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Electric Buses Can Save Local U.S. Governments Billions. China's Showing Us How It's Done

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  • May 31, 2018

America’s largest cities are converting their bus fleets from fossil fuel to electric – what’s behind this accelerating trend? The answer, in a word: economics.

Electric buses, all-electric versions of the diesel-dominated mass transit fleet, are nearing cost-competitiveness with traditional technologies, representing billions in potential savings for cash-strapped local governments.

In many locations, the total lifecycle cost of running electric buses is lower than fossil-fueled buses, and if battery prices continue their rapid decline, the unsubsidized cost of buying an electric bus could be cheaper than diesel as early as the mid 2020’s.

While electric buses make economic sense for local governments, significant hurdles exist to mass fleet electrification. Fortunately, China may hold the key to overcoming them faster and cheaper than expected.

America’s Largest Cities Are Electrifying Their Bus Fleets

Electric buses are becoming a bargain due to lower operational and fuel costs – consider Chicago, which says each electric bus saves $25,000 in annual fuel costs.

The electrification trend is spreading fast. New York City, home to America’s largest bus network, says its 5,700 buses will be all-electric by 2040. Los Angeles, the second-largest bus fleet, will convert all 2,300 buses to electric by 2030. San Francisco, home to 1,100 municipal buses, just announced it will be all-electric by 2035 and will only purchase electric buses by 2025.

Two recent analyses show how those economics are improving. In December, Carnegie Mellon University (CMU) researchers assessed the total lifecycle-costs of different bus technologies, finding battery-electric buses are cost-competitive with liquefied natural gas, compressed natural gas, and hybrid diesel buses – about 40% of the U.S. bus market.

Electric buses have lifecycle-cost advantages over internal-combustion engines because they covert energy into motion more effectively and have far fewer moving parts, making them cheaper to power and maintain over time.

CMU reports electric buses are still more expensive than diesel, but local transit authorities receive most of their capital funding from the federal government, so researchers reassessed the equation if 80% of a bus purchase were covered by outside funds. In this scenario, electric buses are the lowest-cost option for cities that receive federal funding.

Life cycle ownership and social cost of different bus technologies. Carnegie Mellon University

Even without federal funding, fast-falling battery prices could make electric buses the cheapest option within a decade. Bloomberg New Energy Finance (BNEF) reports batteries will only comprise 8% of the total electric bus price by 2030, down from 26% in 2016, making electric buses cheaper than diesel on an unsubsidized basis. BNEF says if battery costs fall faster than projected, electric buses could reach unsubsidized cost parity with diesel around 2025.

In cities with longer bus routes, electricity prices around $0.10 per kilowatt hour (kWh), and diesel prices around $2.50 per gallon, BNEF says electric buses will be fully cost competitive on a total cost of ownership basis around 2020. For context, diesel prices averaged $3.16/gallon nationallyin April 2018, while transportation sector retail electricity rates averaged $0.09/kWh nationally in February 2018 and were above $0.11/kWh in New England and the Mid-Atlantic.

Total cost of electric bus ownership comparison by annual distance. Bloomberg New Energy Finance

Even Higher Electric Bus Upside in School Districts

Big cities may be going electric, but public transit fleets only total 70,000 buses, making their impact relatively small. Meanwhile America’s public schools have 480,000 school buses, so their upside is nearly seven times larger.

According to U.S. PIRG, 95% of school buses run on diesel (compared to 60% of public transit buses) and school districts would save nearly $6,400 annually in reduced fuel and maintenance costs per electric bus added. In this equation, U.S. school districts could save roughly $2.9 billion annually if the entire national fleet were converted from diesel to electric .

Even if PIRG’s estimate isn’t accurate, savings could add up quickly with electric buses: The American School Bus Council estimates U.S. school buses consume $3.2 billion worth of diesel per year, and BNEF estimates every 1,000 electric buses on the road displace 500 barrels of diesel fuel per day.

