Simon Schnurrer
When you have a new technology, you have to make it work, also for your customer and for all the partners on the value chain that are working with.
Narrator
How can heavy duty vehicles reduce their carbon emissions and create sustainable surface transportation. Velocity podcast is brought to you by management consulting firm, Oliver Wyman. Join the conversation with Frederico Ucci and Simon Schnurrer.
Frederico Ucci
Good morning, good afternoon and good evening to all of our listeners around the world. Welcome to the Oliver Wyman velocity podcast, you're joined today by myself. I’m Frederico Ucci, I’m a partner in our transportation practice and today I’m joined by Simon Schnurrer also a partner at Oliver Wyman and an expert specializing in automotive practice. Hey Simon, how are you doing today?
Simon
Hello Frederico, thank you for inviting me on to the show. I’m really looking forward to our discussion today.
Frederico
Thank you, Simon. I’m also thrilled to be exploring this topic with you and bring together our perspectives from the transportation and automotive industries. Today’s episode is around the topic both you and I are very passionate and invested in. We will be discussing sustainable surface transportation, what possible solution are there to reduce emissions or decarbonized road transport. As we know in Europe, road transport today accounts for about 20% of CO2 emission which is really significant and in particular a quarter of this is linked to heavy duty transport which will be our main focus today. Of course, Simon, we know that going green in general in the world is paramount today to stop climate change. Transportation in general needs to do its fair share and road transport is the main contributor and therefore a big part of our focus. Tracking is the biggest contributor to CO2 emission for road transportation and it is one where the solution is not yet fully identified. We have short duty tracking, mainly deliveries into cities, daily runs of about 100 maximum 200 kilometers, very little use of highway roads. Then, there is a second segment, I would call medium haul, up to 200, 300 kilometers for trucks between let’s say 10 and 30tons. And then there is what we all know as heavy-duty long haul tracking which is trucks of 44tons, 5axis, at least in Europe and above 300 kilometers. If we speak one second about the first two segments, Simon, what do you think is the solution that you see today?
Simon
Absolutely, there are big differences concerning the use cases you use trucks for. So, if you think about short-term delivery trucks that go into inner cities that don’t have long distances, the battery electric vehicle solutions that are coming over the next years and are already in the market today are very good solution to cover this use segment. If you talk about the longer haul, if you talk of the trucks that are running 10 hours or more a day on the highways on the autobahns of the world, there is important to have a technology that can cover the long-range requirements that can adopt, enable these long distance trips. And that is at the same time green, this is the main challenge. This is the one, well, really is difficult to adopt the electric solutions and still important to have something which is green even beyond carbon. We need to speak about noise about particles, about nox. We need to speak about these efforts because they are not so many. They are used intensely. They contribute a lot to the carbon emissions, here it really is possible to make a difference by adopting new technologies.
Frederico
Absolutely. I agree, Simon. In fact, it is easier to decarbonize shorter haul tracking. The issue with green transportation is that you need to transport the amount of energy that you will need to complete the mission. So, today of course we transport diesel. Diesel is really power intense and therefore you can attract and do over 3000 kilometers by transporting its own fuel. When you have to transport a battery, it starts to become much heavier than the diesel you have in the tank to do those 3000 kilometers and in fact, you will soon reach a point when the battery sucks up the whole weight that the truck can carry and therefore you would be running to carry your battery and not to carry your load. And that’s why it's easier to implement those battery power trucks for short haul missions, but it becomes much more complex when you need to go long haul. So, today our analysis show there are two credible technologies for green tracking which is hydrogen power trucks and electric road systems. Let’s start with hydrogen. There are different ways to produce hydrogen and the one that has the most potential in the future is probably green hydrogen. Simon, you can walk us through the differences between hydrogen production and why hydrogen could be a solution.
