to full article

the
End
of
E85?
With government support gone and
its infrastructure weak, E85 becomes
a cautionary tale on alternative fuel
By Samantha Oller || [email protected]
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Good riddance.
That’s the refrain you’ll hear from politicians hungry
for ways to cut the deficit, food and restaurant industry
groups hoping to trim commodity costs, and traditional
corn-based-ethanol foes and even some ethanol fans on
the end of a tax credit that cost United States taxpayers
$6 billion each year.
On Jan. 1, the industry awoke to no Volumetric Ethanol Excise Tax Credit (VEETC), which provided a 45-cent
credit to blenders and fuel marketers for each gallon of
pure ethanol blended into gasoline. The credit, created
in 2004 as part of the American Jobs Creation Act, was
originally intended to make ethanol a more affordable
substitute for the fuel oxygenate methyl tertiary butyl
ether (MTBE), which was being phased out because of
pollution concerns.
For those who angled for VEETC’s end—and there
were many—it was a long time coming.
But for retailers who sell E85, this was truly the proverbial throwing the baby out with the bathwater. VEETC
applied a 38.25-cents-per-gallon credit to sales of E85,
or $50 million to $55 million per year. With VEETC
gone—all of it—the E85 market, still in its infancy, is
suddenly on life support.
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F ebruary 2012
37
Price Preferences
You can consider Phillip Younger a fullblown flex-fuel vehicle (FFV) enthusiast.
He managed an unattended E85 station, now owned by Renew E85 LLC, in
Oshkosh, Wis., from 2004 to 2011. As
a racing fan, he is well aware of E85’s
reputation as an inexpensive but powerful racing fuel. And with three FFVs
sitting in his driveway, Younger keeps a
close eye on E85 pricing in Wisconsin.
The oil embargos of the 1970s
made a big impression on Younger as
an engineering student. “We have to
get away from saying there are going
to be four choices at the pump—regular, midgrade, premium and diesel,”
says Younger. “Longer term, it will
not be a viable choice. The sooner we
develop at least some of the stations
with other alternative fuels, the better
off we will be.”
When asked how he chooses when
and where he will buy E85, Younger
says: “First I decide if I’m going to buy,”
citing that, despite his fan status, he
buys with economics in mind.
Corn Power: A customer fills up with E85
at a Power Mart in suburban Chicago.
“It’s all fine and dandy to say
we don’t want to support countries
who don’t like us, or we want to buy
local, or buy something green,” says
Younger. “But most consumers think
with their pocketbook. I’m like them. I
will buy outside the range for a while,
but I’m not going to buy if the price
is stupid.” And as of press time in
Wisconsin, he considers the price for
E85 “stupid”: $3.05 to $3.09 a gallon,
compared to $3.19 to $3.29 a gallon
for gasoline.
“That’s not right. My Impala is at
80% [mileage on E85]; I need the price
at eight-tenths of the gas price.” Of
course, with his background in the business, Younger knows how much margin
retailers are making on E85. Most consumers, he says, think of the spread in
cents per gallon, but more are starting
to think in percentages.
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“T
here are very few people
still saying ethanol as
E10, an additive, needs
a subsidy anymore,” says Jeff Trinca,
spokesperson for Coalition for E85,
a group of E85 retailers who support
continuing incentives for the biofuel.
“But what it’s doing is stranding E85.
You’ve got these guys who have made
the investment. Suddenly you’re going
to see a 38-cents-per-gallon increase in
price. It will put it above what regular gas
goes for, and the retailers who made the
investment are worried they will have a
stranded asset.”
Consider that E85—a blend of 85%
ethanol to 15% gasoline—has 30% less
energy by volume compared to regular
unleaded gasoline, resulting in a lower
fuel economy. This means that E85 typi-
cally must be priced at 25% to 30% discount to regular unleaded to be attractive
to flex-fuel vehicle (FFV) drivers.
Indeed, as of early January, the spread
had fallen to a nationwide average of
8.3%, according to pricing website
E85prices.com. The Coalition estimates
that the more than 2,500 E85 fueling
sites in the United States today—out of
163,000 fueling stations nationwide—
represent a $200 million investment in
infrastructure and equipment.
