Up against blend wall, ethanol at a crossroads
January 22nd, 2014
Omaha, NE — A steady stream of semis rolls across the scales at the E Energy ethanol plant near the town of Adams in southeast Nebraska. The smokestack behind the scale house sends up a tall plume of white steam. The sweet smell of fermenting corn is in the air.
E Energy buys 65 million bushels of corn each day from area farmers and turns it into 65 million gallons of ethanol each year.
It’s part of an industry that has been growing by leaps and bounds. Since Congress passed the Renewable Fuel Standard, or RFS, in 2007 – requiring oil refiners to use a growing amount of biofuel – ethanol production capacity has more than doubled.
“There is plenty of supply, plenty of production capacity available,” said E Energy CEO Carl Sitzman.
Ethanol has become a mainstay of the rural economy, but in 2013 the industry ran into a wall. The blend wall. And in 2014, the EPA is proposing that the industry take a step back. The EPA is suggesting a 3 billion gallon cut from the scheduled increase to the ethanol mandate.
“This is not a wise decision on the part of the EPA to reduce a mandate that was established by Congress,” said Sitzman.
The blend wall is really just a number – 10 percent. Gasoline with 10 percent ethanol, called E10, has become the standard nationwide. Almost any car can run on it. Take that 10 percent across the fuel supply and you have the blend wall, the amount of ethanol that fits in the fuel supply – right now about 13 billion gallons.
But the RFS requires oil companies to sell over 14 billion gallons in 2014, and that’s just for corn-based ethanol. Charlie Drevna, president of the American Fuel and Petrochemical Manufacturers, says there’s no easy way for the oil refiners he represents to fill that gap.
“Ethanol’s a good product,” Drevna said. “But you know, too much of a good thing is not good.”
And when Congress passed the RFS in 2007 lawmakers made an assumption that turned out to be wrong. Back then, gas consumption was rising and Congress thought that would continue.
“Fast forward to 2009 when we hit the recession, there was a dramatic drop in the demand for gasoline,” Drevna said.
That drop in demand brought on the blend wall earlier than first anticipated.
The EPA is proposing a cut to the RFS to put it back on pace with gasoline demand. But Iowa State economist Bruce Babcock says cutting the mandate undermines how the law was meant to work.
“If you use EPA’s logic we’ll never move beyond blend wall,” Babcock said.
Because to get past the blend wall, the industry has to get past E10. More flex fuel cars need to fill up with higher ethanol blends like E85. But there’s a problem. Only about 2 percent of gas stations in the U.S. actually offer E85 and they’re concentrated in the Midwest.
Babcock says the RFS is supposed to force oil companies to put in more pumps.
“The RFS was designed to increase the consumption of biofuels at the expense of fossil gasoline,” Babcock said. “That’s what the RFS is supposed to do.”
Here’s how. Once the mandate is larger than the blend wall, refiners have to buy credits from the government to comply with the law. As the price for credits goes up, the price for E85 comes down. It started to happen this summer.
All of a sudden, E85 looks a lot more attractive to flex fuel drivers and gas retailers.
Cutting the mandate, Babcock says, lets refiners off the hook and stalls expansion of E85 leaving little room for second generation biofuels that have lower greenhouse emissions.
“People who want to see technology developed to have a greener economy should care about this,” Babcock said. “Because EPA’s decision darkens the outlook for all those policy objectives.”
Even if EPA backs off the mandate for 2014, AFPM’s Charlie Drevna says a growing coalition of interest groups wants Congress to rethink the law altogether.
“It’s just not the refining industry calling for significant reform or repeal of this act,” said Drevna. “It is a cross section of business, industry, and environmental groups saying it’s time for Congress to take a long hard look at this thing.”
The EPA is studying the impact of the proposed cut to the ethanol mandate and may decide by midyear.
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