|At a Glance|
Many fleets rely on government funding for fleet greening projects:
Many public fleets, and the alternative-fuel industry as a whole, rejoice at the news of incentives that benefit their businesses or greening objectives. Fleets use grants and tax incentives to acquire vehicles, install fueling or charging infrastructure, or purchase lower-priced fuel. Vehicle manufacturers advertise tax incentives as a way to lower acquisition cost and also benefit from research and development (R&D) funds. Blenders may use it to lower fuel costs. And there are a host of jobs created as a result of the alt-fuel industry and the nation’s commitment to reduce petroleum consumption.
Financial help from the government has undoubtedly advanced the green transportation industry and continues to do so. But can government funding continue, and will it?
At the same levels — probably not. That’s according to Kipp Coddington, who heads the Washington D.C. office of Kazmarek Mowrey Cloud Laseter LLP, a Virginia law firm that specializes in energy and environmental law.
On Oct. 1, 2013, the first day of the federal shutdown, Coddington delivered a speech at the Green Fleet Conference predicting this decrease in federal funding for the alternative-fuel space. As of the end of January, he said at least some of his prediction has come true.
“There were a whole series of vehicle- and fuel-related government tax incentives that expired on Dec. 31, 2013,” Coddington said. “Congress may retroactively extend those. But it may not.”
There are three main reasons why he thinks government funding will slow down. One is that the United States is out of the Great Recession, and as a result, large funding projects such as the American Recovery & Reinvestment Act stimulus funding that has overall supported green energies is less likely to be enacted.
Another is the $17 trillion debt that needs to be paid down. “People are worried about paying down that debt gradually over the coming decades, and there’s less appetite for bigger and bigger programs to support green initiatives, generally,” Coddington said. “I think the pot of money available for these programs won’t be as big in the future as they were in the immediate past.”
Lastly, he thinks some alternative fuels have already received the push they need, such as compressed natural gas (CNG).
“Some of these technologies are already standing on their own two feet and arguably don’t need government support,” Coddington said.
This doesn’t mean an end to funding. “There will be a continuation of moderate support for R&D for certain technologies, or grants, but I don’t think we’ll see the creation of whole new programs to support particular green fuels,” he said.
Does It Pencil Out?
Kelly Reagan gets enthusiastic when he talks about fleet greening. Known for his commitment to CNG, the City of Columbus, Ohio’s fleet administrator will very gladly tell you how many gallons of CNG the fleet uses, how much the city has saved in fuel costs, and why the city is now making significant investments in CNG fueling infrastructure without any outside funding.
“CNG pencils [out],” he explained.
Reagan said the payback for the higher upfront cost of a tandem axle refuse truck is five years based on fuel cost savings. Since these vehicles have a lifecycle of seven to eight years, any refuse truck older than five years is saving the city money.
“We pay $1.80 for CNG and the average cost of diesel is $3.84,” he said. “It’s half the cost.”
The City of Columbus’ initial investment in CNG got some help from ARRA funding, Reagan admits. That initial funding, which totaled $1.2 million, paid for one-third of the cost of the first fueling station and helped pay for the first 23 vehicles. However, after that first monetary infusion, the city didn’t receive any other financial assistance because there wasn’t any, Reagan said. And yet, it’s set to open its second fueling station at a cost of $5.4 million in April and is working to open two more by 2016.
There is growing CNG fueling infrastructure in the area, including the neighboring City of Dublin’s public access station.
“As infrastructure is built across the Midwest, not having the availability of federal and state incentives is not going to slow down the continuance of alt fuels because the cost of diesel fuels will do nothing but continue to go up,” Reagan said.
Expired Incentives Cause Concern
What do tax incentives do for untaxed municipalities? They can get the cash from the Internal Revenue Service (IRS), or the discount may be passed to them from suppliers.
To cover infrastructure costs for expensive projects such as CNG fueling stations, fleets typically charge a markup per gallon that covers the cost of station construction and maintenance. Currently, the Columbus fleet charges $1.80 per gasoline gallon equivalent (GGE) to its own fleet users and other government agencies. Columbus paid for the station using its capital bond fund. Reagan estimates the fueling station will pay for itself after seven years, from the fuel markup, and its expected life span is 15-20 years.
This is where tax incentives come into play — in this case, the 50-cent-per-gallon Alternative Fuel Excise Tax Credit, one of the expired incentives that has yet to be reinstated as of late February. This tax credit is designed to offset the infrastructure cost for building CNG, liquefied natural gas (LNG), and propane autogas fuel stations, among other fuel types.
The 50 cents Columbus gets is put back into the general fund to help repay infrastructure costs. From April 2012, when the station opened, to December 2013, when the credit expired, the city collected $140,000.
However, since this wasn’t guaranteed, Reagan didn’t count the revenue from this tax credit into his calculations. Any credit the city gets from the IRS just helps pay down the cost of the station faster.
