By Jim Snyder
Posted: 12/02/08 06:10 PM [ET]

Their stocks battered, ethanol makers are lobbying Congress and the administration to lift a cap that limits the amount of the corn-based fuel that can be blended with gasoline.

“If our country is serious about energy independence, we need to give domestic energy access to the market,” said Jeff Broin, CEO of Poet, a large ethanol producer.

Poet is one of several ethanol makers lobbying Congress and the administration to provide immediate relief from the cap in part to help the industry get through what Broin describes as “difficult economic times.”

Ethanol blends are now limited to 10 percent of the total fuel. Higher blends require a waiver from the Environmental Protection Agency (EPA). One waiver was granted for a blend of fuel that is 85 percent ethanol — the so-called E-85 — but its use is not widespread and is limited to special “flex-fuel” vehicles specially designed to handle higher ethanol contents. Ethanol is more corrosive than gasoline.

The goal of ethanol makers is to win approval of intermediate blends like E-15 and E-20.

While the government supports the domestic ethanol industry through tax breaks, tariff protections and a production mandate, ethanol producers have been hammered in the marketplace by high corn prices and tight credit markets.

Most ethanol producers are private companies, but the stocks of ones that are public have plummeted in the past year. Vera Sun, the largest ethanol producer, has filed for bankruptcy protection.

“The majority of the equity in the ethanol industry has been wiped out in the last 12 months,” said Todd Alexander, an attorney with Chadbourne and Parke who tracks the ethanol industry.

A year ago, Congress moved to grow the market for ethanol and other gasoline alternatives by adopting a renewable fuels standard (RFS) that requires 15 billion gallons of corn-based ethanol to be produced annually by 2015. By 2022, the RFS anticipates that another 22 billion gallons of next-generation alternative fuels like ethanol will be produced from cellulosic plant fiber each year.

The 15 billion gallon limit was based on how much ethanol could be blended under the 10 percent blending cap. Gasoline consumption was anticipated to grow to 150 billion gallons a year. Some loosening of the cap to accommodate blends like E-15 or E-20 has always been anticipated. But the question is how quickly those blends should be allowed in the marketplace.

The push by the ethanol industry is opposed by small engine makers, oil refiners and some environmental groups that worry corn-based ethanol does more environmental harm than good and want to limit production.

Kris Kiser, a spokesman for an umbrella group of manufacturing organizations called ALL Safe, said higher ethanol blends are “a real concern for us.”

Ethanol burns hotter than gasoline and can damage small engines in particular, Kiser said. It also presents a safety risk, he said.

Ethanol makers dispute the contention that blends higher than E-10 present any hazards, and say studies show that small engines can handle higher blends.

But manufacturers lobbied successfully for language to be added to the Energy Independence and Security Act specifying that higher blends have to be approved by the EPA after a vigorous testing process.

Kiser said the concern is that corn-based ethanol producers are lobbying to circumvent those studies.

“This is in its infancy and you already have people trying to get around it,” he said.

Ethanol makers already say they are bumping up against the blend limit. Theoretically, E-10 blends could accommodate a total of 15 billion gallons of corn-based ethanol. Because some regions of the country use blends that are less than 10 percent ethanol, the total production limit of the E-10 limit is actually around 13 billion gallons, Broin said.

“The rule is in conflict with the law,” Broin said. He said his company is lobbying to remove the 10 percent cap either by an executive order or through legislation.

The 10 percent cap not only hurts corn-based ethanol, but development of the next-generation fuels that are expected to be much cleaner and release fewer greenhouse gas emissions than either conventional gasoline or today’s ethanol, Broin said.

“Investment [into cellulosic ethanol] will be nonexistent because there is no marketplace for it,” Broin said.

But another obstacle is manufacturing warranties that would be voided if consumers use a higher ethanol blend. Alexander of Chadbourne and Parke said ethanol makers also have to convince automakers to extend warranties for drivers who use E-15 or E-20. If they aren’t extended, drivers will be reluctant to buy those blends.

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