Spain is well-positioned to boost its sustainable fuel production and become a major producer as Europe accelerates its net-zero transition.
The European Union has set a target to reduce greenhouse gas (GHG) emissions by at least 55 percent by 2030 compared to the 1990 levels.1 To achieve this target, major changes are required in Spain’s energy consumption and efficiency, shifting from fossil fuels to more sustainable energy sources by embracing renewable molecules (see sidebar “What are renewable molecules?”).
In 2021, transport represented approximately 30 percent of Spain’s GHG emissions, highlighting the need to decarbonize this sector.2 While the electrification pathway will be key to this transition, the deployment of sustainable fuels will also be essential as a decarbonization lever for the legacy internal combustion vehicle fleet and other hard-to-abate transport modes, such as heavy-duty vehicles, aviation, and maritime.
Iberia’s journey in biofuels began with the adoption of conventional biodiesel and bioethanol, which to date have been pivotal in reducing the region’s reliance on fossil fuels in transport. This focus on conventional biofuels represents a critical starting point, enabling Iberia to comply with both national and EU renewable energy directives and blending mandates and to build the infrastructure and market receptiveness necessary for the future integration of advanced biofuels.
The sustainable fuels landscape is complex, with many fuel types, technological production pathways, and feedstocks (see sidebar “Sustainable fuel definitions”). The hydrotreated vegetable oil (HVO) process—sometimes referred to as hydroprocessed esters and fatty acids (HEFA), particularly in the aviation context—can produce two different products: renewable diesel for road transport and sustainable aviation fuel (SAF). This is the most mature pathway to produce sustainable fuels, yet because of feedstock access limitations in Spain, alternative technologies need to be developed.3
As decarbonization goals become more ambitious, particularly with the implementation of the Renewable Energy Directive III (RED III) by 2030, the role of drop-in fuels such as HVO will become increasingly important. Unlike traditional biofuels, drop-in fuels can be seamlessly blended with conventional fuels without facing technical limitations (no “blend walls”), enabling higher blending ratios and helping to achieve more stringent carbon reduction targets. To unlock Spain’s full potential in the production of sustainable fuels and enable the decarbonization of the transport sector, public and private stakeholders may need to collaborate to overcome the challenges and capture this opportunity.
In this article—the fifth in our series looking at the Iberian decarbonization opportunity—we explore the benefits and challenges of the HVO/HEFA pathway and emerging technologies, drawing insights from our Energy Initiative research (see sidebar “The Iberian Industry and Energy Transition Initiative”), exploring the potential unlocks that are required to boost sustainable fuel adoption in Spain’s transport sector. Renewable fuels of nonbiological origin (RFNBOs) are covered in a separate publication, “The Iberian green industrial opportunity: Green hydrogen.”
We look at how sustainable fuels are needed to decarbonize the transport sector and how clarity over the offtake of sustainable fuels is key to attracting the necessary investments. We also highlight how effective incentives and protection from non-EU competition are crucial to allow local production to flourish and scale. Last, we delve into feedstock constraints, which, to effectively address the transport sector’s decarbonization, will require the development of a mix of various technologies.
The evolving regulatory landscape
The European Commission set the latest decarbonization mandates in the RED III, which came into force in November 2023. Each member state is required to transpose this directive into national law within an 18-month period.
While the Spanish transposition of RED III is still pending, the directive mandates that EU countries achieve a 29.0 percent minimum share of renewable energy in the transport sector’s final energy consumption, or a minimum 14.5 percent GHG intensity reduction, by 2030.4 Additionally, this regulation mandates that, in the same time period, at least 5.5 percent of the energy supplied to the transport sector must come from advanced biofuels (sourced from nonfood-based feedstocks) and RFNBOs with a minimum of 1.0 percent coming specifically from RFNBOs.5
To achieve these targets, RED III introduces a series of multipliers counting toward energy targets. Advanced biofuels (Annex IX, part A feedstocks) and RFNBOs have a two-times multiplier across transport sectors. Additionally, within the aviation and maritime sectors, the directive provides a 1.2 times multiplier for advanced biofuels and a 1.5 times multiplier for RFNBOs.6
Besides RED III, the European Union has also approved the ReFuel EU Aviation and FuelEU Maritime regulations, specifically targeting the decarbonization of the aviation and maritime sectors, respectively (see sidebar “Sustainable fuel transport-specific regulation” for specific regulation by transport mode).
