Transportation from Market Trends

Output growth for energy-intensive industries remains slow

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Industrial sector output has grown more slowly than the overall economy in recent decades, with imports meeting a growing share of demand for industrial goods, whereas the service sector has grown more rapidly [122]. In the AEO2012 Reference case, real GDP grows at an average annual rate of 2.5 percent from 2010 to 2035, while both the industrial sector as a whole and its manufacturing component grow by 1.6 percent per year (Figure 61). As the economy recovers from the 2008-2009 recession, growth in U.S. manufacturing output in the Reference case accelerates from 2010 through 2020. After 2020, growth in manufacturing output slows due to increased foreign competition, slower expansion of domestic production capacity, and higher energy prices. These factors weigh heavily on the energy-intensive manufacturing sectors, which taken together grow at a slower rate of about 1.0 percent per year from 2010 to 2035, with variation by industry ranging from 0.8-percent annual growth for bulk chemicals to 1.5-percent annual growth for food processing.

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A decline in U.S. dollar exchange rates, combined with modest growth in unit labor costs, stimulates U.S. exports, eventually improving the U.S. current account balance. From 2010 to 2035, real exports of goods and services grow by an average of 5.9 percent per year, and real imports of goods and services grow by an average of 4.1 percent per year. Strong growth in exports is an important component of projected growth in the transportation equipment, electronics, and machinery industries.

Industrial and commercial sectors lead U.S. growth in primary energy use

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Total primary energy consumption, including fuels used for electricity generation, grows by 0.3 percent per year from 2010 to 2035, to 106.9 quadrillion Btu in 2035 in the AEO2012 Reference case (Figure 72). The largest growth, 3.3 quadrillion Btu from 2010 to 2035, is in the commercial sector, which currently accounts for the smallest share of end-use energy demand. Even as standards for building shells and energy efficiency are being tightened in the commercial sector, the growth rate for commercial energy use, at 0.7 percent per year, is the highest among the end-use sectors, propelled by 1.0 percent average annual growth in commercial floorspace.

The industrial sector, which was more severely affected than the other end-use sectors by the 2008-2009 economic downturn, shows the second-largest increase in total primary energy use, at 3.1 quadrillion Btu from 2010 to 2035. The total increase in industrial energy consumption is 2.1 quadrillion Btu from 2008 to 2035, attributable to increased production of biofuels to meet the Energy Independence and Security Act of 2007 (EISA2007) renewable fuels standard (RFS) as well as increased use of natural gas in some industries, such as food and paper, to generate their own electricity.

Primary energy use in both the residential and transportation sectors grows by 0.2 percent per year, or by just over 1 quadrillion Btu each from 2010 to 2035. In the residential sector, increased efficiency reduces energy use for space heating, lighting, and clothes washers and dryers. In the transportation sector, light-duty vehicle (LDV) energy consumption declines after 2012 to 14.7 quadrillion Btu in 2023 (the lowest point since 1998) before increasing through 2035, when it is still 4 percent below the 2010 level.

Transportation energy use grows slowly in comparison with historical trend

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Transportation sector energy consumption grows at an average annual rate of 0.1 percent from 2010 to 2035 (from 27.6 quadrillion Btu to 28.6 quadrillion Btu), much slower than the 1.2-percent average from 1975 to 2010. The slower growth results primarily from improvement in fuel economy for both LDVs and heavy-duty vehicles (HDVs), as well as relatively modest growth in demand for personal travel.

LDV energy demand falls by 3.2 percent (0.5 quadrillion Btu) from 2010 to 2035 (Figure 88). Personal travel demand rises more slowly than in recent history, with the increase more than offset by existing GHG standards for model year (MY) 2012 to 2016 and by EISA2007 fuel economy standards for MY 2017 to 2020. Inclusion of the proposed standards for MY 2017-2025, which are not included in the Reference case, reduce LDV energy demand by 20.0 percent (3.2 quadrillion Btu) from 2010 to 2035.

Energy demand for HDVs (including tractor trailers, buses, vocational vehicles, and heavy-duty pickups and vans) increases by 21 percent, or 1.1 quadrillion Btu, from 2010 to 2035, as a result of increases in vehicle miles traveled (VMT) as economic output recovers. Fuel efficiency and GHG emissions standards temper growth in energy demand even as more miles are traveled overall.

Energy demand for aircraft increases by 11 percent, or 0.3 quadrillion Btu from 2010 to 2035. Higher incomes and moderate growth in fuel costs encourage more personal air travel, the resulting increase in energy use offset by gains in aircraft fuel efficiency. Air freight use of energy grows as a result of export growth. Energy consumption for marine and rail travel also increases, as industrial output grows and more coal is transported. Energy use for pipelines also increases, even though more natural gas production occurs closer to end-use markets.

CAFE and greenhouse gas emissions standards boost vehicle fuel economy

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The introduction of Corporate Average Fuel Economy (CAFE) standards for LDVs in 1978 resulted in an increase in fuel economy from 19.9 miles per gallon (mpg) in 1978 to 26.2 mpg in 1987. Over the two decades that followed, despite improvements in LDV technology, fuel economy fell to between 24 and 26 mpg as sales of light-duty trucks increased from 20 percent of new LDV sales in 1980 to almost 55 percent in 2004 [124]. The subsequent rise in fuel prices and reduction in sales of light-duty trucks, coupled with tighter CAFE standards for light-duty trucks starting with MY 2008, led to a rise in LDV fuel economy to 29.2 mpg in 2010.

The National Highway Traffic Safety Administration (NHTSA) introduced attribute-based CAFE standards for MY 2011 LDVs in 2009 and, together with the U.S. Environmental Protection Agency (EPA), in 2010 announced CAFE and GHG emissions standards for MY 2012 to MY 2016. EISA2007 further requires that LDVs achieve an average fuel economy of 35 mpg by MY 2020 [125]. In the AEO2012 Reference case, the fuel economy of new LDVs [126] rises to 30.0 mpg in 2011, 33.8 mpg in 2016, and 35.9 mpg in 2020 (Figure 89). After 2020, CAFE standards remain constant, with LDV fuel economy increasing moderately to 37.9 mpg in 2035 as a result of more widespread adoption of fuel-saving technologies.

In December 2011, NHTSA and EPA proposed more stringent attribute-based CAFE and GHG emissions standards for MYs 2017 to 2025 [127]. The proposal calls for a projected average LDV CAFE of 49.6 mpg by 2025 together with a GHG standard equivalent to 54.5 mpg. With the inclusion of the proposed LDV CAFE standards, LDV fuel economy in the CAFE Standards case increases by nearly 30 percent in 2035 compared to the Reference case.

Travel demand for personal vehicles increases more slowly than in the past

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Personal vehicle travel demand, measured as VMT per licensed driver, grew at an average annual rate of 1.1 percent from 1970 to 2007, from about 8,700 miles per driver in 1970 to 12,800 miles per driver in 2007. Increased travel was supported by rising incomes, declining costs of driving per mile (determined by fuel economy and fuel price), and demographic changes (such as women entering the workforce). Between 2007 and 2010, VMT per licensed driver declined to around 12,700 miles per driver because of a spike in the cost of driving per mile and the economic downturn. In the AEO2012 Reference case, VMT per licensed driver grows by an average of 0.2 percent per year, to 13,350 miles per driver in 2035 (Figure 90).

Although the real price of motor gasoline in the transportation sector increases by 48 percent from 2010 to 2035 in the Reference case, VMT per licensed driver still grows as real disposable personal income climbs by 81 percent. Faster growth in income than in fuel prices ensures that travel demand continues to rise by reducing the percentage of income spent on fuel. In addition, the effect of rising fuel costs is moderated by a 30-percent improvement in new vehicle fuel economy following the implementation of more stringent GHG and CAFE standards for LDVs.

Several demographic forces play a role in moderating the growth in VMT per licensed driver despite the rise in real disposable income. Although LDV sales increase through 2035, the number of vehicles per licensed driver remains relatively constant (at just over 1 per licensed driver). Also, unemployment remains above pre-recession levels in the Reference case until later in the projection, further tempering the increase in personal travel demand.

