Cloudy Skies: DOE backs sustainable aviation fuel, but airline demand is slow

Billions of dollars of federal funding for critical climate technologies has come to a screeching halt in the Trump administration. Even approved and Congressionally allocated loans and grants have been stuck in limbo. 

The sustainable aviation fuel sector became the first to buck that trend when the Department of Energy’s Loan Programs Office last month released the first tranche of a $1.44 billion loan guarantee to Montana Renewables to expand its biofuels refinery in Great Falls, Montana. The expansion would position the company as among the largest producers globally of sustainable aviation fuel, or SAF.

It’s the only disbursement of some $50 billion in conditional loans inked by the Loan Programs Office, or LPO, during the Biden administration since Trump took office.

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Biofuels, despite their dubious climate benefits, have long enjoyed bipartisan backing. Support for corn-based ethanol is virtually de rigueur for candidates in the critical Iowa presidential caucuses. And because biofuels like SAF use existing oil and gas infrastructure, they are generally embraced by the drill, baby, drill crowd.  

“We’re a new novel technology with crossover appeal,” said Vikrum Aiyer, head of climate policy and external affairs at Heirloom Carbon, which just inked a deal with United Airlines to provide carbon for SAF.

This particular spigot was reopened only after the intercession of Montana Republican Sen. Steve Daines, who sought White House approval by emphasizing that the loan would help the US reach Trump’s goal of “energy dominance” and also create up to 500 jobs in the state. 

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Another large sustainable aviation fuel loan guarantee announced by the LPO in October – $1.46 billion to Englewood, Colorado-based Gevo to finance construction of a 60 million-gallon per year refinery in Lake Preston, South Dakota – remains on hold.

Also at risk: the Inflation Reduction Act’s 45Z Clean Fuel Production Credit, which provides a $1.25-per gallon credit for fuels that meet certain sustainability criteria. It has been placed on hold, along with other Biden-era climate incentives, for a 90-day comment period. Even before President Trump took office, US Rep. Beth Van Duyne (R-Texas) introduced a House bill to repeal it.

The tax credit is critical in addressing the No. 1 barrier to widespread airline adoption of SAF: cost. Prices for the lower-carbon fuel currently run around $6 per gallon, two to three times higher than conventional jet fuel. Airlines have been willing, up to a point, to pay that premium to reach sustainability goals and meet carbon-reduction mandates in Europe and China. But cost is a major barrier in a brutally competitive global industry running on razor-thin profit margins. 

Startups and policymakers are scrambling to make the economics work. Even if the airline industry reaches its goal — a big if — of reducing emissions by at least 5% by 2030 and zeroing them out by 2050, in large part through increased use of SAF,  the rapid growth in air travel threatens to outpace those gains. Air travel grew by 10% in 2024.  

Feedstocks

Like other biofuels, SAF can be produced using a variety of feedstocks. The most common today are used cooking oil, virgin vegetable oil, or animal fats, which are refined into hydroprocessed esters and fatty acids (HEFA). Other approved feedstocks include basic corn ethanol, municipal solid waste, agricultural wastes like corn stover, algae, and “fuel crops” such as canola. 

Such biofuels still release emissions when burned; their lower carbon footprint comes from the more sustainable, non-petroleum input. For safety reasons, SAF must be chemically interchangeable with petroleum-based jet fuel ­– to be “drop-in fuel” in industry parlance. 

In February, Gevo announced a partnership with fuels conversion company Axens to speed development of its ethanol-to-SAF technology.

A competing SAF production process that uses captured CO2 is attracting millions of investor dollars into startups using the technology. Companies such as Twelve, Air Company, Infinium, and Sora Fuels use captured carbon and water in a process powered by renewable energy to create synthetic fuels, or e-fuels, rather than biofuels. Such e-fuels can lower emissions as much as 90% from conventional fuels, but are even more expensive today than their biofuel peers. 

Busy investment season

Despite the challenges, SAF makers have been scooping up cash. 

Berkeley, California-based Twelve, which makes SAF from captured CO2, last week secured $83 million in equity and project financing to build out its first plant in Moses Lake, Washington. 

The funding tops up the company’s $645 million Series C haul in September. The total includes $400 million in project equity from TPG’s $7.3 billion Rise Climate Fund and a $200 million Series C round led by TPG, Capricorn Investment Group, and Pulse Fund. The Series C round brought Twelve’s valuation to $1 billion, making it one of TechCrunch’s unicorns for 2024. 

Other investors include Emerson Collective, the Microsoft Climate Innovation Fund, Alaska Airlines and Munich Re Ventures. Twelve plans to open its Moses lake “AirPlant” later this year.

