Navigant Research Blog

Oil Price Retreat Could Spur Government Action

— February 24, 2015

Although the oil market has been historically volatile, the circumstances of the latest price dive suggest that low oil prices may be the new norm. If that’s the case, it could negatively affect both oil companies and the markets for clean transportation technologies like alternative fuel vehicles (AFVs).

Because of U.S. and some state government policies that mandate automakers produce more fuel-efficient vehicles and/or AFVs, low oil prices mean that it’s more expensive for automakers to improve fuel efficiency and produce AFVs to make these vehicles competitive with less fuel-efficient, and less costly, conventional vehicles. If they don’t absorb these costs, they’ll likely wind up paying penalties for being out of compliance with fuel efficiency standards and AFV mandates.

Raise the Tax

Federal and state government subsidies and incentives for AFVs provide some insulation from these costs. Yet, these policies were designed in an environment where oil prices were 30%–50% higher than they currently are. More recently, two policies have been proposed that would be beneficial to automakers seeking to comply with stringent fuel efficiency standards and AFV mandates. The first is an increase in the gas tax; the second, an increase to the U.S. federal incentive for plug-in electric vehicles (PEVs) and the inclusion of natural gas-powered vehicles in that incentive.

The federal gas tax is currently 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel. The tax, which has not been increased since 1993, is used to fund the repair and update of U.S. roads through the federal Highway Trust Fund. In recent years, the fund has been on the brink of insolvency but kept afloat by stopgap measures that provide money from the U.S. general fund. The current proposal, which would increase the tax by 5 cents per gallon over the next 3 years, would provide $210 billion over the next 10 years. The following chart shows the effect the proposal would have on the average U.S. price of gasoline over the next 10 years if oil prices rise to $90/barrel by 2025.

Gas Prices Under Increased Tax Proposal, United States: 2002-2025

(Sources: Navigant Research, U.S. Energy Information Administration)

Getting Flexible

The federal incentive for PEVs currently maxes out at $7,500 per vehicle and is accessed by the PEV owner when they file taxes for the year they bought their PEV. Of note, a PEV owner has to accrue at least $7,500 of taxable income to receive the max incentive. The White House has proposed to increase the incentive to $10,000 per vehicle, provide it as a point-of-sale rebate, and include natural gas-powered vehicles as eligible. The point-of-sale rebate would enable AFV buyers to incorporate the incentive into monthly payments upon purchase and receive the full incentive irrespective of their income.

The effect of both policies would make AFVs more competitive with conventional vehicles on an energy cost basis and open AFVs up to a larger, lower-income market, making it much easier for automakers to comply with federal and state fuel efficiency programs. This is not the first time these policies have been proposed, and it’s likely they’ll meet similar fates as their predecessors. However, low oil prices do introduce a new dynamic that may provide some flexibility in Congress, as well as increased pressure from interest groups that may create the necessary support.

 

Energy Efficiency Economics 101

— February 18, 2015

The frequently overlooked component for unlocking the great potential of energy efficiency in commercial buildings is the bottom line: cold hard cash. For commercial building owners and operators, especially those managing small and medium (under 50,000 square feet) facilities, the idea of installing energy-efficient equipment or energy management tools is a nice-to-have, not a need-to-have.

Tenant improvement and making a profit by keeping expenses low come before improving or replacing equipment with state-of-the-art efficient alternatives. A recent report from the National Institute of Building Sciences’ Council on Finance, Insurance and Real Estate contains a set of findings and recommendations on how small commercial buildings can implement energy-efficient retrofit projects.

Live Data

The report lays out the case for focusing on small and medium commercial buildings, a dormant $36 billion market opportunity that could provide huge employment opportunities (424,000 job-years) and carbon reductions (87 million metric tons a year). According to Navigant Research’s Energy Management for Small and Medium Buildings report, the energy management systems and services associated with this market are expected grow from $231.3 million in revenue in 2013 to $1.3 billion in 2022. The benefits are clear; what can be done?

The report recommends a few multi-tiered sets of actions that could help invigorate this market, at least in the United States. These include federal action, such as expanding research from the Commercial Buildings Energy Consumption Survey (CBECS), which is a critical tool for understanding the state of energy use in commercial buildings, but is only updated every 5 years. CBECS data could be used with benchmarking data to make the collective understanding of building energy data a living data set, providing a meaningful performance-based evaluation of how energy efficiency is actually deployed in existing buildings.

Increasing the Pace

Another recommendation is challenging in this political climate. The Section 179 (D) tax code, a part of the Energy Policy Act (EPAct) that incentivized commercial building energy efficiency, expired at the end of 2013. At $1.80 per square foot for the full achievement of 50% energy reduction, the incentive was helpful. The reliance on modeling was a challenge, and the improvement of benchmarking data drawn from a living version of CBECS could change that.

Finally, the report focuses on the variety of financing that can be made more available to this market. If energy efficiency financing can be presented as a secure investment with known outcomes and well-understood risks, the adjacent available pools of financing could, with some urging, be made available.  Increasing the deployment of utility-based on-bill financing is one possibility, but not all utilities in the United States would be open to that approach. Property Assessed Clean Energy (PACE) programs enable energy efficiency (or solar deployments) to be financed by local bonds, and repaid via local property taxes over time. The White House recently announced it would use the success of PACE in the multifamily residential market in California and apply it to federal Housing and Urban Development Department housing.

