Decarbonization of the heavy-duty transport sector: A necessary step in the EU’s energy transition

If the EU is to achieve its green ambitions, the heavy-duty transportation sector must play its part and transition away from fossil fuels. Currently, prices remain the biggest challenge. If the EU wants to decarbonize the heavyweights of the roads, it needs to focus on making the decision an economic one as much as a green one.

To tackle climate change, the European Commission, under the strategic vision of the European Green Deal, has set an ambitious target to achieve net-zero emissions in the EU by 2050. To achieve this objective, greenhouse gas (GHG) emissions must be reduced across all sectors of the EU’s economy. According to the European Environment Agency, the transportation and mobility sector, which includes automotive, waterborne, and rail transportation, contributes 25% of total GHG emissions, making decarbonization of this sector a priority. Of these emissions, the heavy-duty truck (HDT) sector emits 20%, despite representing only 2% of the total vehicle fleet in the EU.

By 2050, the commission aims to reduce the transportation and mobility sector’s emissions by 90% compared to 1990 levels. In line with this goal, the EU recently approved its updated Renewable Energy Directive (RED III), which sets a binding target to reduce GHG emissions in the transportation sector by 15% by 2030. If the HDT industry is to meet a 15% and 90% GHG reduction, we estimate the EU needs to replace 280,000 diesel HDTs with zero-emission HDTs by 2030 and 1.5 million by 2050.[1]In addition, the commission is proposing a higher reduction objective of 30% by 2030 and 90% by 2040 for heavy-duty vehicles[2] specifically. In the bus segment, electric buses have just overtaken their diesel counterparts in quarterly sales in the EU (as predicted by Rabobank), and demand for other electric vehicles and plug-in-hybrid vehicles is rapidly growing.

In addition to the climate-change challenge, the EU’s lack of fossil fuel resources creates another driver for change. The HDT sector transports 77% of all land freight across the EU. Being a diesel fleet, the sector’s operational capacity is profoundly impacted by changes in fuel prices. The current conflict in Ukraine created a new energy paradigm for the EU, disrupting its oil supply chain and driving up fuel prices. In the future, oil prices could increase, especially if the conflict that recently broke out between Israel and Hamas in the Gaza Strip extends throughout the Middle East. The transition to e-HDTs will help the EU on its path to strategic energy autonomy and a decarbonized transport sector. At a company level, shifting to e-HDTs could help increase competitiveness due to lower operational costs.

[1] We assume that the diesel fleet is constant through the years at 1.8m vehicles and that other mobility sectors do not compensate for HDT emissions by decarbonizing more than 30% and 90% in the target years.

[2] All vehicles with a weight of 3.5 tons and above.

China leads the global e-HDT market. In 2021, it accounted for 52,000 of the 60,000 worldwide registered electric medium-duty trucks and HDTs. The International Energy Agency estimates that 90% of electric trucks are in the medium-duty class (below 12 metric tons). Thus, we estimate that China alone registered about 5,200 e-HDTs, equal to more than 90% of the world fleet.

Europe and North America have also steadily expanded their electric fleets in recent years in response to demand driven by policy support schemes that lower the total cost of ownership (TCO) of e-HDTs, the rollout of charging infrastructure, and the offer of new models from original equipment manufacturers (OEMs). In 2021, Europe and the US accounted for 10% of the global e-HDT market, with 280 and 310 estimated registrations respectively, compared to 1,500 and 2,400 registrations of medium trucks. Year-to-year growth rates in both regions are high, above 100%, but from exceptionally low baselines.

A recent report from the European Automobile Manufacturers’ Association published data on new registrations of e-HDTs in the EU from the first half of 2022 and 2023. Extrapolating this data for the second half of 2022, and assuming registrations from years prior to 2021 have been negligible, we estimate the total e-HDT fleet in operation in the EU at around 2,000 vehicles [3] as of mid-2023. Comparing the current fleet with the estimated 1.5M vehicles required by 2050 gives perspective on the challenge ahead. Figure 1 shows the estimated number of vehicles registered in the biggest markets in the EU and the Netherlands.

[3] Assuming the national markets followed a linear trend: 2H 2022 = (1H 2022 + 1H 2023)/2.

