The U.S. Needs Natural Gas Vehicles, So Why Can't the Feds Get Out of the Way?

Back in 2008, when gas was over $4 a gallon, T. Boone Pickens kicked off his effort to get the U.S. join the rest of the world in the move to natural gas vehicles, known as NGVs. His "Pickens Plan" involved using America's ample natural gas resources to power cars and trucks. Yet little has happened: Of the 11 million NGVs on the road today, all but 100,000 are outside America, mostly in Europe and Asia.

Why is the U.S. so far behind? Answer: the federal government.

Kick foreign oil for real
For all the Oval Office talk from President Nixon through President Obama, the U.S. still imports about two-thirds of its oil, mostly from nations that hate us. The need for alternatives, meantime, is growing. Disasters like the BP spill in the Gulf of Mexico, wars in the Middle East, diminished reserves, and the growth of India and China will all push up the price of oil. Which is why we now need a policy of cheap natural gas from Congress -- or at the very least, for lawmakers to get out of the way.

The 1970 Clean Air Act did a lot of good things, like create the Environmental Protection Agency; but it also had unintended consequences, like stifling vehicle innovation. The Clean Air Act requires every model, year, and engine combination be rigorously tested for emissions and certified. The California Air Resources Board has even tougher standards that 16 other states follow and that more than doubles the cost to upgrade a vehicle to natural gas.

The certification expense is minor for the likes of Ford (F) and Toyota (TY), but for a small manufacturer it's prohibitive. And small companies are the ones that do most of the innovating. Costs for an installed NGV kit in Europe are around $2,000; in the U.S. it's more than five times that. Those kits would be cheaper if demand increases, but demand won't increase until more cars are on the road -- a classic chicken-egg bind.

Will Congress Help?
Some in Congress recognize the red-tape issue is holding back innovation and adoption by adding all these costs. The "Streamline Vehicle Conversion Act" aims reduce this red tape, but Congress seems unable to pass much of anything these days. The EPA in May started a process to cut the red tape with some regulation changes. One CEO of a conversion kit company told me that he was submitting test results and paperwork that would normally get only 3 certifications, but with the new regulations he will get 174. This is progress but we need Congress to clean up the Clean Air Act to bring it up to the level of Europe, particularly in the area of new bi-fuel cars.

The rest of the world uses bi-fuel engine kits to add natural gas capability to existing cars and new cars directly from the maker. This cuts the cost and raises buyer confidence. GM, Ford, Toyota, Honda, Mercedes, BMW, and VW all sell bi-fuel models in their showrooms around the world -- but not in the U.S. The only passenger NGV available today directly from a manufacturer is the Honda Civic GX (shown above). The Civic GX has been declared the "America's Greenest Car" seven years in a row, but Honda only builds 2,000 a year, making it mainly a PR vehicle.

What's Stopping Manufacturers
Honda knows that the lack of fueling stations in the U.S. (a big problem if you only run on natural gas) limits sales. You need bi-fuel technology, which let's you run on natural gas first, and then electronically switch over to gasoline when you run out. This is critical for mass adoption. Bi-fuel gets around the lack of natural gas stations, but the Feds don't subsidize that approach. The Feds subsidize dedicated NGVs. That is like subsidizing a full electric car -- the Nissan Leaf, for instance -- but not one that has a range extender on it, such as the Chevy Volt.

I've been studying the global alternative transportation market for five years as an equity research analyst. My analysis shows that unleaded vehicles are a reasonable choice for the consumer today. Unleaded cars score 19 out of 20 possible stars (see chart) on the four key metrics that impact the consumer: price, range, refueling stations, and carmaker backing. But as a nation-that means federal policy-we need to be concerned about the use of foreign oil and air pollution. Adding these issues tilts the scales in favor of bi-fuel. If we had reasonable EU-style regulations in the U.S., bi-fuel would handily beat unleaded 26 stars to 22 stars.

If we could get the regulations out of the way, then bi-fuel NGVs in the U.S. would sell well. In Europe the bi-fuel systems are sold in the 10s of thousands and are available from all the major carmakers on multiple models. With scale like that we could see the conversion price come way down. And with a NGV you can fill up your car at your house with a home compression unit (something you can't do with a unleaded car). There is another bill in Congress that would solve many of the issues, but while it has passed the House, it is stuck in the Senate.

There is a possibility that a lame duck Congress will pass something at the end of the year. Promoting an economical and mature technology, which is cleaner, cuts oil imports, and should create jobs should be a no-brainer - but such obvious choices have eluded the Federal government before.

Star Ratings for Passenger Car Types

Click for a larger version. Each bar represents 1 to 5 stars for each of the six key metrics (i.e., a perfect score is 30 stars).

Sources: U.S. EIA, U.S. National Academy of Sciences, and Car Manufacturers

John M.A. Roy has been covering Alternative Energy companies for Wall Street since 2005, most recently as a Senior Research Analyst at Janney Montgomery Scott.