How energy economics could help electrify public transit

How energy economics could help electrify public transit

train tokyo electric public transit
It will take economic incentive to shift America's transit infrastructure away from fossil fuels.

At the December climate talks in Paris, it was noted that, in the absence of significant changes, the transportation sector is on track to become the fastest growing industrial contributor to global greenhouse gas emissions. However, the transportation sector continues to face serious challenges in curbing emissions.

Although effective strategies for reducing transportation emissions exist, they have been difficult to advance, largely because of costs.

Electric vehicles, for example, have lower operating costs but are more expensive to buy than similar-model conventional fuel vehicles. With conventional fuel prices so low, it is even harder to motivate consumers and fleet managers to consider electric vehicle technology.

Another promising solution for the transportation sector is to adapt financial strategies used by the energy sector, such as energy services companies (ESCOs). These companies were unique when they first came on the market because they allowed building owners to finance energy efficiency projects with the ongoing savings generated by the project.

ESCOs also helped building owners with the technical aspects of efficiency projects, including selecting the right technology, managing installations and monitoring ongoing savings. They guaranteed to project sponsors that the savings would cover costs over the lifetime of the project. This meant that a building owner could take on an energy efficiency program with minimal risk or investment.

Energy markets benefited from ESCOs because they helped advance certain energy technologies and manage energy use. In many cases, ESCOs also proved to be profitable businesses. Today, most ESCOs are operated by the private sector.

So far, ESCOs have been not been widely used in the transportation sector, but opportunities exist, including in public transportation.

Transit vehicles drive great distances every year and, in general, are not very fuel efficient. A transit bus driving 64,000 kilometers per year would consume 58,000 liters of diesel fuel, spending $38,250 on fuel, even at today’s low diesel prices.

Operating an electric vehicle the same number of miles would use about $6,500 worth of electricity, a savings of over $30,000 per year per vehicle. These savings may be sufficient to fund part or all of the cost of an electric transit vehicle.

While a back-of-the-envelope equation suggests that a transit ESCO (T-ESCO) may pencil out, there are challenges for transit operators, both with the technology and with the way ESCOs work. Initial experiences with electric transit vehicles in the 1990s were not good — most early-model vehicles did not perform as promised and were scrapped in demonstration phases.

Newer electric vehicle models, however, are much more promising, and slowly but surely, manufacturers have been addressing operators’ concerns about vehicle range and charging needs. New electric vehicle models can travel 248.5 miles on a single charge, and upgraded charging equipment allows operators to charge vehicles while they wait at a bus stop in five to seven minutes.

The most persistent challenge, however, may be costs. For a transit agency to invest in an electric vehicle, they must pay a premium for the vehicle as well as invest in charging infrastructure. Even if some public sector funding is available, for transit operators to go electric, they need to be able to buy the same number of buses with roughly the same amount of money. 

Thus, even though electric vehicles are less expensive in the long run, transit operators most likely would be unwilling to buy them if it means they get fewer vehicles. This, however, creates a perfect opportunity for a T-ESCO: A transit manager could look to the ESCO to finance all or part of the project, assist with the technology installation and monitor fuel (and emissions) savings.

Opportunities for the U.S. market

Without a lot of experience, one of the largest initial obstacles to setting up an ESCO program for electric transit vehicles is that most U.S. transit agencies purchase their vehicles outright. Federal funding rules technically allow for financing, but historically, few agencies have used the option.

As a result, the transit industry, including staff and their governing boards, is inexperienced with financing capital purchases and uncomfortable with debt.

Encouraging transit agencies to venture into electric vehicle technology, therefore, requires convincing them not only that the technology works, but also that they can and should pay for it in new ways. Despite these challenges, the ESCO concept is a good and much-needed one if the United States wants to diversify its collective vehicle fleet to less carbon-intensive and lower-emission vehicles. Some immediate actions and next steps in this effort include:

  1. Creating rules and regulations that support transit vehicle financing. As discussed, transit agencies are not used to financing their capital purchases; they also are not sure how to mix federal, state and private funding to buy a vehicle. The federal government and state agencies need to provide guidance on transit financing that allows for more flexibility in capital purchasing, including financing and, in particular, private sector financing. This guidance also should guide development of ESCO or ESCO-like programming.

