Renewed conflict in the Strait of Hormuz is once again driving up fossil fuel prices. For airlines already reeling from the fuel price surge since the Iran War began in late February, the lesson is clear: volatility is the new normal. Conventional jet fuel skyrocketed from $2.50/gallon in mid-February to a peak of nearly $5/gallon in late April in the US, with international markets experiencing even higher spikes. This makes sense, as about 20% of global oil and gas supplies normally flows through the Strait of Hormuz, and that was largely taken off the market.
The sudden impacts of this supply shock prompted widespread calls to diversify jet fuel sources, including through sustainable aviation fuel (SAF), a more expensive but lower-carbon version of jet fuel made from non-fossil fuel pathways. Conventional jet fuel prices declined to $3.10/gallon in late June amid a tenuous US-Iran ceasefire, but the latest fighting has driven them close to $4 as of late July.
What doesn’t make sense is that SAF prices have been rising almost identically to conventional jet fuel, despite its production inputs being entirely unrelated to the Strait of Hormuz. In theory, SAF can be produced anywhere and from a variety of feedstocks, boosting supply security. As conventional jet fuel prices surge, the premiums for SAF should decrease, making it more attractive.
That hasn’t happened, though, because of the current, less-than-ideal nature of the SAF market. Over 95% of SAF now being produced uses the HEFA (hydro-processed esters and fatty acids) approach, whose main feedstocks are used cooking oil, animal fats, and soybean and other food-based crop oils. Traders artificially tie these commodities to futures pricing for soybean oil and home heating oil, which fluctuate with petroleum prices. These are ill-suited proxies for a low carbon fuel meant to replace jet fuel.
Historically, airlines purchasing SAF have accepted such contractual arrangements because they make the SAF premiums appear fixed and thus more predictable. These contracts are de-risked from significant volatility impacting SAF producers, but airlines generally don’t see SAF premiums decrease, even as conventional jet fuel prices surge yet again.
Producing and contracting SAF against existing commodities means that SAF rarely is more affordable relative to the fossil baseline, so there’s little incentive for airlines to scale up their SAF commitments. And the current HEFA SAF market price is always short term due to the way the feedstocks can be purchased. This is a major problem for SAF developers, who need to have reliable SAF offtakers lined up for years to get projects off the ground. HEFA SAF producers likewise don’t reap any windfall, since their feedstock contracts – and therefore their production costs – are artificially tied to broader energy market pricing.
But there’s a far better option that avoids these pitfalls, involving a different feedstock for producing SAF: using renewable natural gas (RNG) to make SAF. RNG is made by capturing the methane from dairy and swine manure, landfills, food waste, and wastewater. While virtually identical to fossil natural gas, RNG has far lower lifecycle greenhouse gas (GHG) emissions. RNG can be net carbon negative when sourced from manure or food waste thanks to all the avoided methane emissions that would have otherwise escaped into the atmosphere (where it is a far more potent GHG than carbon dioxide).
Because RNG is often decoupled from global petroleum prices, its price stays largely flat even as oil spikes. In the US, RNG is only indexed to Henry Hub natural gas prices, which are not affected by the Strait of Hormuz and are very low due to massive domestic natural gas production. RNG is also often sold in long-term, fixed-price contracts of 10-15 years, providing the certainty that fuel producers and consumers prefer. SAF made from RNG has the potential to be much cheaper (i.e., not artificially inflated by markets) than HEFA SAF, with stable prices insulated from global disruptions.
Moreover, HEFA feedstocks are in high demand to make SAF as well as renewable diesel and biodiesel, with very constrained supply. By contrast, RNG has two distinct supply advantages. First, RNG production is already plentiful, expanding quickly each year, and has major growth potential in every state in the US. Second, RNG can be supplied through “book and claim” accounting, using the natural gas grid that already exists across America. Book and claim is a widely used practice where the environmental attributes of the RNG are sold separately from the physical gas molecules, with meticulous tracking and verification.
So while HEFA SAF producers need the physical liquid feedstocks, which are limited in scale and have to be somewhat nearby the fuel production process in order to keep costs down, RNG SAF producers can use RNG made anywhere in the country, whether through direct procurement or buying the environmental attributes. Book and claim’s flexibility could significantly reduce the volatility of SAF feedstock prices and spur an expansion of the domestic RNG and SAF industries, creating jobs and cutting GHG emissions.
Despite all of these major structural advantages, however, there is not yet any significant RNG-to-SAF production in the US. Why?
All SAF pathways face general headwinds (high capital costs, lack of stable long-term federal support, unclear demand, need for risk sharing with offtakers), but the RNG-to-SAF pathway faces additional, unnecessary economic hurdles. In order for SAF plants of any kind to pencil out, they need to earn credits (“RINs”) under EPA’s Renewable Fuel Standard (RFS). EPA has approved RFS pathways for making SAF from HEFA, but not yet from RNG. Clear RFS pathways for RNG-to-SAF production would allow offtakers to confidently make long-term procurement decisions. This in turn would support developers and investors to expand RNG production nationwide and build RNG-to-SAF plants.
EPA approval of this simple, commonsense regulatory step would help accelerate the production of RNG-based SAF that’s cheaper and more available than what the market has seen so far, and which genuinely improves the nation’s energy security.
Michael Lerner is Director of Research and Publications at Energy Vision, a clean energy non-profit. He is the lead author of many reports on methane abatement strategies from organic waste, including "Meeting the Methane Challenge." He holds a B.A. and M.A. in political science from NYU.
