Renewable Transport Fuel Obligations (Sustainable Aviation Fuel) Order 2024

Tuesday 5th November 2024 Grand Committee

Considered in Grand Committee

15:45

Moved by

[Lord Hendy of Richmond Hill]

That the Grand Committee do consider the Renewable Transport Fuel Obligations (Sustainable Aviation Fuel) Order 2024.

Relevant document: 1st Report from the Secondary Legislation Scrutiny Committee

[The Minister of State, Department for Transport (Lord Hendy of Richmond Hill) (Lab)]

My Lords, the order was laid in draft before this House on 24 July 2024. It will ensure that sustainable aviation fuel, also known as SAF—I hope that your Lordships will tolerate the use of that acronym—makes up an increasing proportion of the jet fuel supplied to the UK each year. As a consequence, the greenhouse gas impact of flying will be significantly reduced. The draft order, referred to as the SAF mandate, will contribute to fulfilling our manifesto commitment to secure the UK aviation industry’s long-term future and it has received significant cross-party parliamentary support to this point. No issues were raised on the draft order at the Secondary Legislation Scrutiny Committee or the Statutory Instruments Joint Committee.

The SAF mandate is a bespoke mechanism for guaranteeing demand for SAF in the UK. It will send a strong signal to industry that SAF will play a pivotal role in the future of UK aviation and will provide an incentive for SAF to be supplied. However, it is just one pillar of a wider approach to capitalise on the environmental and economic opportunities that SAF offers. The UK will also lay legislation to support SAF production in the UK by providing revenue certainty. This will strengthen the UK’s leadership in SAF production, improving its fuel security while fostering industrial development and generating green jobs.

We are pleased to see SAF starting to be brought to the UK market in small but increasing volumes. The SAF mandate will help to address barriers to widespread adoption and realise the full potential of this technology. The United Kingdom has a rich history of being at the forefront of aviation innovation and we will continue to show leadership by introducing one the world’s most ambitious frameworks to drive demand for SAF.

SAF is blended with conventional kerosene to be used in existing aircraft and engines without modification. It is a low-carbon fuel that uses sustainable feedstocks instead of crude oil, which achieves greenhouse gas savings across its lifecycle production and use. It can be derived from a wide range of sources that achieve carbon savings relative to fossil fuel in different ways. They include biomass derived from wastes and residues; fossil wastes that cannot be avoided, reused or recycled; and renewable and nuclear energy. This means that we can draw on resources that would otherwise be discarded, such as agricultural residues and black binbag waste, to make jet fuel. The existing renewable transport fuel obligation, or RTFO, rewards the supply of SAF but does not obligate aviation fuel supply. By introducing a specific obligation on aviation fuel, we will guarantee a minimum supply of SAF.

I turn to the specific content of the statutory instrument. It introduces two obligations on suppliers of fossil jet fuel: a main obligation and a power-to-liquid obligation. The obligations are placed on jet fuel suppliers at the point at which their fuel can be supplied only to UK aviation. Each obligation period is one year in length and runs on a calendar year basis. To fulfil the obligations, suppliers must redeem SAF certificates at the end of the obligation period. Certificates are awarded to suppliers of SAF that meets the sustainability criteria. The number of certificates that a supplier receives is in proportion to the greenhouse gas savings that it achieves.

Power-to-liquid fuel, a type of SAF made from carbon dioxide and renewable or nuclear power and heat, will be rewarded with specific certificates that can be used to meet the power-to-liquid obligation. This will specifically incentivise the supply of these fuels, given their potential for higher greenhouse gas emissions reduction and lower risk of environmental impacts.

SAF made from segregated oil and fats, such as used cooking oil, commonly called HEFA, will also receive separate certificates. Suppliers can use these certificates to meet their main obligation, but the amount will be capped, starting from 2027, to allow market space for novel technologies. All other types of SAF are rewarded with standard certificates, which can be used to meet the main obligation. All certificates can be traded between account holders for a price determined by the market. The value of these certificates therefore provides a revenue stream for producers of renewable fuels and demand for their products in the fuel market.

Where a supplier has a shortfall in certificates to meet the obligations, a supplier must pay the buyout, which is a fixed price per unit of energy. The purpose of a buyout mechanism is to provide a way for suppliers to discharge their mandate obligation in cases where they are unable to secure a supply of SAF, preventing excessive costs from being passed on to consumers. This price is set to be higher than the expected cost of producing and supplying the same unit of SAF under normal market conditions, thus incentivising the supply of SAF.

