LOS ANGELES/SAN FRANCISCO, April 25 (Reuters) - UPS

and FedEx ( FDX ) are facing uncertainty in U.S.

supplies of big, boxy electric step vans they need to replace

their gas guzzlers and make a dent in the country's

climate-warming tailpipe emissions.

The path to electrification by the package delivery giants is

critical to U.S. President Joe Biden's transportation climate

goals. Achieving that aim, however, is hampered by battery

shortages that are limiting EV supplies and keeping prices high,

and by startup electric van makers that are running out of money

and shutting down.

"The question is how many of those (companies) will be here

in five years, 10 years?" Luke Wake, UPS's vice president of

fleet maintenance and engineering, told Reuters.

In a double whammy, UPS and FedEx ( FDX ) are also losing access to

California vouchers that help defray EV prices that can be about

two times higher than traditional delivery trucks.

UPS and FedEx ( FDX ) obtained some relief from EV supply

constraints when trend-setting California, the epicenter of

electrification, put on hold a rule that would have required

them to purchase electric delivery vehicles exclusively starting

this year. An industry group whose members include UPS and FedEx ( FDX )

has filed a lawsuit claiming that California first needed the

approval of U.S. regulators.

The delivery companies and their electric van suppliers face

a Catch-22 situation, said Sam Fiorani, a vice president at

AutoForecast Solutions.

"You need the demand to have the supply and you need the

supply to have the demand. Getting both of them to work at the

same time is the problem," he said.

UPS has tested and purchased EVs for decades and is a

bellwether for demand. It has more than 150,000 delivery

vehicles around the globe and is among the top buyers of step

vans, replacing about 7,000 of its ubiquitous brown trucks each

year in the U.S. alone.

UPS and FedEx ( FDX ), which each have rolled out about 1,000

electric step trucks, are keeping their options open.

UPS is sticking with its plan, set in 2016, to rely on EVs

and other alternative fuel vehicles to reduce emissions. Those

other vehicles include 13,000 step vans that run on renewable

natural gas (RNG).

FedEx ( FDX ) told Reuters it is looking for opportunities to

incorporate other lower-emission delivery trucks into its

fleet.

'SUBJECT TO AVAILABILITY'

UPS and FedEx ( FDX ) favor step vans - larger, often custom-built

trucks with roomy cargo areas.

U.S. deployments of EV step vans by UPS, FedEx ( FDX ) and others

such as bread and linen carriers peaked at 275 in 2021 and fell

to 238 in 2022, according to data from the nonprofit CALSTART.

Those deployments were between 220 and 250 for 2023, the group

estimates.

Meanwhile, delivery rival Amazon.com ( AMZN ) already has

over 10,000 smaller electric cargo vans from Rivian

across the U.S. and Europe - still a tiny fraction of the

broader cargo van market.

UPS and FedEx ( FDX ) say electric step vans are hard to find.

"There is limited availability for larger capacity vans,"

FedEx ( FDX ) said in a statement.

In 2021, FedEx ( FDX ) announced its goal to make 100% of pickup and

delivery vehicle purchases in its company-owned Express unit

electric by 2030. It sometimes adds the words "subject to

availability" in statements about that goal.

UPS made a big bet on the EV transition in 2020, investing in

UK-based Arrival and placing an order for 10,000 electric vans.

But Arrival ran out of money before selling a single

vehicle to UPS.

Arrival is not alone. Upstart EV maker Lightning eMotors ( ZEVY )

is in receivership, while Workhorse and Xos

have issued going-concern warnings.

Atlanta-based UPS expects to use 40% alternative fuel in its

Ground operations by 2025, up from 29% currently. RNG trucks

today can be more climate-friendly than EVs powered by

electricity from coal and other fossil fuels, Wake said.

Environment advocates do not embrace UPS's RNG analysis,

citing the tiny percentage of RNG in the natural gas supply and

the risk of leaks that release methane, a heat-trapping

greenhouse gas.

STICKER SHOCK

Wake said EV prices can be "cost-prohibitive," but declined

to disclose how much UPS pays.

In Southern California, UPS recently dispatched new

zero-emissions step vans made by long-time supplier Freightliner

Custom Chassis Corp (FCCC) - owned by Daimler Truck -

and SEA Electric, which is being purchased by Canada's Exro

Technologies ( EXROF ).

The cost of an FCCC MT50e electric step van is just over

$260,000, according to U.S. General Services Administration

documents. That is about double the cost of a traditional model,

industry advisers said. Freightliner declined to comment on

pricing and said "we stand ready to produce as many MT50e

products as the market and our customers demand."

California for years offered purchase vouchers of $60,000 or

$85,000 to all commercial buyers of electric step vans - but

changed terms for large companies like UPS and FedEx ( FDX ) in 2023.

A Reuters review found those companies now must buy 30

trucks without incentives before they are eligible for half of

the value of vouchers on additional purchases. Those

large-company incentives will end on Jan. 1, 2025.

As states like Oregon and Washington prepare to offer

vouchers, the California incentive change could be weighing on

adoption as the biggest fleets historically represent a larger

percentage of new truck purchases, said CALSTART Vice President

Tor Larson. If the U.S. Environmental Protection Agency

clears the way for California to restrict large delivery company

fleet purchases to electric and other zero-emissions vehicles,

this could give the electric step van market a European-style

regulatory nudge. This is because the rule could then be adopted

by other U.S. states.

"The U.S. tries to use carrots. Europe does a good job of

using sticks," said Scott Phillippi, a former UPS executive.