Sales of alternative fuel, fuel flexible, and hybrid vehicles rise

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LDVs that use diesel, other alternative fuels, hybrid-electric, or all-electric systems play a significant role in meeting more stringent GHG emissions and fuel economy standards, as well as offering fuel savings in the face of higher fuel prices. Sales of such vehicles increase from 14 percent of all new LDV sales in 2010 to 35 percent in 2035 in the AEO2012 Reference case. Sales would be even higher with consideration of the proposed fuel economy standards covering MYs 2017 through 2025 that are not included in the Reference case (see discussion in "Issues in focus").

Flex-fuel vehicles (FFVs), which can use blends of ethanol up to 85 percent, represent the largest share of vehicles, at 17 percent of all new vehicle sales. Manufacturers selling FFVs currently receive incentives in the form of fuel economy credits earned for CAFE compliance through MY 2016. FFVs also play a critical role in meeting the RFS for biofuels.

Sales of hybrid electric and all-electric vehicles that use stored electric energy grow considerably in the Reference case (Figure 91). Micro hybrids, which use start/stop technology to manage engine operation while at idle, account for 6 percent of total LDV sales in 2035, which is the largest share for vehicles that use electric storage. Gasoline-electric and diesel-electric hybrid vehicles account for 5 percent of total LDV sales in 2035; and plug-in and all-electric hybrid vehicles account for 3 percent of LDV sales and 9 percent of sales of vehicles using diesel, alternative fuels, hybrid, or all-electric systems.

Sales of diesel vehicles also increase, to 4 percent of total LDV sales in 2035. Light-duty gaseous and fuel cell vehicles account for less than 0.5 percent of new vehicle sales throughout the projection because of the limited availability of a fueling infrastructure and their high incremental cost.

Heavy-duty vehicle energy demand continues to grow but slows from historical rates

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Energy demand for HDVs-including tractor trailers, vocational vehicles, heavy-duty pickups and vans, and buses-increases from 5.1 quadrillion Btu in 2010 to 6.2 quadrillion Btu in 2035, at an average annual growth rate of 0.8 percent, which is the highest among transportation modes. Still, the increase in energy demand for HDVs is lower than the 2-percent annual average from 1995 to 2010, as increases in VMT are offset by improvements in fuel economy following the recent introduction of new standards for HDV fuel efficiency and GHG emissions.

The total number of miles traveled annually by all HDVs grows by 48 percent from 2010 to 2035, from 234 billion miles to 345 billion miles, for an average annual increase of 1.6 percent. The rise in VMT is supported by rising economic output over the projection period and an increase in the number of trucks on the road, from 8.9 million in 2010 to 12.5 million in 2035.

Higher fuel economy for HDVs partially offsets the increase in their VMT, as average new vehicle fuel economy increases from 6.6 mpg in 2010 to 8.2 mpg in 2035. The gain in fuel economy is primarily a consequence of the new GHG emissions and fuel efficiency standards enacted by EPA and NHTSA that begin in MY 2014 and reach the most stringent levels in MY 2018 [128]. Fuel economy continues to improve moderately after 2018, as fuel-saving technologies continue to be adopted for economic reasons (Figure 92).

Transportation uses lead growth in consumption of petroleum and other liquids

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In 2010, the United States imported 11 percent of its total natural gas supply. In the AEO2012 Reference case, U.S. natural gas production grows faster than consumption, so that early in the next decade exports exceed imports. In 2035, U.S. net natural gas exports are about 1.4 trillion cubic feet (about 4 billion cubic feet per day), half of which is exported overseas as liquefied natural gas (LNG). The other half is transported by pipelines, primarily to Mexico.

U.S. LNG exports supplied from lower 48 natural gas production are assumed to start when LNG export capacity of 1.1 billion cubic feet per day goes into operation in 2016. An additional 1.1 billion cubic feet per day of capacity is expected to come on line in 2019. At full capacity, the facilities could ship 0.8 trillion cubic feet of LNG to overseas consumers per year. Net U.S. LNG exports are somewhat lower than those figures imply, however, because LNG imports to the New England region are projected to continue. In general, future U.S. exports of LNG depend on a number of factors that are difficult to anticipate and thus are highly uncertain.

Net natural gas imports from Canada decline over the next decade in the Reference case and then stabilize at about 1.1 trillion cubic feet per year (Figure 109), when natural gas prices in the U.S. lower 48 States become high enough to motivate Canadian producers to expand their production of shale gas and tight gas. In Mexico, natural gas consumption shows robust growth through 2035, while Mexico's production grows at a slower rate. As a result, increasing volumes of imported natural gas from the United States fill the growing gap between Mexico's production and consumption.

Infrastructure hurdles limit near-term growth in consumption of E15 and E85 fuels

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A number of factors have recently limited the amount of ethanol that can be consumed domestically. Currently, given the limited availability of E85, the primary use of ethanol is as a blendstock for gasoline. With rapid growth in ethanol capacity and production in recent years, ethanol consumption in 2010 approached the legal gasoline blending limit of 10 percent (E10). As of January 2011, the EPA increased the blending limit to 15 percent for vehicles built in 2001 and later [137]. Once the final requirements are put in place, blenders will no longer be prohibited from blending beyond 10 percent for the general stock; however, a number of issues are expected to limit the rate at which terminals and retail outlets choose to take advantage of the option.

Liability from potential misfueling and infrastructure problems is one of the top concerns expected to slow the widespread adoption of E15. Retailers are hesitant to sell E15, even with the EPA's warning label, if they are not relieved of responsibility for damage to consumers' vehicles that may result from misfueling with the higher ethanol blend or from malfunctions of storage equipment or infrastructure. Consumer acceptance of the new fuel blend will also play a part, and warning labels may deter customers from risking potential damage from the use of E15, which potentially could void vehicle warranties.

In light of those potential issues, ethanol blending in gasoline increases slowly in the Reference case, from 13.2 billion gallons in 2010 (about 9 percent of the gasoline pool) to 15.0 billion gallons in 2020 (about 11 percent) and 15.8 billion gallons in 2035 (12.5 percent). Given the blending limitations, the remaining growth in ethanol use is in E85, which grows from about 0.6 billion gallons in 2018 to 9.5 billion gallons in 2035 (Figure 116).

Transportation from Issues in Focus

4. Energy impacts of proposed CAFE standards for light-duty vehicles, model years 2017 to 2025

In response to environmental, economic, and energy security concerns, EPA and NHTSA in December 2011 jointly issued a proposed rule covering GHG emissions and CAFE standards for passenger cars and light-duty trucks in MY 2017 through MY 2025 [42]. EPA and NHTSA expect to announce a final rule in the second half of 2012. In this section, EIA uses the National Energy Modeling System (NEMS), which has been updated since last year but, due to the timing of the modeling process, does not incorporate all information from the pending rulemaking process, to assess potential energy impacts of the regulatory proposal.

EPA is proposing GHG emissions standards that will reach a fleetwide LDV average of 163 grams CO₂ per mile (54.5 mpg equivalent) in MY 2025, or 49.6 mpg for the CAFE-only portion (Table 8). Passenger car standards are made more stringent by reducing the average annual CO₂ emissions allowed by 5 percent per year from MY 2016 through MY 2025. Average annual CO2 emissions from light-duty trucks are reduced by 3.5 percent per year from MY 2016 through MY 2021, with larger average reductions for smaller lightduty trucks and smaller average reductions for larger lightduty trucks. For MY 2021 through MY 2025, light-duty trucks would be required to achieve a 5-percent average annual reduction rate. In this section, EIA assumes that the reductions in GHG emissions required under EPA standards exceed the reductions required under the NHTSA CAFE standards and are achieved through changes other than those that would provide further improvement in fuel economy as tested for compliance with the NHTSA standards.

