electric trucks, wastes about 70% of the energy value. This waste of energy and the resulting poor economics was noted recently by the County of Los Angeles when the board of supervisors approved a small demonstration of how the hydrogen economy would work.

To fix this entirely uneconomic and nonexistent hydrogen economy in transportation, even regulators and politicians understand that tens of billions of public dollars will be spent primarily for the benefit of the major oil companies that produce the petroleum natural gas (CH4) from which hydrogen is made in the real world.

Major oil companies are big promoters of externalizing the costs of creating a new market for petroleum natural gas, a molecule with a carbon intensity of 100 that converts into hydrogen with a carbon intensity of more than 150 (see the CARB approved pathways for hydrogen as a fuel).  Considering that ethanol is about 60 CI, the enthusiasm for 150 CI hydrogen that creates new carbon emissions compared to renewable fuels such as ethanol and renewable diesel that use atmospheric CO2 (from growing crops) is powered by lobbying money from highly profitable oil companies and loud chirps from highly emotional and blatantly illogical EJ groups – not by a goal of low cost fuel for our poorest citizens.

So reducing diesel use by producing domestic biodiesel in India made sense in 2007 and still makes sense today.

Similar to the 2021 White House SAF grand challenge, in 2007 the government of India identified a grand solution and set out a grand target: a 5% blend of biodiesel into the 25 billion gallon diesel market in India, then expanding the renewable fuels goal as the minimum target is achieved.

Now, in 2024, the market for biodiesel in India is growing rapidly, with many motivated investors and developers building new capacity to meet predictable demand growth at positive profit margins.

So, a large country with a clear need to solve its dependence on imported petroleum fuels has successfully achieved the launch and rapid growth of a domestically produced biofuel to increase the wealth and independence of the nation. India is now leading the way on the blending of renewable fuels, as shown in the recent international COP meetings where India Prime Minister Modi led the formation and promotion of the U.S./Brazil/India renewable fuels consortium.

How did the notoriously bureaucratic and slow-moving Government of India, working within a democratic and often chaotic political environment, achieve measurable and rapid progress toward such a Grand Challenge to blend renewable fuels?

For the first years starting in 2007, the Government of India failed miserably.  Biodiesel plants were funded by investors based upon the good intentions set forth in the 2007 National Biofuels Policy for the adoption of renewable fuels, but the oil refiners in India priced biodiesel relative to the price of petroleum fuels. As a result, very few gallons of renewable biodiesel were sold in India until the 2018 National Biofuels Policy in India made it illegal to export or import biodiesel, thereby specifically increasing domestic investment in new renewable fuels capacity in the country.

India had learned. The political leaders learned that failing to support the domestic agricultural economy had real political implications. In 2020, partially driven by the Covid crisis, India realized the strategic value of its ag sector as the second largest sugar exporter in the world: sugar can make ethanol which replaces imported crude oil necessary for gasoline production.

Cost-plus and India’s success

India adopted a cost-plus structure for the conversion of sugarcane into ethanol, setting a 20% ethanol blend target.  Since India already had a mechanism to set the price of sugar, the government simply adopted a price for ethanol that provided pricing and margin certainty to producers. Within only a few years, India achieved its initial goals of meaningfully reducing its dependence on imported crude oil by significantly increasing the market for domestically produced agricultural products through the production of ethanol to reduce the country’s dependence on imported crude oil.

In 2022, the India government applied a similar Cost Plus structure to the purchase of biodiesel by fuel blenders, known as the three oil marketing companies. The market responded quickly and positively, increasing the number of biodiesel producers rapidly as the Cost Plus pricing structure gave certainty for new investment in building expanded production capacity.

So, after years of failed policy in India due to an apparent lack of understanding of the decision process undertaken by investors and developers when deciding whether to build a new renewable fuels plant, the India government realized that investors simply need to know that they will receive a return on their investment.

The success of the Cost Plus pricing method seems fairly obvious to anyone with a business degree, but apparently it’s not taught in political science classes so Cost Plus appears to be a fascinating new revelation of how to rapidly grow an industry.

The actual problem we have is that we are not serious about the adoption of renewable fuels. That is a political problem, not an industry problem.

How White House weakness drives renewable fuels down, oil companies up

In the case of renewable fuels, the major players are oil companies that will be displaced gradually as their petroleum products are not needed. The political appetite for domestic, cleaner, renewable fuels to build the wealth of the heartland and to provide low cost fuel for our population by expanding the use of renewable fuels must exceed the political comfort from oil industry funding of political campaigns, lobbyists, lawyers, and consultants.

An example: Ethanol containing 110 octane sells wholesale for only $1.80 per gallon in California today, but a 90% petroleum blending mandate enforced by CARB prevents more than a 10% blend of ethanol, so prices to consumers are about $6.00 per gallon at the pump for 91 octane gasoline.

The White House SAF Grand Challenge is failing, primarily because of the White House has failed to enforce the federal renewable fuel standard by setting blending mandates below the actual capacity of existing renewable diesel producers and ignoring new capacity under construction.

The White House (and EPA) decision in mid-2023 to set the RFS Renewable Volume Obligation below actual production capacity for all fuels except cellulosic renewable natural gas was a financial windfall for major oil companies at the cost of the failure to grow the renewable fuels industries in the US.

As a direct result of this single White House and EPA decision on the RVO, RIN prices crashed from $1.80 in Q2 2023 to $0.36 for D4/D5/D6 RINs in Q1 2024.  The loss of billions of dollars of revenues for renewal fuels producer was a gain of billions of dollars of profits for oil companies in the US.

Side note: Major oil companies are significant renewable fuel producers now and will be the largest producers of renewable fuels in the future. Their general political opposition to higher blends of renewable fuels is simply an attempt to slow down the inevitable 100+ years of transition to renewable fuels. Crude oil will be increasingly difficult and expensive to find and produce over the next 100 years, and renewable fuels will continue to be cleaner, domestic, job-creating and a lower cost fuel for consumers. Major oil companies are simply pursuing the survival of their sunk costs in oil refineries and other infrastructure, including the massive value of oil reserves.

The White House should not expect major oil companies to embrace the demise of their business, so without strong political leadership and a clear profit margin for investors (such as major oil companies), it is no surprise that the White House has achieved very little in the production of SAF.

The Political Leadership Challenge

This lack of political appetite for the adoption of SAF, starting with the White House, is the primary barrier that prevents major oil companies from making the substantial investments in new feedstock production (the “oil fields” of renewable fuels) and renewable fuels plants, and supporting significant increases in renewable fuels blending ratios.

The growth of SAF is a political leadership problem, not a problem created by major companies. Oil executives are simply acting rationally in the face of inconsistent enforcement of “mandates” under the RFS by the federal government.

Elections have consequences. The failure by the White House working through the EPA to strongly enforce the blending of domestically produced SAF, renewable diesel, biodiesel, and ethanol is one of them.

Airlines can fix this political failure by contracting on a Cost Plus basis with producers of SAF, transferring the benefits from the existing and future incentives to the airlines in exchange for the certainty of a positive operating margin for producers.

This Cost Plus solution is simple and obvious, and will result in a rapid growth of new investment and new production capacity of sustainable aviation fuel to replace petroleum jet fuel to achieve the goal of decarbonizing aviation.