The End of E85?

With government support gone and its infrastructure weak, E85 becomes a cautionary tale on alternative fuel.

By
Samantha Oller, Senior Editor/Special Projects Coordinator

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“There are very few people still saying ethanol as E10, an additive, needs a subsidy anymore,” says Jeff Trinca, spokesperson for Coalition for E85, a group of E85 retailers who support continuing incentives for the biofuel. “But what it’s doing is stranding E85. You’ve got these guys who have made the investment. Suddenly you’re going to see a 38-cents-per-gallon increase in price. It will put it above what regular gas goes for, and the retailers who made the investment are worried they will have a stranded asset.”

Consider that E85—a blend of 85% ethanol to 15% gasoline—has 30% less energy by volume compared to regular unleaded gasoline, resulting in a lower fuel economy. This means that E85 typically must be priced at 25% to 30% discount to regular unleaded to be attractive to flex-fuel vehicle (FFV) drivers.

Indeed, as of early January, the spread had fallen to a nationwide average of 8.3%, according to pricing website E85prices.com. The Coalition estimates that the more than 2,500 E85 fueling sites in the United States today—out of 163,000 fueling stations nationwide— represent a $200 million investment in infrastructure and equipment.

Fragile Investment

Matt Bjornson, president of Bjornson Oil Co., Cavalier, N.D., is one of these retailers. His company has been selling E85 from one of its three sites for more than a year, spurred as much by the appeal of domestically grown fuel as the enthusiasm of local and federal offi cials in establishing the E85 infrastructure.

“Our state and federal governments were quite intent on promoting E85 going forward,” says Bjornson. The company spent “six fi gures” updating its piping system to be E85 compatible and installed two blender pumps to dispense blends from E10 to E85, he says.

“It’s really frustrating, because not only did we waste a lot of money, but the state department of commerce had a program where they kicked in money for each dispenser installed, and our corn growers association in the state kicked in $2,500 a dispenser,” says Bjornson. “You had a whole program a lot of people took advantage of, and unfortunately it looks like all for naught.”

Douglass Distributing, Sherman, Texas, installed an E85 pump at its Texoma location in 2011. While E85 has not been a financial windfall for the company—the site sold less than 1,000 gallons in the first 10 days it was offered—the biofuel was meant to be a differentiator and offer consumers a choice, says chairman Bill Douglass. “We spend a lot of time with niches,” he says. His chain also sells propane, kerosene and biodiesel, and installed an electric charging station in 2011.

But with VEETC now dead, “then we just bought a $50,000 turkey,” says Douglass.

“If you’d have said in early 2010 that the ethanol tax credit was going to expire in 2011, people would have thought you were crazy,” says Dan Gilligan, president of Petroleum Marketers Association of America (PMAA), Arlington, Va., also a Coalition for E85 member. “But here it is, and it looks like it certainly will expire. It will spook business people; they can’t live like that. You can’t make sound decisions when things are on and off.”

One could argue that, like all business decisions, installing E85 is a choice, and a risky one at that. Any advantage to corn-based ethanol—whether related to energy security or environmental friendliness—has been fiercely debated by its numerous foes. Also, there is the high cost of equipping a site to handle the highly corrosive fuel.

And then there are the necessary short-term price supports for E85, making its volumes perhaps even more sensitive to price changes than regular unleaded.

“The price needs to be 25% to 30% cheaper for [FFV drivers] to come out, and it really hasn’t been,” says Bjornson. “With the end of VEETC, it’s going to be dead, and that’s an understatement.”

Despite—or rather, because of—these issues, you could also argue that E85 is a painful example of how not to introduce an alternative fuel to the U.S. fueling infrastructure. The establishment of mandates in the Renewable Fuels Standard, without regard for the state of the infrastructure and business dynamics, paired with a flurry of incentives by state and federal governments to install E85, and ending with the quick removal of price supports, shows a complete lack of a game plan for alternative fuels.

“We’ve put the cart before the horse way too often with biofuels policy,” says John Eichberger, vice president of government relations for Alexandria, Va.-based NACS, a Coalition for E85 member. “Hopefully, we can start getting a balance to the overall national energy policy where we talk about economic security, energy security, environmental protection and sustainability all at the same time with the same objective in mind. “I don’t think we will have a sensible, long-term strategy until we have that dialogue. And that’s going to take some strong leadership to accomplish.”

