Energy Policy Act: Including Propane as an Alternative Motor Fuel Will Have Little Impact on Propane Market
Released: 1998-09-24T00:00:00

Letter

Background

To help meet its goal of replacing a portion of the conventional fuel used by light-duty vehicles in the United States with replacement fuels, EPACT established mandates, to be implemented by the Secretary of Energy, that require certain fleet operators to include alternative-fueled vehicles (AFV) in their fleets. Specifically, EPACT required that federal fleets acquire AFVs beginning in fiscal year 1993 and that state fleets and alternative fuel providers acquire AFVs beginning in model-year 1996. The federal AFV fleet program went into effect in 1993, but the mandates for state and alternative fuel provider fleets were delayed until 1997 because, according to a DOE official, the Department did not issue the rulemaking, as required by EPACT, early enough for the mandates to take effect in 1996. Also, under EPACT, the Secretary of Energy may require municipal and private (business) fleets to purchase an increasing percentage of AFVs to help meet the fuel-replacement goal. Under EPACT, DOE published an advance notice of proposed rulemaking in April 1998 and held public hearings in May and June 1998 to determine whether the establishment of the municipal and private fleet mandate is necessary and whether such a mandate will help attain EPACT’s fuel-replacement goal. EPACT does not require that the goal be achieved and authorizes the Secretary of Energy to modify the goal or the target years if he or she determines that they are not achievable. Table 1 presents a summary of EPACT’s AFV acquisition mandates for the fleets covered by the act.

EPACT’s Replacement Goal Is Not Likely to Be Achieved

The goal of EPACT to replace 10 percent of the conventional fuel consumed by light-duty vehicles by 2000 and 30 percent by 2010 with replacement fuels is unlikely to be achieved. On the basis of EIA’s modeling analysis, we estimate that alternative fuels will account for less than 1 percent of the total fuel to be consumed by light-duty vehicles in 2000 and about 3.4 percent in 2010, even after accounting for EPACT’s provisions mandating that fleets acquire AFVs. Previous studies by DOE have also concluded that EPACT’s goal is unlikely to be achieved after implementing the fleet acquisition mandates. Appendix I summarizes the results of several previous studies by DOE and Oak Ridge National Laboratory.

Industry and DOE officials we talked with gave several reasons why the consumption of alternative fuels by light-duty vehicles will fall short of EPACT’s replacement goal. First, EPACT mandates that fleets acquire AFVs but does not explicitly require that those vehicles use alternative fuels.Consequently, according to industry officials, some fleets meet their AFV requirements by purchasing vehicles capable of using both gasoline and an alternative fuel (called dual-fueled vehicles), but these vehicles are usually run on gasoline. Moreover, both DOE and industry officials believe that achieving EPACT’s goal will require greater use of alternative fuels by vehicles beyond those in the fleets covered by the act, a development they believe is unlikely. For one thing, the high price of AFVs discourages their use. For example, according to one industry official, converting a conventional vehicle to run on propane can cost over $3,500, while a manufacturer’s AFV that runs on propane can cost about $6,000 more than a conventional gasoline-powered vehicle. In addition, the lower price of gasoline discourages increased use of the higher priced alternative fuels. Both DOE and industry officials said that the price of gasoline is simply too low for the transportation sector to purchase significant quantities of alternative fuels. (See fig. 1 for a comparison of gasoline and propane prices, adjusted for inflation.) Finally, the infrastructure needed to keep AFVs refueled is currently inadequate to support the wide-scale use of AFVs that are not operated as centrally fueled fleet vehicles. Industry officials told us that the consumption of alternative fuels for transportation is too small to justify any large-scale investment in this infrastructure.

EPACT Will Lead to a Small Increase in the Use of Propane as a Transportation Fuel

EPACT is expected to lead to a small increase in the use of propane as a transportation fuel. After EPACT’s AFV acquisition requirements are accounted for, the resulting increase in transportation use will represent only 0.4 percent of the total consumption of propane in 2000 and 3.2 percent in 2010. As a result, consumption of propane as a transportation fuel will account for about 1.5 percent of the total propane used in the United States in 2000 and about 5.1 percent in 2010. The effects of EPACT specifically on the consumption of propane fuel by light-duty vehicles are summarized in table 2.

