[Senate Hearing 112-36]
[From the U.S. Government Publishing Office]
S. Hrg. 112-36
BIOFUELS
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
TO
REVIEW THE U.S. DEPARTMENT OF ENERGY'S BIOFUEL PROGRAMS AND BIOFUEL
INFRASTRUCTURE ISSUES, AND TO CONSIDER S. 187, THE BIOFUELS MARKET
EXPANSION ACT OF 2011
__________
APRIL 7, 2011
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont MIKE LEE, Utah
DEBBIE STABENOW, Michigan RAND PAUL, Kentucky
MARK UDALL, Colorado DANIEL COATS, Indiana
JEANNE SHAHEEN, New Hampshire ROB PORTMAN, Ohio
AL FRANKEN, Minnesota JOHN HOEVEN, North Dakota
JOE MANCHIN, III, West Virginia BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Brady, Bill, CEO, Mascoma Corporation, Lebanon, NH............... 11
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Dinneen, Bob, President and CEO, Renewable Fuels Association..... 19
Eichberger, John, Vice President, Government Relations, National
Association of Convenience Stores, Alexandria, VA.............. 24
Harkin, Hon. Tom, U.S. Senator From Iowa......................... 4
Karr, Shane, Vice President for Federal Affairs, Alliance of
Automobile Manufacturers....................................... 15
Kelly, Henry, Acting Assistant Secretary, Office of Energy
Efficiency and Renewable Energy, Department of Energy.......... 49
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 3
APPENDIXES
Appendix I
Responses to additional questions................................ 57
Appendix II
Additional material submitted for the record..................... 77
BIOFUELS
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THURSDAY, APRIL 7, 2011
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:32 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. OK. Why don't we get started?
Today's hearing will discuss biofuels and the biofuel
infrastructure issues. It's important that we consider those
issues for two main reasons.
First, the unrest in the Middle East and associated high
oil prices are a reminder of the cost of our reliance on
foreign oil. Libya's oil production is shut in for the
indefinite future. Oil prices might well remain high for some
period here. These high oil prices and the resulting high
gasoline prices endanger our national and global economic
recovery. So it makes sense to be sure we're doing all we can
to make our economy less vulnerable to dramatic changes in oil.
In my view the key to making our economy less vulnerable to
oil price increases is to use less oil. Renewable biofuels are
the best near term option for replacing oil in the
transportation sector. Increased use of biofuels combined with
fuel efficiency gains and increased domestic oil production
have together reversed years of increasing dependence on
imported oil and have actually lowered our petroleum imports.
We can go into those statistics. But that's a very good
trend which I think we all need to acknowledge.
Second, the second reason why this is an appropriate time
for this hearing is that even as we have a renewed sense of
urgency to shift away from reliance on oil, renewable fuels are
facing financing and infrastructure constraints that could
prevent them from reaching their full production potential. The
financing constraints are shared by many clean energy
technologies and are not limited to renewable fuels.
Senator Murkowski and I authored a piece of legislation in
the last Congress to address those policy challenges through
the creation of a Clean Energy Deployment Administration. I
hope the committee can focus again on that policy in the near
future.
The infrastructure issues, however, are specific to the
renewable fuels industry. We have maxxed out our capacity to
absorb ethanol into our gasoline pool. This is true of
traditional corn based ethanol, but also true of emerging
cellulosic ethanol which is the advanced biofuel that is
expected to be the first to enter the marketplace.
Cellulosic ethanol is made from woody biomass, from waste
materials and grasses and the inedible parts of agricultural
crops. Cellulosic ethanol does not compete with the food
supply.
We have three broad options for continuing to replace oil
consumption with renewable fuel consumption and staying on
track to satisfy the requirements that we put in the 2007
Renewable Fuel Standard.
The first of those broad options is to increase the market
for high level ethanol blends of 85 percent ethanol and 15
percent gasoline. That's E-85.
The second broad option would be to use ethanol in mid
level blends higher than the current 10 or 15 percent ethanol,
but still significantly less than 85 percent ethanol.
The third would be to move forward with renewable fuels
other than ethanol.
Senator Harkin, who is here today to give us his views
along with Senators Johnson and Franken and Klobuchar have
helped to initiate the discussions on this topic with the
introduction of S. 187, the Biofuels Market Expansion Act of
2007. 2011 it must be, right? S. 187 chooses the first of these
options. That is maximizing the market penetration of E-85
through a mandate for cars and pumps that are compatible with
E-85.
I'm concerned somewhat about the danger of over shooting
the mark on maximizing E-85 infrastructure because I'm hoping
that infrastructure compatible drop in fuels such as algae
based biocrude and biobutanol would emerge to fill much of the
renewable fuels requirement in the future. I know Senator Coons
is very focused on this set of issues too and will be actively
involved in the questions as we get into the hearing.
I'm not suggesting we can simply put our renewable fuels
policy on hold while we wait for drop in fuels to come to
market. As best we can tell right now ethanol from cellulose is
likely to be the next renewable fuel to enter the marketplace.
I note that the overwhelming majority of the grants and loan
guarantees made by the Department of Energy and the Department
of Agriculture have been for cellulosic ethanol. It seems to
make sense that we would be working to ensure that there is a
market for this cellulosic ethanol.
It's appropriate to explore a middle ground approach on
this infrastructure issue. If ethanol can fuel more than 10
percent of our transportation needs in the near term than we
should explore a path toward enabling it to do so. However, we
should not go so far in locking our infrastructure into ethanol
as the renewable fuel choice that we prevent different and
perhaps even better renewable fuels from coming to market in
the future.
There's obviously a balancing act here. These are complex
issues which are going to require us to get the very best
information we can before we take any action.
Senator Murkowski.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman and welcome to
Senator Harkin to the committee today.
I think that this hearing marks the first time that our
committee has actually focused specifically on biofuels
policies since some time mid of 2008 when we looked at the
relationship between renewable fuels and food prices. Looking
back I think it was probably a pretty optimistic time. It was a
time when many policymakers thought that we had found both
technologies and policies that would substantially reduce our
Nation's oil consumption over a relatively brief period of
time. But roughly 3 years later I think it's probably fair to
say that some of the optimism surrounding biofuels has begun to
ebb.
First generation biofuels have entered the market in
significant quantities and at considerable cost to taxpayers.
There's less agreement on the use of certain feed stocks. A
coalition of some 90 groups, an unlikely alliance that includes
members of the agriculture, environmental and business
communities has emerged to oppose most, if not all Federal
support for corn based ethanol. The optimism surrounding
advanced biofuels, meanwhile, has both dimmed and shifted.
Congress' mandate for cellulosic biofuel required 100
million gallons last year but we saw very little production.
This year the cellulosic standard ramps up to 250 million
gallons. But again, barely any of that fuel will reach market.
With time and technological developments many have begun to
tout the drop in replacement fuels, as you know, Mr. Chairman,
which promise to be more compatible with the existing
infrastructure as the wave of the future.
We've reached a crossroads, I think, for our biofuel
policies well before most of us expected to reach one. Nothing
characterizes that crossroads better than the so called blend
wall where ethanol production rises over 10 percent of our fuel
supply. This could limit the overall use of ethanol. It could
leave cellulosic production, one that begins in earnest, with
no market at all. As we've seen with the recent A15 waiver
there are no easy way out of this situation, only processes
that we should seek to avoid in the future.
Now I hope that my comments this morning are not construed
as anti-ethanol or anti-biofuel because that's clearly not my
intention. I believe most certainly that biofuels have a
definite and an ongoing place in our fuel supply. I make these
observations simply to point out that our work in this area is
just not finished.
We face a range of problems related to infrastructure,
related to liability, other issues that could ultimately
require legislation to address. Other committees are planning
to revisit the RFS to make sure that it's working in Congress
as intended. Given how the past few years have unfolded we
should also recognize that it's possible that we may just be
too aggressive.
I'm hopeful that today will mark the start of a larger
conversation between all of the stakeholders that are affected
by the biofuels policy. We should determine if there are ideas
and if there are consensus on these ideas to help resolve the
blend well problem, avoid retroactive fuel waivers and
generally improve our biofuels policies. As part of that effort
we'll need to pay close attention to the costs that would
result from any new policy that's put forward.
We need to do our best to anticipate some of the unintended
consequences that could arise. We will need to focus on all of
the issues that are facing biofuels, not just some. We should
be ready to admit that perhaps our previous policies have not
always worked out as well as expected.
I look forward to the testimony that we will receive here
this morning. Again, thank Senator Harkin, Senator Franken, so
many, that are involved in this issue, for their input.
The Chairman. Thank you very much.
Our first witness today is Senator Harkin, who's been a
leader on this set of issues for all the years that I've been
here in the Senate. We very much welcome him and look forward
to hearing your views on what we ought to do.
Go right ahead.
STATEMENT OF HON. TOM HARKIN, U.S. SENATOR FROM IOWA
Senator Harkin. Thank you very much, Mr. Chairman and
Senator Murkowski, members of the Energy and Natural Resources
Committee. I appreciate the opportunity to provide my
perspective on this issue of biofuels which I understand this
is what this hearing is about.
You know, we constantly hear the refrain that we've got to
reduce our oil imports. We've got to get off of imported oil.
It's just a constant refrain all the time. To the extent where
I think most people actually believe we have done nothing. We
have just banging our heads against a wall. We've done nothing
to reduce our oil imports.
I'm here today with a different message. We have made
substantial progress in reducing oil imports. We can easily do
more. I want to reemphasize, easily do more.
The greatest success in reducing our dependence on imported
oil has come about through the advancement of biofuels, now
totaling about 13 billion gallons per year or about 10 percent
of our gasoline use in this country is now based in biofuels.
Quite frankly that's happened in the last 10 years or put in
another way the amount of ethanol or biofuels that we are using
in America today is more than all of the gasoline used in Great
Britain and France combined. More than all of the gasoline used
in Great Britain and France combined, that's how much we're
using right now in term of biofuels.
As I said, this has happened in 10 years. Think about that.
We've reduced our dependence on imported oil by 10 percent in
less than 10 years.
But most of this remarkable achievement has come about
through actions of Congress, mostly from this committee,
through the Renewable Fuels Standard of 2005 and what we called
RFS-2 in 2007. So my message is not one of doom and gloom nor
is it of idle hope. I think we can have optimism and confidence
based not upon a will of a whisp or some ephemeral kinds of
ghosts that we're chasing but based upon facts and
accomplishments.
What have we done? what are the facts?
Well, OK, here we go.
This committee passed and the Congress passed the Renewable
Fuels Standard saying that we're going to have 36 billion
gallons of renewable fuels by 2022. Now we can achieve this and
easily achieve this. I said we're at 13 right now. We've done
that in literally 10 years.
But we need Federal policies to support biofuels expansion.
Now one of those you mentioned the blend wall, the E10. We've
been using 10 percent or gasohol as I've said, since the 60s,
70s.
Finally EPA, last year, and we met with them, a number of
us. Senators met with them last fall. As you know they have now
increased it to E15 that any car manufactured after 2001 can
use 15 percent of ethanol blend without any problems
whatsoever.
The problem before 2001 is they don't really have enough
cars to test because most of those cars before 2001 already
have 100,000 miles. So we don't know what's causing the
problems. But, they've already proved E15. Quite frankly in our
talks with them there's a belief that we can go to E20 without
really any problems whatsoever, E20.
But the biggest challenge that we face in biofuels is what
I call marketplace expansion. Senator Murkowski, you mentioned
briefly about putting things in place that prohibit the
development of other kinds of fuels. We kind of have that
situation right now in the way that we have our cars
manufactured and the way that we have our gasoline stations set
up that really work against biofuels expansion.
So our bill, S. 187, does basically three things.
It provides a mandate on flex fuel cars. It has a phase in
that all cars made in America, sold in America, have to be
flexible fuel by a certain year. Again, we know that that costs
less than $100 a car, much less, if you do it on a mass
production basis.
Or think of it this way, all of the cars, almost all the
cars sold in the Brazil for the last dozen years have all been
flex fuel. Ford, every car they make in Brazil does flexible
fuel. General Motors, every car they make in Brazil is flexible
fuel. Honda, Toyota, they're all flexible fuel. So there's no
reason why we can't do that here.
So S. 187 basically phases in a requirement that cars sold
in America have to be flexible fuel. When I mean flexible fuel
that means they can burn at anything from gasoline to 85
percent ethanol. Brazil it's anything from gasoline to 100
percent ethanol.
The second requirement of S. 187 is to require blender
pumps. That over a 6-year period of time that major oil
companies, major gasoline stations would have to have at least
one blender pump at a certain number of gas stations to the
point where by 2020, 50 percent of all gasoline stations, one
half of all gasoline stations would have at least one blender
pump at that gasoline station.
I will relate to you a meeting that Senator Lugar and I had
just a few years ago. We had called in the automobile
companies. We had Chrysler there, Ford, General Motors. I think
a representative of Honda was there. I forget who else.
We sat across the table from them and were asking them
about why they aren't producing more flexible fuel cars. They
said, well, there's a lot of reasons. But the basic reason was
why produce a flexible fuel car when there's no flex fuel out
there. There are no stations out there. Why build them?
Literally, literally within a month after that we had, I
remember we had, Texaco, Exxon, Shell, Mobil. We had a bunch of
the major gasoline stations, companies, gas--oil companies in,
Senator Lugar and I and there were some others there. We asked
them why don't you put more blender pumps at your gasoline
stations and their response was, you guessed it. Because there
are no cars out there that can use this fuel.
So we have the chicken and egg situation. So the way to
break that down is to have a phase in of both flexible fuel
cars and blender pumps at the same time. So that as you make
more flexible fuel cars, there are more blender pumps at the
station. So those are two of the items in the bill.
It also, in our bill, provides grants. Obviously there are
some small gasoline stations that people own just a few, maybe
two or three or four, five, gasoline stations. We provide
grants there for them to put in the tanks and the blender
pumps.
The third part of the bill which is also vitally important
is a loan guarantee for pipelines. A pipeline from places where
they produce biofuels to the places where there are the most
cars, like the east coast, for example. Already there are a
couple of companies that have right of way and are prepared
basically, to move ahead with a dedicated biofuels pipeline
from the Midwest to basically New Jersey/New York City/
Pennsylvania area.
But because of markets and because of the recession they
haven't moved ahead. A loan guarantee, I think, would jump
start that and get that pipeline built so that you could ship
the biofuels to where most of the people are.
So those are basically the three things that are in S. 187.
I might just add a couple of, three things, other.
We need to develop more cellulosic ethanol. That was
mentioned, I think, by both Senator Bingaman and Senator
Murkowski on cellulosic ethanol.
A few years ago we started on this. It showed great
promise. Then the recession hit. A lot of the investments went
down. But we've had some setbacks in that.
But I think we need to restart that effort and move ahead
again on cellulosic ethanol. For the main reason is that--and
we've had a number of experiments that I've been involved in
for my role on the Agriculture Committee of using grasslands,
using places of where you can go. Things like switch grass and
things like that where you can harvest it annually. There's no
erosion problems, either switch grass, miscanthus, things like
that.
We've had experiments. We know we can grow that in areas
where you're not really growing crops or anything else. But you
can grow a lot of grass. You can harvest that every year for
biofuels production. So we need to get that back on track.
One other issue that comes up is the issue of energy
payback. A lot of critics say, well it takes more energy to
make ethanol than you get out of it. I hope that's been put to
rest.
We've had studies done by the Argon National Laboratory,
the Department of Agriculture. That shows that that simply is
not true. That we basically can get up to just short, maybe
twice the amount of energy out of a unit of ethanol than the
energy that goes into it.
Which is reasonable when you think about it because most
biofuels, ethanol, it takes sunshine and rain and soil. Those
are renewable. So it doesn't take a lot of energy to produce
the ethanol. I hope that's been put to bed.
It was mentioned about the drop in fuels, the biobutanols
and the green gasolines. Again I think they have a lot of
promise. But that's again, 20 years down the pike. We need to
have continued research in it. But don't think that somehow we
shouldn't do biofuels. We shouldn't do ethanol because we're
going to have these drop in fuels.
Drop in fuels are not there. We can be researching that for
the next 10, 20 years. I think we should. But it's not anywhere
near being available like ethanol is right now.
Last, there was an article that came out this morning in
the New York Times. I just saw it. It says, ``Rush to use crops
as fuel raises food prices and hunger fears.''
Again, this is one of those--I don't know what you'd call
it that just keeps coming up all the time in which there's just
no basis in fact. We use mostly corn now to make ethanol in
this country. Our corn exports are as much as they've ever
been. The amount of corn we feed to chickens, hogs, and cattle
and livestock is basically the same as it's ever been.
What's happened is we've increased the productivity. So the
increased productivity, a lot of that has gone into ethanol and
corn production. So it hasn't been that we're taking anything
out of the food chain. We simply have increased the productive
capacity of corn.
A lot of people don't know that the distiller's grain that
is left over after you make ethanol is a good feed source for
livestock. So you can still feed the cattle and still get the
meat out of it. A lot of people think well that corn is the
corn we eat. That's not the corn we eat. That's the corn you
feed the chickens and cattle and hogs to produce meat that we
consume.
So this, again, this story again, is just one of those
things that keep coming up all the time that by using ethanol
or biofuels we're going to have a lot of hungry people. That's
just simply not so. But it just keeps coming up all the time.
I thank you for having me here this morning. I'll just
close by saying that biofuels is and will continue to be our
most important strategy to reduce dependence on imported oil
if, I believe, we do the things that are outlined in S. 187,
blender pumps, flex fuel cars and pipelines that can move this.
With that, I think we can really, really move from a 10 percent
to 20, to 30 percent reduction in our gasoline supplies in a
very short period of time.
Thank you, Mr. Chairman.
[The prepared statement of Senator Harkin follows:]
Prepared Statement of Hon. Tom Harkin, U.S. Senator From Iowa
Chairman Bingaman and Ranking Member Murkowski, thank you for
holding this hearing and for inviting me to offer my views on the
status and future of biofuels. I have supported the production and use
of biofuels as a key strategy for America for decades, so I welcome
this opportunity to provide my current perspectives and
recommendations.
We're all familiar with America's addiction to oil and our
dangerous dependence on foreign oil. That message has been delivered
countless times for decades, with powerful amplification every time oil
prices rise. When those prices rise, we repeatedly decry the fact that
we haven't solved this problem. Many think it's as though we're banging
our heads against the wall, with no progress made nor any policy
solutions in sight.
I'm here to offer a different perspective that recognizes our
continuing challenges with respect to our addition to oil, but which
also applauds some noteworthy successes. My message is that we've taken
real steps to reduce our dependency on oil, and we have made
substantial progress, but that there are also further steps within our
reach.
The first thing we've done is to increase vehicle efficiency, and
that has dramatically reduced our need for oil.
Even more remarkable, our biofuel production now totals about 13
billion gallons per year, and equals nearly 10 percent of our gasoline
supply. While 10 percent might not sound too impressive, that is more
than all the gasoline that Great Britain and France combined use in a
year. Please think about that. For the first three decades that we
bemoaned our oil dependency dilemma, no alternative fuels played any
significant role in powering our cars and trucks. But over this past
decade, contributions from ethanol and biodiesel have risen to nearly
10 percent of demand.
Given the size of our liquid fuels market, this is a remarkable
accomplishment. Biofuels truly are working for us. Congress played a
key role in this. In addition to the biofuels tax credits that we
established in the 1970's, we also adopted the Renewable Fuel Standard
in the 2005 energy bill, and we adopted a revised, more aggressive RFS2
in 2007 to put us on this trajectory.
So my message to your committee, Senator Bingaman, to the Congress,
and to the American people, is not a message of doom and gloom about
our continuing dependence on oil. Nor is it a message of idle hope. My
message is one of optimism--optimism grounded in what we have done, and
confidence that we can do much more. Our Renewable Fuel Standard calls
for 36 billion gallons of biofuel by 2022. We can do that. We will do
that. We must do that, and we must make sure that our federal biofuels
policies' support this pace of biofuels expansion.
Success isn't a slam dunk. We have some major challenges. The
biggest challenge is that our marketplace for transportation fuels is
not yet equipped to absorb the increasing volumes of biofuels required
by the Renewable Fuel Standard. This issue is especially acute for
ethanol, which is the leading biofuel today, and which, despite real
promise in other biofuels, will almost certainly remain the dominant
biofuel for at least 2 more decades. Our problem is that nearly all of
our ethanol is used in the form of E10, which is a 10 percent blend of
ethanol with gasoline and which can be sold for use in all gasoline-
powered vehicles. We use very little ethanol at higher blend levels,
both because very few vehicles can legally use higher blends, and
because such higher blends are available at very few refueling
stations. With ethanol nearing 10 percent of our total gasoline
supplies, we're facing what's called the ``blend wall.'' This is a very
serious limitation to expanding the use of ethanol. While the
Environmental Protection Agency has announced that E15 will be approved
for use in vehicles that are model year 2001 or newer, this only offers
limited and temporary ethanol expansion potential.
I want to point out that even this marketplace limitation, from a
longer-term perspective, is a clear sign of our success. Hitting this
10 percent blend wall is a result of that success! Ten years ago, when
gasoline was essentially the only fuel, almost no one would have
predicted this problem, that by 2011 we would be struggling with how to
help an alternative to gasoline climb over a 10 percent barrier.
However, with leadership in Congress, these challenges can be
addressed. Thank you for including Senate bill S.187, the Biofuels
Market Expansion Act of 2011, among the discussion topics for this
hearing. I introduced this bill, along with Senators Johnson,
Klobuchar, and Franken, on the very first legislative day of this
Congress to highlight its importance. This measure consists of three
main components.
1) The first is a requirement that a large majority of
automobiles manufactured for sale in the United States be
``flex-fuel'' vehicles, meaning that they can utilize a wide
range of ethanol blends, all the way from E0, straight
gasoline, to E85. This is easy to do, and I've been told that
it only costs about $100 per vehicle, and possibly less. Almost
all cars sold in Brazil have been flex-fuel vehicles for
several years now.
2) The next provision expands the number of blender pumps
that can provide higher blends of ethanol across the country.
It does that by requiring that major fuel distributors, those
distributing the fuels sold at more than 50 refueling stations,
install blender pumps at increasing numbers of their stations
over a six-year period. It also authorizes grants for owners of
smaller numbers of filling stations to install blender pumps
that will dispense fuels with higher ethanol contents.
3) This bill also authorizes loan guarantees for the
development of biofuel pipelines to move ethanol from its major
production regions to other areas of the nation. There is
already serious interest in building a pipeline from the
Midwest to the New York harbor. But, investment commitments for
such a large project require a loan guarantee because of the
associated uncertainties and risks.
This Biofuels Market Expansion bill that you are looking at today
is one way to address the marketplace and infrastructure challenges
associated with supporting the further roll out of biofuels. There may
well be better ways, different provisions that are more broadly
acceptable while accomplishing the same purpose, and I look forward to
working with your committee and our colleagues across the Senate in
formulating and passing a bill. Indeed, many think we should revisit
our whole federal policy framework for biofuels, including
consideration of financial provisions such as the ethanol tax credits,
and I agree with that. I understand that the ethanol industry intends
to propose biofuels policy reform, including possible reductions in tax
credits for ethanol coupled with provisions to support market
expansion. I think that is commendable. I only wish that other
industries would do the same--including the oil industry, which is
getting very lucrative and unnecessary subsidies.
In addition to addressing the marketplace and infrastructure
challenges that biofuels currently face, I'd also like to note the
importance of accelerating the development and commercialization of
cellulosic ethanol and other advanced biofuels. Frankly, about 3 or 4
years ago, advanced biofuel technology seemed to be poised to take off.
Unfortunately, the fact that technologies were not quite ready, along
with the financial meltdown that froze investments for new
technologies, has cost us about 3 or 4 years. We now need to make sure
that advanced biofuels' development and commercialization gets the
federal support it needs in order to get back on a fast track.
I also want to take this opportunity to address the environmental
charges that some have raised relative to ethanol. One question that
continues to be raised has to do with the energy payback of ethanol.
Authoritative analysis released last summer by the Department of
Agriculture concludes that ethanol delivers about twice as much energy
as is used in its production. That analysis takes into account the
lower energy content of ethanol as well as the energy contents
remaining in the main byproduct, the distillers grains that are used
for livestock feed. We should also consider petroleum payback since a
key benefit of biofuels is displacement of imported oil. Ethanol from
corn actually delivers the equivalent of about 12 times as much energy
as is contained in the petroleum used in its production.
As we consider alternative fuels, I agree that we should be
examining their environmental impacts. In this regard, I would point
out that we are using increasing amounts of fuels from tar sands, and
surely we can all agree that the energy and water requirements for
ethanol are far less than for those fuels.
There are also some who assert that corn ethanol is a mistake and
that we should focus on ``drop-in'' fuels such as biobutanol or green
gasoline. I agree that there is real promise and potential to drop-in
fuels, and I wholeheartedly support their further development, but
their widespread use and application is realistically decades away. I
think it will be 20 years before they contribute 10 percent of our
fuels, so that would be a 2-decade mistake. In the meantime, we are
likely to see very substantial commercialization of cellulosic ethanol.
By all means, we should continue apace with the development of drop-in
fuels, but this is not an either-or proposition. Until drop-in fuels
are commercially viable, we should continue to support ethanol.
Finally, some have expressed serious concerns about the impact of
biofuels production on deforestation in developing countries. I
understand that deforestation is a major contributor to increases in
atmospheric greenhouse gases, and I fully support the need for
controlling such land use changes. However, I believe the most
effective way to limit environmentally destructive land-use change
elsewhere is through land use policies. Limiting the development of
biofuels in the United States seems to me a very uncertain and likely
ineffective approach to reducing deforestation in Indonesia.
As one who has a strong environmental record and has authored or
supported numerous conservation programs, I hope that our environmental
groups revisit their prioritization of alternative, environmentally
responsible strategies for America to reduce our dependence on oil. In
this real world of energy policy, a stance against ethanol may well be
a stance in favor of tar sands oil.
Let me close by repeating my belief that biofuels have been--and
will continue to be--our most important supply-side strategy for
reducing dependence on imported oil. Those biofuels lower
transportation fuel costs by increasing fuel supplies, and that saves
us money at the pump, as well as reducing our dependence on foreign
oil. Biofuels also are cleaner today than gasoline, by any measure, and
their environmental impacts are steadily declining as we improve
efficiencies and reduce emissions in our biorefineries. We should be
pleased with our record with ethanol and biofuels. We definitely should
enable their expanding contributions to resolving our most critical
energy problem.
Senator Bingaman and Senator Murkowski, I congratulate you and your
committee members for your leadership on charting strategies for
addressing our oil problem. Thank you for this very timely
consideration of our national biofuels policy issues. You led the
formulation and passage of the renewable fuel standards that set the
trajectory for biofuel contributions. We should all celebrate that
success, and we must stay on that course. Thank you for inviting me to
testify today on a subject that I consider to be so vital to our future
energy economy, and I look forward to working with you and our
colleagues across the Senate on reforming federal biofuels policy to
assure their continuing and expanding contributions to our
transportation fuel supplies.
The Chairman. Thank you very much. I appreciate your
testimony. I'm sure we will have a great opportunity to discuss
this with you more as the weeks go on here through the session.
Why don't we go ahead with our first panel of witnesses? I
know that I was informed Senator Shaheen wanted to introduce
Mr. Brady. So why don't you go ahead with that at this time if
you want. I'll introduce the other three.
Senator Shaheen. Thank you very much, Mr. Chairman. Welcome
to all of our panelists this morning. I'm really delighted. I
should probably share this introduction a little bit with
Senator Stabenow.
But we have Bill Brady here, who is the CEO of Mascoma
Corporation which is a New Hampshire based corporation that is
about to build a facility in Michigan. We would rather have it
in New Hampshire. But we're delighted we're expanding. You're
expanding. We hope that goes forward as planned.
Mascoma and the effort that Bill is leading is a facility
that has developed cellulosic ethanol from research that was
done at Dartmouth. It's, I think cutting edge research, really
on the cutting edge globally for the research that they're
doing on cellulosic ethanol. I've had the opportunity to visit
the facility up in Lebanon and Hanover, New Hampshire. It's
very impressive to see the growth that you have benefited from
and to see the research that's going on there.
So we're delighted to have you here and to be able to
question you about some of the challenges that you face.
Hopefully we can put in place some policies to continue to
benefit the work that you're doing.
Thank you very much for being here, Mr. Brady.
The Chairman. Alright. Let me before we hear from you, Mr.
Brady, let me introduce our other three panel members.
Mr. Shane Karr, who is the Vice President for Federal
Affairs with the alliance of Automobile Manufacturers. We
appreciate you being here.
Bob Dinneen, who is President and CEO of the Renewable
Fuels Association. We're glad to have you back before the
committee.
Mr. John Eichberger, who is the Vice President of
Government Relations with the National Association of
Convenience Stores. Thank you for being here.
Why don't we just have each of you take five or 6 minutes
and give us the main points that you think we should
understand. We will include your full statements in the record
as if read.
Mr. Brady, why don't you go ahead?
STATEMENT OF BILL BRADY, CEO, MASCOMA CORPORATION, LEBANON, NH
Mr. Brady. Thank you. Thank you very much, Senator Shaheen.
Thank you, Mr. Chairman, Senator Murkowski and members of the
committee. It's my honor to be here today.
Senator Shaheen did a terrific job introducing the company.
We do have our headquarters in the great State of New
Hampshire. We have a pilot facility, a 300,000 gallon pilot
facility in/near Syracuse, New York. We are indeed planning a
40 million gallon commercial scale production facility in
Kinross, Michigan, in the upper peninsula of Michigan.
The $350 million Kinross project which we call Frontier
Renewable Resources is being developed in conjunction with a
Michigan based timber company called, J.M. Longyear, 120 year
old timber company. We will make 40 million gallons of
cellulosic ethanol. The construction will employ 150 people.
Once operational there will be 70 skilled jobs in the facility
and the State of Michigan estimates spin off jobs on the order
of 700.
In the past year we've made significant progress.
On the technology front, ethanol produced at that plant
will be competitive with oil at $75 per barrel and will be
competitive on a cash cost basis with corn ethanol today.
On the financial and supply chain front Valero Energy
Corporation has invested in Mascoma and will be partnering with
us both on taking the off take from the facility and providing
equity.
We also have a pending loan guarantee application under
consideration at the Department of Energy.
So we've made considerable progress. We do need the
government's help to get the project moving. I'll outline that
in a second. But before I do I want to make it clear. Our job
and our commitment is to continue to drive down the costs,
advance the technology and make this technology competitive.
We're committed to doing that.
On the government front. The companies like mine have made
good progress because we have been backed by venture companies
and strategic investors. What's needed now is a significant
capital investment to build the production facilities.
Venture capital firms don't provide that type of capital.
Most private equity firms want to see it working before they'll
put considerable money to work and debt providers simply won't
take that risk or the cost will be much too high. This is the
so called Valley of Death that I think you hear about with new
companies between where we are now and building the first
facilities.
So here's how the government can help.
First, Congress must maintain the DOE's authority and
funding to provide renewable energy loan guarantees. Concepts
like Chairman Bingaman's CEDA proposal holds great promise for
the future. But today the DOE Loan Guarantee Program is the
best choice and the best bet for companies like ours.