Of course, each municipality is run differently and while Reagan was able to convince elected officials to take on that construction debt up front, other public entities may be unable or unwilling to make that investment.
Keith Leech, fleet manager at the City of Sacramento, Calif., is quick to point out the medium- and heavy-duty natural gas vehicles pay for themselves in fuel savings, even with minimal or no grant funding. What’s harder for him, however, is fueling infrastructure.
“We can’t do it alone without government help on this fuel infrastructure. There’s just no way,” Leech said.
Sacramento dispenses about a million gallons of LNG per year, so that’s half a million dollars it’s not going to get this year from the 50-cent rebate. That money usually goes back to infrastructure development, and Leech wants the incentive back.
When Sacramento doubled its LNG fueling station capacity a few years ago, the city received a $600,000 grant from the state and used two years of its 50-cent-per-gallon money to pay for the $1.6 million expansion.
The tax credit also covers propane autogas, and these fuel prices are also likely to increase. Larry Campbell, CPFP, fleet management director for the City of Fort Wayne, Ind., said the city has a small number of off-road units that use propane autogas.
“It’ll increase our costs, we know that,” he said. “We’re still going to use it.” Campbell explained that the city already has the fueling infrastructure, and the fuel will still be less expensive than regular gasoline.
Another expired incentive that may affect fleets if not reinstated is the Biodiesel Mixture Excise Tax Credit, which provides blenders with a $1 credit per gallon of pure biodiesel blended with petroleum diesel. Fleets using biodiesel may see an uptick in prices if their blenders previously passed this discount on to them, which is something that may affect the City of Columbus.
“Eighty-one percent of the diesel we consumed last year was biodiesel,” Reagan explained. The fleet uses B-20 in warmer weather and B-5 in colder months. If prices go up, “we may end up using less biodiesel…or we may move from B-20 to B-5,” he said.
While Reagan may be worried about this expired incentive, Campbell, whose fleet uses a significant amount of B-20, doesn’t.
“That’s not going to stop us,” he said. The city has its fuel prices locked in for calendar-year 2014. After that, Campbell doesn’t think the city’s fuel price will increase because the city didn’t benefit from it to begin with — it began using biodiesel before the tax credit, and prices didn’t go down when it was granted.
When Incentives Are Necessary
The City of Sacramento was an early adopter of light-duty electric vehicles (EVs). This is mainly because it was one of nine communities chosen by EV infrastructure company Coulomb Technologies to deploy charging stations as part of a project funded by ARRA dollars, Leech said. The city now has a handful of EVs in its fleet, and government incentives have made those EVs worth it for the city.
Leech says the fleet leases Volts, Ford Focus EVs, and Nissan Leafs for about $250 per month. He’s able to get that price by prepaying for the three-year leases and getting $10,000 in federal and state incentives for each vehicle.
Would he have been able to make a case for these vehicles without the incentives?
“Absolutely not,” Leech said.
Richard Battersby, CAFM, CPFP, director of fleet services for the University of California, Davis, agrees.
“They’re not cost competitive with gasoline vehicles [without incentives],” he said. “Anyone who tells you otherwise is deluding themselves.” With the incentives, however, it puts the cost in the ballpark of a gasoline vehicle and makes it possible for fleets and consumers to try out the technology, he added.
Leech says there may be a use where EVs are cost-competitive without incentives. The challenge is for fleets to find that use, if it exists.
“If you could find an application where there was more use, you might be able to make an argument,” Leech said. “If you’ve got someone in that sweet spot, who’s guaranteed to use it 15,000-17,000 miles per year, and they get the HOV [high occupancy vehicle] sticker, and you could have that fuel savings, then you could make the case to buy that vehicle outright.”
State & Local Agencies Also Have Funding
Federal incentives are just one form of financial assistance — states and local agencies have their own greening incentives. Classifying them all is difficult, however; agencies often have their own regulations, incentives, and fuels they want to push.
“The lack of federal incentives doesn’t mean there aren’t dollars available through state governments or other agencies that buyers can access,” said Michael Taylor, director of autogas business development of the Propane Education & Research Council (PERC), a government-authorized group.
Taylor is working on a compilation of federal and state incentives specifically for propane autogas. Based on some of the research he’s seen, he says California provides generous incentives for propane-autogas, along with Texas. In addition, Florida just enacted legislation to provide funding for the fuel, the Ohio House of Representatives passed an incentive law, though it needs to be reviewed by the Senate, and Pennsylvania also has incentives for alternative fuels.
In states where there are a lot of shale gas deposits, leaders may be more likely to push the use of CNG and provide state funding for it. One example of this is in the State of Oklahoma, where a House representative introduced HB 2954 in early February that would help provide funding to counties in Oklahoma to invest in CNG vehicles and public-access fueling stations.
Which Fuel Gets Funded?
Campbell, from Fort Wayne, thinks if the government is going to fund alternative fuels, they should keep funding equal so that biodiesel, E-85, CNG, LNG, propane autogas, and electric vehicles get a fair chance in the alternative-fuel space.
