The Sustainable Aviation Fuel Pricing Challenge

Owing to its low production volume, Sustainable Aviation Fuel (SAF) typically costs 3-5 times as much as traditional jet fuel, depending at any given time on the price of fossil jet fuel, the cost of renewable feedstocks, the related processing costs, and more. Meanwhile, supply and demand dynamics naturally impact price levels too.

Nevertheless, Michael Sargeant, Vice President Americas for Finnish refiner Neste’s Renewable Aviation business unit is optimistic that relative pricing levels of conventional jet fuel and SAF will eventually converge. "Over time and as the industry scales up production of SAF, the cost of SAF could benefit from economies of scale in its production and learning benefits as we get smarter at how to make it,” he suggests.

“Conversely, if the cost of carbon increases over time, the total cost of fossil fuel will go up. These forces could also cause the cost of SAF and fossil jet fuel to converge over time.”

However, in terms of relative pricing for SAF and conventional fuel, another factor is at work, Sargeant argues. “For a like-for-like comparison one needs to add the cost of carbon and climate impact to the fossil jet fuel cost. The real question should be ‘What will the cost be if we don’t start using SAF?’.”

Thinking Creatively About SAF Pricing

Kennedy Ricci, President and CEO of 4AIR says there’s more than one way to look at how SAF and conventional jet fuel should be priced – and, in practical terms, how SAF’s current substantial pricing disadvantage against Jet A/Jet A-1 might potentially be mitigated to some degree.

“There are two ways of looking at it,” Ricci notes. “Feedstocks will eventually become more and more expensive, so SAF will be more expensive [than Jet A/Jet A-1] for a long time. But this is where accounting and tracing [of life-cycle carbon emissions] becomes more important.

“If users account realistically in balance-sheet terms for the carbon emissions they reduce by using SAF instead of conventional jet fuel, they will be willing to pay more for SAF than for Jet A/Jet A-1,” he reckons.

Today, conventional jet fuel is not being priced to reflect the adverse effects of its emissions of carbon greenhouse gases on the climate and environment globally, and the costs of trying to mitigate those effects. Those costs would be substantial and would bring the market pricing of Jet A/Jet A-1 much closer to the market pricing of SAF than they are now.

But Ricci highlights there is currently no standard method to price the effects of jet fuel’s carbon emissions. So, the best way of approximating how jet fuel’s carbon emissions should be priced is to derive their implicit cost by looking at how much aircraft operators are currently paying for SAF and how much they are paying for conventional fuels.

Taking the relative prices for 300 gallons of each fuel, the difference between the prices for the two fuels produces a range of dollar amounts which shows how much users are willing to pay to reduce one metric ton of carbon emissions. The market price differences between the two types of fuel range from $400 to $700 per metric ton.

“That’s how much you pay to reduce that metric ton of carbon,” Ricci explains.

A Possible SAF Price-Mitigation Strategy

Further analysis of the pricing variations, and gap in pricing levels that users pay for 100% SAF compared with Jet A/Jet A-1, arises primarily from differences in delivery costs and fuel taxation, Ricci notes.

The local nature of SAF price differences means prices for the fuel can vary substantially, even among the airports within a relatively small area, he says.

This fact suggests not only that pricing of 100% SAF in such areas would benefit from application of a book-and-claim system (to stabilize price variations at different airports), but also that a simple strategy might help bring down the price differential between the SAF and conventional jet fuel.

Applying that strategy could effectively cut the cost of carbon reduction for SAF-using Business Aviation customers in such areas, Ricci says.

First, there needs to be a close analysis of the SAF and Jet A/Jet A-1 prices at each airport in the local area, as well as the quantities of the two types of fuel delivered to each airport and how many FBOs each airport boasts.

Each airport’s overall traffic levels should be studied too, particularly (for Business Aviation users of SAF) how many business aircraft movements each airport handles.

From that data, the SAF price-reduction strategy, in conjunction with one or more book-and-claim programs available at each local airport, calls for deliveries of SAF to be concentrated at the airport where the SAF price is cheapest, Ricci says.

Using the book-and-claim approach, operators would fill their aircraft tanks with SAF at that cheapest-fuel airport even if they bought it at other airports in the area. That would effectively bring down the costs of decarbonization to all the local operators prepared to buy SAF, he concludes.

Read more about the current and future status of SAF.

More information from:
4AIR: www.4air.aero
Neste: www.neste.com