If you own a gasoline station, Karl Doenges wants to talk to you. His company, CleanFuel USA, based in Georgetown, Texas, helps stations sell fuel that is a mixture of gasoline and ethanol.  

Mr. Doenges and others see a growing business in ethanol-blended fuel, backed by rising oil prices, concern for energy independence, and worries over climate change accelerated by burning fossil-fuel based gasoline.

These concerns in mind, the U.S. government last year passed an energy bill that requires a nearly three-fold rise is the consumption of ethanol by 2022. In response, ethanol producers are ramping up production across the country.

And dozens of startups—zinging along with millions in venture capital funding—seek to develop new technology that will drive down the price of ethanol, made mostly from corn in the U.S. today, using sources like fast-growing grasses or agricultural waste.

But some in the industry worry that the distribution and retail infrastructure for ethanol is lagging, that the rise in production means nothing if it can’t reach the consumer.

They contend that if the U.S. is going to seriously reduce its dependence on oil, then it must quickly ramp up ethanol production and consumption. They point to countries like Brazil and Sweden that have implemented ambitious plans for replacing gasoline with ethanol.

“There is no question that the distribution and retail side of ethanol fuels has a long, long way to go,” said Bill Roe, chief executive of General Motors-backed Coskata, an ethanol startup based in Warrenville, Illinois. “With the latest energy bill it is too easy to say that if you make it, it will get sold.”

E10 on the way

Most ethanol now used in the U.S is blended with gasoline in increments of 10 percent, called E10. Your standard vehicle on the road today can run on that mixture without changes, and existing storage tanks and dispensers at filling stations are adequate.

A growing number of states now require E10, and oil companies—as a result of government mandates or for their own economic reasons—are increasingly offering the blended fuel. Oil giant ExxonMobil, for example, recently announced that this year it would double its production of E10.

But even if all the gasoline consumed in the U.S. in 2022 were E10, using U.S Energy Information Association forecasts that would still mean only about 14 billion gallons of ethanol consumed. That would be at least 16 billion gallons short of the Renewable Fuel Standard mandated by the energy bill.

So if ethanol use is going to ramp up, higher blends than E10 will be needed. And that’s where the contention begins.

Some, like the National Ethanol Vehicle Coalition, want to see a jump to E85, which is 85 parts ethanol and 15 parts gasoline. They point out that there are already 6 million flexible-fuel vehicles on the road, which can run on pure gasoline and blends up to E85. And the three largest U.S. carmakers—Chrysler, General Motors, and Ford—say half their lines will be E85 compatible by 2012.

But to increase the volume of E85 in the system would require an overhaul of gas stations across the country. Today there are only about 1,500 stations, or less than 1 percent in the U.S., with storage tanks and dispensers that can serve E85. If each station assisted 300 of the flex-fuel vehicles on the road today, said Michelle Kautz of NEVC, there would have to be 20,000 stations.

“I would say our biggest hurdle is the potential cost to the retailer of putting infrastructure in and the education needed to get customers to support that,” said Robert White, of the Ethanol Promotion and Information Council, a trade group.

Putting in an E85 tank and dispenser costs from between $6,000 and $30,000, said Mr. Doenges, vice president and general manager for CleanFuel USA, which has equipped several hundred stations.

The simplest overhauls need a tank cleaned and a new dispenser. The big jobs—with all the “bells and whistles”—require ripping out concrete, adding new tanks and dispensers, and extending islands and canopies.

There are federal tax breaks and a growing number of state incentives for stations to add E85 infrastructure.

But Mr. Doenges said the other hurdle to ramping up E85 is the oil companies.

They control much of the fuel at the bulk terminals, the large storage facilities around the country where gasoline and other fuels are kept in tanks and later distributed by truck to retailers. It’s at the terminals where E10 is made. But the demand for E85 is too low for it to be economical for big oil companies to produce, he said.

Others say that oil companies won’t blend E85 because it dramatically reduces the demand for their product—gasoline.

So CleanFuel USA also acts as a distributor, taking ethanol straight from producers, predominantly in the Midwest, to retailers.

The lack of availability of E85 from major distributors has made gasoline station owners reluctant to install new dispensers. And since there are few stations asking distributors for E85, there’s little incentive for anyone to make the blend.

That’s why the other side to this debate wants to see a gradual rise in blend percentages. They say that the millions of dispensers already in place across the country can handle a 15 percent ethanol blend, and recent research backed by the state of Minnesota suggests that standard vehicles can run on it too.

Matt Hartwig of the Renewable Fuel Association said that ethanol storage tanks are popping up at terminals across the country.

“You see the infrastructure being put in place,” he said. And once the ethanol is at the terminals—even if it’s intended for E10—that will make the jump to higher blends easier in the future, he said.

It’s all about the money

Morningstar analyst Michael Tian doesn’t lose sleep over this debate. He says the infrastructure will come once the price of ethanol drops.

“If you can’t get ethanol cheap enough, you won’t use it,” he said.

Ethanol contains less energy than gasoline, meaning a car filled with ethanol gets fewer miles per gallon. Accounting for this energy difference, at the time of publishing, E85 was retailing for a nationwide average of $3.56 a gallon compared with $3.28 for regular gasoline, according to the Automobile Association of America.

Marianne Wu, a partner with Mohr Davidow Ventures, a venture capital firm in Silicon Valley that has invested in ethanol startups, isn’t so bothered about the infrastructure build out either.

“The market is already so big,” she said. “The risk [for startups] is if the technology will work, if it will scale up, if it will be economically attractive.”

For those focused on the business of ethanol, that may be true—it’s already a huge market and a cheaper product will drive sales. But others with grander visions—of energy independence, of reduced greenhouse gas emissions—want those darn E85 dispensers in as fast as Doenges and his crews can hammer out a block of concrete.