The SAF Podcast

The SAF Podcast: EBRD - The art of spreading risk in SAF projects

• SAF Investor • Season 2 • Episode 23

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 In this episode of The SAF Podcast, we sit down with Roberto Gonzalez from the European Bank for Reconstruction and Development (EBRD) to explore the complexities of financing Sustainable Aviation Fuel (SAF) projects.

Roberto takes us through his personal journey from chemical engineering and oil refining to his pivotal role in the EBRD's energy transition team. We discuss EBRD's ambitious goals of achieving over 50% green investments and ensuring alignment with the Paris Agreement, while also exploring the unique challenges and opportunities in making SAF projects attractive to investors.

Roberto offers unique insights into the bankability of SAF across different regions, particularly in Eastern Europe, Central Asia, and Northern Africa. We delve into the critical factors that make SAF projects viable, such as feedstock supply, market demand, and technology risks. We also discuss the tools available to help spread the risk in new projects through the financial tools EBRD uses to support these projects, including first-loss guarantees, concessional debt, and technical assistance.

Additionally, we discuss the role of mandates, subsidies, and the aviation sector's willingness to adopt greener fuel sources despite higher costs. This episode offers valuable insights into the pivotal role of SAF in decarbonizing aviation and the financial innovations driving its adoption.

If you enjoyed this episode, make sure that you check out our previous episode with Binyam Reja, World Bank to hear about the opportunity and challenges of building SAF capacity in emerging markets: https://www.buzzsprout.com/2202964/15581228

Host: Oscar Henderson, SAF Investor

Speaker 1:

Hello and welcome to the latest episode of the SAF podcast. This week, we're delighted to be joined by Roberto Gonzalez from the European Bank of Reconstruction and Development, which some of you might know as EBRD. Roberto, how are you? Yeah, good Thanks for having me Excellent, Delighted to have you. So I thought we'd start by in our usual way, just if you could take us through your background and then take us through EBRD and what you guys sort of do. What's the EBRD? Sort of mission statement, as it were.

Speaker 2:

Sure. So my background background I'm a chemical engineer by background. I started my career working in oil and gas refining and actually my first ever project was a jet A1 production unit in a refinery unit in a refinery. I have started up JDA1 production units actually, and then after that I continue moving and working into oil and gas, moving from very technical to more type of project consultancy and investment decision making, and from there I changed careers and I joined the EBRD where I work in the energy transition team.

Speaker 2:

So inside EBRD we have this department called Climate Strategy and Delivery that is in charge of driving the green mandate of the bank, and so I am part of that team and in particular I focus on sustainable fuels and energy, renewable energy and stuff. So the EBRD itself has changed or improved its ambition in green investments. So now the target for EBRD is to have a share of green financing that is above 50% and all our investments needs to be Paris aligned. So that means that the focus on green investments is increasing and that is in our region of operation. On green investments is increasing and that is in our region of operation. So EBRD has a specific region of operation, that is, I mean we have countries in Eastern Europe, central Asia, northern Africa, turquoise and soon we will be expanding in sub-Saharan Africa.

Speaker 1:

So the first question I really want to sort of start off with is you guys are involved in lots of different clean energy projects across the regions you just mentioned and I suppose the big question is is SAF bankable in its current form at the moment? I know it's a massive question to start off with, but I think it's sort of the crux of the issue.

Speaker 2:

I mean, one of the good things and the tricky things about working in EBRD is the difference between the regions where we operate. So we operate in countries that are in the European Union and countries that are not, and countries that are lagging behind in the green transition and countries that have a massive potential and are at the forefront of it. So the answer is it depends, as a good consultant will always say. It depends, as a good consultant will always say. So it is, it is mankable in certain regions. So if you are investing in the European Union, you have a clear mandate and you have some certitude of the demand.

Speaker 2:

The price signal is also there. We have seen that in the past, although the prices have come down in the recent past. But there is the possibility of getting a bankable project even more if you have a local source feedstock. So if you are going through the simplest route, that is, heifer, and you have locally sourced or used cooking oil or animal fats, then you are probably within a bankable project. But the same is true for other bridges. So, for instance, we operate in countries that have high density of population and those will generate a lot of feedstock for the heifer route. And if you can use the local feedstock, so then you will have a project that will make sense and will probably be bankable.

