Issues in Focus
6. Heavy-duty natural gas vehicles
Environmental and energy security concerns, together with recent optimism about natural gas supply and recent lower natural gas prices, have led to significant interest in the potential for fueling heavy-duty vehicles (HDVs) with natural gas produced domestically. Key market uncertainties with regard to natural gas as a fuel for HDVs include fuel and infrastructure issues (such as the build-out process for refueling stations and whether there will be sufficient demand for refueling to cover the required capital outlays, and retail pricing and taxes for liquefied natural gas [LNG] and compressed natural gas [CNG] fuels); and vehicle issues (including incremental costs for HDVs fueled by natural gas, availability of fueling infrastructure, cost-effectiveness in view of average vehicle usage, vehicle residual value, vehicle weight, and vehicle refueling time).
Current state of the market
At present, HDVs in the United States are fueled almost exclusively by petroleum-based diesel fuel [53]. In 2010, use of petroleum-based diesel fuel by HDVs accounted for 17 percent (2.2 million barrels per day) of total petroleum consumption in the transportation sector (12.8 million barrels per day) and 12 percent of the U.S. total for all sectors (18.3 million barrels per day). Consumption of petroleum-based diesel fuel by HDVs increases to 2.3 million barrels per day in 2035 in the AEO2012 Reference case, accounting for 19 percent of total petroleum consumption in the transportation sector (12.1 million barrels per day) and 14 percent of the U.S. total for all sectors (17.2 million barrels per day).
Historically, natural gas has played a negligible role as a highway transportation fuel in the United States. In 2010, there were fewer than 40,000 total natural gas HDVs on the road, or 0.4 percent of the total HDV stock of nearly 9 million vehicles. Sales of new HDVs fueled by natural gas peaked at about 8,000 in 2003, and fewer than 1,000 were sold in 2010 out of a total of more 360,000 HDVs sold. With relatively few vehicles on the road, natural gas accounted for 0.3 percent of total energy used by HDVs in 2010.
As of May 2012, there were 1,047 CNG fueling stations and 53 LNG fueling stations in the United States, with 53 percent of the CNG stations and 57 percent of the LNG stations being privately owned and not open to the public [54]. Further, the stations were not evenly distributed across the United States, with 22 percent (227) of the CNG stations and 68 percent (36) of the LNG stations located in California. In comparison, nationwide, there were more than 157,000 stations selling motor gasoline in 2010 [55].

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Developments in natural gas and petroleum markets in recent years have led to significant price disparities between the two fuels and sparked renewed interest in natural gas as a transportation fuel. Led by technological breakthroughs in the production of natural gas from shale formations, domestic production of dry natural gas increased by about 14 percent from 2008 to 2011. In the AEO2012 Reference case, U.S. natural gas production (including supplemental gas) increases from 21.6 trillion cubic feet in 2010 to 28.0 trillion cubic feet in 2035. Further, although the world market for oil and petroleum products is highly integrated, with prices set in the global marketplace, natural gas markets are less integrated, with significant price differences across regions of the world. With the recent growth in U.S. natural gas production, domestic natural gas prices in 2012 are significantly lower than crude oil prices on an energy-equivalent basis (Figure 34).
Fuel and infrastructure issues
Even when it appears that an emerging technology can be profitable with significant market penetration, achieving significant penetration can be difficult and, potentially, unattainable. Refueling stations for NGVs are unlikely to be built without some assurance that there will be sufficient numbers of NGVs to be refueled, soon enough to allow for recovery of the capital investment within a reasonable period of time. In terms of estimating the prices that will be charged for NGV fuels beyond the cost of the dry natural gas itself, and the issue of expected utilization rates, there are additional uncertainties related to capital and operating costs, taxes, and the potential of prices being set on the basis of the prices of competing fuels.
Basic fuel issues
Diesel fuel falls into the category of distillate fuels, which have constituted more than 25 percent of U.S. refinery output in recent years. The cost of diesel fuel is linked closely to the value of crude oil inputs for the refining process. In 2011, the spot price of Gulf Coast ultra-low sulfur diesel fuel averaged $2.97 per gallon. The wholesale diesel price reflects crude oil costs, as well as the difference between the wholesale price at the refinery gate and the cost of crude oil input, commonly referred to as the "crack spread," which reflects the costs and profits of refineries.
Beyond the wholesale price, the pump price of diesel fuel reflects distribution costs, Federal, State, and local fuel taxes, retailing costs, and profits. For diesel fuel, with an average energy content of 138,690 Btu per gallon, the 2011 national average retail price of $3.84 per gallon is equivalent to about $27.80 per million Btu.