In the EU, the main markets for HDTs are France, Germany, Italy, Poland, and Spain, with total numbers closely correlated to the size of each country. Unsurprisingly, the bigger the country the higher the need for HDTs for long-haul transportation (i.e., transportation between destinations more than 400km apart). This group of countries combined account for 1.1M registered HDTs, about 60% of the total in the EU. Germany and France hold first and second place in the total number of registered e-HDTs, while Poland and Italy rank considerably lower, yet these countries have a similar number of HDT fleets. This indicates that market size might not be a good predictor for adoption. For example, both Poland and Italy underperform in this metric, while the Netherlands has a larger e-HDT fleet compared to its 40,000 registered diesel HDTs.

The Netherlands' comparatively high electrification of its HDT fleet can be, in part, attributed to the prominent role of the Rotterdam port, which serves as a pivotal connection to industrial centers. Since January 2022, the port of Rotterdam has been designated by the port authorities as a low-emission area, which means only trucks complying with Euro 6 emission regulations can operate. Not coincidentally, the first e-HDT in the Netherlands started operations in the port of Rotterdam. In addition to the strong pollution standards, its open economy promotes the transition.

So why are we seeing such a low adoption rate of e-HDTs? Currently, the higher TCO for e-HDTs does not make economic sense to operators, so adoption remains limited to green enthusiasts. Once the economics of e-HDTs make sense, the charging infrastructure required for trucks needs to be significantly expanded to match demand, or it could become the bottleneck in the transition.

Fleet operators look at the TCO when making purchases for their fleets. The TCO is comprised of two components: fixed costs, which are normally attributable to the vehicle price, and variable costs, which depends on the activity of the vehicle. With large fleet operators typically renewing vehicles every five years,[4] purchasers look at the medium-term horizon. Within this time frame, the lower variable costs, such as maintenance and fuel costs, allow e-HDTs to narrow the gap with their diesel counterparts. Additionally, legislative changes can influence the TCO calculation; for example, Germany just approved a EUR 200 increase in the price per metric ton of CO2 emitted by HDTs. This policy will increase the cost per kilometer driven by EUR 0.15 [5] when the policy goes into force in December 2023.

At present, two critical pieces of EU legislation are shaping the TCO equation. The European Commission is currently redacting the Euro 7 emissions standards,[6] which are expected to come into force in July 2027 for trucks. Meeting these future standards will require additional investments in diesel trucks, such as filters for small particles. Furthermore, the commission is also planning to incorporate transport fuels into a dedicated Emissions Trading System, a move that could exert upward pressure on fuel prices. Both measures will increase the TCO for diesel HDTs and therefore strengthen the case for e-HDTs.

The batteries of e-HDTs currently make the vehicle price tag considerably higher than the diesel alternative, and this price difference accounts for the higher TCO of e-HDTs. For certain models, the price is almost 2.5 times higher. The higher price of these vehicles also significantly increases the initial capital expenditure (capex) needs of fleet operators. Higher capex, in turn, increases exposure to interest rates, which translates to added operational risk and debt costs for fleet operators looking to transition. The five-year net present value of the average TCO of an e-HDT in Europe is EUR 600,000 while its diesel counterpart sits at EUR 500,000, according to the International Council on Clean Transportation. This cost differential in the TCO is currently the fundamental issue behind the modest adoption of e-HDTs.

Further ahead, however, these roadblocks will be cleared. As economies of scale in the e-HDT sector start to kick in, prices will fall. Battery pack prices are expected to decline 20% by 2030 compared to today due to technological advancements and economies of scale. Among the four main OEMs in the EU by market size (Mercedes-Benz, Volvo Trucks, DAF, and MAN), Mercedes-Benz has started production of an e-HDT in the Rhine region, while Volvo Trucks has its main production site for e-HDTs in Ghent.

However, legacy manufacturers do not have guaranteed success in the electric vehicle segment, as competition from the Chinese manufacturer BYD and the American company Tesla pose a challenge. BYD, for example, is already selling two of its 10 e-HDT models in the EU. Both manufacturers have strong battery supply chains and can take advantage of economies of scale from the size of their home markets.

The lack of economies of scale is a source of risk for OEMs and, by extension, for the transition. Swedish startup Volta Trucks, for example, recently filed for bankruptcy after its battery supply chain failed because of high transportation cost per battery.

