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Breaching the ethanol blend wall

On a fence-mending trip to the Midwest in April, EPA Administrator Lisa Jackson put on a hard hat to tour a biodiesel plant in Newton, Iowa. It was a media event. Cameras clicked as reporters watched Jackson and Ag Secretary Tom Vilsack peer at vials of vegetable oil in a lab and walk by steel tanks to a control room.

But Jackson also met privately with biofuels industry leaders. One was Jeff Broin, CEO of the ethanol company, POET, and a founder of the lobbying group, Growth Energy.

Ever since Congress passed the Energy Independence and Security Act in 2007, with an ambitious goal of having U.S. vehicles burn 36 billion gallons of biofuels by 2022, Broin has warned that we can't get there from here.

He points out that EPA's limit of 10% ethanol (E10) in unleaded gasoline amounts to a wall against blending even more ethanol into fuel.

We're at the wall. Today, the nation's capacity to make ethanol is about 14 billion gallons. Last winter, that was enough to supply slightly more than 10% ethanol for gasoline, according to the Department of Energy. To breach the blend wall, in March 2009 Growth Energy asked EPA to allow 15% ethanol (E15) in conventional gasoline. Not until October of 2010 did EPA have ample test results to approve it – and only for 2007 model vehicles or newer. Last January it OK'd cars and pickups sold for 2001 and later. Growth Energy hailed that as a huge market, more than half the vehicles on the road.

Yet, today, you'll have a hard time finding anyone selling E15, unless it's at a blender pump that lets you dial up from E10. EPA's labels and rules for the new fuel were released in late June but more regulations were waiting to be revised. The only vehicles that legally could buy E15 were flex-fuel models made to burn up to 85% ethanol.

Broin used his time with Jackson last April to push E15.

“We talked about E15 and the additional hurdles we have to get over,” he said afterward.

Underwriters Laboratories, Inc. hasn't approved pumps for E15, Broin says, even though “the pumps the UL claims can't pump E15 today have been pumping E85 for years.”

Broin wants EPA to approve higher Reid Vapor Pressure (RVP), a measure of gasoline volatility, for E15. At low levels, ethanol makes gas evaporate faster. Congress gave E10 a waiver from EPA's vapor pressure limits, but not E15.

It turns out that the list of barriers to E15 is even longer. So most retailers won't sell it for at least two more years. Ethanol has well-known troubles in Congress, but it's the blend wall that could soon cost farmers by putting downward pressure on corn prices. The 2007 energy law allows up to 15 billion gallons of ethanol from corn. The blend wall puts any expansion of ethanol that's not cellulosic on hold.

“E15 will take some time (measured in years) to hit the market and, like E10 before it, will mainly be a Midwestern fuel to start,” says Chad Hart, an Iowa State University economist who tracks the ethanol market as well as corn and soybeans.

Corn demand stalls

The effect on corn usage will be a distinct slowdown in the growth rate of corn use for ethanol production,” Hart says. “Actually, we're already seeing that in the USDA numbers as the projections for the 2011/12 crop have ethanol use only going up 50 million bushels.”

That projection of 5.05 billion bushels next year is a virtual standstill in the ethanol demand market. USDA's June supply and demand estimate has ethanol plants using 5 billion bushels of corn this year from the 2010/11 crop. That's 432 million more than was bought by ethanol plants from the 2009/10 crop. And ethanol usage for that crop was up by almost 900 million bushels from 2008/09.

“If you figure 2.8 gallons of ethanol per bushel of corn, then 5 billion bushels of corn yields 14 billion gallons of ethanol. That pretty much fills the E10 market,” Hart says. “So slow adoption of E15 implies corn usage for ethanol hovering around 5 billion bushels over the next couple years.”

Earlier this summer, Hart had not yet run any formal economic models on how all this will affect corn prices, but here's his back-of-the-envelope estimate:

“With the reduction in the usage growth trend and carrying forward corn yield trends, that implies lower corn prices as we look out (but we have to build up stock levels first). If we have trendline yields over the next couple of years (definitely a stretch this year), I think we'd see prices in the low $4 range, possibly slipping into the high $3's. More likely, given lower production projections for this year but trendline production beyond, right now my 2013/14 corn price estimate would be $4.50,” he says.

