CESL Accelerates On The Green Track, Opens Bids For 6,465 Electric Buses

On Tuesday, Convergence Energy Services Ltd (CESL) opened bids for the country’s largest tender for 6,465 electric buses, which it aggregated on behalf of various state transport undertakings. The response was overwhelming with four players — Ashok Leyland-promoted Switch Mobility, PMI Electro Mobility, JBM, and Pinnacle — becoming the highest bidders in one or more of the eights lots of electric bus requirements (based on different specifications) that came up for bidding.

With this, the state-owned company, which was set up in 2020 to offer interventions to solve gaps in the energy renewable ecosystem, appears to be moving in double-quick time. It is a subsidiary of Energy Efficiency Services, a joint venture of four public sector power producers and traders — NTPC, Power Finance Corporation, REC Ltd and Powergrid Corporation.

In less than a year, the company has given out orders for around 12,000 electric buses — the first ones will start rolling out in a few months. And in the next few weeks, it will be floating another tender for around 5,000 electric buses but based on a new business model in which state transport undertakings (STUs) will dry-lease buses from the OEM consortiums on a monthly rental.

“Demand for electric buses from STUs is not an issue. It’s a no-brainer because we have demonstrated that running electric buses reduces operating costs by 30 per cent (and that is without taking into consideration subsidies given under FAME II to buses) compared to a diesel bus. We have also cracked the business model,” said Mahua Acharya, managing director and CEO, adding that the government’s target to put 50,000 electric buses on the road in three years can be crossed much earlier.

Based on CESL’s due diligence, which includes checking whether STUs have approved budgets and depots, the actual (not the speculative) demand is already 25,000 electric buses and growing, but the country lacks the capacity to make so many buses. Acharya said there were only 2,000 electric buses on the roads in the country, a fraction of the 147,000-odd buses run by all the STUs in the country. So the upside is huge.

The business model CESL has put together is simple. Under the “gross cost contract” the bus is owned, maintained and run by the OEM and its consortium for STUs at a specific rate per kilometre fee, which is discovered through competitive bidding. After 12 years the asset is given to the STU at Rs 1.

There are, however, two major challenges for the electrification of buses, Acharya admitted. One is clearly the lack of adequate finance for manufacturing buses and, two, the fear of financially strained STUs defaulting.

The cost of manufacturing 50,000 electric buses is a staggering Rs 60,000 crore, of which 70 per cent is typically financed by debt. Banks are not willing to fund these companies or consortiums because of the 12-year risk, and sustained payments from STUs are a big question mark. STU defaults will impede rapid electrification of public transportation.

As Manvi Jain, director, PMI, one of the bidders for Tuesday’s tenders, explained, “Each bus costs Rs 1.2 crore. Even public sector banks, barring State Bank of India, are unwilling to provide loans. For large auto companies with deep pockets, funding is not a problem. But it is for start-ups.”

To be sure, this is not a new problem — financial institutions faced the same experience in funding renewables where state distribution companies (discoms) failed to pay for electricity. It is these problems, Acharya said, that have deterred private equity funds from focusing on green ventures. Potential STU defaults are one reason that kept Tata Motors away from the latest round of bidding.

PMI’s Jain said that some climate funds had started experimenting with electric mobility but the money was small. “The government should give priority to the lending status of the industry. If this issue is addressed we can break even in the third year.”

The good thing is that various departments are conscious of the problem. The Ministry of Road Transport and Highways is considering a CESL proposal for a Payment Security Fund, from which OEMs would be paid if the STU defaults, with a mechanism to recover the money from the STUs later.

But as Acharya pointed out, this is, at best, a “band-aid” solution. The long-term answer should be replicating an organisation such as the Solar Energy Corporation of India (SECI) for renewables in the electric mobility business that is structured to provide payment security. SECI is an intermediary that procures power from developers and sells it to discoms.

CESL also aggregates electric car demand for the Centre and centrally-owned public sector units. But, Acharya said, there was no dearth of demand — state governments collectively had a demand of 3,500 electric cars. The CESL board, however, does not permit funding of cars for state governments and undertakings, which is a key impediment.

The company has also been working on building a public charging infrastructure. Here, CESL has shifted from initially investing and operating them on their own through a subsidy (it owns 500 of them) to aggregating land sites for state governments and offering them through a tender to private players. “We changed gears so that we could scale up faster by aggregating land sites. There has been huge demand and a lot of players have bid and won,” Acharya said.

CESL has already closed deals for over 3,000 sites across the country for a 10-year period under which it leases the sites from the state or local administrations. CESL then puts up these sites for bidding on a revenue-share basis that includes a small premium to the lease price it pays for the land.

Acharya admitted that it is unclear whether this model was an optimum one, given that there were few electric cars on the road. But, she said, the winning bidder in these charging stations could supplement primary income by offering internet, beverages or a food kiosk.

The major challenge here is that the power load discoms supply may be inadequate, especially for fast chargers. “But many are taking a speculative risk for the future because they expect the demand and the growth of electric vehicles will grow manifold,” Acharya said. In that sense, CESL’s role in creating a market is certainly unique.

Dashboard

• CESL has already placed orders for 12,000 electric buses on behalf of state transport undertakings. The demand is over 25,000
• It is trying out a new business model of dry-leasing buses by STUs for the first time
• Has placed orders and deployments are on for around 3,000 public charging stations across the country on a revenue-share basis with private players; CESL owns around 500 of these
• Has procured or is in the process of procuring over 2,000 electric cars for the central government and PSUs