Biofuels mandate conflicts with market realities

Federal policy is supportive of alternative energy, but not without hurdles.

Back in the early days of biofuels industry development, the federal government passed The Energy Policy Act of 2005 which set mandated volumes of biofuel (mostly ethanol) that must be mixed with gasoline sold in the United States at 4 billion gallons by 2006, 6.1 billion gallons by 2009 and 7.5 billion gallons by 2012. Two years later, the Energy Independence and Security Act of 2007 extended the target to 36 billion gallons by 2022. The level mandated for 2013 biofuels is 13.8 billion gallons of corn starch derived ethanol, 1.28 billion gallons of biodiesel and 14 million gallons of cellulosic ethanol. These mandated levels have had a positive impact on our economy and environment by reducing imports of crude oil, reducing greenhouse gas emissions and promoting domestic rural economic development.

So if this has been successful up to this point, more is better, right? Yes, but not without hurdles to navigate. One significant hurdle is the utilization of ethanol in blends with petroleum gasoline. Most of the gasoline used in the United States is a blend of 10 percent ethanol with 90 percent petroleum gasoline. This 10 percent blend meets the regulatory limits on many American automobiles. (The exceptions are model year 2001 automobiles or newer and flex-fuel vehicles). Since most of the ethanol is utilized in a 10 percent blend, we can calculate the limited market by knowing that Americans burned 134 billion gallons of gasoline in 2011. The quick math shows that the market for ethanol is 13.4 billion gallons (134 billion x 10 percent). This is what is known as the “blend wall.” Remember, the federal government mandate for ethanol use in 2013 is 13.8 billion gallons of corn ethanol and 14 million gallons of cellulosic ethanol. Thus, in 2013 we will reach the blend wall.

While hitting the blend wall may cause some market price concerns in the near term, it is more concerning in the future as mandated biofuel levels continue to increase. In just two years, 2015 mandates are set at 15 billion gallons of corn ethanol and 3 billion gallons of cellulosic ethanol. This is where the two sources of ethanol, corn and cellulosic, will be competing for the same market. According to Robert Wisner in “Biofuels mandates approach a market collision point,” published in the AgMRC Renewable Energy and Climate Change Newsletter May 2013, “The potential problem for the corn starch ethanol industry is that cellulosic ethanol and/or imported sugar cane ethanol [which] appears likely to reduce the available market for corn starch ethanol.”

So there is the problem, what is the solution? There are several possibilities, including:

  1. Increase the market for ethanol by:
    • Allowing an increased blend percentage (possibly 15 percent ethanol blended fuel) to be used. On January 21, 2011, EPA granted the second partial waiver for E15 for use in MY2001-2006 light-duty motor vehicles, making it legal to sell and use E15 in these vehicles.
    • Increasing the use of E85 (85 percent ethanol blended fuel) in flex-fuel vehicles. According to the U.S. Energy Information Administration there are over 10 million flex-fuel vehicles on the road today, but only one million of those use E-85.
    • Burning more total gasoline. This is not likely since use has been declining since 2007 when we used 142 billion gallons. As government efficiency standards for new vehicles increase and Americans are reducing miles driven, the trend of reduced use seems likely.
  2. The U.S. EPA decreases the mandated amounts of biofuels to be used. They have done this in the last couple of years with cellulosic ethanol because the industry has not developed the capacity to produce the predetermined amount yet. This would be a short-term fix that does not follow policy.
  3. The development of other non-ethanol drop-in biomass fuels like biobutanol, which has similar properties to gasoline that allow it to be transported and stored in existing pipelines and tanks and burned in any gasoline engine without making modifications to the vehicle.
  4. Perhaps the most likely option would include some combination of the options listed above.

While these challenges are significant and will take innovative thinking to overcome, some would say that it is a success that we have reached this point. Most successful industries change incrementally and with economic driven motives. Biofuels are no exception.

Michigan State University Extension continues to provide educational programs and business support in concert with Michigan State University research in the biofuel area.

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