Although early models of NGVs sometimes were less fuel-efficient than comparable diesel-fueled vehicles, current technologies allow for natural gas to be used as efficiently as diesel in HDV applications. Therefore, comparisons between natural gas and diesel fueling costs can be based on the price of energy-equivalent volumes of fuel. For this analysis, the cost and price of natural gas fuels are expressed in terms of diesel gallon equivalent (dge). For example, with an energy content of approximately 84,820 Btu per gallon, 1 gallon of LNG is equivalent in energy terms to 0.612 gallons of diesel fuel.
Fuel costs for LNG and CNG vehicles depend on the cost of natural gas used to produce the fuels, the cost of the liquefaction or compression process (including profits), the cost of moving fuel from production to refueling sites (if applicable), taxes, and retailing costs. Costs can vary with the scale of operations, but the significant disparity between current natural gas and crude oil prices suggests that the cost of CNG and LNG fuels in dge terms could be significantly below the price of diesel fuel.
There are different wholesale natural gas prices and capital costs associated with CNG and LNG stations. CNG retail stations, which typically have connections to the pipeline distribution network and thus require compression equipment and special refueling pumps, are likely to pay prices for natural gas that are similar to those paid by commercial facilities. For LNG stations, insulated LNG storage tanks and special refueling pumps are needed. LNG typically would be delivered from a liquefaction facility that, depending on its scale, would pay a natural gas price similar to the prices paid by electric power plants. The costs of liquefying and transporting the fuel to the retail station would ultimately be included in the retail price.
In a competitive market, retail fuel prices should reflect costs, including input, processing, distribution, and retailing costs, normal profit margins for processors, distributors, and retailers, and taxes. For example, the market for diesel fuel, which is produced by a large number of foreign and domestic refiners and is sold through numerous distributors and retail outlets, generally is considered to be a competitive market, in which retail prices follow costs.
CNG and LNG markets, at least in their initial stages, may not be as competitive as diesel fuel markets. For example, at public refueling stations, LNG and CNG currently sell at prices significantly higher than would be suggested by a long-term analysis of cost-based pricing. According to DOE's April 2012 "Clean Cities Alternative Fuel Price Report," the average nationwide nominal retail price for LNG was $3.05 per dge, and the average for CNG was $2.32 per dge [56].
If the use of LNG and/or CNG to fuel HDVs starts to grow, it is likely to take some time before fuel production and refueling infrastructure become sufficiently widespread for competition among fuel providers alone to assure that fuel prices are more closely linked to cost-based levels. However, even without many fuel providers, operators of an LNG and/or CNG vehicle fleet may be in a position to negotiate cost-based fuel prices with refueling station operators seeking to lock in demand for their initial investments in refueling infrastructure. Such arrangements provide an alternative to reliance on centrally fueled fleets as a means of circumventing the problem of how to introduce NGVs and natural gas refueling infrastructures concurrently.
Build-out process for refueling stations
It is not clear how NGVs and an expanded natural gas refueling infrastructure ultimately will evolve. One view is that a "hub-and-spoke" model for refueling infrastructure will expand sufficiently in multiple areas for a point-to-point system to take hold eventually. The "hubs" in the model would include the local refueling infrastructure, currently in place primarily to support local fleets. The "spokes" would ensure that refueling infrastructure is in place on the main transportation corridors connecting the hubs.
Several regional efforts are in place to encourage such "hub-and-spoke" growth for NGV refueling facilities. They include the Texas Clean Transportation Triangle [57], a strategic plan for CNG and LNG refueling stations between Dallas, San Antonio, and Houston; and the Interstate Clean Transportation Corridor [58], which aims to provide LNG fueling stations between such major western cities as Los Angeles, Las Vegas, Phoenix, Reno, Salt Lake City, and San Francisco. There also is a plan for a Pennsylvania Clean Transportation Corridor [59], which would provide CNG and LNG fueling stations between Pittsburgh, Harrisburg, Scranton, and Philadelphia.
In several corridors, Federal and State incentives are subsidizing both the construction of refueling stations and the production of heavy-duty LNG vehicles [60], in an effort to ensure that both demand and supply will be in place concurrently. A major question is whether gaps between isolated targeted markets can be bridged to provide a nationwide refueling structure that will allow heavy-duty NGVs to travel almost anywhere.
