Europe’s e-Fuel Strategy for Aviation

December 11, 2025

HOW THE STIP IS RESHAPING INVESTMENT, MARKET MECHANISMS AND REGULATION

With the Sustainable Transport Investment Plan (“STIP”), the European Commission is supporting the ReFuelEU Aviation and Fuel EU Maritime to make renewable and low-carbon fuels available on an industrial scale in the key transport sectors of aviation and shipping. The plan combines financial instruments, regulatory requirements and new market mechanisms to reliably connect producers and consumers in both sectors. One aim is to make available investments of € 2.9bn until 2027 and – even more important – to structurally develop the European market for alternative fuels. Despite different priorities depending on the sector, there is a clear industrial policy objective of making Europe more technically and fossil fuel independent.

MARKET MECHANISMS FOR ACCELERATING E-SAF

Investors and project developers are facing a new situation, particularly in the area of electro-sustainable aviation fuels (“e-SAF”). Political backing and regulatory guidelines are becoming more visible. In addition to direct investment aid, STIP is addressing the problem of high costs of eSAF compared to kerosine and that the interests of the supply and demand sides are often diametrically opposed. Projects with high investment costs need reliable, long-term off-take agreements – without them, bankability remains limited and even delays eligible projects. For the off-take side, on the other hand, flexibility and price security are essential. Therefore, short-term off-take agreements are usually required here.

“STIP is introducing a pilot double auction procedure that brings producers and consumers together.”

THE DOUBLE AUCTION PROCEDURE AS A KEY MECHANISM

In order to resolve this conflict of objectives, STIP is introducing a pilot double auction procedure that brings producers and consumers together. Unlike traditional subsidy models, it relies on simultaneous price determination: producers submit minimum price bids and consumers submit maximum price bids. The auction determines a clearing price that is binding for both parties. For early movers the STIP is bridging the difference between the clearing price and the bids with an initial funding of €500m. If the price is above the consumer’s maximum bid or below the producer’s minimum price, compensation is paid. This creates planning security without full price risk for market players.

FINANCING VIA STIP, ETS AND CONTRACTS FOR DIFFERENCE

The financing of the initial €500m for the pilot auction process will come from public funds under the STIP or supplementary programmes. In addition, if the pilot auction procedure turns into a long-term mechanism there are discussions about using revenues from the EU Emissions Trading System (“ETS”) as a source of financing in order to link CO₂ pricing directly to aviation decarbonisation. Contracts for difference, from the EU budget or earmarked levies, are also conceivable.

“The STIP also confirms the importance of offtake agreements. This is an important step for investors, as the bankability of projects depends on reliable, long-term compensation mechanisms.”

The STIP also confirms the importance of offtake agreements. This is an important step for investors, as the bankability of projects depends on reliable, long-term compensation mechanisms. For the European e-SAF sector, this is a strategic instrument to accelerate ramp-up and ensure competitiveness vis-à-vis regions with more aggressive subsidy regimes.

LEGAL CERTAINTY AND INFRASTRUCTURE: THE DECISIVE FACTORS FOR MARKET SCALE-UP

However, the STIP is a ‘plan’ and alone does not eliminate the legal and economic challenges. The correct legal implementation of the mechanisms is crucial, as are practicable auction solutions to relieve the burden on producers and consumers. Added to this is the complex infrastructure: e-SAF requires renewable electricity, CO₂ sources, hydrogen and transport and storage chains. This interdependence raises technical and regulatory questions – from permits to grid access – that are crucial for financiers. This is why the capital market side is gaining in importance: investors expect clear regulatory signals to make risks calculable. Unclear guidelines on subsidy conditions or certification requirements can delay complex financing. The combination of European and national subsidy instruments is also central to contract design and determines the long-term viability of projects.

CONCLUSION: POLITICAL FRAMEWORK, MARKET MECHANISMS AND CAPITAL MARKET MUST BE INTERLINKED

“STIP is more than just a funding programme. It is an industrial policy instrument that aims to reduce technological dependencies and strengthen European value creation.”

STIP is more than just a funding programme. It is an industrial policy instrument that aims to reduce technological dependencies and strengthen European value creation in both sectors – aviation and maritime. If competitive markets for renewable and low-carbon fuels can be established, the EU can develop an independent role. If the ramp-up fails to materialise, there is a risk of a structural competitive disadvantage compared to regions such as the US, which is providing significant incentives with the Inflation Reduction Act, thereby creating more favourable conditions in the long term.

For investors, industry players and financial institutions, this means that location decisions, supply chains and contract models must be closely linked to the political roadmap. The decisive factor will be how regulatory requirements, support instruments and market mechanisms are combined to make projects bankable – especially in the case of off-take models, the use of support programmes and the hedging of price and volume risks.

The STIP does not create an immediately functional market, but it lays the foundation for one. The decisive factor will be how quickly political declarations of intent are translated into binding instruments. Success will depend on whether the regulatory framework, infrastructure planning and capital market mechanisms mesh in time. The coming years will show whether Europe can achieve the necessary pace to position itself sustainably in global competition.

Source: WFW