According to Coddington, however, it’s whichever fuel has lobbyists on the hill that will influence future funding.
“Congress is influenced by people bringing them ideas,” he said. So while a senator from the corn belt might automatically vote to support ethanol because his voters are farmers, the rest of the industry needs to rely on getting their voices heard in Washington.
Is It Worth It?
The light-duty federal fleet is moving toward E-85 as its fuel of choice. It’s been a rocky journey toward implementation, with lack of fueling infrastructure and driver education as two major hurdles the fleet had to overcome — and still faces.
Numerous local and state governments have passed “fleet greening” goals, initiatives, and legislation pushing government fleets toward cleaner fleets. Some of these greening goals have been helped by funding from the ARRA. If incentives are slowing down, and local and state government fleets still have to follow these greening mandates, how do they pay for the more expensive equipment they must purchase?
While incentive funding (or lack of it) will alter the greening decisions of some fleets, other industry professionals say this won’t stop the alt-fuel industry.
“We applaud the incentives. We really like them when they’re available,” said Taylor of PERC. “However, if the federal government does not have the incentives available, we can still prove the ROI. We can show it.”
The City of Sacramento has heavily relied on incentives and grants for its alt-fuel projects, but Leech remains confident that even if incentives go away or slow down, that won’t stop the city’s transition to a greener fleet.
“If you ask whether we’re going to still continue this with or without government incentives, yes, definitely. On natural gas, yes, unless something crazy were to happen like diesel prices get cut in half, but I don’t see that happening,” he said. “We’d just find another way to move things forward. It might take longer.”
Battersby says about half of the fuel the UC Davis fleet uses is alternative fuel, which includes natural gas, biodiesel, and E-85. It also has EVs. He says while the university fleet sometimes gets funding for these vehicles, it doesn’t rely on it. “It’s nice when it works out that way, or maybe we can buy more when we get incentive funding, but we do have goals to meet in terms of clean air,” he said.
Investment in alternative fuels may cost more, but even if you decide not to transition to alt-fuels, environmental mandates are increasing the price of traditional gasoline and diesel vehicles. Federal Corporate Average Fuel Economy (CAFE) regulations are pushing OEMs to make more fuel-efficient light-duty vehicles. On Feb. 18, the Obama administration announced that federal agencies would begin developing new fuel standards for medium- and heavy-duty vehicles. The light-duty regulations are expected to increase vehicle acquisition cost by about $2,000 per vehicle for a MY-2025 car. Cost increases for medium- and heavy-duty vehicles should also be expected.
Campbell points to current regulations that affect vehicle cost. “Look at the federal mandate for the emissions of a diesel vehicle. It can add as much as $15,000–$20,000 more to the same truck in comparison to five years ago. That’s [that much more] to do the same job,” he explained.
If a diesel engine retrofit costs $5,000 extra for a particular vehicle versus $10,000 extra to purchase an alternative-fuel vehicle, fleets need to determine whether that AFV is going to reduce emissions by that much, Campbell said. Sometimes you can make the case for that extra cost for cleaner air, and other times, you can’t.
“Sometimes, we can’t justify that cost [increase] as a municipality. How do you propose to your taxpayers that to be green, we’re going to have to run this type of fuel?” Campbell asked. “Your mayor might want it, but can you get it through your council members?”
The Politics of Fleet Greening
When it comes down to it, the decision on whether to go toward alternative fuels, even if cost is higher, rests on political beliefs — most importantly, the beliefs of the leadership. This has been shown through the numerous regulations about fuel efficiency and clean air requirements on local, state, and federal levels. It’s shown through government fleets’ dedication or experimentation with alt-fuel vehicles, whether that’s mandated or voluntary.
Battersby believes government agencies should experiment to move the alt-fuel industry forward.
“When it comes to new technologies like these and it’s not driven by ROI, it’s hard to get private companies to engage. Private industry can be put out of business if their prices go up. Governments can do a bit more experimentation because they don’t have competition, which I think is why we see governments doing this,” he said. “If it does make sense, the volumes do start to go up and costs come down.”
Leech is willing to jump through the hoops to get incentive funding, even if there is no savings as a result.
“It’s to show leadership in the community and get them out here and get them visible,” he said of the electric vehicles in the Sacramento fleet.
Some think it is government’s role to guide society toward what its leaders believe is a greater good, such as cleaner air.
“When you operate a government fleet, you end up a part of that process, whether you want to or not,” Battersby said.
- Richard Battersby, CAFM, CPFP, director of fleet services, University of California, Davis
- Larry Campbell, CPFP, fleet management director, City of Fort Wayne, Ind.
- Kipp Coddington, lawyer, Kazmarek Mowrey Cloud Laseter LLP
- Keith Leech, fleet manager, City of Sacramento, Calif.
- Kelly Reagan, fleet administrator, City of Columbus, Ohio
- Michael Taylor, director, autogas business development, Propane Education & Research Council (PERC)