EPA’s Renewable Fuel Standard Proposal Ignores Root Cause of Blend Wall

EPA today proposed Renewable Fuel Standard (RFS) biofuel blending targets for 2014, 2015, and 2016. The agency expects to complete the rulemaking by Nov. 30, which means it will be two years late finalizing the 2014 targets and one year late finalizing the 2015 targets.

The 2007 Energy Independence and Security Act (EISA), which established the RFS program in its current form, mandates that refiners, blenders, and fuel importers increase the amount of biofuel sold in the nation’s motor fuel supply from 4 billion gallons in 2006 to 36 billion gallons in 2022. However, EISA also authorizes EPA to adjust the annual targets if “there is an inadequate domestic supply,” broadly defined by the agency to include all infrastructure, market, and legal constraints “that could result in an inadequate supply of renewable fuel to the ultimate consumers.”

In Nov. 2013, EPA concluded that the 2014 RFS mandate would exceed the “blend wall” — the maximum quantity of ethanol that can be sold in a given year. The blend wall is a product of two factors: the overall size of the motor fuel market and practical constraints on how much ethanol can be blended into each gallon of motor fuel sold. Warranty and liability concerns, lack of compatible fueling infrastructure, and, most importantly, anemic consumer demand, effectively limit the standard blend to E10 — motor fuel containing up to 10% ethanol.

Based on blend-wall arithmetic, EPA in Nov. 2013 proposed to trim the overall 2014 statutory target from 18.15 billion gallons to 15.21 billion gallons — a 16% cut. That sparked a firestorm of protest from biofuel interests, and EPA has been dithering over the targets ever since – until today.

EPA’s proposal gets mixed reviews from biofuel lobbyists. On the one hand, the targets are lower than the corresponding EISA targets.

On the other hand, the proposed target for 2016 will exceed the E10 blend wall by about 840 million gallons (p. 58). It is important to biofuel producers that all ethanol produced actually be sold for use as motor fuel. Otherwise, supply will exceed demand, and the ensuing glut will depress biofuel prices.

EPA assumes up to 600 million of those gallons can be sold via increased sales of E85 – motor fuel blended with up to 85% ethanol (p. 60). In a coordinated move, the USDA yesterday announced plans to spend $100 million to subsidize installation of E85 blender pumps.

My best guess is that in 2017 (or sooner) the blend wall crisis will return.

As often noted on this blog, ethanol contains about two-thirds the energy of an equivalent amount of gasoline. The higher the blend, the worse mileage your car gets, and the more you have to spend to drive a given distance. For example, according to FuelEconomy.Gov, at current prices, the typical owner of a flex-fuel vehicle would spend an extra $850 to $1,350 annually to operate the vehicle on E85 instead of regular gasoline. Herewith a few examples:

So even if every gas station has an E85 pump, consumers will avoid the fuel in droves, because it is a bad buy. Lower energy content, inferior fuel economy, and higher consumer cost are the root cause of the blend wall. The same factors also explain why the “choice” to buy ethanol must be mandated.

EPA’s proposal is a stop gap measure. The blend wall will thwart the central planners in 2017 or sooner. Lack of consumer acceptance is a market barrier that neither regulatory fiat nor corporate welfare can overcome.