In November 2017, Tesla's (NASDAQ: TSLA) Elon Musk unveiled the Tesla Semi to much fanfare. It sparked a discussion about the transformative potential to electrify long-haul trucking. Transportation is responsible for 27% of America's total carbon emissions, and medium- and heavy-duty trucks account for 23% of transportation's total carbon output. Replace diesels with zero-emission engines, and you'd drop U.S. carbon emissions over 6%.
Doing the math is one thing. Putting innovative trucks onto the highway is another. The reality is that the Tesla Semi is still years away from hitting the road -- and the same goes for rival Nikola Motors' hydrogen-electric semi trucks, led by the Nikola One.
But there's another heavy-duty truck strategy, with near-zero emissions, that's flying way under the radar. That's a bit unusual considering, unlike Tesla and Nikola, the first dozen or so trucks using the new technology -- powered by natural gas -- are already in the hands of customers.
The engines have a larger market opportunity in the near term than either electric semi. They just received backing from an oil supermajor, and might be key to the near- and long-term future of natural-gas fuels supplier Clean Energy Fuels (NASDAQ: CLNE). Can the natural gas consortium beat out the hyped-up semi offerings from Tesla and Nikola Motors?
Are natural gas engines the next big thing?
The near-zero natural gas engines were created by a joint venture between Cummins (NYSE: CMI) and Westport Fuel Systems (NASDAQ: WPRT), called Cummins Westport. Unveiled on May 1, the engine lineup can be used in medium- and heavy-duty trucks, including buses, refuse vehicles, and long-haul trucks. In fact, the ISX 12N engine, as it is called, is the world's first Class 8 on-highway truck engine to be certified near-zero by the California Air Resources Board, which sets emission standards that are followed by 16 other states. The Tesla Semi and Nikola One are both Class 8 vehicles, or what most people refer to as semis.
What does "near zero" mean, exactly? When powered by renewable natural gas (RNG), or natural gas sourced from landfills or other biological means, the engines produce life cycle emissions equivalent to a 100% battery electric engine of similar size powered by a natural gas power plant.
Cummins Westport has offered other near-zero engines for several years, but none as powerful as the ISX 12N. Therefore, it rebranded its previous lineup with new names and its "Move to Zero" marketing campaign. It also launched after delivering the first engine to a customer, AJR Trucking, which will soon have 20 total in its possession.
The business model relies on a simple idea: Natural gas engines can be put into existing trucks and refueled with existing natural gas fuel infrastructure -- much more easily than an electric or hydrogen fuel cell truck could. They provide an economic way to meet stringent new emissions standards being slapped onto the trucking industry. That's especially true in the State of California. Considering that electric semis aren't available to meet today's regulations, trucking fleets may turn to natural gas instead.
It's no surprise, then, that ISX 12N engines are expected to gain traction quickly in the state. That'll be a lot easier considering Clean Energy Fuels has built out a robust network of refueling stations in California. It is the largest supplier of RNG in the nation and sold a total of 351 million gasoline-gallon equivalents of natural gas transportation fuels in all of 2017.
It'll be even easier for the trucking industry to transition to natural gas after French energy giant Total SA purchased a $25 million stake in Clean Energy Fuels. More important, Total will provide $100 million to jump-start a new leasing program helping diesel fleet owners switch to natural gas engines. That could put up to $450 million in natural gas heavy-duty trucks on the highway -- all using the refueling infrastructure of Clean Energy Fuels and adding demand of up to 50 million gallons per year.
That should provide a big boost to the technology, but questions remain: Do fleet owners have any incentive to wait for electric semis? What about all of those orders for Tesla and Nikola Motors?
Electric, hydrogen, or natural gas?
There are some notable differences among the three alternative-fuel semi trucks.
First is the fact that Tesla and Nikola Motors are selling the entire truck, whereas Cummins Westport is selling a lineup of engines. That's a testament to the more-mature technology ecosystem for combustion engines compared to electric modes of transportation. And it should make it easier for the natural gas engine (and natural gas semi trucks) to gain traction in the near term.
Second is the market opportunity. Although the Tesla Semi and Nikola One are hyped as the next big thing in heavy-duty trucking, limitations imposed by cost and refueling infrastructure mean they'll be able to serve only a small part of the North American trucking fleet. That is, electric semis will work best for fleets with predetermined routes -- like from a production facility to a warehouse or airport. That's why nearly all orders announced to date are from companies like Anheuser-Busch, UPS, PepsiCo, and the like.
The near-zero engine lineup from Cummins Westport doesn't face the same daunting limitations. They're more expensive than diesel, but less costly than electric semis. Natural gas trucks don't have the same robust refueling infrastructure as diesel, but fleet owners have a buffet compared to electric charging stations. That means natural gas heavy-duty trucks are better suited to capture more of the overall trucking market -- and they have a huge lead when it comes to market launch.
The main takeaway is this: Replacing diesel power with alternative fuels won't be easy, as there are always trade-offs. When it comes to cost and availability in 2018, however, natural gas engines are the clear (and only) choice for fleet owners looking to ditch diesel.
Let's not get too carried away
Will electric and hydrogen-electric semis have a place in the future of long-haul trucking? Absolutely. But while it's fun to dream with numbers, it's important to remember the long arc of technology commercialization. Electric and fuel-cell semis are, at best, years away from hitting the highway en masse. And even when they do, they'll encounter economic hurdles that will limit their market opportunity.
That leaves natural gas trucks as the best near-term strategy for fleet owners looking (or being forced) to move away from diesel. Whether they "move to zero" or not remains to be seen, but investors may get the answer in the next year or two by following ISX 12N engine sales data.
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