But for retailers looking to get behind the wheel and implement a wider variety of ethanol blends at their stations, there are plenty of roadblocks, from concerns about rising prices to a lack of infrastructure and fears about misfueling lawsuits.
And yet there’s more than a kernel of truth to the idea that ethanol can be a viable and increasingly important alternative fuel that benefits consumers and helps our nation achieve greater energy independence.
A recent study by the Center for Agriculture and Rural Development found that national average gasoline prices decreased by $1.09 per gallon in 2011, due in part to the use of 13.9 billion gallons of ethanol in the United States. Understood in a broader context, thanks in part to ethanol use, net imports of petroleum and crude oil diminished to approximately 45% of demand vs. 60% in 2005, as reported by Renewable Fuels Association president Bob Dineen during a House Energy and Commerce subcommittee on Energy and Power hearing in July.
But the prevailing question remains: Can carrying higher-grade ethanol pay off for convenience retailers, especially those outside of the Midwest?
Consider that the Volumetric Ethanol Excise Tax Credit (VEETC), which provided a 45-cent credit to fuel marketers and blenders for each gallon of pure ethanol blended into gasoline, expired Jan. 1. Furthermore, production of ethanol is currently decelerating as manufacturers face the challenge of record low profit margins. Case in point: In June, two major ethanol plants in Nebraska— Nedak Ethanol and Valero Energy—temporarily shut down, while production has stalled at a number of other ethanol mills.
Additionally, per a report from commodities information provider Platts, ethanol profit margins in June were -17%, the lowest level since reporting started in 2005. The average price per gallon of ethanol in June dropped to $2 a gallon, but prices ballooned to $2.54 a gallon in July. Experts blame the increase on the dry, hot summer in the nation’s Corn Belt as well as production closures, which led to higher corn prices.
Gasoline prices, meanwhile, have fallen off. As a result, the lucky break that ethanol retailers enjoyed in the first half of 2012 (high gas prices and low ethanol prices, despite the demise of VEETC) appears to be ending.
Dollars and Sense
Today, ethanol prices are all over the map, says Dan Gilligan, president of the Petroleum Marketers Association of America (PMAA), Arlington, Va. Gilligan believes that ethanol prices are likely to be on the upswing in the second half of 2012, due to factors such as the nationwide drought, which will put upward pressure on prices.
“However, it looks like the economy is slowing down again, which means that demand will slow for all fuels,” says Gilligan. “So we could actually see too much production of ethanol and not enough demand, which could put downward pressure on prices. It will be very tough on ethanol producers if demand falls and production costs go up.”
Retailers, of course, prefer low-priced ethanol, because sales increase when prices fall, Gilligan says.
“E10 blend sales have consistently grown at our stores,” says Matt Bjornson, partner in Bjornson Oil Co. Inc., Cavalier, N.D., which has sold E85 at one of its three sites for nearly two years. “We offer some type of ethanol blend at every one of the fueling positions at our stores. It’s the largest seller.”
Can E85 Stay Alive?
Today, about 2,500 gas stations are invested in E85. And many stations, especially throughout the Corn Belt, offer blends such as E20, E30 and E40. But while E85 sales have risen from approximately 53 million to 99 million gallons since 2005, E85’s market share constitutes less than one-tenth of 1% of gasoline sold in the United States.
“For E85 to survive, ethanol needs to be a good 30% below gasoline to be com petitive,” says Gilligan, citing that E85’s fuel efficiency is around 20% to 30% lower than regular gasoline. “Retailers see that play out at the pump. Customers are pretty good at figuring out where the ethanol price stands in relation to gas, and they’ll quit buying [E85] when it gets above that 30% threshold.”
Yet as long as the price spread between ethanol and gas remains favorable, suppliers will benefit, says Gilligan.
“I’ve had some retailers tell me they’ve had tremendous success with E85, as well as others who have told me of terrible losses with E85,” says John Eichberger, vice president of government relations for Alexandria, Va.-based NACS, a Coalition for E85 member. “Success or failure depends on various factors, from existing market conditions to the customer base they’re servicing to the cost to invest in the necessary equipment.”
Matt Horton, CEO of Propel Fuels, Redwood City, Calif., a co-founding company of the Coalition for E85, says high ethanol prices combined with falling gas prices have made the economics of E85 more difficult today than several months ago.