Fragile Investment
Matt Bjornson, president of Bjornson
Oil Co., Cavalier, N.D., is one of these
retailers. His company has been selling
E85 from one of its three sites for more
than a year, spurred as much by the
appeal of domestically grown fuel as the
E85 By the
Numbers
25%
The percentage of gas stations
that the EPA considers sufficient
to provide FFV drivers with
“reasonable” access to E85
1.5%
The current percentage of stations
in the United States that sell E85
90%
Percentage of registered FFVs with
no E85 pump in their ZIP code
50%
Percentage of registered FFVs with
no E85 pump in their county
enthusiasm of local and federal officials
in establishing the E85 infrastructure.
“Our state and federal governments
were quite intent on promoting E85
going forward,” says Bjornson. The
company spent “six figures” updating its
piping system to be E85 compatible and
installed two blender pumps to dispense
blends from E10 to E85, he says.
“It’s really frustrating, because not
only did we waste a lot of money, but
the state department of commerce had
a program where they kicked in money
for each dispenser installed, and our corn
growers association in the state kicked in
$2,500 a dispenser,” says Bjornson. “You
had a whole program a lot of people took
advantage of, and unfortunately it looks
like all for naught.”
Douglass Distributing, Sherman,
Texas, installed an E85 pump at its
Texoma location in 2011. While E85
has not been a financial windfall for
the company—the site sold less than
1,000 gallons in the first 10 days it was
offered—the biofuel was meant to be
a differentiator and offer consumers a
choice, says chairman Bill Douglass. “We
spend a lot of time with niches,” he says.
His chain also sells propane, kerosene
and biodiesel, and installed an electric
charging station in 2011.
But with VEETC now dead, “then
we just bought a $50,000 turkey,” says
Douglass.
“If you’d have said in early 2010 that
the ethanol tax credit was going to expire
in 2011, people would have thought you
were crazy,” says Dan Gilligan, president
of Petroleum Marketers Association of
38.25 cents
Per-gallon credit for E85
through VEETC
$50 million
Estimate of extending E85 credit
from VEETC for one year
$200 million
Total investment in E85 equipment
and infrastructure in the
United States
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E15: A New Hope
Another backstop to the loss of investment for E85 retailers is
E15, which, as of press time, was still working its way through
misfueling and liability issues and was not yet approved for
sale by the Environmental Protection Agency (EPA) [CSP—
Nov. ’10, p. 71]. That is because E85 equipment—unlike that
of E10—is fully compatible and legal for handling E15.
NACS is focused on passing a bill for liability relief,
designed to eliminate hurdles for retailers who want to sell
any new federally approved and regulated fuel.
“Passing this bill won’t bring fuels to market immediately,” says John Eichberger, vice president of government
relations. “Our pitch on the Hill is, ‘Do you want more fuels
in the market? Then you need to eliminate the hurdles that
are from preventing them from hitting retail.’ ”
“E15 is a real driver, a real safety net to some of these
guys,” says Todd Garner, president of Protec Fuels, a firm that
develops E85 sites in exchange for a fuel contract. “They’re
thinking, ‘Even if E85 sales slow down, E15 gets pushed
through to where I can sell it.’ ” To open up more options
for customers, Protec is outfitting sites with blender pumps,
which will allow the sale of blends from E10 to E85.
But even if these retailers will not be legally liable for
misfuels with E15, they should still consider the effect of
such accidents on their business, says Eichberger. “The
theory is, if I have a flexible system I can sell flexible fuels,”
he says. “Now the question of, ‘Should I sell E15?’ comes
into a consumer perspective.”
Matt Bjornson, president of Bjornson Oil and an E85
retailer, isn’t enthusiastic about E15’s prospects. “I don’t see
E15 taking off in a big way anytime soon,” he says. “You
have rules about what age vehicle E15 can go into. Enforcing at the retail level will be next to impossible.
“People will put in E15 in cars that shouldn’t have it,
have trouble, and give ethanol a bad name.”
Tom Buis, CEO of ethanol producer coalition Growth
Energy, expects E15’s liability issues to get worked out by
mid-2012, and says the group is lobbying states to offer
incentives to help fund installation of blender pumps.
