CAFE, RFS in Conflict

Published in CSP Daily News

NACS: Policies can't coexist, even with "enormous" industry infrastructure investment

ALEXANDRIA, Va. -- The requirements mandated by the Renewable Fuels Standard (RFS) and the proposed Corporate Average Fuel Economy (CAFE) standards are likely to create a situation in which one or both of these programs will fail unless significant concerns are addressed, according to NACS.

"RFS and CAFE policies cannot coexist without substantial changes in the retail and vehicle markets to accommodate significantly higher concentrations of renewable fuels, an unlikely scenario given that we may not even meet current requirements as they stand in 2012," said John Eichberger, NACS vice president of government relations and the author of the new NACS whitepaper, The Future of Fuels: An Analysis of Future Energy Trends & Potential Retail Market Opportunities.

NACS is dedicated to ensuring that convenience stores remain the dominant choice for consumer refueling for decades to come. The more than 120,000 convenience stores selling motor fuel--an estimated 80% of the fuels purchased in the United States--will face the brunt of the competing objectives of the RFS and CAFE standards, said Eichberger, noting that the two regulations cannot coexist without dramatic revisions.

"NACS members strongly support efforts to enhance the nation's energy security and don't oppose improving the fuel efficiency of the nation's vehicle fleet; however, we are very concerned that the policies being enacted and drafted are not effectively coordinated and could compromise each other. The result could force countless small businesses to examine whether they want to invest hundreds of thousands of dollars to retrofit their existing fueling equipment or exit the business. Either way, the consumer ultimately loses," said Eichberger.

The Renewable Fuels Standard, revised by Congress as part of the Energy Independence & Security Act of 2007 (EISA), requires that increasing amounts of qualified renewable fuels be integrated into the motor fuels supply, culminating at a minimum of 36 billion gallons in 2022. This mandate was expected to increase renewables to approximately 20% to 25% of the overall gasoline market in 2022, about double the rate of 10.4% last year.

Meanwhile, in 2011, the Obama administration proposed new CAFE standards, which are expected to be finalized this summer, that seek to increase the average fleet fuel efficiency to an equivalent of 54.5 miles per gallon by 2025. The cumulative effect of the two mandates is that renewable fuels will be required to represent a significantly greater share of the market than originally anticipated--perhaps as much as 40%, or four times higher than today.

"This level of renewable fuels penetration in the market will impose significant economic burdens on the retail fuels market and consumers," said Eichberger. "To meet such a high renewable fuels concentration, it is likely that most retailers in the country will have to replace their underground storage tank systems and fuel dispensers. For the convenience industry alone, this will require a minimum infrastructure investment that will add nearly $22 billion to the cost of retailing fuels."

Even after this enormous infrastructure investment, it still may be impossible to satisfy the RFS, considering that only one in six consumers will drive vehicles capable of running on the mandated fuels. The U.S. Energy Information Administration (EIA) projects only 16% of on-road vehicles in 2022 will be flexible fuel vehicles.

"Unless something dramatic happens, we will hit the 'blend wall' within the next two years and will not be able to meet RFS requirements. This will trigger massive fines throughout the petroleum distribution system that will increase the cost to sell motor fuels," said Eichberger.

Eichberger called upon Congress to initiate a comprehensive review of regulations affecting the motor fuels and passenger vehicle industries to determine their compatibility with one another and to develop a comprehensive national motor fuels policy. "Such a policy must coordinate legislative and regulatory requirements to ensure that the objectives of one policy support, rather than undermine, the objectives of another," he said.

"We don't believe that improved efficiency, enhanced sustainability, national energy security and economic growth are mutually exclusive objectives. But if they are not pursued in a strategic, coordinated effort they can lead to unintended consequences that can derail progress towards all of the objectives," said Eichberger.

Looking into the future, it is likely that the government will play an even heavier hand in determining what consumers drive and what energy they purchase to fuel these vehicles, noted Eichberger.

"As the objectives of these requirements ramps up in the coming years, we are advising fuels retailers to exercise forethought when making infrastructure changes so that they help reduce the cost of converting to new energy technologies," said Eichberger. "We are asking Congress to exercise that same forethought as members design long-term motor fuels policies."

The complete 48-page white paper, which includes projections and analysis using the U.S. Energy Information Administration's 2011 Annual Energy Outlook, is available at nacsonline.com/futureoffuels.

Alexandria, Va.-based NACS, founded in 1961 as the National Association of Convenience Stores, is the international association for convenience and fuel retailing. It has 2,100 retail and 1,600 supplier member companies.