THE ELECTRIFICATION OF PUBLIC TRANSPORTS
Episode 1: Three turbulent effects that will dominate in the rapid electrification of our public transport
For some twenty years, ecological considerations in political decisions on both a national and local scale have led numerous cities across the world to put ‘clean’ mobility at the top of their agendas. This means developing vehicles that emit low amounts of local pollutants (NOx, fine particles, etc.) and atmospheric pollutants (greenhouse gases).
We talk about a ‘clean’ vehicles when they produce little or no polluting emissions, but in practice no vehicle is truly clean. They all emit local pollutants and greenhouse gases during their production, during their use and at the end of their useful lives.
This article deals principally with ‘zero direct emission’ transport (called hereafter ‘zero emission’ or ‘ZE’ for the sake of simplicity) which emits no direct pollution (exhaust emissions), in contrast to decarbonised transport which emits little or no CO2 and depends on the energy mix of each country.
European regulations requiring low- or zero-emission public transport have caused the number of calls to tender issued by cities for these types of transport to grow. In France, the LTECV law (for Loi de Transition Energétique pour la Croissance Verte – Energy transition for green growth law) has scheduled investments in transport infrastructure.
At present, electric battery buses are the most advanced solutions from a technical and industrial perspective for zero-emission transport. Demand for electric battery buses has therefore exploded in Europe, and the capacity of operators to roll out these vehicles in cities, whilst finding the right economic balance, has become a significant strategic challenge.
Upstream, an electric battery manufacturing sector is being established in Europe (i) to meet this demand, (ii) secure supply (currently mostly sourced from China), (iii) create jobs, and (iv) answer an environmental necessity, among other objectives. Indeed, when analysing the entire life cycles, taking into account manufacturing and transportation, if the battery is made in China, the environmental impact assessment of the electric vehicle can be disappointing. However, rolling out an electric fleet of vehicles is complex: it requires a larger initial investment than a classic fleet, both for the acquisition of the fleet itself and for the creation of the necessary infrastructure (adaptation and modernisation of bus stations and depots, recharging power, etc.). It also implies greater operating constraints (recharging time, management of battery performance, etc.). The implementation of these electric public transport fleets therefore requires complex financial and strategic choices from manufacturers, investors and operators.
The in-depth work that we have undertaken and summarised in this article makes it possible to understand the developments taking place in the electric battery sector, but also to identify the main value creation levers based on various scenarios at the level of the battery, the bus or the fleet. It also highlights other trends in the future of mobility, whether from a strategic (new business models) or technological (hydrogen battery) standpoint.
A. Electric batteries are currently 90% produced in Asia (60% in China alone). In light of the significant market growth, the wish to create a certain level of independence and the will to reduce the impact on the environment, a European electric battery sector is emerging, based on several consortia.
B. Production costs per kWh will also reduce thanks to, on the one hand, technological innovations in progress and, on the other hand, mproved recycling techniques and increased battery capacities.
C. Our analysis of the value chain and cost structure of a battery has enabled us to identify the production steps that provide the greatest added value. A quantitative analysis has made it possible to assess value creation levers: smart charging and recycling have proved to be two key points to maximise the economic value of a battery over its entire life cycle.
D. Making strategic choices at certain key steps in the life cycle of the battery are critical to exploit its full potential for value creation. In particular, considering how to reuse the battery at the end of its first life makes it possible to optimise itseconomic potential.
E. An intermediary financial model serving as the link between the producer model and the operator model is under development: Battery as a Service (BaaS). This model gives the historical operator the opportunity to use a battery that is neither sold nor purely rented to him, but made available via a flexible, bespoke contract adapted to his needs at any moment.
F. Moreover, other forms of low- or zero- emission public transport are emerging alongside electric battery vehicles, such as hydrogen fuel cell electric buses (zero emission) or biomethane buses (low emission). There are so many decisions to make for investors, operators and other actors in the sector – decisions that need bespoke strategic support.
New regulations and more accessible prices have given rise to the ambitions of numerous cities to reduce CO2 emissions by putting in place low- or zero-emission public transport fleets. Moreover, the Paris Agreement and certain laws related to energy transition in Europe have established precise objectives for 2025 and 2030, in particular the LTECV (Loi de Transition Energétique pour la Croissance Verte – Energy transition for green growth law) from August 2015 in France. In addition, for some ten years, the improvement in electric battery performance, the diversification of the offer (autonomy, capacity, charging time, etc.), the significant rowth of demand and the reduction of prices have all facilitated the rise of electric mobility.
