Navigant Research Blog

Diesel’s Second Act in the U.S.

— May 31, 2012

It has long been a source of frustration among advocates of diesel cars that American car buyers have been so impervious to their attractions while Europeans have flocked to diesel.  This is starting to change, with diesel car sales rising significantly in the past few years.  There is still a huge gap in the market share for diesel compared to Europe, but the increasing availability of light duty diesel models in the U.S. combined with the rising gas prices are making the U.S. a promising market for diesel for the first time in many years.

To provide some context, the chart below shows the market share for diesel in LDVs in Western Europe and the top four European car markets since 1994.  In Europe, diesel sales began ticking up in the late 1990s, and broke past the 50% mark for the total Western European market as of 2006.

Diesel Share of New Passenger Car Vehicle Registrations, Western Europe and
Top Four EU Car Markets: 1994-2010

(Source: Pike Research)

The percentage varies quite a bit from country to country, based largely on the comparative prices of diesel and petrol.  In most of Western Europe, diesel is taxed at a lower rate than petrol, and this is partly responsible for the massive shift from petrol to diesel for passenger cars (that and the high prices for fuel overall).  However, this is not true everywhere, most notably the United Kingdom, which has one of the lower rates of diesel market share, but still sees diesel capturing over 40% of sales.

By contrast the U.S. has had very little light duty diesel market activity except in the pickup truck category.  It’s widely assumed that U.S. consumers’ bad experience with diesel cars in the 1980s spoiled the market, as many diesel cars from that time were unreliable lower powered, and distinctively smoky and smelly.

We are now seeing a major shift.  The U.S. saw a significant jump in demand for clean diesel cars in 2011, up 27% over 2010.  That’s higher than the total growth in the light-duty car market, which was around 10%, and also more than the hybrid market, which actually saw sales drop slightly, just 2% from 2011 over 2010, although this is most likely a blip and not a trend that we expect to continue.

There are a couple of reasons why the U.S. is becoming a better market.  First, diesel cars in the U.S. are now much cleaner, as they adhere to the same emissions standards as gas cars do – another difference with Europe, where diesel is regulated separately from petrol and given greater allowance on NOx emissions which are the hardest to control for diesel.

Second is simply increasing availability of diesel models beyond the pickup category.  The market is still dominated by the European OEMs, many of which are in the premium vehicle segments, but there are also mid-range diesel cars like the Volkswagen Jetta and Golf, which capture more than 50% of diesel car sales in the U.S.  The 2013 introduction of the diesel powered Chevrolet Cruze, which will be the first new diesel car in the U.S. by a domestic manufacturer in quite some time, has created high anticipation.

Going forward, we expect the U.S. diesel market to show strong growth but still at a relatively low total market share.   As with the hybrid market, demand for diesel may wax and wane a bit as gasoline prices do, but with gas prices expected to rise, this should drive demand for all types of fuel efficient vehicles, including diesels.


Standards Announcements Expand Wireless Device Market

— May 31, 2012

As the building automation industry has drifted away from proprietary communication protocols toward open ones, it has also faced the new challenge of integrating wireless devices as wireless technology and products evolve and mature to satisfy tomorrow’s energy management solutions and globalizing markets.  A number of standards – particularly ZigBee and EnOcean – have staked out spots in the growing wireless automation device market and are aiming to further solidify their roles as the market matures.

Two major recent announcements provide insight into where that future lies.  The first was the International Electrotechnical Commission (IEC)’s announcement that it had ratified a new standard, ISO/IEC 14543-3-10, for low-powered wireless devices, particularly energy-harvesting, battery-free wireless devices.  This was tantamount to an IEC endorsement of the EnOcean Alliance’s entire battery-free product ecosystem, and will drive both increased development of EnOcean-based products as well as other energy-harvesting wireless devices.  Previously, no such standard existed for low- and no-power consumption wireless devices, so EnOcean’s products lacked such an industry stamp-of-approval until today.  (If you’re not familiar with EnOcean, their battery-free technology harvests energy from the surrounding environment, such as the energy generated by flipping a switch or from incident light, to transmit a signal over short distances.)

I caught up with Graham Martin, Chairman of the EnOcean Alliance, at the Light+Building Show in Frankfurt a few weeks ago, where vendors such as Siemens, Honeywell, and many others were displaying EnOcean products.  He reported that sales of EnOcean products have been growing about 50% per year, which he hopes will create economies of scale for EnOcean products.  Although EnOcean has made considerable inroads in the Central European wireless automation device market, it is setting its sights on the U.S.  market over the next decade, where it will come face-to-face with ZigBee and its growing ecosystem of devices for smart buildings and the smart grid.

ZigBee, for its part, has been all but silent on this front.  It recently announced the launch of a new standard, ZigBee Light Link, an open standard that provides wireless control for wireless LED controls.  In the fiercely competitive LED lighting environment, where new lawsuits over alleged patent infringements seem to be surfacing on an almost daily basis, the new ZigBee standard provides a vendor-agnostic control solution that facilitates interoperability across different vendors’ technologies.

Today, wireless controls still represent a small niche within the $75 billion automation market, as we discuss in our report, “Commercial Building Automation Systems”.  However, these major announcements from EnOcean and ZigBee represent a big leap forward for wireless and devices and will undoubtedly increase confidence among building systems integrators and facility managers in the viability and maturation of wireless device technology.


