1

A n Assessment of the Impact of RIN Prices on the Retail Price of E85

Dallas Burkholder, Office of Transportation and Air Quality, US EPA

November 2015

Executive Summary

On June 10 , 2015 EPA published proposed volume standards for 2014

– 2016 that envisioned reductions from statutory target volumes for total renewable fuel, advanced biofuel, and cellulosic biofuel

. The proposed reductions for advanced and total renewable fuel were based on the use of both the cellulosic and general waiver auth orities, including in the latter case a proposed determination that there would be an “ inadequate domestic supply ” of renewable fuels to meet the statutory target volumes. EPA proposed to define “inadequate domestic supply” as including an assessment of bo th the potential to produce or import renewable fuel and the ability of the market to supply the renewable fuels to vehicles that can consume them. In comments on the proposed rule many renewable fuel supporters claimed that EPA had significantly under

- est imated the quantity of renewable
fuel that can be supplied to vehicles 2016. In particular many stated that the potential for
E85 sales volumes was far greater than EPA had considered in our table of potential scenarios. These parties often cited the ability for higher RIN prices to enable a reduction in the retail price of E85, and for the lowered retail price of E85 to subsequently inc rease the
sales volumes of E85.

The purpose of this docu ment is to explore the available data to evaluate the impact that RIN prices have on the price of E85. This document will focus on available data from 2013, when D6 RIN prices first rose above a few cents per gallon, through the most recent
available data (July 2015)

. In reviewing the ava ilable data we conclude that E85 wholesalers and/or r etail station operators appear to be seeking to maximize their profits from E85 sales, rather than seeking to maximize E85 sales volumes

. The result is that retail E85 pr ices only partially reflect the potential discount enabled by higher RIN prices. This is
consistent with what would be expect ed in an E85 marketplace that is largely non

competitive. The impact that the retail price of E85 has on the sales volumes of E85 h as also been evaluated by EPA in a separate document. 1

1 “ Correlating E85 cons umption volumes with E85 price,” memorandum from David Korotney to docket EPA

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Background

E85 is a transportation fuel consisting of 51%

- 83% ethanol, with the remainder comprised of gasoline and gasoline blendstocks

. There are currently approximately 3,000
fuel retail stations in the United States that sell E85

, 2 and approximately 14. 9 million flexible fuel vehicles (FFVs) that can operate on the fuel. 3 While this represents only a portion of all of the refueling stati ons (2%) and vehicles ( 6.3 %) nationwide, it nevertheless represents a significant opportunity for the consumption of E85 . For example, if on average each FFV refueled on E85 25 % of the time, E85 sales could exceed 5 b illion gallons per

year. 4

Despite this potential for significant volumes of E85 sales, actual sales are estimated to be approximately 150 million gallons in 2014. 5 There are many reasons for the large gap
between the theoretical maximum sales volume of E85 and the actual volume of E85 sold, including limited access to refueling station s offering E85, lack of awareness on the part of FFV owners that they have an FFV that can operate on E85, and the need for a higher refueling frequency due to lower fuel economy for vehicle s when oper ating on E85. We believe that a significant challenge to increasing sales of E85 is that fuel cost s are generally higher for FFV owners purchasing E85vs. E10. 6 Several parties have suggested that higher RIN prices are likely to result in lower retail price s for E85, which will in turn lead to increased sales volume of E85 through existing infrastructure, as well as the expansion of E85 infrastructure. This document explains the mechanism by which higher RIN prices can lead to lower E85 prices and examines t he available RIN price and E85 retail pricing data to assess the extent to which these theoretical dynamics are reflected in the current market. The connection between E85 retail price and sales volumes is explored by EPA in a separate document. 7

RIN Prices and E85 Retail Prices: The Theory

2 Data from AFDC Alternative Fueling Station Locator. Includes both public and private E85 stations. Accessed November 6, 2015. <http://www.afdc.energy.gov/locator/stations/results?utf8=%E2%9C%93&location=&fuel=E85&private=false&pri vate=true&planned=false&owner=all&payment=all&radius=false&radius_miles=5&e85_has_blender_pump=false >

