WORKING PAPER 2019-05

The cost of supporting alternative jet fuels in the European Union

Author: Nikita Pavlenko, Stephanie Searle, and Adam Christensen Date: March 2019 Keywords: Aviation, Biofuels, Low-Carbon Fuels, GHG Emissions

Summary oil–derived HEFA at approximately sector can thus dilute the effective- €200 per tonne of CO2 equivalents ness of fuels policies while increasing Alternative jet fuels (AJFs) are (CO e) reduced; however, waste fats their costs. among the few available in-sector 2 and oils are already widely used by approaches to reduce aviation sector Supplementary policies are necessary the road sector and therefore their emissions. Although the aviation to mitigate the risk and uncertainty supply may be limited. The next most sector has not played a prominent associated with AJFs produced effective options are the gasification role in fuels policy to date, policy- using advanced, capital-intensive of municipal solid waste and lignocel- makers are increasingly incorporat- conversion technologies. Although lulosic feedstocks, which have a cost ing aviation fuels into long-term the lowest-carbon fuels generally of approximately €400 to €500 per strategies as the road sector is have low feedstock costs, this benefit tonne of CO e reduced. We find that it electrified. This report reviews the 2 is offset by high upfront capital is important for policies to incentivize existing literature on the economics expenses that pose a much larger AJFs on the basis of GHG reduction of AJF production and assesses the risk to potential investors than tech- performance rather than volumes of costs of production for a selection of nologies with relatively low capital fuel supplied. AJF conversion technologies, incor- costs, such as HEFA fuels. Even porating life-cycle greenhouse gas Prioritizing aviation fuels within with valuable production incentives, (GHG) emissions accounting into the fuels policies can create perverse first-of-a-kind projects based on either gasification or alcohol-to-jet economic analysis of AJF production incentives. For example, the recast and identifying the AJF production processes may require direct financial European Union Renewable Energy pathways that offer the most cost- support, such as grants or contracts- Directive (RED II) applies a multiplier effective carbon reductions. for-difference to mitigate investors’ level of 1.2 for AJFs counting toward perception of risk and bring those the target for renewable energy We find that different AJF tech- projects to the market. nologies have widely varying in transport. Because most AJF levlized production costs and carbon pathways involve producing a mixed abatement potential. AJF production slate of road and aviation fuels, Introduction costs can vary substantially, ranging policies such as multipliers that credit Aviation is one of the fastest-growing from around €0.88 per liter for hydro- one sector at a higher rate than sources of greenhouse gas (GHG) processed fuels made from waste fats others can prove to be ineffective or emissions globally, averaging more and oils [i.e., hydroprocessed esters even counterproductive. We find that than 4% annual growth in emissions as and fatty acids (HEFA)] to €3.44 per a policy multiplier of around 1.3 would people worldwide travel more often. liter for the direct conversion of sugar most likely induce existing producers Electrification is commonly seen as to jet fuel; these prices are two to to operate less efficiently in order a promising strategy for decarbon- eight times the price of petroleum jet to produce additional AJF, while izing the road sector. There are more fuel. We estimate that the most cost- this level would not be sufficient to limited opportunities to electrify effective fuel for carbon abatement drive investment in new facilities. aircraft, however, so the aviation in the near term is used cooking Multipliers that prioritize the aviation sector will likely remain reliant on

Acknowledgments: This work was generously supported by the European Climate Foundation. Thanks to Mark Staples of MIT’s Lab for Aviation and the Environment and Andrew Murphy and Jori Silvonen, both of Transport & Environment, for reviews and helpful input.

© INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION, 2019 WWW.THEICCT.ORG THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

liquid fuels largely through 2050, not supported AJFs, excluding the We use capital expenditure (CAPEX) particularly for long-haul flights (Hall aviation sector from the 2020 targets estimates from the literature, in con- et al., 2018). Steeper GHG reductions for the Renewable Energy Directive junction with data on the operating would thus require carbon intensity (RED). However, the EU has recently costs and input and output prices reductions in the liquid fuel used in moved to include AJFs in its recast from specific production processes, aviation through switching to alterna- Renewable Energy Directive for the to better understand how different tive fuels. 2021–2030 period (RED II), including factors influence the final costs of a 1.2 multiplier for AJFs and marine production for a selection of AJF Total worldwide offtake agreements fuels relative to fuels used in the pathways. We then discuss how for alternative jet fuels (AJFs) have road and rail sectors. This directive, policy can be designed to address been slow, falling far short of 1% of including the support for AJFs, must the cost challenges specific to global aviation fuel consumption be implemented by member states AJF pathways with greater climate (U.S. Department of Agriculture, 2018; with national legislation. mitigation potential. We also U.S. Department of Energy, 2017). estimate the cost-effectiveness of The slow commercialization of AJF It is unlikely that technology improve- climate mitigation for various AJF production is primarily attributable to ments alone can result in cost parity pathways and assess the quantity two connected factors: high costs and for AJFs; however, policy support can of financial support necessary to lack of policy support. AJFs require help to bridge the gap between them overcome the economic barriers for separate, more complex processing and conventional fuels. The imple- the best-performing AJF pathways. relative to conventional, first-gener- mentation of RED II for 2030, along ation biofuels in order to be used as with the introduction of CORSIA, “drop-in” fuels that meet the same may together create a framework Literature Review operational specifications as conven- where individual member states can As a first step, we review applicable tional jet fuels. The additional cost develop their own tailored aviation literature on the primary alternative and complexity of these advanced fuels policies. As countries begin to fuel types and the analytical tools conversion processes can bring the update their own, national-level fuels that have been used to assess their overall price of production for AJFs policies, it is critical that they learn costs and cost-effectiveness. This to several times that of conventional from the mistakes made in the road study assesses five pathways for jet fuel, making it impossible for AJFs biofuels sector, where more than a AJF production already certified as to compete in the market without decade of policy support has greatly drop-in fuels by ASTM International, expanded the use of food-based strong policy support. meaning that they can be used for feedstocks yet fostered minimal commercial aviation if they meet A number of policies are beginning growth in very-low-carbon advanced the criteria specified in the ASTM to incentivize lower-carbon fuels biofuels. If the international aviation standard. ASTM D7566 specifies the in aviation. The International Civil sector intends to achieve its decar- necessary characteristics for each Aviation Organization (ICAO) bonization goals by 2050, policies of the five fuels and their maximum recently unveiled the Carbon should instead focus on supporting allowable blending rates with con- Offsetting and Reduction Scheme fuels with deep carbon savings. for International Aviation (CORSIA), ventional jet fuel; if they meet those which targets carbon-neutral growth Although our understanding of specifications, the final blended in the aviation sector beyond 2020 the costs of production of AJFs fuels can be used interchangeably through a variety of market-based has grown substantially in recent with conventional jet fuel (ASTM 1 measures for airlines, including years, the relationship between International, n.d.). We evaluate the carbon offsets (such as Clean the levelized production costs of following fuel conversion pathways: Development Mechanism credits), emerging AJF conversion pathways • Hydroprocessed esters and improved airplane efficiency, and and the environmental performance fatty acids (HEFA or HEFA-SPK): switching to lower-carbon fuels. AJFs of those pathways has thus far The HEFA pathway uses fatty are eligible within the United States’ played a minor role in informing feedstocks such a vegetable Renewable Fuel Standard (RFS), and policy design for aviation fuels. Here, oils or waste fats, which first California and the United Kingdom we explore the cost-effectiveness have recently moved to allow of fuel switching for a variety of 1 The specifications laid out in D7566 limit crediting of low-carbon jet fuel in the AJF conversion pathways from a drop-in fuels to certain blend rates, from Low Carbon Fuel Standard (LCFS) climate perspective and highlight 10% to 50%, depending on chemical and the Renewable Transport Fuel the policy conditions necessary composition. In this study, we evaluate the production costs and life-cycle emissions Obligation (RTFO), respectively. The for AJF deployment to generate only for the drop-in fuels rather than the European Union (EU) has historically meaningful emissions reductions. final blended fuels.

