Natural Gas Business Case Webinar (Text Version)
This is a text version of the video for the Natural Gas Business Case webinar presented on July 27, 2010, by Caley Johnson, National Renewable Energy Laboratory.
COORDINATOR: Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today's call. At that time, you may press star one to ask a question. I'd also like to inform all parties that today's call is being recorded. If you have any objections, you may disconnect at this time. Now I'd like to turn the call over to Ms. Sandra Loi. Ma'am, you may begin.
SANDRA LOI: Thank you, (Chase). Good morning, everyone. Thank you for joining us for our monthly Webinar.
For those who don't know me, I'm Sandra Loi with the National Renewable Energy Lab, and I support the Clean Cities program. A lot of you on the line are probably coordinators, but I know that there are likely several stakeholders and other visitors. So welcome—glad you could join us.
Today's Webinar will be focused on the business case for CNG in municipal fleets. And today, we have a speaker here from the National Renewable Energy Lab who has worked on pulling this data and this report together.
Caley Johnson is an Analyst II here at the National Renewable Energy Lab, focused on the Clean Cities program. And in his role, he assesses the market penetration and potential of alternative fuels in advance vehicle technologies.
Caley created the data, analysis, and trends Web site, wrote the emissions pages of the AFDC, complied a few properties charts on the AFDC, and wrote the E85 business case for fuel retailers.
And Caley also administers the Clean Cities survey every year and uses the information from it to write the Clean Cities metrics report.
Before coming to NREL, Caley was a project manager for the Climate Protection Partnerships Division of the Environmental Protection Agency. In this role, he worked with companies to assess and reduce their carbon footprint.
So Caley is going to go ahead and give you an overview of this business case he's put together. And we will then have—open up the lines for questions at the end. Caley, you can get started.
CALEY JOHNSON: Thanks, Sandra.
SANDRA LOI: Sure.
CALEY JOHNSON: You guys probably recognize my voice. I've been contacting some of you about the Clean Cities survey, so this is the kind of stuff I do when I'm not harassing you.
I look at business cases and, in this instance, for the compressed natural gas in municipal fleets, and kind of do investment assessments of them.
So look at the agenda—there we go. First of all, I want to explain why municipal fleets. Why did we focus in on these fleets to assess their profitability?
Then I want to give just a general overview on assessing investment profitability. How—what are the standard procedures? And how do all major companies and investment firms do it?
Then I want to explain a model that I set up to explore the profitability of compressed natural gas fleets for municipal fleets. I call it the VICE model. I'll get into acronyms later.
And then I want to talk about the base-case scenario. If you're looking at the average or the common fleet, how do the economics look for that?
And then I want to look at pressing questions for fleet owners. If you start with base-case scenario and then you have a question such as well, what if the price of diesel fuel goes way up? How does that affect the profitability of a CNG project?
So let's start with why did we zero in on municipal fleets? And by municipal fleets I'm talking about transit buses, refuse trucks, and school buses.
The main reason is that circular roots lead to—lead back to the CNG station. Just the logistics of it work out very well for these three fleets to circulate back to the same station again and again.
So that makes it very—much for convenient for these fleets to use compressed natural gas and many other fleets.
Also, municipal governments value quite a few of the attributes that come with compressed natural gas that many businesses don't.
One of these is long-term cost effectiveness. So many businesses, at least in the United States, are really focused on that quarter's profits. And so they don't have the freedom quite often to make an investment that's going to save them money over the period of 3 or 4 or 15 years whereas municipal governments quite often do have that ability.
They have—compressed natural gas has more consistent operating costs. And municipal governments can capitalize on this quite often. Quite often, they value this better than private companies.
And compressed natural gas offers increased energy and climate security, which many municipal governments are interested in and have actually made pledges to improve their energy and climate security—and have active programs working towards it.
And then finally, they have—municipal governments value the reduced local air and noise pollution. There has been a study done on refuse trucks that showed that they actually emit less noise.
And I think it's safe to assume that the buses also emit less noise, which, if your interest as a municipal government is to improve the quality of life of your residence, the local air pollution and the noise pollution make a big difference.
I'll give you the overall feeling for your city. And they really affect the livelihoods of the residence. That being said, there are other fleets where compressed natural gas seems to make a lot of sense that we haven't covered in this report—but I hope to cover in a future report.
