Biofuels for aviation

Biofuels for aviation

Biofuels for aviation By: Carlo Hamelinck, Maarten Cuijpers, Matthias Spoettle, Arno van den Bos Date: May 2013 Project number: BIENL13187 Ecofys 2013 by order of: Ministry of Infrastructure and the Environment ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T +31 (0)30 662-3300 F +31 (0)30 662-3301 E info@ecofys.com I www.ecofys.com Chamber of Commerce 30161191

Summary Background Aviation is the fastest growing transport modality worldwide with a projected growth of 4.5% annually up to 2050. If fuel use and GHG emissions increase at the same rate this results in a sixfold increase by 2050. Actual growth will be smaller because of operational and technical improvements, but still, a threefold increase is expected by 2050. In 2012, the Air Transport Action Group (ATAG - representing the combined global commercial aviation sector) presented a number of options that should, together, reduce the impact of aviation: (1) energy efficient technology, (2) improved operations, (3) improved infrastructure and (4) biofuels 1. At that time, the interest in biofuels for aviation, both in the Netherlands and around the world, was already rapidly increasing. This report In this report we advise the Dutch government on stimulating the uptake of bio jet fuel in the Netherlands. A broad group of Dutch stakeholders and international experts was consulted by way of individual interviews and a workshop. International initiatives and ideas have been studied to understand opportunities and restrictions for what can be developed in the Netherlands and to inspire ways forward. The research focussed on the practical and economic aspects and development pathways for large scale application of bio jet fuels. As the sustainability of biofuels is discussed in many other studies, we have assumed that biofuels sustainability can and shall be ensured. The report was commissioned by the Dutch Ministry of Infrastructure and the Environment. Opportunities for the Netherlands The strong combination of progressive Dutch public and private stakeholders, the important position of the Netherlands in fossil jet fuel trade, strong logistics and infrastructure and the foresight of a growing international market reaching full commercialisation after 2020 offer unique strategic opportunities for the Dutch economy and stakeholders to maintain and strengthen its international position in this evolving business. The opportunities for the Netherlands especially reside in unique starting points: The Netherlands holds an important position in the European aviation sector; o Schiphol is the fourth largest European airport; o Air France-KLM is one of the largest European airlines; The ports of Rotterdam and Amsterdam are key logistic hubs in European jet fuel trade; o Both ports supply Schiphol with jet fuel, via advanced pipelines; o Other major airports in North Western Europe, Germany in particular, can be provided with jet fuels via the Central European Pipeline System; 1 ATAG, 2012, A sustainable flightpath towards reducing emissions, Air Transport Action Group. iii ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T +31 (0)30 662-3300 F +31 (0)30 662-3301 E info@ecofys.com I www.ecofys.com Chamber of Commerce 30161191

Neste Oil has a plant in the Rotterdam harbour that can produce bio jet fuel, although it is currently only used to produce biofuels for road transport; The Dutch company SkyNRG is currently the global market leader in bio jet fuel trade, having supplied over 20 airlines worldwide. Start of a growing market Currently, bio jet fuel trade volumes are still very small, with most airlines having performed only single test flights. We expect a strong market growth up to 2020 in line with the European Advanced Biofuel Flight Path 2020 and ICAO goals. The EC projects that this will result in 2 million tonne of bio jet fuel consumption in 2020, which equals 1% of the total world jet fuel consumption in 2020 2. After 2020 the market will commercialise to grow towards the European Commission s (EC) long term goal of 40% low carbon fuel use in aviation by 2050 3. Several projects are now being shaped that will enlarge the Dutch market for bio jet fuels in the coming years: the recently announced series of KLM flights between JFK International Airport and Schiphol Airport, the KLM Corporate BioFuel Programme that enables corporates to fly on bio jet fuels, as well as the ambition of KLM to use 1% bio jet fuel by 2015 throughout their entire fleet. Dutch stakeholders also participate in international initiatives, such as ITAKA (Initiative Towards sustainable Kerosene for Aviation), which aims to produce bio jet fuels from Spanish camelina and will demonstrate a complete supply, including distribution via existing fossil jet fuel infrastructure and use in KLM aircrafts. Barriers Dutch R&D policy, e.g. the Topsector policy, allows government and industries to jointly accelerate research, development and innovation projects in the field of bio jet fuels. In parallel to starting up projects, a number of barriers will have to be removed to capitalise the opportunities: High costs bio jet fuels are 2-4 times more expensive than fossil jet fuels, as a consequence of the early stage of conversion technology as well as higher operational costs associated with incidental batches. Also the limited availability implies that there is not yet a competitive market for bio jet fuels. The cost/price will decrease once the production volume increases and more producers enter the market; In the short run, the price gap must be overcome. Instruments such as biotickets in the Netherlands, and the Emission Trading Scheme could only bridge a part of that gap; While the European Union Renewable Energy Directive (EU RED) allows bio jet fuels to be counted towards the RED obligation, so far the Netherlands have been the only Member State to make this explicit in their national transposition of the RED. Once more Member States implement such measures, the level playing field with road biofuels will improve, and larger volumes of bio jet fuels will be applied, which will reduce their cost and price; There is great willingness, but low market power with airlines. Many airlines have shown interest in flying on bio jet fuels, but lack the financial resources to overcome the price gap. Single 2 EC DG ENER, Choren, Lufthansa, 2011, 2 million tons per year: A performing biofuels supply chain for EU aviation. This technical paper explains the European Advanced Biofuels Flightpath initiative. 3 EC COM(2011) 144 final, White Paper Roadmap to a Single European Transport Area Towards a competitive and resource efficient transport system. iv ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T +31 (0)30 662-3300 F +31 (0)30 662-3301 E info@ecofys.com I www.ecofys.com Chamber of Commerce 30161191

airlines cannot afford to pay a higher price for bio jet fuels, because that would impact their competitiveness with other airlines. A sector approach is required; Financing challenges exist in scaling up bio jet fuel production capacity. At the moment, investments are limited because of the difficult current economic situation, overcapacity of existing biofuel production plants in Europe and the lack of a convincing stable long term bio jet fuel market perspective; Some production technologies under development still have technical challenges and would need larger upfront investments for first-of-a-kind installations before they could deliver cheaper fuels; Concerns about sustainability airlines are prudent in their actions in the field of bio jet fuels as biofuels are frequently the subject of sustainability debates and airlines are particularly vulnerable to public opinion. Full sustainability aspects of bio jet fuel supply chains must be demonstrated by certification schemes, including both the direct and indirect effects. Advice to the government To position the Netherlands as a key player in the upcoming bio jet fuel market, supply and demand should be developed in the same pace. Ecofys advises the Dutch government to take a number of actions and implement a set of policy options in the short term (2013-2015) which will create a Dutch market for bio jet fuel. In the medium term (2015-2020) the market in the Netherlands should be scaled up by further stimulating demand of commercial airlines in the Netherlands and in the EU, while at the same time developing bio jet fuel production capacity in the Netherlands. In the longer term (2020-2030) the market will reach full commercialisation, where volumes will go up and advanced production technologies will have to be used to meet the increasing demand for bio jet fuels. Stable long term policy The Dutch government should ensure, throughout the short and medium term, that R&D is performed on the bio jet fuel supply chain and (new) production technologies of bio jet fuel so that advanced production technologies can be deployed once the market reaches full commercialisation. Ecofys recommends that throughout the process of stimulating the bio jet fuel market the Dutch government continuously advocates the use of bio jet fuel on a European level and aims to increase the volumes of bio jet fuel trade internationally. Stimulating the market growth outside the Netherlands ensures that other countries follow in the traction created by the Dutch frontrunner companies, so that demand increases and the price goes down. Dutch first movers can expand their activities to the international market and the Netherlands can become a hub for bio jet fuels, just as it is already a hub for regular jet fuel. v ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T +31 (0)30 662-3300 F +31 (0)30 662-3301 E info@ecofys.com I www.ecofys.com Chamber of Commerce 30161191

To remove the barriers and to capitalise on the opportunities for the Netherlands we propose the following set of policy recommendations and short term actions for the Dutch government. In the table below the short, medium and long term actions are summarised for different regions. Short term 2013-2015 Medium term 2015-2020 Long term 2020-2030 Create the Dutch market Improve sustainability demonstration Scale up Dutch bio jet fuel demand Connect to other markets Production capacity and supply chain in the Netherlands Establish a fully commercial market Deploy new production technologies NL Launching customer role Double counting of biofuels put in to aviation in NL Facilitate HVO bio jet fuel project plan in NL Stimulate R&D in new technologies Facilitate regular communication between key NL stakeholders Support the implementation of the HVO bio jet fuel project in NL Continue to stimulate R&D in new technologies and facilitate pilot plants utilising new technologies Create incentives for airlines using biofuels/rewarding systems Support new technology bio jet fuel project in NL EU Stimulate inclusion of bio jet fuel in transposition RED other Member states Separate mandate for biofuel in aviation World Shape international sustainability criteria Explore cooperation with other nations (Bilateral) agreements with other nations Investigate support for feedstock projects (in developing countries) vi ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T +31 (0)30 662-3300 F +31 (0)30 662-3301 E info@ecofys.com I www.ecofys.com Chamber of Commerce 30161191

Table of contents Summary iii Table of contents vii 1 Introduction 1 2 Background 3 2.1 Relevance 3 2.2 Production technologies 3 2.3 Costs 7 2.4 Volumes 8 2.5 Environmental aspects 9 2.6 European legislative framework 10 3 International developments 13 3.1 Bio jet fuel flights 13 3.2 Bio jet fuel networks 15 3.3 Certification and qualification 19 3.4 Stakeholder positions in the bio jet market 19 3.5 Market power, drivers and followers 23 4 A Dutch perspective 26 4.1 Fossil jet fuel supply chain 26 4.2 Bio jet fuel supply chain 28 4.3 Bio jet fuel supply chain for the future 28 4.4 Feedstock production 29 4.5 Linking to Dutch government initiatives 29 4.6 Opportunities 29 5 Role of the Dutch government 31 5.1 Barriers for the commercialisation of bio jet fuel 32 5.2 Policy recommendations 35 Appendix A Central Europe Pipeline System 42 Appendix B Workshop attendees and interviewees 43 vii ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T +31 (0)30 662-3300 F +31 (0)30 662-3301 E info@ecofys.com I www.ecofys.com Chamber of Commerce 30161191

