Growth in Domestic Ethanol Demand: E15 to E85 and the Need for Long-Term Policy

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Sampath Jayasinghe and David Miller
Decision Innovation Solutions
11107 Aurora Avenue
Urbandale, IA 50322
http://www.decision-innovation.com/

Ethanol, the most common U.S. biofuel, is generally blended with gasoline to make E10 (10% ethanol and 90% conventional gasoline). Today, approximately 142 billion gallons of gasoline is consumed for transportation purposes in the United States (USDA-ERS, 2016). Of that, E10 accounts for more than 95% (EIA, 2016). In addition to being a significant source of energy in the fuel market, ethanol also plays an important role as the octane source of choice in the fuel market place, but enormous challenges as well as opportunities are coming in the years ahead.

New Political Economic Developments

On the political economy front, there are a few interesting developments occurring. On May 18, 2016, the Environmental Protection Agency (EPA) released the 2017 Renewable Fuel Standard (RFS) proposal for a public comment period ending July 11, 2016. This proposal contains renewable volume obligations (RVOs) for advanced biofuel, cellulosic biofuel, and total renewable fuel that apply to all motor vehicle gasoline and diesel produced or imported in the year 2017. This proposal also includes the RVO for biomass-based diesel for 2018.

Table 1: EPA Proposed Volume Requirements for Renewable Fuel Standard 2017

EPA Proposed Volume Requirements for Renewable Fuel Standard 2017

Note: Units for all volumes are ethanol-equivalent, except for biomass-based diesel volumes, which are expressed as physical gallons. Proposed volumes for 2017 other than biomass-based diesel.

As shown in Table 1, the proposed volumes for the total renewable fuel obligation for 2017 is 18.8 billion gallons. These proposed numbers are well below the applicable volume specified under the Energy Independence and Security Act of 2007 and later revised in 2010. The EPA proposes to limit the corn-based ethanol mandate at 14.8 billion gallons in 2017. The biomass-based diesel volume is proposed to increase from 2.0 billion gallons in 2016 to 2.1 billion gallons in 2018.  Note that the statutory total renewable fuel volume requirements for 2017 is 24 billion gallons of which the advanced biofuel is 9 billion gallons.  

In addition to the EPA proposal, a new legislative bill (H.R. 5180 - Food and Fuel Consumer Protection Act of 2016)was introduced on May 10, 2016, in the U.S. House of Representatives that would place a cap on the volume of ethanol blended into gasoline (i.e., blend wall). This legislation is based on the viewpoint that there is too much ethanol that cannot be blended safely into the U.S. gasoline supply. This would cap the blend wall to no more than 9.7% by volume from the current 10%. This has reignited the old debate about food and fuel costs and consumer choices, with criticism coming from ethanol groups and some support coming from oil interest groups such as the American Petroleum Institute.

On the biodiesel front, a new legislative bill has been introduced in the U.S. House of Representatives on May 13, 2016, to extend the biodiesel tax credit program up to 2019. Current tax credit will expire by the end of this year and tax incentives are presently given to biodiesel blenders. But this new bill proposes that tax incentives be given to domestic producers rather than to blenders.

Domestic Demand for Ethanol

The total volume of U.S. ethanol consumption has continued to increase since 2010, as shown in Figure 1. Note that ethanol supply is the sum of fuel ethanol production (including denaturant) and imports by calendar year from 2010 to 2015. Domestic disappearance is the fuel ethanol consummation excluding exports. Based on the latest U.S. Bioenergy Statistics monthly data from USDA-ERS (USDA-ERS, 2016), the total U.S. consumption of fuel ethanol in 2015 was 13.956 billion gallons compared with 13.444 billion gallons in 2014. This is an increase of 4% from 2014 to 2015.

Annual Fueld Ethanol Supply and Domestic Disappearance

The RFS stipulates that transportation fuel should contain 36 billion gallons of biofuels by 2022. The total demand for U.S. fuel ethanol comes mainly from domestic consumption through blending with gasoline with some coming in part from exports. The United States is the world’s largest ethanol exporter and has excess production capacity. In 2015, the United States exported an estimated 844.3 million gallons of ethanol, which is a slight drop of 0.2% compared with 2014. Our previous analysis on ethanol trade and a detailed breakdown of export markets can be found in the April 2016 issue .

Further growth in the U.S. ethanol industry will need to address or overcome issues including very narrow profit margins, lack of growth in exports, as well as the variability in exports of distillers dried grains with solubles exports.  

Future growth in ethanol demand will mainly depend on the development of a long-term policy framework driven to create innovative ethanol consumption programs, such as E15, midlevel blends, and E85 blends. Use of intermediate blends are needed to increase the amount of ethanol consumption in the domestic fuel market to meet the RFS. The EPA defines E15 as gasoline blended with 10.5% to 15% ethanol. E85 is 70% to 85% ethanol and 15% to 30% gasoline. E85 blends may vary seasonally and geographically. For example, in the state of Iowa, E85 is a fuel blend containing between 70% and 85% ethanol, depending on the season.

In 2011, the EPA approved the use of E15 in all light and medium-duty vehicles of model year 2001 or newer vehicles, as well as flex-fuel vehicles (FFVs). This approved group of vehicles consists of more than 80% surface motor vehicles on the road today. E85 can only be used in FFVs. FFVs comprise roughly 8% of all vehicles on the road today, according to the Renewable Fuel Association (RFA, 2016).

Growth in E15 has been slow, as there are so many regulation bottlenecks. However, interest in E15 is increasing. We looked at the data on E15 and E85 availability in the state of Iowa. The Iowa Renewable Fuel Association (IRFA) website website shows that there are 40 fueling stations offering E15 and 207 fueling stations offering E85 in the state of Iowa.

