Sarah Keay-Bright plots an affordable pathway for low income nations to reduce the cost of bus electrification and scale up private investment. The first step is to put a true figure on the total cost of ownership (TCO) for electric buses versus existing conventional fossil fuel ones. Externalities such as air pollution are often left out. Subsidies, fuel and vehicle taxes also play a role. Every country is different, because of matters that include everything from charging infrastructure to route topography. Whatever the TCO, the operating costs of e-buses are far lower, but the upfront costs are much higher, putting off investment. New methods of financing – some already tried and tested – need to be made available and publicised. The author looks at the vital effect of policy, early engagement with energy regulators and utilities to predict electricity price trends, and how bulk buying can keep costs down.This is the second of a 2-part article. Part 1 looked at affordable electric car take-up in east Europe.
BNEF estimates that purchase parity between e-buses and conventional buses will not be achieved until 2030, much later than its 2022 prediction for passenger cars. BNEF analysis also shows that parity based on lifecycle costs is already being achieved for e-buses under some conditions but the higher upfront costs of e-buses compared to conventional buses is a major barrier to investment. Grants have typically been used to finance e-buses in Europe but this is not sustainable for large-scale investment. Furthermore, many lower income countries are not strongly motivated to reduce greenhouse gas emissions beyond their Paris Agreement commitments (GHGs).
Consequently, some municipalities and transit operators are delaying e-bus purchase decisions or opting instead for Euro VI diesel or CNG buses, even when the e-bus investment is favourable based on lifecycle costs and far greater emissions reductions would be achieved. Financing and leasing provide an effective solution but lack of access to or knowledge of low-cost financing options is a barrier.
Electrification of urban bus fleets has made a good start right across Europe, including in lower income countries such as Poland, Czechia and Hungary. It is now time to scale-up and accelerate investment. This upcoming decade presents climate finance donors and public financial institutions with a major opportunity to rapidly expand financing flows to bus electrification in lower income countries.
The role of policy
Many fleets are owned, leased, contracted or licensed by public authorities to deliver public services. Indeed, public procurement accounts for 75% of all new bus registrations (in the EU and similarly in the rest of Europe). In July this year, EU Directive 2019/1161 on the promotion of clean and energy-efficient road transport vehicles was published; the previous directive had fallen short of expectations. The new directive requires countries to procure a minimum % of clean vehicles – defined as 25gCO2/km for 2025 and 0gCO2/km for 2030 – in sales and covers lease, rental and hire-purchase vehicles.
Ambitious cities that have signed up to the C40 Fossil-Fuel-Free Streets Declaration, which includes Warsaw, have their focus on achieving much more than the minimum. For example, these cities commit to both the exclusive procurement of zero emission buses by 2025 and the establishment of Zero Emission Zones by 2030.
Focussing on the economics and financing
Some countries and cities, however, might struggle politically to adopt ambitious measures to drive the demand-side of the e-bus market. Focusing interventions on the objective of improving the economics and financing of bus electrification, however, is a no-regrets approach. Such interventions include, among others:
i) ensuring investments in new buses used for public services are based on lifecycle costs and involve comparison of technologies, including e-buses
ii) measures to reduce risks and drive cost reductions, e.g. through bulk procurement; early engagement with the energy regulator;
iii) creating or exploiting mechanisms to close the TCO (Total Cost of Ownership) gap;
iv) promoting and raising awareness of financing opportunities. These are discussed in more detail below.
Critical for E-bus investment: quality TCO assessment and comparison with alternatives
As the operating costs of e-buses are far lower compared to conventional buses, it is essential to assess investments based on lifecycle costs, also known as the Total Cost of Ownership (TCO), which encompasses capex and opex over the lifetime of the investment. The previous public procurement EU Directive 2009/33 set out a life-cycle costing methodology but the new directive abandons this methodology as it was deemed too complicated. Contracting authorities and entities must develop their own methodologies and some countries will likely need technical assistance.
The cost of electric bus configurations varies from case to case, depending on local context. Numerous factors must be considered including choice of battery size and charging infrastructure technology, which in turn depends on operating range, passenger capacity, topography of the route, battery specifications and lifetime, charging infrastructure options, availability and cost of power generation or electricity storage on the route or in the depot, and thermal requirements depending on the weather or seasons.
