E15 Summer Waiver: Key Market Questions: Biofuels Digest

By John Eichberger, Executive Director, Fuels Institute

Special for The Digest

Last week, the Biden administration announced plans to use the emergency waiver power to allow the summer sale of E15 fuel, a blend of gasoline and up to 15% ethanol. The sale of E15 during the summer months is currently prohibited due to environmental regulations. The goal of this action is to provide a lower priced fuel option to consumers and encourage more retail establishments to offer the fuel. Following this announcement, the Fuels Institute has reviewed the E15 market to better understand the impact this decision may have on fuel supply and prices and to provide additional insights into the fuel market for transport.

Why can’t we sell E15 in summer?

The answer to this question dates back to 22 years of amendments to the Clean Air Act of 1990. During the development of this legislation, Congress recognized the potential value of ethanol as a renewable fuel product that could replace certain hydrocarbons, reduce emissions, increase octane and potentially reduce costs. However, the chemical properties of ethanol increase the potential for gasoline evaporation when blended in lower concentrations. (Evaporation potential is measured in terms of Reid Vapor Pressure, or RVP, and reported as pressure in pounds per square inch, or PSI.)

We care about the RVP of gasoline because warmer temperatures increase evaporative emissions and contribute to more air pollution. Therefore, the Environmental Protection Agency requires gasoline during the summer months to be made with a lower RVP to reduce emissions and improve air quality. When Congress envisioned the future ethanol market in 1990, ethanol was typically blended at 10% volume. This concentration results in an increase in RVP equal to approximately one pound. So Congress included a provision in the Clean Air Act allowing gasoline blended with 9-10% ethanol to exceed the RVP regulatory limit by 1 PSI. (There are exclusions to this, but in general this provision applies to two-thirds of the nation.)

Fast forward to 2011 and the ethanol industry managed to get partial permission to blend gasoline with up to 15% ethanol. However, the Clean Air Act does not recognize E15 for the purposes of the RVP waiver because it did not exist in 1990. Therefore, it is effectively prohibited to sell E15 during the summer months unless the gasoline into which it is blended is produced with an RVP to account for the increase in RVP. This lower RVP gasoline is not required for the nearly ubiquitous E10, and with the currently low volume demand for E15, refiners have had no incentive to produce a gasoline to meet this requirement.

Should we be able to sell E15 in the summer?

That’s a very different question. The regulations crafted under Congressional direction in the Clean Air Act are clear — but they’re also outdated and inconsistent with science. In fact, E15 increases the RVP of gasoline less than E10 – as the volume of ethanol increases, its impact on evaporation decreases. But the law only provides for the RVP waiver at E10 – again, that’s because in 1990 no one anticipated the existence of E15.

Enter the Trump administration. On May 31, 2019, the EPA signed a rule allowing E15 to be sold year-round, seeking to remove this outdated restriction. However, on July 2, 2021, the United States Court of Appeals reversed this action stating that Congress explicitly limited the waiver to fuels containing 9-10% ethanol and that the EPA had no authority. to modify this provision. The main conclusion of this decision is that Congress must take action to revise the Clean Air Act. Doing this is a significant challenge because it opens the door to further efforts to change the law by those who think it is not aggressive enough as well as those who think it is too heavy handed. Given the current political divide, the prospects for congressional action look relatively bleak.

Therefore, since the decision, EPA staff and ethanol industry advocates have sought a way forward to allow E15 to be sold year-round. This week’s announcement appears to be the option deemed the most viable.

Can E15 lower prices at the pump?

