J. Alan Weber, Donald L. Van Dyne*

Abstract

The U.S. Department of Energy has issued regulations to implement portions of the Energy Policy Act of 1992 (EPACT). EPACT was designed to strengthen domestic energy security by reducing petroleum imports through the purchase of alternative fueled vehicles, alternative fuels, and the development of infrastructure to service them. By the year 2000, 75% of all affected state vehicle purchases must be alternative fueled vehicles. The acquisition of biodiesel flexible fueled vehicles (FFVs) represents a cost effective compliance strategy for Midwest state fleets.

Operationally, biodiesel performs very similar to low sulfur diesel in terms of power, torque, and fuel economy. Biodiesel blends can be utilized in diesel fleets without modifying engines or infrastructure. Therefore, the capital costs associated with converting to biodiesel are minimal. Biodiesel blends compare favorably on an economic basis with other alternative fuels. In addition, utilization of a resource which originates within the state's boundaries has the potential to reduce the costs associated with EPACT compliance and provide economic development opportunities.

Keywords. Biodiesel, Biofuels, Renewable Fuels, Market Emphasis, Economics

Introduction

Energy security issues have prompted legislation and regulatory actions spurring demand for alternative fuels such as biodiesel. Specifically, the U.S. Congress and many state governments have passed legislative actions that address both environmental and energy security issues through the required purchase of alternative fueled vehicles (AFVs). At the national level, state fleets must meet AFV purchase requirements of the Energy Policy Act. At the state level, Missouri state agencies must meet the Fuel Conservation for State Vehicles Program which also requires the purchase of alternative fueled vehicles. Regarding implementation, state energy officials must be able to meet state and federal regulations in a time period of stagnant budgets. Fleet mangers must be assured about performance and operating issues associated with the use of alternative fuels. Thus, state governments must find cost effective, reliable compliance strategies.

EPACT and State Fleets

Congress enacted EPACT in 1992. The intent of this statute was to strengthen the nation's energy security by displacing imported petroleum. To help accomplish this goal, EPACT requires that by the year 2000, 75% of all affected vehicle purchases for state fleets must be alternative fueled vehicles. The U.S. Department of Energy (DOE) was authorized to implement this legislation and, on February 28, 1995, proposed the Alternative Fuel Transportation Program regulations. This rule was finalized on March 14, 1996.

State fleet requirements will begin in model year 1997 (MY97) and will affect centrally fueled fleets with 20 or more light-duty vehicles that operate in major urban areas. Acquisition schedules have been revised to begin in MY97, starting on September 1, 1996, and must be met by August 31, 1997. Currently, state government fleets will only be required to purchase AFV's. There is no requirement that these fleets actually use alternative fuel in those vehicles. For example, government fleets may purchase flexible fueled biodiesel trucks and never actually use any biodiesel.

Table 1. EPACT Acquisition Requirements for State Fleets.

The Department of Energy has revised the definition of "alternative fuel" to include biodiesel. DOE has concluded that an additional rulemaking proceeding will be required to develop the information needed to reach a conclusion on which, if any, mixture or blends of biodiesel should be included in the definition of "alternative fuel". DOE defined an alternative fueled vehicle as a dedicated vehicle or a dual fueled vehicle (including flexible fueled vehicles). A flexible fueled vehicle (FFV) means any motor vehicle engineered and designed to be operated on any mixture of two or more different fuels. Since neat biodiesel has been classified as an "alternative fuel", a bi-fuel vehicle that is authorized by the vehicle manufacturer to be operated on 100% vol. biodiesel (B100) or diesel would meet the definition of a dual-fueled vehicle.

The acquisition of AFV's exceeding 8,500 pounds GVWR will generate credits for this program. The final rule provides for the allocation of one credit for each AFV a fleet or covered person acquires that exceeds the number of alternative fueled vehicles that fleet or person is required to acquire. These credits can be banked, traded, or applied to the state fleet light duty requirements.

