Willingness to Pay for Ethanol in Motor Fuel

Introduction

Propel Fuels worked with Iowa State University’s Center for Agriculture and Rural Development (CARD) to determine motorists’ willingness to pay for ethanol-blend gasolines (specifically E10 and E85) in the United States.

CARD researchers conducted intercept surveys of motorists with FFVs at E85 fuel stations in Iowa, Colorado, Oklahoma, Arkansas, and California. All California station locations were Propel-branded locations. The information collected included prices observed at fuel stations, fuel choices by flex motorists, and responses to a series of questions about ethanol and gasoline. The CARD study empirically estimates the relative preferences of motorists for E10 and E85 in different regions of the US to better understand the aggregate demand for E85.

Key Findings

1. Propel locations experience significantly higher adoption rates compared to other retailers in the study. Specifically, motorists were 2.5 times more likely to choose E85 at Propel locations versus other retailers.

The probability that a flex motorist chooses E85 is not significantly different between the regions where the survey was conducted, other than for California (Propel locations), where the study finds flex motorists are significantly more likely to choose E85. Motorists’ ages, genders, vehicle types, how many miles they drive per year, and whether they have FFV badges on their vehicles are not significant factors.

The study reveals that motorists at Propel locations choose E85 88.7% of the time, as compared to 34.8% of the time at non-Propel locations. In other words, motorists were 2.5 times more likely to choose E85 at Propel locations compared to other retailers.

2. The price discount to gasoline required for E85 adoption is much lower at Propel locations than at non-Propel locations.

When the nominal E85 price per gallon was about 80 percent of the nominal E10 price per gallon, less than half of the flex motorists who fueled at non-Propel stations chose E85. However, nearly 90 percent of flex motorists who fueled at Propel stations chose E85 at the same relative prices.

Reason for the Study

The Renewable Fuels Standard (RFS2) requires increasing quantities of ethanol and other biofuels to be blended in the motor fuel consumed in the US each year. So far, meeting the ethanol requirement has been relatively easy, because the vast majority of gasoline consumed in the US is E10, which contains up to 10 percent ethanol. The maximum quantity of ethanol that can be blended into the total E10 motor fuel pool is commonly referred to as the blend wall. The quantity of ethanol mandated by the RFS2 is now reaching the point where it is set to surpass the blend wall.

One solution is alternative gasoline blends that contain more than 10 percent ethanol, such as E85, a gasoline blend that contains no more than 83 and no less than 51 percent ethanol. On average, a gallon of E85 contains about 74 percent ethanol, so each gallon of E85 consumed as a substitute for E10 increases ethanol consumption by about 0.64 gallons. Thus, ethanol consumption could exceed the blend wall if even a small fraction of motorists fuel with E85 instead of E10.

However, E85 consumption across the United States has historically been low. CARD wanted to find out whether E85 provides a feasible pathway for compliance with expanding biofuel mandates. And if so, how low would the price have to be to entice enough consumption of E85?

Downloads

Access the complete study:

​“Willingness to Pay for Ethanol in Motor Fuel: Evidence from Revealed and Stated Preference for E85”​ by Kenneth Liao and Sebastien Pouliot, Iowa State University CARD, March 2016