Clean, green options lacking as airlines seek alternatives to petroleum

Source: Amanda Peterka, E&E reporter • Posted: Tuesday, January 15, 2013

First of three stories about airline biofuels.

There’s an old saying in the aviation business: Lift is a gift, but thrust is a must.

Behind the truism is a harsh reality for airlines trying to reduce their emissions and slash sky-high fuel costs. It takes a lot of petroleum to get an airplane going, and electrifying the fleet is not an option.

So airlines are scrambling for cleaner, greener and cheaper fuels. “We would be fools not to ensure that we have some alternative going forward,” said John Heimlich, vice president and chief economist at Airlines 4 America, a consortium of 11 airlines. “We don’t want to be the only industry left behind without any form of alternative energy.”

The alternative of choice: biofuels.

Airlines, plane manufacturers and airports are working together and with the military to test biofuels that airports can use in fueling infrastructure. Commercial airlines have logged more than 1,700 test flights on biofuels — including a recent Canadian flight that for the first time soared on 100 percent biofuel — but there’s still a bumpy ride ahead.

Capital costs for biofuel producers remain high, the price of aviation jet fuel remains above that of traditional jet fuel, policy around the globe is varied, and uncertain and long-term contracts are nearly impossible to obtain. The renewable jet fuel market is also seeing fierce competition from the diesel market.

“We’ve having the best of times and the worst of times,” said Ross Macfarlane of Washington-based Climate Solutions, which has worked with Pacific Northwest airlines and airports in a regional partnership.

The issue is supply — or rather, lack of it. There’s just not enough available biofuel to make it feasible for flight on a grand scale.

“Anyone who is going to be making renewable fuels from readily available plant sources today, and animals and used cooking oil and greases, will have this conundrum in dealing with a real strong demand in the aviation biofuels industry but the inability to pay the premium,” said Jim Rekoske, vice president and general manager of the renewable energy and chemicals business unit at UOP LLC.

“In the short term, unless airlines are willing to pay a premium, it will be difficult to convince them” to use renewable fuels,” he added.

Money’s a big incentive, and U.S. airlines are spending gobs of it on fuel.

In 2011, airline companies spent nearly $48 billion on jet fuel for domestic and international travel. Fuel prices are now about 35 percent of an airline’s operating cost, up from 10 percent in 2001, and fuel remains around record prices of more than $3 a gallon. Every penny per gallon in increased jet fuel costs translates to a price increase for U.S. passenger and cargo airlines of about $175 million a year, according to a report in 2011 by an aviation biofuels initiative in the Pacific Northwest.

Jet fuel prices are increasing despite the fact that U.S. airlines have used less fuel over the past decade — from about 16.8 billion gallons in 2002 to 16.3 billion gallons in 2011 on both domestic and international travel, according to a report last fall by the Department of Transportation’s Office of Inspector General.

“We use less and spend more,” Heimlich said. “That’s not a good formula.”

Financial, environmental pressures

Although fees for baggage and other items on board aircraft have helped boost profits — in the first half of last year, U.S. airlines made $1.7 billion from baggage fees — each passenger still yields only about a 0.4 percent profit margin for airline companies, Heimlich said.

So more than 50 U.S. passenger and cargo airlines have filed for bankruptcy in the past 12 years. And since June 2007, U.S. airlines have reduced the number of domestic scheduled passenger flights by 13.9 percent, according to the DOT report.

Prices have been not only high but also volatile, peaking in 2008 and then seesawing since then.

“If you’re an airline or you’re a shipping company or whatever, it’s very difficult to operate in that environment,” Zia Haq, a senior analyst at the Department of Energy, said at a recent conference in Washington, D.C. “Because you’re going to book a ticket that you’re going to pay six months or two weeks ahead of time, so you have to guess what your price is going to be in the future.”

Yet world demand for aviation continues to grow at around 5.2 percent a year, outpacing world growth in gross domestic product, as more people across the globe rise to higher income statuses, said Julie Felgar, managing director of environment and aviation policy at Boeing Co. Within the next 20 years, the global aviation industry will need about 34,000 new airplanes: 41 percent as replacements for older ones and 59 percent as additional planes.

“Saying we could do less flights is not realistic to our future,” Felgar said.

