The Airline Shake-out Starts Up

The Airline Shake-Out Starts Up
May 2020

This month saw two of Latin America’s three largest airlines file for bankruptcy: LATAM and Avianca. They are the most visible casualties to date of the unprecedented fall in air traffic since the onset of the COVID-19 pandemic, though they certainly won’t be the last. Today’s Infrastructure Ideas looks at some of the emerging implications for airlines of the unfolding shake-out.

Airline travel was one of the areas first and most severely disrupted by the emergence of the coronavirus. With the combination of passenger health concerns, and uncoordinated government travel bans and/or carrier stops, anywhere from 75 to 90% of passenger volumes disappeared in less than one quarter. The level of passengers in the US dropped below 100,000 per day, last seen in the 1950s. Five months in, the financial impacts are starting to show in a big way. IATA has estimated lost industry revenues at over $300 billion, and not too many carriers have the Balance Sheet to withstand this.

Already in February, Air Italy – the old Meridiana Air partly owned both by the Aga Khan Fund and by Qatar Airways – went into liquidation, and Turkish Atlas Global filed for bankruptcy. In April Air Mauritius entered administration and Virgin Australia filed for bankruptcy, while in May LATAM and Avianca were kept company by TAME Ecuador, which entered liquidation. Other airlines whose positions were already difficult before COVID-19 are trying to stay afloat: South African Airways, the largest airline in sub-Saharan Africa, remains in bankruptcy, hoping for some kind of rescue, while SAA Express, its regional affiliate, has entered liquidation; Kenya Airways, another of Africa’s big three airlines, recorded its second major annual loss, close to US$100 million, before the pandemic even started (the Kenyan Parliament has voted to re-nationalize the carrier); and Philippine Air announced a revenue loss of over $1B. A rehabilitation plan for Thai Airways was approved on May 19, involving the Government of Thailand’s stake dropping below 50%.

Aside from the announced bankruptcies, airlines around the world have shed thousands of jobs, cut salaries and grounded planes. McKinsey estimates airline capacity has been reduced by 75%. This without mentioning the impact on airports and many associated services which have also been deeply affected.

For the most part, bankruptcies are arriving first for Emerging Market-based airlines. While some of these airlines have been recording the strongest growth in the industry, and have the potential for much higher growth in the future than their OECD-based counterparts, there have been two things going against them: thinner equity bases, and the lack of fiscal space in non-OECD countries for supplying financial assistance – as has been the case in the USA, and most recently with Lufthansa.

Avianca, which claims to be the world’s second-oldest continuously running airline, filed for Chapter 11 in New York on May 12, blaming its collapse on the “unforeseeable impact of the Covid-19 pandemic.” While the company stated it is neither in insolvency or liquidation, it did close its Peruvian affiliate, along with cutting its fleet. Avianca had had remarkable growth over the past two decades, but had already been showing signs of stress before the pandemic. Former controlling shareholder German Efromovich was removed in May 2019, after defaulting on a $450 million loan from United Airlines which had been secured by his 51.5% stake in Avianca. While United is now the largest shareholder, it ceded its voting rights to Salvadorean Roberto Kriete (a former chairman of TACA Airlines). Chile-based LATAM had also been growing strongly. It is South America’s largest carrier by passenger traffic, had more than 340 planes in its fleet and nearly 42,000 employees on its payroll, and reported a profit of $190 million in 2019. In December 2019 Delta Air Lines, agreed to purchase 20% of the company for $1.9 billion, and Qatar Airways already owns 10%. The company’s May 25 Chapter 11 filing focuses more on the downturn as an opportunity to reduce its debt. Its three main shareholders have agreed to provide up to $900 million in financing as LATAM makes its way through the bankruptcy process.

Investors, operators and governments are now all asking themselves — what comes next? Here the key uncertainty, as in so many sectors, is what course the pandemic takes. Case and death levels are still rising, though in aggregate significantly slower than a month ago. Many countries have begun at least the first phases of re-opening, and air traffic has shown its first uptick since mid-May. The Pakistan International Airlines crash in Karachi is one of several instances where the re-opening of flights has not started smoothly. So it remains unclear how protracted the decline will be, though it appears that demand is likely to have bottomed out, and unclear whether demand returns to pre-crisis levels and if so, how soon. On the one hand, the post-9/11 experience was one where growth in air traffic resumed strongly, in spite of structural changes in the air travel experience related to security. On the other hand, McKinsey notes that not only may health-related concerns keep passengers out of planes, but climate change concerns had also begun to have some impact.

Keeping these uncertainties in mind, we can hazard some guesses on what kind of structural changes aviation is likely to undergo. Here are some views on what the post-pandemic future may hold:

1. Fewer carriers. Almost certainly we will see fewer carriers, either through the route of liquidation, or through the route of mergers. While EM-based carriers have seen more bankruptcies so far this year, it may be that advanced economy-based carriers see more liquidations. Factors pointing in this direction include growth potential, and there being more merger targets in Emerging Markets today. The post 9/11 crisis in air travel almost two decades ago led to major consolidation among US airlines, with USAIR, Northwest and Continental disappearing, but not much consolidation among Emerging Markets carriers. Granted national interests in flagship carriers will, as always, be a major impediment to such consolidation, yet mergers and acquisitions are likely. Already in Latin America, the path of both Avianca and LATAM over the past decade has shown consolidation to be accepted in the region, and the stakes taken recently by United, Qatar and Delta have shown non-regional ownership has become politically acceptable. In Africa, one of the more surprising developments of the last month has been the announcement by Ethiopian Airlines on May 5 that it is in talks to revive both Air Mauritius and South African Airways. Ethiopian operates Malawi Airlines, had bought 45% of Zambia Airways in 2018, partners with ASKY of Togo, and has previously been in talks to revive Ghana Airways.
2. Fewer passengers. In terms of demand, the COVID pandemic is likely to be a crisis with a very long tail. Most forecasts expect more waves of infection, whether in large re-opening markets such as the USA (or as Korea is currently experiencing), or in markets where the initial pandemic wave had more limited impact. This is likely to keep travel-related concerns high for some time.
3. Pressure to reconfigure aircraft. Proximity to infected people, including those who do not know they are infected or do not show signs of infection, is now understood to be the biggest vector for spreading of the coronavirus. Airlines’ business models have been driven by packing as many people as possible on planes, as tightly together as can be sold. There will be a clear conflict between these two drivers. This week has seen an interesting experiment by Air Canada, which is beginning to offer in effect “all business class” flights, leaving more space between passengers on the entire plane.
4. Higher airport fees and health-related costs. Airports are facing the same issues as airlines: plunging revenues, and pressure to make investments in reconfiguring assets (see note on this in our previous Infrastructure Ideas note). One of the very few directions airports will be able to go to increase their revenues and stay afloat will be to charge higher fees to airlines – all the more as the number of airlines decreases.
5. Higher fares, and a higher premium on efficiencies (including fuel efficiency). Fewer passengers and higher costs. At least in the near-to-medium term, airlines will have little choice but to raise fares. In the very short term some are offering minimal fares to try to re-spark travel, but this tactic will be completely unsustainable. Facing decreased demand and higher costs, as noted above, airlines will have to focus very hard on their P&Ls.
6. Unprecedented government support. Airlines will find it very difficult to square this circle without help. This we already see in many OECD countries. It seems unlikely, however, that the support provided to date will be enough for many carriers, barring an unexpectedly rapid decline in rates of infection and an unexpectedly rapid return of passenger demand. It is likely that politics becomes a big determinant in OECD countries of which carriers get further support, and survive, and which ones do not, and wind up liquidated or acquired. We have not seen as much of this in many Emerging Markets, which has been a factor in why the Aviancas and LATAMs have become early bankruptcy headliners. Many EM countries’ fiscal space is doubly constrained by the economic contraction and pre-crisis indebtedness. Yet airlines also play a role that is in some ways more essential in many EM countries, where road and rail alternatives for transport remain limited. We would therefore expect that, especially as the Multilateral Development Banks ramp up their crisis-related fiscal support, we will start to see a number of EM-based carriers get new government support.

