E15 Summer Waiver: Key Questions About the Market

  John Eichberger |  April 14, 2022

This week, the Biden Administration announced its intention to use emergency waiver authority to allow for the summer-time sale of the fuel E15, a mixture of gasoline and up to 15% ethanol. The sale of E15 during the summer months is currently prohibited due to environmental regulations. The goal of this action is to provide a lower price fuel option for consumers and encourage more retail facilities to offer the fuel. Following this announcement, the Fuels Institute took a look at the E15 market to better understand what impact this decision might have on fuel supply and prices and to provide some additional insights on the transportation energy market.

Why can we not sell E15 in the summer?

The answer to this goes back 22 years to the Clean Air Act Amendments of 1990. During the development of that legislation, Congress recognized the potential value of ethanol as a renewable fuel product that could displace some hydrocarbon fuels, reduce emissions, boost octane and potentially reduce costs. However, ethanol’s chemical properties increase the evaporative potential of gasoline when blended at lower concentrations.  (The evaporative potential is measured in terms of Reid vapor pressure, or RVP, and reported as pressure in pounds per square inch, or PSI.)

We care about the RVP of gasoline because warmer temperatures increase evaporative emissions and contribute to more air pollution. Therefore, the Environmental Protection Agency requires gasoline during the summer months to be manufactured with a lower RVP to reduce emissions and benefit air quality. When Congress considered the future market for ethanol back in 1990, ethanol was typically blended at a volume of 10%. This concentration results in an increase of RVP equal to approximately one pound. Congress therefore included a provision in the Clean Air Act authorizing gasoline blended with 9% - 10% ethanol to exceed the regulatory RVP limit by 1 PSI. (There are exclusions to this, but in general this provision applies to two-thirds of the nation.)

Fast-forward to 2011 and the ethanol industry was successful in getting a partial authorization to blend gasoline with up to 15% ethanol. However, the Clean Air Act does not recognize E15 for purposes of the RVP waiver because it did not exist in 1990. Therefore, E15 is effectively prohibited from being sold during the summer months unless the gasoline into which it is blended is produced with a lower RVP to accommodate the RVP increase. This lower RVP gasoline is not required for the nearly ubiquitous E10, and with currently low volume demand for E15, refiners have had no incentive to produce a gasoline to meet this requirement.

Should we be able to sell E15 in the summer?

This is a very different question. The regulations developed at the direction of Congress in the Clean Air Act are clear – but they are also outdated and inconsistent with science. E15 in fact increases the RVP of gasoline less than E10 – as the volume of ethanol increases, its impact on evaporation goes down. But the law only provides the RVP waiver to E10 – again, this is because in 1990 no one anticipated the existence of E15.

Enter the Trump Administration. On May 31, 2019, the EPA signed a rule authorizing the sale of E15 year-round, seeking to eliminate this outdated restriction. However, on July 2, 2021, the U.S. Court of Appeals reversed this action stating that Congress explicitly restricted the waiver to fuels containing 9% - 10% ethanol and that EPA did not have the authority to change this provision. The key takeaway from this ruling is that Congress must take action to revise the Clean Air Act. Doing this is a significant challenge since it opens the door to other efforts to change the Act from those who think it is not aggressive enough as well as those who think it is overly burdensome. Given the current political divide, the prospects for Congressional action appear to be relatively dim.

Consequently, since the ruling, staff at EPA and ethanol industry advocates have been seeking a path forward to enable year-round sales of E15. The announcement this week seems to be the option determined to be the most viable.

Can E15 lower pump prices?