And airlines are facing pressure from consumers and governments, namely the European Union, to reduce their emissions of heat-trapping greenhouse gases. According to the U.N. Intergovernmental Panel on Climate Change, airlines account for 2 percent of global carbon emissions. Although U.S. emissions have fallen since 1990, the industry’s overall global emissions are expected to reach 3 percent by 2050.

Partly in response to expected caps on carbon use and rising fuel prices and partly out of a desire to green its operations, the commercial airline industry as a whole has set for itself two goals to address emissions and fuel use: Achieve carbon-neutral growth beginning in 2020 and reduce carbon dioxide emissions 50 percent by 2050 compared with 2005 levels.

Changes in airplane manufacturing to increase efficiency — through the use of lighter materials and winglets to reduce drag — are one means of getting to those goals, and one that’s already being done throughout the industry. Boeing, for example, aims for an efficiency increase of 15 percent with each new model plane that is released.

Airlines are also exploring increasing the efficiency of operations, such as switching from a ground-based radar system to a satellite-based system, a move that is estimated to immediately reduce the aviation industry’s emissions by 12 percent.

But increasing the efficiency of planes and operations will barely get airlines halfway to their goals. The only way to get there, aviation officials say, is through the commercialization of renewable jet fuel.

“You can do a lot with more efficient flight routing and promoting alternatives to air travel in some cases, but unless you really think we’re just going to give up aviation, you have to also find new generations of fuels,” Macfarlane said.

‘We’ve actually come a long way’

Qatar Airways last week completed the first commercial flight on natural gas, but for the most part, airlines are focused on renewable jet fuel made from materials like plants, waste and algae-derived oils.

In the past five or so years, “everything” has been dedicated to finding a drop-in solution, or one that won’t require overhauling airports’ fueling infrastructure, Boeing’s Felgar said.

Drop-in fuels are made from renewable material but are identical to petroleum-based fuels.

Spurring some of the first research was the Defense Department’s Defense Advanced Research Projects Agency (DARPA), which decided in 2006 to seek projects that would develop renewable military jet fuel from oilseed crops. The goal was to find fuel that could power U.S. Air Force and NATO planes.

That same year saw the creation of the Commercial Aviation Alternative Fuels Initiative, an organization made up of trade groups representing the airlines, manufacturers and airports, as well as the Federal Aviation Administration, to advance aviation biofuels.

Two years later, Virgin Atlantic Airways Ltd. became the first airline to fly a commercial aircraft on biofuels. The Boeing 747 flew from London to Amsterdam on a fuel blend that contained 20 percent biofuel made from coconut oil and babassu nut and 80 percent kerosene. The biofuel mixture was used in one of the plane’s four engines.

Other flights followed. In 2009, then-Continental Airlines successfully flew the first U.S. demonstration flight on biofuel, a Boeing 737-800 that flew for 90 minutes on a blend of 50 percent algae- and jatropha-derived oil provided by Sapphire Energy Inc. in one of its engines. A year later, United Airlines Inc., which bought Continental, followed that up with a demonstration flight on synthetic fuel made from natural gas

In 2011, United also completed the first commercial revenue flight in the United States on biofuel. The airplane flew from Houston to Chicago on a blend of 50 percent algae fuel provided by Solazyme Inc. and 50 percent petroleum-based fuel.

In parallel, ASTM International, the global standard-setting organization, has approved two technology pathways for renewable jet fuel, finding them safe to use and compatible with existing infrastructure and aircraft.

The first, approved in 2009, is a Fischer-Tropsch process that converts cellulosic materials to synthesis gas and then into fuel through a combination of heat and catalysts. The other, more recently approved fuel is a hydroprocessing technology known as HEFA. The process, adapted from the refining industry, takes in oil from crops like camelina and jatropha or from animals and converts them to drop-in petroleum.

ASTM’s decisions, which are recognized by many governments around the country including the United States, essentially allow the fuels to be used in commercial flights. Several other technologies, including alcohol-to-jet, are also under consideration.

“I think when you look back on the history to how we’ve gotten to where we’ve gotten, we’ve actually come a long way in a very short amount of time,” said Jimmy Samartzis, managing director of global sustainability for United Airlines.

“The industry on a whole has completed over 1,500-plus flights on biofuels. We had visions in 2006 and have gotten technologies approved, and companies are beginning to move forward in terms of commercial-scale production,” he added.