Sustainable fuels’ pathways and their role in Spain’s energy transition
The European RED III directive has yet to be transposed in Spain. To comply with the previous RED II mandates, Spain defined a short- to midterm plan, including a blending mandate for the reduction of emissions in the road transport sector. Conventional fuels must contain 10.5 percent of liquid and gaseous biofuels by 2023, increasing to 12.0 percent by 2026.7 These biofuels are a lower-carbon alternative to traditional liquid fuels produced from crude oil refining.
While the adoption of electric vehicles (EVs) in light vehicles (such as passenger cars) is growing, internal combustion engine (ICE) vehicles still dominate the Spanish market, powered by liquid fuels (95 percent of passenger cars and 100 percent of trucks). By 2035, this is expected to decrease; however, ICE vehicles will still make up the majority of the car parc—accounting for 67 percent of passenger cars and 64 percent of trucks. Additionally, most planes and ships will still be powered by liquid fuels.8
If Spain can position itself as a producer of sustainable fuels, the country could expedite its energy transition and meet European mandates while continuing to serve existing ICE demand. Even as the world moves toward transport electrification, there will remain an important role for sustainable fuels in transportation:
- In road transport, new light-vehicle sales are expected to be dominated by EVs, the sales of which could be accelerated in part by regulation (including a potential ban of ICE light-vehicle sales in Europe from 2035).9 EVs in Europe already have a lower total cost of ownership (TCO) than ICE vehicles when available subsidies are considered and are expected to reach cost parity without incentives by 2025, although high up-front costs remain a challenge.10 In contrast, sales of heavy-duty vehicles (HDVs) are expected to progress slower due to the larger battery requirements and current state of infrastructure readiness. The existing ICE car and truck parc will need to be decarbonized with sustainable fuels to meet the 2030 mandates.
- In aviation, low-carbon power train technologies (hydrogen and electric) are still very immature. The need for high energy density at low weight makes electrification difficult, especially for long-haul flights. This means electric aircraft will likely be limited in capacity.11 SAF is the only viable decarbonization pathway known today, and demand will be largely driven by mandates.12
- In maritime, biofuels—such as biomethane, biomethanol, fatty acid methyl ester (FAME), HVO, and others—will be the first technology available, while e-fuels (for example, RFNBOs such as e-methanol or e-ammonia) are expected to become the primary decarbonization fuels in the future, although the timing and extent of their adoption remain uncertain. Battery-fueled vessels are anticipated to be a niche market for short-range vessels with predictable bunkering operations.
According to our analysis, among the different sustainable fuel technologies, in the short-to-medium term (the next ten to 15 years), HVO is the most promising option to decarbonize the road and aviation sectors. HVO is produced in hydrotreating units (also used in refineries to produce traditional fuels) mainly from edible oils, such as soy oil and waste lipids (for example, animal fats and used cooking oil [UCO]). HVO does not require structural adjustments—a truck engine, for instance, can operate with diesel, a mix of diesel and HVO diesel, or just HVO diesel. Other biofuels, such as ethanol, would require structural changes to the engine beyond a certain level of blending. Spain already has an operational HVO capacity of 0.9 metric tons per annum (Mtpa).13
By 2030, we expect that renewable diesel (HVO diesel) could be a key alternative to both fossil diesel and FAME. Our analysis shows that HVO SAF (sometimes called HEFA) is currently the most mature and is likely to remain the most economical low-carbon alternative to replace jet fuel and kerosene by 2030.
