Cost and Benefit Risk Framework for Modern Railway Electrification Options

The Federal Railroad Administration (FRA) office of Research, Development & Test awarded a contract in 2023 to the University of Texas at Austin for an updated re-examination of freight railway electrification, with the following tasks:

1. Develop updated costs and benefits for electrification of rail transportation considering traditional and modern innovative methods.
2. Review past and current electrification studies and identify technologies and strategic operation and implementation approaches to improve benefits and reduce capital, operating costs and risk.
3. Provide a risk-based framework that can aid railroads in evaluating electrification investments, and guide future supplier research and development, given current technological limitations and possible solutions to infrastructure and operational challenges.

The primary objectives were to provide a holistic understanding of the key technical and economic barriers to freight rail electrification on North America, identify innovative technologies and implementation approaches, and provide a framework for economic evaluation of costs, benefits and risks. What the team nor the report did not address was a “Switzerland-like” nationwide electrification assumption (economically and operationally unrealistic and unnecessary) or electrification for passenger operations (especially not “high speed rail”).

After a year of work, the University of Texas team delivered its 218-page report (containing 75,859 words; 49 figures; 30 Tables; and 76 cited historical documents) on Sept. 30, 2024, to Washington, D.C. for its use. Once officially vetted and approved by the FRA, the report will be available to the public through the FRA website.

Also delivered with the report was a spreadsheet-based user-input “economic model” to enable a railroad to input its own assumptions (cost of electricity, investment parameters, etc.) for conventional electrification (using electric locomotives with “continuous” overhead catenary) and battery-electric locomotives (recharged either stationary or in-motion using “discontinuous” catenary) along with a 33-page user manual for the model. The financial model includes probabilistic Monte Carlo simulations calculating the likely range of financial outcomes for any scenario.

The first team task involved gathering and cataloging railway electrification reports from 1970 to present, to enable the team to identify the key decision parameters in previous electrification reports. A total of 59 electrification reports, studies and analyses were cataloged and reviewed by the team.

The team discovered seven key factors that governed all the “legacy” studies from the 1960s through 1980s. There were many goals in the historical studies, but a key goal was replacing diesel fuel with electricity for traction (because of concerns about petroleum supplies and fuel prices).

Today, one key driver is to decarbonize freight railroads without losing market share and reduce emissions such as oxides of nitrogen and particulate matter.

Locomotive technology has also changed significantly since the past studies. The baseline locomotives in 1980 were 3,000 traction horsepower with direct current (DC) motors, and the baseline electric locomotive was a 6,000 horsepower DC-motored locomotive, designed not to haul more tonnage but to increase train speed. Today the baseline locomotives are 4,300-4,400 horsepower with AC motors, providing more tractive effort and increasing tonnage ratings.

Previous electrification studies all assumed electrification would convert American freight rail to a European-like operation involving shorter fast freight trains. (Higher freight speeds is not an industry goal.)

Railroads have been adopting alternating current (AC) traction, improving the conversion of horsepower into tractive effort, i.e., more tonnage moved. (In the legacy era, AC motors were not available.)

The electric utility industry has changed significantly. Power generation and long-distance power transmission were co-owned by utilities. (Today, generation and transmission are, under deregulation, separate entities.)

Not to be overlooked, freight railroads are today now faced with large environmental challenges to reduce and eliminate carbon emissions, and their regulatory world and investment opportunities are different.

Some of the legacy studies examined included those of the Southern Pacific 1964-1974 to electrify various mainlines in the southwestern states (updating previous studies from the 1930s). The SP reports came from a private archive in Dunsmuir, California. One unique discovery by the team was that SP envisioned a limited partnership (“Catenary Associates, Inc.”) separate from the utilities that would defer long term loan repayments. SP also investigated sharing its rights of way with utilities for new transmission lines (a concept the report highlights as important for today’s railroads).

