There is a great deal of enthusiasm in the transportation world today about a wide variety of technologies that could fundamentally change the way products are moved to market in the U.S. Among these potentially revolutionary technologies are battery-electric vehicles, hydrogen fuel cell electric vehicles, autonomous vehicles, and hybrid technologies. Yet, years before any of these were in the headlines, natural gas was the premier alternative transportation energy of the future.
The discussion surrounding the viability and future of alternative fuels is ever-maturing as infrastructure becomes more developed, technology more intuitive, and markets demonstrate unpredictable volatility.
As 2019 demonstrated, diesel fuel prices fluctuate drastically due to unforeseen weather events, state tax changes, and international geopolitical factors. At their highest, average US diesel wholesale prices reached 283¢/gallon and stooped down to 228¢/gallon at their lowest. That is a 55 cent difference in one calendar year—a variable cost that is difficult to account for in annual budgets, despite using the most advanced data and forecasting models available. The volatility of energy, which makes up as much as 30 percent of your total transportation spend, puts your overall transportation strategy and budget at risk.
It’s Time to Diversify Alternative Fuel Portfolios
For this reason, the industry seems to be pointing in one direction: diversification. Diversifying fuel portfolios mitigates the risk associated with any one fuel type and its unique challenges and volatility. The chart below shows the cost and emissions trade-off for each energy type that can be used as transportation energy. For more information about other alternatives besides natural gas, see our blog.
Natural gas is one of the most viable fuel options on the market from a risk management standpoint. It can come in two forms; compressed natural gas (CNG) and liquified natural gas (LNG). Both energy forms come from either conventional natural gas or renewable natural gas (RNG). We will focus on CNG in this blog, as it is the most common in over-the-road transportation in the U.S.
Natural gas has been a part of the discussion since it first hit the market in the 1980s, but until recently once struggled to maintain market share due to the lack of practical viability of the technology. Today, this is no longer the case as is typical with the maturation of any disruptive technology. Tax credits for the purchase of natural gas vehicles, major infrastructure expansion, advancements in alternative fuel technology, and continually stringent emissions reduction protocols make the natural gas network we see today much more successful.
CNG Cost Per Gallon Offers Price Stability
The true value of natural gas is most evident when directly comparing it against more traditional transportation fuel types like diesel. In 2018, national average prices indicated that in high diesel price environments, CNG fuel prices become not only viable but more cost-effective to shippers.
The key reason why CNG is preferred as a fuel over diesel is stability. The stable price point of CNG is significantly more insulated from market disruptions that affect diesel prices as illustrated below. Each fuel type is mutually exclusive from a supply chain perspective, occupying separate pipelines and having higher concentrations in different regions. Disruptions to one almost never influence the price of another.
A “natural hedge” exists in CNG pricing. CNG fuel prices per gallon are most commonly adjusted monthly, compared to weekly or daily models, allowing disruptions to pass in the interim period without having to pay for those significant spikes and dips immediately. Investing a portion of transportation spend and resources into a natural gas network creates stability, making budgeting decisions easier and incidental costs less significant.
The actual natural gas commodity makes up a much smaller portion of the total cost buildup for the fuel. Compared to diesel where nearly 70 percent of the total cost is attributed to the commodity, the natural gas commodity only makes up 25 percent of the total. Instead, steadier cost components such as compression, distribution, and taxation costs make up the bulk of the end user’s price. A smaller percentage means that even when natural gas commodity prices change drastically, total retail price fluctuations are muted. This makes final natural gas pricing both more favorable and more stable in the long term.
Infrastructure for CNG Fueling Stations Has Expanded
One concern of adopting a new fuel type at a larger scale is the presence of infrastructure that is both cost-efficient and viable given vehicle fueling constraints. While diesel is one of the most familiar and expansive fuel types used in North America, natural gas infrastructure has increased significantly in the last ten years, with more than 700 heavy-duty public stations in operation across the United States.
Natural gas stations were opening at a rapid pace starting in 2012 but have since slowed. As shown in the chart at right, new station openings peaked in 2014, when 144 stations opened. So far in 2019, just 11 new stations were opened. The slowing nature of new station additions is a consequence of investors jumping over natural gas technology and into battery-electric and hydrogen fuel cell as the future transportation fuel.
Regional Savings Opportunities Exist For CNG Over Diesel
Much like diesel, natural gas prices vary across the country. To conduct a targeted analysis of natural gas and diesel prices in a specific geography, you must recognize the fuel efficiency differences and consider the availability of infrastructure. Both of these factors are important to identify areas of economic opportunity. The map below shows a sample of states with favorable economic conditions for fuel savings when converting to natural gas. These figures do not include state or federal incentives, which will improve the value proposition.
Among several states, the highest benefit of adopting natural gas technology exists in California and Illinois—which have the highest concentration of natural gas fueling stations in the country.
California has long been the driving force of alternative energies in the nation. The high diesel excise taxes and state carbon programs—including cap-and-trade and the low carbon fuel standard (LCFS)—will continue to strengthen economics for natural gas and other alternatives throughout the next decade.
The state of Illinois presents a unique opportunity for natural gas conversion economics. The ability to match over-the-road freight or drayage operations into major rail hubs creates ideal conditions for natural gas usage. Furthermore, the surrounding states display favorable natural gas economics for conversion.
As a shipper looking to limit volatility in both their transportation budget and fuel portfolio, starting an investigation into a natural gas program is a good place to start. Backed by the right data and industry insights, investing into your own fleet, or incentivizing carriers to make a switch is possible.