Just a few years ago, natural gas fuel seemed to be the answer for all of the United States' energy problems. It's in abundant supply domestically, prices are low, and the changeover from using gasoline to natural gas won't require a wholesale shift in the way consumers buy and consume energy.

But the natural gas fuel revolution seems to have lost momentum, and leaders Clean Energy Fuels (NASDAQ:CLNE) and Westport Innovations (NASDAQ:WPRT)have been market laggards in a year when companies with growth potential have been hot. What has happened? Is the natural gas fuel revolution dead or has the market just missed its growth story?

CLNE Chart

CLNE data by YCharts.

There's no single answer, but investors may be reconsidering the size of the market for natural gas fuels. Natural gas is developing into a great alternative for a niche in the market, not an alternative for you and I in our daily commute, as some had hoped.

Natural gas's momentum is gone
The appeal of natural gas fuel is easy enough to understand. According to Clean Energy Fuels, it can cost $1.50 per gallon less than diesel and results in 23% fewer emissions in the medium and heavy-duty markets they're targeting. Westport Innovations is making the transition easy, designing natural gas engines and equipment to convert consumer vehicles to natural gas. 

But natural gas's cost advantage can easily evaporate, mitigating the need to switch fuels at all. That's exactly what has happened over the past three years, killing some of the industry's momentum.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts.

Rising natural gas prices aren't the end of the world for natural gas fuel, but they hurt. Between one-third and one-half of Clean Energy Fuels' fuel costs come from buying natural gas. As the price rises, it either squeezes margins for Clean Energy Fuels or makes the switch to natural gas less cost effective for customers, both bad trends for the industry.

Clne Press Image

Clean Energy Fuels is building hundreds of stations like this one to expand CNG and LNG availability. Source: Clean Energy Fuels.

If there was reason to think that the price of natural gas will fall to $2 per thousand cubic feet again soon I would say there's hope, but when prices were that low drilling for natural gas came to a halt. I don't see the price of natural gas falling much; there's also potential that oil will drop, hurting natural gas's cost advantage.

The U.S. is becoming energy independent
One of the great advantages natural gas once had is that it's abundant domestically relative to oil, which was imported from places like the Middle East. But U.S. shale drilling has changed that picture: net imports of oil have fallen from 60.3% of consumption in 2005 to just 28.5% last year. At the rate production is increasing, the U.S. could be energy independent by 2020.

That creates a tougher political environment for natural gas, which has been helped immensely by tax credits. In fact, last year $45.4 million of Clean Energy Fuels' revenue, or 12.8%, came from the volumetric excise tax credit.

If moving from oil use to natural gas doesn't cut energy imports and requires taxpayer subsidies to be successful, I don't see why a wholesale energy shift would happen. It would make more sense to put taxpayer money into truly clean energies that are already becoming competitive with oil.

Alternative energy competition is growing
Natural gas has a great sales pitch to the medium and heavy-duty trucking market, but shifting those markets isn't the ultimate goal of the natural gas industry. The aim was to capture significant share in the passenger market as well.

The problem today is that electric vehicles are becoming consumers' alternative fuel of choice, limiting the overall market. Tesla Motors (NASDAQ:TSLA) has proved that electric vehicles are desirable for consumers, and competitors are also stepping up their game in this space. It helps that there are now more than 20,000 public charging stations in the U.S., dwarfing the slightly more than 1,000 natural gas stations. 

To make matters worse, regional fleets operated by the likes of UPS and FedEx are testing using electric vehicles and fuel cells to power trucks. These regional fleets account for most natural gas fuel sold in the U.S. right now, and if an electric or hydrogen drivetrain can compete it would further hurt the natural gas story. 

The natural gas cost advantage also evaporates when compared to EVs for consumers, plus Tesla has proven that electric performance is far better than a natural gas vehicle. The expansion of natural gas simply took too long while electric vehicles solved many of the engineering challenges limiting their success. Today I see little upside in the consumer market for natural gas because alternative fuel vehicles will trend toward electric.

Infrastructure doesn't exist for a wholesale shift
The final challenge natural gas faces is infrastructure. It costs about $1 million to build a compressed natural gas fueling station; as of the last Energy Information Administration report there were only 447 public stations. That has expanded in the two years since the report, but CNG is in need of massive infrastructure.

Cng Station Map Eia

Compressed natural gas fuel stations in the U.S. as of March 27, 2012. Source: EIA.

Clean Energy Fuels and Westport Innovations have focused on the medium and heavy-duty markets, which is where America's natural gas highway has promise. But as I pointed out above, that emphasis limits the potential market for these companies and lowers return on investment in stations and engine technology.

Can natural gas fuel come back?
Natural gas could definitely be a big winner in the trucking market. Given the new products Westport Innovations is launching this year and the expansion of Clean Energy Fuels' network of stations, the alternative is very viable. Westport Innovations recently said natural gas had penetrated 1.7% of the 215,039 Class 8 trucks in the U.S. by the end of fourth-quarter 2013 and is rapidly increasing shipments. But this came during the same year the company reported a $185.4 million loss, showing that uptake isn't happening fast enough to make money.

The challenge for these companies is that the changeover to natural gas is expensive, while the fuel's cost advantages aren't necessarily long lasting. Trucking fleets may switch over gradually, but the market will be somewhat limited. Natural gas will also have trouble catching on in markets like consumer vehicles because alternatives provide better performance and more infrastructure.

Investors need to adjust their growth expectations lower and understand the headwinds these companies face. Natural gas is an interesting alternative fuel option but it isn't the no-brainer investment some thought a year or two ago. That makes these stocks high risk, particularly as alternatives improve.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels, Tesla Motors, and Westport Innovations. The Motley Fool owns shares of Tesla Motors and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.