Jittery fuel dealers

Although some gasoline retailers, mainly in the Midwest, would like to offer a higher blend of ethanol, much of the industry is worried about unresolved legal and technical issues.

“E15 is not going to be the dominant fuel in the market. But in the near, immediate future, it's going to be a niche market,” says John Eichberger, a Washington lobbyist for the National Association of Convenience Stores.

Owners of gasoline retailing stations face three big obstacles, Eichberger says.

First, even after EPA issues final rules for labels on gas pumps that will warn against using E15 in older cars, stations face potential fines.

“If you pull up to my station with a 1995 car and put in E15 to save 5¢ a gallon, that makes the station owner liable to a $37,500-a-day fine from the EPA for violating the Clean Air Act,” Eichberger says.

Second, even though EPA has approved E15 for 2001 and newer cars, automakers aren't likely to update warranties good only with E10, he says. Using E15 in those cars may void any existing warranties, automakers have said.

Third, station owners worry that if someone believes E15 damaged his or her car or that it voided the warranty, they could be sued by the disgruntled motorist. They fear that having the proper labels won't protect them from lawsuits.

To fix those problems, Eichberger's retailer group wants Congress to pass legislation to shield them from product liability for E15 if they're following EPA's rules. And it would like new standards for pumps and fuel tanks, perhaps set by EPA, that would allow stations to use existing equipment that Underwriters Laboratories won't certify. That lack of UL approval affects many state and local laws and codes as well as federal safety laws. A new underground tank can cost $100,000; pumps cost about $20,000.

Eichberger says that most of the industry is behind the legislation.

“The auto industry, the engine industry, and the fuels industry are united. And that rarely happens,” he says. Earlier this summer they were waiting for backing of ethanol lobbying groups. They hoped to have a bill introduced in committees in the House before this month. The most optimistic timetable has both the full House and Senate passing the bill sometime next year before the 2012 election.

Even with that best-case timetable, “I think we're a couple of years before there's any measurable availability of E15,” he says.

And even then, it's unlikely to be sold in most of the country for other environmental reasons, he says.

In about a third of the U.S. (the areas with the worst air pollution), only reformulated gasoline can be sold. EPA has to change a complex model to allow that. “They have not adjusted that, and when they do, they're probably going to be sued by the environmental community,” Eichberger says. California, which has its own reformulated gas program, doesn't allow more than 10% ethanol blends.

About a fourth of the nation has problems with high ozone levels. That's where limits on RVP apply. Unless Congress changes the Clean Air Act to allow E15, the fuel could be locked out of that market, even though ethanol increases vapor pressure the most at 8% blend levels. The pressure drops as levels get higher.

Eichberger says 50% or 60% of the U.S. is under environmental regulations that won't allow E15.

Finally, about half of gasoline retailers are barred from selling E15 by contracts with their oil company suppliers, Eichberger says.

All this adds up to a niche market.

Still, ethanol trade groups are working hard to make that niche as big as possible.

“The hurdles or the challenges we have remaining are the kind that will take time to work through,” says Chris Thorne, a spokesperson for Growth Energy.

The red-tape maze

According to Growth Energy, the Renewable Fuels Association (RFA) and the American Coalition for Ethanol (ACE), here are some of the technical barriers they're currently working on.

● EPA Registration. Not only does EPA have to approve a warning label for pumps with E15, but also it has to register 15% ethanol as a fuel additive. EPA is also reviewing the health effects of E15.

● State Regulations. Most states have regulations describing appropriate fuel quality. Before E15 can be sold, states will have to either pass legislation allowing it or they'll have to rewrite the regulations administratively. A new Iowa law took effect July 1 that provides a 3¢ tax credit for retailers selling E15, as soon as EPA makes it legal.