The instrument also sets out the criteria that SAF must meet in order to be eligible, to ensure that we maintain the highest sustainability credentials. The order makes provision for the administration and management of accounts for suppliers to ensure that a record is kept of obligations and certificates. It also sets out appropriate processes for the revocation of certificates and issuing penalties where certain provisions are contravened.

Renewable fuels already contribute one-third of transport’s emission reductions from the current carbon budget. However, this is almost exclusively in the road fuel sector. Introducing the SAF mandate will broaden the use of low-carbon fuels into aviation and secure the long-term future of this transport mode. It is projected that, between 2025 and 2040, the SAF mandate could deliver up to 25 million tonnes of SAF, securing a saving of up to 54 million tonnes of carbon dioxide.

To conclude, we must act now to address the global challenge of climate change. Historically, the aviation industry has faced difficulty in achieving carbon reductions. However, SAF represents an immediate opportunity to change this. The technology has been proven to achieve significant greenhouse gas savings and it can be used in aircraft today.

15:52

Sitting suspended for a Division in the House.

16:05

[Lord Hendy of Richmond Hill (Lab)]

My Lords, with permission, I shall start the concluding paragraph again.

To conclude, we must act now to address the global challenge of climate change. Historically, the aviation industry has faced difficulty in achieving carbon reductions. However, SAF represents an immediate opportunity to change this. The technology has been proven to achieve significant greenhouse gas savings and it can be used in aircraft today. The proposed instrument will facilitate the adoption of this technology on a large scale, which is essential for achieving net zero and delivering on the manifesto commitment to secure the future of aviation.

[Baroness Randerson (LD)]

My Lords, I thank the Minister for his explanation. There is no doubt about the need for action in relation to aviation. UK aviation fuel use more than doubled between 1990 and 2020, despite efficiency improvements in aeroplane design. By 2050, aviation will be one of our largest emitters. The technological advances are not looking optimistic in relation to battery and hydrogen-powered aircraft. Such flights are a long way off becoming long-distance or even medium-distance in terms of practicality. Combine this with the fact that the lifespan of an aircraft is 30-plus years and this is a huge challenge for us. SAF is far from a perfect answer, but it is all we have and it is welcome to see this draft SI here.

I have obediently read this complex and lengthy document and I have some fairly basic questions for the Minister. First, the consultation took place in 2022, I think. Why has it taken so long to get from the consultation process to this SI? I am aware, when I ask that question, that it is deeply unfair, because this was the previous Government’s problem, but I notice that, at the top of the front page, it says that this draft SI replaces one produced on 20 May this year. Is it substantially different in terms of its impact, or is the difference simply that a couple of mistakes have been ironed out? The length of time it has taken is disappointing, because the previous Government announced “jet zero” with a great fanfare several years ago, and therefore the slowdown is a problem.

Secondly, have the new Government changed the plans for the operation of the new system? They might have changed the SI, but have they changed their plans to any practical extent? Thirdly, the aviation industry has been pressing us for government action to stimulate production of SAF for many months or even years. It has been telling us that, if the Government did not take action rapidly, SAF production would take off, if I can use that term, in our competitor countries, we would fall behind and we would not therefore be a leader in SAF production. I am referring here to the manufacture rather than the use of SAF.

Although this SI seems to encourage the use of SAF, it does not seem to directly provide a mechanism to encourage and support the manufacture of SAF, along the lines of the mechanism that we have been pressed by the aviation industry to adopt. Can the Minister explain whether anything in the Budget will help encourage the production of SAF? I noted that money was available for the aerospace industry and was unsure whether that would cover this sort of thing.

Finally, there is good SAF and not so good SAF, which is referred to in this Explanatory Memorandum. Can the Minister explain how industry checks, and government process checks, will ensure that the SAF manufactured and used in the UK is up to the highest environmental standards?

[Lord Trefgarne (Con)]

I apologise to your Lordships for not being in my place when we resumed following the Division.

I have a simple question for the Minister. Can he say whether all this applies to general aviation, in particular aviation involving smaller aircraft which very often run on aviation gasoline and not the fuel that forms part of this agreement? This is important because the price of fuel is a critical part of operators’ costing, they need to know where and when they can get it and that it will be available when required. In essence, the question is, does this apply to general aviation and to smaller aircraft running on gasoline, as well as to larger ones running on turbine fuel?

