Propane stands its ground despite sweeping changes to energy policy

Two laws enacted within the past 12 months – the Infrastructure Investment and Jobs Act (November 2021) and the Inflation Reduction Act (August 2022) – aim to advance the nation’s clean energy economy and include multiple incentives for propane.

The Infrastructure Investment and Jobs Act identifies propane as an emerging alternative fuel and authorizes access to over $7 billion in funding for refueling infrastructure and clean vehicles, including propane.

The Inflation Reduction Act, in contrast, was passed along party lines and includes major subsidies for electrification and a higher corporate tax rate.

The National Propane Gas Association (NPGA) secured its top priorities for propane in this otherwise partisan law, says Michael Baker, vice president of federal legislative affairs. Propane will benefit from provisions that extend tax credits for autogas fuel and infrastructure; expand possibilities for the production of renewable propane; and incentivize the use of combined heat and power systems.

However, those wins are a small piece of the overall pie, he adds.

“There’s some really good stuff for propane in this bill. NPGA worked hard to make sure Congress considered multiple incentives that are beneficial to the industry,” says Baker. “But we can’t call this bill a complete victory. There are significant giveaways to electrification.”

NPGA says most concerning to the industry is a section that establishes a high-efficiency electric home rebate program, which provides rebates to homeowners to adopt electric appliances and equipment.

But the transportation market seems to be a bright spot for propane despite the authorization of substantial funding for electric vehicles (EVs) in both pieces of legislation.

Autogas infrastructure

Funding opportunities for propane under the Infrastructure Investment and Jobs Act include access to:

• $2.5 billion in grant funding for propane refueling infrastructure along the national highway system.
• $2.5 billion in grant funding for propane school buses.
• $1.6 billion in grant funding for propane transit vehicles.

The Federal Transit Authority already awarded grants that can be used to purchase propane buses and facilities to at least five state and local projects in Massachusetts, Michigan, Minnesota, North Carolina and South Dakota, totaling more than $18 million.

The grants come from two programs funded by the Infrastructure Investment and Jobs Act – the Buses and Bus Facilities Program and the Low or No Emission Grant Program. Both programs solicit applications and make awards each year.

One of the awards – $12 million to the Michigan Department of Transportation for traditional, zero-emission and propane replacement buses for small and rural transit agencies statewide – typifies a key opportunity that David Kennedy, director of autogas design at Alliance AutoGas, says many marketers overlook.

Small, rural propane projects may compete with large, urban projects more effectively than marketers expect because both the Infrastructure Investment and Jobs Act and the Inflation Reduction Act place emphasis on expanding the clean energy economy in disadvantaged and rural areas, where many propane marketers serve customers.

“That’s kind of EVs’ Achilles’ heel,” says Kennedy. “When you start getting out into the rural and disadvantaged areas, they don’t have the electrical grid infrastructure to do even small EV projects or electrification-of-everything projects, so they have to look for another way to do it. And that’s where propane really shines.”

If a propane autogas project in a rural or disadvantaged area is also placed along an alternative fuel corridor, essentially along the interstate highway system, that project moves “straight up to the top of the list” for awards, adds Kennedy.

Incentives extended

The Inflation Reduction Act provides several opportunities for propane in the transportation market by extending tax credits for propane autogas and funding projects that lower diesel emissions.

Alternative fuel tax credit: The 37-cent credit for each gallon of propane sold in the transportation sector, including forklifts, now extends through 2024 and is retroactive for 2022.

Of the government funds available for propane autogas, the alternative fuel tax credit makes the biggest difference for Alliance AutoGas and its customers, explains Kennedy. The company passes the credit to customers who, in turn, reinvest and continue to expand their autogas programs.

“That is a huge thing for our autogas fleet customers at the end of the year to get a check written back to them for this tax credit money. That has made the difference in a lot of projects,” he says.

Crucially, the extension through 2024 allows fleet customers to manage a forward-looking budget. Conversations with prospective customers also go smoother as a result.

Kennedy explains: “Previously we would say, ‘There’s a tax credit that typically becomes available, but we don’t know yet. Here’s what it would be without it; here’s what it would be with it.’ Now, we don’t have to have that awkward discussion. We can say: ‘You’re going to get the benefit of this excise tax credit now and will continue to get the benefit all the way through Dec. 31, 2024.’”

Alternative fuel refueling property credit: This provision continues to support propane refueling infrastructure, but it was amended to include applicability to certain electric vehicles as well and limits the applicable locations eligible.

Diesel emissions reduction: This provision allocates $60 million to the Environmental Protection Agency for Diesel Emissions Reduction Act (DERA) grants. DERA funds clean school bus rebates and other diesel emission grants.

