ACT Expo 2018 Takeaways: Natural Gas Continues To Lead The Way But Host Of Other Technologies & Fuels Gaining Traction As Part Of “All Of The Above” Strategy
Following up on many questions we have received about ACT EXPO 2018 we though it would be great to share a well-written summary provided by Graig-Halum Capital Group so that you know what you have missed if you did not attend.
In this the 8th year of the conference a main takeaway was greater industry activity levels, higher attendance, and a more broad array of fuels and technologies. While not getting the splashy headlines of some other ACT participants, it is clear that natural gas CNG, LNG, RNG is far and away the most advanced fuel technology and ready to scale with 2018 potentially set to be a record year for the industry led by the CWI ISX12N engine. For emerging technologies, ACT Expo marked a meaningful uptick in electrification, both battery-electric and fuel cell powered, and established fuels such as propane growing in certain areas and applications of the market (most notably school bus).
With more stringent emissions requirements, growing sustainability initiatives, and growing demand from corporate and municipal customers, OEMs face a “dynamic fork in the road” in how to get positioned with alternatives as the market seeks to move away from diesel. This OEM strategy is an “all of the above strategy” for energy optionality, with each fuel and technology positioned for different parts of the market and at different stages of development, and China and Europe an example of the path forward. An additional emerging tailwind is rising prices for traditional fuels. All of this will impact numerous companies in our Clean Technology & Industrials coverage universe. Below are some of our key takeaways from the event including some of our checks:
Natural gas is the mature fuel/technology and the blueprint for other alternatives
While almost under the radar at ACT Expo, which often highlights the newest and emerging technologies (this year’s heavy focus was on electrification), natural gas and renewable natural gas (RNG) is where the majority of OEM and fleet activity is occurring. Aside from propane (an established fuel), the rest of the industry is now going down the development path that natural gas has already gone over the last 10+ years. Other fuels and technologies will eventually get there, but natural gas has a clear technology path with many product improvements and lessons learned. Natural gas also has a developed and expanding fueling infrastructure, widespread maintenance capabilities, and system costs which continue to come down. We heard a common viewpoint that performance issues are largely a thing of the past and stable fuel prices are also an important adoption driver.
Significant demand for the CWI ISX12N with industry potentially positioned for a record year
Our checks at ACT Expo indicate that there is strong early demand for CWI’s near-zero natural gas product offering (ISX12N, L9N, B6.7N). At the show, Kenworth unveiled the first OEM truck with the ISX12N available for sale. We believe initial sales of 7,500-10,000 CWI ISX12N engines are widely expected. Importantly, the high end of this range, along with 9L and 6.7L volumes, would mark a record year for natural gas volumes. We also note we heard the viewpoint that this number could have been even stronger if not for the lack of available additional build slots given the strength of the overall truck market. This volume trajectory is reminiscent of the expectations in early 2014 which were derailed by a number of factors, most notably the start of the drop in oil prices. We think that the natural gas industry can easily handle this scale up whereas back in 2014 it was not prepared to do so. Our checks indicate a number of big orders out there, in particular from the refuse sector, and we heard Waste Management’s view that CWI NZ engines are “the best partnership of emissions and economics.” Lastly, we expect near-zero engines and RNG (resulting in EV equivalent emissions) to be a critical component of future plans at the Ports of Los Angeles and Long Beach.
A move away from diesel the goal with an “all of the above” strategy
A clear theme from ACT Expo 2018 was that there is a strong desire and demand to move away from diesel in transportation. While there is often a desire to choose a specific technology, the reality is that the industry needs an “all of the above” approach, with a diversity of technologies utilized based on the requirements of specific applications (such as duty cycle, range, and weight). Given annual diesel consumption of 25B+ gallons, there is substantial room for numerous technologies. We found it telling that Agility Fuel Solutions, a long-time and dominant fuel system provider historically, with a primary focus on natural gas, now has propane, hydrogen and hybrid capabilities as part of its offering. Aside from propane which is a mature and well-established fuel, other technologies are anywhere from 5-10 years behind natural gas, but innovation is rapidly occurring:
- Propane is affordable, available, and has a proven engine technology. We note increased activity
around propane with it ideal in school buses (an area of accelerating demand indicated by our checks), step-vans, and forklifts due to low fuel costs, lower maintenance, and simple infrastructure.
- Hydrogen fuel cells – Electrification with a fuel cell as the power source was an area where activity and future planning is picking up. We believe that hydrogen is commonly viewed longer-term as most logical to be a strong technology for heavy-duty trucking. At present, the positives of hydrogen include fast fueling, zero emissions, and lower system weight. The negatives include high system cost, fuel high cost, and lack of fueling infrastructure. Toyota noted its view that fuel cells are ideal longer term for heavy-duty trucking.
- Battery-electric – Electrification with a battery as the power source got significant attention at ACT Expo 2018. Along with high hopes for battery-electric come numerous questions to be answered such as system cost, system weight and cargo displacement, lack of charging infrastructure, and speed of charging. While many of these challenges are expected to be overcome going forward and there is a high level of confidence that there is a place for battery-electric, applications such as light-duty, delivery, transit, school bus, and certain medium-duty (defined route/return to base applications) are where adoption is most likely in the near-term.
- Hybrids – A number of OEMs are increasing involvement with hydrids, pairing battery-electric with diesel, gasoline or natural gas enabling initial miles driven battery powered and substantial range if required utilizing the other fuel. This is seen as a viable technology for light and medium duty applications.
Rest of the world illustrates where North America can eventually go – We believe that China and Europe should serve as a blueprint for the United States and the use of diesel alternative technologies. In China, LNG vehicles make up 10%+ of the overall market, with battery-electric and fuel cell electric vehicles gaining significant traction due to government support to address environmental concerns. In Europe, sustainability concerns are a high priority and a strong economic case can be made for CNG, LNG, while battery-electric vehicles are making inroads in medium- and light-duty applications. Adoption of advanced transportation technologies is behind in North America, but interest in sustainability is building at the State and Local level and from fleets. While not to the level of 2014, rising diesel prices and, more importantly, price stability is something which is driving increased interest in diesel alternatives.