Government mandates

The big question, though, is how to get from the test flights of today to the visions the aviation industry has for itself 10 and 40 years from now.

“We still do not have sufficient supply. We do not have the price-point driver on sustainable aviation biofuels,” said Felgar of Boeing. “The refinery capacity is small. There is still a price premium. If you’re an airline, even with the best of environmental intentions, you need to be paying at least price parity for your fuels and preferably below.”

There are several obstacles in the way to the mass production of cost-efficient alternative aviation fuels.

Renewable fuel producers, for one, are moving to make diesel fuel “faster and sooner rather than making jet fuel,” said Rekoske of UOP, the refining technology subsidiary of Honeywell International Inc.

Although diesel and jet fuel are essentially the same price and made from the same plant oils, fats and greases, there is always a yield loss when making jet fuel because it requires a shorter carbon chain than diesel. The diesel market is also much larger and has fewer quality controls.

Moreover, the U.S. regulatory system is much better established for ground-based fuels.

“Unfortunately, because most of the policies supporting first-generation fuels were developed without this thought in mind, in many cases there’s not even a level playing field for aviation fuels, let alone an active support and recognition that these fuels need to have priority,” Climate Solutions’ Macfarlane said.

U.S. EPA, for instance, has not yet included renewable jet fuel in the nation’s biofuel mandates. Such an action would allow aviation fuel manufacturers to participate in the market for renewable fuel credits, giving them the power to buy and sell credits that can be used toward meeting the requirements in the renewable fuel standard.

Last year, the agency issued a direct final rule that would have opened up the market for aviation biofuels and fuels made from several types of feedstocks, but EPA withdrew it on a negative comment from a group of environmental organizations that worried about the feedstocks becoming invasive. EPA is currently going through the regular rulemaking process on the rule and has yet to make it final; a decision is expected this year.

Companies looking into aviation biofuels also have questions about how the renewable fuel standard, which applies to fuels consumed in the United States, plays out for an airline that purchases aviation biofuel here but consumes it on a flight overseas to Europe or Asia.

Mona Dajani, a partner at Baker & McKenzie and an expert in renewable energy, says the industry is also facing confusing tax laws on a state and federal level, as well as globally; a lack of clear price-setting guidelines; and a disconnect between policymaking and how policies are carried out.

“The problem is that investors are waiting for certainty,” said Rich Altman, executive director emeritus at the Commercial Aviation Alternative Fuels Initiative. “It’s not regulations — it’s the regulatory uncertainty that’s the problem. Investment interests can’t act or at least plan what their actions can be.”

‘Uncertainty breeds opportunity’

The lack of certainty in investments has made it difficult for the U.S. companies trying to produce aviation biofuels, said Eric McAfee, CEO of Aemetis Inc., a company that has a renewable fuels plant in California.

“Today it looks like, at least from the producers’ point of view, that there’s an uncertainty at best, and maybe no incentive at all at worst, to produce jet fuel for anybody,” McAfee said

Like other advanced biofuels that are just beginning to come online, the aviation sector is also struggling to secure financing for large-scale projects, as well as a reliable supply of feedstocks.

Long-term off-take agreements have also proved elusive. Because of the volatile nature of oil prices, typical commercial aviation fuel contracts are short, about 12 to 18 months, according to Heimlich of Airlines 4 America.

Biofuel producers and investors generally want longer contracts, he said.

“We’ve had a number of people come to us and say, ‘Well, can you do a 20-year off-take?'” Heimlich said. “And after I spit my drink out, I say, ‘Well, if we change to a utility in the Northeast and we change our business and get rid of all these planes, maybe we could. But we’re not.'”

The biggest challenge, UOP’s Rekoske said, is that what the aviation industry and biofuels producers are attempting to do is to begin a market from nothing, and do it in a short amount of time

“We’re starting essentially from zero in the industry,” he said. “The infrastructure for moving around our raw materials is very limited, the infrastructure for converting our raw materials is very limited.”

Still, companies see opportunity in the burgeoning aviation biofuel market.

“Uncertainty breeds opportunity. And in this scenario, our first opportunity is to create certainty,” McAfee said. “And the guys that step up, the gals that step up and get that reduced volatility will be immensely rewarded because there’s no way you can take the volatility out of the oil business.”

Up next: Airlines’ demand spurs biofuel producers.