Bring Out Your Dead

Earlier this year I attended the National Ethanol Conference and was asked what I thought about the future of the alternative fuel E85. Never one to shy away from an honest answer, I told 1,000 primarily pro-ethanol attendees, that without serious life support, it might find itself on the cart of dead bodies from Monty Python’s “Holy Grail.” Of course, advocates will respond to this statement loudly proclaiming, “I’m not dead yet!”

And of course, the market for E85 is not dead yet. There are more than 20 million flexible fuel vehicles (FFVs) in the United States, FFVs still represent about 10% of new vehicles sold, the number of stations offering E85 has increased in the past couple of years and there are some stores that are selling a significant amount of the fuel. But sometimes the seas are calmest before the storm.

Let’s look at the situation moving forward:

• Historically, automakers have received a CAFE credit for every FFV they have produced. This credit, however, has been declining in recent years and is scheduled to disappear in 2019. What incentive will there be for auto companies to continue production? According to a recent forecast produced by Navigant Research for the Transportation Energy Institute, sales of FFVs are expected to drop to about 1.5% in 2025.
• The equipment necessary for a vehicle to operate on fuel blends from E0 – E85 is not expensive, but the emissions certification of each vehicle can be quite costly. In addition, to boost efficiency to meet federal standards, automakers are employing strategies such as downsizing, turbo boosting, direct injection, light-weighting, etc. FFV technology may not be fully compatible with such technologies. In the absence of an incentive, it is hard to imagine why they would continue to produce FFVs.
• There has not been a definitive “pull” from the market – the vast majority of consumers do not enter the dealership asking for a FFV. It is generally accepted that the majority the 20 million Americans who own a FFV do not even know what that means. Dealerships certainly have not been promoting the technology, which limits consumer understanding and familiarity. In the absence of consumer demand for a specific technology, and with no additional incentive, production is likely to suffer.
• While the number of stations offering E85 has increased recently, a lot of that is due to the increase in availability of E15. (E85 is used as a blending component with E10 to produce E15.) For those selling E85, sales have not typically been strong, according to a recent Transportation Energy Institute analysis of 620 E85 retail facilities. Over a 14-month period evaluated in that report, E85 generated daily sales of about 241 gallons, or 4.8% of unleaded volume. There are stores that do much better, but on average sales remain lower than premium gasoline and the equipment to sell E85 is much more expensive.
• According to this report, it is not just a matter of lowering the price of E85. For the sample set, the price of E85 averaged about 44 cents per gallon (about 16.1%) less than unleaded and there was a limited correlation between the price of E85 relative to unleaded and the volume of E85 sold. In fact, when analyzed we found that the observed performance did not result in a reliable predictive model. It was clear that there are other factors beyond price that are affecting E85 sales.

The bottom line is, in the absence of some sort of incentive to convince the automakers to continue to produce FFVs, the market will dry up – but not tomorrow. There are more than 20 million legacy FFVs in the United States and FFVs will continue to be sold (in diminishing volumes) for the next ten years or so. The Transportation Energy Institute report of Navigant Research projections indicates that FFVs will still represent more than 7% of the vehicles on the road in 2025, despite the drop in sales.

Resuscitating this market will require a concerted effort by those passionate about E85 to generate an economic value to keep FFVs entering the market. If this is successful, it should also be paired with a consumer education campaign to increase demand and generate the return on investment necessary to convince fuel retailers to expand availability in the market. Otherwise, pile the body on the cart and move along.