OPTIMAL CONVERSION OF SHIPPING FLEETS FROM DIESEL TO NATURAL GAS: A COST-BENEFIT ANALYSIS MATTHEW MICHAEL O MEARA

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1 OPTIMAL CONVERSION OF SHIPPING FLEETS FROM DIESEL TO NATURAL GAS: A COST-BENEFIT ANALYSIS by MATTHEW MICHAEL O MEARA (Under the Direction of Gregory Colson and Berna Karali) ABSTRACT Natural gas has experienced a surge in the U.S. energy sector, accounting for more than 25% of the total amount of energy used in the U.S. in 2009, though during that same year it accounted for less than 3% of the total energy used in the transportation sector. For a vehicle to operate on natural gas, it must be outfitted to use either a highly pressurized form of gas known as compressed natural gas (CNG) or a liquid form called liquefied natural gas (LNG). CNG technology is best suited for return-to-base scenarios where vehicles refuel daily. Case studies in the literature have examined the feasibility of operating municipal fleets on CNG. The objective of this thesis is to evaluate the conditions under which it would be economically profitable for a private regional shipping company to outfit their fleet to operate on CNG as opposed to conventional diesel. INDEX WORDS: Alternative Fuels, Compressed Natural Gas, Heavy-Duty Trucks, Natural Gas, Net Present Value, Shipping Fleet

2 OPTIMAL CONVERSION OF SHIPPING FLEETS FROM DIESEL TO NATURAL GAS: A COST-BENEFIT ANALYSIS by MATTHEW MICHAEL O MEARA A Thesis Submitted to the Graduate Faculty of The University of Georgia in Partial Fulfillment of the Requirements for the Degree MASTER OF SCIENCE ATHENS, GEORGIA 2013

3 2013 MATTHEW MICHAEL O MEARA All Rights Reserved

4 OPTIMAL CONVERSION OF SHIPPING FLEETS FROM DIESEL TO NATURAL GAS: A COST-BENEFIT ANALYSIS by MATTHEW MICHAEL O MEARA Major Professors: Committee: Gregory Colson Berna Karali Nicholas Magnan Michael E. Wetzstein Electronic Version Approved: Maureen Grasso Dean of the Graduate School The University of Georgia May 2013

5 iv DEDICATION To my parents, Mike and Julie, and my brother, Daniel, for your continuous and unconditional support, love, and guidance.

6 v ACKNOWLEDGEMENTS First and foremost, I would like to thank my major professors, Dr. Greg Colson and Dr. Berna Karali, for all of their help, guidance, and patience during the entire process, from the formation of the topic through the editing of my many drafts. This being the first time I have undertaken a research project of this magnitude, I asked Dr. Colson and Dr. Karali to donate a considerable amount of their time and attention to this thesis. They always willingly obliged, and for this I am deeply grateful. I would also like to thank Dr. Michael Wetzstein and Dr. Nicholas Magnan for serving as members of my committee and for offering support along the way. I would like to thank my fellow graduate students, many of whom I have forged friendships with that will last long after we graduate. I want to thank my parents for their encouragement during my time at the University of Georgia, their sacrifice that afforded me the opportunity to study here, and their love, which has been a constant presence for as long as I can remember. I want to thank my brother Daniel, who despite being younger, is a bigger man than me in more ways than one, and Kaitlyn, for being Kaitlyn. Lastly, I want to thank the guys at Hancock who have been my roommates, friends, and family for five years now.

7 vi TABLE OF CONTENTS Page ACKNOWLEDGEMENTS...v LIST OF TABLES... viii LIST OF FIGURES... ix ACRONYMS AND ABBREVIATIONS...x CHAPTER ONE INTRODUCTION...1 Background...1 Objectives...9 Outline...11 TWO LITERATURE REVIEW...12 Previous Studies...12 Net Present Value...17 THREE DATA...20 Specification of the Model s Parameters...28 FOUR METHODS...36 Compressed Natural Gas Net Present Value Model...37 Diesel Net Present Value Model...38 Discounted Payback Period...39 Simulation Structure...40 Switch Existing Diesel Fleet to CNG...42

8 vii FIVE ANALYSIS...44 Model Results...44 Switch Existing Diesel Fleet to CNG Results...52 Sensitivity Analysis...58 SIX SUMMARY AND CONCLUSIONS...66 REFERENCES...71

9 viii LIST OF TABLES Page Table 3.1: Compressed Natural Gas Model Variables Table 3.2: Compressed Natural Gas Variable Sources...24 Table 3.3: Diesel Model Variables Table 3.4: Diesel Variable Sources...27 Table 3.5: Total Dollar per DGE CNG and Diesel Price...30 Table 3.6: Categorical Variables for Scenario Analysis- Low, Medium, and High Cases...34 Table 3.7: Categorical Variables for Sensitivity Analysis - Low, Medium, and High Cases...35 Table 4.1: NPV Model Simulation Scenarios Table 5.1: Model Results for Scenarios 1, 2, & Table 5.2: Model Results for Scenarios 4, 5, & Table 5.3: Model Results for Scenarios 7, 8, & Table 5.4: CNG Project Profitability Table 5.5: Switch Diesel Operations to CNG Low Case Table 5.6: Switch Diesel Operations to CNG Medium Case...54 Table 5.7: Switch Diesel Operations to CNG High Case Table 5.8: Sensitivity of Payback Periods Model Parameters Table 5.9: Sensitivity of Payback Periods Model Parameters Table 5.10: Sensitivity of Payback Periods to Fluctuations in Fuel Prices....62

