Financing the Infrastructure to Support Alternative Fuel Vehicles: How Much Investment is Needed and How Will It Be Funded? Prepared by: Ellen Hughes-Cromwick Joshua Cregger Director and Chief Economist Project Manager Corporate Economics and Strategic Issues Center for Automotive Research Ford Motor Company 3005 Boardwalk, Suite 200 One American Road Ann Arbor, MI 48108 Dearborn, MI 48126 April 9, 2013 All statements, findings, and conclusions in this report are those of the authors and do not necessarily reflect those of the Global Interdependence Center, Ford Motor Company, or the Center for Automotive Research. TABLE OF CONTENTS Acknowledgements ......................................................................................................................... iv ABSTRACT ........................................................................................................................................ 1 INTRODUCTION ............................................................................................................................... 3 ALTERNATIVE FUELS ........................................................................................................................ 7 GASOLINE ....................................................................................................................................... 8 DIESEL ........................................................................................................................................... 8 NATURAL GAS ................................................................................................................................. 9 Compressed Natural Gas ........................................................................................................ 9 Liquefied Natural Gas ............................................................................................................. 9 ELECTRICITY .................................................................................................................................. 10 HYDROGEN ................................................................................................................................... 11 Combustion of Hydrogen ...................................................................................................... 11 Hydrogen Fuel Cells ............................................................................................................... 11 BIOFUELS ...................................................................................................................................... 12 Ethanol .................................................................................................................................. 12 Biodiesel ................................................................................................................................ 13 Drop-in Biofuels ..................................................................................................................... 13 COMPARISON OF FUELS ................................................................................................................... 13 CASE STUDIES ................................................................................................................................ 15 BIOFUELS GROWTH IN BRAZIL ........................................................................................................... 15 The Proalcool ......................................................................................................................... 15 Fall of the Ethanol Car and the Rise of Flex-Fuel Vehicles .................................................... 16 Fuel Blending ......................................................................................................................... 16 Infrastructure Financing ........................................................................................................ 17 Vehicles ................................................................................................................................. 17 Lessons Learned .................................................................................................................... 18 DIESEL ADOPTION IN EUROPE ........................................................................................................... 18 RENEWABLE ENERGY DEVELOPMENT IN GERMANY ............................................................................... 21 Feed-in Tariff ......................................................................................................................... 22 Other Financing Options for Renewable Energy ................................................................... 23 EXISTING INFRASTRUCTURE INVESTMENTS IN SELECTED COUNTRIES ........................................ 25 BRAZIL ......................................................................................................................................... 25 i CHINA .......................................................................................................................................... 26 EUROPEAN UNION ......................................................................................................................... 26 UNITED STATES .............................................................................................................................. 27 AFV Policies ........................................................................................................................... 28 Funding of Infrastructure ...................................................................................................... 30 CALIFORNIA .................................................................................................................................. 30 AFV Policies ........................................................................................................................... 31 FUTURE INFRASTRUCTURE INVESTMENT ..................................................................................... 33 CLEAN FUELS OUTLET REGULATION ................................................................................................... 33 REQUIRED INFRASTRUCTURE ............................................................................................................. 34 COMPARISON OF INFRASTRUCTURE COSTS TO OTHER ESTIMATES ............................................................ 37 INFRASTRUCTURE ESTIMATES BY COUNTRY .......................................................................................... 