INSIGHT: Larger players hang back as Europe SAF mandates loom

LONDON (ICIS)–Fresh upcoming legislation in the EU and UK from 2025 are set to galvanise the biofuels sector by setting minimum targets for sustainable fuels usage in the aviation sector, but hesitance remains among the larger players.

• New mandates set to galvanise sector growth
• Larger incumbents still cautious about big bets
• Pace of demand growth after SAF mandates remains to be seen

The EU sustainable aviation fuels (SAF) mandate will set a minimum floor for fuel at EU airports to contain at least 2% from 2025 and gradually tick up each year, to hit 6% by 2030.

These targets ratchet up dramatically from that point, with the 2030-35 period likely to be a transformational period for the aviation sector,  as the SAF mandate to increase from 6% to 20% in just five years.

By 2050, SAF is expected to become the dominant form of aviation fuel, with the EU mandating that airport fuels be 70% SAF by the midpoint of the century.

Over the next 26 years, aviation firms and fuels producers will need to solve many colossal questions, including the precise composition of the fuels and how those raw materials can be sourced and scaled.

Although the European Commission’s ambitions for SAF growth over the next half-decade are a far cry from the step changes required between 2030 and 2050, the introduction of those first minimum targets will be transformational.

“I think it’s widely seen as a game-changer in the sector,” said ICIS markets editor for biofuels Nazif Nazmul.

SAF currently makes up 0.1% of the global aviation fuel mix and approximately 0.5% in the EU, according to Nazmul, so a 2% target for next year means that airport fuel providers will be under pressure to ramp up capacity quickly.

SLOWING AMBITIONS
Despite this, the last few months have seen a spate of delays and cancellations from some of the largest entrants to the sector, in Europe and elsewhere.

BP announced in June that it is dramatically scaling back its bet on SAF, in the wake of taking full ownership of Brazil-based sugarcane and ethanol major Bunge Bioenergia.

The company has paused planning of two projects and continues to assess three others, which it attributed to a desire to simplify its new fuels portfolio.

Shell also announced a pause to work on its flagship Rotterdam, Netherlands biofuels plant as part of a bid to control costs, but also “to assess the most commercial way forward for the project,” according to Shell downstream renewables and energy solutions director Huibert Vigeveno.

The pause will allow Shell to optimize its project development order and reduce the number of engineers on the ground at the site, but projected savings are counterbalanced by a heavy price. Shell estimates that the write-down from the move will cost the company $600 million to $1 billion.

STILL EARLY STAGE
Shell has not commented on the capacity for the 2025 EU mandate to improve market conditions, but the impact of the new legislation could take time to trickle through the market.

Spain’s Cepsa, on the other hand, is proceeding with its €1.2bn, 500,000 tonnes/year biofuels project, with start-up scheduled for 2026.

“There is a huge chunk of the aviation market that biofuels was not a part of previously, when biofuels were previously relegated to road transport,” Nazmul said.

“But now it has opened up to aviation and I think this is something that definitely got the oil majors interested in the first place. But I think the scale is something that they’re beginning to question. Is it something that they’re able to pull off right now or should they wait for the market to get a little bit more mature?”, he added.

A factor in many green chemicals and green fuels markets is the imminent extent of the scale-up dictated by policymakers at a point where many technologies thought to be necessary for decarbonisation are at the pre-commercial or pilot stage.

As with chemical recycling, which has seen players try to step up quickly from pilot to small scale to commercial scale plants, biofuels players need to move fast to meet targets.

But the economics of the sector remain challenging for now, and future prospects opaque, meaning that slower-moving fuel sector incumbents may hang back and let more specialized firms take the first larger steps.

“The pace of market growth following the rollout of the mandates remains to be seen, which is why some larger players are opting to hold back for the time being,” Nazmul said.

FEEDSTOCK, TECHNOLOGY QUESTIONS
Like the rest of the bio-based materials sectors, the question of what feedstocks and technologies will be viable as the market grows remains unclear, with players betting on different routes.

“That’s the question no one knows for sure,” Nazmul said. Currently there are seven different routes to produce SAF, and it’s kind of a gamble.”

“Will there be enough feedstock? Will there be enough capacity? Will we be importing for example SAF from the US? Doesn’t that defeat the entire purpose of slashing emissions when you’re shipping these biofuels long distances?”, he added.

The wider world is observing the steps taken in Europe and the US to develop a viable commercial market for SAF, but few moves have been made outside those regions so far.

The same may be the case for large energy sector incumbents, who have the financial flexibility to wait for the market to mature a little before going all in. 2025 may prove to be the starting gun for the sector to develop in earnest, but the real rewards may be further down the line.

“Asian countries are really interested in SAF, we’re seeing some investments in Japan, but countries like India and China are yet to really commit. It’s a matter of time and I’m sure those companies and those countries are assessing the best possible options out there,” Nazmul added.

SECTOR BACKGROUND
Biofuels are liquid fuels derived from biomass, such as biodegradable agricultural, forestry or fishery products, municipal waste, or biodegradable industrial waste.

Biofuels can be categorized into four generations:

• First-generation: Produced from food crops like corn and sugarcane using conventional technology. These biofuels have moderate costs, as they depend heavily on crop prices.
• Second-generation: Made from non-food biomass like agricultural residues, wood, and waste. These are more expensive due to the advanced technology required.
• Third-generation: Derived from algae and other fast-growing biomass, but have high costs that are expected to decrease with technological advances.
• Fourth-generation: Involve biofuels that capture and store carbon during production, often using genetically modified organisms. These also have high costs but may become more affordable as technology improves.

Biofuels are increasingly popular across many industries but especially in the transportation sector. This is due to concerns over the impact and supply of fossil fuels, and the fact that many of these fuels are compatible with existing systems.

Supply and demand have been bolstered by legislative mandates and corporate climate commitments aimed at promoting sustainability and the environmental benefits of biofuels. This has led to a significant increase in demand in recent years.

While first-generation biofuels once dominated the market, there has been a significant shift towards second-generation biofuels.

Despite incentives, the global transition to biofuels faces challenges. High costs and uncertainty about profitability hinder vital investments. Long-term take-up goals have also increased concerns over supply capabilities.

Insight by Tom Brown and Zara Najimi

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