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Natural Gas: What Fleets Need to Know, Part 3 - What's the payback?

October 2012, TruckingInfo.com - Feature

by Deborah Lockridge, Editor in Chief, Editor in Chief - Also by this author

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The environmental and image benefits of being "green" and reducing dependence on foreign oil are among the reasons fleets are looking at natural gas fuel for trucks, but even the most diehard "green" fleet is still looking for a return on its investment.

Dart Transit launched a small fleet of CNG-powered tractors dedicated to Andersen Window Corp. While CNG-fueled trucks cost about $45,000 more, Dart projects that fuel cost savings $25,000-$35,000 per year, per truck.
Dart Transit launched a small fleet of CNG-powered tractors dedicated to Andersen Window Corp. While CNG-fueled trucks cost about $45,000 more, Dart projects that fuel cost savings $25,000-$35,000 per year, per truck.

The question is - how do you figure the ROI on a natural-gas truck?

There's no denying there's a higher up-front cost. Proponents of natural gas say the payoff comes primarily in the form of lower natural-gas prices, which typically run $1 to $2 lower per diesel-gallon-equivalent than diesel.

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Green Energy Oilfield Services in Fairfield, Texas, took delivery of 60 LNG-powered Peterbilt trucks earlier this year. However, Roger Nevil, president and COO of the company, says his CFO figured it would pay for itself fairly quickly. "We figured out just on the fuel cost savings alone, it's about a 14- to 15-month payback."

How much more you'll pay up front depends on a lot of factors, including the size of the engine, whether it's burning compressed natural gas or liquefied natural gas, how many fuel tanks you need onboard, whether the engine requires a higher-priced automatic transmission, the industry you're in, etc.

You're probably looking at $40,000-plus for a truck with the 8.9-liter Cummins ISL G spark-ignited engine, and more for the Westport HD 15-liter with LNG. Scott Perry, the vice president who heads up Ryder's alternative fuels program, says the cost is typically 50% to 100% more than a comparable diesel-powered rig.

As the industry gains critical mass, prices for equipment will come down. James Harger, chief marketing officer for Clean Energy Fuels, said during a recent Truckload Carriers Association panel discussion that for big refuse fleets, which have been investing heavily in natural gas trucks, incremental costs have dropped from $60,000 in 2007 to $15,000 to $20,000 currently.

There are also aftermarket dual-fuel options for retrofit on older trucks that have lower up-front costs. However, with any dual-fuel option, you have to take into account how much of the more expensive diesel fuel is used compared to natural gas.

The payback period for natural-gas-powered trucks can vary greatly, depending on the application.

Ryder's Perry explains that some customers operate their vehicles over a 10- to 12-year lifespan and have lower annual mileage, so they have a longer payback period. However, he says, "Most of our customers are working from the perspective that they have competing interests for available capital in their organization. So to get support for higher lease rates, they're looking for returns that will allow them to recover those incremental costs in the first two years and recognize savings in the balance of the lease."

The number of miles traveled in a year, and therefore the amount of fuel used and the amount of money saved, is the major factor in ROI, explains Chad Parker, Volvo product manager handling alternative fuels.

"If they're doing 100,000 miles a year, that is going to be probably in the 20- to 24-month time period. When you get into more longer-haul applications and LNG, there's a quicker return on the initial investment just because of the fuel cost saved."

Easing the pain

In some parts of the country, including California, Texas, Oklahoma, Louisiana and West Virginia, there are financial incentives available to help defray the up-front cost. In addition, nonprofit Cascade Sierra Solutions offers education, grants and loans to help truckers move to cleaner vehicles, which includes natural gas. The federal Clean Cities Coalition also works closely with natural gas providers, OEMs and dealers, in partnership with local communities.

That's how Bill Malone, president of Enviro Express in Bridgeport, Conn., got into natural gas. He's converting his 40-truck fleet to natural gas, with 18 trucks so far, mostly Kenworth LNG, and opened the first LNG fueling facility east of the Mississippi. With the help of the grant, he says, the ROI on their investment in the trucks and fueling facility (which sells LNG and CNG retail) is expected to be about 40 months.

Navistar International earlier this year announced a program with Clean Energy Fuels, where customers who commit to buying a certain amount of natural gas from Clean Energy for five years get financial incentives to offset the incremental cost - and get a fueling infrastructure put in at no cost. Those customers will pay more than the going rate for natural gas, but there'll still be a 50-to 60-cent a gallon saving compared to diesel fuel, according to Clean Energy officials.

Looking for a payback
Figuring ROI is a complex process and a moving target.

"It's not as simple as $ 1.50 a gallon times X gallons a year," said Jim Hebe, senior vice president for North American sales operations at Navistar International during a TCA panel discussion.

On top of fuel prices, some of the ROI factors you need to consider include fueling costs, maintenance costs, insurance costs, whether the additional weight and space for fuel tanks will affect payload capacity, and hard-to-quantify benefits such as attracting more customers and company image.

Then there's the question of fuel economy.

Because diesel's a liquid, it's hard to make apple-to-apple comparisons with natural gas. So we talk in terms of "diesel gallon equivalents." One of the most common ways to figure a diesel gallon equivalent is by the amount of energy measured in British thermal units, or Btu. Diesel has approximately 139,000 Btu per gallon, so an amount of natural gas that also has 139,000 Btu is a diesel gallon equivalent.