Speaker 2:

There are other places in which obviously is more difficult, but there are always opportunities. I mean, that is probably one of the good things about SAF is the variety of pathways that you have, and then you can be surprised of which pathways will work in which countries. Mandates helps a lot in Europe. When it's outside Europe, you need to get commitment from airlines, from a business model that is maybe for export to the European Union, but you need to have that market, and oftentimes that is in the EU, is simplified by the mandates. When it's outside the EU, then you need to have partners or a market that is identified and that comes a lot with collaboration with the aviation sector.

Speaker 1:

Is that the major sort of thing you're looking for when you're, you know, looking at these projects and sort of the plans and where you're going to sort of get involved with? Is that sort of the major?

Speaker 2:

I think it's a lot of things at once and that makes it a little bit messy, but it's normal because it's quite innovative or new stuff in your conscious operations, certainly it is. So feedstock, supply and market is obviously key risks. That needs to be addressed, that is for sure, because if you don't have those, you don't have a project. Then technology risk I mean it depends on what pathways you choose no, but oftentimes if you go through the HEFA route you have many licensors, proven technology, alcohol to jet is getting there, then the e-fuels and gasification and all that is trickier and I think that that will take some time, at least in the countries of operation. So that makes that technology risk depending on where. So that makes that technology risk depending on where which pathway can be manageable or not.

Speaker 2:

And then it depends on your counterparty, and that is something that is also relevant for SAF. The counterparties are very different. So it's not a classic energy project in which you have majors all the time that has have the experience into developing such complex and expensive projects and know how to handle that capital and the timelines and the schedule. Sometimes you have counterparties that are weaker. And doesn't mean that they will not be successful. But that means that that that a little bit more due diligence needs to be done, uh, more mitigation measures needs to be put in place, and obviously all that results in higher um uh costs, but, but at the same time, uh, I mean it's doable, but yeah, it's that difference in the project developers that adds a new dimension of risk in SAF.

Speaker 1:

I think one of the good examples of this that's happened recently is the EBRD investment in Aristana, because a lot of that was built around sort of the development of SAF in Kazakhstan. Yeah, so do you just want to sort of go into that a bit?

Speaker 2:

Yeah, I think that I mean, when you ask for the EBRD background, and I mentioned that all our activities or investment needs to be Paris aligned. That resulted from that. So aviation is a hard-to-abate sector, has a significant carbon footprint and obviously for us, investing in that sector requires some additional measures. And so by investing in in Aristana IPO, so basically we we managed to, to, in collaboration with the company, to to get commitments about net zero and commitments that that included to update their lowcarbon development program, have additional milestones, have it verified and from that Eristana, I mean, is working on the update. But they have announced in 2024 that they will have a target for SAF of 5% by 2030. So that is a big commitment for Air Astana, but it also shows the ambition of the company and the alignment with the overall aviation sector, which is great to see.

Speaker 1:

So when do you ideally want to get involved in a project? When do you want someone who's building a project to come to you and say you know, we're looking at this and we're looking at building a project here. Or does it slightly depend on, as you said earlier, the myriad of factors that come into play?

Speaker 2:

Yeah, so EBRD is a multinational development bank, so we have a different mandate than a commercial bank, but also different tools. So we have a pool of donor funds that we can use to do technical assistance, and that is very important in something like the SAF market, in which there is a lack of knowledge or expertise. And then, for instance, we can support companies, countries, into developing pre-feasibility studies, roadmaps, technology screenings, feedstock supply analysis, anything related to preparing for making a decision on a SAF investment, and that is important because obviously all that goes into making the project bankable. So the more information, the more you work on the risk, in all of the factors involving sub-production, the higher the chances of getting a bankable project. So we can get involved as early as possible.

