In 2016, it’s far from simple to decide whether to switch from diesel to an alternative fuel or powertrain (electric or hybrid). It was easier to run the numbers and come to a conclusion one way or the other when the price of diesel fuel was on the rise and promising developments in alternative power technology were arriving one after another.
Not four years ago, predictions were made that natural gas alone would fuel up to 20% of new heavy-duty trucks by 2020. Now, though, thanks to everything from lower diesel prices to fleet concerns about natural-gas payback and fueling infrastructure costs, and a new push for electric zero-emissions vehicles, those predictions look to have been too optimistic.
The slide in the price of diesel fuel over the past two years has complicated the decision for many fleets. The question for them is not whether diesel prices will rise again, but how soon and how sharply. On the other hand, fleets that have invested heavily in natural gas vehicles and fueling infrastructure are unlikely to change horses quickly. And they tend to appreciate the price stability of natural-gas fuel vs. diesel’s price volatility.
The upcoming federal greenhouse gas/fuel economy rules are something of a wild card looking further out. The final Phase 2 rules, released last month, will cover 2021 to 2027-model-year trucks and tractors and 2018-to-2027 MY trailers. New, stepped engine standards will require a 4% carbon dioxide (CO2) reduction from 2017 to 2027. And Phase 2 will also address natural gas vehicles and engines, including emissions from the crankcase and LNG boil-off, regarded as two of the largest sources of on-vehicle methane emissions.
The impact of new rules aside, lowering fuel spend has not been the only reason truck fleets have chosen to convert to alternatives. Some opt for green power in accordance with corporate sustainability goals or to comply with shipper requirements for more sustainable transportation. Vocational fleets may run on alternative fuels produced by their own operations, such as natural-gas utilities or refuse fleets that use landfill waste, at an enviable cost. Others may operate in localities with specific environmental regulations or alternative fuel incentives.
Compressed natural gas remains the king of alternative fuels when it comes to medium- and heavy-duty trucks. For this article, that will be our main focus, but many of the overall themes apply to other alternative fuels and powertrains as well.
Crude oil and diesel prices
A crucial figure to keep in mind is CNG retail pricing vs. diesel. The latest quarterly Clean Cities Alternative Fuel Price Report shows that, on average during the latest reporting period, CNG cost about 15 cents more than diesel on a per-diesel gallon equivalent basis.
According to Clean Cities, interest in alternative fuels generally increases when the alternative fuel price is less than the conventional fuel price on a per gallon basis — “even if that differential does not directly translate to savings on an energy-equivalent basis.”
Some experts, however, don’t expect the price of diesel to remain that low.
“Over the past five- and 10-year periods in North America, [crude] oil has been at or above a range of $60-$70 per barrel. That equates to national average diesel prices of $2.55-$2.90 per gallon,” says consultant Jon Gabrielsen, president of Atlanta-based J.T. Gabrielsen Consulting. “The consensus of all the oil analysts that I follow is that oil will return to about that level and remain at that level or above for most of the near-term future.”
He says that’s a “reasonably confident” outlook because “as current wells age, they produce less and less. Oil has to be at those prices to justify drilling enough new wells to sustain global demand over the long term. The prevailing thinking had been that oil will reach $60 per barrel by year-end 2016 and $70 by year-end 2017. That could still happen, or it may take a little longer.”
Gabrielsen says although the medium-term (one- to two-year) trend is in the vicinity of $70 a barrel, “the path there will more likely resemble a roller coaster than a straight line,” with higher peaks and higher lows for each successive cycle.
Investing for the long term
UPS operates one of the largest private alternative fuel and advanced technology fleets in the country, with more than 7,200 vehicles. In March it announced plans to build 12 more CNG fueling stations and add 380 new CNG tractors. The $100 million investment represents part of the company’s effort to reduce its environmental footprint and diversify its fuel sources.
Because UPS own its fleet and the necessary infrastructure, it can “invest for the long-term rather than planning around near-term fluctuations in fuel pricing,” explains Mark Wallace, UPS senior vice president of global engineering and sustainability. “CNG is part of a broad investment in a variety of alternative fuel vehicles.”
