Ethanol: Volatile substance, volatile pricing?

Holden and its ethanol consortium partners often mention energy security among the advantages of a biofuel like E85. But what does that mean exactly?

It sounds like armed guards protecting petro-chemical refineries and high-level diplomatic missions to OPEC countries arguing for relief from extortionate pricing.

At the consumer level, it's just as much a matter of leaving the car parked at home and taking a bike or train somewhere because you can no longer afford to fill the tank.

Flex fuel is supposed to alleviate some of the pricing spikes that make front-page news. The idea is that the locally-brewed ethanol is not subject to the vagaries of currency exchange rates for imported fuel or the market-determined price per barrel.

E85 does contain petrol, so the price of the blended biofuel will still vary with the rise and fall of petrol prices, but not to the same degree.

What some will find troubling then, is that the one retail fuel chain carrying the new fuel (Caltex with its Bio E-Flex brand), has said that it will peg the price of its E85 product to it's Vortex 98 premium unleaded, as we reported at the media preview for the Holden Commodore VE Series II.

Without any further explanation, that leaves consumers expecting E85 to reach $1.36 a litre once the price of 98 RON PULP hits $1.70.

The price of Bio E-Flex is pegged at 34 cents below the premium petrol, says Caltex spokesman, Michael Ridley-Smith. Explaining how the company had arrived at the differential of 34 cents per litre in the first place, Ridley-Smith drew a parallel between the premium petrol product and the higher-octane biofuel.

"We wanted to start out with the fuel that its performance characteristics are nearest -- and discount from there. If your starting point is [91 RON] ULP, you're not giving it fair value for the benefits you bring. It's 105 octane..."

That's not to say the differential between the two fuels will remain fixed at that point, though, should the price of petrol stampede.

"The differential will change; definitely," Ridley-Smith told the Carsales Network during the drive program last week for the new Holden range. Exactly how much that will change will rest with the sort of deal Caltex can do with the three ethanol suppliers in Australia (and a fourth once Coskata's waste-converting plant comes on line).

"Depending on what the ethanol producers do... we change those differentials from time to time. With E10, for instance, when we were up $1.40 to $1.60 [for] ULP, our E10 was at a three-cent differential -- and the price was great.  Now we can't afford that, so we've had to move our differential back to a two-cent discount.

"So things do change. The premium fuel differential has changed from time to time. We don't produce any ethanol, so we've gotta buy it all in... It really does depend on what the ethanol producers do, but on the whole, ethanol in Australia doesn't mirror petrol prices."

For Caltex at least, the ethanol will help keep the wholesale price of E85 artificially low. It then remains the prerogative of the retailer to determine how the Bio E-Flex should be priced for consumers. If the biofuel ends up too steep, consumer sentiment will probably drive the company to lower prices -- that and competition from rivals, something Ridley-Smith expects to happen sooner or later.

"Customers of the three suppliers will have capped pricing in their contracts, for a set period of time," says Ridley-Smith.

"The three suppliers are Manildra, CSR (Sucrogen, as they're now called) and the Dolby refinery."

It's the capped pricing and the finite-term contracts that will help Caltex to keep the prices low enough to satisfy consumers, but if there's any hint that E85 might not be the bargain that it looks on the face of it, there's another alternative fuel ready to take advantage of that -- LPG.

E85 provides the Commodore with the flexibility of running on the biofuel or conventional 91 RON ULP, but LPG is already available now, with plenty of infrastructure -- and retail competition -- to support it.

Furthermore, while E85 offers car owners a cheaper alternative to conventional petrol and bootspace unrestricted by the need to house separate gas tanks, Holden's archrival Ford has a Falcon that will run on the gas alone -- and that car is soon to be upgraded with a new Liquid Pressure Injection system for greater efficiency.

LPG is cheaper again than E85 and the one major disadvantage is that it isn't a renewable fuel, but even in respect of energy security it's a better option than petrol.

And with the LPI engine, there's a reasonable probability that the upcoming Falcon may consume a smaller quantity of the cheaper LPG for a given distance at a given speed than the Commodore on E85 alone.

Caltex needn't be worried too much either way; it sells both E85 and LPG anyway. According to Ridley-Smith, the company doesn't expect startling sales of Bio E-Flex right away.

"We've been reasonably conservative on that," he said of the company's forward estimates, but the decision to go with E85 was based on a need to be more than just a fossil-fuel supplier.

"We recognise that fossil fuels, whilst they're not going away, they can't meet the energy needs of the future -- so we do have to diversify."

The question for the new-car buyer remains however. Buy the flexible E85 Commodore now or wait for the LPI Falcon -- with its prospective lower running costs?

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