europe’s natural gas and bio-methane vehicle market.pdf

7/22/2019 Europes Natural Gas and bio-methane vehicle market.pdf

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Europes Natural Gas andBio-methane Vehicle Market

Complimentary Report:2014 Market overview, current status and forecasts


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Thank you for downloading this complimentary whitepaper, written and produced in connectionwith the 3rd Annual Natural Gas Vehicles Summit(November 25-26, Novotel Amsterdam City)

This report was written by Mike Madden and Chris Le Fevre in advance of their presentation at this years Natural GasVehicles Conference.

Mike and Chris will be presenting the 2014 end-of-year update on the state of play for natural gas vehicles in Europe,including infrastructure, vehicle availability and competition from other uses for natural gas.

Chris Le Fevre

Chris has worked in the energy sector for over 30 years including a variety of positions toexecutive director level in Transco and British Gas. Before that he worked for Shell International inthe Netherlands and Malaysia. Since 2002 Chris has run a successful independent energyconsulting business serving a range of clients throughout Europe. Recent projects include LNG

terminal and gas storage studies, UK and continental gas market studies for project principals andlenders, advice to European gas companies on liberalisation, gas sourcing and businessdevelopment, assistance on energy sector due diligence for buyers, executive training andanalysis of energy retail issues.

Mike Madden

Mike is Managing Director of MJMEnergy and an expert on gas and LNG infrastructure andmarkets. As a chartered engineer with over thirty years operational and commercial experience,Mike offers a unique blend of technical and commercial advice to clients. Mike started his careerat British Gas (BG) spending 8 years designing, building and maintaining the high-pressure gasnetwork before becoming involved in BGs commercial operations, where Mike led a team ofnegotiators negotiating contracts for BG worth hundreds of millions of pounds. Since leaving BGin 1994 Mike has been involved in providing consultancy and training services to the worldsenergy markets, including involvement in a number of LNG Terminal User Agreement (TUA)negotiations and other LNG related projects throughout the EU, Asia, Africa and North America.

This is Europes Premier Fleet NGV Event we connect heads of transport and logistics fleet operators with the entirevalue chain for CNG, LNG and Biogas in Europe. 2014 fleet speakers include UPS, DHL, KBC Logistics, Reading Buses and Nestl Waters hear case studies on using

natural gas and biogas and gain insight from their experience Be the first to see what is coming next year for EuroVI from the leading vehicles manufacturers, such as Daimler, Volvo

and Iveco

And benefit from our great regulatory perspective, with a tax overview from the European Commission, outline ofstandards from the Netherlands Standardization Institute and case studies of local areas such as the City of Stockholm

See full details of speakers, sponsors, attendees andfull agenda here: www.ngvevent.com/eu



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3rd Annual Natural Gas Vehicles EuropeEurope's Premier Fleet Event

November 25-26, 2014 | Novotel, Amsterdam City

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1 Executive summary

Natural Gas Vehicles (NGVs) are a rapidly expanding technology which has the potential to transform road and marinetransport fuel sectors as well as having significant impact on world natural gas markets. This paper provides a brief

review of the markets for NGVs in Europe, focusing on road transportation, with consideration of growth drivers andforecasts, regulation and policy issues, gas supply availability, and factors to be considered in converting fleets to naturalgas. It should be noted that the paper is particularly focused on the major gas consuming countries within the EU27,although it also refers to wider European countries.

Chapter 1: NGV Europe Market Overview

Natural gas has potential to transform the transportation sector due to its attractive commercial and environmentalbenefits. Natural gas is cheaper compared with oil and the taxes are considerably less. The fuel is also cleaner burning

than oil-based transportation fuels, and can help foster a lower-carbon future. Yet, despite these benefits, natural gas

has so far had limited penetration in the European transport sector with approximately 1.85 million NGVs (0.4% of thetotal vehicle market) and Europe has a small share around 11% - of the global NGV population.

There are various potential markets for NGVs in Europe, in particular CNG (compressed natural gas) for small vehiclesand buses, and LNG (liquefied natural gas) for heavy duty vehicles. There is a wide range of views on potential growth of

the market. Our own Low, Mid and High scenario models of gas demand for road transport show strong prospects for

growth from 16bcm in 2025 in our Low scenario, to 75bcm in our High scenario. Key issues affecting growth include

pricing, taxation and infrastructure. Broader consideration is also given to the use of natural gas for marine vessels andrail.

Chapter 2: Availability of gas suppliesWhilst 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 pricingis expected to continue, which is likely to maintain or increase the differential between wholesale natural gas and dieselprices. Gas supplies that are used as a transportation fuel include LNG, CNG and biomethane. This chapter explores thedifferent supply chains of these forms of methane, as well as provides information about the different pricing systemsand markets. Specific examples are also used to illustrate the development of biomethane in transport.

Chapter 3: Regulation and government policies

The European Commission and government policies are playing an important role in fostering the development ofnatural gas as a transportation fuel. Stakeholders require a strong grasp of how the European Commission policies (andthose of national governments) will continue to shape the future development of the NGV sector in both positive andpotentially negative ways over the next five years. There is a very wide range of EU and national policies and schemes in

place or under consideration. Though many of these are intended to promote the use of natural gas as a road transportfuel, there is a risk of conflict between different policies and regulators. Also considered are the potential environmentalrisks of using natural gas, including methane slippage.



