NACS: Evolve Renewable Fuels Standard to Reflect Market Realities

"Consumer unfamiliarity with E15 significantly limits its retail availability"

ALEXANDRIA, Va. -- The requirements of the 2007 Renewable Fuels Standard (RFS) are already outdated and must evolve if the goals of the program are to be achieved, according to NACS.

"The assumptions about the growth of the U.S. motor fuels market that informed the 2007 Congress have proven wrong, and the program needs to evolve to reflect current market realities," said John Eichberger, NACS vice president of government relations. "Six years ago, there was every indication that motor fuels demand would continue to increase. Instead, it has declined by 7% since 2007 and is projected to continue to decline, making it even harder to satisfy the requirements of the RFS."

The RFS requires that increasing amounts of qualified renewable fuels be integrated into the motor fuels supply, culminating at a minimum of 36 billion gallons in 2022. Based on the U.S. Energy Information Administration's (EIA) current market projections, this mandate is expected to increase renewables to approximately 28% of the overall gasoline market in 2022, nearly triple the rate of 9.6% in 2012 and almost 40% more than expected when the program was revised in 2007.

While E10 blends (gasoline containing 10% ethanol) are relatively standard across the country, users will need to consume much higher percentages of ethanol--including E15 and E85--to satisfy the mandate's ever-increasing consumption targets. But recent consumer input indicates that the market is not ready to accommodate sufficient volumes of these alternative fuel blends to satisfy the requirements of the RFS. Inadequate infrastructure and limited consumer demand puts the future of the RFS in peril unless adjustments are made.

"For the RFS to succeed, two things have to happen in a relatively short span of time. First, retailers must be able to legally and affordably sell new fuels. Second, consumers need to accept and use the new fuels that will be required by the program; however, gasoline demand destruction combined with the aggressive implementation schedule of the RFS has shortened the timeframe for all of this to happen. Without revisions, the entire program could be in jeopardy," said Eichberger.

NACS surveyed consumers and fuel retailers to assess their familiarity with the alternative fuels. Only 26% of fuel consumers said that they are familiar with E15, and this lack of awareness significantly diminishes potential demand. After the survey described E15, only 59% of the consumers said that they would consider purchasing E15 if it were the same price per gallon as gasoline.

Three of five (59% also) of these consumers who would consider using E15 said that their primary vehicle is from the model year 2001 or earlier, prohibited from using E15 by the U.S. Environmental Protection Agency. (Respondents were not informed during the survey of this regulatory limitation.) This means only one-third (34%) of consumers are authorized and willing to consider purchasing E15.

Retailers recognize this limitation in demand, with more than three-quarters (79%) of the NACS members surveyed citing lack of demand as the reason that they don't sell the fuel.

"Consumer unfamiliarity with E15 significantly limits its retail availability because demand is insufficient," said Eichberger. "Worse, most consumers are wary of the product: 55% of those who said that they will not purchase E15 said that they are worried that it will damage their vehicles and 45% are worried about decreased performance and fuel efficiency. Limited potential demand will not change until some negative perceptions about the fuel are addressed through a comprehensive education campaign."

Consumers were not much more familiar with E85, which has been in the market for more than a decade. Only 29% of consumers surveyed said that they were familiar with the product and only 10% said they drive a flex-fuel vehicle, which is required to use E85. Furthermore, three of four (75%) fuel retailers surveyed said that demand isn't sufficient for them to install E85 pumps, which may be why there are only 2,354 U.S. commercial fueling stations currently selling E85, according to Department of Energy statistics.

Demand isn't the only issue limiting availability. Retailers also expressed concerns about the costs associated with upgrading or replacing equipment to legally store and sell these new fuels: 46% said that the costs to upgrade to sell E15 were a concern, and 44% said that the costs to upgrade for E85 were a concern. Failure to use certified equipment can expose retailers to potential liability. Retailers also expressed concerns over potential liability from misfueling: 46% and 44% cited liability concerns over E15 and E85, respectively.

However, incentives could help entice retailers to sell both E15 and E85. More than half (64%) of retailers surveyed said that reasonable protection from misfueling liability would entice them to consider selling E15, and nearly half (46%) said that similar protections would entice them to sell E85.

"Most retailers simply want to understand their potential risk before they invest in new equipment to sell a product. We want to see a smooth market transition to meet the higher mandated blends, but that is simply not going to happen until consumers are ready for the fuels and until legal uncertainties for fuels retailers are clarified," said Eichberger.

The RFS is not a modern program and its objectives will not be achieved without modifications. But the overall goals are worth pursuing and they may be achievable with modifications and a robust education program, said Eichberger. He said that NACS recommends policymakers pursue a three-step program to evolve and reinvigorate the RFS:

*First, the statutory increases in renewable fuel volumes sold each year must be revised to reflect the declining size of the overall gasoline market.

*Second, policymakers must take steps to make higher ethanol blends legal and attractive to sell.

*Third, a significant education campaign is needed to build consumer demand.

The NACS consumer survey was conducted by Penn, Schoen & Berland Associates LLC, with 1,183 gas consumers surveyed from May 7-9, 2013. The NACS retailer survey was conducted May 29-June 7, 2013, and incorporates responses from more than 30 retailer companies, which range in size from one-store owners to large chains operating hundreds of stores.