Investment in E85 could be cheaper than purchasing ethanol credits
A study from Iowa State University said the cost of installing tanks to handle fuel with 85 percent ethanol could be cheaper than purchasing energy credits to avoid blending the fuel mostly made from corn.
Iowa State professor Bruce Babcock said ethanol demand would increase by between 800 million and 1 billion gallons per year for every 2,500 stations with E85 fueling capabilities. His study estimated that it could cost those stations about $87.5 million if new tanks do not need to be installed and at least $325 million if they do.
Congress created Renewable Identification Numbers (RIN), a special serial number given to batches of biofuels before they are sold to refiners and gasoline importers looking to comply with a federal mandate to use a certain amount of ethanol. In exchange for not blending ethanol, the refiner can choose to purchase RINs. Iowa is the nation’s largest ethanol producer.
“With the price of the tradable ethanol credits trading between 60 cents and 70 cents per gallon, and with at least 14 billion credits needed under current mandates, it seems that the reduction in compliance costs could be greater than the costs of investing in E85 infrastructure, which would create an incentive for investment,” Babcock said in the report.
“Oil companies might find it more efficient to make the investment themselves if the required price of ethanol credits rises too high for too long,” he added.
The study estimated that if the Environmental Protection Agency sets 2014 ethanol blending mandates at 13.9 billion gallons, then investment in 2,500 E85 stations would reduce oil company compliance costs from $2.84 billion to $1.09 billion.
The Renewable Fuel Standard, created in 2005 and expanded two years later by Congress, requires refiners to buy alternative fuels made from corn, soybeans and other products in order to reduce the country’s dependence on foreign energy. It calls for 18.15 billion gallons of renewable fuels to be blended into the nation’s gasoline supply in 2014 – a figure energy trade groups are asking the EPA to lower to 14.8 billion gallons. This year 16.55 billion gallons must be blended into the U.S. fuel supply.
As motorists drive less and cars become more fuel efficient, fewer gallons of motor fuel with ethanol are consumed. That means it’s harder for companies to blend as much of the corn-based fuel as they are required to do each year — a problem known as the blend wall.
Babcock and a colleague at Iowa State’s Center for Agricultural and Rural Development said the United States can overcome the blend wall and meet the country’s renewable fuels mandate starting next year by lowering prices of 85 percent ethanol to spur demand.