Considering Natural Gas Vehicles for Fleets.

There are nearly 5 million natural gas vehicles (NGVs) in service worldwide. While the number of NGVs on North America's roads is estimated between 135,000 and 150,000 vehicles, there's a significant shift towards larger, medium- and heavy-duty vehicles, such as transit buses, school buses and trash trucks.

Two natural gas vehicles. Left: Vons Grocery CNG tractor trailer. Right : Refuse hauler, NYC. Photos: DOE/NREL, Warren Gretz

"Now, more than ever, the North American NGV market is primed for growth," says Rich Kolodziej, president of NGVAmerica, formerly known as the Natural Gas Vehicle Coalition. "Concern about the long-term outlook for gasoline and diesel prices, especially among fleets, is starting to sink in. As fleet managers  become increasingly familiar with the new federal NGV incentives and the resulting economics, I think we'll see more of them  re-engage."

The Environmental Protection Agency (EPA) emissions requirements are forcing diesel truck manufacturers to use complex strategies that push costs higher. On the other hand, notes Kolodziej, heavy-duty NGVs are not only cleaner, but also they're able to meet the new requirements with improved fuel economy and performance. Several heavy-duty natural gas engine manufacturers have already demonstrated they’ll meet 2010 requirements in 2007.

Summary of New Federal Tax Incentives

Paul Kerkhoven, NGVAmerica's director of Government Affairs, refers to the new federal tax incentives signed into law last August as a "three-legged stool" comprising vehicle tax credits, motor fuel excise tax credits and station tax credits.

Federal Alternative Fuel Vehicle Tax Credits

Under a provision of the Energy Policy Act of 2005, buyers of a new dedicated alternative fueled vehicle placed in service after December 31, 2005, are eligible for a tax credit of 50 percent of the incremental cost of the vehicle, with an additional 30 percent "bonus" credit for vehicles meeting the most stringent applicable EPA or California Air Resources Board (CARB) emission standard. If the buyer of the vehicle is a tax-exempt entity, such as a school district, transit agency or municipality, the tax credit may transfer to the seller of the vehicle. The amount of pass-through tax credit is a negotiating point between the buyer and seller to be reflected in a lower purchase price.

"This is a major step forward," says Brian Stokes, who as manager of Emissions Reduction Programs at Pacific Gas and Electric (PG&E) heads the company's Clean Air Transportation team and coordinates closely with the corporate fleet group. "The two keys to sustainable growth in this market are economics and value-added benefits," says Stokes. He believes the best opportunities for NGVs appear to be in the heavy-duty market sectors where high fuel use and natural gas's lower cost on a diesel-gallon-equivalent (dge) translates into good economics and in the light duty market where HOV lane access and home refueling offer value-added benefits.

"The vehicle tax credit will help us generate the manufacturing volumes critical to convincing original equipment manufacturers (OEMs) to produce the vehicles our customers want at a reasonable price," says Stokes. "It's our job to educate customers about the benefits, show the feasibility by investing in demonstration projects and help generate orders."

PG&E recently spearheaded such a heavy-duty vehicle demonstration project, which was largely responsible for Freightliner's decision to factory-produce a natural gas powered version of its popular M2 business class truck. A DaimlerChrysler company, Freightliner is the largest heavy-duty truck manufacturer in North America and a leading producer of medium-duty trucks and specialized commercial vehicles. The effort, coordinated in conjunction with the Clean Vehicle Education Foundation's (CVEF) Utility & Public Fleet Council (UPFC), involved field-retrofitting natural gas engines in a number of the company's heavy-duty utility work trucks. PG&E then took a demo unit on tour, showing it at utility trade shows, lending it to prospective customers to "kick the tires," and assessing potential orders through a CVEF- coordinated survey. "Getting line-production of the M2 creates economies of scale that greatly reduce the premium associated with field retrofits," say Brian Pepper, a PG&E senior program manager in Transportation Services and co-chairman of the UPFC. "Putting the vehicle out there in front of customers, then communicating their feedback and interest to Freightliner was critical to our success in showing them a solid business case for OEM production" he says.

The amount of the available tax credit is based on four gross vehicle weight rating (GVWR) groupings that have total incremental cost caps ranging from a $5000 for light duty vehicles (up to 8,500 lbs.) to $40,000 for heavy duty vehicles (more than 26,000 lbs.). For example, a dedicated natural gas-powered light-duty pick-up that meets a lesser EPA emission standard could qualify for up to $2,500, while a Honda Civic GX, which meets CARB's more stringent SULEV standard, could qualify for up to $4,000 in federal tax credits. Heavy-duty natural gas powered vehicles with GVWR over 26,000 pounds, such as a transit bus or utility crew truck, could qualify for up to $32,000 if the engine meets the strictest emission standard in place for heavy-duty engines.

NGVAmerica's Kerkhoven says the IRS ruled in June that existing petroleum-powered vehicles repowered or retrofit with an EPA- or CARB-certified natural gas engine or "conversion system," thereby enabling it to operate as dedicated natural gas-powered vehicle, would qualify for the credit as long as the newly modified vehicle was placed into service after December 31, 2005. IRS' recognition of repowers and retrofits is an extremely important development because many of the light-, medium- and heavy-duty vehicles available today are those modified with EPA- or CARB-certified natural gas conversion systems manufactured by Small Volume Manufacturers (SVM). According to a document posted on CVEF's website [www.cleanvehicle.org], SVM retrofit systems are available for dozens of light- and medium- duty GM and Ford vehicles, and several manufacturers offer natural gas engines for repowering existing heavy-duty vehicles. 

