Ethanol and State Government and Gas Prices and Fuel and Tax Credits and Alternative fuels and Government & Economic Development and Government and Transportation, Distribution & Logistics

Fund to fuel ethanol use out of gas

December 29, 2008
A state fund supporting an 18-cent-a-gallon tax credit for gas stations selling E85 ethanol was exhausted in the first three months of the state's new fiscal year.

The timing for the alternative fuel couldn't be worse. Gasoline prices have plummeted to around $1.50 a gallon from $4-plus this summer, making E85 and its inherently lower fuel economy less attractive to retailers and motorists.

"Right now, you have to be pretty green to use E85," said Ed McClure, CEO of Marion-based McClure Oil Corp., which sells E85 at its stations in central and northern Indiana, saying sales have "definitely slowed down."

Even though many stations in the metro area this month sold E85 at a nickel a gallon cheaper than gasoline, E85's lower fuel economy meant the actual cost to the motorist could be 50 or 60 cents more per gallon than gas.

That's in stark contrast to June, when gas prices soared to $4.19 a gallon. Then, E85 could be had for 30 cents a gallon less than gasoline even after accounting for its lower fuel economy.

"In June or July, we could sell E85 blindfolded," said Jim Gentry, fuel purchasing manager for Greenfield-based GasAmerica, which operates more than 80 stations in the region and was among the first to sell E85 in the Indianapolis area. "Back in the summer, we didn't need the 18-cent [state tax] credit."

The tax credit enacted in 2007 helped spur a dramatic increase in the number of stations selling E85. It's offered at 121 stations across the state, up from just one in Terre Haute in 2005.

The tax credit grew out of Senate Bill 250, the so-called corn check-off bill. It set aside a half cent from each bushel of corn sold, raising $3 million annually for corn research and promotion.

Up to 25 percent of that is used for a retail tax credit and to promote the availability of E85, a blend of 85 percent alcohol/15 percent gasoline. The $500,000 in the state's ethanol tax credit account was exhausted just three months into the 2009 fiscal year that started July 1.

"We blew through that money," said Kellie Walsh, executive director of the Central Indiana Clean Cities Alliance, a federally funded program that's helped encourage the use of alternative fuels.

"I am anxious to see whether gasoline prices dropping has our flex-fuel customers continuing with E85 or if they're going back over" to gasoline, said Walsh, as she drove a flex-fuel Chevrolet Impala to Evansville Dec. 18 for the grand opening of that city's first E85 pump.

The southwestern Indiana pump was a milestone of sorts for Walsh: the final piece in an E85 corridor running up U.S. 41 to Gary.

Walsh and gasoline stations that have signed on to sell E85 have grown accustomed to these wild cycles in ethanol relative to gasoline. She expects gasoline prices to rise again in a matter of months. Also, as far as she can tell, no stations have pulled their E85 pumps or switched them to gasoline or other fuels.

Not that station owners don't have that option.

"If E85 went away, we could use it for another product," said McClure, whose stations sell nine kinds of petroleum products his company blends. "We haven't given up on it."

Neither has GasAmerica. It recently installed E85 pumps at new or remodeled stations in Anderson and Fortville.

"That being said, that's not to say it's the smartest business decision at this point in time," Gentry said.

Of course, gasoline station operators have had some help in the form of state and federal incentives to dispense E85. For example, the Indiana State Department of Agriculture offers a grant of up to $20,000 to purchase new equipment or toward the cost of conversion.

Those conversions can be done for as little as $15,000, Walsh said.

"The infrastructure is there. We believe [E85 demand] will come back again. We believe the economy will come back again," Gentry said.

The 18-cent tax credit funded by the state's corn check-off program won't be replenished until July. But the trade group representing the state's 190 fuel marketers and their 2,600 stations said legislation may be in order for the next session to make sure stations can claim the credit when it is needed most—such as during the current trough in gas prices.

"We'd like to give the governor the authority to trigger it and only make it available when conditions would warrant it," said Scot Imus, executive director of the Indiana Petroleum Marketers & Convenience Store Association.

Currently, the unfavorable price spread of E85 to gasoline is the least of the problems for the state's fuel sellers, however.

The dramatic fall in gasoline prices will hammer stations when they make their next sales tax payments to the state. Fuel vendors are the only retailers forced to prepay their sales taxes. The requirement comes from a change in state law during the 1980s when several stations went bust and didn't pay sales tax.

Early next year, gas retailers will pay state sales tax based on stratospheric summer gasoline prices. IPMC says that will drive many out of business. The tax calculation is made every six months, forcing fuel retailers to essentially front the state the money for six months until they get it back during the next calculation. But the association argues many stations won't last that long and seeks help from the Legislature or governor.

It's already a rough period for the state's burgeoning ethanol refining industry, which took off like wildfire in recent years with a flurry of new construction and plans for even more plants.

Rising corn prices during the year and a temporary glut of ethanol amid an overbuilding of plants helped crush profits of refiners. Some have filed for bankruptcy and have slowed construction of new plants in Indiana and other states.

The gold rush was fueled by a demand for ethanol as a replacement for the fuel additive MTBE, which was banned for environmental reasons. In 2006, President Bush signed legislation requiring fuel producers to supply at least 36 billion gallons of the renewable fuel ethanol by 2022.
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