10 ix LIST OF FIGURES Page Figure 1.1: Historical NG Wellhead and West Texas Instrument Oil Prices, Figure 1.2: Historical Commercial NG and Diesel Prices, Figure 1.3: Projected NG Wellhead and West Texas Instrument Oil Prices, Figure 1.4: Projected Commercial NG and Diesel Prices,

11 x ACRONYMS AND ABREVIATIONS BTU British Thermal Units CD Conventional Diesel CNG Compressed Natural Gas CWI Cummins Westport, Inc. DGE Diesel Gallon Equivalent EIA Energy Information Administration ECD Emission Controlled Diesel HDV Heavy-Duty Vehicle LNG Liquefied Natural Gas NEMS National Energy Modeling System NG Natural Gas NGV Natural Gas Vehicle NPV Net Present Value NREL National Renewable Energy Laboratory MCF Thousand Cubic Feet UPS United Parcel Service VRI Vehicle-to-Refueling-Station Index VICE Vehicle and Infrastructure Case-Flow Evaluation VMT Vehicle Miles Traveled WMATA Washington Metropolitan Area Transit Authority

12 1 CHAPTER ONE INTRODUCTION Background Natural gas is considered to be the most flexible of the fossil fuels, accounting for almost 25% of all energy used in the residential, commercial, and industrial sectors. Traditionally, natural gas has been primarily used to generate electricity (Center for Climate and Energy Solutions, 2012). However, recent technological advancements that have made it feasible to access abundant previously cost-prohibitive shale gas resources have led energy industry participants to search for other economically viable uses for natural gas. The U.S. Energy Information Administration (EIA) projects that shale natural gas will account for 49% of all natural gas production in the U.S. by 2035, more than double the 23% share it commanded in During this same time period total natural gas production is projected to increase from approximately 22 trillion cubic feet in 2010 to 27.9 trillion cubic feet in The influx in domestic shale gas resources will certainly have a large effect on U.S. natural gas markets as well as the larger energy sector as a whole (EIA, 2012). While the U.S. consumed more natural gas than it produced in 2010, importing a net of 2.6 trillion cubic feet from other countries, the EIA projects that the rapid increase in shale gas production will allow the U.S. to become an exporter of natural gas by 2022, leading to net exports of 1.4 trillion cubic feet by 2035 (EIA, 2012). Increased natural gas production will lead to greater self-sufficiency in natural gas and greater energy security overall; as natural gas is substituted for other forms of fuel the U.S. will become less susceptible to downturns brought on by energy shocks in the global market. Natural gas is also cleaner to burn than either coal or

13 2 petroleum, and this will provide an opportunity to reduce carbon dioxide emissions and the harmful health side effects associated with the pollution. Perhaps the most significant projected effect of increased natural gas production is lower, more stable natural gas prices as compared to other forms of fuel. The EIA projects the commercial price of natural gas will only modestly increase from a current price of $1.25 per Diesel Gallon Equivalent (DGE) to a little more than $2.05 per DGE by the year By comparison, the commercial price of diesel is projected to increase from $4.08 per DGE to $5.29 per DGE in the same time period. Collectively, the perceived benefits to an increased domestic supply of natural gas, coupled with the EIA price projections, have generated a growing interest in using natural gas as a fuel substitute in the transportation sector. There currently exist a number of technologies that allow for natural gas to be used in a wide range of vehicles. One such technology is for natural gas to be converted into methanol, which can then be burned in an internal combustion engine with only slight modifications. The more common use for natural gas in transportation is either in a highly pressurized state, known as compressed natural gas (CNG), or in a liquefied state referred to as liquefied natural gas (LNG). CNG is natural gas compressed to 1% of its normal atmospheric volume. When used in vehicles, CNG is stored in cylindrical tanks at pressures of between 3,000 and 3,600 pounds per square inch. On the other hand, LNG is created by chilling natural gas to 260 degrees Fahrenheit and then allowing it to condense into a liquid % the volume of the gaseous form (Knittel, 2012). At present, light and medium-duty vehicles, such as personal cars, trucks, and class 3-6 commercial vehicles are candidates to be powered by CNG while medium to heavy-duty class 7 and 8 vehicles are more suited to run on either CNG or LNG (Knittel, 2012; Krupnick, 2010).

14 $/DGE 3 Figure 1.1 Historical Natural Gas Wellhead and West Texas Intermediate Oil Prices, $4.00 $3.50 $3.00 $2.50 Historical NG and Oil Market Prices ($/DGE) $2.00 $1.50 $1.00 $0.50 $- NG Wellhead Year West Texas Intermediate Source: Energy Information Administration

15 4 Figure 1.2 Historical Commercial Natural Gas and Diesel Prices, Source: Energy Information Administration

16 $/DGE 5 Figure 1.3 Projected Natural Gas Wellhead and West Texas Intermediate Oil Prices, $5.00 Projected NG and Oil Market Prices ($/DGE) $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 NG Wellhead Year West Texas Intermediate Source: Energy Information Administration

17 6 Figure 1.4 Projected Commercial Natural Gas and Diesel Prices, Source: Energy Information Administration