3 Sum of the Ethanol

- Fl ex Fuel ICE Light

- Duty Vehicle Stock (Cars and Light Trucks) from the Energy Information
Administration ’s 2015 Annual Energy Outlook

4 “E85: A Market Performance Analysis and Forecast” Fuels Institute

5 “ Estimating E85 Consumption in 2013 and 2014

, ” memorandum from Dallas Burkholder to docket EPA

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6 While E85 is generally offered at a lower price per gallon than E10, the lower per gallon price is generally insufficient to make up for the approximately 22% lower energy content of a gal lon of E85 relative to a gallon of
E10.

7 “ Correlating E85 consumption volumes with E85 price, ” memorandum from David Korotney to docket EPA

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In theory, high RIN prices can reduce the price of E85 at retail by effectively reducing the cost of the ethanol component of the fuel

. RINs are generated by ethanol producers and assigned to ethanol produced at reg istered facilities using approved renewable fuel production pathways . The RINs are initially sold along with the ethanol, but may be separated by obligated parties that purchase the ethanol, or by blenders who purchase
ethanol and blend it with petroleum products to produce transportation fuel, such as E85 or E10. If, for example, a fuel blender purchases a gallon of ethan ol with an attached RIN for $2.0 0, separates the RIN (after blending the ethanol to produce a transportation fuel) an d sells the RIN to an obligated party for $0.05 the net cost of the liquid ethanol without a RIN is $ 1.95 per gallon. If, however, the blender sells the RIN for $1.00 the net cost of the liquid ethanol without the RIN is $1. 0 0 per gallon. By lowering the n et cost of the liquid ethanol to the fuel blender, higher RIN prices (or RIN value) can potentially be “passed through” to consumers, reducing the cost of blend ed fuels that contain ethanol. The higher the ethanol content of the transportation fuel, the gr eater the potential discount enabled by high RIN prices. Papers published by Philip Verleger Jr. 8 and Bruce Babcock and Sebastien Pouliot 9
discussed this mechanism in their work examining the impact of higher RIN prices on E85 retail prices and sales volum es

. EPA agrees that in theory passing through the RIN value to retail pricing should lead to lower retail prices for E85 . The question examined in this document is the extent to which
the pass

- through of RIN value occurs and can be observed in the retail price of E85

. This is a significant issue, as it is one of the primary ways the RFS program can incentivize the increasing use of renewable fuels. In order for the RIN price to impact the retail price of E85, the value of the RIN, either in whole or in part, must be passed along from the fuel
blender to the retail station an d ultimately to the FFV owner. One of the key assumptions made in both the Verleger and Babcock and Pouliot papers is that the entire RIN value is
refl ected in the retail price of E85. In his paper, Verleger states that “we will assume that 100% of RIN costs are passed

- through from refiners to blenders, and that blenders pass through 100% of the value of RINs down to retail customers. That is, we assume constant margins throughout the chain of transactions.” 10 Similarly, Babcock and Pouliot make the assumption that margins remain constant as RIN prices change, and therefore the fully RIN value is passed through stating that “the markup between wholesale an d retail fuel prices is a constant 75 cents per gallon...we make the further assumption that the wholesale price [of E85] equals the weighted average of wholesale ethanol and gasoline prices.” 11

Our analysis focused on the validity of these assumptions

. In a highly competitive market

, where E85 wholesalers (e.g., ethanol production facilities and terminals) and retailers are in direct competition with one another , we would expect nearly all of the RIN value to be reflected in the retail price of E85 as competi ng businesses seek to offer low cost products

to attract customers . This would be consistent with the papers cited above , as well as our

8 Verleger, Philip K., Jr. “The Renewable Fuel Standard: How Markets Can Knock Down Walls.” Janua ry 2014.

9 Babcock, Bruce A. and Sebastien Pouliot. Feasibility and Cost of Increasing US Ethanol Consumption Beyond
E10

. Car d Policy Briefs, January 2014. 14

- PB 17.