Silver Linings

Silver Linings: the COVID-19 crisis and infrastructure
May 2020

The COVID-19 epidemic has transformed pretty much all aspects of life over the past three months. Our previous Infrastructure Ideas column, written in the early days of the pandemic, outlined some of the possible effects of COVID-19 on the world of infrastructure. As is the case in so many areas, the implications were depressing. It is also apparent that positive news are in great need – and not based on distorted data and magical thinking, as can be seen coming from some quarters. Today’s column looks then at some silver linings for infrastructure in the pandemic era – and there are some!

We’ll start with the two most obvious “winners” from the crisis: logistics, and emissions reductions.

1) New and expanded logistics opportunities. As can be readily seen on any highway or city street, the amount of goods being delivered to homes through (generally) online orders has skyrocketed in 2020. The world’s biggest retailer, Walmart, has reported a 74% increase in e-commerce sales for the last quarter. Volumes have grown so sharply that even logistics giants are having difficulties keeping up: FedEx has asked several of its major store clients to slow or limit home delivery sales in order for FedEx to be able to manage shipping logistics. Amazon, possibly the biggest winner of all, announced back in March that it would be hiring for as many as 100,000 new positions, mainly in warehouse handling, and reported a 26% increase in quarterly sales – an impressive feat for a company with already over $200 billion annual revenue. And providers of logistics software and supporting services are also thriving.

The jump in demand for infrastructure logistics driven by e-commerce and home delivery services is broad-based and likely to remain with us. As Coronavirus infections continue to spread into new areas, demand is growing in virtually all geographies. An example is the three-year old Colombian company Liftit, recipient of an investment from the IFC. Liftit provides a technological platform that connects truck drivers with companies that need cargo delivered (similar to a ride-hailing app), and has already expanded beyond Colombia. The matching of large customers with truck fleets is a crucial link in the supply chains, especially in regions where the majority of drivers are independents (See more on Liftit here). In Pakistan, a similar app-based service connecting people and goods via motorbikes in major cities, Bykea, is getting a far-higher profile through the delivery of food parcels for thousands of people during the crisis. Bykea uses smartphones, a call center comprised mostly of women working from home, and a network of 30,000 motorbike driver-partners. In Africa, the use of drones for logistics has gotten a major COVID-related boost from the demand for transporting test samples to labs. US startup Zipline has launched operations for its pilotless flying vehicles in Ghana and Rwanda, also using them to ship protective equipment, vaccines, drugs and other supplies. These kind of advances, combined with changes in consumer demand (buyers who discover convenience which they had not tested previously, and/or those who remain wary of crowded retail shopping situations in the future for health reasons), will continue to fuel logistics growth well into the future. And an analysis by the Brookings Institute (Could COVID-19 help logistics?) shows some of the labor-related benefits of logistics jobs indicates that these jobs often carry good training opportunities with transferrable skillsets, and potentially higher pay relative to low formal educational barriers to entry.

2) Emissions reductions. An international study of global carbon emissions found that daily emissions declined 17% between January and early April, over 1,000 metric tons compared to average levels in 2019, and could decline anywhere between 4.4% to 8% by end 2020. That would mark the largest annual decrease in carbon emissions since WW II. Carbon reductions are primarily driven by fewer people driving — surface transport activity levels dropped 50% by the end of April. This was equal to (50%) the fall in the amount of gasoline supplied in the US—a close measurement of direct consumption— over the two-week period ending April 3. With all those cars now sequestered in garages, air quality around the world has gone through the roof. As reported in Wired, researchers at Columbia University calculated that carbon monoxide emissions in New York City, mostly coming from vehicles, fell by 50% in March. Another positive side effect of this is on public health: research from the Harvard School of Public Health has shown that air pollution is associated with higher Covid-19 death rates, even small increases in long-term exposure to fine particulate matter leads to significantly higher mortality. Chances are not great that emissions will stay on this path post-crisis, but for now this piece of news is good for the climate.

3) Acceleration of the energy transition. Aside from the two obvious winners above, there are other interesting trends flowing more under the radar. One is on energy transition. While it is likely that energy use will rebound sharply after the pandemic, its carbon intensity should be lower. Of particular interest is that while the coronavirus lockdown will cause the biggest drop in energy demand in history, it looks like renewables will manage to increase output through the crisis. The International Energy Agency (IEA) says that demand is likely to fall 6% in 2020, with rich countries showing a steeper decline, the U.S. falling 9% and the European Union losing 11%. Global oil demand is poised to slump by about 9%, coal demand is falling about 8%, and natural gas about 5%. Yet the IEA expects production of wind and solar to grow in 2020. In the first week of April, it was widely reported that wind and solar had produced more electricity in the US than coal did for two months in a row, for the first time on record. A Wood Mackenzie analyst, Matthew Preston, notes that coal is now more expensive in most of the US than natural gas, wind or solar energy: “Just about everything that can go wrong, has gone wrong for the coal industry.” More banks, including HSBC in April, have announced the cessation of coal financing; HSBC’s announcement closed previous loopholes for coal plants in Bangladesh, Indonesia and Vietnam, and included a Vietnamese project for which it was the global coordinator. HSBC had reportedly financed $8 billion of new coal plants over the past three years. While oil and gas prices have fallen sharply in 2020 to date, there are signs of supply reductions and cost increases on the post-crisis horizon. Moody’s had announced already in late 2019 that 91% of all US third-quarter defaulted corporate debt was due to oil and gas companies. As wind and solar prices continue to fall (see below), coal’s lack of competitiveness will grow, while gas will also have an increasingly harder time competing on costs against renewables. Expect that projections for renewables’ share of the energy mix in future years begin to tick up.

