Fuel For Thought: The Commercial Vehicle Fleet Accelerates Toward ZEV Adoption

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The projected curve in tractor-trailer
electrification in the US is getting steeper, but a future of
roadways filled with EV and hydrogen big rigs is still strewn with
potholes.

Tougher emissions regulations arriving in 2030,
emerging technological developments, and improvements in the ZEV
medium- and heavy-truck cost picture ‒ with hydrogen in particular
‒ have sharply increased the potential for adoption of ZEV or
near-ZEV commercial vehicles.

In weighing the factors involved in
implementing a ZEV big-rig fleet, S&P Global Mobility now
forecasts medium-term ZEV commercial vehicle registrations in the
United States higher than ever before. Expectations for the end of
the decade now reach nearly 140,000 annual new registrations of ZEV
trucks starting in 2030, an expected share of more than 25% of the
Class 4-8 medium- and heavy-duty truck market.

That said, for all the pronouncements of a
future of battery-powered Tesla Semis and hydrogen-fueled Nikolas,
serious impediments remain on the road to mass adoption.

Compared to previous forecasts, S&P Global
Mobility’s most recent projection represents higher volumes in unit
terms, as well as a more rapid expected transition away from
established internal combustion engine (ICE) technologies.
Expressed in terms of the compound annual growth rate (CAGR) of
forecast ZEV registrations, the pace of change has risen from 70%
per year to 109% in just two forecast rounds. This steeper expected
adoption curve is due to more than just greater optimism about
prospects for 2030.

Regulatory push

Bullishness for 2030 has grown alongside
increasingly ambitious government regulations and supports ‒
including the Inflation Reduction Act (IRA), proposed changes to
Greenhouse Gas (GHG) Phase 2 standards, and proposed GHG Phase 3
standards for MY 2028-2032 from EPA/NHTSA.

The so-called GHG Phase 3 standards reveal a
bold initiative to push the pace of change in the industry ‒
drastically reducing allowable CO2 emissions beyond the 2028
threshold foreseen in Phase 2 ‒ to include reopening and tightening
already-published goals for model year 2027 diesel engines. By MY
2032, the proposed GHG phase 3 regulations will mandate an
incremental OEM fleet average emissions reduction of 37% in the
medium-duty truck (MDT, including Class 2b & 3) and 27% in the
heavy-duty truck (HDT, Class 8) segments, compared to the final
2027 year of GHG Phase 2 standards.

Regulatory bodies are wielding tax credit and
voucher carrots as well as legal sticks to achieve their emissions
targets. For instance, the 30% of value (up to $40,000) incentive
written into the IRA (in the form of a tax credit) for businesses
and tax-exempt organizations that buy a qualified commercial clean
vehicle. In California, proposed incentives for a Class 8 hydrogen
fuel-cell tractor under the Hybrid and Zero Emission Truck and Bus
Voucher Incentive Project (HVIP) could reach as high as $240,000
for a fuel cell electric truck.

These IRA incentives also apply to the cost
side ‒ especially for hydrogen-powered vehicles ‒ in that
incentives can shape the potential cost curve for refueling some
ZEV vehicles. Easing that cost burden would help support the
initial steep capital expense of the two chief hydrogen propulsion
technologies ‒ hydrogen internal combustion (H2 ICE) and hydrogen
fuel cell electric propulsion (FCEV) ‒ in which fuel costs loom
large as a share of cost of ownership.

But most of the technology forcing mandates are
sticks ‒ such as the implementation of Tier 4 emissions for light
commercial vehicles and the Advanced Clean Truck and Advanced Clean
Fleets legislation affecting California and at least six of the
states that follow the California Air Resource Board (CARB)
mandates.

The Advanced Clean Trucks rule requires
manufacturers who sell medium-duty and heavy-duty vehicles (Classes
4-8) to sell an increasing proportion of zero emissions commercial
vehicles from 2024-2035. A partner bill, the Advanced Clean Fleets
rule, is working its way through the rulemaking process. This rule
places requirements on fleets that meet certain characteristics to
also have an increasing percentage of zero emissions commercial
vehicles in their fleets. This rule also goes into effect in 2024.
And by the end of 2023, California also is enacting strict rules
for the types of drayage trucks allowed to idle at intermodal
seaports and railyards.

Getting up to speed

Despite the regulatory push, recent market
performance for ZEV MHCVs has been muted, with new registrations of
ZEV big rigs so far this year below expectations. While US
registration volumes of Class 4-8 ZEVs in the first four months of
2023 had an impressive-sounding 200% year-over-year increase,
supported by the registrations of the first trucks from Nikola and
Tesla, it represented barely 1,100 units and amounted to just 0.6%
of new vehicle registration volume ‒ and was 44% lower than
forecast.

