Weighting On the Line
When Coleman Jones, General Motors’ principle octane scout, took the stage at last year’s National Ethanol Conference and summed up the automaker’s strategy for meeting federal emissions and fuel economy standards in four sentences, he spoke volumes about the uncertain future of flex-fuel vehicles (FFVs) in America. “We’re going to have better power trains,” he said. “We’re going to have engines with direct injection, and downsize boosted. We’re going to have transmissions with more gears and more efficiency. We’re going to have better vehicles that are lighter, have lower drag, lower rolling-resistance tires and lower electrical consumption. We’re going to use the alternatives mentioned in the greenhouse gas rule, and those are electricity and natural gas.”
Jones then quipped, “That strategy represents long hours of forecasting and modeling by many specialties within General Motors.” And just like that, the snippet of Jones’ presentation related to GM’s future U.S. fleet was over. Gone in 30 seconds without a word on FFVs. Jones spent his remaining 15 minutes off-theme, trekking through the consumer-driven rise of ethanol-capable vehicles in Brazil. It burned time and sent a message. He said—without saying it—that people who make cars answer to people who buy cars. Brazil is saturated with ethanol-capable vehicles because Brazilians, and their government, want ethanol-capable vehicles. In the United States, conversely, too few Americans demand FFVs and the sole incentive for their production is, practically speaking, about to sunset.
At the start of 2014, GM and other automakers are still tightlipped about the future of America’s E85-capable vehicles. Jones passed on an opportunity to talk to EPM in mid-December, even while he chaired an ethanol-related ASTM subcommittee meeting in Tampa, Fla. And he wasn’t the only automaker rep with little or nothing to say about the future of flex fuel. Ford, too, declined. Mercedes-Benz balked through press time and Volkswagen didn’t respond. Toyota and Honda talked, but the first produces only a few U.S. FFVs and the latter none at all. “All the autos are being extraordinarily careful these days in making public statements about their future FFV intentions,” says Brian Jennings, executive director of the American Coalition for Ethanol.
Outwardly, though, it’s business as usual. U.S. automakers bullishly rolled out FFVs for 2014, continuing to offer dozens of E85-capable models as they concurrently upgrade their fleets for E15. GM, which offers more E85-ready automobiles than any original engine manufacturer (OEM) on the planet, is making 16 model-year 2014 FFVs for the general public and an additional four FFVs for its fleet customers. “We’re committed to alternative fuels and believe biofuels are the most near-term solution to reduce petroleum dependence and carbon dioxide emissions,” Jones said in a brief written statement to EPM.
In fact, none of Detroit’s Big Three—GM, Ford and Chrysler—show tangible signs of slowing down on FFVs, yet. More than 50 current-model FFVs are on the market—a record number—but with more than 300 cars, sport utility vehicles and light trucks on American showroom floors, it represents just one-sixth of the window-stickered fleet. And now, just as more E85 pumps are starting to spring up in high-population regions of the U.S., the ongoing production of FFVs is in total jeopardy.
Collapsing Credit
For more than a decade, auto manufacturers have been offered an attractive incentive to make FFVs. That, in turn, has allowed them to offer the big, powerful vehicles Americans want—sport utility vehicles and light trucks—without paying heavy fines for failing to comply with U.S. corporate average fuel economy (CAFE) rules. The program has been so effective that the sheer momentum of the incentive has, at times, compelled Big Three manufacturers to make more FFVs than the incentive credits. But now, a new CAFE rule, finalized in mid-2012 and set to kick in with the rollout of 2017 models, does away with credits for FFVs as they are currently known. The rule, instead, re-establishes the credit in a way that rewards “real-world” tailpipe emissions gained from the actual use of E85 and midlevel ethanol blends, rather than FFV sales alone. But just one automaker—GM—is even potentially capable of tracking ethanol use in its vehicles, and none of them like the alternative formula EPA has worked up to keep FFV credits marginally relevant. Both options force automakers to bet on ethanol use rising, and that may compel some of them to put their compliance money on less risky plays in the next few years.
The options are unworkable, says Kristy Moore, vice president of technical services at the Renewable Fuels Association. “They’re going to place a condition on a manufacturer that says, ‘We’re only going to give you an incentive to build FFVs if you can prove to us that your FFVs are actually running on E85 some of the time.’ There is no government agency or any other reliable entity even tracking how many gallons of E85 are sold, manufactured, delivered and used. That’s not a valid option. There is no mechanism to do that. They’re asking for the impossible.”