The zero-emission (electric or hydrogen fuel cell battery) or low-emission (biomethane or natural gas) sector has turned out to be even more strategic in this post-quarantine period linked to COVID-19, which has further highlighted the stakes related to energy transition. As stated by the UN, this crisis ‘provides a global impetus to reach sustainable development objectives by 2030’. However, the path between ambition and implementation is riddled with pitfalls. For example, Paris – via the RATP and Ile-de-France Mobilités – was aiming for a 100% clean bus fleet by 2025, with 80% electric buses (i.e. zero emission) and 20% biomethane buses (i.e. low emission), in the city’s ‘2025 bus plan’.
However, economic constraints are such that today the objective is to replace only two thirds of the fleet with electric buses, the last third being comprised of biomethane (‘biogas’) buses1. These economic constraints concern both the financial investment and the economic and operating models. But let’s start by looking into the current stakes of the electric battery market.
1. THE CURRENT ELECTRIC BATTERY MARKET
A. The rise of a sustainable and competitive electric battery sector in Europe
Over the past ten years or so, the lithium-ion battery market has exploded. Today, two major trends are at play (Figure 1):
• the decrease in the price of lithium- ion batteries, which amounted to $209 per kWh in 2017 and should fall below $100 per kWh by 2025;
• the increase in global roduction capacity, estimated at 13% per annum on average between 2018 and 2030.
Today, global production of Li-ion batteries, all uses combined, amounts to a capacity of around 500 GWh. Asia, and China in particular, is the leader in this sector by far: Chinese production alone represented approximately ten times European production. It follows then that seven of the top ten Li-ion battery manufacturers are Chinese – the leader being the giant CATL – representing capacity of approximately 300 GWh2.
The sub-sector relating to Li-ion battery electric vehicles represents 70% of this market, that is, approximately 350 GWh.
Figure 1: Development of production capacity and prices of all-purpose Li-ion batteries between 2005 and 20303 4 5
And 40% of this sub-sector relates in particular to buses and other commercial vehicles, that is, 140 GWh. This production is also dominated by China, particularly the Chinese company CATL (70%6 of the bus battery market), as the electrification of bus fleets in China was pushed by the government much earlier than in Europe: for example, since 2009 the city of Shenzen has benefitted from government subsidies for the development of its electric fleet.
Though production remains mostly Chinese, the USA and Europe should gain market shares, growing from only 10% of global electric battery production in 2020 to 40% in 2030. This rise in production capacity outside Asia will lead to a better balance between supply and demand. It is therefore a contributing factor to the reduction of prices, gains in factory productivity thanks to economies of scale, and the increase in the capacity of production chains. Tesla’s gigafactory in Nevada, for example, will produce 35 GWh annually in 2020 against 20 GWh in 2018. Similarly, the Swedish company Northvolt, starting with a capacity of 16 GWh, plans to double its factory’s production capacity by 2030 and end up reaching 150 GWh in 2050.
With regard to Europe in particular, the local sector is being built where political risk is low, financial incentives are high and administrative processes are easy. Easy access to qualified labour, reliable energy resources and a secure supply of raw materials are all essential. All of these conditions come together in Europe, where the commitment to transitioning to a low-emission system is strong. The presence of highly qualified engineers is also an advantage for the years to come, in the context of rapid technological developments. All of these elements make Europe a high-potential zone for the production of electric batteries. Indeed, significant political and financial means have been mobilised to give rise to European or transnational projects.
Therefore, as shown in Figure 2, even if Asia remains dominant in the electric battery market, an international rebalancing will take place by 2030, particularly at the European level.
Figure 2: Development of production capacity of Li-ion batteries by region
(location based on company HQ)4
Figure 3 presents the current landscape of cell and battery production in Europe. The significant presence of Asian actors is evident, as well as the European large-scale factory construction projects, aiming to structure a sustainable and economically viable industrial sector.
The EU programme European Battery Alliance (EBA250), launched in October 2017, is made up of 17 private companies directly involved throughout the value chain, including BASF, BMW, Eneris, and especially the joint venture ACC (Automotive Cells Company) between PSA (and its German subsidiary Opel) and SAFT (a subsidiary of Total). They are supported by over 120 other companies and partner research organisations, as well as public bodies such as the European Investment Bank. The aim is to develop highly innovative and sustainable technologies for Li-ion batteries (whether liquid electrolyte or semi-conductor) that are safer and greener, exhibiting a longer lifespan and a shorter charging time than those currently on the market. The EBA250 benefits from €5 billion in private financing and €3.2 billion in public inancing, including €1 billion from France and €1.2 billion from Germany.
