Ethanol Blend Wall Fast Approaching

The Energy Information Administration (EIA), in its July 8 weekly petroleum report, predicts that the ethanol market will reach the so-called “blend wall” by early 2011. This is the point at which the U.S. ethanol market will be fully saturated.

The Environmental Protection Agency (EPA) regulates the maximum amount of ethanol that may be blended into gasoline for use in conventional engines under the Clean Air Act. Currently, the maximum blend rate is set at ten percent (E-10) for vehicles with conventional engines. Flex fuel vehicles can use either gasoline or much higher ethanol blends – up to 85 percent (E-85). More than seven million flex fuel vehicles are on the road today. However, due to limited distribution of E-85 (there are only 1,900 pumps nationwide), most flex fuel vehicles run on E-10 or less, and E-85 sales constitute less than two percent of the total ethanol market. The EIA estimates that ethanol currently replaces about 9.2 percent of the nation’s gasoline supply. The “blend wall” will be reached when ethanol constitutes a little more than ten percent of the gasoline supply at an annual ethanol production rate of about 13.5 billion gallons.

The blend wall presents a significant problem for many second generation biofuels producers who are now seeking financing to build advanced cellulosic ethanol biorefineries. If the market is staturated, they may not have any place to sell their product. This kind of uncertainty adds to the challenge of finding financing. As such, the blend wall could also stand in the way of meeting the federal renewable fuel standard of 36 billion gallons per year by 2022.

There are a number of ways to address the blend wall problem: 1) produce other biofuels instead of ethanol, such as biobutanol or bio-based gasoline, which can be used in conventional engines; 2) increase demand for E-85 by encouraging increased consumer demand, expanding the number of E-85 blender pumps nationwide, and producing more flex fuel vehicles; or 3) change the EPA’s ethanol fuel blending standard to a higher ratio.

Companies such as Gevo, Butamax, and Cobalt Technologies are pursuing biobutanol production technologies. Legislators in Congress are pursuing the second option in legislation such as the Consumer Fuels Choice Act (H.R. 5632) to subsidize the installation of ethanol blender pumps, the Consumer Vehicle Choice Act (H.R. 5633) to mandate that 90 percent of all new light vehicles (except electric vehicles) be flex fuel vehicles by the 2013 model year, and companion legislation in the Senate, the CHOICE Act (S. 1627).

However, the third approach has been the focus of much activity (and, for the ethanol industry, much frustration) in the past year. In April 2009, the ethanol industry formally asked EPA to increase the ethanol blending limit to 15 percent (E-15). Since then, the EPA and the Department of Energy have been testing vehicle engine and emissions performance at higher ethanol blend rates to see if the standard can be changed without harm to public health or consumers. The EPA is expected to make a decision on the industry’s request later this fall. For the latest information from EPA, click here.