The End of E85?
With government support gone and its infrastructure weak, E85 becomes a cautionary tale on alternative fuel.
Searching for an Energy Policy
But if E85 died, would anyone miss it?
This is a small market, no doubt, representing only about 98.9 million gallons in 2009, just a trickle when compared to 134.4 billion gallons of regular unleaded, according to Energy Information Administration estimates.
“The E85 market really hasn’t taken off in the United States,” says Mackinnon Lawrence, a senior analyst with Pike Research, a clean-technology research group based in Boulder, Colo., and coauthor of a 2011 study on biofuels. Lawrence considers VEETC a secondary incentive, and, when combined with the RFS—which mandated that renewablefuels use be doubled by 2012—a redundant one at that. “In terms of that market growing, it certainly would be helped with VEETC,” he says. “But even with VEETC, it wasn’t making any headway.”
The central issue with E85, says Lawrence, is infrastructure build-out. “The estimates are pretty high to change out the whole fueling infrastructure,” he says. “The question then becomes: Is that more advantageous than funding pipelines, or advanced biofuels production capacity?”
There is also the lukewarm embrace of E85 by consumers, regardless of the approximately 9 million FFVs on the road today. According to a study by General Motors (GM), about 70% of its FFV buyers were not aware they could fuel up with E85, while less than 10% used it. “If E85 disappears, with all of the FFVs on the market, the customer’s not going to be affected at all—if they even know they can put E85 in their car, which most of them don’t know,” says Eichberger.
However, E85’s struggles are symptomatic of an even larger issue: the lack of a clear U.S. energy policy. It is one that threatens the future of fuel alternatives, at a time when the Obama administration is juggling the challenge of growing jobs and moving the country toward a cleanenergy future, as symbolized by the pending approval of the Keystone pipeline.
“One big challenge the renewable-fuels industry has had in the United States is an unstable energy policy,” says Matt Horton, co-founder of the Coalition for E85 and CEO of Propel Fuels, Redwood City, Calif., a business that leases land on retailers’ lots for E85 and biodiesel installations [CSP— Dec. ’11, p. 139]. “These tax credits are here one year, gone the next. It really makes it difficult for people to make long-term, sustained investments.”
This lack of solid footing has also been a big issue for alternative-fuel producers, says Lawrence of Pike Research. “Biofuel [producers] talk about needing four to five years of stable policy to really attract the investment they need, and that clearly has not been the case in the United States. We have a ways to go at articulating a policy that will spur investment.
“At the end of the day, you’re only a fraction of the market,” Lawrence says of biofuels in general. “It takes quite a lot of investment just to get to that fraction.”
In effect, it gives the retailer and consumer a “no vote of confidence” about alternative fuels, says Garner of Protec. “Take the worst-case scenario: The spread between ethanol and gasoline collapses, we can’t sell E85 at a discount, and there’s no credit to maintain it until it becomes a mature market. People will throw up their hands and say, ‘I’m tired of getting involved in stuff that involves the government.’ ”
Count retailer Bjornson among these. “We have almost a next-to-zero energy policy,” says Bjornson. “This is the perfect example. They go from 100% balls-tothe- wall they want E85, to where they are going to let it fall off the face of the Earth. How many times are they going to promote or encourage private investment in an alternative fuel, and when they throw up their arms, the business owner gets burned? You’re not going to be so likely to do that the next time.”
Something has to give. According to a 2011 study commissioned by the Renewable Fuels Association and conducted by engineering and consulting firm Air Improvement Resource Inc., without a significant expansion of the E85 infrastructure, the EPA will not meet its middle- and high-consumption renewable fuels targets. Meanwhile, the Big Three automakers—Chrysler, Ford and GM—have pledged to produce half of their 2012 fleet as flex-fuel capable.
But the damage to retailers from a psychological perspective may already be done. Bjornson says that even if the government offered a 100% grant to fund a retailer’s adoption of an alternative fuel, “they’re still asking the retailer to give up his most valuable real estate on the whole entire lot to dedicate to this product. After a debacle like this, what companies in their right mind will give up real estate?
“This message is an important one to legislators: To have an energy policy in the first place, then to have a consistent one, is pretty important if you want the private sector to participate.”
Garner of Protec has one main message he wants to communicate to policymakers.
“You’ve got to show the consumer and people who sell fuel out there that as a government, you’re behind the biofuel and alternative-fuel industry,” says Garner. “They’ve gone out and spent money, redone stations, done what they had to do to sell the fuel because there are so many FFVs out there. If you don’t step up and do that, if you lose them, you won’t get them back.”
That’s the refrain you’ll hear from politicians hungry for ways to cut the defi cit, food and restaurant industry groups hoping to trim commodity costs, and traditional corn-based-ethanol foes and even some ethanol fans on the end of a tax credit that cost United States taxpayers $6 billion each year.