Eliminating the program will delay projects and make it very,
very difficult for us to raise funds.
Second, the market signals for cellulosic ethanol provided
by the RFS-2 and by the PTC or Production Tax Credit are
critical. Efforts to weaken the RFS 16 billion gallons must be
avoided. The existing PTC or Production Tax Credit is scheduled
to expire in 2012. This is vital to our first plant financials.
Ideally our industry would like to see long term, 10 year,
production tax incentives. But engaging in this yearly
extenders game does not give investors confidence that it will
be there for them.
Then third, the U.S. needs to make significant progress in
breaking through the blend wall. I think Senator Harkin spoke
about this. We need to create some space for cellulosic fuels.
The investors are very aware of this blend wall and its
limitations and what they basically want to see, what we all
want to see, is infrastructure policy on FFVs and on blender
pumps that equal the RFS-2 gallons or that support the RFS-2
gallons. So a robust commitment to FFVs is necessary and
critical. We know this technology is here and is relatively
inexpensive.
Efforts also need to focus on blender pumps. I think we
need Federal mechanisms to significantly increase the speed of
installation of blender pumps. I commend Senator Harkin's
efforts to address these issues in S. 187.
So my final message is the time is now. The technologies
are ready. Unfortunately the Valley is before us. The market
signals are less than clear.
We spend as a country, $560 billion per year on imported
oil. I think a long weekend of that spending would go a long
way to moving this industry forward quickly. It will help this
country in what we so badly need in our energy independence and
economic security.
So I thank you for holding this hearing. I thank you very
much for having me here today.
[The prepared statement of Mr. Brady follows:]
Prepared Statement of Bill Brady, CEO, Mascoma Corporation
Good morning, Mr. Chairman and members of the committee. My name is
Bill Brady, CEO of Mascoma Corporation and Chairman of the Advanced
Ethanol Council, a group of companies leading the development and
commercialization of advanced ethanol technologies.
Mascoma is an innovative biofuels company committed to developing
environmentally sustainable, low cost, low carbon biofuels from
cellulosic biomass. The company's corporate office and R&D laboratories
are based in Lebanon, New Hampshire. Mascoma is producing cellulosic
ethanol at a 300,000 gallon demonstration scale at its facility in
Rome, New York. We are also developing a 40 million gallon per year
commercial scale project in Kinross, Michigan. Our hope is to begin
construction on this facility this fall pending achievement of several
milestones, some of which I will discuss today.
BACKGROUND ON MASCOMA'S TECHNOLOGY AND RESEARCH AND DEMONSTRATION
FACILITIES
Mascoma's Consolidated BioProcessing method converts non-food
biomass feedstocks into cellulosic ethanol through a patented process
that eliminates the need for costly enzymes and additives. This
transformative technology enables ethanol competitively priced with
gasoline to be derived from cellulose in a manner not previously
possible. The processing steps involve:
1. Selective harvesting of pulpwood.
2. Chipping of excess pulpwood (the feedstock we are using in
our first plant).
3. Pretreating the feedstock by cooking and processing the
wood chips into a softened material similar to peat moss.
4. Combining the pretreated material with proprietary
microorganisms in a fermenter, and fermenting the cellulose
into ethanol.
5. Recovering ethanol and lignin from the process. Cellulosic
ethanol is blended with gasoline as a low carbon motor fuel.
The unconverted fiber, called lignin, is used as a low carbon
boiler fuel or converted into other non-ethanol fuels.
Mascoma's aim is to develop the lowest cost technology to convert
cellulose materials into ethanol that we will, in turn, use in
commercial scale ethanol facilities in rural America that will create
new economic opportunities for local feedstock providers, create jobs,
and lessen our dependence on foreign oil.
At our labs in Lebanon, New Hampshire our team of 60 scientists are
continuing to make significant advances in our CBP process by improving
upon our advanced biocatalysts for the cost effective conversion of
cellulosic biomass into ethanol.
Our demonstration facility in Rome, New York has been in operation
since the fall of 2008. It is here that our integrated team of
scientists, engineers, and experience plant operators validate the
organisms we have developed in Lebanon at large scale. It is also where
new process technologies are implemented before being included in our
designs for our commercial facility.
Mascoma has been fortunate to have received grant funding from the
Department of Energy to augment private equity in our research and
demonstration activities in Lebanon and Rome. I thank the Committee for
its leadership in providing DOE with this important authority.
EFFORTS UNDERWAY TO DEVELOP FIRST COMMERCIAL FACILITY
Mascoma, in conjunction with J.M, Longyear, a Michigan-based
natural resource management company that is certified under the Forest
Stewardship Council, is actively developing the first commercial scale
production facility through its affiliate Frontier Renewable Resources
in Kinross, Michigan. The facility will use sustainable, lower-value
wood products such as pulpwood to produce 40 million gallons of
cellulosic ethanol per year.
The $350 million Kinross biorefinery will be located in a rural
area in the Upper Peninsula of Michigan. The plant will be constructed
on a site near a decommissioned U.S. Air Force base. The facility is
strategically located in close proximity to approximately 8.3 million
acres of timberlands. Annual growth in these forests exceeds harvest by
1.8 million tons annually and the Kinross facility could double its
expected production levels and the area would still have an annual
surplus of growth. Beyond this, a recent analysis by Michigan
Technological University found that the Kinross facility will reduce
greenhouse gas emissions by 108% compared to gasoline.
The construction and operation of a cellulosic ethanol plant in
this area will create jobs and develop demand for underutilized
regional hardwood timber resources, providing support for the local
economy. It will employ 150 people during construction. Once
operational, the plant will employ 70 highly skilled people, and create
700 spin off jobs in the region according to estimates by the state of
Michigan.
In the past year, we have made substantial strides in developing
the Kinross site in regards to technology development, supply chain
development and securing additional financing. On the technology front,
cellulosic ethanol produced at our Kinross facility will be competitive
with oil at $75 per barrel. In addition, we will be competitive with
corn ethanol today when compared on a cash cost basis. On the financing
and supply chain front, we announced, in January, that Valero Energy
Corporation invested in Mascoma and will be partnering with us in the
Frontier project. Additionally, we have a pending loan guarantee
application under consideration at the Department of Energy.
We have made considerable progress. However, we know we need to
continue to drive down our costs to make cellulosic ethanol even more
competitive in the marketplace. This is our job and our commitment. We
will also need strong continued and consistent federal policies to help
us reach our goal of breaking ground in 2011 and beginning operations
in 2013.
NEED FOR CONTINUING ROLE OF THE FEDERAL GOVERNMENT
Advanced and cellulosic ethanol companies like Mascoma have made
significant progress in recent years in large part because of backing
of venture and strategic investors. Our technologies are well developed
and proven at demonstration scale. What is needed is a significant
capital infusion to scale up to full commercial operation. Venture
capital firms do not provide this type of financing. Most private
equity firms want to see that the technology works before they will
commit large scale funding. Debt providers either won't engage because
of risk or set the cost of debt too high in comparison to relevant
risk. While companies like mine have been able to secure investments
from strategic investors, a delta still exists. This is the so-called
``valley of death.''
It is during this critical time that clear signals must be sent to
the marketplace about the Federal government's commitment to advanced
biofuels. As we move forward in our discussions with investors, there
are three critical areas where the Federal government needs to provide
consistency.
First, Congress must maintain DOE's authority and funding to
provide renewable energy loan guarantees. To cross the valley and start
construction of projects in 2011, this loan guarantee authority
represents the best available tool for many projects. Last week, 34
CEOs with loan guarantees pending at DOE sent a letter highlighting
that their projects represent an additional $24 billion in near-term
investment in America's energy infrastructure and would put another
35,000 Americans to work. Additionally, seven leading trade
associations representing, biofuels, biomass, wind, solar, and
geothermal interests also sent a letter highlighting support for the
program last week. With high crude oil and gasoline prices and a RFS2
mandate calling for significantly more gallons of cellulosic biofuels,
now is not the time to eliminate this program. It will delay projects
and undermine confidence in the investment community.
Second, the market signals for cellulosic ethanol provided by the
RFS2 and the cellulosic biofuels production tax credit must be
maintained. The RFS2's call for 36 billion gallons of renewable fuels
including 16 billion gallons of cellulosic biofuels including the
cellulosic waiver credit pricing mechanism are extremely important.
Efforts to weaken this commitment must be avoided. In addition, the
existing cellulosic biofuels production tax credit (PTC) is important
to our financials in the near term as our capital and production costs
continue to decline. The existing PTC is set to expire at the end of
2012. Ideally, our industry would like to see long-term (10 year) tax
incentives for advanced and cellulosic biofuels. Engaging in a yearly
extenders game surrounding the cellulosic biofuels production tax
credit will not provide the kind of consistent market signal that
investors are looking for when making decisions in this industry. As
you can imagine, incentives that expire before a facility is placed in
service are very hard to market to investors. Well developed projects
that break ground this year will likely not be in production until
2013. A one year extension of tax incentives that expire in 2011 or
2012 do not provide the type of certainty investors are looking for
when making investment decisions.
Third, the United States needs to make significant progress in
breaking through the existing ethanol blend wall to ensure sufficient
head room in the fuel marketplace for advanced and cellulosic ethanol.
Investors are very aware of the limitations of the existing blend wall.
While EPA, with the support of DOE and other agencies, have spent
significant time working to approve increased ethanol blends in the
existing automobile fleet from E10 to E15, focus needs to shift to
removing infrastructure hurdles preventing the use of even higher
ethanol blends in the future.
In 2007, GM, Ford, and DaimlerChrysler committed to increasing
production of FFVs to 50% by 2012 conditioned on having sufficient E85
refueling infrastructure to meet this demand. While this was an
important step forward, pledges and incremental progress help only to a
degree. A robust commitment to FFVs is necessary to unlock the
potential of advanced and cellulosic ethanol and provide investors with
the certainty they need. Besides producing vehicles that are capable of
running on high ethanol blends, efforts need to be focused on
installing blender pumps that can handle higher ethanol blends in our
country's approximately 180,000 gas stations. Today, there are only
approximately 2,300 E85 pumps (up from 1,200 in 2007) at those 180,000
stations. Addressing vehicles and pumps are essential to improving the
investment climate and ensuring sufficient consumer demand for advanced
and cellulosic ethanol. I commend Senator Harkin's efforts to address
these issues in S. 187, the Biofuels Market Expansion Act of 2011 and
thank the committee for holding this hearing on this critical issue.
CONCLUSION
The time is now for the United States to make significant strides
in the commercialization of advanced and cellulosic ethanol. The
technologies are ready. Unfortunately, the valley is before us, and the
market signals that will help drive investment are less than clear.
High oil prices are not only driving up gasoline prices at the pump,
but the costs of goods and services across the entire economy. The U.S.
is spending $560 billion annually to import foreign sources of oil
which make up 60 percent of our total oil requirements. In 2008, the
price spike in the gasoline market cost the United States nearly $1
trillion. It would be far better to invest funds to build out the
advanced and cellulosic ethanol infrastructure that our country so
badly needs for our energy security and economic well-being.
Putting in place a consistent, long-term federal policy for
advanced and cellulosic biofuels including significant focus on higher-
blend ethanol infrastructure and FFVs is critical to continued
development in the United States and its ability to continue to keep
pace with clean energy investments of other countries.
Thank you.
The Chairman. Thank you very much.
Mr. Karr, go right ahead, please.
STATEMENT OF SHANE KARR, VICE PRESIDENT FOR FEDERAL AFFAIRS,
ALLIANCE OF AUTOMOBILE MANUFACTURERS
Mr. Karr. Thank you, Chairman Bingaman, Senator Murkowski
and members of the committee. I appreciate the opportunity to
be here today representing the Alliance of Automobile
Manufacturers, a trade association of 12 car and light truck
manufacturers, who together account for nearly 80 percent of
annual motor vehicle sales in the United States.
Auto manufacturing is a cornerstone of the U.S. economy.
Indeed we're the largest remaining manufacturing sector in the
U.S economy.
Our sector accounts for more than 4 percent of gross
domestic product.
Supports eight million private sector jobs, $500 billion in
annual compensation, and $70 billion in personal income tax
revenues.
On behalf of the Alliance I appreciate the opportunity to
offer our views on the role biofuels can play in helping
address our Nation's energy security and environmental
concerns.
Auto makers are fully engaged in development of vehicles in
advanced technologies to help reduce gasoline consumption and
emissions including carbon emissions. Today consumers can
choose from more than 160 models that get over 30 miles per
gallon. We're working on a variety of additional technologies
that will also dramatically reduce gasoline consumption.
However, there's no single--there's no silver bullet or
single technology that will solve the challenges of enhancing
energy security and reducing greenhouse gas emissions.
Therefore, we strongly believe that any legislation mandating a
particular technology is a step in the wrong direction for our
Nation's energy policy. So let me say first and clearly, auto
makers support biofuels and continue to believe they are an
important component of a national strategy to lessen our
dependence on foreign oil.
Several of my member companies are direct investors in
conventional and advanced biofuel companies. We also support
flexible fuel technology and are manufacturing flexible fuel
vehicles faster than the fueling infrastructure can keep up. In
fact there are already more than 8.2 million FFVs on U.S.
roads. Yet less than 2 percent of gas stations have an
alternative fuel pump and most are concentrated in the Midwest
which makes sense because that's where most ethanol is
produced.
But even in states where E85 pumps are concentrated, actual
sale of E85 has been stagnant. For example, in 2008 which is
the last year for which we have complete data, Minnesota had
more stations than any other State in the country, 364 with an
E85 pump. But on average, FFVs in that State use less than one
full tank of E85 for the whole year.
The data suggests that widespread market penetration of
biofuels is not as simple as it is sometimes portrayed. FFVs
will continue to be an important vehicle technology. But their
effectiveness in helping to reduce U.S. oil consumption is a
function of fuel price and availability and consumer's
willingness to use the fuel.
So S. 187 calls for 90 percent of vehicles to be FFVs
beginning in model year 2016 and 90 percent mandate would cost
consumers more than $2 billion per year to purchase FFVs which
is a significant tax if consumers have little or no access to
the alternative fuels or little incentive to use them. But for
manufacturers there's also a large opportunity cost with this
plan. Hundreds of millions of dollars annually that we could be
applying to other fuel saving technologies would be diverted to
one single technology that would result in oil savings and
emissions reductions only if consumers actually use the
biofuels in significant quantities.
So while auto makers oppose FFV mandates we recognize the
need for pragmatic policies to address expanding production of
biofuels under the RFS. Our industry has a vision for how we
could work together to ensure that our Nation's passenger
vehicle fleet and our national fuel pool remain compatible as
we transition to greater use of renewable fuels. For our part,
auto makers would commit to a dialog with Congress and the
appropriate Federal agencies to discuss making our future light
duty vehicles capable of running on gasoline alcohol blends at
a higher level than what is available today at E10 for model
years beyond the established timeframe.
The availability of the new fuel should coincide with the
availability of vehicles that can run on the new fuel. So we
have a market for both. In order to ensure successful
implementation we would work closely with other stakeholders to
determine the right level and timeframe. We would propose
government policies where necessary to safeguard consumer
access to the fuels.
Some key considerations in a transition like this would
include:
Maintaining a high octane level since ethanol provides less
energy per gallon than gasoline, it would be important that the
future fuel would provide higher octane which would allow us to
minimize fuel economy decreases and corresponding increases in
greenhouse gas emissions.
Legacy fuels. Legacy fuels would have to continue to be
available for older vehicles and other small engines while the
refueling infrastructure for higher level ethanol blends is
transitioning. Likewise we would need to take serious steps to
ensure that we don't have widespread mis-fueling.
Finally liability protection because we know some mis-
fueling is likely to occur despite our best efforts.
Appropriate consideration should be given for some liability
protection for auto makers and fuel providers.
This approach that I've outlined would give auto makers the
lead time required and the certainty needed to design and
develop vehicles that can best meet the multitude of
requirements placed on us by our regulators and the
expectations of our customers. It should also provide a clear
path for producers, retailers, engine manufacturers and other
stakeholders. With certainty about the fuels our vehicles will
be using our engineers can design vehicles that are optimized
for these fuels. This will allow us to deliver better fuel
economy, better performance and more cost effective compliance
with the mission standards which in turn improves the value
proposition for our customers.
Thank you for the opportunity to testify. I would be happy
to answer any questions.
[The prepared statement of Mr. Karr follows:]
Prepared Statement of Shane Karr, Vice President, Federal Government
Affairs, the Alliance of Automobile Manufacturers
Thank you, Chairman Bingaman, Ranking Member Murkowski and members
of the Committee. My name is Shane Karr and I am Vice President for
Federal Government Affairs at the Alliance of Automobile Manufacturers
(Alliance). The Alliance is a trade association of twelve car and light
truck manufacturers including BMW Group, Chrysler Group LLC, Ford Motor
Company, General Motors Company, Jaguar Land Rover, Mazda, Mercedes-
Benz, Mitsubishi Motors, Porsche Cars, Toyota Motors, Volkswagen Group
and Volvo Cars. Together, Alliance members account for nearly 80
percent of annual motor vehicle sales in the U.S. Auto manufacturing is
a cornerstone of the U.S. economy, supporting 8 million private-sector
jobs, $500 billion in annual compensation, and $70 billion in personal
income tax revenues. On behalf of the Alliance, I appreciate the
opportunity to offer our views on the role biofuels can play in helping
address our nation's energy security and environmental concerns.
Automakers are fully engaged in development of vehicles and
advanced technologies to help reduce gasoline consumption and
emissions, including carbon emissions. Today, consumers can choose from
more than 160 models that get over 30 miles per gallon--and we are
working on a variety of additional technologies that will also
dramatically reduce gasoline consumption. However, there is no silver
bullet or single technology that will solve the challenges of enhancing
energy security and reducing greenhouse gas emissions. Therefore, we
strongly believe that any legislation mandating a particular vehicle
technology is a step in the wrong direction for our nation's energy
policy.
Automakers support flexible fuel technology and are manufacturing
flexible fuel vehicles (FFVs) faster than the fueling infrastructure
can keep up. In fact, there are already more than 8.2 million FFVs on
U.S. roads, yet less than 2 percent of gas stations have an alternative
fuel pump, and most are concentrated in the Midwest, where most ethanol
is produced. The GAO predicts that federal fleet alternative fuel usage
requirements are unlikely to be met in the foreseeable future ``because
of limited availability of alternative fuel.'' But even in states where
E85 pumps are concentrated, actual sale of E85 has been stagnant. For
example, in 2008 (the last year for which complete data is available),
Minnesota had 364 stations with an E85 pump, but on average, FFVs in
the state used less than one full tank of E85 each for the whole year.
The data suggests that widespread market penetration of biofuels is not
as simple as it is sometimes portrayed. FFVs will likely continue to be
an important vehicle technology, but their effectiveness in helping to
reduce U.S. oil consumption is a function of fuel price and
availability and consumers' willingness to use it.
S. 187 calls for 90 percent of vehicles to be FFVs beginning in
model year 2016. At costs of $100-$300 per vehicle, a 90 percent
mandate would cost consumers more than $2 billion per year to purchase
FFVs (if fully passed through), even though consumers will have little
or no access to alternative fuels. Therefore, such a mandate is
essentially a tax with little consumer benefit. There is also a large
opportunity cost with such a plan. Hundreds of millions of dollars
annually that could be applied to other fuel saving technologies would
be diverted to one technology. Without companion fuel use, the overall
GHG and oil consumption reductions from an FFV mandate would be
marginal and possibly less impactful than other technology
applications.
The cost of making vehicles flex fuel capable is also expected to
increase in the next few years as smog-forming emissions requirements
are tightened. Today's FFVs do not comply with the most stringent state
emissions standards and testing requirements. California has indicated
it will require virtually all vehicles to certify to the most stringent
standard in the coming years under LEV III, and the federal government
is likely to follow suit under Tier 3. It is not clear that future FFVs
may be engineered to meet these regulations at an affordable cost for
consumers.
All of this said, automakers continue to believe that renewable
fuels are an important component of our national strategy to lessen our
dependence on foreign oil. Our industry also understands that calls for
FFV mandates are largely motivated by the requirements of the Renewable
Fuel Standard (RFS) to greatly increase the amount of ethanol and other
biofuels in the national fuel mix.
While our industry opposes FFV mandates for all of the reasons I
have previously noted, we recognize the need for pragmatic policies to
address expanding production of biofuels under the RFS. We know the
auto industry has a role to play in helping to make the RFS a success.
The question is: What combination of fuel-related and auto-related
policies will best facilitate that goal? FFV mandates that fail to
align the vehicle population with the fuel available in the marketplace
are not the answer. The pressing need going forward--for automakers,
for fuel providers, and for American consumers--is to ensure that our
nation's passenger vehicle fleet and our national fuel pool remain
compatible as we transition to greater use of renewable fuels. Our
industry has a vision for how we can work together prospectively with
policymakers and fuel providers to accomplish that goal.
For our part, automakers would commit to a dialog with Congress and
the appropriate federal agencies to discuss making our future light
duty vehicles capable of running on gasoline/alcohol blends at a level
higher than what is available today at E10, for model years beyond an
established timeframe. The availability of the new fuel should coincide
with the availability of the vehicles that can run on the new fuel, so
there is a market for both. Such a prospective approach is a far
preferable alternative to the use of E15 in MY 2001 and newer vehicles,
which are not designed, certified or warranted to run on greater than
10% volume ethanol blends.
In order to ensure a successful implementation, we would work
closely with other stakeholders to determine the right level and to
identify and propose government policies to safeguard consumer access
to the fuels needed to maintain vehicle performance, reliability, and
refueling convenience. Some key considerations in such a transition
include:
Octane Level: Since ethanol provides less energy per gallon
than gasoline, the future fuel may need to provide higher
octane--to minimize fuel economy decreases and corresponding
increases in greenhouse gas emissions--as more ethanol is added
to gasoline. This change may be crucial for consumer
acceptance. It is also critical that automakers not be
penalized under future regulations for any decreases in fuel
economy that are attributable to greater ethanol use.
Legacy Fuels--Misfueling: Legacy fuels must continue to be
available for older vehicles while the refueling infrastructure
for higher level ethanol blends is transitioning. Government
assistance in implementing an effective program to educate
consumers about the fueling capabilities of their vehicles to
prevent misfueling will also be crucial to the success of the
effort. In addition, enforcement of fuel blend and labeling
requirements must be extensively and effectively executed.
Liability Protection: Because some misfueling is likely to
occur despite the best efforts of regulators, automakers and
fuel providers, consideration should be given for appropriate
liability protection that would stem from misfueling.
The approach I have outlined here provides a strong path forward to
helping to meet our energy security goals. By taking a responsible,
prospective approach, for both the vehicles and the fuels, we can avoid
the problems that have undermined the ability of E85 to make a
meaningful contribution to date and the problems likely posed by using
E-15 in older vehicles not designed for such fuels.
Above all, this approach would give automakers the lead-time
required and establish the certainty needed to design and develop
vehicles that can best meet the multitude of requirements placed on us
by regulators, and by consumers. It should also provide a clear path
for producers, retailers, engine manufacturers and other stakeholders.
With certainty about the fuels our vehicles will be using, our
engineers can design vehicles that are optimized for these fuels. This
will allow us to deliver better fuel economy, better performance, and
more cost-effective compliance with emissions standards--which in turn
improves the value proposition for our customers.
The Chairman. Thank you very much.
Mr. Dinneen, go right ahead.
STATEMENT OF BOB DINNEEN, PRESIDENT AND CEO, RENEWABLE FUELS
ASSOCIATION
Mr. Dinneen. Thank you, Mr. Chairman. Good morning,
Chairman Bingaman, Senator Murkowski, members of the committee.
My name is Bob Dinneen. I'm the President of the Renewable
Fuels Association.
This is an important and timely hearing. I would echo
Senator Harkin's comments that because of the vision of this
committee in the passage of the energy bill in 2007. That bill
put our Nation on a path toward greater energy diversity and
national security through an expanded renewable fuel standard.
That has stimulated unprecedented investment in the U.S.
ethanol biofuels industry. As a consequence with more than 13
billion gallons of production, the U.S. now leads the world in
the production and use of clean, renewable, domestic liquid
transportation fuels. Consider the progress that has been made
as a consequence of that bill.
Today ethanol is blended into roughly 90 percent of the
gasoline sold in this country. In 2010 ethanol production
contributed $53 billion to the national gross domestic product
and added $36 billion to household income.
Ethanol production has meant jobs to this country. 70,000
Americans are employed directly in the production of ethanol
and in the industries providing goods and services. But the
economic activity generated by ethanol production supports a
total of more than 400,000 jobs across this country.
Domestic ethanol production improves our Nation's balance
of trade while also reducing our reliance on foreign oil. The
production of 13 billion gallons of ethanol means that the U.S.
needed to import 445 million fewer barrels of oil in 2010 to
refine gasoline. That is more oil than the U.S. imports from
Saudi Arabia. Displacing these imported oil barrels saved the
U.S. more than $34 billion last year.
But finally at a time when American consumers are faced,
once again, with skyrocketing gasoline prices, ethanol is
helping to hold the price of gasoline lower at the pump.
Economists estimate that increased ethanol blending has reduced
the price of gasoline from 15 to 50 cents a gallon. For the
average American driver that's an annual savings of $120 to
$400 each year. Those savings result not just from the fact
that ethanol has been priced 50 cents to a dollar less than
gasoline over the last several years, but also because 13
billion gallons is reducing the net amount of oil that we have
to import and use.
But for the energy bill 2007 to reach its ultimate goal of
36 billion gallons of renewable fuels additional Federal
efforts to open markets, stimulate investments in new
technologies and assist in the development of infrastructure
for these new fuels will absolutely be necessary. Without
question moving beyond 10 percent ethanol blends is essential
to meeting the 36 billion gallon RFS. Importantly cellulosic
and advanced ethanol will largely represent the renewable fuel
supply beyond E10. To leave the blend market artificially
constrained further limits the market opportunities for next
generation biofuels that are so very close to commercialization
today. That's why E15 is so important.
But in addition to expanding the ethanol blend market it is
going to be critical to the future growth of cellulosic and
advanced ethanol to promote ethanol's important role as an
alternative fuel as well. Currently, as Shane indicated, the
E85 market represents just a fraction of the overall U.S.
ethanol market. But it's growing.
We estimate that there are about eight and a half billion
flex fuel vehicles on American roads today. That's up
significantly from recent years and is a testament to the
leadership of General Motors and Ford and Chrysler. But it
still represents just 3 percent of the total automotive fleet.
We need more flex fuel vehicles.
I was greatly encouraged by the comments a moment ago from
the Alliance of Automobile Manufacturers recognizing the need
to move our passenger vehicles beyond E10 is a big step. I
welcome the offer of a dialog to discuss the most appropriate
blend level and timeframe. I would encourage this committee,
however, that this dialog should happen expeditiously because
with each passing day America's energy crisis grows ever worse.
Mr. Brady has articulated quite well the challenges of
financial investment in second generation technologies. But I
will merely underscore that if the volume of advanced biofuels
envisioned by the energy bill are to be realized in the
infrastructure to support them, the Department of Energy's Loan
Guarantee Program must be more effectively implemented. Federal
funding to this program should be restored.
Now addressing the infrastructure needs of America's
renewable fuels policy cannot be based on a wish list. It must
be grounded in sound analysis. The RFA has released a study on
how future requirements of the RFS can be met if the right
commitments are made to ensure a steady evolution of refueling
infrastructure and the automotive fleet.
In short, blender pumps will need to be installed at a
minimum of 53,000 service stations. This represents roughly 33
percent of service stations across the country. Efforts to
install blender pumps should focus on areas with the highest
levels of vehicle miles traveled throughout the country.
Many of the challenges I've discussed are addressed by S.
187. The RFA supports that legislation. At a minimum Federal
policies should maintain and extend existing tax incentives for
higher ethanol blends to allow for the continued growth of
these fuels, expand tax incentives for refueling infrastructure
and create new consumer based incentives to encourage the
purchase of FFVs.
The RFA supports legislative action to require a percentage
of new vehicles sold in the U.S. be FFVs. Further the RFA
supports legislation requiring the installation of higher level
ethanol blends refueling infrastructure. But there may be many
ways to accomplish these goals. We want to work with this
committee and all stakeholders to accomplish that.
Mr. Chairman, thank you for your continued leadership. I
look forward to working with you and the rest of the committee
in the coming months to move this country's energy future
forward.
[The prepared statement of Mr. Dinneen follows:]
Prepared Statement of Bob Dinneen, President & CEO, Renewable Fuels
Association
Good morning, Chairman Bingaman, Ranking Member Murkowski, and
Members of the Committee. My name is Bob Dinneen and I am president and
CEO of the Renewable Fuels Association (RFA), the national trade
association representing the U.S. ethanol industry.
RFA is the leading trade association for America's ethanol
industry. Its mission is to advance the development, production, and
use of fuel ethanol and co-products by strengthening America's ethanol
industry and raising awareness about the benefits of renewable fuels.
Founded in 1981, RFA's 300-plus members are working to help America
become cleaner, safer, more energy secure and more economically
vibrant.
This is an important and timely hearing, and I am pleased to be
here to discuss the future of our nation's ethanol industry and how S.
187--the ``Biofuel Market Expansion Act of 2011 can help our country
achieve its energy security goals.
Due to the visionary and invaluable work of this Committee in the
110th Congress, the Energy Independence and Security Act of 2007 (EISA)
put our nation on a path toward greater energy diversity and national
security through the expanded Renewable Fuels Standard (RFS). EISA has
stimulated unprecedented investment in the U.S. biofuels industry and,
as a consequence, the U.S. now leads the world in the production and
use of clean, renewable, domestic liquid transportation fuels. For
EISA's ultimate goal of 36 billion gallons of renewable fuel use to be
realized, however, additional federal efforts to open markets,
stimulate investments in new technologies and assist in the development
of infrastructure for these new fuels will be necessary.
BACKGROUND
Today, ethanol is blended into roughly 90 percent of the gasoline
sold in the U.S., the majority as E10 (10 percent ethanol and 90
percent gasoline)--a blend component adding octane, displacing toxics
and helping refiners meet Clean Air Act specifications. Ethanol is a
thoroughly tested, safe, and effective motor fuel. Americans spend
nearly $1 billion a day importing oil, often from hostile regions of
the world. If the chaos in the Middle East teaches us anything, it
should be that America must forcefully begin down the path of energy
self-reliance. Increasing the use of domestic renewable fuels like
ethanol is the first, and arguably, the easiest step we can take.
Already, ethanol production is contributing to our nation's
financial well-being as well as that of American households. In 2010,
ethanol production contributed $53.6 billion to the national Gross
Domestic Product and added $36 billion to household incomes.
According to an economic analysis from Cardno ENTRIX, 70,600
Americans are employed directly in the production of ethanol and in
industries providing goods and services to ethanol producers. The
economic activity generated by ethanol production supported a total of
more than 400,000 Americans in 2010.
Additionally, ethanol production is paying for itself. The
increased economic activity and income generated by America's ethanol
industry added some $12 billion to federal, state and local governments
through increased tax revenue.
Domestic ethanol production improves our nation's balance of trade
while also reducing our reliance on foreign oil. The production of 13
billion gallons of ethanol means that the U.S. needed to import 445
million fewer barrels of oil in 2010 to refine gasoline. That is more
oil than America imports from Saudi Arabia annually. Displacing these
imported oil barrels saved the U.S. $34 billion in 2010.
