Alternative Jet Fuels: Federal Activities Support Development and Usage, but Long-term Commercial Viability Hinges on Market Factors
Released: 2014-05-07T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: The federal government has encouraged the development and use of alternative fuels to reduce greenhouse gas emissions associated with aviation and to enhance economic development and energy security for the United States. To help achieve these goals of reducing greenhouse gas emissions, the aviation industry is actively supporting alternative jet fuels.

GAO was asked to provide information on the progress and challenges to developing and using alternative jet fuels in the United States. This report examines (1) the role of the federal government in the development and use of alternative jet fuels and (2) key challenges to developing and using alternative jet fuels and actions that the federal government plans to or could take to help address those challenges.

GAO interviewed officials from five federal agencies—FAA, USDA, DOE, DOD, and EPA. GAO selected these agencies for review because GAO identified them as the federal agencies most involved in the development and use of alternative jet fuels. GAO also reviewed relevant literature and federal and industry documents and discussed challenges and potential federal actions with 23 stakeholders from government, academia, and the private sector, selected to represent a range of perspectives and expertise in areas related to each step in the development and use of alternative jet fuels. GAO is not making recommendations in this report. DOT, USDA, DOE, DOD, and EPA reviewed a draft of this report and provided technical comments that were incorporated as appropriate.

section_title: What GAO Found
paragraphs: The federal government supports the development and use of alternative jet fuels through both broad and targeted initiatives. Broad national strategies promote the development of a variety of alternative fuels—including alternative jet fuel—to help achieve national goals, such as securing energy independence, fostering economic development, and reducing greenhouse gas emissions. In addition, the renewable fuel program—established by law in 2005 to encourage greater use of renewable fuels and administered by the Environmental Protection Agency (EPA)—requires that U.S. transportation fuels contain certain amounts of renewable fuels annually, increasing from 9-billion gallons in 2008 to 36-billion gallons in 2022. The other four federal agencies that GAO reviewed—Department of Transportation's (DOT) Federal Aviation Administration (FAA), Department of Agriculture (USDA), Department of Energy (DOE), and Department of Defense (DOD)—directly support alternative jet fuels through targeted goals, initiatives, and interagency and industry coordination efforts. For example, FAA set a goal for the U.S. aviation industry to use 1-billion gallons of alternative jet fuels annually by 2018. The four agencies also sponsor research that specifically targets alternative jet-fuel development or provide direct support for its future commercial production, or both. For example, FAA and DOD support research to determine the technical feasibility of using new alternative jet fuels on aircraft and in existing infrastructure. Also, USDA, DOE, and DOD have coordinated their activities to support the future construction or retrofit of multiple domestic commercial- or pre-commercial-scale production facilities to produce alternative fuels, including alternative jet fuels. Specifically, in May and June 2013, four private fuel producers received awards totaling $20.5 million in federal funds, with private industry paying at least 50 percent of the cost.

Achieving price competitiveness for alternative jet fuels is the overarching challenge to developing a viable market. No alternative jet fuels are currently commercially available at prices competitive with conventional jet fuels. The 23 stakeholders that GAO interviewed most frequently cited high development costs and the uncertainty of federal regulations and policies as primary reasons why alternative jet fuels are not priced competitively and believe that federal activities are needed to help advance the alternative jet-fuels industry. For example, according to 10 stakeholders, fuel producers face difficulties in obtaining private investment to help construct commercial-scale fuel production facilities, in part because of concerns about the supply and high cost of feedstock (the source used to produce the fuel, such as crops) and high capital costs. Also, 13 stakeholders stated that continued uncertainty about the future of current federal policies—particularly the renewable fuel program—generally causes potential investors to discount the value of federal subsidies, discounting that, in turn, limits the support these policies may provide the industry. Stakeholders identified a variety of federal actions to advance alternative jet-fuels development, including continuing current federal research efforts, providing greater regulatory and policy certainty, and giving more direct financial support. However, even if the cost to produce alternative jet fuels is reduced, market factors may still determine the long-term success of the industry. The main market factors identified by stakeholders were (1) comparative value of competing end products, (2) feedstock prices, and (3) the costs of conventional jet fuels.

section_title: Letter
paragraphs: Governments and the international aviation community are seeking to  limit aviation greenhouse-gas emissions, which according to many  scientists and the Intergovernmental Panel on Climate Change,  negatively affect the earth’s climate. While aviation emissions represent a  small share of total U.S. carbon dioxide emissions—the most significant  greenhouse gas emission emitted by aviation—we have found that the  aviation sector’s share is estimated to increase at a greater rate than  other sources of fossil fuel combustion, in part due to projected growth in  the aviation industry and the fact that unlike other transportation modes,  the aviation industry does not have near-term alternatives to liquid fuels.  The development and use of alternative jet fuels, particularly fuels derived  from renewable sources (renewable fuels), have the potential to reduce  greenhouse gas emissions associated with aviation, in part because  crops used to produce these fuels, called feedstock, remove carbon  dioxide from the air as they grow. In addition to potentially reducing  greenhouse gas emissions associated with aviation, developing  dependable domestic sources of alternative fuels could help enhance  energy security for the United States. According to the Energy Information  Administration, jet fuel prices more than tripled from 2002 to 2012. Over  this time period, jet fuel’s share of airlines’ total operating costs increased  from 13 percent to 31 percent, making fuel the largest component of  operating costs in 2012, based on analysis of airlines’ financial reports to  the Department of Transportation (DOT). As a result, the cost of  producing alternative jet fuels is an important factor in the extent to which  they provide a viable option for the aviation sector to replace more  conventional petroleum-based jet fuel.

To encourage greater use of alternative fuels for all sectors, the federal  government has taken steps to encourage the development of a  commercially viable, alternative-fuels industry. In 2005, Congress,  through the Energy Policy Act of 2005, established the renewable fuels  program, establishing the basis for the Administrator of the Environmental  Protection Agency (EPA) to adopt standards through regulations, which  for the first time require that surface transportation fuels sold in the United  States contain a minimum amount of renewable fuels. In March 2011,  the White House put forward a plan to produce more domestic oil and  reduce U.S. dependence on foreign oil by leveraging alternative fuels and  increasing fuel efficiency. In June 2013, the President released a Climate  Action Plan stating that renewable alternative fuels play an important role  in reducing greenhouse gas emissions from the transportation sector,  increasing energy security, and fostering rural economic development.  The plan proposed increased funding for research, development, and  deployment of advanced biofuels. The aviation industry also has efforts  under way, including partnerships with fuel producers and other  stakeholders, to enhance the development and use of alternative jet fuel  to help achieve the industry’s goals of reducing greenhouse gas  emissions. Currently, some types of alternative jet fuels are approved  for use in civilian and military aircraft.

You asked us to provide information on the progress in and challenges to  developing and using alternative jet fuels in the United States. This report  examines (1) the role of the federal government in the development and  use of alternative jet fuels and (2) key challenges to developing and using  alternative jet fuels and actions that the federal government plans to or  could take to help address those challenges.

To identify the role of the federal government, we interviewed officials and  reviewed strategic plans, performance reports, and other documents  relevant to alternative jet fuels from five federal agencies: the DOT's  Federal Aviation Administration (FAA), the Department of Agriculture  (USDA), the Department of Energy (DOE), the Department of Defense  (DOD) and its military departments (Army, Navy, and Air Force), and the  EPA. We selected these agencies for review because we identified them  as the federal agencies most involved in the development or use of  alternative jet fuels. We also reviewed White House and other broad or  government-wide documents relevant to alternative fuels generally. We  reviewed relevant memorandums of understanding or other agreements  between the five selected federal agencies and other entities. To identify  key challenges and planned or possible actions to address key  challenges, we selected and interviewed 23 stakeholders representing  government, academia, and the private sector. We selected these  stakeholders based on criteria that included type and depth of experience  and knowledge in the area of alternative jet fuels, recognition in the  professional community, and representation of a range of expertise in  areas related to each step in the development and use of alternative jet  fuels, such as feedstock development or fuel production. We asked these  stakeholders a series of semi-structured, open-ended questions about  economic, policy, and technological issues related to developing and  using alternative jet fuels. In addition, we interviewed officials from the  five selected federal agencies, as well as other non-federal alternative jet- fuels industry stakeholders, including fuel producers, airlines, aircraft  manufacturers, and environmental groups. We also reviewed literature on  challenges to developing and using alternative jet fuels. We focused our  study on federal efforts, except to the extent that international or private  sector efforts are coordinated with federal efforts. We did not provide an  exhaustive list of federal initiatives related to alternative jet fuels or rank  the planned or potential federal actions to address the key challenges that  we identified. Appendix I provides a more detailed description of our  scope and methodology.

