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November 04, 2024

Flying in different directions? Mixed SAF signals from China and the U.S.

Flying in Different Directions? Mixed SAF Signals from China and the U.S.

Operating in a market where both significant regulatory support and rapid technical progress are vital but by no means guaranteed, SAF stakeholders are already well used to a degree of uncertainty.  Individual government, airline and producer decisions can have an outsized impact through the value chain in an environment where (almost) everyone is agreed on the need for vast volumes of the new product, but where commercial technologies are at a relatively early stage and investor confidence remains easily shaken.  However, as of November, developments are looming in the SAF space that may have a greater impact than “the usual” volatility.

As the United States comes to the end of a tumultuous Presidential Election campaign, Sustainable Aviation Fuel is only one of numerous markets that will be considering potentially very different prospects depending on the eventual result, particularly in the low carbon fuel sector.  Headlines pointing to a potential Republican administration committed to gutting many of the measures enshrined in the market-making Inflation Reduction Act and generally pulling back from a wider decarbonisation agenda may cause justifiable anxiety among investors not only in the U.S. but in the wider SAF sector.

At the same time, market observers are awaiting another potential inflection point for SAF growth, as expectations rise that China will announce a national blend mandate in the near future.  If these expectations are borne out, such a mandate could have a significantly positive impact on global SAF demand in the coming decade but would also have severe ramifications for supply in other regions and – crucially – feedstock availability for both SAF and other biofuels.

In NexantECA’s view, while a Republican government in the U.S. may be far less convinced by the value of an economy-wide decarbonisation drive than a Democrat administration, this shift would be mitigated in the case of SAF by a range of factors, cushioning producers to a certain extent.  However, the realities of feedstock availability mean the effects of a Chinese mandate – if enforced – could flow through the SAF and other biofuel value chains in ways that are both positive and negative for global markets.

United States: Turbulence Ahead?

In the U.S., a Democrat victory in the Presidential Election could be expected to result in a broad continuation of the climate-related policy of the last four years, most notably continued support for the wide range of measures in the 2022 Inflation Reduction Act.  The Act, and its raft of tax credits and more direct incentives, have been a crucial plank in supporting the goals set out in the Federal SAF Grand Challenge, which effectively targets full displacement of petroleum jet fuel by 2050.  This regulatory framework – alongside the also highly influential California Low Carbon Fuel Standard – has been a key driver in the very rapid growth of drop-in fuel (mainly HVO/HEFA) production capacity in the U.S. over the last five years, much of which is increasingly focused on SAF output. 

On the other hand, the Republican campaign has repeatedly referred to the IRA as part of a “Green New Scam” that it intends to eliminate.  Notably, Republican policy commitments include plans to rescind the 1974 Congressional Budget & Impoundment Control Act (CBA), which limits executive branch ability to claw back “wasteful spending” by federal agencies, and to use these returned powers to rescind any unspent funds allocated to the climate-related portions of the IRA. 

However, these powers would apply to unspent direct grants enabled by the Act, rather than against the system of tax credits that have been a key support to investments across the low carbon sector, including in growing U.S. SAF capacity.  Full removal of key SAF tax credits (such as the 40B/45Z credits providing uplift to SAF profitability) would require control of both US legislative houses and consensus from lawmakers.  The positive impact of these tax credits on a range of industries beyond SAF production – most notably ethanol production and by extension corn cultivation – in many traditionally Republican-represented U.S. states could significantly reduce consensus among Republican lawmakers as to the benefits of removing or reducing them. 

In addition, reports indicating that a large proportion of IRA grant funding had already been allocated by October further diminish the likely direct impact of the policy statements regarding the IRA.  Notably for the SAF sector, in August, the Federal Aviation Administration announced grants from the IRA amounting to US$290 million, under the Fueling Aviation’s Sustainable Transition (FAST) scheme, directed at growing SAF production capacity, infrastructure, and technology.  Further cushioning may be expected from the likelihood that many state level authorities will seek to continue to incentivize low carbon industry investment – including drop-in fuel capacity construction – even if Federal measures are scaled back, in support of industrial development and job creation.  Finally, the Republican emphasis on the power of trade barriers means that reduced support for U.S. SAF production would be unlikely to lead to higher competition from SAF imports.

In the longer-term, the eventual effect on investments in SAF and other transport decarbonization options of a Republican election victory may be related more to expectations around what such a government does not do, rather than on how much it scales back existing measures.  Long-term displacement of petroleum jet fuel in U.S. aviation will likely require a ramping up of policy measures – starting in the short-term – such as blend mandates, carbon pricing, or reducing support for fossil fuels production and use, none of which could be expected to be a priority of an incoming new government.  Whether this would dampen overall SAF investment growth, or merely increase the attractions of capacity-building elsewhere, is less certain, and ultimately SAF project developers may see the trimming of the IRA's strong support for U.S. manufacturing as influencing choice of location more than stop/go decisions.