Some industry and DOE officials told us that although propane has certain attributes that could make it the alternative fuel of choice, such as permitting a longer driving range than compressed natural gas, the barriers cited previously—the high relative cost of AFVs, the low price of gasoline, and the inadequate infrastructure for refueling—still inhibit its use. In addition, it does not appear that the propane industry will strongly promote the fuel as an alternative vehicle fuel. Propane industry officials and others told us that the industry lacks the internal cohesion necessary to promote the use of propane as a transportation fuel. Some officials pointed out that the history of the industry has been one of small-scale suppliers that primarily serve the heating and other household needs of residential customers. These suppliers do not necessarily want to see propane become a major transportation fuel for fear that that would erode their business. By comparison, DOE and industry officials and other experts told us that the natural gas industry is aggressively promoting compressed natural gas as an alternative transportation fuel. A manufacturer of AFVs also told us that the natural gas industry has been much more aggressive in pushing for the increased manufacture of vehicles that run on its fuel than the propane industry has.

EPACT Will Have Very Little Impact on the Supply and Price of Propane

Because EPACT is not expected to cause any significant increase in propane demand, it will have very little impact on the supply and price of propane. Any effects of EPACT on the supply and price of propane are indirect, that is, are in response to any higher demand its mandates might cause. Because EPACT will not cause much change in the demand for propane, little change in the supply and price of propane can be expected to result from EPACT’s mandates. We estimate that the additional U.S. production of propane that will result from EPACT will be about 7,000 barrels per day in 2000 and 85,000 barrels per day in 2010. According to EIA’s modeling results, these levels of domestic production will satisfy most of the additional propane demand or consumption caused by EPACT, while imports will satisfy the rest.

Some propane users have expressed concern that EPACT could cause imports to become a greater proportion of the U.S. propane supply. We found evidence that U.S. propane imports will increase but not because of EPACT. For instance, Purvin and Gertz, Inc., a consulting firm specializing in analyses of the oil and gas industry, projects that U.S. imports of propane will rise from about 179,985 barrels per day in 1997 to about 264,400 barrels in 2000 and almost triple by 2010 to about 483,200 barrels (see fig. 2). As a percentage of the total U.S. propane supply, imports will rise from about 14.5 percent in 1997 to about 19 percent in 2000 and 28 percent in 2010, according to the firm’s estimates. However, Purvin and Gertz officials told us that these increases in imports are unrelated to EPACT. The firm’s projections of both supply and demand for propane do not account for EPACT because it believes its effects on the propane market will be inconsequential.

We estimate, based on EIA’s modeling, that the effect of EPACT on the overall price of propane will be negligible: an increase of 0.17 cent per gallon in 2000 and 3.28 cents per gallon in 2010 (fig. 3 shows the average price of propane, in 1996 dollars per million Btu, with and without EPACT’s effects, from 1997 through 2010). Table 3 presents the estimated price impacts of EPACT on three categories of U.S. consumers. The estimated price increase effects for residential consumers will be only 0.10 cent per gallon in 2000 and 1.50 cents per gallon in 2010; the increase for industrial consumers is estimated to be 0.10 cent per gallon in 2000 and 1.70 cents per gallon in 2010; and the increase for transportation consumers is estimated at 0.43 cent per gallon in 2000 and 2.33 cents in 2010. In addition, Purvin and Gertz officials believe that the U.S. market will become the destination for a large share of the increased propane production from natural gas fields being discovered in many parts of the world, which could lead to lower prices.

EPACT Will Have No Discernible Adverse Effect on Existing Propane Consumers

Existing consumers of propane, such as residential and petrochemical users, are not expected to be adversely affected by EPACT because the act is expected to have a negligible effect on propane prices. EPACT would cause a measurable adverse impact on existing propane consumers if it significantly increased the demand for propane as a transportation fuel and drove up its price. But, as previously discussed, demand and price are not likely to rise significantly given the limited effects of EPACT’s mandates for fleets. DOE, EIA, and most of the industry officials and experts we talked with believe that the price effects of EPACT will be negligible and that propane consumption by nontransportation sectors will not be affected by EPACT. Figure 4 presents projections, based on EIA’s modeling, for the consumption of propane by various U.S. end-use sectors, including the transportation sector, after factoring in the impact of EPACT.

