Author’s Note: I recently had the honor of being invited to present to the World Resource Institute’s Electric School Bus Initiative consortium alongside Jigar Shah, the former director of the Loan Programs Office. The WRI electric mobility team asked me to present on how public developers could support traditional green banking-related solutions to e-mobility challenges. Because I am not a specialist in mobility, I decided that this presentation was a good opportunity for me to put on my former academic hat and reframe these policy problems using some theory about market design to advance specific solutions. Read the slide presentation here.
The two big problems for electric school bus adoption are two fold:
- There are few original equipment manufacturers (OEMs) that can deliver a cheap, reliable, and standardized electric school bus at the rate necessary to meet most states’ adoption goals at a reasonable price point.
- There is not enough capital or risk appetite available for school districts to commit to expensive upfront purchases of buses as well as of the infrastructure upgrades that expanding manufacturing capacity and vehicle charging capacity require.
Our challenge is something we encounter over and over across decarbonization sectors and, really, any fixed capital investment: a pipeline problem. Supply and demand just don’t match because there’s no market infrastructure that offers products at prices that meet the expectations of financiers, producers, and consumers.
School electrification advocates have generally supported two kinds of solutions to this problem:
- Moving the risks of project development and financing away from school boards—which are administratively ill-prepared to own, operate, and monetize electric school buses—onto the balance sheets of specialized, often private, third-party operators; or
- Monetizing school buses as “big batteries on wheels” with particularly advantageous time-of-use profiles that make them parts of a broader virtual power plant network, thus creating new additional value for the investment.
The role of public finance in these types of schemas is to provide low, even concessionary capital that lowers the financing rates of these deals and derisks other lenders.
All of these are good and necessary solutions—but I do not know if they go far enough to get at the pipeline problem. What I propose is moving beyond a pure green banking-based model of financing school buses to a public developer model.
I do not mean that school districts should build buses directly. On this, I think Jigar and I are on the same page that this probably would not work. Instead of being an OEM, a public developer would be what I term a dealer.
Dealers are a broad class of entities that make markets, not by matching buyers and sellers directly to each other—like, say, a real estate broker—but by buying from OEMs in advance of retail consumers’ purchases, building up and managing inventory during that delay period, and selling that inventory onto consumers when they are prepared to buy in a second, independent transaction. Dealers are the entities that make market prices “efficient” because they reduce the transaction costs of acquiring assets. They make a “spread” connecting buyers’ and sellers’ prices.
I was first introduced to the concept of a dealer through monetary economics, because banks are naturally dealers in the “time value of money.” In other words, they mediate between liquidity preferences. But banks and financial intermediaries are not the only kinds of dealers in the world: Your local supermarket is a dealer! It buys inventory from wholesalers and food producers and, then, resell it to you. This point feels mundane, but it’s worth stressing: For most of modern history food was mostly bought and sold in farmer’s markets, which acted more like brokerages than dealers.
What does all this have to do with electric school buses?
The answer is that a dealer is perhaps the ideal institution for solving our pipeline problem. They can anticipate consumer demand and create a situation in which the consumer can be offered a sale price for a product that they know will exist rather than force them to bet on the possibility of it existing. On the flip side, the dealer can offer the producer of that product a prearranged purchase price and a consistent market for their future output. The dealer’s demand helps fund expenses that producers must incur in the present to create that future output.
Where our missing electric school buses are concerned, the public developer could be a public dealer that makes purchasing commitments now for a stock of electric school buses to sell them later to school districts. This model is different from more traditional green banking, where the green bank makes a loan to the consumer to buy an asset, and/or to the producer to make that asset without formally playing the middleman.
However, this practice isn’t unknown. As we have discussed in our earlier writing on rooftop solar and distributed energy resources, and as some of the best state green banks in the country have already demonstrated, it makes a lot of sense to structure financing for a solar panel project as a lease or PPA owned by the bank rather than by a site owner. These third-party ownership structures make the bank a developer as much as a lender—and also makes the bank a dealer, because it holds equity in the asset and thus “carries” it in their inventory, even if their intention is to eventually sell the asset to the ultimate site owner.
There’s even more to it! Best practices for such public solar lease programs involve creating an inventory of installation subcontractors that, by virtue of being pre-approved counter-parties, work on a kind of soft retainer. They can provide a standardized installation product and even sell their services and products to the green bank-supported solar project at a lower price in exchange for consistent “wholesale” deal flow. Thus, dealers do not just finance demand but directly coordinate supply.
In a market as narrow as that for electric school buses, “dealership” is a critical function because state green banks, or even multi-state consortia, could act as high-volume upfront buyers to set a floor for product demand and thus push forward manufacturing capacity. Moreover, as the big fish in a small pond, so to speak, they can not only extract lower prices from OEMs but set production and quality standards. We can imagine that a large procurement contract from a big public dealer will include minimum technical and cost parameters for any of the OEMs that apply to deliver on it.
I do not want to give the impression that public dealers are a magical, costless solution to this very pressing financing problem. Private dealers are businesses and, like any other business, they will seek compensation for the risks they take. Any public dealer would face the same risks and costs as a private one does: inventory risk and liquidity risk. Inventory risk is the risk that the dealer will not be able to find a spot price from a buyer that will satisfy their costs of acquiring, storing, and marketing their inventory of assets. Liquidity risk is the risk that a dealer will not be able to obtain the short-term funding necessary to finance the costs of carrying inventory until it can be sold; without funding to cover its carrying costs, it is thus forced to sell its inventory at fire-sale prices to make its own payment commitments to creditors, employees, and subcontractors.
Thus, even if public dealers—another kind of public developer—can reduce the cost of carrying some of these risks by sacrificing their return expectations and profitability thresholds, they cannot eliminate them altogether. They need other policy support such as scale, commitments of public credit, and regulations that support consumer demand for their inventory. Single states and local governments, which will probably be the leaders in this space, might find such risks daunting but, given the chaos in Washington, it is time for creative solutions—only they can drive them. That being said, maybe there’s a case not just for doing this on a state-by-state basis but for combining resources of the many new state green banks into a national consortium to purchase the national American-standard electric school bus.