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

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: βIs a CfD the solution?β
The study involved interviewing 37 organisations to assess their views on a CfD and associated features:
- Indexation of strike price (e.g. inflation)
- How to fund a CfD (e.g. air passenger duty, ETS and/or other mechanism)
- Feedstock certainty and sustainability (e.g. should sustainability be aligned to the mandate; how to manage changes in feedstock availability)
- 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?)
- Application of CfD model across different technologies and project types
- Contract duration (e.g. 15 years)
- 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 β 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.
Read the Report
The Phase 1 Report can be downloaded here
Read more about our Jet Zero activity.