As the decarbonization of transport becomes pressing, new investment opportunities are emerging. One is sustainable aviation fuel.
As the pressure to decarbonize intensifies, the transportation sector is rapidly innovating, ranging from electric and hydrogen-powered vehicles to the resurgence of sail technology on container ships. Private capital has been quick to follow suit, injecting over $360bn into clean technology deals in the last decade, with around $140bn directed toward automobiles, battery technology, and materials, according to Preqin data. The cleantech industry has also expanded, with investments in decarbonization initiatives well underway. One particular bottleneck in the decarbonization of transportation presents an investment opportunity: sustainable aviation fuel (SAF).
Decarbonizing aviation faces turbulence
Within the transportation sector, efforts to decarbonize primarily revolve around enhancing efficiency and transitioning to cleaner energy sources to minimize emissions. While this has yielded advances in automobiles, rail systems, and shipping, successfully decarbonizing aviation presents a greater challenge.
Electric and hydrogen-powered aircraft are currently impractical due to aircraft density requirements. Additionally, while enhancing aircraft efficiency is vital for emission reduction, the industry's reliance on fossil fuels for jet fuel perpetuates environmental harm. So, decarbonizing aviation hinges on adopting SAF as the primary path toward achieving net-zero emissions.
Policy paves the way for SAF investment
To facilitate SAF investment, governments globally are putting forth legislation to catalyze the industry. The improved policy landscape around SAF as a result has opened opportunities for private capital as a result. In Europe, ReFuelEU is poised to increase both supply and demand for SAF while aligning the aviation industry with the EU’s targets. In Asia, Singapore has mandated that all outgoing flights use SAF by 2026 and Japanese airline companies are set to replace 10% of jet fuel with SAF by 2030. However, some of the most targeted policies facilitating investment in SAF are being rolled out in the US.
The US is the largest market for commercial aviation, and therefore the largest emitter. To address this, the Biden Administration set out the SAF Grand Challenge with aims of producing 3 billion gallons of SAF by 2030 and 35 billion gallons by 2050. While these are ambitious targets, the US has shown interest in investing in the energy transition by rolling out some significant policies. The Inflation Reduction Act (IRA) and Bipartisan Infrastructure Deal were passed in 2021 and 2022, earmarking $394bn and $550bn, respectively, for energy transition. The IRA outlined specific policies on SAF production, manufacturing, storage, and transportation infrastructure. In development are the Sustainable Aviation Fuel Act and the Farm Bill reauthorization, which could further support SAF adoption.
Such policies have fomented investment. Preqin's infrastructure deals data reveals a substantial surge in aggregate deal size for biomass and biofuel infrastructure in North America, exceeding $3bn in 2022 – a notable increase on previous years (Fig. 1). Although no new investment has been reported so far in 2024, this trajectory suggests investment will persist as long as policy support remains.
Fig. 1: Biomass/biofuel infrastructure aggregate deal size, 2013 – 2023
Source: Preqin Pro. Data as of March 2024
As the policy landscape aligns and aviation emissions targets become more concrete, the 2020s are emerging as the pivotal decade for investing in the SAF industry. Given SAF's novelty, investors have abundant opportunities to establish companies in this space and at various levels of investment.
SAF investment opportunities
SAF investment opportunities can be categorized into two main areas: inputs and technology. A diverse range of inputs can produce SAF, including agricultural feedstocks, energy crops, municipal solid waste, and algae, as well as fats and oils from animal or vegetable waste. These inputs undergo various conversion processes, such as gasification and microbial conversion, among others, to transform them into jet fuel. The resulting fuel is blended either at the production facility or onsite into its final consumable form.
Agriculture and waste management fuel investment
Investment in SAF inputs predominantly centers on agriculture and waste management. North America has emerged as the primary recipient of agricultural-focused capital, according to our data. While fundraising slowed in North America last year, 2024 has had a robust start, with over $500mn raised in under three months (Fig. 2).
Fig. 2: Unlisted agriculture/farmland funds aggregate capital raised, 2010 – March 2024
Source: Preqin Pro. Data as of March 2024
Meanwhile, waste management funds reached new highs in 2023, with over $145bn aggregate capital raised. North America and Europe have led the charge, with fundraising of $79bn and $54bn, respectively (Fig. 3).
Fig. 3: Waste management funds aggregate capital raised, 2010 – March 2024
Source: Preqin Pro. Data as of March 2024
With countries aiming for ambitious SAF production goals by 2030, investment in both agriculture and waste management is essential. S&P Commodity Insights estimates that SAF production in the US will reach 2.1 billion gallons by 2030, falling short of the 3 billion-gallon milestone. Private capital can bridge this gap by investing in a range of inputs. Given the projected supply gap and the critical role of biofuels, SAF inputs are likely to offer an attractive risk-return profile in the coming decades.
SAF technology
The second highest level of investment is in SAF technology. The most dominant form currently is the mature HEFA (Hydroprocessed Esters and Fatty Acids) pathway. It uses waste fats, oils, and greases to create jet fuel and is used in most plants currently producing SAF. While HEFA is set to capture 97% of 2024 global production,1 the majority of new SAF plants in development are slated to use other processes such as alcohol to jet fuel, hydrothermal liquefaction, biomass gasification, fischer-tropsch, and methanol to jet fuel.
As SAF is a decarbonization technology, investments here are a segment of the larger cleantech space. Investment in cleantech has increased significantly since 2019, and will continue to do so as addressing emissions grows in importance (Fig. 4).
Fig. 4: Aggregate cleantech deal size, 2013 – March 2024
Source: Preqin Pro. Data as of March 2024
Similar to other cleantech investments, SAF technology is new to commercial use and higher risk by nature. This risk profile is reflected in the most common investment types for cleantech deals, with our data suggesting venture capital offers the largest routes to investment (Fig. 5). PIPE investments are the second largest route to market, offering another path for investors looking for an efficient way to quickly deploy capital into cleantech companies.
Fig. 5: Largest cleantech deal types by aggregate deal size, 2015 – March 2024
Source: Preqin Pro. Data as of March 2024
The runway ahead
Investment in SAF companies has surged over the past year, riding the momentum of cleantech deals since 2020. Notable transactions include CleanJoule, a Utah-based SAF manufacturer securing $50mn in funding, and Velocys, a UK-based SAF technology company subject to a $40mn buyout. LanzaJet, a US SAF success story, received a $1.8mn grant from the UK Department of Transportation and an additional $30mn in venture funding from Southwest Airlines in the final quarter of 2023 alone, according to Preqin’s deals data. These investments underscore the aviation industry's commitment to SAF, with major players including commercial airline companies. With this commitment solidified, conditions seem right to prime demand for SAF and industry growth.
Despite positive signs for the SAF industry's early development, policy will remain pivotal. While regulated SAF targets globally will bolster demand, investors may gravitate toward countries like the US, with evolving systems of tax credits and subsidies. Ultimately, policy will shape the industry's future, favoring countries with attractive offerings to investors.
Investors seeking higher risk profiles will likely explore SAF technology companies, while those seeking consistent returns may invest in SAF inputs to address the significant supply gap. Despite the aviation sector's decarbonization challenges, significant investment opportunities exist, fueled by the sustained demand for SAF in the coming decades.
1 SPGCI Food, Agriculture, and Biofuels – Top Predictions for 2024
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