Green flying will lead to higher prices. Can it takeoff?

Anthony Nolan, pointing to the royal warrant emblazoned on one of the 23 green-and white trucks at Olleco’s depot near Heathrow Airport, points out the procession of British Airways aircraft shaking the roof tiles.

The commercial director of the company grins. “I am the warrant holder,” he says. “I have the certificate.”

Olleco collects used cooking oil from royal kitchens and regularly visits Buckingham Palace and Windsor Castle. Nolan’s crew packages the oil and loads it on lorries. They then take it to refineries where it is turned into sustainable aircraft fuel and environmentally friendly biodiesel.

The world’s aviation elite will descend this week on Farnborough Airport for the biennial airshow. The world’s leading airlines and plane makers will be announcing new multimillion-pound orders for jets with great fanfare. Defence companies will display their latest high-tech weapons, and executives will gather to drink champagne at a prefabricated chalet.

The conversation will also focus on how to reduce the carbon footprint of commercial aviation, especially since, just last week, green transport was a major part of King’s Speech.

Electric and hydrogen-powered planes are often discussed, but they’re still decades away from being commercially viable. The SAF will, however, play the largest role in helping to achieve the net-zero goal of 2050, according to experts. According to Sustainable Aviation, SAF will help achieve 39 percent of the required emission reductions. SAF can be used in any aircraft. It is compatible with jet fuels.

But it comes with a price. The cost of even the cheapest sustainable aviation is double that of kerosene. The cost difference between green jet-fuel and non-green will be reduced in coming years, but in the short to medium term going green could have a negative impact on airline finances.

This will result in higher fares.

Will prices increase? “If everything stays the same, [prices] will increase by £20-£40 per sector in 2030,” said ShaiWeiss, Virgin Atlantic’s chief executive at its 40th anniversary celebrations held last month in Las Vegas. “That’s what the cost of decarbonising aircraft is.”

UK airlines are required to purchase a minimum percentage of their fuel from SAF starting next year. The UK’s carriers will be affected by the withdrawal of the free carbon credits they were given in 2026. These are permits that allow for a specific amount of emissions.

The public filings reveal that these two changes will add more than £500,000,000 in annual costs to the industry. They will be forced to pass on the costs to travelers as they struggle to make a profit.

SAF is produced in several ways. Currently, the main method is to heat up fatty wastes, like used cooking oil, without oxygen, and produce gas. The liquid fuel is made from this.

Another method is to ferment starchy products like sugar cane or corn grain into ethanol. This can be refined into SAF. Thirdly, black-bag waste that is destined for landfill can be turned into wax and converted to jet fuel.

Some people consider e-fuels to be the gold standard. Carbon dioxide and “green” hydrogen (produced by electrolysing the water with renewable electricity) are mixed together before they are turned into liquid. The process is costly and the production of large quantities for aviation has not yet reached its full potential.

Fuel suppliers will be affected by the new UK “SAF mandate” introduced by the previous government, which is due to take effect in January. Offtake agreements, where a third-party agrees to purchase a certain quantity of a product at a set price, will pass the cost on to airlines. They will then pass this cost onto passengers via higher fares.

According to the mandate, 2% of jet fuel will be SAF by next year. This percentage will increase each year until it reaches 10% in 2030. The mandate will continue in a more gradual trajectory until it reaches 22 per cent by 2030.

According to the government, 2 percent of jet fuel is equivalent to 230,000 tons. A lack of UK production capacity means that the majority of this fuel will have to be imported, with all of its environmental costs.

The UK was to have five additional SAF refineries fully operational by 2025. The target for SAF refineries in the UK was revised to five “under construction” SAF refineries by 2025.

In the UK, only Phillips 66 in Humberside will produce SAF in 2025. Insiders claim that this refinery produces only 20,000 tonnes SAF per year.

SAF imports by ship are not good for the environment. Carbon footprints in the maritime sector are comparable to those of commercial aviation.

One senior industry source said, “We expect the majority of it to come from the US.”

The European continent has more refineries, but the Inflation Reduction Act of President Joe Biden has provided substantial subsidies to American SAF. According to figures provided by Argus Media, US prices are about 25% cheaper than European counterparts. Shell has recently stopped construction at its SAF facility in Rotterdam.

According to an analysis of the average price, UK jet fuel suppliers are likely to have to charge airlines $310 million more next year in order to comply with the SAF mandate. These costs will be passed on to consumers via increased fares. If SAF prices don’t fall, the cost of green fuel will increase in future years as mandates to provide more fuel are increased.

The cost of SAF is not the only thing that keeps British airline executives up at night. Businesses that are energy-intensive have agreed to participate in the emissions trading scheme for almost two decades. The scheme was initially rolled out by EU and adopted by the UK in 2021 after Brexit.

Companies must purchase carbon credits in order to offset the emissions that they produce. The UK government provides free credits to airlines. This giveaway will end in 2026.

The government publishes annual free allocations each year. PwC, a professional accounting firm, found that between 2026 and 30 the average UK ETS credit would cost €92.73 a tonne. According to the allocations for 2025 published by the government and analysis, airlines will have to pay €379,000,000 more if the free allocation expires in 2026.

Virgin Atlantic will fuel its first 100 percent SAF transatlantic commercial flight in November 2023.

The King’s Speech included a bill that would “support sustainable aviation oil production”. A “revenue-support mechanism” is being introduced to underwrite the costs of building SAF refineries, by guaranteeing that the fuel can be sold at a certain minimum price. The wind energy industry was launched with a similar concept more than ten years ago.

The International Air Transport Association stated that “This type policy support is beneficial for establishing SAF manufacturing and growing the market but also ensures that the ambitious SAF mandates set by UK government can be achieved.”

This announcement is sure to have been a boost for the high-flyers who will be gathered at Farnborough. Aviation chiefs say that simply telling climate activists like Greta Thunberg to “Don’t Fly” is not feasible. Reduce the carbon footprint of the aviation sector with the support of the state is possible.

Nolan and the team at Olleco are likely to become busier as domestic production of SAF increases. For now, there’s still plenty of work to do. The customer list for the day is written on a large whiteboard above the Southall depot. But not all of their calls will be royal. The Codfather takeaway near Heathrow, Virginia Chicken & Ribs in West London, and Hawksmoor steakhouse are also due to receive cooking oil.

Commercial air travel is the greatest social leveller.