“We believe that ethanol prices will remain relatively high in the near term. Market conditions will be particularly difficult for smaller E85 retailers who don’t have a sophisticated ethanol supply chain,” Horton says. “But when we’ve seen the price of E85 increase relative to gasoline, thousands of loyal customers, including many fleets, have continued to buy E85. Customers tell us it feels good to make a choice that supports the American economy and energy independence while protecting our environment.”
For those retailers who have already invested in committed E85 infrastructure, including Bjornson, “we’re in it for the long haul,” he says. “E85 is a viable fuel option if the discount to regular gasoline is in that 25% to 30% range.”
E15 Enters the Scene
Higher-blend ethanol: It’s not just for flex fuel vehicles (FFVs) anymore. Introducing E15, America’s newest alternative fuel, has sparked its share of controversy since the EPA gave final approval in June for its sale and use in light-duty vehicles manufactured since 2001. That’s because many retailers are concerned that using gasoline with more than a 10% ethanol blend could damage non-FFV engines and violate auto manufacturer warranties.
In July, Scott Zaremba’s Zarco 66 gas station in Lawrence, Kan., became the nation’s first retailer to sell E15. Zaremba, who uses blender pumps to blend fuel options right at the station, offers 14 E15 fueling positions and, at the time of this interview, was selling E15 for 2 cents below E10, at $3.27 per gallon.
Unlike many other retailers who are nervous about liability risks of selling E15, Zaremba believes he has all his bases covered.
“We’ve done everything in accordance with the regulatory agencies, including proper labeling on the dispenser, registration with the EPA as a blender of the product, and being registered with a third-party fuel tester,” says Zaremba, who is also vice president of the Petroleum Marketers of Kansas.
Gilligan, however, expresses doubts about gas stations gravitating to E15 en masse anytime soon. “When many car makers are saying, ‘Do not put E15 into this car,’ it puts retailers in a really difficult situation. If more than 500 of the 160,000 gas stations in the U.S. offer E15 in the next five years, I’ll be very surprised,” says Gilligan, who points out that 100,000 sta tions operate on a two-tank system that makes it cost-prohibitive to incorporate E15. “The major oil companies are not likely to allow their branded retailers to eliminate E10 or premium, so you’re taking 100,000 stations out of the potential market unless they want to add an extra tank and dispenser [for E15].”
Eichberger agrees that E15 will be a hard sell for retailers to adopt.
“Ask yourself as a retailer, ‘Do I sell a product that’s only approved for a certain class of customers?’ They’re being told not to use it by the manufacturer, which limits your potential demand,” he says. “You may be able to sell it at a lower price point, but that may encourage customers who are not driving suitable engines to use the fuel to save a few pennies per gallon. Does that expose you to liability? Under the Clean Air Act, the retailer could be held responsible even if he follows all EPA requirements for labeling.”
Zaremba, meanwhile, says he’ll continue full speed ahead with E15, which he plans to roll out at other Zarco 66 stations. “Some automakers have said that you can’t use [E15] in their vehicles,” says Zaremba. “But my stance is, if it’s a 2001 or newer vehicle, [E15] is approved transportation energy for those vehicles.”
Uncle Sam’s Take
Congress passed the second Renewable Fuels Standard (RFS) in 2007, requiring annual production of 15 billion gallons of ethanol by 2015 and at least 36 billion gallons of qualified renewable fuels that will need to be blended into the fuel supply by 2022.
According to NACS, however, forecasts suggest that only 15% of the automobiles running in 2022 will be able to use such fuel, and $22 billion would be needed for retailers to upgrade their dispensers and tank systems to carry the higher ethanol blend.
To help lessen these transitional costs, NACS is urging Congress to approve legislation it helped introduce last March: the Domestic Fuels Protection Act and the Domestic Fuels Act (H.R. 4345 and S. 2264, respectively). If enacted, these two measures would offer legal protection for retailers and specify compliance with all applicable federal, state and local laws regarding compatibility if their equipment complies with the required EPA guidelines. As a result, retailers who sell a new fuel such as E15 can save tens of thousands of dollars otherwise spent on unnecessary equipment replacement and be safeguarded from legal liability for misfueling if they abide by the labeling requirements.
