US heavy duty NGV sales robust despite oil price impact on payback

The drop in crude oil prices has doubled the payback period for US natural gas vehicles (NGV) compared to diesel, from about one year and eight months in mid-2014 to around three to four years currently, Frank Bio, director of sales development, specialty vehicle & alternate fuels at Volvo Group North America, said.

Image credit: © Volvo Truck Corporation

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The increase in payback time has dampened some enthusiasm for NGVs, in particular light-duty vehicles, but other incentives to switch to gas – such as environmental benefits, US domestic supply and supply stability – remain strong.

Sales of medium- and heavy-duty gas vehicles rose in 2014 as some companies continued to shift fleets toward gas vehicles and many customers are waiting for clarity on oil prices before they make the switch.

“The market is experiencing less interest in natural gas for the moment and it is expected to increase as the price of diesel inches north,” Bio told FC Gas Intelligence.

Total US NGV sales fell by 6.5% in 2014, to 18,000 vehicles, mainly due to lower sales of light-duty vehicles, according to NGV America, a national trade association dedicated to vehicles powered by natural gas or biomethane.

“The number of total sales is surprisingly healthy given the dramatic drop in crude oil and related gasoline and diesel prices, which began in late June 2014. Despite the low cost of oil and other factors, NGV production and sales saw strong increases in both the medium- and heavy-duty market segments,” NGV America said in a report published in March.

“With the expected slow but steady increase in crude oil prices in 2015, the economic value proposition for NGVs across all sectors is expected to improve and once again drive greater NGV sales,” the association said.

There are about 153,000 NGVs on US roads and roughly 15 million worldwide.

NGVs typically cost more than gasoline or diesel vehicles, largely due to the cost of high-pressure and insulated fuel tanks, which are necessary to store CNG or LNG.

However, the savings from lower natural gas prices can translate into significant savings over the life of a vehicle, depending on fuel efficiency and the number of miles driven.

The biggest savings are currently being seen in heavy-duty, high-mileage fleets, which saw a 30% rise in sales in 2014 to 8,700 vehicles. 


 Source: NGV America's ‘2014 NGV Production and Sales Report’.

Bio gave an example using market prices on April 28, 2014, before the oil price slump, when the diesel pump price was $3.975 a gallon.

The spread between oil and gas prices meant the cost for fuel and diesel exhaust fluid (DEF) for a Class 8 heavy duty truck running 100,000 miles a year was around $58,063, while it amounted to $30,420 with natural gas at $1.81 diesel gallon equivalent (DGE) - even taking into account the 15% lower fuel economy for the natural gas engine.

Opting for natural gas at that time of higher oil prices would have produced savings of $27,643 per year. However, considering that natural gas trucks cost about $43,640 more to purchase and maintenance costs are higher, it would have taken about one year and eight months to pay back the difference between a natural gas engine truck and a diesel engine truck.

Taking a diesel price of $2.78 a gallon, which is towards the lower end of the price range seen in June 2015, the diesel cost per year for 100,000 miles is only $40,608. This puts the difference between a diesel and natural gas vehicle at around $10,188 per year.

Trading up
NGV America expects NGV production and sales to remain stable or increase in 2015, compared to 2014 levels, and this will largely depend on the oil price.

Fleets that started their transition to natural gas before the oil price slump last summer kept on placing orders through 2014 and are expected to “stay the course” in 2015, it said.

"What is occurring in the market is that the companies that have purchased and have committed to natural gas in the past continue to purchase, while companies that base their decision only on price are taking a longer look and are delaying their decision,” Volvo’s Bio said.

Customers who are buying NGVs do not expect to trade them afterwards on the same trade cycle of diesel. “It’s a mistake to think that way,” Bio said, adding that a typical trade cycle of a diesel truck might be three to five years.

The demand for used natural gas trucks is low due to lower life expectancy and technological advances, so customers purchasing a natural gas truck need to keep them longer and expect the value to be much lower than a diesel truck if they trade, he said.

Many customers do not base their decision to purchase NGVs on cost alone but also consider the fuels’ environmental footprint, energy independence and supply stability.

Big truck boom
The rise in heavy-duty truck sales in 2014 came from three distinct drivers: continued growth in refuse truck sales and strong transit bus orders, the first full-year availability of a new engine platform, and growth in dual-fuel systems.

In particular, refuse truck sales continued to capture more than 50% of the market as the industry’s large fleets pursued their transition to natural gas, NGV America said.

Natural gas transit bus orders were especially strong in 2014 as many existing agencies began replacing original natural gas units purchased in the late 1990’s and early 2000s.

The availability of the Cummins Westport (CWI) ISX-12G 11.9L engine led to significant sales from many of the major truck original equipment manufacturers.

“Solid growth in the heavy-duty sector is expected to continue in 2015. The medium-duty sector is also expected to continue to make similar sales gains in 2015 due to the availability of several platforms for relatively low incremental costs and to significant life-cycle savings for most applications,” NGV America said.

“However, sales growth in both the heavy- and medium-duty sectors will continue to be tempered by and dependent upon the price of oil and the demand for diesel fuel,” it said.


 Source: NGV America's ‘2014 NGV Production and Sales Report’