Simon
Absolutely. Its important to understand the differences between these gray, blue and green hydrogens in order to understand their impact on the sustainability of the whole transport segment. So, if we think about gray hydrogen, this is a hydrogen that’s produced based on fossil fuels, not green by nature. Its natural gas or coal gasification conversion into hydrogen and this at the moment accounts for 95% of global H2 production. Gray hydrogen is by far the dominant source as you say, it's not really helpful to resolve and sustainability challenges here. If we move on to blue hydrogen, that’s also based on fossil fuels such as natural gas or coal. But here, the carbon emissions are at least captured, stored or reused so that’s better from an atmosphere and carbon emissions standpoint. If we move on to the green hydrogen, and that's the one you were talking about. This is the future, it's produced on renewable energy such as wind or solar. This is something that does not emit carbon emissions and at the moment accounts for only 2% of global H2 productions. So, it's still limited in terms of production scale. But it’s the solutions in terms of sustainability going forward because this is the only green H2 you have. And of course, there are challenges, its still very high production cost that needs to be reduced based on carbon pricing. Obviously, it will get more competitive and if you think about all of that, I mean hydrogen has the potential to be a parity with RI hydrogen-3. But this needs of course a lot of effort, a lot of push-like elements by also by technology providers. And it needs a considerable role out of asset here. See, of course, a lot of initiatives at the moment, national or even cross-national initiatives, for example, the European Union is pushing the EU green deal which includes and involves a lot of green hydrogen initiatives. In France, there is a deployment plan dated 2018 so there’s a big push in France. Also in Netherlands, there’s the Dutch climate agreement 2019. So, we see a lot of initiatives that are pushing hydrogen, especially green hydrogen over the next years. And there is hope that this will lead to an increase in share of total H2 production.
Frederico
Absolutely. Thank you, Simon for running us through hydrogen technologies and I agree with you. It is really one of the key technologies that could make long-haul heavy-duty transport green. The reason is as you said green hydrogen is produced with zero emissions and hydrogen itself is very abundant, actually its the most abundant element in the world. Once it’s stored, put into a fuel cell has a very strong power intensity. And therefore, by carrying very little weight since its very light, we can have all the energy we need to move the truck. The other energy I would like to comment today about is really the electric road systems. Electric roads are essentially an electric infrastructure that runs on the highways, imagine as if it was a train catenary where the tracks by electrical systems would link and absorb directly the electricity from the network basically as if they were a train. Okay. Imagine the train as a pantograph and plugs to the catenary, it would be similar for the truck. There is a fundamental difference with the hydrogen power trucks because, you would not be transporting onboard the power that you need to move. You would be taking it as you go from the electrical network and you would just have a small auxiliary battery to do those few kilometers where you are not on the highway. Electric road system is completely green, there are no emissions, it is just an electric motor, the track is also very light, it is not transporting any battery, any fuel, very limited equipment, therefore a lot of space for useful load to be transported. The challenges of electric road are essentially on the infrastructure side. So, first of all, we will need to electrify a big part of the European highways for trucks to be able to continuously run. The autonomy for them to run outside of the electrified network is limited and we cannot have only a few kilometers of electrified network. And this is, of course, expensive from an investment perspective and it is also expensive from a maintenance perspective. Second point, and probably the most difficult one is the compatibility. We would need to succeed in something that we have very seldom seen unfortunately so far in Europe, which is aligning everybody on one single standard. Imagine one truck running from Palermo to Rotterdam, it would need to continue its mission crossing several European countries, so, Italy and Germany and Netherlands, of course you need to have the same standard across all of these countries. If you look at the railways today, everyone has different electrical standards. It is very complex to run a train internationally, and you need special locomotives who can run on different voltages. It’s extremely complex and expensive. We cannot afford that for tracking. We need to have one system, decide if it will be the catenary or induction or conduction or whichever the technology, whatever will be the voltage. It needs to be seamless across the countries. And to have this kind of alignment is very complex. The third and I would say last issue with the electric roads is the fact that you are not storing the power. The power is consumed from the tracks directly from the network which means that you can have a huge peaks in the electrical network when demand is high and when demand is low. And to adapt those peaks, you need to massively increase the power production. So, you would need for Europe several extra power plants or renewables installations to run exactly when demand is high. As we know it is not easy to match offer and demand, especially in renewables which run essentially, solar of course, during the day and wind when its windy and there is no storage solution. So, these are clearly the challenges of electric road system because I remind everybody, if we run everything electric but the electricity is producing by burning coal or gas, we have not solved the decarbonation issue. Simon, what do you think of these challenges and how would you also comment on the hydrogen ones?
