Sustainable aviation fuel has been a talkfest for far too long

Australian Financial Review

In the endless stream of conversation (and mind-numbing flow of press releases) about the future of sustainable aviation fuel, two big questions remain unanswered.

If there is such huge demand for SAF, why does the industry need government support? And what role are the big four banks playing in underwriting investment?

Australia, abundant in sunshine, sugar and soon-to-be out-of-work coal miners is – after a lost decade when governments were more reticent about embracing net-zero goals – taking steps to turn Queensland into a hub to supply the region’s airlines with SAF.

In one of her first speeches in government two years ago, Transport Minister Catherine King flagged renewable fuels as a focus, particularly in the aviation industry.

But for someone so committed, there has been surprisingly little policy. King established the JetZero Council (which has met only a handful of times) and put a paltry $30 million of funding into the Australian Renewable Energy Agency. Two years later, Australia still produces exactly zero SAF and there are zero fully funded projects.

Nearly every participant in King’s JetZero Council describes it as a gabfest. They are in almost universal agreement that its first step should have been to mandate a certain percentage of SAF usage by a certain time.

Japan has mandated that airlines must use SAF for 10 per cent of their fuel mix by 2030 to land there, while Singapore is starting slower, mandating 2 per cent by 2026. This is, according to Reuters, expected to drive up the price of an economy airfare from the city by $US3 to Bangkok, $US6 to Tokyo and $US16 to London Heathrow.

The fare difference in premium cabins will be many multiples of that if airlines distribute according to actual carbon emissions.

The CSIRO and Boeing released a study last year showing Australia could produce 60 per cent of its total SAF needs – or 5 billion litres – by next year if we took steps to encourage production of feedstock materials and demand from users.

Instead of following our well-trodden model of exporting raw materials like coal and iron ore to countries where people actually make things, we need to put in place policies that keep SAF feedstocks at home. The absurdity of shipping these to Europe, Japan or Singapore – and the resulting emissions – is lost on no one.

On the offtake side, there is wide agreement that the Australian Defence Force should be mandated as a user of SAF, at least to begin with when the gap with regular fuel prices is widest, with a mandate over commercial aviation to follow.

Defence is a logical buyer and also an interested player in the renewable liquid fuels ecosystem, given Australia imports 90 per cent of its total need. Even the most hardened climate change deniers see the value in government building out a SAF and biodiesel industry, if for no other reason than to shore up the country’s defences.

Renewable diesel is the mining industry’s pathway to decarbonisation while the electrification of big trucks and heavy equipment – much like aircraft – remains decades away. The question of incentivising production is much more fraught, particularly given concerns about diverting food supplies and sending price signals to travellers to encourage the right consumer behaviour.

Anthony Albanese has flagged that his Made in Australia manufacturing package will try to level the playing field with the United States, where the Biden administration’s Inflation Reduction Act and California’s subsidies mean big players now produce SAF for only about twice as much as kerosene jet fuel. In Australia, it is likely to cost four or five times more than the conventional product.

How do we match the IRA?

In clean energy, the prime minister looks poised to reduce red tape for the right types of institutional foreign investors (pension funds, not private equity) and bring forward tax write-offs. Labor is avoiding the word “subsidies”, but the industry wants the government to put $2 billion of its own money on the table.

On top of mandates, they want to derisk the supply side for early projects through the injection of government grants, debt or equity to reduce the cost of capital and bring offtake prices down to more or less the same as regular fuel. From there, they say there is a wall of private capital ready to flow into the pipeline of projects.

BP has been sitting on pressing the button on investment to turn its shuttered Kwinana refinery into a plant that turns waste cooking oil into SAF in a process known as HEFA.

Qantas, Airbus, JetZero Australia and now the Japanese trading house Idemitsu have all stumped up money to turn Townsville’s surplus sugar and sugarcane waste into ethanol, which would then be converted into SAF using the liquids-to-fuel method.

LanzaJet – backed by Bill Gates, Shell, British Airways and Mitsui, among others – is providing the technology, which is now operational at Freedom Pines in Georgia, to JetZero Australia (the company, not the government’s JetZero Council).

When it comes to financing, these two projects sit at opposite ends of the spectrum, as well as the Australian continent.

The HEFA method employed at Kwinana is much more ubiquitous and major banks see this as “bankable”. But 80 per cent of production will come via only the largest players.

Even though it has been done offshore, the liquids-to-fuel method favoured on the east coast is not seen as a risk big banks are willing to take any time soon.

IFM Investors is working with GrainCorp on a similar liquids-to-fuel project as the Townsville project and says it will invest up to $1 billion. The trouble for the big super funds is that the return on their investment will be low. They need the government to play a role in the capital stack to de-risk and incentivise their flow of funds.

Build it and they will fly

Qantas says it already buys SAF in California for within cooee of its regular jet fuel costs. But it also wants a mandate in Australia to help bring more supply closer to home.

Virgin doesn’t fly to the US any more and, as a budget airline, where fuel occupies a much bigger component of its overall costs than it does at Qantas, is currently anti-mandate.

For all the talk, which will ramp up as the government sits down to figure out how much money it will put into renewable liquid fuels, there is hope that Australia might avoid some of its previous mistakes when it comes to our abundant natural resources.