Finally, at a time when American drivers are facing rising gas
prices, ethanol is helping to hold pump prices lower than they would be
otherwise. Economists from government agencies like DOE, universities
like Iowa State, and financial institutions like Merrill Lynch have
examined the impact of increased ethanol blending on consumer gas
prices. Their studies have concluded that increased blending of ethanol
has generally reduced the price of gasoline by 15-50 cents per gallon.
For the average American driver, that's an annual savings of $120 to
$400 dollars. These savings result not only from the fact that ethanol
has been $0.50-$1.00 cheaper than gasoline at the wholesale level for
the last several years, but also from the fact that replacing 13
billion gallons of gasoline reduces aggregate oil demand and, thus,
exerts downward pressure on gasoline prices.
OPEN MARKETS
Because U.S. ethanol production capacity continues to grow
steadily, there is a sense of urgency surrounding the need to move to
ethanol blends that include more than 10 percent ethanol. The RFA is
dedicated to maximizing the use of ethanol consistent with sound
technical evidence. The RFA supports the safe and effective use of
higher level ethanol blends in both conventional as well as Flex-Fuel
Vehicles (FFVs). The RFA continues to work with engine and vehicle
manufacturers, as well as non-road engine and vehicle manufacturers, to
secure their support for the use of higher level blends of ethanol.
Moving beyond 10 percent ethanol blends is essential to achieving
our nation's goals of reducing our reliance on foreign oil, and to
foster the growth of a robust, domestic renewable fuels industry. The
implementation of EISA and its 36 billion gallon RFS will require the
use of ethanol beyond the traditional 10 percent blends. Cellulosic and
advanced ethanol will largely represent the renewable fuel supply
beyond the E10 blend market. To leave the market artificially
constrained further limits market opportunities for next generation
biofuels very close to commercialization, missing an opportunity to
meaningfully increase America's use of renewable fuels and reduce our
dependence on imported oil.
The U.S. Environmental Protection Agency (EPA) has approved E15
blends to be safe for use in all cars, pickups and SUVs built in 2001
and later, or 62 percent of vehicles on the road today according to car
industry data--nearly two out of every three cars on the road today. If
E15 were used in all vehicles covered by this decision, the theoretical
blend wall for ethanol use would be approximately 17.5 billion gallons.
The EPA continues to move in the right direction with respect to
increasing ethanol blends, but challenges still remain. The RFA
continues to urge EPA to extend the waiver for E15 use to all passenger
vehicles. A report by the highly regarded automotive engineering firm,
Ricardo Inc., concluded there were no unique emissions, material
compatibility or drivability issues with older vehicles compared to
2001 automobiles. Our nation can and should move in the direction of
ethanol blends in excess of 10 percent in conventional, gas-only
vehicles.
As with any new fuel, additional testing and some regulatory issues
relating to the fuel's properties must be addressed before widespread
E15 use can occur. The RFA is working to address those issues and
accelerate the commercial use of E15.
In addition to expanding the blend market, it will be critical to
the future growth opportunities for cellulosic and advanced ethanol to
promote ethanol's important role as an alternative fuel as well.
Currently, the E85 market represents just a fraction of the overall
U.S. ethanol market, but it is growing. We estimate that there are
about 8.5 million flexible fuel vehicles on America's roadways today.
That's up significantly from recent years and a testament to the
leadership and commitment of General Motors and Ford; but it still
represents just 3 percent of the total automotive fleet. Likewise, we
estimate E85 and mid-level blends are offered at approximately 2,700
retail gas stations across the U.S. That's a huge improvement over the
handful of E85 stations just a decade ago, but it still represents just
1.5 percent of the nation's gas stations. Obviously we have a long way
to go if consumers are to be given the flexibility to maximize their
use of domestic renewable fuels like ethanol. Efforts to expand FFV
technology must be a part of our energy future.
STIMULATE INVESTMENT
A major policy objective of EISA was to accelerate the
commercialization of new technologies and next generation biofuels.
Certainly, by creating demand for at least 21 billion gallons of
advanced biofuels by 2022, cellulosic ethanol and other advanced
biofuels were given a tremendous boost. But the economic collapse of
2008 and the concurrent banking crisis made it extraordinarily
difficult for these new technologies to secure financing. The U.S.
Department of Energy (DOE) Loan Guarantee Program this Committee
thoughtfully created has been hamstrung by a bureaucracy seemingly
unwilling to meaningfully reduce the risk associated with these
investments.
If the volumes of advanced biofuels envisioned by EISA and the
infrastructure to support them are to be realized, the DOE Loan
Guarantee Program must be more effectively implemented and Federal
funding to this important program should be restored.
REFUELING INFRASTRUCTURE
Achieving the goals of the RFS and giving Americans more control
over their energy future can be done with smart policies and targeted
investment that expand ethanol refueling infrastructure and use. In a
climate of fiscal concerns, we can meaningfully expand the ethanol
market, reduce our reliance on imported oil, and create jobs without
breaking the bank. Addressing the infrastructure needs of America's
renewable fuels policy cannot be based on a wish list. It must be
grounded in sound research and analysis that identifies policy needs
and the needs of the marketplace.
On March 7th, the RFA released a study on how the future
requirements of the RFS can be met primarily with ethanol if the right
commitments are made to ensure a steady evolution of refueling
infrastructure and the automotive fleet.
The study, conducted by Air Improvement Resource, Inc. (AIR) and
commissioned by the RFA, shows that the long-term requirements of the
RFS can indeed be met mostly with ethanol if ``blender pumps'' are made
available at approximately one-third of nation's 162,000 service
stations, and if automakers honor and expand their commitment to
produce more FFVs. (Blender pumps are fuel dispensers designed to
dispense a variety of ethanol blends from 10 percent up to 85 percent
ethanol.)
The AIR study examines 27 future scenarios regarding available
ethanol volumes, FFV availability, ethanol use in non-FFVs, and the
availability and location of blender pumps and/or E85 pumps. Based on
the results of the scenarios, certain conclusions can be drawn about
the role ethanol can play in meeting the RFS2, which ultimately
requires the use of 36 billion gallons of renewable fuels by 2022.
Expanding the use of ethanol will take a multi-pronged approach.
The EPA's approval of E15 for use in vehicles made in 2001 and
subsequent years will help grow the potential market for ethanol to
approximately 20 billion gallons over the next several years. Still,
even if E15 is eventually used in all conventional vehicles, meeting
long term RFS requirements with ethanol will necessitate a substantial
increase in the availability and use of ``mid-level'' ethanol blends
(i.e., blends consisting of more than 15 percent ethanol and less than
85 percent gasoline).
If all light-duty vehicles sold in the United States in 2015 and
later years are FFVs, and if a corresponding expansion of refueling
infrastructure occurs, ethanol could be used to meet the majority of
the long-term RFS2 requirements. Under this scenario, the average
ethanol blend needed in FFVs by 2022 would be nearly 30 percent (E30),
while it is assumed all non-FFVs would be using E15.
The AIR report provided some key insights into the infrastructure
and vehicle needs to make the RFS2 successful, including:
Long term RFS requirements can be achieved if automakers
honor and expand their commitments to ramp up production of
FFVs, and if blender pumps are installed at roughly one-third
of the nation's retail service stations.
Even if E15 is eventually used in all conventional vehicles
(non-FFVs), meeting long term RFS requirements with ethanol
will necessitate a substantial increase in the availability and
use of ``mid-level'' ethanol blends.
Without the commitment of the ``Detroit Three'' automakers
to ensure that 50 percent of the vehicles they produce in 2012
and subsequent years are FFVs, it would not be possible to meet
long term RFS requirements.
Even with the 50 percent FFV production commitment by the
``Detroit Three,'' FFVs would need to refuel with E85
essentially three-quarters of the time or E56 all of the time
by 2022. This highlights the need for an expanded commitment to
FFV production from all automakers.
If all vehicles sold in 2015 and subsequent years are FFVs,
and if E15 is used in all non-FFVs, the average fuel blend
consumed in FFVs will need to contain 29 percent ethanol by
volume (E29) in order to satisfy the 2022 RFS2 requirements.
Incidentally, E30 is one of the most common and popular blends
dispensed from blender pumps today.
If the RFS2 is to be met, blender pumps will need to be
installed at a minimum of 53,000 service stations. This
represents roughly 33 percent of service stations in the
country. Efforts to install blender pumps should focus on areas
with the highest levels of vehicle miles traveled per service
station.
S. 187--THE ``BIOFUEL MARKET EXPANSION ACT OF 2011
Many of the challenges discussed are addressed by S. 187,
legislation introduced by Senator Tom Harkin that would require certain
fuel marketers to install blender pumps and tanks at an increasing
percentage of their stations beginning in three years, and would also
mandate that half of all new passenger vehicles sold in the U.S. be
flexible fuel vehicles (FFV). The bill would also direct the Secretary
of Energy to make grants to direct retailers for 50 percent of the cost
of installing blender pumps and storage tanks for ethanol.
The RFA supports S. 187. Without question, policies that expand the
number of certified and approved blender pumps available to consumers
to support the sale of blends between E15 and E85 for FFVs, and
incentives that favor ethanol sales into the E10-E85 market will aid in
the transition beyond the blend market for ethanol.
At a minimum, federal policies should maintain and extend existing
tax incentives for higher level ethanol blends to allow for continued
growth, expand tax incentives for refueling infrastructure, and create
new consumer-based tax incentives to encourage the purchase of FFVs.
The RFA supports legislative action to require a percentage of new
vehicles sold in the U.S. be flexible fuel capable. Further, the RFA
supports legislation requiring the installation of higher level ethanol
blends refueling infrastructure.
CONCLUSION
The continued commitment of the 112th Congress, this Committee, and
the enactment of legislation such as S. 187 will all contribute to
ensuring America's future energy security.
Chairman Bingaman and Ranking Member Murkowski, you have made clear
your commitment to the hardworking men and woman across America who are
today's newest energy producers. The RFA looks forward to working with
you to further develop and implement sound policies that provide the
proper incentives to grow ethanol use across a variety of blending
levels.
Thank you.
The Chairman. Thank you very much.
Mr. Eichberger, go right ahead.
STATEMENT OF JOHN EICHBERGER, VICE PRESIDENT, GOVERNMENT
RELATIONS, NATIONAL ASSOCIATION OF CONVENIENCE STORES,
ALEXANDRIA, VA
Mr. Eichberger. Thank you, Chairman Bingaman, Senator
Murkowski, members of the committee. My name is John
Eichberger. I'm with the National Association of Convenience
Stores and our industry operates around 117,000 retail fueling
outlets in the country. We generate about half a trillion
dollars in sales every year. That is one out of 28 American
dollars spent goes through the convenience store industry.
Fifty-seven and a half percent of all of our fueling
stations are one store companies. They're not chains. They're
Mom and Pop operations. We sell through--about 80 percent of
the gasoline and diesel fuel in this country.
We're here today to evaluate the challenges facing the
implementation of renewable fuel standard and to consider
options for overcoming these challenges. I want to make it
clear our members want to sell the fuel products that our
customers want to buy. We want to find the best way to move
forward in doing that.
In thinking about how to prepare my oral statement today I
thought it might be a good idea to walk through the
decisionmaking process a retailer faces when considering
offering a new fuel. It's not the same as offering a new candy
bar. It takes a little bit more of an investment.
So what I thought we'd start off doing is pick a retailer
from your State that you're familiar with and let's pick a
fuel. I'm going to use E15 as my example because that's the one
we're familiar with. But it really could be anything.
It could be E40. It could be E50. It could be a liquefied
chicken McNuggets and barbecue sauce. The facts are the same in
terms of the decisionmaking process.
The first thing the retailer needs to consider is how much
it will cost to enter this new market. Now assume he just
installed state-of-the-art tanks, pipes and dispensers a year
and a half/two years ago. He's probably thinking my equipment
is probably safe enough to handle E15. Maybe I could just go
ahead and do that.
Perhaps he's correct in the equipment is safe and
compatible. But it does not necessarily mean that it is lawful
to do so. Federal law requires that any equipment that stores
or dispenses a flammable or combustible liquid must be
certified by nationally recognized testing laboratories such as
Underwriters Laboratories, as compatible with that fuel.
Now the challenge is that it wasn't until last spring that
you all had listed that any dispensers as compatible with any
fuel containing greater than 10 percent ethanol. That's means
all the E85 stations in the country are using equipment that
was not UL listed. They agreed to do that when they bought the
equipment from their dispenser manufacturers. The dispenser
manufacturer offered them an E85 compatible dispenser and
charged them a seven to $8 thousand premium for that unit,
although it was not UL listed.
So it is most likely since no equipment was certified until
last March, that the equipment at this retailer's location is
not certified by UL. Therefore it must be replaced completely.
A new dispenser, blender pumps that we've been talking about
today, can cost upwards of $20,000.
It's important to know what a blender pump is. We use them
all the time. Typically you take premium tank. You take an
unleaded tank. You run it through a blender pump and you
provide the customer with a mid grade option. It's just a
mixing unit.
In today's discussion we're talking about blender pumps
maybe you're going to take an E85 tank and an E10 tank. Mix it
together to get E15, E40 or whatever the mixture might be. But
you're going to have to replace that dispenser under current
law.
If the retailer has to replace his tanks and pipes. The
second you crack concrete you're looking at maybe 100,000 or
more depending on where they operate and what the environmental
regulations are. So the retailer could be looking at an
investment cost of $120,000 just to sell E15 in a lawful
manner.
But this retailer we're talking about, he's committed. He
wants to be a leader in his community to renewable fuels. So he
makes the investment.
Now he has to ask the question that Mr. Karr was
referencing. Does the customer want to buy it? According to Mr.
Dinneen's testimony, about 62 percent of vehicles approved by
EPA to use E15 can do so. About 65 percent--or he said another
3 percent can use E85, flex fuel vehicles. So we're looking at
a total population of vehicles, about 65 percent on the road,
can lawfully buy E15.
But the question is can that 65 percent of the population.
Do they want to buy it? The auto makers have already said they
don't necessarily support EPA's decision on E15. Their
warranties and user manuals do not support the use of that
fuel. This could definitely impede demand. The retailer has to
think about that.
This takes us to an important distinction. This is the
first transition to a new fuel that does not require the
customer to buy it. If you look back at the last couple decades
when we pulled lead out of gasoline. We pulled sulphur out of
on road diesel fuel. The new vehicles manufactured were
required to run on that fuel. So you had a definite guaranteed
demand and that demand was going to grow over time because all
new vehicles had to run on that product.
The other main difference is unleaded gasoline and ultra
low sulphur diesel were backward compatible. All vehicles on
the road were able to run on those fuels. You didn't have a
concern with mis-fueling causing problems.
So we look at it now and say, we also have to look at the
fact that the equipment at retail was able to run/use those
fuels without being replaced. So now we look at the retailer
and we think about OK, we have a limited demand. I'm going to
do it anyway.
But how do I prevent consumers from mis-fueling? If a
retailer offers a fuel and the customer mis-fuels that retailer
could be held for violation of the Clean Air Act. He could be
sued for any damage to the engine and voiding the warranty.
More importantly if that fuel is eventually ruled to be not
appropriate and ruled defective he could be sued for selling a
defective product. Even though at the time he sold it, it was
lawful and compliant with all applicable laws and regulations.
Retroactive liability is something he has to think about.
So with all these factors of play he may reconsider his
decision to sell the fuel. So we need to talk about how we can
eliminate these challenges and get the retailer to an answer of
yes. I'm going to sell the fuels.
Several proposals being discussed today that are in my
written statement, I just want to point out a couple things
that we need to be considering when you think about new
programs.
The first question is will the new fuels were discussing be
backward compatible? If not, how do we protect consumer to
legacy fuels vehicles and manufacturers and sellers of the fuel
from potential damage and liability?
Will the consumers be able to use the new fuels being
offered and will they actually buy them? That's demand.
Will retailers have to replace their equipment or will the
new fuels be compatible and reduce costs?
Finally will the fuels be economically beneficial to the
consumer?
NACS recommends four things.
One, Congress should authorize a new method for determining
the technical and lawful compatibility of equipment. We need to
be able to look back and see if our existing equipment is
compatible. Under current law and UL policy, we cannot
recertify existing equipment. We have to replace it. We should
be able to determine if that new tank and dispenser is safe,
make it lawful to sell a new fuel. Reduce the cost of entry.
Congress should provide a regulatory certainty and legal
protection to market participants who lawfully sell fuels
according to today's regulations and protect them from
retroactive liability if the laws change in the future.
Congress should refrain from picking a fuel of the future.
We've talked about innovation. We've talked about where we need
to go.
If we pick a fuel as the winner in the future, we will
stifle innovation in new fuels, drop in fuels, biobutol. The
research may actually stop because Congress has already said
this is the fuel we're going to go to. We want to make sure
those options stay open.
But challenges in implementing RFS are real but they can be
overcome if we focus on the elements necessary to do so. I
thank you for the opportunity to show our perspective. I look
forward to your questions.
[The prepared statement of Mr. Eichberger follows:]
Prepared Statement of John Eichberger, Vice President of Government
Relations, National Association of Convenience Stores, Alexandria, VA
SUMMARY
NACS members make decisions each day regarding what products
to sell and which services to offer their customers. But taking
a chance by offering a new candy bar is very different from
switching their fueling infrastructure to accommodate a new
fuel. For this reason, and many others, they are often slow to
adopt new fuel products until they are certain sufficient
consumer demand exists to provide a reasonable return on their
investment--an investment which in many cases can be
significant.
Our industry is committed to complying with today's laws and
regulations, to provide our customers with the best products
and services we can offer and to adapt to new technologies and
market opportunities as they arise. NACS members are not
beholden to any specific product--they simply desire to sell
what the customer wants to buy provided it is lawful and,
hopefully, profitable to do so. As new fuels come onto the
market, our members want to have the legal option to sell these
fuels if their customers wish to buy them.
Retailers face many challenges when considering whether to
sell a new fuel and these challenges must be overcome if the
goals of the RFS are to be realized. Among these issues are the
compatibility of retail storage and dispensing equipment;
associated risks of a customer fueling a non-authorized engine
with a new fuel; and associated risks of retroactive liability
if today's laws governing the sale of such fuels change in the
future.
S. 187 highlights many of the issues standing in the way of
new fuels, specifically the compatibility of engines to run on
higher-blend ethanol fuels and the availability of these fuels
at retail facilities. The discussion generated by this
legislation is critical to finding the right solutions.
Although NACS believes S. 187 misses the mark with its proposed
solutions, we believe from this discussion other ideas can be
developed that will move the market in the right direction and
prepare it to accommodate new fuels.
Proposals to set a fuel specification of the future would
enable engine and equipment manufacturers time to build units
that can accommodate the new fuel. NACS believes this is an
interesting concept and if sufficient lead time were provided
could yield some positive outcomes. However, NACS cautions
against dictating specifically which fuel should be the ``fuel
of the future'' since making such a decision based upon
currently available technologies could undermine innovation and
prevent the emergence of new fuel products that are more
suitable to the nation's objectives and require less investment
in infrastructure modifications. NACS is also concerned about
the consequences of requiring another wholesale change in
existing infrastructure to accommodate the new fuels.
NACS urges Congress to consider proposals that will allow
retailers to have existing equipment evaluated and certified as
compatible with new fuels, thereby eliminating some of the
costs associated with necessary replacements; protect market
participants from liability in the event self-service consumers
ignore warning notices and misfuel their vehicles; protect
market participants from retroactive liability should today's
laws governing fuel sales change in the future; and promote
development of new fuel products that are more compatible with
existing vehicles and infrastructure.
INTRODUCTION
Chairman Bingaman, Senator Murkowski and members of the Senate
Energy and Natural Resources Committee. Thank you for the opportunity
to present to you the perspective of the convenience and fuel retailing
industry concerning the future of renewable and alternative fuels in
the United States.
My name is John Eichberger and I am Vice President of Government
Relations for the National Association of Convenience Stores (NACS).
NACS is an international trade association comprised of more than 2,200
retail member companies and more than 1,800 supplier companies doing
business in nearly 50 countries.
As of December 31, 2010, the U.S. convenience and fuel retailing
industry operated 146,341 stores of which 117,297 (80.2%) sold motor
fuels. In 2009, our industry generated $511 billion in sales (one of
every 28 dollars spent in the United States), employed more than 1.5
million workers and sold approximately 80% of the nation's motor fuel.
Our industry is dominated by small businesses. In fact, of the
convenience stores that sell fuel, 57.5% of them are single-store
companies--true mom and pop operations. Despite common misperceptions,
the large integrated oil companies are leaving the retail market place
and today own and operate fewer than 2% of the retail locations.
Although a store may sell a particular brand of fuel associated with a
refiner, the vast majority are independently owned and operated and the
relationship to the fuel brand they sell ends there. The rest have
sought to establish their own brand in the market.\1\
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\1\ See Attachment 1.
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NACS members make decisions each day regarding what products to
sell and which services to offer their customers. But taking a chance
by offering a new candy bar is very different from switching their
fueling infrastructure to accommodate a new fuel. For this reason, and
many others, they are often slow to adopt new fuel products until they
are certain sufficient consumer demand exists to provide a reasonable
return on their investment--an investment which in many cases can be
significant.
Our industry is committed to complying with today's laws and
regulations, to provide our customers with the best products and
services we can offer and to adapt to new technologies and market
opportunities as they arise. NACS members are not beholden to any
specific product--they simply desire to sell what the customer wants to
buy provided it is lawful and, hopefully, profitable to do so. As new
fuels come onto the market, our members want to have the legal option
to sell these fuels if their customers wish to buy them.
It is with this background that NACS approaches the discussion
about the future of renewable fuels. In this testimony, I will outline
the challenges facing the retail motor fuel marketplace as it tries to
accommodate the demands of the Renewable Fuel Standard (RFS), evaluate
different legislative proposals designed to help overcome these
challenges and provide NACS recommendations for policies that will
assist the market transition to new, renewable and sustainable fuels.
THE BLEND WALL
Since enactment of the Energy Independence and Security Act (EISA)
of 2007, Washington has been discussing the pending arrival of the
blend wall--that point beyond which the market cannot absorb any
additional renewable fuels. We can now say unequivocally that we are
there.
The 2011 statutory mandate for the RFS is 13.95 billion gallons. If
10% ethanol were blended into every gallon of gasoline sold in the
nation in 2010, we would max out at 13.85 billion gallons.\2\ Meanwhile
the market for higher blends of ethanol for flexible fuel vehicles
(FFVs) has not developed as rapidly as some had hoped and there are few
indications for a rapid expansion. So clearly we have a problem.
---------------------------------------------------------------------------
\2\ U.S. Energy Information Administration Product Supplied 2010,
Finished Motor Gasoline: 3.297 billion barrels (http://www.eia.doe.gov/
dnav/pet/pet_cons_psup_dc_nus_mbbl_a.htm)
---------------------------------------------------------------------------
The recent decision by EPA to authorize the use of E15 in certain
vehicles and engines does very little to expand the use of renewable
fuels. This is primarily because there are many barriers to the
introduction of E15 that must be overcome before it is fully legal or
advisable for it to be sold\3\ and the number of markets into which it
may be sold are extremely limited.\4\
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\3\ See Attachment 2.
\4\ Once E15 is officially registered and satisfies the various
conditions required by EPA for sale in the market, other factors will
continue to limit its availability. These include: 1) the Federal
Reformulated Gasoline Program's complex model for emissions
characteristics must be amended to accommodate E15; 2) The Clean Air
Act's Reid Vapor Pressure one pound allowance afforded to gasoline
blended with 9-10% ethanol must be amended to apply to fuels with up to
15% ethanol, otherwise such fuels would violate air quality control
programs in many states and counties; 3) The California Reformulated
Gasoline program does not allow for ethanol concentrations above 10%;
and 4) Various contractual obligations with supplier companies may
reduce the ability of branded retail outlets (representing
approximately 50% of retail facilities) to sell fuels containing more
than 10% ethanol.
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But let's imagine for a moment that all barriers to E15 are
removed, it can be used in all engines and it becomes ubiquitous in the
market. At 15% maximum blend, we still can only blend 20.78 billion
gallons of renewable fuels. While this would buy us four additional
years of compliance with the RFS schedule, it is far short of the 36
billion gallons ultimately required.
That leaves us with the real issue facing us today--How can we get
from here to there in a way that benefits consumers, our energy
security and our economy?
One of the primary challenges facing the fuels market is the lack
of planning that goes into establishing energy policy. The RFS was
developed to promote energy independence, reduce our reliance on fossil
fuels and benefit the environment. It set ambitious goals and focused
on the materials used to produce our fuel. It did not, however, take
into consideration how the fuel would be delivered into the consumer's
vehicle. The distribution and retail infrastructure was largely ignored
in favor of broader policy issues, yet it is precisely this component
of the system that is presenting some of the greatest obstacles to
successful implementation of the program.
Our backs are now to the wall, so to speak. We recognize there are
infrastructure issues that must be addressed: more than 160,000 retail
facilities, 230 million vehicles and hundreds of millions of small
engines are incapable of accommodating any additional renewable fuels.
So what policies can Congress consider that will help bridge the
gap between what we can do and what we are required to do by law?
Before we can answer that question, it is critical to understand the
challenges that face the retail infrastructure.
INFRASTRUCTURE LIMITATIONS
1) Compatibility
The reason the retail market is unable to accommodate additional
volumes of renewable fuels begins with the equipment found at retail
stations. By law, all equipment used to store and dispense flammable
and combustible liquids must be certified by a nationally recognized
testing laboratory. These requirements are found in regulations of the
Occupational Safety and Health Administration.\5\
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\5\ 29CFR1926.152(a)(1) ``Only approved containers and portable
tanks shall be used for storage and handling of flammable and
combustible liquids.'' ``Approved'' is defined at 29CFR1910.106 (35)
``Approved unless otherwise indicated, approved, or listed by a
nationally recognized testing laboratory.''
---------------------------------------------------------------------------
Currently, there is essentially only one organization that
certifies such equipment--Underwriters Laboratories (UL). UL
establishes specifications for safety and compatibility and runs tests
on equipment submitted by manufacturers for UL listing. Once satisfied,
UL lists the equipment as meeting a certain standard for a certain
fuel. Prior to last spring, UL had not listed a single motor fuel
dispenser (a.k.a, pump) as compatible with any fuel containing more
than 10% ethanol. This means that any dispenser in the market prior to
last spring is not legally permitted to sell E15, E85 or anything above
10% ethanol--even if it is technically able to do so safely.
If a retailer fails to use listed equipment, that retailer is
violating OSHA regulations and may be violating tank insurance
policies, state tank fund program requirements, bank loan covenants,
and potentially other local regulations. Furthermore, if the retailer
experiences a petroleum release from that equipment, he could be sued
on the grounds of negligence for using non-listed equipment, which
would subject him to penalties above and beyond the cost of
remediation.
This brings us to the primary challenge: If no dispenser prior to
early 2010 was listed as compatible with E10+ fuels, what options are
available to retailers to sell E10+ fuels?
In February 2009,\6\ UL issued a letter announcing that dispensers
listed under a certain UL standard as compatible with E10 were in fact
safe to handle fuels containing up to 15% ethanol. UL said that it
would support ``local authorities having jurisdiction'' to provide
waivers to retailers who wished to increase their ethanol blends
through these dispensers. UL did not, however, change the official
certification of those dispensers. Consequently, retailers who relied
upon local authority waivers would still be in violation of all laws
and regulations requiring listed equipment.
---------------------------------------------------------------------------
\6\ Underwriters Laboratories. (http://www.ul.com/global/eng/pages/
corporate/newsroom/
newsitem.jsp?cpath=%2Fglobal%2Feng%2Fcontent%2Fcorporate%2Fnewsroom%2Fpr
essreleases%2F
data%2Funderwriterslaboratoriesannouncessupportforauthoritieshavi
ngjurisdiction20090219140900_20090219140900.xml)
---------------------------------------------------------------------------
However, in December 2010\7\ UL rescinded that notice based upon
new research that indicated issues with gaskets, seals and hoses when
exposed to E15. UL now recommends that only equipment specifically
listed by UL as compatible with E10+ fuels be used for such fuels.
---------------------------------------------------------------------------
\7\ Underwriters Laboratories. (http://www.ul.com/global/eng/pages/
offerings/industries/energy/alternative/flammableandcombustiblefluids/
updates/)
---------------------------------------------------------------------------
Unfortunately, this places a significant economic burden on the
retail market. UL policy prevents retroactive certification of
equipment. In other words, only those units produced after UL
certification is issued are so certified--all previously manufactured
devices, even if they are the same model, are subject only to the UL
listing available at the time of manufacture. This means that no retail
dispensers, except those produced after UL issued a listing last
spring, are legally approved for E10+ fuels.
In other words, under current requirements any retailer wishing to
sell E10+ fuels must replace their dispensers. On average, a retail
motor fuel dispenser costs approximately $20,000.
It is less clear how many underground storage tanks and associated
pipes and lines would require replacement. Many of these units are
manufactured to be compatible with high concentrations of ethanol,
however they may not be listed as such. Further, if there are concerns
with gaskets and seals in dispensers, care must be given to ensure the
underground gaskets and seals do not pose a threat to the environment.
Once a retailer begins to replace underground equipment, the cost can
escalate rapidly and can easily exceed $100,000 per location.
2) Misfueling
The second major issue facing retailers is the potential liability
associated with improperly fueling a vehicle with a non-approved fuel.
The EPA decision concerning E15 puts this issue into sharp focus for
retailers. Under EPA's partial waiver, only vehicles manufactured in
model year 2001 or more recently are authorized to fuel with E15. Older
vehicles, motorcycles, boats, and small engines are not authorized to
use E15.
For the retailer, bifurcating the market in this way presents
serious challenges. How does the retailer prevent the consumer from
buying the wrong fuel? Typically, when new fuels are authorized they
are backwards compatible so this is not a problem. In other words,
older vehicles can use the new fuel.
Example 1: When EPA phased lead out of gasoline in the late
1970s and early 1980s, older vehicles were capable of running
on unleaded--newer vehicles, however, were required to run only
on unleaded. These newer vehicle gasoline tanks were equipped
with smaller fill pipes into which a leaded nozzle could not
fit--likewise, unleaded dispensers were equipped with smaller
nozzles.
Example 2: When EPA mandated a 97% reduction in the sulfur
content of on-road diesel fuel, trucks manufactured beginning
with model year 2007 were required to use only ultra low sulfur
diesel (ULSD) fuel. Earlier model trucks were able to run on
this new fuel. Misfueling was limited by a combination of a
mandated oversupply of ULSD (which limited the supply of the
restricted fuel and therefore limited the potential for
misfueling) and enforced labeling requirements.
E15 is very different--legacy vehicles are not permitted to use the
new fuel. Doing so will violate Clean Air Act standards and could cause
engine performance or safety issues. Yet, there are no viable options
to retroactively install physical countermeasures to prevent
misfueling. Further, the risk to retailers of a customer using E15 in
the wrong engine--whether accidentally or intentionally--are
significant.
First of all, retailers could be subject to penalties under the
Clean Air Act for not preventing a customer from misfueling with E15.
