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A natural fit?

The upfront installation costs are considerable and the fuelling network is still negligible but despite these considerable obstacles, fleet owners can consider natural gas as a viable fuel for their operations, according to a new report...

The upfront installation costs are considerable and the fuelling network is still negligible but despite these considerable obstacles, fleet owners can consider natural gas as a viable fuel for their operations, according to a new report published by the Conference Board of Canada.

In fact, the Conference Board estimates that converting fleets to natural gas could generate savings of approximately $150,000 per truck over a 10-year period. This saving is nearly twice the cost of installing a natural gas engine – estimated at $80,000 per vehicle, according to the Conference Board, an independent, not-for-profit, applied research organization.  

“Our models indicate that while the capital costs are high, the savings from lower fuel costs make natural gas an economically viable fuel for the trucking sector,” said Vijay Gill, co-author of Cheap Enough? Making the Switch From Diesel Fuel to Natural Gas. “Trucking firms could reap significant net benefits in operating costs while also reducing their environmental impact.”

The report considers the potential for natural gas as an alternative to diesel for heavy-duty trucks in particular. When looking at the financial impact it takes into consideration the expected operating cost savings over the life cycle of the vehicle, the additional upfront capital costs, and the impact of fuel taxes and capital cost allowances. These impacts are also considered in the context of the greenhouse gas (GHG) reduction potential of the fuel.

For-hire trucking with its more than 12,000 carriers competing for $34 billion in annual revenues is particularly sensitive to the energy price shocks currently experienced with diesel. Thin margins are in part a function of the low degree of capitalization in the industry. Operating costs rather than capital costs make up the largest slice of the total cost pie for motor carriers. And this in turn makes for a far more volatile cost structure and a lower operating margin than what is required in other capital-intensive industries.

Rapidly rising fuel prices can quickly erase margins in the trucking industry. Trucking consumed over 5 billion litres of diesel fuel in 2008. At a unit price of $1.20 per litre, this would amount to about than 20% of industry revenues, the report points out.

“To further put the fuel costs in perspective, a 30-cent increase in the price of diesel fuel without a corresponding rise in freight charges would wipe out the operating margin. This demonstrates the importance of minimizing fuel consumption and mitigating the impact of fuel price increases through the use of fuel surcharges or hedging instruments,” Gill states in his report.

Both natural gas and oil prices can be volatile but historically, on an energy-equivalency basis, natural gas has traded at a significant discount relative to crude oil. Today, that discount is trending toward historical highs: crude oil now costs more than four times the price of natural gas per unit of energy. The same holds true when comparing wholesale diesel and natural gas prices. This gap leaves plenty of room to cover the additional costs of compressing or liquefying gas for transportation uses, according to Gill.

“Large shale gas discoveries in North America, and to a lesser extent, Canada, will likely serve as a price buffer against new sources of demand for natural gas. Over the past several years, significant investments in shale gas production capacity have generated enough incremental supply to hold natural gas prices well below historical peaks,” Gill forecasts.

Gill is careful to point out that shifting toward natural gas will not directly help carriers reduce their exposure to volatile fuel prices. Natural gas prices can be volatile, he stresses, and exhibit a larger degree of seasonality. However, carriers with mixed fleets could benefit from the fact that gas and oil prices have not always moved together and at times have moved in the opposite direction.

“If these trends persist, a mixed fleet could act as a natural hedge against price volatility. In addition, long-term price contracts are more readily available for natural gas than they are for diesel. Taking advantage of long-term contracts can add certainty to the cost savings over the life cycle of the vehicle,” he says.

Natural gas currently holds a further fiscal advantage over diesel as a transportation fuel because it is exempt from federal and provincial excise taxes.