Until then, the rise and fall of E85 may have greater implications on the success of not only ethanol blends but also other future transportation fuels, because it sours retailers willing to take the risk on a new product and scares away those who are considering an alternative. Bjornson, a former chairman of PMAA, has publicly and financially supported the association’s efforts in advocating for E85. “Just because the battle is tough doesn’t mean it shouldn’t be fought,” he says.

Bjornson plans to keep E85 in stock, with hopes that it eventually gets a lifeline from Congress.

That said, “I would say it’s one of the poorest investments we have ever made, thanks to the government,” he says. “Is it going to be the end of our company? Obviously not. But we definitely were led down the wrong path.”

Not Giving Up

“E85 retailers have a really different mindset,” says Todd Garner, co-founder of the Coalition for E85 and president and CEO of Protec Fuel, Boca Raton, Fla. “They do think a little differently and are willing to take some risk and provide something new to their customer base.”

Protec is a distributor and fuel riskmanagement firm that assists retailers in the Southeast and East Coast with installation of E85 equipment in exchange for a fuel contract. Since its first installation in 2006, the company has retrofitted about 100 sites with E85 fueling locations. While it had signed up about 10 retailers to install E85 this January and February, it is telling new customers that the fuel may not be as profitable as it was in the past.

“Right now we’re in this completely unknown territory,” says Garner. “When we sell [E85] at 40 cents below [gasoline], the volume is incredible. But when we start to get 20 cents below gasoline, volume starts to fall off.” He says this trend has exacerbated as FFV drivers become more focused on E85’s mileage drag.

While Garner did not think the E85 business would evaporate as of Jan. 1, it is only because ethanol prices, as of press time, had fallen in the final quarter of 2011. “If they go right back up—that’s how scary it is—it could have easily been the other way on Jan. 1,” he says. “Every station in the country was not going to sell product because nobody’s going to buy it.”

However, it is easy to find retailers who say they will stick with E85 through this uncertain time; most typically, they are the midsize and large chains that have embraced the biofuel on a wide scale because of their corn-belt footprint or as a green differentiator.

Kum & Go L.C., West Des Moines, Iowa, is the largest retailer of E85 in the country, with more than 70 sites out of its chain of 450; it plans to add E85 to at least 45 sites in 2012. Today, the chain is still “committed” to the product, says Kyle J. Krause, president and CEO, who does not believe the end of VEETC spells the demise for E85. This is because political support for ethanol varies by level of government, he argues.

“Nationally, you have the painting of an ethanol subsidy being bad by many, and at the state level, you still see it being hit or miss on whether they like it, don’t like it, support it or don’t support it,” he says. Iowa, while home to 41 ethanol plants, has seen some of its local Republican politicians question state subsidies.

Kum & Go first installed E85 in the mid-’90s. “I’m not sure that location has yet made money on E85 in the 15 years we’ve had it,” Krause admits. “It’s just a long-term type of thing. But we think where we’re at, it fits into a broader piece. We’re in the Midwest; this is where we market, it’s what our customers do, it’s what we are. And so when we try to be local within our market, selling E85 for us is being local.”

Similarly, Thorntons Inc., Louisville, Ky., remains dedicated to the fuel it has installed at 42 of its 162 sites. John Zikias, senior vice president of category management and supply chain for fuel and merchandise, says Thorntons benefits from a good supply in the Midwest, and believes the “homegrown” appeal of corn-based ethanol offers a competitive advantage.

Volumes are “mixed,” and “it’s a longterm build,” says Zikias. “We are pleased with the volume. It’s a viable fuel option. We will have to work through the tax issue, but it’s a way to allow consumers an alternative fuel that’s a little more environmentally friendly, vs. imported oil.”

He is convinced these same consumers will stick around despite any potential price increase. “It’s going to be consumers who will still buy E85 regardless because it’s about being domestic, more environmentally friendly. Even if its price is at parity with RBOB, consumers will buy it,” he says, referring to the commonly used acronym for traditional gasoline, or Reformulated Blendstock for Oxygenate Blending.