These projections are in contrast to those of a previous DOE study that investigated what might happen if alternative fuels, AFVs, and a refueling infrastructure were available on a widespread basis, a hypothetical scenario different from the questions addressed in our report. Appendix I provides additional detail on that study, which indicated a significant impact on the petrochemical industry if EPACT’s replacement goal was met in 2010. According to industry officials and experts, the petrochemical sector is likely to reduce its propane consumption if the price of propane rises because a significant portion of the propane that sector uses can be replaced with other feedstocks, such as naphtha and ethane. However, these officials also told us that switching feedstocks would also lead to increases in the prices of the substitutes, resulting in an increase in the industrial consumers’ production costs. These industry officials believe that if EPACT’s replacement goal is met, the likely consequences on their industry will be severe.

Agency Comments and Our Evaluation

We provided a draft of this report to DOE for review and comment. DOE agreed with our findings and provided some technical clarifications where appropriate.

Scope and Methodology

To determine whether and how including propane as an alternative fuel under EPACT will affect the supply, price, and existing consumers of propane, we asked EIA to use its National Energy Modeling System to estimate the likelihood of achieving EPACT’s fuel replacement goal and to estimate the potential impact. (See app. II for more explanation of the modeling of EPACT’s effects.) We asked EIA to include in the analysis all of the mandates in EPACT that require federal and state governments as well as fuel providers to procure AFVs for their fleets, including the mandates for private and municipal fleets that have not gone into effect. We also interviewed officials of the propane and oil industries, manufacturers of AFVs, companies that convert conventional vehicles to AFVs, the alternative fuels infrastructure industry, and relevant DOE and EIA officials for their perspectives on likely effects of EPACT. We also reviewed the EPACT documents as well as studies by DOE and others that deal with EPACT and alternative fuels.

We conducted our review from February through September 1998 in accordance with generally accepted government auditing standards.

We will send copies of this report to interested congressional committees and the Secretary of Energy. We will also make copies available to others upon request.

Please call me at (202) 512-3841 if you have any questions. Major contributors to this report are listed in appendix III.

Results From Previous DOE Studies

The Department of Energy (DOE) has conducted several studies of the Energy Policy Act of 1992 (EPACT). The scope of these studies is broader than the objectives of our report in that these studies went beyond the mandated fleet measures analyzed in our report. For instance, these studies estimated impacts of actually reaching the EPACT replacement goal, as well as impacts of other policy initiatives. This appendix summarizes some of the information three of these studies provide on the barriers to the widespread use of alternative fuels and on implications for the future use of alternative fuels.

Replacement of Gasoline With Alternative Fuels Is Likely to Fall Short of EPACT’s Goal

“Major transitional impediments” will have to be overcome to reach EPACT’s goal of replacing 10 percent of the conventional fuel consumed by light-duty vehicles with alternative fuels by 2000 and replacing 30 percent by 2010, according to a 1997 DOE study. To meet the 2000 goal, 35 to 40 percent of total 1999 sales of new light-duty vehicles would have to be alternative-fueled vehicles, according to that study. To meet the 2010 goal, sales of alternative-fueled vehicles would have to stay in the range of 30 to 38 percent of all new light-duty vehicles sold. A 1998 draft report by DOE’s Oak Ridge National Laboratory, however, found that with the implementation of EPACT’s fleet requirements, including private fleet mandates, alternative-fueled vehicles would make up less than 1 percent of new vehicle sales in 2000 and only 4 percent by 2010. This study concluded it was unlikely that the 2000 goal will be met, or that the 2010 goal would be met without significant new policy initiatives. The study described the following transitional barriers to the greater use of alternative fuels: the lack of scale economies in the production of alternative fuels and alternative-fueled vehicles, the consumer costs of the low retail availability of alternative fuels and the limited model diversity of alternative-fueled vehicles, and the slow turnover of durable capital equipment and vehicles already on the road.

Table I.1 summarizes the Oak Ridge study’s estimates of what portion of petroleum consumption would be replaced by alternative fuels in 2010 under six different sets of assumptions. In the base case, DOE assumed existing fleet mandates, while in the late rule case DOE assumed a local government and private fleet mandate was added. In either of those cases, alternative fuels would constitute less than 1 percent of light-duty vehicle motor fuel sales in 2010. The assumptions made in the next three cases produced estimated replacement levels between 14 and 22 percent. In the no barriers case, DOE assumed that vehicles and fuels would be produced at large-scale costs and that all fuels would be widely available at retail locations. In the greenhouse gas case, DOE assumed fuel tax reductions in proportion to the reductions in greenhouse gas emissions from a baseline level of emissions for gasoline. In the tax credit case, DOE assumed an ethanol tax credit would continue through 2010. The last of the six cases was the only one in which EPACT’s goal of 30-percent replacement was achieved. In this case, called the fuel sales mandate case, DOE assumed that the Congress would require that retail sales of alternative fuel meet EPACT’s goal but does not describe how such a result would be mandated.