This concern is not without justification. In the past, retailers have
been held accountable for the actions of their customers. For example,
because unleaded fuel was more expensive than leaded fuel, some
consumers physically altered their vehicle fill pipes to accommodate
the larger leaded nozzles either by using can openers or by using a
funnel while fueling. The retailer had no ability to prevent such
behavior, but the EPA often levied fines against the retailer for not
physically preventing the consumer from bypassing the misfueling
countermeasures.
To EPA's credit, they have asserted that they would not be
targeting retailers for consumer misfueling. But that provides little
comfort to retailers--EPA policy can change in the absence of specific
legal safeguards. Further, the Clean Air Act includes a private right
of action and any citizen can file a lawsuit against a retailer who
does not prevent misfueling. Whether the retailer is found guilty does
not change the fact that defending against such claims can be very
expensive.
Furthermore, the consumer may seek to hold the retailer liable for
their own actions. Using the wrong fuel could void an engine's
warranty, cause engine performance problems or even compromise the
safety of some equipment. In all situations, some consumer may seek to
hold the retailer accountable even when the retailer was not
responsible for the improper use of the fuel. Once again, the defense
to such claims can be expensive.
3) General Liability Exposure
Finally, there are widespread concerns throughout the retail
community and with our product suppliers that the rules of the game may
change and we could be left potentially exposed to significant
liability. For example, E15 is approved only for certain engines and
its use in other engines is prohibited by the EPA due to associated
emissions and performance issues.
What if E15 does indeed cause problems in non-approved engines or
even in approved engines? What if in the future the product is
determined defective, the rules are changed and E15 is no longer
approved for use in commerce? There is significant concern that such a
change in the law would be retroactively applied to any who
manufactured, distributed, blended or sold the product in question.
Retailers are hesitant to enter new fuel markets without some
assurance that their compliance with the law today will protect them
from retroactive liability should the law change in the future. It
seems reasonable that law abiding citizens should not be held
accountable if the law changes in the future. Congress could help
overcome significant resistance to new fuels by providing assurances
that market participants will only be held to account for the laws as
they exist at the time and not subject to liability for violating a
future law or regulation.
RESOLVING THE CHALLENGES
While these challenges facing the retail market are significant,
they are not insurmountable. Several proposals have been put on the
table by Members of Congress or other stakeholders, and each deserves
consideration. While none may be a solution by itself, there are
elements within each that can help guide the discussion towards a
solution that might benefit all stakeholders and help achieve the
national objectives.
S. 187, The Biofuels Market Expansion Act of 2011
The Biofuels Market Expansion Act of 2011 (S. 187) seeks to require
the production of additional flexible fuel vehicles that can run on
anything from E0--E85. This section seeks to increase the potential
demand for higher blends of ethanol. This is a critical factor because
when retailers are considering the introduction of a new product they
want to know if their customers can and will buy that product. By
expanding the number of customers who ``can'' buy the product, part of
this equation is addressed. The other component (will the customer buy
the product?) is much more difficult to quantify, but the legislation
is trying to make some progress by expanding the customers' ability to
buy the product.
But is a production mandate necessary? Perhaps not. The domestic
auto manufacturers are committed to increasing the volume of FFVs on
the road and they do receive fuel economy credits for doing so. What
incentives might Congress consider to encourage foreign auto makers to
bring FFVs to the U.S.? The incremental cost of an FFV compared to a
regular gasoline engine is quite low so perhaps the incentive would be
cost effective.
Another option that could be considered to increase the number of
FFVs on the market is to review the EPA approval process for after-
market conversion kits. There are companies making kits to retrofit
legacy vehicles to run on higher ethanol blended fuels, but the
approval process is quite costly and burdensome. Perhaps Congress can
review policies that would expedite the availability of such retrofit
kits and provide consumers an incentive to convert their vehicles to
run on both gasoline and higher ethanol-blended fuels. The cost of
doing so is not prohibitive and this could help increase the number of
FFVs on the market, thereby improving the economic calculation for the
retailer.
Another component of the bill addresses the availability of higher
ethanol blended fuels. One of the complaints the auto makers have
raised is that their FFV customers have few options to refuel with E85.
That is true, but I must point out that there is no requirement for
customers to fuel with E85 (unlike with the transitions to unleaded and
ULSD) and their purchase decisions are predominantly driven by
economics. In many markets, the economics of E85 do not enable the
product to remain competitive with gasoline and E85 retailers often
watch FFV customers fuel with regular gasoline, rendering their
investment in E85 infrastructure moot.
S. 187 tries to address concerns about the limited availability of
higher blended ethanol fuel by requiring that refiners pay for the
installation of blender pumps capable of selling these fuels.\8\ The
bill stipulates that a certain percentage of the stations directly
owned by the refiner, as well as those owned by independent operators
selling the refiner's brand of fuel, install blender pumps. It further
establishes a grant program for independent non-branded operators to
install blender pumps.
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\8\ ``Blender pumps'' are dispensers that can mix liquid fuel
products from multiple storage tanks to produce another product. The
most popular example is a blender pump using Premium gasoline and
Regular octane gasoline to produce Mid-grade. In the case of S. 187, a
blender pump would conceivably use a higher ethanol blended fuel
product (perhaps E85) and mix it with a lower ethanol blended fuel
product (E10) to produce a mid-level ethanol product. The blend ratios
are set by the owner of the dispenser to provide the consumer with a
pre-set selection of fuel blends. Some misunderstand this technology
and assume the consumer will be able to adjust the blend ratio to their
preference. This would create significant challenges and involve
multiple regulatory agencies.
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While it is clear that the bill is trying to bring ethanol
dispensers to market without placing a financial burden on independent
retailers, it fails to recognize that costs incurred upstream will be
passed through to the retailers and ultimately the consumer. So how
much will S. 187 potentially cost?
According to the National Petroleum News' Market Facts 2010
report,\9\ in 2009 the top 15 refiner brands were sold through 83,150
branded locations. S. 187 would require that 10% of these locations
install a blender pump by 2014; 20% by 2016; 35% by 2018 and 50% by
2020.
---------------------------------------------------------------------------
\9\ See attachment 3.
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To estimate the potential cost of this program, we can use a very
rough estimate that a new UL listed blender pump will cost
approximately $20,000. Replacing the underground equipment at each site
could cost on average $100,000. The total cost per location could be
$120,000. In this worst case scenario, the associated costs to the
industry and, ultimately, consumer would be:
----------------------------------------------------------------------------------------------------------------
Year Locations Mandated Cumulative Cost
----------------------------------------------------------------------------------------------------------------
2014 8,315 $0.997 B
----------------------------------------------------------------------------------------------------------------
2016 16,630 $1.995 B
----------------------------------------------------------------------------------------------------------------
2018 29,102 $3.492 B
----------------------------------------------------------------------------------------------------------------
2020 41,575 $4.989 B
----------------------------------------------------------------------------------------------------------------
For the independent, non-branded locations the legislation creates
a grant program to help offset the cost of installation of a compatible
blender pump and associated equipment including tanks, offering 50% of
the entire cost of the project. Understandably, and in keeping with
reasonable public policy, those who accept the federal cost share must
commit to selling an eligible fuel through the new equipment for at
least two of the subsequent four years.
While many retailers will seek to avail themselves of federal
financial assistance, grant programs come with challenges for the
retailer. In some situations, the retailer may wish to try offering his
customers a new fuel. But if that fuel is not successful, the retailer
may wish to revert to the original product offering. Under the grant
program, this is not easy to do. Consequently, a grant program may
provide some benefits to retailers who are already committed to selling
a new fuel, but because of its conditions it may not have much
influence over those who are not convinced a new fuel is the right
decision for their store.
While NACS does not believe S. 187 hits the target with its
approach to the issues, we believe it helps highlight the core problems
facing the retail market and the introduction of new fuels. But perhaps
there is a better approach.
Prospective Compatibility Requirements
Another proposal that has been floated and might be under
consideration by some members of this committee is to set a target date
at which time a new renewable fuel blend will be authorized and engines
will be engineered to run on that fuel. For example, it could stipulate
that E40 will be approved and engines will be designed to run on it by
year 2016.
This approach is very interesting. If developed appropriately, it
could provide auto and other engine manufacturers sufficient lead time
to calibrate their products to run on the new fuel. In addition, the
new engines can be engineered with physical misfueling countermeasures
that can help limit the incidence of consumers using the wrong fuel in
their engines.
Such a proposal also could eliminate the stair step process that
will inevitably occur in our efforts to reach the goals of the RFS--a
process begun with the E15 rule and that will likely initiate a new
battle with each subsequent step. A necessary component of such a
strategy would be to amend the implementation schedule of the RFS to
provide sufficient time for the new fuel to enter the market.
For these reasons, it is a worthy of further consideration to see
if remaining issues can be resolved. However, these remaining issues
are primarily found at the retail level of trade and may be the most
challenging to overcome. For if the current infrastructure is unable to
accommodate E15, how likely is it to be able to accommodate a fuel
formulation that would ultimately satisfy the RFS, such as E30 or E40?
Once again, we find ourselves trying to adjust an infrastructure
composed of 160,000 retail outlets to a new fuel formulation that might
not be compatible with the underground storage tanks, pipes and
dispensers currently in use.
Considering that the typical store operates eight fueling position
through four dispensers, we can estimate a total retail dispenser
population of 640,000. How many of these will have to be replaced? If
only UL-listed devices are allowed to sell these products, one can
assume nearly all of them would have to be replaced.
Further, according to EPA's Office of Underground Storage Tanks,
there are 215,000 sites in the U.S. (retail plus non-retail) that
operate approximately 597,000 active underground storage tanks.\10\ How
many of these will have to be replaced? It is uncertain how many are
listed as compatible with anything higher than E10, so one would have
to assume the majority would have to be replaced.
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\10\ U.S. Environmental Protection Agency Office of Underground
Storage Tanks ``FY 2010 Annual Report on the Underground Storage Tank
Program'' (http://www.epa.gov/oust/pubs/fy10_annual_ust_report_3-
11.pdf)
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Congress must take into consideration that it was not long ago
(1988-1998) that federal law required that all USTs in the country be
removed from the ground and retrofitted with leak detection, spill
prevention and anti-corrosion systems. The wholesale retrofit
requirements led to the closure of thousands of facilities due to the
costs required to comply with the new law. Since then, many states have
enacted additional requirements that have forced retailers to retrofit
or replace the systems that were installed to comply with the federal
law. Another round of mandatory replacements will be a very hard sell.
Using the same estimated costs applied to the requirements under S.
187 ($20,000 per dispenser and $100,000 per UST system), one could
estimate the cumulative cost of a wholesale retrofit of the entire fuel
dispensing infrastructure to be $12.8 billion for dispensers and $59.7
billion for UST systems. In addition, it would likely take 10--15 years
to roll-over the existing infrastructure.
For the individual store owner who might operate two underground
storage tanks and four dispensers, the cost could be upwards of
$200,000. In 2009, an average a single convenience store reported
approximately $33,000 in pre-tax profits. That is only a small fraction
of the cost such a contemplated upgrade would require.
NACS further cautions against picking one specific fuel as the
``fuel of the future.'' Rather, it would be more constructive to
identify key characteristics of the new fuel to which engines and
equipment could be manufactured, set the timeline for attaining the
goal, and allow technology, science and the market determine which fuel
will be the sustainable choice. It most definitely will be a renewable,
cleaner burning fuel that will help achieve the overall objectives of
national energy policy.
As discussions on these strategies continue, it would be in the
best interests of consumers and the economy as whole to consider
alternatives that could alleviate the costs associated with the
infrastructure retrofit.
Alternative Strategy
Under current legal requirements that equipment must be listed by a
nationally recognized testing laboratory, most of the nation's retail
infrastructure must be replaced to accommodate any new fuel. However,
NACS questions if that is technically required to ensure environmental
health and safety?
At one time, UL believed existing dispensers could accommodate 15%
ethanol without problem. Further research demonstrated challenges with
some seals, gaskets and hoses. Clearly, no retailer wants their
equipment to leak, but can susceptible components be replaced with
compatible components and deliver a safe dispenser at a fraction of the
cost for a new one?
Furthermore, many underground storage tanks are likely compatible
with certain new fuels even if they are not listed as such. For
example, a double wall steel tank equipped with a proper anticorrosion
system is likely compatible with any concentration of ethanol. Should
such a system be required to be replaced simply because it was not
originally listed for such fuels?
NACS believes that there is an opportunity to provide a lower cost
of entry for new fuel blends by adjusting the legal requirements for
demonstrating compatibility of retail fueling equipment. Because UL
will not retroactively certify any equipment, perhaps Congress could
authorize an alternative method for certifying legacy equipment. Such a
method would preserve the protections for environmental health and
safety, but eliminate the need to replace all equipment simply because
the certification policy of the primary testing laboratory will not re-
evaluate legacy equipment.
Legislation to accomplish this objective was introduced in the
House of Representatives last Congress by Reps. Mike Ross (D-AR) and
John Shimkus (R-IL) as H.R. 5778, the Renewable Fuels Marketing Act.
This bill directed the EPA to develop guidelines for determining the
compatibility of equipment with new fuels and stipulates equipment that
satisfied such guidelines would thereby satisfy all laws and
regulations concerning compatibility.
Such an approach would ensure that equipment used for new fuels is
fully compatible with those fuels and provide retailers the possibility
that does not exist today to enter new fuel markets without having to
replace all of their equipment. While this approach will not resolve
all compatibility issues in the market, it will provide opportunities
for many retailers to avoid costly and unnecessary investments, which
will in the long run save consumers money.
RECOMMENDATIONS
This transition to a new fuel market is unique in the fact that it
is not backwards compatible and consumers are not required to buy the
new fuel. As noted above, the transition to unleaded gasoline and ultra
low sulfur diesel was accompanied by a requirement that consumers must
purchase the new fuel for new vehicles. But they also were developed in
such a way that older vehicles were fully capable of operating on the
new fuel. Such is not the case today.
Another difference between today's transition and those of the past
is the effect the new fuel blends have on the retail infrastructure.
There was no need to replace tanks or dispensers when lead and sulfur
were phased out of the fuel--retailers simply needed to ensure an
appropriate transition of their inventories. But the transition to
higher blends of ethanol poses very serious challenges due to the
corrosive nature of the additive product. How to overcome this
challenge must be a priority of this Congress.
To date, most policymakers focus on the future of renewable fuels
and the role for ethanol in that market. This is understandable
considering ethanol is the dominant renewable fuel additive and likely
will be for the foreseeable future. But whether produced from corn,
sugar cane or switchgrass, ethanol has chemical characteristics which
negatively affect the infrastructure--both at the retail station and in
the consumers' engines. This should cause Congress to pause and
consider carefully in which direction it wishes to go.
NACS believes the challenges standing in the way of the RFS are
surmountable, provided Congress is willing to address them directly and
provide alternative pathways to achieving the national objectives. To
accomplish the stated objectives of the RFS, NACS suggests Congress
consider the following policies:
Provide retailers with a mechanism to have existing storage
and dispensing equipment evaluated to determine if they are
technically compatible with new fuels and, if so, provide legal
authority to use that equipment to sell new fuels. This will
potentially save the industry, and consumers, billions in
unnecessary investments.
Provide retailers with labeling requirements for new fuels
that educate and inform consumers about the authorized uses of
new fuels. Ensure that compliance with such requirements will
satisfy a retailer's requirements under the Clean Air Act and
protect them from violations or engine warranty claims in the
even a self-service customer ignores the notifications and
misfuels a non-authorized engine.
Provide market participants with regulatory and legal
certainty that compliance with current applicable laws and
regulations concerning the manufacture, distribution, storage
and sale of new fuels will protect them from retroactive
liability should the laws and regulations change at some time
in the future.
Encourage and facilitate the production and conversion of
flexible fuel vehicles, thereby increasing the potential market
demand for higher blends of ethanol fuels and creating a more
attractive market for retailers to offer such fuels.
Evaluate the prospects for marketing of infrastructure-
compatible fuels and support the development of such fuels.
These could aid compliance with the RFS and save retailers,
engine makers and consumers billions of dollars. Policymakers
might consider establishing characteristics that new fuels must
possess so that equipment and engines can be manufactured or
retrofitted to accommodate whichever new fuel provides the
greatest benefit to consumers and the economy.
Refrain from pre-selecting the ``fuel of the future'' and
allow the market to determine the product that will most
benefit consumers and the economy. To pre-select a winner based
upon current available technologies will undermine innovation
and prevent the market from developing a better option that may
not be apparent to policymakers.
The nation's convenience and fuel retailers are ready to assist
Congress in its consideration of policies that will promote a stable
and efficient market for transportation fuels. There are many factors
to consider and we hope that policymakers will proceed cautiously and
avoid imposing unnecessary and costly burdens on the system.
Thank you for the opportunity to share our perspectives with the
Committee.*
---------------------------------------------------------------------------
* [Note: All attachments have been retained in committee files.]
The Chairman. OK. Thank you all for your excellent
testimony. Let me start with a few questions.
On this issue of reduced BTU content for ethanol compared
to traditional gasoline. I think Mr. Karr, you talked about
this issue, I think, and how this poses a problem. I'd be
interested in any of the rest of you responding to that.
Mr. Dinneen, do you see this as an issue that we need to
worry about here? I mean, what's the solution to this problem?
Mr. Dinneen. I think every gasoline component is going to
have different qualities. Ethanol has higher octane content
than most other gasoline components. That's why it's valuable
to refiners.
I do think it makes a great deal of sense as we're moving
forward and trying to improve fuel efficiency. The auto
companies have made a pretty compelling case that they need to
increase octane. There's probably not much more fuel efficiency
they can get with--if they have to design a vehicle for 89
octanes.
So a fuel of the future, most likely, is going to have to
have a higher octane. I think they can design vehicles for
that.
The Chairman. This question that, sort of, is embedded in
this, all of these discussions of whether we should be
promoting more use and the building of infrastructure to
accommodate E85 or whether we should put more emphasis on some
kind of mid-level blend, something above E15, but something
substantially less than E85. I'm not clear as to where any of
you come out on that decision.
Mr. Eichberger, did you have a thought as to which of those
two makes the most sense from the perspective of the folks you
represent?
Mr. Eichberger. From an infrastructure compatibility
standpoint there's very little difference. However, from a
marketing perspective I've always questioned why was E85 picked
as the fuel for alternative refueling cars for flex fuel
vehicles? E85 has a 25 to 30 percent fuel economy disadvantage
compared to gasoline.
E40/E50 have a much lower penalty on fuel economy. So
consumer acceptance to a mid-level fuel that provides more
miles per gallon would probably be greater. Plus, if you don't
have that huge distinction in fuel economy the retailer may
actually be able to obtain product that can be priced
competitively at the retail location with gasoline and actually
encourage consumption.
Whereas E85 the price differential is so significant.
Sometimes that cost factor is not available at the retailers.
So I think a mid-level ethanol blend if we can get to a
compatible infrastructure makes a little bit more sense from a
marketing perspective.
The Chairman. OK. Any of the rest of you have a thought on
this?
Mr. Karr. I think our experience with E85 today shows, as I
sort of indicated in my testimony that maybe the chicken and
egg problem isn't as simple as, you know, we thought it was
five or more years ago. That price, again, price and
performance from the consumer perspective are critical. From an
engine manufacturers perspective the narrower the range or more
precise fuel spec that you're building a vehicle to, the better
you can optimize the performance of that vehicle both from a
smog forming emissions perspective and also from a fuel economy
perspective.
So for example, the ethanol producers are running this
really kind of interesting experiment if you're a NASCAR fan.
With NASCAR this year where they're running E15 at all the
NASCAR races. They're not, you know, Kyle Busch is not pulling
into the pits and putting a different blend of fuel in his car
each time, E20 or E30 or E10. I mean, they are running on a
very precise fuel. That's because they are optimizing the
performance of those vehicles.
The same way, I mean, we're not building NASCAR race cars
for everyone. But we are building great cars that perform very
well. We can do that best, again, from an engine manufacturer's
perspective, when you know what fuel spec you're building to.
The Chairman. OK.
Mr. Dinneen, did you have a thought on this?
Mr. Dinneen. I did. Actually I'm all about flexibility. The
point is we need to move beyond E10.
I think flex fuel vehicles provide the most flexibility to
consumers. It's not a mandate that they can dial in the blend
that they think makes the most sense. Frankly there is a fair
amount of anecdotal evidence to suggest that given the
opportunity people seem to be gravitating toward E30 because
that is a blend level that they have noticed to provide them
with the best gas mileage and performance.
But I'm very encouraged by Mr. Karr's testimony today that
they acknowledge the need to move beyond E10. I think we need
to move in that direction.
The Chairman. Mr. Brady, is this something that you have a
perspective on?
Mr. Brady. I do. As I said earlier, breaking through the
blend wall is critical. I think if E30 motivates auto makers
and motivates blender pump installations then we should do it.
I do think we have to ask ourselves whether E30 will get us
all the way to the RFS-2 gallons and whether or not higher
blends, such as E85, gives us more flexibility in our ability
to get there.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you.
I'm going to bring up the issue that we're all talking
about here which is how do we pay for all the things that we
want. Mr. Dinneen, Mr. Brady, you have both asked for a strong
flex fuel mandate and the blender pump assistance, the
extension of the cellulosic tax credit and perhaps more funding
for the Loan Guarantee program. So the real question is how do
we pay for it? Where do we find the offset?
As you know there's discussion on the floor. I don't know
whether we actually get to a vote on the ethanol subsidy. But
you know as well as anybody that that's circulating out there.
A real focus right now on what is happening with the level of
subsidies and basically how do we pay for those things that
clearly would help the industry. I wouldn't disagree with that.
But how do we do it?
Mr. Dinneen. Senator, I think our industry has stepped up
and worked with members of the Senate and the House and the
Administration to reform the Ethanol Tax Incentive program. We
do think that that is necessary. We think it's appropriate.
The fact of the matter is the ethanol industry has grown
considerably. The cost of the incentive has grown. I think that
there is a way to do it in a way that would allow the industry
to continue to evolve and to grow but is sensitive to the
fiscal concerns that you're expressing.
I sort of wait for any other industry that is benefiting
today from tax incentives to step up and offer to do the same
thing. Look, we recognize that the ethanol incentive, as it has
been, needs to change. We want to do that in a way that is
fiscally responsible. We want to do that in a way that
recognizes that, you know, there's a great deal of volatility
in the oil market that continues to jeopardize our fuel.
While it's a little hard to remember right now at $105 a
barrel of oil, we're 24 months removed from $39 a barrel of
oil. So let's protect the investments that the taxpayers made
in this industry by having some kind of a variable incentive
that would provide marketers with the incentive to blend when
the marketplace isn't doing that. But at $105 a barrel of oil,
the marketplace is already doing it.
I do think that there's other ways that we can use the tax
policy to encourage investments in second generation biofuels.
We need to be focused on that as well. But I don't think it
makes sense to just throw the baby out with the bath water.
I think we need to be fiscally responsible. But I do think
we need to allow this industry to continue to grow and evolve.
Like I said, I await any other energy industry to step up and
make that same commitment.
Senator Murkowski. Let me ask you then since talking
subsidies here. Let me ask you a question about the tariffs
because we're now seeing Brazil importing. It's a small
quantity, but they're importing a small quantity of ethanol
from the United States. I think it's probably fair to say it
was kind of a surprise to see the barges going in the other
direction.
But ethanol clearly appears to have made some real strides
in the cost competitiveness. So the question would then be is
it time to reduce or perhaps eliminate our tariffs on imports?
Mr. Dinneen. The tariffs on imports has never been a
barrier to entry. Yes, we are shipping ethanol today to Brazil
because their marketplace demands it. But in the past we have
imported product from Brazil when our marketplace has needed
it. The product test flowed back and forth as the market--the
situation requires it.
The tariff has been there not to protect the industry, but
to protect the taxpayer lest the tax incentive that is made
available to refiners, whether that product is imported or
domestic, would be supporting product from Brazil that's
already the beneficiary of decades of government investment. So
it's merely to assure that the tax incentive does what it's
intended to do. That is to stimulate domestic production and
domestic demand.
Senator Murkowski. Let me ask a question. This would
probably be to Mr. Karr and Mr. Eichberger and this is both of
you have mentioned the liability issue.
Mr. Eichberger, you spoke more directly to the issue of the
potential for mis-fueling. How do we deal with this liability
issue? Is EPA doing enough, I guess, to really educate the
consumer about not selecting the wrong fuel blend?
Mr. Eichberger. When you look at going backward in the
legacy fleets you cannot retrofit the vehicles to put a
physical mis-fueling countermeasure. When we pulled lead out of
gas and then we changed the fill pipe size.
Senator Murkowski. Right.
Mr. Eichberger. But change the nozzle size. They can't do
that anymore.
Senator Murkowski. Why not?
Mr. Eichberger. You'd have to retrofit the vehicles. You'd
have to do a complete recall of all the cars. It just doesn't
make a whole lot of logistical sense.
We have been supporting legislation in the House of
Representatives that would put a little more meat on the bones
for the labeling requirements. We've all--EPA is working on
labels for E15. We advocated extremely high profile labels,
different colors, different sizes, to make sure the customer
sees it. To educate the customers as best we can.
We believe that if a retailer does everything they're
supposed to do and educates the consumer. There's an education
program from EPA which has not been rolled out yet. Then if the
consumer, self service customer, ignores the warning labels,
the self service customer should take responsibility on
themselves for any damage to the engine.
Now that does not prevent mis-fueling. But from a retailer
perspective it makes it a little more comfortable to move in to
try new fuels that may have a limited market application. If we
know that if the self service customer ignores everything we
tell them, they're not going to turn around and sue us. We're
not going to be fined for Clean Air Act violations.
It doesn't prevent. But it helps provide a little bit more
comfort to the marketplace.
Senator Murkowski. Do you see the liability issue as one
that if we fail to resolve this you will have your Mom and Pop
operators who simply choose not to go there with these other
fuel selections?
Mr. Eichberger. You will have quite a few retailers choose
not to go in this direction. Mom and Pop retailers may actually
try because they have less to lose. The larger chains----
Senator Murkowski. That's fair.
Mr. Eichberger. They're much more hesitant to move into
this market because not only do you have the mis-fueling issues
but what if the mis-fueling causes a determination that it's a
defective product down the road. A lot of us are familiar with
the MTB litigation that resulted in multibillions and billions
of dollars of lawsuits. We're not willing to go down that road
again.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Senator Shaheen.
Senator Shaheen. Thank you.
Mr. Brady, I have to start with you since you're from New
Hampshire. Can you just briefly describe what some of the
benefits and also the disadvantages are to cellulosic verses
ethanol from corn?
Mr. Brady. The advantages are first of all that it's a non
food source. It is also has a better carbon footprint when you
look at the total life cycle of cellulosic relative to first
generation. Those are the advantages.
I think on an operating cost basis they're pretty similar.
The disadvantage to build a cellulosic ethanol plant is
more expensive than to build a corn ethanol plant. So the
capital costs are significantly higher. They will come down
over time. But fundamentally they'll always be a bit higher
than first generation.
Senator Shaheen. Why is it higher?
Mr. Brady. It's all along the process. But if you just
think in the beginning. We, in the Michigan project, we bring
in wood and have to debark it and chip it whereas corn is
generally just ground up in the front. That's No. 1.
No. 2, it takes twice as long to ferment cellulosic than it
does corn based starch. Those facts just carry through the
entire process.
Senator Shaheen. OK.
In 2007 there was a renewable fuel standard created in the
Energy Independence and Security Act. Has that been enough to
really drive investment in biofuels? I'll ask you that, Mr.
Brady and then if the others would like to comment.
Mr. Brady. It definitely helped. The 16 billion cellulosic
mandate in 2022 definitely helped. I think when we now get to,
as I tried to explain earlier, as we now get to the big capital
investment in the big plant. Investors start to ask are there
the infrastructure pieces in place to match that 16 billion
gallons.
So that was a terrific start. I think we have to put the
second piece in place for completeness.
Senator Shaheen. So, one of the things that's being talked
about as part the budget agreement is the fairly significant
reduction in the DOE Loan Guarantee Program. What would that do
to trying to do the follow on investment that is needed?
Mr. Brady. It's about the worst possible thing that we
could do for second generation ethanol and frankly for advanced
biofuels. It's about the worst possible thing we could do. This
Valley of Death, I know it's a bit of cliche. But I must tell
the committee it's real.
The Loan Guarantee Program is the solution. It's a terrific
solution. We just have to get it to work. We have to keep it.
We have to get it to work.
Senator Shaheen. Thank you.
Mr. Eichberger, I apologize I missed most of your
testimony. But I did hear you say that right now we can't
recertify existing equipment and that that's one of the
challenges, that we need to change that.
Do you have any estimates on what the cost differential
would be if we could recertify and also maybe you could
describe how challenging a process that would be?
Mr. Eichberger. Certainly. The current rules are you must
be listed by a nationally recognized testing laboratory, such
as Underwriters Laboratories. They have a very strict policy
that once it's been manufactured and in the market they're not
going to go back and retest it. Because they don't know what's
happened to it since it's left. I understand that position.
The challenge is if I just put in a brand new system last
month, but it wasn't certified and listed. It very well could
be technically safe. Why should that not also be legally safe
to do so?
We have been proposing that the EPA set up a system of
issue guidelines for determining the compatibility of
equipment. We think EPA is a right source to do that. They've
come out with proposals say UL manufacturer tested or meeting
the API recommended practice or some other.
If we meet those criteria they're legally safe, legally
authorized. If there's a release, we're still on the hook for
clean up. We're not asking for a get out of jail free in case
we have a spill. We clean it up.
What we're hoping to do is avoid potential negligence
claims for the simple fact we were using non-listed equipment.
If we can move forward in that direction you can lower the cost
of entry for a lot of retailers, not all of them. Because they
have to know everything they have in the ground.
But you're going to lower the cost of entry. Maybe they
just have to replace a couple seals and gaskets rather than
replacing the entire system. It could be a much greater
incentive to move into new fuels.
Senator Shaheen. Thank you.
Mr. Dinneen, do we currently have a tariff on imported
ethanol? How does that affect the Blender's Tax Credit?
Mr. Dinneen. There is a tariff on imported ethanol today.
It is there to offset the tax incentive that refiners and
blenders get when they utilize ethanol. I would note that
Brazil also has a tariff that is in place today. So, you know,
everybody is looking to ensure that the incentives that they're
putting in place for domestic energy production is not
exported.
Senator Shaheen. Thank you. Thank you, Mr. Chairman.
The Chairman. Senator Portman.
Senator Portman. Thank you, Mr. Chairman. Thank you all for
your good testimony today.
This is a great opportunity to learn more about, not just
how we meet the standard that we've established in the 2007
legislation. But how we do it in the context of increasing
budget deficits and an economy that continues to be weak coming
out of the recession. So if you'd noted by some of the
questions today already we're in a little different environment
than we were in 2007 when incidentally our budget deficit was
one tenth of what it is today.
We had a very different economic growth projection. I'm
encouraged by the progress that has been made. It looks like
between 10 and 12 percent of our oil imports have in fact been
replaced by biofuels.
Mr. Dinneen, in your testimony you said that saved the U.S.
about $34 billion. In a way that's true. Again, I'm supportive
of biofuels, but in a way you have to also look at, you know,
who it saved.
It saved $34 billion one way to look at it. Another way to
look at it is when you add up the blender's credit, 45 cents a
gallon. The tariff we talked about which I think is 54 cents.
