Sustainable fuels: a decisive contribution to the energy transition

Interview with Roland Kahalé, Head of Low-Carbon Fuels in BNP Paribas’ Low Carbon Transition Group.

Roland looks at the latest trends in the sustainable fuels market, as well as challenges and growth drivers for the future in high-potential industries, from aviation, shipping and road transportation to industry and chemicals.

What is the situation in the low-carbon fuels industry today?

With significantly lower greenhouse gas emissions than traditional fossil fuels, sustainable fuels harbour potential for hard-to-abate industries where electrification presents challenges – notably aviation and maritime transportation.

The sustainable fuels market has a promising outlook, despite the challenges. The IEA’s Net Zero Emissions Scenario 2050 projects a twofold increase in demand for low-carbon fuels (including hydrogen) by 2030, set to double again by 2050. The sustainable fuels market growth in recent years has been driven by regulatory incentives – emissions trading systems, blending mandates, subsidies – as well as increasing environmental awareness and technological advancements.

Biofuels have faced headwinds recently in Europe and the United States, while biomethane has been buoyed by low-cost feedstock, larger plants, high natural gas prices and supportive policies. The European Union is targeting 35 billion cubic meters of biomethane per year by 2030, which looks ambitious given permitting and social acceptability questions.

Sustainable Aviation Fuel (SAF) has been gaining particular traction. From just 0.3% of total jet fuel production in 2024, according to the International Air Transport Association (IATA), SAF is estimated to contribute some 65% of the emissions reduction needed by aviation to reach net zero by 2050 supported by several ASTM-approved* pathways.

FuelEU Maritime, coming into force in January 2025, is designed to accelerate the use of sustainable fuels to promote the reduction of GHG intensity of ships arriving at – or departing from – a European port. It requires eligible shipping companies to cut GHG emissions by 6% in 2030 and 80% by 2050, and will require collaboration between owners and charterers.

In road transportation, the share of sustainable fuels used in heavy road transportation is set to grow going forward, while the EV market is developing for passenger cars. Road transport emissions are expected to drop drastically, particularly in advanced economies.

Sustainable fuels cover:

Biofuels produced in gas or liquid form from wastes, residues and renewable organic resources such as agricultural waste, manure, and other biomass. Their carbon footprint depends on the type of feedstock used.
E-fuels based on green hydrogen produced from low-carbon or renewable electricity – renewable fuels of non-biological origin (RFNBO). Most require captured CO2, preferably biogenic as a complementary feedstock, i.e. e-kerosene, e-methane, e-methanol, etc.
Low-carbon ammonia, which is a fuel not requiring carbon dioxide as a feedstock but instead uses nitrogen from the air and low-carbon hydrogen.

How to scale up the deployment of low-carbon fuels?

There are some key areas to address. Firstly, complexity, uncertainties and strict technical criteria in the current regulations need to be addressed for low-carbon fuels, to scale them up across sectors and geographies.

Secondly, the development of a liquid market for commoditised trading with reference market prices would be another important prerequisite for the market’s acceleration.

Additionally, transport and import terminals infrastructure for certain molecules must be developed to establish global value chains and connect low-cost production regions with users of new energies. With production costs for e-fuels currently several times greater than those of fossil fuel equivalents, securing long-term offtake agreements would help ensure a bankable and balanced risk-return profile.

Technology is another area to watch, with some emerging technologies experiencing challenges in meeting the project financing criteria and therefore in attracting investors due to high technology risk. We have seen several recent cancelled or suspended projects, and so a limited number of Final Investment Decisions (FID) in the industry.

Lastly, there are questions of availability, sustainability and competition. Biofuels face constraints in feedstock availability because of limited waste and residue oils and fats. The certificate of sustainability is essential to ensure compliance with ESG criteria required by regulation to produce biofuels from biomass. We will likely observe competition for feedstock used for the production of sustainable fuels among various industries – including road, aviation, and maritime transportation – and some countries have already introduced caps to address this issue. For example, the UK is limiting SAF produced from hydroprocessed esters and fatty acids (HEFA) to mitigate the risk of diverting fuel from road transport to aviation.

What are the main levers to address these challenges and support the sustainable fuels market as a whole?

Strong and clear policy and mandates could help incentivise offtakers to take long-term positions within a stable framework and thereby scale up the market and reduce the need for public support schemes over time. Such support could be based on contracts for difference, tax incentives or increased fossil fuel surcharges: H2Global for example is a supportive market maker mechanism mitigating several challenges, including offtake agreement tenor mismatch, aggregation of small-scale demand, and counterparty creditworthiness.

