Guidance for Selling Alternative Fuels to Airlines July 2018

Transcription

1 Guidance fr Selling Alternative Fuels t Airlines July 2018 A Jint Publicatin f the Cmmercial Aviatin Alternative Fuels Initiative (CAAFI) Business Team and the Airlines fr America (A4A) Energy Cuncil

2 Intrductin The purpse f this paper is t cmmunicate the basic infrmatin and technical requirements fr airlines t cntemplate purchase agreements with suppliers f nn-petrleum-derived jet fuel. In additin, it describes actins that airlines can take t accelerate the cmmercializatin f alternatives at scale. T help rient ptential prducers and ther supply-chain participants with respect t hw and when t engage with airlines, we have laid ut a generalized prcess that describes key steps tward entering int a purchase agreement. This prcess crss-references ther CAAFI dcuments, including the Path t Alternative Jet Fuel Readiness, which prvides infrmatin n hw t becme invlved with the aviatin cmmunity, the testing and envirnmental evaluatins required t shw the fuel s suitability fr aviatin use, and hw t best facilitate ASTM Internatinal certificatin fr a new fuel. It als refers t several CAAFI cmmunicatin tls designed t aid in the cmmunicatin f bth the necessary steps t be taken and the prgress f alternative jet fuel prjects: Fuel Readiness Level () prvides guidance n fuel technical develpment and certificatin Exit Criteria is a checklist detailing what is perfrmed at each level Feedstck Readiness Level (FSRL), develped in cllabratin with the U.S. Department f Agriculture (USDA), tracks develpment and availability f the raw materials (r feedstcks) required t make alternative jet fuels Envirnmental Prgressin prvides guidance n envirnmental analyses; Envirnmental Sustainability Overview prvides backgrund n the envirnmental sustainability issues t be cnsidered in the prductin and deplyment f alternative jet fuels A descriptin f these dcuments and tls resides at This paper als includes a sample term sheet with general statements and specific data elements that airlines wuld expect t be included in any prspective purchase agreement. This is nt a draft purchase agreement. At the same time, this dcument is an pen invitatin fr suppliers t ffer suggestins as t hw jet-fuel cnsumers including cmmercial, general and military aviatin entities can help suppliers advance their business mdels. Why are airlines interested in cmmercial-scale alternative jet fuel prductin? The cmmercial aviatin industry is interested in fstering the develpment and deplyment f alternative fuels fr the fllwing reasns: Supply Diversificatin: The high and vlatile price f petrleum-derived jet fuel pses key business challenges t airlines, especially because fuel is ne f the industry s highest perating csts. Once alternative jet fuels reach cmmercial scale, they may ffer an pprtunity t diversify surces f jet fuel available t airlines and reinvent aspects f the fuel supply chain. Expanding the available jet fuel slate in this way may help enhance market stability. In additin, alternative jet fuels culd be essential t accmmdate future demand grwth fr air transprt services. Operatinal Reliability: Cmmercial-scale prductin f alternative jet fuels can blster the supply f liquid fuel t the airline industry. Given current technlgy, there are n practical ptins t pwer aircraft engines ther than with liquid fuels. As cmpetitin fr petrleum-based prducts intensifies due t increased demand frm ther industry sectrs acrss the glbe and the pssible scarcity f this nn-renewable resurce in future decades, there are cncerns that aviatin may find it difficult t meet its energy needs ver time. Furthermre, alternative jet fuel prductin facilities need nt be situated in the same lcatins as cnventinal refineries. This wuld allw the gegraphic diversificatin f prductin away frm sites prne t natural disasters, such as the U.S. Gulf Cast r West Cast. CAAFI & A4A Guidance fr Selling Alternative Fuels t Airlines Page 2 f 8

