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Financing Heavy Duty Vehicles: batteries as an asset and longer-term thinking

14 May 2024/Categories: Industry News, Freight Forwarding, Logistics & Supply Chain, Net-Zero


Financing Heavy Duty Vehicles: batteries as an asset and longer-term thinking

By Ian Dennis, Business Development Director at Zenobē

Heavy Duty Vehicles account for over 6% of total EU greenhouse gas (GHG) emissions.[1] Whilst in the UK, Heavy Good Vehicles alone are responsible for 20% of all transport emissions.[2] That’s roughly equivalent to all domestic and international air travel, buses and domestic shipping combined.

As a result, legislation is tightening. The UK Government announced at COP26 in November 2021, it would end the sale of all new non-zero emission HGVs from 2040. We’re also seeing some of the largest organisations in the UK being compelled to disclose their emissions from Scope 1 and 2 (direct) to Scope 3 (indirect).

How we generate power is changing rapidly too. December 2023 was the 15th month in a row where zero-carbon generation produced more than fossil fuel generation.[3] 

Fleet electrification is no longer an aspiration for HDV operators: it’s a real target. But the question remains, how to make the business case for electric work?

Vehicle funding to date

The heavy-duty vehicle (HDV) sector is a mature market, with diesel vehicle values and lifecycles well established and operating cycles and residual values known variables. Typically, HDV’s are funded through hire purchase agreements, finance leases, operating leases, and contract hire solutions which may also include maintenance.

These funding methods are well known and revolve around minimising the cashflow impact of acquiring new assets to a business.  Hire purchase provides ownership at the end of the facility, potentially allowing the operator to take the benefit – and risk - of the future residual value. The other forms of finance involve leasing products where the lessor typically retains the residual value. 

For diesel vehicles, prior experience and known values allow lessors to form a position on future residual values, with larger residual values or guaranteed buybacks from the manufacturer providing deferment of capital and a reduction in costs to the lessee – the operator.

Battery electric vehicles (BEV) have now entered the market, typically on back to base depot-operations as this suits the charging requirements of the vehicles available today. Whilst excellent for decarbonisation, a lack of established residual value for these vehicles presents a problem for funding.

Rethinking funding and batteries as an asset

With no track record or previous history to utilise, manufacturers and funders are currently unable to determine future residual values and therefore can only provide facilities based on scrap value. For an operator, this means that already expensive BEV’s are more difficult to fund, and the cost could be prohibitive to their ambitions.

However, there are solutions available to enable operators to lease vehicles and enjoy some of the benefits of residual values.  The battery market is well known to certain specialist lessors - such as Zenobē - who can define and implement residual values into a financing solution. 

Unlike diesel vehicles, which are considered as one unit, BEVs can be split into two main components - the chassis and the battery. Allowing a specialist lessor to take a residual value position on the battery can present significant cashflow benefits.

But the benefits are more than financial. As we know, batteries will eventually degrade beyond required performance levels and need replacing. Building replacement and performance guarantees into the financing allows the operator to fully utilise the vehicle for its entire lifetime with the risks managed by the lessor.

A longer lifetime for BEVs

There is also a strong argument that BEVs should be funded over longer periods.  The current 5 or 6-year funding model places pressure on operator’s cashflow and has largely been driven by available funding periods. With lessors managing batteries and offering guarantees, there is no reason why longer lifecycles could not be enjoyed by operators with vehicles being kept on fleets for 10 to 12 years.

Some operators will argue that their fleet refresh policy is far shorter, yet this has been driven by diesel models with residual values and the ability to trade vehicles on - currently unproven in the BEV sector. 

Battery technology advancements might deliver benefits such as improved energy density or increased payload and range. Batteries can be manufactured in different formats to meet vehicle design constraints. Whilst there will be software updates, the suspension, steering and braking systems (including regenerative braking) will not change substantially.

If operators integrate battery guarantees into their lease, where would be the driver to change vehicle after 3 or 5 years? A BEV can have a much longer lifetime where it can run and deliver value for much longer. A longer life for the vehicle will be beneficial both in terms of the total cost of ownership of the vehicle and in prolonging the usable life of these materials.

Building the business case

A holistic, total lifetime view is essential when considering the business case for switching to electric. Decoupling the battery from chassis allows for specialist funders to offer solutions which de-risk the battery, the most expensive component on the vehicle and the one which carries the greatest risk for operators. Building in battery replacement creates space for technological advancements and provides the operator with the certainty that the vehicle will meet operational requirements.

 

Lessors such as Zenobē can remove risk and reduce costs for operators as they bring BEVs into their fleets. It's not a one size fits all, but rather a modular approach, incorporating funding and charging solutions to maximise vehicle uptime.

 

[1] Zemo Partnership, ‘EC brings forward new CO2 emissions targets for new heavy-duty vehicles (HDVs) from 2030’, 14th February 2023: https://www.zemo.org.uk/news-events/news,ec-brings-forward-new-co2-emissions-targets-for-new-heavyduty-vehicles-hdvs_4498.htm

[2]  Green Finance Institute, ‘COPa8: Urgent action needed to electrify UK’s most polluting vehicles, says new report from industry led by the Green Finance Institute’, 6th December 2023: https://www.greenfinanceinstitute.com/news-and-insights/cop28-urgent-action-needed-to-electrify-uks-most-polluting-vehicles-says-new-report-from-industry-led-by-the-green-finance-institute/

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