1 Introduction The aviation sector is responsible for at least 2% of the global manmade greenhouse gas (GHG) emissions, which is a fairly small share when compared to other modes of transport such as road transport. However, it is in fact the fastest growing transport modality with an projected average growth of 4.5% annually up to 2050. The latter would lead to a sixfold increase in GHG emissions without any efficiency improvements and a threefold increase if current efficiency improvements of 1.5% annually are maintained. The aviation sector recognises the growing and urgent need for society to address the global challenge of climate change and understands that the sector has a role to play. The global aviation industry stated that it will halve its GHG emissions by 2050 compared to 2005 levels, in a position paper presented at the climate negotiations in Doha of November 2012 4. The long-term low emission strategy is based on four pillars that will jointly help the industry reach their ambitious targets. Energy efficient technology; Improved operations; Improved infrastructure; Biofuels. The largest contribution to reaching the targets in 2050 should come from the use of biofuels, which per unit can reduce GHG emissions by up to 80% compared to fossil fuels. The use of biofuels could also protect airlines from the high and volatile fossil jet fuel prices which have taken up an increasingly large share in the costs of airline operations. In year 2005/06 the fuel costs were 19% 5 of total operating costs, to over 30% in 2012 6. In this report we will focus on drop-in biofuels, excluding other alternative jet fuel options such as gas to-liquid (GTL). The Netherlands holds an important position in the European aviation sector; Schiphol is the fourth largest European airport, Air France-KLM one of the largest European airlines and the harbours Rotterdam and Amsterdam are key logistic hubs in European jet fuel trade. It is therefore important to consider what the biofuel for aviation (or bio jet fuel) development described above means for the situation in the Netherlands. In this report we will answer the questions: 1) What are the current international bio jet fuel developments and what do they mean for the Netherlands? 2) How does bio jet fuel fit within the existing logistic, institutional and economic framework in the Netherlands? 3) What barriers exist for 4 ATAG, 2012, A sustainable flightpath towards reducing emissions, Air Transport Action Group. 5 Ecofys (Van den Heuvel), 2011, European airlines enter the biofuels market. 6 IATA, 2012, Special Report Fuel - Slick Oil. BIENL13187 1

the commercial deployment of a bio jet industry? and 4) What role could/should the Dutch government play in removing the barriers identified? Outline of the report In Chapter 2 the technical, economic, environmental and legislative aspects of biofuels in aviation are described. This allows us to understand the basic drivers for the use of bio jet fuel in aviation. In Chapter 3 an analysis of the international playing field is made, including the most relevant airline activities, biofuel producer activities and networks launched worldwide. It is important to take a global viewpoint as the starting point for extracting lessons for the Netherlands for the following reasons: (1) aviation and biofuels are inherently global sectors; (2) internationally many activities have already been undertaken from which important success factors can be extracted; (3) the Netherlands is a densely populated area with limited land availability to cultivate biofuel feedstock, therefore Dutch bio jet supply chains will often be international. Drawing on the results from the international analysis from Chapter 3, in Chapter 4 we take a Dutch perspective. In this chapter, important Dutch stakeholders are identified and roles, drivers and positions discussed. The main opportunities and barriers for the development of biofuel supply chains in the Netherlands are mapped and analysed. Furthermore, possible supply chains for biofuels in the Netherlands for the very short and medium term are discussed. In Chapter 5, we look at the most important opportunities and barriers and we discuss how the Dutch government could play a role in facilitating the development in Dutch biofuel value chains in the Netherlands. Important inputs for this chapter are the stakeholder interviews and the workshop we have held with the stakeholders identified in Chapter 4. BIENL13187 2

2 Background 2.1 Relevance In addressing the increasing demand for carbon reduction, the aviation industry itself declared it would work towards a sustainable development. In 2009 the International Air Transport Association (IATA) set an ambitious target to proactively contribute to a sustainable low carbon development, through improvements in infrastructure, operations and technology, and with an important contribution from renewable energy. Whereas road transport could use a variety of energy sources from electricity and hydrogen to gas and solar, the aviation sector depends on energy intensive liquid fuels. Biofuels provide the only midterm feasible option for airlines to reduce the carbon intensity of its fuels. According to IATA, plant oil derived aviation biofuel could reduce the carbon footprint of the industry by up to 80%. Furthermore the use of biofuels will reduce the dependence on fossil fuels and as they can be produced from a wide range of abundant biomass resources, they improve fuel security. In the long run, alternative fuels may limit fuel price increases, when cheap feedstock can efficiently be converted into aviation biofuel. For the near future, the aviation sector is mostly focussing on drop in fuels that can be blended with fossil kerosene up to the ratio defined in the fuel specification and are compatible with existing infrastructure and aircraft engines. The innovation developments in the (potentially) promising production technologies are discussed in this chapter. 2.2 Production technologies There are currently four principally different chemical routes to produce bio jet fuel which use a variety of feedstocks. Two of these routes, the Hydrogenated Vegetable Oil (HVO) and the Fischer- Tropsch (FT) have been certified to be used in commercial aviation and can be used in the short term. In the medium to long term Hydrogenated Pyrolysis Oil (HPO) and other biomass-/sugar-based bio jet fuel will become certified and commercially available. It is possible that no single production route will ever prevail over the other routes as there is limited feedstock available and all routes may have to be used. Furthermore using a mix of production technologies and feedstocks would lower the risks of bio jet fuel price shocks. In Table 1 an overview of bio jet fuel production routes is given. BIENL13187 3

Table 1: Overview of bio jet fuel production routes. Bio jet fuel Certified to be Current state of Type of feedstock production route used in aviation technology Vegetable oils, Hydrogenated waste streams from Vegetable Oil (HVO) Proven and applied food industry, byproducts of or Hydroprocessed Yes commercially Esters and Fatty (except for algal oil) vegetable oil Acids (HEFA) refining, algal oil Woody Proven but not Fischer-Tropsch (FT) Yes (lignocellulosic) applied biomass commercially Woody Hydrogenated Pyrolysis Oil (HPO) No (lignocellulosic) Pilot phase biomass Other biomass- /sugar-based No Sugars, Starches Pilot phase biofuels Remarks Currently the most popular route to produce bio jet fuel BA and Solena are cooperating to open a FT bio jet plant in 2015 Alcohol-to-Jet route under consideration for ASTM certification 2.2.1 Hydrogenated vegetable oil (HVO) or Hydroprocessed Esters and Fatty Acids (HEFA) HVO 7 (or HEFA) is produced by hydrogenating vegetable oils, waste streams from food industry or by-products of vegetable oil refining. The oils can originate from plants, algae or can be microbial oil. Hydrogen demand for hydrogenation of different feedstock qualities varies, resulting in conversion cost advantages for certain raw materials like palm oil and animal fats. In absence of technical restraints, market forces and legislation are the main forces for raw material selection. HVO production processes using plant oils such as palm oil have been heavily criticized as being unsustainable. Our view is that HVO processes using plant oils can be sustainable, but clear sustainability criteria are needed as a prerequisite. HVO production is already proven on full commercial scale. Neste Oil operates two 190,000 tonne/year HVO plants in Finland, an 800,000 tonne/year plant in Singapore and another 800,000 tonne/year HVO plant in Rotterdam. The Neste Oil plants are now primarily used to produce renewable diesel but can also, in principle, be used to produce bio jet fuel, which has also already been done in one of the Finland plants. UOP Honeywell and its customers have announced several HVO projects worldwide. In Europe both ENI and Galp Energia have plans for HVO plants each with a capacity of 330,000 tonne/year but these are yet to be constructed (EC, 2011). 7 HVO for jet-fuel are also known as Hydroprocessed Renewable Jet (HRJ) and have recently received the designation HEFA (Hydrotreated Esters and Fatty Acids) by ASTM. BIENL13187 4

Algal oils can also replace vegetable oils in HVO or similar processes but these will not be commercially available within the next 5-8 years. Due to very high infrastructure cost for industrial algal cultivation it is unclear when competitiveness vs. conventional plant oil or other advanced biofuels cost will be achieved. However, due to the fact that in principle there are no issues related to land use, algal oils have attracted significant interest from the aviation sector (EC, 2011). 2.2.2 Synthetic Fischer-Tropsch (BtL) Synthetic Fischer-Tropsch fuels, also called BtL fuels (biomass-to-liquids), is produced by a two-step process in which (mostly woody) biomass is converted to a syngas rich in hydrogen and carbon monoxide. After cleaning, the syngas is catalytically converted through Fischer-Tropsch (FT) synthesis into a broad range of hydrocarbon liquids, including synthetic diesel and bio jet. This type of fuel is already approved for a max 50% blend with JET-A1 by ASTM (SWAFEA, 2011). FT technology often uses lignocellulosic waste streams for the production of biofuels, a feedstock which leads to few concerns about sustainability. The FT synthesis has been applied in industrial scale processes for decades, based on synthesis gas produced from coal and natural gas. StoraEnso and Neste Oil as well as UPM and Carbona have formed consortia to realise BTL plants on the basis of biomass gasification and FT in Europe. Neste Oil and Stora Enso carried out a testing program where biowax was produced from forest waste by gasification technology at their joint-ownership plant in Varkaus, Finland, during years 2009-2011. The technical performance of the plant was excellent but the investment in a commercial scale plant was found to be unprofitable. UHDE, together with a number of French companies, announced the realisation of BioTfuel, a small pilot scale FT plant using biomass and/or torrified material. In the UK, Solena is developing a waste to bio jet facility using patented plasma gasification technology combined with FT. The planned capacity is 50,000 t/year bio jet, with full production by 2014 (EC, 2011). Note that upscaling to commercial volumes of FT products can be problematic as illustrated by the recent failures by German company Choren Industries to bring their technology to scale 8. The most favoured concepts for Europe based industrial biomass gasification plants, producing FT kerosene, are targeting an output of about 200,000 tonne/year FT-fuel. Roughly 70% of the produced FT product can be converted to aviation fuels. The size of FT equipped biomass gasification plants is normally limited by the commercial availability of sustainably produced feedstock at the production site. From a sole conversion cost perspective, FT plants should be built as large as possible. One alternative to the use of raw lignocellulosic biomass via gasification is pyrolysis oil or torrified biomass. Those storable intermediates can be transported from numerous distributed pyrolysis or torrefaction plants to a large centralised unit for FT fuel production. However, total conversion efficiency of this approach is considerably lower compared to direct use of raw biomass and cost advantages are unclear (EC, 2011). 8 Energy Trends Insider, 2011, What Happened at Choren? Column. BIENL13187 5

2.2.3 Hydrogenated Pyrolysis Oil (HPO) HPO is based on pyrolysis oils from lignocellulosic biomass. Pyrolysis oils can be hydrotreated either in dedicated facilities or co-processed with petroleum oils in refineries. Today, pyrolysis oil is between research and demonstration level. Worldwide, several initiatives that develop fast pyrolysis processes exist. A few of them (e.g. Ensyn/Envergent Technologies (a joint venture between UOP Honeywell and Ensyn Corp from Canada) and BTG in the Netherlands) are implementing the pyrolysis process on a commercial scale to produce crude pyrolysis oil. Contrary to vegetable oils, pyrolysis oil contains a few hundred different chemical components. For application in the transport sector the crude pyrolysis oil needs further upgrading to produce HPO. One or more hydrogenation steps are required to achieve the desired product quality. The scale of operation for producing the pyrolysis oil can be quite different from the upgrading activities. The latter one might be combined with current refinery operations. Envergent/UOP, for example, is conducting a demonstration project for pyrolysis and an upgrading technology to transport fuels at the Tesoro refinery in Hawaii. Contrary to FT and HVO fuels, HPO will still contain a certain amount of aromatic compounds which are currently needed in jetfuel to avoid engine sealing problems. Therefore, HPO may complement HVO and FT (EC 2011). 2.2.4 Other biomass-/sugar-based biofuels In recent years, several novel biofuel conversion routes have been announced, such as the direct conversion of sugars into synthetic diesel fuels 9. These include: The use of micro-organisms such as yeast, algae or cyanobacteria that turn sugar into alkanes, the basic hydrocarbons for gasoline, diesel and jet fuel; The transformation of a variety of sugars into hydrogen and chemical intermediates using aqueous phase reforming, and then into alkanes via a catalytic process; The use of modified yeasts to convert sugars into hydrocarbons that can be hydrogenated to synthetic diesel. So far, none of the above processes has been demonstrated on a commercial scale. Sugar to hydrocarbon fuels are technically feasible but will not play any significant role by 2020 2. Following recent announcements and the progress made by US biofuel start-ups such as Virent, Amyris and Gevo whose fuels are now considered by ASTM, these pathways are certain to be included in future studies (SWAFEA, 2011) and projects. In France a project subsidy was recently 9 IEA, 2011, Technology Roadmap - Biofuels for Transport. BIENL13187 6