3 Reginal Ecnmic Expansin: Cmmercial-scale prductin f alternative jet fuels has the ptential t generate jbs and spur ecnmic activity, especially in rural areas where bijet feedstcks can be cultivated. In additin, the grwth f a dmestic alternative fuels industry wuld help reduce U.S. imprts f freign crude il and refined prducts, freeing up resurces t be invested dmestically. Alternative jet fuels can als bviate the need fr carbn taxes, emissins trading schemes r ther measures under cnsideratin fr cnventinal jet fuel that culd have anti-grwth cnsequences. Envirnmental Benefit: If ecnmically viable and cmmercially available at scale, alternative fuels culd imprve lcal air quality and reduce aviatin-related life-cycle greenhuse gas (GHG) emissins, thus advancing aviatin s lngstanding cmmitment t minimize envirnmental impact. In turn, by meeting increasing custmer and sharehlder interest in envirnmental perfrmance, airlines can further secure lng-term business sustainability. What are the airlines requirements fr cntemplating the purchase f alternative jet fuel? Alternative fuels must meet the fllwing requirements in rder t be acceptable fr use by airlines: Fuel certificatin: Cmpliance with the relevant ASTM Internatinal (r equivalent) certificatin Drp-in: Cmplete cmpatibility with existing strage, transprtatin and handling infrastructure, and existing engine, aircraft and ther equipment Reliability f supply and n-time delivery: Airlines put special emphasis in the reliability f supply and n-time, n-specificatin delivery f the fuel; any supplier f jet fuel t the airlines, be it cnventinal r alternative, must meet the stringent requirements fr delivery and availability f the prduct that airlines require t be able t perate their flights n a daily, year-rund basis Envirnmental benefit Cmpliance with accepted criteria t be mre envirnmentally friendly than traditinal jet fuel, in particular resulting in a reduced life-cycle GHG emissins prfile, withut cmprmising critical uses (e.g., fd supply) f relevant feedstcks The ability f the fuel t meet the envirnmental and sustainability criteria under prgrams that credit the envirnmental benefits f alternative jet fuel, such as the U.S. Renewable Fuel Standard and the emerging Carbn Offsetting and Reductin Scheme fr Internatinal Aviatin (CORSIA) under the Internatinal Civil Aviatin Organizatin (ICAO), are likely t be f interest t certain airlines Reductins in lcal air quality emissins, such as particulate matter and sulfur cmpunds, cmpared t cnventinal fuel The prductin f the fuels must be in cmpliance with envirnmental laws and regulatins and nt induce envirnmental prblems that wuld call int questin the airlines use f the fuels; ne means f reflecting this may be thrugh a demnstratin that the fuel was prduced cnsistent with recgnized sustainability criteria as described in the CAAFI Envirnmental Sustainability Overview dcument Ecnmic viability: Every airline will have its wn prcurement strategy and will ultimately enter its wn individual cntract with a fuel prducer with a unique set f cnditins, including price; accrdingly, any final decisins n price will be the prduct f direct engagement between the airline and the fuel supplier. Hwever, the fllwing pints generally reflect the widely shared views f jet-fuel buyers: Price cmpetitiveness: Airlines are interested in alternative fuels that ffer price cmpetitiveness vis-à-vis cnventinal fuel. In general, this means that the net price f alternative fuels, including any tax r ther credits as well as adjustments fr energy density, shuld be, n average, cmparable t the price f cnventinal fuel. Fr alternative fuels still CAAFI & A4A Guidance fr Selling Alternative Fuels t Airlines Page 3 f 8

