Project

Aviation faces major challenges in achieving climate neutrality. While global passenger numbers are forecast to increase, the technical possibilities for avoiding emissions are limited. The use of sustainable aviation fuel (SAF) therefore plays a crucial role. Bio-based SAF has limited potential in terms of raw materials. Alternatively, the use of electricity-based kerosene, known as eSAF, is seen as the key to low-emission flying. ReFuelEU Aviation defines an increasing quota for the use of eSAF from 2030 onwards, but there is currently insufficient investment in facilities to produce the necessary quantities. This study analyses the barriers and instruments for securing investments and derives recommendations

The aim of the project is to analyze market barriers to existing instruments and to derive and evaluate options for an instrument based the concept of a contract for difference (CfD). . The study was commissioned by RheinMain University of Applied Sciences as part of the InnoFuels project in Innovation Focus Area 7: «Market & Regulation».

The study begins with an analysis of the initial situation regarding the challenge of reducing emissions in aviation. In addition to technical restrictions, the focus is on current regulations and market barriers to the ramp-up of eSAF. In the next step, six existing instruments for hedging and funding from other sectors are analyzed, all of which rely on a contract for difference (CfD). On this basis, suitable design elements for an eSAF CfD to secure the market ramp-up are analyzed. The focus is on the design elements of indexation, allocation mechanism, contractual partners and payment modalities. Based on this analysis, the study then develops five concrete concepts for an eSAF CfD, which differ in their expectations of profit neutrality and in their choice of a public or private contractual partner. The options are then evaluated comparatively with a focus on the potential to overcome market barriers. Other objectives of the instrument and its interaction with other instruments such as ReFuelEU Aviation and the EU ETS are also discussed. Finally, the results are discussed and recommendations are formulated.

The report is currently being prepared for publication.

The analysis of the design options shows that different policy instruments can contribute differently to overcoming some market barriers. A state funded double-sided eSAF-CfD following the model of H2Global is the best way to achieve this, with the government entering into a long-term contract with the producer and a short-term contract with the distributor. However, this option cannot be implemented without subsidies. Financing from EU ETS revenues or a levy on airline tickets would be conceivable, but implementation would not be trivial. Long-term supply contracts (eSAF-PAs) can bring producers and distributors together in the private sector. Government guarantees against project failure could cover risks here, but even then, eSAF-PAs alone cannot solve the central market barriers. Both an amortisation account and flexible private-sector loans are less suitable for enabling the eSAF ramp-up, as they provide liquidity for distributors but do not offer real protection against high additional costs.

In order for the proposed eSAF-CfD options to contribute to the ramp-up, it is essential to reduce regulatory uncertainties for the eSAF ramp-up. The eSAF quota and penalties for non-compliance must be enshrined in law and reinforced with credible political backing.

Overall, the following steps can be derived to support the eSAF ramp-up:

• First and foremost, the uncertainties in the regulatory framework of the quota and the design of the EU ETS must be resolved. These two instruments form the market framework that requires the use of eSAF and are therefore fundamental to a successful ramp-up. All additional instruments should be subordinate to these and their limits clearly communicated.
• If the state is to intervene in the market to a limited extent, the standardisation of eSAF purchase agreements backed by government guarantees is the appropriate instrument to support the ramp-up. It is administratively lean, addresses some of the market barriers and paves the way for a free eSAF-PA market, which is important for the further development of the market.

In addition, a state funded double-sided eSAF-CfD can address and remove market barriers even more explicitly. This instrument is more complex in regulatory and administrative terms and carries an even greater risk that players will wait for the subsidy without trusting the quota. Communicating the limits of the subsidy is therefore essential here. In order to reduce the effort involved and take effect within a short period of time, it makes sense to structure the double-sided eSAF-CfD via a subsidy round from H2Global. To increase acceptance, financing the subsidy via a levy or from EU ETS revenues could be considered.

October 2024 - July 2025

The study was commissioned by the RheinMain University of Applied Sciences

Part of the InnoFuels project in Innovation focus 7: Market & regulation

Project InnoFuels

• Coordinated by Karsruhe Institute of Technology (KIT)
• Funded by the Federal Ministry of Transport