10 Verleger, Philip K., Jr. “The Renewable Fuel Standard: How Markets Can Knock Down Walls. ” January 2014.

11 Babcock, Bruce A. and Sebastien Pouliot. Feasibility and Cost of Increasing US Ethanol Consumption Beyond
E10 . Card Policy Briefs, January 2014. 14

- PB 17.4

observations in the highly competitive retail gasoline ( E10 ) market . However, even if we recognize that such a situation might occur in the future, this is not necessarily the case in
the E85 market today . If, contrary to the assumptions made in these papers, higher RIN prices primarily lead to the opportunity for increas ed per gallon profits for the fuel
blenders or retail station owners then any analyses assuming the full pass through of the RIN value would not accurately reflect the current marketplace . In this case the RIN price would have a much lesser, or in an extre me case where the entire RIN value is withheld as profit, no impact on the retail price of E85 , and thus little to no impact on E85 sales
volumes

.

RIN Prices and E85 Retail Prices: Observed Impacts

To better understand the relationship between RIN prices and the retail price of E85, EPA examined the available information from January 2013, when D6 RIN prices first rose above a few cents per gallon, through July 2015. EPA used pricing data for E85 and E10 from E85prices.com

. While the pricing data reported on E85prices.com is user reported, rather than the result of a comprehensive survey or data collection effort

, it was the best pricing data available to EPA at the time of this assessment, and has pr oven to be consistent
with other data sets. 12 EPA used D6 RIN prices as reported by OPIS. Using this information

we began by plott ing the monthly average D6 RIN price versus the monthly average retail E85 price and the monthly average discount of E85 relati ve to E10 (Figure 1 and Figure 2 below).

12 “ Correlating E85 consumption volumes with E85 price, ” memorandum from David Korotney to docket EPA

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D6 RIN Price vs. E85 Retail Price

January 2013

– July 2015

Figure 2

D6 RIN Price vs. E85 Discount Relative to E10

January 2013

– July 20156

Figure 1 shows that from January 2013 through July 2015, for a dollar increase in RIN price the retail price of E85 decreased by approximately $0.2 1 instead of decreasing by $0.7 4 (assuming E85 contains 74% ethanol on average ) as would be expected if the entire RIN value was passed along to the consumer and all other fact ors were held constant. From this
data alone we cannot necessarily conclude that increasing RIN prices caused a decrease in E85 prices, or conversely that RIN prices had only a limited impact on E85 retail prices,
since RIN prices are just one of many factors that i mpact the retail price of E85. In addition,
the limited data available and the poor correlation indicated by the very low R 2 value
indicate that thes e data were far from conclusive. Finally, it is likely that when both E10 and E85 fuels are available for purchase, FFV owners will make the decision of which fuel to buy based on the relative price of E85 compared to E10 rather than the absolute price of
E85.

Figure 2 explores the relationship between E85 and E10 retail prices with varying RIN prices. If the RIN price is being passed through to customers, as was assumed in the Verleger and Babcock and Pouliot studies, we would expect to see a large and increasing discount for E85 relative to E10 as the RIN price in creased if al l other factors were

constant. When assessing these data we do see a weak correlation between the RIN price and the discount for E85 relative to E10 at the retail level, but it is small er than would be expected if the full value of the D6 RIN was being passed through . These data suggest that for a dollar increase in RIN price the percent discount for the retail price of E85 relative to
E10 increases by approximately 5 %, or about $0.1 5 per gallon relative to E10. Again, however, the data is limi ted to the observed pric es and market conditions that varied over the two and a half years for which data is available , and under other condition s this correlation may change. It is also not possible to use this correlation to determine how much of the RIN value is being “passed on” to consumers, as this correlation does not attempt to control for changes in the prices of ethanol or gasoline. While the correlation
between the D 6 RIN price and the E85 discount relative to E10 is better than the correlation between the D6 RIN price and the average retail price of E85, it is still a relatively poor correlation.

