Navigating the Challenges of Project Financing for Sustainable Aviation Fuel in the EU
Navigating the Net Zero Skies: Challenges in Financing Sustainable Aviation Fuel Projects in the EU
Exploring the hurdles facing early-stage SAF initiatives despite robust regulatory support.
In the current global shift toward a “Net Zero” future, the European Union has introduced increasingly robust legislation mandating decarbonisation targets, including the promotion and gradual adoption of low-carbon fuels across key sectors.
The Regulatory Landscape of Aviation Decarbonisation
Among the industries under increased regulatory scrutiny is aviation, which accounts for approximately 2.5% of global CO₂ emissions. In response, the EU has enacted the ReFuelEU Aviation Regulation, designed to facilitate the sector's decarbonisation through the mandated use of Sustainable Aviation Fuel (SAF). This regulation places binding obligations on fuel suppliers, EU airports, and aircraft operators to supply, ensure access to, and utilise SAF in increasing proportions over time.
Financial institutions are also facing growing internal mandates to support environmentally sustainable investments. However, despite a supportive regulatory framework and growing market interest, only a limited number of SAF projects in Europe—or targeting the European market—have achieved final investment decisions, particularly when measured against the scale required to meet EU targets.
Several major airlines have voluntarily set SAF usage goals, complementing regulatory mandates. Nonetheless, a number of challenges continue to impede the ability of SAF projects to secure project finance. This article explores those key hurdles and their implications for early-stage SAF projects.
Defining Sustainable Aviation Fuel under EU Law
SAF is a “drop-in” fuel, meaning it can be blended with conventional jet fuel and used in existing aircraft engines without requiring modifications. Although SAF emits CO₂ upon combustion, it is considered significantly less carbon-intensive when produced using approved sustainable methods.
Categories of SAF under ReFuelEU Aviation Regulation:
- Aviation biofuels – Liquid fuels derived from eligible biomass sources (e.g., used cooking oil, animal manure, palm oil mill effluent), excluding feedstocks that compete with food or feed production.
- Synthetic aviation fuels (e-fuels) – Produced by combining green hydrogen with captured CO₂, provided they meet the EU’s Renewable Fuels of Non-Biological Origin (RFNBO) criteria.
- Recycled carbon aviation fuels – Derived from waste streams of non-renewable origin, such as synthetic crude oil from municipal solid waste, and compliant with Renewable Energy Directive III (RED III) standards.
Regulatory Mandates to Stimulate SAF Demand
Given SAF’s current price premium over conventional jet fuel, legislative measures are necessary to ensure market adoption. The ReFuelEU Aviation Regulation imposes escalating blending mandates on fuel suppliers and aircraft operators:
- Fuel suppliers must deliver aviation fuel with a minimum SAF content of 2% by 2025, rising to 6% by 2030 and reaching 70% by 2050.
- Within SAF, a sub-mandate for RFNBO content starts at 1.2% in 2030, increasing to 28% by 2050.
- Aircraft operators must uplift at least 90% of their annual fuel requirements from EU airports, preventing SAF avoidance through fuel tankering at non-EU locations.
- Airport managing bodies are required to ensure infrastructure facilitates access to SAF blends.
A regulatory review assessing the effectiveness of these mandates is scheduled for January 1, 2027.
Key Challenges to Project Financing for SAF Initiatives
1. Offtake Agreements and Market Uncertainty
Despite recovering post-pandemic, many airlines are financially constrained and unable to commit to long-term SAF offtake agreements at prevailing prices. Most airline fuel procurement strategies do not hedge beyond 2–3 years, while project finance lenders typically require 10–25 year fixed-price offtake agreements to underpin long-term debt.
To mitigate the financing gap, one proposed solution is the introduction of creditworthy aggregators—intermediaries that can commit to long-term SAF purchases and resell to end-users on shorter terms. Commodities trading houses may find this model attractive given potential upside as compliance mandates increase SAF demand.
Larger SAF facilities may also struggle to secure a single offtaker capable of underwriting total output. In these cases, developers may pursue multi-offtake models, distributing credit risk across several buyers and potentially retaining a portion of production for sale on the merchant market, albeit with the added complexity and risk this entails.
2. SAF Pricing and Valuation Volatility
The absence of a reliable long-term pricing index for SAF makes valuation challenging. Prices are influenced by volatile variables such as feedstock costs, regulatory developments, and carbon pricing mechanisms.
Lenders typically prefer offtake contracts tied to predictable pricing models, often using proxies like fossil jet fuel benchmarks. In the absence of long-term price certainty, developers will be required to provide robust sensitivity analyses and risk mitigation strategies.
3. Feedstock Supply and Security
For bio-SAF, feedstock availability is a critical issue. Competing mandates across EU sectors increase pressure on supply and drive up costs. Lenders will expect long-term, credible feedstock supply agreements that meet strict EU sustainability criteria.
For e-SAF, a reliable and eligible CO₂ supply is equally vital—particularly biogenic CO₂, which is considered more compliant under EU regulations. However, SAF projects dependent on external sources of CO₂ face project-on-project risk, especially if upstream facilities are under construction.
Detailed due diligence on feedstock sustainability, greenhouse gas modelling, and regulatory compliance under RED III will be a standard requirement for debt providers.
4. Technology Risk and Maturity
While the HEFA process (hydrotreated esters and fatty acids) is commercially proven and currently dominant, the EU intends to cap its use over time to promote diversification into other technologies such as Alcohol-to-Jet (ATJ) and e-fuels.
Emerging technologies such as Fischer-Tropsch synthesis for e-SAF production are technically proven at smaller scales but carry additional integration and scalability risks. Lenders will favour technologies with a flexible product slate, offering pivot options (e.g., synthetic diesel) should SAF markets fluctuate.
Robust technical due diligence and comprehensive construction contract structures, including technology wraps and performance guarantees, will be essential to secure financing.
5. Construction Strategy and Contracting
SAF projects often require the integration of multiple complex systems and technologies. Lenders will generally prefer a lump-sum turnkey (LSTK) EPC contract to reduce construction risk, although multi-contracting strategies with strong engineering, procurement, and construction management (EPCM) oversight may be acceptable for experienced sponsors seeking cost efficiencies.
6. Utility Infrastructure and Power Requirements
SAF production is typically energy-intensive, requiring constant power supply for equipment and processes. Projects relying on grid power must ensure that grid mix emissions are low enough to comply with EU GHG thresholds.
Sites located in regions with abundant renewable energy or grids with over 90% renewable penetration will be better positioned to meet sustainability criteria. Additionally, water availability is critical, particularly for non-HEFA production pathways.
7. Evolving Regulatory Landscape
The SAF regulatory environment remains complex and dynamic, with major reviews (e.g., ReFuelEU in 2027) expected to shape future compliance requirements. Change in law risks must be addressed in project contracts—ideally through cost pass-through mechanisms in offtake agreements, ensuring that additional compliance burdens are borne by end-users.
Lenders will also scrutinise how SAF projects align with EU taxonomy and broader ESG frameworks, assessing long-term resilience to potential regulatory shifts.
The Leaning:
The EU’s ReFuelEU Aviation Regulation and related sustainability directives have set the stage for transformative change in the aviation sector. While there is clear momentum and growing investor interest, project financing for SAF developments remains constrained by challenges related to market structure, regulatory complexity, feedstock security, and technology readiness.
Navigating these barriers requires creative structuring, robust risk allocation, and sustained policy support. As SAF mandates increase and the regulatory environment matures, early movers equipped with credible offtake strategies, proven technology, and resilient contracting structures will be best positioned to unlock capital and scale production to meet Europe’s decarbonisation goals.
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