Figure 3: Cell and battery production plant projects under way in Europe7 8 9 10 11 12
More precisely, ACC, often nicknamed the ‘Airbus of batteries’, will build a pilot plant in the south-west of France, followed by two cell production factories for electric batteries in the Hauts-de- France region and in Germany. Another major project – the construction of a gigafactory – is being undertaken by the French start-up Verkor13 (notably supported by Schneider Electric) and aims to produce Li-ion cells for southern Europe (France, Spain and Italy) from the end of 2023. This project takes its inspiration directly from the Swedish start-up Northvolt, which raised €1 billion from private investors (including Volkswagen, BMW and Goldman Sachs) to finance the creation of a lithium-ion battery production factory in Sweden. Verkor’s project represents an investment of €1.6 billion and the 200-hectare factory will likely be based in France. Similarly, the Norwegian company Freyr launched the construction of a battery cell manufacturing plant in Norway (€4.5 billion), which will have a capacity of 32 GWh from 2023 and will be one of the largest in Europe.
It is worth mentioning that other projects are under development to build a European battery recycling sector, a key step in the electric battery value chain. Supported by Eramet, BASF and Suez, the ReLieVe (Recycling for Li-ion batteries for Electric Vehicles) project – with a smaller budget of €4.7 million – aims to develop an innovative and competitive ‘closed-loop’ recycling process, enabling the recovery of nickel, cobalt, manganese and lithium for new batteries.
B. Better performance thanks to new conception and recycling technologies, which lead to a reduction in production costs
The technical performance criteria of electric batteries such as autonomy or specific capacity (stored energy by unit of mass) should triple by 2030 thanks to new battery technologies, as shown in Figure 4. Incremental innovations in Li-ion batteries will make it possible in the short term to replace the rare metals used in the manufacture of the electrodes, such as cobalt and manganese, which are too expensive and polluting. The 33% reduction in the use of cobalt, partially replaced by nickel, which is much less expensive, will make it possible to offset the 40% ncrease in the price of cobalt forecast between 2020 and 2030. With 60% nickel, 20% manganese and only 20% cobalt, NMC 622 technology will replace NMC 111 batteries (which ontain 33% cobalt) and will represent 30% of the market in 2030. By 2030, new disruptive technologies are expected, with new cathodes and solid electrolytes in particular, reatly increasing the reliability of the battery. Current batteries that use a liquid electrolyte work efficiently at room temperature and over a range between 0°C and 45°C14; a solid electrolyte, however, enables a wider range of use, between -20°C and 100°C15. In addition, Samsung has recently patented a battery in which the cathode and the anode are covered with graphene balls; its recharge time is five times quicker. As for batteries with silicone anodes, they have greater capacity thanks to the replacement of usual graphite anode with an anode in silicone derived from the purification of sand.
Figure 4a: Development of battery technologies up to 203016 17
Figure 4b: Development of market share of the different Li-ion battery technologies up to 2030
Ultimately, recycling costs should fall as understanding of current techniques (hydrometallurgy and pyrometallurgy) advances. A new, much less expensive technique is currently under development: the ‘direct recycling’ process. In this process, the electrolyte and the materials making up the cathodes are recovered to be reused directly with no metallurgical treatment necessary. Figure 5 below shows the advantages and disadvantages of each of these recycling methods.
Figure 5: New recycling methods: less expensive and more environmentally friendly solutions18 19 20
The combination of these elements (improved performance, reduction in proportions of rare materials, new recycling processes) will enable a drastic reduction in production costs by 2030, making the electric battery market a promising sector for investors. Our cost structure model (cf. Figure 6 below) indicates that by 2030 the production cost of an NMC 111 battery will decrease by at least 25% compared with its current level. For future battery technologies, this reduction will be greater. For example, Tesla has announced a 56% reduction by 2022 in the production cost per kilowatt-hour of its new batteries thanks to a series of technical innovations.
However, though costs are expected to fall significantly, the financial equation for electric vehicle fleets remains complex. Our analysis of the life cycle of a battery, its cost structure and its performance factors makes it possible to identify certain value creation levers that could make all the difference for transport operators.
Figure 6: The cost structure of a battery (NMC 111) makes is possible to anticipate its production costs by 2030
2. MAXIMISING THE VALUE OF A BATTERY THANKS TO THE DETAIL OF ITS COSTS THROUGHOUT ITS LIFE CYCLE
A. A cost structure that reveals the stages with the highest added value in the manufacturing cycle of a battery
The electric battery value chain can be broken down into several stages (Figure 7): supply of raw materials, manufacture of basic chemical components, conception and production of cells generating electrical energy, conception and production of modules, manufacture of packs (protection against shocks, vibrations), integration of the battery into smart control and performance management systems (battery management system), and, finally, recycling of components and metals at the end of their useful lives. This last stage shows that batteries still have value, even at the end of their useful lives.