Clean Energy Fuels and Navistar Agreement: More than Marketing Hype?

— May 30, 2012

In February, Clean Energy Fuels and Navistar announced a marketing agreement under which fleets can purchase a Navistar natural gas powered truck at the same cost as a diesel truck with a fuel purchase contract with Clean Energy Fuels for natural gas.  Essentially the agreement allows fleet operators to purchase trucks and fuel all in one package.  On the back end, the extra cost of the truck is subsidized to some degree by Clean Energy Fuels, which recovers the cost through the fuel.

The incremental cost for natural gas trucks over diesel trucks varies significantly based on the size of truck and type of fuel (liquefied vs. compressed natural gas).  The extra cost of the NG trucks can be anywhere from $10,000 to $45,000.  Though the market is divided on whether the Navistar/Clean Energy Fuels package is the right tool to accelerate growth of NGVs in the United States, no one doubts that it will help.  Predictably, though, Navistar’s competitors see this as more a marketing gimmick than a game-changing financing tool.  As Freightliner officials correctly pointed out to me at the Mid American Truck Show in March, it might actually be cheaper for fleets to finance the full cost of the truck right now because interest rates are so low, rather than finance it through a fuel contract.  Of course, the counter to that argument is that the natural gas fuel costs are also low, so that contract cost would presumably be pretty low.

In the end, I suspect this will play well among fleet managers who still have to buy the fuel somewhere; with this contract they can remove the incremental cost from their truck purchase budget.  It’s all a bit of a shell game because the costs are simply shifted from the “hardware” (the vehicle) to the “software” (the fuel).  But as long as natural gas prices remain well below diesel, burying the cost of the truck in the fuel contract makes sense because it all comes out as a wash in the total cost of ownership.  Fleets who purchase NG trucks without this contract (from other brands, like Freightliner or Autocar) will still end up recouping their costs in the total cost of ownership calculation.  The advantage for Navistar is that fleets that separate budgets for truck purchases and fuel contracts may be able to buy more NG trucks with this strategy.

Ultimately, this deal may do more for Clean Energy Fuels and their goal to build 150 LNG stations at Flying J truck stops than it does for Navistar.  It seems probable that Navistar would be able to market and sell NG trucks at about the same pace without this deal, but Clean Energy Fuels will likely be bolstered by an influx of new fuel contracts.


Making Fuel Efficiency Pay in Larger Vehicles

— May 30, 2012

Recent auto sales figures for the United States suggest that the market is continuing to recover, with strong April sales numbers and early indications are that May will be even hotter, especially for Chrysler.  The year’s strong sales are a reflection of improving consumer confidence and strong fleet sales.  Early projections for increasing demand in May suggest that demand for light duty trucks is a key factor as well.  It’s striking to see the increase in American-made pickups and SUVs.  GM’s full-size pickup trucks saw major increases in April even as overall GM sales faltered slightly.  Ford reports that F series pickup sales rose by 4% in April. However, U.S. consumers are showing increasing interest in many of the more fuel efficient vehicle models, like the Ford Fusion and the Prius line-up, which appears to be the major driver behind Toyota’s expected sales rebound this year.

But what about fuel efficiency for the light duty trucks and SUVs that are popular with fleets?  For fleets that are concerned about hedging their bets on fuel costs, there is increasing interest in some of the alternative fuel options, like hybrids.  The question is whether the payback on fuel costs will cover the price premium.  My recent report on the Total Cost of Ownership for fleet operators takes a look at some of the options in these vehicle segments and the results are mixed

The comparisons for the SUV vehicle class are limited by the availability of alternative fuel options in the United States.  Fewer OEMs produce alternative fuel options in their SUV brands, in part because the size of the SUV seriously limits the benefits of certain types of alternative fuels.  For example, hybridization has limited benefits for SUVs and pure electrification at present is not really viable for the SUV class.

The results of the total cost of ownership (TCO) analysis show that moving from a gasoline to a hybrid version of a large SUV does not reduce the TCO, even over 120,000 miles, because of the substantial price premium and relatively small fuel economy improvement of around 23%.  The smaller SUV class works better for the hybrid option.  While the price premium is still high – a sticker price for a hybrid SUV can be at least 25% more than a comparable gas model, in some cases much more – the fuel economy improvements are much higher, perhaps around 45% or more.  The smaller hybrid SUV shows lower TCO at both $4.00 and $5.00/gallon gas prices, suggesting that this option is a good way to hedge against likely fuel price hikes.

Estimated Total Cost of Ownership Comparison for Pickups and SUVs with 120,000 Lifetime Miles, United States and Europe: 2012

(Source: Pike Research)

For the pickup segment, the alternative fuel options again are very limited, and the TCO results are similar to those for the large SUV.  For these larger vehicles, it is very difficult to achieve major fuel economy improvements with hybridization.  Moreover, diesel options are more common in this vehicle class, making it challenging for hybrids to compete.

There is an opportunity for diesel in the SUV and crossover segments as well, if the diesel price premium is kept to under around $3,500.  While hybrids are still likely to be king of the small and mid-size fuel efficient vehicles in the U.S. for the near term, we could see more interest in diesel for fuel economy-conscious customers who are shopping in the SUV and crossover segments.


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