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By Robert Rapier on Dec 1, 2009 with no responses

EPA Delays Ethanol Ruling

In a move that wasn’t really a surprise, today the EPA announced that they are not yet ready to approve ethanol blends above E10 for automobiles:

EPA Notifies Industry Group on Status of Ethanol Waiver Request

WASHINGTON – The U.S. Environmental Protection Agency (EPA) today announced that it expects to make a final determination in mid-2010 regarding whether to increase the allowable ethanol content in fuel.

In a letter sent today to Growth Energy – a bio fuels industry association that had asked EPA to grant a waiver that would allow for the use of up to 15 percent of ethanol in gasoline – the agency said that while not all tests have been completed, the results of two tests indicate that engines in newer cars likely can handle an ethanol blend higher than the current 10-percent limit. The agency will decide whether to raise the blending limit when more testing data is available. EPA also announced that it has begun the process to craft the labeling requirements that will be necessary if the blending limit is raised.

In March 2009, Growth Energy requested a waiver to allow for the use of up to 15 percent ethanol in gasoline, an increase of five percent points. Under the Clean Air Act, EPA was required to respond to the waiver request by December 1, 2009. EPA has been evaluating the group’s request and has received a broad range of public comments as part of the administrative rulemaking process. EPA and the Department of Energy also undertook a number of studies to determine whether cars could handle higher ethanol blends. Testing has been proceeding as quickly as possible given the available testing facilities.

In a letter to Growth Energy, a pro-ethanol organization headed up by POET CEO Jeff Broin and General Wesley Clark, the EPA indicated that testing had only been completed on two vehicles, but testing on an additional 12 vehicles was expected to be completed by May 2010. On the basis of the two completed tests, the EPA said they would “be in a position to approve E15 for 2001 and newer vehicles in the mid-year timeframe.”

That begs the question of whether there is expected to be a potential problem in vehicles older than 2001 models. If so, and E15 is approved for 2001 and newer models, I can imagine a logistical nightmare and a class action lawsuit waiting to happen. Instead of having three grades of gasoline, there would likely need to be five or six grades depending on the age of your car. For gasoline blenders and for station owners, it will be a bit of a headache. For lawyers, a potential windfall as pre-2001 car owners have their engines ruined because they put the wrong fuel in, or someone else messed up in the supply chain.

Instead of going down this path, why don’t we do more to incentivize E85? We aren’t close to saturating the market for E85; the problem is just that the E85 price isn’t low enough relative to gasoline. There are supposedly several million E85 vehicles on the roads today, with automakers ramping up production even more in future years.

Consider for a moment the potential E85 market in the Midwest, where most of the corn is grown and most of the ethanol is produced. Per the EIA, the demand for gasoline in the Midwest in 2008 was 2.5 million barrels per day. Imagine for a moment that this demand was for E85. In that case, because of the lower energy content, demand would rise to around 3.3 million barrels per day. Of that, 85%, or 2.8 million barrels per day, would come from ethanol.

How much is 2.8 million barrels per day? It would be 43 billion gallons per year of ethanol, far greater than the 10 billion or so gallons of ethanol produced in the U.S. in 2010. In fact, even if you could convince only half the people in the Midwest to use E85, there would be absolutely no need to even think about increasing the amount of ethanol in the general gasoline pool. And that’s just in the Midwest!

So why isn’t this strategy being heavily pursued? Primarily I think it comes down to cost. If you can get 15% ethanol into the gasoline pool, any cost penalty is spread out over many consumers and it is further masked because the bulk of the fuel is gasoline. With E85, ethanol is carry the brunt of the costs and the penalty is far more obvious.

As I write this, per this site that promotes E85 fuel, right now the savings from burning E85 instead of regular gasoline is only 11.88% (a national average price of $2.53 for gasoline versus $2.23 for E85). The problem is that the mileage penalty is going to be over 20% in most cases (the energy content of E85 is almost 30% less than gasoline on a per gallon basis), and therefore people are not going to voluntarily buy it.

How to get around that? Well, if you could instead make everyone buy E15, you don’t really have to worry about that cost problem. Consumers will be forced to take the hit, but it will be spread out across all consumers. But if they could make the cost of ethanol more competitive such that the savings from E85 is consistently around 25-30% relative to gasoline, E85 demand would be great enough to consume all of the ethanol we will make for the foreseeable future.