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Chapter 4: Technical and financial issues

The higher relative costs of buying an NGV compared to conventionally-fuelled vehicles has caused a challenge to therise of natural gas as a transportation fuel. Therefore, this chapter explores the payback options in the NGV market.Special attention is paid to the passenger vehicle sector in Germany where payback on CNG cars is possible within shorttime periods as long as annual mileage is high (above 30,000km). In buses there are strong prospects for CNG, however,subsidies for bus purchase and operation in some countries can act as a major barrier. There are strong prospects forLNG as a transportation fuel for HDVs. The main factors that influence the rate of return for truck fleet operators are also

considered.

Another area explored is the state of natural gas refuelling infrastructure as this is a key issue in decisions to convert all orpart of a fleets vehicles to natural gas. The future European infrastructure will combine a network of CNG, LNG andL-CNG stations. This chapter analyses current developments in natural gas refuelling stations as well as the potentialplans for the future. Based on current developments and policies, it is likely that there will be a well-developedinfrastructure for both CNG and LNG covering most of Europe by 2025.




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2 Overview of the market in Europe

2.1 Introduction

This section provides an overview of the market for gas as a road transport fuel in Europe, surveying market size andgrowth forecasts; growth drivers; location of existing, proposed and planned CNG/LNG stations; and other applicationsto transport.

2.2 Overview of the market for gas as a road transport fuel in EU

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 pricingis expected to continue, which is likely to maintain or increase the differential between wholesale natural gas and dieselprices. Gas supplies that are used as a transportation fuel include LNG, CNG and biomethane. This chapter explores thedifferent supply chains of these forms of methane, as well as provides information about the different pricing systemsand markets. Specific examples are also used to illustrate the development of biomethane in transport.

Existing NGV market

The European road transportation market is currently dominated by petroleum-based fuels. In 2011, about 318 milliontonnes of oil equivalent (mtoe) was consumed in the transportation sector, of which 93% was oil. Natural gas is notreported 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 vehicleswhere CNG in particular is a popular option. There is limited penetration of natural gas vehicles elsewhere in Europe andEurope currently has a modest share around 11% - of the global NGV population.




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Table 1: European countries with highest number of NGVs

Country

Ukraine

Italy

BulgariaSweden

Source: NGVA (2013a)

NGV population

387,981

846,000

61,27044,319

% of NGV compared with total vehicle population

5.13%

2.07%

1.83%0.92%


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Vehicle sectors, and applicability for CNG and/or LNG

There are two main technical applications of natural gas as a transportation fuel: compressed natural gas (CNG) and

liquefied natural gas (LNG) . CNG is natural gas compressed to between 200 and 275 bar and stored as a pressurized gasin a high-pressure storage tank. LNG is natural gas cooled to -161C 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 three 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 -161C and stored in large insulated tanks. LNG will warm despiteinsulation and will eventually vaporize. This is known as boil-off and creates the risk that methane may be vented to theatmosphere. To prevent methane slip, LNG-fuelled vehicles cannot be stationary too long, limiting the suitability of thefuel 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 lessspace than LNG tanks and can be stationary for longer.

NGV growth forecasts

Although use of natural gas as a vehicle fuel has been in existence for a number of years, there is currently growinginterest in this sector and in particular potential for growth in the LNG market. As a result, a number of organisationshave recently produced NGV growth forecasts. This section gives a brief overview of the different forecasts of naturalgas in transportation.




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There is a wide range of views from the IEAs 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 higherat 43bcm by 2030. Bearing this in mind MJMEnergy has modeled demand for gas as a road transport fuel in Low, Midand 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.

Growth Drivers

In 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 NGVsincluding the role of taxation, regulation and access to infrastructure.

Taxation

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


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

ForecastIEA

Citi

Eurogas

EGF EU baseline

EGF EU Alternative

EEGFTF/NGVA

2020

5.1

2.6

24

2025

7.2

7

1.5

2030

8.2

2.9

14

43

20353.8

16

2040

11.2

Table 3: MJMEnergys forecasts of European demand for gas in roadtransportation

Low

Medium

High

2020

11

22

43

2025

16

35

75

2030

21

48

106

2035

25

60

137



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Europes Natural Gas andBio-methane Vehicle MarketComplimentary Report:2014 Market overview, current status and forecasts

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

France

Germany

Netherlands

UK

/litre

Diesel

0.43

0.46

0.44

0.67

Tax in $/MMBtu

Diesel

17.1

18.4

17.6

26.8

Natural Gas

0.0

5.6

7.6

9.5

Tax in /km

Diesel

0.14

0.15

0.14

0.21

Natural Gas

0.00

0.05

0.08

0.09

Fuel price

The other driving force for the adoption of natural gas as a transportation fuel is the cost advantage over diesel.Although the price advantage in Europe is not as great as in the US, it is still significant. The graph above shows some

price differences between wholesale gas, diesel and three sets of gas prices: the cost of Japanese LNG, which is stronglycorrelated to gas oil and fuel oil prices, the cost of German gas imports as assessed by BAFA, and the cost of gas in theUK at the NBP hub market. The graph highlights the economic advantages in using gas over oil-based vehicle fuels in

most markets, but particularly in markets such as the UK, and to a lesser extent Germany, where gas prices are signifi-cantly lower than diesel prices. The prices shown in the graph are all wholesale prices and do not include retail costs andtaxation. A key factor is the extent to which gas prices are decoupled from oil prices. Historically both Japanese LNG and

German gas prices have been strongly correlated with gasoil and fuel oil prices. However, following the recession of

2009 German gas prices have started to decouple from oil prices due to the growth of gas trading markets and renego-tiation of long-term contracts, bringing German gas prices lower towards the UK level. This significantly increases gas

cost advantage over diesel.

