BYD Motors and Generate Capital have pioneered a new leasing program to accelerate the adoption of electric buses. The joint venture will also create new opportunities to deploy second-life energy storage.

Battery-powered buses are becoming more popular as cities and states look to curb local pollution and carbon emissions. But while EVs offer environmental benefits and fuel savings over time, they come at a premium compared to their diesel competitors.

The joint venture announced this week, described as the first of its kind, is designed to expand the U.S. electric bus fleet by reducing upfront costs.

Generate Capital will invest $200 million to buy and lease the buses. Warren Buffett-backed BYD, one of the world’s largest electric vehicle manufacturers, will make and market the buses to public- and private-sector customers.

Traditional leasing companies typically don’t assign any residual value to electric vehicles, which makes financing difficult, explained Jigar Shah, Generate co-founder and president. Shah spearheaded “no money down” solar as founder and CEO of SunEdison, and has since brought this model to battery storage, fuel cells and now electric buses.

"We all get super excited about how technology cost curves have come down and a new future is coming," he said, in an interview. "But there’s a messiness to how that gets implemented."

“Commodity capital is not treating EV buses fairly,” Shah continued. “Generate steps in when those situations occur and makes money on the messiness of the process…until we can convince commodity capital that the current financial products they have for the diesel bus market are fully applicable to the EV bus market.”

“It makes BYD happy — and their competitors — because now we’re helping their future business get access to much lower cost of capital,” he said.

There are approximately 345,000 electric buses on the road worldwide, according to Bloomberg New Energy Finance’s 2017 Global EV Outlook. However, the U.S. battery-electric bus stock stands at only about 350 (of which BYD claims to have manufactured roughly two-thirds).

Bobby Hill, vice president of North America for BYD Coach and Bus, said the Federal Transit Agency (FTA) will distribute around $84 million in competitive grant funds for electric buses this year through its Low or No Emission Bus Program. But those funds don’t go very far. Transit agencies often only receive enough money to purchase a single bus, and bigger cities tend to beat out smaller ones for grant dollars.

With the new Generate and BYD leasing program, transit agencies will be able to immediately start saving on their monthly payments for fuel and maintenance, Hill said.

He added that FTA rules allowing transit agencies to apply grant funds specifically to leasing batteries, in addition to purchasing electric buses, make the lease option even more advantageous.

“They can lease the whole entire bus, including the batteries — and right now our 40-foot bus with batteries is around $780,000,” said Hill. “Or they could buy the bus for a fraction of that amount of money and lease the batteries on a monthly payment.”

A new second-life battery storage business

If an electric bus battery fails, or the warranty simply runs out (after 12 years in BYD’s case), those batteries can still live on in other applications, which makes up part of an EV’s residual value that manufacturers want to highlight.

Once a bus battery lease ends, that battery can still be used in a stationary storage system, say, to balance output from a solar farm or to help with peak shaving, and probably last another 15-20 years, according to Hill.

None of BYD’s customers have reached the end of their battery warranty to date. Even some of the larger deployments in China are only just approaching year eight. “So we have a few more years to go before we start retiring buses and utilizing those batteries for their second life,” Hill said.

BYD already has an energy storage division, and it is currently pitching its transit agency customers on purchasing new batteries. But the Chinese manufacturer is also letting customers know there’s an opportunity to do something with their bus batteries when the vehicle retires.

“In the next four to six years, we’re really going to see how that program works,” said Hill.

In the case of a private customer, like Google or Facebook, the bus may be leased on a shorter term, well before the end of its useful life. Under BYD’s new joint venture, Generate will take back the bus, refurbish it and sell it to another customer. The original battery may also be replaced and sold again separately for second-life use.

Making new technologies high quality and “boring”

There is a lot of hype around electric vehicles. News of dramatic battery cost reductions and gigafactories are driving ambitious sales projections. But there’s still a lot of work that needs to be done behind the scenes to hit those numbers.

Figuring out how customers work with their existing leasing companies, and how to make electric trucks and buses more affordable, is a conversation that plagues many CFOs, said Shah. It’s not unlike the hurdles around buying solar in 2003.

“Getting this comfort level into the CFO’s office is not just a factor of how many hype stories they’ve read; it’s who is actually answering their questions,” said Shah.

When asked about BYD's bus quality issues uncovered in serving L.A. Metro, Shah said that Generate has done its "full due diligence" and believes the buses are well made. He added that he's confident a major manufacturer like BYD has the experience to fix any quality challenges. He also said that Generate supports the entire electric bus market and will also work with other manufacturers.

Hill insisted that BYD's electric buses have already improved in recent years and, like any new technology, will improve further with time. "The longer we keep doing this the better the batteries are going to get," he said. "The longer we educate drivers and the more agencies have electric buses in their fleet the better the range is going to be all around.”

The BYD-Generate venture already has several clients, including prominent universities, top corporations and smaller municipalities.

In addition to backing the electric bus lease program, Generate is educating customers on incentives and contract terms that help lower the cost of financing.

“I like to make things that were once exciting boring,” said Shah. “Because the more boring I make it, the cheaper the capital that wants to chase it.”

This story was updated with additional information on BYD's electric bus quality issues.