Industry Trends and the Business Case for CNG Conversion

For many years, air quality concerns and the pursuit of more sustainable and reliable energy sources have led many public transit agencies and municipalities to consider conversion to “clean” fuel vehicle fleets to meet greenhouse gas emission reduction and energy conservation goals. More recently, the falling cost of compressed natural gas (CNG) has resulted in a growing economic rationale for CNG conversion. This article summarizes historical CNG market trends and the business case for CNG conversion, and finds the following:

  • Most transit systems that have converted to CNG operations have been motivated by the need to reduce greenhouse gas emissions.
  • While CNG is today, on average, 40 percent less expensive than diesel, there are a number of variables that influence its cost, and thus its economic attractiveness, to any single user. These variables include the geographic location of the consumer, their ability to access tax incentives, and the volume of fuel purchased.
  • The upfront infrastructure and capital costs associated with CNG conversion has generally limited the procurement and operation of natural gas vehicles to larger transit systems.
  • In terms of the nation’s public transportation system, the share of CNG buses and natural gas consumption grew dramatically through most of the 2000s, but has remained relatively flat over the last four years. Biodiesel and hybrid electric power have gained market share over the past 5 to 10 years.
  • There appears to be variability in users’ perceptions and accounting of the maintenance costs associated with CNG vehicles and fueling stations.
  • Analytical tools have been developed that help potential consumers determine when lifecycle cost savings can offset the upfront capital investment in CNG conversion. 
  • Natural gas prices are forecast to remain less expensive than crude oil through at least 2040.

Historical Trends

When data collection began in 1996, the American Public Transportation Association (APTA) estimated that 2 percent of the nation’s public transportation bus fleet was powered by CNG and liquefied natural gas. By 2000 the figure had grown to 7.1 percent, which was also the share of total CNG consumption by public transportation agencies across the US.1

Modest growth continued in the early 2000s, with interest in transit agency (and other municipal fleet) conversion to CNG and other alternative fuels sustained almost entirely by air quality concerns. Large bus systems operating in extreme air quality non-attainment areas, such as the Los Angeles County Metropolitan Transportation Authority (LACMTA), constituted the primary growth in the alternative fuel market. As late as 2006, the Federal Transit Administration’s (FTA) report to Congress on the costs and benefits of conversion to alternative fuels promoted the important environmental benefits of non-fossil fuels, but also noted several barriers to conversion to alternatives, including the following:

  • Higher operating costs for items like the alternative fuels themselves and maintaining vehicles and equipment using them.
  • Higher capital costs of alternative fuel vehicles and supporting facilities, especially natural gas facilities.
  • Unproven reliability and durability of early production models of new alternative fuel vehicles that could affect transit service dependability.
  • Limited availability of new alternative fuels.
  • Risk of interruptions in fuel delivery.
  • The need to develop, adopt, and enforce codes and standards for alternative fuel performance and stability, comparable to those used in specifying diesel fuel quality.
  • Higher logistics costs of adding a duplicative inventory of components and spare parts peculiar to the alternative fuel vehicles.
  • Costs of developing new operating and maintenance procedures for handling alternative fuels and conducting special training for mechanics and vehicle operators.2

At the same time that FTA was preparing its report, however, more cost-effective drilling techniques such as horizontal drilling and hydraulic fracking were being introduced, resulting in an increased supply of natural gas, and corresponding reductions in price.3 Indeed, it has been posited that this decrease in fuel cost has changed the primary reason transit agencies convert to CNG from either environmental concerns or political pressure in 2002, to price advantage in 2011.4 Other trends and innovations have also slowly helped to overcome several of the other barriers identified by FTA. For example, the incremental cost of CNG vehicles as compared to diesel buses is declining (data shows CNG buses cost in the range of $30,000 to $100,000 more than diesel buses; variances can often be attributed to the size of the vehicle procurement), while bus reliability is improving. Similarly, it is believed that the incremental operation and maintenance costs of CNG vehicles and fueling facilities have decreased as CNG bus operators gain more experience with the technology.

Today, compressed natural gas costs approximately 40 percent less than diesel fuel. The US Department of Energy’s (USDoE) April 2013 Clean Cities Alternative Fuel Price Report estimated average fuel prices across the United States shown in Box 1. Box 2 presents the price of diesel vs. CNG since 2000. It demonstrates that CNG is becoming increasingly less expensive than diesel, and that its price has been more stable over time, providing users with more cost reliability in an increasingly volatile energy market. Federal funding has been available to help local transit systems purchase CNG buses and fueling facilities. Until fiscal year 2012, FTA administered a discretionary Clean Fuels Grant Program. Although the program was repealed by the most recent transportation authorization, Moving Ahead for Progress in the 21st Century (MAP-21), funding under FTA’s urbanized area formula program increased, and the capital and preventative maintenance costs associated with CNG bus operations remains an eligible expense under that program. The Federal Highway Administration’s Congestion Mitigation and Air Quality Improvement program has also been available since 1991 and has provided substantial funding towards CNG buses and facilities.