[Lord Moylan (Con)]

My Lords, I am grateful to the Minister for arranging a briefing with officials so that I could better understand this complex proposal. The briefing was indeed helpful and I learned a great deal.

I find this a troubling statutory instrument not because I have any objection to the use of SAF by aircraft—indeed, I welcome that—but because of the chosen mechanism. We are still meant to be a free-market country and the normal means of market operation in this country is that, where there is a demand for something, a supply is forthcoming.

We are told that, despite the fact that SAF is estimated to cost between three times and seven times as much as standard kerosene-based fuel, there is a genuine and strong demand for it from airlines, not because they enjoy paying more for their fuel necessarily but because from their own reputational point of view they wish to do as much as they can to decarbonise the operation of their fleets. SAF is the principal technique available to them for doing that at the moment, as the noble Baroness, Lady Randerson, pointed out, so the demand undoubtedly exists. Why is the supply therefore not forthcoming? Why is it that they would have to go somewhere else to buy SAF—which is the implication of their position—when the demand exists here and we are home to major suppliers? Nobody seems to have explained this.

We have decided, despite the fact that we allegedly operate a market economy, that the Government are going to intervene so as to mandate the supply of this fuel. The means of mandating it is through this instrument —through the mandate—and that will not only oblige it to be produced but oblige it to be sold in certain quantities that will increase every year.

That addresses only the standard available type of SAF—the HEFA-type SAF that the Minister referred to. There are other, more exotic means of producing SAF not yet available, some of them perhaps even undreamt of. They will be subject to a separate mandate so that, to fulfil the mandate, it will be obligatory to produce some SAF by these alternative methods. That graph continues to grow over a period, as illustrated in the table on page 7 of the statutory instrument. What I would really like to know is: why can this not be done by the market?

16:15

Why is it that we have not only to mandate the production of SAF—although not actually mandating the purchase, as I understand it—but to do so, as the Minister referred to, by giving a guaranteed price to suppliers and a guaranteed return to investors? I had understood, as a consequence of the briefing, that the guaranteed return was incorporated in this instrument. I may have got that wrong and it may have been an assumption on my part—I do not mean to criticise officials when I say that—because, as I understood the Minister, he seemed to say that separate legislation would be brought forward to provide the guaranteed return to investors. If that is so, perhaps my ensuing comments refer more to that separate legislation, but for the moment I will take it all as one instrument and one package

I ask myself: why would you have private investors who need and deserve a guaranteed return? Since that guarantee will effectively be a UK government guarantee, why would the investors be deserving of a return that was greater than gilts? When I asked in the briefing whether it would be greater than gilts, I was told that it would be, although the amount has not been settled at this stage. It seems that the investors are the group driving the complexity of the market intervention required by this instrument. As I say, I find this troubling to some extent. For how long will those prices and that return be guaranteed? I would very much like to know the answer to these questions.

If the Minister cannot answer them due to my own fault of understanding and they are not part of this instrument then I will understand, because I will have made a mistake, but they seem to be crucial things for us to know. In a sense, they go to the heart of the distortion that we are introducing into our own markets. It is a microcosm of the way in which the state is increasingly taking over our industrial sector. Of course, a lot of this is being done with the collusion and welcome of the industrial sector. Who would not welcome guaranteed production prices or guaranteed returns? I completely understand that, but it is not the heart of a beating, competitive capitalism of the sort that produces a competitive, growing and increasingly productive economy. It troubles me that we are in this position.

I would like to know the answers to some questions. I second the questions asked by the noble Baroness, Lady Randerson, and by my noble friend Lord Trefgarne, but I have my own questions to add. Has an assessment been made of the cost implication for airlines of this mandate? What are the cost implications for the passenger of this mandate as it increases? I do not mean necessarily in its first year, when a very small admixture of SAF to the kerosene-based fuel is hardly likely to be noticed, but the mandate is very demanding as it stretches out over future years—and not very many future years. It ramps up quite dramatically.

What impact is this likely to have on passenger numbers? The airline industry is forecasting quite a significant fall in those, as a result of decarbonisation. One may dispute whether those estimates are excessive—the industry may be putting too high a figure on it—but it is hard to believe that there will not be some fall in numbers as a result of this sort of measure. Has the department estimated that and can the Minister tell us how many ordinary, working people—if I may call them that—will find that they are simply priced out of their holidays, as a result of this measure and those like it?

Finally, I would very much like to know what return will be offered to investors. The figure may not be available at the moment, but how much above gilts is it likely to be? What justification is there for a risk-free return greater than the return that could be achieved on government bonds?