4 in develpment, the basis f cmparisn typically wuld be the frward curve 1 f cnventinal jet fuel fr the future perids in which the alternative fuels may becme available. Flexibility in pricing mechanism: Airlines are pen t different pricing mechanisms. Fr example, they can cnsider indexing t the price f cnventinal jet fuel (current r frward curve) and indexing t the price f cnventinal fuel accmpanied by a price cllar. They are als pen t cnsidering indexing t varius cmmdities ther than crude il. Valuatin f envirnmental r ther credits: Because f regulatry r plicy framewrks, sme alternative fuels culd earn envirnmental, tax, r ther types f credit, such as a RIN credit under the U.S. RFS2 prgram 2 r the emerging ICAO CORSIA system. 3 While it is recgnized that these credits can help reduce the purchase price f alternative jet fuel, airlines find it difficult t evaluate thse credits ver the lng run given uncertainties in the market fr thse credits and lack f visibility int the stability f thse regulatry r plicy framewrks and assciated markets. Thus, the airlines are likely t take the risk assciated with such credits int accunt when discussing their ptential rle and value in a purchase agreement. Alternative fuels currently d nt appear t prvide value as a hedge instrument: It is pssible that alternative jet fuel may prvide price diversificatin t an airline with respect t cnventinal fuel. Hwever, given the nascent nature f the cmmercial alternative jet fuel industry and assciated price histry, airlines are unable t quantify the value f a ptential hedge. A viable hedge requires market liquidity (i.e., a high vlume f bids and asks), which is highly unlikely fr renewable jet fuel bth based n the scarcity f vlume and based n experience that even the market fr cnventinal jet fuel is illiquid. This is evidenced by the fact that airlines rarely hedge jet fuel; instead, thse that pt t hedge typically hedge crude il, heating il r cmparable liquid cmmdities. In additin, it is helpful t keep in mind that airline attitudes with respect t hedging are very different, with sme airlines having extensive hedging prtflis and thers nt hedging at all. Small premiums cmbined with cperative purchases: Airlines are generally willing t explre the pssibility f purchasing small amunts f alternative fuel as a grup. In such a scenari, they may be willing t pay a small premium fr the alternative fuel prvided that it wuld be a meaningful step tward cmmercializatin. A cperative purchase agreement with a step-up clause wuld allw airlines t spread the risk amngst them while assuring prducers that the cntracted vlumes cllectively wuld be purchased by the grup. What are airlines willing t d t help cmmercialize alternative jet fuel? Airlines are interested in accelerating the cmmercializatin f alternative fuels prvided that the airline industry s cmpetitiveness is nt negatively affected. Airlines are pen t creative ideas that can lead t meaningful prgress. Supprtive actin may include: 1 The term frward curve refers t a series f sequential prices either fr future delivery f an asset (such as crude il, heating il, natural gas, diesel r jet fuel) r expected future settlements f an index. See A Lk Frward Understanding Frward Curves in Energy Markets (May 2012), 2 The expanded Renewable Fuel Standard, cmmnly knwn as RFS2, establishes mandates f renewable and advanced fuels fr the U.S. transprtatin fuel supply. In a 2013 ruling, the U.S. Envirnmental Prtectin Agency (EPA) allwed fr jet fuel pathways t qualify under RFS2. Several jet fuel pathways have been apprved under RFS2, with mre under cnsideratin. Renewable Identificatin Numbers (RINs) are generated fr each galln f qualifying renewable fuel under RFS2. Obligated parties (e.g., refineries and ther fuel suppliers) can use RINs t meet their renewable vlume bligatins and can trade r bank them fr future cmpliance perids. Thus, RFS2 creates a market fr RINs, which can be used t ffset the cst f renewable fuel. Fr mre infrmatin, see: 3 CORSIA is a carbn ffsetting system that is being develped under ICAO, the United Natins bdy that sets standards and recmmended practices fr internatinal civil aviatin. The CORSIA framewrk, which calls fr certain carbn ffsetting prvisins t becme effective beginning in 2021, cntemplates that the lifecycle GHG emissins savings frm an aircraft peratr s purchase f alternative jet fuel may be credited against the peratr s carbn ffset bligatin, if the fuel meets the envirnmental, sustainability and tracking criteria. Thse criteria are currently under develpment at ICAO. Fr mre infrmatin, see: CAAFI & A4A Guidance fr Selling Alternative Fuels t Airlines Page 4 f 8

