Welcome to the latest edition of Energy Source, coming to you from London. Wednesday proved to be a challenging day for the UK’s electricity markets.
The National Energy System Operator, responsible for maintaining power supply, issued several alerts. They called upon power generators to boost supply due to falling wind speeds, while import cables were already heavily utilized.
Phil Hewitt, director at the energy data firm Montel Analytics, commented that this was the “tightest day so far this year.” Gas-fired power stations were demanding very high prices to come online, with one station asking for £5,750 per megawatt-hour, while the day-ahead wholesale price sits around £97 per megawatt-hour.
Despite the challenges, the market reacted effectively, ensuring that electricity supply continued without interruption. By 8 PM on Wednesday, Britain sourced 57.7% of its electricity from gas, 8.6% from wind, and 11.7% from interconnectors.
This scenario highlights the increasing complexities of managing the electricity system as it increasingly relies on intermittent renewable sources, challenges that many countries worldwide will soon face as well.
In today’s main story, we delve into the introduction of sustainable aviation fuel (SAF) mandates in the EU and the UK, a significant step in the energy transition.
As the new year begins, while many individuals set resolutions, the aviation industry in these regions is faced with new regulations aimed at reducing reliance on fossil fuels.
Fuel suppliers at UK and EU airports must now provide a portion of sustainable aviation fuel for outgoing flights. A variety of sources can be considered for SAF, including cooking oil, municipal waste, or hydrogen, as long as they aren’t derived from fossil fuels.
In the first year, the mandates are modest: 2% of jet fuel must be SAF in both the UK and EU. However, these figures are expected to rise to 10% in the UK and 6% in the EU by 2030, and likely beyond that.
This marks a new chapter in the energy transition, as governments aim to enforce compliance in the aviation sector to meet critical decarbonization goals. Furthermore, the price of carbon emissions certificates is anticipated to increase, making carbon emissions more costly for airlines.
The push towards sustainable fuels in aviation is complicated and can be more expensive compared to traditional fossil fuels, which may hinder both demand and supply. Policymakers are hopeful that generating demand will help overcome these challenges.
Eirik Pitkethly, BP’s vice-president of regulatory affairs for bioenergy, stated that the mandates “provide confidence to investors, clear market opportunity, and a driver for a completely new product in the market.”
However, last year’s outlook for future supply appeared bleak. Despite the new demand mandates, several sustainable aviation fuel projects were halted or delayed due to high costs and limited feedstock availability. For instance, Shell paused construction on a biofuels plant in Rotterdam last July, citing unfavorable market conditions.
In total, nearly 2 million tons of annual SAF production capacity was either cancelled or put on hold during 2024, according to consultancy Wood Mackenzie. To put it in perspective, the UK’s mandate for this year is expected to require around 230,000 tons.
Ozzy Jegunma, a senior research analyst, noted that “challenging market conditions, availability of competitively priced sustainable feedstock, and altered strategic priorities” contributed to these cancellations.
Forecasts suggest that SAF produced from used cooking oil in north-west Europe could cost up to three times more than conventional jet fuel by 2030.
In the coming years, a portion of the mandates in the EU and UK will need to be met with synthetic fuels to alleviate the pressure on biofuel feedstocks. Synthetic fuels, which can be produced by combining carbon dioxide with hydrogen made from green electricity, present their own set of complexities and costs. Indeed, both Shell and Uniper withdrew from proposed projects in Sweden last year.
Impacts on Airfares
Monika Rybakowska, a policy director at the airline group Airlines for Europe, emphasized that this year is one of adaptation for the industry. She expressed concerns about a potential “green premium,” whereby the costs of meeting these new regulations could be passed on to consumers.
“The intention is not to make flying more expensive; it’s about decarbonizing aviation, striving for a balance between sustainability and affordability,” she added. The UK government has estimated that compliance with these mandates could lead to a £9.40 increase in average one-way ticket prices by 2040. In worst-case scenarios, this could rise to £37.80 if airlines struggle to secure enough sustainable fuel and opt for buyout fees instead. However, they indicated a willingness to review the mandate to avoid significant price hikes.
Tim Alderslade, chief executive of the UK airline lobby group Airlines UK, suggested that with the correct policies, the impact of these mandates on ticket prices can be minimal. “Our priority is ensuring the success of the mandate,” he remarked.
The UK government has previously had to adjust policies requiring car manufacturers to produce specific numbers of electric vehicles after industry complaints about the difficulties of compliance. The effectiveness of similar mandates in the aviation sector is now being put to the test.