Figure 7: Value chain of an electric battery: stakes and challenges21 22
To determine the cost structure of a battery, we have analysed each stage to determine its impact on the value of a new battery. Four types of expenditure appear at each stage: purchase costs (raw materials or components), labour costs, R&D costs and fixed costs (expenditure linked to electricity or additional material necessary for the conception of the cells).
The stage related to the manufacture of basic components is the most expensive (26% of the total cost) because it concerns the various elements making up the electrodes and the solvent contained in the electrolyte. The integration of the battery into a smart system is also a crucial step (22%) due to the importance of the software in monitoring the performance of the battery, which requires a significant investment in R&D. This stage also provides the most added value insofar as the increase in the level of production will not lead to an explosion in R&D costs – these will already have been incurred. Finally, the cell conception and production stage is the third most expensive. It is characterised by high R&D and labour costs.
Figure 8: Value chain of an NMC 111 battery in 202023 24
B. Identification of the key stages in a battery’s life cycle to maximise its valuee
The state of health (SoH) of a battery is an indicator that helps to optimise its use. Mobility contracts with electric bus operators generally stipulate an SoH of between 100% and 80%. Beyond this limit, the battery cannot be used with the same level of security and efficiency – it is the end of its first life. The battery is therefore at a critical moment in its life cycle, where choices must be made: if the battery performance allows it, it can be used again in another contract; it can be allocated to an stationary energy storage unit in its second life (to balance the grid, for example); and it can be sold at the end of its useful life to be recycled, where certain components will be refined to be reused.
Figure 9: Life cycle of an electric battery (based on SoH)
The state of health of a battery makes it possible to evaluate its state. Four factors can lead to the deterioration (decrease in capacity and increase in internal resistance) of a battery:
• Temperature (T): extreme temperatures negatively affect the state of health of a battery. At high temperatures, the internal activity of a battery increases, thereby reducing its capacity; below 0°C, internal resistance increases considerably, thereby accelerating its ageing25.
• The charge and discharge rate (C-rate): this corresponds to the intensity of the electric current going through the battery. The higher it is, the quicker the battery will age.
• The state of charge (SoC): this relates to the proportion of energy stored by the battery compared with its total state of charge. The capacity of a battery deteriorates not only during charge/discharge but also, to a lesser extent, when it is not used or stored if it is not empty. The storage of batteries with a relatively low SoC is therefore recommended to limit their deterioration. To optimise their length of life, recharging batteries to 100% should be done occasionally to balance the cells.
• Depth of discharge (DoD): this represents the percentage of energy that has been lost by the battery since its last recharge and therefore characterises its charging profile. The greater the DoD, the quicker the battery will deteriorate. According to the type of battery used, the optimal DoD (hardly possible operationally!) varies between 50% and 70%.
Knowing the deterioration factors of a battery makes it possible to anticipate this deterioration based on its use, its technology, the monitoring of its performance and its conservation. For example, charge and discharge modes vary greatly depending on whether the battery is used in urban or semirural environments. A semirural use would lead to greater deterioration due to the distances travelled, requiring more frequent and rapid recharges.
Based on these factors, we have highlighted value creation levers able to be used to control and maximise the value of the battery throughout its life cycle. These levers concern the optimisation of a battery’s use, the management of its performance and the management of used batteries.
Figure 10: The ten value creation levers of an electric battery
One of these levers is smart charging, that is, smart and innovative technology making it possible to recharge electric buses at the optimal time: not saturating the grid with demand for electricity, avoiding peaks in demand from both households and electric vehicles at the same time, for example.
A second interesting lever concerns improving recycling techniques, leading to a reduction in recycling costs. Indeed, the continued improvement of current techniques (hydrometallurgy and pyrometallurgy) and the emergence of new efficient techniques (the ‘direct recycling’ process) contribute to the prolonged use of the battery into a second life, followed by its recycling, instead of a shorter use that would be limited to the first life of the battery followed by its sale.
Finally, a third lever consists of managing battery performance, and therefore the know-how related to performance monitoring. ‘Maintenance’ contracts are proposed by battery suppliers. As part of these contracts, certain parameters (SoC, DoD, C-rate, charge intensity, temperature during charge/discharge, etc.) are measured via a battery management system (BMS) to monitor performance: the battery undergoes several charge and discharge cycles under varying conditions and the analysis of the data collected by the BMS can lead to the battery’s replacement if it has deteriorated too much or if the conditions of use no longer comply with the conditions of the contract, particularly those related to safety. But this performance monitoring is currently proving to be more a matter of insurance than of maintenance in the strict sense of the word. That is why a value creation lever would be to renegotiate the contract to bring it closer to the real costs of monitoring performance or even internalising this know-how, more for strategic reasons than for financial ones. Indeed, controlling operating data and battery performance data in real time is crucial because it makes it possible to adapt battery technologies as closely as possible to the use made of them. It should be noted, however, that this last lever is only applicable with great difficulty at present, as numerous battery manufacturers do not allow their clients to internalise this service.
