What’s Preventing the Rapid Deployment of Electric Buses Worldwide?

A blurry picture of a transit bus

Holmes Hummel explores this question and shares our recent work with The Global Innovation Lab for Climate Finance  and Convergence on Pay As You Save® (PAYS®) for Clean Transport in a guest post on the NextBillion Blog:

Electrifying Transportation: Can This Innovative Financing Model Make Electric Buses a Global Reality?

Electrifying transportation at scale is critical to fighting climate change and urban pollution. In the context of both near-term Paris Agreement commitments through 2030 and long-term greenhouse gas mitigation paths through the end of the century, rapid electrification is vital to success in every conceivable climate stabilization scenario. Mass adoption of electric vehicles would also contribute to the reduction of harmful urban pollutants that contribute to seven million pollution-related deaths each year and cause nine in 10 people around the world to breathe polluted air.

Within the transportation sector, transit buses present an excellent business case for electrification. Between declining battery costs and lower fuel and maintenance expenses, electric buses have life-cycle costs that are increasingly competitive with diesel buses in many markets. Their electricity usage patterns are regular and predictable, and buses can often charge during off-peak periods of excess electricity supply, minimizing both the cost of electricity and the strain potentially placed on the grid by the presence of other electric vehicles and/or intermittent energy sources.

So, what is preventing the rapid deployment of electric buses worldwide?

THE BARRIER TO ELECTRIFICATION

High upfront costs are the primary barrier to electrification. Electric buses have up to 40 percent higher upfront costs than diesel buses, primarily due to the cost of batteries and charging infrastructure. This increased cost can be prohibitive to many bus service providers who might otherwise be interested in electrifying.

However, primarily due to savings on operating and maintenance costs, electric buses can actually have lower total operating costs (TCO) over the life of the bus than their diesel counterparts. A 2018 report by Bloomberg New Energy Finance showed that the TCO for most configurations of electric buses is already less than the TCO for diesel buses, and with falling battery costs, electric buses may be fully cost-competitive on a TCO basis within two to three years.

A WAY FORWARD: PAY AS YOU SAVE® (PAYS®)

To overcome the upfront cost barrier and accelerate the electrification of global bus fleets, Clean Energy Works is applying an innovative financing solution called Pay As You Save® (PAYS®) to the transportation sector.

With PAYS, utilities cover the high upfront costs of eco-friendly/sustainable upgrades, and recover their costs over time. This model has been successfully applied to energy efficient appliances in India and building upgrades in the United States, but it has never been applied to the transportation sector.

Under a PAYS for Clean Transport program, the utility would buy the bus batteries and charging infrastructure, lowering the upfront costs and allowing bus service providers to buy electric buses at no additional cost over diesel buses. The utility company then would recoup the cost of the batteries and infrastructure over time through a tariff, which would be calibrated to ensure that the operating costs of the electric buses remain lower than those of diesel buses. Once the utility’s costs are fully recovered, the bus service provider would own the battery and charger assets.

financial analysis conducted by the Global Innovation Lab for Climate Finance indicates the strong potential for impact in this approach. For example, in Santiago, Chile, a PAYS investment for 100 buses could leverage more than $70 of investment capital for each grant dollar, while reducing overall grant requirements by 97 percent, generating $25 million in electricity sales revenues, and eliminating 62,000 tons of CO2 emissions. Modeling for Bogota, Cape Town, Mexico City and Belo Horizonte demonstrated that at a 100-bus scale, electric buses with PAYS are already cheaper over their lifecycle than diesel buses in some cities. Electric buses with PAYS support require far less grant funding to be viable, and are a significantly more effective use of grant funds, also leveraging a greater proportion of private finance than a non-PAYS transaction.

The utility is a key part of this transaction. Utilities are typically much larger and better capitalized than bus service providers, which means they can access the capital needed for these upfront costs with a lower cost of capital and lower transaction cost. The utility benefits from this transaction by gaining significant new electricity sales from the electric bus fleets, along with an updated business model that could be used to finance other solutions at the grid edge such as solar panels and storage batteries.

WHAT’S NEXT?

