Next to Impossible
By John Eichberger

At the end of 2007, Congress enacted legislation to in­crease the size of the na­tion’s renewable fuels stan­dard (RFS) from a mandatory use of 7.5 billion gallons of renewables in 2012 to at least 36 billion gallons by 2022. At the time, many hailed this new law as a great step forward in the effort to reduce the nation’s depen­dence on foreign oil.

However, despite the significant amount of attention given to dictating which fuels would satisfy the mandate and their potential impact on green­house gas emissions, scant attention focused on the critical issue of imple­mentation.

Suppose the nation is able to satisfy the new law’s production of the pre­scribed renewable fuels, including the required 16 billion gallons of cellulosic biofuels — of which not a single com­mercially viable gallon has yet been produced. How will the nation actual­ly sell these products to consumers? And will consumers even be able to use them?

As the leading retailer of motor fuels, our industry is uniquely positioned to help policymakers and regulators un­derstand the real challenges of meeting this daunting goal. To help, NACS is launching an aggressive education ini­tiative with Washington power brokers to pave the way for a smoother imple­mentation of the RFS.

The challenge begins with the structure of the RFS, as enacted by the Energy Independence and Security Act and signed into law in December 2007. Building upon the program established by the Energy Policy Act of 2005, this bill adds significant volume require­ments as well as complicates the pro­gram by adding lifecycle greenhouse gas reduction requirements to the mandated fuel mix. It limits the use of corn-derived ethanol at 15 billion gallons and requires at least 16 billion gallons of cellulosic biofuels.

The E10 Blend Wall
Currently, the motor fuels market uses ethanol in two primary concen­trations: E10 (10 percent ethanol, 90 percent gasoline), suitable for most vehicles, and E85 (70 to 85 percent ethanol, 30 to 15 percent gasoline), suitable only for flexible fuel vehicles (FFVs).

As mandated, biomass-based diesel is expected to contribute limited volume to the overall RFS, so ethanol likely bears the brunt. But whether corn-derived or cellulosic, ethanol has its limits. Meet the “blend wall.”

To explain it simply: In 2007, the na­tion consumed approximately 150 bil­lion gallons of gasoline. Assuming this remains relatively constant (ignoring the impact of the recession) and assum­ing that the industry blends 10 percent ethanol into every gallon in the United States, this will result in the blending of 15 billion gallons of ethanol. If you do the math, that’s 21 billion gallons short of the mandated target.

So how can we bridge the difference?

E85: A Niche Contributor
Some proponents claim that E85 can significantly contribute to the success­ful implementation of the RFS — not true. Currently fewer than 2,000 retail locations sell E85, limiting the potential supply. And despite the allegations of some politicians, the limited number of locations is not due to some anti-etha­nol conspiracy. There are several very important reasons for it:

• Local fire codes require retailers to sell only products for which their equipment is officially certified as Underwriters Laboratories (UL) compatible. Currently, UL has not certified a single dispenser as com­patible with E85. Therefore, E85 re­tailers risk gross negligence liability if they experience a fuel compatibility-related equipment failure. Many retailers also find that their under­ground equipment is not properly certified to store and dispense E85.
• Converting a gasoline retail location to sell E85 is costly, with estimates up to $200,000 depending upon the modifications required and the asso­ciated regulations.
• FFV penetration in the market re­mains limited, despite increased pro­duction from American automakers. In August 2008, there were approxi­mately 7.3 million FFVs in the United States, or fewer than 3 percent of pas­senger vehicles in the nation. Using data from the Department of Energy, FFVs could represent 6 percent of the market by 2012. Despite the growth (which was predicted before the Big 3 U.S. automakers went begging to Con­gress for a bailout), these vehicles will remain a small minority of the poten­tial demand pool. Notably, foreign au­tomakers are not producing FFVs.
• FFV owners can switch between E85 and gasoline, which further restrains the potential demand for E85. Without a predictable level of demand from the small pool of FFV owners, a retailer has great difficulty calculating the po­tential return on investment associat­ed with compatible infrastructure.
• E85 provides consumers with ap­proximately 25 percent fewer miles per gallon than gasoline, thereby forcing consumers to refuel more often. Consequently, retailers must offer E85 at a discount to compensate for the reduced energy efficiency and the inconvenience of more frequent refueling.

Mid-Level Ethanol
If E10 and E85 are not the answer to the 36 billion gallon mandate, what other options are there?