Missouri Legislation: Fuel Conservation for State Vehicles Program

In addition to federal EPACT requirements, Missouri state agencies currently follow guidelines established by the Fuel Conservation for State Vehicles Program which was passed into law by the Missouri Legislature in 1991. This law, RSMo 414.400 - 414.417, charges the Department of Natural Resources with development and implementation of a program to reduce fuel consumption, improve fleet management, and promote the use of alternative fuels. Similar to EPACT, this legislation requires the acquisition of alternative fueled vehicles (AFVs). Requirements of the law are as follows:

3. Any state [Missouri] agency which operates a fleet of more then fifteen motor vehicles shall acquire vehicles capable of using alternative fuels as follows:

(1) Ten percent of the agency's fleet by July 1, 1996;
(2) Thirty percent of the agency's fleet by July 1, 1998; and
(3) Fifty percent of the agency's fleet by July 1, 2000.
(L. 1991 H.B. 45)

In order to accommodate developments in the alternative fuel industry, bills were introduced into the Missouri Legislature in 1996 which would more closely align Missouri's program with EPACT.

The previously mentioned bills were drafted to ensure that fleets complying with Missouri's law would also comply with EPACT guidelines established at the federal level. Missouri fleets would have been required to acquire vehicles capable of using alternative fuels as follows:

(1) at least ten percent of the agency's fleet vehicles acquired between July 1, 1994 and July 1, 1996;

(2) at least thirty percent of the agency's fleet vehicles acquired between July 1, 1996 and July 1, 1998;

(3) at least fifty percent of the agency's fleet vehicles acquired between July 1, 1998 and July 1, 2000, and each biennial period thereafter.

Furthermore, the proposed bills would have required at least thirty percent of all motor fuel purchased annually for use in alternative fueled vehicles, must be alternative fuel by July 1, 2000. These bills were not passed during the 1996 Legislative process, but will most likely be brought forward again in 1997. Therefore, Missouri fleets will be required to meet the original requirements of RSMo 414.400- 414. 417, in addition to federal requirements.

Missouri Department of Agriculture: A Case Study

The Missouri Department of Agriculture (MDA) manages a fleet of 245 vehicles, a large portion of which is located across the state in county and district offices. In addition, MDA oversees thirty-five vehicles with the Missouri State Fair. The State Fair vehicles are used primarily off-road and for maintenance purposes. Table 2 details the MDA fleet.

Table 2. Missouri Department of Agriculture Fleet Description

The MDA plans to replace 35 passenger vehicles in FY97 at a cost of $574,000. According to RSMo Sections 414.400 - 414.417, MDA is responsible for acquiring alternative fuel vehicles to total 10% of the MDA fleet by July 1, 1996. Therefore, MDA should be operating 25 AFV's in their fleet and would be required to purchase sixteen additional alternative fuel vehicles to meet the requirements of the state statute. In order to comply with EPACT, MDA would only need to purchase four AFV's during the 1997 model year (9/1/96 - 8/31/97). Four AFV's represents 10% of the planned purchases for the MDA fleet. However, MDA currently operates nine alternative fueled vehicles. Eight of these vehicles are ethanol duel fueled vehicles (E-85) and one is a propane duel fueled truck. These vehicles were purchased in 1994, therefore, the purchase of these AFV's has generated 27 credits for the federal EPACT program (one credit per vehicle for three years).

Table 3. Comparison of Required Vehicle Purchases for the Missouri Department of Agriculture to Meet EPACT and the Missouri Statute Requirements.

Essentially, EPACT required purchases for year one are four vehicles, but the MDA already has 27 credits. Therefore purchases are not required for the EPACT program. In addition, MDA would have been required to purchase sixteen additional AFV's in 1996 to meet the state statute. Therefore, sixteen additional EPACT credits would have been generated if these vehicles were purchased before September 1, 1996. Assuming MDA plans to purchase 35 additional passenger vehicles each year for the next three years, table 3 details the required number of AFV purchases that are necessary to meet both the state statute and EPACT. Missouri state law, as currently written, will require a significant number of AFV acquisitions in the next three years.

If only EPACT requirements were to be met the MDA would not need to make any AFV purchases until MY2000 due to the number of credits that have been generated from AFV purchases prior to MY97.

As previously noted, both the Missouri legislation and the requirements of EPACT are for vehicle purchases only. Therefore, compliance with these requirements is dependent upon the number of vehicles purchased not the amount of fuel that is used. Vehicles which count toward a purchase requirement are determined by the type of fuel that those vehicles are capable of being fueled with. For example, neat biodiesel is classified by DOE as an alternative fuel. Therefore, a vehicle that is capable of being operated on B100 would qualify as an eligible purchase.