4) Technology continues to move forward. The single brightest development in infrastructure for the past decade has been that energy has been getting cheaper around the world, driven initially by the increased supply of natural gas enabled by new imaging and drilling technology, and in more recent years by the continued technology-led plunge in wind and solar costs. While these gains have fallen out of the headlines during the COVID-19 pandemic, they have been continuing.

In late April, yet another global record-low solar price was achieved. And it was achieved for the world’s largest solar project. Abu Dhabi announced that the winning bid for its Al Dhafra project – which at 2 Gigawatts will be the largest single-site solar energy project in the world – came in at a stunning 1.35 US cents per kilowatt-hour. A consortium of EDF and JinkoSolar was the winner. This breaks the previous record of 1.6 cents/Kwh from January in Qatar, and 1.7 cents/Kwh from November 2019 in Dubai. An even larger project, on multiple sites within one solar park, Bhadla solar power park in Rajasthan, India, became fully operational in March. The park has 2.25 GW of now operating solar capacity. The solar park saw multiple record-low tariffs (down to US 3.8 cents/Kwh) during some highly competitive auctions. More and more wind and solar capacity is also being developed in “hybrid” projects including battery storage. According to the US Energy Information Administration there are already 4.6 GW of wind, gas, oil and photovoltaic power plants co-located with batteries in the U.S., with another 14.7 GW in the immediate development pipeline and 69 GW in the longer-term interconnection queues of regional power markets. In the interconnection queues, a quarter of all proposed solar projects are combined with batteries, and in bellwether California, almost two-thirds of solar projects are proposed as hybrids. Power-purchase agreement prices for hybrid power plants are continuing to plummet, with declining costs for wind, solar and batteries as these technologies mature. And on the newer-technology end, in early May Minnesota utility Great River Energy confirmed it will deploy a one MW battery with 150 hours capacity – completed unprecedented for the energy industry. The battery, an “aqueous air” battery system from Form Energy, is due online late 2023, and increases contracted battery storage records by more than 20 times. This is the first announced deal that will take the technology out of the lab and deploy it in a full-scale power plant context. In conjunction with this, Great River Energy, the second-largest power supplier in Minnesota, announced plans to phase out coal power. The arrival of long-duration storage will be another major turning point for energy systems worldwide.

5) And some miscellany. While not rising to the level of the previous four positives for infrastructure, there are a handful of other interesting developments for infrastructure investors and users to keep an eye on during the pandemic. One is around highly depressed air travel: while airlines seem to be doing a reasonably good job keeping flying as virus-free as possible, conditions at airports have potential travelers very concerned about returning to flying. This may well lead to a push for building new airport terminals of very different designs than current terminals; “Future-proofing” has become an “in” term for airport designers, with both health screening facilities and more spaces to enable social distancing than today’s terminals, which often seek to maximize density. This may entail terminals built with steel instead of concrete to increase flexibility, as well as very different uses of space. Investors may see an unexpected area to put capital into infrastructure here. A second area is expanded broadband access. As more schools across more jurisdictions try to implement distance learning, the importance of accessible internet where it is today not available has shot up the list of political priorities. Close to 200 countries have announced or implemented school closures in 2020, with the majority seeking to implement online courses, and quality of internet access has become a major issue. We can expect this area to draw on a far greater portion of public infrastructure spending – possibly as Public-Private Partnerships – as a result of the crisis. A third and related area stems from the exponential increase in online courses driven by the crisis and school closures. This, combined with improved rural broadband access, could become a major factor in expanded technical training in developing countries. Lack of trained staff is a significant bottleneck for rail, logistics, and other infrastructure services in many countries. Fourth, bicycle-sharing and e-bike programs look like they may gain from the crisis. While initially bike-sharing plunged from concerns over potential virus spread, they have strongly rebounded in many places. Bicycle ridership has soared generally, as public transit is viewed as a source of virus exposure risk and some cities close streets to cars to enable more socially-distanced walking (and biking), and sterilizing equipment has emerged as easier for shared bicycles than for shared cars. Miami is one place that has also launched expanded e-bike delivery services during the pandemic. And fifth, the virus may stimulate greater attention to urban sanitation generally, as urban areas have been disproportionately affected by COVID-19. Perhaps we may at long last see an uptick in public infrastructure spending in sanitation, or greater willingness to consider Public-Private-Partnerships in the area.

These are trying times for everyone, including in infrastructure. But at least there are silver linings. We all need positives some of the time. And at some stage, the crisis will be over!

Infrastructure in 2020: Ten Predictions

Infrastructure in 2020: ten predictions
January 2020

1. Wind and solar keep growing.

Growth in global renewable energy investment in 2018 and 2019 has been akin to the Sherlock Holmes tale of the curious incident of the dog that didn’t bark – there hasn’t been any. After a down year in 2018, global renewable energy investment stayed essentially flat at $282B in 2019, according to Bloomberg New Energy Finance (though still more than double BNEF’s estimate of investment in fossil fuel-based generation). Look for numbers to head back up in 2020, on the back of renewables’ cost advantages. In the US, the EIA forecast last week that wind and solar will make up three-quarters of new capacity additions in 2020, breaking previous records of annual capacity additions. The big variable for the coming year will be the largest renewable market in the world, China. The missing global renewable growth would have been there in 2018 and 2019 were it not for declines in China, whose $83B 2019 investment level was down for a second straight year, primarily in solar which is down 2/3 since its 2017 peak. As China transitions away from its Feed-in-Tariff mechanism for domestic solar generation towards competitive auctions, Infrastructure Ideas expects prices for new capacity to tumble, as they have everywhere else that auctions have taken hold, and growth in solar installations to resume in response. For Emerging Markets other than China and India, wind and solar investment rose 22% to a record $47.5 billion. In 2020, look for $300B in investment, a record 200 GW in new wind and solar capacity, and renewables as a share of net new generating capacity added worldwide to cross 70% for this first time.

2. Offshore wind is the new big thing

It looked like a curiosity for many years, but offshore wind is now breaking into the mainstream of electricity generation. Only five years ago, offered prices for offshore tended around $0.15-0.20 a kilowatt-hour, well-above the price for competing sources. But larger and more efficient turbines, bigger projects, access to better offshore wind resources, and more developed supply chains have been driving prices down. In September 2019, the UK saw bids for offshore generation at under $0.05/KwH, and now offshore is able to compete without subsidies in many markets. Bloomberg reports offshore wind financings in 2019 came close to a whopping $30 billion. Tenders are planned in many countries, and are spreading beyond initial markets of Europe, the US and China. Vietnam is looking at what could become the world’s largest offshore wind farm with a capacity of 3,400 MW. Look for many offshore wind headlines in 2020.