Many see ethanol blends such as E15 or E20 as the bridge between the blend wall and the RFS. Increasing gasoline blends from 10 to 15 percent ethanol could potentially extend the blend wall from 15 billion gallons to 22 billion gallons, substantially improv­ing the market’s ability to satisfy the mandate. While this is a possibility worth exploring, several challenges must be overcome:

• Most equipment in service at petro­leum retail locations is certified by UL as compatible with gasoline blended with up to 10 percent etha­nol. However, UL has been cited in some publications as having tested this equipment up to 15 percent. UL has confirmed with NACS that while it does test to 15 percent ethanol, it is only officially certified to 10 percent. It is therefore at this 10 percent limit that retailers are protected from po­tential gross negligence liability.
• Further, UL will not retroactively change the certification of equipment currently in service if it decides to in­crease its certification to 15 percent. So any retailer who wants to sell gaso­line blended with greater than 10 per­cent ethanol will incur infrastructure modification costs similar to those associated with the conversion to sell E85 — both above and below ground.
• Retailers who sell gasoline blended compatible, risk exposure to gross with greater than 10 percent ethanol, through equipment not certified as negligence liability. They may face substantial regulatory fines and could be sued by consumers for significant damages.
• Auto manufacturers currently extend warrantees on the existing fleet to ac­commodate gasoline blended with up to 10 percent ethanol. To date, they have not amended their warrantees to provide coverage retroactively in the event consumers refuel with blends higher than 10 percent.
• If the automobile fleet is not certified compatible to run on E15, then this fuel is only suitable for the limited number of FFVs on the market. As­suming that ethanol-blended fuels will sell for a lower price, consumers may find it cheaper to purchase E15. If those consumers are not driving a FFV, retailers may be exposed to mis­fueling liability and any associated vehicle damage that might occur.
• Small engine vehicles and equip­ment, such as lawn mowers, chain saws and marine vessels, have suf­fered performance and safety issues because of ethanol blends greater than 10 percent.

Retailer Concerns
The concerns about potential liability for equipment failure or vehicle dam­age associated with ethanol blends in excess of 10 percent are only — at this point — legal concerns. There’s no doc­umented evidence that retailers who currently sell blends above E10 experi­ence fuel compatibility-related equip­ment failures either domestically or in other countries.

Alternatively, there is some evidence that most of the existing vehicle fleet would not be adversely affected by E15, but that does not rule out liability. Just because problems have not started per­colating, retailers and vehicle manufac­turers should not enter the renewable fuels market without some caution.

In markets where retailers are sell­ing E85, and in some cases E15, E20 and E30, they typically do so with the coop­eration of local regulatory officials — ensuring that they won’t be held ac­countable for using non-compatible equipment. This does not, however, protect them from private citizens filing lawsuits or regulators taking en­forcement action in the event of equip­ment failure.

This is a real concern. This kind of li­ability can easily put a retailer out of business. Identifying these concerns is not nay-saying against ethanol, it is sim­ply identifying real world issues that must be addressed.

What’s the Solution?
Infrastructure limitations are not an ex­cuse for failing to implement the RFS. We need to find a way to overcome the challenges set forth — and NACS be­lieves this can be done — with the assis­tance of Congress. We are discussing the following options with Congress to de­termine which ones might be feasible:

• Expand federal assistance for the conversion of retail facilities to sell E85 by enacting legislation to increase financial limits and expand the eligi­bility to include upgrades to sell E15. Retailers cannot afford to make these conversion investments on their own, especially in the absence of a viable market demand and potential return on investment.
• Investigate alternatives to the reliance upon UL certification to exempt retailers from equipment compatibility liability. Currently, equipment manufacturers claim that they are producing equipment that can dispense E85 and that much of the equipment in the market is suit­able for E15, but UL has not upheld these claims. Congress should con­sider changing certification proce­dures and expanding the universe of acceptable certification authorities, perhaps even allowing manufactur­ers to self-certify.
• Provide clear procedures for retail­ers to follow to protect themselves from liability associated with con­sumers who misfuel their vehicles with high ethanol blends.
• Help convince auto manufacturers to honor their warrantees if con­sumers use fuel blends in excess of 10 percent ethanol. Studies on the ex­isting and legacy vehicle fleet are ex­amining compatibility ranges, with some predicting that vehicles manu­factured after a certain date might be suitable for mid-level ethanol. The automakers will need some govern­ment assistance to protect against ex­cessive warranty claims in the event of systems failure.
• Encourage foreign automakers to produce FFVs. If the nation relies upon the Big 3 automakers to pro­duce all of the FFVs for the market, penetration will never reach the lev­el where retailers can predict a rea­sonable demand for E85 or higher ethanol levels.
• Work with the Environmental Pro­tection Agency to offer potential after-market kits to convert tradi­tional gasoline-powered vehicles to FFV. These kits currently exist, but the certification is costly and the ef­fectiveness is erratic. However, if the kits prove to be effective, Congress should work to reduce the cost of de­velopment and provide a financial incentive for consumers to convert their vehicles.
• Consider measures to ensure the continued availability of E10 and lower blends for the off-road, ma­rine and small engine and equip­ment markets.

Without a serious discussion mov­ing forward, we will continue to lan­guish in the valley of the unknown, and anxious politicians will continue to propose legislation that would force re­tailers to make costly conversions. There must be a better way. 

Successful RFS implementation re­quires jumping over more than a few hurdles. All of these options are up for consideration and debate, but there are many complexities that would need vetting, and some may turn out to be ab­solute non-starters.

The RFS Implementation Schedule
Required Renewable Fuels:

Year   Gallons (in billions)
2008   9.0
2011   13.95
2009   11.1
2010   12.95
2012   15.2
2013   16.55
2014   18.15
2015   20.5
2016   22.25
2018   26.0
2017   24.0
2019   28.0
2021   33.0
2020   30.0
2022   36.0