To take a more comprehensive look at the question of whether or not RIN prices are passed through to consumers of E85 through lower net ethanol costs we must consider not only RIN prices and E85 retail prices, but also the price of ethanol and gasoline to the E85 blenders. This is because a decrease in the cost of gasoline rel ative to the cost of ethanol could potentially mask any reduction in the retail price of E85 that may otherwise have resulted from an increasing RIN price. Similarly, a decrease in the price of ethanol (with an assigned RIN) in conjunction with an increase in the D6 RIN price may amplify the impact that we would expect to observe on the retail price of E85 due to the rising D6 RIN price absent the change in ethanol price. To examine this issue we first determined the cost of producing E85 from ethanol and g asoline available at the terminal using the equation
below.

E85 COP = (E P
– RIN P ) * 0.71 + G P * 0.297

Where:

E85 COP = E85 Cost of Production
E P = Wholesale p rice of ethanol (USDA reported Iowa price)
RIN P = D6 RIN price (Reported by OPIS)
G P = Gasoline (E10) Price (N ational average wholesale price; reported by

EIA for regular gasoline )

In this equation, E85 is assumed to contain 74% ethanol and 26% gasoline

, 13 and is assumed to be produced by combining 0.71gallons of ethanol and 0.29 gallons of gasoline ( E10 )

. 14

We then subtracted t he cost of production of E85 from the observed E85 retail price for
each month from January 2013 through July 2015 . This gives us the monthly average mark

up between the cost of production of E85 and the retail price. T his value is not necessarily equal to per gallon profit, as it also includes the cost of blending and transporting the E85, any taxes on E85, and margin to cover the overhead of the fuel blender and retailer (including the potentially significant costs to upgrade their equipment to be compatible with E85)

. Nevertheless, if the assumptions made in the two papers referenced above were valid , we would not expect the mark

- up to vary with the RIN value if the valu e of the RIN was being passed through to the E85 consumers. We plotted the D6 RIN price against the
E85 retail mark

- up (E85 retail price

– E85 cost of production). This plot is shown in Figure
3 below.

13 The national average ethanol content for E85, as estimated by EIA, is 74% . In some cases natural gasoline may have been used to as a petroleum blendstock to produce E85, but in the absence of such data we have assumed that the E85 was produced using gasoline and/or gasoline blendstock.

14 While it may be a more common practice to produce E85 by blending pure gasoline (E0) and ethanol rather than ethanol and E10, as this calculation assumes, nat ionwide pricing for pure gasoline (E0) was not available. We believe that any error introduced by using the E10 price and adjusting for the number of RINs that would be generated in doing so is very small.8 Figure 3

RIN Price vs. E85 Retail Mark

- Up a

January 20 13

– July 2015

a D6 RIN prices and E85 retail prices from OPIS. E85 cost of production calculated using the equation above.

As a control case, we also plotted the D6 RIN price versus the E10 retail mark

- up in Figure 4 below. This was done to explore whether there might be factors unrelated to, but correlated with, the D6 RIN price over the observed time period, for which we are not accounting. As expected, we found no correlation between the D6 RIN price and the E10
retail mark

- up.9 Figure 4

RIN Price vs. E10 Retail Mark

- Up

January 2013

– July 2015

While the correlation between the E85 mark

- up and the RIN price shown in Figure 3 is still fairly low, it is significantly stronger than the previous plots, and a discernable trend can be

seen. These data reveal that, contrary to the assumptions made by Verleger and Babcock and Pouliot, there was a positive correlation between RIN prices and the retail mark

- up of
E85 in the observed time period

. This indicates that the full value of the RIN is not being passed through to E85 consumers. For a dollar increase in the D6 RIN price , the difference between the cost of production of a gallon of E85 and the average retail price (the retailer
mark

- up) incr eased by approximately $0. 40

. To state this another way, for every dollar increase in RIN value of a gallon of E85 15 the average retail price of a gallon of E85 decreases by approximately $0. 44 while the retail mark