“[The year] 2012 offers a lot of promise, especially as we
get E15 into the marketplace and more flex pumps out there.
They’re a market-clearing mechanism for not only the fuel,
but it also provides consumers choice at the pump,” he says.
“Let them pick the price and performance, and the type of
vehicle they have. It’s not easy to flip on a switch and it happens. You have to work on it.”
America (PMAA), Arlington, Va., also a Coalition for E85 member. “But here it is, and it looks like it certainly will expire. It will
spook business people; they can’t live like that. You can’t make
sound decisions when things are on and off.”
One could argue that, like all business decisions, installing E85 is a choice, and a risky one at that. Any advantage to
corn-based ethanol—whether related to energy security or
environmental friendliness—has been fiercely debated by its
numerous foes. Also, there is the high cost of equipping a site to
handle the highly corrosive fuel.
And then there are the necessary short-term price supports
for E85, making its volumes perhaps even more sensitive to price
changes than regular unleaded.
“The price needs to be 25% to 30% cheaper for [FFV drivers] to come out, and it really hasn’t been,” says Bjornson.
“With the end of VEETC, it’s going to be dead, and that’s an
understatement.”
Despite—or rather, because of—these issues, you could
also argue that E85 is a painful example of how not to introduce an alternative fuel to the U.S. fueling infrastructure. The
establishment of mandates in the Renewable Fuels Standard,
without regard for the state of the infrastructure and business
dynamics, paired with a flurry of incentives by state and federal
governments to install E85, and ending with the quick removal
of price supports, shows a complete lack of a game plan for
alternative fuels.
“We’ve put the cart before the horse way too often with biofuels policy,” says John Eichberger, vice president of government
relations for Alexandria, Va.-based NACS, a Coalition for E85
member. “Hopefully, we can start getting a balance to the overall
national energy policy where we talk about economic security,
energy security, environmental protection and sustainability all
at the same time with the same objective in mind.
“I don’t think we will have a sensible, long-term strategy
until we have that dialogue. And that’s going to take some strong
leadership to accomplish.”
Until then, the rise and fall of E85 may have greater implications on the success of not only ethanol blends but also other
future transportation fuels, because it sours retailers willing to
take the risk on a new product and scares away those who are
considering an alternative.
Bjornson, a former chairman of PMAA, has publicly and
financially supported the association’s efforts in advocating for
E85. “Just because the battle is tough doesn’t mean it shouldn’t
be fought,” he says. Bjornson plans to keep E85 in stock, with
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“I would say it’s one of the
poorest investments we have
ever made, thanks to the
government. … We definitely
were led down the wrong path.”
hopes that it eventually gets a lifeline
from Congress.
That said, “I would say it’s one of the
poorest investments we have ever made,
thanks to the government,” he says. “Is
it going to be the end of our company?
Obviously not. But we definitely were led
down the wrong path.”
Not Giving Up
“E85 retailers have a really different
mindset,” says Todd Garner, co-founder
of the Coalition for E85 and president
and CEO of Protec Fuel, Boca Raton, Fla.
“They do think a little differently and
are willing to take some risk and provide
something new to their customer base.”
Protec is a distributor and fuel riskmanagement firm that assists retailers in
the Southeast and East Coast with installation of E85 equipment in exchange for
a fuel contract. Since its first installation
in 2006, the company has retrofitted
about 100 sites with E85 fueling locations. While it had signed up about 10
retailers to install E85 this January and
February, it is telling new customers that
the fuel may not be as profitable as it was
in the past.
“Right now we’re in this completely
unknown territory,” says Garner. “When
we sell [E85] at 40 cents below [gasoline],
the volume is incredible. But when we
start to get 20 cents below gasoline, volume starts to fall off.” He says this trend
has exacerbated as FFV drivers become
more focused on E85’s mileage drag.
While Garner did not think the E85
business would evaporate as of Jan.
1, it is only because ethanol prices, as
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of press time, had fallen in the final
quarter of 2011. “If they go right back
up—that’s how scary it is—it could
have easily been the other way on Jan.
