Pathways for Developing a Natural Gas Vehicle Market
March 13, 2019
Leaders in the global oil and gas sector are in Houston this week to discuss everything from technological innovations that will lead to more efficient production in the sector to the geopolitics of managing production and ensuring safe and reliable supplies to crucial growing markets. Natural gas continues to play a strong role in the fuel mix of many countries in everything from power generation to fertilizer production. Natural gas also plays a role in many countries’ transportation sector. Natural gas vehicles (NGVs), which use compressed natural gas (CNG) or liquefied natural gas (LNG) as fuel, exist as vehicles manufactured by automobile makers or aftermarket conversions. Despite the proven viability of the NGV technology as an alternative to gasoline or diesel-powered vehicles as early as the 1930s, the global penetration rate, an estimated 2 percent of total vehicles, still remains low.
Today, there are several factors that drive the growth of NGVs. First, there is a recent growth in natural gas production around the world, which has heightened interest in the use of natural gas in the transportation sector. With the shale revolution in North America, the United States became a net exporter of natural gas in 2017 and expected to become a net energy exporter by 2022. In addition, global carbon dioxide emissions from the transportation sector have risen to 23 percent of overall emissions. NGVs, with their lower emissions of particulate matter, provide a solution to the increasing threats of air pollution. While NGV penetration rates remain low globally, government policies have driven the deployment of NGVs in several countries. Recognizing the likelihood of a coming divergence between the use of natural gas for fueling passenger versus heavy-duty vehicles, we looked at five countries with significant passenger NGV fleets to see what kinds of pathways lead to the growth of their NGV market to date.
In the past 20 years, Argentina tripled its NGV population to 1.6 million vehicles thanks in part to its Liquid Fuels Substitution Program, which was launched in 1984. The main purpose of the program was to free up more of the country’s oil resources for export instead of domestic consumption for transportation. The program aimed to replace diesel with natural gas in public transportation through vehicle conversions to run on CNG. The Argentine government focused on maintaining favorable CNG prices through liquid fuel taxation and establishing standards and codes for CNG equipment, vehicle conversion, and fueling stations. Credit lines were extended for the conversion of the taxi fleet in Buenos Aires, and the funding of three refueling stations in key parts of the capital was meant to allay the fears of the public around the use of natural gas as a transportation fuel. In the case of Argentina, the price advantage of CNG to diesel and gasoline remained the strongest driver for the conversion rate of gasoline or diesel vehicles to CNG vehicles. Argentina’s NGV fleet growth spiked in the early 2000s when Argentina faced an economic crisis. However, the price factor was impacted by the country’s eventual natural gas supply shortage thus leading to a stagnation in its fleet from 2004. Despite these challenges, Argentina continues to support NGVs with its first LNG trucks delivered this year and plans establish import regulations for CNG vehicles.
With the world’s largest NGV fleet at 6 million NGVs—approximately 3.7 percent of the country’s total vehicles—China supported natural gas in transportation to curb vehicular air pollution. China first introduced the Clean Vehicles Action for 12 demonstration cities in 1999. The program established percentage targets for alternative fuels, including CNG in bus and taxi fleets, provided R&D funding for industry and financial subsidies for buyers. Up until 2015, the government regulated CNG prices to be lower than gasoline for transportation. The growth of the NGV market has also been indirectly supported by China’s efforts in developing natural gas infrastructure, such as West to East Gas Pipeline Projects. These pipelines have ensured that provinces that lack natural gas resources are able to access it through this network. However, remote areas are still far from this gas grid, and there are safety concerns with CNG vehicles in dense cities (some cities have strict mandates against CNG conversions). Central and local governments, over the past years, have established development plans to promote NGVs in public transportation, supported refueling infrastructure construction, provided financial support through subsidies and tax exemptions, and relaxed restrictions on CNG conversions. To tackle pollution from diesel use, LNG was introduced for heavy-duty vehicles in 2012. China will continue to be a strong market for NGVs. In its 13th Five-Year Plan for Natural Gas Development, China set a target of 10 million natural gas vehicles, doubling its 2016 NGV population, and 12,000 refueling stations for vehicles by 2020.