Figure 1: Selected oil and gas prices.

Source: Le Fevre



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Regulation

Another important driver in the adoption of natural gas vehicles is the role of the European Commission in:

Aiming to reduce dependence on imported oil used in transportation

Reducing vehicle emissions which currently account for about 20% of Europes total carbon dioxide emissions.

Infrastructure

Natural gas refuelling stations are a prerequisite for any future growth of natural gas vehicles. The growth of the NGVsector in Europe is marred by significant technical barriers, including infrastructure constraints and hesitance about the

availability of infrastructure from potential adopters. This has led to the so-called the chicken-and-egg problem.However, total spend on NGV refuelling infrastructure to date has been estimated by the European Commission to

amount to 322 million for road transport and geographic coverage is improving.

Within the EU, there are currently about 3,000 CNG refuelling stations (2,500 public and 500 private) as well as about

220 planned stations. NGVA has developed the first European interactive map of CNG and LNG filling stations, includinginformation of the stations GPS coordinates, opening hours, payment method, a trip planning function and a search

nearby/by country option. The map below shows the current numbers of CNG (including L-CNG) stations in Europe.Blue indicates good coverage, yellow medium and red poor or no coverage.

Figure 2: Map of CNG filling stations in Europe.

Source: NGVA


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There are far fewer LNG refueling facilities in Europe, with stations operational in only five countries. The table below

provides details of existing and planned LNG refueling stations as well existing LNG import and storage capacity.

2.2 Other applications to transport

LNG for marine bunkers

There is a strong case for using LNG as a marine fuel. Currently, the most widely used marine bunker fuel is heavy fuel oilwhich contains a high sulphur content. However, there are forthcoming regulations that will be a key driver for a change

in shipping fuels. The International Maritime International Convention for the Prevention of Pollution from Ships (known

as MARPOL) is setting new sulphur limits under Annex VI that will come into force on January 1 2015 for parts of Europe

and North America (and 1 January 2020 or 1 January 2025 for the rest of the world). There are specially designatedareas in European waters (the North Sea, the English Channel and the Baltic Sea) called Emission Control Areas that haverestrictions on the levels of SOx and NOx emissions from ships. The current sulphur limit is 1% and will be reduced to0.1% by 2015. LNG is a viable compliance strategy because it produces virtually no sulphur particles. Other complianceoptions include the use of scrubbers or switching to more expensive marine gas-oil which contains less sulphur.

There is also an economic incentive to use LNG as a marine fuel because of the differential between natural gas anddiesel or fuel oil prices. The financial case for using LNG will have to also include the additional costs of

retrofitting/building a new LNG-fuelled ship and the costs involved in constructing the LNG refuelling infrastructure.

Marine bunkers in Europe

LNG is preferred over CNG as a marine fuel because CNG tanks would utilise a far greater amount of space, leaving lessroom for cargo. There is a range of LNG fuelling options:

Ship-to-Ship (STS) for vessels with a bunker volume in excess of 100m3 using a bunker vessel with a capacity of

between 1,000-10,000m3. Truck-to-Ship (TTS) for vessels with a bunker volume below 200m3.

Bunkering directly from Terminal-to-Ship via Pipeline (TPS) which is suitable for all bunker volumes.

Table 5: Existing and planned LNG and L-CNG stations with LNG importand storage capacity figures.

Country

Germany

France

Italy

Netherlands

Spain

Sweden

United Kingdom

Source: Le Fevre

Existing

LNG

0

0

0

7

12

9

13

Planned

1

3

2

15-20

1

1

1

LNG import

capacity (bcm/a)

0

24

11

21

60

0.7

51

LNG storage

capacity (bcm)

0

0.5

0.2

0.54

1.95

0.02

1.22

L-CNG

0

0

7

1

12

4

9


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3.3 LNG supply chain

The LNG industry has a major global supply chain covering the production, liquefaction, shipping and regasification of

LNG. Most LNG is exported to gas-consuming countries where it is typically regasified at import (regasification) terminalsin order to be injected into the gas supply system. Currently LNG for road transportation is a small sideline to this majorbusiness, whereby some LNG regasification terminals have installed facilities to load LNG onto tanker trucks which can

then supply the fuel to LNG and L-CNG refuelling stations.