1,” he says. “Every station in the country
was not going to sell product because
nobody’s going to buy it.”
However, it is easy to find retailers
who say they will stick with E85 through
this uncertain time; most typically, they
are the midsize and large chains that have
embraced the biofuel on a wide scale
because of their corn-belt footprint or as
a green differentiator.
Kum & Go L.C., West Des Moines,
Iowa, is the largest retailer of E85 in the
country, with more than 70 sites out of
its chain of 450; it plans to add E85 to at
least 45 sites in 2012. Today, the chain is
still “committed” to the product, says Kyle
J. Krause, president and CEO, who does
not believe the end of VEETC spells the
demise for E85. This is because political support for ethanol varies by level of
government, he argues.
“Nationally, you have the painting of an
ethanol subsidy being bad by many, and
at the state level, you still see it being hit
or miss on whether they like it, don’t like
it, support it or don’t support it,” he says.
Iowa, while home to 41 ethanol plants, has
seen some of its local Republican politicians question state subsidies.
Kum & Go first installed E85 in the
mid-’90s. “I’m not sure that location has
yet made money on E85 in the 15 years
we’ve had it,” Krause admits. “It’s just a
long-term type of thing. But we think
where we’re at, it fits into a broader piece.
We’re in the Midwest; this is where we
market, it’s what our customers do, it’s
what we are. And so when we try to be
local within our market, selling E85 for
us is being local.”
Similarly, Thorntons Inc., Louisville,
Ky., remains dedicated to the fuel it
has installed at 42 of its 162 sites. John
Zikias, senior vice president of category
management and supply chain for fuel
and merchandise, says Thorntons benefits from a good supply in the Midwest,
and believes the “homegrown” appeal of
corn-based ethanol offers a competitive
advantage.
Volumes are “mixed,” and “it’s a longterm build,” says Zikias. “We are pleased
with the volume. It’s a viable fuel option.
We will have to work through the tax issue,
but it’s a way to allow consumers an alternative fuel that’s a little more environmentally friendly, vs. imported oil.”
He is convinced these same consumers will stick around despite any
potential price increase. “It’s going to be
consumers who will still buy E85 regardless because it’s about being domestic,
more environmentally friendly. Even if
its price is at parity with RBOB, consumers will buy it,” he says, referring to the
commonly used acronym for traditional
gasoline, or Reformulated Blendstock
for Oxygenate Blending.
The Spinx Corp., Greenville, S.C., is
similarly dedicated to E85, says founder
and CEO Stewart Spinks. “It’s better to
support the Corn Belt than the Sand
Belt,” he jokes. The fuel makes up 2.5% of
Spinx’s volumes, which Spinks considers
“not abysmal,” considering that premium
has 7.5% share.
At the same time, the chain plans to
convert 10 of its 41 E85 pumps to straight
87 octane gasoline by end of January, in
light of ethanol price increases. The company had seen a “tremendous” increase at
Poll Position
In a poll of flex-fuel vehicle (FFV)
drivers by Web site e85prices.com,
the rack in early January, reflecting the loss
of VEETC. These are lower-volume sites,
Spinks says, where E85 has not taken off.
“I don’t want to send the message that
we’re no longer interested in alternative
fuels, but from an economic point of
view, the volumes are too low to continue to offer it,” he says. “And No. 2, the
consumer is saying we want ethanol-free
gasoline available.” While earlier in 2011,
Spinx was able to sell E85 at a 40-cent
differential to regular gasoline, the stores
will likely be forced to shrink that spread
to 10 to 20 cents.
“We’ll eat some margins like our suppliers will, and consumers will pay more
for alternative fuels,” he says.
And that is the conundrum many E85
advocates face. “E85’s future is in broad
uncertainty,” says Eichberger. “For the
retailer, it will come down to ‘What’s my
per-gallon cost? What’s my per-gallon
opportunity?’ If I’m going to be taking a
bath on E85, I might as well switch it to
something I can make some money on.”
