Deals with IAG and Southwest Airlines to buy carbon-negative aviation fuel from sustainable fuel producer Velocys (LSE:VLS) has boosted the group’s stock last week by more than 40%.
Having such big names in aviation back the small-cap stock gives it a vote of confidence and the increased push for clean energy projects by the UK government might provide future support for the growth of the business. But with big oil companies, armed with significantly more capital, also looking to produce more sustainable fuel, Velocys will need to make sure it stands out.
What is Velocys?
Velocys, a spin-out from Oxford University, is a producer of sustainable fuels made from waste materials for use in aviation and heavy goods transport. The use of sustainable aviation fuel is on the rise, and it’s high on the agenda for many airlines as governments and consumers push for more environmentally friendly modes of travel.
Using SAF, which is produced from sustainable feedstocks such as solid waste from homes, cooking oil or other non-palm waste oils, results in a reduction in carbon emissions. Over the lifecycle of the fuel it can reduce up to 80% of carbon emissions.
What do its results look like?
Velocys CEO Henrik Wareborn said the certainty of revenue provided by the deals with IAG and Southwest Airlines should also enable construction capital financing. The deals relate to the planned Bayou Fuels biorefinery in Mississippi. Southwest Airlines agreed to buy an estimated 219 million gallons of sustainable aviation fuel at a fixed price across a period of 15 years, while IAG is expected to purchase 73 million gallons.
It’s not only start-ups that are eyeing this attractive marketplace. Major oil producer BP has partnerships with Neste and Fulcrum BioEnergy. Earlier this year, Shell withdrew from a joint venture with Velocys in order to pursue its own projects in this segment.
What about the market for these biofuels?
It looks like there is set to be significant demand for biofuels.
According to a recent report from SkyNRG – an SAF provider which partners with Boeing – approximately 300 SAF plants with an average production capacity of 100,000 metric tons per year will be needed by 2050 just to fulfil the mandated demand in the European Union.
Another report from FastMarkets expects global demand for SAF to increase from 80,000 to 3 million tonnes by 2025.
Anything to worry about here?
While SAF is seen as the answer to reduce carbon emissions in an industry that accounts for 2.5% of the world’s emissions, there are also concerns that SAF production may impact other parts of the environment.
For now though, Velocys is continuing to ride the high from its recently inked deals and the potential tailwinds from a global push to increase sustainable-fuel production to meet environmental commitments. Although the excitement from last week has slightly calmed, and the share price is below its 52-week high of 17.94p, it is still up 115.7% to 11p in the last 12 months.