Unlocking capital – learning from a high-flying industry
Patrick Edmond
Chief Commercial Officer
Future Energy Global
A perennial challenge in the SAF world is the mismatch between project developers looking for long-term revenue certainty and offtakers not wanting to commit beyond the short term. There’s discussion about how policymakers can bring certainty via revenue certainty mechanisms and double-sided auctions, and these are valid and important approaches. But we can also learn from other successful industries. And in particular, we in Future Energy Global have learnt a lot from the aircraft leasing sector.
Aircraft leasing is a huge global business. About half of all commercial aircraft in the world are owned by lessors rather than airlines (and of those lessor-owned aircraft, about 60% are controlled from Ireland!). In the aircraft leasing business there are two types of mismatches between airlines’ and aircraft manufacturers’ goals. Airlines, especially small and medium sized airlines, are typically looking for relatively small numbers of additional aircraft, and they usually want those aircraft in the short term: summer next year, or the summer after. They are not thinking about making commitments for five years or 10 years in the future.
On the other hand, aircraft manufacturers have to plan for the long-term. if I go to Airbus today to order a new A320, it’ll be somewhere in the early 2030s before the aircraft can be delivered. Equally, manufacturers are understandably more interested in selling 20 or 50 aircraft at a time rather than ones and twos, so a small airline is unlikely to get a particularly good deal from the aircraft manufacturer. That’s where an intermediary adds value: the intermediary (the aircraft lessor) aggregates the demand for aircraft from multiple airlines, perhaps adds some more aircraft on top of that based on its confidence it can place them, and places a big order with the aircraft manufacturer. That order can stretch over multiple years, giving the manufacturer the longer-term visibility it needs, while at the same time fulfilling the short-term needs of individual airlines.
Thus the intermediary is fixing structural mismatches between buyers and sellers. Specifically, it’s solving two problems: on the one hand, a timing mismatch between end-users’ short-term timescales and manufacturers’ long-term visibility needs, and on the other hand, a volume mismatch between manufacturers’ high volume requirements and individual customers’ lower volume needs.
Future Energy Global (based in Ireland, just like most aircraft lessors) functions as a market intermediary (analogous to an aircraft lessor) in the SAF space: we aggregate SAF demand from multiple airlines and corporates and combine it with our own market outlook for future demand, and we place corresponding substantial multi-year offtake agreements with SAF producers. Analogously to the aircraft leasing industry, this gives producers more certainty, while providing flexibility (and competitive pricing) to the airlines and corporates who are buying the emission savings associated with SAF.
We talk here about “emissions savings” because that’s the essential property of SAF that is being monetised. SAF is two products in one: of course it’s the molecules that make an aircraft engine run, but it’s also the lifecycle emissions savings relative to fossil kerosene, and those savings have a monetary value. We specialise in trading these SAF environmental attributes using the “Book and Claim” system. Book and Claim is already well established in other renewable energy markets and is now becoming increasingly important for SAF too. It separates those two products and allows them to be traded separately: the molecules can be burnt in one place and the emission savings can be credited somewhere else. As long as the accounting is robust, this can deliver environmental benefits to the end users who are willing to pay for them without having to ship tankers of fuel around the world, saving time, cost, and emissions.
In fact there are two SAF markets: the mandated market (for example RefuelEU-Aviation or the UK mandate) and the voluntary market, which as its name suggests consists of airlines and corporates choosing to buy SAF or SAF attributes even though they are not obliged to do so. Book and Claim is already established in the voluntary market, and is now also being evaluated for future inclusion in mandated markets such as RefuelEU-Aviation.
That voluntary market is growing, but will grow much faster once corporates have clearer guidelines for how to account for their SAF-related emissions reductions; indeed we’re expecting guidelines from SBTI in the near future and from GHG protocol in the next year or two, which will give corporates the certainty they need to invest in so-called SAF Scope 3 credits as an effective way both of compensating for their business travel emission and supporting the future sustainable development of the aviation industry on which they rely to do their business.
As a SAF market intermediary, then, we can play a significant role in derisking new projects. Our role is not to invest large sums upfront towards capital expenditure; what we do by entering into multi-year offtake commitments for SAF environmental attributes is to send a clear market signal which allows project developers to raise finance more easily because their revenue streams are now more clearly visible.
We believe strongly in the importance of intermediaries in this market, and indeed we don’t have to rely on belief: our growing customer list already includes leading international airlines, major SAF producers, and global corporates, proving the relevance of our model.
And – despite a lot of headlines from one or two noisy world leaders – sustainability isn’t going away: the market in which we operate is also growing.
So we in Future Energy Global are upbeat about the potential for SAF market growth, and the level of interest we’re seeing from project developers wanting to talk offtakes, as well as investors wanting to talk about our forthcoming Series A fundraise, gives us a lot of confidence in the future.
SAF’s growth will be driven by policymakers, but also by effective market structures, and we know that intermediaries are the key to unlocking the power of markets for the benefit of both manufacturers and end-users – just look at the aircraft leasing industry if you want proof!