Fleet operators facing rising diesel costs and increasing environmental pressures may view natural gas-powered trucks as an attractive solution. With lower fuel expenses and cleaner emissions, the appeal is clear. However, beneath the promising surface lie complexities that demand careful consideration before making the switch.
The Natural Gas Market: A Landscape of Opportunities and Challenges
Over the past two years, the natural gas market has drawn significant attention. Despite abundant reserves, price increases appear inevitable due to rising extraction costs and the mismatch with prices driven by hydraulic fracturing ("fracking") technology. The volatility of natural gas prices directly impacts the cost differential between natural gas fuel and diesel—a key factor for fleets considering the transition.
To assess the potential return on investment in natural gas-powered trucks, financial models calculating net present value (NPV) and internal rate of return (IRR) can be employed. Before delving into these models, it is essential to review recent developments in the natural gas and diesel markets.
In late 2011, the natural gas market experienced a supply glut that persisted through 2012. By early 2013, however, excess capacity began to diminish. As inventories dropped from five-year highs to five-year averages, Henry Hub spot prices surged by 38%, climbing from approximately $3.20 per thousand cubic feet (Mcf) to $4.40. Since April, prices have stabilized around $3.80 per Mcf. At these low levels, drilling remains economically viable only in the most productive shale gas regions, suggesting future price increases are likely.
The average price over the past six months—$3.80 per Mcf—represents a 38% increase over the 2012 average. It is important to note that wellhead prices are just one component of retail prices for compressed natural gas (CNG) and liquefied natural gas (LNG). Currently, LNG availability is concentrated primarily in California.
CNG vs. LNG: Key Differences and Considerations
In California, LNG prices (measured in diesel gallon equivalents, or DGE) range from $2.19 to $4.09 per gallon—a staggering 87% variance. Outside California, disparities are even more pronounced. In Houston, LNG costs $1.99 per DGE, while in La Crosse, Wisconsin, prices soar to $9.64. Such regional discrepancies are unheard of in the mature and competitive diesel market. Additionally, unlike diesel, LNG is prone to boiling off and evaporation due to temperature fluctuations, introducing further instability.
CNG, by contrast, is more widely available and chemically stable. Once compressed, CNG can be stored for decades. Retail prices for CNG also exhibit greater consistency, though regional variations persist. In the Greater Los Angeles area, current CNG prices range from $2.26 to $3.59 per DGE—a 59% spread. Diesel prices within any given region rarely display such extremes.
The average retail price for CNG in Los Angeles is $2.91 per DGE, while the national average hovers near $2.50. CNG pricing comprises eight major components: commodity costs, transportation fees to utility city gates, local gas company service charges, taxes and assessments, compression expenses (using electric pumps), facility maintenance and repair costs, capital and equipment amortization, and retail markups.
These factors vary by location, with wellhead prices being the sole variable cost. On average, commodity prices account for just 20% to 30% of CNG retail prices, contributing to their relative stability. Diesel prices similarly exhibit less volatility than crude oil benchmarks.
Since January 2012, CNG prices have remained within a narrow band, particularly given fluctuations in underlying commodity prices. Data from the Clean Cities Alternative Fuel Price Report indicates a mere 4% difference between the highest and lowest CNG prices during this period. Diesel prices, by comparison, showed a 10% spread. While real-world volatility may exceed reported figures, the data suggests CNG prices are more stable than diesel.
Beyond price stability, CNG consistently offers cost savings on an energy-equivalent basis. Since January 2012, the average price differential has been $1.65 per DGE, with minimum and maximum spreads of $1.49 and $1.85, respectively.
Transitioning to Natural Gas: Costs, Risks, and Rewards
Adopting CNG or LNG-powered fleets is not without risks or expenses. On the risk side, narrowing price differentials between natural gas and diesel could erode anticipated savings. On the cost side, natural gas powertrains carry higher upfront expenses. Due to lower energy density (BTUs per gallon) compared to diesel, achieving equivalent range requires larger fuel tanks—3.7 gallons of CNG or 1.72 gallons of LNG per gallon of diesel.
These bulkier, more complex tanks add weight and cost, potentially reducing payload capacity. Refueling requirements also differ: LNG demands specialized safety gear and training for handlers due to its cryogenic nature, while CNG tanks require slow-fill techniques (6–8 hours) for complete refueling. Without dedicated fueling infrastructure, effective tank capacity may decrease by up to 25%.
Investment Modeling: Quantifying Risks and Returns
Financial models evaluating natural gas fleet transitions incorporate nearly 20 user-defined inputs to project incremental discounted cash flows, including:
- Regional variations in natural gas spot prices and diesel prices
- Powertrain type (CNG or LNG) and displacement
- Tank size and configuration
- Fleet characteristics (truck/tractor count, average payload, annual mileage, trip distance, and fuel efficiency)
- Refueling method (slow- or fast-fill CNG)
- Financial parameters (discount rate, price differentials between models, useful life, residual value, and incremental capital costs)
Applying this framework to real-world fleet scenarios yields divergent outcomes. For some operators, transitioning presents minimal risk—with positive NPV under likely fuel price scenarios. For others, even favorable pricing fails to justify the investment. The decision hinges on meticulous analysis of fleet-specific variables, weighed against alternative capital deployment opportunities.
While natural gas-powered trucks offer compelling advantages under certain conditions, success depends on navigating intricate operational and economic trade-offs. As with any strategic investment, thorough due diligence separates prudent decisions from costly missteps.