What Is Holding Back Natural Gas As The Transport Fuel Of The Future?

The natural gas revolution has brought big changes to the U.S. energy scene. Natural gas prices, which used to move closely together with oil prices, have plunged in the last five years, as the following chart shows.

One result has been the rapid displacement of coal by natural gas in electric power generation. According to a recent report from the Union of Concerned Scientists, some 100 gigawatts of coal-fired electric plants, representing more than a quarter of coal capacity and nearly a tenth of total U.S. electric capacity, have either been closed or are likely soon to be closed because they have become uncompetitive with natural gas.

Natural gas has also been displacing oil at a rapid rate as a home heating fuel. In transportation, however, the use of natural gas is spreading more slowly.

Transportation ranks second only to electric power generation in total energy use. There are at least three ways to use natural gas to power transportation. One is to generate electricity with natural gas, which can then power electric cars or electrified rail lines. Another is to convert natural gas to liquids like methanol or synthetic gasoline. However, as I discussed in this post two years ago, the biggest potential lies in the direct use of compressed natural gas (CNG) or liquid natural gas (LNG) as a fuel for natural gas vehicles (NGVs).

As the next chart shows, there is nothing new about NGVs, which are in widespread use in many countries. Some governments have promoted them to reduce urban pollution and others to achieve greater energy independence.

In many of these countries, gas is widely used for light vehicles like taxis and private cars. In the United States on the other hand, the small number of NGVs now in service are mostly city busses, garbage trucks, delivery vans, and other fleet vehicles.

What is holding back the wider use of CNG in the U.S. transportation system? Not technology. Unlike hydrogen, cellulosic ethanol, algae diesel, and other futuristic alternatives, NGVs use simple, off-the-shelf technology. That is part of the reason they are popular in Pakistan, Bangladesh, Armenia, and other developing and emerging market countries. Instead, the slow spread of CNG as a transportation fuel in the United States is largely attributable to economic and political factors.

The network problem
As James Hamilton notes in a recent post, the spread of natural gas as a motor fuel, especially in its early stages, encounters a network problem. There is no point in owning an NGV if you have no place to refuel it, and no point in building refueling stations if no one owns NGVs. That explains why early adopters of CNG have mostly been fleet operators whose vehicles refuel when they return to base at the end of their shift. However, two factors are now breaking down the barrier posed by the network problem.

First, natural gas is particularly attractive as a replacement for diesel fuel in heavy trucks. Compared with light vehicles like passenger cars and pickups, heavy trucks drive more miles per year and consume more fuel per mile. Long-haul trucks further gain if they use LNG instead of CNG. LNG vehicles have greater initial costs but have more compact fuel tanks and greater driving range. All of these factors increase the payoff to the use of natural gas for long-haul vehicles, and they also increase the payoff to investments in fueling stations.

Not surprisingly, then, truck stops have been the pioneers in building fueling stations. Pilot-Flying J, a leader in the field, already has a network of natural gas filling stations that extends from coast to coast. By the end of 2013, the company’s natural gas highway will run from the Canadian to the Mexican border, as well. (Click here for a map.) These stations will at first offer LNG for long-haul trucks, but once they are in place, adding CNG will be a natural extension of service. A spokesperson says the company will do so on a station-by-station basis as local and regional demand develops.

Second, it is possible to build dual-fuel vehicles, which can run on either gasoline or CNG at the flip of a switch. In 2012, Ford (F), General Motors (GM), and Chrysler all started offering dual-fuel versions of popular pickup models. True, dual-fuel vehicles cost a bit more than pure NGVs, and they require room for two sets of fuel tanks. The current offerings run $40,000 and up. Still, any three-quarter ton pickup is going to use a lot of fuel, and if used for business, is likely to run up a lot of miles. Dual-fuel pickups will appeal to farmers, building contractors, and others who may sometimes be within range of a CNG filling station, and sometimes not. As more such vehicles go on the road, they will create the necessary incentive to add more stations to the network.

Policy issues
Even if we assume that the network problem will gradually take care of itself, certain aspects of energy and environmental policy still retard the spread of NGVs in the United States. NGV advocates urge three kinds of changes.

First, they advocate changes in the taxation of motor fuel. For example, the LNG used by heavy trucks is now taxed at the same rate of $.243 per gallon as diesel fuel, despite the fact that it takes 1.7 gallons of LNG to supply the same energy as a gallon of diesel. NGVAmerica, an industry group, recommends equalizing the tax on an energy-equivalent basis. A more radical proposal would be to tax motor fuels on a carbon-equivalent basis. Because natural gas is less carbon intensive per unit of energy than diesel fuel, a carbon tax would further increase the attractiveness of LNG and CNG fuels. (Note: Some fracking opponents have disputed the premise that natural gas is less carbon-intensive, on a life-cycle basis, than diesel or gasoline. I discussed the complex economics of fracking in this earlier post.)

Second, advocates say that federal regulations should be at least as friendly toward NGVs as they are toward other clean and fuel-efficient vehicles. That has not always been the case. For example, up until 2011, the EPA maintained an onerous set of regulations for approving after-market CNG conversion kits for passenger cars and light trucks. Fortunately, those regulations have now been streamlined, which may increase the rate of after-market conversions. Even so, in some respects, tax incentives, fuel economy standards, and other regulations are tilted toward more fashionable technologies like hybrid-electric and all-electric vehicles, ignoring CNG.

Third, and more controversially, NGV advocates have pushed for subsidies and tax credits targeted directly at natural gas fuels, expansion of the fueling network, and purchase of NGVs. Legislation known as the NAT GAS Act, introduced in both the House and Senate during 2011, would have boosted NGVs in a number of ways. However, the legislation did not pass, in part because of opposition from conservative organizations like the Heritage Foundation, which objected to the NAT GAS Act as a market distorting subsidy. There is probably some truth to that, in the sense that under a national energy policy that required users of every kind of fuel to pay full costs, including environmental and national security costs, NGVs would be able to make it on their own merits without a need for specially targeted tax credits or subsidies. Adding subsidies for natural gas to a system that already underprices more carbon-intensive fuels seems like the wrong approach.

The bottom line
When all is said and done, CNG is a decidedly unfashionable entry in the fuel-of-the-future sweepstakes, yet it may be the dark horse that wins the race. If your goal is to flaunt your green credentials, then go ahead and trade in your hybrid Prius for an all-electric Leaf. Meanwhile, the contractor down the block will buy a new dual-fuel F-250, or buy an aftermarket conversion kit for the beat-up model already in service. Which vehicle will make the greater contribution to energy independence, national security, and a healthy planet? You guessed it. The NGV, hands down.

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