A standard diesel engine can be operated on neat biodiesel. Assuming that OEM's will not void existing diesel warranty status for B100, state fleet operators can purchase a diesel vehicle (biodiesel FFV) to assist them in meeting vehicle purchase requirements. At the present time, none of these vehicles must be operated on the alternative fuel. Therefore, it is possible to purchase a biodiesel FFV and operate the vehicle on a biodiesel blend or diesel fuel.

DOE has yet to designate biodiesel blends as alternative fuels for the purposes of EPACT. However, since the regulations do not require the use of alternative fuels, state fleet operators that purchase a biodiesel FFV designed to operate on neat biodiesel can utilize any blend level they choose. When compared to the incremental costs associated with purchasing other AFVs, biodiesel is the most cost-effective compliance strategy available for state fleets. Table 4 details capital costs that would be required to purchase the sixteen AFVs needed to comply with the Missouri statute in 1996.

Table 4. Incremental Capital Costs Associated with the Purchase of 16 AFVs to Comply with the Requirements of the Fuel Conservation for State Vehicles Program..

Fleet Economic and Performance Implications of Biodiesel Use

Biodiesel is currently marketed at a premium compared to petroleum diesel. Therefore fuel costs are greater than petroleum diesel for fleet managers that use a biodiesel blend. Although biodiesel is more expensive on a per gallon basis, there are no significant infrastructure changes or incremental maintenance costs associated with its use. This contrasts to the significant capital investments that must be made in vehicle modifications and fueling infrastructure for other alternative fuels. Three independent studies have confirmed that biodiesel blends (i.e. B20) are cost competitive with other alternative fuel options when compared on a vehicle life cycle basis.

Table 5: Medium Duty Truck Fleet Economics

Source: Booz-Allen & Hamilton, Inc., 1994

A study completed by Booz-Allen & Hamilton found that the cost of converting to biodiesel is very competitive with converting to any of the alternative fuels because no additional capital or maintenance costs are incurred. Under the scenarios analyzed in a 1994 report, a truck or bus fleet using B20 would experience lower total annual costs than using LPG, CNG, LNG, ethanol or methanol.

The National Biodiesel Board has conducted emissions and performance data on several medium and heavy duty engine families fueled with B20, including the Detroit Diesel Series 60, 6V-71, 6V-92, 8V-71, Cummins L10, Cummins 5.9 B, and the Navistar 7.3 HEUI. Emissions data from these tests demonstrate that particulate matter, opacity, carbon monoxide and hydrocarbons are reduced. Oxides of nitrogen are slightly increased with some engines. Operating performance parameters, such as fuel consumption, power, and torque were similar to diesel fuel for these tests.

With the lubricity of low sulfur diesel fuel being scrutinized, biodiesel use has been proven to be a benefit. A lubricity test of biodiesel, conducted at Southwest Research Institute demonstrated that, biodiesel has significantly higher lubricity than low sulfur/low aromatic diesel fuel diesel fuel. Long term tests are being initiated to determine if this may result in longer engine or component life than conventional petrodiesel.

Low Sulfur/ Low Aromatic Petrodiesel Lubricity Results

†Analysis performed by Southwest Research Institute. These results are not an endorsement of biodiesel by Southwest Research Institute.

There are some special considerations for biodiesel usage of which fleet managers need to be aware. Biodiesel is a natural solvent and will soften and degrade certain types of elastomers and natural rubber compounds. Precautions are needed when using high percent blends to ensure that the existing fueling system, primarily fuel hoses and fuel pump seals, does not contain elastomer compounds that are incompatible with biodiesel. Elastomers compatible with biodiesel are available and are being used in many engines produced after 1994. Fleet operators also need to be aware of the cold flow properties of biodiesel. A 20% blend of biodiesel will increase the cold flow properties (cold filter plugging point, cloud point, pour point) of petrodiesel approximately 3 to 5 degrees Fahrenheit.

Economic Impacts on Missouri's Economy

An important factor that is not usually considered when calculating the costs and benefits of industrial feedstock materials is the macroeconomic effect associated with domestically produced, renewable energy sources. Economic benefits of a biodiesel industry in the U.S. would include value added to the feedstock (oilseeds, fats, or yellow grease), an increased number of jobs, an increased tax base from plant operations and income taxes, and investments in plant and equipment.