The GHG reduction potential of sustainable fuels depends on the feedstock used. Food and feed crops, or first-generation (1G) feedstocks—such as soy and corn—enable up to 60 to 70 percent GHG reduction, while second-generation (2G) biofuel feedstock can enable up to 90 percent GHG reduction. 2G feedstocks include UCO and are specified in RED III, Annex IX.14 (For a definition of 1- and 2G feedstocks, see sidebar “First-generation versus second-generation feedstock”).
Other technologies could accelerate the route to net zero, such as alcohol-to-X (AtX), gasification-to-methanol, Fischer-Tropsch synthesis, or power-to-liquid (PtL) for e-fuel production. AtX and gasification produce biofuels from cellulosic crops, agricultural and forestry residues, and municipal solid waste (MSW). PtL produces e-fuels from carbon and green hydrogen. These technologies still face challenges in scaling up, including low technology readiness levels, economic viability, and potential feedstock limitations. However, their potential to decarbonize the transport sector makes it crucial to support their expansion in the coming years.
Spain’s advantage in HVO/HEFA production
Refining activities are an important part of the Spanish economy, having contributed a direct gross value added (GVA) of approximately €4 billion in 2022, representing around 2.5 percent of the total manufacturing industry’s GVA.15 This industry is also a crucial backbone for Spain’s employment, comprising approximately 200,000 individuals directly or indirectly and constituting over 9 percent of the total manufacturing industry’s workforce. The transformation of the sector and its assets will be crucial for decarbonization.16
Spain is well-positioned to decarbonize its transport sector by replacing traditional fuels with biofuels produced domestically. The overall competitiveness of biofuel projects is largely improved when auxiliary units and permits from existing refineries are utilized to build new units or retrofit selected units to HVO. These usually require lower capital expenditure and have faster implementation times than greenfield projects (for instance, they are likely to already be compliant with permits and regulatory requirements).
Spain also has refining facilities that rank in the top quartile in Europe in terms of performance.17 And further, according to our research, the country has robust inner storage and pipeline distribution systems ready to be used with minimal-to-no retrofit to accommodate biofuels. Considering these factors, Spain already has an advantage over countries that lack this industrial base.
By 2030, Spain’s sustainable fuel demand is projected to reach approximately 3 Mtpa, meeting key regulatory requirements (RED III, ReFuelEU, and Fuel EU). Notably, the country could emerge as one of the largest European markets for renewable diesel and SAF, with renewable diesel demand expected to surpass 1.6 Mtpa and SAF demand over 0.4 Mtpa (Exhibit 1).18
According to our analysis, Spain’s announced capacity for liquid sustainable fuels is projected to be approximately 3.4 Mtpa by 2030, of which HVO (renewable diesel and SAF) capacity ranges between 2.1 to 2.7 Mtpa, positioning Spain among the three largest producers in Europe. Achieving such capacity would enable the country to meet local road and aviation demand (approximately 2.0 Mtpa) and target export markets with a potential surplus capacity of 0.1 to 0.2 Mtpa of renewable diesel and 0.3 to 0.5 Mtpa of SAF by 2030.19 The European market outlook for renewable diesel and SAF predicts demand-supply shortages in several countries, creating a potential opportunity for Spanish exports.
Key challenges and unlocks for sustainable fuels
Spain could become one of the largest EU markets for sustainable fuels by 2030. Unlocking its full potential, however, hinges on addressing several challenges: local demand uncertainty for sustainable road fuels, cost-competitiveness of sustainable fuels, access to financing, and the development of new technologies such as e-fuels. Public and private sector stakeholders would need to work together to address these challenges if decarbonization of the country’s transport sector is to be achieved:
- Local demand uncertainty: While European legislation ensures demand certainty for sustainable fuels in aviation and maritime up to 2050, the lack of European or Spanish road targets could affect investment decisions on the development of sustainable fuels targeted at legacy ICE vehicles.20 Further uncertainty arises from the range of EV projections from different scenarios and sources. The uncertainty around sustainable fuel demand in road transport has a ripple effect since HVO SAF production generates HVO diesel, bioLPG (also known as biopropane), and bionaphtha as by-products.21 The projected demand for SAF in the aviation sector by 2030 may be insufficient to attract industrial-scale investments across Europe. Certainty around HVO diesel demand would help attract investments, reduce production costs, and increase SAF availability.