Fifty-four percent is the tariff now or 54 cents----
Mr. Dinneen. It's 54 cents.
Senator Portman. [continuing]. Per gallon and then I think
there's a 2.5 percent tax as well. Of course the R and D
funding through DOE which we talked about, Mr. Brady talked
about. So at some point we have to just figure out what is the
apples to apples comparison here.
Any thoughts on that?
Mr. Dinneen. I happen to think that the existing Federal
program for ethanol has been extraordinarily cost effective. I
mean there are other things on that balance sheet.
The fact that the growing demand for grain is helping to
reduce farm program costs, for example.
The fact that we are creating 70,000 jobs in direct
employment and 400,000 jobs across the economy is also helping
to add to Federal and State tax coffers.
If you look at the overall balance sheet, there's no
question but that the investment that the taxpayers is making
in this industry is paying dividends.
Yes, we have to be fiscally responsible. We ought to look
at ways to reform these programs. But we ought not cut them off
all together.
We can be penny wise and pound foolish. The fact of the
matter is the only thing that we have today that is reducing
our dependence on imported oil is ethanol. What is causing so
much havoc in/throughout the entire economy? It is skyrocketing
and volatile oil prices.
So if we don't get a handle on our dependence on oil and
the consequences for our economy that result from it then
that's the real fiscal issue we ought to be concentrating on.
Senator Portman. Good points. Other thoughts?
Mr. Brady.
Mr. Brady. I would more or less agree with Mr. Dinneen.
Senator Portman. OK.
Let's talk a little bit about the next generation
cellulosic ethanol. Again, coming from Ohio corn based ethanol
is an incredibly important part of our economy as Mr. Dinneen
said. In fact we have $700 million now in annual sales. At
least 210 jobs being created at a single facility, well at five
different facilities.
I've had an opportunity to tour a couple of them. But the
opportunities to move toward cellulosic ethanol do provide some
economic benefits in theory and particularly wood chips that
you're working on. Grasses, algae, we've talked about today.
What's the timing? We've had some optimism, you know, in
the early part of the last decade about this. Then in 2007, I
think there was optimism that we could meet the standard by
corn based ethanol, but also a lot of other cellulosic sources
more quickly perhaps than people think now.
But since you're in the business why don't you tell us what
you think the real potential is? What's the timing?
Mr. Brady. Yes. I think first we should address the issue
of how long it's taking, as you bring up, Senator. I think
there are really two things that happened since the 2007/2008
timeline.
One, of course, was the financial crisis which set these
projects back.
Senator Portman. Yes.
Mr. Brady. Frankly speaking I think the rate of
technological advancement at that time was a bit oversold. The
technologies were not nearly as ready, I think, as they were
advertised.
I can tell you now we have put together an Advanced Ethanol
Council which I chair. I can tell you there are 10 members in
there. A number of them have projects at about the level I just
described, our Michigan project which is technology ready.
Working on the financing, but facing this gap in financing and
a way to close that gap.
So I think the industry has made significant progress. I
think the most important thing we can do is to get the
company's whose technology is ready to get these first plants
built. They won't be perfect, but to get them built and to work
the technology out and then proliferate quickly after that.
But we are very, very close.
Senator Portman. That's what I think. In your written
testimony, you talked about the Valley of Death of sort of
getting to the point of commercialization and the need to move.
You think there are a number of different technologies that are
poised to make that leap?
Mr. Brady. I do.
Senator Portman. Let's talk about the blender credit and
the fact that at the end of this year the tariff expires and
there needs to be some kind of a decision made. Where are you,
Mr. Dinneen, in terms of what you see as the right mix? You
said earlier that the industry is looking to come up with
something that meets the economic and fiscal conditions of the
day.
What do you think that is? What's the right mix in terms of
the tariff and in terms of the blender's credit?
Mr. Dinneen. We've been working with the folks in the
Senate and the House on a reform package that would essentially
create a variable tax incentive that would recognize that at
$105 a barrel of oil that you have today you probably don't
need an incentive to encourage a gasoline marketer to use a
fuel that is so much cheaper than gasoline. But recognize that
there is volatility in this market. If you have a situation as
you did just 24 months ago where you've got $39 a barrel of
oil.
Let's protect the investment that the taxpayer has made in
this industry and make sure that there's something so that you
are reducing the cost of these fuels in those circumstances. I
think, quite frankly, given where most people anticipate oil
prices are going to be that that would be a pretty fiscally
responsible approach.
But it's got to be more than just, you know, the tax
incentive. I think the things we've talked about here. You also
do need to address a market. You need to make sure that there
are vehicles capable of using more than 10 percent of ethanol
blends so that when Mascoma is producing cellulosic ethanol
there's a market for it.
You do have to have an infrastructure capable of delivering
those fuels. I would caution folks that, you know, are
enthusiastic about drop in fuels. I come from the school, we
need it all.
These technologies are absolutely very promising. But there
may not be any such thing as a drop in fuel. Until these things
are produced you don't know what co-contaminants there are
going to be.
The infrastructure investments that we're making will quite
likely be necessary for those as well. Most certainly aren't
going to be standard investments because they'll be able to use
that infrastructure.
Senator Portman. My time is up. I think it would be helpful
to the committee to have, maybe in writing, what the blender
tax credit range you're looking at when you talk about having a
variable rate. It might be helpful for us although we're not
the tax writing committee. I know the chairman and others will
be looked at for input.
Thank you.
The Chairman. Thank you.
Senator Stabenow.
Senator Stabenow. Thank you very much, Mr. Chairman.
I want to indicate as Chair of the Agriculture Committee we
held a hearing last week as well on this topic. I want to thank
you for doing this. I'm looking forward to working with you on
this both in the Energy Committee.
But also as we move forward on the next farm bill. As we
look for ways to be able to strengthen the energy title of the
farm bill and the cellulosic ethanol tax credit that came as
part of the package with the farm bill last time to focus on
advanced biofuels. I think is very important for us to be able
to extend and to be able to work together on the issues that
we're talking about today.
I firmly believe that biofuels ethanol, our opportunities
around advanced biofuels are critical to provide competition to
get us off of foreign oil. I mean, we need American, home
grown, energy. We're talking about something this morning that
will certainly be a major role in doing that.
Ethanol, corn based ethanol, is a maturing industry. Adding
cellulosic is, I think, very important for all of us. Mr. Karr,
I want to agree with you when said we're making great
automobiles, by the way. We are.
Mr. Chairman, just for the note, it's our American
companies winning all the awards last year. So it put a smile
on my face and the hard working folks from Michigan that have
been producing and making and engineering those vehicles. We're
very proud about that.
But let me talk about, sort of, those two pieces. Because,
you know, there's no question reducing dependence on foreign
oil is an incredibly important. Moving to cleaner, renewable
fuels are very important for many, many reasons.
It's also important to continue what is happening in our
American automobile industry. The great work that's being done,
the progress, the jobs being created, the vehicles that are
highly efficient, creating more options for consumers. We're
hearing a lot of concerns about those two goals being in
conflict or not being able to be addressed together in terms of
policy priorities particularly in light of the upcoming cafe
rules and the debate about higher ethanol blends.
So I'd like to ask anyone who would like to respond on the
panel to talk about these two goals and the extent to which we
can move forward and make this a win/win and resolve any
conflicts right now in our ability to meet those goals.
Mr. Karr. Thank you for that question.
I would take slight issue with one of Bob Dinneen's earlier
statements that the only we're doing to lessen our dependence
on foreign oil is in the biofuel space. Because, of course,
auto makers are going to spend over $50 billion between now and
2016 to significantly increase the fuel economy of our national
fleet. We are in the process of talking to the Administration
right now about fuel economy standards going from 2017 forward.
But with regard to the question of conflict between our
various goals, it is true that the possibility for conflict
exists. But I think part of my purpose in being here today is
to at least lay out, from our perspective, an outline of an
approach that we think could help to minimize that conflict. In
addition to the fuel economy standards that we are looking at,
we're also facing, you know, significant ratcheting up of
stringency of smog, on the smog forming emissions side.
So for our perspective it makes sense to look at this from
a comprehensive way and incorporate how we move forward in the
biofuels space as part of that overall package. I understand
that there are a lot of details and that there are a lot of
stakeholders at the table. But, you know, we are prepared to
sit down and have that conversation.
Senator Stabenow. Thank you.
Anyone else on the panel?
Mr. Dinneen.
Mr. Dinneen. I just think I'd agree. I think, look there
may be some potential for conflict. But I think if we're
sitting down and working through some of these issues we can
determine a policy that makes the most sense.
I actually agree with Mr. Karr about the conservation.
That's certainly a part of what needs to be in the mix. I come
from the school that we need all energy sources. That our
energy situation is such that we ought not be saying no to
anything right now.
So I think, you know, the statement that he made earlier
about sitting down with stakeholders and trying to determine
what is the most appropriate level and timeframe is something
that's a conversation that I want to engage in today.
Senator Stabenow. Great.
Mr. Eichberger. Senator, if I may?
The thing that was missing from the 2007 energy discussions
and the RFS was kind of a topic of today's hearing is
infrastructure. Now we're trying to play catch up. So any
discussion as we move forward we're more than willing to sit
down and talk about it.
We want to make sure that infrastructure remains important
because you can produce all the fuels you want. You can produce
all the cars you want. But if you can't get the fuel into the
cars----
Senator Stabenow. Right.
Mr. Eichberger. It makes no difference.
Senator Stabenow. Right.
Mr. Eichberger. So.
Senator Stabenow. Yes. Thank you very much.
I know my time is up, Mr. Chairman. I would just again say
to Mr. Brady, we are excited about your coming, Mascoma,
working very hard to come and create the first commercial scale
cellulosic facility in the upper peninsula of Michigan. Looking
forward to working with you to make sure that we can have the
right policies in place and continue those to allow you to be
successful.
Mr. Brady. We can't wait to have you up there for the
ground breaking.
Senator Stabenow. I'm ready.
Mr. Brady. Great.
Senator Stabenow. Thank you.
The Chairman. Senator Hoeven.
Senator Hoeven. Thank you, Mr. Chairman.
I'm going to start my questions along the lines of Senator
Murkowski because I think she's right. The challenge is
dollars. As you know we're a little short of dollars here,
spending more than we're taking in and that's a problem that
we've got to change.
The other is mandates. I've always found that people react
better if you ask them to do something then if you tell them
they have to do something. So I think incentives work better
than mandates.
Big fan of blender pumps. Believe in flex fuel vehicles.
Both give consumers choice.
I also believe in simple is best. Enhance of EPA can come
out with higher blends and said that all vehicles can use it
including small engines, large engines. It's a lot easier for
your retailers than if some can use it and some can't.
Sixty-two percent on and on, it's got to be a certain year
and so on and so forth. It makes it pretty hard for your
retailers to set up their pumps to serve everybody on a cost
effective basis. When some can use it and some can't.
Now you've got all your labeling requirements and a lot of
other confusion. I think one of the biggest problems in terms
of the Federal Government is they're making things more complex
instead of making it simple. So I appreciate some of your
recommendations in that regard.
With that in mind I'd like to ask each one of you. Given
the financial constraints and all of the mandates how do we
effectively, most effectively, maybe your one or two best
concepts, get more flex fuel vehicles out there. Get more
blender pumps out there and get this higher blend standard so
we simplify the process to expand the use of biofuels.
Mr. Brady, if you would start? Run right through it.
The other question I'd add and throw something in there on
it. This relates, of course, to what you're doing. Is how do we
migrate to this second generation biofuels, to cellulosic and
so forth?
I know Senator Portman talked a little bit about corn and
the need to move to next generation. So if you'd touch on those
two things. Your best one or two ideas, I'd like to hear them.
Mr. Brady. Senator, on your first question, having the
least amount of time to think about it I would say two things.
I think we do need to reform the Vtech, the current tax scheme
for biofuels. I think we need to reformat.
I think it needs to be more oriented to next generation,
diversifying the feed stocks and better environmental
performance. So I would start there. I would start with that
pot of money.
The other thing I would say. The Loan Guarantee Program, by
the way, I don't think we need more money. I think we need the
money that's been put aside for the current DOE Loan Guarantee
Program to be more effective.
So I think on both of those things there are existing
programs that can work a lot better in helping this transition
from first to second generation.
Senator Hoeven. Good example of what I'm asking for. The
squaring makes a difference, but loan guarantees is a good
example. Maybe the kind of thing we can sell. So appreciate
that.
Mr. Brady. Yes.
Senator Hoeven. You'd made that comment earlier.
Mr. Brady. Yes, sir.
Senator Hoeven. Thank you.
Mr. Karr. In the vehicle space one of the policy options
that Congress has pursued that doesn't cost is to allow auto
manufacturers to earn credits toward meeting their fuel economy
standards through the production of FFVs. In 2007 in the Energy
Independence and Security Act, Congress had put those in place
through 2020. In the last round of fuel economy rulemakings the
Administration is phasing those out in 2016 unless we can
demonstrate that biofuels are actually being used in those
vehicles.
So I think there's room to have more discussion about that
type of incentive both, legislatively and in the regulatory
arena.
Senator Hoeven. Alright.
Mr. Dinneen. Senator, we've talked already about how we
certainly are committed to reforming the tax incentive and
doing it in a way that is fiscally responsible. So I'll leave
that alone.
I'll say that moving forward you got to have a market. I
give great credit to Ford and General Motors and Chrysler that
have committed the 50 percent of the vehicles that they will
produce in 2012 and later are going to be flex fuel vehicles.
That is a tremendous commitment.
We need to figure out a way to get the other auto
manufacturers to match the commitment of the U.S. companies.
Whether that's a cafe credit or some other sort of----
Senator Hoeven. Yes. How do you do it without a mandate? I
mean, what ideas, without a mandate.
Mr. Dinneen. Mr. Karr has mentioned the cafe credit. That
will certainly create other issues. I mean, it's--there are no
easy policy options here. If, you know, the challenge is
finding something that you say, not a mandate. Mandates
wouldn't cost anything.
Senator Hoeven. But the cafe credit is a good example.
Mr. Dinneen. Yes. The cafe credit would. But there would be
other issues, you know. But it's certainly worth exploring.
The other thing though, you need to figure out a way to get
more blender pumps out there. John may have some ideas on that
that don't involve money. I think his notion that, you know,
just making sure that we can recertify existing equipment is
certainly one we ought to be looking at.
Senator Hoeven. I agree. That's a good example, John, that
I wrote down when you brought it up earlier. Other ideas?
Mr. Eichberger. That's the critical one. I believe there's
a lot of retail facilities out there that could move into
higher blend of ethanol if it was lawfully allowed to do so.
It's a matter of recertifying that equipment and making sure
that we can do without retribution.
Senator Hoeven. So not only certification, but some kind of
recertification where somebody comes in and looks at it and
says this is fine for E15 or?
Mr. Eichberger. Right. Yes. Some way to have the legacy
equipment that's at retail facilities eligible to sell new
fuels. Then as we increase supply of ethanol and other
renewable fuels we increase the demand of flexible fuel
vehicles.
More retailers will look at this as an opportunity to
service our customers without a huge investment in resources.
If we can do this, you can eliminate the need for any type of
government support for new equipment by allowing retailers to
use what's already in the ground.
Senator Hoeven. Thank you.
The Chairman. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman and so many of
the witnesses. I was going to ask a question about the Loan
Guarantee Program. But so many of the witnesses and my
colleagues have mentioned the Loan Guarantee Program that I
just want to say that yesterday I sent a letter with the
chairman and my colleagues, Senator Landrieu and Wyden and
Coons and Johnson and Shaheen, urging that Senator McConnell
and Reed not consider any HR1 language in the continuing
resolution that would gut the Loan Guarantee Program.
This is about 58,000 construction jobs, 30 billion in clean
energy projects and I think it's very important that we make
sure that the CR does not include that gutting proposal. I
think you all have done a good job this morning of discussing
the whys of that. But just know that we are fighting to make
sure that isn't part of a continuing resolution.
I also want to associate myself with my colleague, Senator
Murkowski about ethanol. I never understood why the ethanol--I
understand why the ethanol producers have some anxiety about
lifting the tax barriers on ethanol. But at the same time I
think it would have helped create the market faster and
allowing that import.
But I want to go to this question of gas prices and how
alternative fuel--what we really need to be doing to drive
down, you know, the price. I mean, Brazil was staring at $147
oil and basically had the ability to have 90 percent of their
vehicles be flex fuel vehicles. So when the price spiked they
just turned over to their domestic production. So they
basically insulated their economy from those gas spikes.
Here we are with the same choice now saying we could move
forward and insulate ourselves from those gas price spikes if
we gave ourselves an alternative to the monopoly that is
currently oil and particularly foreign oil. So, first I wanted
to ask Mr. Karr, were there any technical or economic hurdles
for making those flex fuel cars for the Brazilians?
Mr. Karr. No. I don't think the concern is that we can't
make flex fuel vehicles. As I said in my testimony, we're in
support of a flex fuel technology and have put over 8.2 million
on U.S. roads today. So they're not technical hurdles
currently.
There are potential technical hurdles having to do with the
next round of smog forming emissions. But they're not
technical----
Senator Cantwell. Yes, different. We came very close. The
Senate actually passed language as part of the 2007 energy bill
that would have required 50 percent of cars to be flex fuel
cars. But in the negotiations with the House, unfortunately,
that provision was dropped.
So but as far as the fuel though, if we had a fleet like
that do you think that the alternative sources could help us
drive down the price? How do you see the price? I mean, maybe
Mr. Dinneen, how do you see current alternative fuel prices,
you know, compared to gasoline today?
How do you see that for the future? Particularly if we had,
you know, a 50 percent fleet or something like that?
Mr. Dinneen. Senator you're absolutely right that Brazil
has insulated itself from those energy shocks by just giving
its consumers the flexibility. The flex fuel vehicles are about
50 percent of the automotive fleet in Brazil. The rest of the
vehicles run on a 25 percent ethanol blend. So, I mean, they
have maximized their use of renewable fuels. It's a heck of a
program.
Their 50 percent of the fleet, you know, compares to our 3
percent of the fleet being FFV. So we do need to do far more.
If we are able to there's no question that we'll continue to
have a beneficial impact on gas prices. I say continue to have
because as I said, ethanol today is driving down the price of
gasoline.
It's a little hard to really recognize it when you got $4 a
gallon. But because ethanol today is 50 cents cheaper than
gasoline it's already driving down the price of motor fuel and
just by the fact that we have 13 billion gallons of domestic
renewable fuel adding to our gasoline pool. That is driving
down the price of fuel generally.
So the economists have generally said that the 13 billion
gallons of ethanol that we're using today is responsible for 15
to 50 cents reduced price on gasoline. If there's more FFVs, if
there are more biofuels, when we get to the point when there's
36 billion gallons of fuel from domestic renewables in this
country gasoline prices will have to moderate. No question.
Senator Cantwell. So the faster that we can go on that, the
more we're going to see a drop in gasoline prices. I think
that's the headline for today. I mean, consumers all over
America want to know.
I mean, I personally think the era of cheap oil is over and
that all we are now is on the roller coaster. So this is about
whether we're going to allow the U.S. economy to be continually
subject to that level of volatility and/or are whether we're
going to produce something that is going to take that monopoly
and give it some competition.
So I appreciate your testimony today about this. Thank you,
Mr. Chairman for the hearing.
The Chairman. Thank you very much. We appreciate all of you
being here. I think it's been excellent testimony.
We do have one additional panel which is the Representative
from the Department of Energy. Dr. Henry Kelly, the Acting
Assistant Secretary in the Office of Energy Efficiency and
Renewable Energy. So we would ask him to please come forward
and give us the Administration's perspective on this set of
issues.
Please go right ahead.
STATEMENT OF HENRY KELLY, ACTING ASSISTANT SECRETARY, OFFICE OF
ENERGY EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY
Mr. Kelly. Thank you very much, Chairman Bingaman, Ranking
Member Murkowski. Thank you again for inviting me. I'm here to
discuss the Department of Energy's biofuels program and the
Biofuels Market Expansion Act of 2011.
Transportation is obviously a key part of the U.S. energy
economy. It's two-thirds of the United States oil consumption
and one-third of the Nation's greenhouse gas emissions. After
housing, it's the second biggest monthly expense for most
American families.
As the President said last week in an economy that relies
so heavily on oil rising prices at the pump affect everybody
and biofuels are clearly a part of the American solution. Home
grown biomass can provide a cost effective alternative to oil
imports and create businesses and jobs throughout the U.S.
economy including rural areas.
DOE is making investments in research and development of
the next generation of biofuels. It is also working hard to
create markets for existing and new technologies through new
fueling station technologies and other methods. I'm pleased to
report that we've made significant progress in this area. The
Administration's FY 2012 budget proposes to maintain this
momentum.
Now the Biofuels Market Expansion Act of 2011 addresses
several key barriers to increase use of biomass. The bill would
require auto makers to make an increasing fraction of their
vehicles flex fuel and includes a number of other provisions to
expand existing infrastructure capable of handling higher
ethanol blends. DOE is currently taking a number of steps,
already, to address these exact challenges.
Prior to October 2010, the amount of ethanol that could be
blended in gasoline for use in standard vehicle engines without
modification was limited to 10 percent by volume. DOE has
conducted extensive tests and worked closely with EPA to
provide the data needed to determine the potential impact of
E15. Again, that's gasoline containing up to 15 percent of
ethanol by volume.
On compliance with the vehicle and engine emissions
standards established under the Clean Air Act, EPA ultimately
decided based on DOE and other test data analysis that E15 may
be introduced into commerce for the use in model year 2001 and
newer passenger vehicles once several considerations are met.
This would allow the approximately 150 million vehicles that
are on the road that are post 2001 and newer to be using E15.
Now DOE is also working with auto manufacturers to assess
the viability of making new vehicles compatible with higher
ethanol blends. DOE estimates that about 3 percent of the
vehicles now on the road are already manufactured to be
compatible with E85. Roughly 15 percent of the sales of new
vehicles are also compatible with E85.
Most of these come from the domestic manufacturers who have
committed to having 50 percent of their vehicles be compatible
with E85 in model year 2012. The total average in 2012 is
likely to be between 18 and 20 percent of all new vehicles. We
estimate that the incremental cost of adding E85 compatibility
to a new vehicle is between $50 and $100 per vehicle.
Moving to E15 and higher blends also requires making the
fuel dispensers, the fuel pumps and underground storage tanks
compatible with these fuels. DOE has been working with
Underwriters Laboratories and pump manufacturers to accelerate
production of new pumps that can operate with E15 and higher
blends. Pumps capable of dispensing much higher blends, like
E85, currently cost about 60 percent more than conventional
dispensers or pumps. That's largely because of limited
production volume. If these pumps were produced in quantity the
differential cost could be down to a few hundred dollars per
pump. We're also working to develop retrofit kits working with
Underwriters Lab and the dispenser manufacturers to develop an
inexpensive kit where you can build to an existing dispenser
and retrofit it and get it approved.
The funding could be made available for this through our
DOE's existing State Energy Program funding and through
Recovery Act funding. We've informed the states that this is
possible. The Department, of course, is willing to work with
this committee on any new ideas for moving these retrofits and
the incentive for new pumps compatible with higher ethanol
blends forward.
As we take steps to break down the barriers to greater use
of today's biofuels, DOE is also making investments into the
next generation of biofuel technologies. The American
Reinvestment and Recovery Act accelerated the investment in
biofuels considerably. We were able to fund an additional 18 R
and D projects which added to the 11 projects that were funded
in 2007/2008. This has allowed us to explore a number of very
interesting new technologies on a significant scale.
These projects are helping scientists and entrepreneurs
explore techniques for converting cellulose such as wood and
corn stover waste to ethanol as well as technologies for
converting corn and the cellulosic materials into drop in
substitutes for gasoline diesel and jet fuel. To accelerate the
development of these technologies, President Obama recently
announced a goal of breaking ground on four commercial scale
cellulose or advanced biofuels plants over the next 2 years. To
meet this goal, the FY 2012 budget includes funding for both R
and D and for a reverse auction which cellulose and advanced
biofuel project sponsors would be able to compete for
additional support.
With support for such plants, advanced conversion
technology could play a significant role in the next few years,
and we're supporting two main pathways to achieve advanced
biomass. One is thermo-chemical based on pyrolysis or just
gasifying material. The second is advanced biochemical
techniques using enzymes and other methods. Over the long term
we think that both of these show considerable progress and have
the potential for driving prices down so that they're fully
compatible with petroleum based fuels.
The President recently set of goal of reducing petroleum
imports by a third by 2025. Together with increased fuel
economy in vehicles and acceleration of electric vehicle
deployments, biofuels are a critical part of our national
effort to achieve this goal. The Administration is still
formulating its position on the bill before this committee and
welcomes the opportunity to continue working with the committee
to advance our energy goals.
I'd be happy to answer any questions.
[The prepared statement of Mr. Kelly follows:]
Prepared Statement of Henry Kelly, Acting Assistant Secretary for
Energy Efficiency, Office of Energy Efficiency and Renewable Energy,
Department of Energy
Chairman Bingaman, Ranking Member Murkowski and Members of the
Committee, thank you for the opportunity to discuss the Department of
Energy's biofuels program and the ``Biofuels Market Expansion Act of
2011'' (S. 187).
The transportation sector accounts for approximately two-thirds of
the United States' oil consumption and contributes to one-third of the
Nation's greenhouse gas emissions\1\. After housing, transportation is
the second biggest monthly expense for most American families\2\. As
the President said last week, ``In an economy that relies so heavily on
oil, rising prices at the pump affect everybody.'' Biofuels are a key
part of the solution. They can provide a costeffective alternative to
oil imports that create business opportunities and jobs in the U.S.
economy--including the economies in rural areas. The Administration has
set a goal to help fueling station owners install 10,000 blender pumps
over the next five years, to enable widespread use of E-15. DOE is
supporting this goal through investment in research and development for
the next generation of biofuels and new fueling stations technologies.
---------------------------------------------------------------------------
\1\ http://www1.eere.energy.gov/vehiclesandfuels/pdfs/
vehicles_fs.pdf
\2\ http://www.bls.gov/news.release/cesan.nr0.htm
---------------------------------------------------------------------------
The Administration is focused on a range of challenges, and is
prioritizing efforts that can accelerate the substitution of imported
petroleum with home grown bio-based and renewable fuels. This requires
a research and programmatic balance to help both new and existing
biomass technologies permeate the market. I am pleased to report that
we have made significant progress in this area. The Administration's
Fiscal Year (FY) 2012 budget proposes to maintain this momentum.
The ``Biofuels Market Expansion Act of 2011'' addresses several key
barriers to increased use of biofuels. The bill would require
automakers to make an increasing percentage of ``flexfuel'' vehicles,
and includes a number of provisions to expand fueling infrastructure
capable of handling higher ethanol blends. DOE is currently taking a
number of steps to address these challenges.
Prior to October 2010, the amount of ethanol that could be blended
in gasoline for use in standard vehicle engines without modification
was limited to 10 percent by volume. Through extensive vehicle testing,
DOE worked closely with EPA to provide data needed to determine the
potential impact of E15 (gasoline containing more than 10 volume
percent and up to 15 volume percent ethanol) on compliance with vehicle
and engine emission standards established under the Clean Air Act. EPA
ultimately decided, based on DOE and other test data and analysis, that
E15 may be introduced into commerce for use in model year (MY) 2001 and
newer passenger vehicles once several conditions are met. This would
allow the approximately 150 million MY 2001 and newer passenger
vehicles on the road today to fuel with E15.
DOE is also working with auto manufacturers to assess the viability
of making new vehicles compatible with higher ethanol blends. DOE
estimates approximately 3 percent (8 million out of approximately 240
million) of passenger vehicles on the roads today are already
manufactured to be compatible with blends up to 85 percent. Roughly 15
percent of new vehicle sales are also compatible and domestic
manufacturers have pledged to increase this fraction to 50 percent by
model year 2012 (18-20 percent of total sales, including a few non-
domestic models). DOE estimates that the per-vehicle cost is in the
range of $50-$100/vehicle.
Moving E15 and higher blends also requires work to ensure that fuel
pumps and underground fuel storage tanks are equipped to handle these
fuels. DOE is working with pump manufacturers to accelerate production
of new pumps that can operate with E15 and higher ethanol blends. While
pumps capable of dispensing very high ethanol blends such as E85
currently cost 1.6 times as much as the conventional pumps
(conventional pumps cost $15,000, E85 pumps cost $25,000) DOE
analysis suggests that the cost differential could be driven down to a
few hundred dollars if the high-blend pumps were manufactured in
volume. DOE is working with pump manufacturers to develop and market
retrofit kits to upgrade existing pumps to be compatible with E15. In
addition, DOE is working with states, who are able to use State Energy
Program or Recovery Act funding, to upgrade existing fuel pumps to be
compatible with higher ethanol blends. DOE is also collaborating with
the U.S. Department of Agriculture in this area. The Department
welcomes the opportunity to work with this Committee to further
encourage the installation of new pumps equipped to handle higher
ethanol blends and to retrofit existing pumps.
As we take steps to break down barriers to greater use of today's
biofuels, DOE is also making investments in next-generation biofuels
technologies. The American Reinvestment and Recovery Act of 2009 (the
Recovery Act) accelerated investment in innovative biorefineries,
providing funding for an additional 18 RD&D projects, in addition to
the 11 projects previously funded in 2007 and 2008. Through these
projects, DOE is helping scientists and entrepreneurs explore
technologies for converting cellulose such as wood waste and corn
stover, as well as technologies for products other than ethanol--
including drop-in substitutes for gasoline, diesel, and jet fuel. To
help accelerate the development of these technologies, President Obama
announced a goal of breaking ground on four commercial-scale cellulosic
or advanced biofuels plants over the next two years. To help meet this
goal, the FY 2012 budget includes funding for a reverse auction in
which cellulosic and advanced biofuels project sponsors would compete
for additional support.
With support for such plants, advanced conversion technologies
could play a significant role in a commercial biofuels market within a
few years. DOE is supporting two main pathways to convert biomass into
biofuels in a cost-effective manner: (1) thermo-chemical conversion,
based on pyrolysis or gasification, and (2) biochemical conversion
using enzymes, fermentation, and other mechanisms, including algae.
Over the longer term, research advances showing promise in the
laboratory could greatly increase the productivity and reduce the cost
of biochemical processes using engineered yeast, bacteria, and other
organisms.
The President recently set a goal of reducing petroleum imports by
one third by 2025. Together with increased fuel economy in vehicles,
and acceleration of electric vehicle deployments, biofuels are a
critical part of a national effort to achieve this goal. The
Administration is still formulating its position on the bill before
this committee and welcomes the opportunity to continue working with
the committee to advance our energy goals.
The Chairman. OK. Thank you very much.
Let me ask just a few questions here. Your statement about
DOE is working with pump manufacturers to develop and market
retrofit kits to upgrade existing pumps to be compatible with
E15. How does that relate to the concern that we just heard
from Mr. Eichberger about the difficulty in getting approvals
or certification on pumps that people with convenience stores
are faced with? How do those issues relate?
Mr. Kelly. We're trying to work through that exact issue.
The first is to make sure that we have the technology that
actually works and find whether we can get the kit itself
certified. Then we have to find a way to work with people to
make sure that they have a retrofit at their facility that
meets all of the local and national regulations. We're working
through that right now.
