The Not-So-Distant Future of Fuels

After years of investment and research, for UPS, now is the time for alternative energy sources.

Mike Casteel, director of fleet procurement for UPS, recently gave a keynote address on “the future of fuels” at the annual meeting of the Fuels Institute in Dallas, Texas. Afterwards, Fuels Institute Executive Director John Eichberger interviewed Casteel, who has more than 40 years of logistics, energy and automotive experience. Below is their candid chat about strategy, alternative vehicles and fuels and the economics of sustainability. 

Eichberger: You have 10,000 alternative fuel and advanced technology vehicles worldwide. The best environmental program or strategy is meaningless if it’s not economically sustainable. Are there other motivations?

Casteel: There are other considerations, certainly. But in my career, I’ve seen this heavy interest in alternative fuels happen a number of times. It’s usually the interest starts with high oil prices. Remember the oil conversations back in the 90s when there was this concern if we would have enough oil for fuel?

It has gone through cycles in my career where there’s a lot of interest in alternative fuels and technologies. Oil cost is high. It is in limited supply. And then oil will come down, and the interest in alternative fuels wanes, and then it starts over again when oil prices go back up.

Find out the latest news on UPS’s sustainability efforts here.

I’ve been through this about three times in my career. So this last time, about 2014, oil was somewhere around $100 a barrel, and the gas industry went through this massive change that everybody’s aware of.

The interest in alternative fuels increased again, and so we started doing some serious stuff with natural gas. We have a big natural gas fleet. It was driven by fuel economics so the sustainability piece of this has always been there.

The environmental sustainability part of it is an important factor in our company, but it has to be economically sustainable and for UPS, it has been.

Eichberger: UPS made a big bet on natural gas. Has it delivered what you hoped?

Casteel: It has in a number of ways. When you include the cost of compression, if you own your own station, you’re well under $1-a-gallon equivalent for natural gas. Purely from a fuel-use standpoint, the fuel costs have worked really well.

The performance of the truck has been really good, and for us, this has become routine.

We deployed a natural gas fleet. We’re doing it on a big scale. We’re not doing three or four trucks here and three or four trucks there. We’ll build a multimillion-dollar station and infrastructure, and we’ll put 50 to 100 Class 8 natural gas tractors in a single location.

We’re running this station almost 24 hours a day so we get a lot of use out of a relatively expensive asset. The performance of the truck has been great. Our costs to maintain a natural gas vehicle is relatively equal to a diesel.

The costs per mile is a little lower on natural gas, but it’s got to be rationalized because we travel a lot more miles. That’s our intention. So it’s worked out well, and the drivers really like it. The trucks are quiet and the performance is fine.

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In some ways, we think we can be a trend setter for alternative fuels.

Eichberger: How important is your environmental fleet, and how important are incentives?

Casteel: Our alternative fleet is very important. Our brand is highly recognizable. We use a lot of fuel.

In some ways, we think we can be a trend setter. Some of what we’ve done with natural gas, especially timed with low oil prices, has been to try to avoid going through that cycle again where interest goes away, and then you’ve got to start this all over again.

We kept buying natural gas trucks since we’re in it for the long term. We kept working with the manufacturers to lower the costs of the truck — and they were incentivized to do this, too. I can say in some ways low oil prices really helped this situation because it forced technology to improve.

It also forced people to really dig deep to figure out ways to improve their production costs and the station equipment as well.

Today, we’re in a place where it’s financially feasible for us to deploy in key locations without any incentives. We’ll use them when they’re available.

A lot of these incentives have been valuable for us to be able to deploy in areas where we might not have been able to deploy. So they do serve a purpose. They’ve kind of primed the pump so to speak.

Eichberger: Is UPS looking at ways to take your existing power trains and infrastructure and use more renewable resources?

Casteel: We just signed a contract with Clean Energy Fuels Corp., purchasing 170 million gallon equivalents of RNG through 2026. We will use roughly 25 million gallon equivalents of RNG each year for the next seven years. We’re on track to be using about 100 million gallons of natural gas each year.