5 Lng-term ff-take agreements: Airlines are willing t cnsider entering int lng-term ff-take agreements, defined as agreements f three years r mre. Thrughut the term f the agreement, there may be flexibility with respect t sme f the key cnditins (e.g., price, vlume, prducts). Generally, airlines are unable t cnsider agreements exceeding 10 years. (Nte: Mst term cntracts fr cnventinal jet fuel range frm 12 t 24 mnths.) Flexibility in prduct delivery: While airlines are primarily interested in alternative fuels fr use n aircraft, they als acknwledge that a) mst prcesses fr alternative jet fuel prductin als generate alternative fuels fr surface use, and b) the ecnmics f many prcesses may favr prductin f alternative fuels fr surface use. Therefre, airlines are pen t cnsidering the entire prductin slate f alternative fuel facilities as part f an ff-take agreement. This may include airlines purchasing alternative fuels fr surface use t meet their wn demands (e.g., fr use in grund supprt equipment). In additin, airlines may be respnsive t prducer prpsals t change the prductin slate depending n market cnditins fr bth aviatin and surface alternative fuels. Cperative purchases: As mentined abve, airlines are pen t cnsidering jint purchases as a grup, including cperative purchase agreements with the military. Equity investments: Airlines are pen t cnsidering becming upstream investrs in alternative fuel prjects, especially in circumstances when their participatin can help a prducer reach meaningful milestnes and accelerate cmmercializatin. Plicy advcacy: Airlines generally are willing t supprt plicy advcacy that culd help level the playing field fr alternative fuels with respect t cnventinal fuel withut raising the cst f cnventinal fuel r ther financially negative cnsequences. Airlines are acutely aware f the risks assciated with investing in this sectr, including via purchase agreements. Accrdingly, airlines are interested nly in thse cmmercial agreements that adequately address the fllwing eight buckets f risk typically cited by financial institutins: 1. Cnstructin what is cst and time t cmplete? 2. Technlgy what if the technlgy des nt wrk, r fails t yield the prmised prductin? 3. Feedstck will it be available at any cst, let alne at the presumed cst? 4. Plicy if the prject s viability depends n gvernment plicy/assistance, will that plicy remain cnstant thrughut the facility s ecnmic life? 5. Financial have the ecnmic assumptins (e.g., cst f debt and equity, cst f prductin, selling price f all f the fuel prducts) been realized? 6. Engineering is the engineering and design f the plant apprpriate? 7. Management what experience des management have and what happens if it prves inadequate fr the task? 8. Scalability is the prject able t scale up and generate meaningful quantities f fuel t prvide reliable supply and help lwer fuel price ver time thrugh ecnmies f scale? What des a term sheet lk like? Althugh the term sheet fr a cmmercial agreement will vary depending n the specifics f the arrangement, prducers can expect t see many f the fllwing elements: Item Prduct Example Alternative jet fuel: neat, blended (rati) certified t ASTM D7566 r equivalent Other alternative fuel (e.g., diesel): neat, blended (rati) certified t relevant specificatin CAAFI & A4A Guidance fr Selling Alternative Fuels t Airlines Page 5 f 8

6 Item Delivery pint Vlume Term Pricing Credits Envirnment/ Sustainability Example Refinery gate Prduct terminal r pipeline Airprt strage Typically expressed in annual quantities but culd vary seasnally Typical airline jet fuel term cntracts extend frm ne t tw years Alternative fuel deals culd span three t ten years The pricing mechanism will depend n many factrs and will be negtiated directly between buyer(s) and seller(s) Airline jet-fuel buyers will seek mechanisms that invlve risk-sharing by the supplier and investrs; fr example, if the supplier wants a price flr, a price cap shuld als be ffered T accrue t prducer r t buyer [X%] reductin f lifecycle GHG emissins relative t cnventinal fuel accrding t [Y] methdlgy Sustainability declaratin r certificatin accrding t [Z] framewrk(s) What is the best way t engage with airlines? CAAFI (reachable via is the first pint f entry fr an interested jetfuel supplier r marketer. CAAFI is willing and able t help make the necessary intrductins fr prducers t engage with airlines and ther end users. When and hw t engage with airlines depends t a great extent n hw far a given prducer is alng the cmmercializatin curve. As mentined in the intrductin, CAAFI has develped a number f readiness tls t create a cmmn language and understanding f the develpment stage f prductin pathways. The primary tls the Fuel Readiness Level (), the Feedstck Readiness Level (FSRL) and the Envirnmental Prgressin, help facilitate cmmunicatin with ptential end users. Appendix A shws hw these three tls relate t ne ther. In additin, the rightmst clumn prvides guidance as t hw and when t apprach airlines and ther end users accrding t maturity f the technlgy. These include: R&D Team fr prductin pathways that are early in the maturity curve ( < 3). See Path t Alternative Jet Fuel Readiness n fr mre infrmatin. Certificatin and Qualificatin (C&Q) Team fr prductin pathways that fall neither within ne f the existing ASTM fuel certificatins nr within ne f the task frces fr pathways currently in the certificatin prcess. The C&Q Team can help ptential prducers, fr example, by serving as an interface t the ASTM prcess, reviewing prducer and OEM wrk plans and research reprts, and guiding the wrk flw thrugh the ASTM annex ballt prcess. Business Team fr prductin pathways that have reached the preliminary technical evaluatin ( 4) r prductin system validatin ( 5) stages. Business Team and Airline Spnsr fr prductin pathways in full-scale technical evaluatin ( 6) r fuel certificatin ( 7), the Business Team wuld facilitate the assignment f an airline spnsr t help the prducer understand the airlines requirements and, at the same time, affrd the prducer the pprtunity t start building a business prpsitin. Airline Spnsr fr prductin pathways in cmmercializatin ( 8) r with prductin capacity established ( 9), the Business Team wuld facilitate direct cntacts with interested airline spnsrs t engage in cmmercial discussins. CAAFI & A4A Guidance fr Selling Alternative Fuels t Airlines Page 6 f 8

