Proximo Weekly: US bus bonanza?

In the second quarter of 2021 EQT Infrastructure agreed the $4.6 billion acquisition of First Student and First Transit, closing on the transaction the following quarter. First Student is the largest student transportation operator in North America, with a fleet of 40,000 buses, while First Transit carries about 350 million passengers per year at 300 locations. EQT, advised by Morgan Stanley, Simpson Thacher & Bartlett, Barclays, and BMO, closed on the acquisition before the Biden administration successfully passed its infrastructure bill. Yet, the anticipation of increased support for bus electrification was a contributory factor in the deal at the time, according to Alex Darden, a partner at EQT.

In the period between signing and close on the EQT acquisition, Carlyle, in a joint venture with Schneider Electric (AlphaStruxure), launched what they called an Integrated Fleet Electrification Infrastructure Project in Maryland. The project involves the ambitious combination of solar PV canopies, onsite generation, battery energy storage, microgrid controls, and electric bus chargers, though AlphaStruxure is working on a much smaller scale than EQT, with 44 buses to be supported by the project.

Tom Rousakis, leader for US infrastructure transactions at EY, is confident that “we are at the pivotal point in the EV transition.” He believes that while the infrastructure bill provides the much-needed capital to build a market around electric buses to meet the need of large-scale deployment, the challenge will be to local agencies that will need to navigate this evolving market and manage fleet transitions with caution.

Bus electrification would not be receiving so much attention were it not for the amount of federal dollars that it is attracting. The new law allocates $2.5 billion to zero-emission electric school buses and a further $2.5 billion toward zero and low-emission school buses, including both electric and alternative fuel vehicles. It allocates another $7.5 billion to transit agencies and a further $7.5 billion to EV infrastructure. How far these federal dollars will go in terms of a nation-wide bid for electrification remains to be seen, but it's certainly a start for enticing private investment.

The Unites States' 480,000 school buses account for 80% of all the country's buses, but less than 1% of that total is electrified. It is estimated that electrifying the entire fleet of US school buses would reduce greenhouse gas emissions by about 8 million tonnes per year, which explains the attention that buses received in the infrastructure bill. The new Clean School Bus program, to run between 2022 and 2026 will see the US Environmental Protection Agency cover up to 100% of the costs of replacing existing school buses, including charging or fuelling infrastructure and the vehicles themselves.

States have already been allocated over $480 million in funding for electric school buses and infrastructure, with $180 million of that total in the form of Volkswagen settlement funds. The Volkswagen (VW) settlement was agreed in 2016 in the wake of a scandal in which VW was found to have faked diesel emissions tests, and the settlement has been the primary source of funding for electric school buses in 28 states. But the settlement is a one-time funding source that many states have already drained and the rest will soon deplete. There are still state green banks that can meet critical parts of any funding requirements, but additional sources of capital are needed to ensure the growth of this new market. Private investors and public-private partnerships (P3s) look like the logical next steps, particularly for school districts. P3s might allow governments to reduce their exposure to the risks attached to bus electrification. Given the abundance of risks associated with bus electrification, P3 could be vital in allowing the market to scale up.

Risks and costs

The list of risks in electrifying any bus fleet, whether school or transit, is extensive. Substantial market capacity issues, particularly when it comes to battery range and reliability, are currently the highest impediment and source of costs for these transitions, both in the US and arguably globally. A battery-operated bus has a significantly reduced range compared to that of a diesel bus. The stop and go nature of buses is a challenge, as are weather conditions and landscape. Batteries degrade over time, which creates uncertainty for bus operators around the cost of operations. The state of the battery market, in terms of technology and manufacturing, needs to evolve further to meet the demand of wide-scale electrification.

Outside of battery concerns, the next most prevalent risk is the lack of infrastructure needed to support the transition. Existing charging depots will need to be retrofitted or new depots built. Those depots will need access to suitable power supplies, which will require partnerships with local utilities. The distribution and location of fast flow charging will need to accommodate both the lower range of battery-powered buses, and bus routes themselves may need to be adapted. Pilot technologies are being developed for in-road charging, but they would still present logistical challenges, in terms of distribution and traffic interference. Electric buses also present challenges to how agencies approach costs, because unless they can evaluate a purchase's total cost of ownership, they may struggle to demonstrate affordability. An electric bus can cost up to twice as much as a diesel bus but because they use fewer moving parts, the cost of maintenance is likely to be reduced over time.

Governments and operators will also need to get a handle on new forms of volatility in energy prices. Transit operators are used to turbulence in fuel costs and have the hedging strategies in place to manage them. However, the volatility in electricity prices can be even greater, particularly in states such as California, Arizona, Massachusetts that employ time-of-use rates for electricity. Managing where and when to charge, alongside electricity cost fluctuations, not to mention making any required electrical grid improvements, understandably deters private investment in electrification. That’s where federal funding comes into play, particularly in states that already have incentives for electrification, a list that includes but is not limited to California, Florida, Texas, Washington, and New York. Federal dollars will undoubtedly offset some of the above costs and uncertainties, and should help develop this market, but electrification will still require a leap of faith for both the public and private sector.

It will be appealing to governments to try and transfer these risks to the private sector given the complexities involved. P3 has has been advertised as an opportunity for private investors to tackle challenges that public entities don’t have the expertise to manage. A private EV ecosystem does look like it is emerging. At a White House press conference on 3 February, President Biden announced that Australian charging column manufacturer Tritium DCFC will this year open a factory in Tennessee to build electric-vehicle charging stations. Tritium, listed on the Nasdaq stock market via a special-purpose acquisition company, expects to produce 30,000 of its fast chargers per year. But outside general EV infrastructure, the primary opportunities for private investment in bus electrification lie in school buses.

The Proximo perspective

The differences between school districts and transit agencies will be hugely significant, but electrifying a school bus fleet will be less complex than electrifying other parts of the US transport sector, as vehicles use fixed routes and limited operating hours that facilitate a greater ability to manage processes like charging. This ability is so great that opportunities for revenue generation from vehicle-to-grid conversion are being considered, with bus batteries functioning as battery storage facilities, particularly in summer months.

The primary role of school districts is to educate children, so it makes sense that they would prefer to outsource to the private sector the management and mitigation of the risks associated with their buses. Many school districts in the US already use private operators to provide and operate their fleets and those operators may be best placed to make a transition to electric buses. Given the high level of uncertainty surrounding bus electrification, P3 contracts will ask both sides to manage risks and school districts could still have to take ownership of mistakes as and when they occur.

With the influx of federal capital, school bus conversion could serve as the lower hanging fruit that will help a market around battery and electric bus technology develop, and this should benefit transit agencies over time. Recent and upcoming acquisitions in the school bus sector therefore are likely to lead to P3 deals in all areas of the electrification market.

If the private infrastructure investors bite and the foundations are put in place for large scale electrified bus fleets in the US, it would seem far more likely than it does now that nationwide electrification will become feasible. 

 

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