Green Gasoline

MICHAEL GARRY

In their efforts to run environmentally progressive companies and sell products that promote a green lifestyle, some food retailers have ventured into a complex and contentious area — selling E85 gasoline, which contains from 70% to 85% ethanol.

Currently, about 122 outlets operated by food retailers (including supermarkets and convenience stores) offer E85 gasoline at their fuel stations. In total, about 2,200 fuel retailers sell E85 in the U.S., with a heavy concentration in the ethanol-friendly Midwest, out of a universe of 170,000 fuel outlets.

According to the Department of Energy, Kroger is the leading purveyor of E85 among food retailers, with 48 outlets, most of them in Ohio and Texas. Meijer is second with 42 E85 outlets in Michigan, Ohio and Illinois; H.E. Butt Grocery has 11 E85 outlets in Texas; and eight of Giant Eagle's GetGo convenience stores offer E85. The rest of the E85 food retailers, including Schnuck Markets, Hy-Vee, Woodman's, Hansen's IGA, Martin's IGA and Martin's Super Market, offer it in one to three outlets.

On its website, Kroger, Cincinnati, states that it is committed to making renewable, domestic fuel available for customers who choose to use it. “We are also exploring additional opportunities to offer customers E85 fuel throughout the U.S. as consumer demand grows,” the site says. “We believe that demand will grow as alternative fuel becomes more conveniently available.”

Daniel Donovan, a spokesman for Giant Eagle, said that while the chain's alternative fuel offerings currently only make up a small percentage of overall fuel sales, “they present a unique point of difference for us by providing a service to those customers interested in the offerings.” In the future, he added, “we will continue to evaluate opportunities to expand our alternative fuel offerings, as well as opportunities to better promote the offering at our current sites.”

Retailers that sell E85 must invest in special equipment. The DOE estimates that a new tank and a new or retrofit dispenser cost between $50,000 and $70,000; converting an existing tank, plus a new or retrofit dispenser, runs between $5,000 and $30,000. For their part, consumers need a flex-fuel vehicle to use E85; about 4% of cars on the road fall into that category, though the percentage is expected to grow over the next few years.

E85 represents only 1% to 1.5% of the ethanol produced in the U.S., according to Robert White, director of market development, Renewable Fuels Association (RFA), Omaha, Neb. The rest of the ethanol is used in most conventional gasoline, albeit in much smaller concentrations — typically E10, containing 10% ethanol and 90% gasoline.

In 2009, the ethanol industry has petitioned the Environmental Protection Agency to allow blends up to E15, but last month the EPA delayed making that decision.

Ethanol gasoline of any variety has been the center of a sharp debate pitting the ethanol industry on one side and a variety of groups on the other, including the Grocery Manufacturers of America and the Environmental Working Group. The ethanol industry positions gasoline blended with ethanol as a greener fuel generating fewer greenhouse gas emissions than regular gas while lessening the dependence of the U.S. economy on foreign oil. But because U.S. ethanol is currently derived from corn, GMA has pointed to the upward pressure on corn and food commodity prices, while environmental groups contend that ethanol production does not contribute positively to the environment.

But the U.S. government is supporting the production of ethanol with tax incentives and production mandates; 36 billion gallons of renewable fuel must be added to the gas supply annually by 2022, with a maximum of 15 billion gallons coming from corn by 2015. To make up the difference, major research efforts are focused on developing alternative sources of ethanol that would reduce or eliminate the need to use corn, and alleviate pricing concerns in the food industry.

Complicating the issue for retailers is that the equipment needed to sell E85 lost its certification from Underwriters Laboratory (UL) three years ago. This has left retailers selling E85 with some potential legal liability, according to the RFA, and has prevented some retailers from entering the market.

SUPPORTING LOCAL FARMERS

Hansen's IGA, Bangor, Wis., which operates five supermarkets, offers E85 at two locations (a third was recently converted from E85 to diesel fuel). Hansen's replaced premium gas with E85 dispensers at those locations. “We're trying to support local corn farmers, who are our customer base, and there's an ethanol plant in our area,” said Greg Hansen, son of owner Leo Hansen. Hansen's has offered E85 for about three years.