The Tennessee Valley Authority (TVA) contacted the Southern and the Louisville & Nashville railways in 1978 with a proposal to electrify both of their mainlines between Cincinnati, Chattanooga and Atlanta, largely as a public demonstration of railroad electrification of high-density freight mainlines. One of the two top executives of the TVA had just been appointed by President Jimmy Carter and had previously been Vice President Law at the Chicago & North Western (with a long term background in and knowledge of railroads). The executive archives at the Southern Railway Historical Association in Chattanooga, Tennessee were accessed to find critical correspondence.

The TVA proposed creation of Railroad Electrification Management Corporation to finance, build, own and operate the catenary system, substations, etc., with Southern and the L&N purchasing electric locomotives, maintaining the catenary and buying electric power. TVA also planned on obtaining a $200 million appropriation from the U.S. Congress.

The primary drivers for the TVA study were availability and cost of electricity versus the volatility of diesel supplies and cost. By the early 1980s both Southern and the L&N ended their participation, largely because their own respective mergers (Southern with Norfolk & Western, and L&N as part of CSX) refocused management attention and capital requirements.

Studies by Conrail (1979-1981, public documents) and Union Pacific (1980, obtained from the Union Pacific Museum in Council Bluffs, Iowa) identified similar benefits and challenges, similarly pointing to the huge financial risks of “traditional” electrification even in the era of fast-rising diesel prices.

The only freight electrification that “happened” was the new BC Rail Tumbler Ridge branch in British Columbia, to serve two new metallurgical coal mines built for Japanese steelmakers, operated 1983-2000 (after the demand for met coal collapsed).

Among the team’s observations, this:

After reviewing these reports, the team concluded that future electrification of railroad freight lines will present a variety of possible private industry sector financial and societal beneficial outcomes.

Also, electrification has not previously been implemented by U.S. Class I railroads because of various economic, technical, and institutional barriers.

Overall, the primary barriers to freight rail electrification were found to be its high up-front capital costs, high risks due to the uncertainty of electrification availability and pricing in the North American commercial context, and the presence of alternative investments that railroads need to make at somewhat less financial risk. Also of note, the rail freight industry during the period 1970s into the 1990s faced other modernization and financial challenges besides the choice of fuel. Instead, the chosen investment path over the past decades was largely one of improving the critical mass use of diesel-electric locomotives with new emissions-reducing technology to clean up the exhaust.

Also, during that same timeline, few in the public or the private sector could estimate what the public’s cost of carbon as a risk even was. That cost of carbon variable is still being determined today as this 2024 study is delivered.

Since the 1980s changing technology and a shift from electrification to reduce energy costs to electrification as a way to benefit the environment and public through reduced emissions have potentially altered the impact and relevancy of some of these barriers, and created new economic investment pathways to overcome them.

The team’s second task was to identify alternative technologies and strategies to reduce the primary cost factors of electrification. This included researching novel conversion of existing diesel-electric AC locomotives into electric (with small “last mile” batteries for catenary-less operation) using the existing locomotive underframe, inverters, trucks and AC motors. Electric locomotives based on European designs were discounted as unnecessary due to the high amount of “Americanization and redesign” required to comply with FRA regulations and Association of American Railroads (AAR) Standards.

The team briefly considered (and reported on) the locomotive supply industry in the U.S., and how U.S. manufacturers may have to partner with offshore manufacturers of high-voltage transformers, etc., to repurpose an AC diesel-electric locomotives into an AC electric (with last-mile battery) locomotive, or a battery-electric locomotive.

The team discovered (and used the spreadsheet model to quantify the financial benefits) that having electric locomotives with “last mile batteries” enabling operation for short distances without energized catenary could eliminate one of the classic legacy “complaints” about electrification. The various legacy studies all addressed the need to “raise overhead bridges” or “undercut tunnels” to provide additional vertical clearance for 25Kv or 50Kv AC energized catenary wires. The team’s approach is to avoid such expensive civil engineering rework, and have electric locomotives proceed through the “low clearance zones” under battery power. We found, for example, that this approach could reduce the civil rework capex on a long double-track electrification project by $150 million.

