Is the Vision of Commercial Fleet Nirvana Right Around the Corner?
How the history of the natural gas trucks can inform the forward path for electric trucks
Every major headline. Every major tradeshow. Seemingly every piece of policy. All signs are pointing to a future buzzing with electric trucks of all shapes and sizes.
As the first batch of electric trucks roll off the factory lines this year from nearly every traditional truck OEM, and an array of startups and new market players, there is no question that the electric truck drumbeat will only increase in frequency and volume.
Will the first 100 or so trucks in 2019 turn into 300 to 500 in 2020 or 2021? Will we reach thousands of units per year by the 2025 timeframe? In a heavy-duty truck market that can sell between 250,000 and 400,000 trucks a year, how and when can we think about getting to a 10 percent market penetration rate (nevertheless 20 or 30 percent, or more)? Like predicting the price of oil, these are the questions everyone wants answers to, however, few – if any – have clear crystal ball clarity to truly predict how quickly this market will develop.
The Promise of Electric Trucks
Should the technology be able to prove itself, electric trucks promise tremendous benefits to fleet operators and society in general. Quiet, tailpipe-less trucks, cruising our highways and moving stealthily through our neighborhoods offer the promise of clean air and reduced contributions to global climate change.
Simultaneously, operators have been promised lower total cost of ownership via reduced fuel costs and lower maintenance costs due to the reduced number of moving parts on an electric truck. Combined with the expectation that revenue will soar from increased demand from environmentally sustainable and market-share driven customers wanting to hire companies to collect and distribute society’s goods with sleek electric trucks, the vision of commercial fleet nirvana is potentially right around the corner.
However, for all of their promised benefits and appeal, commercial electric trucks have yet to truly prove themselves as operationally sufficient and economically superior. It is simply too early to tell if this promising young up-and-comer has what it takes to make it in the big leagues.
As an array of pilot programs and first-generation deployments take to the streets in 2019 and beyond, we will quickly begin to prove the ability for electric trucks to be not only environmentally sustainable, but more importantly, economically sustainable.
The bottom line is this: for the promise of electric trucks to become a widespread reality, they absolutely must offer commercial fleet operators a total cost of ownership similar or superior to that offered by today’s incumbent and increasingly sophisticated diesel platforms. This is no doubt an enviable challenge, especially as today’s diesels continue to raise the bar for all other fuels and technologies. Recent news from the electric-truck-heavy CES show in Las Vegas provides the confirmation to this point: the latest model diesel-powered Freightliner Cascadia – outfitted with all of the latest connected technology and fuel efficiency improvement “bells & whistles” – took home the “Best of CES” award for Best Transportation Technology.
Natural Gas Trucks: A Brief Historical Perspective
As we try to predict the future of electric trucks, we should consider the storyline of another recent up-and-comer: the natural gas truck.
At the start of this past decade, the simultaneous run-up in the price of global oil to north of $100 per barrel and the advent of shale gas boom convinced investors, media editors, industry analysts, OEMs, fleet operators and a wide assortment of industry stakeholders that natural gas vehicles (NGVs) were the path to trucking’s salvation from diesel’s stranglehold. There was no question, it was going to happen.
NGVs promised operationally simplistic equipment, less maintenance given their passive after-treatment systems, and environmentally superior performance for costs less than running diesel rigs (sound familiar?). Research groups were projecting greater than 10 percent compound annual growth rates and 30 to 40 percent market penetration on the near-term horizon. Even the U.S. Energy Information Administration predicted in the agency’s 2013 Annual Energy Outlook that heavy-duty natural gas vehicles would grow “at an average annual growth rate of 14.6 percent” through 2040. Investment in the space began to climb, as was often highlighted by the likes of Jim “Mad Money” Cramer and other Wall Street coverage groups. In 2012, it was absolutely certain: natural gas trucks were the future.
By all means, natural gas has achieved meaningful market penetration through 2019, with nearly 100,000 medium and heavy-duty NGVs on the road in the U.S. and Canada, and annual sales volumes in the ballpark of 5,000 units per year. However, such sales are across all OEMs and all applications, including refuse, transit, municipal and over-the-road trucks. At these sales volumes, the natural gas industry remains healthy, but by no means booming.
Speculative investment in technology and infrastructure build out has transitioned to a more conservative pace. In spite of being bumped from the above-the-fold headlines, the NGV market continues to see consistent annual sales volume. In the right application and with the right management team, natural gas trucks can deliver a significantly improved total cost of ownership to the end user, driven in part by lower maintenance costs and fuel prices, which have remained consistently below diesel by 30 to 50 percent.
A Tale of Two Fuels
As we reflect on the last 10 years of the Class 6-8 alternative fuel vehicle market, can the lessons from the natural gas truck industry inform the future of the electric truck sector? There are tremendous similarities with a few notable differences in the interest, investment and infrastructure development between these two segments.
The level of interest in electric trucks is very similar to that which we saw with natural gas trucks in the 2012 to 2014 era. Throughout the U.S. and Canada, fleets were scrambling to buy and test this promising new technology, with orders being placed for a dozen or so, up to a few hundred. We are now seeing this same mass “toe in the water” approach by fleets throughout North America, beginning to experiment with electric trucks in order to answer the almighty question: will they work? Will they meet the rigorous operational demands of the fleet, while delivering superior performance to the organization’s bottom line, and the environment?
Investment in the electric truck sector is happening at a level not seen in the natural gas truck industry. NGV-related investments were focused on new on-board tank systems, fueling infrastructure and equipment, and some engine development work. OEMs were investing in integration, assembly and production of NGVs, but not in new OEM-designed engines or other natural gas subcomponents and systems.
