The Battle Over The Blender Pump Is Coming

January 29, 2009

How Unintended Consequences Can Really Go Awry

The Energy Independence And Security Act of 2007 (EISA 2007) is 310 pages long and addresses a number of measures to reduce energy use.  The Renewable Fuel Standard portion is only 30 pages,  Sections 201 – 248, and deals primarily with E85 and bio-diesel.  It provides very generous incentives to make E85, market E85 and produce and sell Flex-Fuel vehicles, which are the only kind of vehicles that can use ethanol blends above 10% at the present time.  However, now that ethanol is more costly to produce than gasoline, there is no economic benefit to owning a Flex-Fuel vehicle, since it takes a 25% or more mileage hit when burning E85.  The car is a dinosaur and there are rumors that Detroit is not interested in making them.  On top of that it will take a huge infrastructure investment to distribute and vend E85, since it requires a special pump with all stainless steel hardware, as in expensive.

Unfortunately the act designates hard ethanol production quotas that are based on the rapid deployment of Flex-Fuel vehicles and the rapid ramp up of E85 distribution.  Now that the overall economy is tanking and there really is no economic reality for E85, the ethanol has to go somewhere, and so it is going into all of the gasoline for non flex-fuel cars as E10.  Only problem is that by the end of 2010 or sometime in 2011 there will be more ethanol produced than is needed to take all of the gasoline in the US E10.  This is known as the “blending wall.”  What to do?

When In Doubt Just Increase The Ethanol Blending Level

So the ethanol producers answer to this limitation is just ask Congress to mandate an ethanol blending level at E15 at least, higher would be even better.  That will use up a large amount of ethanol and move the blending wall out a few years.  After all Minnesota, the first mandatory E10 state in the country, already has a law that recommends that all of the gasoline in Minnesota be taken E20 by 2013, if certain changes obtain.  These are the same changes being proposed to Congress to allow all of the gasoline to be take E15.  Get the EPA to find that if E15 or higher is used in non flex-fuel vehicles it will not increase air pollution.   Get the auto manufacturers to warranty non flex-fuel cars for E15+, no small matter.  And is the warranty going to be retroactive, or will it only apply to new cars?  Finally get lots of gas stations to upgrade their infrastructure to be able to sell higher blends.  See how simple this is.

The Blender Pump Will Solve All Problems, Big And Small

It is the last  problem discussed above that brings us to the truly ironic unintended consequence of EISA 2007, that battle over the blender pump.  If gas stations are going to have to deliver E15 to get beyond the blending wall, should they also be able to deliver E20 and above as is going to be required by Minnesota?  If the car manufacturers cannot warrant old cars above E10 then gas stations are going to have to be able to select the level of ethanol blending to be delivered to the customer and this brings us to the blender pump, which is, possibly, where we should have been all along.

It appears very straightforward in this age of computers.  Why not have a tank of ethanol free gasoline and a tank of E85, or even pure ethanol.  Tell the computer what level of ethanol blending you want and the blender pump mixes the ethanol, or E85,  and clear gasoline at any level between E0 and E85, or even E100, whatever the customer wants.

Sorry!  This turns out to be a BIG PROBLEM!  In fact, it is a huge problem and it is economic and political.

Because of the way the ethanol blending mandate is implemented blender pumps are resulting in litigation filed by oil companies against states.  The American Petroleum Institute (API) and the National Petrochemicals and Refiners Association (NPRA) have sued North Carolina and API and BP Products North America, Inc. have sued South Carolina.  Georgia is proposing a similar law, and if it passes they will get sued too.  All of this litigation results from the way EPA mandates quotas for ethanol blending and who gets the blender’s credit, and greed plays no small part in it.

The EPA sets quotas for the major gasoline distributors as to the amount of ethanol that they must blend into all of the gasoline that they distribute.  The distributors terminal then blends ethanol into the gasoline sent to service stations and does the accounting for the EPA, no small accounting matter.  If a distributor does not meet quota they can buy a cap and trade type credit, called a RIN, from a distributor that has distributed more ethanol than their EPA quota requires.  If a distributor does not meet quota or doesn’t buy RIN’s for missing quota they are subject to a fine by the EPA up to $32,500 per day.

So it behooves every major distributor to blend at the full E10 level to meet quota, and perhaps build up a RIN cushion.  The problem is that the blending terminal gets a $0.045 / gallon of E10 federal tax credit.  However if a lot of gas stations buy gasoline with no ethanol in it to use with blender pumps, not only does the terminal not get the tax credit, they might have trouble meeting their ethanol quota.  If the station uses E85 as the blending agent, then the terminal gets the tax credit and it counts towards their ethanol quota.  But if the station buys pure ethanol, it bypasses the terminal entirely and therein lies the bigger problem.  The major distributors are demanding that the gas stations with blender pumps buy E10 and E85 and then blend in between, so that the terminals get the full tax credit and the ethanol quota credit.  However, state politicians believe that this will result in higher gas prices for their citizens because the gasoline distributors will not pass along any of the savings from the $0.045 tax credit from blending E10.

And Why Doesn’t Anybody Mention Suboctane Blending?

There is another serious problem that the gasoline refiners never mention in this battle.  If all of the finished product that they make is E10 or above, they can produce a blending base product that has a lower AKI than today’s unblended gasoline.  For 87 AKI regular gasoline, they can produce 84 AKI blending product that when combined with at least 10% ethanol results in 87 AKI E10.  This “suboctane” blending product is cheaper to refine and results in more product out of the refinery process.  If the gasoline distributor has to deliver large amounts of 87 AKI clear product so that gas stations can sell anything from E0 to E100, the refineries won’t get this additional savings.  This is never mentioned in the lawsuits but will turn out to be a huge economic boon to the gasoline refiners as the whole country is taken E10 and above.  Of course the irony is that right now 45 states are not mandatory E10 states, so gasoline in those states can be ethanol free if the gas station wants to sell it, which is scaring the heck out of the gasoline distributors with EPA quotas and the ethanol industry.

A Few Remaining Minor Problems

Blender pumps will be very EXPENSIVE when they are finally available.  Currently there are no UL approved blender pumps so service stations in many parts of the country couldn’t install them even if they were able to pay for them.  The infrastructure upgrade costs will be very high.  Luckily the government is willing to take copious amounts of your tax dollars to make huge tax incentives available to those willing to make the subsidized investment.

It should be noted that ethanol fires require special firefighting equipment to be suppressed.  They cannot be put out with the equipment found at most municipal firehouses today.  It requires the type of foam apparatus that is common on airports.  It is going to be interesting when large amounts of pure ethanol are being delivered to lots of corner service stations.

It is not clear how this is going to play out but it certainly illustrates how unintended consequences of the government micro managing the energy economy in this country can go completely awry.

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