TLDR: In which the author’s heart is broken and put back together again over sustainable fuels. Or, the bull case for renewable natural gas (RNG) in transportation.
Low carbon fuels: A love story
Last week, RNG producer Opal Fuels LLC merged with the SPAC ArcLight Clean Transition Corp. II at a valuation of roughly $2 billion. Yes, $2 billion. That’s … a lot of money. But wait, is the RNG transport fuel market really that big? Aren’t there only around 175,000 NG trucks on the road today? Who is using this stuff and where? I’m glad you asked because today we’ll unpack all your questions and more. But first, a love story about my first foray into alternative fuels:
The year was 2011 and I was smitten by the promises of a man named T. Boone Pickens. Like many in freight, I latched on to the idea of natural gas trucking as a game-changer for fleets. The technology was available and funds were flowing into refueling infrastructure. His firm, Clean Energy, was going to vertically integrate and deliver low-carbon fuel to the masses at a price below diesel. We jumped into an early demonstration project, leased a handful of trucks, set up the fueling agreement, and signed up a pilot customer. And then … it all stopped. After just a few months, our customer was underwhelmed and so were we. The project fizzled as quickly as it started. My heart was broken by the fact that we couldn’t scale this solution. But I learned a lot from this lost love. I’m wiser now and have a healthier view of new technology adoption and the macro forces at play in the energy transition.
Looking back on the experience, there were three primary reasons we didn’t succeed. The engine technology was too small for our application, resulting in poor fuel efficiency. Our customer was unable to effectively leverage the emission reductions and capitalize on the brand value from our sustainable freight solution. And finally, the fuel cost savings weren’t enough to overcome the high equipment costs and network limitations.
So, what’s different this time? Are we destined to repeat the same nat gas hype cycle of the last decade in freight? No, no, no. It finally seems that all of these hurdles have been cleared, or at least the last of them very soon will be. Let’s dig in.
Photo Credit: Cummins Inc.
Equipment
Our project in Southern California was built on leasing five Freightliner Cascadias operating a Cummins-Westport ISX-12G engine running on compressed natural gas (CNG). I remember seeing this beauty on display at The Great American Trucking Show in Dallas the year before. But what a difference a year and a full trailer make…
This engine model was (and still is) perfectly fine in the right operating conditions. Dray moves from the port, short and regional service hauling light freight, etc. are all good applications. I mean, UPS has made enormous investments in this technology because it neatly fits the company’s service routes and fueling requirements. Amazon recently made similar commitments.
Our experience suggested that the engine model was undersized to operate in a long-haul operation. However, while current fleets have driven millions of miles on CNG and LNG using smaller engines, Cummins is now expanding its offerings by introducing a 15-liter engine.
With a larger engine available to provide fleets with the necessary horsepower and torque to operate efficiently in long-haul applications, I expect adoption to increase. Plus it is expected to weigh up to 500 pounds less than comparable diesel-powered engines, making it more efficient and less prone to sacrifice payload. With equipment that can get any job done, we should see more fleets making data-driven purchase decisions based on the total cost of ownership. This includes taking into account revenue and marketing opportunities as well as life cycle fuel costs.
Photo Credit: UPS
Brand equity
The major opportunity at the time of our pilot project was to reduce costs, not necessarily emissions. With the price of diesel around $6 a gallon in California, we had a fairly easy sell to get the nat gas trucks on the road. But first movers in the CNG trucking space found a difficult path to scale. The fuel savings were there but minimal. And it was a stretch to pay up for the expensive equipment without a long-term path to profitability.
More importantly, very few freight buyers were looking to actively reduce emissions. It’s only in the past three to four years that companies like AB Inbev have taken major steps to cut global supply chain emissions. Growth in corporate climate pledges is rapidly gaining momentum, with the Science-Based Targets Initiative reporting more companies joined in the past 18 months than in the previous six years.
And along with this burgeoning model of stakeholder capitalism, where companies seek long-term value creation by taking into account the needs of all stakeholders and society at large, comes the opportunity for logistics service providers to truly differentiate themselves. Expect continued momentum for green freight providers as shippers continue to understand their footprint and work with their suppliers to reduce emissions.
OK, we have capable equipment and interested customers. But haven’t we had that for a while, to some degree? Why are there still so few of these trucks in operation?
Photo Credit: Opal Fuels
Fuel availability and cost
The important, third leg of the stool here is RNG. RNG is a big deal for fleets and shippers. And obviously, based on the headline article above, it’s a huge investment opportunity for RNG fuel producers as well. If we just follow the money, plenty of large bets are being made on scaling up this zero-carbon fueling solution.
To create RNG, biogas from landfills, dairy farms, and wastewater treatment plants that would otherwise be released into the atmosphere is collected and processed, according to the Environmental Protection Agency. Landfill RNG can reduce GHG emissions by 50% to 70% compared to diesel, while sourcing RNG from dairy farms provides an even bigger emissions benefit. RNG can be transported easily via NG pipelines to one of the nearly 900 NG stations across North America. But the main markets experiencing massive growth in RNG utilization are found on the west coast, where voluminous clean fuel standards are accelerating adoption.
Ten years ago during our pilot program, the California Low Carbon Fuel Standard (LCFS) was in its infancy and facing legal hurdles. The program has endured and evolved such that today, an LCFS credit is the highest-priced carbon credit on the planet. At today’s prices, a diesel-equivalent gallon of low-carbon dairy RNG is worth 10 times the price of its fossil-based alternative, giving fuel producers an enormous incentive to expand.
I will have to dedicate a future entry to breaking down the intricacies of clean fuel standards because they’re long and interesting and it won’t fit in this article. If you’re just dying for the background, ACT did a great job of recapping it last year here.
Conclusion
I’m bullish on RNG expansion into the freight markets. Technology, lower emissions and fueling infrastructure are all available today. While many will argue that resources should be deployed instead toward an electric or hydrogen fueling future, I believe we are facing a polyfuel future. A future where we will hopefully find a way to fairly incorporate carbon pricing. A future where the right fuel in the right application at the right price will get the job done. I hope that’s not ridiculously idealistic. I’ve had my heart broken before and don’t want it to happen again.
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