Consumers love choices. Healthy or indulgent? Energy or relaxation?
But when it comes to fuels, consumers’ choice has been fixed for more than 100 years, dictated by the existing fueling infrastructure. Or is the existing fueling infrastructure dictated by the type of cars consumers choose to drive?
This is the chicken-and-egg dilemma of alternative fuels—how to introduce a fuel choice when supply and demand refuse to make that first big move.
The crippling dynamic looms over high-ethanol blends such as E85, for which less than 3,000 fueling sites exist to serve more than 600,000 flex-fuel vehicles (FFV) on the streets; and electric charging stations, for which a little more than 6,000 public outlets are available to more than 57,000 electric vehicles (EVs). Even compressed natural gas (CNG), which has the advantage of a large domestic supply and low prices, is still straining to gain momentum, with only about 600 public CNG fueling locations for more than 115,000 CNG-powered vehicles, according to the U.S. Department of Energy.
But is the hang-up all on the supply side? Consider that the total vehicle fleet of the United States is more than 250 million, according to the U.S. Department of Transportation. Alternative fuel vehicles (AFVs) make up only about 5% of this figure—after throwing in FFVs and hybrid EVs, which can run on regular gasoline. Granted, AFVs are often priced at a premium, but this is only part of the story.
In the case of all alternatives, establishing a foothold in the fueling infrastructure is a complex equation of education, technology, cost and meeting consumers’ fueling needs.
- According to an oft-cited survey by GM of FFV owners, less than 10% used E85, while 70% were not even aware they could use the fuel, which is often—but not always—priced at a significant discount to regular gasoline.
- Even with the development of DC fast-charging technology, which is capable of charging an EV battery to full capacity within 30 minutes, it is simply not fast enough to meet the in-and-out convenience occasion.
- While CNG is selling at a gasoline gallon equivalent (GGE) of $2.10 as of press time, compared to the national average of $3.59 per gallon of regular unleaded, retailers still face installation costs from the six figures to low millions.
Then there is the sometimes positively perceived, sometimes negatively received role of government in the form of programs such as Clean Cities that are designed to spur market development, subsidies to increase price competitiveness and tighten the ROI, and mandates to give everyone in the supply chain a shove.
But there’s another component to the equation that isn’t easily measurable: the retailers who see the competitive promise of alternative fuels and push through the supply/demand logjam out of good ol’ entrepreneurship.
“I’m a believer that we need multiple sources as our energy costs continue to rise and we only have a single source for transportation energy as a whole,” says Scott Zaremba, president of Zarco USA, Lawrence, Kan., which sells biodiesel and a range of ethanol blends. “Being a retailer, we can bring those changes to the consumer today. Whatever they are, as a retailer I want to be able to bring those to the consumer so they can have a choice as to what they want to use.”
“It is recognizing the opportunity,” says Joel Hirschboeck, superintendent of alternative fuels for Kwik Trip Inc., La Crosse, Wis., which plans to offer CNG at more than two-dozen sites by year-end, and also offers E85, biodiesel, propane and charging stations.
As for the chicken-and-egg dilemma, he says, “We want to take it out of [the discussion] and say, ‘Here’s half the solution: We’re going to put it out there and make it available. Come talk to us and find out what’s going on, and how you can fill out the other half of the equation.’ ”
It’s a Gas
At the end of 2012, there were just fewer than 1,300 CNG stations in the United States. That figure is projected to reach 3,300 by 2020, “ by far the largest number of stations being added worldwide,” says Dave Hurst, principal research analyst for Boulder, Colo.-based Navigant Research, which just released a study on CNG fueling infrastructure.
“The challenge is that while [3,300 stations] sounds like a lot, there are 160,000 gas and diesel stations.
“It’s a little like an inchworm, where one will get ahead of the other, and then the other plays catch-up,” Hurst continues. “Right now the vehicles have got a bit ahead of the stations, and the stations are rapidly playing catch-up.”
Kwik Trip has been working both sides of the equation. On supply, the retailer aims to have CNG available at 26 of its 430 sites by the end 2013, with new locations opening in Iowa, Minnesota and Wisconsin. Like most retailers who embrace alternative fuels, Kwik Trip is taking the long view.
