This is a student exercise!. Natural Gas Alternative for StarMetro Applied Economic Research Group.

This is a student exercise!

Natural Gas Alternative for StarMetroApplied Economic Research Group

Key Questions

1. Should StarMetro operate its transit fleet on natural gas?

2. What is the best turnover strategy for StarMetro?

Presentation Overview

Transit authority run by the City of Tallahassee

Traveled over 2.3 million miles in 2011

650,000 gallons of diesel gas used in 2011

FY 2012 budget: $2.3 million for fuel

StarMetro Fleet Composition

60 diesel buses 12 year life cycle Average age: 3 years

17 paratransits 5 year life cycle

3 electric buses Operation begins

in August

Compressed Natural Gas

Opportunity for CNG Market Growth in US

CNG use is growing at 30% globally, but only 3% in the United States After diesel, second-most widespread fuel option for

buses in the US (20% of transit buses as of 2011)

Why is it a good option? Cheaper than diesel Large domestic production Cleaner burning fuel than diesel

StarMetro’s purchase of electric buses shows a clear interest in pursuing alternative energy sources

Emissions

CNG Emits Fewer Emissions Than Diesel

Image Source: TCRP Report 146, 2011

CNG Would Improve Tallahassee Air Quality

Higher emissions of methane (CH4) and nitrogen oxides (NOX) from natural gas production

Reduced tail pipe emissions: Particulate matter (PM) Nitrogen Oxides (NOX) Hydrocarbon (HC) Carbon Dioxide (CO2)

Opportunity for improvement regarding PM concentration in Tallahassee

Fixed Costs

CNG Buses Are More Expensive

CNG buses currently cost about $70,000 more than comparable diesel buses Diesel: $390,000 CNG: $460,000

StarMetro usually purchases 5 buses a year via federal grants

Depot Modifications Are Necessary with CNG

Must install safety equipment Increased ventilation Methane detection

Modifications would cost approximately $250,000 if turn over 100% of fleet $100,000 + $2500 per bus

Variable Costs

CNG Would Save on Fuel Costs

CNG buses require 20% more fuel 3.08 MPG (CNG) vs. 3.64 MPG (diesel)

However, CNG is 40-50% cheaper than diesel

Additional Electricity CNG is compressed at the fueling site, requiring

extra energy About $0.16 per DGE

EIA Projected Prices of Diesel and CNG

Image Source: M.J. Bradley & Associates, 2012

Calculating Fuel Costs

Annual Miles DrivenMP

G

Total Gallons of

Fuel

Per Gallon Price of

Fuel

Total Gallons of

Fuel

Total Fuel Costs

CNG Buses Are Less Costly to Maintain

Annual savings of $18,000 for a complete CNG fleet

Annual maintenance costs are slightly more expensive for diesel buses than for CNG buses Approximately $5200 per diesel bus and $4900

per CNG bus

Diesel Bus Variable Costs Exceed Those of CNG

Cost of CNG

CNG BusMaintenance Costs

Cost of

Diesel

Diesel BusMaintenance Costs

$25,800 per busin 2013

$38,900 per busin 2013

Variable Cost of CNG

Bus

Variable Cost of

Diesel Bus

$33,700

$20,900 $4900

$5200

Diesel Buses Have Greater Lifetime Costs

$834,700 $781,700

CNG would save $53,000 per bus

Purchasing price of buses plus total variable costs of 2013-2024 lifecycle:

StarMetro should implement a CNG program.

Turnover Timeline

Turnover Will Be Complete By 2024

12 year plan

Assumptions: Continue to

purchase 5 buses per year (standardize age structure)

Diesel and CNG buses have similar life cycles

Routes and fleet size will remain constant

YearNumber of Diesel

Buses

Number of CNG Buses

2013 55 5

2014 50 10

2015 45 15

2016 40 20

2017 35 25

2018 30 30

2019 25 35

2020 20 40

2021 15 45

2022 10 50

2023 5 55

2024 0 60

Fueling Options

Fuel at Existing Station

Partnership with Leon County Schools

Public-private station, city will provide gas

StarMetro could negotiate a contract to purchase at a reduced rate

Concern: $0.15 mark-up over wholesale price

Build a Proprietary Station to Avoid Mark-Up

May eventually be more economical for StarMetro to build their own station

Would cost about $2M if StarMetro turned over 100% of fleet

Funding Options: Federal grant Municipal bond

StarMetro Could Apply for a Federal Grant

FTA 5308 Clean Fuels Grant

Usually $2 to $3 million Gainesville: $3 million for biodiesel buses Tampa: $2.32 million for CNG fueling station

Tallahassee comparable to Gainesville with respect to air quality

City Could Issue a Bond

In order to be feasible: Annual savings must cover annual costs Accumulated savings must cover principal at

maturity

Assumptions: Buses are purchased using federal grant money as

usual Issue a $2M 10-year bond in 2016 at 5% Cost of maintaining station $350,000 annually

(includes labor and depreciation)

Bond Financing Feasible in 2016

Interest Payments + Operation Costs($450,000)

Costs + Principal($2,450,000)

Cumulative savings can cover principal at maturity.

Cumulative Savings

Annual CostsCumulative Net Savings

Specialized Knowledge is Needed to Manage CNG Fueling Sites

Technology is extremely sophisticated

Each Option Has Some Disadvantages

Station Maintenance CNG programs pursued by some municipal transit

authorities were abandoned due to poor management of proprietary stations

Private companies have more success with maintaining fueling sites

Higher Costs Leasing through Nopetro implies higher fuel costs A proprietary station would provide a higher

payoff if StarMetro is willing to take on the added risk

Comparing the Options

Nopetro Station

Proprietary Station

Construction Cost

Fuel Cost

Maintenance

While it may eventually become cheaper to build and fuel at a proprietary station, the issue of station maintenance is of greater concern.

We recommend that StarMetro pursue the less risky option of fueling at the Nopetro station permanently.

In Conclusion

1. Should StarMetro operate its transit fleet on natural gas?

2. What is the best turnover strategy for StarMetro?

Yes, it would save money and reduce emissions.

Replace 5 diesel buses per year with CNG buses and negotiate a fueling contract with Nopetro.

Applied Economic Research Group