E-15 Ethanol Blends, EPA, and Implications for Ethanol Industry
AgMRC Renewable Energy Newsletter
Professor of Economics and Energy Economist
Ag Marketing Resources Center
Iowa State University
Note on Wisner Status Change
Due to tight University budgets, this month’s articles may be the last that I author for the Renewable Energy Newsletter of the Ag Marketing Resource Center. This month may also bring an end to our monthly assessments of adequacy of corn and soybean supplies and prices for biofuels, as well as our balance sheet projections for DGS, soybean oil and biodiesel. We are exploring other possibilities for continuing this work, but at present the outcome remains uncertain. Because biofuels and other types of renewable energy have been given center stage in the nation’s energy and greenhouse gas policies and with their major importance to U.S. and world agriculture, it is with great regret that I anticipate this change in status.
Earlier this year, the U.S. Environmental Protection Agency (EPA) was asked to consider raising the maximum allowable ethanol-gasoline blend for non-flex-fuel gasoline-powered vehicles from its present 10% to as high as 15% ethanol. The higher blends are essential if biofuels mandates in the December 2007 Energy Independence and Security Act(1) are to be met. EPA allowed a comment period in which proponents and opponents could give their reactions to the possible higher allowable blend. There was essentially unanimous agreement within the ethanol industry that the higher blends should be allowed in order to move forward with a transition to more renewable fuels and to encourage investors and developers of cellulosic ethanol. A number of other groups including the automobile industry, manufacturers and users of small off-road engines, and others expressed varying types of concerns.(2)
On December 1, 2009, EPA announced that it was delaying its decision on this request to May 2010, to allow completion of research on impacts of the higher blend on various vehicles. Of particular concern was the impact on emission control equipment and implications for manufacturers’ warranties. With its announcement, EPA sent a letter to Growth Energy, which along with 52 ethanol producers had made the request for the higher allowable blend. The letter provides some additional detail on a probable approach that EPA may take next year to implement higher blends. In this article, we examine some areas of uncertainty and possible implications of this development for the ethanol industry.
Importance to ethanol and corn industries
Current EPA signals on this issue have important implications for gasoline retailers, in addition to petroleum refiners, ethanol producers, the soybean industry, the livestock and poultry sectors, and the entire corn-related sector of agriculture. Since the corn-based ethanol industry is rapidly approaching a 10% blend wall and government-mandated blending of cellulosic ethanol will begin next year, a positive response to this request would be vital for the infant cellulosic ethanol industry. In theory, raising the allowable blend from 10% to 15% would raise the maximum market potential for fuel ethanol by 50%. If so, it would replace another 5% of the nation’s gasoline supply with ethanol on a volumetric basis or about 3.4% on an energy-equivalent basis. Under these conditions, if all of the added market went to corn-based ethanol and other demands for corn did not change, the need for corn for ethanol could increase from the current blend-wall level of approximately 5 billion bushels to around 7.5 billion bushels. At the 2009 U.S. average yield, after adjusting for corn replacement by distillers grain feeding, which would create a need for about 11 to 12 million more corn acres if most of the added demand were filled by corn ethanol. That in turn would have impacts on the seed, fertilizer and other farm supply industries, the livestock and poultry sector, and other food and agriculturally related industries in the U.S. and abroad. The intention of Congress in the U.S. Energy Independence and Security Act of 2007 clearly was that part of this additional ethanol market would be shared with cellulosic ethanol and other advanced fuels. However, it is unlikely that enough fuel from these latter sources will be available in the next two to three years to reach the levels called for in the act. Thus, if the E-15 mandate is implemented in the near future, most of the added demand would go to corn-based ethanol.
In reality, if E-15 blends are approved, the potential impact appears likely to be economically significant for the ethanol and corn industries, but considerably smaller than one would expect at first glance and well below a 50% market expansion. There also is a possibility that EPA might approve a maximum allowable blend higher than E-10 but less than E-15. An E-12 blend has been discussed frequently, although it was not mentioned in the letter from EPA to Growth Energy. An E-12 blend theoretically would expand the maximum ethanol market by 20% vs. the market available with E-10, although the actual market expansion would probably be less.
Implications at the retail fuel level
The letter that EPA sent to Growth Energy in response to its request for E-15 blends is available. It indicates that the Department of Energy (DOE) is conducting tests on E-15 effects on 19 vehicles to determine long-term emissions impacts.(3) Tests have been completed on two vehicles and have shown no problems, but EPA is delaying the approval of the higher blends in order to allow tests to be completed on at least 12 other vehicles. Those tests are expected to be completed by the end of May 2010. If the results are satisfactory, EPA indicates it would be in a position to “approve E-15 blends for 2001 and newer vehicles in a mid-year timeframe.”(4) Meanwhile, EPA indicates it will work to prepare appropriate retail pump labeling so that consumers will be able to select appropriate fuel blends for their vehicles and off-road equipment. There are strong implications that if E-15 is approved, it will be only for 2001 and newer vehicles.