EV threats

While the Inflation Reduction Act recognizes propane as an alternative fuel that contributes to emission reduction goals, it also authorizes substantial subsidies for EVs. Among the EV-friendly provisions are:

• $400 million toward electrification of Class 6 and Class 7 heavy-duty vehicles.
• $3 billion to the U.S. Postal Service to acquire electric vehicles and support infrastructure.
• Credits for new electric vehicles made from U.S.-sourced minerals or batteries.
• Credits for used battery and fuel-cell electric cars.
• Credits for placing commercial electric vehicles into service.
• $2 billion to the secretary of energy to subsidize domestic manufacturing of electric vehicles and their components.

Even still, EV funding in the final text of the Inflation Reduction Act came in billions of dollars lower than originally proposed in the Build Back Better bill, notes Baker.

For Kennedy, the domestic sourcing requirement for certain EV credits already dampens the effect because, currently, the minerals and batteries for EVs are produced abroad. The lack of eligible EVs for certain credits “leaves the door wide open” for propane to tell its story and gain its own funding, he says.

Moreover, given the chance to compete, propane still holds the upper hand in certain segments of the transportation market regardless of EV incentives, suggests Todd Mouw, executive vice president of sales and marketing at Roush CleanTech.

He believes the latest legislation puts propane “in the catbird seat” by continuing to place pressure on diesel in key propane applications.

“In the class of vehicles that we operate in – Class 4-7 school bus, truck, paratransit – it’s basically signaling the death of diesel. It’s just going to be really expensive and really tough for diesel to survive.”

That leaves propane on the playing field with gasoline, natural gas and EVs. While EVs received a lot of attention in the Inflation Reduction Act, Mouw believes the barriers to adoption in the Class 4-7 space, including cost and scalability, leave plenty of opportunity for propane.

Take the school bus market, for example. Mouw calculates the opportunity step by step: An estimated 30,000 school buses are replaced each year. Funds in the Infrastructure Investment and Jobs Act only support 1,300 to 1,400 electric models. Even if the price of electric models goes down and funds cover 5,000 models, that leaves 25,000 units that need to be replaced. As diesel costs rise and fleets seek more sustainable solutions, propane’s tax credits and proven track record in the space make it the obvious choice. Each bus burns 4,500 gallons of propane per year and operates for 10 to 12 years.

“It would be a major error on our part as an industry to miss out on that,” says Mouw.

That’s not to say EVs don’t pose any threats to propane’s transportation gallons. Mouw expresses concern about public transport, particularly vehicles that run on fixed routes, as OEMs can benefit from higher volume production for electric models in this space. Overall, though, his view is that, with a smart assessment of the market, propane can capture more gallons and margin in transportation.

“If anything, we’re fighting diesel. We’re not fighting EV. And I think [the legislation] creates more awareness for what our solution is and can be going forward,” he says.

Boost to renewables

Both Mouw and Kennedy emphasize that reducing propane’s carbon intensity with renewables is key to staying in the conversation in the future.

The Inflation Reduction Act does include incentives for the production of renewable propane and possibly rDME through tax credits for biofuels and sustainable aviation fuel – of which renewable propane is a byproduct – as well as the creation of a tech-neutral clean fuel production credit in which renewable propane qualifies.

It’s one of the important wins NPGA secured during the legislative process, says Baker.

In the transportation space, fleet customers are actually asking for renewable options to meet their sustainability goals, explains Kennedy, so the current problem with renewable propane is simply not having enough of it.

“We used to have to educate end users on what this was, and now they’re asking for it,” says Kennedy. “That’s a big change.”

Going forward, notes Mouw, propane marketers will need to be mindful about the pricing for renewable fuels because the industry will want to continue to offer fleets an excellent total cost of ownership. But for now, it’s enough to communicate the product exists and supply will scale in the years to come.

“The utilities and EV folks do a great job of selling the future,” he says. “We can sell the current because we’ve got something that actually works and pencils for fleets. But I think we need to make sure we keep thinking about what’s next.”

Join the fray

In Kennedy’s view, propane marketers will not capture the opportunities presented in the federal legislation unless they get involved.

His message for fellow marketers: “They are going to have to go out there and be active with their local government officials and Clean Cities organizations, and they are going to have to fight for this money. Because I promise you, the electrification-of-everything people are highly motivated, organized, and they are already going after this money.”

Baker says NPGA will continue to support propane marketers throughout the process by working with Clean Cities organizations and state propane associations to help marketers understand the opportunities available to them.

The association will also challenge implementation of provisions as needed.

“If we don’t like something that comes out of the agencies – so if they release new program funding, and we don’t think it follows congressional intent – we’re going to take every regulatory and legislative action we can to try to reverse or right the ship,” says Baker.

He also urges marketers to meet with their congresspeople and educate them about propane because lawmakers can’t help an industry they don’t understand.

“For folks who do want to engage, there’s a really great opportunity because every one of our marketers has a direct tie to a congressional district or state on how their business impacts the lives of constituents every day,” says Baker.