Here's what would drive even more electric buses into U.S. cities

Proterra electric bus
Proterra's 40 foot electric bus Catalyst E2

The ski resort community that’s home to the Sundance Film Festival — Park City, Utah — is also the birthplace of something far geekier: a new business model for selling electric buses.

The tourist destination was the first community in the U.S. to buy a fleet of electric buses by leasing the batteries that power the buses from Silicon Valley startup Proterra. The city leases the buses’ batteries out of its operational funds in the same way that it would have bought fuel for diesel buses. Diesel buses are the standard type of bus that most cities use for moving residents around.

The funding innovation is important because it lowered the upfront cost that Park City paid for its new fleet, bringing it closer, or even below, what it would have paid for diesel buses. At the same time, the leasing model also allowed the city to lower its risk around the batteries, which over the past few years have gotten both dramatically lower in cost and somewhat higher in energy density.  

Alternative financing has helped other energy technologies break out and it could do so for electric buses, too. The business model of paying for solar power as a service helped solar panels morph from being a niche energy source to becoming a mainstream form of power generation for home owners (although in recent years the trend has shifted back to loans).

Park City isn’t the only city experimenting with alternative ways to pay for electric buses. In recent months, New York’s MTA — which operates the largest bus fleet in the U.S. — decided to lease five of Proterra’s electric buses (both the batteries and the buses) over a three-year period. The Big Apple is looking to experiment with the technology through a pilot program, which could help it make decisions for a larger investment down the road.

The new electric bus financing options could become increasingly popular as more, and smaller, cities review their city transit fleets to figure out ways to afford to buy electric buses. Most of the several hundred electric buses currently driving on the roads in the U.S. were paid for upfront by large cities such as Seattle, Los Angeles, and San Francisco that have set aggressive environmental goals, according to a recent report from Bloomberg New Energy Finance.

But smaller cities just don’t have the budgets to make those big upfront lump sum payments and often don’t have access to the kinds of federal and state grants that have helped pay for early sales of electric buses. Public transportation is "a bit of the haves and the have nots," explained Proterra CEO Ryan Popple.

Popple envisions that one day Proterra’s electric buses and batteries eventually will have an even more sophisticated business model that will involve utilities. "The correct business model is that we sell the vehicles to fleet operators and they pay for the battery pack through the price of electricity," said Popple.

In that scenario a utility such as PG&E would buy the batteries and the city transit agency would rent the batteries from the utility. The math works out because batteries can be used for several years (six to 10 years) in vehicles, but then can continue to be used reliably to charge and discharge plugged into the power grid. "Batteries have residual value," said Popple.

Bloomberg New Energy Finance predicts that third parties eventually will enter the electric bus market to provide financing and leasing options for electric buses for cities and corporations. But the report contends that this "won’t happen overnight."

Currently the market for electric buses in the U.S. is still in its early days. Out of 70,000 buses in city fleets in the U.S. just 300 were electric buses as of 2017, according to the Bloomberg New Energy Finance report. That means less than 1 percent of city buses were electrified in the U.S.

But that number is expected to grow by 34 percent per year on average. By 2025, 5 percent of city bus fleets are expected to be electric.

Growth probably would be a lot faster in the U.S. if there were new kinds of financing for every city, small and large, that wanted it. "We could be moving faster if we financed every battery pack and treated battery packs like fuel or a service," said Popple.

At this point demand isn’t the problem for Proterra. The company is constrained by production, and it has sold more than 546 electric buses to cities, organizations and companies.

The U.S. is one of the smaller global markets for electric buses. The big one is, not surprisingly, China.

China has seen 210 percent growth year over year with its electric bus market thanks to aggressive government subsidies, a strong desire to lower air pollution and investments in brand new bus infrastructure. There were close to 400,000 electric buses operating in China in 2017, reports Bloomberg New Energy Finance.

By 2025, close to 1.2 million electric buses will be on the roads in China, predicted the report. Ninety-nine percent of the current global electric bus market is in China and that figure is supposed to remain at 99 percent by 2025. Wow.

The electric bus market is important to watch as it’ll likely be a bellwether for the electrification of trucks and other larger vehicles, said Popple, adding: "We want the electric bus to annihilate the diesel bus."