WORKING PAPER FINANCING ELECTRIC AND HYBRID-ELECTRIC BUSES: 10 QUESTIONS CITY DECISION-MAKERS SHOULD ASK CHRISTOPHER MOON-MIKLAUCIC, ANNE MAASSEN, XIANGYI LI, AND SEBASTIAN CASTELLANOS EXECUTIVE SUMMARY CONTENTS Highlights Executive Summary .......................................1 Electric and hybrid-electric buses offer cities Abbreviations ............................................. 5 ▪ environmental and health benefits, such as helping to Question 1.................................................. 6 lower emissions that contribute to poor air quality and global climate change, as well as economic benefits, Question 2 ..................................................7 such as potential cost savings. Question 3 ................................................. 9 Although capital costs are often higher than Question 4 ................................................ 10 ▪ conventional diesel buses, electric buses often have Question 5 .................................................11 a competitive and sometimes lower total cost of Question 6 ................................................ 14 ownership (TCO) due to savings from reduced energy Question 7 .................................................17 costs per mile and maintenance. Question 8 ................................................ 18 Cities are adapting to how buses and bus services ▪ are procured, allowing third parties to assume an Question 9 ................................................ 19 important share of the risk. More flexible procurement Question 10 ............................................... 21 enables bus manufacturers to offer operators the Conclusion ................................................22 option to lease both buses and batteries, reducing Appendix A: Case Studies ...............................23 technological and financial risks. References ...............................................26 Stakeholders not traditionally involved in transport, ▪ such as utility companies, have also recently been entering the market to purchase vehicles or batteries and lease them to the operators of the public fleets. Working Papers contain preliminary research, analysis, Some governments are helping cities to afford findings, and recommendations. They are circulated to ▪ both direct and indirect costs of bus electrification. stimulate timely discussion and critical feedback, and to A variety of grants are helping cover direct influence ongoing debate on emerging issues. Working costs, including for both capital and operational papers may eventually be published in another form and their content may be revised. expenditures on buses and research and development. Tax incentives, such as value-added, import, and Suggested Citation: Moon-Miklaucic, C., A. Maassen, X. Li, S. corporate profit tax breaks, are used to reduce the cost Castellanos. 2019. “Financing Electric and Hybrid-Electric Buses: burden on operators and manufacturers. 10 Questions City Decision-Makers Should Ask” Working Paper. Washington, DC: World Resources Institute. Available online at Operators can reduce the financing costs by accessing www.wri.org/publication/financing-electric-buses. ▪ available credit guarantees or concessional debt, for example, by public sector financial institutions. WORKING PAPER | October 2019 | 1 Box ES-1 | About This Working Paper Studies show that, compared to ICE transit buses, hybrid- electric buses have 11.8 percent higher fuel efficiency, 24–40 percent lower carbon dioxide (CO2) emissions, The overarching goal of this publication is to provide a 18–90 percent lower nitrogen oxide (NOx) emissions, practical, easy-to-navigate reference document to help 37–98 percent lower carbon monoxide (CO) emissions, practitioners decide if or how to adopt electric and hybrid- and 17–78 percent lower hydrocarbon emissions, with the electric bus fleets for public transport in their cities. Designed ranges dependent on different road test types and drive for an action-oriented policy audience looking to learn from experiences of other cities, this publication provides evidence- cycles (Hallmark et al. 2013). Our focus is on “public” based answers to questions about recent developments in the electric or hybrid-electric buses used in public transit electric and hybrid-electric bus space. It is not designed to be fleets, regardless of whether these are under public owner- a comprehensive guide to electric bus adoption, and it does ship or are privately owned and operated through a public not make prescriptive recommendations. For those purposes, service contract. the two WRI reports cited in the next column are better suited. In addition, this paper touches on both electric and hybrid- Since discourse on this topic is still relatively nascent, electric buses because we see the challenges in terms of existing literature on electric bus adoption in public fleets finance applying to both technologies, which require higher is sparse and has mainly focused on technical components up-front capital costs to incorporate into transit systems such as battery capacity and storage (Lajunen and Lipman compared to traditional internal-combustion-engine (ICE) 2016), performance uncertainties in cold and hot weather buses. As such, the terms electric and hybrid-electric will (Bullis 2013; Prohaska et al. 2016), or route and charging be used throughout the paper to differentiate the types of technologies. conditions (Perrotta et al. 2014; Li 2016). In addition, the few relevant publications are either a decade old (van der The questions have been selected by the authors based on Straten et al. 2007) or concentrate solely on large-scale literature reviews, extensive desktop research into specific market dynamics (BNEF 2018) rather than providing case case studies, and interviews with stakeholders and global experts in the field. Thus, the responses are not meant to be studies and lessons learned on individual cities’ attempts prescriptive but instead represent the findings of the research. at implementing clean buses into their public fleets. How- Brief summaries of the questions that will be touched upon in ever, the World Resources Institute (WRI) has published this publication are included in this Executive Summary. These two reports on electric buses: Barriers to Adopting Elec- are intended to provide context to the relevance of each topic tric Buses (Sclar et al. 2019) and How to Enable Electric rather than offer direct answers to the questions posed, which Bus Adoption in Cities Worldwide (Li et al. 2019). These will be elaborated later in the paper in separate sections. sister reports explore the lessons learned from the experi- ence of 16 cities that were early adopters of electric buses. Our paper seeks to build on guidance provided by those reports and dive deeper into some of the financial issues Context cities face. As electric and hybrid-electric buses gradually become Question 1: What are the benefits, costs, and reported a reality worldwide (see Figure ES-1), achieving a better impacts of electric and hybrid-electric buses? understanding of the mechanisms supporting investments Electric and hybrid-electric buses generally deliver local in these new technologies as well as their assets is more and global emission reductions, improved service quality, important than ever. The global electric bus fleet grew and lower per-mile operational costs compared to ICE about 32 percent in 2018 (BNEF 2019), and it represents buses. Cities have reported multifaceted benefits in using the fastest-growing part of the electric vehicle market electric and hybrid-electric buses, including reduced (Heid et al. 2018). Nevertheless, capital costs for fully air and noise pollution; lower operational and mainte- electric buses may be double or triple that of conventional nance costs; and lower CO , CO, particulate matter, and internal combustion engine (ICE) buses (Lajunen and Lip- 2 other emissions. In terms of monetary costs, research man 2016), and batteries may need to be replaced after demonstrates that, in their current (2019) state of matu- six to eight years (Guerrero 2017), highlighting the rity, electric buses may offer a lower TCO over their useful importance of finding sustainable financial plans and lifetime. Nonetheless, they do have higher up-front costs— business models. due to expensive batteries and the need for additional 2 | Financing Electric and Hybrid-Electric Buses: 10 Questions City Decision-Makers Should Ask charging facilities—as well as costs related to disposal Question 3: How are cities procuring electric and and recycling of the assets. However, these expenses vary hybrid-electric bus services? according to the local electricity, fuel, and labor costs as well as the local bus market. In general, urban bus services can be provided along a spectrum of public to private provision. Along this con- Question 2: What are the physical assets needed for tinuum, the public and private sectors bear variable costs the adoption of electric and hybrid-electric buses? with different contracts or structures. Although cities have not typically made substantial changes in modes of Electric and hybrid-electric bus adoption can have differ- contracting when introducing electric or hybrid-electric ent combinations of technical components depending on buses, a new model of delivery is emerging as third-party the objectives pursued. A combination of several types of actors (mainly manufacturers and leasing companies) take physical assets usually needs to be considered, including