Around the world, there’s a strong push to put aviation on a more sustainable footing and reduce the industry’s greenhouse gas (GHG) footprint. Increasing the production of sustainable aviation fuel (SAF) — a close cousin of renewable diesel (RD) — is key to this effort. But while the economic case for producing RD in the U.S. has been compelling for some time thanks to government subsidies, the returns on investment for producing SAF appear more dubious, despite a seemingly generous production tax credit for SAF in the Inflation Reduction Act (IRA). As we discuss in today’s RBN blog, the incentive for making jet fuel is likely too small — and too short-lived — to overcome the higher cost of production for SAF compared to RD, and additional incentives may be needed to spur meaningful increases in SAF production.

Jet fuel is the planet’s third-most consumed transportation fuel, totaling about 7 MMb/d globally. Although worldwide consumption of jet fuel is significantly less than diesel (28 MMb/d) and gasoline (24 MMb/d), it represents a respectable 12% of these “Big Three” clean transportation fuels. In the U.S., jet fuel accounts for a similar portion. Therefore, its considerable volume presents a valid target for carbon reduction. Many airlines have set “net-zero-by-2050” targets and (many would argue) the increased use of SAF would have more of a climate impact than carbon offsets. So, when combined with the environmental objectives of consuming airlines, there seems to be a case to be made for SAF. But is it economic to produce?

As we said in Sail Away, SAF and RD not only provide lower-carbon, renewable-based alternatives to petroleum-based jet fuel and diesel, respectively, they are also the chemical twins of those widely used fuels and therefore can serve as “drop-in” replacements for them. Further, SAF and RD (like traditional jet fuel and diesel) have similar — but not identical — chemical makeups, with the specs for SAF (like jet fuel) reflecting the special needs of jet engines and jet aircraft (such as a very low freeze point).

Making SAF from RD via HEFA

Similar to petroleum, plant oils and recycled fats contain long-chain hydrocarbons that are energy-dense and release significant amounts of energy when burned. However, plant oils and fats generate a lot of smoke when burned directly because these complex hydrocarbon molecules contain what you might say is the wrong combination of hydrogen and oxygen. Therefore, to be a drop-in replacement, they must be converted to molecules that are essentially the same as their petroleum-based equivalent.

Currently, the most mature technology for producing RD from plant oils or other recycled fats uses hydrogen to remove oxygen (primarily hydrodeoxygenation, or HDO) to produce hydroprocessed esters and fatty acids (HEFA). The produced HEFA stream consists of straight-chain paraffinic hydrocarbons that, once isomerized (to improve flow properties), has no sulfur and very little aromatics (which enables RD to burn cleaner), and a high cetane number (the equivalent of high octane in gasoline) — all characteristics of the “perfect” diesel.

This same HEFA process can be used to produce SAF (which contains the same molecules as petroleum-sourced jet fuel) by adding a hydrocracking processing step. SAF molecules are shorter chains of hydrocarbons; therefore, the diesel-sized molecules in RD must be broken (or “cracked”). Also, hydrogen must be added to fill in the broken bonds previously connecting two carbon atoms. [HEFA-based SAF was approved by the American Society for Testing and Materials (ASTM) in 2011 and can be blended up to 50% with conventional jet fuel.]

In our earlier Come Clean blog series on reducing carbon dioxide from the transportation sector, we looked at RD (Part 5) and SAF (Part 6) production technologies. However, a brief review of the production process is important before looking at production economics.

As shown in Figure 1, the typical HEFA route to SAF has four steps: (1) Hydrodeoxygenation (HDO) and Decarboxylation (DCO), where renewable feedstock (such as vegetable oil) is reacted with hydrogen (H₂) at high pressure over a reactor filled with catalyst (blue reactor at left); (2) Separation, where produced water (about 10%-12% of the feedstock’s volume) is rejected, and gases are vented (gray drum); (3) Isomerization and Hydrocracking, where diesel molecules are cracked in a hydrogen environment into lighter molecules, targeting jet fuel components (green reactor); and (4) Fractionation, where the reaction products are separated into key components RD, SAF, naphtha, LPG, and fuel gas (orange cylinder). [The maze-like lines in the fractionation column represent trays used to separate, or distill, the products resulting from isomerization and hydrocracking.]

It is the hydrocracking step (green-shaded area near center) that allows the yield to shift from almost 100% RD in “Max RD” mode to higher yields of SAF in “Max SAF” mode (green-shaded column at far right). Note also that the Max SAF case results in higher yields of renewable LPG and naphtha (dashed red oval), which are less desirable side products of lesser value. Also note that production of only RD (the white Max RD column) requires limited fractionation capability, especially if the SAF boiling-range components remain in the RD product. Some facilities have the capability to separate small amounts of SAF produced without the separate hydrocracking step; however, additional RD/SAF fractionation capability is required to produce higher volumes of SAF. The yields shown above are estimates based on publicly available data and our analysis — they are sufficient to support an economic analysis, recognizing that they may not reflect any particular production facility.