“We recognized that gasoline petroleum products and diesel will continue to decline over time,” says Hirschboeck. “It’s really identifying what fuel is going to replace that, and you start to look at all of the advantages CNG has to offer, and it really stands out on its own.” He cites the large domestic supply, the fact that CNG burns cleaner than gasoline, and its lack of reliance on government assistance or support to make it cost-competitive to gasoline or diesel on a per-gallon basis.
But unlike most other retailers who install CNG, Kwik Trip did not first establish an anchor tenant to help recover the high cost of installing the fueling infrastructure. Call it a leap of faith, or just confidence.
“Being a true c-store fuel provider, we’re taking the risk on ourselves to build out the infrastructure without a pre-determined tenant,” says Hirschboeck. “We’re looking at it from the functional infrastructure standpoint, from the overall big picture view of: What makes the most sense for the most people to adopt this technology, this fuel product?”
In building a “functional infrastructure,” Kwik Trip is focusing on the major corridors near or on which its sites reside, the areas of the most freight movement and commuter traffic.
It has been pushing demand by doing educational outreach with local fleets—who make up the bulk of CNG consumers—and hosting an annual natural-gas trade show and summit at its La Crosse headquarters that brings potential consumers, natural-gas vehicle (NGV) manufacturers and suppliers together.
“We took the stance that in every market we’re going to bring a station to, we will host an educational seminar,” says Hirschboeck. Attendees learn the basics of natural gas and safety considerations, can examine NGVs and hear about Kwik Trip’s experiences with its own fleet, and learn more about the retailer’s infrastructure plans.
Ultimately, Kwik Trip feels sure of the fuel itself. “I can lock in pricing for six years right now on a set quantity. That’s unheard of with gasoline and other petroleum products, being able to lock down a price point with that much time,” says Hirschboeck. “It really shows there is confidence in the marketplace.”
Kwik Trip also sells E85 at several locations, but since the end of the Volumetric Ethanol Excise Tax Credit (VEETC), a federal credit that discounted the fuel by more than 38 cents per gallon to keep it competitive with regular gasoline, the company has seen volumes declining [CSP—Feb. ’12, p. 36]. With that in mind, does Kwik Trip see the long-term case for E85?
“I don’t know 100% of that answer and where the future will take us,” says Hirschboeck, who could not comment on company plans to expand E85, which maintains a small—but passionate—consumer base. “At the end of the day, with alternative fuel, you still have to get back to the dollars and cents of it. If it makes sense for the consumer to commit to that, especially from a business perspective, then they’re going to do it.”
The Fear Factor
Zaremba’s passion for pushing supply of alternatives—in this case, E15—has driven him to sever his relationship with his supplier of the past 25 years, Phillips 66.
In June 2012, the EPA approved the ethanol blend for use in FFVs, 2001-model-year and newer cars, light-duty trucks and medium-duty passenger vehicles and SUVs. The agency’s approval came despite objections from some auto manufacturers and many fuel industry groups, concerned that liability and safety issues had not been fully addressed. After Zaremba began selling E15 at eight sites, Phillips 66 requested he make infrastructure changes or else the company would end its contract with him.
“The rules were created to make it impossible for me to be able to do what I’ve been doing without a huge added infrastructure cost,” he says. His choices included selling E15 from a yellow hose, just like E85; adding a separate dispenser; or paying a six-figure fee to break his contract. He stopped selling E15 this spring, and then decided to make a change.
“I’m in the process today of rebranding my locations,” he explains, pointing out that he also has changed the name of his company from Zarco 66 to Zarco USA Inc.
“Now I’m not under the thumb of anyone telling me what we have to do,” says Zaremba. “Just like any retailer across the country, being able to be in charge of your own destiny makes it much easier. … We have huge competitors. So when you try to compete with them on a one-to-one basis without being able to innovate or change, it’s been very difficult.
“We have to carve out niches that set us apart.”
He also agrees that education is key in erasing negative perceptions about high ethanol blends. Last November, AAA warned its members about potential damage to their vehicles if they misfueled with E15. “Anything that happens to your car, or your bumper falls off, it’s something we did,” he says. “It’s because you use ethanol or biodiesel or stopped at one of our locations. They spin everything out to make it as negative as possible. The fear factor is great.”
