Greenhouse gas emissions from the transportation sector are growing faster than those from any other sector. With the transportation sector already accounting for nearly one-quarter (23 percent) of greenhouse gas emissions worldwide, investing in public transportation is a critical strategy to address global climate change.
Strategies to curb transport emissions, such as by transitioning to electric vehicles, depend primarily on pushing forward new efficiency-maximizing technologies for transportation networks and individual vehicles. Yet adoption rates have been slow, in part because vehicle owners and transportation providers lack the resources to finance the transition of their fleets.
Innovative funding and financing programs, such as “transportation-oriented energy services companies” (T-ESCOs), offer new opportunities to encourage electrification with lower levels of investment.
In a previous blog, we explained how T-ESCOs could help increase the efficiency of the transportation sector by replicating the global success of energy services companies (ESCOs) and energy performance contracts (EPC). Here, we examine the stakeholders and benefits of unrolling a T-ESCO model.
How Can the Transportation Transition Begin?
Creative financing for the transport sector can be adapted from existing efforts to improve energy efficiency in buildings. The building sector has benefited from the involvement of ESCOs, or businesses that fund and install energy-saving equipment, charge the building owner a fee to pay back for this installation, and guarantee that the costs will not exceed the financial savings associated with the new product or system.
ESCOs have helped to increase the efficiency of the building sector with improvements in lighting; heating, ventilation and air conditioning; and energy management systems, among others. The ESCO manages the investment process, offers or arranges financing, contributes technical assistance, and provides ongoing monitoring and evaluation services. ESCOs work with clients—typically, building owners—through energy performance contracts (EPCs) that lay out the terms and expectations of the projects.
Research from the Vermont Energy Investment Corporation indicates that this innovative funding model could expand beyond the building sector to finance the transportation transition, given the clear similarities between traditional and transport-oriented EPCs (see table).
Traditional versus Transport-Oriented Energy Performance Contracts (EPCs)
“Traditional” Partners Engaged in EPC for Building Energy Efficiency Markets
Potential EPC Partners in Transport Sector
|Client (Facility Owner): An energy user that bears the cost of energy use and will be the beneficiary of net financial savings from the project.||Client (Fleet Owner/Transit Agency): An entity that manages a fleet of fossil fuel-based vehicles and is looking to replace those with electric vehicles to reduce costs and/or to achieve other secondary benefits.|
|ESCO: The firm in charge of project development, financing and implementation (through an EPC) of the energy efficiency upgrades (made in accordance with the specifications of the Facility Owner) in return for a stream of payments.||T-ESCO: A firm or a consortium of firms that is in charge of procurement, design, and financing electric vehicles to replace and/or augment the fossil fuel-based fleet in return for a stream of payments.|
|Lender: The debt provider that is repaid from energy savings resulting from the upgrade.||Lender: The debt provider that is repaid by savings produced by the T-ESCO’s operations of the electric vehicle fleet.|
|Evaluation, Measurement and Verification (EM&V) Provider: A third-party firm that provides an independent review of the ESCO’s performance with regard to its contractual obligations.||Evaluation, Measurement and Verification (EM&V) Provider: A third-party firm that provides an independent review of the T-ESCO’s performance with regard to its contractual obligations.|
Who Could Champion the Shift?
A T-ESCO requires a handful of direct stakeholders, including: an entity interested and willing to play the part of the ESCO; a client or fleet manager interested in reducing energy consumption; and an investor willing to fund the program (see figure). However, a host of stakeholders at the periphery also stand to benefit from the development and proliferation of T-ESCOs. These stakeholders could champion the implementation of cleaner transportation systems.
Four Unexpected Champions
Four unexpected champions of the clean transportation revolution include:
1. Electricity producers and distributors: The conversion of transportation fleets away from fossil fuels and toward electricity through T-ESCOs can lead to a significant increase in demand for electricity. In many developed countries where demand for electricity is slowing or negative, T-ESCOs offer an opportunity for electricity producers to expand into the transportation sector, generating new revenues and investments. In countries and areas where there is a shortage of electricity supply, T-ESCOs could create opportunities to fund upgrades and additional investments.