18 7 At present, natural gas plays only a very minor role in the U.S. transportation sector. In 2010, quadrillion British thermal units (BTUs) of energy were consumed by the U.S. transportation sector, of which natural gas accounted for 0.68 quadrillion BTUs with petroleum accounting for the remaining quadrillion BTUs (3% and 9% respectively). The percentage of natural gas vehicles (NGVs) on the road is even smaller; of the more than 250 million vehicles on the road in the U.S., only approximately 117,000 of them are equipped to operate on natural gas, the majority of which run on CNG as opposed to LNG (Center for Climate and Energy Solutions, 2012). Where natural gas has had some success is displacing diesel fuel for use in heavy-duty vehicles. Here, natural gas has managed to corner a small portion of the market, with approximately 40,000, or 4%, of the more than nine million heavy-duty vehicles (HDVs) on the road operating on some form on natural gas (EIA, 2012). The slow adoption of natural gas for use in transportation can be attributed to a number of different obstacles. For one, natural gas powered vehicles cost more than their conventional gas or diesel powered counterparts. Some small personal vehicles can be modified from their original configuration to run on CNG, but the majority of vehicles outfitted to operate on either CNG or LNG must be bought new. These new CNG and LNG vehicles command an incremental price premium over similar conventional models that can range anywhere from $2,000 to $3,000 for lower class vehicles to as much as $70,000 for class 8 vehicles. A lack of refueling stations and general natural gas infrastructure is also a concern (Knittel, 2012; Krupnick). As of February 2013, there were 1,197 CNG fueling stations and 66 LNG fueling stations unevenly distributed across the U.S., of which only 566 and 28 were open to the public, respectively (Alternative Fuels Data Center, 2011). When compared to more than 157,000 fueling stations selling gasoline across the U.S. in 2010 it becomes apparent just how sparse the

19 8 current natural gas infrastructure is (EIA, 2012). The issue has compounded itself into what industry leaders have deemed a chicken and egg problem (Krupnick, 2010). Consumers are hesitant to purchase NGVs because of a lack of an adequate number of fueling stations, yet there exists little motivation to expand current natural gas infrastructure until consumer demand for fuel makes it economical to do so. The two aforementioned obstacles are perhaps the most prominent issues facing the widespread adoption of natural gas as a vehicle fuel, yet additional reservations do exist. The safety of natural gas has been called into question, as has been the industry s ability to convince an apprehensive consumer base about the merits of natural gas. Furthermore, natural gas powered vehicles do not currently have the ability to travel the same range as conventionally fueled vehicles. This limitation on driving range is exacerbated by the lack of refueling infrastructure mentioned above. Additionally, that cabin and storage space must be reduced in natural gas vehicles to make room for larger fuel tanks is another barrier that consumers must come to terms with if NGVs are to become an aspect of everyday life. All of these obstacles are contributing factors as to why so few of the small, lightweight vehicles currently on the road are equipped to run on natural gas. A smaller segment of the overall market that has been able to overcome the inherit obstacles associated with natural gas and achieve success, namely intermediate weight trucks and municipal fleets. Municipal operations, such as public buses and refuse haulers, as well as private shipping companies like United Parcel Service (UPS) are uniquely positioned to address the challenges facing natural gas adoption. For instance, government and corporate entities have the power to invest large sums of money into the purchase of NGVs that the average consumer does not. These operations, motivated by a desire to either cut costs or address environmental

20 9 obligations or both, can construct an onsite fueling station thus negating the need for additional fueling infrastructure. Furthermore, the nature and purpose of municipal and smaller private fleets is conducive to success under the current technology provided by natural gas. Refuse haulers, public transport buses and medium-weight shipping trucks all operate within the confines of a designated area, often following a specific route and then returning to a central location at the conclusion of the shift or day. The reduced driving range of NGVs is thus of less concern as vehicles are never far from the central refueling station. In addition, vehicles operating as part of a municipal fleet or small shipping company travel much greater number of miles annually than private vehicles, allowing savings from the use of cheaper fuel to accrue much faster, which in turn accelerates the payback period for the investment in vehicles and private fueling stations. As such, municipal fleets and private shipping companies consisting medium-weight vehicles are able to address many of the issues viewed as limitations of natural gas by the majority of the automobile industry. As a direct result of the success of natural gas with municipal and medium-duty fleets, natural gas proponents have sought to extend the technology to other vehicles with comparable characteristics, such as school buses and taxis. Likewise, a growing interest has been directed at the possibility of converting long-haul heavy-duty trucks, which possess many of the previously mentioned characteristics, to operate on natural gas as opposed to diesel. It is this specific topic that serves as the basis for this thesis. Objectives The goal of this thesis is to determine the optimal conditions under which it would be profitable for a regional shipping fleet to outfit its heavy-duty trucks to run on compressed natural gas instead of conventional diesel fuel. In contrast to earlier research focused primarily on the

21 10 conversion of public municipal fleets, this study examines a private profit-driven operation engaged in intra-day shipping, allowing the fleet to return to a centralized facility for refueling on a daily basis. Parameters including the size of the fleet, the cost of building a refueling station, the price of fuel, and the expected life of the vehicles are assessed to determine how they affect the net present value of costs for both CNG and diesel operations. The difference in the net present value of costs of a CNG operation and a diesel operation will show which investment opportunity provides the largest amount of cost savings. The discounted payback period required to recover the initial capital used to purchase a truck fleet and fueling station is calculated to provide further insight on the profitability of each investment scenario. Profitability will depend on a number of parameters such as fleet size, vehicle miles traveled, initial investment costs, and continued maintenance costs. This study uses data obtained from the EIA and the Federal Regulatory Energy Commission as well as previous studies and reports. Additionally, innovation within the trucking industry, brought on by a necessity to improve the quality of life for drivers as well as cut costs, has seen a fundamental shift from large-scale continental shipping networks to more defined, regional shipping network (DuCote et al., 2006). The establishment of regional shipping networks is especially conducive to natural gas vehicle operation. Finally, research on the potential for using natural gas as a fuel for fleet vehicles and heavy-duty trucks is minimal. What research does exist has focused primarily on the use of CNG with municipal fleets or the substitution of LNG for diesel in long-haul heavy-duty trucking operations.