However, natural gas trucks may not go the same number of miles on that DGE as they would on a gallon of diesel. The spark-ignited combustion process is less efficient than traditional diesel combustion. These engines, such as the Cummins ISLG 8.9-liter that's in prevalent use today, have 5% to 12% lower fuel economy, according to Zak Ellison, director of customer support at Cummins, during a TCA panel discussion.

However, a dual-fuel engine such as the Westport HD is still using traditional diesel compression combustion, so there is little to no penalty in fuel economy.

If you are going to invest in your own fueling station, that's another factor to consider. Selling natural gas to outside customers can help pay for that investment.

As infrastructure expands, the need to have your own fueling facilities may become less of a factor.

However, when looking at the availability of fueling stations, you also need to look at how far out of route drivers may have to travel to reach fueling stations, burning extra fuel and precious hours of service.

Will they be able to fill as fast as on diesel? How much more frequently will they have to stop to fuel?

Other factors

The extra weight of CNG tanks and fuel may affect the amount of payload hauled.

Insurance rates may be a little higher for natural-gas-powered vehicles, says Sharon Banks, founder and CEO of Cascade Sierra Solutions, "not because of added risk, just because it's a more expensive vehicle," she says.

You also need to consider maintenance and repair. If you do it yourself, it means upgrades to your maintenance facilities to bring them into code for working and extra training for technicians. LNG will typically mean more expensive shop upgrades than CNG.

Spark-ignited engines take a different engine oil that must be changed more often, and have spark plugs that need to be changed. On the other hand, they don't need selective catalytic reduction or a diesel particulate filter, meaning less cost for diesel exhaust fluid and DPF cleaning and replacement.

Then there's the question of residual value, says Stu MacKay president of the MacKay & Co. market research and consulting firm. "Are we going to find an adequate base of second owners who can or are willing to pay the premium? In many cases the vocational use changes with the second owner," he notes.

In short, you'll need to do your homework.

"Don't just look at how cheap the fuel is," says Volvo's Parker. "There's a lot of great information on the Department of Energy's website and fuel suppliers' websites. Do some kind of cost calculation, whether it's from the dealer or OEMs or engine manufacturers. Look at the whole package."

What if natural gas prices go up?

The boom in U.S. natural gas production has created an oversupply, leading to 10-year lows in natural gas prices. At the same time, some natural gas producers have cut back because of the low prices. If demand for natural gas increases, some wonder, won't prices increase, too?

At press time, natural gas prices were about $2.70 per million Btu, or MMBtu. For comparison, from 1990 through 2012, natural gas futures prices averaged $4.10 per MMBtu, reaching a record high of $15.35 in 2005 in the wake of hurricanes Katrina and Rita, which shut off natural gas supply flows along the Gulf Coast.

The Department of Energy expects natural gas prices to rise. The DOE's Energy Information Administration projects that after 2017, natural gas prices will rise more rapidly than crude oil prices - but oil prices will still be at least three times higher than natural gas prices.

Natural-gas evangelist and energy magnate! Boone Pickens has said natural gas prices need to be around $5 MMBtu to make economic sense for natural-gas producers.

So it's a pretty sure bet that natural gas commodity prices will rise. But natural gas experts say even a large price spike in the commodities price will not result in a correspondingly large spike at the pump.

"I think the laws of supply and demand definitely would create some movement in pricing, but I think it's important to understand the fundamental cost of the fuel in the retail environment," says Scott Perry, who heads up Ryder's alternative fuels program.

He explains that about 70% of the cost of a gallon of diesel is based on the petroleum itself. The rest of that price is made up of taxes, infrastructure and things of that nature. Because the price of oil is so volatile, affected day to day by such things as economic news from Europe or unrest in the Middle East, the price of diesel is volatile, as well.

In contrast, only about 20 to 25% of the cost of a diesel gallon equivalent of natural gas is driven by the price of the commodity, which is less volatile in the first place. The rest is tied to taxes, infrastructure, costs for the compression or liquefaction facilities, etc.

Basically, each $1 per MMBtu increase in natural gas prices equals a 14- to 15-cent-per-DGE increase at the pump. So if the commodities price doubles from $3 to $6, the pump price would rise by less than 50 cents per DGE.

In addition, the natural gas fueling infrastructure is still a relatively young industry, points out Brian Powers, vice president of operations for Clean Energy Fuels. Just as with the trucks, higher volumes should mean lower costs to build and maintain fueling facilities.

"Once the volumes start to materialize, once you start to get market share, the capital efficiency of the infrastructure will improve," he says. "So if in the future the cost of natural gas goes up, my view is, once the volume goes up, you're going to more than offset that."

Learn more about natural gas and the fleets using it, including an extensive list of online resources, on our website at www.truckinginfo.com/hdt/naturalgas2012.

From the October 2012 issue of Heavy Duty Trucking magazine.

Natural Gas: What Fleets Need to Know, Part 1

Natural Gas: What Fleets Need to Know, Part 2 - New Engines, More Options

NATURAL GAS: WHAT FLEETS NEED TO KNOW, contents page



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