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E15 Scenarios

October 5, 2010


Sometime in the coming days, the Environmental Protection Agency (EPA) is expected to announce a partial waiver decision allowing the use of E15 in light duty vehicles with a model year (MY) of 2007 or newer. It is widely believed that this decision will be followed by another announcement this winter that would extend the E15 allowance to MY2001 and newer vehicles. While some in the industry maintain that the pending EPA decisions to bifurcate the gasoline and vehicle markets would be a boon to ethanol demand and help us conquer the E10 blend wall, the Renewable Fuels Association (RFA) has consistently stated that a partial waiver on E15 is unlikely to have an immediate or significant impact on the market. Rather, it is our position that the needle on ethanol demand only moves significantly if an E15 waiver applies to ALL light duty vehicles regardless of vintage. This isnt a concern born out of speculation. Like all RFA positions, it is born from our due diligence on important issues, including conversations with important stakeholders and a thorough review of the data. Specifically, our concern over EPAs approach stems from numerous conversations weve had with gasoline marketers and retailerstheyve made it abundantly clear to us that they are unlikely to offer E15 unless it is approved for use in every vehicle that pulls up to the pump. In its weekly newsletter from September 17, 2010, the Petroleum Marketers Association of America stated, Limiting the waiver to a specific class of vehicles based on date of manufacture means retailers would be forced by market conditions to carry both E-10 and E-15 product, thus increasing the risk of consumer misfueling. The good news is that the waiver will likely not require E-15 but only allow its use. Refiners are not expected to supply E-15 as a result of the waiver approval alone. The idea of offering E10 in some pumps and E15 in others has not been popular amongst gasoline retailers. They say theyre concerned about misfueling and argue that they simply dont have the resources to ensure that the cars that visit their stations are appropriately directed to the right set of gas pumps based on vehicle vintage. That is why the RFA is the only ethanol industry group supportive of the Renewable Fuels Marketing Act, a bill that would provide retailers and their insurance providers the confidence they need to aggressively begin offering higher level ethanol blends. Since waiver discussions began, the RFA has always held that theres absolutely no reason that E15 shouldnt be approved for all vehicles. Much of the data included in the waiver request came from testing the RFA helped to conduct and showed E15 to be safe. Continuing to challenge EPAs approach and the agencys lack of scientific evidence to support it, we recently released a report by automotive engineering firm Ricardo that used EPAs own methodology and examined the likely impacts of E15 use in older (MY 1994-2000) vehicles. The Ricardo study concluded that adoption and use of E15 would not adversely affect fuel system components in properly engineered vehicles, nor would it cause them to perform in a sub-optimal manner, when compared to the use of E10. Extending approval of E15 to these older vehicles would eliminate many of the headaches for the gasoline supply chain that would otherwise result from a partial waiver. In any case, we have been receiving lots of questions about what EPAs expected E15 decisions would mean both theoretically and practically for ethanol demand and production. It is well known that due to the current statutory limit on ethanol blends at 10 percent (E10), the current maximum market for ethanol stands at roughly 13.5 billion gallons. Based on year-to-date production levels, 2010 ethanol output is expected to be very close to 13 billion gallons. We are, without a doubt, nosing up against the blend wall. In addition, the E10 blend wall makes meeting future Renewable Fuels Standard requirements an extremely tall order. How would E15 approval change that? We examined several possible E15 scenarios to find out. Approval of E15 for MY2007 and Newer Vehicles If, as expected, EPA approves the use of E15 only for MY2007 and newer vehicles in the next few weeks, the practical impacts on ethanol demand will be minimal. According to various data sources, MY2007 and newer vehicles represent about 20-25% of the current light duty vehicle fleet. If every single MY2007 and newer vehicle in America used E15 for every fill-up, the theoretical market for ethanol would grow by 1.4-1.6 billion gallons, raising the overall blend wall to about 15 billion gallons. Of course, it is highly unlikely that E15 would be immediately available to all MY2007 and newer vehicles (or even a majority of them) for the reasons stated by retailers above. If we were to arbitrarily assume, for instance, that only one out of every five retailers would decide to sell E15 in the near term, the overall ethanol market would grow only by about 300 million gallons. Approval of E15 for Model Year (MY) 2001 and newer vehicles EPA has stated that it intends to approve E15 for use in MY2001 and newer vehicles later this year or early in 2011. These vehicles comprise about 60% of the current fleet, meaning there is still a substantial portion of the vehicles on the road today that are older than MY2001. If every MY2001 and newer light duty vehicle used E15 all of the time, the ethanol market maximum would grow by some 4 billion gallons and the overall blend wall would rise to about 17.5 billion gallons. Again, however, the practical adoption of E15 would be much lower. As stated above, it is unlikely that retailers will broadly offer E15 to consumers if it isnt approved for use in all vehicles. If we again arbitrarily assume that, over time, economics would drive one out of every five retailers to offer E15 in response to EPAs decision, the overall market for ethanol would grow by some 800 million gallons. Approval of E15 for all vehicles As demonstrated by the recent Ricardo engineering assessment, there is no compelling reason to question the efficacy of E15 in older vehicles. Approving the use of E15 in all light duty vehicles would alleviate most the gasoline supply chains concerns associated with a bifurcated vehicle and fuel market. A full waiver would clear the way for broad adoption at the retail level. Under a scenario where EPA green-lights E15 for use in all vehicles, the potential market for ethanol would grow to more than 20 billion gallons. Such a step would also go a long way toward ensuring mid-term RFS requirements can in fact be satisfied. Its important to remember that in any of these cases other challenges remain. There are state fire code issues, fuel registration matters, and fuel specifications and standards that will need ironing out. But the bottom line is this: the only scenario that likely results in a substantive and lasting boost to ethanol demand is approval of E15 for all vehicles. There is a small, but silver lining should EPA only allow 2007 and newer vehicles to use E15. Even by limiting E15 to such a small market, it does mean that E15 is an approved fuel. As such, all of the work the RFA has done to address state fuel regulations and other obstacles to E15 use noted above can now be fully implemented with a fuel that is approved. The RFA remains hopeful that EPA will honestly and scientifically review the data. Such a review could only lead to one conclusion: E15 is a safe and effective fuel for use in all light duty vehicles.