Global fuel demand displacement from electric buses, 2011-2018. Bloomberg New Energy Finance

PIRG also reports replacing all U.S. school buses with electric buses would avoid 5.3 million tons of emissions annually. Anyone who’s ever ridden in a school bus remembers the acrid aroma of diesel exhaust, but breathing in diesel fumes is a major health risk for the 26 million kids PIRG says ride school buses. Diesel exhaust is classified as a likely carcinogen by the U.S. EPA and a 2015 study of 61 million people linked diesel exhaust to higher mortality rates.

Can China’s Electrification Success Help U.S. Cities Reach Their All-Electric Goals?

So how can local governments overcome upfront financing hurdles? And why should cities wait decades to convert if lifecycle economics already make sense? The answer could be thousands of miles away.

Shenzen, China converted its entire fleet of 16,400 buses from diesel to electric between 2012 and 2017, building the world’s first 100% all-electric bus fleet – larger than New York, Los Angeles, New Jersey, Chicago, and Toronto, combined. World Resources Institute says four factors made this possible:

  1. Government funds helped finance electric bus purchases
  2. Creative financing cut upfront costs for bus operators
  3. Utilities and bus operators collaborated to optimize charging
  4. Bus operators required battery lifetime warranties from manufacturers

Electric bus adoption in Shenzen, China 2012-2017. World Resources Institute

Comparing the Chinese and American electric bus markets aren’t apples-to-apples: China has around 99% of all electric buses worldwide, and bought 90,000 electric buses in 2017. China’s transition was powered by a central mandate and transitional funding from the government, but Shenzen’s lessons can still apply, with some translation.

First, local governments can finance electric bus purchases with existing funding. PIRG urged state governments to allocate funds from the $14.7 billion Volkswagen Dieselgate settlement to buying electric buses, along with building electric vehicle charging infrastructure. Federal funds beyond the funding modeled by CMU also apply: In March 2018, the U.S. EPA awarded $8.7 million to replace 450 diesel buses across 141 school bus fleets in 32 states.

States can also pitch in. Los Angeles recently received a $36 million grant from the California Transit and Intercity Rail Capital Program to purchase 112 electric buses, and California’s $25 million Rural School Bus Pilot Project provides electric bus funding through cap-and-trade revenue.

Second, local governments can create purchasing solutions with manufacturers. American electric bus manufacturer Proterra offers to sell electric buses at the cost of a diesel bus in exchange for a 12-year service agreement to use Proterra-owned batteries. Local government procurement policies can account for air pollution and climate benefits of electric buses when making new bus purchases, so that lifecycle costs are clear. Commitments to buy electric buses can attract manufacturer investment, as with Chinese electric bus manufacturer BYD, which built a 450,000 square foot manufacturing facility in California.

Third, local governments should coordinate with utilities to build and optimize charging infrastructure. Rising electric vehicle charging demand is widely accepted as a way utilities can increase electricity sales, provided bus charging is shifted into off-peak hours and regulators allow utilities to recover some costs of building charging stations through customer rates.

Utilities can also leverage their business model to help local governments finance electric bus purchases by covering the up-front cost difference between diesel and electric buses, in exchange for a monthly charge on transit agency power bills and the value of new energy storage resources. In this approach, local governments get electric buses at the price of a diesel bus and save money over time, while utilities gain approximately $100,000 in new power sales over the life of each electric bus.

America “Catching Up Fast” on Electric Buses

America may only represent 1% of today’s global electric bus market, but the economic upside of electrifying transit fleets is too significant to ignore. American’s “markets are driven by unit economics, local policy and community pressure to reduce pollution,” said Proterra CEO Ryan Popple. “The U.S. is catching up fast in adoption, and the market-based approach has led to better technology.”

Our largest cities are sending clear signals that the U.S. is ready to recharge mass transit, and while the federal government won’t issue a national mandate like China’s anytime soon, smart policy can accelerate electric buses on our roads.

By Silvio MarcacciCommunications Director at Energy Innovation, where he leads the firm’s public relations and communications efforts.

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