granted to the ProBio3 project 10 that investigates microbial conversions on specific fatty acids of carbon substrates from renewable non-food resources and industrial by-products. In the Netherlands the University of Wageningen researches algae cultivation and biorefinery. In the AlgaeParc the University of Wageningen aims to develop cost-effective and sustainable microalgae production methods outdoors. 2.2.5 Other non drop-in fuels For the longer term, other fuels such as liquefied natural gas or liquid hydrogen (both referred to as cryogenic fuels) are sometimes put forward (EC, 2011 quoting Airbus, 2010). Also electrically propelled aircrafts like the CE-Liner 11 seem to be seriously developed by Bauhaus Luftfahrt, with a projected entry into service in 2035 to 2040. However these initiatives are still in very early stages, and should not be counted on to meet the objectives of the European Flight Path 2050. The SWAFEA project concludes that Drop-in fuels are the only current candidates for aviation: any perceived production cost advantages of non-drop-in fuels do not stack up against costly incompatibilities with the current equipment and infrastructure. 2.3 Costs The biggest hurdle for the introduction of aviation biofuel in scaling up commercial flights is the price gap between fossil jet fuel and aviation biofuel. Currently aviation biofuel is at 2-4 times the price of fossil jet fuel, with only limited volumes available and as the aviation biofuel demand by airlines remains small and incidental, there is currently little incentive for biofuel producers to scale-up the production. For airlines the security of supply and price competiveness are crucial for further development. As bio jet fuel is not produced on a commercial scale, it is difficult to estimate production cost. In this chapter we will give a brief overview of current production costs for the different bio jet fuel types and compare them with fossil jet fuel prices. The cost structures of certified HVO and woody biomass-based FT and HPO processes are fundamentally different: HVO requires a modest upfront capital investment and production cost is highly dependent on vegetable oil feedstock prices with approximately 60-75% of the final biofuel cost being made up of feedstock costs 2. In November 2012 crude palm oil, being the cheapest suitable oil, is trading at around 779 USD/tonne 12 (about 600 Euro/tonne). Another challenge is the price volatility of his feedstock, which for the last three years has been similar, if not higher, than the price volatility of oil. The HVO industry expects that the availability of inedible oils (camelina, jatropha) and later on algal oils will mitigate today s high feedstock price fluctuations in the longer term. Generally, the cost of the raw material will be the critical factor in the HVO production economics as it is such a large share of the final costs. 10 LISBP, 2012, Probio3 project, winner of the"investissement d'avenir" news item at www.lisbp.insa-toulouse.fr 11 Bauhaus Luftfahrt, 2012, Ce-Liner concept study for electro-mobility in aviation presented news item at www.bauhaus-luftfahrt.net 12 Palm oil price at www.palmoilhq.com BIENL13187 7

Ligno-cellulose based FT and HPO biofuels have lower exposure to raw material cost. Based on a raw material price of 80 /tonne dry matter, the feedstock price component of FT fuel is about 0.3 per litre 2. However, FT fuels face higher conversion costs than HVO s due to more complex production processes. This is particularly relevant at the current initial stage, as from engineering practice the costs of a new product start to reduce significantly from the 3rd plant of a new technology. The European Commission (2011) estimates that, depending on specific site conditions, the conversion cost share of biomass based FT-fuel will decrease from roughly 1 /l in industrial first-of-its-kind projects to a range of 0.7-0.8 /l with learning curve effects and economies of scale if several large scale gasification/ft plants are realised by 2020. The EC states that additional conversion cost reduction is expected after 2020 based on general process optimisation and industry typical investment cost reduction referring to a progress ratio of about 85% with each duplication step of cumulative capacity. Anticipating that raw material prices for HVO and FT biofuels are subject to a similar dynamic, it can be anticipated that FT fuels will start achieving production cost advantages compared to HVOs from 2020 onwards 2. Up to 2020 IAE Bioenergy assumes a cost range for FT jet fuel from 1500 /tonne 1800 /tonne and for HVO jet fuel from 1200 /tonne 1300 /tonne in its report on bio jet fuel published in September 2012. Given current prices for fossil jet fuel of 765 /tonne (993 USD/tonne) 13 in November 2012, the price difference is enormous. Currently prices for bio jet fuel are 2-4 times higher than for fossil jet fuel. Bio jet fuel will only become fully commercially competitive if the price for biomass per energy content is at the same level as the price per energy content for crude oil. 2.4 Volumes In 2011 representatives from the European Commission, the paraffinic biofuel producers and the aviation sector published the technical paper 2 million tons per year: A performing biofuel supply chain for EU aviation ( European Advanced Biofuels Flight Path Initiative ). This paper outlines a flight path to achieve a minimum annual replacement of 2 million tonne fossil kerosene by sustainable produced biofuels in 2020. To put this number into perspective currently about 200 million tonne of fossil jet fuel are consumed annually of which 53 million tonne are in Europe. In 2011 about 13.9 million tonne of biofuels were consumed in Europe (Biofuels Barometer 2012). In their 2009 Review of the potential for biofuels in aviation for the UK Committee on Climate Change (CCC) E4tech concluded that biofuels could represent up to 1.6% of the fuel mix for the aviation industry in 2020 with 65-70% greenhouse gas savings compared to fossil jet fuel. Given the highest scenario of expected aviation fuel demand with 287 million tonne (Unlimited skies scenario ULS), this would result in 4.6 million tonne of biofuels. The low scenario, taking significant consumer lifestyle changes and high environmental consciousness into account, (Down to Earth scenario DtE) 13 Price was quoted as 3.00 USD/ gallon, for U.S. Gulf Coast Kerosene-Type Jet Fuel. Spot Price FOB. See http://www.indexmundi.com/commodities/?commodity=jet-fuel. BIENL13187 8

expects 198 million tonne of aviation fuel in 2020 (Consave project 2005). In this scenario the biofuel share would sum up to a maximum of 3.2 million tonne. The 2 million tonne of biofuels for aviation in 2020, proclaimed by the European Flight path initiative would be 0.69% in the ULS scenario and 1% in the DtE scenario of the worldwide jet fuel consumption. 2.5 Environmental aspects Currently aviation is responsible for at least 2% of the total manmade GHG emissions worldwide. However IATA estimates that the worldwide aviation sector will grow up to 4.5% per year, which could result in six times more CO 2 emissions in 2050. It is IATA s vision to reduce net CO 2 emissions by 50% by 2050, compared with 2005 levels (see Figure 1). Furthermore, all industry growth shall be carbon neutral from 2020 onwards. As stated above, this ambitious target could be achieved with bio jet fuel, however it needs to be ensured that the used biofuels are produced in a sustainable manner and indeed save greenhouse gases (GHG) in comparison to fossil fuels. Figure 1: Air Transport Action Group scenario to 50% GHG emission reduction in 2050. In addition to direct GHG occurring in the production of biofuels, indirect impacts will also have to be taken into account, thereby adding to the GHG balance. The most complex and prominent aspect of biofuels sustainability is Indirect Land Use Change (ILUC), which currently dominates the EU debate on transport biofuel sustainability. ILUC is the effect caused when existing cropland is used for biofuel feedstock production, so previous land use is displaced and as a result there is an increased risk that BIENL13187 9

non-agricultural land, e.g. primary forest, is converted into cropland elsewhere. ILUC can therefore lead to higher GHG-emissions and loss of biodiversity. The discussion on which feedstocks and production processes are or are not sustainable takes place in other studies. It is key that the selection is based on measurable and comparable sustainability criteria for feedstocks, production processes and complete chain performance, rather than a priori classifying certain feedstocks as (un)sustainable. Still, the lingering discussion on the sustainability of biofuels is not good for the development of any biofuels market, let alone for bio jet fuels. It is therefore very important that all stakeholders seek to optimise and demonstrate the sustainability effects. 2.6 European legislative framework The biofuels policy of the EU is regulated by the Renewable Energy Directive (RED) and Fuel Quality Directive (FQD) 14, which both came into force in 2009. The RED requires that EU Member States ensure 10% renewable energy in transport in 2020. This 10% is formulated as follows: 10% = All Renewable Energy in all forms of transport Petrol, diesel, biofuels, electricity In road and rail transport In all transport The denominator is currently mainly based on energy use in the road sector, since petrol and diesel and biofuels are primarily used in road transport, and electricity use in transport is still small compared to the first three elements of the denominator. The numerator includes all forms of renewable energy in all forms of transport. So, in principle, bio jet fuel counts towards the RED target. This means that when bio jet fuels are deployed in a Member State, that Member State is allowed to count it towards its national target. (The same holds for biofuels in shipping, or in rail transport). However, this does not automatically mean that bio jet fuels are incentivised, as EU Member States are free to decide which biofuel they incentivise in what manner. To stimulate the deployment of biofuels in aviation, since December 2012, the Netherlands has included in its legislation that bio jet fuels sales are indeed included in meeting the biofuel mandates of economic operators, see next section. The Netherlands is at present still the only Member State that appreciates bio jet fuels in the frame of the RED. Companies that sell bio jet fuel in the Dutch market earn biotickets that (other) operators with a biofuels obligation can use to fulfil their 14 Directives 2009/28/EC and 2009/30/EC respectively. BIENL13187 10

obligation (for details, see below: Implementation in the Netherlands). Thus bio jet fuels get the same value as other biofuels in the Dutch market. Germany and the United Kingdom also seem interested in including bio jet fuels in their biofuels mandates. Biofuels marketed in the frame of the RED have to meet specific sustainability criteria; otherwise they cannot be incentivised and cannot count towards the national targets: Not all land can be used for biofuels feedstock, there are restrictions with regard to carbon stock change and biodiversity; The greenhouse gas savings threshold for biofuels compared to fossil fuels is currently 35%, increasing to 50% in 2017 and 60% from 2018 onwards. The fulfilment of these criteria can be proven by accepted sustainability schemes. As of December 2012 the European Commission has recognised 13 sustainability schemes. More environmental and social criteria may be included later. In the FQD, technical regulations for petrol, diesel and gas-oil, are mainly laid down, however, it also includes a target for lifecycle greenhouse gas emission reduction of the complete product spectrum in 2020 compared to 2010. Fuel suppliers have to reach a 6% reduction in the greenhouse gas intensity of all fuels delivered to the market in 2020. This can be achieved by improving the oil extraction, refining and transport practices, but this is difficult, since new fossil oil resources are more carbon intensive. Also, refining to meet stricter environmental requirements (mainly sulphur content) slightly decreases refining efficiency. So, effectively, the only way to reduce the lifecycle greenhouse gas emissions is to replace part of the fossil fuels with a sustainable alternative, i.e. biofuels or renewable electricity. A 6% reduction could be reached by blending 10% biofuels, if we assume that the average greenhouse gas emission reduction of biofuels is 60% compared to fossil fuels. In October 2012 the European Commission (EC) published a legislative proposal aimed at introducing an ILUC policy measure in the RED and FQD. This would mean that the use of biofuels will be subjected to a more stringent sustainability regime. The main points of the proposal are: 5% cap of total biofuels consumption in 2020 for food crop based biofuels; Promotion of biofuels from waste and residues by quadruple counting of biofuels produced from municipal solid waste, agricultural, aquacultural, fisheries and forestry residues and renewable fuels of non-biological origin; 60% GHG threshold applies for new installations after 1 July 2012; Introduction of feedstock type specific ILUC factors in the RED and FQD for reporting purposes only (e.g. 55gC02eg /MJ for oil crops); no ILUC factor applies for biofuels from waste and residues or if direct land use change can be demonstrated. The ILUC proposal still needs to be approved by the European Parliament and the Council of Ministers, who could amend it. If this proposal is approved as described above, algae as well as waste BIENL13187 11

and residues based bio jet fuels are very promising for the aviation industry from a GHG saving perspective. As of January 2012 the aviation sector is also included in the European Emission Trading Scheme (EU-ETS). Whereas around 80% of historical emissions are allocated as free allowances to the aviation sector, the remaining 20% (and all emissions above the cap) have to be offset with carbon certificates, if not reduced by other measures. Currently, the carbon certificates are priced at around 3 /tonne CO 2. This translates to about 10 /tonne jet fuel, which is very small in comparison to the additional costs of bio jet fuels in comparison with jet fuels, see also Section Figure 11. In November 2012, the EU commissioner for Climate Action Hedegaard announced that the obligations within the EU ETS will be put on hold for flights to and from the European Economic Area (EEA) for one year to enable the International Civil Aviation Organization (ICAO) to reach an internationally accepted solution to deal with carbon emissions in aviation. The EU has announced, that If ICAO fails, she will impose the EU ETS again after the one year moratorium. The perceived unilateral and extraterritorial introduction of ETS by the EU led to problems with non EU countries. 'Carbon leakage' should be avoided as well as level playing field disturbance for European aviation industry. The European aviation industry pursues a global solution in concert with IATA. ETS is still applicable for intra-european flights including some operators from non EU countries. Implementation in the Netherlands The Netherlands implemented the RED and the FQD in the Dutch Environmental Management Act, which came into force in January 2011. In order to achieve the 10% renewable energy in transport the Netherlands implemented a quota obligation for biofuel suppliers, starting from 4.25% in 2011 increasing to 5.5% in 2014. Suppliers of petrol and diesel can meet the obligation by supplying biofuels to the market themselves as well as arranging that other companies sell biofuels to the Dutch market. This is organised through a so-called bioticket administration. For each volume of biofuels or renewable energy sold for transport, a company receives a bioticket. Biotickets can be traded between obliged companies to fulfil their RED and FQD obligations. The value of a bioticket is currently primarily established in the biodiesel market as this is where most renewable energy is put into transport. As of December 2012, bio jet fuels can contribute to the fulfilment of this quota obligation. Companies (such as currently SkyNRG) receive biotickets for the volume of bio jet fuel they put in the Dutch market, and they can sell these biotickets to oil companies that need (additional) biotickets to meet their obligation. BIENL13187 12

