IFC Transport INSIGHTS ELECTRIC VEHICLES 101 A series of transport notes on electric vehicle trends and opportunities from IFC Bumps in the Road: Challenges to E-bus Implementation January 2020 With a broad view of the benefits of electric vehicles and sense for Total Cost of Ownership, or TCO, we turn to some of the challenges of implementation. The good news is that dozens of municipalities are experimenting with e-buses, while some last-mile delivery companies are using pilot fleets to test performance. At the same time, a smaller group of operators are pushing ahead with more drastic, “big bang” efforts to put dozens or even hundreds of electric vehicles into service. We saw how some locations have already reached TCO parity, while other places will require further reductions in costs and perhaps some forward- thinking tax and tariff policies. The bad news is that the track record for electric buses to date has been mixed, and e-bus adoption has not scaled up as fast as many had hoped due to institutional, technical, and financial challenges. For those seeking to stay the course with internal combustion engines, there are plenty of valid arguments. To clear the air, today’s piece will bring some of these problems out in the open. BUMPS IN THE ROAD risk without political “arm twisting” at the national Below is a snapshot of some of the bumps in the road: or local level (or perhaps an air quality crisis—an increasingly common issue). Institutional Challenges ● The Diesel Incumbency: In most large cities, bus ● City Transit Frameworks: At the city level, where transit is a mix of formal and informal operations, finding institutional capacity is often challenging, the vast majority of which runs on diesel. While there is remarkably little information on the diesel buses are fully depreciated after eight to ten commercial and technical aspects of implementing an e-bus program. Cities that do not already have years in most cases, buses in emerging markets often stay on the streets for up to 20 years, which reasonable transit frameworks and well-run bus can create a huge lag for fleet conversion. Also, if networks will have a difficult time leapfrogging to cities can’t figure out a way to make the transition electric buses, where technical, financial planning, to electric interesting and profitable to operators and governance factors are critical. Also, city transit is from a return perspective, they might be spinning not an ideal environment for risk-taking, as botched their wheels. implementation of a new bus program could likely be political suicide for responsible officials. Technological and Infrastructure- ● Old-School Procurement: Procurement frameworks related Challenges based on the lowest upfront cost are still the norm, ● High Upfront Cost: Electric buses are still an order which puts e-buses at a huge disadvantage with of magnitude more expensive than old school city procurement officials. E-buses can cost up to diesel—in some cases twice as much. In Colombia, twice more than fossil-burning models. It is hard to where Chinese equipment is widely available, a convince risk-averse city bureaucrats to take the 1 smaller 8.5-meter electric bus currently costs around Financial Challenges $200,000—compared with approximately $100,000 ● Fuzzy Math: Related to the points above (as for a conventional diesel bus (note: all dollar figures well as yesterday’s discussion) e-buses are still are in U.S. dollars). This differential expands for relatively expensive. The savings generated over larger models that require more expensive batteries time through operational cost savings are subject and heavier frames to manage the additional to several factors that are difficult to predict. If weight. If you think about introducing hundreds you apply adequate discount rates to the risks you of these vehicles into the transit mix, the cost take commercially, the numbers often don’t quite differential is substantial and difficult to absorb. work yet—from a pure IRR perspective—without risk enhancement and/or some patient long-term ● Performance Issues Related to Batteries: Batteries (perhaps concessional) financing that matches the are still at a relatively early stage of development longer payback period of the cleaner vehicles. with low energy density per kilogram. This creates range limitations as buses can only handle a limited ● Creditworthiness Issues: Not far behind the number of battery packs on their frames. When fuzzy math are creditworthiness issues with you factor in heating and air conditioning, hills, the underlying business models. Traditional bus stopping and starting, traffic speeds, frequency of concessions are fraught with risk allocation issues stops, and passenger loads (not to mention battery for the private sector, including acquisition, demand, degradation over time), it is difficult to forecast and performance risks while revenues are typically performance. To make matters worse, there have in local currencies. Operators are generally not in a been high-profile cases in developed markets financial or technical position to add bus technology where buses were returned to the manufacturer risk to the cocktail. New business models are coming for performance shortfalls (fairly or unfairly). online in many cities globally with separation of Without careful upfront design specifications for asset ownership and operator roles—and sometimes the particular application and proper training and even segregation of the charging infrastructure. supporting infrastructure, it is not hard to imagine However, as you add layers of complexity to a how performance could fall short. municipal concession business, you may be asking for trouble regarding institutional capacity to ● Infrastructure Development: Aside from the buses manage all of these moving parts. themselves, cities need well-located real estate (for centralized depots) and power infrastructure to ● Expensive Financing: It is not surprising to hear support the charging stations reliably and cheaply. that existing sources of finance for operators, in Bloomberg New Energy Finance estimates that, the short term, are very expensive. Local operators in addition to the high costs of electric buses, are undercapitalized and opaque, while financing is cities should plan on another $20,000–25,000 in generally from local banks on some sort of asset- infrastructure costs per bus at this initial stage. backed basis. There is a wall of well-intentioned While this is less of an issue for cities with existing international donor and financial capital (including bus rapid transit networks and depot space, blended finance) waiting to invest in e-buses in acquiring scarce and expensive land in strategic particular. But there seems to be an equally high locations for servicing a new electric fleet could be wall of misunderstanding about the credit risks and complicated enough to discourage city officials from structuring necessary to reach financial close. making the switch. 2 ENTER IFC sleeves to try to figure this out. It would not be hard to Before losing hope, most of these challenges could play imagine financing a acquisition special purpose vehicle to IFC’s strengths with a little creativity and daring. This or funding to one of the global utilities (such as France’s could be a sector where we invest in early-stage Enel/Engie) that are investing in e-buses. Leasing models innovation that could include a range of electric types, may also be the way forward for electric fleets ranging as well as support to both public and private sector from small electric scooters and three-wheelers to clients. On the public sector side, IFC already works delivery trucks and even massive urban buses. with a network of global municipalities that are IFC is already on the hunt for the right business models experimenting with electrified transport. It would not be and partners—and we are already investing in a few a stretch to put together an advisory program (perhaps choice operations globally. It is just a matter of time fortified with some donor funding) that prioritizes a before this becomes a more prominent part of our few choice opportunities and helps these municipalities business. get down the learning curve. IFC is already working on a host of operations that bring advisory and investment support to electrified urban transport. ADDITIONAL TRANSPORT NOTES IN On the private side, IFC should continue financing THE ELECTRIC VEHICLES 101 SERIES well-structured private electric vehicle initiatives and An EV Playbook for Electric Buses concessions with reasonable municipal counterparties E-Bus Economics: Fuzzy Math? and bankable risk allocation. The operations will not be perfect vis-à-vis what we are used to in customary Electric Buses: Why Now? infrastructure concessions, but we should roll up our Twists and Turns: New Business Models This article was written by John Graham, Principal Industry Specialist, Global Transport at IFC. 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