ALEXANDRIA, Va. -- When it comes to the transformation of the future vehicle fleet, the question is not if it will happen, but when.
That’s the one of themes of the Fuels Institute’s latest report, Tomorrow’s Vehicles, which is based on projections from Navigant Research and examines fuel demand and the makeup of the vehicle fleet through 2025. CSP Fuels spoke with John Eichberger, executive director of the Alexandria, Va.-based Fuels Institute, about what fuel retailers should expect in the next decade, and what surprises may come 20 to 25 years from now.
Read on for eight takeaways on fuel demand and the vehicle fleet in the near term and not-too-distant future.
1. Fuel consumption will be flat to down
In the base scenario, the report is projecting a 0.2% decline in the compound annual growth rate (CAGR) of gasoline and ethanol consumption, and the aggressive scenario projects a 0.3% CAGR drop. The erosion in consumption will come mainly from the light-duty market, which makes up about 90% of gasoline and ethanol consumption. The reason why can be defined by one acronym: Corporate Average Fuel Economy (CAFE).
“Gas consumption is going down, not because gasoline vehicles are reducing in number, but because of [greater] fuel efficiency,” Eichberger said, referring to federal standards that require automakers to increase the average fuel efficiency of new cars and trucks to 54.5 miles per gallon (mpg) by 2025.
Through 2025, diesel and biodiesel consumption should rise, along with higher consumption among heavy-duty vehicles. By the base scenario, consumption is projected to rise 14% from 2016 levels by 2025. The annual growth rate, however, should slow because of greater fuel efficiency and a shift toward alternative fuels.
2. The vehicle fleet is global
The Trump administration has promised to revisit CAFE targets in its midyear 2017 review, at the request of automakers who argue that cheap fuel prices are driving consumers to less fuel-efficient vehicles, making hitting the future targets more difficult. Any slowdown or rollback, however, would ultimately have only a minor effect on overall vehicle fuel efficiency by 2025, Eichberger said. That’s because major automakers serve a global market and want to build cost efficiencies.
“The auto industry wants a global vehicle platform,” he said, citing Volkswagen’s efforts to move toward three basic vehicle architectures for all its models in all markets. It’s a strategy that most major automakers are emulating.
“They want to reduce the number of powertrains and engines they’re producing to satisfy multiple global markets,” he said. And while the United States is an important market, it represents only 20% of global auto sales.
“They’ll continue gaining advancements for efficiency standards in other countries, even if the United States backs off a little bit,” Eichberger said. “In that mindset, they want to build an engine that is more efficient for the European standards, Asian standards and the U.S. standards. And if they can use the same engine to satisfy all of those, they’re going to do that.”
3. Internal-combustion engines are catching up with hybrids
Hybrid sales have declined recently, which Eichberger attributes to their eroding value comparison to conventional internal-combustion engine models. For one, they typically have a $3,000 to $5,000 premium over conventional vehicles, even as their mileage advantage has shrunk to only 5 miles per gallon.
“As a consumer you say, ‘A $3,000 to $5,000 premium for the hybrid with gas at $2 a gallon, and it’s only 5 gallons more efficient--that could take me 12 years to recover that money,’ ” he said.
The report, however, expects hybrids’ share of the light-duty market to grow more than 49% from 2016 to 2025, in the base scenario, as automakers turn to varying degrees of hybridization to improve fuel economy. Their share at that point would be about 3.5%.
4. Good-bye FFVs, hello high-octane fuels
The report expects sales of flex-fuel vehicles (FFV), which are engineered to run on high-octane fuels such as E85, to shrink to only 1% of new vehicle sales by 2025. However, FFVs should remain at about 8% of vehicles on the road and will not greatly decrease until about 2030, when automakers will begin retiring legacy models because they will likely no longer get CAFE credits from the government for making them.
So what’s to happen to the more than 3,000 fueling sites that sell E85 in the United States? Has that investment in infrastructure been wasted? The short answer is no.
“As the auto industry looks to maximize the efficiency of the internal combustion engine, they’re looking at higher-octane fuel,” Eichberger said. “Many are modeling an E25, E30 or E40 fuel. If that’s the case, that E85 infrastructure is ready.”