3. Challenges mount for power grids and utilities

Grid operators will continue to see a ramp-up of challenges associated with the energy transition in 2020. In developed markets, these challenges include continued switching to lower-cost generation sources, transmission, integrating storage, and integrating growing numbers of electric vehicles. The average EV traveling 100 miles uses as much power as the average US home does daily. California projects that EV’s will use over 5% of the state’s generation capacity by 2030. In developing markets with technically weaker grids, dealing with intermittency will be a bigger challenge, as well as integrating distributed generation and storage. Emerging Market cities may also create new demands as they start adopting electric buses in large volumes, the way we’ve seen in China. Large EV bus fleets will put significant pressure on charging infrastructure resources, while also offering potential storage solutions for urban utilities, especially as Vehicle-to-grid technology, or V2G, becomes more available. Look in 2020 for larger transmission investments in developed markets, and increasing concern in Emerging Markets – particularly those with state-owned grids – about how to modernize grids.

4. Non-lithium batteries get serious

As recently headlined in the Economist, Generating clean power is now relatively straightforward. Storing it is far trickier. Total investment in storage in 2019 came to around $5B, 99% in lithium-ion batteries. While this has been a major success, grids will need complements to lithium-ion technology soon. Though the cost of lithium-ion batteries is falling quickly, longer-term storage is likely beyond its practical capacity. Capacity to keep growing with solar and wind is also a question: the Institute for Sustainable Futures states that a world run fully on renewables would require 280% of the world’s lithium reserves, while concerns over sustainable sourcing of cobalt remain. Companies focused on longer-duration storage alternatives saw a major influx of investment in 2019, led by Energy Vault $110 million funding round, the single largest equity investment in a stationary storage company, according to Wood Mackenzie. Highview Power signed the first liquid air storage offtake deal, for 50MW in Vermont in December 2019. While 2020 project announcements with non-lithium batteries will remain small, look for them to make big headlines. And look for them to spread faster into smaller, low-income developing countries. The economics are more favorable in remote or island grids, where imported diesel creates a much-easier benchmark for storage to beat on price. Canada’s e-Zn targets remote communities that stand to benefit by offsetting diesel generator usage. NantEnergy, using zinc-air batteries has installed some 3,000 microgrids.

5. Green House Gas emissions: alarm keeps climbing, but no global agreements yet

One of our safest predictions. New studies and projections will continue to show climate change having a larger impact sooner than their predecessors. And politics, centered but not limited to the US, will again prevent significant concerted action to reduce emissions. The 2019 Madrid Summit was a glaring display of the stand-off. The only possible change for even 2021 here is the November election in the US.

6. Emissions-free city zones multiply

Though no global climate agreements are on the horizon, there is much climate policy activity at the local and national level: one big example is emissions-free city zones. This month, Barcelona opened southern Europe’s biggest low-emissions zone, covering the entire metropolitan area. Petrol-driven cars bought before 2000 and diesels older than 2006 are banned and face fines of up to €500 each time they enter the zone, which is monitored by 150 cameras. The new Spanish government is said to be planning low emission zones for all towns with over 50,000 residents. Whether driven by national or municipal authorities, we can expect to see such initiatives multiply rapidly, driven both by concerns over global climate inaction and over local air quality. Such zones now create opportunities for carmakers, though one can also expect to see EVs increasingly favored by such mandates, tilting the new opportunities towards EVs – and providers of EV infrastructure.

7. Unilateral “100% renewables” commitments multiply

Between frustration at the lack of global progress on reducing emissions, and the prospect of increasingly cost-competitive renewables and storage resources, a growing number of US states and utilities are setting targets for reliance on 100% clean energy. Thirteen US states, along with Puerto Rico and the District of Columbia, have now set 100% clean energy targets. Another four large states have announced plans to do so. Half-a-dozen large private-sector utilities have also committed to 100% clean energy targets, including famously coal-intensive Duke Energy. These mandates will continue to open new opportunities for renewable energy and storage providers, and importantly will likely offer less price-sensitive demand for longer-duration storage providers. The mandates will also start to impinge increasingly on natural gas demand for generation, and risk beginning to strand fossil-fuel generation capacity ahead of technical end-of-life timetables.

8. Financing premiums appear for climate risks

A big piece of news in the finance world last week was Blackrock’s announcement it would put in place a coal-exclusion policy. But even with Blackrock’s heft — it is the world’s largest investor in coal – this by itself is not a huge game-changer: not much new coal is going up in Blackrock’s geographies. Expect the bigger news in 2020 for infrastructure financing to instead be the appearance of the higher financial costs related to climate risks. In many ways it is shocking this has not happened yet, though a good piece of reporting from the New York Times last September pointed a finger at a big reason for the US. The Times reported that US banks are shielding themselves from climate change at taxpayers’ expense by shifting riskier mortgages — such as those in coastal areas — off their books and over to the federal government. Regulations governing Fannie Mae and Freddie Mac do not let them factor the added risk from natural disasters into their pricing, which means banks can offload mortgages in vulnerable areas without financial penalty. That cannot last without soon bankrupting the two biggest pieces of the US mortgage system (although it would be consistent for the Trump administration to prefer that option). The broader insurance industry is also suffering. According to Swiss Re, 2017 and 2018 were for insurers the most-expensive two-year period of natural catastrophes on record, most of them related to global warming. 2018’s most expensive insurance payout anywhere in the world was for the California Camp Fire. Fortune noted that new research shows that the wildfires of 2017 and 2018 alone wiped out a full quarter-century of the insurance industry’s profits. Unlike Fannie Mae and Freddie Mac, private insurance companies can react, and they will have to charge more to stay afloat. Expect 2020 to be the year that insurance prices begin to factor in climate-related catastrophe risks in a big way, and for that to begin flowing through to financing costs.

9. Delivery vehicles become the new EV focus

Electric car and bus sales volumes continue to grow, but expect electric vans to get a lot of the attention in 2020. Already in September 2019, Amazon placed a massive order for over 100,000 electric delivery vans – worth about $6B. The continued rocketing growth of the e-commerce delivery business, and the frequent use of diesel vehicles for delivery, make for an attractive and fast-growing market for electric vans. As noted by Wired, urban deliveries don’t require all that much range. Routes are predictable and plannable, and because the vehicles return at the end of every shift to a depot, recharging them is a breeze. Add the concerns of many cities about transport emissions, as noted above, and the attraction of the new market segment is easy to see. Now 2020 has started with a $110 million investment for Arrival, a UK start-up making electric delivery vans, from the combination of Hyundai and Kia. Arrival promises that its vehicles will be cheaper than their traditional, diesel-powered competitors, even without further declines in battery prices. Interestingly Arrival’s business model will also facilitate more rapid expansion to Emerging Markets than for makers of other EVs. Rather than building a huge new production plant, Arrival will work from “microfactories” that make only 10,000 or so vehicles a year, but sit closer to where their customers are, and making geographic expansion simple. Look for major changes in the logistics business in emerging country cities to flow from this soon.

