By John Eichberger
Last month in part 2 of the "Future of Fuels Report," we shared that liquid fuels will remain the dominant source of transportation energy for the foreseeable future â€" representing more than 96% of transporÂtation BTUs in 2035. And while gasoline and diesel fuel will continue their leading positions in the market (more than 88% market share), competing priorities will affect the overall market composition. Part 3, which follows, will focus on the role of ethanol and renewables.
In 2007, Congress enacted the second Renewable Fuels Standard (RFS), mandating that by 2022 a minimum of 36 billion gallons of qualified renewÂable fuels will have to be blended into the fuel supply. This means that the liquid fuels market will have to accommodate much higher blends of ethanol to satisfy the mandate. Of course, Congress did not think about the implicaÂtions this policy might have on the infrastructure, nor did the administration think about how this policy would complement â€" or conflict â€" with its deÂsigns to increase fuel economy standards for the nationâ€™s vehicles.
The combination of these two policies will require that, by 2022, every gallon of gasoline will have to contain a minimum of 37% ethanol. HowÂever, projections indicate that only 15% of the vehicles on the market at that time will be able to run on this fuel, not to mention that every retailer will have to replace their tank systems and dispensers to accommodate this blend rate â€" an industry cost of at least $22 billion.
So although the tax credit for ethanol and the import tariffs has expired, the future for renewables is still driven by the government. and unless steps are taken to revise the governmentâ€™s approach to renewables and vehicle fuel efficiency â€" to create a comprehensive national fuels policy that coordinates the various requireÂments in a way that will allow successful implementation of each and that leverages the existing infrastrucÂture and benefits consumers â€" the program will fail.
NACS is supporting the Domestic Fuels Protection act (H.R. 4345) and the Domestic Fuels act (S. 2264), legÂislation that will provide the market some flexibility to transition to a more renewable-based fuel supply, but such flexibility has limitations. Therefore, NACS is also pushing for a reconsideration of existing policies and the development of a coordinated approach to national fuels policy.
This article is part 3 of a 4 part series, the first two ran in the March and April issues.
As the dominant renewable fuel in the nation, ethanol continues to play a more prominent role in the marketplace. In 2010, the naÂtion consumed 13.2 billion gallons of ethanol, representing 9.6% of the finished gasoline consumed in the nation. The structure of the RFS puts a cap on the use of tradiÂtional, corn-derived ethanol at 15 billion gallons, a volume that will be met in 2015. Additional volumes of renewable fuels will have to be provided by cellulosic ethanol or other types of advanced biofuels as defined in the RFS.
This poses a significant probÂlem for the RFS because there are currently no commercially viable gallons of cellulosic ethanol, or any other type advanced biofuels and 8.65 million gallons of celluÂlosic biofuels â€" targets unlikely to be met. This failure of the celluÂlosic ethanol industry to produce enough advanced biofuels to satÂisfy the RFS is a serious problem. Barring a production efficiency breakthrough, this component of the RFS could fall apart.
There is one feature of the RFS that could escalate the commerÂcial viability of existing production processes: renewable identificaÂtion numbers (RINs), the credits obligated parties must obtain to satisfy their renewable mandates. As the scarcity of actual gallons of advanced biofuels increases, the value of advanced RINs also increases and the break-even threshold for the small and developing advanced biofuels producÂtion market becomes easier to achieve. In such a scenario, the regulatory costs of non-compliance could render a viable market for the burgeoning yet expensive cellulosic ethanol market.
From a retailer perspective the primaÂry issue is accommodating the mandated volumes; regardless of the feedstock used to produce it, ethanol acts like ethanol. Whether the fuel is cellulosic or corn-deÂrived, certain compatibility and market requirements for storing and selling the product do not change.
Most importantly, mandated volÂumes for renewable fuels and celluÂlosic ethanol have created what is comÂmonly referred to as the "blend wall," the point at which the market will be unable to increase blending ethanol into gasoline. This is prompting real consideration of how ethanol is used in the marketplace, and how blend ratios can be increased to accommodate the increasing mandated volumes.
The typical ratio for ethanol blended into gasoline is 10%. EPA considers E10 "substantially similar" to gasoline and imposes no restrictions for its use; it is authorized for use in any engine forÂmulated to operate on pure gasoline. With the implementation of the RFS, the use of E10 in the United States has increased dramatically. In 2010, the nation consumed a total of 13.2 billion gallons of ethanol, most of which was blended with gasoline as E10.