Additionally, the Coalition for E85 is pressing Congress to approve E85 as an alternative fuel, for which it would be given a special tax credit enjoyed by natural gas, propane and hydrogen. VEETC made E85 ineligible for the alternative-fuel tax credit, but now that VEETC is gone, coalition spokesman Phil Lampert believes the tax code should be modified to include E85.
Eichberger says he and groups such as Coalition for E85 “are frustrated in Washington,” particularly by the “blend wall”—the tipping point when the market will not be able to increase blending ethanol into gasoline—which is created by RFS-mandated volumes for cellulosic ethanol (made from sources such as algae) and renewable fuels.
“The problem is that the RFS implementation schedule over the next two years is 15 billion gallons that have to be blended,” says Eichberger. “If you put 10% ethanol into every gallon of gasoline we sell, you’re only marketing 13.4 billion gallons of ethanol. So even if we start marketing E15 broadly, it will buy us maybe a year or two before we hit the next blend wall.”
Indeed, based on Energy Information Administration projections, E85 and E10 will satisfy only as much as 56% of the RFS-mandated volumes in 2035. The remainder must come from other alternative fuels that have yet to hit the market.
Gilligan predicts that when Congress returns to session in 2013, there will be a move to reform the RFS to make it fit better with the demand for gas, “which I believe will be flat for the next 20 years,” he says.
“You can’t keep increasing the volume of ethanol that you put into gasoline, because you’re simply not selling as much gas.”
Lampert says that, despite the Coalition for E85’s best efforts to sway lawmakers on Capitol Hill, given the political season and lack of any type of coordination or facilitation of public policy, favorable E85 legislation probably doesn’t have a chance of passing until after the presidential election.
Speaking of which, President Obama’s and Mitt Romney’s respective stances on ethanol are interesting to compare. The Obama administration has demonstrated strong support for the ethanol industry, and ethanol production has been given top priority by his Department of Agriculture. The administration has offered farm subsidies and farm loans for corn growers, tax credits for ethanol producers and tariffs on overseas ethanol. Also, in 2011 the USDA supported the rollout of 10,000 ethanol flex-fuel pumps across the country.
Romney backs ethanol and has said in the past that he supports federal subsidies to help get the ethanol industry on its feet, but he has criticized long-term government subsidies for ethanol. Before VEETC expired, Romney suggested he wanted to see a more gradual decrease in the VEETC tax credit rather than the sudden expiration that did occur.
Worthy Investment for Some
Aside from an unclear and inadequate U.S. energy policy, many experts say the single biggest impediment to wider adoption of higher-grade ethanol fuels is insufficient infrastructure.
“There are 700,000 gas pumps in America, yet probably less than 1,000 have been certified for anything over E10,” says Gilligan. “The average net profit of a convenience store is about $38,000 a year. Are they going to spend $150,000 or more to put in a new tank and dispenser for [higher ethanol blends]? It doesn’t make a lot of sense unless government subsidies are available, and most governments face big deficits.”
Despite those numbers, Lampert counters that retailers should consider adding higher ethanol blends to their pumps.
“For E15, 2001 and newer vehicles comprise about 65% of all vehicles on the road today, while E85 vehicles comprise 4%, giving you a market of 69% of vehicles that are compatible,” says Lampert. “Retailers that don’t offer that increased blend are losing that potential market. If you’ve already made the investment [in E85], maintain it and continue to look for more opportunities to further add it.”
For c-stores that want to take the plunge into higher-grade ethanol, Eichberger recommends a forward-thinking approach.
“Ask yourself: How can I design my station to be as flexible as possible so costs can be as low as possible?” he says. “That means purchasing highly compatible equipment that’s tested and certified for as many ethanol products as possible, and that will prevent you from digging up your concrete again [for a new tank].”
E15 Facts
- On April 2, 2012, EPA approved E15 as a registered fuel.
- E15 is now allowed in all autos manufactured since 2001. That’s 239 million cars on the road today, which consume 75% of all fuel in the United States.
- In July, a Zarco 66 gas station in Lawrence, Kan., became the nation’s first retailer to sell E15.
- 100,000 stations operate on a two-tank system that makes it cost-prohibitive to incorporate E15.
- A full transition to E15 will reduce greenhouse-gas emissions by an additional 8 million tons per year—comparable to removing more than 1.35 million vehicles off the road
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