This is where Robert White comes in. Director of ethanol trade group Renewable Fuels Association, Washington, D.C., White routinely addresses issues surrounding mid- to high-range ethanol blends, most notably installation costs.
“We commonly hear someone throw out $200,000 to $300,000 to add E85 and in some cases E15,” says White, who points out that more than 30 stations in eight states offer E15, with several soon to start—“none of which have come within a double-digit percentage point of that $200,000 to $300,000 mark.”
Final costs depend on multiple factors, such as the station, existing fueling infrastructure, the franchise agreement, government incentives and more. Building a site from new? OK, six figures. Starting with existing infrastructure? Less than $10,000 is more realistic.
The ethanol industry isn’t the only one scrapping for a market-share fight. Proponents of methanol, or wood alcohol, are hoping it will soon rejoin the fray. The fuel, which was sold in the 1990s for AFVs in the United States, and today is widely used in China, can be made from different feedstocks or natural gas. But most AFVs today are warrantied to operate only on ethanol or gasoline.
But software entrepreneurs Eyal Aronoff, co-founder of Quest Software—which was sold to Dell recently for $2.4 billion—and Yossie Hollander believe there is a fix for this. The pair founded the Fuel Freedom Campaign, Irvine, Calif., to spearhead the adoption of methanol and introduce more competition in the fuel market.
“There are three reasons why petroleum continues to dominate the market,” says Aronoff. “The first reason is car makers make cars that run on petroleum products. The second is the supply chain is used to supply petroleum-based products. It still lives under the old oil company’s mentality: one company finds the oil, drills it, ships it and then supplies the gas stations or in many cases owns the gas stations.” The third reason, according to Aronoff: Regulations that control fueling, fuel stations and emissions from the car are built with only one fuel in mind.
The foundation is pushing for multiple actions, including:
- Remove commercial and regulatory barriers to competition;
- Upgrade the software in existing and future car engines to enable them to burn methanol;
- Encourage automakers to make more FFVs;
- Deploy an infrastructure for selling methanol, which according to the group would be relatively straightforward.
“Say a gas station has a natural-gas feed coming into it,” says Aronoff. “It could install a small shipping-container-size device that can convert it to methanol on the spot. It could sell methanol for $1.50 per gallon, not including taxes. These are the kind of creative solutions we are looking at.”
The foundation hopes to have a test location open later this year, and is hoping that retailers will embrace what it considers a solid business case for the fuel.
“These fuels,” Aronoff says, “have a lower caloric content than gas,” or about half the energy of a gallon of gasoline.
“[This] means you would need to come to the gas station more often,” he continues. “Of course, for a gas station owner, who makes a large portion of profits from the c-store, if people have to come more often, that’s a great advantage.”
From the perspective of John Eichberger, vice president of government relations for NACS, such a dynamic would cripple an alternative fuel’s chance for success in the c-store channel. He cites E85.
“You can discount E85 on a BTU basis to compensate for the mileage penalty, but you’ve got to go further than that and compensate them on the convenience factor,” says Eichberger. “We’re all about quick in, quick out, serve the customer when they want to be served. You double or increase by 30% their visits to c-stores to fill up the car, and they’re not happy. And they’re going to reject it.”
This same convenience conundrum is tripping up electric in the c-store channel. Kwik Trip has 70 free EV charging stations in its network, but their use is “very low level,” Hirschboeck says.
“We’re at a point where we need a bump in technology,” he says. “For a c-store, our average in and out time is probably 5 minutes per customer. The customer comes in, gets what they need and then wants to move on. To offer parking stalls requiring 30 to 40 minutes or an hour to charge your vehicle is really counterintuitive to what the customer is looking for.”
For Eichberger, any alternative fuel that requires special handling or does not deliver the expected convenience experience faces an immediate disadvantage.
The “magic bullet,” he believes, is a drop-in fuel that can substitute for petroleum and go straight into the pipeline, storage tanks, dispensers and cars, as a mix with regular unleaded or pure—“whichever the market is ready for.”
“If you have an alternative or synthetic gas that looks, feels, performs and has the same fueling experience as traditional fuels, the consumer will accept it, and chances are if we can sell it for less, the consumer will demand it.”