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undergo a deoxygenation a molecule with a carbon chain further uncertainty to the future reaction followed by the addition length closer to distillate hydro- CAPEX of advanced fuel production. of hydrogen in order to break carbons than traditional alcohol down the fatty compounds into fermentation products, followed The AJF production process closest hydrocarbons, which can then by upgrading into farnesane to full-scale commercial production is the HEFA pathway, in which fats be further refined into a mix (C15H32), which can be used as a of various liquid fuels. Can be drop-in fuel. Can be blended up and oils are converted into synthetic blended up to 50%.2 to 10%. hydrocarbons [Pavlenko & Kharina, 2018; (S&T)2 Consultants, 2018]. This • Synthesis gas Fischer-Tropsch This study’s assessment of production fuel conversion pathway is similar synthesized paraffinic kerosene costs for the above fuel pathways to that of renewable diesel [also (FT-SPK): This fuel conversion draws upon a wide body of existing called hydrotreated vegetable oil pathway includes the gasification techno-economic analyses for AJF (HVO) or hydrogenation-derived of feedstocks into synthesis gas production, the majority of which renewable diesel (HDRD)], with the (i.e., syn-gas), a mix of CO and use process modeling to estimate addition of further hydrocracking to H . The syn-gas is then combined 2 CAPEX values and material flows. produce hydrocarbons within the with a catalyst in a reactor to Two studies (Bann et al., 2017; de jet fuel range. The renewable diesel generate a mix of hydrocar- Jong, 2018) developed harmonized production process itself generally bons, which can then be refined assessments of the cost of production produces some jet fuel–range hydro- into various liquid fuels. Can be for a variety of fuel conversion carbons as a co-product (generally blended up to 50%. pathways. Other published techno- around 25% of the total fuel product economic analyses focus on specific • Power-to-liquids Fischer- yield). It may be possible to optimize production systems, estimating the Tropsch synthesized paraffinic a renewable diesel facility to produce cost of production for a specific fuel kerosene (PtL or FT-SPK): a greater share of HEFA, but this Similar to FT-SPK from bio-feed- conversion pathway or feedstock. would likely raise overall operating costs (Pearlson et al., 2013). We can stocks, synthesis gas can also be Because of scarce data from infer many of the production costs for generated from the electrolysis of commercial operations, most HEFA from existing renewable diesel water (using renewable electric- bottom-up CAPEX cost estimates projects, particularly where both ity) and combined with captured must be estimated from process types of fuel are produced as co- carbon to generate a suitable modeling and simulations rather than feedstock for FT synthesis. Can products. It is also possible to reduce from actual facility data [Albrecht be blended up to 50%. upfront costs through repurposing et al., 2017; (S&T)2 Consultants, existing facilities (i.e., brownfield • Alcohol-to-jet synthesized 2018]. Process modeling of a hypo- development), as demonstrated paraffinic kerosene (ATJ-SPK): thetical advanced fuel facility uses by AltAir, a HEFA producer that This fuel conversion pathway existing data on the chemistry and uses a redeveloped asphalt refinery uses fermentation to convert efficiency of conversion processes (Kharina & Pavlenko, 2017; Pearlson sugars, starches, or hydrolyzed at pilot scales to create a bottom-up et al., 2013). cellulose into an intermediate estimate of a system’s operating alcohol, either isobutanol or conditions (e.g., yield, temperature), The expected capital costs for ethanol, which is then further production stages, and equipment new renewable diesel and HEFA processed and upgraded into needs at larger scales. Reliance on production facilities are expected to a mix of hydrocarbons. Can be process modeling can lead to wide be in the range of several hundred blended up to 50%. uncertainty on the cost of production million euros [(S&T)2 Consultants, • Synthesized isoparaffins (SIP): for advanced pathways, particu- 2018]. For a facility using the Neste Also called direct sugars-to- larly capital-intensive pathways far process with an output of 1,000 hydrocarbons (DSHC), this fuel away from commercialization; these tonnes per day (approximately 450 conversion pathway converts pathways tend to have low levels million liters per year), de Jong sugary feedstocks through fer- of available reference data on their (2018) estimated a total cost of equipment and installation costs installation (inclusive of equipment mentation into farnesene (C15H24), (Albrecht et al., 2017). A poor under- purchase, planning, and installation)

2 HEFA+ or high–freeze point HEFA (HFP- standing of the shape of learning of between €207 and €670 million. HEFA) is currently undergoing testing for curves for these pathways, which Likewise, the EU Sub Group on ASTM certification. This variant of HEFA has a reflect the reduction of future costs Advanced Biofuels (Maniatis et al., higher freeze point than standard HEFA fuel and would only be allowed to be blended up as experience with the technology 2017) estimated that the capital costs to 10% (Pavlenko & Kharina, 2018). in question accumulates, may add for a facility producing 625 million

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liters per year would range from €250 fuel yield from a renewable diesel pioneer project with a capacity of 120 million to €750 million. Pearlson facility is the opportunity to produce million liters per year could cost more (2011) estimated that a renewable HEFA+, which is currently undergoing than €500 million to construct, but diesel/HEFA facility with a capacity testing for ASTM certification; this subsequent process improvements on of approximately 220 million liters variant would have physical properties the gasification stage could reduce per year would bear capital costs of closer to those of conventional overall capital costs by as much as approximately €100 million, with a renewable diesel but would be limited 30% for Nth-of-a-kind projects. range of possible values depending to only a 10% blend rate in jet fuel on the exact nameplate capacity (i.e., (Pavlenko & Kharina, 2018). FT synthesis can also be used to the maximum production capacity) of convert hydrogen produced via the project. Available actual cost data Whereas renewable diesel and HEFA renewable electricity–powered on existing renewable diesel facilities fuels are largely already produced hydrolysis into drop-in aviation is generally in sync with these assess- at commercial scales, the costs and fuels [i.e., power-to-liquids (PtL)], ments. Neste’s renewable diesel operating specifications of other fuel although this conversion pathway is conversion facility in Singapore, with conversion pathways that are much likely to have highly variable costs a capacity of nearly 1 billion liters per further from commercialization are associated with the cost of renewable year, cost approximately €600 million much more uncertain. The gasification electricity in the EU, particularly in to construct (€ 2018). Estimates and Fischer-Tropsch (gasification- the short term (Searle & Christensen, from the Shell Company of Australia FT) route of fuel production can be 2018). Techno-economic analysis of suggest that a hydroprocessing used to convert a range of low-cost PtL suggests that capital expendi- facility with an annual capacity of 450 agricultural residues, energy crops, tures and input electricity costs can to 1400 million liters would require and municipal solid waste (MSW) be substantial, with capital costs for a between €389 million and €839 into a slate of liquid fuels, including project with a capacity of around 120 million to construct (Qantas, 2013). renewable diesel, jet fuel, and million liters per year of €300 million Diamond Green Diesel recently spent gasoline. Relative to several other fuel to €700 million for PtL production approximately €165 million to expand conversion pathways, gasification- via FT synthesis—a range of €2.5 its U.S. production of renewable FT is particularly capital-intensive; to €7 per liter of annual capacity, diesel by more than 400 million liters although the technology is anticipated depending on configuration (Schmidt per year, noting a 50% cost reduction to improve over time, even Nth-of-a- et al., 2016). by using an existing brownfield site kind projects are anticipated to have Converting sugars, starches, and (Darling Ingredients, 2016). very high capital costs in the near term. Estimates for the capital expen- cellulosic feedstocks into jet fuel is Overall, estimates of capital spending diture on gasification vary widely; possible through several methods on renewable diesel/HEFA facilities according to the process character- collectively called “alcohol-to-jet” range from around €0.40 to ization developed by de Jong (2018), (ATJ). These processes generally €1.50 per liter of annual capacity, the potential total cost of investment produce either ethanol or isobutanol averaging around €0.60 per liter, for a project with a capacity of through fermentation as an interme- with larger facilities generally having approximately 220 million liters per diate molecule prior to dehydration lower per-liter capital costs due to year ranges between €339 million and and oligomerization into a synthetic economies of scale. De Jong (2018) €1,230 million—one of the greatest hydrocarbon. Whereas first-gener- estimated that the potential for variances among fuel conversion ation ethanol production from food future improvements in capital costs pathways in that analysis. Techno- feedstocks is already relatively com- from technological improvements economic analyses from several U.S. mercialized, with well-documented for renewable diesel/HEFA are likely national laboratories suggest that the costs, the additional expense of to be minimal. Operating costs for capital costs for integrated gasifica- dehydration and oligomerization is HEFA production are dominated by tion–fuel production facilities could less certain. Maniatis et al. (2017) feedstock acquisition, the largest range from €390 million to €610 estimated a range of €1.00 to single contributor to the overall cost of million for capacities between 90 and €1.40 per liter for the conversion of fuel production (Pearlson et al., 2013). 150 million liters per year, depending sugars to aviation fuels. The authors Maximizing jet fuel yields increases on configuration (Swanson et al., estimated that the cost of producing the operating expenses through 2010; Zhu et al., 2011). On average, cellulosic ethanol alone is €0.84 to the use of additional hydrogen for gasification-FT capital costs are €1.50 per liter, and that an added more extensive hydrocracking, while estimated to range from €4 to €6 per finishing step to produce drop-in jet reducing the overall yield of liquid liter of annual production capacity. fuels would likely increase the cost to fuel products (Pearlson et al., 2013). Interviews conducted by Peters et al. beyond €1.40/liter. Tao et al. (2017) Another option for increasing the jet (2015) suggest that a first-of-a-kind or estimated that the capital cost for

