As the events throughout 2020 have demonstrated time and again, our world is changing in a big way. With that, we are seeing the energy that makes everything possible continue to evolve in step. Although diesel prices have dipped to historic lows diminishing the incentive to seek alternative energies, the shift to new fuel types will be accelerated in the decade ahead.
Among these potentially revolutionary energy 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 next widespread energy adoption will depend on which technology meets crucial criteria in terms of infrastructure, technology development, and, of course, cost.
It’s Time to Diversify Alternative Fuel Portfolios
To help mitigate the growing suite of risks facing supply chain and transportation organizations, the industry seems to be pointing in one direction: diversification. Diversifying fuel portfolios insulates an organization from outages, market swings, or challenges that arise associated with any one fuel type. Each has unique challenges and volatility, so energy solutions will continue to be an “and” solution. The chart below shows the cost and emissions trade-off for each transportation energy type.
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Natural gas has historically been one of the most viable fuel options on the market. It can come in two forms; compressed natural gas (CNG) and liquified natural gas (LNG). Both compressed and liquified energy forms can be made from either conventional natural gas or renewable natural gas (RNG), which creates even greater emissions reduction benefits. We will focus on CNG transportation in this blog, as it is the most common alternative used in over-the-road supply chain operations in the U.S.
Natural gas has been a part of the discussion since it first hit the market in the 1980s, but much like any disruptive technology, struggled to gain market share until recently. Today, incentives for wider use have helped expand its use. Tax credits for CNG vehicle purchases, major infrastructure expansion, advancements in alternative fuel technology, and more 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, the CNG price per gallon becomes cost-effective, and therefore highly attractive, for shippers.
But low prices are not the main attraction for CNG transportation. Price stability helps offset the steep swings we often see in diesel markets. 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. Having both present in your transportation network is a key part of diversification.
A “natural hedge” exists in CNG pricing. CNG fuel prices per gallon are most commonly adjusted monthly rather than weekly or daily models, like diesel. This allows some level of disruption to pass in the interim period without having to pay for significant spikes and dips. Investing a portion of transportation spend and resources into a natural gas network creates stability, making budgeting decisions easier and incidental costs less significant.
Additionally, the actual natural gas commodity makes up a much smaller portion of the total price’s cost buildup. Whereas diesel is 70 percent of the total cost of the commodity, the natural gas commodity only makes up 25 percent of the total. Steadier cost components such as compression, distribution, and taxation 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 Stations Has Expanded
Creating an infrastructure that is both cost-efficient and viable is one challenge facing the technology. While diesel is one of the most familiar and expansive fuel types used in North America, the presence of natural gas infrastructure has increased significantly in the last ten years, with more than 700 heavy-duty public fill stations in operation across the United States.
CNG fueling stations began opening at a rapid pace in 2012 but have since slowed. As shown in the chart at left, new station openings peaked in 2014, when 144 stations opened. The year 2019 saw just 11 new stations open. The slowing nature of new CNG station additions is a consequence of investors bypassing natural gas to favor battery-electric and hydrogen fuel cell technology as the new favorite transportation fuel of the future.
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. Natural gas vehicles have different drivetrains than diesel vehicles, therefore achieving shorter long-haul distances. Both of these factors are important to identify areas of economic opportunity for a single shipper to invest in their own infrastructure or fleets.
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The map below shows a sample of states with favorable economic conditions for fuel savings when converting to CNG fleets. 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.