3 International developments In 2011 the number of alternative fuel initiatives for aviation announced internationally grew to over 300, compared to just 11 initiatives in 2009 15. This remarkable growth marks the increase in attention for the use of biofuels in aviation. The large number of test flights done worldwide, which have different characteristics in terms of distance, biofuel feedstock, biofuel production process, blend percentages and number of engines powered with biofuel, have shown that using biofuel for aviation is technically viable and can be environmentally beneficial and safe for all airline operations. In this chapter, the international developments on biofuels for aviation are analysed. In Section 3.1 the bio jet fuel flights by airlines are mapped, in 3.2 bio jet fuel networks and their agenda in the international biofuel arena is discussed. In 3.3 we analyse typical bio jet fuel value chains and commercial constructions and we compare this with the fossil jet fuel market. In this part we identify which stakeholders take up which roles in the bio jet fuel market and are even looking to shift their role compared to the fossil jet fuel market. Finally in 3.4 the key stakeholders in the bio jet fuel market are identified by analysing which parties have the power in this upcoming market. 3.1 Bio jet fuel flights Since 2008 commercial airlines have performed flights using bio jet fuel. In 2009 a total of 11 published alternative fuel activities had been identified, rapidly growing to over 300 activities in 2011 (IATA, 2011). Over time the purpose of the airlines performing bio jet fuel flights evolved from single technical test flights to longer series of commercial flights on bio jet fuel. In 2008 Virgin Atlantic was the first commercial airline to perform bio jet fuel testing on a flight between London and Amsterdam. The Boeing 747 used a 20% bio jet fuel blend derived from Brazilian babassu nut oil and coconut oil in one of its four engines. Three years later in 2011 Lufthansa operated the longest series of 1187 bio jet fuel flights between July and December 2011 with one Airbus A-321 between Hamburg and Frankfurt, including 4 return flights per day (8 flights). One of the two engines was powered with a biofuel derived from camelina oil (80%), jatropha oil (15%) and animal fat (5%). The Lufthansa biofuel program was completed by making the first ever transatlantic bio jet fuel flight in January 2012 from Hamburg to Washington. From 2011 onwards a steep increase in the number of single flights can be seen, as well as the first airlines performing longer series of flights. In July 2011, KLM performed the first commercial flight on biofuel, followed in September 2011 with the series (200 flights) between Amsterdam and Paris and in 2012 KLM operated the longest intercontinental flight on biofuel to Rio de Janeiro. Currently two European airlines, Lufthansa and KLM, and one North-American airline, Alaska Airlines, have done a prolonged series of testing. KLM, in a partnership with Schiphol Group, Delta Air Lines and the Port Authority of New York and New Jersey, has recently announced that they will start weekly flights 15 IATA, 2011, Report on Alternative Fuels. BIENL13187 13

from John F. Kennedy Airport to Schiphol 16. KLM has declared its intention to strive for a 1% mix of sustainable biofuel throughout the entire fleet by 2015. Also Lufthansa has indicated that they are considering setting up a new series of flight on bio jet fuel. In Figure 2 a historic overview of bio jet fuel flights is shown, indicating a number of key milestones in the bio jet fuel market such as the first test flight with a selected group of passengers using bio jet fuel by KLM in 2009. Figure 2: historic overview of bio jet fuel flights. In the United States the US military was one of the main drivers of bio jet fuel developments. In 2011 the Obama administration steered the Department of Agriculture, Department of Navy, and the Department of Energy to jointly invest $510 million to assist the development and commercialisation of a sustainable industry for aviation and marine biofuels, and to foster mutual cooperation among the federal agencies as well as across the public and private sectors. Within a broader US military biofuel programme, which aims to reduce the US military dependency on foreign countries, the Air Force will remain able to pay a significant premium for bio jet fuel in the coming years. The launching customer role of the US military received a lot of criticism 17. As a reaction the US House Armed Services Committee decided in May 2012 that the military is not allowed to pay a premium for biofuel 18. At the time of writing it appeared that the rules would soon be adjusted again so that the US military can continue its advanced biofuel activities and stay in the role of launching customer 19. In the Netherlands the Ministry of Defence performed an Apache flight in 2010 fuelling one of the two engines with 50% blend bio jet fuel. The feedstock used was cooking oil (90%) as well as algae oil (10%), and the fuel was provided by Honeywell UOP. Partners in the project were Boeing, General Electric, Honeywell UOP, SkyNRG and NLR. Since the Apache test flight the Dutch military has not started new bio jet fuel activities. 16 KLM, 2013, KLM takes steps in sustainable flights news item at nieuws.klm.com 17 Reuters, 2012, U.S. Air Force tests biofuel at $59 per gallon news item at www.reuters.com 18 National Defense Magazine, 2012, GOP Amendments Could Derail Military Biofuels Plan blog at www.nationaldefensemagazine.org 19 Biofuels Digest, 2012, Defense bill done: biofuels survive news item at www.biofuelsdigest.com BIENL13187 14

3.2 Bio jet fuel networks Interest in alternative fuels was sparked in 2006 in the US by the establishment of the Commercial Aviation Alternative Fuels Initiative (CAAFI). Since 2006 more networks have emerged worldwide that aim to promote the use of alternative fuels for aviation. These networks have different purposes and operate within different geographical areas. Networks can be horizontal, which means that they connect similar stakeholders in value chain (e.g. only airlines), or vertical, meaning that they bring together stakeholders from different parts of the value chain (e.g. biofuel producers, airlines and aircraft manufacturers). Networks can also strive to develop supply chains, to bring together stakeholders and initiate discussion or rather to grasp the economic potential of bio jet fuels for a region or nation. All networks have in common that they intend to connect relevant stakeholders to facilitate the development of the bio jet sector. In Table 2 an overview of all international bio jet networks is given. BIENL13187 15

Table 2: Overview of international bio jet networks. Name Scope Orientation Stakeholders Key focus SAFUG International Horizontal Airlines ITAKA European Vertical European Advanced Biofuels Flight path Initiative Green deal biokerosene European Vertical Netherlands Vertical Bio jet & Feedstock Producers, Suppliers, Airports, Airlines, Knowledge Institutions OEMs, Airlines, Bio jet & Feedstock Producers, EC KLM, Dutch Ministries of Infrastructure & Environment and Economic Affairs Stakeholder Platform, Sustainability Supply Chain Development EU platform supports the deployment of two million tonnes bio jet in 2020 Agreement on concrete actions by KLM and government to develop the bio jet fuel market in the Netherlands CAAFI United States Vertical OEMs, Airlines, Fuel Suppliers, Universities and U.S. Government Agencies Stakeholder Platform ABRABA Brazil Vertical aireg Germany Vertical OEMs, Airlines, Bio jet & Feedstock Producers OEMs, Airlines, Bio jet & Feedstock Producers, Knowledge Institutions, German Government Agencies Stakeholder Platform Supply Chain Development Stakeholder Platform, Supply Chain Development Bioquerosino Spain Vertical OEMs, Airlines, Bio jet & Feedstock Producers, Knowledge Institutions, Spanish Government Agencies Stakeholder Platform, Supply Chain Development Plan de Vuelo Mexico Vertical Aviation Industry Actors, Knowledge Institutions, Feedstock Producers and Mexican Government Representatives Study on Regional Potential MASBI Midwest US Vertical SAFN Flightpath to sustainable aviation Northwest US New Zealand / Australia Vertical Vertical AISAF Australia Vertical OEMs, Airlines, Feedstock & Bio jet Producers, Knowledge Institutions, NGOs, investors OEMs, airlines, logistic hubs, NGO's, US Federal and State Government Agencies Technology providers, OEMs, Airlines, Knowledge Institutions, sector organisations, government institutions United States Study Centre, Baker & McKenzie, Boeing Australia, CSIRO, GE, Quantas, Australian Government, Virgin Australia Stakeholder Platform, Supply Chain Development Study on Regional Potential Study on Regional Potential Strategic advisory group to Australian industry and government Implementation of Flightpath to sustainable aviation recommendations BIENL13187 16

International networks SAFUG The Sustainable Aviation Fuel Users Group was formed in 2008 with support and advice from environmental organisations such as the Natural Resources Defense Council and the Roundtable on Sustainable Biofuels (RSB). The group is focused on accelerating the development and commercialisation of sustainable aviation biofuels. All members have signed a sustainability pledge in which they state that they will only use sustainable bio jet fuel. All 26 member airlines together represent 32% of the worldwide commercial aviation fuel demand (2011). European Advanced Biofuels Flight path Initiative The initiative was established in 2011 by the European Commission (EC) services, in close coordination with Airbus, leading European airlines (Lufthansa, Air France/KLM, & British Airways) and key European biofuel producers (Choren Industries, Neste Oil, Biomass Technology Group and UOP). The goal is to promote and support the use of bio jet fuel in the EU. The members have committed to the goal of using 2mln tonnes of bio jet fuel in 2020; this is roughly 4% of the total European kerosene consumption of 2010 or 10% of the kerosene consumption of the three large European airlines - Lufthansa, British Airways and Air France-KLM - that are involved in the initiative. ITAKA The Initiative Towards sustainable Kerosene for Aviation project is a collaborative initiative that aims to link feedstock growers, biofuel producers, distributors and end users in establishing a large scale (4,000t) European sustainable drop-in HEFA (camelina) bio jet supply chain. The production capacity will be large enough to allow testing its use in existing logistic systems and in normal flight operations in the EU. Also, the project will carry out sustainability, competitiveness and technology assessments to study economic, social and regulatory implications of large-scale use. ITAKA is a project under the Seventh European Framework Programme and was kicked-off in November 2012 with a project period of 36 months. KLM has signed an off-take agreement with the ITAKA consortium to use the 4,000 tonne fuel. The bio jet fuel will be produced by Neste Oil. National networks Green deal biokerosine (NL) The Dutch green deal on bio jet fuel 20 between KLM and the Ministries of Infrastructure & Environment and Economic Affairs was developed in September 2011. It states that KLM will further develop its biofuel activities (e.g. corporate bio jet programme, R&D investments, contribution to Roundtable on Sustainable Biofuels). On the other hand the Dutch government promised to e.g. remove administrative barriers for the blending of bio jet fuel, include bio jet fuel in the national transposition of the RED, contribute to the Roundtable on Sustainable Biofuels, facilitate a level playing field for the Dutch aviation industry on a European level and investigate the possibility of acting as a launching customer. CAAFI (USA) The Commercial Aviation Alternative Fuels Initiative was formed in 2006 by three industry associations in the US representing airports, airlines and OEMs and the Federal Aviation Administration. Reasons for forming CAAFI included 1) concerns about the energy security of the US, 2) volatility in oil prices and 3) environmental concerns. CAAFI participants are evaluating 20 Ondernemend Groen, 2012, KLM sluit Green Deal over biobrandstoffen news item at ondernemendgroen.nl BIENL13187 17