Figure 3: The LNG supply chain

Source: MJMEnergy

World LNG and terminals

LNG markets are currently tight due to high demand from Asia Pacific and South America and the difficulties

experienced in Angola and Algeria over attempts to increase production, as well as the political issues in Yemen andEgypt that have hampered LNG exports. The nuclear closures in Japan and South Korea in recent years have spikeddemand for LNG as a replacement fuel for power generation. On the supply side, markets should remain tight until 2016,but from 2017 onwards it is expected that there will be a steep LNG supply growth in several regions, including Australia,North America, East Africa and Russia. From around 2015, there will also be a new liquefaction technology in use -Floating Liquefied Natural Gas (FLNG) - which may in some cases provide a lower cost means to produce and liquefy

natural gas, and an economically viable method to access stranded offshore gas fields. Figure XX below shows Europes

regasification and liquefaction plants.


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Figure 4: Locations of regasification and liquefaction plants in Europe

Source: GIIGNL

Europe is traditionally a large importer of LNG, with Norway being the only European country to export LNG. In 2013,European LNG imports decreased by 13.5mpta (-28.5%), reaching 33.3mtpa, which is below 2005 levels. European LNGimports have been comparatively subdued in recent years due to a combination of low industrial and commercial gasdemand following the recession, replacement of gas-fired power generation demand with coal-fired and renewable

generation, and the diversion of LNG to higher priced Asia Pacific markets, to be replaced by pipeline gas especially from

Norway and Russia. As a result there is considerable spare capacity at European LNG regasification terminals, should

LNG use for road transportation increase. LNG imports to Europe typically come from Qatar, Algeria, Nigeria, Norway,Yemen, Trinidad & Tobago and Peru. The figure above shows Europes regasification plants along with Norways

liquefaction plant and Libya and Algerias liquefaction plants.


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Figure 5: LNG Imports in Europe, 2007-2013.

Eauropean LNG imports 2007-2013

Other sources of LNG

In additional there is some limited availability of LNG from peak-shaving storage sites and other grid-connectedliquefaction facilities around Europe. For instance, the Avonmouth peak shaving storage site in the UK has formed the

basis for a number of pilot schemes. LNG from the Avonmouth site is being supplied direct to clients sites such asCocaColas Enfield depot or to Gasrecs filling stations (of which there are eight). GasRec is working in partnership with

Tesco to develop a liquefied biomethane project at a landfill site in Surrey. The plant will have capacity to produce

approximately 4,300 tonnes of liquid biomethane per annum (equivalent to 5.2 million litres of diesel). BLNG is a mixtureof liquefied biomethane (15%-25%) and LNG (75%-85%).

LNG pricing

On a global basis LNG wholesale pricing tends to be set by the pipeline gas which it is competing. So for example in AsiaPacific gas prices tend to be indexed to oil prices (in particular the JCC index of crude oil imported to Japan) so LNG

prices are also. In North America gas prices are driven by trading on the Henry Hub and other gas spot markets, with

only limited influence from oil. In Europe there is a complicated position whereby in some markets, particularly in

Southern and Eastern Europe, LNG prices are strongly oil-indexed (particularly to Brent crude oil and oil products),whereas in other markets, particularly in North-West Europe, LNG is sold against gas hub prices (especially the NBP),

albeit these hub prices are still, to a somewhat decreasing extent, influenced by oil prices.

The minimum cost of LNG for road transport in Europe therefore is likely to relate to the wholesale gas cost in therelevant market, which at current levels is likely to be lower in North-West Europe than in Southern and Eastern Europe.

In addition there will be LNG handling and retail costs, margin and tax on top of this.


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Figure 6: World LNG pricing regions

Source: MJMEnergy

3.4 CNG supply chainCNG supplies are usually sourced from a pipeline connection to the gas supply network. CNG stations use pressurizeddispensers to compress gas at around 200-275 bar. There is also an L-CNG option that can supply both LNG and CNGvehicles. LNG is delivered by tanker trucks to an insulated tank at the L-CNG station. LNG can be supplied from the tank,and also compressed and regasified to be dispensed at the right pressure as CNG. CNG pricing is therefore related to

either the cost of pipeline gas or LNG, depending on its supply chain.


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3.5 Biomethane supply chain

Biomethane has strong environmental advantages over natural gas and other fossil fuels because it is capturing and

using a product that would otherwise be released to atmosphere. Methane is a potent greenhouse gas, so usingbiomethane in transport means that the user is in effect creating negative greenhouse gas emissions compared to otherfuels. For this reason it is becoming a popular source of fuel for NGVs. It may be compressed or liquefied (so called

BioLNG), so it can be transported and stored. However, there is still limited biomethane production infrastructure. Those

adopting biomethane as a fuel are more likely to be depot-based fleets such as trucks and buses. As described in thepicture below, biomethane is a grid-quality methane gas produced from biogas (an approximately 60:40 mixture ofmethane and CO2 which is itself the product of anaerobic digestion of biomass).

Figure 7: The biogas supply chain

Source: MJMEnergy


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There are a number of projects in the UK which are using biomethane, LNG or a blend of the two in transport fuels thatare described in the table below.

Biomethane pricing

Biomethane is a low emissions and renewable alternative to conventional vehicle fuels. There is currently a wide rangeof estimates for the cost to produce and sell biomethane as a vehicle fuel, however, it is significantly more expensive to

produce than LNG, and therefore typically requires subsidies to be competitive. Perhaps the most reliable data comes

from Sweden, which has one of the most developed biomethane transport fuel markets in Europe, and this suggests thecost is between 0.65-0.75 per kg, excluding taxes. On an energy basis, this is equal to 0.47-0.57 per litre diesel. Thiscompares to a current diesel price (without taxes) of around 0.75/litre.

