The high-ethanol fuel known as E85 has gained a small foothold in Minnesota in recent years, thanks in part to a subsidized price advantage and the presence of major producers and blenders in the state.

Now, the federal tax credit that boosted the industry is gone, raising questions about the fuel's future.

Without the 38-cent-per-gallon subsidy that went away Jan. 1, E85 prices are moving up. It's still cheaper than gasoline, but the shrinking difference may not be enough to compensate drivers who get fewer miles per gallon because of the fuel's lower energy content.

"E85 is going to have a tough road ahead of it," said Dustin Haaland, director of renewable fuels for CHS Inc., an Inver Grove Heights-based farmer-owned cooperative that is a major blender and retailer of ethanol under the Cenex brand.

The post-subsidy era also brings tough choices for owners of flexible-fuel vehicles, including the state of Minnesota, which has more than 3,000 vehicles capable of burning E85, and in 2010 used 963,000 gallons of it.

They must decide whether to support a fuel that is 85 percent home-grown ethanol even it it's no longer competitively priced. Minnesota is the nation's fourth-largest ethanol producer, and leads the nation with 364 retailers selling E85.

"We have our eyes open, and we are watching this," said Tim Morse, director of Minnesota's fleet. "We think it is too early to make any kind of decision right now."

Morse said he wants to see if the full 38 cents of lost E85 subsidy gets added to the state's fuel price. That could boost the state's annual E85 bill by $366,000.

Last week in the Twin Cities, E85 was 16 cents to 40 cents lower than regular gasoline, which also rose in price. That's as little as a 5 percent price difference. E85's price advantage has sometimes been more than four times better and averaged 17 percent last year, according to the state Commerce Department.

At Lerum Auto, the only E85 dealer in Richfield, owner Dean Lerum had another 1,000 gallons of E85 delivered on Wednesday -- at the new, unsubsidized price.

"I am going to let the market decide," said Lerum, for whom E85 once represented 25 percent of fuel sales, but now accounts for 5 to 7 percent. "If it drops a whole lot more, I will get rid of it."

E85's many challenges

E85, whose sales in Minnesota peaked in 2008, has always faced challenges. Americans own more than 8 million flex-fuel vehicles capable of burning E85 or gasoline. Yet only about 2 percent of gas stations sell E85. The fuel also decreases a vehicle's miles per gallon by 15 to 25 percent compared with gasoline, experts say.

"It's a product slightly ahead of its time," Jeff Broin, the CEO of ethanol producer Poet, said last month. "While it is a fantastic fuel, is extremely environmentally friendly and it's obviously using a lot of Midwest corn, the engines in the cars today don't burn E85 very efficiently."

Broin and others in the ethanol industry say E30, which is a 30 percent ethanol blend, probably is a better deal for flex-fuel vehicles, at least for now. But that blend is available at few stations, usually from special pumps that allow drivers to select a blend.

Many retailers are reluctant to make the investment in such pumps because motor fuel is a low-margin business. Cenex stores, with their ties to a farmer-owned cooperative, have been a leader in offering a range of ethanol fuels, with 374 locations offering E85 and other blends.

"The blender pump is the future," said Haaland of CHS.

Outlook for pricing

Regular gasoline, which is 10 percent ethanol, also lost 4.5 cents per gallon in subsidy when the Volumetric Ethanol Excise Tax Credit expired Dec. 31. It's a smaller amount because the 45-cent tax credit was for each gallon of ethanol mixed by refiners and blenders. They are still required to blend ethanol, though not necessarily at 85 percent.

Some experts suspect the full effect of the post-subsidy E85 price changes hasn't yet reached retail pumps. Around the state, E85 prices have always varied widely, and can be influenced by such things as the proximity to an ethanol refinery, said Kelly Marczak, director of Clean Air Choice, a program of the American Lung Association.

"We hope that while our pocketbooks are important, people will also consider it is a homegrown fuel,'' said Marczak, whose organization says E85 reduces ozone and other air pollutants.

In the shifting energy markets, E85 potentially could regain its price advantage. Its margin vs. gasoline is greatest when oil prices are high and corn prices are low. But corn prices have been high, and oil prices may be headed higher.

"Gas prices have moved higher recently because of what is going on with the Iranian threat of closing the Strait of Hormuz," said Brian Milne, energy editor for Telvent DTN, a news and data service for the energy industry. "Also, in looking at the U.S. economy there are signs it is on a growth trajectory and that has boosted oil prices."

Yet many gasoline retail chains have committed to E85 by installing pumps. Milne said they may try to hold down E85 price increases to retain customers.

But, he added, "at some point if your margin is blown out, you are just not going to move ethanol."

David Shaffer • 612-673-7090