Fleet decarbonization: Operationalizing the transition

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Transportation is responsible for about 27 percent of US greenhouse-gas emissions, primarily from the burning of fossil fuels for cars, trucks, ships, trains, and planes. For fleet operators, this unsustainable environment presents both risks and opportunities. A primary source of risk is the uncertain technical transition to low-carbon alternatives, as well as the potential effects this transition could have on operations and ways of working. However, amid a shifting regulatory landscape, as well as the growing demand from customers for greener transport, the potential cost advantages of fleet decarbonization presents real opportunities for the sector.

The global green-logistics market is projected to grow at 6 percent annually over the next five years, while the costs of switching to green transport are falling rapidly (for more information on this topic, see “Getting to carbon-free commercial fleets”).1 Although an increase in battery prices in the short term has been observed because of current supply–demand constraints, as an industry, there is agreement on the long-term downward trajectory in battery prices; in the light-commercial-vehicle (LCV) segment, battery electric vehicles (BEVs) are set to achieve 90 to 95 percent of the cost per mile of internal-combustion-engine (ICE) vehicles as soon as 2025.2 Given these upsides, fleet operators have a strong incentive to strategically assess and plan for decarbonization. However, three key variables will affect the timing and scope of this transition.

Infrastructure buildup and accessibility

The transition to a decarbonized fleet, whether powered by renewable natural gas or by battery electric or fuel cell electric technologies, will not be a simple pivot. Indeed, more than 50 percent of fleet operators already operating BEVs report that setting up charging infrastructure can take more than a year.3 That said, the pieces of the logistical puzzle are starting to fall into place. Among clean-power options, infrastructure for natural gas—compressed natural gas (CNG) or liquid natural gas (LNG)—is well established. And as charging velocity picks up, battery power is becoming increasingly lasting and more efficient. While infrastructure for the distribution and refueling of hydrogen remains in an earlier stage than the equivalent BEV infrastructure, continued investment is expected to accelerate growth significantly in the late 2020s and 2030s.4

Vehicle purchase and sale

Two of the major variables in total cost of ownership (TCO) of BEVs are useful life and residual vehicle values in the used-BEV market, which has yet to form. While deep technical assessments suggest that useful life of some vehicles, such as battery electric vans, can be on par with the parallel ICE vehicles, the value that those vehicles will deliver in remarketing is unknown. OEM supply constraints limiting the number of vehicles could provide tailwinds and push residual values over those historically seen for ICE vehicles. At the same time, advances in vehicle technology, such as batteries with a higher energy density, may provide a headwind. The unknowns surrounding these two parameters are one key pain point that fleets experience when adopting electric vehicles (EVs). Additionally, fleet lessors face a similar challenge in pricing their offerings, especially for closed leases. Unclear ICE residual values, which are projected to decline over the period of EV adoption, add to the challenging situation because forecasting the impact on cash flows and balance sheets during the transition is complex.

Impact on day-to-day operations

The transition to a decarbonized fleet will create new workflows for functions including drivers, maintenance personnel, and fleet schedulers, for which retraining and upskilling will be required. Operators will need to hire new tech-savvy talent, and ways of working will change as well. For example, dwell times may increase as a result of recharging needs, which could affect scheduling and have implications for on-duty hour limits. Given these challenges, it is not surprising that about 50 percent of fleet operators say that incorporating and optimizing charging into regular business processes (without incurring downtime) is one of the biggest transitioning obstacles they face.5

As operators focus on how best to move forward, they must evaluate their options and make technology and economic decisions based on imperfect market information—a natural character­istic of a highly dynamic environment. However, with respect to technology, tentative signs of consensus are emerging. In the LCV and medium-duty-trucks segments, the consensus across the industry is increasingly in favor of BEV-based solutions (Exhibit 1). However, many operators see CNG or LNG as bridge options to achieve partial decarbon­ization, amid lighter impacts on infra­structure and operations. In the short term, others are considering renewable natural gas, which can offer as much as a 100 percent reduction in emissions in some cases, compared with diesel fuel, albeit at a higher TCO than BEVs.6 The key variable will be the average carbon intensity of local electricity supply. Still, in the longer term, the upside is limited given that the grid should become more sustainable over time.7 (Note that this projection represents a US view.)

Light-commercial-vehicle emissions are highest from internal-combustion engines.