- Cost-competitiveness to drive supply: Establishing a competitive local supply of sustainable fuels involves several challenges. First, in the case of 2G biofuels, such as advanced HVO, our analysis shows that they are over 100 percent more expensive to produce than fossil fuels and, therefore, rely on mandates or incentives to be competitive. Second, Spanish and other European producers face the risk of competition from other regions, such as Asia, which have more readily available feedstocks, fewer requirements (for example, lack of proof of sustainable origin), or industrial subsidies, such as those provided to US producers under the Inflation Reduction Act (IRA). Third, European regulation stipulates that only certain feedstocks can be used to make biofuels for transport to avoid unintended consequences on food and feed crops and biodiversity.22 This requires producers to seek alternative feedstocks, which are both more expensive and less readily available.
- Access to financing: New HVO projects require a significant capital expenditure of between $500 to $1,000 per ton (based on a benchmark of recent and relevant project announcements), depending on the scale, nature (greenfield or brownfield), and execution of the project. They often rely on corporate or equity financing, given the uncertainty surrounding both demand and costs (feedstock represents approximately 80 percent of biofuel costs).23
- New technologies: A major challenge to HVO production is feedstock constraints, making the development of new technologies necessary. However, new technologies face their own challenges—from high production costs derived from the investment required to develop these technologies (for example, alcohol-to-jet [AtJ]) to the development of new feedstock supply chains (such as limited green hydrogen production and CO2 capture for PtL) or low willingness to sign long-term offtakes required to derisk these projects and ensure access to nonrecourse financing.
The remainder of this article explores each of these broad challenges in turn and outlines potential unlocks that could drive Spain’s sustainable fuels production.
1. Local demand uncertainty
Sustainable fuel demand in the transport sector is driven mainly by regulatory mandates and incentives. In the European Union, a “stick” approach is used based on supply-side mandates and penalties implemented at the member state level, with different blending mandates for low-carbon feedstocks (RED III, ReFuelEU, and FuelEU).
Uncertain renewable diesel demand in road transport beyond 2030: The outlook for renewable diesel demand in road transport remains uncertain, given that it depends on regulation and EV penetration, which in turn are driven by several other factors (see the second article in our series, “The Iberian green industrial opportunity: Electrification and renewables”). According to our analysis, approximately 70 percent of passenger cars and trucks in Spain will still be ICE vehicles by 2035, given that the ban on ICEs applies only to new vehicles sold (Exhibit 2).
Sustainable fuels are therefore targeted toward ICE vehicles (passenger cars, light commercial vehicles, and trucks), where diesel is expected to remain dominant. However, the current lack of regulation over biofuels consumption in road transport beyond 2030 could complicate investment decisions on new sustainable fuels capacity—thus preventing the shift away from traditional fuels for the remaining ICE vehicle parc.
Uncertain economic viability of HVO capacity given unsure market demand: Currently, the range of fuels produced in HVO units does not have a clear market, challenging the economic viability of these facilities. SAF may be favored as demand is driven by RefuelEU regulation. However, HVO units maximizing SAF production will still produce HVO diesel, bioLPG, and bionaphtha as by-products, for which the market may still be reluctant to pay a premium.24
According to our analysis, in 2022, air and maritime accounted for 13 percent and 16 percent of final energy consumption in transportation, respectively, while road transport made up 70 percent. Therefore, supporting the use of renewable fuels in road transport in the short term is vital for the uptake of sustainable fuels in aviation and maritime in the long run—aviation and marine fuel demand alone may not be sufficient to justify the development of sustainable fuel facilities in the short term due to lack of scale. Reliable revenues generated from the sale of sustainable fuels to the road transport industry could enable fuel suppliers to accelerate technological development.