NHTSA has proposed CAFE standards for LDVs that will reach a fleetwide average of 49.6 mpg in MY 2025, based on the projected inclusion of reductions in GHG emissions that are achieved by means other than improvements in fuel economy. CAFE standards are proposed for MY 2017 through MY 2021, and conditionally for MY 2022 through MY 2025. The proposed standards for passenger cars increase by 4.1 percent per year for MY 2017 through MY 2021 and 4.3 percent for MY 2022 through MY 2025. For light-duty trucks, the CAFE standards would increase by 2.9 percent per year for MY 2017 through MY 2021, with greater improvement required for smaller light-duty trucks and somewhat smaller improvement required for larger light-duty trucks. For MY 2022 through MY 2025, CAFE standards for all light-duty trucks would increase by 4.7 percent per year. Although there are complex dynamics in play among the CAFE standards and other policies, including those related to biofuels [43] and other gasoline alternatives, CAFE standards are the single most powerful regulatory mechanism affecting energy use in the U.S. transportation sector.

AEO2012 includes a CAFE Standards case that incorporates the proposed NHTSA fuel economy standards for MY 2017 through MY 2025. Fuel economy and GHG emissions standards for MY 2011 through MY 2016 have been promulgated already as final rules and are represented in the AEO2012 Reference case. Further, the Reference case assumes that CAFE standards rise slightly to meet the requirement that LDVs reach 35 mpg by 2020 mandated in EISA2007.

As modeled by EIA, compliance with the more stringent fuel economy standards in the CAFE Standards case leads to a change in the vehicle sales mix. Vehicles that use electric power stored in batteries, or use a combination of a liquid fuel (including gasoline) and electric power stored in batteries for motive and/or accessory power—such as hybrid electric vehicles (HEVs) or plug-in hybrid electric vehicles (PHEVs)—or that use liquid fuels other than gasoline, such as diesel or E85, play a larger role than in the Reference case. The CAFE Standards case also projects a significant improvement in the fuel economy of traditional vehicles with gasoline internal combustion engines with and without micro hybrid technologies. In the analysis, vehicles that combine gasoline internal combustion engines with micro hybrid systems are projected to have the largest increase in sales relative to the Reference
case (Figure 23 and Table 9).

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Gasoline-only vehicles retain the single largest share of new vehicle sales in 2025. In order to meet increased fuel economy requirements, the average fuel economy of gasoline vehicles, including micro hybrids, is raised by the introduction of new fuelefficient technologies and improved vehicle designs. The fuel economy of gasoline-only passenger cars, including micro hybrids, increases from 32 mpg in 2010 to 51 mpg in 2025 in the CAFE Standards case, compared with 38 mpg in 2025 in the Reference case. The fuel economy of gasoline-powered light-duty trucks, including micro hybrids, rises similarly, from 24 mpg in 2010 to 37 mpg in 2025 in the CAFE Standards case, compared with 31 mpg in 2025 in the Reference case.

As vehicle attributes, such as horsepower and weight, change in response to the more stringent fuel economy standards, some consumers switch from passenger cars to light trucks. Light-duty trucks account for 39 percent of new LDV sales in 2025 in the CAFE Standards case, higher than their 37 percent share in 2025 in the Reference case but still much lower than their 2005 share of more than 50 percent. In 2025, new passenger cars average 56 mpg and light-duty trucks average 40 mpg in the CAFE Standards case, compared with 41 mpg and 31 mpg, respectively, in the Reference case. Although more stringent standards stimulate sales of vehicles with higher fuel economy, it takes time for new vehicles to penetrate the vehicle fleet in numbers that are sufficiently large to affect the average fuel economy of the entire U.S. LDV stock. Currently there are about 230 million LDVs on the road in the United States, projected to increase to 276 million in 2035. As a consequence of the gradual scrapping of older vehicles and the introduction of new, more fuel-efficient models, the average on-road fuel economy of the LDV stock, representing the fuel economy realized by all vehicles in use, increases from around 20 mpg in 2010 to 22 mpg in 2016, 27.5 mpg in 2025, and 34.5 mpg in 2035, as compared with 28 mpg in 2035 in the Reference case (Figure 24).

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More stringent fuel economy standards lead to reductions in total energy consumption. Total cumulative delivered energy consumption by LDVs from 2017 to 2035 is 8 percent lower in the CAFE Standards case than in the Reference case. LDV delivered energy consumption is 6 percent lower in 2025 in the CAFE Standards case than in the Reference case and 17 percent lower in 2035. Total consumption of petroleum and other liquids in the transportation sector is 0.5 million barrels per day lower in 2025 and 1.4 million barrels per day lower in 2035 in the CAFE Standards case than in the Reference case (Figure 25). The existing standards are modestly exceeded in the Reference case. If the standards are just met, the reduction in liquids consumption is 0.5 million barrels per day in 2025 and 1.6 million barrels per day in 2035 in the CAFE Standards case relative to the Reference case.

The reductions in total delivered energy use and liquid fuel consumption become more pronounced later in the projection, as more of the total vehicle stock consists of vehicles with higher fuel economy.

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The more stringent regulatory standards in the CAFE Standards case change the composition of the vehicle fleet by fuel type and shift the mix of fuels consumed. Nevertheless, motor gasoline, including gasoline blended with up to 15 percent ethanol (used in vehicles manufactured in MY 2001 and after), remains the predominant fuel by far for LDVs in the CAFE Standards case, accounting for 84 percent of LDV delivered energy consumption in 2035—only slightly less than its 86-percent share in 2035 in the Reference case.

Total motor gasoline demand for LDVs is 19 percent lower in the CAFE Standards case in 2035 than in the Reference case, and lower demand for motor gasoline reduces the amount of ethanol used in E10 and E15 gasoline blends. As a consequence, more E85 fuel is sold to meet the RFS. E85 accounts for 10 percent of delivered energy consumption by LDVs in 2035, compared with 8 percent in the Reference case. Diesel fuel accounts for 5 percent of LDV delivered energy consumption in 2035, similar to its share in the Reference case. Electricity use by LDVs grows in the CAFE Standards case but still makes up less than 1 percent of LDV delivered energy demand in 2035.

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Reductions in LDV delivered energy consumption reduce GHG emissions from the transportation sector. From 2017 and 2035, cumulative CO₂ emissions from transportation are 357 million metric tons (mmt) lower in the CAFE Standards case compared to the Reference case, a reduction of 5 percent. Transportation GHG emissions decline from 1,876 mmt in 2010 to 1,759 mmt in 2025 and to 1,690 mmt in 2035, reductions of 4 percent and 10 percent from the Reference case, respectively (Figure 26).

5. Impacts of a breakthrough in battery vehicle technology

The transportation sector's dependence on petroleum-based fuels has prompted significant efforts to develop technology and alternative fuel options that address associated economic, environmental, and energy security concerns. Electric drivetrain vehicles, including HEVs, PHEVs, and plug-in electric vehicles (EVs), are particularly well suited to meet those objectives, because they reduce petroleum consumption by improving vehicle fuel economy and, in the case of PHEVs and EVs, substitute electric power for gasoline use (see Table 10 for a descriptive list of electric drivetrain technologies).

AEO2012 includes a High Technology Battery case that examines the potential impacts of significant breakthroughs in battery electric vehicle technology on vehicle sales, energy demand, and CO2 emissions. Breakthroughs may include a dramatic reduction in the cost of battery and nonbattery systems, success in addressing overheating and life-cycle concerns, as well as the introduction of battery-powered electric vehicles in several additional vehicle size classes. A brief summary of the results of the High Technology Battery case follows a discussion of the current market for battery electric vehicles.

Sales of light-duty HEVs, introduced in the United States more than a decade ago, peaked at about 350,000 new sales in 2007 and have maintained a roughly 3-percent share of total LDV sales through 2011. PHEVs were introduced in the United States at the end of 2010 with the production of the Chevy Volt, a PHEV-40 (PHEV with a 40-mile range). Although manufacturer plans call for increased production of PHEVs, sales in the first full year were under 10,000 units [44]. EVs were first introduced in the early 1900s, and manufacturers again made EVs available in the 1990s but with a focus on niche markets. The Nissan Leaf, an EV-100 (EV with a 100-mile range) introduced around the same time as the Chevy Volt, has sparked interest in the wider commercial prospects for EVs; however, sales in 2011 remained below 10,000 units.