Although E10 is almost ubiquitous in the United States, using 10% ethanol in every gallon of gasoline sold will not satisfy In 2010, the nation consumed 137.8 billion gallons of finished motor gasoline, of which 13.189 billion gallons was ethanol. This meant the average concentration of ethanol in each gallon was 10.6%.1
In 2013, the mandated volume of renewable fuels is 13.8 billion gallons. As discussed in the gasoline section of this report, the RFS-mandated volumes, when compared with EIA gasoline consumption projections, creates a scenario in which ethanol blending must increasingly exceed 10% on average.
Another way of viewing the situation is to evaluate how much of the RFS that E10 can satisfy going forward. This will provide insight into how much the market may have to rely on other renewable fuel blends. The chart, "RFS % as E10," using the blend rate equation, shows that E10 contributes a decreasing percentage to compliance with the RFS-mandated volumes, dropping from97.3% of the RFS volumes in 2010 to 29.2% and 18.6% in the Reference and CAFE3 models, respectively. In essence, additional renewable fuel formulations will be necessary to satisfy the RFS.
According to ASTM (formerly known as the American Society for Testing and Materials), which establishes technical standards for motor fuels, E85 is a fuel that contains gasoline and 51% to 83%2Â ethanol. Lower blend ratios are used in the winter months to address cold weather starting issues presented by higher ethanol volumes. The use of E85 is restricted only to flexible fuel vehicles (FFVs), which are designed to adjust the oxygen intake requirements of the engine based upon the volume of ethanol present in the fuel. These vehicles can operate on any concentration between E0 and E85.
According to EIA, the number of FFVs produced in 2005 was 735,693. By 2009, estimated production was 1.049 million, an increase in annual production of 43%. EIA estimates that the total number of FFVs on the road at the end of 2010 was 9.33 million. Total light-duty vehicles in the United States at the end of 2010 were 227.5 million, yielding a FFV market share of 3.6%.
EIA projects sales of FFVs will increase by an annual rate of 7.3% in the Reference Case with annual sales climbing 523% over this time period. However, in CAFE3 the annual increase is only 4.6% with total sales climb of 232%.
Sales of E85 have been slow in the United States. Since 2005, E85 sales have increased from 52.8 million gallons to 98.9 million, a growth rate of 87.3% over five years but still representing less than one-tenth of 1% of the gasoline sold in the nation. EIA projects growth rates of 26% and 28% annually in the ReferÂence and CAFE3 models. However, even with this increase in consumption, E85 will still represent only 3.2% of the liqÂuid fuels market in 2035 in the ReferÂence Case and 4.3% in CAFE3.
There are two primary reasons adopÂtion of E85 is slow. First, because ethaÂnol contains less energy than gasoline, E85 is estimated to deliver between 25% to 30% fewer miles per gallon. Consumers therefore demand that E85 be offered at a discount to gasoline to compensate for the loss of mileage and to offset the inconvenience of having to refuel more frequently. This is difficult for many retailers to do.
Second, the potential market of cusÂtomers (3.6% of vehicles) is limited and those consumers are not required to buy E85. Consequently, retailers are hesitant to invest in E85 infrastructure, which can be costly. Most tanks and dispensers are legally certified to sell no more than 10% ethanol3 and replacing these systems can cost more than $100,000. Consequently, E85 facility expansion has been slow. As of September 30, 2011, there were only 2,454 E85 retail facilities in the nation, or 1.5% of all fuel facilities.
Several government grants and tax credit programs4 have assisted retailers with installation costs, but these typically only cover a certain percentage of renoÂvation costs. In addition, it is unlikely federal support programs will extend beÂyond their current expiration dates.
Despite the small contribution E85 will make to the overall fuel supply, if the EIA projections are true then E85 has the potential to contribute signifiÂcantly to RFS compliance. When calcuÂlating the effect of E85 on the market, EIA uses a weighted average and asÂsumes every gallon of E85 contains 74% ethanol on average.
