Market Movers

FROM THE OCTOBER ISSUE: Projections for E15 have been inconsistent since the May 31 Reid vapor pressure waiver. Ethanol Producer Magazine explores some of the factors that will influence the blend's trajectory in the coming years.
By Lisa Gibson | September 19, 2019

This year, E15 was immune to the annual dip in sales the month of May traditionally brings. In fact, the Minnesota Department of Commerce reports June 2019 E15 sales in the state—6.3 million gallons—nearly doubled from that of June 2018, 3.66 million. Mike O’Brien, vice president of market development for Growth Energy, says national year-over-year E15 sales increased by double-digit percentages in both May and June. It’s a direct result of the Reid vapor pressure waiver granted by the U.S. EPA on May 31. President Donald Trump had stoked hope of issuing the waiver in the weeks leading up to the final rule.

“We’ll take that as a good sign that momentum was growing into summer, where typically we don’t see that,” O’Brien says. “We typically saw May start to crumble in sales leading into the RVP season.”
The removal of the summer sales slump, along with new stations likely to now offer E15, could boost the 300 million gallons of E15 sold in 2018 to 700 million to 800 million for 2019, says Scott Richman, chief economist with the Renewable Fuels Association. “Without that dip, you get significantly higher volumes,” he says.

Before the waiver, retailers selling E15 had already planned to increase the number of sites offering it from about 1,800 to 3,600 in the next few years, O’Brien says. At the current sales rate, with the planned increases from the 17 chains selling E15 now, sales could increase incrementally by 1.2 billion to 1.4 billion gallons in the next five years, he adds. But at least six new chains are exploring their options through Growth Energy’s Prime the Pump branding and expansion initiative, with the potential to double that growth, O’Brien says. “We are seeing some other players start to warm up their interest in E15 because of the RVP waiver being gone,” he says, adding retailers are excited and are developing more aggressive plans for that market. “That’s the attitude we’ve encountered among all the retailers.”

Ron Lamberty, senior vice president of the American Coalition for Ethanol, points to contact from service companies as an indication that more retailers want to offer E15. “I’ve gotten calls from several different service companies—pump and equipment companies—that have asked what they need to do. That’s a good sign because that’s who stations call when they really want to make a move.”

Lamberty, O’Brien and Richman agree that enormous jumps in E15 sales as a result of the RVP waiver are unlikely within a year, but could be two to five years out. Projections are made more difficult by the myriad factors that could tip the market one way or the other.

Negative Market Factors: Slow to Sell
Among the largest factors with the potential to slow E15 market growth are small refinery exemptions. “The incentive both to expand E15 volumes just to meet the Renewable Fuels Standard, and the incentive that’s provided by D6 RIN prices, are being eroded a little bit,” Richman says.
Through SREs granted from 2013 to 2018, the U.S. EPA has exempted a combined 45.66 billion gallons of gasoline and diesel from meeting RFS blending obligations, representing 4.73 billion RINs. That’s roughly 4 billion gallons of ethanol and biodiesel waived. Most recently, EPA granted 31 SREs Aug. 9, for a total of 13.42 billion gallons of exempted gasoline and diesel, 1.43 billion RINs and 7.5 percent of 2018 RFS blending requirements. As of August, two more petitions were pending for compliance year 2018, according to EPA.

RIN prices should reflect the cost of “not obeying the law,” Lamberty says. “It’s not supposed to be easy because you’re supposed to use ethanol.” D6 RIN prices have hovered between 10 and 25 cents in 2019, down significantly from the highs of near 90 cents at the end of 2016, according to the Energy Information Administration.

That price point can be a compelling argument to retailers considering selling E15. “It was much easier to talk to people about E15 and E85 two years ago, when gas was over $1 higher, with the RIN price,” Lamberty says. “The margins were in the larger range, 12 to 15 (percent). You’re talking a pretty significant percentage of their margin.”

While ethanol industry margins have swiftly declined, leaving plants idled and even closed this year, retailers have had a tremendous past two years. Locations not already selling E15 might not see a need to explore it right away, even with the RVP waiver. The EIA reports that only 2 percent of retail fueling stations nationwide sell E15, which represents a small push currently for new ones to enter that market. Convenience stores move slowly with fuel changes, Lamberty says, traditionally evaluating new options during spring and winter months, and implementing any changes around May of the following year. The process for a station to start offering E15 can be lengthy, as well, including registration with EPA, a survey and infrastructure changes. “It might not cost a lot, but it does cost,” Lamberty says.

RFS renewable volume obligation (RVO) levels in the coming years will play a part, also, Richman says, as well as gas consumption trends. While gas demand remains relatively steady, it flatlined a bit in 2017 and 2018, hovering near 143 billion gallons, according to the EIA. Analysts say a variety of factors are at play, including Corporate Average Fuel Economy standards, the increase in ride-sharing services like Lyft and Uber, and an increase in electric vehicle use. Assuming the start of a long-term decline, one of EIA’s projections shows a sharp dropoff in gasoline demand in 2020, hitting consumption of less than 110 billion gallons in 2035. That’s a decline of about 33 billion gallons, or 23 percent, from the current projection of 2019 consumption, at 142.9 billion.

But an assumption that the flatlining gasoline consumption in 2017 and 2018 is the start of a sharp decline is a large one, and could be swayed by multiple factors. “EIA has understated some of its forecasts in gasoline consumption,” Richman says. “We would be lower than we are right now if those projections had come to pass. Some predictions of near-term reductions in gasoline consumption may have been overdone, but we do realize that, over time, with improving fuel efficiency, we’re going to need to go to higher-level blends in order to be able to maintain ethanol consumption at the levels that are envisioned.”

“I expect gas demand to remain fairly steady,” Lamberty says. “Gas demand seems to be more dependent on cost of gasoline and I think people drive a lot when gas is cheap, and they don’t drive as much when it’s expensive.” Lamberty also emphasizes the effect of the fleet changing from cars and light trucks to SUVs, crossovers and trucks, as well as the effects of CAFE.

CAFE regulates the distance passenger cars and light trucks can travel on one gallon of fuel. A proposed rule, the Safer Affordable Fuel-Efficient (SAFE) Vehicle Rule, would amend CAFE and tailpipe carbon emissions standards for cars and light trucks model years 2021 to 2026, retaining existing CAFE standards on models through 2020. SAFE is less stringent and comes with a savings of $500 billion in “societal costs,” according to the U.S. Department of Transportation. The ethanol industry has applauded the proposed rule for addressing the potential of high-octane fuels. The SAFE rule was submitted to the White House Office of Management and Budget on Aug. 2, marking a final step before its public release.

Positive Market Factors: Bringing the Boost
But just as many factors are set up to potentially hasten E15’s rise as to derail it. The potential five-year, 1.4 billion-gallon incremental increase is set to double with six new large retailers exploring E15, and that only sets up more competition and pressure on others. “If you can bring enough market pressure through independents that we’re working with, that’s going to force those branded sites to have to start offering the product, too,” O’Brien says. “It’s just that normal, competitive positioning that takes place in a marketplace.”

E15’s discount of 3 to 10 cents per gallon over gasoline is particularly significant in a declining gasoline market. “There’ll be a fight for gallons and E15 is going to be right in the middle of that fight, so that could actually accelerate E15 adoption,” O’Brien says. As branded and other retailers lose that share in the market, they’ll want to get back in the game by offering the product that’s taking their share, he adds.

“One store in a particular area can get the ball rolling,” Lamberty says. “The important thing is to always be looking for someone who’s willing to do it, so others have somebody to look at.” It’s important that the message comes from other retailers or marketers, he adds, not the ethanol industry.

Lamberty uses the expansion of E10 in the southeast U.S. as an example. “Once we got the word out about what the math was, everything went pretty quickly there.” In that case, infrastructure to get ethanol to the southeast didn’t exist yet. “And that still went pretty quickly. In this case, we’re not talking about new tanks or rail infrastructure. We’re talking about adjusting the volume of what you already have. It can go very quickly.”

It only hastens further with more terminals offering E15 as interest among retailers grows. “Having a preblended E15 is a much quicker addition for a retailer to put that product in versus trying to rebuild equipment,” O’Brien says. Five terminals started offering E15 in 2017, but that number grew to 175 by mid-2019. “That’s a big function around the E15 Prime the Pump retailers coming into the marketplace,” he says. Retailers blending their own fuels is lost market share for terminals, incentivizing the preblended offerings.

Growmark Energy began offering preblended E15 at a few terminals in 2018, according to Scott Long, manager of marketing and business development for fuels at Growmark. “The decision to make this available was due to customer demand and potential changes to the RVP waiver that could increase the customer demand.”

In February, Growmark started offering preblended E15 at 17 additional terminals in Iowa, Missouri, Nebraska, Oklahoma, Arkansas, Illinois, Kansas and South Dakota. Long says the waiver supports the choice to add pre-blended E15 to more terminals. “A number of retailers were already selling E15 through a blender pump. Now they have the option of getting E15 directly from the terminal.”

When asked if he thinks more terminals across the country will begin selling E15, now that the RVP waiver is in place, Long says, “I can’t speak for the whole country but in the Midwest, we have seen an increase in sales with proper marketing and consumer education. … This is each terminal’s decision as to their offerings. I would think that the ones that are selling ethanol blends would make this another product choice for the consumer.”

If E15 fully replaces E10 nationwide in three years—though highly unlikely—the U.S. could experience a 22.5 billion-gallon domestic ethanol market by 2022, assuming a 140 billion-gallon domestic gasoline market and continued 1.5 billion gallons of exports. With a current capacity of 17 billion gallons, according to Ethanol Producer Magazine’s full database of plants and capacities, an additional 5 billion gallons of production would be needed. If E15 replaced only half of current E10 consumption, an additional 2 billion gallons still would be needed.

Crystal Ball Cliché
Market projections always revolve around assumptions that are difficult or impossible to confirm ahead of time, and many economists will add that disclaimer to their predictions.

While E15 sales likely won’t see an immediate jump that drives the market and margins back up industry-wide, strong figures could start to emerge in two or three years. Lamberty reflects the sentiment of most ethanol industry insiders regarding the overdue RVP waiver, when he jokes, “We should see larger volumes in 2013.”

Momentum is building and retailers who had previously said they’d explore E15 when they can sell it year-round have come back to Growth Energy to discuss it since the RVP waiver was issued, O’Brien says. Others, like Casey’s General Stores, have announced they’ll expand their E15 offerings at even more locations.

“We have a good start,” Richman says. “If we can continue to get the momentum that we see, and we can continue to get real, meaningful RFS levels, then we could see greater acceleration in 2021 and 2022 as a result of that.”

Author: Lisa Gibson
Editor, Ethanol Producer Magazine
[email protected]