The individual decision to purchase a vehicle is influenced by many factors, including style, performance, comfort, environmental values, expected use, refueling capability, and expectations of future fuel prices. In general, one of the single most important factors consumers consider when deciding to purchase a vehicle is cost. Specifically, they generally are more willing to purchase new vehicle technologies, such as battery electric systems, instead of conventional gasoline internal combustion engines (ICEs) if the economic benefit over a period of ownership is greater than the initial price of the vehicle. Additional costs and benefits—such as refueling time or difficulty of refueling, increased or decreased maintenance, and resale value—also may enter into vehicle choice decisions. Further, consumers may be unwilling to spend more to purchase a vehicle, even if it accrues fuel cost savings beyond the initial cost over a relatively short period, because they are unfamiliar with the new technology or alternative fuel.

Battery electric vehicles offer an economic benefit to consumers over conventional gasoline ICEs in terms of significant fuel cost savings from both increased fuel economy for HEVs and PHEVs and the displacement of gasoline with electricity for PHEVs and EVs. Currently available battery electric vehicles such as the Toyota Prius (HEV), Chevy Volt (PHEV), and Nissan Leaf (EV) achieve much higher fuel economy (mpg) and, with the higher efficiency of electric motors, higher gasoline-equivalent mpg in electric mode, providing consumers with lower fueling costs. The Toyota Prius achieves an EPA-estimated 39 to 53 mpg, depending on trim and driving test cycle. The Chevy Volt achieves 35 to 40 mpg in charge-sustaining mode [45] and 93 to 95 mpg equivalent in charge-depleting mode. The Nissan Leaf achieves 99 mpg equivalent. In comparison, the Toyota Corolla, a passenger car generally similar to the Prius, achieves 26 to 34 mpg; the Chevy Cruze, a passenger car in the compact car size class similar to the Volt, achieves 25 to 42 mpg; and the Nissan Versa, a subcompact passenger car similar to the Leaf [46], achieves 24 to 34 mpg.

The inclusion of advanced battery technology that increases fuel economy and, in the case of PHEVs and EVs, displaces gasoline with electricity increases the initial cost of the vehicle to the consumer. The Toyota Prius has a manufacturer's suggested retail price (MSRP) between $24,000 and $29,500 (compared with $16,130 to $17,990 for the Toyota Corolla); the Chevy Volt has an MSRP between $39,145 and $42,085 (compared with $16,800 to $23,190 for the Chevy Cruze); and the Nissan Leaf has an MSRP between $35,200 and $37,250 (compared with $14,480 to $18,490 for the Nissan Versa) [47]. Based on these MSRPs, the current incremental consumer purchase cost of a battery electric vehicle relative to a comparable conventional gasoline vehicle is around $7,000 for an HEV and $20,000 for a PHEV or EV, before accounting for Federal and State tax incentives.

Although consumers may value high-cost battery electric vehicles for a variety of reasons, it is unlikely that they can achieve wide-scale market penetration while their additional purchase costs remain significantly higher than the present value of future fuel savings. Currently, the discounted fuel savings achieved, assuming five years of ownership with future fuel savings discounted at 7 percent, are significantly less than the incremental purchase cost of the vehicles (Table 11). This result is true even if gasoline is $6.00 per gallon. This calculation does not take into account any difference in maintenance cost or refueling infrastructure.

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Recognizing the potential of HEVs, PHEVs, and EVs to reduce U.S. petroleum consumption and save consumers refueling costs, efforts are underway at both the public and private levels to address several of the barriers to wide-scale adoption of battery electric vehicle technology. Paramount among the barriers are reducing the cost of battery electric vehicles by lowering battery and nonbattery system costs and solving battery life-cycle and overheating limitations that will allow battery storage to downsize while maintaining a given driving range. For example, battery and nonbattery systems costs could be reduced by improving the manufacturing process, changing battery chemistry, or improving the electric motor. Solving battery life-cycle and overheating concerns would allow battery capacity to be downsized, which would improve the depth of discharge and make the battery less expensive. In addition, public and private efforts to address other obstacles to wider adoption of plug-in battery vehicles are underway, including the development of public charging infrastructure.

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The AEO2012 High Technology Battery case examines the potential impacts of battery technology breakthroughs by assuming the attainment of program goals established by DOE's Office of Energy Efficiency and Renewable Energy (EERE) for high-energy battery storage cost, maximum depth of discharge, and cost of a nonbattery traction drive system for 2015 and 2030 (Figures 27 and 28) [48]. EERE's program goals represent significant breakthroughs in battery and nonbattery systems, in terms of costs and life-cycle and safety concerns, in comparison with current electric vehicle technologies. Further, with breakthroughs in battery electric vehicle technology, more vehicle size classes are assumed to be available for passenger cars and light-duty trucks.

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Reduced costs for battery and nonbattery systems in the High Technology Battery case lead to significantly lower HEV, PHEV, and EV costs to the consumer (Figures 29 and 30). The Reference case already projects a much lower real price to consumers for battery electric vehicles in 2035 relative to 2010 as a result of cost reductions for battery and nonbattery systems. Those declines are furthered in the High Technology Battery case. The prices of HEVs and PHEVs with a 10-mile range decline by an additional $1,500, or 5 percent, in 2035 in the High Technology Battery case relative to the Reference case. For PHEVs with a 40-mile range the relative decline is $3,500, or 11 percent, in 2035. For EVs with 100-mile (EV100) and 200-mile (EV200) ranges the relative declines are $3,600 and $13,300, or 13 percent and 30 percent, respectively, in 2035 relative to the Reference case.

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Lower vehicle prices lead to greater penetration of battery electric vehicle sales in the High Technology Battery case than projected in the Reference case. Battery electric vehicles, excluding mild hybrids, grow from 3 percent of new LDV sales in 2013 to 24 percent in 2035, compared with 8 percent in 2035 in the Reference case (Figure 31). Due to the still prohibitive incremental cost, EV200 vehicles do not achieve noticeable market penetration.

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Plug-in vehicles, including both PHEVs and EVs, show the largest growth in sales in the High Technology Battery case, resulting from the relatively larger incremental reduction in vehicle costs. Plug-in vehicle sales grow to just over 13 percent of new vehicle sales in 2035, compared with 3 percent in 2035 in the Reference case, with EV sales growing to 8 percent of new LDV sales in 2035, compared with 2 percent in 2035 in the Reference case. Virtually all sales of plug-in vehicles are EVs with a 100-mile range, given the prohibitive cost, even in 2035, of batteries for EVs with a 200-mile range. PHEVs grow to just under 6 percent of total sales, compared with 2 percent in 2035 in the Reference case. Most PHEV sales are vehicles with a 10-mile all-electric range.

Although plug-in vehicle sales increase substantially in the High Technology Battery case, that growth is tempered by the lack of widespread high-speed recharging infrastructure. In the absence of such public infrastructure, consumers must rely almost entirely on recharging at home. According to data from the 2009 Residential Energy Consumption Survey, 49 percent of households that own vehicles park within 20 feet of an electrical outlet [49]. A widespread publicly available infrastructure was not considered as part of the High Technology Battery case, which limits the maximum market potential of PHEVs and EVs.

HEV sales, including an ICE powered by either diesel fuel or gasoline, increase in the High Technology Battery case from 3 percent of sales in 2013 to 11 percent in 2035, compared with 5 percent in 2035 in the Reference case. Although the cost declines for HEVs are modest relative to those for other battery electric vehicle types, HEVs benefit from being unconstrained by the lack of recharging infrastructure.

Increased sales of battery electric vehicles in the High Technology Battery case lead to their gradual penetration throughout the LDV fleet. In 2035, HEVs represent 9 percent of the 276 million LDV stock, as compared with 4 percent in the Reference case. EVs and PHEVs each account for about 5 percent of the LDV stock in the High Technology Battery case in 2035, compared with 1 percent each in the Reference case.