We conducted this performance audit from February 2013 to May 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Definitions vary somewhat, but for the purpose of this report, we define  alternative jet fuels as drop-in liquid fuels that are derived from non- petroleum feedstocks, including renewable biomass (such as crop and  tree residues, algae, or separated municipal solid waste) and some  nonrenewable sources (such as natural gas or coal). Because they are  “drop-in,” alternative jet fuels can replace conventional petroleum-based  jet fuel (i.e., conventional jet fuel) without the need to modify aircraft  engines and fuel distribution infrastructure. This definition means that  alternative jet fuels are a substitute for conventional jet fuel and would  directly compete with it on the commercial market. Most development  activities—both federal and private industry activities—are focused on  alternative jet fuels derived from renewable sources, in part, because of  the prominence of environmental sustainability in national strategies and  a federal requirement that any alternative jet fuel for operational use  procured by any federal agency must have lifecycle greenhouse gas  emissions less than or equal to conventional fuel of the same purpose.

Alternative jet fuels are generally derived from the same feedstocks and  processes as other advanced fuels (e.g., renewable diesel) and even  some industrial products (e.g., plastics). As a result, alternative jet fuel  producers have some flexibility in producing a variety of fuels and other  products, seeking to maximize their profit relative to demand and costs.  Figure 1 describes the six segments of the supply chain for the  development and use of alternative jet fuels.

The first three segments of the alternative jet-fuel supply chain— feedstock production, feedstock logistics, and fuel production—are  common to all alternative fuels, and the first two segments are generally  independent of the end-use product or co-products that are produced. For  example, the camelina crop can be processed, converted, and refined  into multiple end-use products, including renewable gasoline, diesel, and  jet fuel, with the relative quantities of each of these end-use products  determined by the fuel refiner. The activities associated with producing  the camelina (e.g., growing the crop) and the logistical activities of  collecting, storing, and transporting the camelina feedstock before it is  converted to fuel are the same regardless of the relative quantities of  renewable diesel or jet fuel produced. In the third segment of the supply  chain, alternative jet fuels are generally co-produced with other end-use  products, although fuel producers do have some flexibility in the mix of  products they make.

The remaining three segments of the supply chain—fuel testing and  approval, fuel distribution, and end use—include activities that are  specific to jet fuel. For example, this supply chain includes a segment for  fuel testing and approval because before any alternative jet fuel can be  approved for commercial or military use, it must meet unique safety and  performance standards that are more rigorous than standards for other  alternative transportation fuels. Standards for alternative jet fuels are set  out in applicable standards controlled by ASTM International and the  appropriate military department within DOD (the Navy and the Air  Force). The requirements for fuel testing and approval under ASTM  International and military standards vary by the characteristics of the fuel  and the feedstock and production process used, but generally the  requirements include a significant amount of fuel, engine, and aircraft  testing. Initially, a fuel may be tested in a laboratory using small quantities  of fuel (as little as 500 milliliters), but as it progresses through the  approval process, fuel quantity requirements could reach as much as  225,000 gallons if extensive engine testing is required.

The last two segments of the alternative jet fuel supply chain—fuel  distribution and end use—also include activities specific to jet fuels, but  not specific to alternative jet fuels relative to conventional jet fuel.  Specifically, according to the applicable ASTM International and military  standards, once an alternative jet fuel is produced, certified, and released  under the applicable standard, it also meets the standards for  conventional jet fuel. Accordingly, alternative jet fuels can be seamlessly  integrated into the existing jet fuel distribution system and onto aircraft  without changes to any infrastructure.

Although no alternative jet fuels are currently available in the United  States at a competitive price, as discussed later in this report, two  alternative jet fuel production processes—referred to as the Fischer- Tropsch process and the HEFA process—are approved for use by  commercial and military aviation. Under the previously mentioned ASTM  International and military standards, fuels produced through these two  processes are approved for up to a 50 percent blend with conventional jet  fuel. As with conventional jet fuel production processes, both of these  processes produce multiple end-use products, including, for example,  diesel and jet fuel. The fuel producer, to a limited extent, determines the  relative quantities of jet fuel, diesel, and other products to be produced.  For many feedstocks used in the HEFA process, changing the product  ratio to produce more jet fuel and less diesel, however, is more costly  because it requires additional processing and increases the proportion of  output that is comprised of less-valuable co-products, such as liquefied  petroleum gas. Seven other production processes for alternative jet fuels,  such as converting alcohols to jet fuel, are undergoing review in the  ASTM International testing and approval process and in some military  departments’ testing and approval processes.

section_title: Both Broad and Targeted Federal Alternative-Fuels Initiatives Support the Development and Use of Alternative Jet Fuels
subsections: section_title: Broad Federal Strategies and Initiatives Have Supported Alternative Jet- Fuel Development and Use
paragraphs: The White House has developed broad national strategies that promote  the development of alternative fuels to help secure energy independence,  foster economic development, and reduce greenhouse gas emissions.  For example, the Blueprint for a Secure Energy Future (March 2011), the  National Bioeconomy Blueprint (April 2012), and the President’s Climate  Action Plan (June 2013), all describe how supporting the development of  alternative fuels can contribute to achieving these broad national goals.  However, these strategies also note that alternative fuels are only part of  a wide variety of other complementary activities working toward the same  goals. For example, according to the President’s Climate Action Plan,  meeting U.S. greenhouse gas-emission reduction goals depends not  only upon the development and use of alternative fuels, but also on  numerous other activities such as increasing fuel economy standards,  expanding and modernizing the electric grid, and improving the energy  efficiency of homes and businesses.

Some initiatives led by one or more of our five selected federal agencies  involved in the development or use of alternative jet fuel help support  these broad national strategies and are often similarly broad—focusing on  issues that are common to a variety of alternative fuels, including  alternative jet fuels. For example, to support the development of  technologies and processes necessary for the commercial production of  biofuels at prices that are competitive with conventional fuels, USDA and  DOE jointly administer the Biomass Research and Development Initiative,  which assists in developing these technologies through research,  development, and demonstration projects. According to USDA and DOE  officials, most of the initiative’s projects do not target alternative jet fuels  specifically. However, officials from these agencies noted that general  scientific advancements that broad initiatives identify can also advance  alternative jet fuels development specifically. For example, research that  improves the efficiency of a particular fuel-conversion process often  supports the development of all fuels that the process could produce.

In 2007, the Energy Independence and Security Act (EISA) of 2007  expanded the Renewable Fuel Standard (RFS) to cover most surface  transportation fuels, such as fuels for use in motor vehicles and engines  and nonroad vehicles and engines, but not jet fuel. Overall, jet fuel is a  fraction of the total transportation fuel consumed in the United States.  The expanded RFS generally required that covered transportation fuels  contain 9-billion gallons of renewable fuels in 2008, with renewable fuels’  volumes increasing annually to 36-billion gallons in 2022. To demonstrate  compliance with the RFS, fuel producers or importers use renewable  identification numbers (RINs). Fuel producers or importers can obtain  RINs by purchasing and blending renewable fuels themselves, or they  can purchase RINs from renewable fuel producers, importers, blenders,  or other parties. In this way, the renewable fuel program has created a  market for RIN credits. While jet fuel is not used to calculate a fuel  producer’s or importer’s renewable fuel obligation, EPA determined in its  March 2010 final rule for the expanded renewable fuel program that some  feedstocks and conversion processes for renewable jet fuel qualify as  “advanced biofuels,” one of the new categories of renewable fuel  established by EISA. In addition, through regulations issued in March  2013, EPA clarified that some renewable diesel processes that had been  previously evaluated included jet fuel and also approved additional jet-fuel  pathways. If alternative jet fuels produced through these approved  processes generate RIN credits—which the fuel producer may then sell to  others—their sale may help subsidize the cost of producing qualifying  alternative jet fuels.

section_title: Four Federal Agencies Support Alternative Jet Fuels Development and Use through Targeted Goals, Initiatives, and Coordination Efforts
paragraphs: Four of the selected agencies—FAA, DOD, USDA, and DOE—support  initiatives that target alternative jet-fuel development or use specifically.  FAA and DOD have established specific goals for using alternative jet  fuels in commercial and military aircraft and support research and  development (R&D) activities—such as testing to approve new alternative  jet fuels—to help them to achieve these goals. DOD, USDA, and DOE  also have initiatives that provide direct financial support for future  alternative jet-fuel production on a commercial-scale. All of these  agencies coordinate their alternative jet fuel-related efforts with industry  and other stakeholders through partnerships and agreements.
subsections: section_title: Federal Agencies’ Usage Goals
paragraphs: FAA and DOD have established usage goals specifically for alternative jet  fuels. In fiscal year 2012, FAA set a goal for the U.S. aviation industry  (including commercial and military aircraft) to use 1-billion gallons of  alternative jet fuels annually by 2018 with the intent of encouraging  commercial production. According to FAA officials, this represents about  5 percent of the predicted jet fuel consumption for domestic airlines and  the military in 2018. Achieving this goal, however, will depend on a variety  of factors, including support from other federal agencies and industry  stakeholders. USDA and other nongovernmental stakeholders have  stated their intent to help enable commercial production of alternative jet  fuels in support of FAA’s goal through existing programs and expanded  collaboration.

