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I n t e r n a t i o n a l L P G & C N G & L N G m a g a z i n e

WHILST GAS IN NORTH AMERICA IS LARGELY SOURCED INDIGENOUSLY FROM SHALE GAS AND PRICED ACCORDING TO ONE INDEX (HENRY HUB), IN THE EU 66% OF GAS SUPPLIES ARE IMPORTED AND SO PRICE LEVELS ARE HIGHER AND PRICING METHODS ARE MORE DIVERSE.

EUROPEAN WHOLESALE PRICES CAN BE SET BY EITHER GAS TRADING HUBS PRICES OR OIL-INDEXATION. THE GROWTH OF GAS HUB PRICING IS EXPECTED TO CONTINUE, WHICH IS LIKELY TO MAINTAIN OR INCREASE THE DIFFERENTIAL BETWEEN WHOLESALE NATURAL GAS AND DIESEL PRICES. GAS SUPPLIES THAT ARE USED AS A TRANSPORTATION FUEL INCLUDE LNG, CNG AND BIOMETHANE. THIS CHAPTER EXPLORES THE DIFFERENT SUPPLY CHAINS OF THESE FORMS OF METHANE, AS WELL AS PROVIDES INFORMATION ABOUT THE DIFFERENT PRICING SYSTEMS AND MARKETS. SPECIFIC EXAMPLES ARE ALSO USED TO ILLUSTRATE THE DEVELOPMENT OF BIOMETHANE IN TRANSPORT.

Overview of the market for gas as a road

transport fuel in EU

EXISTING NGV MARKETThe European road transportation market is currently dominated by

petroleum-based fuels. In 2011, about 318 million tonnes of oil equivalent (mtoe) was consumed in the transportation sector, of which 93% was oil. Natural gas is not reported separately and consumption figures must be found from other sources, which are described below.

There are around 343 million road vehicles in Europe, of which about 1.85 million are natural gas vehicles (this constitutes about 0.4% of the total vehicle market). Ukraine and Italy have the largest markets for natural gas vehicles where CNG in particular is a popular option. There is limited penetration of natural gas vehicles elsewhere in Europe and Europe currently has a modest share – around 11% – of the global NGV population.

Table 1: European countries with highest number of NGVs

Vehicle sectors, and applicability for CNG and/or LNGThere are 2 main technical applications of natural gas as a transportation

fuel: CNG and LNG.CNG is natural gas compressed to between 200 and 275 bar and stored

as a pressurized gas in a high-pressure storage tank. LNG is natural gas cooled to -161°C and stored as a liquid in highly-insulated tanks.

Typically CNG occupies 1/200th to 1/275h of the volume of gas at standard temperature and pressure, and LNG 1/600th.

There are 3 main vehicle technologies that can use natural gas as a fuel:• Bi-fuelled vehicles – this is the predominant technology used for cars

and vans running on gas. It comprises of a spark ignition engine that is fitted with both a gas and petrol fuel system. The vehicle can then run on either fuel.

• Dedicated gas vehicles – these are vehicles that use a spark ignition engine that runs solely on gas and has been optimised for this purpose.

• Dual-fuelled vehicles – these are diesel vehicles that use a compression ignition diesel engine and run on a mixture of gas and diesel, typically 70% gas and 30% diesel.

The vehicle market can be segmented into key categories, including:• Cars and light commercial vehicles – jointly referred to as light duty

vehicles (LDVs)• Buses• Large commercial and freight vehicles – jointly referred to as heavy

duty vehicles (HDVs)• Waterborne transport by sea and inland waterway

For technical reasons, LNG is a better choice for long distance HDV road vehicles and marine shipping. LNG is typically stored and dispensed at a temperature slightly below -161°C and stored in large insulated tanks. LNG will warm despite insulation and will eventually vaporize. This is known as boil-off and creates the risk that methane may be vented to the atmosphere. To prevent methane slip, LNG-fuelled vehicles cannot be stationary too long, limiting the suitability of the fuel for some vehicle types. CNG is a better choice for light duty vehicles, with quicker refuelling times, and short distance ‘back to depot’ operations for commercial and public transport vehicles. CNG storage tanks also take up less space than LNG tanks and can be stationary for longer.

NGV GROWTH FORECASTSAlthough use of natural gas as a vehicle fuel has been in existence for

a number of years, there is currently growing interest in this sector and in particular potential for growth in the LNG market. As a result,

a number of organisations have recently produced NGV growth forecasts. This section gives a brief overview of the different forecasts of natural gas in transportation.