Based upon this assumption, the volÂume of renewable fuels contributing to compliance with the RFS and sold as E85 can be plotted. The EIA ReferÂence Case projects a 26.7% contribuÂtion to RFS compliance through E85 sales while the CAFE3 model projects a 33.8% contribution. Of course, the marÂket limitations on sales and consumer acceptance of E85 must play into the future market demands, but significant potential exists for E85 to play a role in future compliance.
If the EIA projections are accurate, E10 and E85 have the combined potenÂtial to satisfy 52.3% to 55.9% of the RFS-mandated volumes in 2035. This means other alternatives must come to marÂket to deliver the remaining 40% to 50% of mandated renewable volume.
The combination of E10 and E85 is unÂlikely to satisfy the mandated volumes of the RFS. In response, in 2011 EPA issued two rules partially approving a request by Growth Energy (a trade asÂsociation representing ethanol producÂers) to authorize the use of E15. EPAâ€™s decisions allow the use of E15 in vehiÂcles manufactured in model year 2001 and later, but prohibit its use in prior model year vehicles, marine engines, off-road engines and small equipment engines. EPA based its decisions on veÂhicle testing conducted in cooperation with the Department of Energy. The decisions are being challenged in the courts by refiners and automobile manÂufactures who disagree with the testing protocol and the results.
EPA followed its decision with a final rule establishing procedures for preÂventing the misfueling of non-approved vehicles and engines with E15. The rule requires that all retailers of E15 must afÂfix a specific label either on or adjacent to the fuel selector alerting the consumer that the fuel was approved for only certain engines and that other uses are prohibited by federal law.
For retailers, E15 presents a variÂety of challenges. First, while there are more vehicles on the road legally apÂproved to use E15 than E85, the uniÂverse of approved engines remains less than complete. It is estimated that 60%5 of vehicles on the road are model year 2001 and newer and are thus legally allowed to operate on E15. However, automobile manufacturers do not supÂport EPAâ€™s decision and advise in their ownersâ€™ manuals against using any fuel in excess of 10% ethanol in non-FFVs. In addition, for newer vehicles still unÂder warranty, use of E15 may constitute a violation of the warranty terms. ConÂsequently, the potential market demand for E15 remains uncertain. Second, most equipment is only listed as compatible with up to 10% ethanol. Consequently, the costs to legally offer E15 could be significant and include replacement of dispensers, underground storage tanks, lines and connected equipment.6
Finally, despite compliance with the labeling requirements issued by EPA, a retailer could still be held liable for misfueling. A retailer who does not prevent a consumer from introducing E15 into a non-approved engine could be fined by EPA for violating the Clean Air Act, with fines up to $37,500 per viÂolation. If EPA chooses to not enforce against the retailer, the private right of action provision in the Act could empower a citizen to file a suit against the retailer. Further, a consumer could seek to hold the retailer responsible for voiding the engineâ€™s warranty or for damaging the engine. Under curÂrent law, the retailer could be sued and exposed to potential long-term, retroÂactive liability if the fuel is ever deterÂmined to be defective.
Legislation under consideration in Congress would resolve many of these challenges by authorizing an alternative method for determining the compatÂibility of equipment, thereby potentially mitigating the cost of converting a station to legally sell E15. The legislation would also remove retailer legal liability for misÂfueling, provided he is in full compliance with the labeling requirements. Versions of the legislation also would remove the threat of defective product liability.
If the legislation is enacted into law, the market dynamics for E15 could beÂgin to improve. Given that EPAâ€™s reguÂlations apply to all newly produced vehicles, the population of potential consumers is constantly expanding. In addition, the automobile manufacturÂers may adjust their production speciÂfications to specifically accommodate E15 and, if so, would likely amend their ownerâ€™s manuals and warranties. The problems associated with non-road enÂgines, however, are likely to remain for the foreseeable future.
E15 faces significant hurdles as it atÂtempts to establish a foothold in the market. However, even if it replaced E10 as the dominant fuel in the market, it would be insufficient to satisfy RFS reÂquirements. Using the same calculations and assumptions to calculate the contriÂbution of E15 to the RFS as were used to calculate E10 and E85, if E15 were blended into every gallon sold (which is not possible), it would satisfy 43.7% and 27.8% of the RFS in 2035 in the ReferÂence and CAFE3 cases, respectively. BeÂcause of market and vehicle restrictions on the use of E15, it is clear that its conÂtribution to the RFS will be significantly less than this hypothetical potential.