For heavy-duty trucks (HDTs) and long-haul use cases, the technology playing field is less defined. BEVs may create synergies with the rest of an operator’s fleet and allow the sharing of charging, maintenance, and operations. But high electrical-load requirements for heavy-duty applications are likely to incur peak-demand surcharges in the near to medium term, not to mention the potential for significant additional costs related to grid upgrades. With the TCO for hydrogen fuel cell technology roughly on par with that of battery electric tech­nology, a hybrid approach to transition may be optimal.8 Still, industry players should be aware that the overall supply of green hydrogen may not be sufficient in the short term as hydrogen infrastructure ramps up. Furthermore, as new disruptors continue to bring competitive models of battery electric HDTs to market, volume price points are easing down to about $200,000 to $250,000, almost half of the premiums seen recently.

Ultimately, a key strategic dilemma for operators will be whether to align all use cases under one common technology or leverage multiple technologies that introduce more operational complexity but deliver greater flexibility at any one time. Fleet operators may opt for a dynamic strategy, but this will bring inevitable costs. Careful planning is required. Indeed, excellent project management is likely to be a key pillar of a successful transition.

Developing a comprehensive plan

Given the risks involved in capturing value in the shift to green transport, forward-looking companies have prioritized a comprehensive decarbonization plan that focuses on vehicles, infrastructure, and fleet management. These companies have established this plan before making critical decisions about technology and infrastructure investment, and many base their approach on four key pillars:

  • Diagnostics. The process starts with a diagnostic of the current state of operations, considering fleet size and composition, vehicle requirements, route lengths, and business priorities.
  • Strategy development. Business leaders should attempt a holistic strategy to achieve the future-state operating model. Companies can decide which vehicles and use cases to prioritize, which technologies to invest in, and how they should manage trade-offs between economic gains and emissions reductions.
  • Testing and piloting. Proposed solutions should be launched on a small scale, with built-in flexibility to enable pressure testing of potential disruptions and to help meet required service levels.
  • Execution. After pilot evaluation and iteration, decision makers should define critical execution parameters, including sourcing, construction, and ecosystem partnerships.

Given the risks involved in capturing value in the shift to green transport, forward-looking companies have prioritized a comprehensive decarbonization plan that focuses on vehicles, infrastructure, and fleet management.

The process should take into consideration a com­pany’s wider mission so that the business can align speed of execution and use case prioritization with relevant internal and external goals (Exhibit 2).

Companies should tackle decarbonization through a comprehensive approach.

Individual companies moving toward decarbonization will need to identify the most promising combinations of technology and application in the context of their own business models and ambitions. In prioritizing use cases, it helps to consider them through two different lenses. The first, which focuses on economic factors, prioritizes use cases for vehicle classes and routes that are profitable and that produce the best TCO benefits. The second focuses on emissions benefits and prioritizes the use cases that produce the most improvement in this area. Both lenses can be used to assess the optimal speed of transition and to help choose the most suitable focus areas for a clean-technology rollout.

Two leading companies show the way

Two case studies, both involving leading industry players, illustrate alternative pathways toward decarbonization. The first involves a major logging company whose CEO delivered a top-down mandate stating that the business should achieve an aggressive emissions target by 2030, beginning with the vehicle fleet. Teams were required to decarbonize as much as possible while still achieving a neutral TCO impact, meaning out-of-the-money use cases would need to be offset by TCO-positive use cases.

In line with the four-pillar process, the company assessed its top six equipment archetypes, which were responsible for 90 percent of the company’s emissions, and defined a path to net-zero emissions by 2030. The company developed a road map for optimal charging and vehicle switching for its fleet of electric vehicles and launched a successful 30 percent capital expenditure offset plan to help achieve payback hurdles.

The second case study involves a transportation services provider that saw an opportunity to create efficiencies on its short-haul routes. To optimize its response, the company focused exclusively on identifying routes where decarbonization would support profitability and create additional value, including TCO benefits from shifting to BEV, business building through additional revenue streams (for example, sustainable shipping guarantees for certain sustainable products), and enhanced brand image, which resulted in an increase in volumes.

The value from fleet decarbonization is real, but so are the risks. First movers stand to access and succeed in emerging markets, such as green freight, but only if they can consider a tailored decarbonization pathway. That means aligning solutions with both sources of revenue and business priorities, as well as managing constraints to yield an optimal, effective, and timely transition.

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