Blending to the Top
Sparsely populated North Dakota leads the U.S. in blender pumps.
Source: Ethanol Producer Magazine article by Kris Bevill, Jan. 14, 2011
The USDA’s recent directive to assist retailers with the financial burden of installing 10,000 blender pumps over five years stands to usher in a new push for blender pumps throughout the U.S. While the USDA’s support is a welcome signal of federal support for ethanol infrastructure, other efforts are already being carried out at various levels throughout the country with the same overall goal of increasing the amount of ethanol available to consumers. Several states offer retail station owners incentives to install blender pump or E85 dispensers. Various corn grower groups also offer financial reimbursement for the installation of E85 or blender pumps. Growth Energy offers a direct grant of $2,500 to any retailer who installs an E85 pump and $5,000 for a blender pump. All of these programs are an encouraging sign of the ethanol market’s potential to expand, but one state’s strategy in particular stands out for its impressive level of success in building out blender pump infrastructure.
North Dakota, (total population about 650,000) has an economy that historically has been driven largely by agriculture. In recent years, corn production has increased and, with it, ethanol production. Booming oil production in the western half of the state helped build a budget surplus and has added an interesting dynamic to this traditionally farm-based state. But even before the oil boom began, forward-thinking legislators and hands-on industry members decided that North Dakota needed to accelerate the development of various energy sources produced in the state and to actively promote those resources. In 2000, under the leadership of Gov. John Hoeven, a committee was formed to evaluate the state’s energy resources. The resulting policy, called EmpowerND, included comprehensive measures to support the economic development of all aspects of North Dakota’s energy sources, including coal and petroleum, wind power, ethanol and biodiesel.
One of the initial goals of EmpowerND was to increase the state’s ethanol production by tenfold, says Tom Lilja, executive director of the North Dakota Corn Council. In 2001, the state had just 20 million gallons of ethanol production capacity. A statewide ethanol production incentive program was put in place in 2002 and by 2008, due in part to the incentives made available through EmpowerND, more than 300 million gallons of additional ethanol capacity had come online. The state’s current production capacity is about 330 MMgy.
Once ethanol production capacity had been expanded, work began on increasing in-state usage of the fuel. Members of the state corn growers association contacted the governor’s office to discuss incentivizing E85 as well as ethanol blender pumps. “We approached the governor and he really liked the idea,” Lilja says. “He wanted to do it as a cooperative effort, so the corn growers offered to put up a half-million dollars toward this program to get a lot of pumps across the state.”
The governor requested $2 million from legislators for a statewide Biofuels Blender Pump Program to incentivize the installation of pumps at retail stations. Under the program’s guidelines, any North Dakota retailer who installed an approved blender pump and agreed to sell biofuel blends for two years would be eligible to receive $5,000 for each installed blender pump, capping at $40,000 per retail site. In 2009, the state legislative assembly approved the program and agreed to allocate $1 million from the state’s general fund to finance it. Matching federal funds were obtained to equal the governor’s initial request of $2 million.
In addition to the state program, the North Dakota Corn Council agreed to provide $2,500 for each installed pump. After factoring in federal tax incentives and Growth Energy’s available grant money, the approximate $25,000 price tag for a new blender pump would now actually cost North Dakota retailers about half that amount.
“Moving ethanol and increasing ethanol production has been a big part of the governor’s agenda,” says Shane Goettle, commissioner of North Dakota’s commerce department. “The governor sought early on to increase ethanol production. This [blender pump program] was an effort to support that production. Having the infrastructure in place to consume ethanol was a key part of the strategy. It was the next step in this evolution after we had the plants in place to make it available to our consumers.”
Retailer and consumer response to North Dakota’s blender pump program was almost immediate. Prior to the program’s unveiling in October 2009, the state had no blender pumps. By November 2010 at least 76 ethanol blender pumps had been installed throughout North Dakota and another 172 reimbursement applications had been received by the commerce department.
Of course, installing the pumps is only the first step toward increased consumer usage. Once the choice is available, will customers buy more ethanol? In North Dakota, the short answer is “yes.” Retailers who installed blender pumps in the first year of the program reported increased sales for all types of fuel offered at their stations. Most notable though has been the growth in sales of E85. Between January and August of 2009, 167,025 gallons of E85 were consumed in North Dakota. During the same time period last year, 351,161 gallons of E85 were consumed. “What’s really crazy about those numbers is that 50 percent of that increase was only five blender pump locations,” Lilja says. “So we think E85 sales will be exploding once we have a lot of these pumps in place. We think we could go through 1 million gallons of E85 by 2011.” Sales of mid-level blends were not included in the 2009-’10 comparison, so the actual amount of ethanol consumption within the state is even higher than reported.
Goettle says the number of reimbursements issued by his department is a good indication of the demand for blender pumps from retailers and consumers. “Ethanol consumption has doubled and we expect that to continue to move forward as consumers learn about this choice at the pump and begin using it in their vehicles,” he says. “The choice here lies with the consumer. That’s the advantage of the program. The increase in sales is because consumers are responding to the availability.”
Part of what made North Dakota’s incentive program so successful is the high level of collaboration that occurred between all parties with vested interests in the pumps, including ethanol producers, corn growers, petroleum marketers and state officials. Jeff Zueger, chairman of the North Dakota Ethanol Council and general manager of the 50 MMgy Blue Flint Ethanol LLC plant, located in the central part of the state, says the state’s ethanol plants provided background information and market data to support the call for blender pumps and also lobbied local and state officials to pass the legislation. The work was worth their effort. Zueger says demand for ethanol from state producers increased almost immediately as a result of the program. At Blue Flint, E85 sales from its onsite inline-blending system increased by four times the amount sold prior to the blender pump incentive. And that was within just two months of the program. He expects demand to continue to grow as more pumps are installed in the plant’s area.