Two of DOD’s military departments—the Navy and the Air Force—have  also established usage goals for alternative fuels, including alternative jet  fuels. To support these usage goals, the Navy and Air Force are willing  to purchase alternative fuels that meet specific criteria, including  availability at a price that is competitive with conventional fuels.

The Navy’s 2010 A Navy Energy Vision for the 21st Century states  that increasing its use of alternative energy—including alternative jet  fuels—will help protect it from energy price volatility and supply  disruptions. The plan sets a goal of deriving 50 percent of total Navy  energy consumption afloat—including its jet fuel consumption—from  alternative sources by 2020, which, according to Navy estimates,  would require using about 336-million gallons of alternative fuels  annually (both marine and jet fuels) by 2020. The Navy consumes  over 600-million gallons of petroleum-based aviation fuel each year,  which according to a Navy official, constitutes about 40 percent of its  total petroleum consumption. In addition to setting quantitative goals,  the plan established a goal of demonstrating (which the Navy  completed in July 2012) and deploying the Great Green Fleet—a  group of ships and aircraft fueled by alternative jet fuels and other  alternative energy sources—by 2016.

The Air Force’s 2013 U.S. Air Force Energy Strategic Plan includes  a goal of increasing the use of cost-competitive drop-in alternative jet- fuel blends for non-contingency operations to 50 percent of total  consumption by 2025. According to the plan, the Air Force consumes  about 2.5 billion gallons of jet fuel each year, accounting for about 80  percent of its total energy consumption. The plan states that using  alternative jet fuels could help to diversify the types and secure the  quantities of energy that are needed to perform the Air Force’s  missions, which are currently “heavily dependent” upon petroleum and  petroleum-derived fuels, posing significant strategic and security  vulnerabilities on energy supplies.

section_title: Federal Agency Initiatives for R&D and Direct Financial Support
paragraphs: Two types of federal initiatives specifically support the development and  use of alternative jet fuels—sponsoring R&D and direct financial support  for future commercial production. FAA, DOD, and DOE support R&D  activities to target alternative jet fuels specifically, such as testing to  approve new alternative jet fuels or research to determine the  environmental or economic impact of using them. USDA, DOE, and DOD  have also taken some steps to provide direct financial support for future  commercial-scale production of alternative jet fuels.

DOT—primarily FAA—supports activities to determine the technical  feasibility and impact of using alternative jet fuels, including ways to  reduce the cost of production, through FAA’s Continuous Lower Energy,  Emissions and Noise (CLEEN) program and Centers of Excellence  (COEs), and through other DOT activities.

CLEEN Program: Launched by FAA’s Office of Environment and  Energy in 2010, CLEEN is a cost-sharing program that, among other  things, supports fuel-testing activities to generate data that can be  used to support the approval of new alternative jet fuels. According  to FAA officials, under the program, FAA is providing about $125  million in matching funds (of which about $93 million was provided  through fiscal year 2013) to five projects with engine and airframe  manufacturers. According to FAA officials, four of these projects  address issues related to alternative jet fuels development or use. For  example, through fiscal year 2013, FAA has awarded about $5.5  million through the CLEEN program to conduct laboratory and engine- component tests of advanced alternative jet fuels that could be  approved for commercial use by ASTM International. FAA has  announced its plans to implement a follow-on program in 2015, called  CLEEN II—when FAA plans to end the initial CLEEN program. Like  the initial program, CLEEN II’s goals will include developing and  demonstrating drop-in sustainable alternative jet fuels. However, FAA  officials told us that under CLEEN II they intend to place an emphasis  on advancing coordinated test methods and capabilities to reduce  testing cost and time and the possibility of redundant testing by  multiple engine manufacturers.

Centers of Excellence: FAA also sponsors research studies related  to the environmental impact of using alternative jet fuels through its  COEs. Beginning in 2003, FAA sponsored the Center of Excellence  for Aircraft Noise and Aviation Emissions Mitigation, named  Partnership for AiR Transportation Noise and Emissions Reduction  (PARTNER), a collaborative effort that researched solutions for  existing and anticipated aviation-related noise and emissions  problems. According to FAA officials, five PARTNER projects  focused on alternative jet fuels specifically. For example, one project  studied the economic feasibility, production potential, and  environmental impact of alternative jet-fuel use. Upon the expiration of  PARTNER’s 10-year cooperative agreement in September 2013 and  as required in the FAA Modernization and Reform Act of 2012, FAA  selected a team of universities to form a new COE for Alternative Jet  Fuel and Environment, named the Aviation Sustainability Center  (ASCENT), with research goals that include better understanding  ways to reduce the costs of production processes and ways to meet  FAA’s goal of using 1-billion gallons of alternative jet fuels by 2018.  ASCENT is being led by Washington State University and the  Massachusetts Institute of Technology, and is expected to receive at  least $4 million annually for 10 years to explore ways to meet FAA’s  environmental and energy goals, including sustainable alternative jet  fuels.

DOT activities: DOT also helps fund research through broad agency  announcements for FAA-sponsored projects that address specific  alternative jet fuels’ testing needs. Specifically, in 2010 DOT invited  research in four priority areas: development of novel “drop-in”  alternative jet fuels, alternative jet fuels’ quality control, sustainability  guidance for alternative jet fuels’ users and performance, and  durability testing of new fuels. According to FAA officials, DOT’s John  A. Volpe National Transportation Systems Center has administered  six FAA-sponsored broad agency-announcement research projects  related to alternative jet fuels at a total cost of about $7 million. For  example, DOT provided funds to three alternative jet-fuel producers to  develop and optimize conversion processes for alternative jet fuels.  These funds better positioned the fuel producers to produce fuel for  testing purposes and develop knowledge to help overcome key  technical hurdles to commercial-scale production.

DOD also supports activities to test and approve alternative jet fuels. All  three DOD military departments coordinate their alternative jet-fuel testing  and approval efforts through the Tri-Service Alternative Fuels Working  Group. According to Air Force officials, this working group helps share  data, reports, testing, and certification practices across DOD and is  working toward developing a department-wide certification strategy.  Specifically, the Army, Navy, and Air Force test alternative jet fuels to  ensure that they are safe to use on military ships, aircraft, and fuel  distribution systems. Their testing programs capture technical data  through laboratory, component, engine, fuel system, and weapon system  tests that evaluate the effects of changes in fuel chemistry and properties  on the performance and reliability of military equipment. According to  DOD officials, the department purchased about 1.5-million gallons of  alternative jet fuels to conduct the department’s testing and approval  activities from fiscal years 2007 to 2013 at a total cost of almost  $40 million. Officials from the Navy and Air Force told us that these  activities will help enable them to achieve their stated goals for alternative  jet-fuels use. DOE also, on behalf of DOD, recently solicited applications  for R&D projects that help enable conventional coal-to-liquid production  plants to produce commercially viable quantities of jet fuel that have equal  or lower greenhouse gas emissions and make significant progress toward  being cost-competitive to conventional jet fuel. DOE expects to select and  award applications by the end of August 2014, with about $20 million  available under the solicitation.

In addition, federal agency officials representing eight federal agencies  recently formed an interagency working group that is currently drafting a  national R&D strategy for alternative jet fuels. According to members of  the working group, a national R&D strategy is needed to create a national  vision for alternative jet fuels specifically and a unified federal government  approach to help facilitate interaction with external stakeholders, such as  industry and academia. As part of the working group’s efforts, in January  2014, the working group sponsored a workshop attended by government  and industry stakeholders. The workshop identified a variety of  challenges to making alternative jet fuels, including challenges associated  with feedstock logistics, fuel production and scale-up, fuel certification  and qualification, as well as other cross-cutting issues. According to  members of the working group, the national strategy for alternative jet  fuels will focus on R&D challenges and will not address policy issues.