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a hydrocracking system to upgrade economics of SIP production from a impacts of policy support on costs corn ethanol would add €78 million variety of feedstocks using simulated of production. We also incorpo- to that of a corn ethanol facility with process modeling from SuperPro rate life-cycle assessment (LCA) a production capacity of 230 million Designer. In that analysis, the authors data for several representative fuel liters per year; the total installed cost evaluated the economics of a smaller pathways in order to compare the would exceed €350 million. Cellulosic facility with a nameplate capacity of normalized cost of carbon reduction ATJ facilities would have substantially 61 million liters per year, estimating for fuel switching relative to baseline higher capital costs as a result of the capital expenditures of approxi- petroleum jet fuel. We then identify additional pretreatment and cellulosic mately €250 million for the sugarcane the fuel pathways that offer the most conversion prior to fermentation. conversion process. The authors cost-effective routes to aviation used Aspen Plus simulations in con- decarbonization. Tao et al. (2017) estimated that a junction with scientific literature, corn stover conversion ATJ facility model validation, and vendor quotes DISCOUNTED CASH FLOW would cost approximately 1.5 times to estimate the cost of equipment RATE-OF-RETURN MODELING the CAPEX of a corn grain ATJ facility. purchase and installation. Of the €250 The DCFROR method we use to Similarly, Yao et al. (2017) estimated million CAPEX, the authors estimated estimate the cost of production that a switchgrass ATJ facility that nearly 90% of the total would for each AJF pathway is consistent producing 230 million liters per year be attributable to the finishing stage, with the prevailing methodology would cost more than €650 million— where the farnesene is hydrogenated for techno-economic assessments twice the cost of a comparable corn to form farnesane, with the remaining of next-generation fuel pathways. ethanol ATJ facility. The authors 10% of the costs coming from com- The DCFROR analysis estimates the assumed that the feedstocks would paratively simple processes for sugar present-day net value of a project be converted into ethanol as an inter- fermentation and separation. An by forecasting future cash flows and mediate molecule, prior to upgrading existing producer of SIP fuels, Amyris, into a hydrocarbon product slate found that fuel production provided applying a discount rate to them, (i.e., ethanol-to-jet). Using a mix of relatively little value compared to thereby accounting for the time value literature data and Aspen Plus simu- the cost of sugar, and pivoted to of money. The cost modeling for this lations, they estimated the capital producing biochemicals in lieu of fuels analysis is informed by a literature costs and their distribution across the (Bullis, 2012; Lane, 2018). review to identify the relevant fermentation, dehydration, and oligo- data inputs, using the most recent EU-specific data when available. All merization steps. Such a production Cost assessment scale—230 million liters per year of results are in 2018 euros. The DCFROR ethanol (around 140 million liters methodology analysis uses the following formula to diesel equivalent)—is on the upper This study uses a discounted cash estimate the present-day value of a end of projected cellulosic ethanol flow rate-of-return (DCFROR) given project’s future cash flows: facilities in the literature and is much model to assess the incentive cost CF1 CF2 CFn larger than that of any existing necessary to support the production DCF = + + ... + (1+r)1 (1+r)2 (1+r)n cellulosic ethanol facility. Overall, of a selection of advanced AJFs using Yao et al. found that the CAPEX for various feedstocks. The DCFROR Equation 1. Discounted cash flow cellulosic ATJ would be approximately model incorporates the capital costs, calculation. 60% higher than for conventional ATJ operating costs, and feedstock price where at a similar production scale (Tao et for each fuel, paired with technical al., 2017). data on each conversion pathway’s • CFX refers to the net cash flow operating parameters and product in year x, including fuel sales, It is also possible to directly convert yields. We then use the DCFROR employee salaries, facility depre- sugars into jet fuel without the model to estimate the minimum viable ciation, and maintenance intermediate step of producing jet fuel selling price (i.e., minimum • r is the discount rate for the value alcohol. This may facilitate the use viable price) to break even on an of future cash flows [here, we of cheaper feedstocks such as corn investment for each fuel conversion use a weighted average cost of grain and sugarcane in lieu of more pathway, after accounting for a 15% capital (WACC) of 7%] expensive vegetable oils. Because this rate of return. technology is relatively far from com- • n is the lifetime of the project mercialization for fuel production, the This study uses the calculated most extensive analysis available in the minimum viable prices for the We use the discounted cash flow literature is from Klein-Marcuschamer selection of fuel conversion pathways estimate to estimate the future net et al. (2013), which assessed the and feedstocks to evaluate the earnings from a project relative to the

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upfront investment in that project’s Table 1. Key parameters for DCFROR analysis. capital expenses (i.e., CAPEX). The Parameter Value Reference/background net present value of a given project is Estimated from the weighted average cost estimated using the following formula: Weighted of capital (WACC) from the NREL Annual average cost 7% T Technology Baseline Dataset (National DCFt of capital NPV = – C Renewable Energy Laboratory, n.d.). Σ (1+r)t 0 t=1 The typical project lifetime ranges from 20 to 30 Project years across the technical literature. A 20-year Equation 2. Net present value calculation. 20 years lifetime value was chosen to align with the harmonized where analysis developed by Bann et al. (2017). This value was selected as a middle-range • T is the lifetime of the project estimate in line with the harmonized techno- Construction 3 years economic assessment conducted by Bann et time • t is the time period al. (2017) and the HEFA-specific assessment • r is the discount rate (here, we developed by Pearlson (2011). use the desired rate of return for Straight-line depreciation reflects the lack of the project of 15%) a pattern to the way in which a project is run Depreciation over its lifetime. This default assumption is used Straight line • DCF is the discounted cash flow schedule throughout the techno-economic analyses cited of the project, equal to DCF in and is used by the harmonized analysis developed by de Jong (2018) and Bann et al. (2017). Equation 1 This assumption reflects the standard accounting • C is cash flow in year 0 (i.e., the practices for new biofuel facilities used in both of 0 Depreciation 10 years the harmonized techno-economic assessments CAPEX of the project) period developed by de Jong (2018) and the HEFA- For each project, we estimate specific analysis developed by Pearlson (2011). the minimum viable price for AJF 3 years; 25% of This is ICCT’s assumption based on documented capacity in year 1 delays in reaching full-scale production at necessary for the net present value Ramp-up of operation, existing commercial, second-generation biofuel time to equal zero in Equation 2 while 50% in year 2, facilities using lignocellulosic feedstocks the project generates an internal 75% in year 3 (Pavlenko, 2018). rate of return (IRR) of 15%. The key Inflation rate 1% 2013–2018 average (Eurostat, 2018b). parameters for the calculation are provided in Table 1, which contains for non-HEFA conversion pathways, of sizes of existing HEFA facilities, the values and assumptions used for are highly uncertain and could vary between the smaller, 150-million-liter the discounted cash flow calcula- by as much as 50% in either direction, AltAir facility and Neste’s larger, tion, as well as the background and particularly in the long term [(S&T)2 1-billion-liter biorefineries. citations for each parameter. Consultants, 2018]. Relative to the HEFA process, For fuel conversion pathways that HEFA CAPEX values are informed gasification-FT has a wider range of generate both diesel and jet fuel, we primarily by Pearlson (2011) and possible CAPEX values, largely due solve for a common minimum viable Pearlson et al. (2013), which estimate to uncertainty about the equipment price for both fuels. This assumption the cost for three different facility and installation costs for large-scale is examined in more detail in the sizes for soy oil hydroprocessing gasifiers. For this analysis, we use discussion below. facilities producing a range of hydro- a value developed from data from carbons. Here, we use the middle- investment analysis for advanced COSTS OF PRODUCTION range value of approximately €137 biofuel production conducted by We estimate the levelized cost of million for a project with a capacity Peters et al. (2015). On the basis of production for alternative fuels by of more than 230 million liters of this estimate, we use a standardized first assessing the upfront CAPEX liquid products per year (reflecting scaling factor to adjust the capacity for each fuel conversion pathway. an assumption of roughly €0.6 per of the facility to match the HEFA CAPEX values are drawn from the liter of production capacity). At and ATJ facilities at approximately literature, using representative values around €0.50 per liter of capacity, the 230 million liters per year; we thus from a selection of studies, as shown CAPEX value from these two studies estimate a CAPEX of approximately in Table 2. For each technology, falls within the range of values for €585 million. Pioneer gasification the CAPEX value used reflects the typical HEFA and renewable diesel facilities are expected to have a large total cost of installation, including facilities suggested by de Jong contingency in their capital expenses equipment purchase, installation, and (2018) and Maniatis et al. (2017). The due to uncertainty over the costs for planning. CAPEX values, particularly capacity is within the middle range some process stages, suggesting that