Eichberger cites as an example E10 vs. E15 and E85. E10 offers a seamless fueling experience for the consumer and no special handling for the retailer or distributor, other than an inability to be transported via pipeline. “With E15, you have to know what car you’re in, and does your auto manufacturer support it or not,” he explains. “E85 needs a special vehicle. We’ve got to get away from that.”
There are a few promising future drop-in fuels. Butanol is an alternative to ethanol that offers an energy profile that is very close to gasoline; it avoids the greatly reduced mileage and can be blended at a greater percentage than ethanol into gasoline, and it does not require special storage or transportation. The butanol industry is working with the EPA on regulatory permission to allow blending.
Then there is “green crude,” or renewable crude oil derived from algae, which also can move within the existing fuel infrastructure and be refined into gasoline, diesel and jet fuel. In March, Tesoro Refining & Marketing Co. sealed a deal to buy green crude from Sapphire Energy Inc., which it plans to make into off-road diesel fuel.
The key is scale. While Sapphire, for example, aims to eventually produce 1.5 million barrels of green crude per year, today it generates a little more than 700 barrels. It will supply two barrels per day (bpd) to Tesoro, whose seven refineries combined churn out 675,000 bpd.
“They’re not buying a lot,” Eichberger concedes, “but they are taking oil from algae production and putting it straight into refineries. That’s a pretty good opportunity if we can scale it up.”
Ultimately, scale and price competitiveness will be essential in determining whether an alternative fuel becomes more mainstream.
“When gas prices reach a certain point, consumers will be much more open to consider an alternative, even if it means inconvenient fueling for a while,” says Hurst of Navigant.
“My advice, if you’re looking at a fuel product, is just check all the boxes,” says Eichberger, who anticipates natural gas will enjoy the greatest growth in the next 24 months, especially if prices remain low compared to gasoline and diesel. “Make sure all the equipment is compatible, know who the market is, and comply with applicable laws and regulations.”
A Clean Finish
Clean Cities, the U.S. Department of Energy program that coordinates local efforts to reduce petroleum use in transportation, celebrated its 20th anniversary this year. The program works through forming coalitions—led by a coordinator and composed of stakeholders such as businesses, fuel providers, vehicle fleets, state and local government agencies, and community organizations—that jumpstart alternative-fuel projects, including the deployment of fueling technology, as well as idle-reduction and fuel-economy efforts.
Today, there are nearly 100 coalitions, covering 80% of the U.S. population, which have offset 5 billion gallons of petroleum since 1993. While CNG has garnered the most interest lately, in terms of fuel alternatives Clean Cities plays no favorites.
“There’s interest in an ‘all of the above’ approach for alternative fuels,” says Linda Bluestein, national co-director of Clean Cities, Washington, D.C. “As long as they fit into the requirements of the program, the statutory guidance we were given, we feel communities should be allowed to choose what fits best for them.”
The biggest challenge for the Clean Cities coalitions, says Bluestein, and for those interested in buying and selling alternative fuels, is the enormous amount of outreach and education required to inform local officials, consumers and fleets about their options.
“It may not be that you can go in and sell someone on this in one take,” Bluestein says. “There’s got to be a strategy to make it work. You might end up visiting a fleet 20 times before they make a decision.”
Some of the coalitions’ work has been to “smooth over” local or state policies that create barriers to implementing alternatives.
A Clean Cities coalition can be a helpful ally for marketers looking to introduce alternative fuels because they in many cases have already established a base of public and private allies and funding sources, and have access to educational resources.
“The whole c-store industry has a real history of innovation; they’re good competitors, and we think it’s an exciting development that there’s growing interest from that sector in alternative fuels,” says Bluestein. “For our Clean Cities coalitions, those are good partners to have.”
Finding a Balance
With the exception of hydrogen, the number of alternative fuel vehicles (AFVs) on the road far outstrips the number of public fueling locations, according to the U.S. Department of Energy.
Electric charging stations (public only): 6,444
CNG fueling stations: 602
CNG vehicles: 115,863
LNG fueling stations: 33
LNG vehicles: 143,037
E85 stations: 2,344
Flex-fuel vehicles: 618,506
Liquefied petroleum gas (propane)
LPG vehicles: 270,000
Source: U.S. Department of Energy