Uncertain outlook of voluntary SAF commitments: Demand from the aviation sector is expected to be driven by fuel producers complying with compulsory ReFuelEU regulation, which provides demand certainty.25 Beyond regulatory targets, there are more than 25 major global airlines, representing around 35 percent of total aviation fuel demand, which have made SAF commitments by 2030. However, the growth of these commitments by European airlines departing from Spain remains uncertain due to their voluntary nature.26
Potential unlocks
If the current mandates and milestones remain, Iberian sustainable fuel projects may have to rely on export markets to be viable.
Exporting to member states that have renewable diesel and SAF shortages: Under the current sustainable fuels regulatory landscape, Iberia could potentially have a surplus capacity of renewable diesel and SAF by 2030 (although this is not expected to last after 2030).27 The absence of regulatory incentives for sustainable fuels uptake in road transportation is a major contributor to this potential surplus (Exhibit 3).
Spain’s capacity surplus could potentially satisfy demand pockets in the Mediterranean where local capacity is in short supply—if it can outcompete other international flows and other European net exporters, such as the Netherlands or Sweden.
2. Cost-competitiveness to drive supply
Spanish biofuel producers face challenges, which include lower incentives in comparison to other EU countries, threats from non-EU suppliers, and changing feedstock regulations.
Lower incentive support compared to other EU countries: Within Europe, some of the incentive schemes already in place include credit certificates and tax deductions, which aim to drive supply. Credit systems are designed to promote the production of biofuels over blending mandates because of the increased earnings from excess certificates generated.
Spain has a national credit system in place based on biofuel certificates (each certificate represents one ton of oil equivalent [toe] of biofuel), monitored by SICBIOS.28 The government has recently published the requisites that operators need to meet to apply for certificates.29 According to our analysis, there are approximately 60 fuel operators in the Spanish market, where certificate prices are set based on bilateral agreements. However, average trading values of Spanish certificates (approximately €0.25 per liter of renewable diesel) are significantly lower than in other EU markets (for example, €0.41 per liter of renewable diesel in the Netherlands).30 This lower incentive per certificate could limit producers’ margins, increasing the margin gap between renewable fuels and traditional fuels and reducing producers’ incentives to make the switch.
Additionally, there are currently no tax incentives to improve margins. In our analysis, we have noted that Spanish suppliers of renewable fuels pay identical excise taxes for both pure and blended sustainable fuels, unlike other EU countries such as France or Sweden. This lack of incentives might limit the appeal of investing in cleaner alternatives, which have comparable or narrower profit margins than fossil fuels.
Competition from imports into the European Union is subject to different sustainability frameworks: Feedstock directly influences production costs, scalability, and environmental sustainability of the entire biofuel value chain. RED III sets strict and specific sustainability criteria for biofuels, including GHG emissions savings, land use requirements, and the use of sustainable and environmentally friendly feedstock to avoid negative impacts on biodiversity and the food value chain. For example, by 2030, a 1.7 percent cap on final consumption of energy has been set for Annex IX, part B feedstocks (which include waste lipids), and a 7.0 percent limit of final consumption of energy on 1G food crop-based biofuels.
Other countries follow their own distinct sustainability frameworks, such as the United States’ GREET framework (Greenhouse gases, Regulated Emissions, and Energy use in Technologies).31 Nonetheless, imports of renewable diesel and SAF should meet the same standards of production, including feedstock certification (for example, Annex IX compliance). Currently, Asian and North American imports issue an ISCC (International Sustainability and Certification) certificate that only details GHG emissions depending on the feedstock used (for Annex IX feedstocks).
