Is 2014 the Year of E85?

As a Perfect Storm of price problems ends, will E85 finally find its market and help end a divisive debate over ethanol distribution?

2014 is the year of E85, if there ever was one. Or will be one.

Why? There’s more pressure on the Renewable Fuel Standard than ever — most of it focused on the problems of the ethanol blend wall. And, with a bumper corn crop and no relief on high gasoline prices in sight, the commodity prices are expected to be in line.

(The blend wall? It’s refers to the limits on how much ethanol can be distributed into the market by blending with gasoline. E15 blends have not yet found many outlets, and cannot be used with cars older than the 2001 model year. That makes some retailers and automotive organizations skittish about expanding E15 any time soon).

Now, biobutanol blends at 16 percent, and each gallon of biobutanol counts for 1.3 gallons of ethanol under the RFS — because of butanol’s higher energy density. Long term, if the economics are in line, this will be a powerful engine for circumventing the blend wall.

But biobutanol will not be in wide distribution until at least 2015. And drop-in advanced biofuels, while increasing in capacity, will also be in limited availability through next year.

What’s the industry to do? Well, there’s E85 ethanol.

For years, E85 was touted as a key to expanding ethanol distribution. Anyone can do the math and figure out that there aren’t any problems distributing 36 billion gallons of renewable fuel (the 2022 maximum under RFS) if the vehicles and stations were out there, and prices were in line.

But a “Perfect Storm” of high E85 prices, limited distribution and limited availability of flex-fuel cars ensured that very little E85 was sold into the market.

Changes in ethanol and gasoline prices

But, there’s good news.

As of today, there are at least 11 million flex-fuel vehicles in the United States, capable of using E85 or other higher ethanol blends. The American Coalition for Ethanol projects that there are 15 million. There are roughly 2500 outlets that sell E85 fuels.

More importantly, prices appear to be coming in line, as a bumper US corn crop is expected to cause corn prices to plummet later this year and into 2014 — while gasoline prices remain high.

Today, the retail price of regular unleaded (generally, E10) gasoline in the US is at $3.63 per gallon. The underlying gasoline wholesale price is at $2.986 for the September RBOB contract, dropping to $2.759 for the March 2014 contract.

Meanwhile, the September ethanol contract stands at $2.23 per gallon at the Chicago Board of Trade, while the March 2014 contract is currently priced at $1.65.

Which means that, by March, the underlying commodity cost in E85 will be roughly 69% of the cost of regular unleaded — well ahead of the break-even point where it makes sense for flex-fuel vehicle drivers, on price alone, to use E85.

The chart below, from the bible of all things E85, e85prices.com, shows that the spread between E85 and gasoline is growing. From a low point of 5 percent last december, the spread is now more than 20 percent.

The addressable market

Based on the 11 million vehicles in the US, there is an addressable market for E85 ethanol in the range of 9 billion gallons (Based on 600 regular unleaded gallons per vehicle, per year – we’ve adjusted this north to allow for energy density). With the limited number of E85 outlets, actual distribution is likely to be a fraction of this. But there’s a substantial market available.

Distribution options

The Iowa Renewable Fuels Association has been aggressive in getting behind E85 this year. This week, they announced the launch of its E85 Wholesale Price Listing Service. The IRFA lists E85 prices from wholesale distributors with the intent of increasing transparency in the marketplace, allowing retailers to review supply options in one location.

“The goal of our E85 wholesale price listing program is to assist retailers in providing their consumers with the lowest-cost E85 available,” stated IRFA Executive Director Monte Shaw. “This is good for the Renewable Fuels Standard (RFS), good for consumers, and great for Iowa. Many of these suppliers pass the RIN savings to the consumer, which is making for some very attractive E85 prices. In fact, several E85 suppliers this week have E85 a dollar or more below the average price for regular unleaded gasoline.”

More about that E85 Wholesale Price Listing Program here.

E85 Direct

Elsewhere in Iowa, ethanol plants in Iowa are passing RIN savings on to consumers, making E85, E15 and other higher blends an attractive, low-cost option for consumers pinched by higher petroleum prices.

“Big Oil consistently touts the line that buying RINs equates to higher gas prices, but reality proves otherwise,” stated IRFA Executive Director Monte Shaw. “The blender – the seller of the RIN – can and should pass the value of the RIN through to consumers.  In fact, Iowa ethanol plants are doing just that.  By offering higher blends like E85 directly to retailers, Iowa ethanol plants are passing along the RIN savings and hoping that retailers will reflect the lower wholesale prices at the pump.”

One example is Absolute Energy, a 115 million gallon per year ethanol plant near the Iowa-Minnesota border.  Absolute Energy is now offering E85, a fuel blend containing 85 percent ethanol and 15 percent gasoline, directly to retailers and is passing on the RIN value generated by blending ethanol.

“If Big Oil companies want to sell RINs to each other, stick the money in their pockets, and then use that as an excuse to raise gasoline prices, we can’t stop them,” added Shaw.  “But we can expose the truth.  For every RIN buyer, there is a RIN seller.  And if the fuel market is competitive, then the value of the RIN should ultimately end up reducing the pump price for consumers.  In Iowa we’re cutting out the middleman to ensure that happens.”

Options and opportunities

A national program for E85 distribution — well, there’s no way of knowing whether that could happen. But the price opportunity is there; and the RFS could sure use the help in the form of added distribution. Stations like the Propel Fuels network — offering a new visual and physical experience at their “fueling stations of the future” — stand ready to distribute product.

The new fueling station experience is on display each day at Propel Fuels.

Here’s how it could work. Using the Absolute Energy model, corn ethanol producers could make an E85 product available in 2014 for $1.85 per gallon, wholesale. That might provide a compelling price point for consumers — a 30 percent discount to gasoline, which provides a savings in terms of dollars per mile. To jump-start the market, why not a promotional series of events featuring $1.85 per gallon retail E85.

The cost to ethanol producers? Not much, if any. $1.85 per gallon would value their ethanol at 3.4 cents per gallon more than the March CBOT contract — more than enough to offset the cost of $1.85 retail promotions.

The Bottom Line

Are those the magic numbers? Probably not. And that’s probably not the magic marketing formula, either. Better fuel retailing minds will come up with the right approaches and the right prices. But, for sure — E85 will go farther promoted as a value fuel that happens to be great for the environment.

And one thing we know — when the price is in line, and the outlets and cars are available, ethanol can outsell gasoline on an unsubsidized basis. It happens all the time in Brazil.

The challenge? Well, we’ve seen the promise of E85 touted before and we’ve seen broad spreads between ethanol and corn prices in the past; only to have supply chain problems prevent E85’s breakout as an established value fuel. Will it be different this time? If ever, we suspect that 2014 will be the year.