The Chairman. So what is the timeframe for getting that
done?
Mr. Kelly. I will have to check with my experts. They are
confident that we can at least begin testing in the next few
months. I can get back to you with the exact schedule.
The Chairman. Yes, that would be useful to know how quickly
that's going to happen.
[The information referred to follows:]
The Department can only supply estimates for the timeline because
it does not control the critical tasks required to test and list
(certify) retrofit kits with UL (Underwriter's Laboratory). The design
of the kits is the responsibility of the dispenser manufacturers. The
Department has agreed to pay for the required testing with UL once the
manufacturers supply a suitable kit. Without Department support for the
testing there would be no business case for either manufacturer to
complete their design changes and testing expeditiously because the
expected profit margin would likely not cover the initial investment.
The Department is actively urging both dispenser manufacturers to come
up with retrofit kits as quickly as possible and has been in continuous
contact with UL to arrange for testing as soon as the kits are
available. The testing is anticipated to take at least 16 weeks once it
begins. At the current time, the Department is hopeful a retrofit kit
will be available to test in several months, which could enable at
least one listed retrofit kit by the end of the calendar year if no
development issues are encountered and no testing failures occur.
The Chairman. Maybe you're not the right person to ask on
this. But on some of the other issues that were raised here in
the previous panel has the Administration taken a position on
the current structure of subsidies that we have for production
of ethanol as to what we ought to be doing with that?
Mr. Kelly. I know that they are in conversation with the
Senate on this subject. I don't know that we have a firm
position on this. We obviously went forward with the proposal
for continuing funding this year, but----
The Chairman. What's your take on this whole business?
We've had this focus here for some years now on developing the
infrastructure and producing more vehicles that will be capable
of using E85. That's something of a different mission or goal
than trying to say let's just increase the amount of ethanol
that we're blending into our fuel mix.
Does it make sense for us to keep pursuing this E85 idea?
Instead of just saying, OK, we're going to go to E30 and have
that be the standard in the U.S. or E25 or whatever the right
figure is so that we don't have--we've got this bifurcated
circumstance in here where we've just got EPA saying it's OK to
use E15 if the car is of a certain vintage. It's OK to use E85
if you can find it.
But, it seems as though we really just haven't come down
with a concrete standard here that everybody can plan against.
Mr. Kelly. We are trying to make sure that we have a
diverse portfolio of options.
The Chairman. Usually that means ethanol or gasoline or
electricity. It doesn't mean E15, E85. It seems like at some
point having so much diversity and in the different mixtures is
counterproductive.
Mr. Kelly. We haven't supported a particular mixture. We
certainly have supported----
The Chairman. But I guess my guess my question is shouldn't
you? Shouldn't the Administration say here's what we're going
to have and everybody, the car manufacturers can plan on it.
The ethanol industry can plan on it. The convenience stores can
plan on it.
This is what it's going to be from now until 2020 or
whatever date.
Mr. Kelly. The fact is the total amount of biomass that the
U.S. can produce that would be not harmful to the environment
or compete with food is probably about a billion tons a year.
The question is how do you best want to use that. There are
lots of markets including jet fuel and diesel which are things
that the Department of Defense wants as well as vehicle
markets.
It's premature to say that any particular use of this
scarce biomass resource is clear to us at this point. We are
optimistic that we're going to be able to convert the fuel into
something which can be directly substituted for things like jet
fuel. That's an attractive outcome.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you. Thank you, Dr. Kelly.
You mentioned the competition between biofuels and fuel. I
want to ask you a question about the competition with biofuels
and water. I've got five different questions that I'm going to
submit to you for the record.
But last week we had a hearing on several hydropower bills
and discussion about the intersection, the nexus, between
energy and water and how critical that is and in a hand out
that we got from one of our witnesses here, Catch 22 water
verses energy. This is Michael Webber.
He states, ``The production cycle with biofuels from
growing irrigated crops on a farm to pumping biofuel into a car
can consume 20 or more times as much water for every mile
traveled in the production of gasoline. When scaling up the
water could well become the limiting factor.'' He speaks to the
controversy in several cities or municipalities in Illinois
that opposed an ethanol plant's petition to withdraw two
million gallons a day to produce the ethanol. Resistance will
grow as rancher's wells run dry.
Whether the proponents realize it or not any plan to switch
from gasoline to electricity or biofuels is a strategic
decision to switch our dependence from foreign oil to domestic
water. Just because I've been thinking a lot about water we had
some good testimony on this issue from Department of Energy.
I'd ask you your opinion on this.
Are we, within the Department, looking critically enough at
this issue? When we talk about these policies that will build
out, the ethanol, the biofuels, in an effort for us to consume
less oil and there's essentially a tradeoff here. Because we
are moving to utilization of another commodity if you will,
that of water, which is exceptionally valuable and also limited
in many, many areas.
Can you just discuss that very quickly?
Mr. Kelly. I don't think this is something that can be
discussed terribly quickly, but----
Senator Murkowski. That's probably true. That's not a fair
ask of you.
Mr. Kelly. No. It's a very serious question and one that
we're examining. We would certainly be pleased to answer
questions if you don't think that we're looking at it carefully
enough.
But one thing that we're intrigued by is if you're moving
to cellulosic biofuels you can do things like take corn that
was grown and use the seeds for fuel or food. But then there's
stover, which is what's left over, and use that material to
produce a fuel.
That doesn't add a lot of additional water, as you've grown
the corn already. Some of these other crops can be grown in,
like sugar canes and other things that are grown in places
where they don't have a big impact. You certainly want your use
of scrap material. Again, the material has already been
produced for wood or pulp or paper, for some other reason you
can use that scrap material. But as you start pushing to very
large volumes then clearly you do have to take greater and
greater care.
Senator Murkowski. Do you think that our policies as we're
talking about, you know, how we build this out? How we build
out the biofuels? Are we looking at the issue of our water
usage and the water nexus in the creation of energy, are we
looking at that critically enough or are we moving to these
policies and saying well it's important that we reduce our
reliance on oil?
We're not factoring in sufficiently the issue of water.
Mr. Kelly. It is true that virtually every major energy
facility, as I'm sure you discovered in this hearing, uses a
considerable amount of water.
Senator Murkowski. Some are worse offenders than others.
Apparently the biofuels is one of the worst offenders, at least
in the presentation that we had last week, so. But it is
something that I worry that we are not focused enough on.
We're looking at exciting technologies. We're looking at
ways that we can advertise that we are reducing our consumption
on oil. But we are not factoring in the very critical
assessment that must go on when we look at water and our water
consumption, how that figures into the equation.
I'd like to know a little bit more in terms of what DOE is
doing. Because it seems like a get a little bit from one
hearing and then a little bit from another hearing. But I'm
interested in understanding the nexus just a little bit more.
So if you can help us out with that I'd certainly
appreciate it.
Mr. Kelly. Absolutely.
[The information referred to follows:]
EERE is doing extensive work to manage water use in producing
renewable energy. For biomass, there are two primary concerns:
production of the feedstock which may receive irrigation water, and the
conversion of that feedstock into a liquid fuel for transportation.
EERE's work on feedstocks is focused on crops such as switchgrass that
do not require irrigation. In contrast, about 14% of the total U.S.
corn crop is irrigated, resulting in a weighted average irrigation
requirement for the corn used to produce biofuels of about 67 gallons
of water used for irrigation per gallon of ethanol produced (http://
www.transportation.anl.gov/pdfs/AF/557.pdf). To convert biomass
feedstocks to ethanol, about 3 to 7 gallons of water are used to
produce a gallon of fuel (http://www.swhydro.arizona.edu/archive/V6_N5/
feature4.pdf). Water consumption in the conversion process is being
reduced as one component of a broader set of efforts to improve the
efficiency and lower the cost of ethanol production.
Solar photovoltaics and wind do not require water to produce
electricity. For thermal technologies such as concentrating solar
thermal power and geothermal, attention has been focused on using dry
cooling systems that have minimal use of water, rather than
conventional evaporative cooling. This was the focus of a report to
Congress in 2009, ``Concentrating Solar Power Commercial Application
Study: Reducing Water Consumption of Concentrating Solar Power
Electricity Generation'' (http://www1.eere.energy.gov/solar/pdfs/
csp_water_study.pdf).
These activities reflect the focused work being done which includes
water as an important component of a host of factors that must be
optimized together in order to provide the most robust, cost-effective,
sustainable energy solutions possible.
To brag a bit, we're working on photovoltaics and wind.
Senator Murkowski. Right.
Mr. Kelly. Which fortunately don't require a lot of water.
Some of these solar thermal ones, the original plants, do use
water. But we're trying to minimize that in advanced designs.
Senator Murkowski. Good. I look forward to discussing that
with you. I've got some additional questions that I'll submit
for the record.
Thank you, Mr. Chairman.
Thank you very much. I think it's been a useful hearing. We
will adjourn the hearing at this point.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of Bill Brady to Questions From Senator Murkowski
CELLULOSIC SHORTFALLS
Question 1. Cellulosic biofuels have been slow to enter commercial
production. When do you believe production will catch up to the annual
volumes listed in the Renewable Fuels Standard?
Answer. The 16 billion gallon mandate included in the Renewable
Fuels Standard is critical to attracting additional investment to build
out the cellulosic biofuel sector. More than 10 cellulosic biofuel
companies are very far along in plans to construct the first commercial
scale projects. Assuming financing issues can be worked through,
several of these facilities can be in production in 2013. At that
point, the industry would need to build 20 facilities a year to meet
the 16 billion gallon mandate in 2022. The construction infrastructure
exists for this type of build out. During the peak of construction in
the corn ethanol industry, over 1.5 billion gallons of production
capacity was being put on line per year.
LOGISTICS
Question 2. In your written testimony, you note that Mascoma is
planning to make 40 million gallons of cellulosic ethanol each year at
the Kinross, Michigan plant. For perspective, can you explain how much
material that will require each year? How many tons of biomass will be
used to produce 40 million gallons of fuel?
Answer. The Kinross facility is situated in an area where annual
growth significantly outpaces existing harvest. Even with our facility,
the area will continue to have an annual growth surplus. Initially,
this facility will use 1 million wet tons (500,000 dry tons) of
pulpwood to produce the 40 million gallons in fuel. We expect our
technology to continue to improve our yield over time.
PIPELINE
Question 3. In your testimony, you state that you support S. 187.
Are you concerned that if an ethanol pipeline receives a loan guarantee
and is ultimately constructed, it could affect the Northeast's market
for cellulosic ethanol made by companies like yours?
Answer. The RFS2 caps corn ethanol at 15 billion gallons. The
remainder of the RFS2 will be met with advanced and cellulosic biofuels
including 16 billion gallons of cellulosic biofuels. Upon breaking
through the existing blend wall, the cellulosic ethanol industry will
make up these additional gallons.
An ethanol pipeline does not threaten this market. Instead, it
could make ethanol an even more cost effective option in the fuel
supply. This could help build out additional ethanol infrastructure
that can be beneficial to cellulosic ethanol companies. That said,
given the current federal budget constraints, we would prioritize an
ethanol pipeline below other infrastructure issues including FFVs and
blender pumps.
SUBSIDIES
Question 4. In considering a 10-year extension for the tax credit
for cellulosic ethanol, we could quickly find ourselves in a situation
where the costs become unsustainable. If this credit is extended, how
could it be offset? Do you believe it should be phased down, or made
variable with the price of oil?
Answer. Consistency of tax incentives in the next 10 years is
critical to attracting investment for our first facilities. Investors
are making investment decisions, in part, based upon expectations for
continuation of tax incentives in the space. Given the history of tax
incentives for the oil and gas industry, investors continue to evaluate
whether the Federal government will provide similar treatment to
advanced biofuel technologies. That said, after initial buildout of the
industry is complete and as our production costs continue to come down
over time, it would be natural to have a discussion about how to refine
incentives put in place to spur initial investment in the industry.
PRODUCTION COSTS
Question 5. Your written testimony states that Mascoma's ethanol
will be ``cost-competitive'' with oil at $75 per barrel. You also urge
a 10-year extension of cellulosic ethanol's production tax credit. Can
you explain the apparent discrepancy? With oil currently above $100 a
barrel, shouldn't there be less of a need for a large, long-term tax
credit?
Answer. Mascoma is cost-competitive with oil at $75 per barrel when
you include the cellulosic production tax credit. Our goal is to be
competitive with $50 per barrel oil without tax incentives as we
continue to make developments in our technology. We believe we can hit
this milestone within the next decade.
PLANT ECONOMICS
Question 6. Your Kinross, Michigan facility is estimated to cost
$350 million. Does that include your feedstock costs, your operation
and maintenance costs, or any distribution costs? How much do you
expect your next facility, after Kinross, to cost?
Answer. The $350 million cost is the capital cost for our first
facility. Capital costs will decrease for future facilities. We expect
that a second green-field facility will see significant savings and
cost $300 million. Our feedstock, operation and maintenance costs will
be $1.50 per gallon at startup. We expect continued decreases in these
costs over time.
REGIONAL VS. NATIONAL APPROACH
Question 7. Given all of the challenges associated with scaling up
biofuels usage--ranging from production costs to compatibility with
vehicles and infrastructure--would it make more sense to focus on a
regional, rather than national, approach to deployment? After reaching
the blend wall, would it be more cost effective to grow the market for
biofuels in the Midwest before looking to expand it throughout the rest
of the United States?
Answer. Use of higher blends is critical to meeting the levels of
ethanol use mandated in the RFS2. This requires significant increases
in both FFVs and blender pumps.
One recent analysis indicated that a likely way to meet the RFS
mandate include:
1) All existing non-FFVs running on E15;
2) Automakers produce 100% of their cars as FFVs beginning in
2015; and
3) These FFVs run on E85 for 33% of the time.
This scenario argues for focusing FFVs and blender pumps in highly
populated areas where the most cars and gas stations are focused.
Rather than focus on the Midwest, policies should focus on fostering
car and pump infrastructure in large urban areas where gasoline demand
is greatest.
Response of Bill Brady to Question From Senator Johnson
Question 1. Can you elaborate on the infrastructure needs of
cellulosic ethanol as compared with grain-based ethanol? If we build
out infrastructure now for our current biofuel market, will this also
accelerate development of a market for the next generation of biofuels
from cellulosic sources?
Answer. Developing automobile and pump infrastructure is critical
to the cellulosic ethanol industry. Investors understand the
implications of the existing blend wall and want to know that there
will be room in the transportation fuel marketplace for our product.
Investors want to see ethanol infrastructure align with the RFS2
mandates.
______
Responses of John Eichberger to Questions From Senator Murkowski
MISFUELING E15+ BLENDS
Question 1. In October 2010, a spokesman for your organization,
speaking about the potential for misfueling with E15, said that, ``The
easiest way to remedy this situation is to mandate that everything's
full-serve, that you do not allow the customer to have the opportunity
to misfuel.'' Can you estimate what it would cost for every service
station to revert back to full service? Do you expect that sort of
shift will be necessary with blends above E10? If liability is not
addessed for E15 or higher blends, can you discuss the negative
economic consequences that could result?
Answer. With reference to the quote attributed to my NACS
colleague, it is important to note that some have suggested that this
may be the easiest ``solution'' to prevent misfueling, however NACS
does not believe this is a viable nor effective option for a variety of
reasons. First, the costs would be unsustainable. The average starting
hourly salary for an entry-level convenience store employee in 2009 was
$7.67. On average, a convenience store is open 157.8 hours each week.
To ensure that an E10+ dispenser was staffed full-time would require an
additional $1,210 per week in hourly wages paid, not including
affiliated employment taxes. On an annual basis, this would require an
additional $62,920 per year. If every service station in the nation
(159,006) employed one worker to provide full-service at just one
dispenser, the cumulative cost to the industry would be $10 billion.
Further, there are no assurances that a full-service E15 dispenser
would prevent misfueling. There are many consumers who are unaware of
the make and model of the vehicle they are driving, let alone the model
year. It would be impossible for the station attendant to identify
those vehicles authorized to use E15 from those which are not, and if
the consumer is unable to accurately provide that information the
chance of misfueling will remain. In addition, if there is an economic
incentive to the consumer to fuel with E15 (the relative price of
ethanol and the associated tax credits could yield a lower retail price
for E15 vis-a-vis E10), the consumer may simply misrepresent the model
year of the vehicle being fueled.
NACS believes there are no full-proof options available to prevent
misfueling because any physical countermeasures would require
retrofitting millions of vehicles. Consequently, NACS believes that the
onus for ensuring compliance with Federal law should be placed on the
individual responsible for introducing the fuel into the fuel tank,
whether that be the self-service customer or the full-service
attendant. Any liability for violating the Clean Air Act or for
damaging the engine should reside with that individual. Compliance with
the labeling program being developed by the Administrator of the
Environmental Protection Agency should satisfy the retailer's
responsibility to warn the consumer.
Failure to reform the liability provisions surrounding fuels like
E15 to protect those not directly responsible for the misfueling (i.e.,
the retailer who complied with the labeling requirements of the EPA and
any other party not involved in the act of misfueling) could dissuade
many retailers from offering such fuels. Without reform, retailers
could face fines from EPA for violating the Clean Air Act (fines can be
assessed up to $37,500 per violation), could be sued under the private
right of action that exists within the CAA or could be sued by the
engine owner for voiding the engine's warranty, damaging the engine or
perhaps causing injury to the engine's user. Whether such lawsuits
would be successful is unclear, but the retailer would have to expend
significant funds to mount a defense and that might not be a viable
option--in 2009 the average per-store pre-tax profit for a convenience
store was only $33,170.
LIABILITY
Question 2. In your testimony, you note that misfueling liability
and general liability exposure are some of the most important
constraints for more ethanol entering the market. Can you explain what
would happen if liability is not addressed before higher blends reach
the market? Do you believe that fuel wholesalers and retailers may
decide to not sell the higher blends? Who should be liable for any
potential damages that result from higher ethanol/gasoline blends?
Answer. I believe my response to question one addresses the
questions regarding what would happen if misfueling liability were not
addressed prior to higher blends reaching the market and who should be
liable for potential damages the result from misfueling. Exposure to
such liability could very well prevent many retailers from offering
higher ethanol/gasoline blends.
Smaller retailers who operate in markets where consumers are
heavily vested in the agriculture community and where demand for
ethanol is strong may decide to enter the market even in the absence of
such liability reform. Their cost-benefit analysis is very different
from that of a larger operator who may operate in markets where support
for ethanol is less robust. Large operators may determine they face
higher risks of consumer complaints associated with such fuels and may
determine their risk of liability might exceed the potential benefits
of offering the new fuel.
The issue concerning general liability exposure is potentially more
significant. The motor fuels industry is very hesitant to adopt new
fuels or fuel additives that may at some point in the future be
determined to be defective products. Recent experience, when fuels
mixed with the additive MTBE were declared defective, resulted in
multi-billion dollar class action lawsuits that are ongoing today.
Legal expenses alone are in the hundreds of millions of dollars.
This experience will likely deter many of the larger companies from
entering new product markets without some assurance that they will not
be retroactively held liable if in the future it is decided to declare
these fuels defective and revoke the authorization to sell them. For
the outlets selling fuel under the brand of a refiner (representing
about 50% of the retail facilities in the country), it is likely that
the supply contract will prohibit that location from selling a product
with more than 10% ethanol. The Energy Information and Security Act of
2007 included amendments to the Petroleum Marketing Practices Act to
ensure that branded retail locations could sell renewable fuels
provided they were sufficiently debranded--however, the definition of
renewable fuels in this section applied only to E85. (PL 110-140
Section 241)
The fact that EPA has approved E15 for only a subset of the engine
population raises concerns that the product may cause engine
performance or safety issues. In light of this situation, the concern
about potential liability associated with the manufacture or sale of
this product is elevated. Consequently, absent meaningful liability
reform (both misfueling and product liability) it is likely that a
majority of retail facilities will not assume the risk of selling a new
fuel.
TECHNOLOGY NEUTRALITY
Question 3. Near the end of your written testimony, you recommend
that Congress ``refrain from pre-selecting the `fuel of the future' and
allow the market to determine the product that will most benefit
consumers and the economy.'' Please expand on that statement. What
would the policy look like if this recommendation was followed?
Answer. Currently, there are limited fuel choices available in the
market: traditional petroleum products, ethanol and biodiesel. Other
options are very limited in market penetration and do not show much
promise to expand their market share. In such a situation, it is
understandable that legislators would focus on promoting the expanded
market development of products with which they are familiar.
Renewable fuel debates in Congress typically focus on the
feedstocks used to produce the fuels. The Energy Independence and
Security Act developed a renewable fuels standard based on feedstock
and emission characteristics, limiting the market use of corn-based
ethanol and providing a framework for cellulosic ethanol to support the
program. However, whether ethanol is derived from corn, sugar cane or
cellulose, it remains ethanol and presents the same infrastructure
hurdles.
In setting future targets, Congress could establish a target for
vehicle and equipment compatibility standards based upon today's
available options, perhaps setting a standard for an E40 fuel. If
Congress proceeds in this manner, the resources available for
developing alternative, innovative fuel products could evaporate and
the possibility of new fuels that are more environmentally progressive
and more compatible with existing vehicles and refueling equipment
could evaporate with it.
NACS is very interested in the development of new fuel options and
providing opportunities for consumers to determine which fuel products
will power the future of our transportation needs. Congress can provide
guidance by developing specific criteria that new fuels must meet
(i.e., compatibility and performance standards), thereby providing
engine and equipment manufacturers a target for compatibility without
stifling innovation.
FUEL SALES
Question 4. In looking at state-by-state data on E85 sales, it
appears that the presence of a pump and the availability of the fuel is
no guarantee that it would be sold in significant quantities. Do you
think we could face a similar situation with blender pumps, if their
installation is mandated?
Answer. NACS believes you could face a similar situation with
blender pumps, even if they are not mandated. The challenge with this
transition to renewable fuels is that no vehicles are required to run
on them. As I mentioned in my testimony, prior fuel transitions were 1)
backwards compatible and 2) mandatory for new vehicles. Retailers knew
that the new fuel would be purchased because 1) every engine could use
it and 2) new engines had to use it. That is not the case now, so
consumer demand is very uncertain.
In most circumstances, fuel purchase decisions are driven by price.
In a survey of 1,200 consumers in 2009, NACS found that 70% of
consumers select their fuel retailer based upon price. We also found
that 26% of consumers will drive 10 minutes out of their way to save as
little as 3 cents per gallon. In such a market, the price of an
alternative fuel will play a significant role in level of consumer
demand.
Sales of E85 have been slow in many markets because it cannot be
sold for a competitive price. Because ethanol has fewer BTUs per
gallon, E85 delivers between 25-30% fewer miles per gallon.
Consequently, for the consumer to break even E85 must be priced 25-30%
below regular gasoline.
This is not always possible to do, and E85 sales suffer. Fuels like
E15 will deliver miles per gallon that are more similar to regular
gasoline, so the price differential may not need to be as severe. In
fact, the mileage difference between E10 and E15 may be negligible
while the price of E15, due to the relative cost of ethanol and the tax
credit applied, may be more attractive. This could drive consumer
interest.
However, the authorization to use E15 only in certain vehicles and
engines, combined with the auto industry's warranties covering only up
to E10 and the skepticism the auto makers have expressed about the
fuel's use in legacy vehicles, could substantially dampen potential
demand.
Retailers are aware of consumer perceptions and potential
marketability of new products. Therefore, if the cost of entry to these
new fuel products can be lowered by changing the certification
procedures for equipment and providing liability protection for law-
abiding retailers, more may be willing to try new fuels in the market.
If the fuels are not accepted by their customers, the retailers'
investment is minimal and they can revert to traditional fuels.
However, if the cost of entry is substantial (new equipment may cost
$120,000 or more) the retailers' willingness to take a chance on a new
fuel is considerably reduced.
E15 SALES
Question 5. Could you list all of the steps that you believe must
be taken before fuel retailers will sell E15 at their stations? How
many of those steps have been taken so far, and how many remain
unresolved as of today?
Answer. To help answer this question, I have attached a document
published by the Renewable Fuels Association outlining the numerous
steps that must be taken to make E15 a lawful fuel for use in the
market. I believe many of these steps are in progress, but have not yet
been completed. I have also attached a March 24, 2011, letter from the
Environmental Protection Agency outlining the steps remaining before
E15 is a lawful fuel.
Assuming the fuel satisfies all of the criteria listed in the
attached documents, the following steps are required for the retailer
to offer E15:
1) Equipment.--Retailers must ensure all equipment satisfies
federal and local requirements for compatibility. Regulations
of the Occupational Safety and Health Administration require
that ``flammable and combustible'' liquids be stored in
equipment that has been listed by a nationally recognized
testing laboratory, such as Underwriters Laboratories. Tank
insurance policies, state tank fund programs, bank loans and
many local regulations require compliance with this regulation.
Consequently, the retailer must ensure its dispensers and
underground storage tank systems are listed as compatible with
E15. This could be complicated because there were no UL listed
dispensers for ethanol concentrations above 10% until spring
2010. Further, many retailers are not the original owners of
the facility and, given there are no requirements that
underground storage tank system documents and details must be
transferred at the time a facility is sold, many retailers may
not know what specific equipment they have underground to
determine if it is listed. The attached document from RFA
references that such equipment ``will have to operate on an
exception basis unless or until equipment is listed.'' There
are no exceptions to the requirement that retail equipment be
listed by a nationally recognized testing laboratory.
2) Demand.--Retailers must determine whether there is
sufficient demand to justify the expenditure to secure
compatible equipment. Only 3% of the vehicles in the market are
flexible fuel vehicles manufactured and warrantied to operate
on E10+ fuels. Another 62% (2001 and newer vehicles) of the
market is authorized by EPA to operate on E15, but the auto
manufacturers do not support this decision and do not warranty
their vehicles to run on this fuel. If the auto industry
determines that use of E15 in these vehicles is acceptable,
then a national marketing campaign will be essential to educate
the consumers about the appropriate use of E15 and drive
consumer demand for the product. Then, the economic calculation
for a retailer to invest in upgrades to sell E15 might more
positively justify the decision.
3) Misfueling.--Retailers cannot sell E15 until the EPA
finalizes regulations governing the labeling of E15 dispensers.
NACS has learned that during the week of April 18, 2011, the
Agency had submitted a final rule to the Office of Management
and Budget. Once this rule is published, retailers will know
what is required of them to provide appropriate notice to
consumers regarding the authorized and prohibited uses of E15.
However, these labels will not provide much legal protection to
retailers. In the absence of legislation that gives these
labels the force of law, retailers may still be subject to
violation or litigation under the Clean Air Act if a self-
service consumer misfuels a non-authorized engine with E15.
Further, that customer might sue the retailer in the event E15
voids the engine warranty or causes engine failure. The
retailer must comply with the labeling regime published by EPA,
but without further congressional action many retailers may not
be willing to accept the risks associated with consumer
misfueling.
INFRASTRUCTURE COSTS
Question 6. In your testimony, you note that the blender pump
mandate in S. 187 could cost nearly $5 billion, and it could cost
around $70 billion to retrofit all dispensers and underground storage
tanks. If equipment can be certified retroactively, however, how much
could that reduce your industry's costs?
Answer. It is difficult to specify the savings associated with
recertification since it is impossible for us to know what equipment
each retailer has at their facility. However, recent studies indicate
that the gaskets and seals in dispensers pose the greatest challenge to
E15 compatibility for these units. Underwriters Laboratories cited
these studies as rationale for retracting their prior statements that
most E10 listed dispensers could safely accommodate up to 15% ethanol
blends. Consequently, if retailers could retrofit their existing
dispensers to eliminate the incompatible components, rather than
spending $20,000 on new dispensers their investment could be
dramatically reduced.
With regards to underground storage tank systems, certain
components are generally recognized as compatible with high
concentrations of ethanol but they are not specifically listed as such.
Recertification of these units could save retailers substantial sums.
In general, if the investment for any one retailer can be reduced
from $120,000+ to less than $20,000, the potential for that retailer to
enter the new fuel market is substantially increased. Likewise, the
economic burden on government grant and tax programs designed to
encourage such equipment would be dramatically reduced.
Attachment 1.--Renewable Fuels Association
REGULATORY SUPPORT NECESSARY FOR HIGHER LEVEL ETHANOL BLENDS
The approval by the U.S. Environmental Protection Agency (EPA) of
higher-level ethanol blends in gasoline is only the first step in the
process of moving to ethanol blends beyond E10. As stated in the EPA's
recent update on the E15 waiver application: ``It's also important to
remember that there are a number of additional steps that must be
completed--many of which are not under EPA or DOE control--to allow the
sale and distribution of E-15. These include but are not limited to:
testing on dispensing equipment; changes to state laws to allow for the
use of E15; and completion of the fuels registration process by
industry.''
Beyond the approval of the E15 waiver request by the EPA, there
remain several regulatory challenges, including:
EPA Fuel Additive Registration
All new fuel additives must be registered with the EPA under
40CFR79
Registration process is the submission of evaporative and
combustion emission species representative of the new fuel
blend
Health effects testing is underway for higher level ethanol
blends
EPA Extension of 1 lb. Waiver of Reid Vapor Pressure (RVP) Regulations
Nonattainment areas (areas required to use reformulated
gasoline (RFG)) are granted a one pound per square inch (1psi)
RVP waiver for blends containing nine to ten percent ethanol
(40CFR80.27)
RFG represents ?35 percent of the market
15 percent ethanol blends do not increase the RVP greater
than 10 percent ethanol fuel blends; however, to maintain the
current unleaded gasoline profiles an extension of the 1psi RVP
waiver is needed
The RFA has submitted the request both in the E15 waiver
request docket and in a separate letter (dated May 17, 2010) to
the EPA
EPA Detergent Certification Status
Currently, all gasoline is required to contain a minimum
amount of detergent
These detergents go through a certification process with EPA
Additional amounts of ethanol are not expected to increase
deposit forming tendencies of gasoline; however, this
discussion is in the very early stage.
Fire Code and Retail Fueling Sites
All retail fueling sites must meet both the local and state
fire code
Most state fire codes require ``listed'' equipment 2
Underwriters Laboratories Inc. (UL)\1\ has stated that the
current listing is for ethanol blends ``up to'' but not
including E15
---------------------------------------------------------------------------
\1\ UL is an independent product safety certification organization
that develops standards and test procedures for products, materials,
components, assemblies, tools and equipment, chiefly dealing with
product safety. UL also evaluates and certifies the efficiency of a
company's business processes through its management system registration
programs. UL is one of several companies approved for such testing by
the U.S. Occupational Safety and Health Administration.
---------------------------------------------------------------------------
All tanks, pumps, dispensers, nozzles, etc. will have to
operate on an exception basis unless or until equipment is
listed
Automaker Warranties
Each vehicle has an owner's manual that includes a ``Fuel
Recommendation'' section noting warranty implications
No vehicle owner's manuals recommend the use of ethanol
blends above 10 percent
Implications are that if there is equipment failure while
using blends above E10, the vehicle warranty could be voided
Fuel Specifications
States adopt ASTM\2\ fuel specifications into regulation
---------------------------------------------------------------------------
\2\ Originally known as the American Society for Testing and
Materials, ASTM is an international standards organization that
develops and publishes voluntary consensus technical standards for a
wide range of materials, products, systems, and services.
