Despite representing only 4% of U.S. vehicles, diesel-powered trucks and buses are responsible for a disproportionate share of pollution and carbon emissions, making them a prime target for electrification efforts. Now, the Environmental Defense Fund is offering a “toolkit” to help fleet owners overcome obstacles to making the switch from internal combustion engines.

EDF’s report, “Financing the Transition: Unlocking Capital to Electrify Truck and Bus Fleets,” goes beyond traditional total cost of ownership (TCO) calculations to consider “soft” costs and other risks that present barriers to change. The report introduces a new framework, total cost of electrification (TCE), which it says can help policymakers, fleet owners, utilities and investors account for, and overcome, the challenges.

“The medium- and heavy-duty vehicle (MHDV) market — which includes everything from semi-trucks and delivery vans, to city buses and garbage trucks — is on the cusp of an electric transformation,” the report says. “To ensure and accelerate the transition, we must move beyond the set of traditional mechanisms that have been used to assist one-to-one replacements of trucks and buses, such as grant programs providing basic buy-down payments. … These solutions must deploy limited public monies in a manner that will unlock private capital at an unprecedented scale.”

The product of interviews with 32 stakeholders, including fleet operators, finance professionals and public policy experts, the report was authored by EDF with M.J. Bradley & Associates and Vivid Economics. It allows fleet operators to identify their obstacles and match them with potential solutions, such as green bonds to help with financing or battery guarantees to address technology risks.

Signs of Change

The U.S. has 14 million buses and large trucks, most fueled by diesel, which EDF says “are among the dirtiest vehicles on the road and will be the leading source of growth in transportation climate pollution over the next 30 years.”

Signs of change are apparent: Daimler, the No. 1 freight truck producer in the U.S., has pledged to stop selling internal combustion trucks in its main markets by 2039. Amazon ordered 100,000 electric trucks from electric vehicle startup Rivian last year, and companies including PepsiCo, Anheuser-Busch and J.B. Hunt Transport Services are piloting emission-free trucks.

In June, 15 U.S. states committed to have 30% of their truck, bus and van sales be zero-emission by 2030. In September, California Gov. Gavin Newsom issued an executive order requiring a transition to zero-emission trucks by 2045. These 16 states represent more than a third of the total U.S. MHDV fleet. (See Calif. to Halt Gas-powered Auto Sales by 2035.)

Officials in New York, Los Angeles, Houston and Honolulu are also planning to go all-electric for fleets such as garbage trucks and transit and school buses.

“Several different factors are coming together to make the time right to electrify trucks and buses at larger scale, especially in the transit bus and medium-duty sector,” said Andy Darrell, EDF’s chief of strategy, global energy and finance said in an interview with RTO Insider. “We’re seeing that the technology is reaching a tipping point; that policymakers are beginning to set ambitious goals and targets to help stimulate demand. There’s a rise in interest [by] the investment community in socially responsible investments. And then, of course, from a climate and public health perspective, there is an urgent need to reduce pollution from trucks and buses.”

Yet the transition hasn’t moved as quickly as it could, Darrell said.

“What we heard back [from the interviews] was that capital is ready to help. There is interest in the fleet owners to move forward, but there are a few key … pain points that we need to solve to get past that first transition.”

‘Soft’ Costs

The researchers put a priority on deploying public money where it’s needed the most and where it will have the most impact, as well as enabling private investment and financing options.

EV and battery costs have declined, and studies show electric MHDVs have a lower TCO than ICEs. But zero-emission vehicles are still much more expensive to purchase, “a powerful deterrent,” the report said.

While traditional TCO calculations focus on upfront purchase costs and lifetime operating costs, TCE was designed to target all the barriers, including “soft costs,” such as changes to business operations (e.g., routes and schedules) and permitting approvals. TCE also considers “uncertainties, risks and frictions” that can discourage fleet operators from making the switch.

Among the uncertainties are concerns about battery performance and lifespan and the residual value of vehicles and batteries when they are taken out of service.

Then there are the “frictions,” such as a lack of staff familiar with the new technologies or financing methods, and inertia in the procurement and contracting process.

EDF found that traditional public and private mechanisms to help with the purchase of cleaner vehicles are “often mismatched with the highest-priority needs for fleet transitions.”

Fleet owners also complain that existing grant programs are administratively difficult and expensive to navigate. “The end result is a lost opportunity to replace more internal-combustion vehicles with zero-emission ones,” the report said.

The toolkit identifies three types of financing solutions: capital instruments, risk-reduction instruments and cost-smoothing instruments. These include public-backed “soft” loans with low interest rates, longer maturity and reduced collateral requirements; public “buy down” of interest rates; equity investments; and commercial, municipal and green bonds.

Smaller MHDV fleet electrification projects can be bundled together to attract investors looking for larger opportunities. “This approach can transform one-off, non-traded assets into standardized, tradable assets and has been used in other clean economy sectors (e.g., renewable energy, energy efficiency) to catalyze the flow of capital at scale,” EDF said.

Risk-reduction instruments include performance guarantees to protect electric MHDV purchasers from underperformance of vehicles or batteries and residual value guarantees to protect investors or purchasers by guaranteeing a minimum resale value. Political risk guarantees can protect against losses from changes in climate and vehicle or fuel regulations or policies.

EDF also promotes nonfinancial solutions such as technical support and policy actions, such as changes to allow EVs to acquire monetizable emissions credits or to operate as grid assets via bidirectional charging and discharging.

Darrell noted that school buses are idle most of the day and during summers. “A vehicle-to-grid integration program [that allows the buses to sell power to the grid] could be a terrific solution,” he said. “That might work for school buses, but it might not work for fleets that are in use most of the day.”

Next Steps

“Research of this type is critical in ensuring that the ambitious goals that are being set across the country can be met in the most cost-effective way possible,” Larissa Koehler, a senior attorney at EDF who works on transportation electrification, said in an interview.

Capitalizing on the report will require collaboration, EDF said. “Real progress requires more than frameworks and toolkits. To bring these static documents to life, leaders from government, business and finance must break out of sectoral silos and open themselves up to thinking differently.”

New York’s Metropolitan Transportation Authority has committed to convert its 6,000 transit buses to electricity by 2045, with interim goals of switching out 500 buses per year. But their depots are in crowded urban areas, making them difficult to retrofit with charging stations.

“The depot that I visited ended up having the charging stations up on the roof because they were having a hard time fitting them in elsewhere,” Darrell said. “It took a creative thinker from the real estate side and the fleet side [of MTA] to figure out how to do this.

“I see this gap between the opportunity in the fleets to do something amazing for climate and clean air, and capital waiting on the sidelines to jump in. I’m hoping that this report can help close that gap,” Darrell said. “Now that we understand a little more what the landscape looks like, we are interested to partner with fleet owners and policymakers and investors to try to help create the table around which these stakeholders can come together and … show the real world how this can work.”