It’s clear, however, that EPA is more unwilling than unable to make future FFV credits easy to get and attractive to pursue. The agency had been signaling that the era of favorable treatment of FFVs was coming to an end, and it ultimately became a slow train the ethanol and auto industries saw coming but could not stop.
The final regulation, commonly called the CAFE/GHG rule, is formally titled “2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards.” It became law in late 2012 and takes effect with the introduction of model-year 2017 vehicles. Bridging regulations for 2016-’19 model-year vehicles brings the rule into play with 2016 model-year vehicles. The auto industry designs automobiles three to five years in advance, however, so the makeup of 2015-’17 model year vehicles is already decided.
The RFA and other ethanol trade groups waged a well-mannered war of words with the EPA while the agency worked in tandem with the Department of Transportation’s National Highway Traffic Safety Administration on the new CAFE/GHG rule. The auto industry, too, protested the relative dismantling of FFV credits. During the rule’s public comment period, both industries submitted a breadth of critical feedback, all aimed at convincing EPA that the continuance of FFV credits is vital and complementary to the U.S. renewable fuels standard (RFS), which calls for 36 billion gallons of biofuels by 2022. To the EPA, however, harmonizing federal incentives for both ethanol production and the vehicles that can use E85 looked like double-dipping, and pleas to preserve the existing FFV credit structure ostensibly fell on deaf ears.
FFVs Not On Short List
The new CAFE/GHG rule sets progressively stricter fuel economy and emissions standards for model years 2017 through 2025, until ultimately attaining 54.4 miles per gallon and cutting tailpipe emissions nearly in half. It’s an extension of current CAFE/GHG rules that dictate fuel economy and emissions standards for 2012-’16 model-year vehicles.
Compliance with the new rule won’t come cheap. Automakers will have to invest in new power trains and a host of advanced technologies and components. The cost of those changes will be passed on to consumers, but EPA and NHTSA project that fuel savings will far outweigh higher vehicle costs over the next decade.
Automakers characterize the new CAFE standards as being somewhere between highly challenging to barely attainable. “We’ve got a real challenge ahead of us. A real challenge,” Toyota’s Matthew Kevnick said at last year’s National Ethanol Conference.
The new CAFE rule includes a host of targeted incentives to encourage the early adoption of specific advanced-vehicle technologies, but FFVs are not on the short list. Instead, the low-hanging credits are saved for what EPA calls “game-changing” technologies: electric vehicles, plug-in hybrids, fuel cell vehicles and even natural gas-powered cars and light trucks.
The new rule does offer an FFV incentive, but it’s based on emissions reductions from actual ethanol use. EPA made a detailed case for doing away with the existing FFV credit, saying the cost differential between an FFV and a conventional gasoline vehicle is small, and that few FFV owners fuel up with E85. In essence, the agency decided that indiscriminating subsidization of FFV production had not yielded enough environmental bang for the buck. And they made a change.
Track E85 or Accept ‘F’
At the start of 2014, just 18 months from the rollout of 2016 vehicles, it continues to be unclear which, if any, automakers intend to pursue FFV production in the years ahead. Industry observers say they can only guess what the ultracompetitive Big Three are planning beyond the vehicles already under development. “Are the auto manufacturers going to be making FFVs beyond 2015? We don’t know. We just don’t know,” Moore says. “If they are, at this point, it may only be because the vehicle engineering, design and setup is already done. Beyond that, it is highly questionable. And that’s because EPA has placed questions on manufacturers that no one has answers to.”
Those perplexing questions, Moore says, pertain to tracking E85 use, or—in the likelihood that it can’t be done—using the EPA’s unpopular “F factor,” or weighting factor, for ballparking how much ethanol is used by a typical American FFV annually.
GM, with its exclusive OnStar system, could use vehicle diagnostics to record fuel sensor readings and determine how much ethanol is being consumed by its vehicles. “But that’s one technology from one automaker,” Moore says, explaining that there is no government agency or private company currently measuring E85 use. “No one tracks ethanol gallons consumed,” she says. “We can’t tell the EPA how many gallons out there are E85 versus E10, E15 or E30.”