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as experience improves over time, Table 2. CAPEX values for fuel production by pathway. the CAPEX value could decrease. Value Assumed facility size The levelized costs for PtL are Parameter (€ 2018, million) (million liters per year) Reference Pearlson, 2011; estimated using data from Searle and HEFA 137 230 Pearlson et al., 2013 Christensen (2018), which estimates the cost curves for PtL deployment Gasification-FT 585 230 Peters et al., 2015 ATJ (sugars and across the EU from 2020 to 2050. 355 230 Tao et al., 2017 That study uses a separate DCFROR starches) Tao et al., 2017; Yao analysis with a similar set of assump- ATJ (cellulosic) 548 230 et al., 2017 tions to estimate the necessary incentive values to stimulate PtL Klein- SIP 250 61 Marcuschamer et production in each EU country. We al., 2013 extract the data for PtL middle distil- lates manufactured in France from Table 3. Process yields for fuel conversion. solar electricity in conjunction with

CO2 captured from industrial point Conversion process Yield (tonnes total fuel sources to estimate the minimum and feedstock production/tonne feedstock) Reference viable price for PtL AJF. GREET, 2018; Pearlson et al., HEFA 0.90 2013 The CAPEX values for the ATJ Gasification-FT 0.12 Peters et al., 2015 conversion process are drawn ATJ (corn-to-ethanol) 0.35 GREET, 2018 primarily from Tao et al. (2017) and ATJ (sugar-to-ethanol) 0.47 GREET, 2018 Yao et al. (2017), which estimate the costs of production for ATJ ATJ (cellulosic) 0.26 Peters et al., 2015 from both conventional, crop-based ATJ (ethanol-to-jet) 0.95 Tao et al., 2017 SIP (sugarcane-to- Klein-Marcuschamer et al., feedstocks (i..e, sugars and starches) 0.30 (theoretical maximum) and corn stover, a cellulosic agricul- farnesane) 2013; Lane, 2018 tural residue. The costs of general process inputs which both estimate the vegetable The CAPEX value for SIP production (i.e., electricity, feedstocks, natural oil and hydrogen inputs necessary from sugarcane is drawn from Klein- gas) and sales of the product slate to produce a mix of light ends (e.g., Marcuschamer et al. (2013), which are estimated using the prices shown propane), renewable diesel, and jet assesses the cost of production in the Appendix. Direct, nonvariable fuel. We also estimate the costs of for direct conversion of the sugars costs for each conversion pathway production for the HEFA production in molasses to jet fuel. The study are taken from each study along with process in which the yield of jet fuel estimates a CAPEX of €250 million the CAPEX values and are adjusted is maximized. The overall product for a facility producing 61 million for inflation and the production yield for various feedstocks is liters per year, including capital capacity for each project. relatively similar, although the option expenses for sugar fermentation, of maximizing jet fuel yields a higher separation, and hydrogenation. As The quantities of each material fraction of light ends relative to liquid data on this conversion pathway is flowing into or out of each fuel fuels. The relative product slate for relatively limited, we did not assume production system are informed the HEFA process is compared to the a scale-up factor for this estimate. by the literature for that specific other fuel conversion technologies in process. The direct, nonvariable Figure 1. Next, we estimate the operating expenses for each process are costs for each conversion technology taken directly from the literature, as Process assumptions for the gas- using process data and yields described below. Yield assumptions, ification-FT conversion process from the literature where possible. which have a substantial influence on are developed from Peters et al. Operating costs are broken out into the final cost of production for each (2015) in conjunction with more several components: process inputs pathway, are summarized in Table 3. granular estimates of variable (i.e., direct conversion cost); the costs developed by Swanson et al. product slate (i.e., sales of the fuels Process assumptions for renewable (2010). For project yield, we assume and co-products from the conversion diesel and HEFA production are a typical yield for an Nth-of-a-kind process); and direct, nonvariable drawn primarily from Pearlson facility, as informed by the interviews costs such as for staff and insurance. (2011) and Pearlson et al. (2013), conducted by Peters et al. (2015).

WORKING PAPER 2019-05 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION 7 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

We assume that maintenance, Jet Renewable Diesel Light ends insurance, and plant overhead are proportional to CAPEX, as estimated HEFA (Default) by Peters et al. (2015). The default product slate is assumed to consist primarily of renewable diesel (60% HEFA (Maximum jet) of total), although we also assess a scenario in which the jet fuel yield is Gasification-FT optimized to yield 50% of the total (Default) liquid product slate. The total yield and composition of the FT synthesis Gasification-FT process will vary according to the (Maximum jet) feedstock used, although here we assume a consistent set of product slates across feedstocks. ATJ

Process data on the SIP conversion system is taken from Klein- SIP Marcuschamer et al. (2013), including ongoing operating expenses for 0% 20% 40% 60% 80% 100% the facility costs, utilities, labor, Figure 1. Comparison of product slates across fuel conversion pathways. and consumables. We assume that the feedstock is sugarcane model (GREET, 2018), developed by biofuels could create increased molasses with 55% sugar content. Argonne National Laboratory, where demand for palm oil to substitute We assume that the fermentation possible. For the conversion of MSW for the displaced PFADs, such as in process for sugar-to-farnesene has to jet fuel through gasification-FT, animal feed (Malins, 2017). Indirect a conversion efficiency of 30%, close we use a comparable LCFS-certified emissions attributable to waste to the theoretical maximum, with a value for renewable diesel fuel diversion from landfills can also separation efficiency of 97% (Klein- developed using a California-specific be substantial because of avoided Marcuschamer et al., 2013; Lane, version of the GREET model (CARB, methane emissions from anaerobic 2013). We note that this yield is far 2015). The remaining values for fuel decomposition in poorly managed above the present-day observed conversion pathways not included landfills. The direct LCA emissions yields of 17% noted by the authors, in the GREET model are informed by for the MSW pathway include although below the 55% conversion the LCA literature, as noted in Table avoided methane emissions for efficiency assumption noted in that 4. The baseline carbon intensity of diversion from a California landfill, paper. We assume that the entire petroleum jet fuel is assumed to be calculated using a first-order decay product slate consists of hydropro- 87 gCO2e/MJ (GREET, 2018). model; however, these avoided cessed farnesane, which can be used emissions could be even larger This analysis attributes ILUC as a drop-in replacement for con- in regions with poorly managed emissions to crop-based ventional jet fuel with a blend rate landfills or for some types of organic feedstocks, based primarily on the of 10%. wastes, although they could also analysis developed by Valin et al. be much smaller in regions where (2015) for the use of crop-derived LIFE-CYCLE EMISSIONS the waste is diverted from incinera- fuels in the EU. Indirect emissions tors (U.S. Environmental Protection For this study, we include direct may also be attributable to by- Agency, 2018). life-cycle emissions attribut- products, waste, and residues if able to upstream fuel production, they are diverted from existing uses; Depending on the life-cycle transport, and use, as well as indirect these effects may be meaningful, boundaries of the analysis for emissions from indirect land-use particularly if feedstocks have PtL fuels, and the type of policy change (ILUC) where applicable. close economic relationships with support they qualify for, the indirect Direct life-cycle emissions attribut- vegetable oils. For example, palm emissions for that pathway could be able to feedstock production, fuel fatty acid distillate (PFAD) prices sizable. Without sustainability pro- conversion, transport, and use are closely track those of crude palm tections to ensure that renewable taken from the Greenhouse Gases, oil, as PFADs have similar physical electricity used for the PtL process Regulated Emissions, and Energy properties and can be used similarly. is truly additional, the electric- Use in Transportation (GREET) The diversion of PFAD to produce ity emissions attributable to PtL

8 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION WORKING PAPER 2019-05 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

Table 4. Key parameters for discounted cash flow rate-of-return analysis.

