Navigating the Financial Skyways: Financing SAF Projects in the US

In the urgent quest to address climate change, the U.S. aviation industry is pivoting towards sustainable aviation fuel (SAF). This transition goes beyond merely technological or logistical aspects—it is intrinsically a financial challenge. Generations of reliance on fossil fuels have deeply embedded specific economic dynamics into the industry. Therefore, mastering the transition to SAF requires a profound understanding of these dynamics.

Notably, equity and debt financing play pivotal roles in shaping the financial landscape of SAF projects. Complemented by federal incentives, they provide a robust support framework for the growth and success of SAF projects. This article delves into these crucial themes, offering readers a panoramic view of SAF project financing.

Equity Financing in SAF Projects
In the initial stages of SAF projects, equity financing takes the spotlight. This funding channel is comprised of investments from project developers, venture capitalists, and infrastructure firms willing to venture into the potentially high-risk, high-reward terrain of the nascent SAF sector. Take the example of Fulcrum BioEnergy's Sierra BioFuels project. This project represents a fascinating case of a multifaceted approach to equity financing, integrating private equity, strategic partnerships, federal loan guarantees and grants. On the equity side, Fulcrum tied strategic offtake and other agreements to significant equity investments from BP, SK Innovation and others. But before then, Fulcrum was raising smaller amounts of money by selling its equity as far back as 2008. This blend of funding sources allows the project to unlock substantial SAF production capacity, thereby showcasing the power of diverse equity financing in overcoming risks and jumpstarting SAF projects.

SAF producer Gevo also epitomizes the resilience and strategic acumen required to secure equity financing. Gevo started over 15 years ago with small equity investments and attracted venture funding from Khosla Ventures and others by selling preferred stock and convertible promissory notes. Gevo also acquired a small ethanol plant in western Minnesota and did an initial public offering. Since then, and despite financial hurdles, Gevo has steadily progressed, securing equity investments for its Net-Zero 1 and Net-Zero 2 SAF projects. These instances underscore the indispensable role of equity financing in the SAF sector.

While it has fallen on hard times, Red Rock Biofuels was earlier able to obtain significant equity investments from British Airways parent company International Airlines Group. Red Rocks is a good example of how strategic investors fund even risky SAF projects in their quest to find a supply of SAF.
No matter how these projects are doing now, they all started as ideas. They had stakeholders who convinced small investors to support their dream, hit their milestones, and attracted venture and institutional equity investors.

Debt Financing in SAF Projects
As SAF projects mature and validate their feasibility, those behind the projects start looking at the financing needed to build a production facility. Most of the time, that means they need debt, because equity financing is often too expensive to use for project financing. While traditional debt instruments like bank loans and bonds may be viable options, the uncertainty of a new technology-based project usually means the consideration of more exotic debt options as well.

One mechanism for risk mitigation in SAF projects is through off-take agreements. These agreements assure lenders of a predictable revenue stream, making the project more appealing for debt financing. Gevo's ongoing negotiations for engineering, procurement and construction (EPC) contracts for the Net-Zero 1 SAF project offer a salient example. For its South Dakota project, Gevo is seeking over $100 million in solid waste bonds (often called green bonds). The company is also considering various financing options, including equity investments and potential debt financing from the U.S. DOE This demonstrates how debt financing can provide vital support for expanding SAF projects.

Fulcrum has a number of long-term offtake agreements that also support debt financing for its projects, including approximately $20 million in grant funds from the U.K. Department of Transportation for its U.K. project, and $375 million in the sale of Environmental Improvement Revenue Bonds with the Indiana Finance Authority.

Achieving a Balance: Equity and Debt in SAF Projects
While equity and debt financing each have their roles in SAF project financing, it's careful balancing of the two that often determines project success. This equilibrium significantly influences a project's risk profile, making it more or less attractive to potential investors and lenders. Generally, the riskier the project, whether because of unproven technology, feedstock or offtake risk, the more equity or exotic (and more expensive) debt options are required.

LanzaTech's story brings another layer of complexity to the conversation. This company, renowned for its innovative carbon capture technology, has attracted significant equity investments from strategic partners such as Indian Oil Corporation and All Nippon Airways. These investments not only validate LanzaTech's innovative approach, but also provide the necessary financial fuel to drive their groundbreaking technology forward.

Federal Incentives for SAF Project Financing
No discussion of SAF financing is complete without acknowledging the role of federal incentives. Initiatives like the USDA  Biorefinery, Renewable Chemical and Biobased Product Manufacturing Assistance Program, and the DOE’s Loan Programs Office, have been pivotal in encouraging SAF project financing by providing grants and loan guarantees. The SAF Grand Challenge, a federal initiative, is instrumental in stimulating research and development in the sector and offers potential funding opportunities for innovative SAF technologies. With the Biden administration's commitment to achieving net-zero emissions by 2050, SAF projects have become even more attractive to financiers and investors, setting the stage for a new era of advanced and financially sustainable SAF projects.

The Inflation Reduction Act’s new Section 40B SAF fuel credit also contains helpful credit payments that SAF projects can utilize or even sell to support their equity and debt financing. Several states, including Minnesota, Illinois and Washington, are enacting or considering similar state level incentives as a way to encourage the development of SAF projects in their states.

Staying Informed: Trends, Financing Structures, and Opportunities
The SAF landscape is a dynamic one, constantly shifting with emerging trends, evolving financing structures, and new opportunities. For industry stakeholders, staying abreast of these changes is imperative. One notable emerging trend is the proliferation of strategic partnerships, federal and state incentives, and international collaborations, which can catalyze innovation and financial support for SAF projects.

Moreover, public-private partnerships offer an exciting avenue for advancing SAF development. By combining government support with the nimbleness of private sector entities, these partnerships can accelerate the financing and growth of SAF projects. The growing interest in impact investing, where investments aim to generate positive environmental impact alongside financial returns, also signals a promising new frontier for SAF project funding.

The pivot to SAF is not just a matter of overcoming technical and logistical roadblocks—it requires navigating an intricate financial labyrinth. By delving into the financial stories behind successful SAF projects, industry stakeholders can glean invaluable insights into this complex domain. These stories serve as a roadmap, shedding light on the crucial elements that can make or break a SAF project.
They highlight the importance of robust equity financing during the early stages, the role of debt financing in scaling operations, and the positive impact of federal incentives and public-private partnerships in creating an encouraging environment for SAF projects. Failed projects like Red Rocks also serve as caution signs to developers, investors and partners.

The widespread adoption of SAF is not just a dream—it's a tangible reality within reach. As we rise to the challenge, we are ushering in a new era for the aviation industry—an era characterized by sustainability, innovation and growth. The journey may be complex, but with every successful SAF project, we are one step closer to a greener, cleaner future for aviation.

Author: Todd Taylor
Attorney, Avisen Legal
[email protected]
www.avisenlegal.com