1. This is a student exercise!

2. Natural Gas Alternative for StarMetro Applied Economic Research Group

3. Key Questions 1. Should StarMetro operate its transit fleet on natural gas? 2. What is the best turnover strategy for StarMetro?

4. Intro StarMetro Compressed Natural Gas (CNG) Emissions Costs Fixed Variable Plan Timeline Financing Recommendations Presentation Overview

6. Transit authority run by the City of Tallahassee Traveled over 2.3 million miles in 2011 650,000 gallons of diesel gas used in 2011 FY 2012 budget: $2.3 million for fuel

7. StarMetro Fleet Composition 60 diesel buses 12 year life cycle Average age: 3 years 17 paratransits 5 year life cycle 3 electric buses Operation begins in August

8. Compressed Natural Gas

9. Opportunity for CNG Market Growth in US CNG use is growing at 30% globally, but only 3% in the United States After diesel, second-most widespread fuel option for buses in the US (20% of transit buses as of 2011) Why is it a good option? Cheaper than diesel Large domestic production Cleaner burning fuel than diesel StarMetros purchase of electric buses shows a clear interest in pursuing alternative energy sources

10. Emissions

11. CNG Emits Fewer Emissions Than Diesel Image Source: TCRP Report 146, 2011

12. CNG Would Improve Tallahassee Air Quality Higher emissions of methane (CH 4 ) and nitrogen oxides (NO X ) from natural gas production Reduced tail pipe emissions: Particulate matter (PM) Nitrogen Oxides (NO X ) Hydrocarbon (HC) Carbon Dioxide (CO 2 ) Opportunity for improvement regarding PM concentration in Tallahassee

13. Fixed Costs

14. CNG Buses Are More Expensive CNG buses currently cost about $70,000 more than comparable diesel buses Diesel: $390,000 CNG: $460,000 StarMetro usually purchases 5 buses a year via federal grants

15. Depot Modifications Are Necessary with CNG Must install safety equipment Increased ventilation Methane detection Modifications would cost approximately $250,000 if turn over 100% of fleet $100,000 + $2500 per bus

16. Variable Costs

17. CNG Would Save on Fuel Costs CNG buses require 20% more fuel 3.08 MPG (CNG) vs. 3.64 MPG (diesel) However, CNG is 40-50% cheaper than diesel Additional Electricity CNG is compressed at the fueling site, requiring extra energy About $0.16 per DGE

18. EIA Projected Prices of Diesel and CNG Image Source: M.J. Bradley & Associates, 2012

19. Calculating Fuel Costs Annual Miles Driven MPG Total Gallons of Fuel Per Gallon Price of Fuel Total Gallons of Fuel Total Fuel Costs

20. CNG Buses Are Less Costly to Maintain Annual savings of $18,000 for a complete CNG fleet Annual maintenance costs are slightly more expensive for diesel buses than for CNG buses Approximately $5200 per diesel bus and $4900 per CNG bus

21. Diesel Bus Variable Costs Exceed Those of CNG Cost of CNG CNG Bus Maintenance Costs Cost of Diesel Diesel Bus Maintenance Costs $25,800 per bus in 2013 $38,900 per bus in 2013 Variable Cost of CNG Bus Variable Cost of Diesel Bus $33,700 $20,900$4900 $5200

22. Diesel Buses Have Greater Lifetime Costs $834,700$781,700 CNG would save $53,000 per bus Purchasing price of buses plus total variable costs of 2013- 2024 lifecycle: StarMetro should implement a CNG program.

23. Turnover Timeline

24. Turnover Will Be Complete By 2024 12 year plan Assumptions: Continue to purchase 5 buses per year (standardize age structure) Diesel and CNG buses have similar life cycles Routes and fleet size will remain constant Year Number of Diesel Buses Number of CNG Buses 2013555 20145010 20154515 20164020 20173525 201830 20192535 20202040 20211545 20221050 2023555 2024060

25. Fueling Options

26. Fuel at Existing Station Partnership with Leon County Schools Public-private station, city will provide gas StarMetro could negotiate a contract to purchase at a reduced rate Concern: $0.15 mark-up over wholesale price

27. Build a Proprietary Station to Avoid Mark-Up May eventually be more economical for StarMetro to build their own station Would cost about $2M if StarMetro turned over 100% of fleet Funding Options: Federal grant Municipal bond

28. StarMetro Could Apply for a Federal Grant FTA 5308 Clean Fuels Grant Usually $2 to $3 million Gainesville: $3 million for biodiesel buses Tampa: $2.32 million for CNG fueling station Tallahassee comparable to Gainesville with respect to air quality

29. City Could Issue a Bond In order to be feasible: Annual savings must cover annual costs Accumulated savings must cover principal at maturity Assumptions: Buses are purchased using federal grant money as usual Issue a $2M 10-year bond in 2016 at 5% Cost of maintaining station $350,000 annually (includes labor and depreciation)

30. Bond Financing Feasible in 2016 Interest Payments + Operation Costs ($450,000) Costs + Principal ($2,450,000) Cumulative savings can cover principal at maturity. Cumulative SavingsAnnual CostsCumulative Net Savings

31. Specialized Knowledge is Needed to Manage CNG Fueling Sites Technology is extremely sophisticated

32. Each Option Has Some Disadvantages Station Maintenance CNG programs pursued by some municipal transit authorities were abandoned due to poor management of proprietary stations Private companies have more success with maintaining fueling sites Higher Costs Leasing through Nopetro implies higher fuel costs A proprietary station would provide a higher payoff if StarMetro is willing to take on the added risk

33. Comparing the Options Nopetro StationProprietary Station Construction Cost Fuel Cost Maintenance While it may eventually become cheaper to build and fuel at a proprietary station, the issue of station maintenance is of greater concern. We recommend that StarMetro pursue the less risky option of fueling at the Nopetro station permanently.

34. In Conclusion 1. Should StarMetro operate its transit fleet on natural gas? 2. What is the best turnover strategy for StarMetro? Yes, it would save money and reduce emissions. Replace 5 diesel buses per year with CNG buses and negotiate a fueling contract with Nopetro.

35. Applied Economic Research Group