Q&A - Rock Road: The compelling case for zero emissions public transport

Decarbonising transport, both public and private, is a prominent aspect of UK's net zero ambitions. While the uptake of consumer electric vehicles (EVs) has been staggered as a result of high purchase prices and inadequate charging infrastructure, the use of this technology to decarbonise public transportation is proving to be a lot more successful.

A small fleet of EV buses has been roaming the streets of London for well over a decade, but perceived technology risk and high up-front costs have hindered wide-scale adoption.

Rail rolling stock specialist Rock Rail not only proposes a solution to this roadblock but is also confident that its model can be replicated in other major UK cities and beyond. The company, in partnership with Aviva, has embarked on the zero emissions bus initiative through the newly established offshoot Rock Road.

inspiratia sat down with Rock Road director David Rose (pictured right) to discuss the company's first commercial rollout and the future of zero-emissions transport.

What prompted Rock Rail to pursue the Rock Road initiative?

Rock Rail has a very good track record funding new rolling stock. We are and will continue to be active in the UK rolling stock market in particular. We did our first deal in 2016.

We currently have five UK rolling stock deals under our belt, collectively worth just over £3 billion. It remains an important sector for the company.

The company rightly predicted that there was going to be a bit of a lull in new rolling stock procurement in the UK after 2019. We foresaw a slowdown in the procurement of new rolling stock in the UK and we could see the need to diversify.

This trend was further intensified by the Covid-19 pandemic, so the shift was inevitable, some would say.

We needed to diversify, and we did that in two ways – we diversified our rail operations by going to other countries. Rock Rail targeted deals for new rolling stock in Germany, and we wanted to look at different modes of passenger transport as that's a sector we understood and we had a strong track record.

Bus fleet franchising is also becoming more common. It has been used in London since the 1990s, and other city regions across England are following suit, starting with Greater Manchester.  Other city regions, including Liverpool and West Yorkshire, have indicated that they are also likely to adopt franchising.

Whilst our leasing model works equally well with or without franchising, we believe that there is a particularly strong rationale for a third-party owner of the buses in regions where franchising is present.

As a project developer, Rock needs to listen closely to its funding partners. Many of the institutional investors that we work with have emphasised the importance of strong ESG credentials for projects that they support. Funding the transition from diesel to zero emission buses is a very good fit in this respect and Rock Rail as a company wants to help decarbonise the public transportation sector.

Buses are pivotal to net-zero targets. Get people into a bus, it cars off the road so decarbonising the sector has a double benefit.

We see a strong economic case for battery electric buses. When you look at the whole life cost of the asset, they are cheaper to fuel and there is emerging evidence that they are also cheaper to maintain.

Whilst they are significantly more expensive to buy upfront, the savings over time mean that they can still be cheaper on a whole life basis.

How much more expensive?

It varies, but let's say a diesel bus, on average, costs £250,000 and the electric counterpart is currently around £450,000. So almost twice as expensive.

What about asset depreciation?

Rock factors in that you need to consider the bus and the battery separately when it comes to depreciation. Batteries degrade over time, and Rock expects that over the lifespan of the bus, the battery will have to be replaced once.

Does calling them zero-emission buses as opposed to EV buses imply that Rock Road may consider other carbon-free technologies? Hydrogen buses, perhaps?

We've certainly not ruled that out. We would look at all viable clean technologies, including hydrogen. Having said that, we haven't bought any hydrogen buses just yet. We know that there are good UK manufacturers who can make these buses.

We are absolutely convinced that the technology works, and we are hopeful that both the cost of the buses and the cost of the hydrogen to fuel them will come down in the future. If that were to happen, then we would be interested in funding them. We are monitoring the market carefully.

How did the partnership with Aviva come about?

We did our first zero-emission bus deal in November 2022 in London in partnership with the Mayor of London's Energy Efficiency Fund. It was a relatively small deal compared to Rock's other financings, about £15 million pounds.

This project helped us to prove the business case for a much larger rollout. Immediately after, we started the search for a partner to carry out this initiative at scale and that's where Aviva came into the picture and together, we established Rock Road.