Direct Financial Support for Future Commercial Production  In June 2011, USDA, DOE, and one of DOD’s military departments (the  Navy) signed a memorandum of understanding (MOU) that initiated  cooperation among these agencies in assisting the development and  support of a sustainable commercial biofuels industry, which could  produce alternative jet fuels among other types of biofuels. The MOU  explained that given the current economic environment, significant start- up risks, and competitive barriers of an established conventional fuels  market, it is necessary for the federal government to cooperate with  private industry to create a strong demand signal and to make targeted  investments to achieve the necessary alternative-fuels-production  capacity. The stated objective is to construct or retrofit multiple domestic  commercial- or pre-commercial-scale advanced drop-in biofuel production  facilities. Specific characteristics required for the facilities include that  the biofuels that they produce must be capable of meeting military fuel  standards at a price that is competitive with conventional jet fuel and have  no significant impact on the supply of agricultural commodities for the  production of food.

Under the MOU, USDA, DOE, and the Navy stated their intent to  contribute $170 million each over 3 years, for an aggregate total of $510  million. Under the authority of the Defense Production Act, Title III, DOE  and the Navy planned to fund their share of $340 million for capital  investment and production. USDA planned to provide its contribution  under the authority of the Commodity Credit Corporation Charter Act.  Under this MOU, in June 2012, USDA, DOE, and DOD announced the  initiation of and a solicitation for the Advanced Drop-In Biofuels  Production Project, which would provide awards for biofuels production  facilities over two phases. In May and June 2013, four private  companies were selected to receive awards totaling $20.5 million, with  private industry paying at least 50 percent of the cost. According to  Defense Production Act Title III program officials, the Advanced Drop-In  Biofuels Production Project should provide production capacity for about  35 million gallons per year of renewable jet fuels that meet military  standards and are available at a price that is competitive to conventional  fuels by 2016. But the amount of production capacity is dependent, in  part, on the timing and the number of awards for the Advanced Drop-In  Biofuels Production Project’s second phase. According to DOD officials,  the department plans to make its determination for the second phase of  awards in July 2014.

More recently, in December 2013, the Secretaries of USDA and the Navy  announced another initiative that complements the Advanced Drop-In  Biofuels Production Project called Farm to Fleet, which is intended to help  the Navy meet its alternative-fuels usage goals. Under the initiative, DOD  plans—through its regular domestic bulk-fuel purchases—to issue  solicitations in 2014 for the purchase of about 80-million gallons of any  combination of jet and marine diesel fuels in 2015 that are blended with at  least 10 percent alternative fuels. USDA plans to contribute up to about  $161 million (under the authority of the Commodity Credit Corporation  Charter Act) toward these fuel purchases to help defray any domestic  feedstock costs that would have caused the final alternative fuel to not be  price competitive with conventional fuels.

In addition, DOE provides direct financial support for future alternative jet  fuels production through its integrated biorefineries program, which was  initiated in 2005. Under the program, DOE’s Bioenergy Technologies  Office (BETO) works in partnership with industry to develop, build,  operate, and validate integrated biorefineries at various scales (pilot,  demonstration, and commercial). The purpose of these projects is to  provide federal support to private industry to help bridge the gap between  promising R&D scientific advancements and commercial-scale production  by validating fuel conversion technologies at progressively larger scales.  According to BETO, federal financial support is essential to help offset the  technical and financial risks associated with producing alternative fuels at  a commercial-scale. According to BETO officials, DOE has obligated  almost $198 million for 14 integrated biorefinery projects related to the  development or use of alternative jet fuels. For example, it obligated  about $50 million to a fuel producer to demonstrate the technical and  economic feasibility of refining algal oil into gasoline, diesel, and jet fuel.

section_title: Coordination Efforts with Private Industry and Other Stakeholders
paragraphs: Because of private industry’s indispensible role throughout the alternative  jet fuel supply chain—such as producing feedstock and fuel—it is critical  that the federal government’s activities are coordinated with external  stakeholders. As a result, USDA, DOE, FAA, and DOD participate in a  variety of coordination efforts, such as partnerships with industry and  other stakeholders, to identify opportunities to work toward common goals  and needs. For example, FAA and other federal agencies participate in  the Commercial Aviation Alternative Fuels Initiative (CAAFI), a public- private partnership formed in 2006 to facilitate the development and  deployment of drop-in alternative jet fuels that are intended to reduce all  aviation emissions, improve price stability, and support supply security.  Key CAAFI efforts have included developing and sharing user guides and  tools, as well as organizing workshops for alternative fuel producers and  other stakeholders. For example, in December 2013, CAAFI published a  user’s guide to help alternative jet-fuel producers understand and comply  with ASTM International’s process to test and approve new alternative jet  fuels. The partnership also developed a “Path to Alternative Jet Fuel  Readiness” tool that describes the testing and environmental evaluations  required to show a new alternative jet fuel’s suitability for aviation use and  how to best facilitate ASTM International approval. In addition, in January  2013 and January 2014, CAAFI conducted workshops on current  regulatory, voluntary, and research efforts related to alternative jet-fuel  sustainability issues. Among other things, 2013 workshop participants  identified the need to understand and reconcile differences among  various approaches to calculating life-cycle greenhouse gas emissions  that result from producing alternative jet fuels, and 2014 participants  began assessing the differences.

USDA coordinates with private industry and other governmental  stakeholders through the FARM to FLY initiative, which was initially  established in July 2010 to accelerate the availability of a commercially  viable and sustainable domestic alternative jet-fuels industry, increase  domestic energy security, establish regional supply chains, and support  rural development. USDA expanded the initiative by signing a 5-year  FARM to FLY 2.0 resolution with CAAFI, FAA, Airlines for America, and  others. Under the expanded resolution, participants agreed to designate  personnel for a working group tasked with assessing and proposing ways  to support FAA’s goal of using 1-billion gallons of alternative jet fuels by  2018. The working group plans to issue a final report by the end of 2018.

In addition to the two efforts described above, federal agencies participate  in a variety of other coordination efforts, including the following.

USDA, DOE, FAA, and DOD work with industry and other  stakeholders through regional initiatives that are aimed at advancing  alternative fuels within specific regions of the United States.

DOE’s BETO co-sponsored a September 2013 workshop to obtain  input from industry, academia, and other experts on optimizing and  integrating the use of natural gas and biomass to produce liquid  transportation fuels, including alternative jet fuels.

FAA has signed onto or agreed to engage in activities under  international cooperative agreements with four countries: Australia  (2011), Brazil (2011), Germany (2012), and Spain (2013). Under each  of these agreements, FAA agreed to share information about R&D  efforts, fuel testing or approval requirements, and environmental or  sustainability studies, among other things. According to FAA, these  international partnerships contribute to FAA’s ongoing efforts to  support approval of additional sustainable alternative jet fuels by  ASTM International. For example, representatives from all four  countries participated and shared information about their respective  initiatives at a recent meeting sponsored by CAAFI. Also, FAA and  German Ministry of Transport officials recently participated in a  technical and coordination exchange to share details on fuel testing  and approval activities to identify complementary activities, among  other things.

section_title: Price- Competitiveness Is the Main Challenge; Federal Activities Help Address Challenge, but Market Factors Affect the Long-term Commercial Viability of Alternative Jet Fuels
subsections: section_title: While Some Progress Has Been Made, No Alternative Jet Fuels Are Currently Commercially Available at a Price That Is Competitive with Conventional Jet Fuels
paragraphs: The dates FAA and DOD have established for meeting their alternative  jet-fuel usage goals are several years or more away, and, to date, all  alternative jet fuels purchased in the United States have been for fuel  testing, approval, or demonstration activities, not for day-to-day  operations. For example, in November 2011, two domestic airlines  purchased alternative jet fuels for a limited number of commercial flights.  According to DOD officials, DOD purchased about 150,000 gallons in  fiscal year 2012 (about 1.5-million total gallons since fiscal year 2007) of  alternative jet fuels, all for fuel testing and approval activities, including  about 100,000 gallons for the Navy’s Great Green Fleet demonstration in  July 2012. Commercial and military use is constrained because  alternative jet fuels are not yet produced on a commercial-scale at a price  that is competitive with conventional jet fuel. While FAA officials  acknowledged that FAA’s usage goal is “aspirational,” they noted that  alternative jet fuel use could increase substantially once the industry is  capable of producing alternative jet fuels at a commercial scale and at a  price that is competitive with conventional jet fuels.

Currently, the price for alternative jet fuels exceeds that of conventional  jet fuel. Jet fuel end users—both commercial airlines and DOD—are  extremely price sensitive when making purchasing decisions. Fuel  purchasers are either unwilling to pay a premium for alternative jet fuels  as compared to conventional jet fuel, or in the case of DOD, are  precluded by law and department policy from doing so. The actual price  differential depends on the feedstock, the production process used to  produce the alternative jet fuel, as well as fuel distribution and quantities  produced. Of the two alternative jet-fuel production processes approved  for use in commercial and military aircraft (Fischer-Tropsch and HEFA),  DOD, according to a DOD official, paid from about $3 to $150 per  gallon. These prices, however, reflect purchases of small quantities of  fuel for testing and approval activities, which according to government  officials and a fuel producer we interviewed and literature we reviewed,  are higher than what the price would be if the quantities were produced at  a commercial scale. A study conducted by one of FAA’s COEs in March  2013 estimated that alternative jet fuels produced on a commercial scale  using the HEFA process would require a subsidy of $0.35 to $2.86 per  gallon to be price-competitive with conventional jet fuels in 2020.