Sufficiency of demand for refueling to cover capital outlay
The cost of providing refueling services for NGVs depends on a number of factors and is distinctly different for CNG and LNG vehicles. Investment decisions are likely to be based on levels of demand. NGV refueling capability can be added at an existing facility or at a separate dedicated facility (which would require an additional investment). The costs depend in part on the number of fueling hoses added. LNG stations in particular benefit from higher volumes, but they also require significant additional land to accommodate storage tank(s), and they must satisfy special safety requirements  -- both of which add costs that can vary significantly from place to place. One added cost in operating an LNG station is the need for safety suits and specialized training for station attendants who dispense the fuel.
LNG typically is delivered to refueling stations via tanker truck from a separate liquefaction facility, the proximity of which is a major factor in the cost and frequency of deliveries. Any significant expansion of LNG refueling capacity also will require expanded liquefaction capacity, which currently is not sufficiently dispersed throughout the country to support a nationwide LNG refueling infrastructure. Although there are several dedicated large-scale natural gas liquefaction facilities in the United States, primarily in the West, there are smaller liquefaction plants and LNG storage tanks currently in use for meeting peakshaving needs of utilities and pipelines during times of high demand. There are more than 100 such facilities in the United States, with a combined liquefaction capacity of more than 6 billion cubic feet per day. The majority are concentrated in the Northeast and Southeast [61].
Retail prices and taxes for LNG and CNG fuels
Even if the costs are fully known, retail prices for CNG and LNG transportation fuels remain uncertain, given questions about whether dispensers would charge higher prices in order to recover costs more rapidly if the facility were underutilized or would set prices to be competitive with the price of diesel. Prices charged at private stations for fleet vehicles presumably would be based on cost. With the number of refueling stations limited, competition between retailers is likely to be limited, at least initially. However, NGV refueling stations presumably would want to provide sufficient economic incentive in terms of the competitiveness of fuel prices to encourage more purchases of NGVs. NGV fuel is taxed at State and Federal levels. Currently, on a Federal level, CNG is taxed at the same rate as gasoline on an energy-equivalent basis ($0.18 per gasoline gallon equivalent, or $0.21 per dge). However, LNG is taxed at a higher effective rate than diesel fuel, because it is taxed volumetrically at $0.24 per LNG gallon equivalent ($0.40 per dge) rather than on the basis of energy content [62]. State taxes vary, averaging $0.15 per dge for CNG and $0.24 per dge for LNG.
Vehicle Issues
Incremental vehicle cost
NGVs have significant incremental costs relative to their diesel-powered counterparts because of the need for pressurization and insulation of CNG or LNG tanks and the lower energy content of natural gas as a fuel. Total incremental costs relative to diesel HDVs range from about $9,750 to $36,000 for Class 3 trucks (GVWR 10,001 to 14,000 pounds), $34,150 to $69,250 for Class 4 to 6 trucks (GVWR 14,001 to 26,000 pounds), and $49,000 to $86,125 for Class 7 and 8 trucks (GVWR greater than 26,001 pounds). The incremental costs of heavy-duty NGVs depend in large part on the volume of the vehicle's CNG or LNG storage tank, which can be sized to match its typical daily driving range. Non-storage-tank incremental costs average about $2,000 for Class 3 vehicles, $20,000 for Class 4 to 6 vehicles, and $30,000 for Class 7 to 8 vehicles [63]. Fuel storage costs are about $350 per gallon diesel equivalent for CNG, with the incremental cost for Class 3 CNG vehicle storage tanks ranging between about $8,000 and $30,000; and about $475 per gallon diesel equivalent for LNG, with the incremental cost for Class 4 to 8 LNG vehicle storage tanks ranging between about $14,000 and $52,000. Natural gas fuel storage technology is relatively mature, leaving only modest opportunity for cost reductions.
Availability of fueling infrastructure
The absence of widespread public refueling infrastructure can impose a serious constraint on heavy-duty NGV purchases. Owners who typically refuel vehicles at a private central location do not face an absolute constraint based on infrastructure, however, and heavy-duty NGVs currently in operation have tended to be purchased by fleet operators who refuel consistently at a specific central location or in areas where their vehicles routinely operate on dedicated routes.
