A heated debate is unfolding over the energy transition for commercial fleets. With diesel prices remaining stubbornly high, many fleet managers are turning their attention to natural gas—an abundant and relatively stable alternative fuel. However, beneath this seemingly attractive proposition lie potential pitfalls that could lead to disappointing returns or even significant losses. Is the shift to natural gas fleets truly an opportunity or a challenge? This article provides a thorough analysis of the economics of natural gas fuel to help fleet managers make informed investment decisions.
The Natural Gas Market: Hidden Concerns Behind the Boom
Over the past two years, the natural gas market has been a focal point of discussion. While the shale gas revolution has led to a surge in supply, long-term price increases appear inevitable. The current low prices largely result from squeezed production margins. Once extraction costs exceed profits, production will decline, inevitably driving prices higher.
The volatility of natural gas prices directly affects the price differential between natural gas fuels—compressed natural gas (CNG) and liquefied natural gas (LNG)—and diesel. For fleet operators, this differential is critical in assessing the feasibility of transitioning to natural gas. If natural gas prices remain consistently lower than diesel, switching to natural gas-powered trucks could yield substantial fuel savings.
To evaluate the investment potential more accurately, we developed a model to calculate the net present value (NPV) and internal rate of return (IRR) of such investments. Before delving into the model, let’s review recent developments in the natural gas and diesel markets.
From late 2011 through 2012, the natural gas market experienced a supply glut. By early 2013, however, the market began absorbing the excess capacity. Between January and April, natural gas inventories fell from a five-year high to the five-year average, and spot prices at Henry Hub surged from approximately $3.20 per thousand cubic feet (Mcf) to $4.40—a 38% increase. Since then, spot prices have fluctuated but generally stabilized around $3.80 per Mcf. At these low levels, only the most productive shale gas regions remain profitable, making future price increases likely.
Compared to the 2012 annual average, prices over the past six months have risen by 38%. However, wellhead prices are just one component of CNG and LNG retail prices. Notably, LNG is primarily available in California.
LNG vs. CNG: The Fuel Selection Dilemma
In California, LNG prices vary dramatically, ranging from $2.19 to $4.09 per diesel gallon equivalent (DGE)—a difference of over 87%. Outside California, the disparity is even more pronounced. In Houston, for example, LNG costs as little as $1.99 per DGE, while in La Crosse, Wisconsin, the price soars to $9.64. Such extreme variations are unheard of in the mature and competitive diesel market.
LNG also faces a unique challenge: it naturally evaporates. If its temperature rises above -260°F, LNG boils off and dissipates into the atmosphere. Consequently, LNG pricing is influenced not only by geography but also by time—a factor absent in diesel markets.
In contrast, CNG is more widely available and chemically stable. Once compressed, CNG can be stored for decades. Its retail prices are also more consistent than LNG’s. Even so, CNG prices vary significantly within the same region. In Greater Los Angeles, for instance, CNG prices range from $2.26 to $3.59 per DGE—a 59% difference. Again, such discrepancies are rare in diesel markets.
The average retail price of CNG in Los Angeles is $2.91 per DGE. Nationally, the average hovers around $2.50 per DGE. CNG pricing consists of eight major components: commodity price, transportation to utility city gates, local gas company service fees, taxes and assessments, compression costs (using electric pumps), facility maintenance and repair, capital and equipment amortization, and retail profit margins.
These components vary by location, with only the wellhead commodity price being variable. On average, the commodity price accounts for just 20% to 30% of CNG’s retail price, making CNG far more stable than natural gas spot prices. The same applies to diesel, which exhibits much lower volatility than crude oil.
Since January 2012, CNG prices have remained within a relatively narrow range, especially considering commodity price fluctuations. According to the Clean Cities Alternative Fuel Price Report, the spread between CNG’s highest and lowest prices was just 4%. In contrast, diesel’s peak price was 10% above its lowest. Accounting for data timeliness, actual volatility for both fuels may be higher. Nonetheless, CNG prices are demonstrably less volatile than diesel’s. In short, while CNG and LNG retail prices may be more stable on average, geographic disparities can be substantial and must be factored into any investment analysis.
Beyond lower volatility, CNG has consistently been cheaper than diesel on an energy-equivalent basis. Since January 2012, the average retail price difference has been $1.65 per DGE, with minimum and maximum spreads of $1.49 and $1.85, respectively.
Transition Risks and Costs: Challenges That Cannot Be Ignored
Transitioning to CNG or LNG-powered fleets is not without risks and costs. On the risk side, the price differential between natural gas and diesel could narrow rapidly, turning a promising investment into a poor one. On the cost side, natural gas powertrains are more expensive. Additionally, because CNG and LNG have lower energy density (Btu per gallon) than diesel, replacing diesel trucks requires carrying 3.7 gallons of CNG or 1.72 gallons of LNG per gallon of diesel to achieve equivalent range.
Larger, more complex CNG and LNG tanks are significantly heavier and costlier than diesel tanks. In some cases, the added weight reduces payload capacity. Beyond tank configurations, CNG and LNG have distinct refueling requirements. Since LNG is cryogenic, drivers must use protective gear (face shields, gloves, closed-toe shoes) and receive specialized training. For CNG, tanks must be pressurized during filling, which heats the gas and causes expansion. Rapid-fill tanks reach maximum pressure before being completely full.
To achieve a full tank, slow-fill techniques requiring six to eight hours are necessary. Without dedicated refueling infrastructure, actual tank capacity may be reduced by up to 25%.
Investment Model: Quantifying Risk and Reward
Our investment model generates incremental discounted cash flow projections and estimates payback periods, NPV, and IRR using nearly 20 user-defined inputs, including:
- Region-specific incremental natural gas spot and diesel prices
- Powertrain type (CNG or LNG) and displacement
- Tank size and configuration
- Fleet characteristics, including the number of trucks/tractors, average payload, annual mileage, average trip distance, and fuel economy (the model calculates the natural gas equivalent for diesel)
- Refueling method (slow- or fast-fill CNG)
- Financial considerations, such as discount rate, price differential between truck/tractor models, scrappage timeline, residual value, and incremental capital costs
Running the model with various real-world fleet and pricing scenarios yields interesting results. For some fleets, switching to natural gas carries minimal risk, with positive NPV under the most probable fuel price scenarios. For others, even favorable pricing fails to deliver a positive return on investment.
Evaluating natural gas alternatives for diesel-powered trucks and tractors is complex, but under certain conditions, the economic returns can be substantial. Even then, the value of such investments must be weighed against competing opportunities—typically by comparing IRRs.
In summary, whether natural gas-powered trucks or tractors are a sound investment depends on where and how your fleet operates. The devil is in the details, and only a thorough analysis can lead to the right decision.