The Soviet-style production quota for ethanol, pompously titled the Renewable Fuel Standard (RFS), is in trouble. The RFS requires more ethanol to be sold than can actually be blended into the nation’s motor fuel supply. This “blend wall” problem will get worse as RFS production quota and federal fuel economy standards ratchet up, forcing refiners to blend more and more ethanol into a shrinking motor fuel market.
Here’s the math. Total domestic U.S. motor fuel sales in 2011 stood at 134 billion gallons. Although the U.S. population is increasing, overall motor gasoline consumption is projected to decline by 14% as fuel economy standards tighten between now and 2025. Already, the 2013 blending target for “conventional” (corn-based) biofuel — 13.8 billion gallons — exceeds the 13.4 billion gallons that can be blended as E10 (a fuel mixture containing 10% ethanol).
By 2022, the RFS requires that 36 billion gallons of biofuel be sold in the domestic market, including 21 billion gallons of “advanced” (low-carbon) biofuel, of which 16 billion gallons are to be “cellulosic” (ethanol derived from non-edible plant material such as corn stover, wood chips, and prairie grasses). Because commercial-scale cellulosic plants still do not exist, the EPA repeatedly has had to dumb down the cellulosic blending targets.
Eventually, though, the EPA will have to mandate the sale of at least a few billion gallons of advanced biofuel, just to keep up the pretense that the RFS is something more than corporate welfare for corn farmers. In any event, by 2015, refiners will have to sell 15 billion gallons of corn-ethanol — roughly 1.6 billion gallons more than can be blended as E10.
A side effect of the blend wall is the recent “RINsanity” of skyrocketing biofuel credit prices. The EPA assigns a unique Renewable Identification Number (RIN) to every gallon of ethanol produced and a credit for each gallon sold as motor fuel. Refiners who cannot blend enough ethanol to meet their quota can use surplus credits accumulated during previous years or purchased from other refiners.
Because the blend wall makes the annually increasing quota more and more difficult to meet, RIN credits are suddenly in high demand. Credits that cost only 2-3 cents a gallon last year now sell for about 70 cents. Consumers ultimately pay the cost — an extra 7 cents for each gallon of E10 sold, or an additional $11.7 billion in motor fuel spending in 2013, according to commodity analysts Bill Lapp and Dave Juday. Ouch! Ethanol was supposed to reduce pain at the pump, not increase it.
The ethanol lobby offers two fixes for the blend wall. Neither is workable. The EPA thinks it has another card up its sleeve.
One option long advocated by the biofuel industry is for Congress to “incentivize” sales of E85 (motor fuel blended with up to 85% ethanol). Every gallon of ethanol sold as E85 represents up to 8.5 gallons of ethanol the refiner does not have to sell as E10. In theory, a robust market for E85 would enable refiners to meet the rest of their quota obligation within the E10 blend wall.
However, the chief obstacle to market penetration of E85 is not, as the ethanol lobby contends, the absence of political support such as flex-fuel vehicle mandates and tax breaks to install E85-capable storage tanks and blender pumps. The main barrier is simply that E85, due to its inferior energy density and poor fuel economy, is a money loser for consumers.
FuelEconomy.Gov, a Web site jointly administered by the EPA and the Department of Energy, makes this painfully clear. At today’s prices, the typical owner of a flex-fuel vehicle would spend up to $750 a year more to drive with E85 instead of regular gasoline.
The ethanol lobby’s other solution is for the EPA to approve the sale of E15 by conventional retail outlets. Approving E15 would allow refiners to increase by 50% the quantity of ethanol blended in each gallon of motor fuel sold. In October 2011, the EPA authorized the sale of E15 for newer automobiles (model years 2001 and later). But so far only a handful of retail outlets offer the fuel. As Platts explains, “Liability issues related to misfueling, the cost of outfitting a retail station to carry the fuel, and concerns raised by some auto manufacturers who won’t honor warranties if E15 is used, have dampened the market for the fuel.”
So what is the EPA’s clever new idea? Double down on E15 — literally. The EPA’s recently proposed Tier 3 Vehicle Emission and Fuel Standards Rule contains what New York Times reporter Matthew Wald calls an “audacious suggestion.” A major objective of the rule is to reduce the sulfur content of gasoline, and ethanol contains no sulfur. Under the proposed rule, automakers could “request” the EPA to certify vehicles “optimized” to run on high-octane fuels such as E30. The agency envisions a triple play, in which E30 lowers sulfur emissions, improves fuel economy, and pushes ethanol sales beyond the E10 blend wall (p. 28):
This could help manufacturers that wish to raise compression ratios to improve vehicle efficiency, as a step toward complying with the 2017 and later light-duty greenhouse gas and CAFE standards (2017 LD GHG). This in turn could help provide a market incentive to increase ethanol use beyond E10 by overcoming the disincentive of lower fuel economy associated with increasing ethanol concentrations in fuel, and enhance the environmental performance of ethanol as a transportation fuel by using it to enable more fuel efficient engines.
Ethanol contains less energy than gasoline by volume but, according to the EPA, a vehicle “optimized” to run on E30 could get better mileage than today’s vehicles. Wald explains:
Using high-octane premium-grade gas in an engine that does not require it offers no benefit. But in engines designed to squeeze the fuel-air mixture to very high pressures before igniting it with the spark plug, high-octane fuel burns predictably and can produce more horsepower. . . .Ethanol contains only about two-thirds as much energy as gasoline, gallon for gallon. But if it is burned in engines designed for high cylinder pressures, it will produce competitive horsepower.
Are E30-optimized vehicles commercially viable? The proposed Tier 3 rule provides no data on either the consumer cost of such vehicles or the fuel economy gains. Even if the lifetime fuel savings outweigh the increase in vehicle cost, that is not usually the decisive factor for most consumers, otherwise hybrid sales would be larger than 4% of the vehicle market.
One thing is clear. E30 would face an even bigger infrastructure challenge than E15 does. A March 2012 API study found that “very few” service stations would be able to sell E15 with existing equipment: “Equipment modifications could be as little as new hanging hardware (i.e., hose, nozzle, etc.) or as much as an entirely new fuel dispensing system.” More extensive modifications, such as new dispensers and a new storage tank, would likely be required to sell E30.
That’s a major expense for most service stations, which typically are small businesses with razor thin profit margins on the fuel they sell. According to the National Association of Convenience Stores (NACS):
The cost of a new fuel dispenser is approximately $20,000. An average store has four dispensers, so the cost could be as much as $80,000 to upgrade the dispensers alone. If underground equipment is also replaced, permitting and other related costs would increase expenses significantly.
In April 2012, NACS estimated that the nation’s 120,000 convenience stores would have to spend $22 billion on retrofits if they had to sell blends in the range of E30 and higher.
What would it take to mobilize that much capital? Consumer demand for E30-optimized vehicles is unlikely to surge to the point where the industry on its own would make the requisite investments. Given the debt crisis, Congress is unlikely to pony up billions in tax breaks to subsidize construction of a national E30 infrastructure.
Yet the EPA seems determined to shatter the E10 blend wall. The EPA’s “audacious suggestion” is thus most likely a beachhead for more aggressive moves down the line. Don’t be surprised if future Ethanol Promotion Agency rules effectively mandate that new vehicles be designed to run on E30.