India’s pursuit of NGVs is driven by its long history of tackling air pollution from diesel, especially in urban regions. In 1999, the Supreme Court of India made its landmark decision to adopt Delhi’s pollution control program designed by the Environment Pollution (Prevention and Control) Authority. Key directives from the proposal included converting Delhi’s bus fleet to CNG, defining CNG as an approved type of clean fuel, and providing financial incentives to replace or convert existing autorickshaws and taxis with those operating on CNG. This program became the basis for other cities to adopt similar efforts as the Supreme Court continued to identify heavily polluted Indian cities in the mid-2000s. Through invoking the constitutional principles of right to life and precautionary principles for public health, the Supreme Court also cemented the role of NGVs in addressing air pollution by prioritizing CNG allocation for the transportation sector. Significant price advantages of CNG compared to diesel or gasoline at estimated 41-62 percent, and lower ownership costs of around 20 percent drive an economic incentive for consumers to switch to NGVs. However, India continues to experience many challenges including CNG conversion quality and safety risks, strained refueling infrastructure with daily long waits for vehicle refueling, and NGV market expansion into smaller cities without the economies of scales that usually justify new, costly infrastructure investments. As the Indian government continues to promote a gas-based economy future, highlighted with the Gas4India campaign launched by the Ministry of Petroleum and Natural Gas in 2016, the potential growth for its NGV market will be supported by the government’s efforts to secure sustained natural gas supplies.
The Iranian government began promoting NGVs initially as a response to air pollution. However, other reasons also factored into the government’s decision to promote natural gas. Although Iran is rich in crude oil, the lack of oil refineries forces Iran to refine part of its own crude oil in Europe. When international sanctions banned gasoline sales to Iran, it had to look for alternative sources to meet growing fuel demands in the transportation sector. Natural gas provided an easy option as Iran holds one of the world’s largest gas reserves. The Iranian government first introduced its plan to promote NGVs in 2000 by establishing the Iranian Fuel Conservation Organization (IFCO). The IFCO focused on retrofitting existing vehicles for CNG use and constructing CNG refueling stations. In 2006, the Iranian parliament voted to pay the equipment expenditure costs for all CNG stations, triggering a rapid growth in NGVs. Iran’s NGV policies were a success; the number of NGVs grew from almost zero to 3.5 million in just over a decade, making Iran a global leader of NGVs. However, the popularity of NGVs exceeded the government’s expectations, and there are now insufficient CNG refueling stations in Iran to meet demand. Consider this: as of 2017, there were only 2,380 CNG stations in Iran to service its fleet of 4.5 million NGVs. With a population of 80 million citizens, this amounts to one CNG station per 300,000 people. Despite the shortage of refueling stations, NGVs are likely to remain popular in Iran as CNG is significantly cheaper than gasoline. Finally, Iran’s Sixth Country Development Plan mandates domestic manufacturers to have 50 percent of their annual vehicles produced be CNG compatible, ensuring the availability of NGVs for willing consumers.
The use of natural gas as motor fuel started in Italy around the 1970s when cars were retrofitted for CNG use due to the oil crisis. Retrofitting continued during the 1990s as popular small- and medium-sized cars became available for CNG conversion. Government incentive programs (such as low taxation on CNG conversions) sustained the gradual growth of NGVs in Italy during those years. Concerns about air pollution pushed the government to favor NGVs, and between 2008 and 2010, the government ran a subsidy program that supported both the conversions of existing cars to CNG use and the purchase new NGVs. As a result, the number of NGVs in Italy rose by 68 percent and the number of CNG refueling stations doubled during this period. The success of Italy’s NGV program also owes itself to the already existing gas pipelines infrastructure; Italy has the third largest natural gas transmission system in Europe. Although Italy imports most of the natural gas from Russia and Algeria, CNG prices are still significantly lower than gasoline and diesel prices. The popularity of NGVs in Italy remains strong. By 2017, more than 800,000 NGVs were sold in Italy, which made up 80 percent of total NGV sales in Europe.
