E-Buses To Witness Healthy Traction: ICRA

Electric buses (e-buses) are expected to be at the forefront of India’s electrification drive, with the segment expected to witness healthy traction going forward. ICRA expects e-buses to account for 8-10% of new bus sales by FY2025. The traction in the e-bus segment is already visible over recent months, despite the overall stress in the public transportation segment over the past year and a half due to the pandemic. Although the on-ground deployment under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme has been somewhat delayed on account of the pandemic-induced challenges, the extension of the scheme by two years to April 2024 would support adoption in the segment over the medium term.

Globally, the e-bus market is dominated by China, which accounts for 98% of the global e-bus fleet, and 95% of the global stock of dedicated bus chargers. An organized, collaborative approach towards electrification with involvement of all stakeholders and significant government subsidies aided electrification in China, especially over the 2015 to 2017 period, after which subsidies were gradually phased downwards. Electrification in other geographies like Europe is also picking up gradually. In India too, significant incentives and subsidies have been announced through various schemes like FAME, Smart Cities etc. to reduce cost of acquisition, and spur e-bus adoption, while many state EV policies have announced specific electrification targets and timelines for buses, thereby helping create a roadmap for electrification.

The FAME II scheme implemented by the Department of Heavy Industries (DHI) has planned a significant outlay of Rs. 35 billion towards supporting e-bus adoption in India. Under the scheme, 7m, 9m and 12m electric buses are eligible for a capital subsidy of Rs. 35 lakh, Rs. 45 lakh and Rs. 55 lakh respectively, subject to meeting technical specifications and localization requirements.

According to Mr. Srikumar Krishnamurthy, Vice President & Co-Group Head, ICRA Ratings, “Bus costs are the single largest cost element in electric bus projects, accounting for 75-80% of project costs. With the capital subsidy of Rs. 35-55 lakh per bus under the FAME II scheme, the capital subsidy element can fund a large part of the project costs, up to even 40%, which augurs well for the viability of these projects. Additionally, coupled with the significant savings on fuel costs (3-5x cheaper vis-à-vis conventional buses), these subsidies help to bring the total cost of ownership of e-buses on par with the CNG buses, and more importantly 20-30% lower than diesel buses.”

The Gross-Cost Contract (GCC) model, or opex model of operations, has emerged as the preferred route for e-bus adoption in India, especially as the FAME II scheme offers capital subsidy only for buses procured under this route. This model helps to significantly alleviate the upfront capital burden on cash-strapped SRTUs, while spurring electrification by increasing private participation in the segment. However, the model is currently evolving, and operators are looking at various measures in order to mitigate the risks prevalent in the model. As per ICRA, while execution-related risks remain relatively low for these projects, operational risks are somewhat higher, given the lack of adequate track record of electric vehicles in the country. Operators with direct backing from the e-bus OEMs, and with adequate financial wherewithal and flexibility, would be better placed to establish a strong foothold in this segment.

Adds Mr. Rohan Kanwar Gupta, Vice President & Sector Head, ICRA Ratings, “Although the Niti Aayog has outlined a Model Concession Agreement for the electric bus projects under the GCC model, keeping in mind the interests of various stakeholders, it still remains to be seen how various risks related to project execution, bus performance, receivables etc. play out over the medium to long term. Nevertheless, as the model matures, electric buses are expected to witness increased adoption going forward, aided by the favorable cost economics. Among the various automotive segments, buses would be among the first ones witnessing faster electrification, especially for intra-city operations. While limited charging infrastructure, range anxiety and high capital costs have been the key deterrents in electrification across segments, these are relatively low for the bus segment. Overall, ICRA expects that electric buses are likely to account for 8-10% of new bus sales by FY2025.”

While the FAME II scheme and associated subsidies would support the penetration in initial years, expectations are that capital costs would reduce with localization and evolution in battery technology, which coupled with favorable operating economics, would support sales subsequently.