Chasing Zero: Sustainable aviation fuel update

As part of the UK Government's Jet Zero Strategy to achieve net zero emissions from UK aviation by 2050, the UK Government has announced its sustainable aviation fuel mandate and launched a consultation on a proposed revenue certainty mechanism consultation for UK based producers of SAF.

SAF Mandate

The UK Government sets out details of the SAF Mandate in its response to the second consultation on the mandate that was held earlier in this year. Key features of the scheme are as follows:

• Commencement: The SAF Mandate is intended to commence on 1 January 2025
• SAF target:  The SAF Mandate will introduce specific targets for the proportion of total jet fuel supplied that must be SAF. The target for 2025 will be 2% of the total aviation fuel supplied and will increase so that at least 10% of the jet fuel used by flights taking off from the UK will be SAF by 2030, and 22% by 2040.
• HEFA cap:  As part of the scheme, a cap will be placed on the proportion of SAF derived from hydroprocessed esters and fatty acids (HEFA). The cap, as a proportion of the overall trajectory, will be set at 100% in 2025 and 2026 decreasing to 71% in 2030 and 35% in 2040.
• PtL target: A separate obligation will be introduced from 2028 in respect of power-to-liquid (PtL) derived SAF. The PtL obligation will start at 0.2% of total jet fuel and increase to 3.5% by 2040.
• Supplier obligation: The extent of each supplier's obligation to provide SAF will be determined on the basis of energy supplied.  This will mean that obligated suppliers will need to ensure that a given proportion of the total energy provided by the aviation fuel supplied comes from SAF in line with the targets referred to above. 
• Tradeable certificates: The SAF Mandate will be structured as a tradeable certificate scheme where the suppliers of SAF will receive certificates in proportion to the GHG emissions reductions achieved through suppling SAF. These certificates can be used to discharge a supplier’s obligation or be sold to other suppliers.
• Eligibility: In order to be eligible for certificates, SAF will need to satisfy certain sustainability criteria and be produced from certain eligible feedstocks such as recycled carbon fuels or low carbon hydrogen.
• Buy-out mechanism: The scheme will include a buy-out mechanism to allow suppliers to discharge their SAF Mandate obligations by paying the buy-out price if they have insufficient certificates.  The buy-out prices will be set at £4.70 per litre for the main SAF obligation and £5.00 per litre for the PtL obligation.

The UK general election has introduced some uncertainty as to whether the SAF Mandate will be able to commence in January 2025, as the relevant secondary legislation has not yet been introduced into Parliament. This is something which the new UK Government will need to implement swiftly following the general election so that suppliers, airlines and other stakeholders have sufficient time to register and prepare for the commencement of the scheme.

Revenue certainty mechanism

Through the Consultation, the UK Government is seeking feedback on the options for a revenue certainty mechanism which would attract investment into UK SAF projects. The Government aims to implement this mechanism by 2026 by selecting one of the shortlisted options described below, which are considered by the Government to be the most suitable to achieve the Government's desired policy outcomes.

1. Guaranteed Strike Price

              The Guaranteed Strike Price ("GSP") mechanism is similar to the low carbon electricity contracts for difference scheme and guarantees an agreed price per litre of fuel produced by SAF producers. Producers would be provided with the difference in amount from the contract counterparty (a government appointed body) if the market price is lower than the strike price agreed in contract, and on the contrary, pay the excess amount if the market price is higher than the strike price. The government has indicated that the GSP mechanism offers the highest level of certainty to investors and is the most straightforward to introduce.

2. Buyer of Last Resort

              The Buyer of Last Resort ("BOLR") mechanism guarantees an agreed minimum price for the producer's SAF certificates as a government-appointed body steps in and purchases the SAF certificates once the market price falls below an agreed level. Minimum revenue from SAF production is thereby guaranteed. The BOLR has the option to retain the certificates, sell them back to the market, or carry the certificates over to the next year.

3. Mandate Floor Price

              The Mandate Floor Price ("MFP") mechanism imposes a minimum price for SAF Mandate certificates to be sold and thereby guarantees the level of income SAF producers receive. There are potential complexities in the design of the mechanism that would need to be addressed such as the determination of the appropriate minimum certificate price. Further, the MFP system may not address revenue certainty in a scenario where certificates are not traded.

4. Mandate Auto-Ratchet

              The Mandate Auto-Ratchet ("MAR") mechanism ensures a balanced supply and demand of SAF and maintains the price support provided by the SAF Mandate, which is intended to close the gap between fossil kerosene and additional costs associated with SAF production and supply. Under the MAR mechanism, the supplier's obligation under the SAF mandate automatically adjusts upwards if SAF Mandate targets exceed certain levels. The UK Government has indicated that additional guidance will be issued on how it intends to review the targets.

The Consultation does not specify a date for the Government to respond to the Consultation and, following the general election, it will be for the new UK Government to determine the form of mechanism and the basis on which it will apply to UK SAF producers. Even though the election creates some uncertainty, there does not at this stage appear to be a difference in policy approach between the main political parties in this area.