“It’s been very positive for our facility,” he says. “It provides a great opportunity for our industry to work more closely with retailers on providing product that they can directly market. We’ve found specifically at Blue Flint that if we work directly with retailers, we can offer pricing options that meet their business objective. We offer spot and forward pricing. If they like to have their forward-priced product indexed off of petroleum-based products we can offer that to them as opposed to indexing it off of the ethanol market. It allows for hedging opportunities for the retailer to lock in prices when the spread between gasoline and ethanol are optimal for them.”
The 120 MMgy Tharaldson Ethanol LLC plant in Casselton, located about 20 miles west of Fargo, doesn’t offer inline blending so it has experienced a more gradual climb in local demand, according to general manager Russ Newman. The plant currently sends between 93 and 97 percent of its product to other states in unit train shipments, but he’d like to eventually keep up to 20 million gallons per month in the state. “We realize we’re going to be exporters, but as much as we can get in the area the better,” he says.
While collaboration was vital in forming and implementing North Dakota’s blender pump program, most parties involved credit one man for its ultimate success. Kent Satrang, CEO of Petro Serve USA, manages 20 retail fueling stations throughout the state, several of which are located in Fargo, North Dakota’s largest city. He’s a longtime supporter of ethanol because, he says, it’s “the right thing to do.” His company’s stations were some of the first to install blender pumps following the program’s launch and Satrang says he is very proud of helping North Dakota become the No. 1 blender pump state in the country. “What was done with blender pumps through the North Dakota program is going to be a model for the future for other states and will be huge for North Dakota’s industry,” he says. “To go from zero blender pumps to 250 by the end of 2011 … we have changed the infrastructure of pumps in North Dakota.” In Grand Forks, for example, which is located about an hour north of Fargo and is the state’s third largest city, there were no blender pumps six months ago. In fact, “you couldn’t buy E85 within a 50-mile radius of the town,” Satrang says. “Yet there were 4,000 FFVs. The option was just not there.” Grand Forks consumers now have four blender pumps to choose from, all of which were installed as a direct result of the blender pump incentive program.
Contributions and Considerations
Ethanol became the industry it is today due largely to grassroots political efforts of early producers. North Dakota’s incentive program brings to light an emerging trend which resembles those early production efforts, only now the goal is greater consumer availability for the product. This includes passing legislation and forming relationships with petroleum representatives and transportation fuel marketers. When North Dakota’s blender pump program was in the formative stage, the state’s ethanol producers took an active role in lobbying legislators at the state capital. They also formed relationships with their local representatives and made their case for increased ethanol availability. “We’re fortunate to have a supportive legislature and governor’s office and others within the state lawmaking divisions,” Zueger says. “Policymakers viewed it as an investment in growing ethanol use throughout the state, which would positively affect the economics of the state, rather than viewing it as an expenditure.”
Alliances were also formed with the state petroleum marketers association. “Those people can be your best partners,” Newman says. “Kent Satrang went to [the capital] with the ethanol producers and that was a benefit because the retailers were asking for it, not just ethanol producers.”
Also key to North Dakota’s success was an informational program organized by the state designed to introduce retailers to blender pumps. Ethanol plant managers, retailers, blender pump manufacturers, the petroleum marketers association, the corn growers association and the state commerce department all participated in the meetings. Zueger says those meetings were critical in getting the word out regarding the incentive program to retailers. “We’d set up these meetings and present the different aspects of the blender pump program and the pumps themselves,” Zueger says. “We had retailers who had installed the pumps come to some of the meetings and talk about the experience they had. In our area, we also talked about pricing mechanisms, supply mechanisms and quality control measures that we use in producing the product and moving it to the market.”
Lilja says North Dakota’s program was launched at exactly the right time because it kicked in just as many retailers needed to upgrade their pumps for other reasons. So instead of replacing pumps with new traditional pumps, many were convinced to install blender pumps in order to take advantage of the incentives. Additionally, Lilja believes the location of the first few blender pumps was crucial to the program’s overall success. “It really was because we got some pumps in a larger metropolitan area near the beginning of the program that really helped it,” he says. “I know other states have done blender pumps, but they’ve done them in the small towns and they’ve had a hard time getting into the larger metropolitan areas. Rolling this out of Fargo under the leadership of Satrang and Petro Serve USA was huge.”
Goettle says North Dakota’s overall collaborative attitude toward energy policy deserves evaluation from other states seeking to form their own policies. “We’re one of the few states that has crafted a comprehensive energy policy,” he says. “The manner in which we seek industry input and direct communication with industry on what we need to move forward in all of these sectors is, I think, unique and a model for the country.”
From a financial perspective, there are few states with as healthy a budget surplus as North Dakota has, so groups such as state corn growers associations might have to take on larger roles in offering incentives elsewhere. “Based on the budget situations in other states, I think the corn growers are going to have to offer most of the money per pump,” Lilja says. “We were fortunate to have a $1 billion surplus in North Dakota and that’s one of the reasons the governor was in favor of this.”
Reimbursement applications for blender pumps installed in North Dakota are being accepted through May 1 and it’s possible the state legislators will vote to extend the program. In November, Hoeven was elected to the U.S. Senate and will take a seat on the Senate energy committee. North Dakotans believe Hoeven will use his experience in the state to benefit the nation’s ethanol industry, and early indications from Hoeven suggest he has a similar agenda. “Blender pumps not only support biofuels production, but empower people to make their own choices at the pump,” Hoeven says. “They should be a part of the nation’s larger energy strategy.”
Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine