Issue Date: September 17, 2007
Renewable Fuels Face Bumpy Road
AS THE BUSH ADMINISTRATION and Congress seek ways to expand and diversify domestic energy supplies, federal officials have begun to examine the obstacles posed by the nation's existing petroleum-based transportation infrastructure that currently limit the distribution and use of ethanol and other homegrown alternative fuels.
"While much of the national debate has focused on the production of renewable fuels, much less public attention has been directed to the challenges of infrastructure," noted Alexander A. Karsner, the Department of Energy's assistant secretary for energy efficiency and renewable energy, in recent testimony before a panel of the Senate Energy & Natural Resources Committee.
Government funding alone, he said, will not be sufficient to meet the substantial challenges of changing the U.S. energy portfolio. "The deployment of pumps, vehicles, and other infrastructure must increase rapidly over the next decade so consumers have access to domestic renewable-fuel sources," Karsner said.
Ethanol has been around as a motor fuel in the U.S. since Henry Ford launched his famous Model T in 1908, making it capable of running on gasoline, ethyl alcohol, or a mixture of both. The relatively cheap price of gasoline marginalized ethanol until the Arab oil embargos in the 1970s, when Congress began giving oil companies tax credits for every gallon of ethanol they blended into gasoline.
When oil prices began falling in the late 1980s, U.S. dependence on imported oil began to grow, and ethanol was relegated to little more than a blending component for some gas in the Midwest. The Iraq war and higher oil prices, however, have since put ethanol and other alternative fuels back at the forefront of the energy policy debate.
The White House has made an alternative fuels mandate a centerpiece of its plan to reduce U.S. dependence on imported oil. In his State of the Union address in January, President George W. Bush said the nation should cut its gasoline consumption by 20% within the decade, largely by boosting production of ethanol and other biofuels.
He urged Congress to dramatically expand the federal renewable-fuels standard, which calls for the production of 7.5 billion gal of alternative fuels per year by 2012.
With the U.S. well on the way to exceeding that mark, the Senate passed energy legislation in June that would require annual production of 36 billion gal of ethanol and other biofuels by 2022. The U.S. produced a record 4.9 billion gal of ethanol in 2006, and domestic output is expected to approach 11 billion gal by 2009, according to the Renewable Fuels Association, an industry trade group. Energy legislation approved by the House in August does not call for greater renewable-fuels production, but a higher benchmark is expected to be agreed upon when lawmakers meet this fall to reconcile the House and Senate bills.
One of the biggest challenges in the promotion of renewable-fuel use is the lack of available infrastructure. Members of Congress are concerned that production capacity will grow while demand is curtailed by a lack of access, leading to an ethanol glut. "If we don't have the infrastructure in place, like flexible fuel vehicles and renewable-fuel pumps to absorb all this new ethanol, we could be left with lots of undistributed fuel and have a collapse in the market," Sen. Byron Dorgan (D-N.D.) warned at the Senate Energy Subcommittee hearing.
Flex-fuel vehicles, or FFVs, are capable of running either on gasoline or a blend of gasoline and up to 85% ethanol. The cost of converting a vehicle into an FFV is negligible, about $100, involving minor fuel and ignition system changes. In 1995, the nation had fewer than 5,000 FFVs on its highways. By the end of 2007, more than 6 million FFVs will be operating in the U.S., according to the National Ethanol Vehicle Coalition (NEVC), a Jefferson City, Mo.-based group that advocates for expanded use of E85, a mixture of 85% ethanol and 15% regular unleaded gasoline.
That's still a tiny fraction of the 225 million vehicles on the road today. But last March, the chief executives of DaimlerChrysler, Ford, and General Motors (GM) met with President Bush to discuss ways of getting more motorists to buy vehicles powered by E85. The automakers agreed to double production of FFVs to about 2 million per year by 2010-20% of their expected production. Furthermore, Detroit's Big Three said they could make half of their entire fleets capable of running on alternative fuels by 2012 if enough E85 is available.
THOSE FLEETS of FFVs might be ready to roll, but the means of getting E85 into their fuel tanks might not be. Less than 1% of the nation's 168,000 gas stations currently offer E85, and the vast majority of those are in the Midwest, where corn-based ethanol is primarily produced. "The 1,251 E85 fueling stations operating today in 41 states across the nation pale in comparison with the number of sites needed to satisfy the demands of the motoring public and the nation's automakers," says NEVC Executive Director Phillip J. Lampert.
Sen. Amy Klobuchar (D-Minn.) says the U.S. faces a "chicken-and-egg type of problem" when it comes to the challenge of making renewable fuels available to more drivers. "The automakers are reluctant to promote FFVs in areas where there are no E85 pumps, and gas stations don't want to put in E85 pumps where there are no flex-fuel vehicles," she testified at the Senate hearing. "So we need to tackle both ends of the problem."
To make E85 readily available, Klobuchar believes federal policymakers should follow her state's example. Minnesota has 320 renewable-fuel pumps, far more than any other state. "Wherever possible, we should encourage ethanol producers to sell directly to gas stations and cut out the oil company-owned middleman," she said.