Two of those fleets are delivery trucks and taxicabs that look promising. And there are certainly quite a few case studies where they've been very successful. But they aren't included in this report. And hopefully, in the future I'll be able to cover those.
So let's start with assessing project profitability. This—let's start with—you look at the discounted cash flow of an initial investment and future paybacks and savings.
The discounted cash-flow analysis is the common analysis that's used across basically all industries, including like oil and natural gas, if they're trying to figure out if it's worth investing in drilling an oil rig. And putting in an oil rig—if they're going to make their money back.
They use this way of assessing the profitability. And it comes right down to any business plan needs to show a discounted cash-flow analysis before they can get funding from investors—just to show that they can be profitable.
So you guys are probably familiar with this, but I'd like to go over it just as a refresher and catch up anyone that's not familiar with it.
So you start with your initial investment. Let's go down to this grid below. Let's see—I'm trying to get—all right—that's got my laser pointer now. So let's look at that table.
And let's set up just a very simple example here of—okay, the simplest possible example would be you're going to counterfeit money. And so you need to purchase a printer for $1 million.
And then you can product—you can print $200,000 every year after that for ten years, and then the printer dies. Let's say there are no costs. You get your paper and ink for free.
And so looking at that, if you did the symbol math, you would say, "Oh, you know, I'm paid off after five years—end of story."
But in reality, you need to discount the money that you make in the future because money that you make—money that you have now is actually worth more than money you have in the future. Because you can assume that if you have the money now, you'd be able to invest it in other investments and increase that value.
Therefore, if you had $100 now, you would invest it, say, in the stock market—maybe not right now. But in general, let's say you can invest it in the stock market or someplace. And then ten years from now, you'd have a lot more.
So that would be better than just receiving $100 ten years from now. And so that's the basic concept of discounting. It's to account for that missed opportunity that you would have otherwise had to invest in an alternative project if you hadn't invested in this project.
So back to our example, in year one, you have negative $1 million because you purchased the printer for $1 million. And then this discount factor, which is saying that essentially every year your money is worth 6% less because the discount rate you're using is 6%.
So it flows down to the discounted cash flow, which in year one you don't discount at all. And so you have the full brunt of the expense at $1 million.
And so then your cumulative cash flow is negative $1 million. Where in year one you're—the money that you make in year one is worth 6% less. So we have this discounted factor of 94%. So this is how much money you actually bring in.
And you can see by year 10 that it's actually substantial. The $200,000 that we make in year 10 is actually only worth $112,000 in today's terms.
So then given that discounted cash flow, we want to look at the cumulative cash flow. And by the way, this is the most difficult slide in the whole set. If you don't get this slide, don't worry. You won't be lost for the rest of the presentation.
This is just kind of the preliminary—kind of the hurdle that we have to go through to get—kind of get this concept down.
Okay, and so basically, it boils down to this cumulative cash flow that says, "Okay, in year one, I have negative $1 million. In year two, if I take that negative $1 million and subtract away the $188,000 that I'm making in year one, then by the end of year one, my cumulative cash flow is negative $811,000. And by year two, it's negative $633, all the way up until I break even in between years six and seven.
And then in Year 10, I have a net present value of $472,000. And so keep that in mind. Keep that concept of the cumulative cash flow in mind for this next slide.
There we go. Okay, and so that's the basis that enables us to get metrics such as payback period and net present value and the percent return on investment. You probably recognize those three terms because those are the three major terms that industries use to evaluate investments.
And so picking up where we left off on the last slide, we have the cumulative cash flow. And this is a different example. These are different numbers that actually come from a CNG investment.
Let's say you invest initially at $2.6 million down there. So at year zero, you're at negative $2.6 million. You follow this cumulative cash flow up until you break even, in this case in year four because you can see we're at $0 net present value at year four. And so that is the payback point. At that point, you've gotten your money back from the investment, and it's all profit.
And so you keep on earning more and more money from your—from the savings of your project and from the income of your project until the end of the project life, which in this case we've set at 15 years, which is a common length for a bus to survive.
And so at the end of the project, it's worth about $7 million. And so that's the net present value in this case.
And then the return on investment comes into it because the return on investment is the discount rate. If you have a goal, and say I want to have a return on investment of 10%, then you set the discount rate at 10%, which—and then as long as you have a net present value of zero, then the project is a success, and you've earned your return on investment.