[4] Although these trucks don’t leave the EU market, the average age of a truck is 14.2 years, according to the European Automobile Manufacturers’ Association.

[5] In the case of emission class Euro 3, the most polluting class.

[6] Euro 7 emission standards for trucks, it sets a maximum emission of pollutants such as fine particulates, carbon monoxide and nitrogen oxide.

Bringing the TCO to at least parity will provide the transport sector the signal needed to increase adoption of e-HDTs. Yet, if the charging infrastructure does not meet the demand, congestion issues and range anxiety could delay widespread adoption. HDTs frequently cross multiple borders in a single trip, especially in central Europe, which means the deployment requires a European scope. To connect the road network to all major cities and industrial nodes, the European Commission implemented the Trans-European Transport Network (TEN-T). Distributed in corridors (see figure 2), this network accommodates 88% of total long-haul operations, so it is a useful framework for assessing the current state of the charging infrastructure.

Currently, the kilometers of e-roads [7] in the EU that can serve e-HDTs are limited. Figure 3 presents in green the sections considered e-roads in the EU highway network. A recent study found that the main transportation roads in the EU will need a charging point density of 184 to 389 charging stations per 25x25 km² to service a 15% market penetration of e-HDTs. The charging density of this study is far from present in the EU, and we can identify several bottlenecks: the Spanish section of the Atlantic corridor, the Swiss-Italian section of the Rhine-Alpine corridor, and the North Sea-Baltic connection between Germany and Poland. These areas are going to need intensive infrastructure investments to accommodate a large-scale uptake in e-HDTs.

[7] Roads that have at least one charging point of at least 350kW every 60km.

An efficient network will also have to consider the grid needs of charging stations that serve multiple e-HDTs. The power requirements of such installations quickly land in the megawatts. BloombergNEF estimates that a large charging station with 40 charging points in the US market would need a 25MW grid connection. For comparison, 25MW equals the average consumption of 20,000 Dutch households.[8] Although there are differences between the EU and the US markets, the electricity demand for such charging stations will require grid upgrades. This could be a serious bottleneck, as the EU grid is already congested in some regions, such as the Netherlands, with long waiting times for connections.

[8] Assuming a household consumes 3,500kWh and stations are at full capacity 8h per day on average.

Achieving a 15% reduction of GHG emissions in the HDT sector by 2030 will require adding an average of 45,000 e-HDTs annually. If the HDT sector is to achieve the decarbonization goals on time, it must tackle the two issues of comparatively high TCO and lack of charging infrastructure. In subsidizing the price differential between diesel and electric HDTs, countries can speed up the transition by closing the TCO gap, which gives markets the price signal needed.

As we can see in Figure 4, the size of the subsidy granted to cover the price differential varies considerably across the EU. If differences between subsidy schemes persist long term, it will likely create an unlevel playing field. Transitioning at different speeds will likely increase the difficulty in achieving political consensus in the ambitions of decarbonization targets.

Major e-HDT markets where the subsidy programs cover more than 80% of the price difference between diesel and e-HDT, such as Germany and Spain, are more likely to start seeing sharp increases in their fleet numbers. France and the Netherlands, which have similar programs covering at least 60% of the price difference according to Figure 4, are also expected to see a robust transition. In comparison, countries like Italy and Poland are at the tail end of subsidy schemes, and, as we can see from Figure 1, this correlates to the small size of their e-HDT fleets. Only a few EU countries don’t have any subsidy scheme in place at all to cover the price differential.

Despite the availability of direct subsidies, the infrastructural gap remains a critical issue to solve, as shown in Figure 3. Although trucks can use charging points below 350kW for overnight charging, they do not add significant range within the 30-to-45-minute break that truck drivers typically can take during a workday. To meet the demand from e-HDT, countries need to have infrastructure schemes that target high-power charging points. Only the subsidy schemes in Germany, Spain, and France specifically target the e-HDT charging networks. The lack of specific subsidies in Italy and Poland can further exacerbate the already deficient infrastructure in these regions, potentially slowing the decarbonization of the HDT sector and increasing the gap already present. In a sector that frequently crosses borders, homogeneity in the rollout of infrastructure is highly desirable to avoid geographical bottlenecks.