22 11 Outline This thesis is composed of six chapters. The second chapter discusses the relevant literature on the economics of operating natural gas equipped fleets. Theoretical research and empirical case studies are examined; a brief introduction to net present value analysis with alternative fuels is discussed, as well. Chapter three introduces the data used for the net present value analysis. The model framework is then presented in chapter four. Chapter five discusses the model results and analysis of specific hypothetical scenarios. Finally, chapter six provides concluding remarks and policy implications.

23 12 CHAPTER TWO LITERATURE REVIEW Previous Studies A number of studies have analyzed the merit of natural gas as a vehicle fuel. Primarily, studies have explored the possibility of outfitting municipal fleets, such as refuse trucks, school buses, and public transport buses to operate on natural gas. Ahouissoussi and Wetzstein (1998) provided a cost comparison for operating a municipal transit fleet on CNG, methanol, biodiesel, and low-sulfur diesel fuel. Their study held that regulatory policies aimed at curbing emissions containing harmful particulate matter had left alternative fuels poised to make a potential market impact. Engine costs among the different fuel types were considered to be the same, while fuel system and maintenance costs as well as the miles between rebuilds were assumed to vary. Periodical engine rebuilding is necessary to avoid costly roadside repairs, thus a preventative maintenance program is undertaken by the transit authorities. The authors used maximum likelihood estimation procedures to compare the different costs associated with the alternative fuels following the assumption that transit authorities have a method for determining the optimal time to rebuild an engine. The model results indicated that the cost to rebuild a CNG engine was near equivalent to that of a diesel engine, though the time interval for the rebuild was only half that of diesel, indicating higher maintenance costs. In addition, CNG required higher upfront costs when compared to diesel or biodiesel because of infrastructure and fuel system conversion costs. However, because CNG fuel costs were the lowest among any of the fuels in the study, as the miles driven by the bus

24 13 increased, the relative cost per mile decreased. Regardless, the costs incurred by the transit authority would be largely irreversible, which in turn would introduce a sizeable risk if the desired outcome was not achieved. The authors conclude that incentives will be necessary to induce further industry development. Cohen (2005) evaluated the use of emission controlled diesel (ECD) and CNG technologies in school buses as opposed to conventional diesel (CD). The author stated that a growing emphasis on outdoor air quality and emission control has led regulators to search for low emission alternative fuels for use in municipal fleets that can reduce the harmful health side effects associated with the burning of conventional diesel. The analysis, which built upon an earlier study by the author concerning CNG transit buses, maintained that school buses are an important aspect of municipal fleets to evaluate. There were approximately 67,000 transit buses in the U.S. in 2002 compared to approximately 600,000 school buses. Cohen (2005) employed a cost-effectiveness methodology developed in his earlier study to evaluate the potential of ECD and CNG to replace CD in school buses. The study quantified school bus emissions and resource costs as well as the impact of those emissions on human health in order to generate a cost-effectiveness ratio. The study found that while both ECD and CNG reduced health damages, CNG did so at a much greater expense due in part to the high upfront costs of converting a school bus fleet to operate on CNG instead of CD. Johnson (2010) described under what conditions three separate hypothetical projects transit buses, school buses, and refuse trucks could profit from introducing compressed natural gas to their fleet. The study examined a Vehicle and Infrastructure Case-Flow Evaluation (VICE) model employed by the National Renewable Energy Laboratory (NREL) to explore the relationship between various operation parameters and profitability. Municipal fleets serve as

25 14 the subject of the study for two primary reasons. First, the routes municipal fleets travel are conducive to refueling at one central station and second, municipal governments, who are concerned with improving the quality of life of their citizens, are uniquely positioned to reap the associated benefits of CNG such as long-term cost-effectiveness and improved energy efficiency. The author found that particular fleets were more resilient and profitable than others when parameters in the model were altered. For instance, larger transit and refuse fleets are found to be more profitable than smaller transit and school bus fleets because the numbers of vehicles and the miles driven per year are greater in the first category than the second. Additionally, the study concluded that parameters for the price of diesel and the annual vehicle miles traveled (VMT) carried a disproportionate influence in determining whether or not a project would be profitable as well as the length of the payback period. Two case studies on the use of CNG with municipal fleets and an empirical analysis of personal NGVs are of particular interest. In 2006, a study was conducted (Chandler et al., 2006) to compare the functionality of CNG and diesel buses currently in use by the Washington Metropolitan Area Transit Authority (WMATA). WMATA began operating 146 CNG buses in 2002 before ordering an additional 250 CNG buses, which began operation in Chandler et al. (2006) selected ten CNG buses, five equipped with a Cummins Westport, Inc. (CWI) engine and five equipped with a John Deere engine, as well as five diesel buses from the original fleet for their study. The five CWI equipped buses and the diesel buses were monitored for twelve months while the John Deere equipped buses were monitored only for six months. The evaluation collected operational, maintenance, and performance data for each bus in the study fleet. The authors found that the CNG buses had fuel economies 16%-18% lower than the diesel buses while total maintenance costs for the CWI and John Deere powered CNG buses were 12%