alternative jet fuels in teams focused in four areas: 1) Fuel Certification and Qualification, 2) Research and Development, 3) Environment and 4) Businesses and economics. ABRABA (BRA)- Brazilian Alliance for Aviation Biofuels was created in 2010 as a forum to discuss the various aspects of developing sustainable aeronautical biofuels driven by the growing demand to meet the requirements for reducing greenhouse gas emissions in aviation as well as to provide support for Brazil's energy security. This initiative aims to make Brazil a major world player in sustainable aviation biofuels, similar to what is already being done in ground transportation. The goal is to promote public and private initiatives that streamline the development, certification, and commercial production of sustainable biofuels for aviation. aireg (GER) The Aviation Initiative for Renewable Energy in Germany e.v. was founded in 2011 as an association of companies and organisations from the area of science and research. The initiative for forming aireg was taken from the side of the German aviation market players. aireg's objective is to drive forward the development and use of alternative, regenerative liquid fuels, such as biofuels. Bioqueroseno (ESP) The Spanish Initiative for the Production and Consumption of Biokerosene for Aviation was formed in 2011 with the signing of an agreement between the Ministry of Industry, Energy, and Tourism, the Ministry of Public Works, the Ministry of Agriculture, Food, and Environmental Affairs, Services and Studies for Air Navigation and Aeronautical Safety (SENASA) and several companies related to production of raw materials, refining technologies, aeronautical logistics and sustainability processes. This initiative is structured as a platform to exchange information, identifying needs as well as connecting the public and private sector. Plan de Vuelo (MEX) Mexico s aviation industry Flight Plan program Plan de Vuelo started in July 2010 and includes aviation industry actors, investigators, feedstock producers and representatives from the Mexican government. The program aims to increase collaboration of all the involved parties and to come up with a national biorefinery plan in Mexico. Regional networks MASBI (US) The Midwest Aviation Sustainable Biofuels Initiative was formed in May 2012 by United Airlines, Boeing, Honeywell s UOP, the Chicago Department of Aviation and the Clean Energy Trust. MASBI aims to promote aviation biofuel development in a 12-state region in the Midwest of the US holding significant promise for biomass feedstock, technology development, job creation and sustainable commercialisation. MASBI will deliver a comprehensive evaluation of the region s biofuel potential and a plan to support regional and national needs in a responsible manner. SAFN (US)- The Sustainable Aviation Fuels Northwest initiative was launched in July 2010 by Boeing, Alaska Airlines, the operators of the region s three largest airports - Port of Seattle, Port of Portland and Spokane International Airport - and Washington State University, a centre for advanced biofuels research. Climate Solutions, a Northwest clean-energy non-profit organisation, was asked to manage a stakeholder process that included more than 40 organisations ranging across aviation, biofuels production, environmental advocacy, agriculture, forestry, federal and state government BIENL13187 18

agencies, academic research and technical consultancies. SAFN is the first US regional stakeholder effort to explore the opportunities and challenges surrounding the production of sustainable aviation fuels. 3.3 Certification and qualification Currently ASTM International, formerly known as the American Society for Testing and Materials (ASTM), develops the international standards for Jet Fuel. Two biofuel pathways, HEFA/HVO and FT, have been certified for use in aviation up to blends of 50%. The technical certification process takes 3 to 5 years and requires significant investment to produce the fuel for testing. Furthermore, support from the engine and airframe manufacturers is needed to perform the testing. The aromatics content in the blend is one of the reasons that 50% is the maximum allowed blending percentage for drop in bio jet fuel. Aromatics are required due to compatibility with elastomeric materials which could shrink in the absence of aromatics leading to fuel leakage. On the other side, reducing aromatics content results in reduced soots emissions. Some companies are researching the possibility of producing aromatic free jet fuels. 3.4 Stakeholder positions in the bio jet market The bio jet market is created by demand from airlines, as opposed to road biofuels market which is created by mandates to fuel suppliers. It is the airlines that have taken a leading role in setting up bio jet value chains and therefore we first analyse typical value chains from an airline perspective. After this we will discuss the roles of other stakeholders in the bio jet market. 3.4.1 Airline perspective KLM KLM has developed its strategy for sustainable biofuels around a value chain perspective by simultaneously creating demand and developing supply chains (Figure 3). The first pillar led to the creation of SkyNRG in 2010 and the already mentioned test and demonstration flights (series). The second pillar is being built on partnerships which take an integrated supply chain approach. The aim is to build a portfolio of partnerships that cover different feedstock/technology pathways. This integrated approach is needed to allow for scaling up and attracting the needed financing. An example is the Climate KIC RenJet project, where partners include a.o. DSM, KLM, Schiphol, and SkyNRG. The Climate KIC RenJet project aims to stimulate the development of a European/Dutch supply chain for Alcohol to Jet (AtJ) supply chains. BIENL13187 19

Figure 3: KLM biofuel strategy. Other airlines British Airways has signed a 10 year off-take agreement with US company Solena Fuels Corp. to buy 16 mln. gallons of bio jet produced annually in their municipal waste FT plant in London. In practice this means a 500 million US$ investment in bio jet production. British Airways states that it is able to buy the fuel at market competitive prices. The project is expected to take off in 2015. In the US, United Airlines have set off on a similar course to British Airways by signing a letter of intent with Solazyme to buy 20mln gallons of algae based bio jet fuel a year. Qatar Airways have invested in US bio jet producer Byogy Renewables that uses an alcohol-to-jet pathway. The investment is coupled to an off-take agreement that guarantees QA buying the bio jet. Lufthansa announced in January 2013 that it will invest in Australian advanced renewable oil company Algae.Tec. Lufthansa and Algae.Tec together will build a large scale algae-to-aviation biofuels production facility in Europe situated near to an industrial CO 2 source 21. Funding for the project will be arranged by Lufthansa and the collaboration is coupled to an off-take agreement of at least 50% of the fuel produced. In Figure 4 the bio jet producer airline collaborations described above are shown. 21 Algae.tec, 2012, Algae.Tec and lufthansa sign collaboration agreement to build biofuel production facility in Europe press release at algaetec.com.au BIENL13187 20

Figure 4: Airline investments and off-take agreements with bio jet producers. Airlines doing series of test flights include Lufthansa, KLM and Alaska Airlines. KLM and Alaska airlines were fuelled by SkyNRG, getting used cooking oil (UCO) based bio jet from US based company Dynamic Fuels (Figure 5). Lufthansa did not use an intermediary trader for their test flights but had direct contact with Europe s main bio jet producer Neste oil, agreeing to buy a limited amount of bio jet for their series of test flights in 2011. So far Lufthansa has not committed to any new long term buyers agreements with biofuel producers, but they are considering expanding their activities in the near future. Figure 5: Traditional Business-to-Business interaction. Lastly there is a large group of airlines that have done single test flights with bio jet. The value chain can be constructed through direct contact with a supplier, but also many airlines (e.g. Lan Chile, Quantas, Thai Airways) used SkyNRG as the intermediary for their bio jet trade. The SkyNRG proposition will be discussed below, see also Figure 6. 3.4.2 Other stakeholders In the above the position of airlines and bio jet producers has been discussed. A number of other stakeholders have also been active in the bio jet market including feedstock suppliers, aircraft and engine manufacturers, new market players / start-ups, oil companies, bio refinery technology providers, airports and consumers. Feedstock suppliers As described in Chapter 2, for some routes the feedstock costs are responsible for a large share of the total production costs. Furthermore, feedstock costs have been highly volatile over the past years BIENL13187 21

leading to a risky market situation. Due to the very small volumes that have been traded so far it is difficult to assess the role of feedstock suppliers in the bio jet fuel market. OEMs Original Equipment Manufacturers (OEMs), such as Boeing, Airbus, Embraer, Rolls Royce and Pratt & Whitney and General Electric, have been active in many bio jet projects worldwide. E.g. Boeing, Pratt & Whitney and General Electric have been involved in bio jet projects from the beginning, being founding members of CAAFI and taking a role in the pioneering test flights. Initially the participation of the OEMs in bio jet projects was from a technical testing point of view. Now that an increasing number of flights on bio jet has been performed and the use of bio jet has been technically proven the role of OEMs has shifted to ensuring sustainability of bio jet fuel and worldwide bio jet fuel quality certification alignment. OEMs are involved in projects investigating new pathways to create bio jet fuels such as the French ProBio3 project (see also Section 2.2.4). New market players SkyNRG was launched following the first KLM biofuel test flight of November 2009. Founding partners are AIR FRANCE KLM Group, North Sea Group and Spring Associates. SkyNRG is a one stop shop concept for airlines looking to buy biofuels offering a full supply chain service from bio jet procurement to the fuelling of the aircraft, see Figure 6. SkyNRG does not own bio jet production capacity, but acts as a service provider in constructing the supply chain between airlines and bio jet producers. SkyNRG has delivered bio jet fuel to over 20 airlines, including the series of flights performed by KLM and Alaska Airlines and is currently world leader in bio jet trade. The Bio jet Corporation in the US provides a similar service to SkyNRG, but so far has less practical experience having only serviced 2 airlines. Figure 6: Typical SkyNRG supply chain set-up. Oil Companies So far oil companies have remained close to their core business of selling fossil jet fuel. Oil companies typically see biofuels as a medium/short term option that does not have commercial viability yet. Oil companies are involved in the jet fuel quality standard setting processes. Oil BIENL13187 22

company, Total, has been strategically partnering with US renewable biodiesel and bio jet fuel producer, Amyris, since 2010. As part of this collaboration, in 2012 a consortium of Amyris, Total, Azul Airlines and Embraer performed a single test flight using bio jet sourced from Brazilian sugarcane. Technology providers Technology provider, Honeywell UOP, has produced little over 1.5 mln gallons so far and has been the primary producer of bio jet fuel via the HVO/HEFA route in the US. UOP is involved in worldwide quality and sustainability certification programs. Honeywell UOP does not have the intention of becoming a producer of bio jet fuel but has a business model of licensing technical expertise in bio jet production. Airports Airports are included in regional bio jet projects as they provide the infrastructure for the fuelling at the airport. Airports have an interest in gaining practical experience with bio jet fuel supply chains. In the medium/long term, competition between international hubs could be partially based on which airport has good and inexpensive access to bio jet resources. Consumers Research is needed to get insight into how individual consumers could become interested in paying a premium for environmental reasons, even when the service or experience remains the same. This challenge has been demonstrated by the limited success of carbon compensation options on airline tickets. On the other hand, there is considerable interest from corporates to visibly improve the sustainability of their business and this includes sustainable travel options, as shown by the KLM Corporate BioFuel Programme. 3.5 Market power, drivers and followers Since 2008, the bio jet market has expanded from single test flights and the establishment of international networks to airlines performing a series of test flights and regional networks aiming to deploy commercial bio jet supply chains. This development is needed for larger volumes of bio jet fuel to enter the market. The latest market development is that airlines and bio jet fuel producers are increasingly cooperating to increase bio jet production capacity. The trend of a large increase in bio jet fuelled flights at the end of 2011 and beginning of 2012 has not been continued. However, this does not mean that there is no activity as a number of airlines and producers are currently taking strategic positions on how to advance in the upcoming market. We expect that bio jet volumes will once again start increasing in the near future as some airlines are considering new bio jet fuelled series of flights. In the Netherlands KLM has set up up a green lane between Schiphol Airport and John F. Kennedy International Airport in New York. On this route a weekly biofuel flight with a Boeing 777-200 will take place which requires a significant volume of bio jet fuel. KLM intends to perform bio BIENL13187 23

