Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


Memorandum by Mobil CNG (IT 75)

SECTION I

Mobil CNG-An Introduction to the Company:

  In response to the demand for "greener" fuels, Mobil has established Mobil CNG Ltd, a UK-based subsidiary of Mobil Corporation. Mobil CNG offers a comprehensive fuel supply package, increasing the choice of more environmentally friendly fuels available to fleet operators.

About Compressed Natural Gas:

  There are huge reserves of natural gas in the UK and a national distribution network, which provides secure and easy access to these gas volumes.

  Compressed Natural Gas—CNG—is a natural gas taken from the pipeline and compressed to a fraction of its volume, without losing any of its energy potential. Trucks and buses fuelled by CNG can travel up to 350 miles between fills.

  CNG is an environmentally friendly and fundamentally economical fuel, which is, at present, most suitable for the commercial vehicle sector—for example, local authority and private sector waste disposal vehicles, bus fleets and lorries delivering to large retail chains. For example, Safeway uses Mobil CNG in its distribution fleet.

  CNG is the best choice of all the alternative fuels because it is the safest, quietest and has the lowest overall environmental impact: The appendix gives further details.

Overall Environmental Impact

  Natural gas is produced either as the primary product from a gas well or in association with oil from oil wells. Once it has been dried it is distributed via the underground national mains gas system. As it requires so little processing, over the life cycle of the fuel it is the most environmentally friendly fuel currently available.

Emissions

  Current technology for CNG engines provides exceptional performance in relation to emissions legislation, both the Euro 11 and 111 standards and in relation to the UK's own National Air Quality Strategy.

Safety

  CNG is an extremely safe fuel. The technology used already exceeds the stringent safety requirements of the offshore oil and gas production industry. Since the fuel is lighter than air, in the unlikely event of a leakage it will harmlessly disperse.

Noise

  CNG vehicles are between 50 per cent and 80 per cent quieter than traditionally fuelled HGV vehicles. Use of CNG vehicles can significantly contribute to enhancing the environment. It can also ease traffic congestion by allowing for far greater flexibility in delivering goods, during the night, in residential areas.

SECTION II

  In this submission we focus our responses to the White Paper on Part III, Chapter 4, "Sending the Right Signals".

Economic instruments:

  (Sections 4.118/119/120)

  Mobil CNG welcomes the White Paper's recognition that the costs paid by transport users do not reflect the environmental costs associated with different transport use, in particular noise, pollution and nuisance. Mobil CNG also supports the notion that the use of economic instruments is an important means of influencing travel choice and of encouraging the use of more environmentally friendly fuels. However, Mobil is concerned that where Government seeks to change patterns of transport use and to deliver more choice into the market by use of fiscal incentives, those incentives should be effectively, timely and workable. Below, we present our view on existing incentives and suggest an improved system, which, we believe, would meet the Government's good intentions more quickly and more effectively and without the waste that exists within the current incentives scheme.

4.121 Increasing fuel duty has proved an effective way of directly influencing CO2 emissions from road transport as part of our strategy for tackling climate change.

  Government should make a distinction between achieving the CO2 targets agreed at the Kyoto Summit and the National Air Quality Strategy Targets set out in the UK by the Department of the Environment Transport and the Regions. The latter concerns the emissions ejected into the atmosphere by vehicles, which are harmful to the nation's health and for which, in conjunction with our European partners, stringent targets have been set.

  Effecting a substantial overall reduction in CO2 emissions will be achieved by reducing the total amount of all carbon-based fuels burnt, on a global scale. Although the type of fuel burnt by vehicles is a factor in this equation, it is only a tiny proportion of the overall problem. Mobil CNG believes that Government should focus its fiscal incentives on improving air quality and reducing other emissions, namely carbon monoxide, oxides of nitrogen, other non methane hydrocarbons, particulate matter, (especially PM10s) and sulphur oxides.