 

Differing Diesel Views Sow Auto Industry Confusion

— February 17, 2015

During January’s North American International Auto Show (NAIAS), several manufacturers announced new diesel models to help them meet increasingly stringent fuel economy standards. Nissan unveiled a second-generation Titan XD that straddles the line between light and heavy duty pickups. Nissan will initially build the Titan XD, scheduled to launch this fall, with only a diesel engine; gas trucks with V6 and V8 engines will come later.

GM will be introducing a diesel engine in its Chevy Colorado and GMC Canyon later this year that could potentially increase fuel economy from the current 27 mpg to 30 mpg. Fiat Chrysler announced it will be increasing production of the Dodge Ram 1500 EcoDiesel pickup from 10% of models to 20%.

In the world of diesel cars, Volkswagen will unveil the Golf Gran Turismo Diesel (GTD) car at the upcoming Geneva Motor Show in March. Later this year, Suzuki will add an automatic transmission and several other updates to its SX4 S-Cross.

A Particular Problem

Diesel cars and trucks usually attain higher fuel economy ratings than their gasoline counterparts. According to Navigant Research’s report, Automotive Fuel Efficiency Technologies, the share of diesel cars and light trucks in North America is expected to increase from 1% in 2015 to 2.8% in 2025 as automakers continue to introduce more fuel-efficient models.

However, across the Atlantic, cities are looking to decrease the number of diesel vehicles driving in urban areas due to concerns that diesel vehicles’ higher levels of particulate emissions are causing environmental and health problems.

Not in My Town

Paris Mayor Anne Hidalgo has designs on eliminating diesel vehicles from her city by 2020. Mayor Hidalgo recently announced a ban on some diesel delivery trucks and buses, beginning by July 2015. According to Paris24.com, Hidalgo will provide significant financial incentives for investing in less polluting vehicles. London Mayor Boris Johnson has similar concerns around particulate emissions and is doubling the congestion charges for driving diesel vehicles in the city center to £20.

One solution to reduce the amount of diesel emissions is to add a hybrid drivetrain to a diesel vehicle. Hybrid vehicles reduce the use of the diesel engine by relying on battery power during low speeds and when idling, thus reducing particulate emissions. According to Navigant Research’s report, Electric Drive Trucks and Buses, the currently small market for medium and heavy duty diesel hybrid trucks will grow by a 2014–2023 compound annual growth rate (CAGR) of 28.5% to nearly 95,000 units worldwide by 2023.

 

Kansas City Takes a Flyer on EV Chargers

— February 11, 2015

Kansas City Power & Light (KCP&L), announced in late January that it will install 1,000 public EV charging stations in Kansas City, creating a dramatic increase from the 40 stations that are currently available. The stations are expected to be installed by the end of summer 2015.

According to Navigant Research’s report, Electric Vehicle Geographic Forecasts, there were only 2,687 EVs on the road in the entire state of Missouri at the end of 2014. The report also projects sales of 1,615 plug-in electric vehicles (PEVs) for the state of Missouri in 2015.

With such low PEV numbers in the state thus far, perhaps this move by KCP&L is an effort to encourage more PEV adopters in the Kansas City area. Even California, the largest adopter of EVs in the country, has fewer than 2,000 public EV charging stations. And Missouri, unlike California and other states with high PEV penetration rates, has no tax incentives for EV buyers.

Risky Business

The business proposition for the utility doesn’t look good, either. The network of chargers is estimated to cost $20 million, and the network will be free to the public for the first 2 years of operation. How many years will it take to recoup that investment through added sales of electricity and usage fees once implemented?  Perhaps KCP&L is following the path of California utilities that see significant value in controlling the flow of electricity and re-selling it through EV charging stations. Several California utility companies successfully petitioned the California Public Utilities Commission (CPUC) to allow utilities in the state to re-sell electricity via EV charging stations.

Nevertheless, California has far more EV users and according to PlugInsights, 81% of EV charging occurs at users’ homes, with just 10% of charging occurring at public stations (the remaining is mostly attributed to private charging stations and at workplaces). Thus, even if more Missourians do adopt EVs, the majority will likely be charging their vehicles at home.

Real Impacts

If KCP&L isn’t intending to make money from this initiative, but instead trying to reduce emissions, it would be better suited to convert the state’s existing power plants from coal to natural gas. This would be more cost effective and have a far more significant impact on emissions and air quality. Physically, it does not require much in the way of new equipment to convert a coal plant to run on natural gas. Missouri has one of the dirtiest electricity grids in the country, with coal accounting for a whopping 83% of the state’s electricity generation in 2013.

The map below, from the Union of Concerned Scientists’ report, State of Charge, shows that the gasoline vehicle mile per gallon (mpg) equivalent of an electric car is just 35 mpg in the SPNO region, where Missouri is located. This means that a gasoline car with 35 mpg, such as a Volkswagen Passat, would have the same impact on the environment as an electric car in Missouri (due to the high coal usage in the state). While KCP&L is moving toward removing a few coal power plants from its generation portfolio, an overhaul of the company’s electricity generation sources would have a much bigger impact on emissions reductions than building 1,000 EV charging stations that may or may not be used by consumers.

Electric Vehicle Global Warming Pollution Ratings and Gasoline Vehicle Emissions

(Source: Union of Concerned Scientists)

 

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