Discontinuous catenary was also deeply examined by the team. The concept takes two forms. One is “progressive construction” and energization of catenary, powering dual-mode locomotives. Such locomotives are envisioned as being existing AC diesel-electrics modified so they can accept DC power into their “DC links” (feeding the DC-AC inverters and traction motors) coming from an “electric power tender” with a pantograph, stepdown transformer, etc. and coupled/connected to the modified diesel-electric. The concept is to operate zero-emissions where catenary has been completed and energized and revert to diesel power elsewhere. As the catenary is progressively completed, the amount of diesel operation declines until a corridor is electrified (and the modified diesel-electric “dual-mode” locomotives are then converted to electric propulsion).

The team’s third task included creating a user-friendly spreadsheet tool that will allow a railroad company or other interested party to adjust factors such as electricity costs, rate of installing catenary, etc. to assess the possible project’s broad economics outcome.

The spreadsheet-based simulation tool is rather complex to use, but it will be a public tool (a framework) for examining financial and environmental returns. Furthermore, there is a user model that allows operational research railway industry experts to input their business case metrics into the model for their possible uses on other railway corridors.

The team’s electrification report (and the spreadsheet tool) can also become the basis of a subsequent analysis and report (by the FRA?) assessing other alternative propulsion technologies such as hydrogen fuel cells.

Quoting from the electrification report, the “current” simulation spreadsheet model “… is intended as a tool to assist with electrification decision making by simplifying the process to compare the many alternatives that are becoming available. There is a lot of uncertainty involved in rail electrification, and particularly freight rail electrification.

‘This tool incorporates uncertainty analysis in order to make it clearer how uncertainty propagates to final economic outcomes.

“The CURRENT first version of this model estimates the environmental benefits of electrification, using a variety of variables — which over time can be improved as to accuracy by any user —- that can assist with the analysis of public policy among multiple parties.”

Two case studies were developed during the third phase of the project. The evolving model was used on these two very different geographic corridors.

The results were tested using a Risk Analysis formula.

There are a few illustrated figures identifying how over the two tested case study operations corridors, the economic analysis turned out. The lighter density Minnesota route was not as strong a business case as some of our team members might have expected. The longer and much heavier traffic density route showed better overall returns for both the private and the public sector.

Here are a few summary features of Case Study #1 and its location.

Here are a few summary features of the much longer and higher traffic density Case Study #2.

As indicated in the full report documentation, the model suggested a much stronger commercial business case for this route. But at this stage of our team research and model testing, it is not an absolute answer for investors or the public.

Here is one of the “returns” investment views separated by the public sector benefits (vs. their contribution to the cost) and the private sector or partnership returns as “ranges” from these initial model studies. This is shown using an internal Rate of Return investment calculation formula.

Readers will need to access the final report once its circulation is approved to assess more details about the methodology used and the different scenario projections using the initial input variables and geographic characteristics of the routes examined.

The results here are illustrative of how costs and variables will interact during different “what-if scenarios.” But no firm investment conclusion can be reached at this time until further examination is done by the owners, users, and investors. This model is just a first step platform.

Note the impact from just two variable assumptions as to the return on invested capital. The critical question being what your sector’s real cost of capital is including the challenges of projects that compete with this project with much higher business returns.

• The discount rate against the risks of other returns over time
• Participation (or non-participation) from the public sector which gains so many dollarized environmental benefits.
• Benefits pros and cons from rail right-of-way sharing commercial agreements.

Here’s a snapshot of the complexity involving such negotiations. A template would be a first start, representing each party’s point of view as to its needs and agreement terms.

Here is a closer but still relatively brief look at the technical input and output used in the model. The name “Current Model” is cited in the full report with details also found in the separate linked user manual.