Direct ILUC Carbon emissions emissions intensity GHG savings

Fuel (gCO2e/MJ) (gCO2e/MJ) (gCO2e/MJ) (%) Reference 177.8 to Soy oil HEFA 27.9 to 34.9 150.0 N/A GREET, 2018; Valin et al., 2015 184.9 216.8 to Palm oil HEFA 30.8 to 36.5 231.0 N/A GREET, 2018; Valin et al., 2015 267.5 Palm fatty acid distillate (PFAD) 19.4 213.01 232.4 N/A Seber et al., 2014; Malins, 2017 HEFA Used cooking oil (UCO) HEFA 19.4 — 19.4 78% Seber et al., 2014 Municipal solid waste (MSW) FT-SPK 14.8 — 14.8 83% CARB, 2015 Agricultural residue FT-SPK 6.3 — 6.3 93% GREET, 2018 Energy crop FT-SPK 11.7 –12.0 –0.3 100% GREET, 2018; Valin et al., 2015 Schmidt et al., 2016; Searle & Power-to-liquids (solar) FT-SPK 1.0 12.52 13.5 84% Christensen, 2018 Corn grain alcohol-to-jet (ATJ-SPK) 65.0 14.0 79.0 11% GREET, 2018; Valin et al., 2015 Staples et al., 2014; Valin et al., Sugarcane alcohol-to-jet (ATJ-SPK) 48.13 17.0 65.1 27% 2015 Agricultural residue alcohol-to-jet 14.9 — 14.9 83% GREET, 2018 (ATJ-SPK) Energy crop alcohol-to-jet (ATJ-SPK) 20.3 — 20.3 77% GREET, 2018; Valin et al., 2015 Molasses synthesized isoparaffins de Jong et al., 2017; Valin et al., 47.0 — 47.0 47% (SIP) 2015

1 We assume an indirect emissions value of 213 gCO2e/MJ associated with PFAD use, due to PFADs’ close association with palm oil markets (Malins, 2017). 2 Indirect emissions attributable to PtL include the consequential emissions for new renewable electricity generation infrastructure attributable to the PtL project. would be similar to the marginal to vegetable oils. Generally, the pathways, relative to the wholesale additional electricity for the grid, gasification-FT pathway has low cost of petroleum-derived jet fuel which will include both fossil and direct emissions due to its use of by- indicated by the dashed black renewable sources. This analysis products and wastes with minimal line. The shading for each column assumes that the electricity for PtL upstream or indirect emissions, provides a breakdown of the contri- production comes from additional as well as the export of electricity butions of capital costs, operating renewable electricity generation attributable to the system. There is costs, and feedstock price to the and uses a value of 13 gCO2e/MJ. substantial variation within the ATJ levelized cost of the production This value attributes emissions for pathway, depending on feedstock, process. Across all of the AJF fuel both the PtL production process with crop-derived ATJ fuels having conversion pathways in the figure, and the upstream infrastructure higher direct emissions than ligno- the minimum viable levelized cost necessary for additional renewable cellulosic feedstock–derived fuels. exceeds the baseline fossil fuel electricity generation (Searle & price, indicating that all AJFs will Christensen, 2018). require policy support to compete Results with fossil jet fuel, although the level After factoring in ILUC emissions and COSTS OF PRODUCTION of necessary policy support can indirect emissions for AJFs, there is a vary substantially depending on the wide range of carbon intensities for The minimum viable price calculated feedstock and conversion process. various AJFs across the feedstocks in this study reflects the fuel price and conversion pathway combina- necessary for an investment in a Generally, we find that the HEFA tions, from near-zero for some of given fuel conversion technology pathway is the cheapest source the gasification-FT pathways to well to reach its targeted rate of return; of AJF on a per-liter basis, with above the fossil fuel baseline for palm in other words, the minimum viable a levelized cost of around €0.88 oil–derived HEFA fuel. Generally, price equals the levelized cost of to €1.09 per liter, depending on HEFA fuels are on the higher end production for that fuel technology. feedstock. Because of the relatively of the spectrum, largely as a result Figure 2 illustrates the levelized cost low CAPEX of the HEFA conversion of the ILUC emissions attributable of production across conversion process, most of its cost comes from

WORKING PAPER 2019-05 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION 9 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

€4.50 CAPEX Feedstock Other Baseline fossil jet price €4.00

€3.50

€3.00

€2.50

€2.00

€1.50

€1.00

Levelized cost of production (€/liter) €0.50

€0.00 MSW PFAD Soy oi l Palm oi l residues residues molasses electricity Corn grai n Renewable Sugar cane Sugar cane Agricultural Agricultural Energy crop s Energy crop s Used cooking oi l HEFA Gasification-FT Power-to- ATJ SIP liquids

Figure 2. Comparison of levelized costs of production for alternative jet fuel across fuel conversion pathways. the feedstocks, which are among the low facility overhead, feedstock feedstocks are approximately most expensive in this analysis. At costs, and operating expenses. On 40% more expensive to convert approximately €400 to €650 per a per-liter basis, CAPEX accounts into fuel. For corn and sugarcane, tonne, the feedstock alone accounts for approximately 81% of the cost the upgrading process represents for approximately half of the levelized of gasification-FT fuels made from around 50% of the minimum viable production costs for the HEFA fuels. MSW and approximately 60% of the price, whereas for lignocellulosic Yields for this pathway are also cost of gasification-FT fuels made ATJ conversion, it only accounts relatively high, with approximately from agricultural residues. for around 80% of the minimum 90% of the feedstock converted into viable price. A substantial portion the final product slate. Barring sub- The PtL process, which uses of the ATJ production cost for food stantial shifts in vegetable oil prices, relatively commercialized tech- crop–derived fuels is attributable to it is thus likely that the future price nologies for electrolysis and FT ongoing feedstock and energy costs, of these fuels is unlikely to decline synthesis, incurs high costs due to whereas the largest expense for lig- substantially, even with technologi- the price of renewable electric- nocellulosic ATJ pathways is attrib- cal improvements, because of the ity in the EU (Searle & Christensen, utable to the upfront CAPEX costs, expense of feedstock acquisition. 2018). In the example here, based which account for approximately on a solar-powered PtL project in 40% of the levelized cost. The gasification-FT conversion France, Searle and Christensen (2018) pathway is the next cheapest, par- estimated that renewable electricity The expense of SIP production is ticularly for MSW-derived fuels, would constitute roughly 70% of the largely driven by the economics of with a range of €1.34 to €1.87 per levelized costs. However, it is possible sugar conversion, in which large liter. The primary costs attributable that PtL fuel could be cheaper to amounts of a relatively expensive to the conversion process come produce outside of the EU in other feedstock are converted into from upfront capital expenses, with regions with abundant, low-cost farnesene at low yields. Even at a more uncertainty than the HEFA sources of renewable electricity, such relatively optimistic rate of 0.3 tonnes process because a wide range of as North Africa (Perner et al., 2018). of farnesene per tonne of sugar, at a CAPEX values and yields is possible. molasses price of €167/tonne and However, operating and input costs The cost results for ATJ pathways sugar content of approximately 55%, are low as a result of relatively illustrate that lignocellulosic more than €1,000 worth of molasses

10 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION WORKING PAPER 2019-05 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

