PAYS® for Clean Transport – Q&A
In the U.S., more than a dozen utilities have worked with Energy Efficiency Institute to apply PAYS to building energy upgrades. Utility regulators in New Hampshire, Kansas, Kentucky, Hawaii, and Arkansas have approved opt-in tariffs for those investment programs. See the status of these programs here.
The PAYS model has also been applied to LED lighting and other efficiency upgrades in India by Energy Efficiency Services Limited (EESL), a state-run super-Energy Service Company (ESCO) that has collaborated with utility distribution companies. See EESL PAYS business model, and a recent World Bank press release on IBRD financing for EESL.
PAYS for clean transport applies the same on-bill investment concept to the high upfront costs of electric mobility, starting with clean transit. An EV bus and charger can cost as much as 150% of a diesel bus, presenting a capital cost barrier that prevents transit agencies from buying the cleaner technology, despite their potential long-term cost effectiveness and significant environmental benefits.
With PAYS for clean transport, electric utilities can capitalize the batteries and charging equipment which reduces the upfront cost to the bus service provider (the customer). The utility then recovers its cost for the equipment through a fixed charge on the monthly bill for the bus service provider that is lower than the estimated operational savings of the electric bus. View the model of the instrument here.
For an extended discussion of the differences between PAYS and leasing models, please refer to the instrument analysis by the Global Innovation Lab for Climate Finance (Annex 7.3).
- Additional liabilities: Leasing agreements require the bus service provider to accept a long-term future liability on their balance sheet. By contrast, a PAYS transaction does not impose additional liabilities on a bus service provider’s balance sheet.
Cost recovery: Leases depend on the creditworthiness of the bus service provider. With PAYS, utilities rely upon disconnection for non-payment, which is an effective form of security.
To minimize technology risk exposure, the length of the cost recovery period for the PAYS tariff is limited to the length of the warranty for the equipment (e.g. on-board battery and charging station).
The Energy Efficiency Institute, co-creator of PAYS, holds a trademark for the phrase Pay As You Save and PAYS in the United States only. The trademark protection prevents the name from being appropriated in the United States to refer to program designs that do not meet the minimum criteria for a tariffed on-bill program. This protection does not apply in international markets, and as a result, there are a few instances of the same term being used to brand different program designs.
In all but the most carbon-intensive grids, electric buses produce lower well-to-wheel carbon emissions than their diesel counterparts. The drivetrain energy efficiency is up to 500% higher than that of a diesel engine. They are quieter and produce lower levels of harmful urban pollutants (NOx and fine particulates). For governments aiming to reach greenhouse gas emissions targets in the transport sector in the next 10-15 years, the transition to electric bus fleets must begin now because buses remain in service for about 12 years.
Electrification is a prerequisite to decarbonizing the transport sector. While some power grids are currently comprised of high emissions sources, more renewables are being integrated into grids in many locations.
Electric buses fueled by an electrical grid powered by carbon intensive sources may have small or even negative carbon emission reductions when compared to diesel. However, the much greater tank-to-wheels efficiency of the electric drivetrain means emissions reductions improve quickly as renewables are added to the mix of supply sources.
Electric buses are typically purchased new from the manufacturer.
The utility provides the upfront capital for investment in the batteries and charging infrastructure for the electric bus.
Once the bus is in operation, the utility provides electrical service to the charging site. The cost of that electricity is defined in a tariff for electricity service that applies to all customers that qualify for that rate. For that reason, the tariff that defines the electricity rate is separate from the tariff (or tariff rider) that defines the PAYS charge.
The manufacturer’s warranty should cover equipment performance during the period of cost recovery. If the equipment stops working for no fault of the customer and it is not repaired, the cost recovery charge ends. The utility may include extend the cost recovery period to recover repair costs, if any are incurred.
At the outset, the utility owns the batteries and charging equipment. At the point at which the utility has recovered its costs, its cost recovery charges end, and ownership of the batteries and charging equipment moves to the bus service provider.
The benefits provided by grid connected batteries do have value, and that value should not be conditional upon the source of financing for the battery.
Making (creditworthy) utilities the centerpiece of the transaction has several advantages:
- Cost-effectiveness: Utilities are typically much larger and better capitalized than bus service providers, and they access debt markets on a regular basis, at a lower cost of capital and lower transaction cost.
- Counterparty risk: By lending to a utility, a capital provider holds counterparty risk from the utility, not the bus service provider.
Cost recovery: By using an on-bill financing mechanism, the utility can recover its investment in batteries and chargers through the billing system it uses to collect revenues from all other services delivered.
The bus service provider supplies the upfront capital for the purchase of the electric bus only (not including the batteries or charging infrastructure), paying a price approximately in line with the purchase cost of a diesel bus. Once the bus is in operation, the bus service provider commits to paying the tariff to the utility until the utility’s costs are recovered.
Non-payment of the cost recovery charge can be treated similarly to other charges for utility services, including disconnection of service in case of non-payment.
Even if the bus service provider encounters financial difficulties, or is not particularly creditworthy, it is less likely to not pay its electricity bill than other financial obligations because that would result in cutting fuel to the transit system. The PAYS transaction design may present less counterparty risk to the utility than the bus service provider’s credit rating might otherwise indicate.
External capital may be required in three cases:
- Alternative capital source. If the utility cannot (or prefers not to) finance the purchase of the batteries and charging infrastructure internally, it may seek external capital to provide the financing required. This could be done privately through a bespoke financial instrument, which could include a public debt or bond offering.
- Copayment to buy down the upfront cost to a level that is cost effective. If the bus service provider must make an upfront co-payment to cover a gap in cost effectiveness, grant funding or concessional capital can be raised to cover it.
Professional services for initial implementation in a specific market. The legal, consulting, and administrative fees associated with the first-time design and implementation of the PAYS system for a specific market can be paid by the utility, which may seek to have those costs covered by external grant funding as a public benefit.
A fundamental principle of PAYS is the ability to shift liabilities from bus service provider to utility balance sheets.
As with its other investments, the utility would be obligated to repay its creditor regardless of the performance of its investments, and as with other investments, the utility’s own risk exposure is low because it would be assured of cost recovery through terms of service (a tariff) that have similar recourse options, such as disconnection for non-payment and treatment of unpaid bills for the PAYS investment in a way that is the same as unpaid bills for other services.
No. A new electric bus is more cost effective than buying a diesel bus and then tearing out its engine and tank to make a custom retrofit for that particular chassis, with little or no warranty coverage. While there are a handful of retrofit electric bus producers, the supply chains for retrofit conversion buses are difficult to develop at high volume, especially on the scale that new buses are already being added to the global fleet every year.
PAYS experience in the field of building energy upgrades implements one purchase-sale contract for each of the two parties – because they are two different payments to the solution provider.
Separately, the utility offers the bus service provider a PAYS tariff agreement, and that document establishes the pathway to ownership of the grid-connected equipment for the bus service provider.
This tariff (and the agreement for a customer to opt into it) is set up one time by the utility with approval from its regulator, and then any eligible bus service provider in the utility’s service area can use it as an off-the-shelf document going forward for all future PAYS investments of that type.
Yes, battery lease options are available in some countries in which the bus service provider buys the bus with its own capital, minus the value of the battery, which is capitalized separately. The bus service provider then pays for the battery lease through an operating agreement.
To further underscore that the battery and bus have a commercial value that can be distinguished, the bus and battery often have separate warranty terms, and the battery can be removed from the bus for separate sale for second life applications.