Possible feedstock shortages: Spain’s HVO diesel production has traditionally relied on palm oil derivatives (1G HVO diesel), which, according to our analysis, accounted for over 70 percent of the feedstock used in 2021. However, in line with EU regulations, palm oil and other feedstocks associated with high indirect land use change (ILUC) risks are slated for phaseout by 2030 or earlier (in Spain by 2025).32 This regulatory shift compels producers to seek alternative feedstocks, which are both more expensive and less readily available for advanced HVO production. Waste lipids, predominantly sourced from UCO or animal fats, emerge as the most viable alternatives due to the maturity of conversion technologies and widespread commercial availability, but some are capped by regulation (1.7 percent of transport energy limit for feedstock listed in Annex IX, part B). Our analysis reveals that, in Spain, 45 percent of 2030 expected waste lipid demand could be met with domestic waste lipids collection potential, relying on imports to meet the remaining demand.33
In Spain, currently, around 85 percent of the UCO from hotels, restaurants, and cafés (70 million liters) is collected annually. However, only 8 percent of households’ UCO (eight out of 102 million liters) is currently collected—far below best-performing countries such as Belgium, which collects 50 to 60 percent, which is extensively supported by awareness campaigns.
The European Commission frequently reviews the feedstocks approved under Annex IX, potentially alleviating feedstock shortages or removing previously included feedstocks.34
Potential unlocks
Regulatory frameworks play an important role in unlocking the market and promoting the adoption of sustainable fuels. Among other measures, credit schemes help make sustainable fuel costs competitive with fossil fuels. The EU Emissions Trading System (EU ETS), established in 2008, provides a framework for trading certificates based on GHG emissions.35 Under this scheme, companies are allocated or can purchase allowances (EUAs) for each ton of CO2 emissions they produce. As the EU ETS predominantly focuses on regulating emissions from the power, industry, and aviation sectors, plans are underway for the introduction of EU ETS2 by 2027 or 2028.36 This new market aims to tackle emissions from the road and buildings sectors. Beyond European frameworks, Spain could look at what other countries have introduced and consider adopting or adapting these approaches for its own market.
Enabling certificates trading for different energy sources: Spain can incorporate other energy sources besides biofuels into its existing credit system to comply with RED III regulation. For example, Germany and the Netherlands, both under RED II, have already included other energy sources where credits are earned per ton of CO2 reduced and where each credit represents 1 gigajoule (GJ) of renewable energy.37 These incentives are critical to improving product margins. For example, if the retail price for blended and pure renewable diesel is the same, fuel retailers in the Netherlands might benefit from a 1.4 times higher margin per liter for renewable diesel when compared to fossil diesel by trading such credits (renewable energy units [HBEs]).38
Reviewing the incentives framework and further exploring incentive mechanisms: According to our research, France, Sweden, and the United Kingdom are implementing fiscal measures to enhance the competitive edge of locally produced biofuels. For example, Sweden and the United Kingdom have implemented tax exemptions for biofuel producers, and France has allowed 80 percent tax deductions.39 In the United States, producers are entitled to receive substantial subsidies, which improves their cost competitiveness—for example, US SAF production costs could be 20 percent lower than in the European Union, thanks to IRA incentives.40
Ensuring compliance with quality and sustainability standards from non-EU imports: To address the risk of importing feedstocks and products from non-European countries that have looser sustainability laws, EU authorities could explore different pan-European actions. They could evaluate additional control mechanisms to ensure that imports meet EU feedstock and sustainability requirements and guarantee a level playing field for subsidized inflows (for example, an extension of antidumping laws to ensure fair competition in Europe).