Table 6: Some examples using biomethane and/or LNG as a vehicle fuel

DHL

Source: Le Fevre

John Lewis

Stobart

Muller Wiseman

Tesco

Company Number of biomethane vehicles

35

21 (increased to 40)

5-25

8

101

Total fleet

2,000

2,350

7,500

2,700 (570 tractors)

1,000

Start date

2013

2007

2010

2012

2011

Description

LNG/BioLNG(75%-25%) supplied byGasRec to Daventry depot

Dual-fuelled vehicles.55% LNG. 2 LNG stationsoperated by Chive

Dual-fuelled vehicles.65-70% LNG

Dual-fuelled vehicles.35-55% CNG linkedbiomethane plant

Dual-fuelled LNG vehiclesrefueled by BOC at DHLsBawtry depot


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4 Regulation and government policies

The growth of gas as a transport fuel is strongly influenced by regulation and government policies, particularly in theareas of environmental control legislation, which tends to support use of natural gas over oil products, taxation, and thedevelopment of infrastructure. Within Europe the roles of both the European Union (as represented by the European

Commission) and national governments are crucial for the growth of the NGV industry.

4.1 European Commission policies

Whilst LNG, CNG and biomethane all have essentially the same chemical compositions, they have separate, although

inter-related, supply chains. LNG for road transport is typically sourced from LNG regasification terminals as part of

wider LNG import arrangements. CNG for road transport is typically compressed at the refuelling station using gas directfrom the gas supply system. Biomethane is an alternative renewable source of methane, which must then becompressed or liquefied to be used as a transport fuel. Details of the different supply chains, availability and pricing

systems are considered below.

EU policy with regard to fuel in transport is driven by two main objectives.

Reduce the member states dependence on oil imports - the import bill for oil for transportation came to 1 billion per

day in 2011 Reduce vehicle emissions - around 20% of the EUs total CO2 emissions come from transport

There has been no shortage of policies and initiatives aimed at achieving these objectives. Some of the key ones are:

The 2011 Roadmap to a Single European Transport Area, this targets halving conventionally fuelled cars in urban

transport by 2030 and phasing them out completely by 2050. The Fuel Quality Directive, which sets tougher standards (e.g. the new norm for fuel for HGVs known as Euro VI)

regarding pollutants in fuels. The Renewable Energy Directive, which targets a 10% share of energy from renewable sources in transport by 2020.

CO2 emissions legislation setting emission performance standards for new cars.

The Clean Power for Transport initiative, this includes a Directive on an alternative fuels infrastructure and a statement

of actions regarding LNG in the shipping sector. In April 2014 the European Parliament approved the Directive which

requires member States to set binding targets for infrastructure availability for the most common alternative fuels CNG, LNG and electricity. Council approval of the Directive is expected later in 2014.

In addition, there is funding available under the TEN-T programme for refuelling stations and the LNG Blue Corridorsresearch project aims to invest 14.3 million in developing:

Four main LNG fuelling corridors connecting 12 countries,

A new generation of Euro VI dual-fuelled and dedicated LNG vehicles, Improved efficiency of vehicles and engines including reductions in LNG boil-off, and

Standardisation of fuel tanks, connections and systems and regulations for vehicles and refuelling stations.


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The Blue Corridor project started in early 2013 and by March 2014, 5 out of a planned 14 new LNG/L-CNG stations fortruck refuelling had been identified and specified. The first of these was opened by ENI in Piacenza, Italy, to meet the

requirements for the Mediterranean corridor. Further stations are due to open shortly in Antwerp, Belgium, and rebro,Sweden, and further sites have been identified in Lisbon, Portugal, and Malaga, Spain. Partners in the Blue Corridors

project include natural gas companies such as Fluxys, GasNatural Fenosa and GDF SUEZ, as well as vehiclemanufacturers such as Volvo, Renault and Iveco and intermediaries such as GasRec, Linde (BOC) and Ballast Nedam.

The wide range of policies and initiatives are intended to provide much needed clarity for the industry regarding vehiclespecifications and fuelling infrastructure. This should give the NGV market a more stable platform over the next 5 years,

though the role of national governments will remain crucial as discussed in the next section.

4.2 Government Policies

There are a number of over-arching national government policies that are likely to benefit NGVs. The two most

important are: The trend in most governments for linking annual vehicle licensing charges to CO2 emissions so NGVs will pay a lower

charge than the equivalent petrol or diesel vehicle. The tendency to levy lower fuel tax rates on alternative fuels compared to petrol or diesel either through the

application of carbon taxes (as in Sweden and planned in France) or as an ad-hoc discount as in the UK.

In addition, there are a number of European countries where governments or other bodies have been particularly activein the NGV sector. It is not the intention of this section to provide an exhaustive list though the table below highlightssome of the key developments.


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Table 7: NGV initiatives by national governments

Country

France

Germany

The Netherlands

Italy

Spain

Sweden

UK

Summary of initiatives

The outlook for NGVs has been slightly clouded by the removal of specific purchaseincentives, though the introduction of a carbon tax on road fuels planned for 2015 couldprovide some support.