I know that was a lot for two slides, but going forward here, you don't have to worry if you didn't pick up all of that. You'll be able to just pick up right here and hit the ground running.
So now I want to talk about the VICE model. It's not to be confused with the Miami Vice models. It's actually the vehicle and infrastructure cash-flow evaluation model.
And so that's the model that I set up to track the compressed natural gas case where a fleet purchases a compressed natural gas station, and they also—it looks at the incremental difference—how much more they're paying for CNG buses or vehicles instead of the diesel vehicles.
And it also looks at their operating costs—mostly their fuel costs and their maintenance costs. How much less are their operating costs than operating a similar diesel fleet? And that's how they make back that money from the initial investment.
And, of course, it discounts those values that they earn back and pay back their initial investments with. And the VICE model determines the discounted payback period, the net present value, and the return on investment.
It assesses the finances for transits, refuse, school fleets, and mixes thereof. It gives the discount rate for, or sorry, it assumes that the discount rate for municipal governments is going to be 6%.
And the reason I chose that is because that's what municipal bonds go for. So in order for a municipal government to break even on a project, they have to pay the bondholders 6%. And so they should at least be able to cover that with their project.
And it's—the VICE model is done in Excel. And it's pretty simple to use. And I can send you guys a copy if you'd like. As a matter of fact, on the next slide here, I have a quick screen shot.
So basically, my instructions for using it are fill in—you go through and look at the defaults that are in yellow. And if you have better numbers than any of these defaults, more accurate numbers that fit your fleet better, you fill those in.
And then it will give you your net present value in your payback period in the screen in blue. And you only need to track the fleets that you're interested in.
So in this example, you've entered in number one here. And you look at the transit bus fleet. And you just look over that line of numbers. See if you have better numbers that fit your fleet better.
And then you look at the other numbers in yellow. You definitely have to enter in the number of vehicles in orange there. And then it should tell you on that line there what your estimated net present value is and what your payback period is.
And so this model is very easy to use. And I encourage you to send me an e-mail, or we'll probably post it on the Web sometime soon. I encourage you to open it up and play around with it.
It—there's no tricks to downloading it. You can just open it from my e-mail and play around with it. There are quite a few other tabs supporting this page, but you don't need to worry about those. You can just play around with this front page.
All right, and so let's look at the base case scenario that we look at the economics of and then treat as kind of a starting point.
And so for the base case, we want to look at some fleet parameters. And for these fleet parameters, we're looking at the average value of a bunch of fleets or a common value that is found in many fleets.
And so let's look down here at this table. I have seven model fleets and their parameters, and so under scenario one—and you only have to look at one of these scenarios if you have a particular fleet in mind.
And so you have transit buses. We have their average BMT, their diesel miles per gallon, and their incremental costs, and their vehicle life.
And now we set the vehicle life to be the project life under the assessment. And then we just assume that at the end of the vehicle life, you sell back the parts to the station for kind of a going rate.
And so I got these numbers from numerous data sources. I tried to find them from published numbers. And if they weren't published anywhere, I tried to get them from interviews. I tried to get them from multiple interviews and kind of average between the multiple interviews.
And then we have the three basic fleets here: the transit, school, and refuse trucks. And then also a couple of fleets of mixed. And here you have half trans and half school, in which case we just averaged these numbers between the transit and the school fleet like that.
And now, let's look at the station parameters for the base case. The cost of the station came from Rob Adams, who is with Marathon Technical Services. They build stations. He builds a cost calculator for us, which we have an old one posted on the AFDC. And we're going to post the updated one sometime soon.
And essentially, it tells you, well, the one posted on the AFDC tells you if you have a fleet of however many buses, the station is going to cost a certain amount.
And in the case for—I altered it and translated it to if you have an expected throughput in diesel gallon equivalents per month, how much is the station going to cost.
And so Rob's cost calculator replicates fast-fill stations, and so it's going to be a bit more expensive than time-fill stations, but I talked to Rob, and he felt like that it was applicable to time-filled scenarios.
It gave you a general idea because compression is the bulk of the cost. And you're going to have the same compression, number of compressors, and other equipment regardless of the type of station.
It's—the type of station really kind of changes the storage capacity for the most part. And so we feel that the VICE is applicable in—it's most accurate if you're looking at the buffered fast-fill station.