The Way Forward
While VEETC will not be resurrected,
there is a partial “fix” to E85’s price
woes—and a seemingly simple one at
that. The biofuel is defined as an alternative fuel in the Energy Policy Act of
1992. However, it was excluded from the
45-cent-per-gallon tax credit applied
to other alternative fuels, as part of the
Alternative Fuel Credit, to avoid “doubledipping” of incentives while VEETC was
still active. Proponents argue that E85
should be added as an alternative fuel in
the tax code to gain that credit.
“I’m completely in favor of getting rid
of VEETC; the majority of the money was
going into E10,” says Garner of Protec.
“But E85 is still in its infancy. We’ve got
9 million to 10 million cars out there
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most cited a 15% to 20% spread
as the trigger for an E85 purchase.
The end of the VEETC subsidy had
already pressured the average
spread between the high-ethanol
blend and regular gasoline to 8.3%
by early January.
At which price spread do you
buy E85?
Price spread
Percent who
would buy
15%
27.1%
20%
23.6%
30%
17.8%
25%
11.5%
Same as gasoline
7.9%
10%
7.3%
4.8%
5% less
Source: e85prices.com.
Based on 749 respondents.
and 2,500 stations. Our argument: We’re
not asking [the government] to give the
blender credit for E85 forever. But we’re
just getting going.”
The Coalition for E85 has had “good
meetings” with several congressional
members and their staffers, according
to Trinca, citing Senators Bill Nelson
(D-Fla.), Jeff Bingaman (D-N.M. and
chairman of the Senate Energy Committee), Debbie Stabenow (D-Mich.)
and Maria Cantwell (D-Wash.). On the
House side, “about a dozen members”
seem supportive, says Trinca, including
Rep. Adrian Smith (R-Neb.).
The message the coalition is attempting to hammer home: “For the consumer
who gets up every morning to go to
work, E85 is the only option for flex-fuel
vehicles right now,” says Trinca. “If that
goes away, then that means you just fill
up your FFV with petroleum from the
Middle East. If we get people to focus on
that, we can win supporters.”
It is a tougher argument today, however, than during ethanol’s heyday, when
supporters were able to make the case to
a core group in Congress that domestically produced renewable fuels were a
win-win, reducing the country’s reliance
on imported oil and helping farmers, says
Eichberger. Now faced with a massive
national budget deficit, these same congressmen weigh the price of such support
against painful cuts in defense spending,
for example. “Now out of those 100 legislators, you may only be able to get 40 of
them, and that’s not enough to overcome
the opposition,” he says.
Trinca says the Coalition hasn’t “gotten that much pushback” about recoding
E85, but rather faces the political quagmire of an election year. “Washington
solves things in their own time,” he says.
“One [congressional] staffer said, ‘We
don’t have the bandwidth right now to
deal with this.’ ” If nothing is done, he
suspects the number of E85 sites will be
halved by the end of 2012.
He has been assured that the answers
to E85’s problems, whether it be a possible extension of VEETC for E85 or its
recoding as an alternative fuel, will be
resolved in the first quarter of 2012.
Eichberger of NACS, however, isn’t
so certain. “I’m skeptical that any type
of tax policy that results in a reduction
in revenues for the federal government
has a chance,” he says. “I’m convinced
the budgetary concerns for Congress
and the overall debt approach will
overwhelm any new effort to create an
incentive that is not absolutely critical
to economic growth. It doesn’t mean we
don’t think it’s valid to be asking for it
and to try, and we very well could succeed under certain circumstances and
types of advocacy. But I think it’s going
against a really big hill.”
“This message is an important one to legislators: To have an energy policy in the
first place, then to have a consistent one, is pretty important if you want the private
sector to participate.”
Searching for an Energy Policy
But if E85 died, would anyone miss it?
This is a small market, no doubt, representing only about 98.9 million gallons
in 2009, just a trickle when compared to
134.4 billion gallons of regular unleaded,
according to Energy Information Administration estimates.
“The E85 market really hasn’t taken
off in the United States,” says Mackinnon Lawrence, a senior analyst with Pike
Research, a clean-technology research
group based in Boulder, Colo., and coauthor of a 2011 study on biofuels.