- up increased by $0.56 . The price
data fro m January 2013 through July 2015 show that, on average, only 44 % of the RIN value was being passed along to consumers rather than the 100% assumed by Verleger and Babcock and Pouliot. With an average D6 RIN price of $0. 56 from January 2013 through July 201 5 , the average RIN value per gallon of E85 sold was $0.4 0 (71% of the D6 RIN price). Assuming, based on the historic data, that only 44% of the RIN value is passed on
from wholesale to the customer

, then on average only $0.1 8 out of the $0.4 0 RIN value per gallon of E85 ( based on the approximate average price of 2015 D6 RINs ) made its way t o FFV owners who purchase E85. This represents a discount of E85 at retail of 7 % per gallon attributable to the RIN price

. This is well short of the 16% discount that could have been

15 A $1 increase in the RIN value of a gallon of E 85 would require a $1.41 increase in the cost of a D6 RIN since blending a gallon of E85 from 0.71 gallons of ethanol and 0.29 gallons of E10 allows the blender to separate 0.71
D6 RINs10

realized if the full value of the RIN was passed through to consumers and reflected in the retail price of E85.

The implication of this data is that somewhere along the E85 distribution chain, eit her at the wholesale or retail level, or perhaps a combination of both, those who sell E85 are increasing their profits , perhaps as a means to pay off their infrastructure investments

, rather than passing along the full value of the RIN to consumers. In the time period
observed the 56 % of the RIN value that was not passed along to consumers was withheld by some combination of these parties. 16 As discussed in more detail below, t h is behavior is not unexpected. The primary motivation for E85 wholesalers and retailers is to maximize their profit, not to maximize the quantity of ethanol sold as transportation fuel by passing along the full RIN value to their customers. It therefore makes sense for the wholesalers and retailers to pass along the RIN value only t o the extent that doing so increases sales volumes of E85 to a sufficient degree to offset the higher per gallon profit margin that would otherwise be realized if the entire RIN value were withheld as profit. It is uncertain how these parties would act if RIN prices were to increase beyond the levels observed, whether they would withhold more or less of the RIN value in seeking to maximize their profit. The data strongly suggest , however, that a significant portion of this RIN value is being, and likely wil l continue to be, withheld by E85 wholesalers and retailers in order to maximize their profits. The E85 retail price point that maximizes profits for individual retailers will vary dramatically, depending on the number of FFVs in their area, the number
of competing stations selling E85, their relationship to the E85 blender, and many other
factors.

The Challenge of Non

- Competitive Markets

While the observed data from January 2013 through July 2015 are inconsistent with the assumption of complete pass through of the RIN value to E85 retail price, they are consistent with what one would expect in a non

- competitive market. At the majority of

t erminals today, E85 is still a low volume specialty product. These terminals are currently optimized to blend and distribute E10. Producing increasing volumes of E85 at these terminals, while technically possible, may result in longer fuel loading times, r equire the installation of new fuel storage tanks and blending equipment, the repurposing of existing storage tanks from other profit making purposes, and the replacement of seals and valves to be compatible with fuels containing higher levels of ethanol

. These costs and challenges, combined with the low demand for E85, have historically limited the expansion of E85 at terminals and resulted in a generally non

- competitive market for E85 at the terminal level.

A similarly non

- competitive situation exists at the retail level. While the in use fleet is
estimated to contain 14.2 million FFVs in 2014, they still represent only 6.3% of the

16 EPA is aware of retail stations that are passing on all, or nearly a ll of the RIN value to their E85 customers in the retail price of the E85 they sell. These retailers often have agreements with E85 wholesalers, which in many cases are ethanol producers, to purchase wholesale E85 at a favorable price in return for an agre ement sell E85 at an agreed upon discount relative to E10. This practice is not currently widespread, however, and these stations are included in the national average data used in this assessment.11

passenger vehicle and light truck fleet. Given that the cost of adding a new E85 refueling system ( potentially including under ground storage tank) can cost anywhere from tens of
thousands of dollars to over $1 00 ,000 17 or more, any retailer must be able to project a significant profit from sales of E85 to the relatively small number of FFV owners to justify such an investment. Consequently, E85 is currently only offered at approximately 2% of all retail fueling stations nationwide. With few exceptions, the fueling stations that offer E85 are located at a significant distance from each other so as to avoid competition with one another. As a result, potential customers of E85 fuel are generally not able to seek out the
low est price for E85 in the same way that they would for more widely available fuels such