In order to achieve decarbonization targets, the European Commission, under the umbrella of the Green Deal, proposes doubling rail freight traffic by 2050. Rail freight stands out as one of the most environmentally friendly modes of transportation, emitting just one-fifth of the emissions per metric ton-kilometer of diesel HDTs, making it an appealing choice for reducing emissions in the transportation sector. This is primarily because the rolling resistance of steel wheels on rails is less than that of rubber tires on the road. Businesses seeking to decarbonize their supply chains also look at rail transportation as a solution. Volkswagen Navarra, for example, now moves more than 50% of its vehicles through rail.

The question arises: What impact will rail freight targets have on the decarbonization efforts of the HDT sector, if any? According to a European Commission report, the policies required to double freight traffic will naturally boost train traffic while only causing single-digit percentage declines in road freight. This means that there will still be plenty of growth opportunities for e-HDTs in the future, even if the EU succeeds in drastically expanding its rail freight network.

In addition, promoting intermodal freight transportation between rail and (electrified) road transportation could take advantage of the best of both worlds. Train carriers that transport truck trailers by rail and can directly attach it to trucks at logistic hubs offer a glimpse into an intermodal and green transportation network. This approach enables the EU to capitalize on the energy efficiency of rail networks and the flexibility of trucks in the delivery process, while at the same time meeting decarbonization targets.

Hydrogen HDTs (H-HDTs) have grabbed attention for their potential to decarbonize the transportation sector. By combining hydrogen and oxygen in an electrochemical cell, the vehicles produce electricity to power the vehicle, creating water as its sole byproduct. Additionally, the use of hydrogen promises lower refueling time with higher loads due to a smaller battery size than e-HDTs.

The EU fleet of hydrogen trucks, though, is marginal, with currently just 55 registered vehicles. This number includes both medium- and heavy-duty trucks. The hydrogen infrastructure is also still to be deployed. There are only 176 hydrogen refueling stations across the EU, concentrated in Germany and Benelux. If this technology is to succeed, it will rely on:

Although European green hydrogen production is expected to increase, the current estimated cost of producing is EUR 10/kg.[9] In order to bring the TCO to parity in 2030, the price of hydrogen must be reduced to the range of EUR 4 to EUR 5/kg, according to the International Council on Clean T ransportation. But the current technology must also be improved. The cost of hydrogen tanks and cell units in the trucks must halve by 2030 to bring fixed costs down. The current net present value of a four-year ownership of an H-HDT is valued between 800,000 and 900,000 euros, while diesel stands at 500,000 euros.[10] Taking into consideration the current state of the hydrogen alternative, the immediate deployment of this technology does not seem to present strong competition for e-HDTs.

[9] Using data from EEX HYDRIX index and a conversion rate of 39 kW/kg.

[10] These are net present values are estimated with a EUR 6/kg cost of hydrogen.

The freight transportation sector is in dire need of decarbonization if the EU is going to achieve its net-zero ambitions by 2050. In the heavy-duty vehicle category, electric buses have recently started to outsell diesel alternatives, while the e-HDT segment is lagging way behind. Currently, the share of registered e-HDTs represents less than 1% of the total HDT fleet in the EU. We don’t expect hydrogen-based trucks to rapidly gain market share, as battery electric trucks are better positioned in TCO, and the technology is more mature. Trains, on the other hand, could see a faster increase in freight transportation, especially industrial clusters that have good rail connection to ports. Still, the e-HDT market is 10 times larger than the H-HDT market, and we don’t expect the hydrogen-based trucks to rapidly gain market share or threaten the potential for a much larger e-truck market.

For the e-HDT market to power ahead, two bottlenecks must be solved. The price signal (in this case TCO) must be stronger, as it currently favors diesel HDTs. If the freight transport sector is to meet the EU’s decarbonization goals on time, subsidies are going to need to bridge the gap in TCO until economies of scale and technological developments arrive. In addition, charging infrastructure in the EU needs an enormous investment to make it attractive to operate e-HDT fleets across the region. As the EU pushes for decarbonization, a combination of freight trains and e-HDTs offers an interesting case for both industries. The EU needs to speed up its efforts, not only to meet its green ambitions and strategic energy independence, but also to avoid losing the manufacturing race to Chinese and American competitors.