Simon
Yes. Let me say some words for the future electric vehicle running on H2 because I’m a big fan of this system. As you know, future electric vehicles are using compressed H2 to generate electric power, so they are essentially electric vehicles too but their way of storing energy is just H2 and not just the battery. So, they are very similar to electric vehicles and electric vehicles are being deployed in mass market these days. An important time to be in the market, we can benefit from the technology that is being rolled out anyway. The advantages with an H2 fuel cell electric vehicle, you can resolve the range issue quite quickly. The range can be as long as you need it to be. The technology basically is ready, so the vehicles are running and its working. There are a couple of operational issues, a couple of processes that need to be worked on, for example, refueling when its very cold, especially in winter. We have some specific issues, the degrading for the stacks are sometimes difficult to manage and to forecast and to predict. These are issued to be worked on. But, nevertheless, its a technology that is ready, that is being used today also on other applications. It resolves a lot of issues, of course, only if the H2 comes from renewable sources as pointed out earlier. So, it doesn't make a lot of sense from the sustainability point of view if the H2 is generated by burning fuel or coal. There are some considerable disadvantages of course, of the system too. For example, you need to have an H2 infrastructure which is expensive, which is hard to deploy which needs to be ready for the trucks that are using H2 that need to refuel and even a standard for trucks and for passenger cars at the same time is difficult to manage. So, that’s something to be considered and this infrastructure needs to be rolled out by a couple of players that do not come from the automotive or truck industry. It needs the investment of other players too, which is again difficult to manage. It needs some standardization too as you pointed out for the ERS system. Another big disadvantage is the vehicle cost, which can be as much as 3 to 4 times as much as a conventional engine truck. So, this is something that needs to be understood, that needs to be managed, that needs some total cost of ownership approach that is supported by a number of players. This will be the bridge we need to cross if we want to move on to fuel cell electric trucks. Overall, the infrastructure chain being quite complex for fuel cell electric vehicles is the challenge we should discuss in a little bit of detail here. Frederico, can you offer us some insights into the infrastructure chain.
Frederico
Thank you, Simon, for describing the hydrogen opportunity and technology. Let me also make a point on the fact that hydrogen among the various challenges you quoted is difficult to store. Either you store it at very high compression rates, which makes the bottles very thick and very expensive up to US$700 or you store it liquid, but as we know, hydrogen liquifies at very very low temperatures, sub-minus 250 degrees Celsius which makes its very expensive to store at those low temperatures. So, it would be key for such industries to find solutions to such issue. Fuel cell electric vehicles require a new type of infrastructure. So, first of all, we have the production as you mentioned, we would have essentially green and blue hydrogen. For blue hydrogen, there will be production plants that will produce them from methane but will require all the carbon capture system to be installed and these are quite expensive and can use up to 20 – 30% of the energy that is produced from the hydrogen to store the CO2. And then the green hydrogen, of course, all the solar and wind installations that you mentioned. On top of that, we will need all the electroliers for green hydrogen that will turn water into oxygen and hydrogen by using electricity that is produced through the renewables. And then the more road transport specific infrastructure which will essentially be storage, therefore the hydrogen stored close to the, let me say what could be the new gas stations, the gas will be hydrogen gas, right. And then the refueling stations. The refueling stations that need to have completely different standards because hydrogen is very different from whatever fuel is being used today. Different temperature, pressures and also it is very small molecules that tend to escape very easily therefore requires these new technologies for the refueling. The good point is that for long haul transport, we wouldn’t need the whole refueling network to be converted to hydrogen. If we talk only long-haul transport, we could plan along the key corridors to have important H2 installations where the trucks can plan their refueling. And this could help reduce the cost of infrastructure. I think Simon, its interesting to comment on the balance of cost and investment. The investment is clearly an advantage of hydrogen because a few hydrogen stations and yes of course, you need to produce the hydrogen but then that is factored in the hydrogen unit price whereas for electric road systems you need a huge electric infrastructure to carry the electricity to many kilometers of highways, therefore it would be much more expensive. Oliver Wyman estimates that the investment for Europe would be 5 times higher for electric road systems. But on unit cost and therefore total cost of ownership for the operator, we expect hydrogen to be much more expensive to use and that’s for the fact that hydrogen is just less efficient, you have many more transformation of the electricity. What is your view?