4.122 We will continue to encourage the use of environmentally friendly fuels.

4.123 We have frozen gas duty on road fuel gases

  The Government states that the key to increasing the use of environmentally friendly fuel will be an industry response, offering more choice on the forecourt. Mobile CNG stands ready to deliver this further choice but does not believe that the current differentials in duty have any significant effect on catalysing this market. It is also important for government to focus on which fuels are realistically likely to be taken up by particular market sectors over, say, the next five to 10 years.

  In order to promote the use of CNG fuel by commercial fleet vehicle operators, a price advantage needs to be demonstrated. The example of unleaded fuels showed that the creation of a price advantage was the crucial determining factor in private motorists making the switch from leaded to unleaded fuels. This is even more likely to be true of commercial operations. Consequently, Mobil CNG believes that for the Government to achieve its intentions gas duty must continue to be decreased significantly—not only in real, but also in cash terms. In order for this fiscal measure to be significant we believe it should be decreased towards the EU minimum of 7.8p per kilo.

4.124 The 1999 Finance Bill will provide an incentive for cleaner vehicles through the vehicle excise duty arrangements for lorries and buses. From January 1999 lorries and buses producing very low particulate emissions will receive an incentive of up to £500 off VED rates to encourage owners to achieve tough emissions targets.

  The proposed changes in VED give the greatest incentive to users of the smallest vehicles. Mobil CNG believes it is the operators of fleets of large vehicles that are the key to establishing the more widespread use of CNG. Fiscal incentives should therefore be initially directed at these users in preference to light vehicle users and individual motorists. Consequently, Mobil CNG does not believe that this rebate constitutes a serious incentive at this time. Mobil CNG would not suggest that this rebate should be increased, but rather that the scheme be revised to make the incentive attractive to those who are most likely to help the Government meet its objectives soonest. The incentive needs to be directed at the operator at the stage at which the decision to make the shift to gas powered vehicles is made. In this way, we believe maximum advantage could be derived from the fiscal incentive.

4.127 Local Bus Services have benefited from a scheme for Fuel Duty Rebate since 1962, designed to avoid increases in fuel duty feeding through into fares. For the first time since 1993 we are increasing this rebate by £40 million in line with the duty increase on diesel.

  Mobil CNG does not believe that this rebate is effective in either providing an incentive to bus companies to switch to environmentally friendly fuels or in promoting cleaner bus use over polluting buses. The rebate was originally introduced in order to safeguard fare levels in the face of increasing diesel duty. However as will be clear from the example given below, the rebate is not consistent with the Government's objectives and dilutes the incentive effect of the duty differential that already exists between CNG and diesel.

The Pricing Economics

  Given equivalent economies of scale CNG could be produced at a similar cost to diesel. Currently, CNG receives a 100 per cent duty rebate on bus routes on which diesel attracts a 30 pence per litre rebate. However, because CNG fuel is more expensive in trial size volumes, the effect of the rebate is neutral. Mobil CNG believes that if the Government encouraged the development of a CNG refuelling network, the industry could eventually provide CNG at a base price broadly in line with that of diesel. Currently the effects of the rebate are as follows (the figures used are approximate to illustrate the example).

Diesel10p per litre
Duty45p per litre
Net price55p per litre
Rebate 30p
Total price25p per litre
CNG23p per litre
Duty16p per litre
Net price39p per litre
Rebate 16p (@100 per cent)
Total price23p per litre


Rebate size:

  As will be obvious the 2p differential does not compensate bus companies for additional vehicle purchase costs. In fact, alternative fuels would be more attractive to bus operators if there were no rebates.

  If duty rebate is now frozen as it has been previously and CNG duty continues to attract a 100 per cent rebate, the differential will grow as the 6 per cent real terms increase in duty will hit the diesel bus operator which will encourage more gas fuelled buses.

Statement of Intent

  The uncertainty of whether the rebate will increase in line with duty increases and whether the CNG duty rebate will continue, leaves companies who are making long-term investments in bus fleets unwilling to take the plunge. A clear statement of intent from Government as to the timespan of this rebate and rationale for future changes would assist industry when making these investment decisions.

