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Jet zero government initiatives to provide boon for Velocys?

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Jet Zero, a policy “designed to future-proof aviation so passengers can look forward to guilt-free travel,” according to Grant Shapps, the UK’s Secretary of State for Transport, is being enthusiastically pursued by many western countries.

Aviation makes up between 2.5% to 5% of global greenhouse gas emissions. On the face of it that does not seem like a huge amount, however, only a small proportion of the world’s population flies frequently, and they are almost entirely based in the West. And in the West, for example in the UK, only half the population takes a flight in a year. Only 12% of the population is seen as a ‘frequent flier’ – that is takes three or more flights a year. According to the International Council on Clean Transportation (ICCT) about 3% of the world’s population make up the vast majority of aviation-related emissions.

Hot topic with lawmakers

It is a hot topic with legislators in Europe and North America. The US Congress has just passed the Inflation Reduction Act of 2022, and in it – along with several incentives to reduce greenhouse gas emissions across the board – jet zero is specifically addressed though the implementation of Sustainable Aviation Fuel (SAF) tax credits together with other incentives and mechanisms to accelerate the deployment of advanced fuel technologies.

Subject to becoming law, the legislation allocates approximately USD369bn to reducing greenhouse gas emissions and incentivises expanded production and use of domestic clean energy. SAF tax credits are an integral part of the Act, together with other incentives and mechanisms to accelerate the deployment of advanced fuel technologies, generating non-fossil fuels with a significantly reduced carbon intensity.

Velocys plc [AIM:VLS], the Oxford-based sustainable fuels company, was welcoming of the legislation. Henrik Wareborn, chief executive, said: “The legislation passed in the US is of historic significance, putting the United States on a path to lower its emissions significantly by 2030, and beyond. We believe this landmark legislation represents a compelling model which other governments will seek to follow, in particular in its focus on total amount of avoided carbon instead of volume of sustainable fuel supplied, thus prioritising those technologies which offer routes to negative carbon intensity fuels.”

The UK also recently published its strategy on jet zero, saying it will deliver net zero emissions from aviation by 2050. The UK government plans for flight demand to increase by 70%, which would see aviation emissions rising from 38 million tonnes of CO2 emissions (MtCO2e) in 2019, before the Covid-19 pandemic, to 52MtCO2e by 2050. However, the government hopes to counter this rise by making aviation more efficient, modernising airspace, increasing the use of SAF, increasing the participation of carbon trading markets and developing new zero-emissions aircraft.

Sustainable decarbonisation

Wareborn explained that SAF is the only current commercially scalable decarbonisation route for the aviation sector. “Multiple pathways to SAF production are needed to satisfy the aviation industry’s decarbonisation targets towards net zero. [We] continue to provide [our] clients with integrated extensive IP-protected technology enabling the production of synthetic aviation fuel from a variety of sustainable feedstocks with ultra-low to negative carbon intensity.”

Velocys is developing a SAF project in Natchez, Mississippi called Bayou Fuels, a cellulosic biofuels plant enabling the production of carbon negative fuel through the use of biogenic feedstock, renewable power, and carbon sequestration. The proposed biorefinery will convert 3,000 tons/day of woody biomass forestry residues into 36 million gallons/year of renewable transportation fuels, predominantly SAF, with a negative carbon intensity, said Wareborn.

The new US legislation will underpin the financing of Bayou Fuels through tax credits and associated incentives. Velocys has already secured long-term offtake arrangements for 100% of the SAF output expected from the Bayou Fuels facility with Southwest Airlines (a 15-year agreement) and IAG/British Airways (MOU for a 10-year agreement) avoiding 8.8MtCO2e over the term of the off-takes. This new climate legislation is expected to allow finalisation of conversion of the MOU to a full offtake agreement, said Wareborn.


Scaling-up

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Combined with the UK government’s ambition to build five commercial-scale SAF plants by 2025 and the stipulation that at least 10% of aviation fuel be a SAF blend by 2030, prospects appear to be promising for Velocys. The company’s shares were trading at 5.86p mid-morning (15th August), up 12.69 from close of play the end of the previous week. Velocys has offered a year-to-date return of -19.95% and a one-year return of 18.5% with a 52-week range between 4p and 17.9p, with a market cap of GBP72.5m

Velocys and British Airways are jointly developing the Altalto project, which is to build a full-scale plant in Immingham, UK, to make SAF from commercial and residential residual waste, in anticipation of UK policy incentives competitive with those announced by the US.

Wareborn noted that; “Importantly, the UK mandate is to be expressed in terms of greenhouse gas reductions, rather than simple volume, which will benefit Altalto due to its ultra-low carbon intensity.”

SAF can definitely help reduce the greenhouse gas emissions from aviation. However, in the wider world the policy initiatives announced have instead of gaining acclamation, attracted quite strong criticism.

Undeveloped technology

Carbon Brief a specialist climate change publisher in the UK said; “Under the [UK Government’] strategy’s plans, the UK aviation sector will not reach net-zero by 2050, but instead will still be emitting 19 MtCO2e. For the UK to reach its legal net-zero target, these emissions will need to be removed from the atmosphere.”

The publication noted: “It prioritises largely undeveloped technologies, such as “sustainable aviation fuels” and zero-emission flights – while skirting recommendations from its own climate advisers to reduce demand for flying.”

In its “high-ambition” scenario, the use of SAF in UK flights would reach 10% of overall fuel use by 2030 and 50% by 2050. Carbon Brief said: “These fuels are currently barely used because, as the [UK] government acknowledges, they are expensive and their production relies on technology that is “yet to be proven at scale”.”

The ICCT claimed that there was insufficient feedstock in Europe to meet the proposed demands for SAF in the coming years, and through the process of ‘tankering’ consumption of fossil fuel-based aviation fuel might actually increase if the process of blending SAF is implemented in Europe. Moreover, the production of alternative fuels such as green hydrogen and synthetic fuel, is actually more energy intensive and costly than the production of fossil fuel-based aviation fuel, so the net impact of producing green hydrogen and synthetic fuel might actually increase emissions.

Net zero fantasy

Legislation in the US, UK and Europe to make flying more sustainable is a welcome boon for Velocys and its competitors. However, the targets set are described as “a fantasy” by climate action groups. Possible, the UK-based climate change charity said: ““All of the technology solutions in this [UK] aviation strategy are a complete fantasy. They’re either extremely expensive, close to physically impossible, demand a ridiculous share of the planet’s limited resources, or wouldn’t reduce emissions.”

It continued: “The truth is there is only one method for reducing aviation emissions which we know works: reducing the number of flights. Even the government’s own climate advisers agree – but today the government ignored them in favour of a fantasy of unlimited growth on a finite planet.”

Legislation in the US and UK to deal with the impact of aviation on the climate is very welcome. Velocys and its competitors are at the forefront of developing sustainable solutions to the emissions problems and will grow in importance and value in the next decade.

However, many of the centrally-mandated policies are not really solutions at all, as they do not address the core issues of the impact of emissions on climate change and are just the tip of the iceberg. Whether we still have icebergs in 2050 remains a debatable point.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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