How India can effectively electrify public transportation

The low bankability of electric bus leasing contracts has emerged as a major challenge in India’s plans to electrify its public transportation. As this is due to the poor financial health of most State Transport Undertakings (STUs), the viable long-term solution is to reform them. For immediate relief, measures like introducing a payment security mechanism are necessary. In addition, a functional carbon trading market can further improve the economics of electric buses in the medium term.

India has ambitious goals for electrifying public transportation

India has a vision of increasing the share of electric vehicle (EV) sales to 30% in private cars, 70% in commercial vehicles, 40% in buses, and 80% in two- and three-wheelers by 2030. In absolute numbers, this could translate to 80 million EVs on Indian roads by 2030.

India has a vision of increasing the share of electric vehicle (EV) sales to 30% in private cars, 70% in commercial vehicles, 40% in buses, and 80% in two- and three-wheelers by 2030.

Although it is also exploring solutions like green hydrogen and biofuels, the Indian government recognises that electrification is a prerequisite for decarbonising transportation.

The National Electric Bus Program, run by Convergence Energy Services Limited (CESL), a central public sector company, is leading the government’s efforts for the electrification of buses. CESL aims to deploy 50,000 electric buses across the country in the next few years.

Recent tenders were successful, but new challenges are emerging

The CESL has been aggregating demand from STUs, based on which it periodically issues tenders and holds auctions to procure electric buses on a standard Gross Cost Contract (GCC) model. This is a wet/dry lease model wherein the STU pays the leasing company a fixed rate per kilometre (km) every month.

So far, the electric bus manufacturing companies’ subsidiaries act as leasing companies for owning, operating, and recovering payments from STUs. These subsidiaries finance the entire operations from their internal resources or bank borrowing.

In a recently concluded auction of 6,465 electric buses, CESL discovered prices (not including subsidies) that were 29% lower than what it costs to operate diesel buses.

However, a major challenge that could hinder the success of the electric bus program is the poor financial health of most Indian STUs. Previous reports indicate that only 3-4 STUs out of 70 are financially profitable.

Given the poor financial health of STUs and delays in payments, as more tenders and buses come online, the bankability of these bus contracts is becoming a hurdle.

Given the poor financial health of STUs and delays in payments, as more tenders and buses come online, the bankability of these bus contracts is becoming a hurdle.

Tata Motors, which won an earlier tender to supply 3,600 electric buses, did not participate in the recent tender. Instead, it asked for introducing a payment security mechanism akin to what was kept in place for early renewable energy tenders to cover the payment risk from electricity distribution companies.

Combination of near-term and long-term solutions may overcome the challenges

India’s ambitious plan of inducting 50,000 electric buses in the next few years, which would need financing in the range of Rs60,000-70,000 crores, requires a combination of solutions.

For the short term, a payment security scheme wherein the central government creates a separate fund to cover the delays in payments of STUs to bus leasing companies will develop confidence in the business model.

Alternatively, the government can allow a private payment security fund to mop up resources from global climate funds and development institutions. Bus leasing companies can then access this fund by paying a small fee.

A functional carbon trading market is a medium-term measure that can improve the economics of electric buses (currently, an electric bus purchase price is 40% higher than a diesel bus) as the share of green electricity continues to increase in the Indian energy mix. California’s transportation carbon cap-and-trade program is an example of the benefits of a carbon trading market for transportation electrification. 

Over the long term, the government can develop an incentive structure for STUs to improve their financial health through better operational efficiency, asset monetisation, and exploring innovative revenue-earning opportunities, such as venturing into providing first-mile/last-mile connectivity, on-demand mobility, electric taxi fleet, etc.

For example, one of the ways the Shenzhen Bus Group Company Limited in China achieved 100% electrification of its bus fleet (6,000 buses) is by developing additional sources of revenue.

Also, to reduce the burden on bus leasing companies, STUs can own a portion of the bus fleet as they can raise low-cost capital through instruments like municipal/green bonds and access global climate funds.

For example, the Dallas Area Rapid Transit agency and the Metropolitan Atlanta Rapid Transit Authority in the U.S. raised finances through municipal bonds to finance several of their operations, including purchasing electric buses.

Electrification of public transport has multiple benefits, such as reducing air and noise pollution, lowering running costs, and establishing the supply chain that will ultimately drive economies of scale for other categories of vehicles. Addressing these emerging challenges in a timely fashion will help India turn its electric mobility vision into a reality. 

This article first appeared in the Economic Times