Speaker 2:

We can also get involved at financing stage, so after FID and just go there and invest as a as possible. We can also get involved at financing stage, so after FID and just go there and invest as a normal bank. So we can do whatever. But In this very innovative sector of SAF or sustainable aviation fuels, in our context of operation, we often are involved in very early stages, so working on or developing what will be the best pathway or recommending targets. So we do it at different levels. We can do it at country level, project level, so yeah, so. So that is a big difference with commercial banks does getting involved earlier help?

Speaker 1:

you sort of help the producer understand the risks from your perspective and how to mitigate that? So later down the line, when they come to financing, that's a bit of an easier process, or does it not really matter?

Speaker 2:

it does. No, it does, it does help, uh, identifying early on the risks, because obviously, uh, so we have um. So when we do this type of work, we normally do our procurement selection process, so there is normally good consultancies supporting them, the client, but also then we get involved from the bank, different departments, including banking, which will review, provide opinions and on the risks involved for, and we will also obviously provide any, any recommendations on financial modeling or how it's. I mean assumptions or or anything it it helps.

Speaker 2:

It doesn't mean that a project that we support in early stages will be successful, because there are many, many, many factors, but it helps put SAF into the table. So, for instance, this Eristan example that you mentioned in Kazakhstan. So we never thought that there will be one of our first countries into working on SAF until this Eristan deal came in. In parallel, we have been working for a long time with Kazmonagaz on their low-carbon program, so it all aligned in a way that was quite rare and led to a very successful technical assistance, some technical assistance work in which we developed some SAF roadmap for Kazakhstan, but more specifically, a project for Kasmonagas and Aristana to produce SAF in the country, and there has been a lot of traction from this project from different stakeholders. So it doesn't mean that that will happen or not, but at least I mean again, it's in a country that maybe we thought that we will have more traction in one of our European countries and it's not.

Speaker 1:

So you mentioned. I mean mean, we've been talking about risk for the last few minutes, but I think risk is one of those things where everyone says it is sort of the big R word that everyone's sort of looking to sort of mitigate everywhere else. But could you just sort of? But could you just sort of spell out risk and what the risks are and how you sort of look at them? And not all risks are the same. Some are sort of easier to abate than others. So can you just go through that sort of those?

Speaker 2:

nuances. Yeah, so I mean the biggest risk that we see and that is I mean it's SAF, but it's maybe all biofuels, e-fuels related project is well, maybe in e-fuels is lesser for the feedstock supply. So that is I mean because obviously you can have an off-day contract for the feedstock that you need, but what happens if that fails? Do you have enough feedstock that you need? But what happens if that fails? Do you have enough feedstock around? What will be the cost for that? How will it impact your project economics? That is a very important question because sometimes you have identified the source but the transport of that feedstock is so expensive that if you go out from a certain radius it will really impact your economics.

Speaker 2:

Then there is the market, and that is similar for all e-fuels and all biofuels. So, depending on where you are, you rely on mandates or on a premium that someone is willing to pay. So how is that supported? Can that change? The future Is you have a long-term agreement on that? Is that long-term purchase agreement bankable? Is what happens if you know if that fails again? So, and you need to go open market. So it's very recent market at the SAF and very there is no much price indexation or certainty. It can change a lot and we have seen that in the past it dropped crazily. So those are very important risks in all biofuels and all these projects. So that is for sure. Then there is depends on where you are again in the pathways and stuff, and I think I mentioned that before is you have the technology risk, but also engineering the cost risk, because cost of a bronze, because if you are in the forefront of the technology, technology pathways, then you have that risk. But if you are doing a HEF type of projects, I mean it's not that risky anymore, no, anymore, no, I mean it's classic refining type of technology, uh, then, um, so those are the, the main, main, very main risk, though then you have the normal project risk, right, like I don't know, schedule, cost of runs, whatever you want to do in a normal project finance. So environmental compliance, permits, that is normal.

Speaker 2:

But here is maybe that that side of uh, of the feedstock supply, of the of the market, and and doesn't help that a lot of the majors and big companies recently have scaled down their biofuels projects.