jet fuelled flights on a continuous basis, where the JFK-AMS series will be followed by a new series based on the biofuel coming from ITAKA. Currently the bio jet market is primarily driven by airlines, bio jet producers and OEMs. In the US these three stakeholders are joined by the US military who have allocated significant funding to biofuel development. In the EU the interest in bio jet fuel is primarily driven by sustainability motives, whilst in the US the key driver is energy independence. In the US as well as in the EU, protection from oil price volatility (besides fulfilling sustainability ambitions) is the most important driver for airlines to stimulate the development of bio jet fuel. A more risk-averse approach is taken by oil companies and airports, who have so far not taken a frontrunner role in advancing the bio jet fuel market. Market power reflects the ability of a stakeholder in the value chain to pressurise or stimulate the market, influence price setting and take risks. The market power in the aviation industry lies with the OEMs and the oil companies. Market power for oil companies results from airlines being fully dependant on a limited number of oil companies for their operations. In case of the OEMs a duopoly position has been established by Airbus and Boeing, who together have a market share of 80% 5. In Figure 7 the role within the bio jet fuel market and their market power in the aviation business is shown. High Oil Companies OEM s Aviation Market Power Airports Airlines Biofuel producers Low Follower Biojet stakeholder role Driver Figure 7: Key aviation sector stakeholders: bio jet market role and market power. For the market to reach full commercialisation all main stakeholders will have to work together to set up bio jet fuel supply chains. Most oil companies have not yet been progressive in their actions in the field of bio jet fuels. The motivation for oil companies to distribute biofuels results from their obligations under the RED and the FQD. As it is often mandatory to fulfil obligations in the road BIENL13187 24

transportation sector oil companies have not taken a frontrunner role in making the market for bio jet fuel. Because of a strong interest and some demand from airlines innovative bio jet fuel oil companies such as SkyNRG fill up this niche, but so far the volumes traded have been too limited to attract significant interest from the larger oil companies. Once the volumes become larger, we expect that larger oil companies will become interested. Other important stakeholders that would have to be pulled on board are the airports. Airports have limited market power, but could be progressive in their action by e.g. demanding a certain percentage of biofuel blending when fuelling at their airport. At the moment, airports are hesitant to supply large volumes of bio jet fuels if this means that the jet fuel becomes more expensive, as this impacts one airport s competitiveness compared to others. OEMs, airlines and biofuel producers have been progressive in their action and should be stimulated to remain in their frontrunner roles. Feedstock supply security, access to conversion technology and economic viable off-take agreements are key elements. None of the active players in the biofuel arena have all these elements in-house. Besides, the risks would be high and the cost-benefit too uncertain to invest individually. Therefore only integrated developments securing all parts of the value chain will be successful. BIENL13187 25

4 A Dutch perspective The Netherlands has a strong position in the value chains as a kerosene hub. The combination of a strong logistic position, several motivated Dutch stakeholders and the increased (inter)national and European attention for sustainable aviation offers opportunities for the Netherlands to position themselves as a major player in the upcoming bio jet fuel market. The harbour of Rotterdam and Amsterdam, respectively the #1 and #4 European harbours, provide good accessibility by sea for large tanker ships and offer excellent hinterland connectivity through pipelines, inland ships and trucking. Rotterdam and Amsterdam are well connected to European pipeline systems used for the distribution of oil products (see appendix A). Bio refinery capacity is already available nearby the ports of Rotterdam and Amsterdam, with the Neste Oil plant in Rotterdam having the capability of producing bio jet fuel. KLM is a frontrunner in the use of bio jet fuels and is actively pursuing larger scale application through its involvement in Netherlands based bio jet trader SkyNRG. KLM and SkyNRG are actively participating in European projects such as ITAKA (SkyNRG as consortium partner, KLM as off-taker) and the Climate KIC, both projects aim to set up sustainable European Alcohol to Jet (AtJ) supply chains for bio jet fuel. Schiphol Airport is participating in KLM s Corporate BioFuel Programme, supports the KLM flight series between New York and Amsterdam and participates in the Climate KIC project. The future market in Europe has been made concrete by the EC flight path initiative, which states for 2020 that 2 mln. tonnes of bio jet fuel should be used in the EU. The Netherlands should position themselves in an early phase of this upcoming market, as is being done by e.g. Germany and Spain 22. This strategic consideration is important to ensure that the Netherlands keep their role as a major player in aviation fuel logistics in the longer term. As described in Section 2.6 the Netherlands is the only EU member state that has explicitly included bio jet fuel into their national transposition of the RED to contribute to the fulfilment of the quota. In the above, several stakeholders are described that could be important for the development of a Dutch bio jet supply chain. Below we describe fossil jet fuel chains and the bio jet fuel supply chain that was used by KLM in its bio jet activities. Also we make considerations on what would change in the supply chain if bio jet fuel volumes become larger. 4.1 Fossil jet fuel supply chain In Western Europe the Netherlands holds a key position in the trade and production of jet fuel. The Netherlands is Western Europe s largest exporter of jet fuel and the 2 nd biggest producer of jet fuel. In Europe a total of 53 million tonnes jet fuel was consumed in Europe in 2010, which means that 22 Germany through AIREG and Spain through SENASA. BIENL13187 26

approximately 20% of the European demand for jet fuel in aviation is imported through the Netherlands or produced in the Netherlands (see Table 3). We can conclude that the Netherlands has a strong role as a trader in jet fuel because, of all the jet fuel that is imported or produced in the Netherlands only 33% is used domestically. The jet fuel market in the Netherlands represents a value of approximately 11 bln. Euro. Table 3: Western European fossil jet fuel market in 2012, units are in thousand tonne [Eurostat, 2012]. Production Import Total consumption Use in aviation Export Netherlands 7,415 3,044 3,475 3,458 6,762 Belgium 1,534 1,924 1,492 1,434 1,660 Germany 4,972 4,197 8,188 8,183 764 France 4,708 3,901 7,181 6,431 684 United Kingdom 8,788 7,499 14,861 11,574 1,383 In 2011 Schiphol Amsterdam Airport Schiphol was the fourth largest European passenger airport with approximately 50 million passengers (terminal and transit) and the third largest in freight transport. Roughly 90% of all flights are passenger flights. In total almost 4 mln. tonnes of jet fuel was fuelled at Schiphol in 2011. The jet fuel destined for Schiphol is delivered to Rotterdam or Amsterdam Harbour by tanker ship or pipeline. The jet fuel is supplied by pipeline from the Harbour of Rotterdam (50%) and the Harbour of Amsterdam (50%) to Schiphol. Rotterdam is connected to Schiphol by the Central European Pipeline System (CEPS) 23, a NATO operated European pipeline system constructed for military purposes, but also used for civil purposes. Operation of the CEPS is done by the Dutch Defence Pipeline Organisation (DPO). In the harbour of Amsterdam, dedicated storage capacity is available operated by Oiltanking Amsterdam b.v.. From the storage there is a dedicated pipeline to Schiphol airport operated by Amsterdam Schiphol Pijplijding Beheer B.V. (ASP). The jet fuel is stored in large tanks at the Schiphol airport and delivered to the planes via the Schiphol hydrant system operated by Aircraft Fuel Supply B.V (AFS). AFS is a joint venture between KLM and 5 oil companies which has the exclusive license to deliver jet fuel at Schiphol Airport. AFS delivers over 12 million litres (10.000 tonnes) of jet fuel to Schiphol every day. For pipeline organisation there is little concern on whether fossil or bio jet fuel runs through their pipelines as long as it is certified to be of good quality according to the international accepted standards. In the case of Schiphol the jet fuel is supplied by a pipeline system; this is also often done using trucks at other airports. If no hydrant system infrastructure is available at the airport distribution, it is often done by dedicated fuelling trucks. The fossil fuel supply chain is illustrated in Figure 8. 23 See also Appendix A. BIENL13187 27

Amsterdam Harbour (Oiltanking ASP Pipeline Refinery and shipping Amsterdam B.V.) AFS Storage and hydrant system Schiphol Airlines Rotterdam Harbour CEPS Pipeline Figure 8: Schiphol supply chain for conventional jet fuel. 4.2 Bio jet fuel supply chain Bio jet fuel supply chains are not yet handled through the standard infrastructure because of the small volumes and the dedicated delivery to single airlines. Bio jet fuels have to be certified according to ASTM D7566-11a, which covers the manufacture of aviation turbine fuel that consists of fossil and synthetic blending components. After the bio jet blend has been certified it is regarded as specification D1655 (normal) turbine fuel. The largest share of bio jet fuel trade and logistics in the Netherlands has so far been handled by SkyNRG that buys used cooking oil based bio jet fuel from US company, Dynamic Fuels. From the production facility of Dynamic Fuels the fuel is shipped to a nearby harbour and transported in fuel containers to Rotterdam or Antwerp. The blending can be done in at the harbour in the US or at the harbour in the Netherlands. After quality certification the bio jet blend is transported to Schiphol for delivery to the aircraft. AFS has made storage capacity available at Schiphol airport for the series of bio jet flights that KLM performed in 2011. Bio-refinery and shipping Harbourof Rotterdam or Antwerp Trucking to Schiphol airport AFS storage capacity at Schiphol Dedicated truck delivery to airline Blending with conventional kerosine Figure 9: Dutch bio jet fuel supply chain. 4.3 Bio jet fuel supply chain for the future The existing bio jet supply chains do not yet use standard pipeline infrastructure. Separate supply chains for bio jet fuel are inefficient and as volumes increase and bio jet fuel becomes a commodity, the supply chain should shift to using the standard infrastructure. There are no technical or regulatory barriers for using the standard pipeline infrastructure. If the bio jet blend is certified as Jet A-1 fuel it can be stored and transported in the same tanks and pipelines as fossil jet fuel. The blending point and quality certification would have to be done upstream of the value chain to ensure optimal use of the standard infrastructure. Using the same infrastructure as fossil jet fuel would require the establishment of a mass balance system. This means that the bio jet fuel will no longer be kept separate from fossil jet fuel, but that airlines can claim the use of bio jet through an administrative system. The administrative system ensures a certain amount of bio jet is inserted in BIENL13187 28

the fuelling system, but that it is not necessarily fuelled in the aircraft of the airline that bought the bio jet. 4.4 Feedstock production Currently, most bio jet is produced using Jatropha oil, camelina oil and used cooking oil as a feedstock. Jatropha and camelina will typically be grown outside of the Netherlands because of limited available space. However, securing the availability and acceptable pricing of feedstock will be essential to the development of a successful bio jet fuel industry. When volumes increase the use of more advanced feedstocks such as (agri) waste, residue, non-food cellulosic material (e.g., woody biomass) and algae oil will be necessary to meet the growing demands. According to Deltares (2011) algae production in the Netherlands is possible, but it would be economically more viable to produce the algae outside of the Netherlands in regions were the yields are higher because of more solar irradiation. We conclude that it is not likely that the Netherlands will play a large role in the production of feedstock for aviation biofuels, but that Dutch waste streams might be used for bio jet fuel production. 4.5 Linking to Dutch government initiatives A green deal on biofuels between KLM and the Dutch Ministry of Infrastructure and the Environment that was closed in 2011, underlines the willingness of the Dutch government to strengthen the position of bio jet fuel in the Netherlands. Besides the green deal there are a number of other (government) initiatives that link to the bio jet fuel market. Government action should try to create a synergy between their actions in the field of bio jet fuels and the other initiatives that link directly or indirectly to bio jet fuels. The following topics should be considered: Topsector policy (Topsectoren beleid) - Energy and Chemical; Sector agreement transport and logistics Duurzaamheid in beweging ; Biobased Economy; Mainport innovation fund. 4.6 Opportunities The Netherlands holds an important position in the European aviation sector; Schiphol is the fourth largest European airport, Air France-KLM one of the largest European airlines and the harbours Rotterdam and Amsterdam are key logistic hubs in European jet fuel trade, linked to Central European Pipeline System. Neste Oil has a plant in the Rotterdam harbour that can produce jet fuel although is currently only used to produce biodiesel. Dutch company SkyNRG is currently the market leader in bio jet fuel trade having supplied over 20 airlines worldwide. Furthermore the Dutch government is currently the most progressive Member State in the EU-27 in terms of bio jet fuel stimulation policy. BIENL13187 29

