About
Electrifying transportation is critical for both near-term Paris Agreement goals and for every long-term climate stabilization scenario, and transit buses are one of the best places to start. They offer significant operational savings, can dramatically reduce greenhouse gas emissions, and eliminate harmful diesel pollutants that cause respiratory illness and premature deaths around the world. Battery charging patterns for electric buses can also be managed in a way that minimizes fueling costs and adds value to the electricity grid.
The world purchases more than 100,000 new transit buses each year, most of which are fossil fuel buses, locking in future emissions. Currently only 13% of buses in the global municipal fleet are electric, the vast majority of which are in China. Even once global clean bus sales begin to approach 100%, it will still take more than a decade to fully decarbonize the transit industry, without writing down stranded fossil bus assets.
Significant cost decreases in recent years have made electric buses competitive with, or cheaper than, diesel buses on a lifecycle cost basis in many markets, due to significantly lower fuel and maintenance costs. However, in spite of their fiscal soundness and environmental advantages, electric buses face key barriers that prevent much wider adoption:
- Upfront costs that are 40-50% higher than conventional buses, primarily due to the additional costs of batteries and charging infrastructure
- Perceived counterparty and technology risks in contracts between bus service providers, utilities, and capital providers
- High costs or limited availability of capital for investments in electrification
PAYS for Clean Transport has several features that address major barriers to financing and deploying electric buses at scale:
- Utility investments in battery and charging infrastructure are recovered via an opt-in tariff that is a fixed percentage of diesel bus operating and maintenance costs. Incremental costs of battery and charging infrastructure are thus paid for over time, allowing the bus service provider to enjoy operational and environmental savings from day 1, without additional liabilities.
- The bus service provider purchases electric buses with no additional upfront capital outlay, while the utility can recover its investment securely through a fixed monthly charge on the customer’s electricity bill during the warranty period of the equipment. Simultaneously, the utility is increasing its electricity sales volume through expansion into the transportation sector.
- The superior capitalization of the utility and efficient allocation of risks, mean lower costs of capital for battery and charging infrastructure investments and greater electrification scale.
Meeting transportation decarbonization targets by 2030 is essential in every climate stabilization scenario and requires accelerating transit electrification today. PAYS for Clean Transport will implement debt-financed iterations of the transaction for creditworthy utilities in leading emerging-market cities. Analysis to-date suggests Mexico City, Santiago, Bogotá, and Cape Town may be particularly suitable for pilot projects; however, there remains significant potential in many other parts of the world.
Later iterations of PAYS for Clean Transport will utilize a project finance capital structure that insulates capital providers from balance sheets of less-creditworthy utilities, and allows PAYS to accelerate electrification in a wider variety of contexts. Once operating at scale, a larger pipeline of PAYS for Clean Transport projects with well-documented environmental benefits can form the basis of a bespoke green bond issuance for greater liquidity, investor diversification, and accessible low-cost capital in many markets.
DESIGN
In a PAYS for Clean Transport transaction, the bus service provider procures electric buses from the electric bus manufacturer without batteries or charging infrastructure, at approximately the same upfront cost as diesel buses. Meanwhile the utility obtains capital to finance the additional costs of batteries and charging infrastructure. The utility then recovers its investments through on-bill repayments from the bus service provider each month, and repays the capital provider in-turn.
There are key benefits from this approach:
- The bus service provider benefits from unchanged capital expenditure versus the diesel bus status quo, and enjoys operational savings from day 1.
- The utility receives new and predictable electricity sales during off-peak times and securely recovers its capital expenditure through its regular electricity billing process.
- The capital provider benefits from a low-risk transaction insulated from the bus service provider’s ability to pay.
This approach uses minimal concessional capital to leverage large amounts of private finance to accelerate electrification and electric bus deployment around the world.
Electric buses are a particularly compelling starting point for this financing approach because these vehicles are reaching lifecycle cost parity with fossil equivalents while delivering compelling public health and environmental benefits. But as battery and EV prices continue to decrease, the PAYS for Clean Transport model will have increasing relevance to other vehicle classes including heavy-duty and light-duty service vehicles, taxi fleets, and ultimately passenger vehicles.