This wording leaves the impression that vehicles older than 2001 models probably will not be allowed to use the higher blend, if it is approved. If so, it would somewhat limit the potential size of the increased market potential for ethanol. In addition, for retailers who want to offer E-15 blends along with E-10, it would mean that additional investments in tanks and pumps may be needed. In some cases, lack of land will prevent adding another tank. In other cases, the added investment funds may not be available or the station may be on leased land that does not allow additional tanks to be installed. An alternative for retailers who currently offer E-85 might be to shift their E-85 equipment to E-15 usage. That would reduce the volume of ethanol being marketed through E-85 but would offer them a much greater potential fuel market volume than is currently available from E-85 sales.
At first glance, blender pumps appear to be an alternative to reduce the need for additional retail tanks and pumps. However, information from the petroleum industry indicates that the required type of gasoline changes as ethanol blends change.(5) Thus, different refiner gasoline reformulations may be needed for E-15 vs. E-10 blends. That may be a limitation in using blender pumps. This type of pump has been used in the past by some companies to provide varying levels of octane in gasoline. The question of whether blender pumps are feasible appears to be especially important for areas of the country that are required to use reformulated gasoline. Also, in states whose air pollution regulations will be mandating 10 percent ethanol blends beginning in 2010, it looks likely that E-15 blends will not be feasible. California and Florida are two states where this situation may exist. California is the largest market for gasoline in the U.S. and is also the largest potential ethanol market. Further complicating ethanol’s market potential in California is its proposed greenhouse gas emission (GHG) regulations set to go into effect in 2011.(6) California’s GHG regulations, if implemented in their present form, will make it difficult for the Midwest to market ethanol to the California petroleum industry. One other complication is that Underwriters Laboratory has not approved retail tanks, lines and pumps for ethanol blends exceeding E-10. Approval of local fire marshals reportedly is needed for use of E-85 pumps.(7)
Distribution system complications
Since EPA has not issued final regulations on E-15, much uncertainty still exists on its potential market impacts. The first uncertainty is whether E-15 blends will be allowed at all. If test results should prove to be negative, another possibility would be to allow some level of blends lower than E-15 but higher than E-10. As noted above, E-12 blends have been mentioned frequently as a possibility. Some might view this as a transitional possibility and a way of delaying the approval of E-15 blends for a few years, until most pre-2001 vehicles are taken out of service. If this alternative was selected by EPA, the ethanol, petroleum refining and retail fuel industries would hope that E-12 blends would be approved for all gasoline-powered vehicles, regardless of age. EPA’s letter hinted that it is leaning strongly toward the E-15 alternative rather than E-12 blends, thus suggesting that the probability of E-12 blends is rather low.
If E-15 is approved only for 2001 and newer vehicles, major infrastructure issues and uncertainties about aggregate market impact would very likely emerge. These uncertainties would tend to increase the caution of potential investors in cellulose ethanol facilities. While E-15 blends only for 2001 and newer vehicles would not be expected to have a negative impact on ethanol demand, it could significantly retard expansion of the ethanol market until infrastructure is able to adjust to the higher blend and changes needed in both retail and distribution channels to accommodate additional formulations of gasoline. Thus, it would raise the ethanol blending wall somewhat but not be expected to provide a final solution for the blending wall problem facing both starch-based and cellulosic ethanol. The necessary adjustments could be accelerated by additional tax credits to distributors and retailers but at a cost that is unknown at this time.
Why E-15 is not a complete solution to the blending wall
Data through the second week of December indicate the current U.S. annual use of gasoline is about 138.5 billion gallons.(8) A 15% ethanol blend applied to the nation’s total gasoline use would require about 20.78 billion gallons of ethanol. That’s well below the 36 billion gallons mandated in the 2007 U.S. energy legislation for 2022. If the remaining nearly 16 billion gallons were sold as E-85, this portion of ethanol production would have to be sold at a large discount to gasoline, unless engine technology is changed to remove the mileage reduction of around 25 to 28 percent (shown by DOE studies). That in turn would reduce the profitability of ethanol production, discouraging investment in the industry. E-15 blends likely would require a modest discount in price relative to gasoline as long as consumers can identify it as a different class of fuel than gasoline. However, the needed discount would be small when compared to E-85.
Possible added market size
Along with these various uncertainties, other questions about ethanol’s future growth path stem from unsettled GHG questions. In early December EPA announced that CO2 emissions are hazardous to human health.(9) This is further complicated by unsettled issues related to measurement of indirect land use (ILU) impacts from ethanol. We noted in an article last summer that these issues are on a collision course with mandates from the December 2007 energy legislation that call for progressively higher use of ethanol in the U.S.(10) The energy legislation mandates an increasing percentage blend of ethanol in the nation’s gasoline supply until ethanol on a volumetric basis is equivalent to about one-fourth of the current U.S. gasoline use.
