The Deals on the E-bus Go Round and Round

July 2019

By Todd Hinz, Senior Manager – Fixed Assets – Valuation & Business Analytics, BDO USA, LLP

Tesla’s sleek sports cars may get more media attention, but the bigger electric vehicle opportunity in the short run for fleet operators and leasing companies is likely to be in electric buses.
 
E-buses have already proven themselves to be an important mode of transportation in China, where more than 425,000 are now on the road. Only a tiny fraction of U.S. buses run on electricity right now – 300 in all, slightly more than half (153) in the state of California – but those numbers are likely to rise very soon, thanks to a combination of technological advances, government subsidies, and innovative battery leases.
 
Last year, spending on the U.S. electric bus market reached $745.2 million, and is expected to reach $39.6 million by the end of 2019[1].  P&S Intelligence forecasts the global market will top $1.948.5 billion by 2024[2].
 
Initially, sales are likely to be primed by government incentives. The state of California, for example, has mandated a zero-emissions bus fleet by 2040, which will entail the replacement of 12,000 buses.[3] School bus conversions, particularly to hybrid engines, may also spur more e-bus sales.
 
As sales volumes grow, costs are likely to fall. Analysts forecast that falling manufacturing costs and technological advances for batteries could cut e-bus prices nearly 20% by 2025.[4]
 
Competition may drive down costs further as well. North America is already home to several electric-bus manufacturers, including a California-based manufacturer, Ebus, Inc., which has begun offering the option to retrofit fossil fuel (diesel or CNG) transit buses to battery-electric. The retrofit electric buses will be fitted with a battery that has a 60-mile range, but a freshly charged battery can be swapped out in minutes to keep the bus out on the road.[5]
 
International competition is also likely to add some dynamism to the market, provided the foreign companies can meet transit agencies’ bar for quality. Early signs about foreign bus-makers’ quality control are not entirely encouraging: recently, the city of Albuquerque cancelled its contract with the Chinese manufacturer BYD due to the poor performance of its buses in the hot summer months. City officials had understood that BYD buses would be able to travel about 275 miles per charge, but they were only able to eke out 177 miles per charge.
 
Battery powered e-buses account for the largest share of today’s nascent market and their numbers are expected to grow quickly, thanks to falling battery prices, the political advantages of being emission-free, and deep government pockets. Currently, most e-buses are powered by lithium ion (“Li-ion”) batteries, but the more energy-dense nickel metal hydride (“Ni-MH”) batteries are expected to become more popular as the technology behind them advances and production costs fall.
 
For now, e-buses remain expensive, selling for around $750,000[6] versus $450,000[7] for an average diesel vehicle. However, the sticker shock may be somewhat deceptive. E-bus manufacturers claim their buses are much cheaper to maintain than diesels because they are lighter and have a tenth of the parts. At the same time, they claim their buses will last longer than the 12-year-life expectancy of the traditional steel-frame bus.
 
Considered on an all-in cost basis, electric buses have the potential to deliver impressive cost savings. Proterra, a U.S. electric bus company that builds its buses out of lightweight carbon-fiber-reinforced composite material rather than using the traditional steel bus frame, estimates their battery powered bus will cost about 21¢ per mile compared to about 91¢ per mile for a diesel. The Antelope Valley Transit Authority in Los Angeles County estimates that it saves an average of $46,000 per bus per year for electric versus diesel[8].
 
To clarify the actual cost differential, some e-bus manufacturers have taken a page from the solar industry’s playbook and offered battery-leasing programs. Such shifts in business model pull upfront bus costs down and enable transit agencies to tap their maintenance budgets for batteries, just as they would for diesel or natural gas.
 
This might seem like an accounting gimmick, but given that many U.S. transit agencies keep separate budgets for acquisition and maintenance, some analysts argue that such leasing programs could greatly accelerate adoption of public transit e-fleets.
 
One European think tank, Transport & Environment, takes it a step further, suggesting in a recent report that an “operating lease where the local authority can lease the bus with an option to own the bus at the end of the lease term or battery lease where the bus is bought for roughly the same price as a diesel bus and the battery is leased” could help accelerate adoption.[9]  
 
In other words, the power train and the chassis may change in the brave new e-bus world, but the fiscal mechanism – the lease – seems likely to play a more important role than ever.
 
[1] https://www.globenewswire.com/news-release/2019/03/27/1774112/0/en/Lead-analyst-says-Electric-buses-coaches-market-worth-39-623-million-in-2019.html
[2] https://www.globenewswire.com/news-release/2019/02/25/1741234/0/en/U-S-Electric-Bus-Market-Projected-to-Reach-1-948-5-Million-by-2024-P-S-Intelligence.html
[3] https://www.apnews.com/f2a8b73351a74b9e9ab1d1eee1251898
[4] https://bekryl.com/industry-trends/electric-bus-market-size-analysis
[5] https://www.ebus.com/
[6] https://www.technologyreview.com/s/424311/electric-buses-get-a-jump-start/
[7] http://www.columbia.edu/~ja3041/Electric%20Bus%20Analysis%20for%20NYC%20Transit%20by%20J%20Aber%20Columbia%20University%20-%20May%202016.pdf
[8] https://www.forbes.com/sites/sebastianblanco/2018/08/31/84-million-electric-buses/#2a94e08b5e40
[9] https://www.transportenvironment.org/sites/te/files/publications/Electric%20buses%20arrive%20on%20time.pdf