In late February, United Airlines Ventures, via its Sustainable Flight Fund, made an undisclosed equity investment in Heirloom, a direct air capture company. The airline also agreed to purchase up to 500,000 tons of carbon for the production of sustainable aviation fuel. 

Brooklyn, New York-based Air Company, which also uses captured CO2 in its production process, closed a $69 million Series B round in September. AvFuel, a leading supplier of conventional jet fuel, led the round; other investors included Lowercarbon Capital, IQT, and Alaska Airlines.

There have been stumbles. Last March, LanzaJet, an ethanol-to-SAF producer spun off from Chicago-based biofuels refiner LanzaTech, got a $30 million equity injection from the sustainable investment arm of Southwest Airlines. The companies planned to develop a SAF production facility and “advance the operations” of ethanol maker SAFFiRE Renewables, which Southwest acquired a year ago.

However, the struggling airline is now disbanding the investment group and laying off some SAF employees amid broader layoffs, and is looking to offload SAFFiRE as it slashes costs. 

State-led SAF incentives

In Illinois, tax credits and other business incentives from the Reimagining Energy and Vehicles in Illinois, or REV Illinois, economic development program lured two SAF producers to announce new production plants in the state, with investments of more than $1 billion combined. Avina Clean Hydrogen says it is investing $820 million to construct a 120 million-gallon capacity plant in southwestern Illinois, while Crysalis BioSciences will spend $239.5 million to repurpose a shuttered ethanol plant to produce SAF in the town of Sauget outside St. Louis.

With federal tax credits in limbo, Illinois is one of the few states offering a tax credit ($1.50 per gallon) directly to airlines that purchase SAF. Chicago-based United Airlines has signed offtake deals for up to 4 million gallons of SAF to be used at O’Hare Airport.

“It’s a voluntary market, so these state-based incentives really matter,” said United’s chief sustainability officer Lauren Riley at the BloombergNEF Summit in San Francisco in early February.

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“The $1.50 per gallon goes a long way in addressing the cost premium. Now I can walk into my CFO’s office and say I want to procure SAF for use at O’Hare, our hometown hub, because we can actually afford it. You can’t often say that.”

This month, Minnesota extended its own SAF tax credit, which provides a $1.50 per gallon incentive for biomass-derived fuel. 

Carrots and sticks

Some regions are opting for policy “sticks” rather than carrots. Both the EU and China mandate that jet fuel blends must contain at least 2% SAF by the end of 2025, with increasing percentages in later years. British Columbia will require jet fuel to be at least 1% SAF by 2028, rising to 3% by 2030.

Those international mandates, along with airlines’ efforts to meet sustainability goals, are boosting demand for the lower-carbon fuel. 

Supply is a different story. The industry produced 1.3 billion liters (343.4 million gallons) produced globally in 2024, a big increase, but still short of earlier projections of 1.9 billion liters. That creates upward pressure on SAF pricing.

A Biden-era goal of supplying 10% of jet fuel with SAF by 2030 would require eight to 12 commercial scale SAF facilities to come online by 2030.

United is by far the largest offtaker of SAF with 14.3 billion liters purchased since 2013 (37.8 million gallons), more than triple that of No. 2 Southwest (4.16 billion liters). Other leading offtakers are Delta Airlines, the Oneworld alliance, Lufthansa Group, and Air France-KLM.

 In other deals announced in late 2024, both Air Canada and Air New Zealand revealed agreements with Finland-based Neste to procure 20.5 million liters (5.4 million gallons) and 30 million liters of SAF, respectively. Air New Zealand’s SAF will fuel its planes at Los Angeles and San Francisco International Airports.

Corporations are another key source of private sector funding helping to scale the industry. Their preferred tool is the SAF certificate, or SAFc, a vehicle akin to renewable energy certificates that corporations buy to help reach their carbon reduction targets. 

The Sustainability Aviation Buyers Alliance, consortium of more than 30 global companies founded in partnership with non-profits Environmental Defense Fund and RMI, manages and verifies SAFc transactions.

Alliance members purchase certificates to help offset CO2 emissions from the vast amount of air miles that their employees log for business travel —including a significant chunk from private jets. In April 2024, 20 members of the buyer’s alliance, including Meta, Morgan Stanley, JPMorgan Chase, McKinsey, and Netflix pledged to buy nearly $200 million in certificates, equalling about 50 million gallons of SAF, over the next five years. 

SAF’s take off may be slow, and with US policy shifts in the US it may be several months before its flight path becomes clear. But overseas SAF mandates and declining cost curves are poised to reward patient investors. 

“We know it’s the right thing for United, we know it’s the right thing for our shareholders,” United’s Riley said at the recent BNEF conference. “We’re going to continue to invest in sustainable aviation fuels.”