The Federal Government has set up Initiative for Natural-Gas-Based Mobility to removeconstraints and increase the market share of NGVs by 2020 and has undertaken to keepreduced tax rates for NG to at least 2018. Biogas is also intended to play a major role.

Italy has the biggest NGV market in the EU with 760,000 natural gas vehicles (over 75% ofthe NGVs in the EU) and 810 public re-fuelling stations. The publicly funded conversionprogramme has continued (albeit at a slightly lower level) with the Government makingsome 24.8 million available.

The Government has allocated $3.79 million since 2011 towards company cars that run on

green gas, biogas and some biofuels. It has also established the Green Deal LNG for shipsand trucks running on LNG as well as developing a LNG-based transportation corridoralong the Rhine through Germany to Switzerland.

Some regional Spanish governments offer subsidies towards the purchase of new NGVs e.g. 1,200 for a car and 12,000 for a bus or truck and there are also contributionsavailable towards the cost of new re-fuelling facilities. The Spanish Parliament has alsourged the Government to develop a National Plan for the implementation of natural gas intransportation.

The Swedish Government is a strong promoter of biogas production and utilisation intransport and other applications and also provides relief on the energy tax for NGVs.

UK Government policy in the car sector is primarily directed towards electric vehicles orhybrids, though funding has been provided for a number of pilot projects for heaviervehicles through the Low Carbon Vehicle Partnership. 4 million has been allocatedtowards re-fuelling infrastructure for gas powered HGVs and in November 2013, the UKGovernment stated that the discount in fuel duties for natural gas and biomethane wouldbe maintained for at least 10 years.

It is clear that government incentives could have a significant impact on the NGV market over the next five years, though

it is apparent that there are differences in both priorities and approaches between different countries. It is possible thatthe most profound impact will be initially seen in sectors that embody a degree of cross-border activity such as longdistance road and waterborne freight. Developments in these markets could then form a more solid platform for abroader based NGV sector across Europe.



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4.3 Environmental regulation risks to natural gas

Natural gas and biomethane both clearly have strong environmental advantages over oil-based transportation fuels with

the latter having particular merits as described in Section 3.5. However, the fact that natural gas is still a fossil fuel meansthat for some policy makers it is not considered to be the best approach for de-carbonising the transport sector.Furthermore the global warming potential of methane is many times that of carbon dioxide. The recent IPCC report

increased its GWP estimates to 28 times that of CO2.

The natural gas supply chain is therefore potentially vulnerable to further regulation or restrictions based on concernsrelating to:

Losses during the upstream production and transportation phases this could relate to flaring of surplus gas, the risk

of fugitive emissions from some procedures such as hydraulic fracturing or the energy used in transporting theproduct.

Supply and utilisation losses this includes leakage from distribution networks and re-fuelling depots but more

importantly the risk of methane slip (i.e. gas not being burnt during combustion and escaping to atmosphere) orboil-off in the case of LNG vehicles.

There have also been safety concerns over LNG storage and usage. Studies have shown these to be largely unwarrantedbut the unfamiliarity of many authorities with this form of fuel may lead to delays in gaining approvals or the impositionof higher and therefore more costly standards.

The industry will need to continue to demonstrate a solid professional approach to these matters in order to counter anyfurther restrictions and ensure an unimpeded roll-out of the required infrastructure.

5 Technical and financial issues

5.1 Converting to natural gas: key considerations to address whenconverting a fleet to NGVs

This part of the paper will focus on the technical and financial issues surrounding converting to natural gas vehicles.

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

Cars and light commercial vehicles

There have been two 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 isthat passenger cars face more challenges in terms of access to refuelling infrastructure. Unlike fleets, passenger cars donot 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-partystations, that are available to fleets.

Despite these challenges, Europe is ahead of North America in terms of the natural gas options offered to passengervehicles. 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).



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As mentioned earlier, natural gas as CNG tends to suit light and medium duty vehicles, whilst LNG is more appropriatefor 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 analysisfor a CNG car over a diesel car is shown in the table below:

The table above shows that a Mercedes B 200 would have to cover 30,000km annually for two years in order to achievepayback. 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 thepassenger car sector.

Buses

Buses 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 is important) and are funded bypublic bodies that are incentivized to reduce their environmental footprint. So far CNG has tended to be a more popularchoice 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 subsidycalled the Bus Service Operators Grant (BSOG) is paid to operators of eligible local bus services and communitytransport organisations. Fuel subsidies can reduce the incentive to switch to CNG and make the fuel option uneconomicfor buses in the UK. The table below shows the impact of fuel subsidies on payback times for CNG vehicles in the UK.



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Table 8: Breakeven analysis for CNG car.

Source: Le Fevre

Annual usage (km)

10,000

20,000

30,000

40,000

Undiscounted payback (years)

Mercedes B 200

6.1

3.0

2.0

1.5

VW Golf

>10

6.7

4.5

3.4

Table 9: A comparison of the performance and economics of natural gasand diesel.