---------------------------------------------------------------------------
The current ASTM specification for gasoline (D4814) limits
some of the volatility offsets to E10 which may be necessary
for E15
The current ASTM specification for fuel ethanol (D4806) is
limited to use in 10 percent blends
Current NIST\3\ HB130 limits the ethanol content to 10
percent in all gasoline blends
---------------------------------------------------------------------------
\3\ The National Institute of Standards and Technology is a
measurement standards laboratory which is a non-regulatory agency of
the U.S. Department of Commerce.
---------------------------------------------------------------------------
Technical representatives are currently discussing the
necessary modifications to both the ASTM fuel specifications
and NIST HB130
Octane Certification
The Federal Trade Commission regulations and99 percent of
all state fuel laws require that a fuel's octane be certified
Existing ASTM methods to measure and determine octane do not
include, nor exclude, blends above 10 percent ethanol; however,
test method precision is needed for these specific fuel blends.
An ASTM task force is currently investigating the influence
of higher levels of ethanol on gasoline's octane and the
measurement process
RFA precipitated this discussion and an active participant
in this data development
Safety and Handling
There is no existing information on the safety and handling
of ethanol blended fuels above E10
Laboratory tests show that traditional fire-fighting foams
(or, AFFF) can extinguish an E10 fuel fire
The RFA is currently soliciting research support to evaluate
the effectiveness of these same fire-fighting foams with E15
fuel incidents
Attachment 2.--Letter from the Environmental Protection Agency
United States Environmental Protection Agency,
Office of Enforcement and Compliance Assurance,
Washington, DC, March 24, 2011.
John Eichberger,
Vice President, Government Relations, National Association of
Convenience Stores, 1600 Duke Street, Alexandria, VA.
Charles T. Drevna,
President, National Petrochemical & Refiners Association, 1667 K
Street, NW, Suite 700, Washington, DC.
Bob Greco,
Downstream and Industry Operations, American Petroleum Institute, 1220
L Street, NW, Washington, DC.
Carl Boyett,
President, Society of Independent Gasoline Marketers of America, 3930
Pender Drive, Suite 340, Fairfax, VA.
Dan Gilligan,
President, Petroleum Marketers Association of America, 1901 North Fort
Myer Drive, Suite 500, Arlington, VA.
Bob Dinneen,
President and CEO, Renewable Fuels Association, 425 Third Street SW,
Suite 1150, Washington, DC.
Re: Gasoline Ethanol Blends
Dear Messrs. Eichberger, Drevna, Greco, Boyett, Gilligan, and
Dinneen: The United States Environmental Protection Agency (EPA) has
recently received a number of inquiries asking whether it is currently
legal for retail gasoline stations to sell gasoline blended with more
than 10% ethanol for use in motor vehicles and nonroad engines. EPA has
granted conditional waivers to allow the use of gasoline containing
between 10% and 15% ethanol (E15) in model year 2001 and newer light-
duty motor vehicles. The conditions associated with EPA's waivers,
however, have not yet been satisfied. Thus, the Clean Air Act (Act)
currently prohibits the sale of gasoline containing more than 10%
ethanol for use in gasoline-only vehicles and engines.\1\ Selling E15
gasoline for use in certain gasoline-only vehicles and engines will
only become legal when the waivers' conditions, including the elements
discussed below, are met.
---------------------------------------------------------------------------
\1\ A ``gasoline-only vehicle or engine'' refers to a motor vehicle
or nonroad engine that has been certified by EPA to meet emissions
standards using gasoline containing up to 10% ethanol.
---------------------------------------------------------------------------
The conditions in the El5 waivers are designed to mitigate the
potential for misfueling of E15 in vehicles, engines, and equipment for
which E15 is not approved. These conditions include labeling
requirements for pumps dispensing E15, product transfer document
requirements, and participation in a compliance survey at fuel retail
dispensing facilities to ensure proper labeling of dispensers. EPA has
also published proposed regulations to promote the successful
implementation of the E15 partial waivers. The proposed regulations
parallel the misfueling conditions on the El 5 partial waivers.
In addition, Section 211(a) of the Act, 42 U.S.C. Sec. 7545(a),
prohibits any fuel manufacturer from selling designated fuel, such as
motor vehicle gasoline, unless it is registered with EPA. However,
since the conditions associated with the El5 waiver have not yet been
met, it remains illegal to blend more than 10% ethanol into gasoline
sold for use in gasoline-only vehicles and engines. The Act does not,
however, prohibit retail gasoline stations from selling gasoline
blended with up to 85% ethanol for use in flexible-fueled vehicles or
engines,\2\ and it does not prohibit the sale of gasoline containing up
to 10% ethanol for use in gasoline-only vehicles and engines.
---------------------------------------------------------------------------
\2\ A ``flexible-fueled vehicle or engine'' refers to a motor
vehicle or nonroad engine that has been certified by EPA to meet
emissions standards using E85 (85% ethanol and 15% gasoline), gasoline
without ethanol, or any intermediate combination of gasoline and
ethanol.
---------------------------------------------------------------------------
Sections 211 and 205 of the Act, 42 U.S.C. Sec. Sec. 7545 and
7524, authorize EPA to assess significant civil penalties for improper
fuel blending. To avoid violations of the Act, EPA suggests that retail
gasoline stations that sell gasoline blended with more than 10% ethanol
for use in flexible-fueled vehicles or engines take appropriate steps
to prevent gasoline-only vehicles and engines from being rnisfueled
with fuel containing more than 10% ethanol.
For example, the likelihood of violations can be reduced for a
retailer selling fuel containing greater than 10% ethanol if the
retailer affixes warning labels to all pumps dispensing this product
informing the public that the product may only be used in flexible-
fueled vehicles or engines. EPA encourages fuel providers to employ
other strategies at their facilities that are cost-efficient and
effective in further reducing the risk of misfueling.
If you have any questions regarding this matter, you may call Jeff
Kodish, Fuels Team Leader, at (303) 312-7153.
Sincerely,
Phillip A. Brooks,
Director, Air Enforcement Division.
______
Responses of Shane Karr to Questions From Senator Murkowski
FUEL SPECS
Question 1. Near the end of your written testimony, you note that
vehicles built to a certain fuel specification can ``deliver better
fuel economy, better performance, and more cost-effective compliance
with emissions standards.'' Can you explain what that means in more
detail, and then explain the difference between a narrow
specification--say, E30--as compare to a requirement that vehicles be
able to run on blends up to E85?
Answer. Automotive designs are similar in this regard to almost any
other product engineering design; the narrower the design
considerations or real-world constraints the more optimally the product
can be designed to function. For example, a vehicle that has to be
designed to operate on a large range of fuel blends (blends up to E85)
at many different operating conditions is designed and calibrated
differently, and less optimally, than a vehicle that is designed to run
on a single fuel.
There are many characteristics of a fuel. These include performance
characteristics (such as octane) and chemical characteristics (such as
sulfur content). Fuels with higher octane, when matched with engines/
vehicles optimized to the higher octane, enable the engine to be more
energy efficient and deliver better fuel economy through increased
compression ratio. When a vehicle must be designed to operate on a
large range of fuel properties, the powertrain can only be optimized
for the worst case scenario--all other design points are less than
optimal. A vehicle driver expects a smooth start-up of a cold vehicle
and a smooth re-start of a hot vehicle followed by smooth acceleration
every time and in whatever environmental conditions. Fuels with closely
controlled distillation characteristics, typically represented by a
lower drivability index, enable the vehicle to give the customer the
warm-up drivability that is expected while at the same time meeting
rigorous emissions standards.
Ethanol fuel provides another challenge because of the wide range
of ethanol compositions in the fuels marketplace. Because ethanol
content greatly affects gasoline volatility, the range of ethanol
compositions increases the necessary calibration window and reduces
optimization. Another example is the effect of sulfur in fuel on
emissions performance. Sulfur is a well-known catalyst poison and fuels
with low sulfur contents are essential to meeting in-use emissions
standards. Lastly, in the case of an E85 flex-fuel vehicle,
manufacturers must certify that the vehicle meets the standards on the
entire range of fuel combinations which significantly increases the
engineering workload and the vehicle cost beyond what would be needed
with one fuel.
LEAD TIME
Question 2. In your testimony, you noted that the auto industry
would need sufficient ``lead time'' to comply with legislation
requiring vehicles to run on a higher ethanol blend. What do you
consider sufficient lead time? How long would it take to engineer, and
then begin to manufacture, vehicles that ran on a higher blend?
Answer. Manufacturers typically need about 5 years lead time to
introduce products that are optimized to run on a new fuel blend.
Primarily the lead time is required to optimize the combustion system
for the characteristics of the new fuel to ensure satisfactory
performance and durability. Lead time is also required to develop the
emission control system for that specific fuel. This is especially
important given that very low tailpipe emissions will be required under
LEV3 and Tier 3 regulations. Also, it must be recognized that a
manufacturer cannot redesign its entire product portfolio in a single
year due to limited resources (people, time and money). Realistically,
it would take about 4 additional years to optimize the entire product
portfolio for the new fuel blend.
LIABILITY
Question 3. You alluded to the need to address liability for any
damages that result from higher ethanol blends. Could you explain your
industry's position--or summarize the positions within your industry--
on liability, and how you think liability would ideally be established
for higher ethanol blends?
Answer. Addressing liability for misfueling is one of the most
challenging issues with implementing higher ethanol blends into an
existing market of engine products (vehicle, marine and off-road or
non-road small engines) that were designed, tested, certified and
warranted to E10. Trying to determine whether engine damage, especially
in older vehicles or engines, is attributable to misfueling is
complicated and costly. Fundamentally, no manufacturer wants to be at
odds with a large segment of their customers. Widespread customer
dissatisfaction with its product would be a bad outcome for any
manufacturer, regardless of who is at fault.
Consequently, any move to bifurcate the market with higher blends
of ethanol must be accompanied first and foremost by a serious and
meaningful effort to prevent misfueling. Automakers believe that one of
the significant advantages of a prospective approach to introducing
higher level blends into the national fuel pool is that it gives engine
manufacturers, fuel retailers and other stakeholders the opportunity to
work together with regulators to develop adequate countermeasures to
minimize accidental misfueling.
Nonetheless, no matter what measures are put in place, no mechanism
guarantees that there will not be any misfueling. Automakers know from
experience from the introduction of unleaded gasoline into the market
that some level of misfueling is likely, whether it is intentional or
not. In cases where consumers are inadvertently ignoring warnings or
deliberately circumventing measures to prevent them from using blends
that are not intended for their engines, manufacturers should not be
forced to bear any liability, either for recalls or for damages.
MISFUELING
Question 4. To help minimize the potential for misfueling with E15,
the EPA has proposed a label to warn drivers not to put the fuel into
older vehicles and other non-approved equipment. As proposed, do you
believe that campaign will be sufficient to inform drivers about their
choice of fuels, and sufficient to ensure that drivers do not misfuel?
Answer. In the case of the E15 waiver and the proposed misfueling
rule, EPA's approval of E15 use in some existing vehicles is in direct
conflict with manufacturer recommendations and warranties. Automakers
currently design, test, certify, and warrant all non-FFV vehicles to
E10. Thus, EPA's blanket approval of E15 use in 2001 model year
vehicles and newer will likely cause significant confusion in the
marketplace, regardless of label design or misfueling strategy. It is
true that previous introductions of new fuels--unleaded gasoline,
reformulated gasoline, low sulfur gasoline, ultra-low sulfur diesel
fuel--also faced bifurcated markets and misfueling potential, but there
is a critical distinction here: the new fuels were required only for
new vehicles, which are a small fraction of the market, but they were
all ``backward compatible'' for older vehicle use. In other words, all
vehicles, old as well as new, could use the new fuel without adverse
consequences. This is not the case with E15.
The Alliance views pump labeling as a necessary component of a
misfueling strategy, but by itself, it will be insufficient to prevent
misfueling by consumers, or potential damage to vehicle and non-vehicle
equipment and emission systems. EPA concedes this point by using the
word ``mitigate'' instead of ``prevent.'' The only question, then, is
what will be the extent of the misfueling? EPA should postpone the
introduction of E15 until the overall misfueling approach--including
but not limited to labeling--is well developed, to enable affected
parties such as automakers time to prepare. Such preparations may
include, for example, the development and deployment of communication
materials for customers.
FFV COMMITMENTS
Question 5. It appears that automakers, anticipating greater
volumes of ethanol production, could add flex-fuel capability to their
cars and portray it as a competitive advantage. Please describe the
Alliance's views on commitments to FFV production, as compared to
government mandates. How many of your members have made voluntary
commitments to produce flex-fuel vehicles? Is it reasonable to expect
that more will make commitments in the future?
Answer. As indicated in my testimony, the Alliance is not
supportive of government picking winners and losers among vehicle
technologies. We believe consumers should have the choice to purchase
the vehicles that best suit their needs--whether they live in Alaska or
Florida, in a large city or small town, or drive 5,000 or 15,000 miles
per year.
In 2007, the CEOs of General Motors, Ford and Chrysler stated their
intent to make 50% of their fleets for sale in the US capable of
operating on blends up to E85 by 2012, provided that adequate fuel and
fueling infrastructure exists to make those vehicles desirable to
consumers. The caveat is often forgotten. While no other manufacturers
have made similar public commitments, several others have introduced
FFV models to respond to market demand or regulatory incentives.
If the FFVs produced by the Detroit companies alone actually used
E85 rather than E10, the so-called ``blend wall'' would not exist.
Instead, the average FFV on the road today uses about one tank of E85
per year. There are a variety of reasons for the limited uptake of E85,
including availability of fuel, price and performance relative to a
gallon of E10.
These challenges will not be solved simply by manufacturing more
FFVs, which is why we believe it is time for a comprehensive review of
how best to expand the use of biofuels in our nation's fuel pool. Any
future commitments to produce vehicles with particular features would
be made only in conjunction with a comprehensive and cogent set of
policies ensuring that such vehicles will be a value proposition for
our customers.
FFV COSTS
Question 6. In your testimony, you note that ``the cost of making
vehicles flex fuel capable is also expected to increase in the next few
years as smog-forming emissions requirements are tightened.'' Please
expand on that statement. How much do you think costs will rise?
Answer. California currently has a stringent emissions standard
called PZEV (Partial Zero Emissions Vehicle). An examination of
emissions certification data would show that no OEM has marketed an FFV
certified to this standard. California has indicated that they are
planning on extending standards of this stringency across the whole
fleet, as has EPA. In addition, the new methane emissions standards
have proven quite challenging. Meeting the new standards with E85
certification fuel will require a significant investment in precious
metal and investment in or invention of new hardware. In some cases it
is estimated that the piece cost of an FFV meeting the new standards
could rise by up to $500 and in other cases the cost is unknown because
no technical solution currently exists. These challenges stem from the
physical characteristics of ethanol and E85 and how they affect
emissions in the first 30 seconds of the EPA emissions test.
Responses of Shane Karr to Questions From Senator Tim Johnson
Question 1. My understanding is that the difference between making
a flex fuel vehicle and a standard vehicle is minimal in technology and
cost. Further, you are currently making cars to fit Brazil's FFV
mandate. Why not accelerate the deployment of FFVs here in the United
States? Are there any regulatory hurdles?
Answer. The widespread availability of competitively priced E100 in
Brazil has prompted the Brazilian car-buyer to demand FFVs. Virtually
all spark ignition vehicles produced in Brazil are FFVs. In view of
this success the Brazilian government has not felt it necessary to
mandate the sale of FFVs. In addition, Brazil has substantially
different emissions standards than exist in the U.S. The adoption of
Brazilian emissions standards by the United States and California would
greatly ease the expansion of the FFV production in the U.S. Brazil
sets much less stringent emissions requirements on E100 than exist for
E22. For this reason, the incremental cost impact for E100 emission
controls is negligible in Brazil. Also, on-board diagnostic regulations
in Brazil are less constraining than in North America, further reducing
the cost of FFVs in Brazil relative to the United States. Many have
commented on the widespread marketing of FFVs in Brazil and asked why
these cars cannot be sold here. Those advocates fail to realize that a
variety of state and federal regulations preclude the sale of these
vehicles in the U.S., even if the second fuel tank used in Brazil (a
gasoline tank needed to start the vehicle because of the lower
volatility of E100) was removed.
Question 2. If there are remaining concerns about the approach in
S. 187, what policies could you support to ensure consumers have access
to vehicles that have the flexibility to run on clean, alternative
fuels? Would you support a consumer-based tax credit or rebate similar
to what is available for the purchase of electric vehicles?
Answer. As mentioned in my testimony, the Alliance supports FFVs as
one important technology to reduce our use of imported oil. Your
question implies that FFVs are not available for consumers who want to
purchase them. There are more than 8.2 million FFVs on our nation's
roads, and we are selling close to a million new FFVs each year. There
are a variety of reasons that existing FFVs are not using significant
quantities of E85, including availability of fuel, price and
performance relative to a gallon of E10. These challenges will not be
solved simply by manufacturing more FFVs, which is why we believe it is
time for a comprehensive review of how best to expand the use of
biofuels in our nation's fuel pool.
Consumer-based tax credits, rebates and other incentives (such as
CAFE credits) historically have helped make new technologies viable in
the market. Recognizing that additional financial incentives will be
extremely challenging in light of the significant and appropriate focus
on reducing the deficit, the Alliance would be prepared to work with
you or any other Senator on proposals to expand the use of biofuels.
______
Renewable Fuels Association,
April 18, 2011.
Hon. Jeff Bingaman,
Chairman, Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Hon. Tim Johnson,
U.S. Senate, Washington, DC.
Dear Chairman Bingaman, Ranking Member Murkowski and Senator
Johnson: The Renewable Fuels Association (RFA) appreciates the
opportunity to respond to follow up questions from the April 7, 2011
hearing to review U.S. Department of Energy (DOE) biofuels programs and
biofuels infrastructure issues, and to consider the Biofuels Market
Expansion Act of 2011.
As I stated in my testimony before the Committee, getting more
Americans behind the wheel of a car capable of utilizing higher ethanol
blends is critical to our nation's energy goals and those of the
Renewable Fuels Standard. The RFA is eager to begin this dialogue with
automakers to permanently tear down artificial barriers to ethanol use.
That means more flexible fuel vehicles, more conventional vehicles
using blends above E10, and more blender pumps at gas stations. While
differences in approach may exist, I believe we can find common ground
that meets the needs of both our industries as well as satisfying the
performance and safety needs of American drivers.
In addition to the responses below, I would like to respond to a
line of questioning during the hearing from Ranking Member Murkowski on
biofuels production and water use. The efficiencies adopted by ethanol
producers have led to great improvements in the use of water. According
to a 2010 study published in Biotechnology Letters, the average dry
mill ethanol plant used 2.7 gallons of water per gallon of ethanol
produced in 2008. That is down some 40 percent compared to 2001 and
about half of the average water use in the mid-1990s. Further
reductions in water use are expected in the near term, as new
technologies promise to more efficiently use and recycle the water
required for cooling towers, boilers and other processing components.
Ethanol's water use must be viewed in proper context. Consider that
an average-sized modern ethanol plant uses less water per year than is
used to irrigate a standard 18-hole golf course. Moreover, it takes 40
gallons of water to produce one cup of coffee; 4 gallons for a pound of
hamburger; 11.6 gallons of water to produce a pound of chicken; and,
300 million gallons to produce just one day's worth of the newspapers
across the country. Further, approximately 87 percent of all corn grown
in the U.S. requires no irrigation. Nearly 97 percent of all corn used
at ethanol biorefineries is not irrigated, according to the National
Renewable Energy Laboratory.
These gains in ethanol industry water efficiency stand in contrast
with oil and other energy industries which are seeing their water
profiles worsen. As easy sources of oil are exploited, more marginal
sources of petroleum are needed. These sources, such as tar sands and
oil shale, require far more water than conventional petroleum
extraction and refilling. According to the Pembina Institute, ``For oil
sands mining, approximately 12 barrels of water are needed to produce
each barrel of bitumen in surface mined oil sands operations.''
Additionally, the water is so toxic following this procedure that it
must be held in enormous tailing ponds until it is deemed safe to
release.
Attached please find RFA's responses to questions from Members of
the Committee. If there is any additional information you would like
RFA to provide, please do not hesitate to ask.
Sincerely,
Bob Dinneen,
President & CEO.
Responses of Bob Dinneen to Questions From Senator Murkowski
SHORTFALLS
Question 1. Cellulosic biofuels have been slow to enter commercial
production. When do you believe production will catch up to the annual
volumes listed in the Renewable Fuels Standard?
Answer. There are more than 50 cellulosic and advanced biofuel
demonstration and pilot projects built, under construction or in
scale?up in the United States. There are many more potential projects
under consideration, hinging largely on whether Congress makes clear
that it is standing behind its initial commitment to advanced biofuels.
The technology for cellulosic and advanced biofuels is ready. Companies
have demonstrated success and significantly reduced cost at each stage
of the research, development and scale?up process. The industry is
moving toward deployment of commercial?scale volumes to meet the RFS.
CELLULOSIC PRODUCTION
Question 2. Which company do you project will be the largest
cellulosic ethanol producer in 2011? How many gallons of cellulosic
ethanol will that company produce over the course of the year? Do you
agree with the EPA's assessment that somewhere between 5 million and 17
million gallons will be produced their year?
Answer. The RFS was designed in part to ensure the evolution of
America's biofuels industry is successful. By reducing the standard for
cellulosic biofuels, EPA is accurately reflecting the difficulties
cellulosic biofuel technologies have encountered in obtaining the
capital needed to fully commercialize. However, being aware of this
fact, EPA should have been and must be careful to keep cellulosic
biofuel targets ambitious so as to stimulate the kind of investment
these technologies need to finish commercialization.
LIABILITY
Question 3. During the hearing, liability for E15 and intermediate
ethanol blends emerged as a significant, but unresolved, issue. Can you
share your industry's perspective on liability? You urged the approval
of E15 for all vehicles, which appears to indicate that your industry
expects no damages to result. Would your industry be willing to assume
liability in exchange? Please explain.
Answer. The liability concerns of marketers related to misfueling
should not be summarily dismissed. There is liability already present
every day at the retail station for fuels, safety, spills, and consumer
education. In today's marketplace, gasoline and diesel present the same
educational, safety and misfueling issues for consumers. No additional
or unique challenges will exist with the introduction of new fuels,
like E15.
The RFA will continue to work with marketers to address their
concerns. The RFA has jointly supported legislation with the Petroleum
Marketers Association to provide a pathway forward. In Iowa, Secretary
of Agriculture Bill Northey is working with the industry and insurers
to find a solution that may prove to be a model for other states. The
RFA applauds his effort and any others to address these concerns.
Ultimately, moving beyond E10 is critical to us all. Without expanded
market opportunities, it will be exponentially more challenging to
secure investments in the next generation of ethanol technologies.
LENDING
Question 4. During the financial crisis and economic recession, it
was understandable that most large projects were unable to secure loans
needed to move forward. Has this situation improved over the past year?
Is it any easier to obtain credit for advanced biorefineries today?
Answer. Commercial development of advanced biofuels continues to be
slowed by the recession. There are also acute financing gaps--often
associated with the so?called Valley of Death--that are exacerbated by
an unsettled, policy?driven and largely non?competitive U.S. fuel
marketplace. The ``financing gap'' and ``restricted marketplace''
problems must be addressed in order for our industry to reach its full
potential.
FFV MANDATE
Question 5. You have endorsed a strong flex fuel vehicle mandate,
but it is unclear whether enough biofuel will be produced over the next
20 to 30 years to justify requiring up to 90 percent of vehicles be
able to run on E85. The EIA, for example, forecasts that biofuel
production will reach 24 billion gallons per year in 2022 and 39
billion gallons a year by 2035. As welcome as those increased
production levels would be, is it appropriate to mandate that nearly
all vehicles be able to run on E85, when in most cases that fuel will
not be available?
Answer. Flex fuel vehicles (FFVs) are designed to operate on
ethanol blends up to 85 percent. Blender pumps, offering mid-level
ethanol blends between E10 and E85, provide a unique opportunity for
consumers to benefit from a new array of fuel choices at the pump. With
just one piece of equipment, a petroleum marketer can offer a variety
of new fuels to customers and these customers can select their
preferred formulation with just the touch of a button. Even if a
station does not wish to begin retailing new ethanol fuels immediately,
the infrastructure is in place for the future for ethanol blends beyond
E10.
E85
Question 6. Despite high hopes for E85 stations, and some growth in
their number in recent years, E85 has not helped channel ethanol into
the market to the extent that many expected. Can you offer any insight
into why E85 has been slow to take off, and what would be necessary to
increase its use?
Answer. The market for alternative fuels such as E85 is growing,
driven by many factors, including fluctuating gasoline prices and
energy security. With consumer demand for alternative fuel vehicles
increasing, auto manufacturers are working to produce more FFVs. There
are more than eight million FFVs on the roads today, and automakers
will produce several million more each year. The number of E85 fueling
stations continues to grow nationwide. As of early 2010, there are more
than 2,600 retail stations (out of 160,000 stations nationwide),
offering E85 across the country.
In order for the ethanol and E85 market to grow, we must also
expand the fleet of FFVs able to use ethanol blends above E10. In his
testimony at the April 7th hearing, Shane Karr, Vice President of
Federal Governmental Affairs for the Alliance of Automobile
Manufacturers, also pointed to the need to put more cars on the road
that are approved to run on increased ethanol blends: ``For our part,
automakers would commit to a dialog with Congress and the appropriate
federal agencies to discuss making our future light duty vehicles
capable of running on gasoline/alcohol blends at a level higher than
what is available today at E10, for model years beyond an established
timeframe. The availability of the new fuel should coincide with the
availability of the vehicles that can run on the new fuel, so there is
a market for both.''
REGIONAL VS. NATIONAL APPROACH
Question 7. Given all of the challenges associated with scaling up
biofuels usage--ranging from production costs to compatibility with
vehicles and infrastructure--would it make more sense to focus on a
regional, rather than national approach to deployment? After reaching
the blend wall, would it be more cost effective to grow the market for
biofuels in the Midwest before looking to expand it throughout the rest
of the United States?
Answer. The Midwest has always been quick to embrace and expand the
use of the biofuels that are being produced in the region. Most of the
nation's E85 consumption occurs within the Midwest, and the move to
mid-level blends has already begun in the region. The overwhelming
majority of blender pumps that exist today are in states like
Minnesota, South Dakota, Iowa, and Wisconsin. We believe the Midwest
region will continue to serve as the proving ground for expanded
biofuels usage and an incubator for new bioenergy technologies.
However, nearly 70 percent of the nation's gasoline consumption occurs
in coastal states. Thus, for biofuels to achieve their full potential
in reducing imported oil consumption and stabilizing fuel prices, every
state in the nation should be aggressively taking steps to expand the
market for renewable fuels like ethanol. Additionally, many of the
second generation biofuels facilities that are under development will
be located outside of the Midwest and closer to coastal population
centers. The most economical and efficient use of these second
generation fuels would be in local markets. Accordingly, it is
imperative that the states where these new facilities are being
developed join in the efforts to expand the market for biofuels.
Response of Bob Dinneen to Question From Senator Tim Johnson
Question 1. Consumers make choices about fueling their cars every
day. They know not to put diesel into tanks and they make decisions
about premium, mid-grade and regular based on prices. Can you comment
further on the benefits consumers would see if they have the same type
of choice with ethanol blends?
Answer. In its decision to limit the use of E15 to just 2001 and
new cars and pickups, EPA has denied consumers choice in the type of
fuel they use. Instead, they have chosen to continue giving oil
companies a virtual monopoly over the fueling system. EPA continues to
move in the right direction with respect to increasing ethanol blends,
but challenges still remain.
Ultimately, EPA needs to make E15 available to all vehicles. 2001
and newer cars represent approximately 60 percent of the vehicle fleet.
And while that's a good start and it will grow as newer vehicles
replace the legacy fleet, it still leaves far too many consumers
without an option to use E15 and it undermines the potential
marketplace impact of EPA's decision. The analysis the RFA released
last fall, prepared by the highly regarded automotive engineering firm,
Ricardo, clearly demonstrated there is NO reason not to approve the use
of E15 for vehicles older than 2001. There is no difference in
emissions control equipment, materials compatibility, driveability or
regulatory construct between a 2001 vehicle and an older model that
would justify denying the opportunity to use E15 to all consumers.
A copy of the comprehensive engineering analysis performed by
Ricardo, Inc., an internationally recognized engineering firm, is
attached for the record.*
---------------------------------------------------------------------------
* Document has been retained in committee files.
---------------------------------------------------------------------------
______
Responses of Henry Kelly to Questions From Senator Murkowski
R&D FOCUS
Question 1. In looking at the Department's recent budget requests,
it appears that much of your focus is shifting from ethanol fuels to
drop-in replacements. How advisable do you believe it is for Congress
to consider strong mandates and large investments for ethanol
infrastructure, considering that new fuels may soon emerge that affect
the efficacy of those mandates and investments?
Answer. If federal support for ethanol were totally pulled out at
this time, it would send a very negative signal to many in the
cellulosic ethanol biofuels community and send a signal to others
interested in the future development of other advanced biofuels. The
Department has been a catalyst in terms of long-term federal research
for cellulosic ethanol. The investments have been central to technology
and industry growth as well as industry efforts to meet the Renewable
Fuels Standard requirements. But even with the R&D strides that have
been made over the years, securing cellulosic ethanol's place in the
transportation sector--both as a blend and E85--will require strong
markets for ethanol that are dependent on investments in vehicles,
infrastructure, and safety.
In the near term, we need to be able to deliver ethanol for
blending up to EIS throughout the whole United States. Retail
infrastructure to enable higher level blends (up to E85) for use in
Flex-fuel Vehicles (FFVs) will be required in the Midwest where the
supply of ethanol is the greatest and will likely remain so even after
additional bioftiels enter the market. Drop-in replacements for
petroleum fuels that do not require significant infrastructure
investment can also be an important addition to ethanol if the United
States is to achieve its renewable fuel goals.
The Biomass Program has taken substantial steps to accelerate
cellulosic hydrocarbon biofuels research, development, demonstration,
and deployment (RDD&D) in the past few years, while maintaining robust
R&D and deployment efforts on cellulosic ethanol. Much of our work on
cellulosic ethanol can be directly applied to drop-in fuels or readily
adapted to them, which should translate to faster development and
deployment of drop-in fuels.
SMALL REFINERS STUDY
Question 2. The Energy Policy Act of 2005 directed DOE to complete
an economic impact assessment before small refiners were folded into
the Renewable Fuel Standard. After your Department issued the study in
2009, Congress declared it was not satisfactory, and required DOE to
revise the study. It was due last year, but still has not been
released. In the meantime, the EPA has declared that small refineries
are now subject to the RFS, even without a firm understanding of the
costs that could result. Can you provide an update on this study? When
will it be completed? Do you believe small refineries should be subject
to regulation before its completion?
Answer. As of April 7, the report was in the final review stages at
DOE. The study determined that certain refineries would experience
disproportionate economic hardship if their exemptions were not
extended. Based on the developed metrics and analysis, DOE recommended
that thirteen refineries receive an extension of their exemption. As
explicitly directed by EISA, EPA has notified the 13 affected
refineries that the exemption from the RFS2 provisions has been
extended for a period of 2 years.