The European Union has already set an objective of reducing emissions by 55% by 2030 to decarbonise mainly its transportation sector and achieve carbon neutrality by 2050 under its Green Deal and Fit-for-55, with sector-specific goals such as maritime transport in the EU Emissions Trading System (EU ETS) from 2024. The Renewable Energy Directive III introduces target blending quotas for advanced biofuels and goals for RFNBO, which affect demand for sustainable fuels and set the pathway for hydrogen market growth in the EU.

Other regulations will also drive the industry. The ReFuelEU Aviation initiative and the UK SAF mandate set progressive blending targets for increasing the proportion of SAFs in the fuel mix, aiming for 70% in the EU by 2050 (with 35% share of e-fuels) and 22% in the UK by 2040. The United States Department of Energy’s Loan Programs Office is also providing substantial federal backing to accelerate the growth of first-of-a-kind large-scale projects in the sector.

While demanding, getting closer to global consistency on the definition of sustainable molecules and subsequent regulation will facilitate the development of the molecules and their trade, thereby supporting the traceability of the feedstock and the certification of the produced molecules to ensure they meet the required standards and regulations. Of course, this will all require stakeholders to collaborate along the value chain to fully drive this industry.

Looking in more detail at these partnerships and collaboration: just how important will these be in this space?

Collaboration between players in the private and public sectors is key to building the network backbone with pipelines and production infrastructure. Given the complexity of such capex-intensive projects, it is crucial to implement holistic de-risking mechanisms, especially for the first projects, to mobilise private financing.

We have seen fruitful collaboration for example in the development of blue molecules with carbon capture and storage players, particularly in the US and the Middle East where natural gas prices are competitive. This can lead to production costs that are closer to those of conventional fuels.

In SAF, we are seeing partnerships to pool demand from a group of airlines and SAF equity funds, such as the recently launched Sustainable Aviation Fuel Financing Alliance (SAFFA), which aims to scale up the availability of SAF by investing mainly in relatively technologically mature SAF-producing projects. The SAFFA partners will also have the opportunity to enter into priority offtake contracts for SAF produced by the supported projects. In this particular instance, BNP Paribas alongside anchor investor Airbus joined the initial partners in together committing an aggregate of approximately USD200 million to support the decarbonisation of the aviation industry. “Book-and-claim” systems could support the emergence of a liquid sustainable fuel market by optimising the supply chain and avoiding the costly capital expenditure of new infrastructure.

Collaboration is crucial in the maritime sector, where stakeholders must retrofit existing vessels or commission new ones, as alternative fuels with lower volumetric energy densities require additional storage space. Aside from cost considerations, shipowners must carefully select the appropriate fuel for their fleet, considering its availability in operational ports, its endurance and the safety of handling and storage. Collaborative efforts between fuel producers, infrastructure developers, ports, and regulators will therefore be essential to build confidence, establish robust supply chains, and adhere to standards.

You mention the role of mobilising private financing: how does BNP Paribas support its clients in their transition?

In addition to our existing clients and supporting hard-to-abate industries in their energy transition, BNP Paribas’ Low Carbon Transition Group (LCTG) experts work with innovative companies in the sustainable fuels sector to advise on raising capital, equity, and debt to develop their low-carbon activities, identifying potential investors, and providing advice on structuring risk allocation in the commercial agreements that facilitate reaching a successful FID.

LCTG is currently advising and assisting Arcadia eFuels in its equity and debt funding process in the context of its first large greenfield project to produce eFuels, based in Vordingborg, Denmark. The success of this first-of-a-kind large-scale project is necessary for gaining experience for all players in the field and paving the way for similar projects to be developed worldwide.

BNP Paribas also works with institutional clients by advising and financing the development of their low-carbon businesses, monitoring trends, and acting as a bridge to connect our corporate and investor clients to help them achieve their decarbonisation objectives.

BNP Paribas created the Low Carbon Transition Group (LCTG) in 2021, bringing together a global ecosystem of around 250 bankers to help international corporate and institutional clients accelerate their transition to a sustainable and low-carbon economy. Covering all investment banking products – from project finance and debt advisory through to equity placement, M&A and strategic advisory, it brings together all our sector experts under one roof, with backgrounds across all these areas of expertise to offer our clients the most relevant advice and the best-suited pool of capital for each individual situation.

A full range of expertise and banking solutions have been developed to support the decarbonisation of the economy, particularly in the energy, mobility and industrial sectors. In addition to the renewable and nuclear energy industries, the Bank focuses in particular on projects aimed at developing new value chains, such as batteries, green hydrogen and low-carbon fuels.