26 15 and 2% less than the diesel buses, respectively. The average price of both diesel and CNG during the evaluation was $1.33/DGE and the total operating costs were $1.06/mile for diesel, $1.09/mile CWI CNG, and $1.06/mile for John Deere CNG. Total operating costs were primarily affected by fuel costs and fuel economy, which led to the authors most significant conclusion: any change to fuel costs or fuel economy will significantly alter total operating costs, thereby making one fuel outright more favorable than the other. Under the direction of the Colorado Energy Office, Antares Group, Inc. (2012) conducted a case study of two public CNG refuse operations with a total of 41 trucks in the greater Denver area as well as a private CNG operation consisting of 221 light-duty vehicles at the Denver International Airport. This study noted substantial cost savings, as high as 50%, from the use of CNG. Republic Services, one of the refuse operations, reported CNG costs of $ $2.25 per DGE over the course of the evaluation while average price of diesel during the same period was $3.87 per gallon. The price discrepancy between CNG and diesel found in the Denver area case study presents a stark contrast to the price ratio observed in the WMATA case study, though separated by only six years. Higher diesel prices resulted in CNG becoming a highly profitable option, as was suggested by Chandler et al. (2006) in the WMATA study. An empirical analysis conducted by Yeh (2007) on the adoption of natural gas vehicles for consumer use in eight different countries highlighted three economic indicators that have the greatest effect on investor and consumer adoption: infrastructure, fuel price ratio, and payback period. To illustrate the number of stations available to NGV drivers as well as the potential profitability for CNG station owners, the author developed a natural gas vehicle-to-refuelingstation index (VRI), which is simply the number of natural gas vehicles (in thousands) divided by the total number of natural gas refueling stations. The study asserted that the optimal VRI for

27 16 NGV adoption would be roughly equal to one, meaning there would be one refueling station for every one thousand NGV. To put things in perspective, the VRI for conventional gasoline increased from 0.9 in 1993 to 1.35 in During this same period, the VRI for natural gas increased from 0.05 to 0.10, indicating a substantial need for increased natural gas infrastructure. Yeh (2007) stated that the fuel price ratio, or price difference between conventional gasoline and CNG, was the most important factor when determining whether consumers will make the switch from conventional fuels to natural gas. The study suggested that sustained natural gas price levels 40-50% below conventional gasoline and diesel price levels are necessary for the long term growth of NGVs. The study suggested that consumers demand a payback period of 3-4 years to compensate for an investment in fuel economy, which is well short of the useful life of the car. The short payback period considered acceptable by consumers indicates a high discount rate and an underestimation of the economic benefit of their investment. Government incentives are necessary to compensate for the discrepancy. At present, there is limited research evaluating the potential for private companies to substitute natural gas for diesel in their trucking fleets. The most commonly held belief among industry experts is that liquefied natural gas is the best potential substitute for diesel in long-haul heavy-duty trucking operations while compressed natural gas would be a better suited substitute for medium to heavy-duty trucks operating within a specified region with close proximity to a central fueling station. Krupnick (2010) discussed current arguments made for and against the use of natural gas as an alternative to diesel in commercial freight operations. His research, though focused on heavy-duty trucks for use in shipping fleets, primarily addressed the possibility of using LNG, not CNG. Nonetheless, the three reasons provided by Krupnick (2010) as to why natural gas is

28 17 best suited for fleet vehicles and heavy-duty trucks are applicable to CNG as well as LNG. First, the limited natural gas infrastructure can be overcome by a few strategically placed fueling stations because trucks often travel predictable routes. Second, heavy-duty trucks are better suited to accommodate the added weight and space needed to house either CNG or LNG storage tanks onboard the truck. Third, other alternative fuels such as electricity are not fundamentally suitable for the heavy-duty trucks because of power requirements and battery technology. The author concluded by highlighting a few current trends underway which could make LNG and CNG a more economical alternative to diesel. The price of natural gas will likely remain low in the coming decades, climbing at a much slower rate than the price of diesel. In addition, if demand for natural gas in transportation continues to grow, then economies of scale could contribute to lower prices, thus reducing the incremental gap currently present between conventional and natural gas vehicles. Finally, diesel powered trucks could become even less appealing because of stricter environmental regulations and emission standards. Net Present Value To assess the economic viability of converting a truck based fleet from conventional diesel to natural gas this study conducts a net present value (NPV) analysis. Net present value is an especially useful tool to assess a project where the benefits and costs are received in different increments over time. It is for this reason that net present value has been widely used in previous studies to evaluate whether or not an investment in alternative fuels is a sound economic decision. Gallaghar (2011) presented an analysis of the economics of producing biodiesel, an alternative fuel for conventional diesel, from algae grown in open ponds. An NPV calculation was used in part to account for uncertain operating costs and volatile market prices. In addition,

