UPS Inc. (NYSE:UPS) said May 22 that it placed the largest order for renewable natural gas (RNG) in U.S. history with the purchase of 170 million gallon equivalents of the alternate fuel over the next seven years.
Under the deal, the Atlanta-based transport and logistics giant will pay Clean Energy Fuels, (NASDAQ:CLNE) one of the nation’s leading natural gas suppliers, for the energy, which will be used to run the natural gas-powered delivery vehicles in the UPS fleet. UPS has 6,100 natural gas vehicles operating in nine countries, including the U.S. The cost for the fuel, in present-day dollars, is around $95 million. Natural gas prices, like those of other energy sources, fluctuate daily.
Renewables are produced naturally from methane gas emanating from landfills, wastewater treatment and agriculture, and are distributed through natural gas pipelines for use in either liquified or compressed forms. The objective is to convert trash that might otherwise be disposed of into clean-burning gas.
With the agreement, which applies only to U.S. operations of UPS, about 22 percent of UPS’ conventional fuel sources powering its global ground fleet will have been replaced by alternative fuels of various types. By 2025, it expects alternative fuels to account for 40 percent of its energy purchases supporting its worldwide ground network.
The transition to renewables will replace 135 million gallons of diesel over the life of the agreement, according to UPS.
Since 2014, about a year after it began a relationship with Clean Energy, UPS has consumed about 28 million gallons of RNG for its ground fleet. UPS expects to save money from the conversion because natural gas prices are typically not as volatile as oil prices.
UPS projected that the conversion will cut its greenhouse gas emissions by more than 1 million metric tons over the agreement’s life. Renewable natural gas reduces carbon emissions by 70 percent over conventional diesel or gasoline, UPS said, citing Clean Energy data.
By 2025, UPS wants to achieve a 12 percent “absolute” reduction from 2015 levels in its ground fleet’s greenhouse gas emissions. This means the company has decided to slash its carbon footprint by those levels even as volume growth simultaneously puts more demand on its fleet operations and leads to more fuel consumption. “Reducing our absolute emissions means we’re decoupling our business/volume growth from our emissions growth,” said Glenn Zaccara, a UPS spokesman.
UPS will use its 18 owned and operated refueling stations in 12 states for its fueling needs. Given its enormous network scale, UPS can justify the significant expense of a closed-loop fueling network. Many truck fleets, however, don’t have the luxury of UPS’ density.
The absence of a robust fueling infrastructure and the higher cost of investing in natural gas- powered trucks have traditionally been seen as impediments to broader natural gas usage for transportation. Equipment costs remain elevated. However, Mike Casteel, director of fleet procurement at UPS, said Wednesday there seems to be ample nationwide refueling capacity to accommodate current demand.
Fleet interest in natural gas power typically waxes and wanes with the movement of diesel fuel prices. Except for a three and one-half year period earlier in the decade when diesel prices rose only to crash with the corresponding drop in oil prices, the costs of conventional energy have not spiked at a sustainable rate over the past 11 years to spark wholesale conversions to alternate fuels.
For more than 10 years, Clean Energy Fuels co-founder T. Boone Pickens had stumped for the investment of $1 trillion in wind power to serve as a primary energy source, which would free natural gas to replace oil as the main transportation fuel. Dubbed the “Pickens Plan,” it had a receptive audience when oil prices spiked as high as $145 a barrel in mid-2008. However, interest diminished once oil prices fell sharply in the wake of the financial crisis and the severe recession that followed.
Clean Energy shares surged nearly 8 percent Wednesday on the news to close at $3 a share. However, shares traded as high as $21.67 a share i n March 2012, and have been on a steady decline ever since, perhaps reflecting stagnant demand for alternate fuels.