Some member states have already implemented national measures, such as France’s Carbon-14 measurements of imported sustainable fuels, to test biogenic carbon content and demonstrate compliance with local regulatory requirements. Member states could also seek greater transparency on feedstocks allowed and revision timeframes. This could enhance supply chain efficiency and cost-competitiveness for biofuels, potentially improving investment decisions. Further, countries could accelerate the full adoption of the Union Database for Biofuels (UDB), a global traceability tool from origin to consumption point, which will unify certificate registries of European countries. Registrations for liquid fuels have been open since January 2024, and the UDB was officially launched in November 2024 and is expected to be fully operational by 2025.41
3. Access to financing
HVO projects require substantial capital expenditure investments, and we have noted that many of these projects rely on corporate or equity financing, utilizing revenues generated from other business units (for example, oil and gas companies using funds from upstream activities) or issuing corporate bonds. Financing through other means, such as project finance, is currently difficult, given the uncertainty surrounding cash flows (demand and cost certainty) and the potential to scale (feedstock availability). Accessing financing for HVO units, therefore, poses unique challenges within the energy sector.
Potential unlocks
Spain could potentially overcome these challenges by securing external capital and innovative financing alternatives.
Exploring innovative on- or off-balance sheet financing alternatives: Producers could leverage green investment vehicles as an alternative means to fund biofuel projects. For instance, they could use the proceeds from external environmental, social, and governance-related debt instruments (such as green loans or bonds, sustainability-linked loans or bonds, transition loans, or convertible bonds) to support HVO projects and other environmentally sustainable initiatives. A range of off-balance sheet financing options, such as nonrecourse project finance green debt, could also be explored.
Increasing offtake certainty: Producers could explore local contracts, regional deals, and tenders to secure demand and explore rewards for long-term contracts (such as offering discounts based on expected cost improvements). For example, VARO Energy has supplied the Port of Rotterdam with HVO100 for its vessels since 2018.42
Production volumes under long-term offtake agreements create revenue certainty, attracting less risk-averse lenders and achieving better terms. Creating risk-sharing agreements or separate volume-risk tranches can facilitate access to external financing.
Increasing feedstock supply certainty: Producers could explore long-term supply agreements with traders that are able to absorb this supply risk. For instance, Swedish Preem partnered with Lipsa, a large vegetable oil and animal fats refiner in Spain, to secure access to feedstock.43
4. New technologies
All types of feedstocks will be required to meet the growing demand for sustainable fuels. As feedstock for HVO technology becomes constrained, the development of new technologies that use different feedstocks could become a priority to decarbonize legacy ICE vehicles, aviation, and maritime transport.
According to our analysis, the main alternative technological pathways include gasification, AtX, and PtL, and could achieve up to a 99 percent GHG reduction potential versus fossil fuels in the case of e-fuels (see sidebar “Alternative technology pathways”).
At present, these new technologies are still under development and consequently face significant challenges, including higher costs, technological hurdles, and feedstock access limitations (in the case of hydrogen for PtL). These factors can deter or delay investments.
Uncertainty over winning technology: Most of the new pathways for sustainable fuels are not technologically mature. According to our research, only about five projects have been announced in Europe for AtJ, but none have passed the final investment decision (FID) yet. The first commercial unit for AtJ SAF production was launched in 2024 by LanzaJet in the United States.44
Gasification-Fischer Tropsch (FT) is at a similar stage, with approximately ten project announcements in Europe (none in FID), and faces significant engineering challenges around controlling synthesis gas (syngas) composition. PtL relies on technologies that are not yet available at scale, such as green hydrogen electrolysis and carbon capture and utilization (CCU).45 There are over 30 pilots and projects announced in Europe, with less than 1 percent of the announced capacity in FID.
Higher costs versus HVO/HEFA: Production costs for new technologies are significantly higher than for traditional biofuels such as HVO/HEFA, given that the new technologies are in the development stage. Today, the levelized cost of fuel production from new technologies is 2.0 to 2.5 times higher than for HVO/HEFA.46 However, by 2040, SAF-advanced production pathways are expected to converge with HVO/HEFA prices. PtL could become the most economically competitive technology in regions with low hydrogen costs (hydrogen makes up approximately 60 percent of production costs), which is also enabled by increasing carbon taxes (Exhibit 4).
