In this edition of New Energy Expert Insights, we sat down with John Sheehy, CEO of Pottinger and Rodrigo Arias Lopez, Executive Director at Pottinger, to discuss the investment outlook of sustainable Aviation fuel in Australia.
John Sheehy is the CEO of Pottinger. He has advised private and public sector clients in relation to strategy, M&A, risk, innovation and management in over 40 countries, spanning 6 continents, with a combined value of over $50 billion.
Rodrigo Arias Lopez is an Executive Director at Pottinger. He has deep experience in corporate finance and capital markets having worked in Europe, the Americas and Australia. He advises both private and public clients across multiple industries on corporate strategy, M&A and capital raising.
Pottinger is an independent advisor to leading companies, state and federal governments, industry associations and growth stage companies on M&A, capital raising, corporate strategy and public policy. Pottinger was recently selected to advise on the Sugar Plus Industry Roadmap as part of the Queensland Government’s plans to further the biofuels industry, including Sustainable Aviation Fuel (SAF).1
Tell us about the opportunities for investors in the adoption of SAF?
There will be many opportunities for investors, with different risk-reward profiles, to get involved in the SAF industry.
These include:
- real assets: some investors might choose to invest directly into agricultural land and the feedstock required to produce SAF. This investment opportunity is capital intensive and is likely to be most attractive for incumbent, well capitalised agricultural and/or real estate specialists;
- early stage: the domestic SAF industry currently requires funding for SAF pilot plants. These equity cheques will be modest but require investors which have the right kind of risk appetite for technology and commercialisation risk. Venture capital and private equity investors will be logical participants
- medium term: as SAF facilities scale and technologies mature, investment opportunities will become larger as the funding of bigger production facilities becomes the focus. This will require both equity and debt funding and will involve larger institutional investors such as infrastructure fund managers and climate/transition fund managers; and
- long term: as the asset class matures and resembles more well established renewable energy projects with long-term, inflation-protected offtake agreements, we will see more project-level financing and institutional infrastructure investors/LPs including project finance.
Are you seeing capital being deployed into SAF at scale?
Capital deployment is still relatively modest and largely driven by equity co-commitments by joint venture partners under cooperation agreements to develop pilot facilities.
Before capital can be deployed at scale, businesses need to demonstrate that the underlying technology works. A common measure of technological maturity is NASA’s Technology Readiness Level (TRL). The TRL scale is a globally accepted benchmarking tool for tracking progress and supporting the development of a specific technology rated on a scale from 1-9; A project or technology with a TRL level 1 represents early stage research. Meanwhile, TRL level 9 means deployment of technology at scale on a commercial basis.2
There are multiple technological approaches to the production of SAF. Current SAF technologies vary in terms of maturity. In Australia, we are yet to see any project reach full commercial scale.
What are the prominent SAF technologies?
SAF production technologies can be grouped based on the type of feedstock used. Mainstream examples include:
- HEFA (hydroprocessed esters and fatty acids) which uses fats, oils and greases;
- ATJ (alcohol to jet) which uses carbohydrate-rich crops such as sugarcane and agricultural residues to produce ethanol and then kerosene; and
- Power to liquid, which uses captured CO2 and hydrogen.
Is there a preferred SAF technology, or is there space for multiple SAF technologies?
If you look at the volume of SAF required, technologies and feedstocks will not be mutually exclusive. Multiple technologies and multiple feedstocks will be required in order to meet local and global demand.
When compared with the cost of producing jet fuel from fossil fuels, SAF production is still uneconomical (SAF costs anywhere between 2x and 4x per litre of fuel). This can largely be attributed to a lack of economies of scale. Among mainstream technologies, power to liquid is the costliest of the options.
We expect the price gap between fossil-fuel based jet fuel and SAF to materially narrow over time as fossil fuels are phased out, and carbon taxes and green fuel mandates are implemented.
While there will be movement on both sides of the equation to bring the production costs of SAF in line with jet fuel in the next 10-20 years, we need to bridge the gap faster.
What is the role of Government, and how can it incentivise best practice?
The Government needs to go in early when no one else will.
Two things needed from the government in the near term are:
- active funding of businesses to create pilot projects (for around AUD$5-50 million) to finish feasibility studies and get the pilots off the ground; and
- supporting demand. One way to do that is to make sure that airlines are mandated to use a certain percentage of SAF produced, as well as requiring a fuel mix (as is the case in many other jurisdictions).
How can we accelerate SAF uptake?
Long Term Capital
While near-term subsidies are crucial to get the wheels turning, we also require capital providers with a long term investment horizon. Project returns will be attractive over time, but not all investors have the ability to place truly long term bets. Government can accelerate SAF uptake by acting as a long term equity partner to project sponsors.
Fierce Collaboration
Work is being done at different levels of SAF to foster that fierce level of collaboration. For example, the sugar industry has its own long-term strategic roadmap, “SugarPlus”,3 which determines its role in the bioeconomy.
How are transactions being structured to ensure adequate risk allocation?
We are looking at how to bring people, skills and capital together.
We are doing this through a prolific use of unincorporated and incorporated joint ventures or cooperation agreements (JV). JVs are an effective tool to support consortium members or JV partners to share risks and rewards, as well as foster this fierce collaboration before the large amounts of capital start to flow.
How are SAF developers and manufacturers ensuring that the fuel is sustainable?
We must think about the CO2 footprint of the operation.
Three key considerations are:
- responsible power sourcing: there is an abundance of renewable energy in Australia. Renewables are a very appropriate way of looking at how to power these facilities. This can be done through on-site generation or power purchase arrangements;4
- processing of emissions: we must look at the potential for carbon capture and storage; and
- ecological conservation: as an example, land under cane is often high value and follows the coastline, there are a lot of ecological considerations to be taken into account.
Creating SAF in an eco-friendly way is essential and must be incorporated into government policy considerations.
How does SAF tie in with the broader Eco-Infrastructure conversation?
‘Eco-Infrastructure’ is a term we use at Pottinger that relates to the transition to environmentally-focused projects that can, over time, take on the attributes of the infrastructure asset class. By this, we mean long dated offtake contracts as well as inflation-linked revenues that present low risk with moderate returns. SAF-related assets and infrastructure will become a new infrastructure-like asset class in the near-term.
Closing remarks
Australia has access to all the right factors to become a global leader in SAF production. We have a large land mass, the right feedstocks, a highly skilled labour force and huge pools of institutional capital which support the business case for the development of the industry. We have two major airlines and a huge amount of air travel per capita which alone support a local business case.
The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.
1Sustainable Aviation Fuel, CSIRO (Web Page) <https://research.csiro.au/tnz/sustainable-aviation-fuel/>.
2Technology Readiness Levels for Renewable Energy Sectors, Australian Renewable Energy Agency (Web Page) <https://arena.gov.au/assets/2014/02/Technology-Readiness-Levels.pdf.>.
3SugarPlus Industry Roadmap, Queensland Government (Web Page) <https://sugarresearch.com.au/sugar_files/2022/07/Industry-Roadmap-4pg-brochure-Digital-F.pdf.>.
4For further information, see our article, “The symbiotic relationship between Agriculture and DER”, available here.