Recent developments indicate that alternative jet fuel use may increase in  the future, which could contribute to achieving FAA’s and DOD’s usage  goals. For example, as of January 2014, seven new potential alternative  jet-fuel production processes are undergoing review by ASTM  International for approval—at least one of which FAA officials told us may  be approved by June 2014. According to a couple of government officials  and an industry representative whom we spoke with, a range of approved  production processes could diversify and expand the future supply of  alternative jet fuels. Another potential alternative jet-fuel production  process that will be submitted to ASTM for approval involves using a type  of renewable fuel that is currently used in ground transportation. Because  production capacity already exists for this fuel, it could be made available  more quickly to meet demand from the aviation industry. In addition, two  airlines—United Airlines and Alaska Airlines—have entered into  agreements, known as “off-take agreements,” to purchase alternative jet  fuels from fuel producers’ future production.

section_title: The Overarching Challenge to Developing an Alternative Jet Fuels Market Is Making the Price Competitive with Conventional Jet Fuels
paragraphs: We interviewed 23 academic, federal government, and private industry  stakeholders with expertise in various segments of the supply chain to  help identify challenges to developing and using alternative jet fuels (see  app. I for more information on the criteria used to select the stakeholders  interviewed). Through interviews with these stakeholders using open- ended questions, we identified two major factors—high development  costs for alternative jet fuels and uncertainty with respect to federal  regulations and policies—as the primary contributors to the overarching  challenge that alternative jet fuels are not commercially available at a  price that is competitive with conventional jet fuel.
subsections: section_title: High Development Costs across the Alternative Jet Fuel Supply Chain
paragraphs: Almost all of the stakeholders whom we interviewed (22 of 23) cited at  least one factor related to high development costs. While one of these  stakeholders discussed the challenges associated with high development  costs broadly, the remaining 21 of them highlighted development cost  challenges associated with specific supply-chain segments.

Feedstock production: Stakeholders we interviewed most commonly  cited the high cost of feedstock in connection with the first segment of  the supply chain (15 of 23 stakeholders). Five of these stakeholders  noted that for fuel produced using the HEFA production process, the  cost of some types of feedstock—even before it is transported or  converted—currently exceeds that of conventional fuel. For example,  when comparing conventional jet-fuel prices reported by the Energy  Information Administration and soybean oil prices reported by the  World Bank between 1990 and 2012, the price per gallon of soybean  oil exceeded the price per gallon of conventional jet fuel in almost  every year. In addition, an increase in demand for alternative jet  fuels could increase the derived demand for feedstocks (as alternative  jet fuel producers increase their production output) and the price of  feedstocks could rise.

Six stakeholders noted that the expansion of low cost natural gas  production in the United States could help lower production costs for  alternative fuels derived from nonrenewable sources, such as natural  gas. However, jet fuel produced from nonrenewable sources, such as  natural gas, does not meet the statutory definition of “renewable  biomass,” and therefore could not generate RINs. Expanding the  production of different types of renewable feedstocks could also help  lower feedstock production costs, but three stakeholders noted that  the agriculture community does not have much experience in growing  crops that could be used to produce alternative fuel, and farmers are  hesitant to grow those crops without a guarantee that they can be sold  or the certainty that the energy crop would be more profitable than  what the farmer could otherwise grow.

Feedstock Logistics: While the logistics differ depending on the type  of feedstock, one private-industry stakeholder and studies we  reviewed explained that feedstock used to produce alternative fuels is  generally costly to collect, store, handle, and transport. For example,  oil producing feedstocks—such as camelina, soy, or jatropha—require  special handling, including proper moisture and temperature  conditions for storage and cleaning, drying, and de-hulling before the  process for extracting the oil from the plant occurs. And, some other  feedstock crops, such as wood residues or switchgrass—which are  fibrous, have a low energy density, and have variable moisture  content—are costly to collect, store, and transport because of this  complexity. Moreover, to be more cost effective, these feedstocks  may need to be grown near fuel production facilities; otherwise, they  may need to be shipped by bulk freight transportation (such as by rail  or pipeline), which increases the transportation cost. That is why a  demonstration-scale ethanol biorefinery that we visited that  anticipates producing alternative jet fuels acquires its feedstock  (woody biomass) from a poplar tree plantation less than 10 miles  away (see fig. 2). Operators of the biorefinery told us that the close  proximity of the feedstock source to the biorefinery helps reduce its  feedstock logistics costs.

Fuel production: More than half of the stakeholders we interviewed  (14 of 23), as well as literature we reviewed, indicated that the high  costs associated with transitioning to commercial scale production— such as the capital costs required to construct a commercial-scale  production plant—is a key contributing factor affecting the cost of  producing alternative jet fuels. For example, one study conducted by  the National Research Council estimated that the costs to construct a  single biorefinery converting biomass into a liquid transportation fuel  using different conversion technologies range from $200 million to  $606 million. Stakeholders (5 of 23) also noted that the capital  investment costs for constructing alternative fuel-production plants  would be even higher when producing fuel from nonrenewable  feedstock, such as natural gas.

Ten stakeholders we interviewed highlighted fuel producers’ difficulty  in obtaining the private investment needed to help construct  commercial-scale alternative fuel production plants. According to  stakeholders and literature we reviewed, private financiers are  hesitant to invest, in part, because of risks associated with the  uncertainty about access to a steady supply of feedstock, high  feedstock and capital costs, and an unwillingness on the part of fuel  end users to pay a premium price for alternative jet fuels. This is  generally true of many capital-intensive start-ups, including other  renewable energy industries; four stakeholders noted to us, for  example, that the ethanol industry would not be as commercially  viable today without considerable federal support. One private- industry stakeholder whom we spoke to noted that fuel producers  learn and adapt their processes as they gain experience building and  operating commercial-scale production plants. In other words, once  fuel producers construct a commercial-scale plant and begin  operating it, they can work to create efficiencies in the production  process to reduce costs in other ways. Another private-industry  stakeholder underscored that the amount of time and funding it takes  to move from a good idea in the lab to a commercial scale of  production is substantial. Another stakeholder highlighted the cyclical  nature of the challenge—that is, fuel producers typically require  outside investment finance to construct a commercial-scale plant that  can create efficiencies sufficient to decrease costs, while a private  financier is hesitant to invest funds unless the producer can lower  development costs and guarantee that the fuel price will be  competitive with the price of conventional fuels.

Fuel testing and approval: Ten stakeholders, as well as literature we  reviewed, explained that the time and testing requirements associated  with the testing and approval process for alternative jet fuels add  additional cost—in part because alternative jet fuels, in contrast to  alternative fuels used for other purposes such as surface  transportation, require a more rigorous testing and approval process.  According to an industry report, the ASTM International’s testing and  approval process can last as long as 3 years and cost upwards of $30  million. One stakeholder explained that the fuel testing and approval  process requires producers to demonstrate that their production  processes are “robust and repeatable” and can reliably control  product quality. With regard to the time required to reach fuel  approval, the commercial and military approval process for HEFA  generally took about 3 years. One stakeholder highlighted that given  the amount of time required to get approval for alternative jet fuels,  producers may opt to produce other products, such as diesel, that  they can get to market more quickly.