BIOCHEMICALS
Question 6. Several companies believe that biochemicals are a
better value proposition than biofuels, especially at the early stages
of development. Has the Department focused on the potential of
biochemicals? Going forward, do you intend to allow biochemical
projects to compete for a greater share of biomass R&D funds than in
the past?
Answer. The Department of Energy Biomass Program's current aim is
to focus on replacing the entire barrel of oil with fuels and chemicals
from cellulosic feedstocks. As a replacement for a large portion of the
barrel of oil, production of cost competitive biofuels will continue to
be the priority of the program because of energy security; however,
there is renewed interest in including opportunities in bioproducts
development subject to appropriations. In fact, the recent ``Integrated
Process Improvements for Biochemical Conversion of Biomass Sugars''
funding opportunity announcement allowed for R&D conversion of biomass
to bioproducts as a part of an integrated biorefinery.
CELLULOSIC COSTS
Question 7. The Department has set a goal of making sure cellulosic
ethanol is ``cost-competitive in the blend market'' by 2012. Can you
describe any progress towards that goal? Do you expect it will be met
next year?
Answer. The Department is on track to meet the goal of cost
competitive cellulosic ethanol by 2012. In 2010, DOE-funded research
and development at our National Labs and in cooperation with the
private sector resulted in a mature modeled cost\1\ of $2.70/gal for
the thermochemical conversion route, which is a 17% improvement over
2009 costs and a 43% improvement over 2007 costs. The biochemical
conversion route improved 13% from 2009 (24% from 2007) with a modeled
cost of $2.77/gal achieved. The technologies are expected to achieve
modeled costs of $2.05-$2.15/gal by 2012, a cost range that is
anticipated to be competitive with gasoline.
---------------------------------------------------------------------------
\1\ Mature Modeled Cost assumes cost and risk reduction over time
as a process becomes more efficient. This is different from first-of-a-
kind costs which are higher as a rule. The Department has design case
reports that describe the ``nth-Plant Assumptions'' in Section 1.4 of
the 2011 ``Process Design and Economics for Biochemical Conversion of
Lignocellulosic Biomass to Ethanol'' (http://
www.nrel.govidocsify11osti/47764.pdf).
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CELLULOSIC PRODUCTION
Question 8. Cellulosic biofuels have been slow to enter commercial
production. Can you provide the Department's best estimate of when
production will catch up to the annual volumes listed in the Renewable
Fuel Standard?
Answer. The cellulosic biofuels industry is a new industry that is
moving rapidly from demonstration scale projects to commercial
facilities. The Department is working to to facilitate this transition
through our Biomass Program (financial assistance grants), the loan
guarantee program (loans for commercial scale facilities), and the
Office of Science (developing fundamental knowledge to support new
technologies). In addition, we have included in our FY12 budget request
a cellulosic biofuels reverse auction which would create a production
incentive to reduce risk and encourage investment for ``pioneer''
cellulosic biofiiels conversion facilities. These actions, together
with the investments being made by the U.S. Department of Agriculture,
provide government support to accelerate the start of this industry.
There is also significant interest from the private sector, the
aviation community, and the Department of Defense in biofuels.
BLENDER PUMPS (I)
Question 9. Agriculture Secretary Vilsack has announced that USDA
will help install 10,000 blender pumps over the next five years. S. 187
authorizes $1 billion for a blender pump program at DOE. Do you believe
it is necessary for two federal departments to carry out programs with
the same goal? Is there an upper limit on the number of blender pumps
that the federal government should help deploy?
Answer. On April 8, 2011, Secretary Vilsack announced in a
statement that a ``renewable energy system'' in the Rural Energy for
America Program (REAP) includes blender pumps. REAP primarily works
with communities with populations of 50,000 or less and the grants
apply only to farmers and small businesses in rural areas. These
communities have fewer vehicles and many of those are typically older
models. DOE recommends that these efforts include all communities,
particularly those with higher populations. DOE has provided assistance
to USDA in the form of technical support that includes safety issues
and outreach and education materials for blender pumps. DOE has not
requested funding for blender pumps in light of Secretary Vilsack's
announcement. Were USDA to lead the blender pump installation program,
DOE would continue its collaboration efforts as needed. With regard to
the upper level of blender pumps that the federal government should
help deploy, we do not have a precise number, but believe that for
these pumps to reach major populations a private manufacturer or
manufacturers will need to capitalize on this business opportunity.
BLENDER PUMPS (II)
Question 10. S. 187 would establish a grants program for blender
pumps within the Department of Energy. Given that the Department's
primary focus is on feedstocks and biorefinery development, do you
believe it is appropriate for the Department to administer this type of
infrastructure deployment program?
Answer. DOE has administered infrastructure projects with fuels
defined by the Energy Policy Act of 1992, better known as alternative
fuels. Since Secretary Vilsack's announcement to install 10,000 blender
pumps, based on its experience with alternative refueling pumps DOE has
provided assistance to USDA with technical support that includes safety
issues and outreach and education material for blender pumps. In light
of Secretary Vilsack's announcement, DOE has not requested funding for
blender pump installation projects. Were USDA to lead the blender pump
installation program, DOE would continue its collaboration efforts as
needed.
ETHANOL PIPELINE (I)
Question 11. S. 187 would amend the loan guarantee programs to add
a new category of eligible project--``renewable fuel pipelines.'' Would
the Department prefer a category that narrow, or instead a more
technology-neutral approach for ``transportation fuel infrastructure''
that could include natural gas pipelines, hydrogen highways, and
perhaps even clusters of battery recharging stations for electric
vehicles?
Answer. The Administration does not have a position on this
proposal.
ETHANOL PIPELINE (II)
Question 12. S. 187 provides 90 days for the Secretary of Energy to
promulgate regulations adding renewable fuel pipelines to the loan
guarantee program. How long does the Department anticipate it would
need to publish a final rule, develop a solicitation, and make any
other programmatic changes or additions necessary to support a new
statutory directive before the Department could begin soliciting
applications? Is 90 days sufficient time?
Answer. This question is difficult to answer definitively and
depends on a number of factors to include, for example: (1) how
detailed the statute may be, (2) the amount of detail required in
analysis and data gathering, (3) the number of outside stakeholders
that are involved and how many comments they provide, (4) and the
length of internal DOE and interagency review. Based on experience, the
Department assumes the process to publish a final rule could take
between 12 to 18 months.
ETHANOL PIPELINE (III)
Question 13. Please list any hurdles that the Department has
identified that could hinder the financing of renewable fuel pipelines
under the Title 17 loan guarantee programs.
Answer. The Department has not undertaken the analysis that would
be required to take an informed position on this issue.
TARIFF
Question 14. Please summarize the administration's position on the
tariff on ethanol imports.
Answer. This issue impacts several U.S. government agencies
including USDA, Office of the U.S. Trade Representative (USTR),
Department of Commerce, and State Department. There is currently no
Administration position on this issue.
Response of Henry Kelly to Question From Senator Stabenow
Question 1. I would like to ask you a question about coordination
and streamlining. I think we all share a common goal on this committee
to find solutions to decrease our dependence on foreign energy sources.
This is a goal that is shared with many other government agencies.
As you know, I chair the Senate Agriculture Committee which
oversees the Department of Agriculture's energy programs. One of my
hopes as we enter Farm Bill discussions on the Ag Committee is to look
at how to increase coordination between USDA and DOE to ensure that we
are making sound investments and not duplicating efforts.
I'm specifically interested in ensuring that we take a
comprehensive look at duplication and streamlining--not just within the
department but across other agencies as well. Can you tell me how DOE
is working with USDA to ensure that we are maximizing our resources and
not duplicating efforts? For example, I know that USDA and DOE work
together on the Biomass Research and Development Initiative (BRDI), and
I would like to know what you are doing to coordinate on other
programs.
Answer. The primary coordination mechanism between the Department
of Energy (DOE), Department of Agriculture (USDA), and other Federal
agencies in the area of biomass energy is under the Biomass R&D Act of
2000 (as amended). The Act consists of three primary efforts: an annual
Initiative solicitation; the Biomass Research and Development Board,
and the Biomass Research and Development Technical Advisory Committee.
The annual solicitation is administered jointly by DOE and USDA, with
staff from both agencies involved in each step of the process,
including drafting the solicitation, announcing the solicitation,
reviewing proposals submitted, and selecting/awarding meritorious
projects. We believe that research programs are well coordinated and we
work together on an as-needed basis for other programs (e.g. loan
guarantee projects, etc)
The Biomass Research and Development Board\2\ is an interagency
collaborative composed of senior decision-makers from federal agencies
and the White House, co-chaired by the USDA and the DOE. USDA and DOE
annually implement the Biomass Research and Development Initiative\3\.
The Board meets quarterly and currently includes members from the DOE,
USDA, Department of the Interior, Department of Transportation,
Department of Defense, the Environmental Protection Agency, the
National Science Foundation, and the White House Office of Science and
Technology Policy.
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\2\ http://www.usbiomassboard.gov/board/board.html
\3\ httP://WWW.USbi0MaSSbOard.g0V/initiatiVe/initiatiVe.htM1
---------------------------------------------------------------------------
The Technical Advisory Committee provides external oversight of
Federal biomass energy coordination by advising the Secretaries of
Energy and Agriculture through the development of annual
recommendations. These recommendations are developed at public,
quarterly meetings during which the Committee interacts directly with
DOE, USDA, and other Federal representatives, as well as members of the
broader, non-public biomass community. The Committee consists of
approximately thirty members from industry, academia, non-profit
organizations, state agencies, and trade associations.
In addition to the formal coordination efforts that take place
through the Board, DOE and USDA coordinate on a regular basis through
other mechanisms. For example, DOE often includes USDA representatives
on programmatic peer review and proposal application review panels, and
vice versa. USDA and DOE/National Laboratory researchers work side-by-
side on a variety of existing and proposed projects, including the
Regional Biomass Energy Feedstock Partnership with the Sun Grant
Initiative and the USDA-sponsored Coordinated Agricultural Project.
Both agencies (in addition to the Department of Defense,
Environmental Protection Agency, National Aeronautics and Space
Administration, National Institutes of Health, National Institute of
Standards and Technology, and the National Science Foundation)
participate on the Metabolic Engineering Working Group to stimulate
increased awareness of this emerging field, which has great promise to
improve the efficiency of biofuels production and to develop new means
for producing advanced biofuels and other bio-based products. The group
identified two major initiatives: announcements of interagency, rather
than agency-specific opportunities for funding research grants, and the
beginnings of a government-wide Metabolic Engineering Project
Inventory.
Responses of Henry Kelly to Questions From Senator Tim Johnson
Question 1. It is my understanding that automakers are moving
toward technologies that rely upon a fuel with high octane in order to
meet the fuel economy targets. Ethanol is the cleanest source of octane
available on the market today. Can you comment on the Administration's
new fuel economy standards and how ethanol's octane benefits might
help?
Answer. Automobile manufacturers are considering a range of
different technologies to meet higher fuel economy standards. Several
of these technologies could benefit from increased octane rating; in
the past, they may have required high octane, but with advancements in
modern engine design and controls, this may not be the case. While
ethanol does increase octane, the finished gasoline will have a
standard minimum octane rating based on its grade (i.e., no one will
sell premium gasoline for the price of regular). Higher octane by
itself does not increase fuel efficiency. Vehicles that do not require
premium fuel will not benefit from increased octane, regardless of the
source of the octane. Therefore, the Department views the primary
benefit of ethanol to be petroleum displacement, rather than impact on
octane.
Question 2. If we don't get behind the blend wall or if we pull
federal support for ethanol as some have suggested, what implications
would that have for developing the next generation of advanced
biofuels? What would it mean in the larger context of our energy
security and dependence on foreign oil?
Answer. If federal support were totally pulled out at this time, it
would send a very negative signal to many in the cellulosic ethanol
biofuels community and send a signal to others interested in the future
development of other advanced biofuels. The Department has been a
catalyst in terms of long-term federal research for cellulosic ethanol.
Most recently, through the American Reinvestment and Recovery Act of
2009 (ARRA), DOE accelerated investment in innovative biorefineries,
providing funding for 18 RD&D projects in addition to the 11 projects
previously funded in 2007 and 2008. DOE is also currently addressing
several key market barriers relevant to the ``Biofuels Market Expansion
Act of 2011,'' including restrictions on higher blends of ethanol in
gasoline, by providing data for vehicle and engine testing that has
helped assess ethanol use above the 10 percent level. DOE is also
working with vehicle manufacturers and has received pledges from
domestic manufacturers to increase the fraction of flexible fuel
vehicles to 50% by 2012. DOE also recognizes the importance of blender
pumps and associated underground storage for these higher ethanol
blends, as well as retrofit kits to upgrade existing fuel pumps to be
compatible with E15.
Within the larger context of energy security and reducing our
nation's dependence on oil, continued support for cellulosic ethanol is
critical. However, in order to reduce petroleum usage, we need to focus
on displacement of the whole barrel, not just the portion that can be
displaced by cellulosic ethanol. Only about 44% of a barrel of crude
oil is used to produce light duty petroleum gasoline. About 25% is used
to produce petroleum diesel fuel and about 17% is used to produce other
petroleum products. Ethanol can be used to address the gasoline
fraction of each barrel, and if ethanol's market is further limited by
the blend wall, then only a fraction of that petroleum can be
displaced. If we reduce total petroleum usage by substituting renewable
fuels in one market, we need to think about how that impacts other
markets. The most obvious issue is that we have to replace diesel and
jet in proportion to gasoline, since their combined volume from a
barrel of crude oil is approximately 1/4 that of gasoline, their
markets are projected to grow significantly faster than that for
gasoline, and refineries are constrained in the proportion of gasoline
and diesel/jet fuel they produce. But other products are important,
too. The largest chunk of the ``other products'' is the petrochemical
industry, virtually all of which is based on crude oil and natural gas.
If we do not replace the ``whole barrel'', we risk creating ensuing
effects that will cause shortages or gluts in other markets, with
additional economic consequences.
Question 3. It seems to me that if we deployed more FFVs and
blender pumps as called for in S. 187, and urged EPA to continue
phasing-out the dirty and carcinogenic aromatics (benzene, toluene, and
xylene) the winner would be the American consumer who would have access
to cleaner, safer, and efficient fuel. Can you comment on the public
health benefits of burning renewable fuels as compared with fossil
fuels?
Answer. The combustion of gasoline generates many air toxic
pollutants. When ethanol is blended with gasoline, the emissions from
vehicles and engines change, with some pollutants increasing (such as
NOx and acetaldehyde) and others decreasing (such as carbon monoxide).
Aromatics and benzene emissions may also be reduced if refiners
reformulate their gasoline to reduce its aromatic content by taking
advantage of the added octane from the ethanol. In addition to changes
in direct emissions it is important to point out that the emissions
from combustion, and the resulting human exposure, are affected by many
factors including chemical reactions, temperature, sunlight, clouds,
wind, and precipitation. In particular, under some conditions the
combustion of higher-level blends of ethanol has been estimated to
increase some harmful emissions (tailpipe and evaporative) relative to
conventional gasoline blends.\4\ Both direct human-health effects and
atmospheric-pollution effects are extremely complex; the ``best'' fuel
may differ from one locality to another, and only continued improvement
of our ability to model and measure these impacts will enable well-
informed policy decisions.
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\4\ http://www.stanford.cdu/group/efmh/jacobson/E85PaperEST0207.pdf
Appendix II
Additional Material Submitted for the Record
----------
Growth Energy,
Washington, DC, April 6, 2011.
Hon. Jeff Bingaman,
Chairman, U.S. Senate, Committee on Energy and Natural Resources, 304
Dirksen Senate Office Building, Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, U.S. Senate, Committee on Energy and Natural Resources,
709 Hart Senate Office Building, Washington, DC.
Dear Chairman Bingaman and Ranking Member Murkowski: As the
country's leading advocate for ethanol, Growth Energy urges the Senate
Committee on Energy and Natural Resources to swiftly approve
legislation to expand biofuel consumption--such as S.187, the Biofuels
Market Expansion Act, a bill introduced by Senators Tom Harkin, Tim
Johnson, Al Franken and Amy Klobuchar. This legislation is designed to
grow domestic demand for biofuels through the easing of market-
restricting regulations and construction of infrastructure to deliver
biofuels directly to consumers.
We applaud the Committee on holding today's hearing, and welcome
the opportunity to discuss the impact that expanding ethanol
infrastructure will have on securing our energy security and improving
consumer choice at the pump. For too long, foreign cartels have
manipulated oil production to the detriment of both our economy and the
security of our nation. This Committee has before it the opportunity to
begin to right the wrongs that have plagued our national energy policy
despite the efforts of the last eight Administrations, dating back to
President Nixon.
As a maturing industry, domestically-produced ethanol can do much
more today to replace foreign oil in our transportation fuels market.
However, if we fail to lift the artificial barriers that block ethanol
from entering the market, we will continue a policy that mandates that
90 percent of our motor fuel be gasoline, two-thirds of which is
derived from foreign oil.
However, we cannot help the American economy or our national
security if ethanol is prevented from entering the market. This starts
with allowing higher levels of ethanol in the fuel supply. The U.S.
Environmental Protection Agency recently answered Growth Energy's Green
Jobs Waiver, a regulatory petition to allow blends of up to 15 percent
ethanol, or E15. After exhaustive and extensive engine testing, the EPA
announced that E15 could be used in all vehicles built since 2001--that
means every auto and light truck built in the last decade, a fleet
which consumes about 75 percent of all fuel in the United States.
Opening this market means increased access for our less-expensive,
American-made, environmentally-friendly fuel. It means that instead of
importing 7 billion gallons of oil from countries like Saudi Arabia,
Yemen or Venezuela, we will use a cleaner, greener, more economical
solution made right here at home. It also will create 136,000 new jobs
in the United States; these are jobs that cannot be outsourced because
they will be at ethanol plants and at the small businesses that are
supported by the $211 million in economic activity generated by the
average 100 million gallon-a-year ethanol plant.
The second step is to require every automobile sold in the U.S. to
be a Flex Fuel vehicle. We applaud domestic automakers for agreeing to
make 50 percent of the passenger vehicle and light truck fleet flex
fuel capable in the 2012 model year. But we believe a further expansion
of Flex Fuel vehicles is warranted. In order to ensure that American
consumers have access to the highest quality vehicles that allow a
consumer to have a full choice at the pump of any gasoline or ethanol
blend, we should require foreign automakers to comply with the path
already laid out by U.S. automakers. This can be done at virtually no
cost as these automakers already do it for the vehicle markets in
foreign nations, such as Brazil, a country that has over 90 percent of
their vehicle fleet flex fuel capable. Producing the same vehicles for
the American market as well would not be a significant burden.
Additionally, every filling station in the United States should be
encouraged to install Flex Fuel pumps--so-called `blender pumps'--that
give the motorists the ability to choose their fuel blend. By
incentivizing the installation of Flex Fuel pumps, we would give the
consumer the first real choice in what kind of fuel they put in their
car. We recommend a combination of infrastructure grants and tax
incentives to gasoline retailers as the most effective way to address
this issue.
If you give a driver a choice between ethanol--an inexpensive,
home-grown, clean option--and regular gasoline, they will choose
American-made ethanol. But for those who wish to use regular gasoline,
they too will have that option. The installation of Flex Fuel pumps is
about giving the consumer a choice, a choice that is currently made for
them by requiring them to put at least 90 percent regular gasoline in
their car.
Growth Energy also continues to support the construction of
renewable fuel pipelines as outlined in the Biofuels Market Expansion
Act. Our economic studies have consistently shown economic value for
renewable fuel shippers, and thus for the American consumer, using a
pipeline versus the existing rail infrastructure. These economic
benefits rise over time as rail tariff rates increase on a congested
rail system, even against the operating costs of maintaining a
pipeline.
To be clear, Growth Energy is seeking simple parity with the oil
and gas industry--we are not asking for the government to build
pipelines, but because of the size and nature of such a project, we are
seeking a federal loan guarantee of 80 percent of the cost in order to
provide the certainty and stability to get the job done. A loan
guarantee will also enable access to affordable debt financing. The
Department of Energy completed a feasibility study in March 2010 and
concluded that a loan guarantee was necessary to construct a renewable
fuel pipeline. Without such a guarantee, the project cannot move
forward.
It is also worth noting that these market infrastructure reforms
will also encourage the development and deployment of next generation
fuels like cellulosic ethanol by creating market space and certainty. A
commitment to the transition is necessary for private market
investments and innovation. The blend wall and petroleum mandate
discourage next generation ethanol.
How significant an impact can ethanol make on gasoline prices with
these market reforms? According to a study conducted jointly by
McKinsey & Co. and the National Renewable Energy Laboratory found that
ethanol reduces gasoline prices by at least 17 cents a gallon. Other
studies have shown a consumer savings of 30 cents. These market reforms
will only increase the level of consumer savings.
Further, the high-oxygen content of ethanol means it is better for
the environment; the Yale Journal of Industrial Ecology published a
peer-reviewed study that found grain ethanol is at least 59 percent
cleaner than conventional gasoline in a full Life Cycle Analysis. And
as the American ethanol industry continues to innovate--by using
renewable energy sources at the plant and precision farming
techniques--we continue to drive more reductions in greenhouse gas
emissions.
Finally, a study completed by the Windmill Group found that as many
as 600,000 American jobs depend on the U.S. ethanol industry. We could
create more jobs, especially in hard-hit rural communities, if
artificial barriers to the market are lifted, and if policy is changed
to encourage the development of infrastructure--particularly the
installation of Flex Fuel pumps--in order to give consumers a choice in
their fuel.
Growth Energy fully supports the Biofuels Market Expansion Act of
2011, S. 187, and encourages the Committee to swiftly approve this bill
and others that would expand biofuels programs and infrastructure.
Thank you in advance for your consideration of our comments. We look
forward to working with the Committee on these important issues.
Sincerely,
Tom Buis CEO,
Growth Energy.
______
Propel,
Redwwod City, CA.
White Paper
ALTERNATIVE FUEL INFRASTRUCTURE DEVELOPMENT
Objective: Modify and expand the existing federal income tax credit to
assist with offsetting the costs associated with the storage
and dispensing of mid/high level renewable ethanol blends used
as alternative fuels.
Outline:
1. The tax credit should be expanded to offset up to 50% of
the total cost of the improvements necessary to store and
dispense renewable alternative fuels, not to exceed $100,000
per site.
2. An applicant should receive the tax credit based on the
entire cost of the alternative fuel improvements, not simply
the incremental cost of the alternative fuel equipment as
currently allowed by the IRS.
3. The alternative fuel infrastructure income tax credit
should be transferable and exempt from the Alternative Minimum
Tax.
a. Transferability will assist the large number of
single store operators who may not have a significant
federal tax liability, and;
b. Many single store owners and others who do have
tax liability are subject to the Alternative Minimum
Tax. Exempting the tax credit from the impact of the
AMT will allow these small operators the ability to
establish alternative fuel infrastructure.
4. The renewable alternative fuel income tax credit may only
be used to offset costs associated with improvements necessary
to store and dispense renewable alternative fuels as defined by
the Secretary of the Dept. of Energy.
5. The tax credit would be subject to recapture rules for
failure to use equipment for alternative fuels for at least 7
years.
WHY NOT A GRANT PROGRAM
Grant programs are onerous for the applicant (62% of convenience
stores are owned by single-store operators), require significant
federal grant management oversight, and often consume more than 18
months to promulgate rules and issue awards. Long term and on-going
grant programs are also subject to annual appropriations which may be
problematic.
Upon Legislative and Executive approval, a federal income tax
credit can be initiated in a short period of time. Furthermore, all
retailers are familiar with quarterly federal income tax reports which
would be used to claim the credit. Financial support would be available
in a timely manner, absent onerous and costly administrative expenses,
and all expenditures would still be subject to IRS audit and oversight.
SUMMARY
Propel supports the extension and modification of the existing
federal alternative fuel income tax credit:
A tax credit program is much easier for the applicant to
understand and process,
requires less federal staff involvement, and is thus less
costly for agency administration,
provides funds in a rapid manner, and
can be used to limit total outlays similar to grant
programs.
______
Petroleum Marketeres Association of America,
Arlington, VA, April 7, 2011.
Hon. Jeff Bingaman,
Chairman, Senate Energy and Natural Resources Committee, U.S. Senate,
Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, Senate Energy Committee, U.S. Senate, Washington, DC.
Re: Letter before the Senate Energy and Natural Resources Committee
Hearing Concerning the Department of Energy biofuel programs, biofuel
infrastructure issues, and the ``Biofuels Market Expansion Act of
2011''
Dear Chairman Bingaman and Ranking Member Murkowski: Many PMAA
members will welcome the opportunity to sell greater ethanol blends,
but concerns arise with the potential unintended consequences that
create liability issues for retailers. PMAA supports expanded use of
ethanol in our nation's fuel supply, however, until legal, regulatory,
and financial concerns are addressed, greater ethanol usage will be
minimal.
PMAA is a national trade association in the petroleum industry
representing 8,000 independent petroleum marketing companies who own
60,000 retail fuel outlets such as gas stations, convenience stores and
truck stops. Additionally, these companies supply motor fuels to 40,000
independently owned retail outlets and heating oil to seven million
households and businesses. Of the 162,000 gasoline stations nationwide,
nearly 97 percent are owned by small businesses. While they may sell a
particular gasoline name brand, they are not owned by the major oil
companies. Therefore, for a small business retailer to make the
necessary upgrades to existing infrastructure to safely and legally
sell greater ethanol blends, they must see an economic opportunity to
market these new fuels.
Before I address the financial hurdles to accomplish USDA's goal to
provide 10,000 blender pumps by 2022 and the ``Biofuels Market
Expansion Act of 2011'' (S. 187), legal and regulatory uncertainties
remain. Motorist misfueling is a great concern. Pay at the pump is very
popular in the U.S. and a gas station or convenience store clerk is not
in a position to stop a motorist from dispensing greater ethanol blends
in an unapproved vehicle. Retailers need confidence that if the
dispenser is labeled as specified by EPA, the retailer will not be held
responsible for motorists' misfueling. Similarly, we need liability
protection for retailers should mid-level ethanol blends damage a
vehicle, so that the retailer will not be held responsible. For
example, some experts believe greater ethanol blends could damage
catalytic converters. The retailer must not be held responsible for
repairs if he/she met every requirement specified by EPA. If EPA
approves E15, they are in essence promising consumers that it will not
damage their car. Retailers must not be held liable if it turns out
that EPA was incorrect.
Another concern relates to underground storage infrastructure. We
need EPA's Office of Underground Storage Tanks (OUST) to publish a list
determining which storage tanks, piping, associated equipment, and
dispensers are acceptable for greater ethanol blends. If a retailer
does due diligence and confirms that his equipment meets EPA's
standards, the retailer will then need protection from legal and
insurance problems resulting from a leak caused by ethanol blends above
ten percent. This topic relates to the Underwriters Laboratory (UL)
certification requirement. Currently, very little existing
infrastructure is UL certified for anything higher than 10 percent
alcohol. If problems arise, we do not want fire officials citing
retailers for not having UL certification. In the same sense, we do not
want insurance companies using the UL certification requirement as a
basis for denying a marketer's claim. Finally, it is unfortunate if the
only way for a retailer to be absolutely certain that his liability is
limited, is to replace all underground storage tanks, piping and
dispensers--a very costly and unlikely scenario without significant tax
and grant programs.
USDA BLENDER PUMP PROGRAM
Some PMAA member companies see the blender pump infrastructure
proposal is a thinly veiled attempt at getting 100 percent of the cost
of dispensers paid for, with little or no thought given to the
underground issues. We are concerned that some retailers will sell E15
due to the price advantage compared to E10 while not confirming that
the underground equipment is compatible with anything over E10.
Additionally, there are concerns that retailers will install blender
pumps in counting on marketer funded state tank funds to cover any
releases. This would increase state tank funds for every marketer even
for the ones that play by the rules in making sure that their
underground equipment is compatible with E15.
EPA'S OFFICE OF UNDERGROUND STORAGE TANKS (OUST) E15 COMPATIBILITY
GUIDANCE
Recently, EPA's Office of Underground Storage Tanks (OUST) released
its Notice of Proposed Guidance (NPG) to interested parties that would
clarify its compatibility requirement for UST systems storing E15. This
is an interim guidance period which is subject to change when EPA
determines what compatibility means in its Notice of Proposed
Rulemaking likely to be issued this summer. Guidance is just a
suggested road map that marketers and states could use to determine the
compatibility of E15 with legacy equipment.
PMAA would like to see the EPA OUST develop a risk-based assessment
tool for legacy UST equipment that could be used to determine system
compatibility. Risk assessments could be based on the age of equipment
in the ground, the type of tank used in the system, such as single
wall, double wall, fiberglass, lined, or steel tank, the type of
piping, leak detection systems and release prevention equipment used in
the system. Once a risk assessment judgment is made on the system, a
compatibility determination can be made. A compatibility finding could
also be conditioned on additional requirements that must be met before
the system qualifies for E-15 service. A risk based system for
determining compatibility would be cost effective and a reliable
indicator of which systems is suitable for E-15 use. For example, if
the federal government's blender pump grant program could also be
directed at investments in electronic leak detection systems, this
could help satisfy compatibility requirements even if a retailer was
uncertain whether piping, glues, adhesives was fully compatible with a
higher ethanol blend. The electronic leak detection would notify a
retailer within a matter of minutes if there was a leak and the
retailer could then take the proper steps to clean up the leak.
Electronic leak detection systems are very effective for quickly
finding a leak underground and would be a cost effective way for
retailers to determine compatibility with mid-level ethanol blends.
BIOFUELS INFRASTRUCTURE GRANTS/TAX CREDITS
Financially speaking, grant programs focused solely on dispensers
is inadequate and can potentially be a public safety concern.
Underground leaks from piping and tanks do occur and it is important
that the proper precautions are taken to ensure that the tank and
piping is compatible to handle E10 plus fuels and that the tank is
thoroughly clean and water is not present in the tank. One underground
storage leak can force a retailer out of business. A $100,000 grant per
site that is applicable to underground storage tanks, piping,
submersible pumps, drop tubes, level sensors, and blender pumps may
encourage retailers to make the necessary upgrades to market greater
ethanol fuels in addition to tax credits. Additionally, marketers must
be reimbursed within 30 to 60 days.
Additionally, the current alternative fuel tax credit must be
increased to a minimum of $250,000 for a potential 50 percent credit
worth $125,000 per site. The credit must be eligible to be carried back
at least 2 years and forward 20 years and must be applicable to blender
pumps and all associated underground infrastructure. The credit must
also be eligible for 100 percent of the cost of a complete blender
pump. This may incentivize the station owner to make the necessary
upgrades to market greater ethanol blends. Additionally, if USDA/DOE
wants to entice a retailer to replace perfectly serviceable
infrastructure currently compatible with E10 (in many cases only one-
third to one-half through the expected useful life), USDA and DOE will
need to provide significant financial assistance.
PMAA looks forward to working with you as the federal government
moves forward with its program to expand ethanol use. Again, PMAA would
like to emphasize that it supports the expanded use of ethanol and is
committed for a sustained and effective marketing plan to convince
retailers that financial incentives are available to help them make the
necessary upgrades to safely and legally sell greater ethanol blends.
Sincerely,
Dan Gilligan.