We already had a relationship with Aviva Investors, they invested in all our UK rail deals. So, Aviva Investors introduced us to another part of Aviva called Aviva Capital Partners, and we found that they were a really good partner for what we are trying to achieve.

Is this an exclusive partnership, or will Rock Rail consider partnering with other investors in the future?

We are committed to delivering zero-emission buses in the UK through this joint venture company with Aviva. We've also partnered with UKIB for our first commercial rollout, and we are now focused on funding up to 250 buses through that partnership.

As we've done with rail rolling stock, we are also interested in supporting the rollout of zero-emission buses outside the UK. We believe the model we've built is scalable and we will consider partnership opportunities with other investors outside of the UK.

The electric bus sector is relatively new, and most countries are looking at integrating them into their public transport infrastructure so, we will go where we see opportunity.

What role do you think lenders like UKIB or other multilaterals play in this sector? Is their involvement necessary, or can the job be done by commercial lenders?

UKIB agreed to work with us on our first commercial rollout, they have committed funding to support the first £100m of buses that we purchase.

In this instance, I think they were very much needed. This sector is still fairly new and the presence of UKIB has helped us to 'crowd in' private capital from Aviva and HSBC to support our platform. The technology is proven, but we still can't be 100% sure about the rate of degradation of the assets or their lifespan, and this incorporates a certain degree of risk.

We can't be a 100% certain, right now, what the useful economic life of these buses will be. London currently doesn't allow buses older than 14 years on its TfL franchises but that's not the case everywhere else in the UK. These buses don't suddenly become obsolete after 14 years but how much more life they will have left in them is uncertain.

The use of electric buses for public transport, at least in the UK, only started relatively recently. Once a significant number of battery electric buses have been on the road for longer than 14 years, this will provide additional comfort for commercial lenders to lend on longer tenors.

In line with its investment principles, UKIB's investment in Rock Road is structured to deliver a positive financial return so it is very different to some of the policy interventions by the UK government in the zero-emission bus market (e.g. the ZEBRA scheme and other capital subsidies).

By the time we have funded our first 250 buses and look to expand our fleet, I am sure that UKIB will review the investment to see whether it still meets their investment principles. But for this first transaction, we needed them to help us crowd in other private capital.

What sets Rock Road apart from competitors such as Zenobe?

Rock really sees itself as a transport company. We focus on meeting the needs of passengers and creating mobility services that work for both the public and the government. Rock Road is all about the zero emission buses and we are agnostic between batteries or other zero emission technology.

I can't speak for Zenobe, but the way I see it, they have different parts of their business, and their focus seems geared towards energy storage. One might assume that for Zenobe, batteries come first, and the bus element is an added benefit. For us, it's the other way around.

How do you see the sector evolving in the near future?

There's lots of work to do to transition from diesel to fully zero-emission. This not only includes bus fleets, but also the infrastructure that supports these assets.

It's a really big change that requires quite a lot of investment over the coming years, which Rock Road can support bus operators with.

Another major evolution in the market is bus franchising in areas where it is pursued by the relevant transport authority.  Where franchising is the preferred solution for an area, we think that a lessor such as Rock Road can add a great deal of value to that project by taking on risks such as the battery replacement and residual value of the bus.  We have a dedicated asset management team who will manage these risks across our whole fleet of zero emission buses.

Does the company plan to expand the zero-emission investments to include rail?

On the rail side, the company focuses on buying new trains which are greener than those that they replace.  An example of this is bi-mode trains, which use battery or diesel power where overhead electric wires are unviable and switch to taking electricity from overhead wires when possible.

It's extremely expensive to electrify train lines, especially in complex areas with tunnels or listed buildings, which makes full electrification a challenge. So, the hybrid trains could work really well alongside partial electrification of a line.

Final thoughts on the future of electrification?

There is a strong push for electrification or other zero-emission technology on all sides and this is evident in the mission states for all major bus operators. When an old diesel bus is retired, it is usually replaced with a zero-emission one.

Electric buses, alongside other zero-emission technologies, will be the future of public road transport across the world, there is very little doubt about that. What we need to work out is how quickly we can achieve this transition.