Option

CNG

LNG

Biomethane (CNG)

Liquid biomethane

Source: Goldmann

WTW CO2 benefit

(% compared to diesel)

5-16

4-23

143-146

70

Payback time for 45,000

bus (years without fuel subsidy)

8-12

5-8

1-17

Payback time for 45,000

bus (years with fuel subsidy)

Break-even is not achievable

14-22

1-13


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In countries where there are no fuel subsidies, there is a stronger incentive to switch to CNG because the payback timeis shorter. There is a higher penetration of NGV buses in Sweden (13.7%), Netherlands (6.6%) and Slovakia (3.7%). On theother 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 buswhich is, according to Mattias Goldmann, a spokesperson for Grona Bilister (the Swedish Association of GreenMotorists), estimated as 2.5-5% more expensive than diesel.

Heavy Duty vehicles

Fleets operating heavy-duty trucking now have the option to convert to either CNG or LNG options. Manufacturers whoprovide 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 aresummarized in the table below.

Factors to consider



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Table 10: Additional costs of a CNG bus.

Added cost for CNG bus

Interest

Life span

Resale value

Added cost service/maintenance

Fuel consumption

Fuel cost 100,000 km/year

Fuel cost diesel if 39.4 L/100km at 11.48 SEK/L

Source: Goldmann

300,000 SEK (36,700 EUR)

5%

10 years

SEK 25,000 (2,780) EUR)

SEK 20,000 (2,220 EUR)/year

47 Nm3/100km, 9.75 SEK (1.08 EUR)/ Nm3

458,000 SEK (50,940 EUR)

452,312 SEK (50,300 EUR)

Table 11: CNG v LNG trucks

CNG

Preferred for back to baseoperations with low mileage

Preferred for light/medium

weight vehicles

Preferred where there is enoughtime to fuel (overnight)

May be preferred if there is spacefor several tanks

Factor

Range/utilisation

Vehicle weight

Refuel time

Tank space

LNG

Preferred where maximum range is importantand utilisation is high

Preferred for heavy weight vehicles

Preferred when there is littlerefuelling time

Preferred where space is limited


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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 thoughachieving 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 a44 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 litrecheaper than diesel in Europe before distribution and retail costs, with about two thirds of the difference coming fromtax policy. The table below shows the price (wholesale price + tax) advantage over diesel.

Rate of return

The rate of return is a profit on an investment over a period of time and it is a key consideration for a truck fleet operator.

It is a particularly important consideration because of the premium paid on NGV trucks. The rate of return is influencedby four central factors:

Relative levels of oil and gas prices.

Tax advantage - this will have a significant impact on the rate of return. As the table above shows, tax regimes account

for up to 63% of the difference between LNG and diesel prices. Intensity of usage - Citi estimates that lowering intensity of usage from 300 miles/day to 250 miles/day will decrease

the rate of return from 62% to 46%. Upcharge (the cost of an LNG-fuelled truck) - Citi suggests that a high cost scenario (around $55,000) for an LNG truck

compared to a low cost scenario ($40,000) will reduce the rate of return from 62% to 37%.



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Table 12: European diesel vs LNG costs.

$/MMBtu

Diesel

LNG

Difference

Wholesale price

$20.51

$13.00

$7.51

Tax

$16.54

$3.87

$12.67

Total cost

$37.05

$16.87

$20.18

/litre equivalent

Diesel

LNG

Difference

Breakdown ofdifference in total

cost

Source: Citi

Wholesale price

0.55/litre

0.35/litre

0.20/litre

37%

Tax

0.44/litre

0.10/litre

0.34/litre

63%

Total cost

0.99/litre

0.45/litre

0.54/litre

100%


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5.2 Overview of infrastructure

Existing infrastructure (LNG and CNG)

NGVA estimates that there are currently 2,969 public and private refuelling stations in the EU of which around 40 areequipped with L-CNG capability and a similar number of LNG only stations. The European commission has targets tomake sure there is necessary LNG infrastructure in place by 2020, including:

Setting up LNG refuelling stations in 139 European maritime and inland ports of the Trans-European Core Network by

2020 Installing LNG refuelling stations for trucks every 400 kilometres along the roads of the Trans-European Core Network

by 2020 Ensuring a maximum distance of 100 kilometres between CNG refuelling stations.

5.3 Financial considerations

When calculating the break-even period in buying an LNG truck, a variety of considerations need to be factored in.

Following the analysis of a report by the Oxford Institute of Energy, savings can be calculated if a number ofassumptions and conditions are made:

Upcharge cost of the new vehicle of around 50,000

Annual repair and maintenance costs of around 5,000 per annum

A pump price differential between LNG diesel of 20/MMBtu (including all taxes). This equates to 0.43/km for diesel

and 0.28/km for LNG assuming an effective fuel efficiency of 32 litres/100km and 27kg/100km respectively Usage levels of 50,000, 100,000 and 150,000 km/year.



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Table 13: Planned CNG/L-CNG infrastructure

EU

Russia

Other Europe (includes Turkey)

Total

Source: Le Fevre

Public

2,482

211

767

3,460

Private

487

41

203

731

Planned

214

15

56

285

Table 14: Breakeven analysis for LNG truck vs diesel

Annual usage (km)

50,000

100,000

150,000

Source: Le Fevre

Undiscounted payback (years)

100% Natural gas

>10 years

5.5 years

2 years

75% Natural gas

>10 years

8.3 years

4.4. years


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Design, planning and siting for CNG, LNG and biomethane

The process of designing, planning, and siting LNG facilities is different from CNG siting because LNG facilities tend tobe located with an eye to existing or planned liquefaction facilities. There is more flexibility when constructing CNGstations and they are likely to be built where there is already an existing pipeline distribution system. Traditional largeLNG plants are custom-built facilities and are part of hugely capital-intensive projects and can take up to 72 monthsbefore they are operational.