Speaker 2:

Uh, because that means that they're finding the market is not ready or there are issues there, and then they create the feeling that there is a risky business to invest in, which it is, in a way, because it's supported again by mandates and well, if you go to US subsidies, supported again by mandates, and well, if you go to US subsidies, so it's a market that you need to get certainty on it. And then if you have that, or if we go for talking about risk and de-risking, if you manage to get some collaboration type of project in which you have the feedstock supplier that is part of the project, you have the project developer, you have the airline or the off-taker and all of them are collaborating, then the risk is spread across and that that is that is in. In itself, it's at the riskking mechanism that is very powerful and we have seen that in airlines investing in SAF production and agribusiness going to biofuel production. So that is something that may be at the early stages. What will de-risk these projects?

Speaker 1:

So is that sort of the key of it then? It's not so much sort of eliminating risk, it's spreading risk. So the more collaborative partners you can get involved, the better from a risk perspective, because you're never going to remove it, but the more you can spread it, the better.

Speaker 2:

You can mitigate risk as much as you can. That comes at a cost, always at one point. If you can spread that, that minimize the cost, so so and at the end you get a more bankable product, because the lower the cost, so the more competitive you mentioned the sort of big, big majors sort of scaling down projects and had the potential that has to sort of indicate the the market's not ready.

Speaker 1:

There's sort of too much risk here. Is that just sort of talk or is there actual sort of? Is that a tangible sort of difference that you think it will actually sort of feed through into staff going forward?

Speaker 2:

no, no, it can't. I mean it will influence decision makers and will impact financing of SAF projects. And so I mean, because that obviously is influencing the risk department's view on the sector and the requirements for the risk in a project. So they go, they increase, that is for sure. But, and again I mean no one is ever completely happy to invest in a market that in which you know, the demand is sort of fixed by regulation and policy. So you want a free market and then that you can predict, then that is the best that you can get. But well, I mean, in the EU you have maybe, I don't know, the second best or the third best, that is, a long-term mandate that should not change, which is good.

Speaker 1:

So we've talked about risk. I want to sort of move on to sort of the financial tools that the EBRD have that can sort of help producers, and when sort of they would suit more than others, and how you sort of work out what tools would necessarily suit a project, because I'm guessing every single project producer or developer would want to come to you and say can we have a nice big grant please? Because presumably for a producer that's sort of the gold standard but almost certainly it probably wouldn't be your preferred in every scenario. So how do you work out who gets a grant, how big the grant is?

Speaker 2:

I mean grants are easy to ask and we have had that a lot in the hydrogen spectrum and to a certain point they are unrealistic because of the capex intensity of this project. So to get a real impact, the grant amount I mean percentage needs to be significant but in amount needs to be very high. And obviously then I mean you cannot support many projects. No, so we have two other mechanisms for this type of project. So the first one is first, laws cover. So these are guarantees that we have and they cover EBRD money but also, under certain conditions, the co-lender's money. And this sounds much less, um, attractive than than grants, but if you calculate the grand intensity of this and the impact that it has in the financing of the project, it it is. It is, uh, significant. I mean we're talking about percentages of grand intensity which which, when you said that, doesn't come across as very, very significant, but it is so.

Speaker 2:

For this we have two programs. We have, I mean, for first-class cover, one for the European countries and one for the non-European countries. But they work in a similar way. So we cover up to 45 percent of the of the of the money, uh, freslo's cover and and so I mean it decreases the the amount of the cost of financing and obviously provides also reassurance for for colander. So so the the idea is to get private money coming into the project. So that is one of the things that we have. And then we have also concessional debt. This works under certain conditions for certain projects, in which you have milestones and then the interest rate decreases whenever you hit those milestones. So that is, for instance, we have a program called High Climate Impact for the corporate sector and that from GCF, and that is that type of concessional money.

Speaker 2:

Then grants in very specific and bespoke projects we can ask or reach our donors for grants, and that has happened. I mean, it had happened in the past. We have provided grants for green hydrogen battery storage. So innovative projects, and SAF is one of those. So, but again, that is in a very bespoke manner and project by project. So it's not a mechanism that we have, you know, billions of euros waiting there to use as grants. Wouldn't that be nice?