10. More alarms over hacking of infrastructure

Many new opportunities are opening for infrastructure investment. Yet risks are growing as well. The hacking of Ukrainian energy company Burisma late in 2019 by the Russian military was clearly politically motivated. Hacking capabilities continue to grow far faster than defenses. Look for more widely-publicized attacks on infrastructure assets in 2020.

Airports, Ports and Climate Change (II)

Airports, Ports, and Climate Change (part 2)
December 2019

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This is the second in a two-part Infrastructure Ideas series on the effects of climate change on infrastructure transport facilities, following part 1 on airports. This post will survey climate change impacts on ports around the world.

Over 3700 maritime ports and their supply chains enable global and local commerce, helping the over 90% of the world’s freight that moves by sea. Ships make on average some 3 million landings a year at ports around the world. One study found that ports and ships account for as much as one-quarter of the GDP of the United States, contributing over $5 trillion to the US economy alone. All of these ports are, by definition (leaving out “dry ports” which have their own importance in logistics chains) located by water. As climate change accelerates, and waters rise, all of these ports will be affected by a range of consequences, some of them expensive.

The EU’s Joint Research Center projects that by 2030 64% of all seaports are expected to be inundated by sea level rise, due to the combined effects of tides, waves, and storm surges. The number of ports that face the risk of inundation in 2080 is expected to increase further by 80% to 2080. While various climate change projections may have considerable uncertainty, depending on the combination of how much higher carbon dioxide atmospheric concentrations get (uncertain because possible future emission trajectories are all over the place) and of feedback loops (on which key pieces of the science remain untested), two things are very clear: (1) sea levels will rise, and (2) they will rise more in some places than others. In Europe, it is forecast that the North Sea (where 15% of total world cargo is handled), the Western part of the Baltic Sea, and parts of the British and French Atlantic coasts will see double the sea level rise of most of the rest Europe’s coastline. In the Black Sea and the Mediterranean, impacts from extreme high sea level are expected to be significantly milder, but also to occur more frequently. One analysis projects that once-in-a-century “extreme sea levels” will on average occur approximately every 11 years by 2050, and every 3 and 1 year by 2100 under more extreme warming scenarios. The analysis adds that “some regions are projected to experience an even higher increase in the frequency of occurrence of extreme events, most notably along the Mediterranean and the Black Sea, where the present day 100-year ESL is projected to occur several times a year.”

One might superficially think that rising water levels would, for seaports, be a matter of indifference, or even a plus. As opposed to airports, where airplanes affected by inundation become useless, ports are home to ships which float on top of the water – no matter how high the water is. Dredging might become less of a concern in some ports, and other ports may become less dependent on high tides for larger cargo ships to enter. But while it is no doubt true that climate change impacts will be more severe for airports than for ports, they will not be absent for port owners and operators. A 2011 case study published by the International Finance Corporation, on a port in Colombia, summarized well the issues, of which the two biggest are the storage and movement of goods, and multimodal connectivity inland from the port. Ships can keep floating as the waters rise, but containers of goods cannot. Spoilage risk can be expected to affect revenues in particular for ports handling grains and other perishables. The fairly small number of transshipment ports may not worry too much about inland connectivity, but the large majority of operators will be need to be concerned about impacts of high waters on infrastructure which they do not control – roads, and sometimes rail lines – in and out of the port to other parts of their region. A review of risks to Long Beach Port, one of the busiest in the world, notes that “in the next few decades, access roads could be covered in water; rail lines, either from heat or from ocean water inundation, would be unusable; electrified infrastructure such as cranes could stop working. The piers themselves, particularly older piers in the center of the sprawling 3,000-acre Long Beach complex, would be swallowed by sea and flood water, leaving them inaccessible to trains and trucks”. As the Colombia study also notes in passing, ports in developing and emerging markets may often also have unpaved areas which can be damaged more severely by inundations.

In this context, many ports face both pressure to participate in mitigation/ decarbonization efforts, and pressure to think ahead about adaptation. On mitigation, ome larger ports have had the luxury of trying to get on the front foot in the public debate. Seven ports — Hamburg, Barcelona, Antwerp, Los Angeles, Long Beach, Vancouver and Rotterdam – announced in September 2018 the creation of a “World Ports Climate Action Program,” aimed at working together to find ways to reduce CO2 emissions from maritime transport. Their program has five action areas:

1. Increase efficiency of supply chains using digital tools.
2. Advance policy approaches aimed at reducing emissions within larger geographical areas.
3. Accelerate development of in-port renewable power-to-ship solutions.
4. Accelerate the development of commercially viable sustainable low-carbon fuels for maritime transport and infrastructure for electrification of ship propulsion systems.
5. Accelerate efforts to fully decarbonize cargo-handling facilities in ports.

The Port of Oslo last month announced a 17-point climate-action plan, with the goal of becoming the world’s first zero-emissions port. The port produces 55,000 metric tons of greenhouse-gas emissions a year. By 2030, the port aims to make an 85% reduction in its emissions of carbon dioxide, sulphur oxide, nitrogen oxide, and particulate matter. The plan includes refitting ferry boats, implementing a low-carbon contracting process, and installing shore power, which would allow boats to cut their engines and plug into the grid when docked. Shore power can also power equipment like cranes, which normally run on diesel. Oslo incentivizes replacement of diesel with lower port fees and electricity costs to reward compliant ships, and by revising contracting processes to command terminal builders and shipping companies to obey low-emission rules. Rotterdam, which is Europe’s biggest port, is using zero-emission port equipment, while two months ago the Port of Los Angeles unveiled two new battery-electric top loaders.