The Spinx Corp., Greenville, S.C., is similarly dedicated to E85, says founder and CEO Stewart Spinks. “It’s better to support the Corn Belt than the Sand Belt,” he jokes. The fuel makes up 2.5% of Spinx’s volumes, which Spinks considers “not abysmal,” considering that premium has 7.5% share.

At the same time, the chain plans to convert 10 of its 41 E85 pumps to straight 87 octane gasoline by end of January, in light of ethanol price increases. The company had seen a “tremendous” increase at the rack in early January, reflecting the loss of VEETC. These are lower-volume sites, Spinks says, where E85 has not taken off. “I don’t want to send the message that we’re no longer interested in alternative fuels, but from an economic point of view, the volumes are too low to continue to offer it,” he says. “And No. 2, the consumer is saying we want ethanol-free gasoline available.” While earlier in 2011, Spinx was able to sell E85 at a 40-cent differential to regular gasoline, the stores will likely be forced to shrink that spread to 10 to 20 cents.

“We’ll eat some margins like our suppliers will, and consumers will pay more for alternative fuels,” he says.

And that is the conundrum many E85 advocates face. “E85’s future is in broad uncertainty,” says Eichberger. “For the retailer, it will come down to ‘What’s my per-gallon cost? What’s my per-gallon opportunity?’ If I’m going to be taking a bath on E85, I might as well switch it to something I can make some money on.”

The Way Forward

While VEETC will not be resurrected, there is a partial “fix” to E85’s price woes—and a seemingly simple one at that. The biofuel is defined as an alternative fuel in the Energy Policy Act of 1992. However, it was excluded from the 45-cent-per-gallon tax credit applied to other alternative fuels, as part of the Alternative Fuel Credit, to avoid “doubledipping” of incentives while VEETC was still active. Proponents argue that E85 should be added as an alternative fuel in the tax code to gain that credit.

“I’m completely in favor of getting rid of VEETC; the majority of the money was going into E10,” says Garner of Protec. “But E85 is still in its infancy. We’ve got 9 million to 10 million cars out there and 2,500 stations. Our argument: We’re not asking [the government] to give the blender credit for E85 forever. But we’re just getting going.”

 The Coalition for E85 has had “good meetings” with several congressional members and their staffers, according to Trinca, citing Senators Bill Nelson (D-Fla.), Jeff Bingaman (D-N.M. and chairman of the Senate Energy Committee), Debbie Stabenow (D-Mich.) and Maria Cantwell (D-Wash.). On the House side, “about a dozen members” seem supportive, says Trinca, including Rep. Adrian Smith (R-Neb.).

The message the coalition is attempting to hammer home: “For the consumer who gets up every morning to go to work, E85 is the only option for flex-fuel vehicles right now,” says Trinca. “If that goes away, then that means you just fill up your FFV with petroleum from the Middle East. If we get people to focus on that, we can win supporters.”

 It is a tougher argument today, however, than during ethanol’s heyday, when supporters were able to make the case to a core group in Congress that domestically produced renewable fuels were a win-win, reducing the country’s reliance on imported oil and helping farmers, says Eichberger. Now faced with a massive national budget deficit, these same congressmen weigh the price of such support against painful cuts in defense spending, for example. “Now out of those 100 legislators, you may only be able to get 40 of them, and that’s not enough to overcome the opposition,” he says.

Trinca says the Coalition hasn’t “gotten that much pushback” about recoding E85, but rather faces the political quagmire of an election year. “Washington solves things in their own time,” he says. “One [congressional] staffer said, ‘We don’t have the bandwidth right now to deal with this.’ ” If nothing is done, he suspects the number of E85 sites will be halved by the end of 2012.

He has been assured that the answers to E85’s problems, whether it be a possible extension of VEETC for E85 or its recoding as an alternative fuel, will be resolved in the first quarter of 2012.

Eichberger of NACS, however, isn’t so certain. “I’m skeptical that any type of tax policy that results in a reduction in revenues for the federal government has a chance,” he says. “I’m convinced the budgetary concerns for Congress and the overall debt approach will overwhelm any new effort to create an incentive that is not absolutely critical to economic growth. It doesn’t mean we don’t think it’s valid to be asking for it and to try, and we very well could succeed under certain circumstances and types of advocacy. But I think it’s going against a really big hill.”

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