"Cutting the remaining premium for the factory-produced natural gas M2 by $32,000 will bring its purchase price to near parity with its diesel counterpart," says PG&E's Pepper. "When fuel and maintenance savings are factored in, fleet operators will see a very reasonable payback and a great life-cycle cost advantage."

Federal Motor Fuels Excise Tax Credits

Natural gas's historical cost advantage over gasoline and diesel fuel will improve substantially due to the new federal motor fuels excise tax credit contained in the Energy Policy Act of 2005, says Kerkhoven. Beginning October 1, 2006, the federal government will pay the seller of vehicular alternative fuel 50 cents per gallon of liquefied natural gas (LNG) or gasoline-gallon- equivalent (gge) of compressed natural gas (CNG). For CNG, the motor fuels excise tax credit is not generated until the gas is compressed for vehicular use. 

While one highway bill provision provides this new tax credit, another provision raises the CNG federal tax from its current 6 cents per gge to 18.3 cents per gge, making it equivalent to the federal tax paid per gallon of gasoline, and it also raises the LNG tax from 11.9 to 24.3 cents per gallon, making it equivalent to the federal tax paid per gallon of diesel fuel. For private companies like investor-owned utilities, the net difference after the "rebate" is about 38 cents per gge of CNG and nearly 64 cents per dge of LNG.
 
Kerkhoven says NGVAmerica is still awaiting IRS guidance on the fuel credit, including how it defines the word "seller." The highway bill's language is clear that a fleet operator who buys natural gas and compresses it for use in his/her own fleet is considered the "seller" of the fuel, even though no monetary transaction has taken place. Less clear, however, are cases where the purchase of natural gas and the ownership, operation and maintenance of fueling equipment is shared between the end-use fleet operator and a fuel service provider, such as a utility or independent fuel supplier.

Fueling Station Equipment Tax Credit

The third leg of the stool, says Kerkhoven, is the energy bill provision that allows for an income tax credit equal to 30 percent of the cost of any qualified alternative fuel vehicle refueling property used in a trade or business and placed into service after December 31, 2005. The credit is capped at a maximum of $30,000 "per property" per year. As with the vehicle purchase tax credit, the fueling infrastructure tax credit can be taken by the equipment seller if the purchaser is a tax-exempt entity. The same provision repeals an existing $100,000 tax deduction for fueling stations. The new measure remains in effect until December 31, 2009.

The legislation also permits carrying forward of tax credits if the total allowable credit exceeds the taxable entity's tax liability for that year. As of late-June when this article was written, final IRS guidance was still being developed. Of particular interest is whether the IRS will define individual pieces of equipment as "property" as it does in regulations pertaining to depreciable assets, thus allowing multiple pieces of "property" per fueling station, or if it will take a more restrictive interpretation and define "property" as the entire refueling facility.

Partnering with Advocates, Trade Allies is Key

Gordon Larsen, supervisor of NGV operations for Questar, helped found his local Utah Clean Cities Coalition and has been active in it and other fleet organizations for years, constantly driving home the positive NGV message to customers and policy makers, and helping them pursue grants.

With over 25 years of experience, Questar's NGV program is recognized as one of the most successful programs in the country. Nearly 85 percent of Questar's fleet runs on CNG, its service territory boasts more than 100 stations—many owned and operated by the company— and the market for NGVs is so strong that used vehicles are imported into the state from across the country to meet customer demand. "We've got a fuel price differential of more than a buck-fifty per gallon," says Larsen. "Savings like that draw people out of the woodwork. The demand is so high that used NGVs go at a premium out here."

Questar's NGV customer base includes the usual mix of public and private fleets and a growing forklift market. Additionally, vehicular natural gas throughput at public stations was up 49 percent in 2005.

"Questar was methodical and spent wisely in building its station network," says Larsen. "We took what we knew about station design and built what we needed, adding capacity as we went, without spending a ton on consultants. We did the work ourselves and got better at it." As the NGV market developed, Questar grew its infrastructure network by partnering with retail petroleum fuel providers such as Phillips 66, Sinclair and Tesoro to lease space on their footprints and build stations. "Retail fueling is their business. They know how to market and have the best locations," says Larsen. "It's a lot easier to work with them than against them."

Bob Moore, vice president of Gas Sales & Marketing at KeySpan Energy Delivery in New York, says that partnering with trade allies to bring new and emerging technologies to customers is part of their business model. While KeySpan owns and operates stations in both the New York and New England markets, the company now relies more on third-party station developers to expand its NGV infrastructure. "KeySpan has always believed in maximizing use of outside trade experts, leveraging their capital and expertise along with ours," says Moore. "The marketplace is putting in its own capital. That's a good barometer of the state of the industry."

Ron Gulmi, NGV programs manager and KeySpan's point man on NGVs in the New York market, echoes Moore's comments about working with trade allies. "We see a lot of opportunity to build the heavy-duty fleet market and that starts right here with our own fleet just like we did with the light duty segment in years past," he says, adding that KeySpan communicated its interest in the natural gas-powered Freightliner M2, not only for its own fleet but also for other area utilities such as telephone and cable companies.

© Copyright 2007, American Gas Association, reprinted and excerpted with permission