Generally, ethanol is sold under long-term contract to blending terminals, which are part of the oil industry's pipeline system. The terminals then resell the ethanol to gas stations. "In essence, the price that consumers pay for ethanol is usually set by ethanol's biggest competitor, the oil companies," Klobuchar noted. When ethanol producers sell E85 directly to gas stations, she said, drivers get the benefit of a low-cost fuel, and ethanol producers—not oil companies—collect the 51-cent-per-gal federal blender's credit.
"We have seen this model work well in Minnesota, pioneered by Chippewa Valley Ethanol, in Benson," Klobuchar testified. "They currently supply roughly a hundred gas stations that sell E85 at 60 cents below the price of gas." She said about two-thirds of the gas stations in her state that sell E85 purchase it directly from the ethanol producer.
To make E85 a viable option for most U.S. drivers, DOE estimates that approximately 50,000 to 60,000 stations will be needed to make the fuel available nationwide. On average, retrofitting an existing gas station to offer E85 is estimated to cost $60,000, but an existing federal income tax credit can defray 30% of the total. Although the number of E85 stations across the country has grown from fewer than 750 one year ago to more than 1,200 today, at this rate it would take "110 years to reach critical mass in E85 infrastructure," Karsner told the Senate subcommittee.
Rather than waiting for an E85 delivery system to develop, he said, intermediate blends of gas and ethanol, such as E15 and E20, "may offer an alternative approach." In fact, he said, intermediate blends may provide for "more rapid absorption of renewable fuels into consumer markets in the near-term."
All motor vehicles sold in the U.S. have been designed and engineered to allow the use of up to 10% ethanol. Karsner said DOE is working to examine the compatibility and potential use of intermediate blends in conventional vehicles with the Environmental Protection Agency, which is responsible for certifying fuels and fuel additives before they can be used in the transportation system. "All pumps in this country are presently certified, ready, and enabled to use E15," he told the panel. "We should be preserving multiple pathways."
Sen. Dorgan charged that oil companies are deliberately hampering the availability of renewable fuels by "placing barriers in their franchise agreements that discourage retail gas stations from offering E85." He noted, for example, that stations owned by BP do not allow credit card payments at E85 pumps, and ConocoPhillips will not allow E85 to be dispensed under the main canopy that bears the oil company's brand name. "If we are to make any real progress toward greater energy independence, it is clear we need some real changes in how the transportation sector uses energy," said Dorgan. "That's going to require significant improvement in the infrastructure available for the use of renewable fuels."
Charles T. Drevna, executive vice president of the National Petrochemical & Refiners Association, defended the industry's practices, pointing out that E85 is not made by oil companies. "Some gasoline producers are hesitant to allow E85 under their canopies because of potential liability issues," he said. "You can't expect something that we can't vouch for to be placed under our canopies."
Drevna also expressed concerns with the proposal to expand the national renewable-fuels mandate despite an inadequate distribution system. "While ethanol is a valuable blendstock for gasoline, and its use will undoubtedly continue to grow even without mandates, ethanol also carries a number of disadvantages," he told subcommittee members. Unlike gasoline, ethanol cannot be distributed through pipelines because of problems with water contamination and corrosion. Consequently, ethanol must be blended with gasoline as near to the consumer as possible, usually at the delivery terminal.
"Ethanol delivery and distribution, therefore, must be done through more expensive means such as truck, railcar, barge, or ship before it is blended at the terminal," Drevna noted. He also pointed out that ethanol has only about 70% of gasoline's energy content, which results in a significant fuel economy penalty for E85. "In order for retail consumers to cover the same distance they would using gasoline at the same cost, the retail price of E85 must be 25-30% lower than the price of gasoline," Drevna said.
Although critics question the viability and desirability of efforts to increase the use of ethanol as a motor vehicle fuel, automakers argue it could play a significant role in moving the U.S. toward energy independence. "For ethanol to be a real player in the transportation sector and lessen America's dependence on foreign oil, we need a strong, long-term focus on policies that increase U.S. ethanol production and accelerate E85 infrastructure development," says Sue Cischke, Ford's senior vice president of sustainability, environment, and safety engineering. "We also need key partners like the oil industry to invest in developing and marketing renewable fuels like E85. Without the whole-hearted involvement of the oil industry, we cannot move forward far enough or fast enough."
MEANWHILE, GM kicked off a seven-city tour in July to promote E85 as an alternative to gasoline and is expanding its line of FFV models. Research has shown that many owners of these vehicles do not know that they are capable of running on E85. "We're trying to make people aware, so we can start building more and more demand for this fuel," says Robert Babik, director of vehicle emissions issues for GM.
The company plans to build about 400,000 FFVs this year, and expects to double that number by 2010. GM has said it will be able to produce roughly 2 million FFVs by 2012, but only if the market justifies it. Japanese automakers are also entering the FFV market.
Babik reiterates that the success of these initiatives will depend on expanding access to E85. "We're willing to make the push to advance E85, and we're looking for help to build the infrastructure," Babik says.
Car manufacturers are providing some of that help. Both GM and Ford have helped install hundreds of fueling stations through partnerships with fuel providers. The companies are trying to build a Midwest ethanol corridor, which would allow motorists to fill up with E85 along the highways connecting the region's major cities.
"We are pleased to see so many popular models offered with a flexible-fuel engine in 2008," NEVC's Lampert remarks. "From a humble beginning of fewer than 500 in 1993, we expect that more than 750,000 FFVs will be produced in the coming year."
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