In January of this year, DfT concluded its consultation and confirmed that a guaranteed strike price mechanism will be progressed as the preferred option for giving SAF producers revenue certainty. The first tranche of revenue certainty mechanism contracts will be given to UK projects that produce SAF using non-HEFA technology and feedstocks only. This means SAF which is not derived from refining vegetable oils, waste oils or fats. With the SAF mandate commencing since 1 January 2025, and a ratcheting requirement of SAF within the aviation fuel supply mix to catalyse demand, implementation of a bankable, robust and deliverable mechanism to attract investment in UK SAF plant construction will be critical to meet the SAF mandate but also to improve energy security by reducing reliance on imports. As of 2024, 60% of imported SAF arrived from China. 

The government is clear that it wants to see the UK capture its share of the global SAF market by playing a leading role in development, production and use. Producers, especially those in a nascent industry such as SAF without proven technological readiness, struggle to obtain the significant debt and equity investment required to construct these first-of-a-kind projects. The difficulty is exacerbated by the unpredictable nature of the offtake market, even with a SAF mandate and the regulatory uncertainty within the asset class. This increases the risk premium for equity and makes it almost impossible to attract project financing. 

DfT aims to remove the revenue uncertainty component by implementing the GSP mechanism, along the lines of the contract for difference used in the wholesale electricity market for renewable electricity generation. The CfD regime successfully provided revenue stability to attract investment across solar, offshore wind, onshore wind and soon floating offshore wind. The GSP mechanism will involve a private law contract between UK SAF producers and a government agency counterparty setting a strike price that a producer will receive for eligible SAF. Where the reference price exceeds the strike price, the producer pays the difference to the counterparty. Where the reference price is below the strike price, the producer receives a payment for the difference from the counterparty.

The Government's stated position that the GSP mechanism must be funded by the aviation industry, following the 'polluter pays' principle. A levy will be charged on aviation fuel suppliers, who will pass on the costs to its offtaker airlines, who will apply costs to flight ticket prices. The user of civil aviation therefore ultimately pays. This is akin to the levy on renewable electricity CfDs which apply to electricity suppliers, who indirectly pass on the costs to electricity consumers. 

DfT considers that the revenue certainty mechanism is likely to lower the cost of capital of SAF production plants, meaning producers could sell SAF at a lower market price than in the absence of the revenue certainty mechanism. However, producers and fuel suppliers will incur payments back to the counterparty or by levy payments, depending on the difference between the market price and the strike price of SAF.

DfT's current estimates of the potential impact on airline ticket prices of the revenue certainty mechanism show that the cost per passenger is likely to be limited and in line with the usual market variation of ticket prices.

Next steps

The consultation period on the funding of the GSP ended on 31 March, and we await the results from DfT. The Government's expectation is that all required legislation to implement the GSP will be in place by the end of 2026. Further engagement will be expected before final legislation is passed. Beyond the question of how the GSP will be funded (which is the subject of the current consultation), other key questions that will need to be answered include:

• Who will be the CfD counterparty: currently, the contract for difference regime is managed by Low Carbon Contracts Company Limited (LCCC), whose corporate and financing arrangements have been accepted by market lenders to CfD supported renewables projects. As LCCC is set up to hold levies from electricity suppliers, it is unlikely to be the appropriate entity to receive funds from aviation fuel suppliers. If a separate counterparty is to be set up, DfT will need to ensure it suitably replicates the features of LCCC, to overcome the lender uncertainty which arose on the first CfD projects around sufficiency of funding
• How the reference price will be determined: unlike for wholesale electricity, there is currently no recognised market index for SAF in the UK
• The period of the revenue certainty contract: with SAF plants costing hundreds of millions to build, the specified periods will need to be sufficiently long to spread the amortisation payments of the debt required to fund construction of these projects. CfD contracts with LCCC currently have a 15 year term. However, the government has proposed that such contracts could be extended in the next allocation round (AR7), albeit it has not yet given an indication of what this increase will look like. See our Insight on AR7 for more details.