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The penetration of battery electric vehicles with relatively higher fuel economy and efficient electric motors reduces total energy use by LDVs from 15.6 quadrillion Btu in 2013 to 14.8 quadrillion Btu in 2035 in the High Technology Battery case, compared with 15.5 quadrillion Btu in 2035 in the Reference case (Figure 32). LDV liquid fuel use declines to 14.6 quadrillion Btu in 2035 in the High Technology Battery case, and their electricity use increases to 0.2 quadrillion Btu—as compared with 15.4 quadrillion Btu of liquid fuel consumption and essentially no electricity consumption in 2035 in the Reference case. The reduction in liquid fuel consumption in the High Technology Battery case lowers U.S. net imports of petroleum from 8.5 million barrels per day in 2013 to 6.9 million barrels per day in 2035, compared with 7.2 million barrels per day in 2035 in the Reference case.

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The reduction in total energy consumption by LDVs and displacement of petroleum and other liquid fuels with electricity decreases LDV energy-related CO₂-equivalent emissions from 1,030 million metric tons in 2013 to 935 million metric tons in 2035 in the High Technology Battery case, which represents a 2-percent decrease from 958 million metric tons in 2035 in the Reference case (Figure 33). CO₂ and other GHG emissions from the electric power consumed by PHEVs and EVs is treated as representative of the national electricity grid and not regionalized. Ultimately, the CO₂ and other GHG emissions of plug-in vehicles will depend on the fuel used in generating electricity.

The High Technology Battery case assumes a breakthrough in the costs of batteries and nonbattery systems for battery electric vehicles. Yet, despite the assumed dramatic decline in battery and nonbattery system costs, battery electric vehicles still face obstacles to wide-scale market penetration.

First, prices for battery electric vehicles remain above those for conventional gasoline counterparts, even with the assumption of technology breakthroughs throughout the projection period. The decline in sales prices relative to those for conventional vehicles may be enough to justify purchases by consumers who drive more frequently, consider relatively longer payback periods, or would purchase a more expensive but environmentally cleaner vehicle for a moderate additional cost. However, relatively more expensive battery electric vehicles may not pay back the higher purchase cost over the ownership period for a significant population of consumers.

In addition, EVs face the added constraint of plug-in infrastructure availability. Currently, there are about 8,000 public locations in the United States with at least one outlet for vehicle recharging, about 2,000 of which are in California [50]. In comparison, there are some 150,000 gasoline refueling stations available for public use. Without the construction of a much larger recharging network, consumers will have to rely on residential recharging, which is available for only around 40 percent of U.S. dwellings.

Further, recharging times differ dramatically depending on the voltage of the outlet. Typical 120-volt outlets can take up to 20 hours for a full EV battery to recharge; a 240-volt outlet can reduce the recharging time to about 7 hours [51]. Quick-recharging 480-volt outlets are under consideration for 30-minute "ultra-quick" recharges, but they may raise concerns related to safety and residential or commercial building codes. Even with ultra-quick recharging, EVs still would require substantially longer times for refueling than are required for ICE vehicles using liquid fuels. Given the concerns about availability and duration of recharging, the obstacle of severe range limitation, which does not affect PHEVs or HEVs, may inhibit the adoption of EVs by consumers.

Finally, another obstacle to wide-scale adoption of battery electric vehicles and other types of alternative-fuel vehicles is the increase in fuel economy for conventional gasoline vehicles and other types of AFVs resulting from higher fuel economy standards for LDVs. Final standards for LDV fuel economy currently are in place through MY 2016, and new CAFE standards proposed for MY 2017 through MY 2025 would increase combined LDV fuel economy to 49.6 mpg (56.0 mpg for passenger cars and 40.3 mpg for light-duty trucks) [52]. While the standards themselves may promote the adoption of battery electric vehicles, they also could considerably change the economic payback of electric drivetrain vehicles by decreasing consumer refueling costs for conventional vehicles, thus lowering the fuel savings of electric drivetrain vehicles and making the upfront incremental cost more prohibitive. The potential impact of CAFE standards on other vehicle attributes, costs, and fuel savings adds to the complexity of this dynamic.

6. Heavy-duty natural gas vehicles

Environmental and energy security concerns, together with recent optimism about natural gas supply and recent lower natural gas prices, have led to significant interest in the potential for fueling heavy-duty vehicles (HDVs) with natural gas produced domestically. Key market uncertainties with regard to natural gas as a fuel for HDVs include fuel and infrastructure issues (such as the build-out process for refueling stations and whether there will be sufficient demand for refueling to cover the required capital outlays, and retail pricing and taxes for liquefied natural gas [LNG] and compressed natural gas [CNG] fuels); and vehicle issues (including incremental costs for HDVs fueled by natural gas, availability of fueling infrastructure, cost-effectiveness in view of average vehicle usage, vehicle residual value, vehicle weight, and vehicle refueling time).

Current state of the market

At present, HDVs in the United States are fueled almost exclusively by petroleum-based diesel fuel [53]. In 2010, use of petroleum-based diesel fuel by HDVs accounted for 17 percent (2.2 million barrels per day) of total petroleum consumption in the transportation sector (12.8 million barrels per day) and 12 percent of the U.S. total for all sectors (18.3 million barrels per day). Consumption of petroleum-based diesel fuel by HDVs increases to 2.3 million barrels per day in 2035 in the AEO2012 Reference case, accounting for 19 percent of total petroleum consumption in the transportation sector (12.1 million barrels per day) and 14 percent of the U.S. total for all sectors (17.2 million barrels per day).

Historically, natural gas has played a negligible role as a highway transportation fuel in the United States. In 2010, there were fewer than 40,000 total natural gas HDVs on the road, or 0.4 percent of the total HDV stock of nearly 9 million vehicles. Sales of new HDVs fueled by natural gas peaked at about 8,000 in 2003, and fewer than 1,000 were sold in 2010 out of a total of more 360,000 HDVs sold. With relatively few vehicles on the road, natural gas accounted for 0.3 percent of total energy used by HDVs in 2010.

As of May 2012, there were 1,047 CNG fueling stations and 53 LNG fueling stations in the United States, with 53 percent of the CNG stations and 57 percent of the LNG stations being privately owned and not open to the public [54]. Further, the stations were not evenly distributed across the United States, with 22 percent (227) of the CNG stations and 68 percent (36) of the LNG stations located in California. In comparison, nationwide, there were more than 157,000 stations selling motor gasoline in 2010 [55].

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Developments in natural gas and petroleum markets in recent years have led to significant price disparities between the two fuels and sparked renewed interest in natural gas as a transportation fuel. Led by technological breakthroughs in the production of natural gas from shale formations, domestic production of dry natural gas increased by about 14 percent from 2008 to 2011. In the AEO2012 Reference case, U.S. natural gas production (including supplemental gas) increases from 21.6 trillion cubic feet in 2010 to 28.0 trillion cubic feet in 2035. Further, although the world market for oil and petroleum products is highly integrated, with prices set in the global marketplace, natural gas markets are less integrated, with significant price differences across regions of the world. With the recent growth in U.S. natural gas production, domestic natural gas prices in 2012 are significantly lower than crude oil prices on an energy-equivalent basis (Figure 34).

Fuel and infrastructure issues

Even when it appears that an emerging technology can be profitable with significant market penetration, achieving significant penetration can be difficult and, potentially, unattainable. Refueling stations for NGVs are unlikely to be built without some assurance that there will be sufficient numbers of NGVs to be refueled, soon enough to allow for recovery of the capital investment within a reasonable period of time. In terms of estimating the prices that will be charged for NGV fuels beyond the cost of the dry natural gas itself, and the issue of expected utilization rates, there are additional uncertainties related to capital and operating costs, taxes, and the potential of prices being set on the basis of the prices of competing fuels.

Basic fuel issues

Diesel fuel falls into the category of distillate fuels, which have constituted more than 25 percent of U.S. refinery output in recent years. The cost of diesel fuel is linked closely to the value of crude oil inputs for the refining process. In 2011, the spot price of Gulf Coast ultra-low sulfur diesel fuel averaged $2.97 per gallon. The wholesale diesel price reflects crude oil costs, as well as the difference between the wholesale price at the refinery gate and the cost of crude oil input, commonly referred to as the "crack spread," which reflects the costs and profits of refineries.

Beyond the wholesale price, the pump price of diesel fuel reflects distribution costs, Federal, State, and local fuel taxes, retailing costs, and profits. For diesel fuel, with an average energy content of 138,690 Btu per gallon, the 2011 national average retail price of $3.84 per gallon is equivalent to about $27.80 per million Btu.