Dr. Dermot Hayes, an agricultural economist with Iowa State University, concluded that there are three possible benefits that would accrue to the state from a biodiesel industry;

• By expanding demand for soybean oil, biodiesel allows soybean processors to pay more for soybeans,

• soybean farmers near the biodiesel plant would receive slightly higher prices for soybeans, and

• the presence of a facility that creates energy from soybean would add value to the state's industrial and income base.

Previous economic work demonstrated that for each $1 generated in the state's soybean processing industry an additional $1.50 is generated in the service sector. Of the total amount generated a portion of those revenues is received by the state's treasury in the form of income, sales, and corporate taxes.

Dr. Hayes concluded that, "If the state of Iowa were to mandate the use of a 20% biodiesel blend in its state vehicle fleet where feasible, the total additional cost of this policy would range from $400,000 to $500,000. In this eventuality, the DOT would use a biodiesel blend in about 1/6 of its fleet. If it could be shown that this policy would result in a new five million gallon biodiesel plant in the state, then the policy would create more new tax revenues than it would cost and would clearly be in the best interest of the state".

Over five million gallons of diesel fuel are burned by Missouri state fleets each year. If B20 was used in 1/5 of the State fleet, approximately 200,000 gallons of biodiesel would be needed. Assuming the average price of diesel fuel is 70¢/gallon and the average price of biodiesel is $3.00 per gallon, the incremental fuel costs to the state of Missouri would be approximately $450,000 (similar to the costs modeled in the Iowa economic study). Therefore it is reasonable to assume that the use of a B20 blend in 20% of the states diesel vehicles would successfully generate tax revenues greater than the costs of purchasing biodiesel. In addition, the use of biodiesel to comply with EPACT is not associated with significant incremental capital costs to purchase vehicles or construct fueling infrastructure. This conclusion is dependent upon utilizing soybeans that are grown within the state of Missouri, processed in a plant constructed in Missouri that is at least five million gallons in size, and successful sales of the remaining plant capacity in other markets.

A sustained biodiesel market would also provide direct benefits to the national agricultural sector. According to economic modeling conducted by the Food and Agriculture Policy Research Institute (FAPRI), 70 million gallons of annual demand for biodiesel could add up to $0.18 per bushel increase to the price of soybeans alone. Achievement of 34 million gallons of annual demand could increase revenue to soybean farmers between $125 to $225 million (based on 1994 soybean production of 2.5 billion bushels and increased prices of $0.05 to $0.09 per bushel).

Market Issues: Engine Manufacturers Warranty

Successful penetration of biodiesel into the regulated fleets market is only inhibited by one issue; the acceptance of warranty implications by original equipment manufacturers (OEM's). OEM acceptance is indirectly related to the designation of biodiesel blends as alternative fuels by the Department of Energy.

Engine manufacturers are driven by consumer preference. Regardless of technical acceptance, the production of biodiesel FFVs as well as assumption of liability issues will not occur until vehicle fleet managers demand these vehicles. The bottom line lies with profit potential. Although the biodiesel FFV offers diesel engine manufacturers the opportunity to market an alternative fueled engine where most of the research and development costs have already been encumbered, the OEM is not likely to pursue this option until customers express interest in the product.

If consumers understand how biodiesel vehicles can be used to meet regulatory requirements, the biodiesel FFV offers diesel engine manufacturers a unique opportunity to tap into a new market area and potentially expand diesel engine market share. The Missouri Department of Agriculture currently operates 245 vehicles. Thirty-nine percent of those vehicles (96) are trucks. Of the ninety-six trucks currently operated by MDA, only twelve of them (12.5%) are diesel powered. Gasoline powered trucks cannot be used to meet regulatory requirements, however a diesel engine, designed to operate on neat biodiesel and warrantied as a biodiesel FFV, can be purchased to meet these requirements. Therefore, diesel manufacturers now have the opportunity to regain market share that has historically gone to the gasoline engine. In a report conducted by the Energy Resources Center, the following statement was made after review of the EPACT market: "The AFV's required by EPACT represent new growth and profit potential for diesel OEM's."

