Development of Alternative Fuel Vehicle Market Needs a Multi-Pronged, Multi-Partner Approach

by Matt Frades, Center for Climate and Energy Solutions (C2ES); Nick Nigro, C2ES; and Sandy Fazeli, NASEO

Advances in alternative fuel vehicle (AFV) technologies and policies, and state and federal actions to improve fuel economy, are challenging the dominance of fossil fuels in the transportation sector. Powered by rechargeable batteries, natural gas, hydrogen, or other nonpetroleum-based fuels, AFVs hold the potential to increase energy resiliency, improve air quality, and reduce greenhouse gas emissions. Yet the path to a cleaner and a more energy-secure vehicles market will require more ambitious public and private support in the near term—both for the vehicles themselves and for the infrastructure to refuel and recharge them.

AFV market expansion is limited by small demand, consumer uncertainty about the technologies, and the inadequacy of refueling infrastructure. AFVs are typically more expensive than their gasoline or diesel counterparts, but many AFVs are still financially attractive because they offer significant fuel cost savings over a vehicle’s lifetime. Currently, low oil prices are imposing headwinds on AFV sales, but when considering whether to invest in vehicles and fueling infrastructure, governments, businesses, and consumers should keep in mind that oil prices are expected to rise again in the near future.

States, localities, and private-sector partners play a number of critical roles in helping to develop the AFV market. Prevalent among them are subsidies. According to the DOE Alternative Fuels Data Center, governments and utilities in all 50 states and Washington, D.C., offer 76 grants, 128 tax incentives, and 57 rebates for AFVs and their infrastructure.1

States have also incorporated AFVs into their buying practices. In fact, the National Renewable Energy Laboratory has reported that state fleets are 100% compliant with federal mandates requiring the acquisition of AFVs.2 Additionally, since 2012 Colorado, Oklahoma, and 13 other states have partnered to aggregate their annual AFV procurements, creating a “demand base sufficient to support the design, manufacture, and sale” of affordable natural gas vehicles and signaling an important opportunity for multiple states to scale the market together.3 A parallel effort, the Multi-State Zero Emission Vehicle Action Plan, has increased collaboration among eight states—California, Oregon, and six states in the Northeast—to expand the market for electric vehicles through a combination of initiatives addressing public and private fleets, workplace charging, and consumer incentives, among others.4

State energy offices, often in partnership with Clean Cities coalitions in their states, have also established hubs for information on AFV technologies and market trends. The state energy office in Utah, for instance, has launched Utah Drives Electric, a campaign to educate consumers about the benefits of electric vehicles and share information about Utah’s charging infrastructure, vehicle technologies, and potential savings.5 The energy offices in at least seven states, including Arkansas, Massachusetts, and Maryland, host Clean Cities coalitions, which offer a go-to resource for the states and create local connections to disseminate information on AFVs.

More recently, states and their partners are exploring the role of innovative financing to boost investment in AFVs and refueling infrastructure. Though grants and subsidies have played a key role in advancing early AFV market development, scalable solutions that leverage private-sector investment are needed.

State and local governments are motivated to engage the private sector to maximize the impact of limited public dollars.6 In Washington state, where electric vehicles have been relatively popular, the legislature commissioned a study to develop new business models for electric vehicle charging infrastructure that will foster private-sector commercialization of publicly available EV charging services and expand the role of private-sector investment in EV charging throughout the state.7 The preliminary results of this study show that if state and local governments work together with businesses to improve the financial performance of charging station investments, needed infrastructure can be deployed and public sector funding can be reduced or eliminated in the near term.

States and localities seeking AFV finance solutions are also learning from financing models that have been successful in other sectors. For instance, governments and businesses are exploring how the energy services company (ESCO) model, which has been used to finance building energy efficiency projects, could be applied to fund AFV projects. Owners of large buildings who want to save money by improving energy efficiency must first overcome a significant hurdle: the upfront costs. A similar hurdle exists for fleet managers considering the switch to natural gas vehicles to save on fuel costs: high initial expenses for vehicles and infrastructure.8

In some states, policy action may be necessary to unlock innovative finance options for AFVs. For example, in June 2013 Colorado enacted legislation to expand its utility cost-savings measures law to allow state agencies to enter ESCO-like contracts for AFVs and fueling infrastructure.9 Additionally, both Michigan and California have passed legislation to include electric vehicle charging infrastructure as an eligible project for low-interest Property Assessed Clean Energy financing, which in many other states is typically limited to energy and water efficiency measures.

As the level of public funds available for subsidies dwindles, innovative financing and public–private partnerships may offer solutions to help accelerate progress on AFV deployment. To develop their approaches, governments and businesses can draw from successes in other sectors and regions. The National Association of State Energy Officials and C2ES, with funding from the DOE’s Clean Cities program, have been leading an initiative since 2013 to develop innovative finance mechanisms aimed at accelerating the deployment of AFVs and fueling infrastructure. More information is available at www.c2es.org/initiatives/alternative-fuel-vehicle-finance.

1 DOE Energy Efficiency & Renewable Energy. All laws and incentives sorted by type. Alternative Fuels Data Center. Retrieved from www.afdc.energy.gov/laws/matrix?sort_by=incentive
2 Sears, Ted. (2014, September 9). EPAct program update [PowerPoint slides]. Retrieved from http://annualmeeting.naseo.org/Data/Sites/4/media/presentations/Sears-Ted.pdf
3 Natural gas memorandum of understanding. Retrieved from www.colorado.gov/cs/Satellite?blobcol=urldata&blobheadername1=Content-Disposition&blobheadername2=Content-Type&blobheadervalue1=inline%3B+filename%3D%22NGV+MOU.pdf%22&blobheadervalue2=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251825945490&ssbinary=true
4 www.governor.maryland.gov/documents/MultiStateZEVActionPlan.pdf
5 Utah Office of Energy Development. Utah Electric Vehicles [website]. www.utahelectricvehicles.org
6 Frades, M., Peace, J., & Dougherty, S. (2014, December). The role of clean energy banks in increasing private investment in electric vehicle charging infrastructure. Retrieved from www.c2es.org/publications/role-clean-energy-banks-increasing-private-investment-electric-vehicle-charging-infrast
7 Washington State Legislature, Joint Transportation Committee. (2014, May 14). Electric vehicle charging station networks study. Retrieved from www.leg.wa.gov/JTC/Pages/ElectricVehicleChargingStationNetworksStudy.aspx
8 Frades, M. (2014, June). Applying the energy service company model to advance deployment of fleet natural gas vehicles and fueling infrastructure. Retrieved from www.c2es.org/publications/applying-energy-service-company-model-advance-deployment-fleet-natural-gas-vehicles-fue
9 Advanced Energy Legislation Tracker. Colorado – SB 13-254 – 2013. Retrieved from www.aeltracker.org/bill-details/2000/colorado-2013-sb-13-254