But we feel that it's also applicable to give you an idea if you're looking at the time-fill station. And you'll notice that we have three different lines here for the station cost in millions of dollars by the station size.
And the reason that the three different fleets have three different station costs is largely because they have a different expected throughput. And they have different refueling windows.
And by refueling windows I mean some fleets, such as the transit fleets—they have to get a lot of vehicles through and refueled in a short amount of time. And so you need a higher capacity whereas the refuse stations might have more-staggered schedules. And so you don't have to fill them as quickly and get them—get as many vehicles through on a short basis.
And then the school station you'll notice is a much shorter line. And that's because you just don't realistically scale a school station up higher because school buses, as you might have noticed in the—in this previous slide—school buses use a lot less fuel because they're more fuel efficient and because on average they drive a lot less. And therefore, the school bus stations are made, so they don't need to scale up as far.
And that's why the line is shorter. And that's why it's much steeper because it's not as economical to scale up a school bus station.
And some of you might have been surprised at these high costs at this end of the transit and refuse stations. And keep in mind that 300,000 diesel gallons per month is a huge station.
And so that's just kind of covering all the outliers. So realistically you're looking in a lot—at a lot closer and a lot smaller throughput.
And now we have the fuel cost for the base case. And I got these from the Energy Information Administration. They look at past fuel cost and trends and project future fuel costs.
And you can see that natural gas, as it's been in the past, they're projected that it's going to be pretty flat into the future. You know, we have a lot of new technologies that have opened up new pockets of natural gas that are going to keep the prices down whereas diesel is going to keep on going up.
And keep in mind that this difference, the savings from paying natural gas costs instead of diesel costs are largely what pays back your up front investments in the future.
And then you have the—yes, and just keep in mind that it increases throughout the future.
Now I have the profit—let's look at the profitability of the base case. So given those base case scenarios, we have the—you can see that as the number of vehicles increase, the payback period decreases.
And all of the feedback that I'm going to give you is going to show—is going to include the number of vehicles because that's the most important factor. And that's something that you can't just estimate and say oh, for an average fleet size, it's going to be this.
We need to keep in mind the number of vehicles. And now when looking at the payback period, trying to figure out what would be realistic or a good investment for you.
I tend to look around five years as a decent payback period. Definitely municipal governments, seven years would be a reasonable payback period because their investment opportunities are very limited.
Big companies like Exxon tend to look around three years for a payback period because they have just tons and tons of investment opportunities.
And so keep in mind throughout the rest of these slides that about five years is a pretty realistic, good investment. And so you can see that under the base case, the school buses aren't faring so well.
But that's the base case. And as you'll see in the upcoming slides, there are many, many different attributes that you can change to the scenario to improve these finances of the school bus.
And another thing is to notice how quickly the payback period drops right at around 25 vehicles for the refuse and transit stations.
And now to bring the rate of return into this, if you set the net present value to zero. And so basically if you're looking at a 6% rate of return, have a profitable investment, you only need 11 transit buses or 68 school buses or 14 refuse trucks with the base case scenario.
Now I want to move on to use the model to answer frequently asked questions. These are the questions that always come up when fleet managers are debating whether compressed natural gas would be a good idea for their fleets.
So with the base case established we can check and see what these specific changes have on project profitability. The most important question, as I mentioned earlier, is how many vehicles do you have in your project.
And these questions will fall into three categories. One is a variation in fuel expenditures which dictates, well which includes how much fuel you're using and also how expensive the fuel is.
The changes in up front costs such as the cost of the station and the cost of the vehicles and the changes in operating costs such as operating costs for the station.
So first of all let's look at the question how many miles per year do I need to drive my vehicle to break even? And so these are all the break-even points. Anything up and to the right of the line is going to be profitable.
Anything down and to the left of the line is going to be not profitable. It's going to be a loss. And the first thing I want to point out is look at how steep these curves are.
They're practically corners of a square. And so what that means is that if you're anywhere down here, your project is very sensitive on the number of vehicles in your project.
And so keep in mind that the number of vehicles is on the vertical access. The vehicle miles traveled is on the horizontal access. And if you look at the average fleet for transit and for trash trucks, it had a very high VMT.
And so their projects are very sensitive on the number of vehicles. And so it's—basically, what that boils down to is that if you have a refuse truck fleet and you're kind of on the line about profitability.