The short answer is yes. When the Chicago Board of Trade closed on April 13, 2022, ethanol was trading at $2.137 per gallon. Meanwhile, gasoline (reported as RBOB) was trading at $3.29. At these prices, the wholesale price of E15 would be 5.7 cents per gallon lower than that of E10. Here’s how economics plays out in terms of wholesale fuel prices:

But that’s only part of the story. Because ethanol meets the requirements of the Federal Renewable Fuels Standard (RFS), each gallon is assigned a Renewable Identification Number (RIN) and, when blended with gasoline, generates a credit. These credits can be sold to refiners to meet their obligation. The blender, quite often the retail company, can then use the value of these RINs to either reduce prices at the pump or increase their profitability or a combination of both. RIN values ​​can be quite volatile, ranging from $0.65 to $1.65 in 2021. Assuming RINs are valued at $1.10 (just for illustration purposes) and assuming the retailer applies RIN credit at retail price (which is not guaranteed or an easy thing to do), the price differential between the E15 price advantage could be around 11.2 cents per gallon.

Will the waiver result in more E15s being sold this summer?

The lack of RVP allocation for E15 is a significant impediment to expanding the E15 market. However, based on anecdotal information provided by several retailers, it hasn’t really affected the volumetric sales of stations that carry the product. The EPA used its discretion not to actively enforce the RVP restriction on E15, and many retailers continued to sell it through the summer months. While some put stickers on their dispensers stating that E15 during those months was only for flex-fuel vehicles, others chose not to make that distinction.

That said, issuing a formal waiver provides greater certainty to fuel retailers that they will not be subject to any enforcement action. It also protects them from a private trial. It’s an angle that many don’t recognize – the Clean Air Act includes a provision whereby an individual can sue a company for a violation even if the EPA has not taken action. By formally waiving the restriction, the retailer should be protected from this potential liability.

Will the waiver result in more stores carrying E15?

Preferably not. Retailers who haven’t entered the E15 market have chosen their path for a variety of reasons and while the summer restriction may be one of them, a temporary emergency waiver is unlikely to change their minds. notice. For a retailer to offer E15, they may need to invest in new equipment to ensure it meets compatibility requirements – not all tanks, hoses and dispensers are legally able to accommodate the 15th. A temporary emergency waiver may not provide sufficient regulatory certainty to justify such an investment. For retailers who already have compatible equipment but have chosen not to carry E15 anyway, the waiver may be insufficient to influence their business strategy.

How can ethanol benefit the market more effectively?

The waiver announced this week is being issued largely in response to rising prices at the pump, and ethanol can have a positive influence on this situation, as demonstrated above. But ethanol also represents an opportunity to reduce carbon emissions associated with transportation.

Policymakers and industry leaders have determined that decarbonizing the transportation sector should be a priority, but how we address emissions from the existing fleet and future internal combustion engine vehicles (ICEVs) is a daunting task. The most viable option right now is to reduce the carbon in the fuel these vehicles burn.

According to the California Air Resources Board, the carbon intensity of ethanol is about 30% lower than that of gasoline, and recent improvements in production processes have improved this advantage. A pending report from the Fuels Institute examines in even greater detail the carbon benefits of biofuels, which could be greatly amplified through pending investments in carbon capture and sequestration.

Unfortunately, regulations limit ethanol blend ratios primarily to 10% and therefore limit the carbon benefits that might be available. Increasing the sale of E15 from more retail facilities and opening the door to additional levels of ethanol blend can increase ethanol’s contribution to the mitigation of carbon emissions.

It’s not as easy as it seems, however. This will require a variety of regulatory changes as well as investments in fuel delivery infrastructure to accommodate the higher blends. Also, not all vehicles were designed to run on these higher mixtures, so extra effort would be required to ensure the correct fuel is used in the correct vehicles. But if carbon reduction is a priority, steps must be taken to provide low-carbon fuel, whether ethanol-based or not.

The bottom line is that ICEVs make up 99% of vehicles in the United States and will continue to be an important part of the transportation industry for decades. With 73% of ICEV greenhouse gas emissions generated during fuel combustion, the best way to reduce carbon emissions is to reduce the carbon intensity of the fuel.

The Fuels Institute is investigating various pathways that can lead to reduced carbon emissions from the transportation sector. Applying the right solutions to the right vehicle applications is critical to accelerating emissions reductions and benefiting the end user. Ethanol plays an important role in this effort – the outstanding question is how we can make the most of the opportunities it represents.

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