Paper evaluates consequences of dueling CAFE, RFS policies

By Kris Bevill | April 25, 2012

Increasing fuel efficiency standards are expected to shrink U.S. gasoline demand over the coming years while, at the same time, the renewable fuel standard (RFS) will require increasing amounts of alternative fuels to be blended into the supply, amounting to a collision of policies that will make it nearly impossible for blenders to comply with RFS mandates without an overhaul of retail fuel stations to accommodate higher blends of ethanol, according to a 48-page white paper recently released by the National Association of Convenience Stores.

Proposed Corporate Average Fuel Economy standards, expected to be finalized in July, would require model year 2017-2025 vehicles to achieve a combined efficiency of 54.5 miles per gallon (mpg), an efficiency improvement of nearly 20 mpg compared to the current standard, which requires vehicles to achieve 35.5 mpg by 2016. The Obama administration expects that the 2017-2025 fuel efficiency standards would reduce petroleum demand for light-duty vehicles by 36 percent in 2025. Meanwhile, the RFS requires 36 billion gallons of renewables to be blended into the fuel supply in 2022, a requirement which was expected to comprise 20 to 25 percent of the total fuel consumption when the policy was enacted, but would actually represent up to nearly 40 percent of the total fuel consumption if the new CAFE standards are finalized, according the NACS paper.

“This level of renewable fuels penetration in the market will impose significant economic burdens on the retail fuels market and consumers,” said John Eichberger, NACS vice president of government relations and author of the paper, titled “The Future of Fuels: An Analysis of Future Energy Trends and Potential Retail Market Opportunities.” In order for retailers to offer higher blends of alternative fuels, many will be required to replace underground storage tanks and dispensers, a hefty investment which Eichberger said could force some small retailers to shut down. “NACS members strongly support efforts to enhance the nation’s energy security and don’t oppose improving the fuel efficiency of the nation’s vehicle fleet,” he said. “However, we are very concerned that the policies being enacted and drafted are not effectively coordinated and could compromise each other. The result could force countless small businesses to examine whether they want to invest hundreds of thousands of dollars to retrofit their existing fueling equipment or exit the business.”

It is clear that widespread use of ethanol blends greater than E10 will be required in order to meet escalating RFS mandates, according to the paper. E85 could contribute significantly to the RFS, but Eichberger notes in the paper that expansion has been slow and is expected to grow to only about 3 to 4 percent of the total liquid fuels market in 2035, based on U.S. DOE Energy Information Administration projections. Combined, E10 and E85 could meet up to 55.9 percent of the RFS in 2035, if the EIA projections are accurate, he said, which leaves nearly 50 percent of the mandate to be met by other alternatives. The U.S. EPA’s recent approval of E15 for 2001 and newer vehicles could increase ethanol’s contribution to the RFS, but Eichberger noted that market and vehicle restrictions for that fuel blend will make it difficult for E15 to entirely displace E10, lessening its potential role in meeting RFS requirements. However, Eichberger said in the paper that retailers need to be prepared to sell fuels containing more than 10 percent ethanol in the near future. He noted that the proposed Domestic Fuels Protection Act of 2012 could help to alleviate new infrastructure requirements for E15 and could also relieve retailers from potential liability related to consumer misfueling, improving the market dynamics for E15.

Even with massive infrastructure improvements, Eichberger cautioned that it may become impossible for blenders to meet RFS mandates within the next two years. He urged Congress to review regulations affecting motor fuels and passenger vehicle industries and develop a comprehensive national fuels policy. “We don’t believe that improved efficiency, enhanced sustainability, national energy security and economic growth are mutually exclusive objectives,” he said. “But if they are not pursued in a strategic, coordinated effort they can lead to unintended consequences that can derail progress towards all of the objectives.”