Will it be cars powered by electricity or those running on natural gas that gains the greatest market share in the future? Electric vehicles (EV) are the favored option of the Obama administration because they are "pollution-free."

Unfortunately, several recent studies have shown that depending on the fuel source powering the generation plant, electricity can be quite polluting. In other words, how environmentally friendly EVs are depends on where they are plugged in. This concern has not been the primary reason why EVs haven't caught on with the American consumer. Rather, it has more to do with their high price and limited travel range on a single battery charge that has held back increased market penetration.

Taking center stage now are vehicles powered by natural gas, either as compressed natural gas (CNG) or liquefied natural gas (LNG). The push to get more Americans into CNG- or LNG-powered cars has been driven (pardon the pun) by the natural gas shale revolution that has led to increased reserves and production and low prices.

The consensus view held for the past decade of the role natural gas will play in the domestic, and likely global energy market, is as the bridge fuel to take this country from its crude oil dependency to a country powered by clean renewable fuels. This view has evolved as natural gas production expanded well beyond what was expected and the price of the commodity descended to un-imaginably low levels.

Now, with the prospect of these supply and price conditions extending for decades, instead of being a bridge, natural gas is perceived as the next fuel to power the globe as we go through another historical energy transition. At this point we won't debate the natural gas thesis but rather will focus on its impact on the transportation market and which vehicles drivers may be using in the future.

Somewhat ignored in this discussion about the future of the alternative fuel vehicle market is the role of hybrid vehicles, including gasoline/battery powered and plug-in hybrids. What we have found, as a result of an analysis by an executive leading a company active in the alternative-fuel vehicle market that was made available to us, is that the politically-popular view of EVs being the most environmentally-friendly mode of transportation may not be correct.

The analysis was done at the end of 2010, but we have updated the fuel cost variables for more recent prices. The analysis was driven by the announcement by Toyota (TM-NYSE) that it was introducing a plug-in Prius, a variation on its extremely successful gasoline/battery hybrid. The plug-in version allowed for a fair comparison of pure electric vehicles versus highly efficient internal combustion engine vehicles. As the analysis stated, the two models are essentially the same car with the only variation being the propulsion system. The analysis eliminated key variables such as different vehicles and different battery technologies.

The technical details for the vehicles are listed below and were incorporated in the analysis.

  • Gasoline economy: Popular reviews suggested a range of 45-55 miles per gallon. The mid-point (50 mpg) was used in the analysis.
  • Battery-only range: About 13 miles, as published by Toyota.
  • Battery energy capacity: 5.2 Kilowatt hours (kWh).
  • Battery charging efficiency: About 90%, including battery internal efficiency and recharging power electronics efficiency.
  • Battery re-charging time: About three hours.

Fuel costs used in the analysis:

  • Cost of gasoline: $3.53 -- national average for 2011 according to the Energy Information Administration (EIA).
  • Cost of electricity: $0.118 per kWh -- national average for residential electricity in 2011 according to EIA.

The analysis of commutes in the two model cars shows the following results:

  • Cost of a pure electric round trip commute: (2 x10 miles) x (5.2 kWh/13 miles)/(0.90 charge efficiency) x ($0.118 per kWh) = $1.05
  • Cost of gas/battery hybrid round trip commute: (2 x 10 miles) / 50 mpg) x ($3.53 per gallon) = $1.41

At the time the analysis was originally prepared, gasoline cost $2.73 per gallon and residential electricity cost $0.115 per kWh. Using those parameters, the pure electric trip cost $1.02 while the hybrid mode commute cost $1.09. The cost advantage for the pure electric vehicle was only 7-cents. Today, it is 36-cents, which shows the sensitivity of EV economics to gasoline prices.

Between December 2010 and now, the price of gasoline increased 29% while the cost of residential electricity only rose 2.6%. Low natural gas prices, which also helped drive down coal prices, contributed to the muted increase in electricity costs. As an alternative, we also calculated the pure electric commute cost assuming the cost of electricity rose by one penny over its December 2010 price, which resulted in increasing the commute round trip cost by 9-cents to $1.11.