Adding air pollution costs to TCO comparisons
The cost difference between e-buses and alternatives is strongly influenced by factors such as fuel and vehicle taxes as well as subsidies, and whether or not externalities such as air pollution are included in the TCO assessment, as illustrated by the T&E (European Federation for Transport & Environment) analysis comparing Germany and Sweden. As mentioned in Part 1 of this article, lower income countries must reform their fiscal policy relating to vehicles and fuels in order to enable the transition to sustainable power and transport systems. Furthermore, many EU countries and cities of the CEE region are not compliant with EU air quality legislation, providing strong justification to internalise the external costs of air pollution in TCO assessments.
It can be argued that financial institutions, intending to align their investments with the Paris Agreement climate goals, should also undertake or review TCO assessments comparing technology options.
Organise bulk procurement to reduce costs
One of the ways to reduce costs and to facilitate scale up of investment and financing in bus electrification is through bulk procurement. Large tenders and purchase orders can leverage greater cost reductions, which would otherwise be impossible to achieve for many SMEs and small local authorities. Large-scale coordinated action could also help leverage stronger engagement with the energy regulator and distribution network or system operators (DSOs/DNOs).
Examples of bulk e-bus procurement can be found in various countries, including Poland and Denmark. In Poland, in 2017, the Polish Development Fund (PFR) joined forces with several ministries to sign an agreement with 41 local governments for the purchase of 780 electric buses. During the same year in Copenhagen, Denmark, a joint procurement process involved 10 municipalities, 3 regions, the state-owned network company, and the capital’s utility to achieve discounts on the total number of EVs purchased.
Innovation in financing models and availability of climate finance: awareness-raising needed
Innovation in financing models for bus electrification is helping to enable access to finance, reduce risks and bring down financing costs. For example, bus manufacturers and specialised financing companies (e.g. Solaris Bus & Coach and BZ WBK Leasing; Proterra and Mitsui) are providing leasing services for vehicles and batteries, with agreements commonly including service and maintenance provisions, warrantees as well as a residual value and repurchase agreement that applies at the end of the lease term. Another example of an innovative financing model, promoted by the Global Climate Finance Lab, is provision of finance through the electric utility bill. This model could particularly suit public or private bus service providers that have weak balance sheets but a reliable utility bill repayment record and are served by a solvent and creditworthy utility.
With the emergence of innovative business models and financial instruments as well as new sources of low-cost finance, it is crucial that information is widely disseminated and awareness raised in both the public and private sectors, in all countries of Europe. It will be much easier for investors, financiers, local authorities and transit/bus operators if the information would be available from a single platform or provider.
Early engagement with energy regulators is crucial to mitigate investment risk
Engaging with the energy regulator and DSOs/DNOs before making investments is necessary to understand the structure of present and future electricity costs and implications for decisions concerning charging configuration, depot expansion or relocation, and so on. Given the energy transition underway, power market reforms – such as the Clean Energy For All Europeans package, provisions of which were mentioned in Part 1 – could impact electricity prices or tariffs during the investment timeframe. Decision-making relating to fleet renewal investments also needs to be grounded in a long-term decarbonisation strategy for the entire fleet so discussions with the energy regulator and DSO/DNO really need to take a long-term view. Bus operators should be aware of best practices, such as dedicated EV tariffs, as well issues, such as high demand charges and fixed charges – well explained by the Regulatory Assistance Project.
Need and opportunity for mechanisms to bridge the TCO gap
In lower income countries there often exists weak motivation to internalise external costs such as air pollution or climate change in TCO calculations. The externalities, however, could account for much of the TCO gap between an e-bus and a conventional bus, especially if the power mix of the country has a relatively low carbon intensity. To capture the emissions reductions and close the TCO gap, higher income countries could provide grants or very low-cost finance earmarked for CO2 emissions reduction (climate finance). As an example, the EBRD recently financed an e-bus investment in Bulgaria using finance supplied by Taiwan ICDF’s Green Energy Special Fund, the low interest rate of which made the investment viable.
Sarah Keay-Bright is the former Head of Energy Efficiency at the Energy Charter Secretariat