UK government plans to fund SAF revenue mechanism through a levy on fuel suppliers

The UK government has opened a short consultation into how a proposed price guarantee mechanism to reduce the risks of revenue uncertainty for SAF producers in the UK can be funded. Having carried out a previous consultation on the form the mechanism should take, the government now proposes the selected revenue certainty mechanism (RCM) should be funded by industry, preferably through a levy on jet fuel suppliers. The RCM aims to ensure a steady income flow for producers, even if the price of SAF fluctuates, helping to keep costs down for airlines while providing risk confidence to potential big investors, who have so far failed to emerge. Having supported a number of SAF production start-ups with grants through its Advanced Fuels Fund and the introduction in January of a SAF mandate, the RCM is expected to be the final piece in government policy to kick-start a UK SAF industry.

“The RCM combined with the mandate will contribute to our net zero goals, enabling the aviation sector to continue to grow, including through airport expansion,” said the government. “This is also expected to drive significant investment into the SAF sector, creating green jobs, fostering innovation and driving growth as part of our Plan for Change.”

The RCM is a temporary measure while SAF market prices are uncertain, it added, and similar to that used in other renewable energy sectors. As this will hold down the price of SAF for airlines, the RCM will also protect travellers “against significant cost increases, with any rises expected to be in line with the usual variation of ticket prices,” it promises.

The government said it will monitor the impacts of the mechanism and have the ability to manage liabilities by capping the support to a pre-agreed volume of SAF, as well as agreeing the strike price within contracts.

The UK airline industry voiced its support for the RCM as a means of driving SAF production and ensuring the sector can comply with the mandate, which requires a 10% mix of SAF in all jet fuel from 2030, with increasing percentages over time.

“We look forward to working with government on its design, with a particular focus on encouraging a competitive market and supporting first-of-a-kind plants,” said Tim Alderslade, Chief Executive of Airlines UK. “The goal must be the production of as much SAF at the cheapest possible price for consumers to help the industry get to net zero and support growth in UK aviation, whilst minimising the impact on passengers.”

Added Gaynor Hartnell, Chief Executive of the Renewable Transport Fuel Association: “The RCM is essential if SAF is to be manufactured here in the UK rather than imported. Home produced SAF leads to more jobs and improved fuel security.”

The government says its preference for an industry-funded price support mechanism is based on the ‘polluter pays’ principle for hard-to-abate sectors, such as aviation, and the precedents set by other low carbon energy schemes. Its analysis of estimated costs of intervention could require “relatively modest” amounts of funding and the RCM acting more as an insurance mechanism.

It proposes the funding should come from a variable levy on aviation fuel suppliers. “This allows the cost to be spread across the supply chain and ensures it is borne by those benefiting from the supply of fossil aviation fuel,” says the consultation document. “Aviation fuel suppliers will also benefit from the additional SAF production that the scheme will stimulate, helping them meet their SAF Mandate obligation.”

The levy will be used to cover the cost of payments to SAF producers and the cost of administering the scheme – consistent with existing schemes for renewable electricity and hydrogen. The costs of contracts and the total levy amount will vary over time, expects the government, linked to the changing price of UK supplied non-HEFA SAF. Variations are likely to be more significant and frequent in the early years of the scheme when limited volumes of SAF “cannot negate external shocks”.

For fuel suppliers obligated to pay the levy – estimated to number around 20 – individual contributions would be determined by market share so, for example, an aviation fuel supplier that supplies 20% of total UK aviation fuel would be required to pay 20% of the scheme’s funding requirement.

Significantly, the government says in the consultation document that UK-produced power-to-liquid SAF “could face significant challenges”, based on updated analysis of PtL production costs and the respective SAF mandate buy-out price for the PtL fuel obligation. It says it will engage with stakeholders on this issue.

The consultation runs from March 3 to March 31, with the Sustainable Aviation Fuel (Revenue Support Mechanism) Bill being laid in Parliament in the spring and required legislation due to be in place by the end of 2026.

Photo: Air bp

Christopher Surgenor

Editor

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