 The RFA tracks the number of stations offering E15 and E85 fuel blends in the United States. There are 250 fuel stations offering E15 blends in the U.S. as of May 2016 (private communication with RFA, 2016). The first station was opened in July 2012 in Lawrence, Kansas, and there are 23 states offering E15 blends. As shown in Table 2, the number of U.S. stations offering E15 fuel blends increased by 114% from 2014 to 2015. This indicates that E15 fuel availability at fuel stations is expanding around the country. Figure 2 shows the E15 station distribution in Iowa.

E15 Refueling stations in Iowa

Table 2: U.S. Retail Stations Offering E15 (2012-2015)

U.S, Retail Stations offering E15

Source: Renewable Fuel Association (2016)

There are 3,456 fuel stations offering E85 blends in the U.S. as of May 2016 (private communication with RFA, 2016). As shown in Table 3, the number of U.S. stations offering E85 fuel blends increased by 34% from 2010 to 2015. Current E85 stations as well as E85 prices are published in the RFA station locator found at www.E85prices.com.

Table 3: U.S. Retail Stations Offering E85 (1995-2015)

U.S. Retail Stations offering E85

Source: Renewable Fuel Association (2016)

Growth in Domestic Demand of E15: Issues and Challenges

There are many factors that limit the growth of the E15 market in the U.S. There are three main concerns identified by fuel retailers: (1) extra federal and state regulations to sell E15, (2) misfueling liability, and (3) inability to meet the EPA’s vapor pressure requirement for E15 in the summer months (Moriarty and Yanowitz, 2015). All regulatory requirements can be found in detail at the RFA website.

The cost of upgrading an existing retail gas station (both equipment and installations) to sell E15 has been the main concern, and the cost depends on the existing infrastructure at each individual station. Fuel retailers are eligible for incentives at the state and federal levels to offer E15 and higher blends. Retailers can receive grants through the USDA Biofuels Infrastructure Program to install blender pumps. In addition to federal incentives, there are state-level incentives such as the Iowa Renewable Fuels Infrastructure Program. This program offers cost-share grants to Iowa retailers who wants to upgrade fueling infrastructure to offer registered E15, E85, and other mid-level blends. In addition, there are state-specific tax credits such as Iowa Retailer Tax Credits. The State of Iowa provides a three-cent-per-gallon tax credit for blends of E15 – E69 from September 16 through May 31, and a ten-cent-per-gallon tax credit for blends of E15-E69 from June 1 through September 15 (IRFA, 2016).
In 1991, the E10 blend received the EPA’s waiver for Reid vapor pressure, but the same regulatory relief has not yet been given to E15. Vapor pressure is a method of measuring the volatility of gasoline, which is formerly known as Reid vapor pressure.
Ethanol blending into gasoline of between 10% and 15% in volume can typically cause the vapor pressure to increase. The EPA regulates motor vehicle gasoline vapor pressure from June 1 to September 15 to decrease evaporative fuel emissions (Moriarty and Yanowitz, 2015). Therefore, E15 cannot be sold during the summer months. A very interesting U.S. map that shows states and counties where E15 can or cannot currently be used year-round is published by the American Coalition for Ethanol.

Legislation to expand the waiver for vapor pressure to E15 blends has been introduced in both the U.S. senate and house in March and April 2015, respectively. If this bill is signed into law, fuel retailers would be able to sell E15 during the summer months as well.

Though the E15 growth has been slow since 2012, there is a renewed interest among retailers in offering E15 over the past few months. For example, Kum & Go, a large convenience store chain headquartered in Iowa, is going to offer E15 at more than 100 stores by the end of 2016. They currently offer E15 at 20 locations only. Sheetz, based in North Carolina, recently announced that it will install E15 pumps in 60 stores by spring 2016 2016.

Developments in 2017

The EPA released its proposal for 2017 RFS volumes, and the final ruling is expected to be finalized by November 30. The proposed volumes are slightly positive as there is an increase in total volumes of 18.8 billion gallons in 2017 from 18.11 billion gallons for 2016. The proposed volume for ethanol in 2017 is 0.3 billion gallons, up from the 2016 level of 14.5 billion gallons. In addition, biomass-based diesel is set at 2.1 billion gallons, an increase of 0.1 billion gallons from 2016. The use of a higher blend, such as E15, is the only way the volume of ethanol can increase in the gasoline supply, and an effective long-term plan is needed.  

As stipulated by the U.S. Congress, from the beginning in 2015, the RFS has capped the corn ethanol volume at 15 billion gallons for RIN credits purposes.  Given that, cellulosic biofuels have the most potential to grow and can take an increased share in the total renewable fuel marketplace. However, cellulosic biofuel production is still struggling to emerge and is growing slower than we anticipated for numerous reasons. Largely, the availability of feedstocks, technology, and investment capital have been the key limiting factors, but we could see cellulosic ethanol starting to take off in the near future.

Sources

Iowa Renewable Fuel Association, 2016, various personal communications.

Moriarty, K., and J. Yanowitz, 2015, “E15 and Infrastructure.” National Renewable Energy Laboratory, NREL/TP-5400-64156.

Renewable Fuel Association, 2016, various personal communications.

EIA (U.S. Energy Information Administration), 2016, Today in Energy.

EPA (U.S. Environmental Protection Agency, Renewable Fuel Standard Program: Standards for 2017 and Biomass-Based Diesel Volume for 2018.

USDA-ERS (U.S. Department of Agriculture, Economic Research Service), 2016, U.S. Bioenergy Statistics.