May 2020

Why C-19 and air pollution will accelerate fleet electrification

The electrification of fleets is coming
Why C-19 and air pollution will accelerate fleet electrification
Chief Executive Officer

 

Before the COVID-19 pandemic, municipalities, cities, US states and many school districts were pressing for hard targets on air quality through electrification of transport. These efforts have focused significantly on municipal buses, school buses, delivery & transport fleets and taxi services.

Electric fleet build-outs and announcements have been gaining momentum over the past 12 months. Of course, China has led with some 400,000 urban bus deployments, but Western markets are accelerating rollouts too:

  • London recently announced the largest electric bus fleet in Europe with over 200 in current operation and a target of 2,000 electric buses by 2025
  • The Netherlands is not far behind with a broader regional plan beyond their 500 fleet, plus a goal of 5,000 by 2030
  • Bogota, Colombia has a 379 electric bus fleet going into operation in September
  • Los Angeles has ordered 130 electric buses, with a programme to electrify its full 2,500 fleet by 2030

On the corporate front, companies like Amazon, DHL, UPS and Lyft are now moving quickly:

  • Amazon's recent 100,000 order for Rivian electric vans
  • DHL's StreetScooter project with 14,000 vans across Germany
  • UPS' EV 10,000 order from Arrival
  • Lyft's 200 EV rollout in Denver
  • Dominion Energy's plans to deploy 1,000 electric school buses in Virginia, starting with 200 this year.

But COVID-19 may have changed all this. 

Capital investment plans are being put on hold or cut back by major transport groups around the world. Many governments are advising against the use of public transport as we navigate our paths out of the COVID-19 crisis. Without government support, there is no doubt that many public transport groups risk failure.

Has COVID-19 impaired progress toward urban low-emission targets? 

Consider that according to the World Health Organisation, air pollution kills an estimated 7 million each year, with 9 out of 10 people exposed to air containing high levels of pollutants. A recent Harvard University study suggests Covid-19 death rates rise by about 15% in areas with even a small increase in fine-particle pollution levels in the years before the pandemic, stating: "patterns in Covid-19 death rates generally mimic patterns in both high population density and high PM2.5 [particulate matter] exposure areas." Professor Annette Peters, chair of epidemiology at the University of Munich, has noted that COVID-19 findings "are in line with earlier reports on hospitalisation and mortality due to pneumonia", corroborating these studies.

For fleet operators, there is now a critical choice between two futures: (1) one focused on massively trimmed costs, with increased operating constraints exacerbated by credit market covenants and government scrutiny (in many cases due to huge bailout debts, adding pressures to maintain fleet plus deliver for customers), and (2) another involving business restructuring toward accelerated electrification of transport, involving significant P&L and balance sheet write-offs to reduce risks associated with stranded diesel assets.

The first future of continued execution considers the benefits of low-cost debt capital in the current capital market environment. The notable change for many includes new stakeholders through government lending alongside existing creditors. On the positive side, interest rates will remain low for some time. Balancing this picture, expect increased public scrutiny, restrictions on share dividends and executive remuneration and a sharper focus on meeting the demands of credit vs equity markets. Under this future, it will take longer to electrify, with challenges to fund new electric fleets, batteries and charging depots. Expect a volatile future, as fleet operators will need to manage rapidly deteriorating conventional diesel fleet residual values (and shortening depreciation curves), increased customer pressure and challenging liability management. Think high risks for stakeholders – including creditors, shareholders, customers and employees.

The second future considers taking advantage of the changes presented by COVID-19, with a one-time opportunity to restructure, write-off impaired assets and reposition for growth. The transformation to new services utilising electrified assets offers opportunities to more aggressively de-leverage, reduce O&M costs, decarbonise ahead of peers and orient business around low carbon service offerings. To achieve a competitive cost of capital for fleet infrastructure under this model, the 'second future' considers the creation of off-balance sheet FleetCo funding structures. There is a depth of specialised institutional and strategic investment capital prepared to support this transition. This is a different investment proposition for stakeholders, with an opportunity to accelerate change, reduce residual value risks on conventional fleets and electrify toward nearer-term targets. A rapid shift to the new model offers the potential to drive growth, even in a post-COVID-19 world.

We believe society will return to public transport in the months ahead. To quote Lord Browne from his recent FT interview:

""We are seeing just how fragile the world is in this pandemic, and awareness of fragility is a very important thing in shaping human behaviour…people who have spent months worrying about their lungs are more likely to want clean air." "
Lord Browne

Fleet owners must now decide which future to embrace.

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