Simon
Absolutely, challenges are multiple ones as you already pointed out. The business case needs to work for everybody involved in this system here. This is an innovation that can only breakthrough into the market if it works for all these different companies involved. Looking at the progress we can already see in the market, this is really coming from player groups, from alliances, from cooperations that cross the whole hydrogen value chain and these partnerships are already existing and they are already successful to a certain degree. If you look at the large projects, for example, the port of Rotterdam working together with Shell, with Ebicorp which again in turn basis its fuel cell technology on the Nikola technology. Bp is involved too, you see a lot of players working together in order to make it happen, to get to the business case, to get to the usage, to the large-scale deployment of fuel cell electric vehicles. These challenges you pointed out of storing the energy, of refueling the truck, of letting the truck run even in winter time on long distances, of having an additional cost that needs to be carried by the, let's say by the electricity companies and in the end, the end customer. There's a lot of people that are actually willing to pay more for sustainable transport, but in order to make it happen you have to bring all of these groups together. Quite clear how complex the problem is not only in the technology but also in the commercial aspects of it and that can only be achieved by working together with players from different specializations.
Frederico
Absolutely Simon. And actually let me stress this point, I think it is very important for our listeners. These challenges you and I are talking about are paramount challenges that cannot be solved by one single player in the value chain. They require a business ecosystem, different players working together to find the optimal for all of the system and all of Europe. We cannot have the energy company working individually to optimize the energy production. We cannot have the truck OEM doing what is best for the company. We need have them all to find really the best balance of this technologies to make it work for the whole system. And then it will be bingo for everybody because we know it will be tens and tens of billions in the next 10 years whichever the technology will be. And you have mentioned some of the partnerships that already exist and that’s great. What do you already see in the truck OEM market? What are they organizing around, in your discussions, what do they see as the most promising technologies? And generally, do you find the level of investment sustained enough or focused enough?
Simon
That’s really the key question because all OEM’s in the truck industry have to work on multiple solutions at the same time and this is making their lives so difficult because they have these huge investments they have to make and at the same time they are not 100% sure which technology will prevail. Most of them are forming vertical and horizontal alliances in order to limit the investments they have to make on their own and have that market breakthrough. There is some key learning for the automotive and for the truck industry. When you have a new technology, you have to make it work also for your customer and for all the partners on the value chain that you are working with. Looking at the different deployment success stories and also the difficult stories that came with the emergence of battery electric vehicles, in the car industry, you can clearly see that the companies that were successful did not only offer the new technology but also a new model, a new approach. For example, at Tesla, how they have introduced a battery electric vehicle to the market successfully, they thought beyond the traditional ways of a car manufacturer. They thought about up and down stream alliances first. They thought about a technically integrated system they could offer to their customers. For example, they offered super chargers to their customers. They had to have partners for super chargers in Europe, they had to have partners for the land and equipment. They had to have partners for the operation of it. But they wanted to offer that and they did it as a part of their vertically integrated system. So, think about fuel cell electric trucks, it's not just a truck you can sell to end customers who will pay cash for it. You have to have services around it, you have to think about coverage of the infrastructure, requirements and the different challenges around it. You have to talk to your end customers. There are many end customer segments that are willing to pay a little bit more if transport of goods is sustainable. My final thoughts are three things I would like to tell the truck manufacturers and the truck industry. You need to think about offering vertically integrated systems. Do not leave your customers alone with these complex expensive trucks. You have to go for partnerships. And last but not least, this is something you need to build for scale. It's feasible, it’s difficult but it’s feasible to go for scale here. And this is something that needs to be woven in the approach to go to market that you have to design in the next years.
Frederico
Thank you, Simon. Very clear, I think you made some very important points. Let me make some closing remarks here. When you said we cannot expect the single logistic operator to decide that he wants to pay more for transportation to make it green and also to this alignment of standards that I mentioned before. Really, I think one of the key steps is to have the regulator involved here, to first work with different business ecosystems that you already mentioned to find the optimal technology on what should be the co-existing technologies, drafting key development road map from here to 2030 and then align all the partners involved possibly identifying maybe some heads of value chain that coordinate the investments of everybody so that money doesn’t get lost but is invested in the right spots of this value chain, make it happen and then run the whole industry through it making the regulation that is needed and also the right incentives for the logistic players to adopt greener transportation. Simon, this is all the time we have today. Thank you very much for joining me in this discussion and thank you to our listeners for joining us today. As always, please do get in touch with us on Twitter and LinkedIn at Oliver Wyman. Thank you very much and goodbye.