29 18 Gallaghar (2011) noted that the use of NPV allows for various model inputs, costs, and economic conditions to be varied within a specified range, thus allowing for a simple comparison of different scenarios and possible outcomes. The author concluded if the price of conventional oil continues to increase well past $100 a barrel, the NPV model shows an increasing insensitivity to a reduction in government subsidies or an increase in operational or capital costs associated with algae-to-biodiesel commercialization. Krutilla et al. (2011) evaluated whether the long-term benefits of fuel saving technologies in vehicles, such a hybrids, are worth the short-term costs and if incentives are necessary to help facilitate demand. An NPV model that accounts for fuel prices and technology trends was developed to determine the expected time at which hybrids would become a financially viable alternative. Krutilla et al. (2011) suggested that discounting the cash flows used in the NPV analysis back to the present allows hybrid technology to be evaluated as an investment option over the entire span of the projected project life, not just at one particular point in time. Lastly, Taylor et al. (1991) used an NPV model to directly report the cost-effectiveness of converting a public fleet to operate on CNG. The report was developed directly in response to Texas Senate Bill 740, enacted in September of 1991, which required all school districts with more than 50 buses, state agencies, excluding law enforcement, with more than 15 vehicles, and urban transit authorities to purchase new vehicles that were equipped to operate on natural gas, or an alternative fuel with comparable emission characteristics. State agencies affected by the legislation were able to obtain a program waiver if they could meet one of two criterions: (1) operating the respective fleet on natural gas was more expensive than doing so with conventional gas or diesel, or (2) natural gas was not available in sufficiently abundant supply. Thus, the

30 19 report held direct significance to the aforementioned agencies from a policy perspective. The authors conclude from their study that the introduction of natural gas to the Texas Department of Transportation fleet would cost an estimated $47 million over 30 years. Additionally, Taylor et al. (1991) found that costs could be kept to a minimum if the program were to target larger fleets over 30 vehicles, as well if agencies instituted a practice of building fleets consisting solely of new vehicles originally designed to run on CNG as opposed to diesel conversions. If the Texas Department of Transportation were to follow these general guidelines, as well as monitor the maintenance costs needed for CNG vehicles in an effort to keep the purchase of new vehicles down, then the authors estimate of actual cost saving could have been realized through the use of CNG.

31 20 CHAPTER THERE DATA This chapter introduces the data used in the net present value analysis of the economic viability of transitioning a trucking fleet from diesel to natural gas. In order to conduct the economic feasibility analysis it is necessary to compute the fixed and variable costs of operating a trucking fleet under both fuel types over time. The variable names, variable descriptions, and the corresponding data sources for both the natural gas and diesel simulations are provided in the tables below. A detailed explanation of the data is then presented, followed by concluding remarks. The data compiled for this thesis come from a number of different sources. In terms of academic research, the use of natural gas as an alternative to conventional diesel is still a relatively new topic. While research in the field has grown as interest in alternative fuels has continued to rise, reports and papers in the literature still cite a range of figures and sources in their studies. This limitation coupled with the fact that the natural gas market is an evolving market characterized by historically volatile prices and changing economics, presents complications for conducting an economic feasibility study and requires sensitivity analysis. To address this issue, this thesis uses data compiled from a number of relevant academic journals and industry reports as well as personal interviews on natural gas and heavy-duty vehicles. This practice was determined to be advantageous compared to the use of data from a few select sources. The objective of this thesis, to analyze the economics of a heavy-duty CNG shipping fleet compared to the economics of a comparable diesel shipping fleet, requires that both operations

32 21 use the same variables. For this reason, many of the model variables are assumed to have the same values for both the CNG and diesel operations. The model variables, variable descriptions, and data sources are provided below in Tables 3.1 through 3.4.

33 22 Table 3.1 Compressed Natural Gas Model Variables Variable Variable Name Units Formula Description Total upfront fixed CNG cost $ Total cost of CNG trucks $/truck The total combined cost of the CNG fueling station and truck fleet The total cost of all the trucks in the CNG fleet Cost per CNG truck $/truck --- The unit price of one heavy-duty diesel truck CNG station construction cost $ The total cost to construct a CNG fueling station Total CNG fuel expenditure Total price of CNG $/year $/DGE The total annual amount spent on CNG for the trucking fleet The total cost of a DGE of CNG, including all taxes and electrical compression costs Commercial price of NG $/DGE --- The price per DGE for commercial NG Federal fuel tax for CNG $/DGE --- Federal excise tax for CNG per DGE State fuel tax for CNG $/DGE --- State tax for CNG per DGE Price of electricity to compress CNG Total annual DGE of CNG used $/DGE --- DGE Price of electricity required to power compressor in order to generate one DGE of CNG The total volume of CNG, in DGE, required annually by the entire trucking fleet 1 FC denotes a fixed cost. A description of the fixed costs in the model is provided in the following section entitled Specification of the Model s Parameters and the actual values are given in chapter four.

34 23 Table 3.1 Continued. Compressed Natural Gas Model Variables Variable Variable Name Units Formula Description Total number of CNG trucks Truck --- Total miles driven per CNG truck mi/truck/year --- Miles per DGE for CNG trucks mi/dge --- Total annual cost of M&O for NG operation Total CNG truck maintenance cost Per mile cost of CNG truck maintenance Total CNG station maintenance cost Per DGE cost of CNG station maintenance CNG truck salvage value in year k $ $ $/mi/truck --- $ $/DGE --- $/truck T Time Year --- r Discount rate Percent --- The total number of trucks operated by the firm The total number of miles driven annually by each truck in the firm The miles traveled per DGE for each NG truck The total combined cost of annual truck maintenance costs and station maintenance costs The total annual cost of maintaining the CNG trucking fleet The per mile cost to maintain each CNG truck in the trucking fleet The total annual cost of maintaining the CNG fueling station The per DGE cost to maintain the CNG fueling station The total salvage value a firm can recover from the resale of the CNG fleet in year k The specific period in time of the analysis, given in years The discount factor applied to the analysis to account for the time value of money