If you get to convert an extra three or five buses over to compressed natural gas, it makes a huge difference in your profitability whereas school buses, they're right kind of on this what I call an inflection point.
And so they've very dependent on both the VMT and the number of vehicles in the fleet.
Now the big question, what if diesel prices change? It's a fantastic question, especially given the volatility of diesel prices and the fact that they are always changing.
And so what we have here are—so if you look at our two different sizes of each of these fleets. He has a 50—you have the fleet that is 50 vehicles and you have the fleet that is 100 vehicles.
And you'll notice that all of the refuse and the transit vehicles fleets are really pretty clumped in here which makes it kind of easy to make some general estimates.
When I did the business case diesel was at 2.50. And so we were right on that line of a five-year payback period. Now diesel prices in the US are 2.92. And so that makes it a lot safer bet.
It brings the base case scenario down well below five years. And then you'll notice with the school bus fleets what a difference those extra 50 buses make.
And now the next question, what happens if my vehicle efficiency changes? There's—some fleets are experiencing an increase in their vehicle efficiency on a diesel gallon equivalent basis because—well, some—quite a few fleets are experiencing a loss of efficiency.
And then in the newer fleets and projected into the future some are seen an actual increase in efficiency, especially when compared to all the new emissions requirements with the diesel vehicles.
And so I just wanted to take a look at the impact that that has on profitability. And so I modeled a wide range for my 25% drop in efficiency all the way up to a 10% gain in efficiency.
And you can tell that it doesn't make a huge difference with the transit and refuse fleets whereas it makes a huge difference with, or it makes a large difference with the school bus fleets.
And this is flat because the school bus fleet isn't profitable, no matter what the efficiency is.
The next question, what if I don't get the tax incentives? So we have quite a few tax incentives. I mean as you know the fuel vehicle credit of 55 cents per gallon of diesel equivalent.
You have the vehicle credit of 80% of the incremental cost of the vehicle up to $32,000. And you have the station credit which is 50% of the station up to $50,000.
And so how dependent on these credits are the projects? And it's a good question right now because a lot of these tax incentives are—need to be, for municipal governments which are tax exempt, they need to be passed along from the vehicle provider or the fuel provider or the station builder.
And so that's kind of an uncertain proposition. And also most of these are in debate in Congress right now. And so there is a chance that they won't be forwarded.
Chances are they will be extended in the future. But we just want to look at scenarios what if different tax credits weren't extended into the future.
And so here you have the payback period with the base case scenario with all credits. You can see the transit buses of 3.6 years; school buses, 11.5; refuse trucks, 2.6.
If the fuel credit is taken away, that increases the payback period to 5.9 years. And for refuse trucks, 4.6 years. And for school buses it makes it not profitable.
Likewise if the vehicle tax credit is taken away, the school buses become not profitable you can see the station credits are taken away, what happens. And then if no credits at all are given, what payback periods are.
And so you can see that the station tax credit of 50,000 doesn't matter very much. The fuel and the vehicle tax credits make a big difference. The fuel credit matters the most for transit buses.
And the vehicle credit matters the most for refuse trucks. And finally there are synergies between the credits. If you look at the difference between each one of them added up, for transit buses the differences add up to 4.2 years.
And refuse trucks, the differences add up to 4.3 years. Whereas if you look at the difference between this all credit scenario and the no credit scenario, the difference is 5.5 years for transit buses and 5.2 years for refuse trucks.
So you can tell that there are some definite synergies. So that was put in there more for policy makers to keep that in mind. But it's also good to keep in mind for the fleet operators.
Next, what if the price of my station changes? The station cost estimator, as I mentioned earlier, is just a very general estimate. It depends on many, many factors. So I encourage you guys to download them all to yourself and put in your own prices.
But in the meantime we can look at the affect of a change in station price. And keep in mind that if you get a grant to put in a station, this is the effective difference that it makes.
And so there's a big difference for refuse and transit fleets that are less than 75 vehicles. They're right in that zone. It makes a difference.
And I should mention that these scenarios we're looking at are the payback period over the years and the number of the vehicles in the fleet. And it's looking at the school fleet. The base case scenario is the middle.
And then if you increase the cost of the station to 150%, it's the green line. If you decrease the cost of the station by 50%, it's the blue line.