Representatives of the automobile and small-engine manufacturing inÂdustries have advocated for a higher blend authorization for engines proÂduced after a certain date, thereby proÂviding them with sufficient lead time to change the specifications of their equipment to accommodate the addiÂtional ethanol. At the end of 2011, no specific proposals had been presented.
Blending higher volumes of ethanol into motor gasoline will be required in the long term. The Reference and CAFE3 projections for gasoline, E10 and E85 clearly point to a renewable fuels market that falls short of the RFS mandated volumes in the next 20-plus years. A percentage of fuel volume blended at E15 or beyond must enter the market if the RFS is to be successÂfully implemented.
Therein lies some of the uncertainÂty â€" will the RFS remain in effect to achieve full implementation? Political pressures are building and the future is far from clear, but if current regulatory conditions prevail, retailers must be prepared to sell fuels containing more than 10% ethanol in the near future.
The projected growth potential for dieÂsel fuel should carry with it additional marketing opportunities for biodiesel, a renewable replacement for traditional diesel fuel. It can be used in certain alÂternative engines in a 100% concentraÂtion (referenced as B100), but is most commonly used in the market as B2 to B5 (2% to 5% bio-blend). Similar to E10, biodiesel in concentrations below 5% is considered substantially similar to diesel fuel. In fact, ASTM considers diesel fuel containing a biodiesel comÂponent of 5% or less to be the same as standard diesel fuel. Consequently, no labeling or other notification requireÂments are associated with B5 or lower concentrations. In addition, there are no special handling requirements for biodiesel concentrations at this level. Once retailers begin considering conÂcentrations greater than 5%, additional equipment and vehicle compatibility issues may become a limiting factor.
Biodiesel has enjoyed strong politiÂcal support and has benefited from a $1.00-per-gallon tax credit for bio-Âbased diesel (such as that produced from soybeans, the most common feedÂstock) and a $1.50-per-gallon tax credit for product produced from recycled oils (such as kitchen grease). These tax credits, however, expired at the end of 2011 along with the VEETC (Volumetric Ethanol Excise Tax Credit).
Regardless, biodiesel will remain a component of the market, if for no other reason than the federal governÂment mandates it. The RFS mandates an increasing volume of biomass-based diesel be blended into the marÂket, but caps the mandate at 1 billion gallons in 2012. After 2012, the bioÂdiesel mandate is left to the discretion of EPA but cannot fall below 1 billion gallons. The domestic market for bioÂdiesel is limited, partially due to the limited market for diesel fuel. ConseÂquently, from 2007 to 2010, the United States exported 25% to 53% of its doÂmestic biodiesel production.
Biodiesel consumption has increased over the past 10 years, growing from 10 million gallons in 2001 to 222 million in 2010, reaching its peak in 2007 at 358 million gallons. The market experiÂenced difficulties in 2010 when the tax credit expired. In anticipation of a retÂroactive application of the credit once renewed, producers continued to operÂate and price as if the credit was active. The extended delay in reauthorization of the credit caused several producers to go out of business and, as of 2011, the market had not yet recovered.
Looking forward, EIA projects steady but limited growth for biodiesel. Although liquid gallons of biodiesel will still represent only about 1% of the liquid transportation energy provided, BTUs provided by biodiesel are proÂjected to increase 525% and 575% by 2035 in the Reference and CAFE3 modÂels, respectively. As a percent of the transportation energy sector, biodiesel is projected to contribute 1.0% and 1.1% in the two cases. Consequently, its role in the market will remain limited.
In June we focus on the final part of our series with a focus on non-liquid fuels.
1. Blend rate equation: finished motor gasoline (137.8) - ethanol (13.189) = total gasoline (124.611). Ethanol (13.189)/total gasoline (124.611) = average blend rate (10.6%).
2. ASTM D5798 - 11- Standard Specification for Ethanol Fuel Blends for Flexible Fuel Automotive Spark Ignition Engines
3. Legal consequences can be associated with using non-certified equipment. Visit nacsonline.com/renewablefuels for more information
4. Infrastructure tax credits and incentives can be accessed online: afdc.energy.gov/afdc/
6. Visit nacsonline.com/renewablefuels