Table 2: European demand for gas in road transportation (bcm)

There is a wide range of views from the IEA’s conservative approach, which forecasts gas increasing its share of the road transport market from 0.4% to 1.3% (equivalent to 3.8bcm) by 2035 to EEGTFT which forecasts use over ten times higher at 43bcm by 2030. Bearing this in mind MJMEnergy has modeled demand for gas as a road transport fuel in Low, Mid and High scenarios. It should noted that even in our Low scenario, we forecast strong prospects for gas demand for road transport of 16bcm in 2025, with demand in our High scenario of 75bcm. Key growth factors for these scenarios are considered in the section below.

Table 3: MJMEnergy’s forecasts of European demand for gas in roadtransportation

Growth DriversIn North America, there is a very clear factor driving growth in NGVs:

the significantly lower price of natural gas compared to the cost of either gasoline or refined diesel fuels. The situation in Europe is less clear-cut, and along with the cheaper cost of natural gas over oil-based fuels, there are various other factors that are driving growth of NGVs including the role of taxation, regulation and access to infrastructure.

TaxationEuropean countries generally provide attractive incentives for

on-road gas use in tax regimes. The table below compares the tax levels on diesel with those on natural gas for key European countries. The most supportive tax regimes are found in Belgium, the UK, Italy, France, the Netherlands and Sweden, where excise taxes for natural gas as a vehicle fuel average about €0.58 per litre equivalent lower than those levied on diesel in the same country.

Table 4: Comparison of vehicle fuel tax rates for selected Europeancountries

CONVERTING TO NATURAL GAS: KEY CONSIDERATIONS TO ADDRESS WHEN CONVERTING A FLEET TO NGVSDespite the relative cost advantage for fuelling NGVs compared to

traditional diesel models, the higher relative costs of NGVs compared to traditionally-fuelled vehicles has presented a major challenges to wider use of natural gas as a transportation fuel. This chapter examines costs and other issues that should be considered when contemplating switching to NGVs. Also considered is the equally important issue of fuelling infrastructure developments in Europe.

Cars and light commercial vehiclesThere have been 2 critical barriers to the wider consumer adoption of

NGVs. The first is the higher incremental cost of buying a CNG vehicle (the ‘upcharge’ cost). The breakeven point varies according to car and usage. The second barrier is that passenger cars face more challenges in terms of access to refuelling infrastructure. Unlike fleets, passenger cars do not usually drive in consistent and familiar patterns, and therefore there is less scope to plan visits to CNG-filling stations.

This sector is also likely to lack access to dedicated fuelling arrangements, including company-owned or third-party stations, that are available to fleets.

Despite these challenges, Europe is ahead of North America in terms of the natural gas options o_ered to passenger vehicles. There is a wide range of CNG car manufacturers, including Fiat, GM, Mercedes, Peugeot, Toyota and Volkwagen. This compares with North America, where only Honda offers a CNG car option (the Civic NG).

Natural gas as CNG tends to suit light and medium duty vehicles, whilst LNG is more appropriate for heavy duty vehicles. Using Germany as an example, the fuel cost is €1.12 ($1.54)/kg for CNG whilst it is €1.41 ($1.93)/litre for diesel (equivalent to €30.7 ($42.09)/MMBtu and €56.5 ($77.46)/MMBtu respectively). Breakeven analysis for a CNG car over a diesel car is shown in the table below:

Table 5: Breakeven analysis for CNG car.

The table above shows that a Mercedes B 200 would have to cover 30,000km annually for two years in order to achieve payback. It would take more than four years for a VW Golf to breakeven at 30,000km/year, largely due to the higher cost per kilometer for the equivalent diesel option. There is a strong financial case for NGVs in the light duty vehicle sector for owners with high levels of annual usage, although the range of CNG vehicles is still limited. Whilst there are strong incentives to switch to CNG, electric vehicles might prove to be more attractive because it fully de-carbonises the passenger car sector.

BusesBuses are another vehicle sector that have strong potential to adopt

gas-fuelled engines as they normally conduct back to depot operations, operate in urban environments (so avoiding particulate emissions

Country NGV population % of NGV compared with total vehicle population

Ukraine 387,981 5.13%

Italy 846,000 2.07%

Bulgaria 61,270 1.83%

Sweden 44,319 0.92%

Source: NGVA (2013a)

Annual usage (km)Undiscounted payback (years)