In the electric truck space, leading global OEMs and their Tier 1 suppliers are spending hundreds of millions of dollars – if not billions – on electric truck R&D, including a range of new battery pack systems and designs, e-axles, and a range of subcomponents.
With billions of dollars of collective investment in electric trucks now taking place, there is unquestionably an expectation that the market will grow, leading to tens of thousands of units sold annually, thus allowing for recovery of the up-front investment. Again, the question is: will this work?
The Success of the Electric Truck Market: Only Time Will Tell
At this point in the market, grants and incentives are essentially required in order to buy a medium- or heavy-duty electric truck. While incentives are plentiful these days, the total availability of all grant programs will fund 2,000 to 3,000 medium- and heavy-duty electric trucks per year. Certainly, when spread across all OEMs and all applications, such volume is insufficient for the market to hit critical mass where production volumes begin to deliver on the promise of lower prices, reduced battery costs, etc.
So, how does the market get to the 10,000 to 25,000 unit per year level where such economies of scale can kick in, and where initial investments can be recovered? Will the electric truck sector experience a similar trend to the natural gas industry where a few thousand units are sold each year into niche applications and to operators that have “dialed in” the technology in order to reap its benefits? Will major OEMs and Tier 1 suppliers have the fortitude required to continue to invest in the technology should more modest sales volumes be the reality?
How much investment patience will the market have – particularly given the drop in top-line revenue expected in late 2019/2020 as sales of traditional vehicles return to more normal levels after an incredible 2018 sales year? Or, will the total cost of ownership of electric trucks be so positive that end-users will be buying them by the fistful, thus driving higher volumes and reduced technology costs? Only time will tell.
EV Charging Infrastructure: THE Critical Path Item
Mission critical to the scaling up of the electric truck market is the ability to fuel increasing volumes of heavy-duty vehicles. Electric truck fueling infrastructure is largely agreed to be one of the most challenging aspects to the forward development of this market.
Unlike the natural gas segment, where $2-3 million will build a station that can fuel significant volumes of trucks in rapid succession, heavy-duty electric vehicle refueling is looking to be an entirely different animal. Fleet operations with 25, 50 or 100 units in a yard will require multiple megawatts of new power service in order to be fast-fueled comparable to today’s diesel or natural gas operations. Millions of dollars and several years will be required to bring such service, on top of the hardware costs within the yard.
Extensive and expensive on-site energy storage is an option to mitigate the need for megawatts of electric service, but that too takes capital and space. Another option is to “time fill” trucks overnight over longer periods of off-peak electrical demand; however, outside of the refuse and school bus segments, we have seen very few over-the-road trucking fleets – where increased asset utilization is the goal – follow such an approach in the NGV sector. Perhaps electric trucks will change this time-fueling paradigm?
Beyond infrastructure and service upgrades, demand charges and time-of-use power costs present another layer of complexity and, unless very carefully managed, can potentially increase fuel costs to the end-user. As was the case in the natural gas sector, utilities across the nation are jumping on the bandwagon and working to develop special programs, rate structures, and incentives to help ease the transition and development of electric truck refueling infrastructure. Hundreds of millions of dollars of electric utility incentive programs have been authorized to help develop these fueling stations. But the question remains: will this be enough to allow the market to achieve critical mass? Only time will tell.
The Best Predictor of the Future Can Often be the Past
As we reflect on the history and synergies of the natural gas truck experience, a few things are clear when it comes to thinking about the future growth of the electric truck industry.
1. The technology must prove itself.
Electric trucks must prove to be a “better mousetrap” than what is otherwise available to the commercial fleet operator. Early demonstration projects must prove to be successful. Electric trucks must be reliable, operationally capable (including hauling capacities), and ultimately have an equivalent or lower total cost of ownership with clear and demonstrated answers about residual value and secondary markets. Parts must be readily available and service must be just as seamless as today’s diesel equipment, anywhere in North America. None of these, individually, are small hurdles, never mind collectively.
2. The market must be patient.
Putting in place the after-sales support networks, widespread refueling infrastructure, and the multiple answers needed for fleets to be comfortable investing more widely in electric truck technology will unquestionably take at least five to 10 years. It is difficult to see how the hype and enthusiasm seen in the market today can be sustained over this period of time, which is the minimum time required to achieve meaningful annual sales volumes and a more commercially viable market. If sales in the thousands of units is not achieved in such a period, the market must remain patient. Investment in technology and infrastructure must be sustained during the commercialization process.
3. We must cook chicken omelets.
As is the case with any alternative fuel over the last several decades, the question of which comes first – the chicken or the egg – applies here too. History has proven, time and time again, that the “build it and they will come” model simply does not work in the alternative fuels business. Ultimately, the model that has proved most successful in the medium and heavy-duty commercial vehicle sector is to cook both the chicken and the egg simultaneously.
Even today’s public access truck stop natural gas fueling stations are a prime example of this; they only work if supported by a baseload fleet of vehicles (i.e. an “anchor tenant”). Otherwise, the $2-3 million investment cannot be justified, nor sustained. The same will be true for electric trucks, if not magnified given the higher expected CapEx likely required to develop large EV fueling stations. To be successful, investments in heavy-duty electric truck fueling infrastructure must be matched with appropriate scaled vehicle deployments – we must cook chicken omelets.
My Crystal Ball Says…
Electric trucks offer a lot of promise to fleet operators and society. However, the hyper appeal of this equipment in the commercial fleet world must be exceeded by the ability to deliver lower costs and to the bottom line.
With the first batch of electric trucks now starting to roll out, a lot will be learned in the coming 12 to 36 months. There are significantly more questions than answers right now, with no clear direction on how the market will grow in the near-term to more sustainable volumes. Testing, demonstration, investment, and fortitude will be required as we collectively work to determine the forward path and potential ramp of this promising new commercial truck technology.