Flex-fuel hampered by lack of consumer demand

Source: Amanda Peterka, E&E reporter • Posted: Wednesday, February 26, 2014

Refiners and auto manufacturers last week said they doubted that flex-fuel vehicles designed to run on mostly corn-based fuel will fix the challenges with the federal ethanol mandate.Biofuel supporters have pushed flex-fuel vehicles as a way to overcome the blend wall, or the 10 percent practical limit to the amount of ethanol that can be used in gasoline. Flex-fuel vehicles are designed to run on gasoline mixed with up to 85 percent ethanol.But consumers simply aren’t demanding enough E85 right now, refiners and automakers said at a major ethanol industry conference last week in Orlando, Fla. And proposed U.S. EPA fuel and emissions regulations have challenged the viability of building more flex-fuel vehicles, auto manufacturers said.

“Based on our extensive real-world experience of going to the market with this fuel, E85 sales have limited growth potential and will not be the silver bullet,” Dave Whikehart, director of product supply and optimization at Marathon Petroleum Co., said.

For the first time this year, EPA has proposed to roll back the ethanol mandate to take into account the blend wall. The agency has proposed requiring that refiners blend 13 billion gallons of ethanol, about 800 million gallons less than in 2013 (E&ENews PM, Nov. 15, 2013).

Biofuel backers have slammed the proposal, warning that it is a step backward for biofuels policy that will lead to economic losses in rural America. They argue that increased use of higher ethanol blends, such as E85, present a viable solution to adding more ethanol to the U.S. fuel market.

Flex-fuel vehicles have been on the rise since about 2006, according to automakers. There are currently about 15 million flex-fuel vehicles on the road, constituting about 6 percent of the entire vehicle fleet.

E85, on the other hand, is currently sold at 3,000 locations, mostly in the Midwest. Last year, gas stations installed special E85 pumps at 225 new locations, an 8 percent increase over the previous year.

Accurate sales results are difficult to ascertain, as states do not record data in uniform ways. In the Midwestern states that have good records, the fuel’s progress is mixed. Iowa set a record in sales last year of nearly 10.9 million gallons, up nearly 20 percent from 2012, when drought crippled the nation’s corn country. Gas stations in neighboring Minnesota, on the other hand, sold more than 18 million gallons last year but came in under the 2011 record of 19.8 million gallons.

The selling points of E85 are that it packs more octane and reduces carbon dioxide emissions at the tailpipe compared to conventional gasoline. It’s also significantly cheaper than gasoline containing 10 percent ethanol, which makes up the majority of gasoline sold at gas stations; in January, E85 averaged $2.77 a gallon compared to E10’s average of $3.26 a gallon, according to the U.S. Energy Information Administration.

But despite the general increase in E85’s popularity, there are still several barriers to more widespread use that could really make a dent in the blend wall, refiners and auto manufacturers said last week.

For one, a flex-fuel car fueled on E85 can drive about 80 percent the distance that a car fueled on gasoline containing 10 percent ethanol can travel. There’s also a big disconnect between where flex-fuel vehicles are located and where E85 is sold; Texas, California and Florida, for example, lead the country in the most flex-fuel cars and trucks, but each have a handful of stations that sell E85.

Nationwide, 5 million flex-fuel vehicles are located within 5 miles of an E85 station, according to Bruce Babcock, an energy economist at Iowa State University.

“The reality is E85 is not available everywhere. It’s mostly available in the upper Midwest,” Babcock said. “If you go to where the flex-fuel vehicles are — Florida, Texas and California — there’s very few E85 stations available, and they haven’t priced it anywhere near the price that’s needed to get those owners of flex-fuel vehicles to buy it.”

The main challenge for refiners is a general lack of consumer demand, Whikehart of Marathon said.

Marathon’s Speedway brand has sold E85 for years “but has experienced relatively poor customer acceptance resulting in limited sales volumes,” he said. The company has invested in infrastructure to offer E85 at its terminals in the Southeast, but wholesale demand there is “nonexistent.”

“To date, these infrastructure investments have not produced the desired returns,” he said.

Motorists ‘aggressively ignore it’

A survey by NACS: The Association for Convenience & Fuel Retailing last June found that consumers were largely still unaware of E85: 29 percent of 1,183 consumers surveyed were familiar with E85, while 10 percent said they drove a flex-fuel vehicle.

Bill Woebkenberg, a senior fuels engineer at Mercedes-Benz Research & Development North America, also said that automakers struggle with getting customers to want E85.

“Right now, they don’t want it. They aggressively ignore it,” he said. “It’s a very useful fuel that’s not being utilized.”

Some EPA regulations governing fuel economy and greenhouse gas emissions are also acting as barriers to more adoption, said Coleman Jones, biofuels manager at General Motors. EPA has yet to issue fuel economy guidance to automakers that will address how E85 sales data is to be used. New greenhouse gas rules also provide little incentive because they emphasize certification fuels that pack a higher energy punch.

EPA rules, in general, allow automakers to optimize their cars on higher blends of ethanol. But it’s a “chicken or the egg” scenario because they require that automakers first show that the fuel is being used.

Still, ethanol producers and supporters remain optimistic about E85 and say it can go a long way in addressing the blend wall.

The Renewable Fuels Association, which hosted the ethanol conference last week in Orlando, said that it’s “perfectly realistic” that E85 ethanol volumes reach 700 million gallons this year, compared to the 300 million estimated by EPA, and it criticized refiners, including Marathon, for using the blend wall as an excuse to not comply with the ethanol targets envisioned by the renewable fuel standard.

“There are some stakeholders,” said Geoff Cooper, RFA’s chief economist, “who believe we have gone far enough with the program, and they’re ready to throw in the towel because the RFS is beginning to push them out of their comfort zone.”

Cooper said that EPA should let the RFS take refiners above the 10 percent blend wall. Under that scenario, renewable identification numbers, or the credits that refiners buy and sell to meet their obligations under the standard, can be used to stimulate growth in E85, he said.

According to Minnesota sales data, for example, E85 sales increased last year as credit prices rose and refiners were spooked about hitting the wall. The state sold 2.2 million gallons of E85 in August, right after prices spiked to their highest level of $1.44 a gallon of ethanol and then down to 1.2 million gallons in December when prices fell to the 30-cent range.

Babcock of Iowa State University also said it was feasible to expect 700 million gallons this year — but only if E85 is priced correctly. Although E85 has been cheaper than conventional gasoline, it’s historically been priced at a higher level than that which makes sense for consumers, given its lower energy content, he said.

“I don’t think it’s a failed fuel,” he said. “I don’t think it’s priced right.”