Ground Stop: Time for Plan B on the SAF Grand Challenge?

The International Energy Agency held a materially significant workshop in Paris this week on accelerating the pace of sustainable biofuels development.  There was much talk about sustainable aviation fuels, or rather the lack of them.

Let’s start with the good news. There’s will and steadfastness of purpose from the SAF stakeholders. There’s available capital, technology, policy incentives, and demand. The supply is still not there. Projects are moving at a decent clip for an emerging market, but nowhere near fast enough to meet the SAF Grand Challenge target for 2030 of 3 billion gallons.

The SAF stand-off explained, or how the milk is priced at Starbucks

Why? ask the exasperated supporters.  Let me explain the problem this way. 

If you visit your local Starbucks and order a latte this week, you can have whole milk, 2 percent or skim. Have it your way, subtract the fats you don’t want, the cost of the drink is the same. That’s how airlines need SAF to be. Less carbon intensity, same price.

On the other hand, if I ask for whipped cream, on my latte, you can have it your way add the attribute you need, for something like 50 cents per one-ounce dollop, which works out to roughly a $65 premium per gallon of whip. That’s how producers need SAF to be. Add an attribute, premium price.

Right now the market’s in something of a stand-off. Airlines can’t pay enough, producers can’t provide enough, the spread between the bid and the ask is stalling growth.

I’d rate the spread at around $4 a gallon, in that I would expect that at $2.60 a gallon for SAF the market would be awash in demand; at $6.60 a gallon the market would be swamped with supply.

The US and state governments have  stepped in, via a number of instruments from the California Low Carbon Fuel Standard to the Inflation Reduction Act. They’ve reduced but not eliminated the spread. Now, they’re signaling incentive exhaustion.

So, we’re stuck in a ground stop that’s not lifting. 

The need for speed

Here in Paris, passing the Gare du Nord, it’s worth reflecting that it took 192 years to figure out how to build the Channel Tunnel across the divide of the English Channel, from original conception to opening day. In the same way I expect, in the fullness of time, the ground stop will resolve itself, the market will self-organize. But not soon enough to meet the SAF Grand Challenge, specifically, or Net Zero targets generally.

Restructuring is in order.

 And, some simplification, also. The complexities and uncertainties of carbon accounting and SAF revenue structure is giving me and everyone else a pain in the head like eating ice cream too quickly. 

5 steps to the SAF Grand Challenge, acomplished

So, let me outline a five step fix. I’ll base this around, for the sake of an illustrative scenario, the SAF Grand Challenge target of 3 billion gallons of SAF capacity in place by 2030. It has the advantage of solving the problem and the disadvantage of incumbents dug in with their existing approaches. Here we go, five steps.

1. Airlines participate in a Dutch (reverse auction) to buy 3 billion gallons of SAF for delivery in 2030. The lowest price that clears the demand is the price for all the gallons. I would imagine the auction result would be a small premium over the $2.54 price of fossil-based Jet A as of this writing.

2. Producers participate in a Dutch (reverse) auction to supply 3 billion gallons of SAF for delivery in 2030. The lowest price that clears the demand is the price for all the gallons. 

3. Taking into account the carbon intensity of the participating projects at the bid volumes, an overall emission reduction is calculated. The producers issue carbon performance bonds that can be sold to willing buyers, transferring the right to all carbon-related revenues (e.g. tax credits, RINs) to the bondholders.

4. Corporations and individuals participate in a voluntary Dutch (reverse) auction to bid money for the right to apply SAF volumes in their Scope 3 emission reporting. Again, the lowest price that clears the available carbon reduction tonnage demand is is the price for all the tons. Corporations and individuals that bid for 100 percent of their flight miles receive a special recognition, a Green star banner (in the tradition of Blue Star banners) that they would be able to display at their locations, websites, social media, and so forth.

5. The US government participates, itself or in combination with the several states, by purchasing the carbon performance bonds, at a price equal to #2 – #1 – #3. For example, $6 is the producer price, $2.50 is the buyer price, $1.00 is the corporate contribution, then the remaining uncovered social cost of the energy transition is $2.50 per gallon for the bonds. The government retires, sells or holds the carbon attributes to recover as much of the bond cost as possible. The government would be showing a small loss or profit compared to the costs government is incurring in the current tax and RIN set up. 

For 2031 through 2050, rinse and repeat, until you have 20 years of assured production of 3 billion gallons, 20 years of assured offtake, everyone meets their obligations and targets, SAF takes off. The program can be expanded, contracted or retired as SAF markets achieve more maturity.

The system I have outlined is not particularly novel, what it has is a series of traditional elements such as Dutch auctions, government interventions in bond markets, corporate offsetting, branding and recognition for national service, Scope 3 emissions reporting, etc etc  What’s slightly novel here is that it is aligned into a system that has three attributes of interest. It is simpler, achieves the objective, and might be cheaper.

Over to you

Now, over to you, readers, for reaction. I’d prefer a more workable and bankable alternative in my inbox, if you please, than nitpicking’ this structure.  The planet’s gettin’ hot and perfect must make way for good. 

So, let us consider action along these lines — or present alternatives, now, and stop futzing around. Auctions could start in December which gives the relevant parties eight months to organize, and five years thereafter to deliver the fuel. That’s not a luxury of time but it is still a feasible amount, if action this day is taken.