Focus: With strict targets looming, European aviation races to make green fuel
29/03/2023 07:00
By Inti Landauro, Joanna Plucinska and Simon Jessop
CARTAGENA, Spain/LEEDS, England, March 29 (Reuters) -
E nergy giant Repsol REP.MC has bought into Europe's drive for
green jet fuel, but believes the 200 million euro ($217 million)
plant it is building in southeast Spain faces a bumpier ride
than if it was on the other side of the Atlantic.
Repsol says the plant, which transforms used cooking oil
into so-called sustainable aviation fuel (SAF), has attracted
plenty of customers. But it is concerned Europe's investment
environment will complicate the industry's efforts to take off.
"(In Europe) there is a legal instability and a regulatory
machinery that is very complex and very discouraging towards
seeking new solutions," said Oliver Fernandez, Repsol's director
for air fuel in Madrid.
"We see the U.S. is very in favour of helping companies with
financing and focusing on helping them to develop new things."
Repsol's worries echo those of Europe's aviation sector,
much of which is tasked with boosting SAF use to 10% of all jet
fuel by 2030, despite it currently costing up to five times as
much.
As one of the only ways to decarbonise aviation, investors
and regulators are pushing airlines to up SAF usage. Doing so
could also determine whether airlines can ever be considered
sustainable under the European Union's green finance rules,
impacting their cost of raising money.
As it stands, SAF makes up less than 1% of jet fuel in use.
Airlines, which operate on razor thin margins and are heavily
indebted as they recover from the pandemic, say more needs to be
done to boost production and lower the cost.
While U.S. firms are benefiting from tax incentives to boost
production, Europe has focused on mandating change rather than
incentivising it, said Laurent Donceel, acting managing director
of lobbying group Airlines for Europe.
"It seems the EU is more focused on window dressing and
letting the United States eat it for breakfast," after the EU
published its Net Zero Industry Act in mid March.
"Europe needs to step up and throw its weight behind a
domestic SAF industry to ensure it does not fall behind."
Supporters of Europe's approach argue that the profitable
energy industry should be able to ensure supply, adding that the
harmonized U.S. tax system is better designed to benefit from
incentives, such as those in the Inflation Reduction Act, than
Europe's patchwork of national systems.
PRODUCTION CHALLENGES
Producers say they are struggling to front the investment
costs needed to scale up. Repsol has only created enough SAF so
far to power test flights for IAG-owned carrier Iberia.
"They (governments) would need to bind themselves to certain
prices for 10 to 15 years, because otherwise your producer
doesn't have the investment security ... that's the problem,"
said Ralf Diemer, managing director of industry group, the eFuel
Alliance.
Finland-based Neste NESTE.HE , the world's largest SAF
producer, says it is expanding its facilities in Europe and
elsewhere, but points to challenges including sourcing raw
materials.
Even with investment, new plants take years to build, it
adds, leaving little time to make the volumes needed to meet the
European targets.
"In 2026, we will have over six and a half million tonnes...
of renewable product capacity, of which one third will be SAF
capacity. That's 2.2 million tonnes. That's a bit under 1% of
global aviation fuel demand," said Jonathan Wood, Neste's
vice-president of renewable aviation.
British Airways-owner IAG ICAG.L says it has committed to
$865 million in investments to purchase SAF and support
production, but has only guaranteed around 25% of its 2030
supply target. That means it will likely have to spend billions
more to reach its goals.
"America's programme of both federal and state incentives
for SAF production is the mark of global leadership on the
net-zero transition," IAG told Reuters.
"This is a brilliant model, but if Europe cannot keep up it
will have to import SAF. Let's not import SAF - let's create it
everywhere we need it."
HOME GROWN
Smaller producers, like Velocys VLSV.L and Fulcrum, are
hoping to build facilities and scale-up SAF in the years to
come.
And even if their new projects do not do enough to get
aviation to 10%, SAF production will still go up markedly,
experts said.
"Most companies we speak with have already secured
sufficient SAF supply to meet at least half of their 2030
procurement targets, which is exactly the market signal needed
to support further SAF scale up," said Joe Horrocks-Taylor,
climate analyst at Columbia Threadneedle Investments.
Back at Repsol's plant in Cartagena, the first batch of jet
fuel made from used cooking oil will be shipped out of the
refinery in the fourth quarter of this year. And the firm is
confident much more will get made - and sold - soon.
It's already investing an additional 103 million euros in
another plant to make synthetic jet fuel made out of CO2, which
will open in 2025.
"It will be impossible to distinguish chemically from the
jet fuel made from oil," said Emilio Mayoral, the lead engineer
overseeing some 750 workers building distillery towers and giant
reactors.
"It will be in very high demand."
($1 = 0.9231 euros)
(Writing by Joanna Plucinska
Editing by Mark Potter)
((Joanna.Plucinska@thomsonreuters.com; 00447721669853; Reuters
Messaging: @joannaplucinska))