“Whether a fleet is committed to sustainability as a goal or not, an investment in alternative fuels has to be economically viable to stand the test of time,” says Mike Casteel, UPS director of fleet procurement. “The low cost of diesel is a factor. But as to where the price of fuel needs to be, that’s tough to know.”
On the other hand, he points out that when natural gas was gaining traction in 2012 for use in heavy-duty trucks, it was before major technological improvements came along. Those advances have helped bring down the cost of switching to alternatives. In fact, Casteel thinks the lower price of diesel has accelerated improvements for alternatives. “Those investing in making this work have been forced to improve their technology and costs. And we have worked with them to do that.”
Still, he says that for natural gas to be economically viable in the face of lower diesel prices, a fleet has to deploy on a large scale. “The costs of [CNG/LNG] fueling stations are high, so we choose those fuels where we will be operating enough trucks around the clock.”
UPS has already built 30 natural-gas stations. “We look at the fleet profile in a given city,” says Casteel. “Do we have enough scale there in number of Class 8 tractors and the miles run to justify a CNG station? Then we look at the CNG infrastructure — is there a pipeline close to our property or nearby? It may be costly for the gas utility to put in lines. Whether we go forward depends on the answers we get.” He adds that the same approach applies to liquefied natural gas for tractors. “With LNG, we’re looking at fuel availability and backup supply. It’s not like finding diesel fuel around the corner.”
A truck’s life cycle, of course, is less than that of a station. “We don’t have to worry about residual equipment value because we don’t sell our trucks as used,” Casteel explains. “UPS runs them until there is no life left in them. After five or six years, we will repower a Class 8 and keep it altogether for 10 to 12 years. That makes it easier to develop a long-term plan for running on natural gas.”
Making the economic case
“It’s no secret that low oil prices have weakened the economic lever for alternative fuel vehicles,” says Drew Cullen, Penske Truck Leasing’s senior vice president, fuel and facility services. “However, aggressive fuel pricing, government incentives, fuel-efficient specs, and specific applications are all ways to improve the economic case for alternative fuel vehicles.”
He also notes that customers are pushing many fleets to reduce their environmental footprint, “and alternative fuel vehicles remain one of the most powerful methods to drive this type of change. It also doesn’t hurt that nearly all alternative fuels offer low price volatility and are domestically produced.
“With recent advances, like the commercial availability of renewable natural gas coupled with near-zero NOx engines, the impact that the conversion to alternative fuels can have on a fleet’s environmental footprint can be very significant.”
The right combination of economic factors can favor investing in alternative-fueled trucks even in todays low-diesel-price environment. For example, Cullen points to using natural gas for a high-mileage tractor fleet with enough fuel volume to drive very aggressive pricing, or an operator running Class 5 diesel-electric hybrid trucks in California, “where the combination of heavy traffic and significant incentives can fully offset the cost of the hybrid option.”
He sees transitioning from diesel to alternative fuels as an active process that requires the fleet manager to evaluate the best alternative fuel for the task at hand and to understand how best to put a given fuel into use.
Scott Perry, Ryder System’s vice president of supply management and global fuel products, says customer demand for alternative fuel trucks has been “spotty” recently due to the price differential with diesel.
“A $1.50 per gallon differential will inform their decision-making pretty easily,” Perry says. “So, today, those considering it are fleets expanding on an existing base or looking at it long-term on a sustainability basis or wanting greater price stability. Two or three years ago, the main driver was the economic benefit vs. diesel. Still others, then and now, wonder whether it makes sense for them, weighing in the cost of fueling infrastructure and maintenance support.”
Perry contends that maintenance support for CNG/LNG is “still lacking in trucking, so we continue to invest in that. We upgrade our facilities and tech training in areas surrounding where our customers operate on alternative fuels.”
Ryder’s emphasis on maintenance points to the necessity to look at all aspects of the operation when making an alt-fuel decision.
“The decision to operate natural gas trucks must take into account the costs involved, including the vehicle itself, technical and driver training, education, and fueling,” says Volvo Trucks’ Frank Bio, director of sales development, specialty vehicles and alternative fuels.