Lawrence considers VEETC a secondary
incentive, and, when combined with the
RFS—which mandated that renewablefuels use be doubled by 2012—a redundant one at that. “In terms of that market
growing, it certainly would be helped with
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VEETC,” he says. “But even with VEETC, it
wasn’t making any headway.”
The central issue with E85, says
Lawrence, is infrastructure build-out.
“The estimates are pretty high to change
out the whole fueling infrastructure,”
he says. “The question then becomes: Is
that more advantageous than funding
pipelines, or advanced biofuels production capacity?”
There is also the lukewarm embrace
of E85 by consumers, regardless of the
approximately 9 million FFVs on the
road today. According to a study by General Motors (GM), about 70% of its FFV
buyers were not aware they could fuel up
with E85, while less than 10% used it. “If
E85 disappears, with all of the FFVs on
the market, the customer’s not going to
be affected at all—if they even know they
can put E85 in their car, which most of
them don’t know,” says Eichberger.
However, E85’s struggles are symptomatic of an even larger issue: the lack
of a clear U.S. energy policy. It is one that
threatens the future of fuel alternatives, at
a time when the Obama administration
is juggling the challenge of growing jobs
and moving the country toward a cleanenergy future, as symbolized by the pending approval of the Keystone pipeline.
“One big challenge the renewable-fuels
industry has had in the United States is an
unstable energy policy,” says Matt Horton,
co-founder of the Coalition for E85 and
CEO of Propel Fuels, Redwood City, Calif.,
a business that leases land on retailers’ lots
for E85 and biodiesel installations [CSP—
Dec. ’11, p. 139]. “These tax credits are here
one year, gone the next. It really makes it
difficult for people to make long-term,
sustained investments.”
This lack of solid footing has also been
a big issue for alternative-fuel producers,
says Lawrence of Pike Research. “Biofuel
[producers] talk about needing four to
five years of stable policy to really attract
the investment they need, and that clearly
has not been the case in the United States.
We have a ways to go at articulating a
policy that will spur investment.
“At the end of the day, you’re only a
fraction of the market,” Lawrence says of
biofuels in general. “It takes quite a lot of
investment just to get to that fraction.”
In effect, it gives the retailer and consumer a “no vote of confidence” about
alternative fuels, says Garner of Protec.
“Take the worst-case scenario: The
spread between ethanol and gasoline
collapses, we can’t sell E85 at a discount,
and there’s no credit to maintain it until
it becomes a mature market. People will
throw up their hands and say, ‘I’m tired
of getting involved in stuff that involves
the government.’ ”
Count retailer Bjornson among these.
“We have almost a next-to-zero energy
policy,” says Bjornson. “This is the perfect
example. They go from 100% balls-tothe-wall they want E85, to where they are
going to let it fall off the face of the Earth.
How many times are they going to promote or encourage private investment in
an alternative fuel, and when they throw
up their arms, the business owner gets
burned? You’re not going to be so likely
to do that the next time.”
Something has to give. According to a
2011 study commissioned by the Renewable Fuels Association and conducted
by engineering and consulting firm
Air Improvement Resource Inc., without a significant expansion of the E85
infrastructure, the EPA will not meet its
middle- and high-consumption renewable fuels targets. Meanwhile, the Big
Three automakers—Chrysler, Ford and
GM—have pledged to produce half of
their 2012 fleet as flex-fuel capable.
But the damage to retailers from a
psychological perspective may already
be done. Bjornson says that even if the
government offered a 100% grant to
fund a retailer’s adoption of an alternative fuel, “they’re still asking the retailer
to give up his most valuable real estate
on the whole entire lot to dedicate to this
product. After a debacle like this, what
companies in their right mind will give
up real estate?
“This message is an important one to
legislators: To have an energy policy in
the first place, then to have a consistent
one, is pretty important if you want the
private sector to participate.”
Garner of Protec has one main message
he wants to communicate to policymakers.
“You’ve got to show the consumer and
people who sell fuel out there that as a
government, you’re behind the biofuel
and alternative-fuel industry,” says Garner. “They’ve gone out and spent money,
redone stations, done what they had to do
to sell the fuel because there are so many
FFVs out there. If you don’t step up and
do that, if you lose them, you won’t get
them back.”
n
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