Government Incentives for SAF Production and Use

As for an economic analysis, we should begin with a brief review of the government incentives that have recently transpired or are in development to promote greater production of SAF. These include the U.S. IRA, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), the Illinois Aviation Fuel Tax Credit, and the recently passed European Union (EU) mandate:

• IRA. Section 40B of the recently enacted U.S. law provides for a SAF credit of $1.25 per gallon plus $0.01/gal for each percentage point by which SAF exceeds 50% GHG reduction (up to $0.50/gal) compared with petroleum-based jet fuel. However, this credit is available for 2023 and 2024 only — not long enough to accommodate SAF projects that are not in or near commercial operation. Beginning in 2025, produced SAF is subject to the Clean Fuel Production Credit, Section 45Z, and must be below an established carbon intensity (CI) threshold (50 kg CO₂/MMBtu) before any incentives are triggered. (CI is a calculated measurement of the lifecycle GHG emissions associated with the production, transportation and consumption of petroleum- and renewables-based fuels). The incentives range from zero for SAF with a CI above 50 (e.g., produced from soybean and canola oils) to $0.50/gal for the cleanest of clean SAFs — that, is those produced from extremely low-CI feedstocks such as animal fats (tallow) and used cooking oil.
• CORSIA. The scheme was developed by the International Civil Aviation Organization (ICAO), an agency of the United Nations, and targets carbon-neutral growth in aviation. CORSIA is voluntary for participating nations (which include the U.S.) through 2026 and becomes mandatory from 2027 to 2035. CORSIA’s carbon credit trading scheme allows airline carbon reduction efforts to be monetized using established carbon markets. As such, airlines participating in CORSIA would be able to pay market premiums for SAF.
• Illinois Aviation Fuel Tax Credit. Illinois, which ranks 5^th in U.S. jet fuel demand by state — a big thank you to O'Hare Airport, a leading site for jet fueling — approved legislation in February 2023 to create a $1.50/gal SAF tax credit that airlines can use to effectively lower the price of SAF. The credit is available starting June 1, 2023, through January 1, 2033.
• EU. The EU Parliament and member states agreed in April 2023 that the share of SAF made available to airports within EU countries should total 6% by 2030 and 70% by 2050. The estimated share by 2025 is 2% (current use is estimated at less than 0.05%). The ruling excludes biofuel feedstocks such as food crops and palm oil. The rule also envisions granting carbon allowances to airlines until 2030 to help cover the higher cost of SAF.

Announced SAF Projects in the U.S.

Several projects to produce SAF are in development or already operating, apparently spurred by federal and state government incentives to reduce jet fuel’s carbon footprint, among other economic incentives. In the U.S., these include the following:

• Montana Renewables — In December 2022, Calumet Specialty Products started up a converted portion of its refinery at Great Falls, MT, to produce RD and some SAF. It recently began a multi-year agreement to supply Shell and continues to evaluate the development of an expansion in 2024, along with the potential for maximizing SAF production. Current SAF production capacity is estimated at 30 million-50 million gallons per year (MMgal/year) and production after the expansion — in maximum SAF mode — would be over 200 MMgal/year.
• Valero and Darling Ingredients — The companies announced in February 2023 that they had reached a final investment decision (FID) on an SAF project at their joint-venture Diamond Green Diesel Port Arthur plant in Port Arthur, TX, that will upgrade up to 50% of its 470 MMgal/year of RD capacity to SAF (235 MMgal/year) at an estimated capital cost of $315 million. The project is expected to be completed by 2025.
• World Energy — The company in 2016 commenced SAF production at a former oil refinery in Paramount, CA, producing 35 MMgal/year. In April 2022, World Energy announced plans to expand SAF output at Paramount to 250 MMgal/year by 2024. A few months later, in August 2022, World Energy said it planned to convert its existing biofuel facility on the Houston Ship Channel to produce 250 MMgal/year of SAF by 2025 on its way toward a goal of producing 1,000 MMgal/year by 2030.

So, these investment decisions are being made with complete visibility of the existing incentives available to SAF, including the aforementioned IRA, CORSIA, the Illinois tax credit, and the EU mandate. However, how dependent are the project rates of return on the various incentives available to SAF producers? In an upcoming blog, we’ll examine RD and SAF economics, which are remarkably similar; estimate the degree to which existing SAF incentives fall short; and discuss what that means for SAF producers and production.

Note: The article was authored by Kevin Waguespack of Baker & O’Brien and published on RBN Energy’s Daily Energy Post on June 14, 2023.

“It's Not Enough” was written by Pete Townshend and Rachel Fuller and appears as the eighth song on The Who’s 11^th studio album, Endless Wire. It was released as a digital download single from the album in October 2006. Personnel on the record were: Pete Townshend (guitars, keyboards, backing vocals, drums, drum machine), Roger Daltry (lead vocals), John “Rabbit” Bundrick (organ, backing vocals), Stuart Ross (bass), Billy Nicholls (backing vocals), Peter Huntington (drums), Jolyon Dixon (acoustic guitar), and Rachel Fuller (keyboards).

Endless Wire was recorded between December 2004 and May 2006 at Pete Townshend’s home studio in London and Eel Pie Oceanic in London. Produced by Pete Townshend, Bob Priddle, and Billy Nicholls and released in October 2006, it was The Who’s first new studio album in 24 years and the first since the death of bassist and founding member John Entwistle.

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