Cost-effectiveness with average vehicle usage
In order to take advantage of potential fuel cost savings from switching to NGVs, owners must operate the vehicles enough to pay back the higher incremental cost in a reasonable period of time. The payback period varies with miles driven and is shorter for trucks that are used more intensively. Payback periods for the upfront incremental costs of NGVs are greater than 5 years for Class 3 vehicles unless they are driven at least 20,000 to 40,000 miles per year, and for Class 7 and 8 vehicles unless they are driven at least 60,000 to 80,000 miles per year. Shorter payback periods, 3 years or less, may reflect typical owner expectations more accurately [64], but they require much more intensive use: around 60,000 to 80,000 miles annually for Class 3 vehicles and more than 100,000 miles annually for Class 7 and 8 vehicles. For example, for a Class 7 or 8 compression ignition NGV with average fuel economy of 6 miles per gallon (which has a similar fuel economy compared to a diesel counterpart) and an incremental cost of $80,000, the payback period would be just over 3 years if the vehicle were driven 100,000 miles per year, assuming a diesel fuel price of $4.00 per gallon and an LNG fuel price of $2.50 per gallon. If the same Class 7 or 8 vehicle were driven 40,000 miles per year, the payback period would be about 8 years. Further, without a widely available infrastructure, heavy-duty NGVs tend to be considered by centrally refueled fleets, which may have less mileage-intensive vehicle use.

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According to the Department of Transportation's Vehicle Inventory and Use Survey [65], last completed in 2002, a large segment of the HDV market simply does not drive enough to justify the purchase of an NGV (Figure 35). Around 30 percent of Class 3 vehicles and 75 percent of Class 7 and 8 vehicles are not driven enough to reach the 5-year payback threshold mentioned above. This is a significant portion of the market that would require either more favorable fuel economics or lower vehicle costs before the purchase of an NGV could be justified.
Other market uncertainties
Other factors may also affect market acceptance of heavy-duty NGVs. First, the purchase decision could be affected by the considerable additional weight of CNG or LNG tanks. For owners who typically "weight-out" a vehicle (driving with a full payload), adding heavy CNG or LNG tanks necessitates a reduction in freight payload. The EPA and NHTSA have estimated that about onethird of Class 8 sleeper tractors routinely are "weighted-out" [66].
A diesel tractor with 200 gallons of tank capacity and a fuel economy of 6 miles per gallon can drive 1,200 miles on a single refueling. The same tractor would need up to 110 dge of LNG tank capacity, at a considerable weight penalty and an incremental cost of more than $80,000, to allow for a range of about 650 miles on a single refueling. Because owner/operators typically stop several times per day, the reduction in unrefueled maximum range would not require additional breaks for vehicles with large CNG or LNG tanks. However, CNG and LNG vehicles that do not opt for large tanks because of either weight or incremental cost considerations might have to refuel more frequently.
Finally, the owner perception of the balance of risk and reward for large capital investment is an uncertainty. Higher upfront capital costs can prove economically prohibitive for some potential owners. Even if the payback period for an investment in natural gas vehicles seemed acceptable, financing constraints or returns available on competing investment options could preclude the purchase. Additionally, the residual value of natural gas HDVs could, in theory, affect market uptake. With little natural gas refueling infrastructure in existence, the potential resale market is constrained to owners of centrally operated fleets. However, lease terms tend to limit the importance of this factor.
The complex set of factors influencing the potential for natural gas as a fuel for HDVs includes several areas for which policy mechanisms have been discussed. Most policy debates to date have considered the possibility of subsidies to reduce the incremental cost of natural gas vehicles (for example, in Senate and House versions of the New Alternative Transportation to Give Americans Solutions Act [67]) and Federal grant-based or other financial support for fueling station infrastructure. In addition, market hurdles related to consumer acceptance or payback periods might also be addressed through loan guarantees or related financial support policies, both for the vehicles and for the refueling infrastructure.
HD NGV Potential case results
The AEO2012 HD NGV Potential case examines issues associated with expanded use of heavy-duty NGVs, under an assumption that the refueling infrastructure exists to support such an expansion. The HD NGV Potential case differs from an earlier sensitivity case completed as part of the Annual Energy Outlook 2010, which focused on possible subsidies to expand the market potential for heavy-duty NGVs and limited its attention to vehicles operating within 200 miles of a central CNG refueling facility.
The AEO2012 HD NGV Potential case permits expansion of the HDV market to allow a gradual increase in the share of HDV owners who would consider purchasing an NGV if justified by the fuel economics over a payback distribution with a weighted average of 3 years. The gradual increase in the maximum natural gas market share reflects the fact that a national natural gas refueling program would require time to build out. The natural gas refueling infrastructure is expanded in the HD NGV Potential case simply by assumption; it is not clear how (or whether) specific barriers to natural gas refueling infrastructure investment can be overcome.