Another fascinating benefit of electric vehicles is the increased resilience that can be achieved through their interaction with the grid. In developing countries where the state of grid infrastructure is not well equipped to deal with intermittent energy derived from renewable energy sources (such as wind and solar), the batteries contained in fleet vehicles could be a valuable way to store energy during gaps in energy production. Electric vehicles can also charge and discharge the energy in their batteries quickly, creating potential to use vehicle batteries to help stabilize the grid. While the precise financial value of these grid interactions is highly dependent on local factors and is difficult to estimate, these benefits should not be overlooked during the planning stage of a T-ESCO.
2. Municipal governments: Apart from the typical benefits of a good transit system and a stabilized grid, electric vehicle fleets funded by a T-ESCO could be integrated into other aspects of urban planning, such as emergency planning and community resiliency. Batteries in large electric vehicles can used to create back-up sources of power in case of weather-related disruptions. Especially when paired with distributed solar panel battery technologies, electric vehicles can provide “islanding” benefits in case of a grid outage, an occurrence quite common in developing countries and in areas prone to extreme weather. Fleet hubs, whether at schools or bus depots, can act as effective community shelters with electricity reserves for critical functions.
3. National finance policymakers: Most countries are net importers of fossil fuels, and a large portion of these imports is spent on transportation. Shifting transportation away from fossil fuels and toward electricity would reduce imports and trade deficits. Electricity—in part because it is produced domestically—also shields the transportation sector from volatility in fossil fuel prices. T-ESCOs could further reduce or eliminate the need for fossil fuel subsidies for public transportation, freeing up financial resources.
4. Environment and climate policymakers: The transportation sector presents a variety of challenges to environment and climate policymakers; for example, it is a major and growing contributor to air pollution, both through conventional pollutants and greenhouse gases. The ability to encourage and facilitate a shift of fleet gasoline and diesel vehicles to electricity could be a valuable strategy to help organizations meet environmental and air quality goals without interfering with economic development goals.
The T-ESCO model builds upon corporate structures and legal frameworks that have already been proven internationally in the area of improving energy efficiency in buildings. The familiarity of the ESCO model and EPCs means that there is likely capacity in both the private and public sectors that can be leveraged to make T-ESCOs a reality.
Although the benefits of an electric-based transportation transit system are well noted, the shift away from a predominantly fossil fuel-based sector is unprecedented in many parts of the world. The T-ESCO model provides a pathway for the public sector to secure private sector expertise to help with the transition and to assume its share of risks for a fair return. The motivation to make this shift need not be limited to the policymakers in charge of transit systems or fleets, but could emanate from other stakeholders in a city, state, or country.
When designing a T-ESCO strategy, its positive externalities should be evaluated and valued. Recognizing and including the financial value of such positive externalities in T-ESCO business plans could be helpful in creating the business case and in developing an enabling environment for its successful adoption and implementation.
Anmol Vanamali is the Financing Strategies Director at Vermont Energy Investment Corporation and a Senior Fellow in Climate and Energy at the Worldwatch Institute. Anmol has deep experience in public-private partnership projects and renewable energy investments from his work at Gammon Infrastructure Projects (Mumbai) and Macquarie Group (New York). He is working with VEIC’s Transportation Efficiency Team to advance T-ESCO models.
Bethany Whitaker is a Senior Consultant in the Vermont Energy Investment Corporation’s Transportation Efficiency Team. She has 25 years of experience working in the public transportation sector, including for a transit agency and in private sector consulting. Since joining VEIC, Bethany has been leading VEIC’s efforts to guide and transition the funding and financing of heavy-duty fleet vehicles as they transition to electric modes.