  The Government should recognise that this rebate is currently cancelling out any price advantages for gas fuels arising from the existing duty differential.

  Section III: The Way Forward: Some Questions for Consideration in Delivering the Switch to Alternative fuels.

  As previously stated, Mobil CNG welcomes the Government's objectives of encouraging more choice in the use of environmentally friendly fuels and in coupling those aims with an economic incentive. However, we believe there is a significant risk that the present arrangements will not deliver those worthy objectives. Consequently, we believe that the Select Committee should address the following key questions:

1. AN INTEGRATED FUEL POLICY

  It is not Government's job to second-guess industry or back winners in the field of alternative fuels. In reality, although there are a number of alternative fuels on the market-see Appendix—there is still not a clear view on which of them, if any, will in future come to be seen as mainstream alternatives to petrol or diesel. Mobil CNG believes that the Government should undertake its own investigation into which alternative fuels are most likely to deliver the maximum commercial and environmental benefits. The Government should also consider that different fuels might be more appropriate for certain sectors than others.

  Return to base fleets for example, is one instance where the benefits of CNG can currently be demonstrated. Mobil CNG has recently launched a major new initiative with Safeway Stores plc to power a fleet of gas vehicles which deliver to more than 50 stores in London and the Home Countries. Mobil CNG has installed a refuelling point at Safeway's depot in Welwyn Garden City which members of the Select Committee would be welcome to inspect.

2. ASSESSING OVERALL ENVIRONMENTAL IMPACT

  It is important for the Government to consider the overall impact of different fuels. At each stage, production, transportation, storage and delivery environmental factors need to be assessed. Any additional refining processes undertaken, such as cleaning up petroleum based products, adds to the environmental impact of a fuel. Mobil CNG believe that CNG scores so highly on an environmental index because of the low energy usage involved at each stage. Therefore, Mobil CNG suggests that in addition to formulating an integrated fuel policy, the Government formulate realistic criteria for assessing environmental impact based upon a life-cycle analysis of each alterative fuel.

3. MAXIMISING THE BENEFITS OF ECONOMIC INCENTIVES

  It is important for the Government to identify, in the face of limited refuelling infrastructure, which vehicle sectors are realistic targets for significant growth in the use of low-emission or alterative fuels. It is clear that the HGV and PSV sectors are far more likely to respond to the development of alternative fuels at this point in time than the private car market.

  The Government needs to ensure those economic incentives such as rebates, duty differentials and grants are more effectively targeted. The core of the problem as it currently stands is that the incentives assume that there are cost effective alternatives to petrol and diesel already operating at a significant level in the market. This is not necessarily the case. What are required are fiscal incentives, which will act to catalyse the market, in order to provide that choice. Such measures should include for example:

    Assistance to manufacturers planning to develop new engines capable of running on environmentally friendly fuels.

    Continuing the provision of incentives through the Powershift Scheme. Mobil CNG has some new ideas on how this could best be designed to meet the Government's objectives, which we would be glad to share with the Select Committee.

4. COMPARISONS WITH OTHER MARKETS

  Finally, the Government should examine what has been effective in catalysing the market for alternative fuels in other, especially EU, countries. The Government should also consider the unique possibilities of the UK market, which make CNG so attractive; abundant natural gas reserves, a highly developed distribution infrastructure, a competitive natural gas market and a small landmass with high population density.

5. IN SUMMARY

  To achieve maximum benefit from economic incentives two objectives must be met. Firstly the initial capital costs of vehicle purchase must be overcome. This could most easily be achieved through a revamping of the Powershift scheme. Secondly, a significant difference in running cost needs to be demonstrated through a reformed duty regime. If the Government wishes to kick-start the alternative fuels market in any significant way, "pump-priming" measures will be required. Mobil CNG would welcome the opportunity to develop our ideas with the Select Committee Members.


 
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Prepared 28 April 1999