Finally, federal and state tax incentives have also made conversion to CNG more attractive. The Alternative Fuel Infrastructure Tax Credit provides a tax credit of 30 percent of the cost, not to exceed $30,000, of CNG and other alternative fuel capital equipment. Fueling station owners who install qualified equipment at multiple sites are allowed to use the credit towards each location. The Alternative Fuel Excise Tax Credit provides a credit in the amount of 50 cents per gallon for CNG. Many states offer their own tax incentive programs for alternative fuels and associated capital investment.

With natural gas costs declining and the availability of funding and tax credit opportunities increasing, CNG growth accelerated through the mid to late 2000s. By 2008, CNG accounted for 18.5 percent of all buses operated, and 19.5 percent of all fuel consumed, by public transportation agencies.5 But these figures have held constant through 2011 (the last year of available data). While CNG constitutes the largest market of alternative fuel buses, it should be noted that the deployment of electric, hybrid, and biodiesel buses is growing at a more rapid pace, with electric/hybrid vehicles accounting for 8.8 percent of the nation’s bus fleet (up from 0.1 percent in 1996) and biodiesel buses accounting for 7.9 percent (with no data available prior to 2008). In comparison, APTA estimates that 63.5 percent of all buses are diesel-fueled, down from 95.4 percent in 1996 as shown in Box 3.

As the largest CNG bus operator in the world, LACMTA consumes approximately one-third of the natural gas used by the nation’s transit operators. As shown in Box 4, nine of the largest 20 public transportation agencies in the US operate CNG buses.7 Collectively, these systems account for over 50 percent of the CNG fuel market. It should be noted that most of the 11 other largest systems operate some other form of alternative fueled-vehicles, such as hybrid-electric or biodiesel, or newer—and cleaner — diesel buses.

The Business Case for CNG

The air quality benefits and other environmental reasons for investing in CNG are well known and will not be considered here. Based on a review of the literature, there appears to be at least three important business variables that must be factored into the decision to invest in CNG vehicles and facilities.

Cost of Fuel

While CNG is markedly less costly than diesel, there is some variability in cost within the US, with costs in the Rocky Mountain area significantly lower than in New England (Box 5).

The US Energy Information Administration further forecasts that the cost of CNG will remain much lower than diesel in the future, but notes that it will rise against the current “Henry Hub” price point by approximately 2.4 percent per year through 2040. This is because opportunities for additional innovation are declining and remaining natural gas supplies will be more difficult to extract.6 Meanwhile, the costs of alternatives to CNG such as biodiesel are declining; as noted previously, biodiesel is increasing its share of the fuel market while the CNG market share has remained flat for the past several years.


The upfront infrastructure and capital costs associated with CNG conversion has generally limited the procurement and operation of natural gas fleets to larger transit systems. Many of these transit systems are located in air quality non-attainment areas, and thus have had other than cost savings reasons to invest in CNG infrastructure.

The payback period for a CNG fueling station and vehicle investment is largely determined by the number of vehicles an agency operates. In 2011, the Texas A&M Transportation Institute (TTI) published a study7 of Capital Metro’s (Austin, Texas) evaluation and implementation of a CNG fleet. The study included an analysis of seven peer agencies. TTI found that in order to implement a CNG fueling operation, an agency needs to have at least 11 CNG vehicles to break even with the cost of operating diesel vehicles over a 12-year period. From a lifecycle cost perspective, the capital and operating cost of 11 CNG and diesel vehicles over a 12-year period are both $15.8 million, assuming investment in an 11 vehicle-capacity fueling station. When an agency operates a CNG fleet of between 10 and 20 vehicles, the payback period of the initial investment exceeds 15 years, or longer than the vehicles’ useful life. However, with a 30-vehicle fleet, the payback period drops to seven years and with a fleet of 200 vehicles, it drops to three years. These figures all assume no availability of tax credits to offset any fuel or infrastructure costs.

Tax Credits

The availability of tax credits also has a profound impact on the cost effectiveness of CNG conversion. Box 6 shows National Renewable Energy Laboratory’s estimates of payback periods for a fleet of 100 vehicles, with and without various CNG-related credits.8

This table indicates that station credits do not have an appreciable impact on the lifecycle costs of CNG buses, but that fuel credits, and to a slightly lesser degree, vehicle credits, have a significant impact. As noted previously, these credits are not available everywhere, nor to every potential fleet owner/operator. The availability and amount of credits is also vulnerable to changes in federal and state tax codes.



  1. Public Transportation Fact Book, Appendix A, Historical Tables. APTA. 2013.
  2. A Report to Congress on Policy Options for Increasing the Use of Alternative Fuels in Transit Vehicles.  FTA. 2006.
  3. Natural Gas Explained: Factors Affecting Natural Gas Price. US Energy Information Administration. 2014.
  4. Sandige, Matt and John Overman. Capital Metro CNG Implementation Study. Texas Transportation Institute. 2011.
  5. Public Transportation Fact Book. Appendix A, Historical Tables. APTA. 2013.
  6. Annual Energy Outlook. US Energy Information Administration. 2013.
  7. Sandige, Matt and John Overman. Capital Metro CNG Implementation Study. Texas Transportation Institute. 2011.
  8. Business Case for Compressed Natural Gas in Municipal Fleets. National Renewable Energy Laboratory. 2010.

Image Header Source: Oran Viriyincy (Creative Commons)