CARD: U.S. could meet statutory 2014 RFS volumes

By Erin Voegele | January 07, 2014

A new report published by Iowa State University’s Center for Agricultural and Rural Development demonstrates that 2014 statutory requirements for the renewable fuels standard (RFS) could be met without additional infrastructure investments. Next year, the 2015 statutory requirement could be met with only modest infrastructure investments. The analysis, titled “Feasibility and Cost of Increasing U.S. Ethanol Consumption Beyond E10,” was authored by ISU economists Bruce Babcock and Sebastien Pouliot.

In the paper, Babcock and Pouliot note that E85 represents an opportunity to overcome the E10 blend wall, but point out that the historical consumption of E85 is a poor indicator of the level of possible consumption because E85 has never been priced low enough to save consumers money. Rather than rely on historical consumption data, they employ a new model of E85 demand to estimate the feasibility and cost of meeting higher ethanol mandate levels.

The results of the analysis determined that if existing E85 could sell as much E85 as demanded by consumers, and if the fuel blend was priced at parity with E10, ethanol consumption in E85 would amount to 1.65 billion gallons. Furthermore, if E85 were priced to result in a 20 percent fuel cost reduction for consumers, consumption would jump by 3.6 billion gallons per year. The analysis assumes no growth in the number of flex fuel vehicles on the road after Jan. 1.

However, Babcock and Pouliot note it it’s realistic to assume stations could sell unlimited volumes of E85. When the analysis is adjusted to place a 45,000 gallon per month limit on E85 sales per station, the economists found that the consumption levels would drop to 700 million gallons per year at parity prices and 900 million gallons per year at prices reflecting a 20 percent discount.

In the paper, Babcock and Pouliot also determine that an additional ethanol consumption target of 800 million gallons cold be achieved with retail E85 prices of $2.32 per gallons with no additional stations added. However, if 500 new E85 fueling stations were opened, the required retail price would be $2.71 per gallon. As a result, it would be feasible to meet a 14.4 billion gallon ethanol mandate without any new stations and with only a modestly lower price for E85. Carryover renewable identification numbers (RINs) would also be needed. A 2 billion gallon consumption increase could be achieved with the installation of at least 3,000 new stations and prices of $2.10 per gallon or 3,500 new stations and prices of $2.60 per gallon.

“The large impact that adding new stations has on the retail price of E85 given a level of E85 sales gives EPA a powerful tool to incentivize investment in new stations that can facilitate meeting expanded ethanol consumption targets,” Babcock and Pouliot wrote in the paper. “Any gap that arises between the wholesale price of ethanol needed to support a lower retail E85 price and the cost of producing and transporting ethanol would be closed by the price of RINs. RIN prices also indicate the cost that owners of oil refineries bear to meet biofuel mandates. Thus, there exists an inverse relationship between the cost of compliance with mandates and the number of new E85 stations. This means that owners of oil refineries who bear the costs of complying with mandates can reduce their compliance costs by investing in new E85 stations.”

The paper also predicts that adding E85 locations would reduce the price of RINs. If 800 million gallons of E85 and 600 million carryover RINs were used with 13 billion gallons of ethanol in E10 to meet a 2014 RFS requirement of 14.4 billion gallons, the economists determined RIN prices would be approximately 69 cents. With the addition of 500 additional E85 stations, RIN prices would drop to 18 cents. It would an estimated $65 million in investment to add these stations, resulting in a $7 billion drop in the total value of RINs.

A full copy of the paper can be downloaded from the CARD website.