If GM chooses to track ethanol use in its FFVs, EPA would determine whether the automaker’s data is adequate and how the results should be weighted for credit. With E85 tracking improbable for other OEMs, each is currently determining if EPA’s F factor will yield a large enough incentive to justify future FFV production. Moore and others call EPA’s weighting formula “funny math,” but no one is laughing about what F represents. An EPA draft guidance letter released early this year to give automakers direction on FFV credit calculation, announced that the F factor will be a multiplier of 0.20, or 20 percent of the emissions savings attained by using E85. Currently, automakers receive a much more liberal incentive for FFVs; they get a generous “50/50” weighting that imagines the vehicles are fueling with E85 half the time and then, crucially, exempts everything but the gasoline from the emissions tab. The math is complicated, but automakers contend that the new system could reduce the existing FFV credit by about 97 percent.
Last spring, the RFA urged EPA to use a higher weighting factor and consider the consequences of disassembling the existing FFV credit. “We believe the CAFE/GHG rule will frustrate the goals and intent of the [energy bill] and significantly complicate compliance with the [RFS],” the trade group said, calling many of the agency’s assumptions inaccurate.
EPA closed the door on comments in April and, nine months later, appears to be standing firm.
Production Guesswork
During its protest of the weighting factor, the ethanol industry also urged EPA to take a more conservative approach to estimating future FFV production and sales volumes. In 2006, GM, Ford and Chrysler each committed that FFVs would make up half of their light-duty vehicle output beginning in 2012. “While the automakers have made substantial strides toward honoring this commitment, foreign automakers have thus far chosen not to produce large volumes of FFVs despite the current availability of generous compliance credits,” the RFA said.
Corporate average fuel economy is weighted by the types of vehicles an automaker sells. So OEMs that sell mostly small, fuel-efficient cars have had less incentive to utilize CAFE’s existing incentives for FFVs. Honda, for example, has never produced an FFV for the American market and Toyota has produced FFVs in only a few models, such as the Sequoia SUV and the Tundra full-size pickup. “If foreign automakers aren’t building FFVs under the current credit regime, it seems unreasonable that they would increase FFV production when the credits are made much less attractive or are eliminated,” the RFA advised EPA.
While Volkswagen is offering a number of FFVs for the U.S. market in 2014, most of its foreign counterparts are not. Toyota engineer Matt Kevnick says OEMs are frustrated with the EPA for not “picking up the mantle” and providing clear direction on ethanol, octane and FFVs. “Without that, we haven’t been able to plan or develop our strategic directions,” he says. “And now it’s really late to be trying to make a decision on these things.”
Last February, Stuart Johnson, a senior manager at Volkswagen, said the German automaker committed to making FFVs because of the substantial credit that’s currently available. “They finally did something to get the nontraditional FFV manufacturers into the game,” he said. “And the reason we’re doing it—I’ll be blunt about it—is the substantial credit from now until 2016. It’s worth it for us to provide those vehicles. But beyond that, if there is no market pull or credit available, we’ll stop making those cars.”
Likewise, Ed Cohen, Honda’s vice president of government and industry relations, suggests that if the Japanese automaker isn’t pursuing FFV credits now, it certainly won’t be under the new rules. “The credits never motivated us to build FFVs,” he says.
The disinterest of many foreign OEMs, and the guarded apprehension of their domestic counterparts, means robust U.S. FFV production in the future is dubious. The RFA estimates that FFVs will account for less than a quarter of total vehicle sales in 2020—not half, as EPA assumes. In the near term, sales could be even lower. For example, the U.S. Energy Information Administration projects FFVs will make up less than 10 percent of total vehicle sales between 2016 and 2019, in part because of the phasing out of CAFE credits. Accurate sales projections matter, the RFA says, because government FFV estimates influence the strategic development plans of every automaker. Under the new rules, FFVs have the potential to be more valuable to one automaker if fewer of its competitors make them.
Appropriate Weight?
Critically, the RFA said, EPA needs to raise its ethanol production estimates and revise its assumptions about the timing of E15 market penetration. “Automakers—and the associations that represent them—continue to discourage [E15] use in their vehicles,” the RFA said. “We fully expect that E15 will one day be as common as E10 is today, but in the meantime, EPA should err on the side of encouraging greater production and use of FFVs.”