as E10. This results in a situation in which consumers are comparing the price of E10 to the price of E85 when deciding which fuel to purchase. Station owners that offer E85, rather than competing with other retailers to offer the most cost competitive product, are seeking to establish a price for E85 at a level that maximizes their profit (and reduces they payback time for their investment), taking into account both the per gallon profit margins for both products (E10 and E85) and the potential to increase sales volumes by decreasing the retail price of E85.

For example, consider the various pricing options of a hypothetical retail fuel station owner
who has invested in t he necessary infrastructure to sell E85. If the market conditions for the fuel retail owner are such that they can sell 1000 gallons of E85 per month while setting the price for E85 to maintain a profit margin is $0.50 per gallon of E85, profits on
E85 sal es for that month will be $500. If the retail station owner reduces the retail price for E85 we would expect the monthly s ales volumes of E85 to increase; however this would likely result in a lower profit ma rgin per gallon of E85 sold. If all other factor s remain constant, dropping the retail price of E85 by $0.40 per gallon reduces the retailer’s per gallon profit margin from $0.50 per gallon of E85 sold to $0.10 per gallon. If, as a result of this drop in the retail price of E85, sales of E85 increase by an order of magnitude to 10,000 gallons per month, the retailer’s monthly profit on E85 sales would increase to $1,000 per month. If, however, the lower retail price of E85 doubles E85 sales to 2,000 gallons per month the retailer’s profit on E85 sales dr op s to $200 per month. Data reviewed by EPA on E85 prices and sales volumes suggests that the average E85 station would be expected to increase E85 sales by approximately 1,250 gallons per month by increasing the price discount for E85 relative to E10 by 1 0% (i.e. discounting the retail price of E85 by $0.25 per gallon if we assume an average retail price for gasoline of $2.50 per gallon). 18 The pricing decisions that the hypothetical retail station owner is likely to make are therefore expected to be highly influenced by their expected sales volumes of E85 at various price points and profit margin associated with these E85 retail prices. 19

17 Regulatory Impact Analysis for the RFS2 final rule, Marc h 26, 2010, Section 1.7.4.

18 For a further discussion of the observed relationship between E85 prices and sales volumes see “ Correlating E85 consumption volumes with E85 price, ” memorandum from David Korotney to docket EPA

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19 Other factors, such as the impact of lower fuel prices on convenience store sales and the degree to which increasing E85 sales attract new customers vs. cause existing customers to choose E85 over E10 will likely also be significant factors in a retail st ation owner’s pricing decisions.12

Im plications

The data examined by EPA above suggests that while increasing RIN prices are expected to provide an opportunity for a reduction in the retail price of E85 by reducing the effective price of the ethanol component of E85, the observed impact o f in creasing RIN prices is significantly less tha n what would be expected if the full value of the RIN was passed through to consumers at the retail level. The withholding of this RIN value is reasonable behavior by E85 wholesalers and retailers seeking to maximize their profits in a non

competitive marke t. As the number of terminals and number of retail stations selling E85 increases it is expected that competitive pricing behavior will reduce the per gallon profit margins for E85 until they are at or near the low levels currently realized for gasoline an d diesel fuel. Such a scenario is, ultimately, the dynamic that will enable E85 sales volumes to increase at a more rapid rate than would be expected by infrastructure expansion alone. As we approach this point, encouraged by standards that push beyond the E10 blendwall, we would expect to see an increasing portion of the RIN value passed through to consumers of
E85 at the retail level. E fforts to increase the number of parties selling E85, such as ethanol production facilities adding fuel blending capabili ties or government or industry associations offering grants or alternative funding mechanisms for the installation of E85

pumps such as the recent funding announced by USDA 20 , would serve to increase E85 sales not only by increasing the availability of the fuel, but also by increasing the value of E85 relative to E10 through greater competition.

