Advancing Alternative Fuels

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by: Kevin Nesbitt, Ph.D.

Organizational fleets have long been targeted as an ideal market for alternative fuels beginning with passage of the Alternative Motor Fuels Act in 1988. Although fleets are widely considered good candidates for alternative fuel vehicles (AFVs), advancing these new technologies through the fleet sector has proven difficult. Much of the problem stems for the fact that AFVs are typically treated like any other vehicle purchase. However, investing in an alternative fuel vehicle is not a routine fleet vehicle purchase and should not be treated as such. Forethought must be given to matching the technology to the right fleet application, proper economic evaluation, and disciplined implementation.

Why fleets? Fleet vehicles, on average are driven almost twice as far as household vehicles and thus the cost savings and environmental benefits are realized much faster. Higher turnover rates mean that fleets account for a disproportionately high percentage of all new vehicle sales and, therefore, can accelerate AFV market penetration. Because relatively few decision-makers deploy thousands of vehicles, including a large number of vehicles in politically-compliant government agencies, policies and incentives can have big market impacts. Fleets are also widely believed to be better suited to accommodate new technologies (better vehicle substitutability) and more capable of absorbing the higher acquisition costs (including refueling infrastructure). Finally, many fleets are thought to have operating characteristics conducive to AFV use. Fleets that have central refueling, in-house maintenance, and fixed daily routes could possibly incorporate AFVs into their operations, even before a public refueling and service network is established.

Tailoring to Specific Fleet Needs
Although these arguments over-simplify the potential AFV fleet market and there are many other factors to consider, on whole fleets do provide a good initial market prospect and a means for introducing AFVs into the larger household vehicle market. However, there is no single approach appropriate for all organizational fleets. Fleets do not deliver the same product, provide the same service, or even operate in the same manner. They are not homogeneous in composition and their organizations vary widely in policies and ideologies. Therefore each fleet must be evaluated individually for their potential to incorporate alternative fuel vehicles into their operations.
It is imperative to match the right technology with the right fleet application. A number of factors must be considered including the driving cycle and range requirements, refueling logistics, cargo capacity and passenger needs, maintenance needs, driver assignments, vehicle attributes and performance, company policies and culture, driver acceptance and even public perceptions. A plan for refueling and infrastructure installation must be devised, as well as a prevision for AFV expansion. Problems will likely occur if the AFV and fleet application are mismatched or, at best, the full cost savings and environmental benefits will not be fully realized. Fleet managers are not accustomed to dealing with these AFV specific considerations and may not fully appreciate their significance.

Calculating the True Cost
In general, fleets are a necessary cost of doing business and one of the primary drivers of fleet change is cost savings. Higher priced AFVs, therefore, do not immediately appeal to risk-averse fleet managers. However, the value proposition of AFV fleet vehicles is high. An AFV placed in the right assignment can save an organization thousands of dollars over the life of the vehicle. The key is understanding the economic case, which requires a different valuation approach that takes into consideration the total cost of ownership (TCO). Conventional vehicles that typically comprise a fleet’s choice set exhibit very similar costs, with the most significant difference being purchase price variation. Many AFVs, on the other hand, have higher upfront costs but provide significant operating cost savings. In some cases, lower fuel and maintenance costs can provide full payback in less than a year.
However, total cost of ownership can be difficult to calculate. In addition, there is still considerable uncertainty with regard to certain cost parameters. Some costs savings not even considered by fleet operators – e.g., labor cost savings resulting from HOV lane access – can be quantified and included in the cost analysis. Other cost benefits, like company marketing and image benefits, are more difficult to include. There are few tools available that can provide a detailed fleet vehicle TCO analysis while also showing the risk associated with specific cost uncertainties.
Developing and Implementation
AFV attributes are prioritized differently by personnel, depending on their position and job function within the organization. CEOs, sustainability officers and marketing directors are typically the ones most concerned with image and sustainability goals, while drivers want good driving performance and convenience. However, it is typically left up to the fleet manager, the individual charged with day-to-day oversight, to make sure the AFV is properly incorporated into the fleet. Fleet managers put a high value on cost savings and reliability. All these competing interest, can create problems.

Organizations that formulate thorough vehicle implementation strategies prior to the AFV acquisition have much greater success rates. How the vehicle will be maintained, drivers trained, refueling infrastructure allocated, and other considerations should be determined before the purchase. Likewise, vehicle assignments, long-term usage, and disposal plans should be developed upfront. A full commitment should be conveyed throughout the organization from the start of the decision process until the AFV is retired.

Alternative fuel vehicles are not “drop-in” technologies. Organizations must first find the right fit within their fleet operations. To avoid over-emphasizing purchase cost, an economic analysis should be conducted using the total cost of ownership methodology. Finally, an implementation plan should be developed before the purchase and conveyed to all the key players. These actions will facilitate AFV adoption by fleets and advance the overall market in the long run.