is required to produce 1 tonne of analysis is informed by (S&T)2 The sensitivity analysis, illustrated jet fuel, which has a substantially Consultants (2018), which developed for a selection of feedstocks and lower value. In contrast, sugarcane a series of technical datasheets pathways, is shown in Figure 3. This ATJ (with ethanol as an intermediate containing an uncertainty range for figure shows the shift in levelized cost product) has yields of approximately several parameters for advanced for both optimistic and pessimistic 0.45 tonnes per tonne of sugar, fuel pathways for 2020 and 2050. shifts to the underlying assump- using much cheaper technology. For example, the ATJ pathway has tions (described on the y axis). The Even before factoring in CAPEX and an uncertainty range of ±20% for analysis shows that some conversion operating costs for the facility, the yield, so we estimated the levelized pathways are more sensitive to this SIP process can be cost-prohibitive. cost for both conditions, relative to study’s assumptions than others. Although Klein-Marcuschamer et al. our default assumptions of 0.25 to Notably, the UCO HEFA pathway’s (2013) estimated a minimum viable 0.47 tonnes of feedstock per tonne levelized cost is relatively inflexible price of approximately €1.75/liter, of ethanol. For the SIP pathway, we relative to assumptions, as yields that analysis used yields of 55% for used the cellulosic ethanol uncer- are anticipated to remain stable, the farnesene conversion process, tainty ranges for CAPEX from (S&T)2 and even a 50% CAPEX reduction causes only a minor shift in levelized which may be unrealistic and likely Consultants (2018), along with a cost, as the pathway costs primarily accounts for the difference in yield assumption of 17% that reflects come from feedstock acquisition. In minimum viable price between that the real-world farnesane conversion contrast, the levelized cost of gasifi- study and this analysis. rate noted by Klein-Marcuschamer cation-FT declines by approximately et al. (2013), as well as that study’s Apart from SIP, the levelized costs €0.70/liter in response to a 50% estimate of 55% efficiency. estimated here largely align with decline in CAPEX. Other CAPEX- previous findings and trends from Ramp-up times can have a substan- heavy pathways such as ATJ and SIP the literature. A stochastic analysis tial impact on the levelized cost of a also show a strong response to more conducted by Bann et al. (2017) given fuel, as the reduced production optimistic CAPEX assumptions. The estimated an average baseline value in the critical early stages of the largest variability in the sensitivity of €0.87/liter for the HEFA pathway, project reduces the cash flow for analysis occurs for the SIP pathway, as the high levelized cost for the €0.95/liter for gasification-FT that project in a period where the pathway is tied to the low baseline from MSW, and €1.38 to €2.08 for present value of cash flow is more yields for farnesene conversion various ATJ feedstocks. Likewise, a valuable. Disruptions or delays in the relative to the high cost of sugar. The harmonized analysis conducted by early stages of a project can have a sensitivity analysis doesn’t neces- de Jong (2018) estimated a levelized large impact on its viability, contrib- sarily change our conclusions on the cost of around €1/liter for used uting to investors’ perception of risk cost profiles of various technologies, cooking oil (UCO) HEFA, €1.80/ associated with next-generation fuel except for MSW gasification-FT, liter for gasification-FT of wheat technologies. This study’s default which may fall within the price range straw, and €2.50/liter for ATJ from assumption is of a 3-year ramp-up wheat straw, all on greenfield,N th- of HEFA fuels at the lowest range of period, with production increasing its possible CAPEX costs. of-a-kind facilities. Overall, much of from 25% in year 1 to 100% in year the variation between the analyses 4. For the sensitivity analysis, we can be attributed to differences examined the impact of ramp-up Policy Support for in assumptions in the DCFROR times on the various fuel pathways, AJF Production analysis, particularly feedstock price, testing a “slow” scenario where It is evident from the results of the tax rates, yield, and ramp-up times. production lags at 25% through cost assessment that even the years 1 and 2 and at 50% in year 3, cheapest AJFs are far more expensive SENSITIVITY ANALYSIS as well as a “fast” scenario where than conventional jet fuel, requiring To assess the impact of the assump- production ramps up to 100% in some form of policy support in order tions in the DCFROR analysis on this year 2. The “fast” scenario may to reach cost parity with conventional study’s estimated cost of production, align more with previous techno- fuels. In this section, we evaluate the we developed a sensitivity analysis. economic assessments, whereas the impact of several policy support We varied CAPEX, yield, and start-up “slow” scenario may better reflect mechanisms for AJFs, assessing the times and determined the impact real-world delays and bottlenecks per-liter policy incentive necessary on the levelized cost of production that have plagued the advanced to reach break-even costs as well for each pathway. For HEFA, gasifi- fuels industry (European Parliament, as the impact of some complemen- cation-FT, and ATJ, the sensitivity 2017; Voegele, 2017). tary policies on the levelized costs

WORKING PAPER 2019-05 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION 11 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

Decrease Increase Ramp-up time (Fast, Slow)

Yield (+1%, -1%) oil HEFA CAPEX (-50%, 0) Used cooking

Ramp-up time (Fast, Slow)

Yield (+10%, -10%) MSW

CAPEX (-50%, +50%) gasification-FT

Ramp-up time (Fast, Slow)

Yield (+20%, -20%) AT J

Corn grain CAPEX (-50%, 0, +50%)

Ramp-up time (Fast, Slow)

Yield (55%, 17%) Sugar cane

molasses SI P CAPEX (-50%, 0, +50%)

Petroleum jet

0123456 Levelized cost of production (€/liter)

Figure 3. Sensitivity of levelized cost of production to CAPEX, yield, and ramp-up time parameters in the DCFROR analysis. of fuels. To identify both the most government not to comply with the is intended to bring additional effective policy support mechanisms target) of €1.82/liter (£1.60). We find production of fuel online for a more and the best-performing fuels, we that the RTFO incentive would be challenging sector, a multiplier may use life-cycle GHG emission factors sufficient to support UCO HEFA and instead incentivize producers to to estimate the costs of carbon all three gasification-FT fuels, where shift their product slate to produce abatement for each fuel. these fuels are considered to receive a greater share of jet fuel, at the development fuel crediting (U.K. expense of overall liquid fuel yield. “OPT-IN” AND “MULTIPLIER” Department for Transport, 2017). Soy Given this trade-off, we evaluate PROVISIONS oil, palm oil, and PFADs would be ineligible for the development fuel whether the 1.2 multiplier is sufficient We estimate the necessary incentive credits, as they are not considered to incentivize a shifting in the amount as the difference between wastes or residues within the RTFO, product slate by solving for the NPV our calculated levelized cost of each whereas the remaining conversion of a representative HEFA system pathway and the wholesale cost pathways would remain more and gasification-FT system when of petroleum jet fuel. The policy expensive than the buyout price. the jet fuel yield is maximized. For support necessary for each pathway both fuel conversion systems, the ranges from €0.49/liter (UCO HEFA) RED II provides a small incentive for NPV of the project declines by about to €3.40/liter (molasses SIP). We aviation fuels from non-food sources 6 to 7% when jet fuel production is compare this to the incentive level through the implementation of a maximized, requiring higher levelized for these pathways in the U.K. RTFO. 1.2 multiplier for aviation fuels from costs for both renewable diesel and This program includes a subtarget non-food sources to meet transport- jet fuel in order for the project to for “development fuels” that must sector targets (European Council, stay solvent. Keeping the levelized be waste-based and drop-in for 2018). In practice, this means that cost of renewable diesel constant, aviation, marine, or road use. There member states should incentivize we find that the break-even point for is a buyout price for the develop- non–food-based AJF more than the multiplier (i.e., the level of the ment fuels target (i.e., a price that similar fuels in the road sector by a multiplier at which a producer would obligated parties can pay the factor of 1.2. Although this measure choose to shift the product slate in

12 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION WORKING PAPER 2019-05 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

favor of increased AJF projection) €80.00 occurs between 1.2 and 1.3 for both HEFA and gasification-FT conversion €60.00 processes. For a multiplier of 1.3 and above, we find that there is a net €40.00 benefit to producers for optimizing their process to maximize jet production. Figure 4 illustrates €20.00 this effect, showing the changes to the NPV of a UCO HEFA project €0.00 NPV (€, million) optimized to maximize its jet fuel output; at a multiplier of 1, the project -€20.00 has an NPV of –€20 million relative to a configuration that maximizes -€40.00 total liquid outputs. At a multiplier 1 1.1 1.2 1.25 1.4 1.5 1.6 1.7 1.8 1.9 2 of 1.5, the project may become sub- Aviation fuel multiplier stantially more valuable than for renewable diesel production. At a Figure 4. Comparison of net present value of a hypothetical 230-million-liter UCO multiplier level of 1.2, the multiplier HEFA project optimized for jet production. effect would have minimal impact: the product slates for some fuel incentives, the necessary levelized The value of jet fuel already produced conversion technologies instead cost for the diesel portion of the as part of the product slate would allow producers to shuffle existing middle distillate yield is around increase, but not enough to modify advanced fuel production away from €1.60/liter, but after the jet fraction the process to produce more jet fuel. the road sector, greatly diluting the becomes eligible, the cost of both In practice, a multiplier effect for effect of multipliers on net transport decreases by almost 20%. Ensuring AJFs may have unintended conse- carbon reductions. Furthermore, a that the full liquid fuel product quences at higher levels, because it 1.3 multiplier would be far more likely slate from advanced biorefineries is may provide sufficient incentive to to cause existing producers of HEFA eligible for incentives improves the fuel producers to shift their product fuels to shift their product slates cost proposition for emerging tech- slate to maximize their jet fuel toward AJF, reducing their existing nologies and improves their viability. production while decreasing their total liquid fuel production without overall production of liquid fuels. necessarily improving the viability of CARBON PRICING This could result in policies that separate, more expensive technolo- Aviation fuel policies that provide spend more money on lower overall gies such as gasification-FT and ATJ. incentives on the basis of volumes of fuel production within the transport fuel supplied to the aviation sector sector, thereby increasing the A simpler approach that allows AJF tend to support the cheapest, most effective cost of carbon reductions. to qualify for existing road sector cost-effective AJFs, but the volume For example, in the UCO HEFA policies with the same per-liter level of fuel deployed isn’t necessarily example in Figure 4, a 1.3 multiplier of policy support as for alternative an indicator of carbon reductions would prompt the producer to road fuel may be a more sensible from the policy. In contrast, policies maximize jet fuel output; this opti- near-term policy change. Opt-in mization would reduce the net yield policies can provide additional policy that put a price on carbon, such as from 1 tonne of UCO from around support for advanced road sector California’s LCFS and the European 1,070 liters of middle distillates to producers that produce AJF as a Emissions Trading Scheme (ETS), only 960 liters, but at a higher co-product (such as existing HEFA directly incentivize carbon reductions average incentive price per liter. For and gasification-FT users) as well as by putting a price on GHG emissions, a given tonne of UCO conversion, new, dedicated AJF producers. The often in conjunction with sectoral a 1.3 multiplier effect increases the impact of opt-in policies on a project GHG targets. Obligated parties then net incentive support by around 7%, producing both AJF and renewable reduce emissions using whichever driving a producer to produce 10% diesel could be substantial. In Figure mix of technologies and behaviors less fuel. Although multiplier effects 5, we illustrate the impact of opt-in costs less than the GHG price, such as may provide greater policy support policy on a hypothetical MSW gas- through the use of low-carbon fuels. for more technically demanding and ification-FT project that produces ICAO’s CORSIA policy functions risky fuel conversion technologies jet fuel as 25% of its yield. In a case similarly to a carbon pricing scheme, for AJF production in principle, where only road fuels can qualify for as it establishes targets for obligated

