Are government incentives for ethanol leaving the US behind in the race to fuel up with natural gas? The latest data suggest as much.

The US Energy Information Administration (EIA) recently released an update covering alternative fuel vehicle (AFV) and alternative fuel statistics through 2011. The categories of alternative fuels covered included E85 (85 percent ethanol blended with 15 percent gasoline), natural gas, propane, electricity, and hydrogen — but excluded the ethanol added to standard gasoline blends. These alternative fuels are all fuels that are consumed in alternative fuel vehicles, such as the Flex Fuel Vehicle (FFV) for E85.

The first graphic belows shows the AFVs that were made available each year beginning in 2001. The EIA writes that “‘made available’ means the vehicle either was delivered for the first time to a dealer, leasing company, or end user; was available for delivery to a dealer, leasing company, or end user; or was otherwise placed ‘in use’ during the reporting period.” For the purposes of this article, I will simply use “sold” as a reasonable approximation, but do note that not all of the vehicles were actually sold.

Figure 1. Alternative Fuel Vehicles Sold 2001-2011 (Source: EIA)

In 2011 nearly 2.4 million AFVs were sold, which was a 36-percent increase over the previous year and a 123-percent increase in AFVs sold since 2009. The overwhelming majority of these vehicles were FFVs (88 percent in 2011) designed to run on either E85 or gasoline. Gasoline-electric hybrids were a distant second at 11 percent of the AFVs sold in 2011.

What’s interesting, however, is that even though vehicles that are capable of running on natural gas — either compressed natural gas (CNG) or liquefied natural gas (LNG) — comprised only 0.2 percent of all vehicles that were sold in 2011, Figure 2 shows that 48 percent of the fuel used in AFVs was natural gas. Another 24 percent of the fuel used was propane, which means nearly three-quarters of the alternative fuel consumed in AFVs in 2011 was still fossil fuel.

Figure 2.  Alternative Fuel Consumed in 2011 (Source: EIA).

This means that even though the number of FFVs on the road is growing rapidly, most people are simply using gasoline instead of E85 since gasoline is still usually cheaper to use per mile traveled. If I happened to be a governor in a Midwestern state that produces a lot of ethanol but no oil (like Iowa), I could probably think of a few ways to encourage greater use of this locally produced fuel.

And, in fact, there are some incentives out there for building out E85 infrastructure and encouraging use of E85. Because of the “blend wall” regulatory issue I covered recently, there is an added incentive for refiners to blend and sell E85. The skyrocketing price of ethanol use quotas discussed in that issue may ultimately push more refiners in that direction.

Table 1 shows the growth rate of various alternative fuels from 2007 to 2011. While natural gas did dominate usage throughout the period, the growth rate for E85 was higher. Over the period, E85 usage in AFVs rose by 154 percent versus a 23 percent increase in usage of CNG. As long as strong government support for ethanol continues, E85 usage will probably continue to rise. This may create some investment opportunities around companies that make engines or infrastructure components that are E85 compatible. However, these sorts of investments always come with the added risk from potential changes in government policy.

Table 1. Consumption of Alternative, Replacement and Conventional Fuels 2007-2011 (Source: EIA).

Natural gas as an alternative fuel hasn’t gotten nearly the same type of enthusiastic response from the US government, but the high differential between oil and natural gas prices has still driven some to switch. The high cost of a CNG car versus its gasoline counterpart means that such a switch doesn’t make sense for the average driver, but for fleet owners or those who drive many miles each year, the payback period can be short.

There is plenty that state and federal governments could do to make natural gas conversions more appealing. Whereas the build-out of E85 capacity is being driven by mandate and incentive, the build-out of natural gas capacity is being driven by the market dynamics of oil versus natural gas (supply and price). Governments could focus on the high price differential between CNG and gasoline cars and work to reduce any portion caused by excessive regulations or incentives for other fuel options that place NGVs at a competitive disadvantage.

This high differential is not an issue in developing countries – where Figure 3 shows that natural gas vehicle fleets have been growing exponentially. Iran has more NGVs than any other country with a fleet of 2.86 million (Source), followed by Pakistan (2.85 million), Argentina (1.9 million), Brazil (1.7 million), and China (1 million). In fact, China’s addition of 378,000 NGVs in the past 12 months dwarfs the entire US fleet of 123,000 NGVs.

Figure 3. NGV Growth from 2001 to 2011 (Source: NGV Global)

It is important to bear in mind that while the number of AFVs on the road is growing at an impressive rate, they still represent a very small fraction of the vehicles on the roads. Further, since most of these AFVs are FFVs running on gasoline, the actual fraction of alternative fuel used is very low. In 2011 only 516,000 gallon equivalents of the 171 million gallons of total vehicle fuel consumption was alternative fuel. This represents only 0.3 percent of the total fuel consumed, up from the 0.22 percent alternative fuel fraction in 2007.

Replacement fuels, on the other hand, represent a much larger and faster growing fraction of transportation fuel. These replacement fuels are ethanol in standard motor gasoline and biodiesel, often mixed with petroleum diesel. They are categorized as replacement fuels because they replace fossil fuels in conventional automobiles (as opposed to AFVs).

In 2007, replacement fuels comprised 2.7 percent of total vehicle fuel consumption. By 2011, that fraction had grown to 5.6 percent. However, because future growth of replacement fuels — specifically ethanol in motor gasoline — will be constrained by the blend wall, future displacement of gasoline and diesel in transportation fuels will probably need to come from the alternative fuel category. As the deck is stacked at the moment, E85 may be the biggest winner, although natural gas will certainly be a contender in the US as it already is globally.