So that’s a large percentage of RNG that we’ll be using in our fleet. I think most people understand how that works. It’s seamless to us. We’re able to do this because we already had the infrastructure in place, and we have plans to do more.

We would like for all of our natural gas to be on a program of renewable gas sources. It helps our sustainability goals. But it also means a lot to our brand. It’s something we’re striving to do, and we think we’ll be able to do it.

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UPS is a perfect fit in an urban environment for commercial electrification.

Eichberger: You are doing some electrification. You have a natural gas presence. You’ve got a whole lot of different power trains. Are there certain use applications where different technologies seem to fit better and deliver a better return today?

Casteel: Yes, a lot of my job involves this. You have to model these things and so what you’re looking at is how you use the truck. How many miles is it going to run? Then the electrification — it needs to be the heavy stop-start, relatively low-mile situation to meet this combination of costs and performance.

We can make an electric truck go 200 miles. Put a lot of batteries on it, turn it loose. But what are you getting? You’re not getting a lot of heavy regeneration. It’s not an efficient use of an electric truck in our view. There are better ways to cover 200 miles.

But where it really makes a lot of sense is in the 65- to 75- and even up to 100-mile route with up to 200 stops a day in an urban environment. And the EVs come back home, and they sit in the exact same place for about 10 hours every night. We’re a perfect fit in an urban environment for commercial electrification

Mike Casteel at the annual meeting of the Fuels Institute.

Eichberger: You purchased electric Tesla Semi trucks. Are you looking at the possibility of electrification of all Class 8 vehicles?

Casteel: I see it as more in combination with our natural gas fleet verses replacement, at least in the near term. We’re running the CNG tractors 600 miles a day on average.

If you put a relatively low-mile electrification fleet in the same place, you’re going to cover a lot of your route deployments with a combination of the two energy sources, so I like the optics of that.

I think that Class 8 electric is coming. There are certainly challenges to it. I was just with Tesla and our utility provider in one of our locations where we’re considering a deployment. We have 75 tractors that run out of there, and more than 200 delivery trucks.

The electricity demand for this building is about 1.3 megawatts. If we deployed 20 of the Class 8 and 50 of the medium duty, our demand for that building is going to go from about 1.3 to about 4.5 megawatts, so the utilities there are going to be challenged.

In this case it looks like the utility can provide up to 3.5 additional megawatts. So this fits, but if we do any more than that, it’s a whole different ball game.

Eichberger: It’s interesting to see the electrification. Maybe this technology could have a ripple effect in the market?

Casteel: We hope our RNG announcement prompts an interest in action and getting more supply into the market. We think we did the same thing with the natural gas industry in limiting the costs of the trucks and continuing to deploy when everybody else was not.

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Electrification reduces the attention the truck needs from a technician.

On the electric side, we think we can create interest. We think we can bring enough economies of scale to lower the cost to make it more practical not just for UPS but for the industry. We are going into it trying to figure out a way to make our company better.

And I’ll tell you, frankly, a large part of the interest in electrification is around maintenance. Like any other trucking company knows, it’s more and more difficult to find technicians to maintain your trucks. Electrification reduces the attention the truck needs from a technician.

When you include the infrastructure costs, you may have to pay a bit of a premium for the electric truck when it’s all said and done. You also have to factor in a battery replacement in about seven or eight years, so when you’re modeling this financially, all these things paint a picture.

If they’re only running 75 miles a day, on a delivery route, you’re not using that much fuel, so your fuel savings are not going to really give you a huge payback. We need maintenance reductions, and we think we can get them.

Mike Casteel is Director of Fleet Procurement at UPS. He is responsible for all fleet-related procurement activities for UPS in the U.S. and Canada and has a leading role in developing the financial strategies involved in the deployment of the UPS alternative fuel fleet.

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