The report readily concedes that diesel as a crude-oil based fuel has a significant energy density advantage over natural gas. Its density allows a significant amount of energy to be contained within a relatively small space, requiring smaller fuel tanks and saving weight.  Natural gas on the other hand suffers from a lack of energy density and must be compressed or liquefied in order to be viable as a transportation fuel. Compressed natural gas (CNG) typically takes about 1/300th of the volume of natural gas at standard atmospheric pressure. Liquefied natural gas (LNG) manages to reduce this to approximately 1/600th of the volume. Even at this volume, LNG is approximately 40% less energy-dense than diesel (22 megajoules per litre vs. 38 MJ/L). As a result, natural gas vehicles have a shorter range or require a larger fuel tank, which reduces the truck’s carrying capacity and thus its ability to generate revenue in comparison to diesel. The process of compressing or liquefying gas also comes at a price, in terms of both capital and energy.

There are environmental advantages to CNG, however. Being a fossil fuel, natural gas emits GHGs and so contributes to climate change but it does so at a lower intensity than crude oil-based fuels. Life cycle GHG emissions are generally lower than emissions from diesel by up to 25%. It can be considered a transition fuel in terms of climate change mitigation — “cleaner” than oil and more commercially viable and available in the short term than zero-carbon alternatives. 

“GHG emissions would be expected to fall by more than 50 tonnes per truck per year, assuming no additional demand is generated as a result of the lower operating costs,” the report estimates.

There is also the potential of eventually moving to renewable natural gas (RNG), or biogas, to further reduce GHG emissions while maintaining the use of current technology. Biogas is methane-based and made from renewable sources, such as landfills, sewage waste, and agricultural waste. After being upgraded to biomethane by removing CO2 and other impurities (such as hydrogen sulphide), it can be injected into the existing natural gas pipeline infrastructure, obviating the need for a dedicated transportation and delivery system to end users. The main benefit of biomethane as a replacement for natural gas is the reduced carbon footprint. The fuel itself is carbon neutral, as any associated carbon would have been emitted regardless.

Despite the price and environmental advantages, adoption of natural gas faces several hurdles. The lack of access to capital, particularly for medium and small-sized carriers, adds a barrier to investment even if the economics over the life cycle of the vehicles are favourable.  Gill states that higher capital cost allowance rates would help to encourage investment in the given technology, as they would allow firms to recover their investment sooner.

The Canadian Trucking Alliance recently appeared before a Commons Standing Committee on Transport to appeal to the feds for support in rolling out safety-related and environmentally friendly transport alternatives. The Committee seemed especially interested in the industry’s adoption of natural gas-powered trucks but was told more must be done to stimulate investment.

“Proven technology exists today, right now, that can make our industry even safer, that can level the compe
titive playing field and make the air we breathe cleaner,” Bradley said in his testimony. “The industry is moving in this direction, but the goal should be to accelerate the penetration of this equipment into the marketplace. Trucking is an under-capitalized industry in Canada. We can either wait 20 years to maximize the safety and environmental impact that is possible, or we can partner with government to re-quip our fleets over the next five years, through a combination of regulatory and fiscal measures such as accelerated capital cost allowances, repayable grants and regulation.”

Even more important is the value of the fuel excise tax exemption for natural gas. Nearly half of the estimated savings from natural gas vehicles are in the form of fuel tax savings, as natural gas is currently exempt from the equivalent of a road diesel excise tax. Uncertainty over whether natural gas could lose its tax exemption compounds the disincentive created by the high capital cost of converting to natural gas engines.

“If and when the rate of adoption increases, there will be pressure on governments to introduce new excise taxes due to slowing growth in diesel fuel tax revenues.” Gill points out. “Clarity on the part of the federal and provincial governments about their intentions would reduce this uncertainty. A specified period of exemption could provide additional incentive for carriers and infrastructure providers to make the necessary investments. One option would be to guarantee the exemption for a period of time, but also mandate a small percentage of biomethane production for grid injection, with the additional costs passed through to natural gas consumers.”

Another issue is the absence of refueling stations. In order to address this concern, Gill suggests that trucking companies explore the potential for “co-opetition.” While continuing to compete for customers, carriers could cooperate with natural gas suppliers in the development of a refuelling network and liquefaction facilities.

“While carriers willing to convert their fleets to natural gas face significant capital costs and continuing risks related to relative fuel prices, availability of fuelling infrastructure, and tax policy, they could reap significant net benefits in operating costs while also reducing their environmental impact,” the report concludes.

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