Alongside uncertainty and cost, headwinds have
included the same supply-chain issues that have buffeted the
production of traditional diesel trucks and buses. Among them,
manufacturers have counted lengthy wait times to receive parts;
inability to source sufficient parts; difficulties finding workers
and running full schedules; and elevated input material prices.

In some ways, these problems have been even
more of a challenge for dedicated ZEV startups, which have
typically tighter capital, challenging cash burns, steeper
borrowing rates in the current inflationary cycle, and lower
volumes (and thus revenue) to weather a supply-shortage storm,
compared to larger, relatively more established makers.

In looking at market expectations from just six
months ago, delays in introductions of new Class 4-8 ZEVs have
represented about a quarter of all known or suspected
start-of-production delays for truck and buses overall ‒ well above
the ZEV share of the market.

Dodging potholes

The current high price of hydrogen fuel,
significantly higher than diesel, has been prohibitive for most
would-be hydrogen vehicle buyers. Even in the case of the
theoretically affordable acquisition cost of an H2 ICE truck,
prospective fuel costs have raised questions about the benefits
compared to other propulsion technologies. With the IRA raising the
possibility of hydrogen fuel cost dropping sharply, maybe even to
as low as the diesel gallon equivalent, the opportunities for
hydrogen become brighter, though still not certain. Indeed, more
than two-thirds of the increase in expected 2030 new ZEV truck and
bus volumes comes from anticipated hydrogen truck and bus fuel
price declines.

That said, improved prospects for H2 ICE
depends on H2 ICE products available for purchase. The current
forecast from S&P Global Mobility includes seven H2 ICE truck
models, all expected in Class 8. This is up from just three models
forecast this time a year ago.

Over the next two decades, battery electric
trucks and fuel-cell electric trucks are expected to undergo
significant advancements ‒ paving the way for increased efficiency,
reduced costs, and wider market adoption. It is our expectation
that, with next-generation battery technology, trucks will see
improved energy density and longer-range capabilities, two very
important metrics for truck operations.

Similarly, innovations in hydrogen-related
technologies are anticipated to bring longer range and improved
durability ‒ making them more viable for widespread adoption. As
these technologies continue to mature, economies of scale will
drive down production costs, leading to electric trucks becoming
more competitively priced.

Overall, the main takeaway is that the industry
is at the early stages of innovation of this technology. Improved
capabilities as well as reduced cost will only improve their
competitiveness and popularity of heavy-duty electrified
vehicles.

Demand-side pledges

There are also indirect factors that are
neither the result of carrot nor stick. For example, a number of
companies ‒ some controlling very large fleets of commercial
vehicles ‒ have made aggressive pledges towards the achievement of
carbon neutrality at a corporate level.

For many of these fleets, transportation of
goods is among the largest contributors to their corporate carbon
footprint. For them, the reduction of carbon emissions from the
commercial vehicles they control is one of the most impactful
levers they can pull. PepsiCo has, as a corporation, pledged to be
carbon neutral by 2040 ‒ witness their reported purchase of Tesla
Class 8 Semis. PepsiCo has taken delivery of 54 Tesla Semis to
date, at about $450,000 each.

PepsiCo is not alone. A number of consumer
goods companies have made similar pledges to achieve carbon
neutrality by 2040 or 2050. For many of these companies, reducing
transportation-based carbon emissions offers a quicker and less
capital-intensive approach to reducing carbon footprint when
compared to re-engineering production processes.

Similarly, some of the larger consumer goods
transport companies have also made carbon neutrality pledges with
intent to fulfill their pledges via the aggressive purchase of
ZEVs, some of them also in the “light” commercial vehicle category.
Amazon has plans for a total of 100,000 custom electric
neighborhood delivery vehicles from Rivian by 2030, while FedEx has
committed to carbon-neutrality by 2040, with all parcel pickup and
delivery vehicles being zero emissions by that date.

What needs to be done

In the near-term, regulation, proclamation, and
acquisition are not yet in alignment, and until they are, moving
toward a zero-emission intermodal future faces roadblocks.

In today’s political environment, it seems
likely that regulators will continue to aim ever higher ‒
regardless of real-world economic realities. Over time, this vision
will be supported and re-adjusted by business conditions and cost
realities on the ground ‒ including slower-than-expected early ZEV
commercial vehicle adoption, availability of recharging/refueling
networks, as well as unexpected technology “Eureka!” moments and
subsequent price changes.

But slow adoption now could also mean slower
adoption in the medium term, as large-scale learnings are not
achieved and not shared. Lower numbers early on will also make it
more difficult for disruptor brands in the space to become and
remain financially viable, casting further doubt on a rapid
inflection point early on.

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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.