On Jan. 1, the industry awoke to no Volumetric Ethanol Excise Tax Credit (VEETC), which provided a 45-cent credit to blenders and fuel marketers for each gallon of pure ethanol blended into gasoline. The credit, created in 2004 as part of the American Jobs Creation Act, was originally intended to make ethanol a more affordable substitute for the fuel oxygenate methyl tertiary butyl ether (MTBE), which was being phased out because of pollution concerns. For those who angled for VEETC’s end—and there were many—it was a long time coming.
But for retailers who sell E85, this was truly the proverbial throwing the baby out with the bathwater. VEETC applied a 38.25-cents-per-gallon credit to sales of E85, or $50 million to $55 million per year. With VEETC gone—all of it—the E85 market, still in its infancy, is suddenly on life support.
You can consider Phillip Younger a fullblown flex-fuel vehicle (FFV) enthusiast. He managed an unattended E85 station, now owned by Renew E85 LLC, in Oshkosh, Wis., from 2004 to 2011. As a racing fan, he is well aware of E85’s reputation as an inexpensive but powerful racing fuel. And with three FFVs sitting in his driveway, Younger keeps a close eye on E85 pricing in Wisconsin.
The oil embargos of the 1970s made a big impression on Younger as an engineering student. “We have to get away from saying there are going to be four choices at the pump—regular, midgrade, premium and diesel,” says Younger. “Longer term, it will not be a viable choice. The sooner we develop at least some of the stations with other alternative fuels, the better off we will be.”
When asked how he chooses when and where he will buy E85, Younger says: “First I decide if I’m going to buy,” citing that, despite his fan status, he buys with economics in mind.
“It’s all fine and dandy to say we don’t want to support countries who don’t like us, or we want to buy local, or buy something green,” says Younger. “But most consumers think with their pocketbook. I’m like them. I will buy outside the range for a while, but I’m not going to buy if the price is stupid.” And as of press time in Wisconsin, he considers the price for E85 “stupid”: $3.05 to $3.09 a gallon, compared to $3.19 to $3.29 a gallon for gasoline.
“That’s not right. My Impala is at 80% [mileage on E85]; I need the price at eight-tenths of the gas price.” Of course, with his background in the business, Younger knows how much margin retailers are making on E85. Most consumers, he says, think of the spread in cents per gallon, but more are starting to think in percentages.
E85 By the Numbers
25% The percentage of gas stations that the EPA considers suffi cient to provide FFV drivers with “reasonable” access to E85
1.5% The current percentage of stations in the United States that sell E85
90% Percentage of registered FFVs with no E85 pump in their ZIP code
50% Percentage of registered FFVs with no E85 pump in their county
38.25 cents Per-gallon credit for E85 through VEETC
$50 million Estimate of extending E85 credit from VEETC for one year
$200 million Total investment in E85 equipment and infrastructure in the United States
E15: A New Hope
Another backstop to the loss of investment for E85 retailers is E15, which, as of press time, was still working its way through misfueling and liability issues and was not yet approved for sale by the Environmental Protection Agency (EPA) [CSP— Nov. ’10, p. 71]. That is because E85 equipment—unlike that of E10—is fully compatible and legal for handling E15.
NACS is focused on passing a bill for liability relief, designed to eliminate hurdles for retailers who want to sell any new federally approved and regulated fuel.
“Passing this bill won’t bring fuels to market immediately,” says John Eichberger, vice president of government relations. “Our pitch on the Hill is, ‘Do you want more fuels in the market? Then you need to eliminate the hurdles that are from preventing them from hitting retail.’ ”
“E15 is a real driver, a real safety net to some of these guys,” says Todd Garner, president of Protec Fuels, a firm that develops E85 sites in exchange for a fuel contract. “They’re thinking, ‘Even if E85 sales slow down, E15 gets pushed through to where I can sell it.’ ” To open up more options for customers, Protec is outfitting sites with blender pumps, which will allow the sale of blends from E10 to E85.
But even if these retailers will not be legally liable for misfuels with E15, they should still consider the effect of such accidents on their business, says Eichberger. “The theory is, if I have a flexible system I can sell flexible fuels,” he says. “Now the question of, ‘Should I sell E15?’ comes into a consumer perspective.”
Matt Bjornson, president of Bjornson Oil and an E85 retailer, isn’t enthusiastic about E15’s prospects. “I don’t see E15 taking off in a big way anytime soon,” he says. “You have rules about what age vehicle E15 can go into. Enforcing at the retail level will be next to impossible.
“People will put in E15 in cars that shouldn’t have it, have trouble, and give ethanol a bad name.”
Tom Buis, CEO of ethanol producer coalition Growth Energy, expects E15’s liability issues to get worked out by mid-2012, and says the group is lobbying states to offer incentives to help fund installation of blender pumps.
“[The year] 2012 offers a lot of promise, especially as we get E15 into the marketplace and more flex pumps out there. They’re a market-clearing mechanism for not only the fuel, but it also provides consumers choice at the pump,” he says. “Let them pick the price and performance, and the type of vehicle they have. It’s not easy to flip on a switch and it happens. You have to work on it.”