Although early models of NGVs sometimes were less fuel-efficient than comparable diesel-fueled vehicles, current technologies allow for natural gas to be used as efficiently as diesel in HDV applications. Therefore, comparisons between natural gas and diesel fueling costs can be based on the price of energy-equivalent volumes of fuel. For this analysis, the cost and price of natural gas fuels are expressed in terms of diesel gallon equivalent (dge). For example, with an energy content of approximately 84,820 Btu per gallon, 1 gallon of LNG is equivalent in energy terms to 0.612 gallons of diesel fuel.

Fuel costs for LNG and CNG vehicles depend on the cost of natural gas used to produce the fuels, the cost of the liquefaction or compression process (including profits), the cost of moving fuel from production to refueling sites (if applicable), taxes, and retailing costs. Costs can vary with the scale of operations, but the significant disparity between current natural gas and crude oil prices suggests that the cost of CNG and LNG fuels in dge terms could be significantly below the price of diesel fuel.

There are different wholesale natural gas prices and capital costs associated with CNG and LNG stations. CNG retail stations, which typically have connections to the pipeline distribution network and thus require compression equipment and special refueling pumps, are likely to pay prices for natural gas that are similar to those paid by commercial facilities. For LNG stations, insulated LNG storage tanks and special refueling pumps are needed. LNG typically would be delivered from a liquefaction facility that, depending on its scale, would pay a natural gas price similar to the prices paid by electric power plants. The costs of liquefying and transporting the fuel to the retail station would ultimately be included in the retail price.

In a competitive market, retail fuel prices should reflect costs, including input, processing, distribution, and retailing costs, normal profit margins for processors, distributors, and retailers, and taxes. For example, the market for diesel fuel, which is produced by a large number of foreign and domestic refiners and is sold through numerous distributors and retail outlets, generally is considered to be a competitive market, in which retail prices follow costs.

CNG and LNG markets, at least in their initial stages, may not be as competitive as diesel fuel markets. For example, at public refueling stations, LNG and CNG currently sell at prices significantly higher than would be suggested by a long-term analysis of cost-based pricing. According to DOE's April 2012 "Clean Cities Alternative Fuel Price Report," the average nationwide nominal retail price for LNG was $3.05 per dge, and the average for CNG was $2.32 per dge [56].

If the use of LNG and/or CNG to fuel HDVs starts to grow, it is likely to take some time before fuel production and refueling infrastructure become sufficiently widespread for competition among fuel providers alone to assure that fuel prices are more closely linked to cost-based levels. However, even without many fuel providers, operators of an LNG and/or CNG vehicle fleet may be in a position to negotiate cost-based fuel prices with refueling station operators seeking to lock in demand for their initial investments in refueling infrastructure. Such arrangements provide an alternative to reliance on centrally fueled fleets as a means of circumventing the problem of how to introduce NGVs and natural gas refueling infrastructures concurrently.

Build-out process for refueling stations

It is not clear how NGVs and an expanded natural gas refueling infrastructure ultimately will evolve. One view is that a "hub-and-spoke" model for refueling infrastructure will expand sufficiently in multiple areas for a point-to-point system to take hold eventually. The "hubs" in the model would include the local refueling infrastructure, currently in place primarily to support local fleets. The "spokes" would ensure that refueling infrastructure is in place on the main transportation corridors connecting the hubs.

Several regional efforts are in place to encourage such "hub-and-spoke" growth for NGV refueling facilities. They include the Texas Clean Transportation Triangle [57], a strategic plan for CNG and LNG refueling stations between Dallas, San Antonio, and Houston; and the Interstate Clean Transportation Corridor [58], which aims to provide LNG fueling stations between such major western cities as Los Angeles, Las Vegas, Phoenix, Reno, Salt Lake City, and San Francisco. There also is a plan for a Pennsylvania Clean Transportation Corridor [59], which would provide CNG and LNG fueling stations between Pittsburgh, Harrisburg, Scranton, and Philadelphia.

In several corridors, Federal and State incentives are subsidizing both the construction of refueling stations and the production of heavy-duty LNG vehicles [60], in an effort to ensure that both demand and supply will be in place concurrently. A major question is whether gaps between isolated targeted markets can be bridged to provide a nationwide refueling structure that will allow heavy-duty NGVs to travel almost anywhere.

Sufficiency of demand for refueling to cover capital outlay

The cost of providing refueling services for NGVs depends on a number of factors and is distinctly different for CNG and LNG vehicles. Investment decisions are likely to be based on levels of demand. NGV refueling capability can be added at an existing facility or at a separate dedicated facility (which would require an additional investment). The costs depend in part on the number of fueling hoses added. LNG stations in particular benefit from higher volumes, but they also require significant additional land to accommodate storage tank(s), and they must satisfy special safety requirements —both of which add costs that can vary significantly from place to place. One added cost in operating an LNG station is the need for safety suits and specialized training for station attendants who dispense the fuel.

LNG typically is delivered to refueling stations via tanker truck from a separate liquefaction facility, the proximity of which is a major factor in the cost and frequency of deliveries. Any significant expansion of LNG refueling capacity also will require expanded liquefaction capacity, which currently is not sufficiently dispersed throughout the country to support a nationwide LNG refueling infrastructure. Although there are several dedicated large-scale natural gas liquefaction facilities in the United States, primarily in the West, there are smaller liquefaction plants and LNG storage tanks currently in use for meeting peakshaving needs of utilities and pipelines during times of high demand. There are more than 100 such facilities in the United States, with a combined liquefaction capacity of more than 6 billion cubic feet per day. The majority are concentrated in the Northeast and Southeast [61].

Retail prices and taxes for LNG and CNG fuels

Even if the costs are fully known, retail prices for CNG and LNG transportation fuels remain uncertain, given questions about whether dispensers would charge higher prices in order to recover costs more rapidly if the facility were underutilized or would set prices to be competitive with the price of diesel. Prices charged at private stations for fleet vehicles presumably would be based on cost. With the number of refueling stations limited, competition between retailers is likely to be limited, at least initially. However, NGV refueling stations presumably would want to provide sufficient economic incentive in terms of the competitiveness of fuel prices to encourage more purchases of NGVs. NGV fuel is taxed at State and Federal levels. Currently, on a Federal level, CNG is taxed at the same rate as gasoline on an energy-equivalent basis ($0.18 per gasoline gallon equivalent, or $0.21 per dge). However, LNG is taxed at a higher effective rate than diesel fuel, because it is taxed volumetrically at $0.24 per LNG gallon equivalent ($0.40 per dge) rather than on the basis of energy content [62]. State taxes vary, averaging $0.15 per dge for CNG and $0.24 per dge for LNG.

Vehicle Issues

Incremental vehicle cost

NGVs have significant incremental costs relative to their diesel-powered counterparts because of the need for pressurization and insulation of CNG or LNG tanks and the lower energy content of natural gas as a fuel. Total incremental costs relative to diesel HDVs range from about $9,750 to $36,000 for Class 3 trucks (GVWR 10,001 to 14,000 pounds), $34,150 to $69,250 for Class 4 to 6 trucks (GVWR 14,001 to 26,000 pounds), and $49,000 to $86,125 for Class 7 and 8 trucks (GVWR greater than 26,001 pounds). The incremental costs of heavy-duty NGVs depend in large part on the volume of the vehicle's CNG or LNG storage tank, which can be sized to match its typical daily driving range. Non-storage-tank incremental costs average about $2,000 for Class 3 vehicles, $20,000 for Class 4 to 6 vehicles, and $30,000 for Class 7 to 8 vehicles [63]. Fuel storage costs are about $350 per gallon diesel equivalent for CNG, with the incremental cost for Class 3 CNG vehicle storage tanks ranging between about $8,000 and $30,000; and about $475 per gallon diesel equivalent for LNG, with the incremental cost for Class 4 to 8 LNG vehicle storage tanks ranging between about $14,000 and $52,000. Natural gas fuel storage technology is relatively mature, leaving only modest opportunity for cost reductions.