The main results page of the model displays the project’s calculated economic outputs for four business case perspectives:

• As a Purely Private Railroad Investment: This perspective shows how the investment would perform for the railroad with no external partnerships.
• With Right-of-Way Sharing: This perspective modifies the previous perspective to examine how the private railroad’s returns would change if a right-of-way sharing agreement with an electric utility company, or a grid operator (or other structured arrangement) is included in the calculations.
• Modified into a Public Incentive + Right-of-Way Sharing Analysis: This perspective modifies the purely private railroad investment perspective by examining how the railroad’s private returns would change with a right-of-way sharing agreement and with a public transfer related to the public emissions benefits. There are two user input fields on the Results page labeled the “Climate Emissions Value” and the “Health Emissions Value”. When those fields are set to zero (0%), this perspective should report the same results as the “With Right-of-Way Sharing” perspective. At 100%, the model calculates the railroad’s returns as though the railroad is receiving a payment each year equal to some type of share of the public benefits of the different respective type of emission. These fields can be adjusted to any percentage between 0% and 100% to examine how different levels of public or other support might affect the private railroad’s economic incentives to electrify the corridor.
• With Environment Benefits: This is the only perspective included within the public side. This perspective shows how the project’s investment looks from the public standpoint. This viewpoint does not include any effects from right-of-way sharing.

The model tries to illustrate these monetized impacts as “pro forma” financials, calculated over a future time period back to a present time value defines as the investment industry’s Net Present Value.

All Net Present Values on the model’s summary page are reported in millions of 2024 dollars. The user can define on the Parameters page how many significant figures the net present values will be reported at. The default is displayed with three significant figures.

In the two case studies, the Texas team did not try to resolve for an optimum solution. Our objective was to create a structure that with other material data input, would allow a user to work in a disciplined manner for their own better solutions.

Note well that each of the two evaluated routes includes simulated operations over an existing infrastructure that is privately owned and operated by a private Class I railroad company.

The Class I railroad companies did not participate in the University’s analysis. The resulting calculations therefore do not represent companies’ input or conclusions about the simulated electrification. Nor do the simulations represent an FRA input or output conclusion.

Clearly there will be monetized social benefits. Here are a few of the simulation social benefit findings, to be further evaluated by others.

There are a few specific assumptions comparisons between our 2024 report and an earlier report from 1978 to 1983. Here are some of the older expectations regarding locomotive power:

There are three major forms of locomotive power (with some hybrid formats), each in a competition for being financially favored. We highlighted their strengths and weaknesses as of the current known technological maturity.

Historical studies typically used the concept of adopting the European standards of passenger locomotives, which might somehow be adjusted to run with larger, longer, and much heavier gross weight freight trains. Our team concludes at this point that such examples of locomotive platform switchover needs to be investigated further. For robustness and commercial readiness rather than just early beta testing of prototypes.

Here is the team’s locomotive straight electric type logic as our research ended:

Dual-mode locomotives that can operate using power from OCS or onboard diesel propulsion (or potentially batteries or another alternative fuel source) offer the flexibility to power trains on both newly electrified lines segments as well as over non-electrified segments of an approved project route without the need to intermittently stop and change locomotives. Such operational research route specific analysis would have to be examined further by any carrier considering the change. Our project team made a broad attempt to do that testing, but any project scope will require much further OR (Operations Research) refinement.

Conversion of existing locomotive platforms to dual-mode operation has the twin benefit of 1) potentially decreasing the cost of acquiring the electric locomotive fleet necessary for use with OCS, and 2) allowing trains to start using short segments of OCS as they are constructed and thereby moving benefits earlier in the project timeline instead of having to wait until entire lines are electrified before operating with conventional straight electric locomotives can begin.

These combined benefits have the potential to more substantially alter the economics and risk associated with freight rail electrification. The impacts of these locomotive fuel options and redesigns will impact both a carrier’s future pro forma Income Statements and its Balance Sheet and projected cash flows.

Dual-mode locomotives are also an enabling technology for intermittent electrification (or partial or progressive electrification) schemes where a corridor is converted to electrified operations, but OCS is only installed over part of its length or over selected segments. This dual mode technological innovation allows for a spectrum of electrification options, ranging from scenarios where locomotives primarily operate on batteries but use short segments of OCS to recharge on route, to scenarios where locomotives primarily operate with the OCS but use battery, diesel or fuel cell technology to propel the train through gaps in the OCS strategically located at bridges, overpasses and tunnels where clearance constraints make OCS installation cost prohibitive. In either case, electric operations can be achieved while only installing a fraction of the OCS required for traditional electrification or, at the very least, avoiding the need to construct the costliest sections of OCS.