In addition, as an alternative fuel progresses through the testing and  approval process, the sequence of tests—ranging from laboratory  tests on the fuels to potentially full-scale aircraft tests—require an  increasing quantity of fuel to conduct. Some stakeholders (5 of 23)  elaborated that since most fuel producers are generally companies  with limited funds and small-scale operations, it is extremely costly for  them to produce fuel in large quantities. For both the Fischer-Tropsch  and HEFA approval processes, the federal government has in some  cases provided funding—including purchasing fuels for testing and  providing the equipment needed to conduct the tests—to help relieve  some of the costs for producers. Air Force officials estimated that  DOD generated about 80 percent of the testing data for past  approvals, while private parties are leading most of the current fuel  certifications. Four government and private-industry stakeholders  whom we interviewed, as well as other FAA and DOD officials,  expressed concerns that recent cuts to the Air Force Alternative Fuels  Certification Division overseeing testing and approval will add to the  time and cost of getting additional alternative jet fuels approved.  Specifically, the Air Force’s Alternative Fuels Certification Division  was eliminated in fiscal year 2013 and the funding for the other Air  Force division involved in fuel testing and certification—the Air Force  Research Lab—is also being cut. A senior Air Force Energy official  noted that the Air Force plans to request that funding for its fuel  testing and approval activities be restored once the budget situation  has improved. The official did not know what the consequences of the  recent cuts would be, but indicated that because none of these  alternative jet fuels would be immediately commercially available, the  short-term impact would be minimal.

section_title: Uncertainty of Federal Policies and Regulations
paragraphs: As discussed above, federal policies and regulations can support the  development and use of alternative jet fuels, but uncertainty regarding the  future of this federal support may limit the support that these policies  provide to the alternative jet-fuels industry. More than half of the  stakeholders we interviewed (13 of 23) indicated that continued  uncertainty in federal regulations and policy contribute to the overarching  challenge of making the price of alternative jet fuels competitive with the  price of conventional jet fuels, a situation that undermines the viability of  the alternative jet-fuels industry as compared to conventional jet fuel.  Specifically, these stakeholders cited uncertainty about the RFS and  federal tax expenditures as a challenge to developing and using  alternative jet fuels.

RFS: Government, academic, and private-industry stakeholders (8 of  23) highlighted legal and political challenges to the RFS, which  creates uncertainty about requirements in the future. These  challenges include multiple lawsuits filed regarding the validity of the  program’s volumetric requirements, and political opposition for the  program from some lawmakers. The uncertainty about the future of  the RFS contributes to private financiers’ hesitancy to invest in the  biofuels industry, including alternative jet fuels. Even though  renewable jet fuels produced from specified feedstocks and  conversion processes can qualify as a renewable fuel to meet the  advanced biofuels requirement of the RFS, EPA officials reported that  no RINs for the production of renewable jet fuel have been generated  as of January 2014. However, four stakeholders noted that  alternative jet-fuel producers could use RIN credits to help offset fuel  development costs and to make the fuel’s price more competitive with  the price of conventional jet fuel. Four stakeholders, as well as a  private financier whom we spoke with, noted that, generally, private  financiers wholly or partly discount any potential RIN credit value  when evaluating a fuel producer’s financial prospects and deciding  whether to invest because of uncertainty about the future of the  program. Discounting the value of a RIN credit in financial models  makes the investment in an alternative fuel producer look less  profitable and overall less attractive than the same investment would  look with a stable and fully valued RIN credit. Thus, while the  uncertainty does not increase the actual price of alternative jet fuel, it  may hinder investments that could make alternative jet fuels more  price-competitive to conventional jet fuels. Two other stakeholders  pointed to the EPA’s recent proposal to reduce the total advanced  biofuels standard in 2014 under the RFS as indicative of this  uncertainty. Specifically, one stakeholder highlighted that when EPA  uses its statutory authority to reduce the statutory standards, for  example, for volume under RFS, it creates uncertainty, which  ultimately makes supporting the research, development, and  production of alternative fuels—including alternative jet fuels—less  attractive to private financiers.

Tax expenditures: Two private-industry stakeholders pointed out that  tax credits to incentivize alternative jet fuels and general biofuels  investment and production are authorized for short periods of time,  such as 1 year, and on occasion, were not renewed. For example,  since its enactment in 2004, the biodiesel tax credit expired in 2010,  2011, and again, most recently, on December 31, 2013. This  introduces uncertainty and, similar to the RIN credits, generally  causes private financiers to minimize or discount the tax expenditures’  value when assessing fuel producers’ future expenses and  profitability. Literature we reviewed highlighted the potential for stable  federal tax policy to contribute to the growth of the renewable energy  sector. For example, one study noted that investments in new  commercial scale wind and solar power production facilities were  fostered by production and investments tax credits, respectively. We  also found that the long-term ethanol tax credit was important in  creating a profitable ethanol industry when the industry had to fund  investment in new facilities.

section_title: Stakeholders Generally Believe Federal Actions Are Needed to Advance the Development of Alternative Jet Fuels, While Market Factors Also Affect Long-term Commercial Viability
subsections: section_title: Federal Actions
paragraphs: Stakeholders and studies we reviewed identified a variety of actions that  could assist in the development of alternative jet fuels, ranging from  continuing the current federal efforts to providing greater regulatory and  policy certainty to providing greater financial support. Stakeholders  identified a variety of federal actions as being the most critical for the  federal government to take.

Research and development efforts: A majority of the government,  academic, and private-industry stakeholders that we interviewed (19  of 23) generally agreed that the federal government should continue  research and development efforts to advance the development and  use of alternative jet fuels. Seven of the government, academic and  private-industry stakeholders suggested, however, that the federal  government could be more targeted in its feedstock research and  development efforts, such as finding scientific breakthroughs to  converting algae and cellulosic feedstocks into fuels; developing more  feedstock options; and identifying what feedstocks may be particularly  well-suited to producing alternative jet fuels. Five private-industry  stakeholders noted their support of the federal government’s current  efforts related to fuel testing and approval activities. For example,  FAA and DOD have helped or plan to help fund specific fuel tests for  seven new potential alternative jet-fuel processes that, as of January  2014, are undergoing review by ASTM International for approval.  According to federal agency officials, they anticipate that at least one  of these new processes may be approved by June 2014. Four  government and private-industry stakeholders proposed that the  federal government use and increase access to its jet engine assets  for testing purposes or help streamline the fuel-testing and approval  process for commercial use. For example, one of these government  stakeholders suggested that the federal government use an outside  contractor to manage the fuel-testing and approval process with  subcontracts with facilities for fuel testing, so fuel samples would be  sent to a centralized location. All entities with a role in the fuel-testing  and approval process (laboratories, engine and aircraft  manufacturers, and administrative functions) could then coordinate  and agree upon a final approval determination within several months.  Ultimately, this approach, the stakeholder noted, could help shorten  the ASTM International’s approval timeline, lower the fuel testing  costs, and add clarity and regularity to the process. Three  stakeholders believed that expanding the range of approved  production processes would diversify and expand future supply of  alternative jet fuels.

Regulatory and policy certainty: More than half of the government,  academic, and private-industry stakeholders we interviewed (15 of 23)  generally agreed that the federal government should provide greater  regulatory and policy certainty to support the development and use of  alternative jet fuels. The most commonly cited actions (12 of 23  stakeholders) were providing greater certainty that the renewable fuel  program will not be repealed and changes minimized—specifically,  reductions—in mandated volumes from year to year. Multiple  stakeholders (8 of 23) told us that this may encourage private  financiers to value RIN credits when making investment decisions.  Ultimately, these stakeholders believe that this certainty would attract  more private investment in the industry and help it advance. Other  actions mentioned by stakeholders included expanding the RFS by  expanding the types of feedstocks that would generate a RIN or  mandating a minimum volume standard for alternative jet fuels. EPA  officials told us, however, that because the definition of transportation  fuel in Section 211(o) of the Clean Air Act, which pertains to the  RFS, does not include jet fuels, having the fuel refiner or importer  include the jet fuel they produce or import in determining their annual  renewable fuel obligation would require Congress to revise the  program. Two stakeholders noted that some tax expenditures that are  authorized for short periods of time, such as 1 year, should be  authorized for a longer period of time—such as a minimum of 10  years. They said that this would be helpful in spurring additional  private investment in producing alternative fuels, including alternative  jet fuels. Researchers currently studying the impacts of government  subsidies on this industry told us that government mandates, such as  the RFS, and tax subsidies, as well as their duration, are key factors  in making the production of alternative jet fuels profitable.

Direct financial support: A majority of stakeholders (15 of 23) and  literature we reviewed also highlighted that greater financial support  for alternative jet fuels derived from both renewable and  nonrenewable sources would advance the industry. The two most  common potential federal government actions cited by stakeholders  included entering into long-term contracts for fuel purchases (6  government, academic, and private-industry stakeholders) and  stabilizing existing federal direct support programs (6 government and  private-industry stakeholders). Both of these actions would provide  greater certainty and reduce some of the risks of private investment.  Currently, DOD has statutory authority to enter into certain contracts  procuring services or property, including contracts for the purchase of  alternative fuels, for up to 5 years with an option to extend the  contracts up to 10 years. However, stakeholders we interviewed, as  well as industry experts said that the length of the initial contract  period is too short to stimulate the private capital market or to  encourage potential alternative fuels suppliers to construct or expand  production facilities. Alternative fuels producers have told DOD that  initial contracts for fuel purchases of at least 10 years in duration  would help advance the industry beyond the small production volumes  currently planned. Because this would require a statutory change to  DOD’s authority to contract for jet fuel purchases, DOD has drafted  legislative proposals over the past several fiscal years that would  allow it to enter into longer-term contracts. One proposal advanced for  congressional consideration, but was not adopted. A senior DOD  official told us that under current law, DOD would be required to  obligate sufficient funds in the first year of a long-term contract—for  example, 10 years in length—to pay for the total guaranteed minimum  purchases over the duration of the contract, unless it received a  specific statutory exemption to do otherwise. Without such an  exemption, according to this official, long-term contracts would have a  major effect on DOD’s budgets and obligational authority. Also,  according to a senior DOD official, obtaining and exercising the  authority to enter into longer-term contracts could commit DOD to a  particular type of alternative jet-fuel production process, while the  technological advancements in this industry are changing quickly and  could provide a newer and potentially less expensive production  process, which DOD may not be able to take advantage of. This DOD  official also noted that conventional fuel providers prefer 1-year fuel  purchase contracts. Thus, if DOD had and exercised authority to issue  longer-term solicitations for bulk fuel purchase, the department could  find itself subjected to a bifurcated procurement strategy where the  majority of its fuel contracts would be 1-year contracts with  conventional fuel providers and the remainder would be longer-term  contracts with alternative fuel providers.