39 GAP BETWEEN CURRENT INVESTMENT AND 2030 INVESTMENT .............................................................. 42 FINANCING MODELS TO SUPPORT INFRASTRUCTURE INVESTMENT ........................................... 45 PUBLIC SUPPORT ............................................................................................................................ 46 Direct Government Expenditures .......................................................................................... 46 Municipal Bonds .................................................................................................................... 47 Subsidies ................................................................................................................................ 47 Regulatory Policies ................................................................................................................ 48 INFRASTRUCTURE DEVELOPMENT BANKS ............................................................................................ 49 PUBLIC-PRIVATE PARTNERSHIPS ........................................................................................................ 50 Collateralized Loans .............................................................................................................. 51 Cost-Share Grants ................................................................................................................. 51 PRIVATE FINANCING ....................................................................................................................... 52 Surcharges and User Fees to Recoup Investment Outlays .................................................... 52 Green Bonds .......................................................................................................................... 53 FUNDING THE INFRASTRUCTURE OF THE FUTURE................................................................................... 53 Conclusions ................................................................................................................................... 55 REFERENCES .................................................................................................................................. 57 APPENBDIX A: ABBREVIATIONS .................................................................................................... 67 APPENDIX B: COMPARISON OF GHG EMISSIONS FROM AFVS ..................................................... 68 APPENDIX C: CALIFORNIA CLEAN FUELS OUTLET REGULATION ................................................... 69 ii List of Figures Figure 1: Fuel Economy Standards for Select Countries, MPG, 2000-2025 .................................................. 3 Figure 2: Average End User Diesel and Gas Taxes for Selected EU Countries ............................................ 21 Figure 3: AFV Sales for Europe from 2001-2030 by Fuel Type.................................................................... 40 Figure 4: AFV Sales for the United States from 2001-2030 by Fuel Type ................................................... 41 Figure 5: AFV Sales for China from 2001-2030 by Fuel Type ...................................................................... 41 List of Tables Table 1: Vehicle Price and Fuel Economy by Fuel Type .............................................................................. 14 Table 2: State Rankings for AFV Fueling Stations by Fuel Type .................................................................. 28 Table 3: Number of Light-Duty Vehicles per Station by Fuel Type ............................................................. 35 Table 4: Infrastructure Cost per Vehicle by Fuel Type ................................................................................ 37 Table 5: NPC Estimate of Infrastructure Cost per Vehicle by Fuel Type ..................................................... 37 Table 6: NAS Estimate of Infrastructure Cost per Vehicle by Fuel Type ..................................................... 38 Table 7: AFV Sales in 2030 by Fuel Type by Country .................................................................................. 39 Table 8: Total AFVs in Operation in 2030 by Fuel Type by Country ............................................................ 42 Table 9: Infrastructure Cost by Country in Millions Nominal 2013 $US ..................................................... 42 iii ACKNOWLEDGEMENTS The authors would like to thank the Global Interdependence Council for its support of this work. This study is the result of a group effort, and the authors would like to thank their many colleagues at Ford and the Center for Automotive Research (CAR) for providing assistance and guidance. At Ford, we would like to thank Michael Tamor, Michael Tinskey, and Mark Edie; at CAR, we would like to thank Sean McAlinden, Kim Hill, Michael Schultz, and Diana Douglass. The authors would also like to thank John DeCicco from the University of Michigan and Adam Cooper at the Edison Foundation for their insight. We would also like to thank Wendy Barhydt for her assistance with editing the final paper. iv FINANCING THE INFRASTRUCTURE TO SUPPORT ALTERNATIVE FUEL VEHICLES: HOW MUCH INVESTMENT IS NEEDED AND HOW WILL IT BE FUNDED? ABSTRACT Countries around the world have implemented regulatory requirements to improve fuel economy and reduce greenhouse gas emissions from vehicles. These regulations encourage automakers to sell alternative fuel vehicles (AFVs), which use fuels such as natural gas, electricity, hydrogen, and biofuels. Automakers are already making investments in developing and manufacturing AFVs. There are many challenges to increasing AFV market share and providing appropriate support of fueling infrastructure for these unconventional vehicles. The cost of installing new refueling infrastructure is high. The lack of available breadth of the fueling infrastructure is one factor which may reduce consumer acceptance and confidence in this new technology. Private rates of return from investing in such infrastructure can be low or negative for the private sector, and the required infrastructure spending may be in excess of the private sector’s ability to finance. However, infrastructure for fueling may also have “public good” attributes, thereby providing a role for government funding. This paper describes several different types of alternative fuels and summarizes the existing infrastructure investments to support AFVs in several countries and one U.S. state (Brazil, China, the European Union, the United States, and California). This research offers a long run projection of what the likely future investment requirements would be, in order to support future AFV volumes. The authors have also included an assessment of the gap between what infrastructure investment is needed for successful growth of AFV sales and what has been built out so far, with particular attention to selected countries. Several examples of public financing programs and public-private partnerships to encourage sales of AFVs, construction of refueling infrastructure, and adoption of other environmental technologies are detailed. This paper will describe the costs and benefits of various funding models (e.g. tax incentives, government loan programs, convertible bonds, and joint ventures) which have been or could be put in place to support AFV infrastructure investment spending. 