Oslo’s plan is also of specific interest in that Oslo is a major port for ferries running across the Baltic straights; these ferries are estimated to be responsible for half the port’s emissions, a function of their frequency. Oslo has awarded a contract to Norled to electrify existing passenger ships; Norled delivered the first electric refit in September, and the ship now has the equivalent of 20 Tesla batteries on board. In a further sign of growing interest toward electrification among the industry, last month Washington State Ferries, which runs the second-largest ferry system in the world, announced it is switching from diesel to batteries. Washington State Ferries carry 25 million people a year across Puget Sound, and its annual fuel consumption is on par with that of a midsize airline, making it the state’s biggest diesel polluter. The ferry operator’s electrification program will start with the three most polluting vessels, which consume 5 million gallons of fuel a year between them; switching the three ships to fully electric operations would cut emissions by an estimated 48,000 metric tons of CO2 a year, the equivalent of taking 10,000 cars off the road. This will also require a major quayside electrification effort. Canada’s British Columbia Ferry Services, another major operator, moved to LNG some time ago and is now eyeing electrification of its fleet. This August also saw the launch of the world’s largest all-electric ferry to date, a 200-passenger, 30-car carrying vessel in Denmark, while in July the U.K. government announced that all new ships would have to be equipped with zero-emission technology.

On adaptation, almost all ports will need to take some sort of action to deal with rising waters, and more frequent extreme weather events bringing flooding. Key areas will be in protecting goods being stored and moved within ports, and inland transport connections. So far, the approach being taken by most ports is the obvious one – trying to keep water out of where it’s not wanted, and European ports are in the forefront. Rotterdam, Amsterdam and London are known to be protected against a 1 in 1000-year event, or at least what has been thought of as 1 in 1000-year events. Rotterdam’s measures are of the highest level globally, consisting of two of the largest storm surge barriers in the world. London’s flood barrier is also among the biggest in the world. These kinds of defenses do not come cheap. According to a recent study by consultancy Asia Research and Engagement (ARE), upgrading some of the 50 largest ports in the Asia-Pacific region to help cope with the effects of climate chance could cost up to $49 billion.

Future port adaptation measures are likely to be far more extensive than those implemented to date, and to require more varied technical approaches. Chances are pretty good, as estimates of how much and how soon sea levels will rise keep getting ratcheted up, that current forecast numbers for seawall-type protections will escalate quickly – as in the example of San Francisco’s barrier, whose projected cost jumped in a few years from $50m to over $500m. Chances are also pretty good that other complementary solutions will be needed, along the lines of major drainage improvements and ways to elevate storage facilities. Unless some radical positive change takes place, rising sea levels are likely to inexorably make seawalls regularly obsolete unless they too keep getting (expensively) raised, and solutions that focus more on the parts of ports that have to keep dry make be most cost-effective. Finally, chances are pretty good that new kinds of private-public partnerships for adaptation will be needed. Inland connecting infrastructure is more often owned by local governments that port operations are, and those governments struggle more than port operators to find revenues with which to fund raising and hardening that connecting infrastructure. Ports may find they need to help governments put in place the improvements to connecting infrastructure, without which ports will find their revenue streams drying up – all puns intended.

Airports, Ports, and Climate Change (part I)

Airports, Ports, and Climate Change (part 1)
December 2019

Last month, Denmark announced that Kangerlussuaq Airport — Greenland’s main airport — is set to end civilian flights within five years due to the melting of permafrost cracking its runway. Infrastructure investors take note – this is the first airport worldwide to close due to climate change, but unlikely to be the last. A new greenfield facility will have to be built to accommodate future flights.

A year earlier, Osaka’s Kansai International Airport was largely closed for 17 days, when waves and winds from Typhoon Jebi breached a seawall. In June 2017, American Airlines cancelled 40 flights out of Phoenix, Arizona, as extreme heat made it too difficult for smaller jets to takeoff from the airport.

Welcome to the future of airports.

Climate change is arriving, faster and worse than most projections estimated. For airport operators and investors, this will entail more of the type of consequences already being seen in Greenland, Japan, and Arizona. The current Infrastructure Ideas issue will outline some of these consequences, while the subsequent issue will examine the future of ports in a time of climate adaptation.

Emissions Mitigation. The world’s airlines are expected to fly over 4.5 billion passengers in 2019 (yes, almost a flight for every person on the planet), up by a billion since 2015. This high growth is driving very large capital investment plans for airports, as well as rising emissions. The aviation industry is estimated to be responsible for more than 850 million tons of CO2 emissions annually, about 3% of all global emissions. Emissions from jets are thought to have more harmful effects than many other sources of emissions, as they get released higher up in the atmosphere. Given air traffic projections, emissions from aviation are projected to triple by 2050. This has led in the past few years to increasing concerns, in the context of increasingly dire warnings from the scientific community about the pace and severity of climate change. Already in 2016 the International Civil Aviation Organization, ICAO, agreed to cap carbon emissions from international flights, starting in 2021 – an agreement which may prove difficult to implement if passenger growth continues as projected. Some airlines are also trying to get on the front foot: United Airlines announced a goal to cut its greenhouse gas emissions 50% by 2050. How this will be done, and whether it will be enough to offset the onset of major regulatory limits, remains to be seen. As start-up technology companies explore the launch of “air taxi” services, domestic flight emissions may also see accelerated growth. Industry players should expect that there is likely to be increased conflict between political emission reduction objectives on the one hand and unabated passenger growth on the other. Therefore investors in the sector may do well to factor the risk of political action either taxing flights and/or limiting flights, and therefore reducing the overall needs for capital investment in airport expansions. Arguments can also be seen already that controlling the expansion of airports themselves is an important tool to curbing airline emissions (see Curbed, Want to Get People to Fly Less? Stop Funding Airport Expansions).

Airports themselves emit a tiny fraction of the GHGs that airlines do – at least directly. Their own operations are far less likely to face political pressure of the type that airlines will. Nonetheless a climate neutral accreditation exists and has enrolled many facilities, whose efforts focus on meeting energy needs through renewables and improved efficiency, on the use of hybrid or electric vehicles, and on public/group transit facilitation for employees. Potential emission reductions of this type may be largest in airports located in lower-income countries, which often see a combination of less-modern/ less-efficient operational equipment and older less-fuel efficient aircraft. Jomo Kenyatta International Airport in Nairobi, for example, has achieved major GHG reductions by purchasing power units for parked aircraft which run on electricity, rather than diesel as the older units had. This is good — yet the indirect emissions related to airports are significant, and may prove to be more of a political target in the future. Indirect emissions would be mainly two elements: how many flights airport capacity allows, and transport emissions from people getting to and parking at an airport. As noted above, activism is beginning to target the issue of airport capacity expansions as a means of curbing airline emissions. It is likely that in the near future, the efficiency of passengers reaching an airport starts attracting attention, with arguments for parking expansions to be replaced by public transit, for example. At one level further removed, one can also anticipate growing pressure for investment in passenger rail services, coupled with increased taxation of short-haul flights, to attempt to shift traffic from air to rail for short-distance travel (as most fuel is burned on take-off and landing, making short flights more carbon-intensive flights). The bigger climate change worry for airports, however, is likely to be adaptation.

