Study highlights the need for a Contracts for Difference mechanism to grow a UK Sustainable Aviation Fuel industry

Posted on: 16/12/2021

A study finds industry is mostly supportive of a Contracts for Difference (CfD) mechanism as a price stability mechanism to develop a UK sustainable aviation fuel industry, alongside a mandate.

Understanding how to commercialise the industry (apart from a mandate) is the focus of the Commercialisation sub-group of the Jet Zero Council SAF Delivery Group, and the need for price stability was identified as a critical enabler. NRG Management Consultancy was commissioned by Sustainable Aviation to understand industry perspectives on a CfD mechanism. The main question being: ‘Is a CfD the solution?’

The study involved interviewing 37 organisations to assess their views on a CfD and associated features:

  1. Indexation of strike price (e.g. inflation)
  2. How to fund a CfD (e.g. air passenger duty, ETS and/or other mechanism)
  3. Feedstock certainty and sustainability (e.g. should sustainability be aligned to the mandate; how to manage changes in feedstock availability)
  4. Reference price (e.g. can only be determined once a market price is established, what should the reference price be prior to market price establishment?)
  5. Application of CfD model across different technologies and project types
  6. Contract duration (e.g. 15 years)
  7. Scaling of output (e.g. allow for flexibility of a 10% to 20% increase in capacity)

Summary of industry views on a CfD:

  • Industry is fully supportive of a price stability mechanism and mostly support a CfD style mechanism.
  • The mechanism to fund a proposed CfD requires further work and explore ways to avoid costs passing onto passengers.
  • The methodology for measuring feedstock sustainability must be consistent across mechanisms.
  • Contract changes need to be allowed to factor in changes in feedstock and sustainability criteria.
  • Indexation risks to balance commercialisation should sit with the CfD counterparty.

Challenge identification

  • Timing – if a CfD programme is the solution it should be implemented in parallel to the SAF mandate.
  • Funding – DfT/ Treasury and Industry to work together to determine the optimum approach to funding the price stability mechanism
  • Indexation – government and industry to derive an approach for strike price indexation that balances simplicity and cost to consumers
  • Feedstock – government and industry experts to ensure targets for feedstock sustainability remain appropriate throughout the CfD contract period.

Next steps

  • The Department for Transport (DfT) will assess whether a consultation regarding price stability is appropriate.
  • A secondment within DfT to conduct further analysis on the feasibility of a CfD mechanism is being considered.

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