He also says companies should compare current maintenance capabilities with what additional certifications and investments are needed both in physical buildings and people. Technician certification is critical, he says, as “the high pressure of CNG (3600+ psi) is not for amateur technicians or small, unsophisticated workshops.”
He also notes that “resale [for natural-gas trucks] is typically equal to scrap cost, so the purchaser must consider operating the trucks for a longer than normal cycle — five to seven years rather than a three- to four-year cycle.”
“Making the decision to use alternative fueled (natural gas) vehicles is not short-term or easily justified using the current diesel vs. natural gas price differential,” Bio says. “The capital investment for a Class 8 natural gas truck is 50-65% more than a diesel-powered truck. The current diesel price is $2.13 vs. $2.30 for a diesel gallon equivalent. At that differential, there is no payback for a natural gas truck. Usually it takes about a $1 differential for a natural gas truck’s capital cost and maintenance costs to get to break-even in four years.”
However, there are other major justifications for switching to natural gas beyond a straight return-on-investment calculation, he says.
“Fleets can forecast their fuel cost with improved accuracy,” as natural-gas prices are more stable than diesel. “Another justification is the incentives. Some states will refund the purchaser up to 80% of that increased cost. There is also a federal credit given to the operator, which amounts to 50 cents for each diesel gallon equivalent of natural gas purchased.” These types of credits were not taken into account in his ROI calculation for natural-gas trucks.
The ROI conundrum
Bio’s figures point to the fact that not everyone figures ROI the same way.
Consultant Gabrielsen, who has performed ROI calculations on a variety of alternative fuels, contends that when oil is at $40 per barrel, or about $1.90 diesel, the use of “self-compressed” [fueled on site] natural gas can deliver a three-year simple return on investment. “When oil is at $60-70 barrel ($2.55 - $2.90 diesel), even purchasing all CNG at truck stops would give a fleet a three-year payback or better. And the self-compressing folks would be printing money.”
Gabrielsen provides two caveats to his ROI assessments. One is that they don’t include the extra investment in fueling and shop infrastructure. Those one-time investments, he says, can be spread across a large number of trucks and for multiple generations of replacement trucks over a 20- to 30-year period, and if you’re looking at it on a per-truck basis, they pale in comparison to the added investment per truck of $40,000-$80,000 for something you may only keep four to five years. Including those infrastructure costs per truck, he says, might “add a week or two per truck to the three-year payback.”
He also assumes that maintenance costs for vehicles equipped for CNG would not change from what they were for diesel-fueled trucks. Again, he says, “when you consider the $40,000-80,000 per truck in added investment for CNG, even if maintenance costs were to be consistently higher for CNG than diesel, it would not move the needle much on the payback time, because the difference would be immaterial compared to that added investment in each truck alone.”
“It has never been more difficult to calculate a positive ROI [for alternatives] than it is presently,” says Bob Carrick, Freightliner’s vocational sales manager-natural gas, and a former fleet manager. “We have used a simple rule of thumb for a few years. If the price of your alternate fuel is at a level where it is 50% of the cost of diesel fuel, and you operate 80,000 miles annually, it makes sense. Fuel price remains the key. Also, if a customer does not have their own fuel infrastructure, they should consider partnering or establishing themselves as an ‘anchor tenant’ of a fuel station.”
Carrick also sees resale values as a valid concern for fleets. “Customers have to review their operation and determine if they may modify their normal diesel-equipment replacement cycle. Shop requirements and training are both very important considerations, but easily clarified. Discuss your shop activity and future maintenance plans with your local fire marshal. In many cases, very little or nothing needs to be done in your shop if it is a newer facility and meets liquid fuel shop requirements. Training is very easy and accessible from OEMs, fuel-system suppliers, and Cummins.”
“Fueling infrastructure is part of a broader conversation surrounding macro operations, so it should always be in the consideration set,” contends Brian Holland, president and CFO of Fleet Advantage, a leasing company that focuses on data-driven specs for fuel economy and trade cycles. “However, where fleets should have a larger focus today is on data. Data can help them identify fuel trends and how it correlates to vehicle performance – regardless of the fuel used. Data analytics can make a larger impact on operational savings than the type of fuel chosen.”
From the September 2016 issue of HDT