Some stakeholders (6 of 23) suggested ensuring stability in the  funding stream for the existing Advanced Drop-In Biofuels Production  Project, discussed previously, which was to be jointly funded by the  USDA, DOE, and DOD. To date, the funding put toward the project is  less than the intended amount of $170 million from each federal  agency for an aggregate total of $510 million. According to DOD  officials, $100 million in fiscal year 2012 funds were applied to this  project. For fiscal year 2013, the explanatory statement for the  Consolidated and Further Continuing Appropriations Act, 2013,  listed an additional $60 million for this purpose, which was conditioned  by a provision in the authorization act providing that the funds  appropriated would not be obligated or expended until matching funds  were received from DOE and USDA. And, only in fiscal year 2014,  did DOE receive specific authorization to contribute $45 million, which  will be applied to Phase 2 of the project. According to a senior USDA  official, while USDA was apportioned about $23 million in fiscal year  2013 for these activities, it has not expended any funds to date toward  this initiative. In May and June 2013, four private fuel producers  were selected to receive awards totaling $20.5 million for Phase 1.

The 23 stakeholders whom we interviewed had varying views about the  future of the alternative jet-fuels industry if current federal activities  continue at the same level and no additional federal government action is  taken. Specifically, 5 stakeholders believed that the industry would remain  commercially unviable—that is, continue to produce small quantities of  fuel at prices that are not competitive to conventional jet fuels’ prices.  Another 6 stakeholders believed that the alternative jet-fuels industry  would continue to progress, but at a slow pace. The remaining 12  stakeholders did not articulate a specific prediction for the future of the  alternative jet-fuels industry. Some highlighted their concerns that existing  policies and programs—such as, the RFS or the Advanced Drop-In  Biofuels Production Project—would be repealed, while others expressed  pessimism about the future of the industry if the federal government does  not address larger industry-related economic or policy challenges.

section_title: Market Factors
paragraphs: More than half of the stakeholders (15 of 23) highlighted that market  factors, such as the favorable economics for developing competing  products (e.g., diesel), will ultimately be a key factor in determining the  long-term success of the alternative jet-fuels industry. These stakeholders  highlighted three key market factors—favorable economics for competing  end-use products or co-products, dependence on commodity markets,  and the cost of conventional jet fuel—that they believe will affect the  future prospects for the alternative jet-fuels industry. The remaining 8  stakeholders did not offer comments on market factors.

Favorable Economics for Competing End Products: Nine  stakeholders, as well as literature we reviewed, highlighted that,  currently, end-use products or co-products (such as diesel fuel,  naphtha, cosmetics, and plastics) from the same production  processes used to produce alternative jet fuels are often cheaper and  easier to produce and therefore more profitable as compared to  alternative jet fuels. For example, a study of the HEFA process,  funded, in part, through one of FAA’s COEs, found that if the  production goal was to maximize the total amount of all types of liquid  fuel, rather than specifically jet fuel, then less than 13 percent of the  product mix output would be jet fuel, while almost 70 percent would be  diesel; the remaining product mix would consist of propane, naphtha,  and liquefied petroleum gas. Maximizing the amount of jet fuel  produced would reduce a fuel producer’s profitability due to higher  operating costs and lower revenues. Two stakeholders that we spoke  with who have expertise in fuel production told us that they choose to  produce more of the other end products over alternative jet fuels  because the other products are more profitable. For example, one  stakeholder stated that he has experience selling renewable diesel in  one state at a price premium and market demand is higher for  renewable diesel.

Dependence on Commodity Markets: Because some alternative jet  fuels are made from tradable commodities, the cost of jet fuel  production depends on prices in commodity markets. As noted earlier,  the price of soybean oil—an input to alternative fuels—has historically  exceeded the price of conventional jet fuel. Consequently, it has been  impossible for a producer of alternative jet fuels that uses the HEFA  production process and soybean oil as a feedstock to compete on  price alone with conventional jet fuels, even if the producer’s other  production and transportation costs were negligible. Furthermore, in  many instances, the input commodities (feedstock) have alternative  uses. For example, oil-producing and cellulosic feedstocks can be  used to generate heat, power, and other ground transportation fuels.  Therefore, an increase in demand for these feedstocks in alternative  uses could raise their price and the costs of producing alternative jet  fuels.

Cost of Conventional Jet Fuels: Increases in the supply of  conventional jet fuels would make it harder for alternative fuels to  compete based on price alone. And although international petroleum  markets heavily influence the prices of conventional fuels, which can  be volatile and difficult to predict into the future, domestic policies can  affect jet fuel supply and fuel prices. For example, five stakeholders  highlighted that there has been significant previous federal investment  in establishing the conventional petroleum industry, such as through  long-standing federal tax expenditures that encourage exploration and  drilling for conventional petroleum oil. In addition, two stakeholders  highlighted that the price of conventional jet fuel does not reflect its full  life-cycle cost. Costs not reflected in the price of conventional jet fuel  could include environmental externalities, such as the impact of  greenhouse gas emissions from aviation on climate change, or direct  negative effects on human health from the combustion of jet fuel. If  comparing the full life-cycle costs of conventional versus alternative  jet fuels, alternative jet fuel could be more cost competitive. However,  there is no globally recognized approach for determining the  greenhouse gas effects of renewable fuels and the magnitude of any  greenhouse gas reductions attributable to their production and use.

section_title: Agency Comments
paragraphs: We provided DOT, USDA, DOE, DOD, and EPA with a draft of this report  for their review and comment. DOT provided technical comments that we  incorporated as appropriate. In addition, in comments emailed to us, DOT  highlighted that alongside its federal agency partners, it is fully committed  to the development and use of sustainable alternative jet fuels to address  the nation’s energy security, economic development and environmental  needs. DOT also stated that it believes that it has taken a comprehensive  approach to overcome barriers to the development and deployment of  sustainable alternative jet fuels that are drop-in replacements to fuels  derived from petroleum and that these fuels hold great promise and are  an essential component of ensuring that the flying services the nation  relies upon today remain affordable and available into the future. USDA,  DOE, DOD, and EPA also provided technical comments that we  incorporated as appropriate. In addition, EPA provided written comments,  reprinted in appendix II, stating that the report’s findings related to  approved jet fuel pathways under RFS are accurate.

We are sending copies of this report to interested congressional  committees and the Secretaries of Transportation, Agriculture, Energy,  and Defense, and the Administrator of the EPA. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  Gerald Dillingham at (202) 512-2834 or dillinghamg@gao.gov or Zina  Merritt at (202) 512-5257 or merrittz@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines (1) the role of the federal government in the  development and use of alternative jet fuels and (2) key challenges to  developing and using alternative jet fuels and actions that the federal  government plans to or could take to help address those challenges.