Speaker 1:

wouldn't that be nice, exactly? Um, you said that you cover 45 percent for your first loss capital. That's quite a big chunk of it. I didn't expect it to be that high yeah, so you can I mean.

Speaker 2:

So that is so. We even have work uh specific uh mechanism for biofuel projects in European countries that can cover a little bit more than that. So we are at EBRD. I mean we recognize the relevance of biofuels and we have this biofuels framework. That's specific again for European countries, but we have been trying to push a little bit more. It's not particular for SAF. It covers also other biofuels and biomethane but SAF. So the is to kick start on the bio energy, some bio energy projects in our countries of operation.

Speaker 1:

Okay, so you've got your first loss and the concessional debt and the grants. How do you work out which solution goes to which project and sort of? Is there an element of convincing producers that they have to sort of this is the best approach for them, or are they sort of quite understanding of sort of the financial, sort of tools and how they can best work for the projects?

Speaker 2:

yeah, so. So obviously I mean this always comes into discussion with the client and we try to optimize case by case it Again, grants is what everyone wants, but the good thing about the first loss guarantees that we have is that we have already used them in many places. So it's a system that works, is easy to implement and it comes with technical assistance type of support, so that helps cover costs, as some of the project financing. I mean financing preparation costs, like the due diligence, technical, market, legal. So it's something that comes across quite simple and I think that I mean guarantees, as you don't have any KPIs milestones to get to, to agree to is simpler.

Speaker 2:

Concessional debt, in which you hit milestones and debt. It comes a little bit more complicated because you need to agree on the milestones. They need to be milestones that are aligned with the framework for that concessional funding, and that becomes a little bit more complicated For the grants. So there isn't, I mean, until we reach a donor and we get the grant and it's agreed and all this stuff, so we never have certainty that the grant will be there. So all of that in summary, I think that guarantees is the easiest and the one that you can rely the most on. So when you are doing just your project analysis and how bankable and financing and blah blah blah, so that is very straightforward. When you are, then the other ones are like a little bit more cherry on top, you know like will obviously be beneficial, but you cannot rely 100% on them.

Speaker 1:

So, on the concessional debt, as you said, they can be quite complex with the KPIs that need to be hit and the interest rates and so on. Is that attractive to private finance? Because if it is so complex, there's so many conditionals related to it.

Speaker 2:

Is we have applied that in the past. I mean we have done in in different um sectors. Uh, never in on staff uh yet because, well, I mean we don't have uh yet a staff project in in in uh finance in our countries of operation. We have done that in done that in different sectors and it depends. It depends on the company, it depends on the flexibility, on the readiness and where they are. I mean, because for some companies it's much more difficult to put in place some KPIs. Obviously they need to be green KPIs and things like I don't know, commitment to implement climate corporate governance action plans or milestones on technology implementations or, you know again, climate corporate governance improvements, things like that. So, depending on which company company is, it can be more difficult or less.

Speaker 1:

Do you think there are sort of projects developers and you know, multinational development banks and private banks. Do you think there's an alignment in terms of what the producer needs and what the financier and the investor is prepared to provide? Or do you think there's an alignment in terms of what the producer needs and what the financier and the investors prepared to provide, or do you think there's a sort of slight disconnect?

Speaker 2:

as you know, we've said many times, all producers want to grant but you know, you know there's not a magic money tree going around yeah, no, I think that the grant thing is coming down a bit, I mean, at least in in the hydrogen sector, where we are also very active. I mean we, we. I think that reality uh has come to product developers and now they, the requests are, are different. It's not, it's not grants, it's coming more to infrastructure, common infrastructure support or some other types of financial support. I think that for SAF is the same. Again, there will be always some grants around, but you need to to rely on other uh financial, uh mechanism. I mean uh like concessional, but also I mean in sap, and that is something also that that is different to others.

