Analysis: Ethanol Loses in Tradeoff

OMAHA (DTN) -- In a so-called grand bargain -- ethanol receives year-round E15 sales in exchange for a cap on the price of biofuel credits at 10 cents -- ethanol, biodiesel and other advanced biofuels would likely lose market gains, a new analysis shows.

Scott Irwin, an agriculture economist at the University of Illinois, said in a new analysis on Wednesday the market gains from allowing year-round E15 sales would be dwarfed by what he says would be "catastrophic" effects of capping renewable identification numbers, or RINs, at 10 cents. Such a cap is seen as a way to help small, independent refiners control Renewable Fuel Standard compliance costs.

Though it was reported this week that no such deal has been made, the idea of a potential E15/RIN-price-cap deal emerged from a White House meeting earlier this week between President Donald Trump, members of his cabinet and senators from oil and ethanol states.

Irwin said such a deal essentially would cripple the expansion of higher ethanol blends and would end mandates for biodiesel and other advanced biofuels.

"Our analysis indicates that removing the impediment of the current RVP (Reid vapor pressure) waiver would give a boost to E15 use, but the gains in ethanol use would likely be small in the short run. Longer-run gains are uncertain and would depend on addressing several other factors that contribute to holding back the growth in usage of higher ethanol blends," he said.

"By comparison, a 10-cent RINs cap would have large impacts on biofuels production and use in the U.S. In particular, the impact of such a low RINs price cap on biodiesel would be catastrophic. Assuming the biodiesel tax credit is not in place (which it is not at present), the total biodiesel requirement for the RFS would be reduced from an expected three billion gallons in 2018 to zero gallons."

Irwin said a 10-cent cap on RINs would "remove all incentives for blending higher ethanol blends." The cap would be the equivalent of a waiver of the biodiesel mandate down to zero, the total advanced biofuels mandate down to zero, and would knock down the conventional ethanol mandate to the E10 blend wall.

"The picture that emerges from this analysis of a 'grand bargain' over the RFS is one where the impact of an RVP waiver for E15 would be vastly smaller than the impact of a 10-cent-per-gallon RINs price cap," he said.

The idea of capping RINs was offered by Sen. Ted Cruz, R-Texas, following the Chapter 11 bankruptcy filing of Philadelphia Energy Solutions. The company blamed about $832 million in RIN costs as the reason for its difficulties.

E15 CHALLENGES

Allowing E15 sales year-round is seen as ethanol's solution to bringing down the price of RINs by increasing biofuel volumes in the market.

Though allowing E15 would help, Irwin said there are a number of other issues stunting the fuel's market growth.

For E15 and E85 combined, he said, 300 million to 400 million gallons was sold between 2016 and 2017. Growth is projected to continue in 2018 and 2019, maybe as high as 600 million gallons. Still, he said, that growth would represent just four-tenths of 1% of total gasoline use.

In addition, Irwin said there continue to be E15 liability concerns related to potential mis-fueling in vehicles older than 2001. Also, an estimated 1,640 retail stations offered E15 and 4,300 retail stations offered E85 in 2017. There are more than 150,000 retail gasoline stations in the country, meaning higher ethanol blends are offered at just a small fraction of all retail stations.

"The bottom line from this analysis is that the RVP waiver is just one of several factors that have held back the growth of E15 in the U.S.," Irwin said.

If bringing down the RIN price is considered to be an important policy pursuit, he said, allowing year-round E15 sales and not capping RIN prices may accomplish the objective.

"If ethanol usage could be pushed up just a few hundred million gallons," Irwin said, "the conventional gap could be closed and D6 prices would naturally fall to just a few cents. An RVP waiver for E15 might just do the trick."

Read Irwin's full analysis here: http://bit.ly/…

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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