● Measuring Fuel Quality. Some states require the amount of antiknock octane in fuels to be certified. RFA is working to support that, along with developing fuel specifications for ASTM International, formerly known as the American Society for Testing and Materials. RFA has a staffer on that ASTM task force.

● Infrastructure. Not only does lack of UL certification mean retailers might have to install new pumps to sell E15, but also some state and local fire codes rely on UL certification. Some equipment makers are providing warranties on E15 pumps, according to RFA.

● Lawsuits. Automakers and petroleum companies are among the plaintiffs in several suits aimed at blocking EPA's waiver to the Clean Air Act that allows E15 to be sold. EPA officials have said that one of the reasons they took so long to grant the waiver was they wanted to have solid testing to defend against litigation.

Optimism on the future

The supporters of the ethanol industry to remain optimistic about future expansion of the market for ethanol.

Shortly after the EPA approved E15, Growth Energy CEO Tom Buis compared the new blend to E10, which started small and took years to reach a national market.

Chris Thorne of Growth Energy says his group is working with EPA to deal with the issue of Reid Vapor Pressure.

“They have shown a willingness to work with us on these things, which meets their political charter,” he says.

Blender Pumps To The Rescue?

In the past year, the ethanol industry has faced growing public criticism and attacks in Congress. On the left, Al Gore now says he regrets supporting ethanol because he doesn't view it as a sustainable, low-carbon source of fuel. On the right, Republican presidential candidates like Tim Pawlenty, former governor of Minnesota, and Jon Huntsman, former Utah governor, oppose the 45¢-a-gallon tax credit for ethanol. (Pawlenty is more nuanced, backing a gradual phaseout).

In Congress, the House has voted more than once on amendments that would stop EPA from putting rules on E15 into effect and stop USDA from spending funds to support installation of blender pumps.

In June, Representative Jeff Flake (R-AZ) succeeded in amending the 2012 agriculture appropriations bill to bar USDA funding for blender pumps. The Flake amendment passed by a vote of 283 to 128.

On the same day, the Senate voted 73 to 27 to end the 45¢-a-gallon blenders tax credit for ethanol and 54¢ ethanol tariff.

But the CEO of POET, Jeff Broin, took heart from a lopsided vote in the Senate against an amendment to cut off spending on blender pumps; 59 senators voted against the amendment sponsored by Senator John McCain (R-AZ).

“By voting to repeal the ethanol tax credit, while preserving USDA's funding for flex pumps, the Senate came close to a reform package supported by the ethanol industry,” Broin said.

In July, as Washington struggled to deal with the nation's debt ceiling, senators agreed to kill the blenders credit but keep tax credits for blender pumps. Yet a House hearing on E15 was stacked with critics such as the American Petroleum Institute and the Environmental Working Group.

Nathan Schock, a Poet spokesperson, says equipment costs for selling E15 won't stop some retailers.“We're pretty confident that if retailers see a profit, it won't be much of a barrier,” he says.

Ron Lamberty, vice president for market development at ACE, says he considers the UL testing of ethanol in pumps to be unrealistic and concerns about its effects on engines to be overblown.

“In real life, we're not going to have real damage from E15,” Lamberty says. “That's what they (EPA and the Department of Energy) tested for two years. But I do expect bogeyman-inspired lawsuits.”

Lamberty says oil company staff have predicted that getting E15 to the marketplace will take five to six years. He predicts that retailers who want to sell E15 will move much faster.

“A lot of this will happen rather quickly once the EPA gets its work done,” Lamberty predicts. “Then it could be as early as September, when summer vapor pressure restrictions are removed.”

“I own two gas stations, and I'm not a bit worried about selling E15. And as soon as I can, I will.”

Chuck Woodside, the CEO of a farmer-owned ethanol plant in Minden, Nebraska, is chairman of RFA. Expecting E15 to be a long process, his group wanted EPA to approve E12 as faster, interim step. But RFA backs E15.

RFA also wants to breach the blend wall. “We need to get beyond E10,” Woodside says.

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