Incremental costs for NGVs in the HD NGV Potential case differ from those in the Reference case. In the HD NGV Potential case, incremental costs are determined by assuming a set cost for CNG or LNG engines plus a CNG or LNG tank cost based on the average amount of daily travel and vehicle size class. The HD NGV Potential case includes separate delivered CNG and LNG fuel prices for fleet and nonfleet operators. Added per-unit charges to recover infrastructure are set and held constant in real terms throughout the projection period, based on the assumptions that refueling stations would be utilized at a sufficiently high rate to warrant the capital investment, and that the prices charged for the fuel would be cost-based (i.e., station operators would not set prices on the basis of prices for competing fuels). Motor fuels taxes are assumed to remain at their current levels in nominal terms, maintaining the higher energy-equivalent tax on LNG relative to diesel fuel.

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In defining CNG and LNG prices for the HD NGV Potential case, EIA examined current motor fuel taxes and any charges added to the commodity price of dry natural gas sold at private central refueling stations (fleets) and at retail stations where actual data were available. Accordingly, an HDV Reference case was developed from the AEO2012 Reference case, by including the updated fleet and retail CNG and LNG prices, to provide a consistent basis for comparison with the HD NGV Potential case (Figure 36). The HDV Reference case assumes that Class 3 through 6 vehicles use CNG, obtained from either fleet operators (using fleet prices) or nonfleet operators (using retail prices), and that Class 7 and 8 vehicles, both fleet and nonfleet, use LNG.

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Sales of heavy-duty NGVs rise dramatically in the HD NGV Potential case, based on the national availability of refueling infrastructure and expanded market potential (Figure 37). Sales of new heavy-duty NGVs increase from 860 in 2010 (0.2 percent of total new HDV sales) to about 275,000 in 2035 (34 percent of total new vehicle sales), as compared with 26,000 in the HDV Reference case (3 percent of total new HDV sales). New heavy-duty NGVs gradually claim a more significant share of the vehicle stock, from 0.4 percent in 2010 to 21.8 percent (2,750,000 vehicles) in 2035, as compared with 2.4 percent (300,000 vehicles) in 2035 in the HDV Reference case.

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As a result of the large projected increase in sales of new heavy-duty NGVs, natural gas demand in the HDV sector rises from about 0.01 trillion cubic feet in 2010 to 1.8 trillion cubic feet in 2035 in the HD NGV Potential case, as compared with 0.1 trillion cubic feet in the HDV Reference case (Figure 38). The natural gas share of total energy use by HDVs grows from 0.2 percent in 2010 to 32 percent in 2035 in the HD NGV Potential case, compared with 1.6 percent in the HDV Reference case.
Roughly speaking, about 1 trillion cubic feet of natural gas consumed per year replaces 0.5 million barrels per day of petroleum and other liquids. Thus, natural gas consumption by HDVs in the HD NGV Potential case displaces about 850,000 barrels per day of petroleum and other liquids consumption in 2035 (Figure 39). Without a major impact on world oil prices, which is not expected to result from the gradual but significant adoption of natural gas as a fuel for U.S. HDVs, nearly all the reduction in petroleum and other liquids use by U.S. HDVs would be reflected by a decline in imports.

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In the HD NGV Potential case, projected total U.S. natural gas consumption in 2035 is 1.4 trillion cubic feet (5 percent) higher than in the Reference case, as the increase in natural gas use by vehicles is partially offset by lower consumption in other sectors, in response to higher natural gas prices (Figure 40). The electric power and industrial sectors account for the bulk of the consumption offsets, as their 2035 natural gas use is, respectively, 0.3 trillion cubic feet (3.1 percent) and 0.2 trillion cubic feet (2.7 percent) lower than in the Reference case.
In 2035, U.S. domestic natural gas production in the HD NGV Potential case is 1.1 trillion cubic feet (3.9 percent) higher than in the HDV Reference case. The higher level of natural gas production needed to support the growth in HDV fuel use results in a 10-percent increase in natural gas prices -- $0.76 per million Btu (2010 dollars) -- at the Henry Hub in 2035 in comparison with the HDV Reference case. Percentage increases in delivered natural gas prices to other sectors, which include transmission and distribution costs that are not affected by higher prices to producers, are smaller, with delivered natural gas prices increasing by 4.9 percent in the residential sector, 5.9 percent in the commercial sector, 8.9 percent in the industrial sector, and 7.9 percent in the electricity generation sector in comparison with the HDV Reference case in 2035.

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