The resulting substantial reductions in the capital cost of OCS, and the ability to bring benefits forward through earlier operation of electrified trains even with only short initial OCS segments, have the potential to significantly alter the economics and risk associated with freight rail electrification. Intermittent electrification schemes also offer a more viable long-term pathway to complete electrification of high-density lines than with the traditional “all or nothing” approach to electrification with straight electric locomotives.

The team expects considerable technical debate will cover this locomotive electric locomotive design business question. Importantly, there is no apparent off the shelf high confidence solution as 2024 concludes.

Other Factors Yet to be Tested

This change over time in railroad market opportunities (like dimensional hi-wide-heavy traffic of all types) points to a strategic commercial risk that was not identified back during the nineteen seventies and into the early nineteen eighties.

Such future railroad company market opportunities requiring either wider clearance widths or higher clearance heights needs to be vetted before building out any future OCS corridor. It is both a military and an industrial manufacturing supply chain logistics issue. How will such high-wide- loadings increase? Who has that answer?

Typical market logistics question might be:

“Should the future consider a 23-ft height above the top of the steel rail clearance – plus another one foot allowance for electrical interference from the overhead wires?”

“Should cargo on board widths be expanded out towards 14-ft to 16-ft accommodation? Who has this commercial intelligence?

Past attempts at partnerships between utilities and railroads were driven by potential railroad energy cost savings and the utilities gaining a substantial new customer and potential transmission/distribution access to urban areas using railroad rights of way.

The model calculates that railroad-utility partnerships and lease agreements could potentially provide a value and revenue stream to help fund electrification infrastructure.

There are potential positive cash flow opportunities for both the railroad freight carrier (as a real estate enterprise) and for the national and regional electric grid enterprises as well.

Closing observations about the outcome from the last national look at railroad freight company OCS electrification.

The 1978 data base and 1983 so called TSC study for FRA demonstrated that large-scale freight rail electrification could (might) yield favorable rates of return and suggested that alternative financing arrangements could mitigate railroad company concerns regarding taking on the debt and risk associated with the construction of that large of an electrification infrastructure.

Reminder: the rail industry back then was still facing challenges about financial survival.

Although the 1983 recorded financing discussions suggested that a large FRA or government program would be required to coordinate and provide the necessary loan guarantees, the study left it to individual railroads to use other procedural items such as REAM to conduct further, more-detailed studies of prospective electrified freight rail corridors.

Subsequently, no public financing mechanism for joint venture appeared as a tool for joint public/private investment on this scope of a project.

And one other important issue remains unresolved. It involves how ready some of the proposed new technology (from locomotives to power systems and network integration) are for robust and dependable market operation, because these new systems will be replacing an exceptionally reliable commercial diesel-electric operation. The existing business model is very efficient in terms of low costs per GTM (gross ton-mile). How long will it take to reach such high efficiency outputs when one inserts a prototype with an unknown maturity cycle?

Here’s just one closing example as a thought piece. The current Texas Team model doesn’t directly answer the durability and cycle to high technology level plus high commercial level question.

This is not the full report. And some of the interpretive views expressed here are solely those of Blaze and Iden, who have before this project collaborated on similar commercial and R&D rail freight energy shift topics for other clients. We both remain respectful of our project teammates, but in some cases there may be alternate legitimate commercial and R&D interpretations of the evolving subject. Nevertheless, we have tried to remain faithful to our collective University of Texas findings in this summation for Railway Age readers.

Further, several outside subject experts volunteered to act as unofficial advisors. Some of them may not agree with the conclusions or report findings. But we do appreciate the guidance and suggestions they offered as a public service.

FURTHER READING: Don’t Dismiss Freight Rail Electrification