The European Expert Group on Fuels for the Future (EEGFTF) has suggested that to establish a comprehensive networkof natural gas refuelling stations, there are three options:

European directive-driven approach

EU and member states acting together

A national private-public partnership (PPP) approach within a supportive European framework

Some stakeholders have argued that it is difficult to achieve the necessary infrastructure and that it should be developed

before seeking a wider EU approach.

The EEGFTF has suggested that there is a case for creating a European infrastructure fund in partnership with a Directiverequiring member states to establish a minimum refuelling infrastructure. A joint fund is viewed desirable because theEEGFTF estimates that public natural gas stations will each require investment between 300,000 and 400,000 andinvestment of 1 million for private depot-based facilities. The EEGFTF outlines two recommendations:

Car and light duty vehicle refuelling facilities would need to be sited in around 10% of urban filling stations and at 25%

of those on motorways (maximum separation of 150km). Any gaps in coverage could be bridged by home refuelling,where a small compressor unit is connected to the domestic gas supply.

For heavy duty vehicles, the infrastructure requirements will depend on whether the vehicles are predominantly used

for local or long distance haulage. For the latter, L-CNG stations should be located every 400km along major European

motorways.

Following these guidelines an EU directive on fuel infrastructure covering CNG and LNG was approved by the EuropeanParliament in April 2014 calling for, amongst other requirements:

CNG stations in cities/densely populated areas by 2020

CNG stations within 150km and LNG stations within 400km on the core European road network ((TEN-T Network)

LNG infrastructure in sufficient seaports by 2025

LNG infrastructure in sufficient inland ports by 2030

The directive still needs approval by the European Council, which is expected later in 2014.



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6 ConclusionsThis paper highlights that natural gas as a transportation fuel is increasingly making headway in the European vehicle

market. Although it is still fledging fuel option in most European countries, it is possible to summarise the main factors atplay that could make it a more favourable form of transportation fuel in the future, as well as highlight the uncertaintiesand challenges.

The policies adopted by the European Commission, national governments and supranational bodies will have a strongimpact on the future of natural gas in vehicles. There is a thrust towards reducing the dependence on oil used intransportation and decarbonising the vehicle sector. Whilst these policies might drive the NGV market, there are also

tensions and uncertainties. The European Commissions vision of a reduction of oil in transport can sometimes jar withnational and local initiatives. For instance, the current subsidies for buses in some countries will act as disincentives forthis sector to switch to gas, and inhibit growth of this sector. The focus on the decarbonisation of the passenger vehiclesector in some countries may also mean that natural gas will not be able to compete with electrically-powered cars thatdo not produce any exhaust emissions. There is also the issue of methane escaping to the atmosphere and acting as a

far more potent greenhouse gas than carbon dioxide. Currently, the prospect for natural gas, particularly in the form ofLNG, as a fuel in HDVS looks the most positive.

The chicken and the egg dilemma is on its way to be cracked because of the various projects to build a network of filling

stations, such as the Blue Corridor for LNG-fuelled HDVs. However, more investment in infrastructure is needed and the

length of time to build it will create further delays in the NGV market. Range anxiety is likely to remain as a deterrent toswitching to an unconventional form of transportation fuel.

Commercial factors may also drive the NGV market because of the cost advantage over diesel and the differencesbetween taxes. There is a strong economic case to switch to gas because on average LNG is about 0.54 per equivalentlitre cheaper than diesel in Europe (before distribution and retail costs). It ought to be noted that about 63% of this pricedifference comes from tax advantages. As tax regimes are subject to change, it is possible that national governmentsmight increase tax on natural gas vehicles if gas becomes a more popular option in the future. This might decrease theincentive to switch to natural gas.

Whilst the growth of the LNG market has been negatively affected by the recession, there is optimism that this will be

reversed in the future as the economy recovers. Potential growth of the LNG market will increase availability of LNG

supplies to natural gas dispensing stations, and stimulate market growth in countries where gas has had weakpenetration in vehicle fuel market. Growth of the LNG market might, in turn, raise the prospects for LNG-fuelled HDVs.

In summary, therefore, there are plenty of reasons why NGVs in Europe are likely to become more populous in thefuture. Whether natural gas becomes a more popular option across all vehicle sectors remains to be seen, however.

Whilst there are strong financial reasons why natural gas in the form of LNG in trucks, the future for gas as CNG for LDVs

and buses is less uncertain, not least the infrastructure constraints for LDVs, and subsidies for buses (thus disincentivisingthe adoption of natural gas). As this report has argued, there are driving forces for the growth of NGVs in Europe, as well

as reasons that might inhibit growth.



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GIIGNL, (2014). The LNG Industry, Available at:http://www.giignl.org/system/files/giignl_the_lng_industry_2013_0.pdf (Accessed 22 May 2014).

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