Availability of fueling infrastructure

The absence of widespread public refueling infrastructure can impose a serious constraint on heavy-duty NGV purchases. Owners who typically refuel vehicles at a private central location do not face an absolute constraint based on infrastructure, however, and heavy-duty NGVs currently in operation have tended to be purchased by fleet operators who refuel consistently at a specific central location or in areas where their vehicles routinely operate on dedicated routes.

Cost-effectiveness with average vehicle usage

In order to take advantage of potential fuel cost savings from switching to NGVs, owners must operate the vehicles enough to pay back the higher incremental cost in a reasonable period of time. The payback period varies with miles driven and is shorter for trucks that are used more intensively. Payback periods for the upfront incremental costs of NGVs are greater than 5 years for Class 3 vehicles unless they are driven at least 20,000 to 40,000 miles per year, and for Class 7 and 8 vehicles unless they are driven at least 60,000 to 80,000 miles per year. Shorter payback periods, 3 years or less, may reflect typical owner expectations more accurately [64], but they require much more intensive use: around 60,000 to 80,000 miles annually for Class 3 vehicles and more than 100,000 miles annually for Class 7 and 8 vehicles. For example, for a Class 7 or 8 compression ignition NGV with average fuel economy of 6 miles per gallon (which has a similar fuel economy compared to a diesel counterpart) and an incremental cost of $80,000, the payback period would be just over 3 years if the vehicle were driven 100,000 miles per year, assuming a diesel fuel price of $4.00 per gallon and an LNG fuel price of $2.50 per gallon. If the same Class 7 or 8 vehicle were driven 40,000 miles per year, the payback period would be about 8 years. Further, without a widely available infrastructure, heavy-duty NGVs tend to be considered by centrally refueled fleets, which may have less mileage-intensive vehicle use.

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According to the Department of Transportation's Vehicle Inventory and Use Survey [65], last completed in 2002, a large segment of the HDV market simply does not drive enough to justify the purchase of an NGV (Figure 35). Around 30 percent of Class 3 vehicles and 75 percent of Class 7 and 8 vehicles are not driven enough to reach the 5-year payback threshold mentioned above. This is a significant portion of the market that would require either more favorable fuel economics or lower vehicle costs before the purchase of an NGV could be justified.

Other market uncertainties

Other factors may also affect market acceptance of heavy-duty NGVs. First, the purchase decision could be affected by the considerable additional weight of CNG or LNG tanks. For owners who typically "weight-out" a vehicle (driving with a full payload), adding heavy CNG or LNG tanks necessitates a reduction in freight payload. The EPA and NHTSA have estimated that about onethird of Class 8 sleeper tractors routinely are "weighted-out" [66].

A diesel tractor with 200 gallons of tank capacity and a fuel economy of 6 miles per gallon can drive 1,200 miles on a single refueling. The same tractor would need up to 110 dge of LNG tank capacity, at a considerable weight penalty and an incremental cost of more than $80,000, to allow for a range of about 650 miles on a single refueling. Because owner/operators typically stop several times per day, the reduction in unrefueled maximum range would not require additional breaks for vehicles with large CNG or LNG tanks. However, CNG and LNG vehicles that do not opt for large tanks because of either weight or incremental cost considerations might have to refuel more frequently.

Finally, the owner perception of the balance of risk and reward for large capital investment is an uncertainty. Higher upfront capital costs can prove economically prohibitive for some potential owners. Even if the payback period for an investment in natural gas vehicles seemed acceptable, financing constraints or returns available on competing investment options could preclude the purchase. Additionally, the residual value of natural gas HDVs could, in theory, affect market uptake. With little natural gas refueling infrastructure in existence, the potential resale market is constrained to owners of centrally operated fleets. However, lease terms tend to limit the importance of this factor.

The complex set of factors influencing the potential for natural gas as a fuel for HDVs includes several areas for which policy mechanisms have been discussed. Most policy debates to date have considered the possibility of subsidies to reduce the incremental cost of natural gas vehicles (for example, in Senate and House versions of the New Alternative Transportation to Give Americans Solutions Act [67]) and Federal grant-based or other financial support for fueling station infrastructure. In addition, market hurdles related to consumer acceptance or payback periods might also be addressed through loan guarantees or related financial support policies, both for the vehicles and for the refueling infrastructure.

HD NGV Potential case results

The AEO2012 HD NGV Potential case examines issues associated with expanded use of heavy-duty NGVs, under an assumption that the refueling infrastructure exists to support such an expansion. The HD NGV Potential case differs from an earlier sensitivity case completed as part of the Annual Energy Outlook 2010, which focused on possible subsidies to expand the market potential for heavy-duty NGVs and limited its attention to vehicles operating within 200 miles of a central CNG refueling facility.

The AEO2012 HD NGV Potential case permits expansion of the HDV market to allow a gradual increase in the share of HDV owners who would consider purchasing an NGV if justified by the fuel economics over a payback distribution with a weighted average of 3 years. The gradual increase in the maximum natural gas market share reflects the fact that a national natural gas refueling program would require time to build out. The natural gas refueling infrastructure is expanded in the HD NGV Potential case simply by assumption; it is not clear how (or whether) specific barriers to natural gas refueling infrastructure investment can be overcome.

Incremental costs for NGVs in the HD NGV Potential case differ from those in the Reference case. In the HD NGV Potential case, incremental costs are determined by assuming a set cost for CNG or LNG engines plus a CNG or LNG tank cost based on the average amount of daily travel and vehicle size class. The HD NGV Potential case includes separate delivered CNG and LNG fuel prices for fleet and nonfleet operators. Added per-unit charges to recover infrastructure are set and held constant in real terms throughout the projection period, based on the assumptions that refueling stations would be utilized at a sufficiently high rate to warrant the capital investment, and that the prices charged for the fuel would be cost-based (i.e., station operators would not set prices on the basis of prices for competing fuels). Motor fuels taxes are assumed to remain at their current levels in nominal terms, maintaining the higher energy-equivalent tax on LNG relative to diesel fuel.

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In defining CNG and LNG prices for the HD NGV Potential case, EIA examined current motor fuel taxes and any charges added to the commodity price of dry natural gas sold at private central refueling stations (fleets) and at retail stations where actual data were available. Accordingly, an HDV Reference case was developed from the AEO2012 Reference case, by including the updated fleet and retail CNG and LNG prices, to provide a consistent basis for comparison with the HD NGV Potential case (Figure 36). The HDV Reference case assumes that Class 3 through 6 vehicles use CNG, obtained from either fleet operators (using fleet prices) or nonfleet operators (using retail prices), and that Class 7 and 8 vehicles, both fleet and nonfleet, use LNG.

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Sales of heavy-duty NGVs rise dramatically in the HD NGV Potential case, based on the national availability of refueling infrastructure and expanded market potential (Figure 37). Sales of new heavy-duty NGVs increase from 860 in 2010 (0.2 percent of total new HDV sales) to about 275,000 in 2035 (34 percent of total new vehicle sales), as compared with 26,000 in the HDV Reference case (3 percent of total new HDV sales). New heavy-duty NGVs gradually claim a more significant share of the vehicle stock, from 0.4 percent in 2010 to 21.8 percent (2,750,000 vehicles) in 2035, as compared with 2.4 percent (300,000 vehicles) in 2035 in the HDV Reference case.

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As a result of the large projected increase in sales of new heavy-duty NGVs, natural gas demand in the HDV sector rises from about 0.01 trillion cubic feet in 2010 to 1.8 trillion cubic feet in 2035 in the HD NGV Potential case, as compared with 0.1 trillion cubic feet in the HDV Reference case (Figure 38). The natural gas share of total energy use by HDVs grows from 0.2 percent in 2010 to 32 percent in 2035 in the HD NGV Potential case, compared with 1.6 percent in the HDV Reference case.

Roughly speaking, about 1 trillion cubic feet of natural gas consumed per year replaces 0.5 million barrels per day of petroleum and other liquids. Thus, natural gas consumption by HDVs in the HD NGV Potential case displaces about 850,000 barrels per day of petroleum and other liquids consumption in 2035 (Figure 39). Without a major impact on world oil prices, which is not expected to result from the gradual but significant adoption of natural gas as a fuel for U.S. HDVs, nearly all the reduction in petroleum and other liquids use by U.S. HDVs would be reflected by a decline in imports.