With the market for bio jet fuel expected to grow rapidly in the EU-27 to 2 million tonnes in 2020 the Netherlands is in an ideal position to grasp the economic potential capitalizing on a European frontrunner role in bio jet fuel. At current fossil jet fuel prices the potential value of the expected 2 million tonne bio jet fuel market would be around 2 billion euro, of which the Netherlands should be able to get a significant share, especially as it is already the largest exporter of jet fuel in Western Europe. Currently bio jet fuel is produced from feedstocks that cannot be cultivated in the Netherlands. We conclude that it is not likely that the Netherlands will play a large role in the production of feedstock for aviation biofuels, but that Dutch waste streams might be used for bio jet fuel production. Another potential route could be alcohol to jet (AtJ) for which the Netherlands does have the potential to produce the feedstock though its extensive chemical industry. The Dutch perspective is bright; all ingredients to reinforce our competitive European position in bio jet fuel supply are available, strong stakeholders, proper infrastructures and a cooperating government. Actively pursuing a bio jet fuel industry in the Netherlands would lead to a frontrunner position in the contribution to sustainable aviation. In Chapter 5, we propose a set of policy recommendations for the Dutch government to capitalise on the opportunities. BIENL13187 30

5 Role of the Dutch government In Chapter 4 we described the opportunity for the Netherlands to capitalise on the developments in biofuels for aviation. The Netherlands currently plays a key role in the Western aviation fuels market of approximately 8 billion Euro, only surpassed by the UK which has a jet fuel market representing 13 billion Euro. The opportunity lies in the combination of 1) an important role of the Harbours of Rotterdam and Amsterdam in jet fuel logistics 2) excellent connectivity through pipelines, to 3 out of the top 4 international airports in Europe 3) progressive Dutch stakeholders (KLM, Schiphol, SkyNRG) 4) existence of production plant (Neste Oil) and 4) progressive policy compared to other member states. The combination of factors places the Netherlands in a frontrunner position compared to other countries in (Western-) Europe, a region in which the market for bio jet fuel is seriously taking off as described in Chapter 3. However, there are still significant barriers to be overcome for bio jet fuel to grow to a commercial market. The main market barriers (Figure 10) are (1) lack of demand, (2) lack of supply, and (3) the high costs of bio jet fuel compared to fossil jet fuel. Additionally, (4) concerns about the sustainability of available feedstock hinder the acceptance of bio jet fuel, especially in the aviation sector. Aviation is a very visible sector which is highly sensitive to bad publicity; therefore aviation stakeholders are extremely prudent in their actions. We believe that it is the concerns about sustainability holding the market back rather than the sustainability itself. A prominent factor is the lingering discussion about ILUC (indirect land use change). As long as discussion has not resulted in new legislation that clarifies the consequences for different feedstock, it brings much uncertainty to the market. Certification against the highest sustainability standards (RSB) and production without ILUC impacts (LIIP concept) can affirm confidence in the sustainability of the product. The Dutch government should make clear decisions to successfully remove the barriers and accelerate the bio jet fuel market in The Netherlands. Most of the barriers can be resolved on a national level, whereas some will have to be resolved on an international setting because of the worldwide character of the aviation sector. In both cases the Dutch government can play a role by either taking national action or actively involving themselves in the international processes via international governments and platforms. BIENL13187 31

Price gap Sustainability concerns Biojet fuel market Lack of supply Lack of demand Figure 10: Barriers for the bio jet fuel market. 5.1 Barriers for the commercialisation of bio jet fuel The most important barrier for bio jet fuels is the price gap that exists between fossil jet fuel and bio jet fuel. At current volumes prices for bio jet fuel are 2-4 times higher than the prices for fossil jet fuel, see Figure 11. The price gap has already decreased significantly since the first test with bio jet fuel, at which time the costs were about 30 times higher than the costs for fossil fuel. In Europe the RED provides a mechanism that helps to partially overcome the price gap, which is implemented in the Netherlands trough the bioticket system (see Section 2.6). The value for supplying a certain amount of renewable energy in transport is shaped by the price gap between fossil fuels and biofuels in road transport, the sector in which most of the renewable energy is supplied. Because the price gap in road transport is smaller than for aviation the RED mechanism does not provide sufficient financial incentive to overcome the difference in price between jet fuel and bio jet fuel. Furthermore the Netherlands so far has been the only Member State that has explicitly included aviation biofuels in the national transposition of the RED, which means that it is the only Member State in the EU to attribute a value to biofuels within aviation. In other Member States aviation biofuels have not been included, which means that the incentive described above does not apply. Another mechanism that could decrease the price gap in aviation is the European Emission Trading Scheme (ETS), which aims to reduce the emissions from aviation on intra-european flights (see also Section 2.6). One of the key drivers of using bio jet fuel is that it reduces this GHG impact of aviation and therefore contributes to the goal of the ETS. The implementation of ETS for intercontinental flights was stopped at the end of 2012 to allow international aviation stakeholders to come up with an alternative worldwide system to bring down GHG emissions. At current price levels of 10 Euro/tonne CO 2 ETS will not be a strong driver for the bio jet fuel market in Europe. Current carbon prices would BIENL13187 32

add approximately 0.015 Euro/litre or 0.43 Euro/GJ to the price of fossil jet fuel. This incentive is negligible compared to the total cost gap that still has to be bridged (see Figure 11). In case ETS is re-introduced by the EU in a unilateral and extraterritorial manner, careful consideration to Carbon Leakage risks should be given. Figure 11: Schematic price comparison of fossil jet fuel and bio jet fuel and Dutch policy instruments used to bridge the cost gap 24,25. The demand for bio jet fuel is small because of high prices and concerns about sustainability. For airlines the fuel costs are approximately 30% of the total operational costs 5. Because of the small margins and the highly competitive market that airlines operate in they are not able to pay a price for using biofuels which is twice as high as fossil fuels on a large scale. Sustainability concerns make airlines extra prudent in their actions since bad publicity has the potential to damage them even further. KLM and SkyNRG have set up an innovative program, the Corporate Biofuel Program, with which they partly overcome the barrier of high prices by stimulating corporates to pay a premium for their tickets so that bio jet fuel can be used. Compared to fossil jet fuel the supply for bio jet fuel is very small. Limited availability of production facilities is one reason. In Europe only Neste Oil produces bio jet fuel in its plant in Finland, with the capability to produce it at its Rotterdam plant as well, after making some adjustments to the process. 24 Currently, much of the bio jet fuels used in the Netherlands are made from waste streams and automatically count double towards the fuel supplier s obligation. Further on in this report, we propose to double count all bio jet fuels, regardless of their source. 25 For reasons of visibility, the carbon value in this graph is set to 25 /tonne CO2. The current carbon credit value is actually about a tenfold lower. BIENL13187 33

SkyNRG so far has sourced its bio jet fuel from the US, but Neste Oil and SkyNRG are both involved in the ITAKA project. Another aspect influencing the prices is the cost of feedstock. Currently the most important feedstock is Used Cooking Oil (UCO), mainly because there is less debate about the sustainability of UCO, making it a relatively safe feedstock for airlines to use. When volumes increase other alternative and more advanced feedstock such as (agri) waste, residue and non-food cellulosic material, woody biomass and algae must be used. Technologies using these feedstocks need to be further developed as they are still too costly. Deltares (2011) concludes that producing bio jet fuel from algae grown in the Netherlands currently costs approximately 28 per litre, which is approximately 30 times higher than fossil jet fuel. Furthermore the energy demand for the cultivation, harvesting and processing is very high leading to a strain on the net energy ratio. Investment in bio jet fuel projects is needed to increase volumes. It is however challenging to find investors for projects in these challenging economic times. Furthermore with a large overcapacity of biofuel production capacity already in Europe investors are hesitant to invest in additional capacity. Although the EC envisions the use of 2 million tonne of bio jet fuel in 2020 the pathway towards this goal has not yet been filled sufficiently to ensure long term market security. The mainport innovation fund, a seed capital fund established by TU Delft, KLM, Schiphol, Rabobank and NL Agency, is actively looking to invest in a bio jet fuel start-up company for the first time this year. As long as investment and volumes do not increase, the prices of bio jet fuel will remain high and bio jet fuels will remain too costly for large scale use (see Figure 11). In innovation theory this stalemate position is also known as the Valley of Death and it is key that governments, industry and knowledge institutions work together to ensure that these sustainable innovative technologies continue on the pathway to commercialisation. In the next section we will discuss several actions that the Dutch government could take, on a national and international level, to help the Dutch stakeholders to build this market to full commercialisation. BIENL13187 34

High prices Feedstock cost Incidental production batches Low supply Feedstock availability Upscaling challenges Technology Project financing Low demand High price premium Concerns on sustainability Figure 12: Relation between key barriers for the commercialisation of the bio jet fuel market. Biofuels are often linked to concerns about sustainability which include Indirect Land Use Change (ILUC) and GHG emission reduction effects. Recently, NGOs and other organisations have voiced these concerns strongly. Stakeholders in the aviation sector are visible and their biofuel use will always be looked on critically. This has led to a conservative approach of stakeholders in the aviation sector. The sustainability of biofuels must be guaranteed, which is also included in the European RED and FQD directives. Because of the high visibility it is likely that airlines will always use the most sustainable biofuels, thereby even going a step further than required by the RED and FQD. We feel that sustainability itself is not a barrier, since it is possible to produce biofuels that are sustainable in smaller volumes in the short term using e.g. UCO, Jatropha or palm oil, but rather to overcome the barrier of concerns about sustainability that exist amongst the general public. It is essential that the clear guidance and legislation become available to determine, in a uniform manner, the sustainability of a bio jet fuel supply chain. In case uncertainties remain, additional research is needed to obtain the required information and to prevent undesired hazardous effects. As indicated earlier the sustainability discussion is beyond the scope of this report, but should be considered as an important precondition for the large scale uptake of bio jet fuels. 5.2 Policy recommendations To stimulate the Dutch bio jet fuel market the Dutch government should target the four main barriers: costs, demand, supply and the concerns about sustainability. In this part we discuss several options that can be taken nationally or internationally by the Dutch government. Some are straightforward actions eliminating relative simple issues; others require policy development and/or BIENL13187 35

close cooperation with the stakeholders to assess the effect on the aviation business in the Netherlands. We expect the bio jet fuel market to reach full commercialisation between 2020 and 2030. On the one hand the volumes of bio jet fuel will increase resulting in lower prices. The European Advanced Biofuels Flight Path 2020 sets a goal of 2 million tonnes produced bio jet fuel per annum in 2020 (see Section 3.2) and there are many initiatives going on leading to increasing volumes, also outside Europe. The carbon price is expected to go up to a multiple of the current values, eventually creating a stimulating effect on the use of biofuels. On the other hand the price of fossil jet fuel is expected to increase, especially once the demand for oil products grows again at the end of the economic crisis. The pace of commercialisation in the Netherlands and the value that the bio jet market could create for the Dutch economy are dependent on the stimulus that is given by the government. One of the key messages that all stakeholders have mentioned on several occasions is that a stable long term policy is needed. Once a program is in place the government should ensure that it does not change the rules of the game. Furthermore we must stress that a combination of measures targeting all barriers would be most successful, therefore our policy recommendations should not be seen as a basket from which one can only make one choice, but rather as a comprehensive set of recommendations that would be most effective if applied together. In Table 4 our policy recommendations are summarised. We make a distinction between actions on the short (2013-2015), medium (2015-2020) and long (2020-2030) term. Furthermore we distinguish policy development from straightforward actions and where needed we separate national issues from the EU and worldwide issues. The policy recommendations are built along a short (2013-2015), medium (2015-2020) to long term (2020-2030) axis: Short term: o Create the Dutch market for bio jet fuel; o Develop internationally accepted sustainability criteria; Medium term: o Scale up the Dutch market; o Connect to other markets; o Production capacity and supply chain in the Netherlands; Long term: o Commercialisation of the market; o Novel feedstock production capacity in the Netherlands. BIENL13187 36