35 24 Table 3.2 Compressed Natural Gas Variable Sources Variable Source American Trucking Associations; Argonne National Laboratory; The Hamilton Project; Pacific Northwest National Laboratory National Renewable Energy Laboratory; American Gas Association; TIAX U.S. Energy Information Administration AASHTO; Congressional Bill - H.R AASHTO; Personal Interviews Personal Interviews; TIAX; American Gas Foundation Resources for The Future; The Hamilton Project; Alternative Fuels Data Center American Trucking Associations; TIAX Operating Cost of Trucks; Resources for The Future; American Transportation Research Institute Argonne National Laboratory, Personal Interviews T r National Renewable Energy Laboratory National Renewable Energy Laboratory; Resources for The Future

36 25 Table 3.3 Diesel Model Variables Variable Variable name Units Formula Description Total upfront fixed diesel cost Total cost of the diesel truck fleet $ The total combined cost of the diesel fueling station and truck fleet $ The total cost of all the trucks in the diesel fleet Cost per diesel truck $/truck --- The unit price of one heavy-duty diesel truck Diesel station construction cost Total diesel fuel expenditure Total price of diesel fuel Commercial price of diesel fuel Federal fuel tax for diesel fuel $ $/year $/DGE The total cost to construct a diesel fueling station The total annual amount spent on diesel fuel for the trucking fleet The total cost of a DGE of diesel, including all taxes $/DGE --- The price per DGE for commercial diesel $/DGE --- Federal excise tax for diesel per DGE State fuel tax for diesel fuel $/DGE --- State tax for diesel per DGE Total annual gallons of diesel fuel used DGE The total volume of diesel, in DGE, required annually by the entire trucking fleet Total number of diesel trucks Trucks --- The total number of trucks operated by the firm 1 FC denotes a fixed cost. A description of the fixed costs in the model is provided in the following section entitled Specification of the Model s Parameters and the actual values are given in chapter four.

37 26 Table 3.3 Continued. Diesel Model Variables Variable Variable name Units Formula Description Total miles driven per diesel truck Miles per gallons for diesel trucks Total annual M&O cost for diesel operation Total diesel truck maintenance cost Per mile cost of diesel truck maintenance Total diesel station maintenance cost Per DGE cost of diesel station maintenance Diesel truck salvage value in year k mi/truck/year --- mi/dge --- $ $ mi/truck --- $ $/DGE --- $/truck T Time Year --- r Discount rate Percent --- The total number of miles driven annually by each truck in the firm The miles traveled per DGE for each diesel truck The total combined cost of annual truck maintenance costs and station maintenance costs The total annual cost of maintaining the diesel truck fleet The per mile cost to maintain each diesel truck in the trucking fleet The total annual cost of maintaining the diesel fueling station The per DGE cost to maintain the diesel fueling station The total salvage value a firm can recover from the resale of the diesel fleet in year k The specific period in time of the analysis, given in years The discount factor applied to the analysis to account for the time value of money

38 27 Table 3.4 Diesel Variable Sources Variable Source American Trucking Associations; Resources for The Future; Pacific Northwest National Laboratory Idaho National Laboratory; TIAX; Personal Interviews U.S. Energy Information Administration AASHTO; American Petroleum Institute; Federation of Tax Administrators AASHTO; Personal Interviews Resources for The Future; The Hamilton Project; Alternative Fuels Data Center American Trucking Associations; TIAX Operating Cost of Trucks; Resources for The Future; American Transportation Research Institute Argonne National Laboratory; Personal Interviews T r National Renewable Energy Laboratory National Renewable Energy Laboratory; Resources for The Future

39 28 Specification of the Model s Parameters This section provides a detailed explanation of the parameters used in the model and how specific values were derived. Methods and calculations used to derive the data can be assumed to have been applied identically to both the CNG and diesel data sets, unless noted otherwise. Total upfront fixed cost, is the sum of the capital needed to purchase all of the heavy-duty trucks in the fleet as well as the capital required to construct an onsite fueling station. The total cost of the truck fleet, is the unit cost of each heavy-duty truck, multiplied by the entire number of trucks in the fleet,. CNG heavy-duty trucks are currently more expensive than their diesel counterparts; at present, CNG trucks command a near 50% premium over diesel trucks. The total cost to construct a fueling station,, is a function of a fixed cost multiplied by the total number of trucks in the fleet, plus a fixed cost multiplied by the average annual vehicle miles traveled per truck in the fleet. The first fixed cost in the equation is dependent on the type of fuel used in the operation, either CNG or diesel, while the second fixed cost is dependent on the volume of gallons of diesel, or DGE of CNG, pumped at the station. Fixed costs for both diesel and CNG fueling stations are derived from data in the literature, which provided a foundation for the development of a station cost calculator. The calculator provided flexibility in determining the cost of fueling stations across a wide range of parameters. Fueling station estimates generated by the calculator fell well in line with generally accepted cost estimates in the literature. The exact values of the fixed cost used in the fueling station calculator are provided in chapter four. The cost to construct a CNG fueling station is substantially greater than the cost to construct a diesel fueling station; more infrastructure and equipment is needed for a CNG station and there is an absence of economies of scale.