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In the HD NGV Potential case, projected total U.S. natural gas consumption in 2035 is 1.4 trillion cubic feet (5 percent) higher than in the Reference case, as the increase in natural gas use by vehicles is partially offset by lower consumption in other sectors, in response to higher natural gas prices (Figure 40). The electric power and industrial sectors account for the bulk of the consumption offsets, as their 2035 natural gas use is, respectively, 0.3 trillion cubic feet (3.1 percent) and 0.2 trillion cubic feet (2.7 percent) lower than in the Reference case.

In 2035, U.S. domestic natural gas production in the HD NGV Potential case is 1.1 trillion cubic feet (3.9 percent) higher than in the HDV Reference case. The higher level of natural gas production needed to support the growth in HDV fuel use results in a 10-percent increase in natural gas prices—$0.76 per million Btu (2010 dollars)—at the Henry Hub in 2035 in comparison with the HDV Reference case. Percentage increases in delivered natural gas prices to other sectors, which include transmission and distribution costs that are not affected by higher prices to producers, are smaller, with delivered natural gas prices increasing by 4.9 percent in the residential sector, 5.9 percent in the commercial sector, 8.9 percent in the industrial sector, and 7.9 percent in the electricity generation sector in comparison with the HDV Reference case in 2035.

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Transportation from Legislation and Regulations

Introduction

The Annual Energy Outlook 2012 (AEO2012) generally represents current Federal and State legislation and final implementation regulations available as of the end of December 2011. The AEO2012 Reference case assumes that current laws and regulations affecting the energy sector are largely unchanged throughout the projection period (including the implication that laws that include sunset dates do, in fact, become ineffective at the time of those sunset dates) [5]. The potential impacts of proposed legislation, regulations, or standards-or of sections of legislation that have been enacted but require funds or implementing regulations that have not been provided or specified—are not reflected in the AEO2012 Reference case, but some are considered in alternative cases. This section summarizes Federal and State legislation and regulations newly incorporated or updated in AEO2012 since the completion of the Annual Energy Outlook 2011.

Examples of recently enacted Federal and State legislation and regulations incorporated in the AEO2012 Reference case include:

• New greenhouse gas (GHG) emissions and fuel consumption standards for medium- and heavy-duty engines and vehicles, published by the U.S. Environmental Protection Agency (EPA) and the National Highway Transportation Safety Administration (NHTSA) in September 2011 [6]
• The Cross-State Air Pollution Rule (CSAPR), as finalized by the EPA in July 2011 [7]
• Mercury and Air Toxics Standards (MATS) rule, issued by the EPA in December 2011 [8].

There are many other pieces of legislation and regulation that appear to have some probability of being enacted in the not-toodistant future, and some laws include sunset provisions that may be extended. However, it is difficult to discern the exact forms that the final provisions of pending legislation or regulations will take, and sunset provisions may or may not be extended. Even in situations where existing legislation contains provisions to allow revision of implementing regulations, those provisions may not be exercised consistently. Many pending provisions are examined in alternative cases included in AEO2012 or in other analyses completed by the U.S. Energy Information Administration (EIA). In addition, at the request of the Administration and Congress, EIA has regularly examined the potential implications of proposed legislation in Service Reports. Those reports can be found on the EIA website at www.eia.gov/oiaf/service_rpts.htm.

1. Greenhouse gas emissions and fuel consumption standards for heavy-duty vehicles, model years 2014 through 2018

On September 15, 2011, the EPA and NHTSA jointly announced a final rule, called the HD National Program [9], which for the first time established GHG emissions and fuel consumption standards for on-road heavy-duty trucks with a gross vehicle weight rating (GVWR) above 8,500 pounds (Classes 2b through 8) [10] and their engines. The AEO2012 Reference case incorporates the new standards for heavy-duty vehicles (HDVs)

Due to the tremendous diversity of HDV uses, designs, and power requirements, the HD National Program separates GHG and fuel consumption standards into discrete vehicle categories within combination tractors, vocational vehicles, and heavy-duty pickups and vans (Table 1). Further, the rule recognizes that reducing GHG emissions and fuel consumption will require changes to both the engine and the body of a vehicle (to reduce the amount of work demanded by an engine). The final rule sets separate standards for the different engines used in combination tractors and vocational vehicles. AEO2012 represents standard compliance among HDV regulatory classifications that represent the discrete vehicle categories set forth in the rule.

The HD National Program standards begin for model year (MY) 2014 vehicles and engines and are fully phased in by MY 2018. The EPA, under authority granted by the Clean Air Act, has issued GHG emissions standards that begin with MY 2014 for all engine and body categories. NHTSA, operating under regulatory timelines mandated by the Energy Independence and Security Act [11], set voluntary fuel consumption standards for MY 2014 and 2015, with the standards becoming mandatory for MY 2016 and beyond, except for diesel engine standards, which become mandatory for MY 2017 and beyond. Standards reach the most stringent levels for combination tractors and vocational vehicles in MY 2017, with subsequent standards then holding constant. Heavy-duty pickup and van standards are required to reach the highest level of stringency in MY 2018. AEO2012 includes the HD Table 1.

National Program standards beginning in MY 2014 as set by the GHG emissions portion of the rule, with standards represented by vehicle, including both the chassis and engine. AEO2012 assumes that vehicle chassis and engine manufacturers comply with the voluntary portion of the rule covering the fuel consumption standard. AEO2012 does not model the chassis and engine standards separately but allows the use of technologies to meet the HD National Program combined engine and chassis standards.

Although they are not modeled separately in AEO2012, GHG emission and fuel consumption standards for combination tractors are set for the tractor cabs and the engines used in those cabs separately in the HD National Program. Combination tractor cab standards are subdivided by GVWR (Class 7 or 8), cab type (day or sleeper), and roof type (low, mid, or high). Combination tractor engine standards are subdivided into medium heavy-duty diesel (for use in Class 7 tractors) and heavy heavy-duty diesel (for use in Class 8 tractors) (Table 2). Each tractor cab and engine combination is required to meet the GHG and fuel consumption standards for a given model year, unless they are made up by credits or other program fexibilities.

Again, although they are not modeled separately in AEO2012, GHG emission and fuel consumption standards for vocational vehicles are set separately in the HD National Program for the vehicle chassis and the engines used in the chassis. Vocational vehicle chassis standards are subdivided in the rule by GVWR (Classes 2b to 5, Classes 6 and 7, and Class 8). Vocational vehicle engine standards are subdivided into light heavy-duty diesel (for use in Classes 2b through 5), medium heavy-duty diesel (for use in Classes 6 and 7), heavy heavy-duty diesel (for use in Class 8), and spark-ignited (primarily gasoline) engines (for use in all classes) (Table 3). Each vocational vehicle chassis and engine combination is required to meet the GHG and fuel consumption standard for a given model year, unless made up by credits or other program fexibilities.

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Standards for heavy-duty pickups and vans are based on the "work factor" —a weighted average of the vehicle's payload and towing capacity, adjusted for four-wheel drive capability. The standards for heavy-duty pickups and vans are different for diesel and gasoline engines (Figures 7 and 8). They differ from the standards for combination tractors and vocational vehicles in that they apply to the vehicle fleet average for each manufacturer for a given model year, based on a production volume-weighted target for each model, with targets differing by work factor attribute.

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The final rulemaking exempts small manufacturers of heavy-duty engines, combination tractor cabs, or vocational vehicle chassis from the GHG emissions and fuel consumption standards. Fuel consumption and GHG emissions for alternative-fuel vehicles, such as compressed natural gas vehicles, will be calculated according to their tailpipe emissions. Finally, the rulemaking contains four provisions designed to give manufacturers fexibility in meeting the GHG and fuel consumption standards. Both the EPA and NHTSA will allow for early compliance credits in MY 2013; manufacturer averaging, banking, and trading; advanced technology credits; and innovative technology credits. Those flexibility provisions are not included in the AEO2012 Reference case.