Opinion: Weigh Natural-Gas Equipment’s Costs, Benefits

This Opinion piece appears in the Nov. 19 print edition of Transport Topics. Click here to subscribe today.

By Joe White

CEO

GreenWay Miles

The sold-out Natural Gas in Trucking Summit attests to the phenomenal growth of interest in compressed natural gas and liquefied natural-gas equipment from both sides of the loading dock (10-29, p. 6; 11-5, p. 4). Trucking company executives and shippers alike are aggressively analyzing what they see as the two major benefits of natural-gas equipment: lower fuel costs and reduced carbon emissions. The obvious question that analysis needs to answer now is this: Do the benefits of natural-gas equipment outweigh the additional costs of the equipment?

For trucking companies, the fuel cost advantage can be very significant — or only slightly significant, depending on the carrier and the type of operation. Natural gas is cheaper than diesel fuel. The current national average CNG pump price is $2.40 per diesel gallon equivalent, compared with $4.10 a gallon for diesel. Significant savings in fuel costs are critically important if a trucking company is going to pay an additional $40,000-plus for each CNG tractor.

However, the lower pump price of CNG is not nearly the financial incentive for public fleets as it is for private fleets because of the effect fuel surcharges have on the net fuel cost of for-hire carriers. Here’s why:

Differences between current average pump prices for diesel ($4.10) and CNG ($2.40) suggest a $1.70 a gallon savings with CNG. However, most for-hire trucking companies have fuel surcharges in place that reimburse them for diesel costs above a base price of $1.25 a gallon (base prices differ, but $1.25 is representative). Often, fuel surcharges are structured to effectively make a carrier’s net cost of fuel equal to their base price — $1.25 a gallon — regardless of pump price. Therefore, it does not matter what the for-hire carrier pays at the pump — $4.10 (diesel) or $2.40 (CNG). Their net cost after surcharge will be about $1.25 per gallon.

Consequently, if most or all of the fuel cost savings associated with CNG equipment eventually go to shippers in the form of lower surcharges, the for-hire trucking company will end up paying the same net price for CNG as for subsidized diesel.

The only real, long-term fuel cost advantage of CNG trucks for public carriers is in unsubsidized fuel usage — empty miles traveled and time spent idling. For-hire carriers with 85%-plus laden mile percentages will be hard-pressed to justify an additional $40,000 or more for CNG tractors using fuel cost savings alone.

For shippers, however, the return on investment is completely different. Their fuel surcharge eventually will be reduced by $1.70 a gallon, the difference between diesel and CNG pump prices. At 6.75 miles per gallon, that equates to savings of a whopping 25 cents per mile!

Private fleets have a similar ROI. Since they pay 100% of their fuel costs, they receive 100% of the savings.

This fuel cost-benefit analysis demonstrates that if shippers request that a carrier use natural-gas equipment, before acquiring that equipment, for-hire trucking companies need first to negotiate a payback rate structure or fuel surcharge “lock” that reimburses their bottom line for higher tractor costs.

In addition to bottom-line concerns, we should anticipate that the fuel cost advantage of natural-gas equipment will be a catalyst for changes and new problems in the industry. For example, the size of private fleets is likely to soar at the expense of for-hire fleets. Private fleet owners using for-hire carriers to support their network may gradually take back traffic lanes as they add natural-gas equipment to their fleet that provides a 25-cent-a-mile cost advantage.

In addition, fuel surcharge payments will receive nightmarish levels of shipper scrutiny as dedicated natural-gas equipment, temporarily without freight, and owner-operators with natural-gas tractors haul diesel-subsidized freight.

The same issues will occur within logistics operations assigning freight to companies that operate natural-gas equipment. No shipper will want to oversubsidize fuel costs.

The second advantage of natural-gas equipment is improved sustainability through reduced carbon emissions. Natural-gas heavy-duty tractors emit less carbon than their diesel counterparts do — 20% to 25% less on average.

For every 100,000 miles run, a CNG truck will emit about 35 metric tons of carbon less than a diesel truck. There is definitely a value in reducing carbon emissions, but it is difficult to quantify financially — particularly when a for-hire carrier is attempting to justify the additional $40,000-plus cost of a CNG tractor.

Much of the interest in natural-gas equipment is coming from environmentally concerned shippers asking carriers to acquire lower-emissions equipment. After all, it is getting their product to the market that is generating the carbon dioxide. For-hire trucking companies receiving shipper pressure to add natural-gas equipment for sustainability reasons might want to offer another, less costly alternative — carbon-neutral shipping. Based on current carbon offset pricing, many trucking companies could offer carbon-neutral shipping for a penny a mile or less.

Dividing a penny a mile into $40,000 suggests that 4 million miles could be shipped carbon-neutral for the incremental cost of just one CNG tractor.

In addition, the emissions from CNG equipment running 4 million miles is about 4,800 metric tons of carbon compared to 100% of emissions “neutralized” with carbon-neutral shipping that invests in carbon offsetting projects.

Finally, offering carbon-neutral shipping on a cost-per-mile basis places the cost burden of sustainability where most trucking companies think it should be — on the shipper getting product to the marketplace.

Returning to the question that prompted this article: Do the benefits of natural-gas equipment outweigh the costs? The answer is: It depends.

GreenWay Miles, based in Grayson, Ga., provides carbon audits, carbon reporting, carbon-neutral shipping, truck driver sustainability training and carbon offsets to the logistics industry.