Source: IANGV, ENARGAS, Clean Fuels Consulting, Ettefagh
Comparing these five case studies, air pollution and energy security appear to be the main historical and current drivers for NGV promotion. Air pollution has spurred China, India, Iran, and Italy to launch programs to incentivize NGVs uptake whether through court mandates or subsidies programs. For Argentina, the abundant natural gas reserves and the existing natural gas network provided energy security related incentive to promote NGV.
A common theme for the relative success in each case study is the price competitiveness of gas to diesel and gasoline. Governments have historically and are still maintaining lower natural gas prices through taxation schemes on gasoline or diesel and CNG price regulation. For consumers, the consistent price advantage provides an economic incentive to switch to natural gas for vehicles. In Argentina, CNG was referred to as the “fuel of crisis” during an economic downturn. Another common theme, in each of the case studies, is that all governments have launched incentive programs to promote NGVs. Governments have offered specific fleet conversion programs (Argentina, China, India), tax rebates and subsidies (China, India, Italy), and refueling station subsidies (Iran) to promote NGVs. Interestingly, most of these programs occurred around 2000s when natural gas was still considered a niche fuel.
The main challenges for the further development of NGV markets in these countries seem to be the lack of delivery infrastructure. Some countries, such as China and India, lack extensive gas pipelines that reach rural areas, while others, such as Iran and again India, lack refueling stations to meet the demand from their growing NGV fleets. CNG conversion quality and safety concerns also pose another challenge. For instance, in India, unauthorized CNG tanks and cylinder tampering had led to a few instances of explosions, which has led to the negative public perception of CNG use. Improving refueling infrastructure, as well as providing standards for CNG conversions, will be essential to ensure public trust and growth of NGV markets in these countries.
These five case studies highlight the policies and factors for NGV fleet growth. The motivations driving governments to diversify their fuel mix for transportation have yielded mix results. There is much that we still do not know about future technology disruptions and fuel shocks. However, there is a strong case for policy experimentation to find what role natural gas will play in powering the transportation sector. The long history, public acceptance, and strong government support for natural gas in passenger vehicles will push forward the growth of NGVs in these countries despite some of the challenges discussed. In other countries, such as India and China, it is likely that natural gas is part of the transition to electric vehicles. China launched a New Energy Vehicles program to adopt zero-emission vehicles in its fleet rapidly. India proposed 15 percent electric vehicles in the next five years and is even considering a ban on non-CNG fossil fuel powered vehicles. These two countries represent significant proportions of the global NGV market, yet the market share within its nations’ vehicle population remains low. In Iran and Italy, it is likely that NGVs will continue to play a role in transportation. Remarkably, Italy has shown a strong preference for NGVs to electric vehicles although the government is trying to increase the number of electric vehicles on their roads. Finally, though not discussed in depth, the case for natural gas in heavy-duty vehicles remains strong. In line with global trends for replacing diesel in heavy-duty vehicles, in Argentina, China, India, and Italy, LNG is becoming a more prominent fuel for heavy-duty trucks. Therefore, even if electric vehicles replace light-duty NGVs in the coming years, the use of natural gas in heavy-duty vehicles will likely grow.
Kartikeya Singh is a senior fellow and Deputy Director of the Wadhwani Chair in U.S.-India Policy Studies and a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS), in Washington, D.C. Nicole Huang was an intern with the CSIS Energy and National Security Program, and Naing Thant Phyo was an intern with the CSIS Southeast Asia Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2019 by the Center for Strategic and International Studies. All rights reserved.