And then we've modeled the refuse station down here which is basically identical to the transit station. So we didn't model the transit station.
So you can tell that decreasing the cost of the station can bring the school bus down into a profitable region. And keep in mind that all of these work together.
So if you decrease the cost of the station and get that reduction in payback period, also at the same time that diesel prices go up and you get that reduction, these are scenarios where a school station can be very profitable.
Next question, what happens if my vehicle incremental cost changes? So this is set up the same as that—as the previous chart. You have your payback period.
You have the base case for the school bus in the middle. You have the double to incremental cost. You have half the incremental cost and the same for the refuse.
And the one thing I want to point out is that this is what happens if you get a grant to purchase vehicles. They reduce your vehicle incremental costs.
And another thing I wanted to point out is that even though, let's look at the bus scenario. Even though, actually let's look at the refuse scenario.
Even though when you double it, it brings up your payback period that much. And then when you have it, it's only reviews it at a smaller amount. That's because when you have it, you're losing a lot of the tax credit in there, whereas when you double it, you're still getting that full tax credit.
And so what happens if my vehicle maintenance cost change? And as you can tell, this makes a huge difference for the school bus fleets. And it also makes a big difference for smaller refuse and transit fleets.
The maintenance costs really add up because you have to pay them throughout the entire life of the project. And so the base case is a 50% per mile maintenance cost for both compressed natural gas and diesel fleets.
And then in this case we've increased it to 150% of that, and so 75 cents per mile. And in this case we decreased it to 50% of that, so 25 cents per mile.
You can see that it makes quite a difference. And this is another case that can make school bus fleets profitable on their own, even if that's the only aspect you're changing.
So in the report I've covered a lot more questions. But right now I'd like to just cover the conclusions and then answer any questions that you guys have. And I have some follow up slides that if your questions bring me on to them, I can bring up.
But for now I want to cover the conclusion. And for the conclusion I want to categorize the fleets into three different categories. One is a resilient fleet. It's a fleet that is profitable and you can change a lot of those aspects.
You can change the price of diesel. You can change the cost of the station. You can change a lot. And it stays profitable.
And so all in all the resilient fleets are large. And by large I mean greater than 75 vehicles say, and I'm going to take a drink of water real quick.
So you have your resilient fleets that are large, transit or refuse fleets. And they stay profitable. And by profitable I mean they keep a payback period of less than five years unless the following things happen.
Unless diesel drops below 2.25 a gallon, unless the compressed natural gas vehicle maintenance cost increase 50%, unless the vehicle miles traveled drops below 26,000 miles per year for transit buses or 14,000 per year for refuse.
Now keep in mind that the average is about 35,000 miles. So that's a pretty substantial drop. And they're profitable unless the vehicle incremental costs double or if the various combinations of the above occur.
And now for marginal fleets, these are ones that are profitable but they're kind of on that line. They really depend on a lot of those factors. A lot of the questions that managers are asking I tried to answer in the report.
So fleets that start out with—start out as marginal are all school bus fleets. And then small transit or refuse fleets. And by small I mean less than 75 vehicles.
And so these fleets have a couple of points where they have a really precipitous drop in profitability. They have a lot of gray area where they can go back and forth in profitability over and below that payback of five years.
But they have a few things that really make a precipitous drop in profitability. And one of those is the transit or refuse fleet, if the size drops below 30 vehicles.
Another is if the school bus vehicle miles traveled drops below 10,000 miles per bus. And so if that happens it drops into the third category of fleets that just aren't profitable under their current circumstances.
And I'll call those the no CNG fleets. And the characteristics of those are they have a low annual fuel use. They—which means that they either drive—don't drive very much or they're very efficient vehicles.
And have access to unusually inexpensive diesel fuel. And they have—and by unusually inexpensive, I mean prices that are down below where we've seen them in many years.
They have exceptionally high compressed natural gas vehicle in the infrastructure costs. So that gives you some basic parameters of what could be profitable or not. What makes the fleet resilient? What drops it into a marginal, and what would drop it into a no CNG fleet.
With that I'd like to open up to questions to you guys. And I have no idea how to do that.
COORDINATOR: Thank you. We will now begin the question and answer session of today's call. At this time if you would like to ask a question, please press star one on your touchtone phone and record your name when prompted.
Your name is required to introduce your question. So please check your mute feature on your phone. Once again star one at this time to ask a question, one moment please for the first question.