1 2 INTRODUCTION Countries around the world have implemented regulations which incentivize fuel economy improvements and reductions in greenhouse gas (GHG)1 emissions from vehicles (see Figure 1 below). The purpose of these regulations is largely, although not exclusively, to reduce the impact of GHG emissions—which include carbon dioxide (CO ), methane (CH ), nitrous oxide (N O), and other gases— 2 4 2 on the environment, as well as to enhance energy security by reducing reliance on foreign energy imports. In addition to encouraging automakers to improve performance of gasoline-powered, internal combustion engine vehicles, these regulations encourage automakers to sell alternative fuel vehicles (AFVs), which are powered by other fuels, such as natural gas, electricity, hydrogen, and biofuels. Figure 1: Fuel Economy Standards for Select Countries, MPG, 2000-2025 Source: ICCT 2012 In the United States, fuel economy targets are mandated by Corporate Average Fuel Economy (CAFE) standards. While there are complex dynamics involving efficiency, cost, and consumer demands, CAFE standards are “the single most powerful regulatory mechanism affecting energy use in the U.S. transportation sector.”2 Policies driving innovation in vehicle fuel efficiency are important, because the long-run energy outlook suggests the potential for high and volatile oil prices. On a global scale, there will be high growth in the driving age population over the next decade, and demand for vehicles is rising. In developing countries like China, absent policy, the number of vehicles on the road will increase considerably, intensifying the already severe pollution and congestion issues in urban areas. More efficient vehicles and AFVs will be required to meet future mobility needs across the world. 1 Numerous abbreviations are used throughout this paper. Each abbreviation, along with the associated term, is listed in Appendix A. 2 EIA. (2012). “Annual Energy Outlook 2012 with Projections to 2035.” DOE/EIA-0383(2012). Energy Information Administration, United States Department of Energy. June 2012. <http://www.eia.gov/forecasts/aeo/pdf/0383(2012).pdf>. 3 Automakers are already making investments in developing and manufacturing AFVs. In 2012, Ford sold a record 11,600 natural gas vehicles—more than three times as many as it sold in 2010. Honda also saw increased interest in its natural gas-powered Honda Civic GX; General Motors and Chrysler recently began offering natural gas pickup trucks.3 Plug-in electric vehicles (PEVs) include battery electric vehicles (BEVs) such as the Nissan Leaf and Focus Electric, plug-in hybrid electric vehicles (PHEVs) such as the Chevrolet Volt, Prius Plug-in, and C-MAX Energi. The only PEV available on the U.S. market in 2009 was the Tesla Roadster. During 2012, 13 PEV models were available in the United States; in 2013, PEV offerings will increase to 28 models. Some automakers have introduced hydrogen-powered fuel cell electric vehicles as fleet demonstration models (e.g., the Honda Clarity FCX). There have also been several automakers who have publically announced their intention to offer a hydrogen fuel cell vehicle for sale by 2015. Biofuels are already gaining popularity, with many fleets using biodiesel. In Brazil, flexible fuel (flex-fuel) vehicles capable of running on E85, a blend of ethanol and gasoline, constituted 87 percent of new vehicle sales in 2012;4 flex-fuel vehicles are popular in the United States as well, with nearly 1.5 million sold in 2010.5 In order to facilitate the shift toward AFVs, many challenges will have to be overcome. One of the greatest challenges to promoting AFV adoption is putting into place a new and upgraded infrastructure which is necessary to provide AFV owners with adequate access to these unconventional fuels. The cost of installing new refueling infrastructure is high, and the adoption of AFVs uncertain, making private investment risky and relatively unattractive. Due to current political and economic realities, securing public funding for infrastructure investment could also be a challenge. Previous studies have concluded that a “substantial refueling network is a pre-condition for the market’s accepting alternative fuel vehicles.” 6 Without sufficient refueling infrastructure available, consumer acceptance and confidence in AFV technology could suffer. For some fuels, such as electricity and compressed natural gas, however, home systems for charging and refueling could permit consumer adoption even without the construction of publicly available infrastructure. Once AFVs have achieved commercial scale and a high utilization of their refueling infrastructure, the infrastructure costs will be minor on a per vehicle basis.7 The transition to commercial scale, however, is a significant challenge as it represents a high risk for investors: the utilization of refueling infrastructure could remain low for a prolonged period or the fuel could fail to gain popularity altogether. 3 Durbin, Dee-Ann. (2013). “Natural Gas Vehicles Making Inroads; Sales Rising.” Associated Press. March 5, 2013. <http://bigstory.ap.org/article/natural-gas-vehicles-making-inroads-sales-rising>. 4 ANFAVEA. (2013). "Carta da ANFAVEA." Associação Nacional dos Fabricantes de Veículos Automotores. January 2013. <http://www.anfavea.com.br/cartas/Carta320.pdf>. 5 EERE. (2013). Alternative Fuels Data Center. Energy Efficiency & Renewable Energy, United States Department of Energy. Accessed February 13, 2013. <http://www.afdc.energy.gov/>. 6 Greene, David L. (1990). “Fuel Choice for Multi-Fuel Vehicles.” Contemporary Economic Policy. Volume 8, Issue 4, pp. 118-137. October 1990. 7 NPC. (2012). “Chapter 5: Infrastructure.” Advancing Technology for America’s Transportation Future. National Petroleum Council. August 11, 2012. <http://www.npc.org/FTF-report-080112/Chapter_5-Infrastructure-021113.pdf>. 4