Mercedes B 200 VW Golf

10,000 6.1 >10

20,000 3.0 6.7

30,000 2.0 4.5

40,000 1.5 3.4

Source: Le Fevre

Forecast 2020 2025 2030 2035 2040

IEA - - - 3.8 -

Citi 5.1 7.2 8.2 - 11.2

Eurogas - 7 - - -

EGF EU baseline - 1.5 2.9 16 -

EGF EU Alternative 2.6 - 14 - -

EEGFTF/NGVA 24 - 43 - -

Country€/litre Tax in $/MMBtu Tax in €/km

Diesel Diesel CNG Diesel CNG

France 0.43 17.1 0.0 0.14 0.00

Germany 0.46 18.4 5.6 0.15 0.05

Netherlands 0.44 17.6 7.6 0.14 0.08

UK 0.67 26.8 9.5 0.21 0.09

Forecast 2020 2025 2030 2035

Low 11 16 21 25

Medium 22 35 48 60

High 43 75 106 137

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cont. on p.16►

In countries where there are no fuel subsidies, there is a stronger incentive to switch to CNG because the payback time is shorter. There is a higher penetration of NGV buses in Sweden (13.7%), Netherlands (6.6%) and Slovakia (3.7%). On the other hand there are no CNG buses in Denmark. The European average is around 1.7%.

There are added costs in using CNG as a fuel in buses and the table below shows the costs in Sweden for a CNG bus which is, according to Mattias Goldmann, a spokesperson for Grona Bilister (the Swedish Association of Green Motorists), estimated as 2.5-5% more expensive than diesel.

Heavy Duty vehiclesFleets operating heavy-duty trucking now have the option to convert

to either CNG or LNG options. Manufacturers who provide NGV trucks in Europe include (but not limited to): Volvo, Iveco, Man, Daimler, Van Hool and Scania. When deciding to buy an LNG or CNG truck, there are various considerations that ought to be taken into account which are summarized in the table below.

Factors to consider:Table 7: CNG v LNG trucks

Whilst currently LNG and CNG require more fuel system space than diesel, technological innovations in the longer term ought to narrow the gap somewhat. With North America leading the way, manufacturers are currently developing new tank designs for both CNG and LNG. This ought to help reduce the premium currently paid for NGV trucks – though achieving high manufacturing volumes would probably have a bigger impact. Premiums for NGV trucks vary between 30-35%. For the UK, industry sources suggest a premium of about £30,000 for a 32 tonne rigid vehicle and £35,000 for a 44 tonne 3-axle tractor unit.

LNG as a fuel in heavy duty vehicles is an attractive option in Europe. Citi estimates that LNG is €0.54 per equivalent litre cheaper than diesel in Europe before distribution and retail costs, with about two thirds of the difference coming from tax policy. The table below shows the price (wholesale price + tax) advantage over diesel.

Table 8: European diesel vs LNG costs.

Source: From “Complimentary Report: 2014 Market overview, current status and forecasts” of FCGasIntelligence

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is important) and are funded by public bodies that are incentivized to reduce their environmental footprint. So far CNG has tended to be a more popular choice for buses, although LNG is also an option.

The nature of the subsidy regime plays an important role in the payback times. In the case of the UK, a fuel subsidy called the Bus Service Operators Grant (BSOG) is paid to operators of eligible local bus services and community transport organisations. Fuel subsidies can reduce the incentive to switch to CNG and make the fuel option uneconomic for buses in the UK. The table below shows the impact of fuel subsidies on payback times for CNG vehicles in the UK.

Table 6: A comparison of the performance and economics of natural gas and diesel.

Option WTW CO2 benefit(% compared to diesel)

Payback time for £45,000bus (years – without fuel subsidy)

Payback time for £45,000bus (years – with fuel subsidy)

LNG 5-16 8-12 Break-even is not achievable

Biomethane (CNG) 4-23 5-8 14-22

Liquid biomethane 143-146 1-17 1-13

UK 70 - -

Source: Goldmann

Factor CNG LNG

Range/utilisationPreferred for back to base

operations with low mileage

Preferred where maxi-mum range is impor-

tantand utilisation is high

Vehicle weightPreferred for light/me-

diumweight vehicles

Preferred for heavy weight vehicles

Refuel timePreferred where there is

enoughtime to fuel (overnight)

Preferred when there is little

refuelling time

Tank spaceMay be preferred if there

is spacefor several tanks

Preferred where space is limited

$/MMBtu Wholesale price Tax Total cost

Diesel $20.51 $16.54 $37.05

LNG $13.00 $3.87 $16.87

Dierence $7.51 $12.67 $20.18

€/litre equivalent Wholesale price Tax Total cost

Diesel €0.55/litre €0.44/litre €0.99/litre

LNG €0.35/litre €0.10/litre €0.45/litre

Dierence €0.20/litre €0.34/litre €0.54/litre

Breakdown of dierence in total cost

37% 63% 100%

Source: Citi

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