The short answer is yes.  When the Chicago Board of Trade closed on April 13, 2022, ethanol was trading for $2.137 per gallon. At the same time, gasoline (reported as RBOB) was trading for $3.29. At these prices, the wholesale price of E15 would be 5.7 cents per gallon lower than E10.  Here is how the economics play out in terms of the wholesale price of fuel: 

Product Gasoline Ethanol Wholesale Price
E10 $2.961 $0.214 $3.175
E15 $2.797 $0.321 $3.118

But this is only part of the story. Because ethanol satisfies the obligations of the federal Renewable Fuel Standard (RFS), each gallon is assigned a renewable identification number (RIN) and when blended with gasoline generates a credit. These credits can be sold to refiners to satisfy their obligation. The blender, quite often the retail company, can then use the value of these RINs to either reduce prices at the pump or supplement its profitability or a combination of each.  RIN values can be quite volatile, ranging from $0.65 to $1.65 in 2021. Assuming RINs are valued at $1.10 (just for illustration purposes) and assuming the retailer applies the RIN credit to the retail price (which is not guaranteed or an easy thing to do), the price differential between the price advantage of E15 could expand to about 11.2 cents per gallon.

Product Wholesale Price RIN Value Adjusted Price
E10 $3.175 $0.110 $3.065
E15 $3.118 $0.165 $2.953

Will the waiver result in more E15 sold this summer?

The lack of the RVP allowance for E15 is a significant barrier to the market expansion of E15. However, from anecdotal information provided by several retailers it has not really affected volumetric sales from stations that offer the product. EPA has used it discretion to not actively enforce the RVP restriction on E15 and many retailers have continued to sell it during the summer months. While some have applied stickers to their dispensers saying that E15 in those months is only for flex fuel vehicles, others have chosen to not make that distinction.

That said, the issuance of an official waiver provides greater security to fuel retailers that they will not be subject to any enforcement action. It also protects them from a private lawsuit. This is an angle many don’t recognize – the Clean Air Act includes a provision through which an individual may sue a company for a violation even if EPA has not taken action. By officially waiving the restriction, the retailer should be protected from this potential liability.

Will the waiver result in more stores offering E15?

Most likely not. Retailers who have not entered the E15 market have chosen their path for a variety of reasons and, while the summer restriction may be among them, a temporary emergency waiver is unlikely to change their minds. For a retailer to offer E15, they may have to invest in new equipment to ensure they satisfy compatibility requirements – not all tanks, pipes and dispensers are legally able to accommodate E15. A temporary emergency waiver may not provide enough regulatory certainty to justify such an investment. For retailers who already have compatible equipment but have still chosen to not offer E15, the waiver may be insufficient to influence their business strategy.

How can ethanol more effectively benefit the market?

The waiver announced this week is being issued largely in response to increased prices as the pump, and ethanol can have a positive influence on this situation as demonstrated above. But ethanol also represents an opportunity to lower the carbon emissions associated with transportation.

Policy makers and industry leaders have determined that decarbonizing the transportation sector should be a priority, but how we address emissions from the existing fleet and future internal combustion engine vehicles (ICEV) is a daunting task. The most viable option right now is to reduce the carbon in the fuel these vehicles consume.

According to the California Air Resources Board, the carbon intensity of ethanol is about 30% lower than gasoline and recent improvements in production processes have improved upon that advantage. A pending report from the Fuels Institute looks even further into the carbon benefits of biofuels, which may be amplified greatly through pending carbon capture and sequestration investments.

Unfortunately, regulations limit ethanol blend ratios primarily to 10% and, thereby, limit the carbon benefits that might be available. Increasing the sale of E15 from more retail facilities and opening the door to additional ethanol blend levels can increase the carbon mitigation contribution from ethanol.

This is not as easy as it sounds, however. Doing so will require a variety of regulatory changes as well as investments in fuel distribution infrastructure to accommodate higher blends. In addition, not all vehicles were designed to operate on these higher blends, so additional effort would be required to ensure the right fuel is used in the right vehicles. But if reducing carbon is a priority, then steps should be made to provide a lower carbon fuel, whether it be ethanol-based or not.

The bottom line is that ICEVs represent 99% of the vehicles in the United States and will continue to be a significant part of the transportation sector for decades. With 73% of ICEV greenhouse gas emissions generated during the combustion of fuel, the best way to reduce carbon emissions is by reducing the carbon intensity of the fuel.

The Fuels Institute is researching various paths that can lead to lower carbon emissions from the transportation sector. It is critical that the right solutions be applied to the right vehicle applications to expedite emissions reductions and benefit the end user. Ethanol has an important role in this effort – the outstanding question is how we can best leverage the opportunities is represents.