Natural Gas as an Alternative Fuel

By James

In the wake of the energy revolution in the United States, it would not seem irrational to assume that the abundance of natural gas recovered via hydraulic fracturing would lead to a host of new wide-spread applications, transportation not-withstanding. Indeed, while consumers and brands have for several years debated the worth and feasibility of electric vehicles, as we saw in our EV Charging case, government and industry have slowly begun the transition to natural gas for trucking fleets.

For years municipalities have used natural gas to fuel fleets of public buses, sanitation and utility trucks, and airport shuttles. However, private expansion in the natural gas market was limited. In the last few years, that dynamic has begun to shift, due mostly to more favorable economics. Below is an example of the fuel savings achieved from a single CNG truck.

Diesel CNG
New Truck Cost $150,000 $200,000
Retail Fuel Cost $3.62 $2.22 As of 11/2/2014
GGE GGE Gasoline Gallon Equivalent
$3.62 $1.95 DGE as % of GGE 88%
DGE DGE Diesel Gallon Equivalent
Savings per gallon $1.67

Miles per gallon 6 4.8 Fuel Economy Loss 20%
Annual gallons used 20833 26042 Average annual mileage 125000
Annual fuel cost $75,417 $50,875
Annual fuel Savings $24,542
Payback (years) 2.04
Calculations are approximates

Since most trucks are swapped out every 4-6 years or so, total fuel savings could reach ~$100k. Further, a host of subsidies from the federal government and 17 separate states also incentivize the transition from diesel fuel to natural gas for logistics fleets. Texas and California both offer $45k in subsidies to replace up to 12 diesel trucks per operator, for instance.[i]

No less compelling, natural gas fleets emit 30% less CO2 on average. Hypothetically, if the entire US trucking industry converted to gas overnight, the US would immediately see a 12.25% reduction in CO2 emissions, the equivalent of permanently grounding all air transportation in the country.[ii]

So, if natural gas is more abundant, cheaper, government incentivized and cleaner, why isn’t it being adopted at a faster pace?

Fuel Savings do not equal cost savings

The reality is natural gas trucks come with a host of additional costs that tend to offset fuel savings. First, natural gas has a lower energy concentration (Diesel to CNG is a 6:1 BTU ratio) and, in general, takes up more space. The additional fuel storage is both heavier and displacing for a freight truck, resulting in a lighter maximum capacity load, and therefore, a lower payout.

Further, natural gas trucks require more frequent maintenance due to more due to a higher level of engine degradation. Since there are far fewer mechanics certified to work on natural gas engines, prices are higher. In regards to infrastructure, there are very few facilities constructed meant to deal with natural gas engines which have the distinct property of requiring additional ventilation in the case of a fuel spill.

Further, the lack of ubiquitous natural gas fueling retail sites results in an additional fuel cost relative to diesel simply by the fact that service stations are not always located conveniently.

Infrastructure: Chicken and egg

Perhaps the single largest reason natural gas has been slow to grow in national logistics fleets is the slow going process of building out retail infrastructure. That is not to say it takes a long time to build new stations – it does not. But that the supply of stations will only increase with demand for natural gas as a transport fuel, and demand cannot increase without supply. One firm, Clean Energy Fuels, has built out that national infrastructure almost entirely on its own thus far, as seen below, with concentrations in the Northeast and California. However, many fleet managers admit that the lack of robust infrastructure surrounding distribution is the greatest barrier to adoption of the fuel.[iii]

http://www.cleanenergyfuels.com/why-clean-energy#Robust-Nationwide-Network

Diesel is still attractive

And although a glut of natural gas has hit the market, prices have not plummeted. Indeed, there is cause to believe natural gas prices will only increase if and when new export infrastructure comes online and government clearances are achieved. Meanwhile, the price of crude is dropping and is expected to continue to do so with similar effects on the price of diesel. As the DGE price between natural gas and diesel converges (diesel getting cheaper and gas more expensive), the time at which fleet owners breakeven on their natural gas investment increases. For the low margin, cash poor business of trucking that is not an optimal situation to be in.

EIA, Annual Energy Outlook, 2014

Long Term

Over the long term, the economics will likely play out to encourage a much larger shift to natural gas trucking fleets. By some accounts, 1/3 of the US long-haul fleet will be using Natural Gas by 2025.[iv] This is good news for the climate and for supply chain intense businesses, as nationwide distribution costs will also decline. However, if that is going to happen as expected, natural gas retail developers are going to have to put their foot on the gas.

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

2 Responses to “Natural Gas as an Alternative Fuel”

  1. Being from Massachusetts, and having ridden on many of our CNG fueled buses – I agree with you that natural gas provides an attractive alternative fuel. Specifically, I’ll also highlight how Massachusetts couples this with a waste disposal program which makes it even more environmentally friendly. (http://www.mass.gov/eea/pr-2014/food-waste-disposal.html)

    I would push back, however, on your assumption that supply chain intense businesses will benefit and switch over to this method. While retail infrastructure can be built out and increase the feasibility of using CNG vehicles – heavier loads and more frequent engine maintenance are significant issues for supply chains that need to run reliably and efficiently. A breakdown and delay in a supply chain could end up costing a company thousands in product delay or impairment. While CNG fleets seem to make a lot of sense for government adoption, I think it’s more likely we see them adopted in the consumer segment before we see adoption in the commercial space given the relatively lower financial downside risk.

  2. Thanks for the comment Mary. In retrospect, I think you make a very good point. There is undoubtedly significant risk for fleet managers in adopting this new technology. That risk explains why the large trucking engine manufacturers are not pressing the sale of gas engines as much as expected. The truth is, they are receiving pushback from trucking companies who just aren’t ready to make the switch. In the cases where large organizations have made the switch to natural gas (governments, utilities, small segments of national logistics companies like UPS or FedEx) they’ve had to build out much of their own fueling and maintenance infrastructure to support the switch — something which is prohibitively expensive to a majority of players. That being said, I don’t see consumer adoption likely either for the same reasons mentioned above. It just wouldn’t be convenient for someone to fill up their CNG car because the likelihood of a compatible service station in their neighborhood would be so low. In regards to commercial adoption, at least the infrastructure can be built out near current trucking routes and logistical nodes. Either way, we’re going to be waiting for a long haul (pun intended).

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