WORKING PAPER 2019-05 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION 13 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

parties’ emissions and allows them to €1.80 meet those targets using a selection Diesel Jet of methods, including carbon offsets €1.60 and AJFs. €1.40 In order to identify the necessary carbon price to spur AJF deployment, €1.20 we estimate the carbon abatement cost associated with the various €1.00 AJF technologies described in this paper. Figure 6 illustrates the cost of €0.80 carbon reductions for those AJFs, calculated by taking the difference €0.60 between the levelized cost for that Levelized cost (€/liter) fuel and baseline fossil kerosene and €0.40 dividing the carbon reductions for a liter of that fuel. Indirect emissions €0.20 can substantially increase the cost of carbon abatement (or eliminate €0.00 Road-only Opt-in carbon abatement potential entirely) for AJF produced from food and Figure 5. Comparison of levelized cost for an MSW gasification-FT project with policy feed feedstocks and for wastes and support for the road fuel fraction only versus with opt-in policy support for AJF as well residues diverted from existing uses. as road fuel. Soy oil, palm oil, and PFAD AJF are not shown in this graph because they do substantially. For example, corn grain sector, and it is difficult to collect not offer net GHG reductions relative ATJ has direct conversion emissions additional UCO to fuel the aviation to the fossil baseline; any added cost alone of 65 gCO2e/MJ, approximately sector (Greenea, 2016). In practice, to support these pathways will not 75% of those from conventional heavy incentives for UCO-derived achieve carbon reductions at all. The petroleum jet fuel. AJFs would likely shift consump- range in costs of carbon reductions tion from the road sector to aviation for the remaining pathways varies After factoring in the GHG reduction with minimal net climate benefits potential for various fuels into a (Pavlenko & Kharina, 2018). substantially, from €217/tonne CO2e for UCO HEFA to more than €4,000/ cost analysis, it is evident that either sustainability safeguards (e.g., a Incorporating carbon pricing into tonne CO2e for corn grain ATJ. For comparison, even the most rigorous minimum GHG reduction threshold the value of aviation fuel incentives carbon offset credits are available for for policy support) or carbon pricing could help to directly incentivize the is necessary to ensure that only the best-performing AJFs proportionally less than €5/tonne CO2e (Hamrick & Gallant, 2017). best-performing feedstocks are to their carbon reductions, thereby supported by fuels policies. To avoid ensuring that poor-performing AJFs Generally, food-based fuels tend unintended consequences, eligibil- with a low levelized cost don’t use up to have higher costs of carbon ity must be determined through the bulk of policy support. Although abatement than those produced from LCA accounting of both direct and ICAO’s CORSIA policy incorporates by-products, wastes, and residues. indirect emissions attributable to fuel some elements of a carbon price, The pathways with the best climate production. RED II includes a cap on it puts AJFs at a disadvantage by performance are UCO HEFA, MSW food-based feedstocks used to meet treating their emissions reductions as gasification-FT, and all four fuels the policy target through 2030, equivalent to carbon offsets. Without made from energy crops and agri- along with a more stringent cap on strong, national-level incentives, it is cultural residues. Only UCO HEFA fuels with high-ILUC risk (European unlikely that airlines would opt for fuel and MSW gasification-FT have costs Council, 2018). This policy, however, switching in lieu of carbon offsets, of carbon abatement below €500/ leaves open the opportunity for the which are often at least an order tonne CO2e. Notably, although the ATJ use of vegetable oil–derived HEFA of magnitude cheaper. The price of pathways for corn and sugarcane are fuels, particularly during the initial GHG reductions from fuel switching, competitive with gasification-FT on years of RED II. Although UCO HEFA even for the most effective fuels, is a levelized cost basis, the high direct is the cheapest of the fuels assessed, substantially higher than the cost of conversion emissions for those fuels it is already largely being used for carbon offsets, which can be available raise their cost of carbon abatement biofuel production for the road in large volumes at less than €5/

14 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION WORKING PAPER 2019-05 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

€6,000

€5,000 e) 2

€4,000

€3,000

€2,000

Cost of carbon abatement (€/tonne CO €1,000

€0 Used MSW Energy Agricultural Renewable Agricultural Energy Sugar Corn Sugar cooking crops residues electricity residues crops cane grain cane oil molasses HEFA Gasification-FT Power-to- ATJ SIP liquids

Figure 6. Comparison of costs of GHG mitigation for fuel switching across AJF fuel conversion pathways.

tonne CO2e. A more effective policy al., in press; Pavlenko et al., 2016). The technologies at varying levels of grant would pair a high carbon price for perception of risk can strongly deter funding, relative to the baseline cost transportation-sector emissions with investors. For the purposes of getting of petroleum jet fuel. The blue bars in full, life-cycle accounting for AJFs. a loan or equity investment for an the figure show the shift in levelized This approach would provide a more advanced biorefinery, even strong cost from each fuel pathway’s initial cost-effective method of supporting policy support can be discounted price with the benefit of a €10 million, the AJF pathways, steering obligated heavily by investors who are uncertain €50 million, and €100 million grant. parties toward the fuels that offer whether this support will exist for For HEFA, gasification-FT, and ATJ, the steepest GHG reductions more the duration of the project’s lifetime, the grants shift the levelized cost by effectively than a mandate or a flat, which can range from 15 to 25 years. €0.02 to €0.30 per liter, depending per-liter incentive. Consequently, the nominal value of a on grant size. The SIP pathway policy incentive can be substantially shows substantial sensitivity to COMPLEMENTARY SUPPORT reduced by an investor assessing the grant funding, as the CAPEX of the MECHANISMS viability of a project proposal. project is particularly high relative to the volume of fuel production. The Many of the barriers to commer- Loan guarantees or grants can make closest an AJF pathway gets to cost cializing the best-performing AJF a substantial difference for the parity is with a €100 million grant for pathways are the same as those faced viability of advanced fuel projects, the HEFA pathway, and even in this by fuel conversion technologies in particularly capital-intensive efforts. scenario there remains a meaningful the road sector; in some cases, the Loan guarantees reduce the costs gap between the levelized cost technologies are identical. Although associated with taking on debt for of HEFA and the baseline cost of most AJF pathways face technical a project, decreasing the levelized petroleum jet fuel. barriers, particularly for pretreat- cost, whereas grants directly reduce ment, the largest obstacles to com- the CAPEX associated with a project. Although grants alone cannot support mercialization come from political Figure 7 illustrates the decrease the wide-scale deployment of AJFs, and economic uncertainty (Baldino et in levelized cost for different they can be a valuable supplementary

WORKING PAPER 2019-05 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION 15 THE COST OF SUPPORTING ALTERNATIVE JET FUELS IN THE EUROPEAN UNION

€10 million Decrease

€50 million oil HEFA

Used cooking €100 million

€10 million

€50 million MSW

€100 million gasification-FT

€10 million

€50 million

€100 million Corn grain AT J

€10 million

€50 million Sugar cane

molasses SIP €100 million

Petroleum jet

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.504.00 4.50

Levelized cost of production (€/liter)

