U.S. ethanol makers will be looking to boost exports of the fuel if the federal government, as expected, scales back the amount mandated for use in the domestic market.
With low corn prices, thanks to a record crop, industry officials say the nation’s ethanol plants will produce fuel at attractive prices in 2014 — potentially 1 billion gallons or more above what oil companies would be required to use under the proposed blending requirement.
“My hope is that we can move that via export and that plants will be able to keep running,” said Brian Kletscher, CEO of Highwater Ethanol in Lamberton, Minn., and president of the Minnesota Biofuels Association.
But without new buyers, the ethanol industry could face another round of plant closings in 2014. Kletscher said futures prices for corn, ethanol and byproducts all suggest that ethanol plants can operate at profitable margins for three or four months. After that, he said, the picture is not clear.
“There are a lot of challenges in this business — this is one we don’t need,” he added.
What’s driving it? The U.S. Environmental Protection Agency, which sets biofuel mandates under the Renewable Fuel Standard program (RFS), proposes blending less corn-based ethanol for the domestic market than envisioned under the 2007 law.
The agency’s key reasons are the overall decline in gasoline demand since 2008 along with obstacles to increasing ethanol’s market share beyond 10 percent — the so-called “blend wall.” The scale-back also affects biodiesel and ethanol from nonfood plants.
The ethanol industry, which adamantly opposes the change, has the capacity to refine nearly 15 billion gallons of corn-ethanol annually, and has counted on a 14.4 billion gallon mandate next year, and 15 billion in 2015, when the blend level would be capped. The EPA proposes about 13 billion gallons of mandated corn-ethanol in the fuel supply next year.
The mandates and a complex compliance system have been the ethanol industry’s main path to gaining a bigger share of the U.S. fuels market.
“The ethanol guys made their bet with regulatory policy and they are reaping what they sow — regulatory policy is highly fickle,” said Todd Taylor, an attorney with the Minneapolis law firm Fredrikson & Byron who focuses on biofuel and clean energy.
That’s why exporting is seen as one possible solution. The ethanol industry has been exporting — a record 1.2 billion gallons in 2011. But Europe has since imposed trade barriers.
One export opportunity — past and present — is Brazil, the world’s other leading ethanol producer. Brazil’s ethanol has less of a carbon footprint, and for that reason has even found a market in the United States.
Paul Niznik, biofuels manager for Hart Energy Research and Consulting, said Brazil’s producers have an incentive to sell their ethanol in Europe, leaving an opening for U.S. imports to Brazil.
“It’s not on the scale of a billion gallons,” he added.
Canada also imports U.S. ethanol, and a promising, undeveloped market may be in Asia, although not right away, Niznik said.
How we got here
The RFS compliance system, which could cost refiners $7 billion this year, was supposed to create incentives to upgrade retail locations to dispense higher-ethanol blends, such as E15, E30 and E85. But the EPA concluded that the capacity to sell higher ethanol blends isn’t growing fast enough to justify higher mandates.
The oil industry has coexisted with the ethanol industry on the sale of E10, the standard blend of up to 10 percent used in virtually all of the nation’s gasoline. But the industry has mounted an intense campaign against E15, the 15 percent blend that takes a bit more of oil’s market share.
With U.S. oil production rising, the industry’s trade group wants the RFS repealed, and contends the Obama administration’s proposed modifications don’t go far enough.
“If you tinker with a mandate that is fundamentally flawed, you are going to have a flawed, tinkered mandate,” said Dan Gunderson, a spokesman for the American Petroleum Institute.
Bruce Babcock, professor of energy economics at Iowa State University, said the policy was working.
“But the political forces at work weren’t going to let that happen. The oil companies, the anti-hunger groups, the environmental groups, the livestock groups — everyone lining up against the RFS was more powerful,” he said.
Expanding the U.S. market
One basic problem is that U.S. consumers aren’t flocking to higher-ethanol blends.
In a study released last week, the Fuels Institute found that in 2012 flexible-fuel vehicle owners, on average, pumped less than 20 gallons of E85 into their tanks during the entire year. E85 can only be used in flexible-fuel vehicles and is a good deal only if it’s priced about 20 percent less than E10 to make up for ethanol’s lower gas mileage.
“Consumers have decided they don’t want to use flex fuels possibly because of the price, or consumers are unable to find flex fuels,” said Jeff Lenard, vice president for strategic industry initiatives at the National Association of Convenience Stores, which founded the Fuels Institute.
Research by Iowa State’s Babcock concluded that if 2,500 additional U.S. gas stations put in E85 pumps, they could dispense another 800 million gallons of ethanol a year. But that’s nearly double number of E85 stations across the nation — about 2,700 today. The EPA says about 300 E85 stations are added each year. There are about 10.7 million flexible-fuel vehicles in the country, or about 4.7 percent of the nation’s cars and light trucks.
Retrofitting gas stations to pump higher ethanol blends can be expensive. Growth Energy, an ethanol industry trade group, has been attempting an end run around the oil industry by helping some gasoline retailers to upgrade pumps for higher ethanol blends.
Earlier this month, a Minneapolis station assisted by the group and subsidized by corn growers became the first in the state to sell E15. Growth Energy also helps retailers by sending mailings to nearby flex fuel vehicle owners when E85 stations open.
Mike O’Brien, the Minnesota-based vice president for market development for Growth Energy, said he doesn’t know how much extra ethanol could be sold domestically next year through such efforts. But the economics of higher-ethanol blends are favorable, he said.
“Let’s say there’s oversupply and the price of ethanol goes down,” O’Brien said. “Once you get ethanol into the retail level, the economics of it take off.”
David Shaffer • 612-673-7090 • Twitter: @ShafferStrib