And it looks like our first question comes from a Mr. (Jeff Green). Your line is open.
(JEFF GREEN): Hi Caley. One of the things that I was interested if you've begun exploring is the potential EPA rule change for older vehicles. And how that's going to affect—and also public-private partnerships where opening a municipal station to, you know, private fleets would increase the usage.
CALEY JOHNSON: I haven't really looked into the change in the EPA rule. I have looked into opening up the station to private vehicles.
And let's see. I think with one of my supplemental slides I actually have that. Let's see I have to quick view these all because I can't see them very well, sorry.
Oh, I guess I don't. But yes, in the report I looked into opening it up to private vehicles. And basically it adds a few aspects.
It opens up the refueling window per vehicle which essentially makes the station less expensive per the number of vehicles that go through.
And it's—it also can—gets a grant. And many grants are contingent upon opening up to private vehicles, or public vehicles, sorry, which lowers the overall upfront costs of the station further.
And in quite a few scenarios it could increase the number of hostlers, or attendance at the station because once you open it up to the public, you'd probably need to man the station to keep them from damaging things.
And so I modeled the increase in like adding people to man the station. And so I did those all separately and kind of wrapped them together. But it was too many variables to really put them all together and give a curve, you know.
But I do kind of explore it in the paper and say these are the aspects that you need to look at. And this is how much each one of these aspects decreases the payback period.
But as far as a straight up number, I would actually recommend reading that section of the report. And playing around with the VICE model yourself just to kind of get an idea.
You can run through scenarios like okay, say I need to hire an extra attendant. And say I can get a $100,000 grant for putting in the station if I open it up to the public.
And yet my wear and tear costs are probably going to be this much greater. So I haven't really wrapped them all together in the report.
(JEFF GREEN): Okay I mean one of the things I would recommend is, what we're looking at doing is actually having a secondary fueling island which from an incremental cost standpoint is not very expensive.
And having a private lease of that to reduce the liability from the municipal standpoint for the private sector which also allows it to potentially be unmanned.
And we're finding that that's a much better, you know, potential profit venture than having a manned station. So a couple of things maybe look at.
CALEY JOHNSON: Yes, that's—that would be, yes, it should be interesting. And that's part of the reason why I didn't want to make estimates and say okay, you need to man the station if you make it—if you open it up to the public. Because I kind of like just setting it up and saying how the economics are going to be changed. And let people kind of make their own estimates.
(JEFF GREEN): Right. Okay I mean I just wanted to throw it out there because there's a lot of things that are changing right now. You know, whether or not Congress passes the legislation or not to us, at this point we're looking at it's got to be cost effective with or without government support. And that's what we're trying to figure out how to do.
CALEY JOHNSON: Okay yes.
(JEFF GREEN): All right, thanks for your answers.
CALEY JOHNSON: Thank you.
COORDINATOR: And once again at this time star one to ask a question.
SANDRA LOI: I have one Caley actually that I got over the Web. It's from (Steve Lavell). And he's asking do the background assumptions include the energy requirements of compressing the fuel, ventilating the storage and maintenance areas and the subsequent additional heating costs associated with increased air changes?
CALEY JOHNSON: They include the energy cost. They assume that you're powering the station off of electricity. And so Rob has actually added in a pretty elaborate set of equations to include the electricity cost, both for consumption and both for capacity.
And so yes, I feel pretty good about our accounting for the energy cost used to run the station. But we don't include the energy cost in the increased like airflow. And I'll explain to the listeners what he meant by the increased airflow in the garage.
Is that to be safe in the garage where you store or work on the compressed natural gas vehicles, you need a higher airflow just to keep it from building up.
And so I haven't included the increased cost that it would keep to cool or heat the garage. I'm not sure if there are any more questions over the Web. I don't see them.
I feel like I should be singing elevator music.
COORDINATOR: Are we ready for our next phone question?
CALEY JOHNSON: All right.
COORDINATOR: Mark Smith, your line is open.
MARK SMITH: Yes hi Caley, good job on putting all this together first of all. I know it's tough to try to get a model that you can plug in all the variables. So nice job on tackling that.
CALEY JOHNSON: Thank you.
MARK SMITH: You're welcome. Two questions, Number 1 is, unless I missed it, did any of the analysis include anything in terms of maintenance cost for the station?