China: Clearing For Takeoff?

The question of whether or not China will introduce a mandate is more clear-cut than that regarding the future of US environmental policy.  SAF market observers have become increasingly confident that some form of blending obligation is being prepared, most likely for inclusion in the 15th Five Year Plan (2026-2030), set to be unveiled in 2026.  Recent signs pointing in this direction include the implementation of a phased SAF pilot scheme, the launch of a new SAF Industry Alliance, and the establishment of a national technical center for SAF standards, as well as the testing by state-owned aircraft manufacturer Commercial Aircraft Corporation of China (Comac) of SAF in two of its commercial aircraft.  Reported estimates of what blending level such a mandate could require have varied, from a conservative 2-5 percent to a high 15 percent by 2030, and any eventual legislation could involve a range of caveats and exceptions, with enforcement or penalties a key issue.  For this analysis, NexantECA has assumed a national five percent mandate in 2030. 

NexantECA estimates total Chinese jet fuel demand (including petroleum and alternative and including Hong Kong) at some 56 million tons by 2030.  Without a clear mandate for domestic use, China is projected to consume approximately 0.5 million tons of SAF in 2030.  Assuming that Used Cooking Oil is the primary feedstock for Chinese SAF production (and available Chinese government documentation routinely refers to SAF as a waste-based fuel, excluding at least virgin oils if not other wastes) supplying this demand will require some 0.6 million tons of UCO.  In the event of an enforced five percent Chinese SAF mandate in 2030, consumption could rise to some 2.8 million tons, requiring UCO input of around 3.2 million tons, i.e. incremental UCO use for SAF of some 2.6 million tons in 2030.

There is little doubt that the burgeoning Chinese drop-in fuel production sector would be physically able to meet this level of local SAF demand, or that Chinese UCO resources would be able to supply the necessary feedstock.  Chinese SAF production capacity is already forecast to grow to over four million tons per year from its 2023 level of 0.2 million tons per year, and the country is estimated to account for almost half of the world’s current collection of UCO.  However, this capacity and feedstock resource is also a prime factor in supporting the growth of SAF (and other biofuels) elsewhere in the world, meaning that a Chinese mandate could cause ripples across other regions. 

China’s current and expected HVO/HEFA production base is almost exclusively aimed at meeting export demand, particularly in European markets.  By increasing its own use of SAF and by extension UCO, a Chinese SAF mandate will add to existing pressure on the ability of importing markets to meet their blending commitments (notably the RefuelEU Aviation mandates) and of the global HVO/HEFA sector (for suitable feedstock).  Either Chinese SAF capacity will grow more sharply than anticipated (and NexantECA already projects rapid expansion without the support of a mandate) or available Chinese SAF volumes for import markets will be lower than previously expected. 

In the former case, a larger proportion of Chinese UCO production will be absorbed by local production and therefore will not be available for export (given Chinese collection rates are already high, increased production beyond that already projected is unlikely without giving rise to increased risk of fraudulent production).  Tightening global UCO supply could stimulate collection rates in as yet untapped markets, but would be more likely to squeeze other UCO consumption sectors, such as Renewable Diesel or most likely “conventional” ME biodiesel production.  Low-cost Chinese UCO biodiesel production has already been under pressure from EU anti-dumping tariffs and may be the most likely “victim” of a UCO squeeze, but production elsewhere including in Europe could also suffer from tighter feedstock availability.

In the latter case, it could be assumed that the Chinese government would use its powers to restrict local producers from selling into export markets before meeting domestic demand (enforced quotas have regularly been used to limit Chinese petroleum refinery exports in recent years, as the government has sought to balance local need with export opportunities and support for its own economic players).  In this case, European markets seeking to ramp up consumption in support of RefuelEU Aviation (or non-EU national) mandates would face a somewhat tighter market, without capacity growth either locally or in other feedstock-advantaged export locations.  Given RefuelEU Aviation’s prohibition on food crop use for SAF production, this outcome would also squeeze the UCO market considerably.

Find out more...

NexantECA Support for SAF Stakeholders

Both the outcome of the U.S. Presidential election and the decision-making process within the Chinese government regarding a SAF mandate are hard to predict at time of writing, and the potential implications for the global SAF market of alternative outcomes of each question are highly complex.  Both have the potential to shift dynamics and profitability within the sector, particularly in a tight feedstock environment. NexantECA’s Insights service offers a range of reports enabling stakeholders to track developments in this area, including:

 

The Author...

Matthew Morton, Managing Consultant

 

 

About Us - NexantECA, the Energy and Chemicals Advisory company is the leading advisor to the energy, refining, and chemical industries. Our clientele ranges from major oil and chemical companies, governments, investors, and financial institutions to regulators, development agencies, and law firms. Using a combination of business and technical expertise, with deep and broad understanding of markets, technologies and economics, NexantECA provides solutions that our clients have relied upon for over 50 years.

 

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