In the 2012 State of the Union Address, President Obama highlighted domestic oil and gas, focusing on growing offshore oil development and recent increases in shale gas production. In the following days, he visited western states to promote his proposals, including tax breaks for natural-gas-powered trucks. In this commentary from 2010, Alan Krupnick examines the prospects for converting the heavy-duty truck fleet from diesel to liquefied natural gas.
Can Natural Gas Vehicles Make a Difference?
January 30, 2012
To date, natural gas vehicles (NGVs) have made very little headway into the U.S. motor vehicle fleet. In 2008 NGVs accounted for just 142,000 of the 250 million vehicles on the road.
However, several factors have contributed to increased interest in the potential for NGVs. One is a concern about the dependence of the transportation system on foreign sources of oil. Another is the growing pressure to reduce greenhouse gas emissions (GHGs) by transitioning to cleaner fuels. There is also the discovery of large domestic sources of shale gas. In fact, the recent stimulus bill included funding for natural gas technologies, such as liquefied natural gas (LNG) and fueling stations, as well as tax credits for the purchase of natural gas (and other) clean-fuel vehicles.
To what extent is a transition to NGVs feasible? And what would be the implications for oil dependence, the environment, and the net costs of transportation?
Natural gas is likely to be possible only for large trucks, particularly tractor trailers, and fleet vehicles, including buses. A major hurdle for using natural gas in passenger vehicles (which already have a promising alternative technology—electricity) is the size and weight of natural gas tanks. It would be costly, moreover, to build the infrastructure to service passenger vehicles throughout the nation’s extensive road system. Tractor-trailers, however, travel mostly by interstate highways, where natural gas refueling stations could be concentrated. Indeed, the long-haul industry has been moving toward a “hub and spoke” system, whereby a trucker avoids traveling all over the country by depositing his load at a hub and picking up another for delivery around his home base. And natural-gas-fueled fleet vehicles—taxis, buses, delivery trucks—are already found in many cities, with refueling infrastructure located at centralized urban locations. In fact, air quality requirements are driving some conversions. The Port of Los Angeles, for example, refuels LNG heavy-duty trucks.
Would the use of natural gas in this limited market be enough to make a difference? The 4.3 million light-duty fleet vehicles operating in the United States consumed roughly 12 billion gallons of gasoline last year, equivalent to about 4 percent of economywide oil use. The country’s 6.6 million single-unit trucks (such as FedEx and UPS vehicles), mostly used by businesses and governments in urban areas, consume about 10 billion gallons of diesel fuel. There are also 82,000 transit buses, 480,000 school buses, and 137,000 refuse trucks targeted for natural gas use because they operate in cities and contribute to smog-forming emissions.
Tractor-trailers, numbering 2.2 million, account for the majority of heavy-duty vehicle miles traveled and a large share of transportation diesel. At an average fuel economy of 5.1 miles per gallon, these trucks use an estimated 28 billion gallons of diesel annually, equivalent to 640 million barrels of oil. With total U.S. diesel consumption at 1.151 billion barrels in 2008, fuel substitution here could have a significant effect.
Would increased used of natural gas reduce emissions? To determine total GHG emissions from the use of natural gas as a transportation fuel, one needs to take a life-cycle approach—from the well to the tank, and from the tank to the wheels.
Well-to-tank includes emissions associated with fuel production, processing, transportation, and distribution. This component depends on the source of the natural gas. For example, using biomethane means dramatically lower emissions because the capture of flared gas prevents a potent GHG from being released into the atmosphere from landfills. Extracting gas from shale, however, is emissions intensive as it requires horizontal (rather than vertical drilling).
Tank-to-wheels primarily consists of actual fuel combustion. Although estimates of GHG emissions reductions vary, most studies suggest emissions per mile driven by NGVs are substantially lower than emissions rates for diesel-equivalent vehicles. On the other hand, significantly higher demand for natural gas in the transportation sector will put upward pressure on natural gas prices, which might lead to some substitution of pollution-intensive coal for natural gas in power generation. Regarding emissions of other pollutants, NGVs emit fewer hazardous particulates. One study by the Department of Energy estimated that, when compared to their diesel counterparts, trucks running on natural gas have 95 percent lower particulate emissions, 49 percent lower emissions of nitrogen oxides, but only 7 percent lower carbon dioxide emissions, when all these factors are taken into account. Under favorable conditions, however, carbon dioxide emissions can be far lower.
Would NGVs be competitive? Life-cycle costs to be counted in determining economic viability include the purchase price, fuel and maintenance costs, and the expense of building or converting service infrastructure. The lifespan of trucks is also important, because it determines how thinly the up-front capital costs can be spread out. Similarly, the discount rate used in assessing the cost-effectiveness of NGVs determines the importance of future fuel cost differentials, relative to vehicle and infrastructure costs. The resale market must be considered, too. After six to eight years, trucks are often taken out of the commercial freight business and resold for other uses, and without adequate refueling infrastructure in rural and urban areas, this market could fail.
Because manufacturers have had only limited experience with natural gas engines, it is difficult to accurately estimate their future costs. Current estimates suggest natural gas trucks have very high up-front costs, anywhere from about $35,000 to $100,000 more than comparable diesel trucks. Nonetheless, natural gas trucks can still make economic sense under plausible, albeit optimistic, scenarios—by providing payback periods that might be acceptable to truck buyers, for example. (Payback refers to the amount of time it takes to repay the upfront investment cost through future energy savings.) For example, payback periods can be less than 5 years if natural gas truck purchasers don’t apply very large discount rates to their future fuel cost savings and if the fuel price differential between natural gas and diesel exceeds $1.50 per gallon (price differentials in recent years have most often been in the $0.50 to $1.00 per gallon equivalent range).
A variety of developments are converging to make NGVs economically viable even without fuel or vehicles subsidies. Fuel price differentials of $1.50 per gallon or more are conceivable if oil prices rise in the future while domestic gas prices are held down by shale development. Moreover, as noted above, the interstate trucking industry is moving increasingly away from a structure of long-haul routes to a hub-and-spoke structure, which could facilitate placement of refueling stations and therefore broaden use of NGVs. Additionally, technological changes could push vehicle price differentials down. Economies of scale could further reduce prices of NGVs. Finally, diesel trucks may become disadvantaged with carbon policies and increasingly stringent air pollution regulations.
In short, natural gas-fueled heavy-duty trucks could, under certain conditions, become a good deal for society in terms of reducing oil and local pollution emissions with reasonable cost-effectiveness, though they help only modestly with GHG emissions. What could derail the promise of NGVs? Regulations to control water pollution associated with recovering gas from shale could raise costs and make shale production uneconomic. In addition, we have ignored safety concerns with LNG. Such concerns could discourage construction of refueling stations and the widespread use of LNG-fueled trucks more generally.
In the absence of both very narrow truck price differentials and wide fuel price differentials in favor of natural gas, the market will require subsidies to foster penetration of natural-gas-fueled heavy-duty trucks, or taxes on diesel fuel or on carbon, or some combination of these measures. The existing subsidies are probably not enough, at least given current economic and regulatory conditions.
Alan Krupnick is a senior fellow at Resources for the Future and director of RFF’s Center for Energy Economics and Policy.