Adaptation needs: water. Water has gone from a friend of airports to a foe. In many cities, airports were built near seacoasts to minimize disturbances to humans or avoid natural obstacles like mountains. Now that water is rising, and airports are some of the most vulnerable infrastructure to sea level rise. In the USA, 13 of the country’s 47 largest airports have at least one runway that is vulnerable to storm surge, including the giant facilities in New York, Miami and San Francisco. Globally fifteen of the 50 busiest airports sit less than 30 feet above sea level, while the OECD identified 64 airports as likely to be affected by the predicted rise in sea levels. Complete disappearance of facilities may be remote (for the extreme risk, see our previous Lessons from the Venice Floods), but higher water levels will exacerbate the effects of storms, making airport flooding far more common and damaging. And though damage will be more extensive and long-lasting for coastal airports, inland airports will not be exempt from water-related adaptation issues. More intense rain events, another predicted effect of climate change, will cause more frequent and damaging river flooding, as the US Midwest has been experiencing. Inland airports are also frequently sited near rivers, for the same reasons that their coastal counterparts are frequently sited along the shore, increasing their vulnerability to flooding.

The obvious approach to adaptation for airports is to try to keep the water out. San Francisco is Exhibit A for this approach, having announced plans for a $587 million seawall to protect its airport. When the project was first tabled, in 2012, it was designed for an 11-inch sea level rise, with an estimated cost of $50 million. Seven years later, with climate projections getting worse, the revised plan now calls for planning on a 36-inch rise and has increased the estimated cost by 1,000%. Across the bay, Oakland plans a $46 million project to fortify and raise by 2 feet the 4.5-mile dike which protects it. In Hong Kong, plans for the $18 billion third airport runway were revised to include a 21-foot high seawall. Norway, whose state-run airport operator Avinor has called almost half its airports “quite exposed” to potential sea level rise, has decided to build all future runways at least 23 feet above sea level (For more, see this month’s article in Wired, How Airports are Protecting Themselves Against Rising Seas). Moving the water that does arrive is also critical: airport drainage systems will need significant fortifying to move greater and faster-arriving amounts of water. At some stage, however, airports will face the same dilemma that coastal cities and seaside home-owners increasingly face (see previous column, Capital Punishment): keep investing in barriers to the sea, or move. When city leaders opt to move, as in the case of Jakarta, it will be difficult for its airport to remain viable.

Adaptation needs: Heat. After water, the next biggest issue for airports will be extreme heat. The curbing of takeoffs due to 120-degree heat in Phoenix garnered many headlines (see the New York Times, Too Hot to Fly? Climate Change May Take a Toll on Air Travel). Hotter air means thinner air, impacting the ability of planes with smaller engines to generate enough lift to get airborne. Extreme heat requires longer distances to take off and/or reducing aircraft weight (with fewer passengers or cargo). Airports in locations where high temperatures already occur frequently, and with short runways that limit planes’ ability pick up speed, will be especially affected. One of Air India’s general managers, Captain Rajeev Bajpai, notes that extreme heat is already an aviation problem in countries like Kuwait, where planes can be grounded on summer days because their electronics automatically shut down. Hotter temperatures may cause tarmac to melt, or as in the case of Kangerlussuaq, may cause the ground under the tarmac to melt. While the impact of these issues may not rise to that caused by rising seas, takeoff and weight restrictions, and more frequent tarmac repairs, all add up to substantial costs for airport operators – as well as disruptions to passenger and cargo transport. Higher cooling costs will be another obvious effect.

There will be other climate adaptation needs. ICAO notes that high wind, heavy precipitation and even lightning strike events that threaten facilities, and aircraft are growing more frequent. But dealing with water and heat will be the big two for airports.

Financing Implications. Adapting to climate change will require greater capital spending from airports, accompanied by greater uncertainty and low likelihood of associated revenue gains. The airport industry is already today a major infrastructure investor. According to Reuters, $260 billion in airport infrastructure projects are under construction worldwide. Those are big numbers, and climate adaptation needs will add more, as we can see from the costs of just the San Francisco and Hong Kong plans. The handful of 30-million passenger per year airports will most easily finance and absorb these capital costs. Issues are likely, however, to arise for the larger number of mid-size airports around the world. The problem they will face is that the capital costs for keeping water out are related more to geography than the volume of an airport’s operations, and mid-size airports may face similar adaptation-related capital costs to those of larger airports, but without the same revenue base over which to amortize them. It will be an expensive asymmetry for many airports. The second financial implication of adaptation, greater uncertainty, is also illustrated by the case of San Francisco – where in seven years the projected capital needed to hold off rising waters rose by a factor of ten as projected sea rise levels kept changing. “It’s going to be an evolving battle,” as says Patti Clark, a former airport manager who now teaches at Embry-Riddle College of Aeronautics. Capital expenditures needed for continued operations in 2050 may well look very different in 2030 than it does in 2020. These kind of investments also have the disadvantage they will not in themselves produce incremental revenues – they will just try to keep the ship afloat, so to speak.

Harvey Houston Airport flooding

Houston Airport after Hurricane Harvey

$3 billion for Mobility in the Middle East

In June 2018, Infrastructure Ideas surveyed the mobility revolution in transport. It was clear that capital was soon going to be flowing here in amounts rivaling traditional transport sectors such as ports, airports and railways. And while 95% of the capital to date in these sectors was being deployed in OECD countries, we predicted that soon, as in most areas of infrastructure, the majority of new capital would be seeking out higher growth opportunities in Emerging Markets. It didn’t take long to check that prediction.

Last week, Uber announced that it would acquire the Middle East’s largest ride-sharing service, Careem, for over $3 billion.

This will be one of the largest private infrastructure transactions to date in the Middle East. And for a company that is barely six years old. Careem, based in Dubai and operating across fifteen countries in the Middle East and surrounding areas, was founded in 2012. Ride-sharing was not even its initial business, as it was founded as a corporate car service, before following consumer demand into ride-sharing and delivery services similar to Uber Eats. Large markets served by Careem include Pakistan and Turkey.

For Uber, this is not only big money, but a departure from how it has addressed its Emerging Market competition to date. In China, in Indonesia, and in Russia, Uber has previously chosen to sell its in-country operations to local rivals, preferring to raise cash to cover losses, rather than maintaining loss-making operations in more countries. The Careem acquisition signals that as it edges closer to breaking even and to profitability, Uber may now be more willing to pay for control of Emerging Market rivals. Uber is initially signaling that Uber and Careem services will run in parallel in the dozen or so countries where the two both operate. CEO Mudassir Sheikha will continue to run Careem, according to Uber’s announcement. China’s Didi Chuxing, the biggest ride-sharing company in China, has been one of Careem’s largest investors. Careem’s previous fund-raisings had generated some $800 million, and analysts place Uber’s acquisition price at about a 50% premium to previous valuations.