In the near term, t he fact that E85 wholesalers and retailers are expected to retain a significant portion of the RIN value while th e E85 market is still small is t he very factor that
will encourage the market for E85 to grow. If E85 wholesalers and retailers were unable to realize higher profit margins for E85 relative to E10 they would likely struggle to recover their investments in the infrastructure necessary to sell E85, and there would be very little
incentive to invest in the new infrastructure projects needed to expand the availability of
E85. W ith D6 RIN prices averaging approximately $0. 56 from January 2013 through July
201 5

, the correlation developed from the data in Figure 3 suggests that the mark

- up of E85 from the cost of production to the retail price was approximately $0. 22 per gallon higher than would have been expected if the average RIN price was negligible. 21 This v alue, in addition to whatever margins were available without higher RIN prices, was available to wholesalers and retailers to allow them to more quickly recover the cost of their
investments. If this profit margin continue s in future years , those that have invested in E85 will be able to pay off these investments and begin making significant profits more quickly

. This significant profit potential would incentivize the further expansion of both wholesale
and retail E85 infrastructure.

20 USDA Announced State Finalists for the Biofuel Infrastructure Partnership. Accessed online at

< http://www.usda.gov/wps/portal/usda/usdamediafb?contentid=2015/09/0249.xml&printable=true&contentidonly=t

rue >

21 The linear re gression on the data shown in Figure 3 suggests a relationship between the D6 RIN price and the E85
Retail Mark

- Up that can be estimated by the following equation: E85 Retail Mark

- Up = $0.60 + 0.40*D6 RIN Price. Using this equation we would project an E85 Retail Mark

- Up price of $0.60 if the D6 RIN price was $0.00 and an
E85 Retail Mark

- Up of $0.82 if the RIN price was $0.56.13

We have already seen t his beginning to occur over the last few years

, especially at the
wholesale level where an increasing number of ethanol production facilities have entered into the E85 wholesale market. We anticipate that this trend will continue and expand further to more fuel terminals. The recent data on E85 retail outlets have shown steady growth at about 100 new stations per y ear, and experienced a peak in 2010 of about 350 new stations per year when the price of ethanol blended into gasoline was low relative to gasoline. 22

Conclusion

After examining the available data from January 2013 through July 2015 we have
concluded that while D6 RIN s have the potential to decrease retail prices for E85

, much of this potential price reduction was not realized in the E85 retail price

. The data strongly suggest that RIN s , at present, are limited in their ability to reduce E85 retail prices and ultimately increase E85 sales volumes. We believe this is primarily the result of the non

competitive nature of the E85 market limiting the effectiveness of the RIN price as a tool for reducing the retail price of E85. As long as wholesalers and retailers can maximize their profit through higher per gallon margins , generally corresponding to lower sales volumes

, they wi ll have an incentive to do so. If their potential profit increase s with higher RIN prices ( and corresponding lower net ethanol prices) there would be little or no incentive to pass along these potential price discounts to their customers unless and until the lower retail prices result in E85 sales volume increas es that are high enough to overcome the lower per gallon profit margins. 23 While the current non

- competitive nature of the E85 markets result in higher retail prices for E85 than would otherwise be expected, they also
allow for those wholesalers and retailers who have invested in E85 infrastructure to more quickly recover the cost of these investments by realizing higher margins of E85 sales volumes. This opportunity for higher profit margins can also serve as an incentive f or parties who have not yet done so to invest in the infrastructure necessary to offer E85. Over time, we believe that the RFS program

– through the RIN price mechanism

– can lead to E85 sales growth that accelera tes at an increasing pace by encouraging in frastructure investment motivated by higher profit margins in the near term, and lower E85 retail pricing that results from increasingly competitive E85 markets in the long term

.

22 It is likely that t his was in part due to the $0.45 per gallon ethanol blenders tax credit (VEETC) that expired at the
end of 2011

23 “Correlating E85 consumption volumes with E85 price,” memorandum from David Korotney to docket EPA

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