Clean Energy Works spent most of 2018 working with the Global Innovation Lab for Climate Finance to refine the PAYS for Clean Transport concept and model scenarios in locations that are promising for implementation. After receiving the endorsement of the Lab in September, and a Design Funding grant from Convergence in October, we are preparing to undertake a feasibility study of PAYS for Clean Transport in a Latin American city (to be determined).

But Latin America is not the only region where PAYS can have an impact. Many cities and states in the U.S. are great candidates for a PAYS for Clean Transport program, and there is promise for its application in countries such as Vietnam, India, Jordan and South Africa. PAYS can go beyond transportation, too. Once regulators approve PAYS tariffs, they can be used for any cost-effective solutions at the grid edge, from water heaters and energy efficiency upgrades to solar.

As we work towards our first implementation, programmatic support is needed to establish PAYS model in each country, design tariffs, and catalyze scale-up and replication. Other investment opportunities include debt lent to a creditworthy utility for investment in batteries and charging infrastructure, and for any remaining gaps after cost-effective utility investment.

By leveraging utilities’ balance sheets to mobilize capital for clean transport at scale, innovative financing solutions like PAYS will be critical to upscaling investment in climate action and supporting mitigation efforts. As the benefits of PAYS become more widely accepted, we believe it has the potential to disrupt the transportation sector as we know it, and model advancements in scaling other grid-edge technologies. It holds the potential to unleash the  benefits of reduced pollution and greenhouse gas emissions by innovating within a utility sector that can deliver the benefits of the clean energy economy to all.

This post was originally published on NextBillion.

Financing Innovations featured at the Global Climate Action Summit

Global Climate Action Summit Logo

Dr. Holmes Hummel of Clean Energy Works will be participating in an affiliate event at the Global Climate Action Summit on innovation in mobilizing capital. The focus of this session is on solutions that can unlock investments, especially from the private sector, or create enabling conditions that will be crucial to achieving climate and sustainable development goals.

Across the globe, cities are implementing their climate commitments by acting locally, and front-runners are taking steps to keep global temperature rise to well below 2ºC above pre-industrial levels by the end of the century.

At this event, experts representing development finance institutions, government, and the private sector will share their insights on the barriers and opportunities in mobilizing investment at the city level.

The second half of this invite-only event will explore emerging innovative solutions to unlock investment at the city level, including solutions incubated by the Global Innovation Lab for Climate Finance. Dr. Hummel has been championing Pay As You Save (PAYS) for Clean Transport through the 2018 Lab process and will be matched with an investor for a short interview on this system of unlocking investment for city-level climate action.

Financing Sustainable Cities Initiative includes PAYS for Clean Transport at Clean Bus Finance Academy

Electric Bus

Time and time again, the high upfront cost of electric buses when compared to diesel buses is a major hurdle that cities face when trying to clean up their carbon footprint. The benefits of electric buses are undeniable, including reduced pollution, savings on operation and maintenance of buses, and increased public health benefits. But even if the transit agency, the local government, citizens, and other stakeholders are all aligned on wanting zero-emissions transit options, the biggest question they have to answer is: How can they afford this increased upfront cost?

Our colleagues at the Financing Sustainable Cities Initiative (FSCI) are working to help city governments and investors bridge from innovation to implementation and tackle questions such as this. FSCI is a partnership between C40 and the WRI Ross Center for Sustainable Cities, funded by the Citi Foundation, to help accelerate and scale up investment in sustainable urban solutions like electric buses through their annual Clean Bus Finance Academy.

At the second Clean Bus Finance Academy held in Quito, Ecuador this May, Dr. Holmes Hummel was invited to present on Pay As You Save (PAYS) for Clean Transport, an innovative model where a utility can offer to pay the upfront cost of bus batteries and charging equipment and then recover its cost with a fixed payment on the operator’s electricity bill. This approach reduces dependence on grants to overcome the upfront cost barrier, and as a result, cities can advance their clean transit goals much more quickly.

The Academy was attended by senior officials from nine different cities in Latin America, India, Europe, and North America as well as financial and technical experts.