Figure 7. Impact of grant funding on levelized cost of selected AJF pathways. method of policy support to mitigate conversion technologies at their market values of fuels or credit values risk and assist pioneer and first-of-a- earliest stages of deployment. for other incentives fluctuate, there kind facilities in reaching the market. will be a steady stream of income for a Another policy that more directly Beyond the direct effect on levelized given project. In a sense, a CfD acts as mitigates risk for emerging AJF cost illustrated in Figure 7, grants an insurance policy against political or pathways is a contract-for-difference and loan guarantees may also have a economic downside risk. The primary (CfD) program, which is a contract valuable indirect benefit to the viability benefit of this policy would be to between a prospective fuel producer of advanced conversion pathways. In mitigate the effect of “discounting” by and a government agency. This policy cases where a pathway is relatively investors and increase the perceived can act as a strong complement to cost-effective in terms of carbon value of incentives for potential new other AJF incentives. Participants bid abatement but has a high upfront fuel projects. The United Kingdom has in an auction for a minimum price floor, CAPEX, such as MSW gasification-FT, already implemented this policy as and then the government guarantees the uncertainty and risk associated a primary financing mechanism for that producers will be able to sell their renewable electricity, while California with that project may dissuade fuel for that minimum price floor. A CfD is developing a pilot financial investors. In contrast, a technology program ensures that whenever the mechanism based on the CfD concept such as HEFA conversion, where the market value of a fuel (i.e., wholesale to act as a complementary policy for bulk of the cost is driven by feedstock value plus other incentives) falls dairy biogas production (CARB, 2018; acquisition, may be perceived as below that price floor, the government Pavlenko et al., 2016). less risky by investors despite more will “top up” that producer up to limited long-term carbon abatement the value of the price floor for the In this analysis, the projects that could potential. Grant funding, at least for duration of the contract, which can benefit the most from CfDs are tech- pioneer and first-of-a-kind facilities, be for extended time periods (e.g., nologies such as gasification-FT and may be necessary to support other 10 years) to improve policy certainty. ATJ, which have high upfront capital types of ongoing policy support A CfD provides cost certainty for a expenses and uncertain ramp-up in order to assist capital-intensive fuel producer, ensuring that even as times. Relative to technologies such

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as HEFA that are closer to com- other AJF pathways. However, HEFA on a given project while potentially mercialization, they are much more production costs are unlikely to decreasing the volume of transport reliant on external policy support and decline further in the future, because fuels produced. For example, a 1.3 economic stability. Even with high they are dominated by the high cost multiplier could incentivize HEFA production incentives for low-carbon of feedstock for vegetable and waste producers to maximize their jet fuel AJFs from wastes and residues, the oils. Moreover, the feedstocks used output, increasing production costs high upfront costs and an uncertain for HEFA production either have by 7% but supporting the production revenue stream from a potential substantial indirect emissions, in the of 10% less fuel. Opt-in policies that gasification project may dissuade case of vegetable oils, or are already incentivize AJFs equally with road potential investors. In cases like these, largely being used for fuel production, fuels can improve the viability of a CfD could substantially alleviate the as in the case of UCO. In terms of advanced fuel projects that produce a downside risk for potential investors investment, HEFA fuels may be a dead slate of various fuels by ensuring that and allow those projects to begin end; supporting their production in all of their products receive crediting, construction. CfDs could be a more the near term will do little to facilitate without distorting their product slate. cost-effective method of support than a transition to better-performing, capital grants, as they would only pay lignocellulosic feedstock–derived Although direct incentives are producers per unit of fuel produced, fuels in the longer term. Locking in necessary for advanced fuel tech- ensuring that government spending policy support for HEFA fuels, which nologies to reach cost parity, comple- would only go toward fuel production. are already commercially viable, is an mentary policies are also necessary expensive and ineffective mode of to mitigate risk and assist fledgling aviation decarbonization. technologies. AJF pathways such as Conclusion gasification-FT and ATJ from MSW This analysis evaluates the cost Beyond HEFA fuels made from and agricultural residues offer some of alternative jet fuel (AJF) production UCO, which are severely availability- of the most cost-effective methods of across a variety of fuel conversion constrained, we find that the most carbon reductions for fuel switching pathways and feedstocks, estimating cost-effective sources of carbon but suffer from high upfront capital the cost of carbon abatement reductions in this analysis come from costs that can discourage investment. generated through the use of a the fuels produced via gasification For second-generation fuel conversion selection of AJFs. The results of this using low-carbon feedstocks, such technologies with high upfront costs, cost assessment align broadly with as MSW, energy crops, and agricul- this analysis suggests that direct previous techno-economic assess- tural residues. The levelized costs of capital grants can more meaningfully ments for AJFs, with levelized costs these fuels range from €1.34 to €1.87 reduce their levelized costs than a estimated in a range from €0.88 to per liter, and their cost of carbon per-liter subsidy. Although this type €3.44 per liter—from two to eight reductions ranges from €400 to of policy support may be prohibitive times the baseline price of petroleum €500 per tonne of carbon. Relative for the industry as a whole, incentives jet fuel. Incorporating life-cycle carbon to the carbon costs of fuel switching that mitigate investment risk, such intensities into the analysis illustrates from other pathways, which either as grant funding or CfD, could help that some conversion pathways offer have negligible carbon savings or emerging technologies to scale up much more cost-effective routes even higher levelized costs, these production and transition beyond the to aviation decarbonization than pathways provide the most cost- pioneer plant phase. others. It is thus important that effective carbon reductions among policies incorporate GHG accounting those assessed here. We recommend a sector-agnostic to ensure that policies steer incentives approach of supporting advanced toward the fuels that offer the greatest Prioritizing aviation fuels at the fuels with the most cost-effective carbon reductions. expense of other sectors can increase GHG reductions, rather than prioritiz- the costs of fuels policies at the ing the deployment of AJFs with the This study’s cost analysis suggests expense of overall carbon reduction lowest production costs. Although that the cheapest sources of AJFs goals. Multiplier crediting that treats there remains substantial uncertainty are not likely to provide a pathway AJFs as more valuable than fuels for on the costs of production for AJFs, for long-term aviation decarboniza- the road sector can often be ineffec- there is already ample evidence of tion. The cheapest set of fuels in tive or even counterproductive. We the failure of existing policies in the the analysis are HEFA fuels made find that the 1.2 multiplier for AJF in road sector to support advanced by hydroprocessing vegetable oils the EU’s recast Renewable Energy fuels. By addressing the mistakes of or waste fats; this is the closest Directive (RED II) is too small to drive the past decade of road sector fuels pathway to commercialization and any major changes in AJF production policy, policymakers can support the by far the most common. These on its own. However, at higher technologies and feedstock supply fuels cost, on average, €1/liter to multiplier levels, fuel policies run the chains necessary to facilitate longer- produce—substantially less than risk of increasing overall spending term aviation decarbonization.

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Appendix: Process Input and Output Prices to Develop Operating Costs

Value Parameter (€ 2018) Reference Diesel price (per liter) 0.43 12-month average (U.S. Energy Information Administration, 2018) Jet fuel price (per liter) 0.39 12-month average (U.S. Energy Information Administration, 2018) Gasoline price (per liter) 0.42 12-month average (U.S. Energy Information Administration, 2018) Naphtha price (per liter) 0.38 12-month average (U.S. Energy Information Administration, 2018) Proportional to natural gas price; estimated using equation from U.S. Hydrogen price (per kg) 1.01 Department of Energy, 2017 Electricity price (per kWh) 0.086 Electricity prices for non-household consumers (Eurostat, 2018a) Natural gas price (per MJ) 0.01 Natural gas, all taxes and levies included (Eurostat, 2018c) Commodity price, 5-year average; https://ycharts.com/indicators/ Soybean oil price (per tonne) 646.9 soybean_oil_price Palm oil price (per tonne) 551.5 Commodity price, 5-year average; www.palmoilanalytics.com/price/5 Palm fatty acid distillate price (per tonne) 505.4 Commodity price, 5-year average; www.palmoilanalytics.com/price/2 U.S. Department of Agriculture, USDA MAS; www.ams.usda.gov/ Used cooking oil price (per tonne) 421.7 mnreports/nw_ls442.txt Energy crop price (per tonne) 77.4 Ruiz et al. (2015) Agricultural residue price (per tonne) 64.8 Ruiz et al. (2015) Commodity price, 5-year average, 2013-2018. Trading Economics; Corn grain price (per tonne) 121.9 https://tradingeconomics.com/commodity/corn Commodity price, 5-year average, 2013-2018. Index Mundi. https:// Sugar price (per tonne) 290.1 www.indexmundi.com/commodities/?commodity=sugar

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