The Relative Contribution of Propane in Meeting EPACT’s Goal Is Unclear

Although the Oak Ridge study suggests only a minimal role for propane in meeting EPACT’s goal, in January 1996, DOE issued a report on the feasibility of producing sufficient replacement fuels to meet EPACT’s 10- and 30-percent goal. This study indicated a potentially major role for propane. In it, DOE examined two scenarios: the low oil price scenario, which assumed that the Organization of Petroleum Exporting Countries (OPEC) was not able to exert monopoly control over crude-oil pricing in 2010 and the reference oil price scenario, which assumed that OPEC exerted partial monopoly power over the pricing of crude oil.

Under the low oil price scenario, the world oil price would be $20.60 per barrel; the U.S. price, $21.60. Under the reference oil price scenario, the world oil price would be $25.82 per barrel; the U.S. price, $26.74 per barrel.

For each scenario, DOE examined various possible cases, including the following four. In the benchmark case, DOE assumed that all fuels would be taxed at the same dollar-per-Btu rate, specifically the gasoline tax rate in 1994. It assumed that no well-developed infrastructure for alternative transportation fuels would exist and that alternative-fueled vehicles would be in use by organizations covered by EPACT’s fleet requirements and state mandates, while households would continue to rely on gasoline-fueled vehicles. In the unconstrained case, DOE assumed that a well-developed infrastructure for alternative transportation fuels and vehicles would exist in a long-run situation. In the limited imports case, DOE assumed that at least one-half of alternative fuels used would be produced from within the North American Free Trade Agreement countries. In the letter-of-the-law case, DOE not only assumed limited imports but also assumed that overall petroleum replacement would equal 30 percent. Table I.2 summarizes the results from this study for light-duty vehicle fuel use under the low oil price scenario. Somewhat higher replacement percentages occurred under the unconstrained and limited imports cases in the reference oil price scenario. Propane consumption was higher for the unconstrained and limited imports cases but slightly lower for the letter-of-the-law case under the reference oil price scenario.

The importance of propane as an alternative fuel differed in the 1996 study and the Oak Ridge study because of the 1996 study’s use of lower cost figures for liquified petroleum gas. According to the authors of the Oak Ridge study, had they also used these lower costs, they would have reported a 28-percent displacement of gasoline by alternative fuels in 2010 versus the 14-percent figure they reported in the no barriers case. Of this 28-percent displacement, propane would have constituted about half. The 1996 study estimated that propane would account for 47 percent of the fuel displaced by alternative fuels.

In its 1996 study, DOE found, under its low oil price scenario, potentially significant impacts on the propane market once all transitional barriers to alternative fuels were overcome. As seen in table I.3, when comparing the benchmark and unconstrained cases, liquified petroleum gas consumption by motor vehicles rises from 0.042 million to 1.450 million barrels per day in 2010. At the same time, consumption by the petrochemical industry falls from 0.333 million barrels per day to 0. The remaining liquified petroleum gas consumption, categorized as “nonvehicle end use” (such as residential heating and cooking), decreases from 1.742 million to 1.710 million barrels per day. Under the benchmark case, propane supplied by refineries and gas processing plants were somewhat lower in the reference oil price scenario than the low oil price scenario, whereas non-Canadian imports were higher under the reference oil price scenario. In both the reference and low oil price scenarios, the direction of change in values between the benchmark and the other cases were similar.

Table I.4 summarizes the effect of these changes in consumption and supply on propane prices as estimated in the 1996 report. By contrast, the Oak Ridge study reported no increase in propane prices, except in the case of a fuel sales mandate, under which the liquified petroleum gas price rose less than 2 percent.

Reformulated gasoline contains additional oxygen and burns more cleanly than conventional gasoline.

In comparing the overall results of these two studies, the Oak Ridge authors noted that their results were “in marked contrast to DOE’s 1996 long-run analysis, which concluded that if the necessary infrastructure for a mature alternative fuel and vehicle industry were present, then alternative fuels, as a group, appear likely to sustain a 30-percent market share under equilibrium conditions.” The Oak Ridge report went on to state, “However, the modeling results here suggest that the necessary infrastructure may not evolve smoothly, and fuel and vehicle prices may not benefit from economies of scale in the absence of additional policies . . ..”