The announcement follows by days the IPO by Lyft, which valued Lyft at $22 billion. Uber’s preparations for an IPO have been widely covered, with an expected valuation of around $120 billion.

This is another sign of how technology, after revolutionizing the energy business, is having a larger and larger effect on other parts of the infrastructure world. As we’ve previously written, for investors, staying locked into traditional segments and failing to understanding the impacts of technology will carry a high cost in missed opportunities.

EV Buses: the next big thing (maybe)

EV Buses: the next big thing (maybe)

Over the last two years, electric buses emerged as “the next big thing” in infrastructure for cities around the world. As noted by Infrastructure Ideas last year (“Notes from the Revolution: implications for infrastructure investors”), the market for electric buses has been developing even faster than the much-publicized market for electric cars. McKinsey calls this “the most successful electric vehicle segment,” with a 5-year sales growth rate of over 100%. Bloomberg New Energy Finance forecast, due to EV buses’ advantages in operating and maintenance costs and concerns over urban air quality in many mega-cities, that electric buses will capture as much as 84% of the new bus sales market as early as 2030. The European Commission has called for 75% of all buses to be electric by 2030.

For those readers who don’t ride buses, especially those in North America where e-buses are barely beginning to be introduced, this might look like a quaint but largely irrelevant sideshow. Yet this is already be a $50 billion dollar a year infrastructure market, and global investments in electric buses will likely be well over $1 trillion through the end of 2030. Not a market to sneeze at.

Yet as 2019 gets going, the prospects for EV have gotten cloudier. A lot of advantages and enthusiasm remains, but the experience of early adopting cities has also raised concerns to be addressed. Let’s see what is happening.

Over 100,000 electric buses were sold in 2018, costing between $300,000-$1 million each. Of those, over 85% were sold in China, which has a huge lead over the rest of the world in adoption and production to date. So the experience in China is by the far the deepest. But let’s begin with the more limited European and North American experience.

The experience to date with EV buses in the USA and Europe was summed up recently by City Lab’s Alon Levy in his column “The Verdict’s Still out on Electric Buses.” EV buses have been shown to struggle when it’s too hot, too cold, or too hilly. Much of the issue has related to charging range, with for example Albuquerque finding that their new fleet – purchased from Chinese market-leader BYD – is showing a range of about 2/3 the contractually indicated range of 275 miles per charge. Most of the buses there ran on the city’s Central Avenue route, which features a large elevation change – consistent with the experience of Hong Kong, which also found that EV buses struggled on the hills there. Albuquerque has reportedly returned their buses to BYD. Phoenix, also in the Southwest, reported issues when temperatures hit Summer peaks over 100 Fahrenheit. Meanwhile cities in Minnesota and Massachusetts have found that EV bus charging range drops off significantly when temperatures drop to freezing or below. In Moscow, where Mayor Sergey Sobyanin has made a big push for electric buses, early experience indicates that roughly double the number of buses anticipated have been needed on routes run with EV buses, due to higher than planned time required to charge the buses.

If performance is problematic, and translates into higher – as opposed to lower – operating costs, this burgeoning new market may be in trouble. After all, like with other electric vehicles, EV buses still cost more to purchase than traditional diesel buses – up to 30% more. Notes of caution, as a result, are becoming more common across transit agencies.

China, as noted, now has much more experience with EV buses than North America – in fact, more experience than the rest of the world combined. How has this gone? The answer: much better, but to some extent the verdict is also still out.

Chinese cities such as Shanghai and Shenzhen have become world leaders in electric mass transit. A recent profile of the Shenzhen experience – where all 16,000 buses are now EVs — in The Guardian (“Shenzhen’s Silent Revolution: the world’s first all-electric bus fleet”) was extremely positive. Service levels have been satisfactory, annual CO2 emissions have been cut by nearly a million tons, air pollutants cut as well, and fuel expenses slashed. Because of the volume of the market, EV buses cost less than half (about $300,000) than they do in the US. Which still implies that Shenzhen has bought about $5 billion worth of buses. In the next two years, another 30 Chinese cities plan to achieve 100% electrified public transit, including Guangzhou and Nanjing. Yet a big piece of the success has been on the back of public subsidies. These subsidies make all sorts of sense in terms of public interest in China, with air pollution having been a major health and policy concern in many Chinese cities for years. But they are large – reportedly at around 50% of the capital cost of a bus, plus some operating cost support. These subsidies are due to lapse after 2020, so it will be interesting to see how the domestic market evolves subsequently. Investment in charging stations has also been substantial, with Shenzhen building around 40,000 charging points. And, as elsewhere, hilly terrain (Hong Kong) and cold (northern China) have negatively affected EV bus performance.

What to make of all this? EV buses, like most other disruptive technologies, will take some time to shake out issues. And the issues are real. Yet, it’s easy to forget that the early generations of wind turbines and solar farms failed to meet performance expectations, and experienced various teething problems. These problems haven’t prevented wind and solar from accounting for the vast majority of new electric capacity additions. And both charging technology and bus batteries are still evolving rapidly, with costs continuing to fall and capabilities improving. Perhaps some jurisdictions will decide that unusual conditions – cold, heat, or terrain – should make them late adopters, or hold-outs on EV buses altogether. And many cities will exercise some more caution in planning and procuring their next generation of public transit capacity, which is a good thing. In many Emerging Market cities, with substantial numbers of informal buses plying routes, transitions will take a lot of effort to manage. And it will take a lot of money, which cities will need to finance.

But in the end, EV buses are a superior technology, with rapidly declining costs, and that will be the determinant of the market. Cities will only face more demand for better air quality. Charging costs are far lower than diesel fuel costs. Technology advances and larger manufacturing scale will turn the current upfront cost disadvantage of EV buses into a large cost advantage over the coming decade. “Range anxiety” will find solutions, in improvements of both battery technology and convenience of charging. As for the reliance on subsidies, this is of course an important issue. Yet again the parallel with solar power generation is instructive: subsidies in early years raised production volumes, and accelerated the technology-driven decline in costs. In 2012/2013, for instance, an observer of solar power would have seen something similar to the EV bus market: an apparent reliance on subsidies driving volume, especially in China, and a 20-30% cost disadvantage over alternative technologies. Five years of cost declines later, the cost disadvantage has become a large cost advantage, and subsidies irrelevant. Hard to find reasons that the same story won’t play out with EV buses.

For cities, and for investors, a note of caution on EV buses is fine. Ignoring the coming of a $1 trillion market would be an expensive mistake. Not all cities will spend $5 billion on bus fleets like Shenzhen, but there an awful lot of big cities in the world. This will be a capital-intensive transition. Stay informed and up to date. The diesel bus is heading in the direction of the coal-fired power plant.