While the executive preparing the analysis looked at some other issues, we found those to be less significant than his key conclusions about the pollution impact of the "battery only" vehicle option. He assumed that the national average electricity power generation efficiency was equal to 32% based on an examination of the chart of estimated U.S. energy use in 2009 prepared by the Lawrence Livermore National Laboratory. He also used a value of 130,000 Kilojoules (KJ) of energy in a gallon of gasoline. Based on these assumptions, the analysis of the total energy used in the round trip commutes was as follows:

  • Pure electric round trip commute: (2 x 10 miles) x (5.2 kWh / 13 miles) / (0.90 charge efficiency) / (0.32 electric power-plant efficiency) x (3600 KJ/kWh) = 100,000 KJ
  • Hybrid mode round trip commute: (2 x 10 miles) / (50 mpg) x (130,000 KJ/gallon of gasoline) = 52,000 KJ

The total energy consumed by the "pure electric" vehicle is almost twice the total energy consumed for the gasoline/battery hybrid one. This speaks to the challenge alternative fuels face in trying to displace the high efficiency of gasoline engines and the associated efficiency of the mechanical drivetrain. But what does this mean in terms of greenhouse gas (CO2) emissions? The executive preparing the analysis estimated the amount of CO2 emitted by each fuel for the various modes of travel:

  • Total CO2 emitted from hybrid mode (gasoline) round trip commute = 3.4 kilograms (kg)
  • Total CO2 emitted from hybrid mode (natural gas) round trip commute = 2.3 kg
  • Total CO2 emitted from pure electric round trip if power is from a natural gas-fired electric plant = 5.1 kg
  • Total CO2 emitted from pure electric round trip if power is from a coal-fired electric plant = 10.4 kg
  • Total CO2 emitted from pure electric round trip if power is from the average of all electric power plants (coal, natural gas, nuclear and renewables) = 6.0 kg

This analysis highlights two points: 1) a natural gas-powered hybrid is considerably more environmentally-friendly than a gasoline-powered one; and 2) even if all the electricity comes from a natural gas-powered plant an EV is not as environmentally-friendly as a gas/battery hybrid vehicle, and especially if the hybrid vehicle is powered by natural gas.

In April, the Union of Concerned Scientists issued a report designed to show that EVs were the only vehicle acceptable in a world of global warming. They looked at the amount of pollution from electric power generating plants in 50 cities around the country to see how an EV compared in each city based on a miles-per-gallon comparison of emissions of a gasoline-powered car. What they found in those regions of the country where coal-fired power plants predominate for electricity generation was that EVs would compare to gasoline-powered vehicles with much lower mpg ratings than those geographic regions with cleaner electricity such as California.

The New York Times, when it wrote about the study, created an interactive model to show the pollution rating based on a gasoline-powered vehicle's mpg rating for many cities in the country.

One chart from the Union of Concerned Scientists' study is presented in Exhibit 4. It is hard to read, but it shows the study's conclusion that if a vehicle is powered exclusively by solar or wind, there will be zero emissions. If powered by the cleanest grid region in the country, the vehicle would emit 100 grams of pollution per mile driven, which compares with the best hybrid (50 mpg) that emits 225 grams per mile. The dirtiest grid region would release 340 grams per mile driven while the average new compact car today with a 27- mpg rating would emit 415 grams.

The point of the chart is to show how EVs gain on a pollution basis compared to others even if the source of electricity is dirty. The values in the chart were determined based on full fuel-cycle accounting.

Alternative Fuel Vehicles Drawing Increased Attention

This study would seem to be counter to the above analysis of pure-electric mode commutes compared to hybrid mode trips. We are not sure that the full fuel-cycle accounting truly measures the energy requirement of the vehicles, which also helps explain EV performance issues. We found it interesting that one of the leading auto parts manufacturers, Delphi Automotive PLC (DLPH-NYQ), is working on a gasoline engine that operates like a diesel engine and will be able to yield fuel performance equal to the best hybrids at less cost, and presumably with fewer emissions, too.

Delphi's approach, called gasoline-direct-injection compression ignition, combines a collection of engine-operating strategies that make use of advanced fuel injection and air intake and exhaust controls. Many of these technologies are available on advanced engines today. The company found that if it injected the gasoline in three precisely timed bursts, it could avoid the too-rapid combustion that's made some previous experimental engines too noisy. At the same time, the engine could burn the fuel faster than in conventional gasoline engines.

Alternative Fuel Vehicles Drawing Increased Attention

Diesel engines do not use a spark to ignite the fuel. Instead, diesel engines compress air until it is so hot that fuel injected into the combustion chamber ignites. Attempting to do this with gasoline engines has proven very challenging especially under the wide range of loads put on them such as when the car idles, accelerates and cruises at various speeds.

So far, Delphi has demonstrated this technology with a single-piston test engine under a wide range of operating conditions. It is beginning tests on a multi-cylinder engine that will more closely approximate a production engine. This is just one of many initiatives the auto industry has underway to improve conventional gasoline engines because they remain the most efficient converter of fuel into power.

Transportation may be one segment of the energy market where "all of the above" makes sense. Unfortunately, politicians want to rush to pick one technology they believe is superior (EVs), while stifling others in their haste. It brings to mind the old expression: "Haste makes waste."

G. Allen Brooks is Managing Director of Houston-based investment banking firm Parks Paton Hoepfl & Brown. This article originally appeared in the June 5, 2012, issue of PPHB's newsletter "Musings from the Oil Patch."