CALEY JOHNSON: Yes the maintenance cost, and this is one that I have a supplemental slide for. So the maintenance cost for the CNG station are from equations derived from these estimates.
So I spoke to a few different contractors. One, and these are contractors that have installed many, many stations. And they support the stations. Meaning that they maintain them so they need to have an estimate for how much it's going to cost to maintain ahead of time.
So these, the blue and the yellow lines are two contractors that wanted to remain anonymous. And then the red line here is from Rob Adams.
MARK SMITH: Okay.
CALEY JOHNSON: And so it seemed to me that Rob's kind of split the difference between the two of these. And it seemed quite realistic on quite a few other levels. And so I wrote an equation that matched Rob's estimate pretty well.
And so that's the maintenance and operation costs for the CNG station that we used in the model.
MARK SMITH: Okay good. Thank you for the explanation on that. And then the next question, having complimented you on the great job you did on the CNG model, are you looking at all at LNG and trying to come up with any type of similar model for liquefied natural gas applications?
CALEY JOHNSON: I would like to. I think it's—I think probably next on my priority list, at least, and I have to wait to hear from who actually controls my projects.
But I would really like to look into the taxicabs and the delivery fleets with CNG. That's very high on my list. And I know that we've gotten a couple of requests from liquefied natural gas or propane for a business case.
But I think, yes, I'll definitely—that's definitely like on the list, but maybe not the top of the list right now.
MARK SMITH: Okay I was just curious always I bring that up as we're seeing, you know, on the natural gas side more emphasis, not more emphasis, but we're certain—you know, through the Recovery Act we've seen more LNG projects.
And as you look at, you know, trying to do a corridor that allows you to do, you know, heavy duty and long range call in trucks over the road.
You know, obviously LNG infrastructure is going to play into that. So that was—that's what prompted my question.
CALEY JOHNSON: Oh, okay, yes. I'll definitely keep that in mind.
MARK SMITH: Okay.
CALEY JOHNSON: I'll try to do one.
MARK SMITH: That's all I had. Thank you.
CALEY JOHNSON: Thank you.
COORDINATOR: Thank you. Our next question is from Dennis Smith. Your line is open.
DENNIS SMITH: Hi, Caley, and thanks for the presentation. I just wanted to add more of a comment then a question. And you may have covered this earlier, I joined a little bit late.
But one scenario that just makes these numbers look even better and better on the profitability side is if you've got, and this is often the case with transit or refuse or even school buses, where the fleet has already built the refueling station in earlier years.
But the station has excess capacity. And now they're just looking at the feasibility of incrementally adding another 10 or 20 vehicles when the station was sized for 200 and they don't have that many yet.
Then all those other numbers don't have to be included in there. The additional usage and the economics just look better because they've made those investments in earlier years.
CALEY JOHNSON: Yes, and I think that's basically a guaranteed profitable investment. If you're only paying for the vehicle incremental costs, and then you're getting all of the fuel savings.
And I think, I can't imagine a scenario where you're only paying for those and you're not really paying for much additional—you're not paying much additional cost for the increased capacity on the station. I think pretty much all of those cases would be profitable.
DENNIS SMITH: And I bring that up because a lot of the bigger fleets we work with, they may have gone through the decision process and in fact sort of made the tough economic decision, went and built the infrastructure.
And now several years down the line they're looking at well, should I buy more CNG versus should I buy some hybrids. Should I buy something else?
Well the math looks better and better once you're sort of building load on the station that can add that capacity.
CALEY JOHNSON: Yes. Yes, I can't imagine any scenarios where that wouldn't be the best investment for them.
DENNIS SMITH: Okay, thank you.
CALEY JOHNSON: Thank you.
COORDINATOR: And it looks like I'm showing no further questions at this time.
SANDRA LOI: Great, well thank you so much. Thank you, Caley, for the presentation. And if anyone has any additional questions I know Caley had posted his contact information. You may contact myself as well.
We will be posting up the slides. And actually there's a link to the business case itself if you haven't had a chance to take a look at it. So please do that.
And a link to that is posted. And it is on our AFDC Website. And we will be posting the slides form this Webinar and the recording hopefully in the next week or so. So look for that.
And thank you all for joining us today. And we'll probably speak with you again next month. Have a great one.
COORDINATOR: This concludes today's call. You may disconnect at this time.