Estimating the Effect of EPACT’s Fleet Mandates

This appendix describes the Energy Information Administration’s (EIA) methodology for estimating the effect of EPACT’s purchase mandates for alternative-fueled vehicles (AFV) on the replacement of petroleum fuels used by motor vehicles in the United States and on the demand, supply, price, and existing consumers of propane.

As a starting point, we asked EIA to use its National Energy Modeling System (NEMS) to estimate the likelihood of achieving EPACT’s goals of displacing 10 percent of the petroleum motor fuel used in the United States by 2000 and 30 percent by 2010 by implementing all the mandates placed on “covered” fleets (i.e., those bound by the EPACT mandates) to purchase an increasing percentage of AFVs. We also asked EIA to use NEMS to model the effect of including propane as an alternative motor fuel under EPACT on the demand, supply, price, and existing users of propane. EIA developed and maintains NEMS to forecast the effects of energy policies or programs and changing world energy market conditions on the U.S. and world energy markets.

Estimating EPACT’s Effect on Fuel Displacement

To estimate what percentage of petroleum motor fuel will be replaced by alternative fuels in the United States, EIA used the Transportation Demand Module of NEMS to model the effect of AFV acquisitions by the various covered fleets on the consumption of alternative fuels and calculated the percentage of displaced conventional fuel that this represents. EIA assumed that covered fleets will basically meet their legislative requirements for AFVs by purchasing the minimum percentage mandated by law. According to EIA officials, its analysis has found that the economics of AFV purchases do not justify exceeding the minimum percentage. It therefore estimated the impact of the fleet mandates by including in NEMS the minimum percentage required for each fleet category in each year specified. EIA used the reference case in its Annual Energy Outlook 1998 as a projection of the most likely future trends in energy markets and the U.S. economy.

To estimate the impact of EPACT’s AFV mandates on the demand, supply, and price as well as on existing consumers of propane, EIA performed a special run of NEMS (otherwise known as the GAO case) that basically removed propane-fueled vehicles from consideration, leaving everything else constant, including the assumption that the minimum required percentage of AFV purchases would be made in each fleet category. For each variable of interest, the results of the GAO case were then compared with the reference case in the Annual Energy Outlook 1998 and the difference calculated to determine the estimated impact. For example, to estimate the impact of EPACT mandates on propane use, the difference in propane use between the GAO case and the reference case was computed.

Detailed Assumptions and Other EPACT Provisions Incorporated in the Model

In using NEMS to model the effects of EPACT, EIA made the following assumptions concerning how the provisions of EPACT are incorporated in the model. The fleet AFV purchases necessary to meet the EPACT regulations were derived based on the mandates as they currently exist as well as the Commercial Fleet Vehicle Module calculations. The federal AFV program went into effect in fiscal year 1993 but, generally, the mandates for state and alternative fuel provider fleets were delayed until 1997 because, according to a DOE official, DOE did not issue the rulemaking, as required by EPACT, early enough for the mandate to take effect in 1996. Specifically, it is assumed that each fleet category will meet its AFV mandate by purchasing the minimum percentage of AFVs required by EPACT for that fleet category. Table II.1 presents the percentages used by EIA’s NEMS for AFV purchases for each fleet category and model year, and the mandates for municipal and private fleets still subject to rulemaking. Table II.2 presents the total projected AFV purchases by fleets.

Although the mandates for private and municipal fleets (covered by section 507(g) of EPACT) are not in effect yet and are still subject to rulemaking by the Secretary of Energy, the effects of these mandates were included in the model in order to estimate the total effect of all the AFV acquisition provisions in the law. In the model, the private and municipal fleet mandates do not become effective until model year 2002, based on the schedule specified in the law. Only fleets of 50 or more were considered (in accordance with EPACT), and AFV purchases were categorized as cars or light trucks. Because EPACT covers only fleets in the metropolitan statistical areas with 1980 populations of more than 250,000, the model excluded 10 percent of all business and utility fleets and 37 percent of all government fleets. For other than federal fleets, EPACT covers fleets of 50 or more vehicles, of which at least 20 vehicles can be centrally fueled and are used primarily in metropolitan statistical areas with 1980 populations of more than 250,000.

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