Impact of natural gas vehicles to be minimal

May 14, 2013 | By Barbara Vergetis Lundin

Natural gas vehicles (NGV) will reach only 7.5 million as the industry struggles to capitalize on cheap shale-driven natural gas, according to Lux Research.

In order for natural gas to be used as transportation fuel, one of two things must happen. Either natural gas needs to be converted to liquid fuel using capital-intensive technology, or vehicles need to be retrofitted to run on compressed natural gas or liquefied natural gas. Technology innovation is not the most decisive growth factor. Fuel price differentials, payback period for premium-priced NGVs and fueling infrastructure are the major drivers of growth.

"Cheap natural gas is disrupting the electricity, chemical, and heating industries, but the impact on the transportation market has been minimal," said Andrew Soare, Lux Research senior analyst. "Technical and economic challenges mean that's likely to remain true -- even if fuel splits widen."

Among Lux's findings in the seven key auto markets accounting for 75 percent of vehicles on the road today in the U.S., Europe, China, India, Brazil, Russia and Japan:

Fuel price differential is a key driver. Oil and natural gas prices affect the NGV payback period in terms of how much NGVs save on fuel costs relative to traditionally powered vehicles. Further, NGVs come at a higher upfront cost, and reducing this premium shortens payback the most.
India and China are top markets, but have low penetration. The world's two most populous countries are the fifth- and sixth-largest NGV markets, respectively, but penetration is only around 1 percent each. In 2015, the nations will occupy the top two spots of the seven nations surveyed -- China with sales of 540,000 and India with sales of 250,000.
User behavior will stymie U.S. growth. Even with favorable fuel pricing and low payback periods, NGVs are a tiny fraction of the U.S. vehicle market, owing to user resistance to new vehicles and entrenched driving and fueling habits. What's more, natural gas prices in the U.S. will likely rise over the next few years, reducing the fuel price differential.

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