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US Federal Emission Mandates and Natural Gas Vehicles

|Includes: CAT, CLNE, FSYS, VOLVY, Westport Fuel Systems, Inc. (WPRT)

 The two primary forces that move the Natural Gas vehicle market are regulatory pressure and economics. Outside the USA, the huge price differential between diesel and natural gas as a fuel in markets with little refining capacity but large natural gas reserves is the overwhelming reason this technology is being adopted at a rapid rate.
Myanmar, Thailand, Pakistan, Iran, Chile. Peru, Argentina and Australia are all examples of countries were the adoption of both light duty and heavy duty natural gas engine technology outstrips any efforts here in the USA.

In Europe, emissions regulations and the economic benefits of converting to natural gas combine to make this an attractive option. The challenge for manufacturers is to create a natural gas vehicle that is not so expensive as to make the ROI horizon a distant vista, and yet pass the EURO 5 emission standard. In the USA, the CARB 2010 emission standard is the holy grail manufacturers seek with their technology to allow entry into the US market. To date only two manufacturers have attained this objective in the Heavy duty market, Westport Innovations (NASDAQ:WPRT) and Emissions Solutions, a privately held company in Texas. Other heavy duty diesel OEM's like CAT and Deere have actually pulled out of the over the road natural gas engine development arena, after losing millions in failing to meet the CARB standard.

Westport has done a very nice job of positioning itself as the key supplier of heavy duty engine natural gas technology, essentially being treated as the sole source supplier for most government and industry funded R&D in association with Cummins, Volvo, and the NREL. This positioning should suit them well over the long haul as the "gold standard" of heavy duty natural gas engine technology.

Recent pronouncements from the Obama White House over near future GHG emission reductions from diesel vehicles is a major boost for adoption of heavy duty natural gas engine technology. Big rig diesel engines have had to clean up their exhaust, at the cost of engine and fuel efficiency. At this point it is not possible for engines operating on diesel to meet current emissions and the proposed GHG rules, and barring a phenomenal engineering breakthrough, will not be allowed on the nations highways. This is already in play in California with AB32 mandates on both on and off road heavy duty diesel engines from CARB creating a phase out of most heavy duty equipment built before 2007.

This should prove out to be beneficial to not only Westport, but to suppliers of key natural gas fueling components like Fuel Systems Solutions (NASDAQ:FSYS), which makes the best fuel pressure regulators, and little known Omnitek Engineering (OTCQB:OMTK) which makes the most popular CNG fuel filter.

Soon to be released new rules from the EPA which will streamline the ability of fleet owners to convert existing heavy duty diesel engines to natural gas will also help these parts suppliers, and in the long run will also help Westport and Clean Energy (NASDAQ:CLNE). 

Conversion of existing in-use vehicles will allow the critical mass to be reached that fuel station builders like Clean Energy and GO Natural Gas need to be profitable. Heavy duty diesel fleet engine rebuilds occur at a rate 15 times greater than purchase of new vehicles. Conversions done at the time of a planned rebuild have such a low incremental cost increase, that the ROI is usually less than 12 months at current US fuel prices. If current federal incentives stay in place but are modified to allow re-powers and conversions to qualify as described in HR1835 and the Reid Energy plan, these conversions could be done at no cost to fleet owners, and they would then qualify for clean fuel rebates, further improving their bottom line instantly. Additionally, by converting to natural gas, these fleet owners are no longer subject to diesel emission regulations.

Whether or not the Reid plan makes it through the Nov.17 vote will not make or break natural gas adoption in the US, it will only determine whether it is immediate and brisk or simply near future and steady paced.

Disclosure: LONG WPRT, GSX

Disclosure: long wprt, gsx