E85 Expands, and Why it is Good

Recent public perception holds that gas stations have a license to steal. Station owners say that selling gasoline is an expensive and highly competitive business. If you don't believe it, just take a look around the next time you cruise down a busy street. What other industry has four stores selling essentially the same product on every corner of an intersection? Further proof can be found by the recent sell-off of Exxon and ConocoPhillips company owned stations due to reduced margins.

Fuel retailers are discovering that one way to gain a competitive edge is to go 'green' and offer alternative fuels alongside traditional grades of gasoline. E85 ethanol increasingly seems a natural strategy. This is a good thing for stations because it allows evolving beyond fossil fuels without the risk of completely giving up their traditional core products. And it's good for consumers because expanding fueling opportunities will encourage buying E85 ethanol flexible-fuel vehicles.

There are now over six million flexible-fuel capable cars and light trucks on American roads, with manufacturers committed to adding additional models and greater production in coming years. Ford and General Motors are pushing flexible-fuel vehicles (FFVs) heaviest, but Chrysler, Mercedes, and Nissan also offer models that are E85 compatible. That drives demand. Plus, with higher fuel prices and uncertain petroleum supplies, consumers are actively looking for alternatives.

Availability of E85 is improving but is still limited in most markets. There are currently about 1,750 stations in the United States offering E85, compared to nearly 200,000 gasoline retailers in the United States. That's a huge disparity. Still, building the necessary infrastructure to meet additional E85 demand is relatively straightforward.

Ethanol is a liquid fuel stored primarily in underground tanks and dispensed through a pump, hose, and nozzle just like gasoline. Unlike some motor fuel alternatives, the experience of fueling with E85 is no different than filling up with gasoline.

Even with a growing consumer desire for ethanol, fuel retailers need a solid business case for adding the additional capacity and hardware to handle fuels other than gasoline. The National Renewable Energy Laboratory (NREL) has recently provided this with a new study titled the "E85 Retail Business Case," which helps fuel retailers understand the costs and profit potential of adding E85 to their existing pump islands.

There are several routes a station owner can take to add E85. The most obvious is to install a new, dedicated underground tank and pump for E85. This direction is clearly the most expensive option, with hardware and installation costs estimated by NREL at about $60,000. Another way to go is to convert an existing tank and pump to E85. That requires cleaning the tank and replacing or retrofitting the current gasoline hardware and pump. Total cost is estimated to be about a third of that involved in adding an all-new E85 pump and tank, or $20,000 for the cleaning and conversion. The annual cost to maintain an E85 pump is estimated at $2,000.

Some fuel retailers may find this an attractive alternative if they have a low volume grade of gasoline. Say, for example, a gas station has a third tank for mid-grade gasoline that doesn't sell as well as regular or premium. That mid-grade pump and tank can be converted to E85, without impacting the ability to deliver regular and premium grades to straight gasoline customers. In this case, says NREL, it's important to differentiate the E85 pump from the gasoline pumps with special graphics, different color hoses, and so on to prevent motorists from confusing it with gasoline. Plus, selling E85 is a way to draw new customers and boost a station's image of being environmentally conscious and responsible.

Obviously, every scenario will be different, but in the NREL model paying for a new fuel storage tank will take roughly three times longer for payback than converting an existing tank. This is where volume and profit margin of E85 sales come into play. Greater sales yield a quicker payback, as does a higher profit margin on ethanol. However, since E85 delivers lower fuel economy than gasoline due to lower energy density, consumers will expect to pay less per gallon to make up the difference. According to a University of Minnesota study, a 20 percent price differential between gasoline and E85 delivers maximum profit through a balance of high volume and a good margin. The study shows that the green allure of E85 alone isn't enough, and when the price of gasoline and E85 are the same, E85 sales screech to a halt.

According to the Clean Cities Coalition, the business case for installing E85 at retail stations is also bolstered with the availability of federal infrastructure tax credits available as incentives. Section 1342 of the Energy Policy Act of 2005 allows a credit for 30 percent of the infrastructure cost, up to a $30,000 maximum, through December 2009. With the promise of low-cost cellulosic ethanol breakthroughs on the horizon, the business case for adding E85 grows increasingly stronger every day.