Overview: Clean Energy Works was awarded a feasibility study grant in 2018 Q2. Clean Energy Works will structure and launch a Pay As You Save® (PAYS®) for Clean Transport Facility. PAYS aims to reduce diesel emissions and combat climate change by accelerating the electrification of transportation – starting with an initial project for transit buses in a major Latin American city.
The recent report by the Intergovernmental Panel on Climate Change warned that to meet a 1.5°C limit “rapid and far-reaching transitions” will be required across the global economy. Initiatives like PAYS, which aims to leverage utilities’ balance sheets to mobilize capital for clean transport at scale, will be critical in upscaling investments and supporting mitigation efforts.
Financial analysis indicates strong potential for impact in emerging markets cities. For example, in Santiago, Chile, a PAYS investment for 100 buses can leverage more than $70 of investment capital for each grant dollar, while reducing overall grant requirements by 97%, generating $25 million in electricity sales revenues, and eliminating 62,000 tons of CO2 emissions.
PAYS will first focus on transit buses because electric buses present an excellent business case. With declining battery costs and lower fuel and maintenance expenses, electric buses have lifecycle costs that are increasingly competitive with diesel buses in many markets.
However, the upfront costs of an electric bus can be 40-50% higher than diesel, so the current market penetration rate outside of China is low. PAYS aims to encourage the transition to electric bus fleets by capitalizing incremental upfront costs on the electric utility’s balance sheet, thereby removing financing obstacles faced by local bus service providers in their transition to electric buses.
By focusing on electric buses PAYS also allows more people to benefit from the electrification of transportation, not just the wealthy who can afford to buy electric cars for private use. This is especially important for low-income populations who often rely on public transit and and are exposed to increased air pollution from diesel buses.
PAYS has received significant traction from governments, development finance institutions, investors and philanthropies worldwide, including endorsement from the members of The Global Innovation Lab for Climate Finance in September. Convergence’s funding will allow Clean Energy Works to complete the necessary feasibility work to narrow down the pipeline of cities in Latin America to a candidate city for a first implementation project.
Design question and learning potential for the market: How can a proven approach - Pay As You Save - be applied to a new sector, while attracting prrivate investment into state utilities, typically considered high risk?
PAYS is an innovative financing solution that has been successfully applied to energy efficient appliances in India and building upgrades in the United States, but has not yet been applied to electric vehicles or in developing countries.
PAYS works as follows:
A utility offers each bus service provider a service agreement (PAYS tariff), in which the utility pays for the batteries and charging infrastructure for new electric buses using internal funds or debt financing. The bus service provider can then purchase the buses at no additional upfront cost over diesel buses.
The PAYS tariff allows the utility to recover its costs within the warranty period through a fixed charge on the bus service provider’s regular monthly electric bill. The tariff is calibrated to ensure the estimated operating cost of an electric bus is less than that of a comparable diesel bus. This approach enables bus service providers to pay for the costs of the batteries and charging stations over time rather than all upfront. Once the utility’s costs are fully recovered, the bus service provider owns the battery and charger assets.
PAYS will attract private investment through a blended finance approach by using: 1) first-loss capital (from multilateral development bank or climate fund) to mitigate counterparty risk for investors, and 2) a reserve fund (capitalized by climate fund, government, or philanthropic investors) to cover any gaps in the utility’s full cost recovery and bus service provider’s operational savings (based on the transition from diesel to electric fleet).