Feedstock access: Both AtJ and gasification require advanced feedstocks (2G): lignocellulosic biomass for AtJ (since European regulation caps 1G feedstocks such as corn-based ethanol), and gasification needs agricultural, forestry, and MSW residues. This means both are also subject to European regulation for advanced biofuels. Further, collection is fragmented, and logistics for feedstocks are still underdeveloped. PtL requires stable inflows of CO2 and green hydrogen, which demand abundant renewable electricity (and additional cost to balance the intermittency of renewable energy). CO2 from industrial point sources is abundant and allowed in the European Union, but only until the end of the 2040s. Post-2040, biogenic CO2 will be required, pushing investors to source scarcer biogenic CO2 in their long-term investments. If biogenic CO2 sources (such as biomass power plants) are insufficient to meet demand, the development of direct air capture systems would be needed, further increasing unit costs for e-fuels production and potentially undermining their viability. Other regions, such as the United States, do not require this shift to biogenic CO2.
Lack of incentives to scale new technologies: While it remains unclear which technologies will emerge as the most successful, it is likely that a combination will be needed to decarbonize the transport sector. Similar to HVO, new technology pathways face demand uncertainty from the lack of road transport fuel mandates. In the case of e-fuels, despite lower energy efficiency than EVs (an e-diesel car consumes five times more energy than an EV), road transport offtake volumes would support technology improvements available for aviation and maritime decarbonization.47 The demand for e-fuels is unclear, which raises the question of whether PtL plants would be able to reach sufficient scale and when they would become financially viable.
Access to financing: New pathways face additional barriers, such as unproven technologies and small outputs derived from small-scale projects. Such challenges increase the financial risk of these capital-intensive projects (for example, hydrogen and FT units for PtL projects require €15,000 to €17,000 of investment per ton of e-SAF produced).48
Potential unlocks
Specific measures would be needed to address demand uncertainty and scale up production to enable these new technologies to prosper.
Derisking feedstock supply via partnerships: Producers could address the risk of feedstock accessibility through colocation with sources—such as biogenic CO2—which are near the production plant, helping to secure the supply chain. They could also create agreements to reduce feedstock transportation costs and secure a stable supply. Partnerships may also include the creation of regional clusters to share infrastructure. In the United Kingdom, for instance, there are several carbon capture, utilization, and storage (CCUS) hubs located near industrial clusters (such as Net Zero Teeside).49
Collaborating to exploit synergies among technologies and across the value chain: Synergies between technologies could accelerate their commoditization—for example, gasification and PtL have the FT reactor in common. There could also be synergies in terms of by-products and feedstocks. AtJ, gasification, and HVO/HEFA projects all produce CO2 as by-products, which could be used as feedstock for PtL. Many synergies also appear across the value chain, enabling the mitigation of offtaker risk. Here, partnerships between producers and technology licensors could potentially reduce technology risks.
Exploring innovative financing alternatives: High financial risk makes it difficult to access financing for new technologies; without public funds to fill in the funding gap, these technologies are unlikely to materialize. Provided that technology and offtaker risks are sufficiently mitigated, in the mid to long term, stakeholders could explore alternative financing vehicles for sustainable fuel projects, such as project finance with multilateral banks and export credit agencies supporting private lenders.
Sustainable fuels are a critical tool to decarbonize not only Spain’s aviation and maritime sectors, but also road transport, given that ICE vehicles are likely to be on roads for the years to come.
Sustainable fuels are the most mature solution in the short and midterm for aviation decarbonization, while e-fuels such as e-methanol or e-ammonia could become the marine decarbonization solution of choice in the long term. In road transport, sustainable fuels can help to address the emissions from legacy ICE light-duty vehicles (LDVs) and heavy-duty trucks.
Future demand certainty, supply-side incentives, protection from non-EU imports, and regulatory clarity could all be key to ensuring that sustainable fuel projects in Spain are economically viable and can reach the required scale and adoption needed to decarbonize the country’s transport sector.