Ultimately, the RFA told the EPA to raise its F factor to 0.4 to 0.6, and lock it in through 2019 to keep FFVs rolling off assembly lines in the near term. “We believe an F factor in this range is justified,” the trade group told EPA.
Several months after receiving industry suggestions, EPA hasn’t indicated that it intends to jump on any of them. Importantly, Moore says, it wasn’t only the RFA that advised a weighting factor of 0.4 to 0.6. “The autos, the ethanol industry, corn growers and the U.S. Department of Energy all studied this and agreed on what that utility factor should be,” she says. “[An F factor 0.4 to 0.6] would generate enough incentive for OEMs to continue to produce FFVs. But EPA appears unwilling to address it.”
The CAFE/GHG final rule was published to the U.S. Federal Register more than a year ago, but Moore considers it unfinished, and she believes opportunities to improve the rule’s treatment of FFVs may still exist. Kevnick agrees, explaining that EPA and NHTSA, authorized by two different laws to create fuel economy standards and GHG emissions rules, respectively, are obligated to harmonize their treatments of the final rule. NHTSA’s role is authorized by the statutory requirements of the energy bill and EPA’s part is defined by the Clean Air Act. To make sure everything is synced up, the final rule calls for a “robust and comprehensive” midterm review.
Kevnick, who represents Toyota at the Alliance of Automobile Manufacturers—an important international table of OEMs—says there’s an outside chance that the midterm review may create a window of opportunity for renewed dialogue about FFV credits. “It might give everyone another bite at the apple,” he says.
Need Pull, Want Carrot
Ideally, most agree, future production of FFVs should be predominantly driven by consumer demand. Iowa State University’s Bruce Babcock, along with coauthor Sebastian Pouliot, recently authored a policy brief stating that E85 has never been priced low enough to save FFV owners money. Their model shows that if E85 were priced at “fuel-cost parity” with E10, then ethanol consumption via E85 alone would be 1.65 billion gallons per year. If E85 were priced to generate a 20 percent reduction in fuel costs to consumers, then ethanol consumption would increase by 3.6 billion gallons per year.
Automakers agree that, without a strong government commitment to FFVs, consumer interest in E85 has to rise, and fast. “FFVs worked very well in Brazil because customers wanted them,” Jones said during the question-and-answer period of last year’s NEC automaker panel. “Here in the United States where I have been doing this job for seven years, I have received one complaint that a customer wasn’t able to get the vehicle as an FFV. Clearly, we have a different market. But as a business, if we’re going to build something that costs us more, and that we can’t price at the customer, somebody has to demonstrate some interest.”
Cohen agreed. “If we hear our customers say they want E85, then they’re going to get flex-fuel vehicles,” he said last year. “But … we haven’t heard it yet. We’re obviously toughening up our vehicles for the approved fuels—E15—but until we hear our customers ask us for E85, it’s not high on our list.”
Johnson concurred that FFV production is not a consumer-driven manufacturing decision in the U.S. “We’re not getting customers telling us, ‘We’re not buying your car because you’re not offering an FFV,’” he said. “In Sweden that happened. There was a market [pull]. Our dealers were complaining that they were losing market share because we didn’t have an FFV product to sell. That’s not the case right now in the U.S.”
And Kevnick echoed, “We can produce dynamic products but if the customer doesn’t want them, it benefits no one.”
Bill Woebkenberg, a technical and regulatory affairs rep for Mercedes-Benz, was also on the automaker panel at last year’s NEC. He agreed that consumer pull for FFVs is critical. But he also said that it’s too early for the government to pull the plug on the existing incentive.
“We need a carrot,” Woebkenberg said. “We need a carrot to ensure us that there is a reason to produce these vehicles. We all know, as engineers, that ethanol is a good fuel. It’s powerful stuff. But there’s got to be a reason to use it, and that falls on the lap of EPA. They hold the keys to something that cost them exactly nothing, and that’s called credits. We spend all the money up front, but they can provide something to us that is powerful. So until that happens, and until the fuel supply is established … there is stagnation in flexible fuel vehicles.”
Author: Tom Bryan
Editor in Chief, Ethanol Producer Magazine
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