On a state wide basis, Missouri fleets operate approximately 7,000 vehicles of which 6,300 are light duty vehicles and the remaining are medium or heavy duty. Missouri state fleets expect to purchase approximately 1,400 vehicles in FY97 (1,260 light duty and 140 medium or heavy duty). As evidenced by the MDA case study, a significant portion of gasoline powered trucks could be replaced by biodiesel FFV's. As the federal regulations are currently written, diesel OEM's would have to engineer and warranty an engine to operate on B100.

Designation of a biodiesel blend such as B20 may prompt more OEM's to assume liability issues associated with alternative fueled vehicles because OEM's are technically more comfortable with low percent biodiesel blends. B20 is the most popular biodiesel blend tested so far with major diesel consumers and engine manufacturers. B20 provides many of the environmental and safety benefits of pure biodiesel at a fraction of the cost. B20 is also compatible with existing diesel engine maintenance and refueling facilities. More than 20 million miles of actual in-service pilot programs have been conducted across the nation using B20. Several national trade associations representing major private diesel consumers including the American Trucking Association (ATA) and the American Bus Association (ABA) have endorsed including B20 as an EPACT alternative fuel. For these reasons, B20 should be a popular EPACT compliance option for fleets that deploy diesel powered vehicles.

Even though EPACT currently only requires affected government fleets to purchase AFV's and not to use a minimum amount of alternative fuel, including B20 as an EPACT alternative fuel is still important for at least two reasons. First, in some states, state law will require or provide incentives for state owned fleet vehicles to go beyond minimum requirements of Federal law. These states will require or encourage drivers of their state owned AFV's to actually use alternative fuel. In these states, the cost of alternative fuels will be an important factor. Cost competitive B20 will give states more flexibility to comply with EPACT regardless of whether alternative fuel use is mandatory or voluntary in their state owned AFV's.

Second, while there is currently no Federal mandate to use alternative fuel in many AFV's, that may change. EPACT requires DOE to assess the voluntary use of alternative fuels over the next few years. If voluntary use of alternative fuels falls short of Congressionally determined targets, then Congress has authorized DOE to adopt new regulations to increase the use of alternative fuels. Including B20 as an EPACT alternative fuel will give affected fleets more opportunity to voluntarily meet the goals of EPACT.

Conclusions

Under current state and federal regulations, state fleets will be required to purchase alternative fueled vehicles. State fleet operators, however, are not required to use alternative fuels in these vehicles. These conditions present an opportunity for state fleets to purchase biodiesel FFV's, utilize a low percent biodiesel blend, and create economic development opportunities within the state by selecting biodiesel as their energy policy compliance strategy.

Biodiesel blends, such as B20, have proven to be competitive with other alternative fuels in helping to meet more stringent clean air standards, as well as comply with EPACT and state alternative fuel vehicle purchase mandates. However, before this will truly become reality OEM's must provide engine warranties for biodiesel vehicles. Also, the USDOE must certify B20 blends as an alternative fuel. Success in these two areas will help in reducing dependence on foreign petroleum, provide alternative business opportunities in rural communities and help enhance the environment.

SELECTED REFERENCES

Alternative Fuel Transportation Program; Final Rule; 10 CFR Part 490; FR, Vol. 61, no. 51. pp 10622-10661.

Cottom, Mary. 1996. Missouri Propane. Personal Communication on June 26, 1996.

Food and Agricultural Policy Research Institute. "Increased Soybean Oil Demand: Its Effects on the Soybean and Corn Industries". University of Missouri-Columbia, CNFAP 16-94. April, 1994.

Hayes, Dermot J. 1995. Biodiesel: Potential Economic Benefits to Iowa and Iowa Soybean Producers. Center for Agricultural and Rural Development, Iowa State University. September, 1995.

Hicks, Jenny. 1996. Missouri Gas and Energy. Personal Communication on July 10, 1996

Schaffer, Stephanie. 1995. Missouri Department of Agriculture Fuel Conservation Plan. Missouri Department of Agriculture. October 1, 1995.

Smith, Russ and Maryl Freestone. 1996. Market Opportunities for Diesel Technology; State Government Fleets and Energy Policy Act Mandates. Energy Resources Center, University of Illinois at Chicago. June, 1996.

Weber, J. Alan. 1996. 1996-1998 Biodiesel Marketing Plan. Prepared for the National Biodiesel Board. March 10, 1996.

Yates, Stacey. 1996. Missouri Corn Growers Association. Personal Communication on 9, 1996.