Electrifying transportation is critical to meeting climate goals. Electric transit buses offer a strong starting point: they have a compelling business case, and can reduce air pollution and greenhouse gas emissions. With declining battery costs and lower fuel and maintenance expenses, electric buses have lifecycle costs that are increasingly competitive with diesel buses in many markets.
However, despite these advantages, electric buses face several barriers to wider adoption. More than 100,000 new transit buses are purchased worldwide each year, yet outside of China, only 13% of municipal transit buses sold are electric. Barriers include upfront costs 40-50% higher than diesel buses (driven by battery and charging infrastructure costs); counterparty and technology risks faced by bus service providers and financial institutions; and high-cost capital with limited availability.
PAYS has already been successfully applied to other climate solutions, overcoming barriers to investment at scale without imposing additional liabilities on customers (unlike loans or leases). In a PAYS for Clean Transport transaction:
- A utility leverages its access to capital to invest in batteries and charging infrastructure for electric buses to reduce their upfront cost to customers, which accelerates electric bus procurement while expanding the utility’s revenue base.
- A bus service provider agrees to pay a fixed charge on monthly electric bills that is less than estimated savings versus diesel, reducing operating expenses from day one without incurring additional balance sheet liabilities.
Financial analysis indicates strong potential for impact in half a dozen countries on three continents. For example, in Santiago, Chile, a PAYS investment for 100 buses leverages more than 70 dollars of investment capital for each grant dollar, while reducing overall grant requirements by 97%, generating US$ 25 million in electricity sales revenues, and eliminating 62,000 tons of CO2 emissions.
Scaling up to transit buses in all developing country cities would save over 57 million tons of CO2 emissions per year, and represent a US$ 25 billion annual investment opportunity for transit buses, growing further as PAYS expands to other vehicle types.
A utility offers each bus service provider a service agreement (PAYS tariff), in which the utility pays for the batteries and charging infrastructure for new electric buses using internal funds or debt financing. The bus service provider can then purchase the buses at no additional upfront cost over diesel buses.
The PAYS tariff allows the utility to recover its costs within the warranty period through a fixed charge on the bus service provider’s regular monthly electric bill. The tariff is calibrated to ensure the estimated operating cost of an electric bus is less than that of a comparable diesel bus.
Once the utility’s costs are fully recovered, the bus service provider owns the battery and charger assets. In some cases, the battery and charger cannot be fully capitalized within these constraints, so the remaining amount needed to bring the upfront costs of electric and diesel buses to parity is met with grant support; or concessional capital is used to reduce financing costs.
News & Events
Investors launch new financial instruments for low-carbon transit, sustainable land use, and clean energy in developing countriesSeptember 27, 2018
New York, 27 Sept 2018 – The Lab – an investor-led initiative that aims to drive billions of dollars for climate action by developing and supporting innovative finance instruments – has launched its 2018 class of nine new investment vehicles. Over 30 high-level Lab members from governments, private investors, philanthropies, and development finance institutions convened […]
The Lab picks top finance instruments for action on climate change in developing countries, particularly Brazil, India, and in Sub-Saharan AfricaFebruary 14, 2018
LONDON — The Lab – a public-private initiative composed of experts in sustainable investment from governments, development finance institutions, and the private sector – has picked a new class of investment vehicles to drive much-needed finance to low-carbon, climate-resilient global development, out of over 100 ideas submitted into a competitive pool. The nine new instruments […]