Experts pitch E85 as a ‘blend wall’ solution

Source: Tiffany Stecker, E&E reporter • Posted: Friday, November 15, 2013

On first impression, it may sound like a proposal from the Marie Antoinette of renewable fuels: If the oil industry doesn’t want to sell E15, a 15 percent blend of ethanol in gasoline, let it use an even higher blend, 85 percent ethanol.

But in a series of economic papers released last week, Iowa State University economist Bruce Babcock found that if oil companies choose to invest in infrastructure for the higher blend, E85, it could save them a considerable amount of money when compared to the costs of complying with the renewable fuel standard (RFS), a policy to ramp up biofuels production to 36 billion gallons per year by 2022.

“In my book, the only compliance path is E85,” said Babcock, at a briefing on the issue yesterday. E85 can be used in flex-fuel vehicles, cars that are able to run on many different blends of gasoline and ethanol up to E85.

There are plenty of flex-fuel vehicles on the road, said Babcock. The problem is, they are mostly located near major population centers, far away from the epicenter of E85 pumps in the Midwest. More stations must be built to allow flex-fuel vehicle drivers to easily access stations when the price of E85 is low.

In a policy brief, one of four co-authored with Sebastien Pouliot, another economist at Iowa State’s Center for Agricultural and Rural Development, Babcock found that, by using a combination of buying ethanol gallons and buying renewable identification numbers (RINS) — credits that companies can buy and sell to comply with the RFS in lieu of blending — oil companies could potentially make a profit 12 times over the investment of installing 50 strategically located E85 stations.

This is hypothetical. The price of E85 must be at least 23 percent below the price of E10 to be economical, as ethanol has less energy per volume than gasoline, Babcock finds in another policy brief. But it would allow companies a way to generate RINs that could be used in a later year, allow EPA to continue with the RFS program and allow the biofuels industry to surpass the “blend wall,” a situation in which oil companies are required to blend more ethanol than the standard amount in the country, now limited by the ratio of 10 percent ethanol to 90 percent fuel.

A way around the ‘wall’

“Faced with the high compliance costs of the RFS, their incentive would be to invest, to lower that compliance cost, and to put in E85 stations that can generate more RINs; thereby, by lowering the RIN price, you increase the supply and the price will come down,” explained Babcock.

This is a different take from an oil industry-backed study from NERA Economic Consulting, which called RFS compliance a “death spiral” for the industry (E&ENews PM, March 20).

This year, the projected gasoline supply is about 133 billion gallons. The RFS requires oil companies to blend 13.8 billion gallons, slightly more than 10 percent, and far out of the oil industry’s comfort zone. Although EPA has found that E15 gasoline, a 15 percent ethanol blend, is safe to use in vehicles manufactured after 2001, the automobile industry trade group has complained that the fuel could damage engines. Livestock groups have also campaigned against E15, saying that it will divert corn from feed to ethanol, raising prices for their industry.

But most importantly, said Babcock, it would allow certainty for investors in the next generation of more sustainable biofuels, like cellulosic ethanol from agricultural leftovers, household trash, wood or grasses that doesn’t create the same environmental and economic concerns as corn ethanol. A recently leaked draft for the 2014 RFS targets indicated a dramatic reduction in corn ethanol — 13 billion gallons, rather than the expected 14.4 billion — and producers in the nascent cellulosic industry are afraid this action will freeze investments.

Cellulosic manufacturers concerned

“The cellulosic guys aren’t necessarily tied to corn ethanol, but they see that if you back off from corn ethanol, you back off from them, and then they don’t see a future for themselves, that’s their fear,” said Babcock. “As an economist, I say if we’re really going to back off, let’s back off full time and cut the investment, because why throw good dollars after bad? You need certainty, one way or another.”

The uncertainty is already apparent, say cellulosic ethanol backers. On Tuesday, enzyme company Codexis announced that it will be scrapping its program to make ingredients to break down the tough plant matter that surrounds the sugars needed to make ethanol. The company will instead focus on making higher-value bio-based chemicals.

E85 promotion is a good move for the environment, especially if the ethanol comes from cellulosic sources and not corn, said Jeremy Martin, senior scientist in the Union of Concerned Scientists’ Clean Vehicles Program. A recent Associated Press investigation into the environmental impact of corn ethanol has raised awareness of the issue.

Three large cellulosic ethanol plants are expected to open next year, turning corn stover, husks and wheat straw into ethanol (ClimateWire, Nov. 4).

There are other paths to using less oil via renewable fuels besides ethanol, Martin said. Biodiesel, biobutanol and biogas are examples. Some fuels, known as “drop-ins,” don’t require blending with gasoline, but the infrastructure is relatively nonexistent.

“If ethanol remains the cost-effective way to make biofuels, then E85 is going to be the winner of this race in the long term,” Martin said.