40 29 Total fuel expenditure,, is the total amount of firm capital spent on fuel in a given year. The total amount of capital spent on fuel, whether on CNG or diesel, is a function of the total price of fuel, and for natural gas and diesel, respectively, multiplied by the total number of diesel equivalent gallons, used by the entire fleet. The total price of a single DGE of CNG is comprised of four different components while the total price of a single DGE of diesel is comprised of three components. The first input in a DGE of CNG is the raw natural gas, for which the firm pays the commercial rate, charged by the providing utility. The second and third components in the total price of a DGE of compressed natural gas are state and federal taxes, labeled and respectively, also recorded as per DGE costs. Fourth, the firm must compress the natural gas onsite, which requires the use of electricity, recorded as a per DGE cost. For each DGE of diesel, a firm must pay the commercial rate for diesel charged by the utility, as well as the applicable state and federal taxes; there is not an electrical cost component because no compression is necessary for the diesel fuel. The state tax in each fuel price equation was obtained by averaging the state taxes across the U.S. It should be noted that some references in the literature suggest firms have the potential to negotiate contracts with utilities to obtain favorable rates for natural gas and diesel below their advertised commercial rate. However, such a scenario would be site specific. Industry professionals who were interviewed confirmed the commercial rate of natural gas and diesel would be an acceptable proxy for the likely cost incurred by the hypothetical firms in this thesis. All per gallon costs were converted to DGEs so as to make them easily comparable across studies. This required all per gallon costs to be divided by 0.88, the energy conversion coefficient from per gallon to per DGE. The EIA provides commercial natural gas and diesel

41 30 price projections for each year from the present through the year Commercial natural gas prices are reported in dollars per Thousand Cubic Feet (MCF). In order to convert commercial natural gas prices from dollars per MCF to dollars per DGE, each year s price projection was divided by , the number of gallons per MCF. This number was subsequently divided by 0.88, thus giving us our commercial per DGE price, Commercial diesel price projections are given in per gallon units by the EIA, so each year s price projection was also divided by 0.88 to convert commercial diesel prices to dollar per DGE units. Table 3.5 lists the total dollar per DGE price of both CNG and Diesel used in the model analysis. The analysis uses prices projected 15 years into the future because this is the length of the study and the length of the useful life of heavy-duty shipping trucks. Table 3.5 Total Dollar per DGE CNG and Diesel Price Year (DGE) (DGE) 1 $1.86 $ $1.82 $ $1.80 $ $1.87 $ $1.91 $ $1.97 $ $1.99 $ $2.01 $ $2.03 $ $2.07 $ $2.10 $ $2.11 $ $2.12 $ $2.15 $ $2.15 $5.07

42 31 The total number of trucks, is the total number of trucks employed by the shipping fleet. Fleet size varies by industry and operation as dictated by each individual firm s needs. The analysis in this thesis considers a small fleet of 20 trucks, a medium fleet of 50 trucks, and a large fleet of 80 trucks. Each truck in the fleet is understood to travel a specific amount of miles per year,. The total number of miles driven by each heavy-duty truck is, again, dependent on the industry and operation each firm is engaged in. Estimates on the annual vehicle miles traveled (VMT) by heavy-duty trucks range from 60,000 miles to as high as 125,000 miles. Fuel economy is reported as miles traveled per DGE, CNG trucks are considered to have reduced fuel efficiency compared to diesel trucks of similar size because of the added weight brought on by the larger fuel tanks. Fuel economy estimates for heavy-duty diesel trucks range from 5 MPG to 6.8 MPG. Fuel economy is reported in terms of DGE for both CNG and diesel, the same as costs, so that comparisons can be made between the amounts of energy required to travel equivalent distances. Here fuel economy, when converted to DGE units, can be understood to be in the same range for both types of fuel. Total annual maintenance costs for each firm, is the total combined cost to maintain both the truck fleet and the fueling station. Total truck maintenance costs, is found by multiplying the per mile cost of truck maintenance by the average annual vehicle miles traveled by each truck and the total number of trucks employed by the firm. The truck maintenance cost, which includes vehicle upkeep and the driver s salary, is reported as a per mile cost for each mile driven by an individual truck. Earlier studies cite a range of operating costs from $1.11 per mile to $1.73 per mile. Some case studies have found that CNG trucks require more maintenance than their diesel counterparts while other case

43 32 studies have reported the exact opposite. The analysis in this thesis assumes that per mile operating costs are the same for both CNG and diesel trucks. Total station maintenance costs, is found by multiplying the per DGE cost of station maintenance by the total volume of fuel used by the firm on an annual basis. Fueling station maintenance cost, which includes equipment maintenance and replacement as well as the attendant s salary, is reported as a per DGE cost. CNG stations have more infrastructure than diesel stations, such as compressors, hoses and monitoring equipment which require frequent maintenance. Estimates of the cost to maintain a diesel fueling station range from $0.05 to $0.18 per DGE pumped while the estimates of the cost to maintain a CNG fueling station range from $0.18 to $0.35 per DGE pumped. A secondary point of analysis in this thesis is to evaluate the economic feasibility of replacing an existing diesel shipping fleet with a CNG shipping operation. The decision to replace an existing diesel fleet with a CNG fleet will depend largely on the salvage value of the existing diesel trucks. Salvage value, given by is the proportion of the total cost of the truck fleet that could be recovered if the trucks were resold. Here, k denotes the current age of the diesel trucks, which can take a value from 0 to 15. For the analysis in this thesis, the project life is the same duration as the useful life of the vehicles in the study. In the case of heavy-duty trucks, the useful life is 15 years. Total costs are summed each year of the investment. A time variable, is assigned to each year of the investment period, beginning with year zero and ending with year 15, to specify at what stage of the investment each cost is incurred. Net present value analysis also calls for the use of a discount rate, The literature suggests a wide range of discount rates is suitable, depending on what assumptions are held by