Speaker 2:

It's like you can see announcements from airlines that are that they are ready to increase the tickets price to accommodate for their sub targets, like Lufthansa did some weeks ago. So I mean there is, there is in the in the sub sector it's a little bit in the middle compared to other sectors of the energy transition. So there is a willingness from the market, from the airlines, to take SAF at the price, because I mean they reckon obviously for them the best will be the lower, but they reckon that it will be more expensive and they're willing to pass that through to the customer. Still to be seen what is the reaction on the customers. But this again it's a little bit of this collaboration that was mentioned. So basically you pass through a little bit the costs around and then that makes the projects more attractive than otherwise.

Speaker 1:

So final thing is we've talked a lot about sort of the nascency of SAF and the issues regarding financing, risk and market and whatnot that that brings. How do you see sort of the financing system of SAF developing over the next decade, two decades? Do you think it's a place where there's going to be continued innovation as more pathways grow? So the same tool financial tools are just going to be continued innovation as more pathways grow, so the same tool financial tools are just going to be refined or that sort of the process will get simpler. As more soft projects come up, the maturity of the financial tools will sort of spread to the new pathways and it'll sort of work itself out that way. How do you see it developing?

Speaker 2:

I mean, well, work itself out that way, how do you see it developing? I mean, well, two decades is a long time to forecast, but as I see this, I mean other sectors in our economy you have many options to decarbonize For aviation there is not that many. I people talk about hydrogen electricity, but it's limited really. The solution is SAF. So, starting from the point that we need to decarbonize aviation and that is a must, and there is a commitment for net from the zero from ICAO, from airlines, from countries, from everyone, that means that SAF demand will just increase. I mean it cannot go down, okay, because aviation sector will grow. That is the conclusion for any forecast. Even when you have energy efficiency implementation, the overall demand of fuel will grow, the overall share of SAF will grow on that.

Speaker 2:

So at one point I mean now, we are at this tipping point in which is a marginal market, saf compared to the jet fuel, and it's supported by subsidies, it's supported by mandates fuel and it's supported by subsidies, it's supported by mandates, and and it's nascent. And he said, uh, so yeah, hefa is well known, but at the same time then you go to alcohol, to jet or or others that are approved, and then you know you have a lack of of of experience, that that leads to delays, to cost of runsruns, blah, blah, blah. So in the decades to come, saf will become like jet fuel, will be just a traded commodity, price clarity supported by its own price mechanism, and then from that point and experience from projects, early projects on that will become normal project finance will become like financing an oil refinery 10 years ago. So no one was asking questions about concessional money when you were building a refinery, right? So that is what I think will happen in the next I mean 10 years or so. So basically, market will be there, will happen in the next I mean 10 years or so. So basically market will be there, experience will be there and EPCs will be used to that. So they will provide EPC contracts and all these as they used to do for other sectors.

Speaker 2:

The premium for the SAF will not be a discussion anymore because I mean you will need that SAF, the market will be there and then it will have its own price mechanism and then will be normal product finance. Then you can go into the details of that. So you know you will differentiate between SAFs depending on their carbon footprint, or you will, I don't know, depending on, yeah, where are they from or whatever you you want to, to name it. Uh, there will be difference, local difference, but uh, and and may be, you know, some market distortions, because again, it's a made-up market right now and in, but at one point will be, will be a normal commodity energy market, that is. I hope so in any case.

Speaker 1:

And one other thing in sort of 10 years, 20 years, e-fuels are going to be much more prevalent. We're hoping so. Would the sort of financing risk go to sort of shift from sort of SAF refinery as such to sort of looking at the green hydrogen issue, getting those feedstocks into those sort of pathways?

Speaker 2:

yeah, so that is uh, so I mean the most of the forecast. What they say is that half will be fuels and half will be bio based in 2050. So obviously I mean, if you look at the pricing right now, biofuels should be highly competitive if you don't have a carbon type of correction for the price, but e-fuels are forecast to decrease. The issue with e-fuels is efficiency, as everyone knows. I mean, you need to get the biogenic CO2. You need to produce your hydrogen and efficiency is always down, but but it will be required. If you want to decarbonize the the aviation sector using sap, you will need e-fuels and that is um, that was excellent Thanks to you.