Assuming these government policies do not become a major constraint on ethanol growth in the next two to three years, a presentation from a petroleum and ethanol industry source indicates up to 59% of the nation’s gasoline supply could qualify for E-15 blends.(11) If so, the upper limit on potential ethanol market growth if E-15 blends are approved later this year -- but only for 2001 and newer vehicles -- would be about 31 percent. That’s a substantial growth potential, but many hurdles still need to be overcome and several years likely would be needed to attain maximum growth potential. Even this upper limit is an overstatement. Part of the 59% of the market that could offer E-15 would be made up of pre-2001 vehicles.
If we disregard the pre-2001 vehicles, the potential market growth would translate into added demand for about 965 million bushels more corn for ethanol refineries than the maximum with E-10 blends. After adjusting for the distillers grain solubles (DGS) offset in corn feeding, it would point to a need for about 4.6 million more U.S. corn acres at current yield levels. With a continued uptrend in the nation’s corn yield at the 1990-2007 rate of increase, the acreage increase needed in 2015 would likely be around 4.3 million acres, assuming no significant reduction occurs in food, feed and export demand for U.S. corn.
In these calculations, the California ethanol market is set at a maximum ethanol blend of E-10, as is the reformulated gasoline market. These two markets represent about 41% of the nation’s gasoline use, thus leaving 59% to qualify for E-15 blends.
E-15 and unresolved policy issues
An E-15 blend by itself, even if mandated for all gasoline-powered engines, would fall far below the required level needed to reach federal mandates for 2022. Thus, it too should be viewed as a transitional policy. It would move the industry in the direction of the mandates but would not be the final policy needed to attain goals set approximately two years ago. To reach the 2007 goals, either intermediate blends higher than E-15 would be needed or a high percentage of the U.S. automobile fleet would need to be composed of flex-fuel vehicles. In reality, some combination of both will likely be needed. If a large part of the ethanol supply is marketed as E-85, the mileage drop will require a large price discount of ethanol to gasoline unless E-85 is eventually mandated or vehicle engines are modified to reduce the ethanol mileage drop. A lower ethanol price relative to gasoline would reduce the profitability of ethanol production as cellulose mandates come into full force. That, in turn, would likely be a brake on investments in cellulose ethanol facilities.
Initial ethanol industry reactions to EPA comments that accompanied its decision to delay action on the request for approval of E-15 ethanol were positive. But many uncertainties remain and the impact cannot be precisely quantified until more definite policy details are available. Available information so far indicates that infrastructure changes and additional investments in retail facilities are likely to be needed. Time and profit incentives will be required to create the needed changes. Also, some segments of the market may not qualify for E-15 blends because of local clean air regulations and reformulated gasoline requirements. Reports from the petroleum industry suggest that changes at the refinery level also are likely to be needed to match gasoline formulas with E-15 blends. Reports so far indicate that if EPA ethanol blend policy takes the direction currently anticipated, these changes over time might allow the size of the ethanol market to expand by about one-fifth from the maximum size that would be available through an E-10 maximum blend for conventional vehicles.
1 Energy Independence and Security Act of 2007.
2 See R.N. Wisner, Issues in Raising Allowable Ethanol-Gasoline Blends to E-15 or Higher for Conventional Vehicles, Renewable Energy Newsletter, Ag Marketing Resource Center, August 2009.
3 EPA, Notice of Receipt of a Clean Air Act Waiver Application to Increase the Allowable Ethanol Content of Gasoline to 15 Percent; Letter to Petitioners, November 30, 2009.
4 Ibid., p. 2.
5 John R. Braeutigam (Valero), “Ethanol Blend Wall,” Power Point Presentation at CEC Joint IEPR and Transportation Committee Workshop on Transportation Fuel Infrastructure Issues, April 14, 2009.
6 See R.N. Wisner, Biofuels and Greenhouse Gas Emissions on a Collision Course, Renewable Energy Newsletter, Ag Marketing Resource Center, June 2009.
7 Braeutigam, op. cit.
8 Based on weekly gasoline delivery data from the U.S. Department of Energy (DOE) through the second week of December 2009, converted to an annual rate.
9 EPA Press Release, “Greenhouse Gases Threaten Public Health and the Environment / Science overwhelmingly shows greenhouse gas concentrations at unprecedented levels due to human activity,“ December 7, 2009 and R.N. Wisner, Biofuels and Greenhouse Gas Emissions on a Collision Course, Op. Cit.
10 Energy Independence and Security Act of 2007, op. cit.
11 Braeutigam, op. cit.