7 Hw else can CAAFI help? CAAFI can help make intrductins t ther ptential partners that may be interested in supprting an alternative jet fuel prject. CAAFI facilitates r advises a number f state initiatives in which different stakehlders including airprts, feedstck prducers, fuel prducers, state and lcal agencies and airlines may participate t assemble a prpsal fr a reginal supply-chain slutin. CAAFI cntinues t expand this wrk and invites the participatin f ptential fuel prducers wh have clear gals with respect t supply chain needs. CAAFI can als assist in identifying funding pprtunities thrugh USDA, the Department f Energy (DOE), the Federal Aviatin Administratin (FAA) r ther agencies and crdinate jint reviews with Defense Lgistics Agency (DLA) Energy, as well as representatives f the United States Armed Frces. CAAFI can advise fuel prducers as t ptential beneficial uses f prcess c-prducts fr use in aviatin (i.e., pavement and aircraft deicers frm alchl-t-jet and bidiesel prductin, respectively). Fr additinal infrmatin, please visit CAAFI & A4A Guidance fr Selling Alternative Fuels t Airlines Page 7 f 8

8 Appendix A: CAAFI Readiness Tls and Recmmended Avenues fr Cmmercial Engagement Scale Feedstck Readiness Level (FSRL) Envirnmental Prgressin Descriptin Fuel Readiness Level () Fuel Testing and Certificatin Tllgate Fuel Quantity* Cmmercial Engagement 1 Basic Principles Basic Principles Basic Principles Feedstck and prcess basic principles identified R&D Team 2 Cncept Frmulated Cncept Frmulated Cncept Frmulated Feedstck and cmplete prcess identified R&D Team 3 Prf f Cncept Prf f Cncept Prf f Cncept Small fuel sample available frm lab - basic fuel prperties validated 0.13 US gallns (500ml) R&D Team Preliminary Technical Evaluatin Preliminary Technical Evaluatin Preliminary Technical Evaluatin Preliminary Specificatin f Prperties System perfrmance and integratin studies Entry criteria/specificatin prperties evaluated 10 US gallns (37.8L) Business Team (and C/Q Team fr pathways nt yet apprved by ASTM) Prductin System Validatin Scale up Validatin f Initial Assessments Prcess Validatin Labratry prductin develpment Subscale prductin demnstrated ,000 US gallns ( ,000L) Business Team (and C/Q Team fr pathways nt yet apprved by ASTM) 5.3 Scalability f prductin demnstrated 5.4 Pilt plant capability enabled Full-Scale Prductin Initiatin Full-Scale Feedstck Impact Evaluatin Full-Scale Technical Evaluatin Fit-fr-Purpse Prperties - ASTM Ballting Prcess Cmpnent/Rig Testing - OEM Review and Apprval Fit fr purpse prperties evaluated Turbine ht sectin testing Cmpnent/rig/emissins testing ,000 US gallns ( ,000L) Business Team (and C/Q Team fr pathways nt yet apprved by ASTM) 6.4 Engine/APU Testing - ASTM Research Reprt Engine/APU testing 7 Feedstck Availability Full-Scale Fuel Prducer Impact Evaluatin Certificatin/Fuel Apprval Fuel Class Listed in Internatinal Fuel Specificatins Fuel class/type listed in internatinal fuel standards Business Team (and C/Q Team fr pathways nt yet apprved by ASTM) 8 Cmmercializatin Cmmercializatin Cmmercializatin Business mdel validated fr prductin g-ahead - airline/military purchase agreements secured Airline Spnsr 9 Sustainable Feedstck Prductin Capacity Established Sustainable Feedstck and Fuel Supply Established Prductin Capacity Established Full-scale plant peratinal Airline Spnsr * Quantities required fr risk mitigatin reference CAAFI & A4A Guidance fr Selling Alternative Fuels t Airlines Page 8 f 8