  2. Engaging electric utilities. Electric utilities have a clear stake in electric vehicle technology. Utilities also have experience with ESCO programs and could be a potential partner to transit agencies if/when they venture into an ESCO arrangement. Partnerships with utilities will be essential as transit systems start to implement electric vehicle technology.

  3. Attracting private sector financing. Automobile manufacturers successfully have created a variety of financing tools for consumers, and some electric bus manufacturers are offering similar products. A T-ESCO could be a way to engage the private sector in advancing vehicle technology for the private sector and making sure that the terms are equitable for all parties.

  4. Looking to carbon markets for revenues. Electric vehicles, including transit vehicles, have equipment that makes it easy to track and monitor fuel savings and greenhouse gas emission reductions. Transit agencies could take this information to trade in carbon markets, such as Renewable Identification Numbers (RINS) to raise additional revenues to support their efforts. As these markets mature and grow, so will the opportunity for revenue.

Opportunities for emerging economies

Developing new financing tools to support cleaner transportation is also relevant for worldwide markets, especially in the developing world where rapid urbanization and rising fossil fuel consumption are contributing to dangerous levels of air pollution and debilitating traffic congestion.

The situation in New Delhi, the capital of India, exemplifies challenges faced by many developing economies. New Delhi recently regulated the number of vehicles allowed in the urban area; this strategy may help alleviate congestion and pollution in the short run, but in the longer term, more holistic changes are needed.

Adapting ESCOs to the transportation sector in developing economies also makes sense. In contrast to experience in the United States, many transit agencies in the developing world collect enough fare revenue to cover the cost of operations.

Using capital investments to reduce operating costs, therefore, may generate revenue to support project financing. In addition, similar financing models were used to develop roadway infrastructure (loans repaid with user fees), with support from international lenders, such as the World Bank and the Asian Development Bank as well as private institutions. Adapting these models to create cleaner, healthier and ultimately more efficient local transport systems is a logical extension.

The recent success of the Paris climate talks and the emergence of new climate finance vehicles such as the Green Climate Fund also could be leveraged to encourage ESCO-funded projects with transit agencies and private fleet owners around the world, especially in the developing world. Opportunities to use international climate finance to promote these strategies include:

  1. Encouraging climate finance agencies to partner with commercial institutions to co-finance ESCOs. Climate finance agencies can set up funds or individual portfolios dedicated to transport mitigation projects. These programs could function as co-financiers that partner with commercial financial institutions interested in lending to ESCOs for specific projects or project types. Co-financing could take the form of concessional loans that are priced lower than commercial debt to strengthen the feasibility of the project; or the co-financing can be subordinate to commercial debt, thereby taking on a larger share of the financial risk.

  2. Putting a financial value on emissions reductions through environmental markets to encourage the adoption of clean technologies. The Clean Development Mechanism (CDM), developed under the Kyoto Protocol, was successful in catalyzing 7,800 projects in more than 100 countries and leveraging private finance up to 10 times the amount of public funds used. While the CDM per se is no longer a viable option due to the state of the market, there has been an emergence of environmental markets in various developing countries that could help T-ESCOs in those countries. China, for example, is developing seven sub-national emission trading systems, and India has renewable energy credit exchanges and is developing an energy efficiency savings certificate.

Moreover, the progress in international climate negotiations augurs well for the establishment of an international carbon market or for the rejuvenation of the CDM, which could be another shot in the arm for mitigation projects across the developing world. With respect to ESCOs, all net carbon emission reductions from funded projects could be monetized and become an additional source of revenue.

Encouraging the public transit sector to adopt cleaner technology is an important strategy both to ensure that our collective urban areas remain vibrant, healthy and efficient, but also in the worldwide effort to reduce greenhouse gas emissions.

Although progress in reducing transportation emissions has been slow, there are strategies and opportunities that offer promise. ESCOs encourage the transportation sector to learn from energy markets and to use creative financing mechanisms to help the fleet transition to more energy efficiency technologies and systems.

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