Table 4: Summary of policy recommendations. The numbers within brackets refer to the actions discussed below the table. Short term 2013-2015 Medium term 2015-2020 Long term 2020-2030 Create the Dutch market Develop accepted sustainability criteria Scale up the Dutch market Connect to other markets Production capacity and supply chain in the Netherlands Establish a fully commercial market Deploy new production technologies NL (1) Launching customer role (2) Double counting of biofuels put in to aviation in NL (3) Facilitate HVO bio jet fuel project plan in NL (4) Stimulate R&D in new technologies (10) Facilitate regular communication between key NL stakeholders (3) Support implementation of the HVO bio jet fuel project in NL (4) Continue to stimulate R&D in new technologies and facilitate pilot plants for promising new technologies (5) Create incentives for airlines using biofuels/rewarding systems (4) Support new technology bio jet fuel project in NL (6) Stimulate inclusion of EU bio jet fuel in transposition RED other Member States (7) Separate mandate for biofuel in aviation World (8) Shape international sustainability criteria (9) Explore cooperation with other nations (9) (Bilateral) agreements with other nations (9) Investigate support for feedstock projects (in developing countries) (1) Action: Launching customer role The KLM corporate biofuel programme is an innovative way to create additional demand for bio jet fuel. Several large corporates committed to paying a premium for their tickets to ensure a certain amount of bio jet fuel is used in KLM flights. The Dutch government can set the example by becoming BIENL13187 37

a KLM Corporate BioFuel Programme partner. The Dutch Ministry of Defence could act as a launching customer of bio jet fuel for military practices, similar to what is being done by the US military. (2) Policy: Double counting of biofuels put in to aviation in NL In the RED biofuels produced from certain feedstocks are double counted towards the renewable energy obligation. The double counting promotes the uptake of more advanced feedstocks for the production of biofuels. A similar stimulation could be made for biofuels used in aviation, which would effectively double the value of a bioticket. The double counting would allow a larger share of the cost gap between fossil and bio jet fuels to be bridged (see also Figure 11). A drawback of double counting aviation biofuels is that the total volume of biofuels used in transport would be lower. (3) Action: Facilitate the development of integrated HVO bio jet fuel supply chain in NL As described in Chapter 4, the Dutch situation has significant potential for the development of a bio jet fuel supply chain because of 1) motivated and well positioned Dutch stakeholders and 2) the strong position in the fossil jet fuel market. The HVO pathway seems to be the most commercially viable option at this point. As a first step we propose that the possibility to develop a bio jet fuel project including a Dutch Harbour where the handling of the feedstock and biorefinery could take place, KLM, Schiphol, SkyNRG, Neste Oil,investors and other relevant (Dutch) stakeholders is explored. The government should take a facilitating and initiating role in this process as it could be an important opportunity to gain more practical experience with large scale bio jet fuels. If there is sufficient interest from industry, the government could provide direct support to the project and help acquire the required additional funding from other sources such as the European Investment Bank. Furthermore other financial instruments such as Climate Bonds should be explored to finance the project. (4) Action: Stimulate new bio jet technologies Currently most bio jet fuel is produced from vegetable oils, waste streams from food industry and byproducts of vegetable oil refining. In the future other feedstocks and processes will have to be used to keep up with increasing demands, as availability in current feedstocks is limited. Additional research is needed on new technologies, combinations of alternative/advanced sustainable feedstock such as algae and woody biomass. In the short term research will be needed in conversion technology and feedstock development, in the medium and long term pilot and commercial plants will have to be developed. New processes will have to be approved in a fuel approval process, in which the Dutch government could play a role in providing resources or facilitating a smooth and quick fuel approval process. Similar to their role in (3) the Dutch should facilitate these developments. As part of the Climate KIC project a PhD. trajectory has been awarded to look into incentive & organisational structures for renewable Jet Fuel Supply Chains. This PhD trajectory will be carried out in the coming years under supervision of Prof. dr.ir. Weijnen (Delft University of Technology) and BIENL13187 38

Prof. dr. Faaij (University of Utrecht). Research insights should be used to steer bio jet fuel developments where necessary. With the multiplication of the processes and of their specificities, a critical aspect is to continue to ensure technical suitability of the fuels and safety. This implies first to guarantee that all issues are covered by approval and second to manage compatibility issues between the various pathways all along the production and distribution chain. (5) Policy/Action: Create incentives for airlines using biofuels/rewarding systems The Dutch government or Schiphol Airport could provide small advantages to airlines that use biofuels for their flight. These advantages can e.g. be reduced landing fees at or favourable conditions when competing for take-off and landing slots. The government should work together with Schiphol to identify the possibilities of this type of preferred treatment programs. Before setting up this program easy access and secure supply of bio jet fuel at the airport is needed, which is not yet the case, but would be the case once an HVO bio jet plant in the Netherlands is completed (3). Therefore we consider this a medium term option. A drawback of this option is that it would reduce the income of Schiphol because of lower landing fees and a badly designed and monitored incentive system could result in unequal competition between airlines. (6) Action: Stimulate inclusion of bio jet fuel in transposition RED other Member states The Netherlands is so far the only European Member State that explicitly counts aviation biofuels in the RED obligations. By stimulating other Member States to do the same, a more level playing field 26 would be created, but also the demand volume for bio jet fuels would increase which would decrease the price of the fuels. In parallel, the Dutch government and stakeholders could motivate other major European airlines and airports to introduce a small amount of bio jet fuels. If, for example, 1% of bio jet fuels were to be used at each of the four major European airports, this would seriously move the market, and at the same time those airports would not endanger their relative competitiveness with regards to jet fuel prices. (7) Policy: Separate mandate for biofuel in aviation A separate mandate for aviation is the most progressive option to stimulate supply of bio jet fuel. Introducing a separate mandate in an upcoming market does hold the potential risk of destabilising the market. Furthermore, if the mandate was implemented on a national or even at EU level it could be harmful for the competitive position of the Netherlands as an aviation transit hub because fuel prices would increase. These issues will have to be investigated closely when considering a separate mandate for aviation; therefore we consider a mandate as a long term option. 26 A level playing field means that biofuels used in aviation are treated within the same regulatory framework that renewable energy sources used in other transportation sectors are treated in. It does not mean that it has to be equally financially interesting to put biofuels in aviation, the latter being function of the free market. BIENL13187 39

(8) Action: Develop and define stable and credible sustainability criteria Concerns about sustainability have been voiced as a reason for airlines to be prudent in their biofuel activities. International aviation organisations must work together with NGOs and other stakeholders to ensure that the bio jet fuels will meet stable and credible sustainability criteria. Stakeholders in the bio jet fuel supply chain require clear criteria to justify financial commitment. Internationally accepted sustainability criteria play a key role in ensuring regional interoperability so that the bio jet fuel market can evolve to a commodity market similar to fossil jet fuels. The government, NGOs and stakeholders should cooperate to show that bio jet fuel supply chains are sustainable. The bio jet fuel market should have a clean and sustainable image if consumers, private and corporate are to be convinced to fly on bio jet fuel. The RSB, as an independent group of experts, has the credibility and position to take a leading position in this area. Aviation industry, NGOs and governments should support such a development and positioning of the RSB. (9) Action: Explore cooperation with other nations Cooperation with other nations can help the Netherlands to gain access to a larger market, be informed on international developments, be involved in international projects and share in new knowledge developed abroad. We suggest close ties to national and international organisations and networks promoting the use of biofuels in aviation (see also Section 3.2). The connection to Germany (aireg), the UK (British Airways & Solena GreenSky project) and the European ITAKA & Flight Path projects are especially important because they are geographically close to the Netherlands. Also the connection with the US must be ensured since investment in developing bio jet fuel technologies is high in the US. As a medium term idea it might be possible to close bilateral agreements with other governments to use a blend of a certain percentage of bio jet fuel on flights between certain countries or airports. As an example of bilateral agreements it could be explored if e.g. in Western Europe the four largest airports, London Heathrow, Paris Charles de Gaulle, Frankfurt and Amsterdam Schiphol could make an agreement to blend a small percentage (e.g. 1%) of biofuel with the fossil fuel supply. This would increase volumes significantly without disturbing the hub-competition that these airports have amongst each other. Frankfurt and Schiphol are linked to the CEPS network, which would make supply through the existing pipeline infrastructure possible. London Heathrow is already involved in the Solena FT bio jet fuel plant that will be constructed in the vicinity of London. The Dutch government could initiate talks between Western Europe s largest airports and national governments to explore the possibilities for such a voluntary agreement. Furthermore it could be investigated if the additional costs for the bio jet fuel could be shared between different supply chain stakeholders, e.g. oil companies, airlines and airports. As Spain (Bioqueroseno project), East European countries and other (developing) countries might be important to develop feedstock supply, engagement with their BIENL13187 40

governments might prove valuable as well, given the dependency on the supply of affordable feedstock. (10) Action: Facilitate regular communication between key NL stakeholders In the course of this project a workshop was organised by the Dutch Ministry of Economic Affairs and Ecofys in which key (potential) stakeholders of the Dutch bio jet fuel market were invited to evaluate the current status of the market. Workshops and regular meetings help to generate ideas and build relationships and commitment amongst stakeholders and provide the opportunity to industry stakeholders to express and discuss their desires to the government. Our advice is that the government should facilitate regular communication between key NL stakeholders to assess the progress of the roadmap: Identify to what extent the barriers are removed; Identify which new barriers rise; Discuss how successful actions of the government and industry stakeholders are, how they can be improved and when they can be omitted; Discuss which additional stimulation is needed at national, European and international level; Exchange info concerning best practices. BIENL13187 41

Appendix A Central Europe Pipeline System Source: CEPS, 2009 BIENL13187 42

Appendix B Workshop attendees and interviewees Organisations and people that were interviewed and/or attended the workshop in the frame of this study. Organisation KLM Royal Dutch Airlines Lufthansa Shell BP Total Argos North Sea Group Neste Oil Name Ignaas Caryn, Fokko Kroesen, Ruben Alblas Alexander Zschocke Mike Farmery Thomas Briggs, Theresa Boerschlein Ralf Stöckel Bart-Willem ten Cate Virpi Kroger, Bart Leenders SkyNRG Boeing AlgaeLink Port of Rotterdam Port of Amsterdam Schiphol Aircraft Fuel Supply CAAFI Rotterdam Climate Initiative Ministry of Defence NLR (national aerospace laboratory) TNO (knowledge organisation) PDL (platform sustainable aviation) AIREG IATA OBSA-SENASA Transport and Environment WWF Dirk Kronemeijer, Maarten van Dijk, Susanne Dekker Pia Snijder, Richard Mills Peter van Dorpel Ronald Backers Ruud van Stralen Jonas van Stekelenburg Klaas Winters Steve Csonka George Brouwer Henk Monderen, Wim Zijderveld, Hans Berkhout, Petra Peters van Cranenburgh Toni Kanakis, Louis Aartman Eric van der Veen Joris Vlaming Lukas Rohleder Thomas Roetger César Velarde Catolfi-Salvoni Nuša Urbančič Arjette Stevens, László Máthé BIENL13187 43

ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T +31 (0)30 662-3300 F +31 (0)30 662-3301 E info@ecofys.com I www.ecofys.com

ECOFYS Netherlands B.V. Kanaalweg 15G 3526 KL Utrecht T: +31 (0) 30 662-3300 F: +31 (0) 30 662-3301 E: info@ecofys.com I: www.ecofys.com