Payment security mechanism to drive faster adoption of electric buses

India Ratings and Research (Ind-Ra) anticipates that the government of India's (GoI) introduction of a payment security mechanism (PSM) in the 2024 interim budget will stimulate greater competition in electric bus (e-bus) concessions and reduce the per kilometer fee, a critical bidding parameter. The implementation of a PSM is expected to enhance the risk profile of project developers, enabling them to meet the upgrade and expansion requirements of state transport undertakings (STUs) at competitive prices, particularly given the aggregate loss-making nature of STUs.

Divya Charen C, Associate Director of Infrastructure at Ind-Ra, notes, "The proposed PSMs are set to significantly enhance the risk profile of e-bus concession contracts, addressing counterparty risk and improving project bankability. This will offer balance sheet flexibility to original equipment manufacturers/operators and potentially lead to lower contracted prices under gross cost contracts. The increased interest from new developers and investors is likely to create opportunities for equity release for developers."

Ind-Ra expects forthcoming GoI bids for e-bus concessions to benefit from various PSMs such as payment security funds, direct debit mechanisms from state government accounts, and state guarantees for payments, contingent upon state consent. The reliability of PSM creation and invocation could be ensured by the involvement of Convergence Energy Services Limited as the program manager for GoI's schemes.

The National Electric Bus Program (NEBP) launched in 2022 and the PM-eBus Sewa schemes introduced in 2023 aim to deploy 50,000 and 10,000 e-buses, respectively, by 2030. The competitive pricing observed in NEBP 1 bids for 6,465 buses in January 2023, without subsidies, indicates a shift towards STUs preferring e-buses over diesel buses.

As of January 2024, there is a robust order book of over 20,000 e-buses scheduled for delivery in the next 24 months. GoI has allocated Rs 26.71 billion for FY25 for the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) scheme. Over 6,500 e-buses are currently operational in India, with 2,739 e-buses registered in the current financial year as of January 24, 2024.

Ind-Ra emphasises the importance of standardising contract provisions and transitioning STU operations to accommodate e-buses as the share of e-buses increases. STUs have been driving e-bus adoption, particularly through gross cost contracts, which mitigate the upfront cost disadvantage and leverage FAME subsidies for demand creation.

The agency believes that GoI's performance-linked incentives aimed at advanced automotive and energy storage technologies, along with promoting indigenous manufacturing, will foster an ecosystem beneficial to both STUs and private bus operators.