To examine the role of the federal government, we first identified the  federal agencies most involved in the development or use of alternative  jet fuels through review of relevant documents and preliminary interviews  with stakeholders. We selected five federal agencies: the Department of  Transportation’s (DOT) Federal Aviation Administration (FAA), the  Department of Agriculture (USDA), the Department of Energy (DOE), the  Department of Defense (DOD) and its military departments (Army, Navy,  and Air Force), and the Environmental Protection Agency (EPA). For  each of these five selected federal agencies, we interviewed officials and  reviewed strategic plans, performance reports, and other relevant  documents to obtain information about key federal programs, initiatives,  or goals that targeted the development or use of alternative jet fuels. We  also reviewed literature related to alternative jet fuels and interviewed  other stakeholders, including representatives from the private industry,  such as fuel producers and airlines, as well as representatives from  public-private partnerships. To identify activities that federal agencies are  involved in to coordinate their alternative jet fuel related activities with  other federal agencies, private industry, and stakeholders, we reviewed  relevant memoranda of understanding; international cooperative  agreements; reports from public-private partnerships—such as the  Commercial Aviation Alternative Fuels Initiative—and regional initiatives;  as well as interviewed officials from the five selected federal agencies and  relevant interagency working groups. In addition, to identify broad federal  strategies and initiatives related to alternative fuels generally, we  reviewed key White House and other relevant government-wide  documents, including the National Plan for Aeronautics Research and  Development and Related Infrastructure (December 2007); Growing  America’s Fuels strategy (February 2010); the Blueprint for a Secure  Energy Future (March 2011); the National Bioeconomy Blueprint (April  2012); and the President’s Climate Action Plan (June 2013). Finally, we  also reviewed applicable federal laws and regulations related to  alternative transportation fuels, including the Defense Production Act of   1950; Commodity Credit Corporation Charter Act; Energy Policy Act of  2005; Energy Independence and Security Act of 2007; the Food,  Conservation, and Energy Act of 2008; the FAA Modernization and  Reform Act of 2012; and EPA’s regulations for the renewable fuel  program. We focused our study on federal efforts, except to the extent  that international or private-sector efforts are coordinated with federal  efforts. We did not provide an exhaustive list of federal initiatives; rather,  we discussed key programs or initiatives that federal agency officials told  us and our review of agency documents identified as playing a key role in  supporting the development or use of alternative jet fuels or in achieving  related goals.

To examine key challenges to developing and using alternative jet fuels  and actions that the federal government plans to or could take to help  address those challenges, we (1) identified the extent to which alternative  jet fuel has been purchased for commercial and military use in the United  States; (2) selected and interviewed 23 stakeholders representing  government, academia, and the private sector to obtain their views on key  challenges and planned or possible federal actions; (3) reviewed relevant  literature on challenges to developing and using alternative jet fuels to  help corroborate the views obtained from the 23 stakeholders; and (4)  interviewed officials from the five selected federal agencies, as well as  representatives from other non-federal entities involved in the alternative  jet-fuels industry. To identify the extent to which alternative jet fuel has  been purchased for commercial and military use, we obtained alternative  jet-fuel purchase information for fiscal year 2012 from Airlines For  America—a domestic airline industry group—and for fiscal years 2007 to  2013 from DOD. While we obtained actual quantities from Airlines For  America and from DOD, we did not assess the data’s reliability because it  is not material to our findings and reported the fuel purchase quantities on  an order of magnitude in this report. As part of our methodology for  selecting the 23 stakeholders, we first identified a list of potential  stakeholders by reviewing background information, including federal  agency documents; articles published in scholarly journals; and  documents produced from conferences and by regional initiatives related  to alternative jet fuels. In addition, we considered names of stakeholders  recommended during initial interviews we conducted with federal  government officials, as well as representatives from professional  associations and private industry. We selected the 23 stakeholders  representing government, academia, and private industry based on  criteria that included:  type and depth of experience and knowledge in the area of alternative  jet fuels;  recognition in the professional community;  relevance of published work to the scope of our review;  representation of a range of expertise across the alternative jet fuel  supply chain, such as feedstock development or fuel production;  representation of a range of stakeholders with knowledge about  alternative fuels derived from renewable, nonrenewable, or both  sources; and  representation of a range of stakeholders with knowledge about  alternative fuel use in commercial, military, or both settings.

We asked each of the 23 stakeholders a series of semi-structured, open- ended questions about economic, policy, technological, and other key  challenges related to developing and using alternative jet fuels and  actions that the federal government plans to or could take to help address  them. We synthesized the stakeholders’ views to identify categories of  key challenges and planned or potential federal actions to help address  those challenges. The views of these stakeholders are not generalizeable  to those of all stakeholders with expertise in the area of alternative jet  fuels; however, we believe that they represent a balanced and informed  perspective on the topics discussed. In addition, we reviewed relevant  literature obtained through background research and from federal agency  officials that discussed challenges to developing and using alternative  fuels and planned or potential federal actions to help address those  challenges. We also conducted a literature search and reviewed five  documents that we identified as relevant to challenges related to  developing and using alternative jet fuels. Our literature search targeted  bibliographic databases containing content on commercial and defense  aviation, energy, or both, including Transportation Research International  Documentation (TRID); SciSearch; and the Defense Technical  Information Center (DTIC). Within these resources, the search focused on  scholarly journal articles, conference papers, government reports, and  industry trade press published in 2011 and forward. Through the literature  search and review of abstracts, we initially identified 36 documents that  potentially discussed economic, policy, technological, or other challenges  to developing and using alternative jet fuels. We could not obtain 2 of the  36 documents because they were not readily available. Ultimately, after a  review of the remaining 34 documents, we identified 5 relevant to our  review and reviewed them to help corroborate the key challenges  identified by the 23 stakeholders we had interviewed. For those studies  we cited in the report, we reviewed their methods, assumptions, and  limitations to ensure that they were sufficiently methodologically sound  and determined that they were sufficiently reliable for the purposes of our  report. Lastly, we interviewed officials from the five selected federal  agencies and representatives from other non-federal entities involved in  the alternative jet-fuels industry, including fuel producers, airlines,  airframe and engine manufacturers, environmental groups, and a private  financier to also obtain their views on key challenges to developing and  using alternative jet fuels and actions that the federal government plans to  or could take to help address those challenges. We did not rank the  planned or potential federal actions to help address the key challenges  that were identified.

We conducted this performance audit from February 2013 to May 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

section_title: Appendix II: Comments from the Environmental Protection Agency

section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts

section_title: Staff Acknowledgments
paragraphs: In addition to the individuals named above, Paul Aussendorf, Assistant  Director; Marilyn K. Wasleski, Assistant Director; William Colwell; Leia  Dickerson; Bert Japikse; Delwen Jones; Shvetal Khanna; Sara Ann  Moessbauer; Chris Murray; Josh Ormond; Madhav Panwar; Richard  Scott; Marylynn Sergent; Gretchen Snoey; Benjamin Soltoff; Ardith  Spence; Maria Stattel; and Elizabeth Wood made key contributions to this  report.


Question-summary annotations: questions: question: What is the main challenge facing the jet fuel market?
answer: Achieving price competitiveness for alternative jet fuels is the overarching challenge to developing a viable market.
child_questions: question: Why is there no current viable market?
answer: No alternative jet fuels are currently commercially available at prices competitive with conventional jet fuels.

question: What are the concerns around jet fuel pricing?
answer: The 23 stakeholders that GAO interviewed most frequently cited high development costs and the uncertainty of federal regulations and policies as primary reasons why alternative jet fuels are not priced competitively and believe that federal activities are needed to help advance the alternative jet-fuels industry.
child_questions: question: How does this play into private investment?
answer: For example, according to 10 stakeholders, fuel producers face difficulties in obtaining private investment to help construct commercial-scale fuel production facilities, in part because of concerns about the supply and high cost of feedstock (the source used to produce the fuel, such as crops) and high capital costs.
child_questions: question: How does uncertainty also cite challenges for private investment?
answer: Also, 13 stakeholders stated that continued uncertainty about the future of current federal policies—particularly the renewable fuel program—generally causes potential investors to discount the value of federal subsidies, discounting that, in turn, limits the support these policies may provide the industry.

question: What potential developments have stakeholders identified?
answer: Stakeholders identified a variety of federal actions to advance alternative jet-fuels development, including continuing current federal research efforts, providing greater regulatory and policy certainty, and giving more direct financial support.

question: Why might price reduction not ensure market success?
answer: However, even if the cost to produce alternative jet fuels is reduced, market factors may still determine the long-term success of the industry.

question: What market factors did stakeholders identify?
answer: The main market factors identified by stakeholders were (1) comparative value of competing end products, (2) feedstock prices, and (3) the costs of conventional jet fuels.

questions: question: What agencies did the GAO interview for this report?
answer: GAO interviewed officials from five federal agencies—FAA, USDA, DOE, DOD, and EPA.
child_questions: question: Why were these agencies chosen?
answer: GAO selected these agencies for review because GAO identified them as the federal agencies most involved in the development and use of alternative jet fuels.

question: What did the GAO review for this report?
answer: GAO also reviewed relevant literature and federal and industry documents and discussed challenges and potential federal actions with 23 stakeholders from government, academia, and the private sector, selected to represent a range of perspectives and expertise in areas related to each step in the development and use of alternative jet fuels.

question: What recommendations does this report provide?
answer: GAO is not making recommendations in this report. DOT, USDA, DOE, DOD, and EPA reviewed a draft of this report and provided technical comments that were incorporated as appropriate.