I will be brief in wrapping up, but that last point has nothing whatever to do with climate change; it is about Treasury orthodoxy. Only 30 years ago, the Treasury orthodoxy was that if the Government want to undertake a project, they should finance it through either taxes or borrowing. If through borrowing, the reason was that the Government were always the cheapest and most favourable borrower in the market. They could borrow more cheaply than the private sector could. Why have we determined to outsource this funding requirement, when we admittedly know that it would cost us more than if the Government were to do it themselves?

[Lord Hendy of Richmond Hill (Lab)]

I thank all noble Lords for their contributions to this debate. I will take the questions from the noble Baroness, Lady Randerson, first. Her first questions were about the length of time that it has taken to bring this statutory instrument together.

We have engaged extensively with industry in this area. Two consultations have been completed and, in both cases, industry was generally supportive of our proposals. The most recent consultation, in March 2023, received 104 responses and the government response to this was published in April 2024. We received responses from a range of stakeholders, including fuel suppliers, airlines and NGOs, so it has been extensively consulted on. This statutory instrument replaces the previous one tabled, because there has been a change of Government; the current one was therefore tabled by the new Government.

The noble Baroness asked whether this is good SAF and what good SAF is. The Government have been clear that the mandate must deliver fuels with the highest sustainability credentials. We are therefore putting in place strict sustainability criteria that SAF must meet to be eligible under the mandate. SAF must be made from sustainable waste or residues, such as used cooking oil or forestry residues; recycled carbon fuels, such as unrecyclable plastics; or power-to-liquid fuels made using low-carbon, renewable or nuclear energy. SAF produced from food, feed or energy crops will not be allowed. We will continue to monitor the sustainability of SAF pathways to ensure that high sustainability standards are maintained.

The noble Lord, Lord Trefgarne, asked whether this applies to general aviation. I have been referred to a very complex answer, but I am not sure that I can do full justice to his question. If the noble Lord will indulge me, I will write to him fully on that.

Lastly, the noble Lord, Lord Moylan, raised some questions. He asked about the cost implications for passengers. I am assured that, although SAF will be more expensive than traditional jet fuel, it must be right that the costs of decarbonising the fuel are borne by those that produce the emissions. Providing that sufficient SAF is available, increases in average airfares will fall within the range of their annual variations, seen historically, from which it is not difficult to deduce that the effect on passenger numbers will be quite small.

The noble Lord, Lord Moylan, is correct that the guaranteed return is not in this instrument. That is why the Government have committed to a revenue certainty mechanism.

If there are any questions that I have failed to answer completely, I will write to noble Lords and the noble Baroness about them.

[Lord Moylan (Con)]

May I briefly ask the Minister something? There seem to be two guarantees going on here. Might the Minister be able to inform your Lordships about how they will interact? One is a guaranteed price mechanism. As I understand it, although I am happy to be corrected, the suppliers will be guaranteed a price for the SAF, the suppliers being the large companies that supply this type of fuel—the BPs and so on of this world. The other is a guaranteed return to the investors. The investors are presumably the people who will pay for the construction of the facilities that will produce this material, source it and so on—that is, the infrastructure required to generate it. Can the Minister say how those two guarantees interact, both legislatively and financially? Is the Minister saying that one is being legislated for in this instrument and one is to come later? Noble Lords would be interested to understand that, I think.

[Lord Hendy of Richmond Hill (Lab)]

I thank the noble Lord for his intervention. He is right that there are two mechanisms. The revenue support mechanism Bill will introduce revenue certainty for SAF producers looking to invest in new plants in the UK. Together with the SAF mandate, those measures will give the investment community confidence to invest in these novel and innovative technologies.

The revenue certainty mechanism aims to boost greener flying and support an industry estimated to add more than £1.8 billion to the economy. This will help secure the supply of SAF for UK airlines. The legislation for a revenue certainty mechanism will be in place by the end of 2026. If the noble Lord would like me to explain further how those two mechanisms interact, I would be absolutely delighted to write to him.

To conclude, greener transport is central to the delivery of the UK’s cross-economy climate targets. It directly supports the Prime Minister’s mission to make Britain a clean energy superpower and accelerate our journey to net zero. SAF is one of the key technologies that will facilitate this change. Introducing the SAF mandate will allow the UK to capitalise on the opportunity that SAF presents for decarbonising the aviation sector and will support the transition to net zero.

Motion agreed.