The Fuels Institute is conducting a study on high-octane fuels to determine what the implementation plan would look like if high-octane E10, E25 and E30 roll out to the market, including infrastructure requirements and any regulatory hurdles. The report should be available by March 2018.
5. Natural gas has headwinds
The report expects vehicles powered by compressed natural gas (CNG) and liquefied natural gas (LNG) to make up less than 2% and 0.4% of commercial vehicle sales by 2025, respectively, under a base scenario.
Only a few years ago, the potential of natural gas as an alternative fuel, especially for heavy-duty trucks, seemed great. But in a prolonged low gasoline- and diesel-price environment, they’ve lost their competitive edge despite natural gas’ inherent price stability, Eichberger said.
“Natural gas is for a fleet operator who wants to lock in a long-term, stable energy supply,” he said. For those retailers who have invested the $1.5 million to $2 million per site in natural-gas fueling equipment, “the chances of a massive increase in demand is limited unless we have a significant increase in oil prices.”
6. About those recent EV announcements
During the first week of July, two announcements may have jolted some fuel retailers awake to the disruptive potential of electric vehicles (EVs).
First, Volvo announced it was transitioning from internal combustion engines to electrified engines for its entire model lineup, beginning in 2019.
Then, France pledged to end all sales of gasoline- and diesel-powered vehicles by 2040, not including hybrids.
Eichberger said that Volvo, whose market share in the United States is a fraction of 1%, will include a range of electrified options in its shift away from internal combustion engines. “I would suspect the majority they sell in that time frame will be traditional hybrids, which does not require the consumer to do anything different to get a little bit better fuel economy,” he said.
France’s pledge, led by President Emmanuel Macron, is also less powerful than it might first appear. “Well, President Macron, you do realize that the primary power generation for hybrid vehicles is gasoline and diesel?” Eichberger said. “So in the same exact announcement, it contradicted itself.”
7. The EVs are coming
While EVs are not poised to take over the vehicle fleet in the short term, they will begin to make impressive gains in the not-too-distant future.
“The maturity date for EVs is 2030, 2035. That’s when you’ll have retailers go, ‘Whoa, I’m starting to lose my volume because people are driving EVs,” Eichberger said.
The Fuels Institute report is projecting a 28% CAGR for battery EVs (BEVs) from 2016 to 2025. At that rate, about 5% of vehicles sold in 2025 will be BEVs, not including plug-in EVs or hybrids.
“My suspicion is that at 2025 if we continue at a 28% annual growth rate, by 2030 we’re not looking at a doubling of this market share--we’re looking at a tripling or quadrupling of the sales volume, which would take us to 15% to 20% market share of sales by 2030, 2032,” he said.
As EV technology improves to the point that the vehicles become competitive with their gasoline counterparts on cost, performance, range and convenience, then the market will truly expand beyond the usual EV hotbeds of the West Coast and East Coast.
“The combination of the consumer being ready, the technology being ready and economics starting to make sense, come 2030 and look out—I think the change starts,” Eichberger said.
8. Don’t panic—plan
In the context of strategic planning, 13 years is shockingly close. But fuel retailers should not panic.
“Take a big deep breath: The world is not ending tomorrow,” Eichberger said. “We have about 10 to 15 years to start evaluating market conditions, [and] make strategic changes to the business model to ensure our retail stations can provide the transportation energy consumers need and the alternative traffic generators for those who don’t need to buy transportation energy from the retailer.”
This could include adding an EV charging station, which depends on a retailer’s market. If conditions seem favorable, it makes sense to prepare.
“You don’t have to rush into it, but it is important to start looking at it and say, ‘If I’m going to be building a station and have a 30-year time frame to own and run it, in 10 years I might want to add charging station,' ” Eichberger said. “ ‘Let me go to run conduit now so don’t have to crack concrete to do it. And when investing in a power panel, I’ll make sure I have the capacity to handle the load that a fast charger would require. It’s much cheaper to install it now then to retrofit later.' ”
The Fuels Institute is launching an EV study that will examine consumer charging behavior and projected infrastructure needs by market type. It should be available at the beginning of 2018.
For an executive brief of the Fuels Institute’s Tomorrow’s Vehicles report, click here.