But E85 represents only about 5% of sales at the Hansen's fuel stations that offer it. “It's not a big item and it's not growing,” said Hansen. “There's not enough of a price difference with regular gasoline.” He does not plan to install E85 pumps at his other locations. Still, Hansen has received positive comments from customers for carrying E85. “We've gotten more benefit PR-wise,” he added.

Because the gas mileage derived from E85 is about 20% lower than conventional gasoline, consumers need E85 to cost about 25% less than conventional gas to be economically advantageous, Hansen said. But the price of E85 has generally been from 10% to 15% lower at Hansen's gas stations (it was 8% lower nationally in late December, according to E85prices.com). Pricing was more favorable about a year ago, when interest in E85 peaked, he said.

Woodman's Markets, a 12-store food retailer based in Janesville, Wis., sells E85 at two stores, one in Milwaukee (installed in 2008) and one in N. Aurora, Ill. (installed in 2003). Clint Woodman, son of owner Phil Woodman, also observed that E85 “doesn't seem to sell very well, unless there's a big price differential, and that only happens every so often when the price of regular gas goes way up.”

Woodman's first E85 station is near a car dealership that requested the E85 to service its flex-fuel vehicles, but the second station sells E85 “because it's the right thing to do,” said Woodman. “We're supporting local ethanol producers and giving customers the option.”

RFA's White pointed out that, although sales of E85 may not be great, they may be better than the alternative, such as premium fuel. Moreover, he said, E85 sales will be needed over the next 12 years to meet the government's 36-billion-gallon mandate by 2022. E10 alone will not be sufficient to meet the government's mandated production level.

While more than half of the 2,200 E85 fuel retailers employ a stand-alone E85 fuel dispenser that does not dispense other fuels, the rest use a variant of that design, said RFA's White. “We've seen a distinct change [from the stand-alone model] in the last few years.” About 300 outlets now have a multi-product dispenser that sells various conventional unleaded gas options plus E85. About 500 stations employ a “blender pump” that blends its own E10 and E85 fuel, while another 200 or so use a blender pump that blends E10 and a variety of “mid-level blends (E20, E30 and E50) as well as E85.

The advantage of using a multi-product dispenser is that more consumers will use it than will use a stand-alone E85 dispenser, giving the retailer a better return on investment, said White. Moreover, retailers that use blended pumps get a “blender credit” of 45 cents per gallon of ethanol from the government, enabling them to lower their prices and derive a better margin.

LEGAL LIABILITY

The biggest hurdle to retail sales of E85, said White, remains the decision by UL in 2006 to decertify all fuel dispensers providing fuel with more than 10% ethanol.

Without that certification, “retailers are running the risk of extensive liability,” said John Eichberger, vice president of government relations for the National Association of Convenience Stores, Alexandria, Va. “They are violating OSHA regulations. Legal liability is a dark cloud over this industry.” Liability could also be an issue if the EPA approves E15 blends.

To date, however, no retailer has been sued over E85, Eichberger acknowledged. Moreover, because most E85 fuel stations had been operational for years without any failures or leaks, state and local fire marshals have continued to let retailers operate the pumps until UL recertifies them, said White; he expects that by April or May 2010, “we will have UL-certified E85 dispensers.”

White acknowledged that the decertification by UL has held back the growth of E85 stations. While the decertification may not be much of a concern for a small retailer, some major chains “could never get that through their legal department,” he said. (Wal-Mart, for example, has not yet installed E85 pumps despite reports a few years ago that it was thinking of doing so.)

Thus, the growth in E85 over the past few years has been modest, with the number of new E85 stations at about 300 per year, bringing the current total to 2,200. “If we didn't have the UL situation, the number would be close to 5,000 instead,” said White. “Once the certification is complete, the flood gates will open.”