To illustrate all of this, we have modelled in the example below the effects of different levers on a fleet of 25 buses in both an urban and a semirural context. The options analysed are as follows: smart charging or not during the first life; resale of the battery or reuse in a new contract at the end of the first life; reuse in energy stationary storage infrastructure in the second life (as reserve capacity in this particular case). We note that:
• smart charging creates value systematically and, moreover, has the benefit of being simple to implement;
• frequency regulation is not worthwhile, due to high investment costs, a second life that is too short, and an energy resale price that is too low in France;
• the use of a new contract at the end of a battery’s first life, rather than reselling it, is appealing in an urban scenario because the battery deteriorates more slowly than in a semirural scenario.
There are so many operational decision-making factors to take into account that have a veritable impact on the economic model of electric fleets. That said, beyond these levers enabling operators to optimise the performance of their batteries, there are still other avenues to explore in the face of the complexities of the classic electric bus model: the first consists of a new financial and operational management model for these buses; the second consists of alternative modes of low-or zero-emission transport.
Figure 11: NPV calculation for an NMC battery based on its use and the use of certain levers26 27
3. NEW PERSPECTIVES IN THE MANAGEMENT OF ZERO-EMISSION BUSES
A. The emergence of new economic models: the BaaS model
Despite significant technological advances and the expected reduction in the production costs of electric batteries, technical constraints remain substantial for electric transport operators. First, capital expenditure is higher than for classic vehicles (50% higher than for a diesel fleet28). In addition, performance control, battery maintenance and decisions to be made when battery efficiency is reduced are complex parameters to implement for historical bus operators. In this context, the emergence of the battery as a service (BaaS) model almost seems obvious.
Battery as a service basically frees transport operators from the constraints and risks associated with the management of a battery. The service provider takes care of all aspects linked to the battery’s use, from its certification (in compliance with safety and environmental standards) to performance monitoring to recycling; the service provider also ensures that the service provided complies with the expectations of its client, the transport operator, at all times, with a view towards value optimisation. The service provider therefore has to find the optimal contract and use profile for the battery, depending on the stage of the battery’s life cycle – and therefore its performance – at any given moment. It is its understanding of the different value creation levers, as well as its in-depth knowledge of battery performance, that enables the service provider to determine the ideal client or contract profile adapted to its battery. Some of the most well known BaaS companies include Global Technology Systems, Yuso, Swobbee and Epiroc.
Figure 12: Three different business models
B. The development of new low- or zero-emission means of transport
Figure 13: Forecast number of electric and hydrogen buses up to 2025
In parallel with the rise of electric battery buses, other clean means of transport are under development, such as low-emission buses running on biomethane (biogas) or zero-emission buses running on hydrogen. These technologies are growing substantially across the world, despite differences in their level of maturity, depending on the country.
Based on the local energy source, biogas buses constitute a low-emission technology (reduction of 25% of emissions of toxic fumes compared with petrol vehicles), which has the advantage of an excellent level of autonomy and a short recharge time. However, the infrastructure to be put in place is substantial and expensive.
ZE electric buses (battery- or hydrogen-based) are two complementary technologies. Indeed, hydrogen technology (which is more expensive) becomes more relevant where the battery technology reaches its limits or in future cases (grid saturation, for example).This zero-emission technology provides a high level of autonomy and relatively short recharge cycles (Air Liquide estimates that a hydrogen bus can be recharged in less than 20 minutes29). Nevertheless, the required infrastructure is considerable (hydrogen recharge stations) and the network is virtually non-existent or only at its inception in the majority of large cities today. However, as numerous French cities have shown an interest in this technology by launching pilot projects, the government’s recent recovery plan following the COVID-19 health crisis will dedicate more than €7 billion over ten years to this energy of the future, aiming to build factories that are able to produce the electrolyser in particular (the electrolyser makes it possible to transform hydrogen into electricity via the electrolysis of water). The hydrogen plan forecasts financing of €1.5 billion to develop a hydrogen sector similar to that being undertaken for electric batteries – this is in cooperation with Germany.
Figure 14: New types of low- or zero-emission mobility30 31
The main challenge facing the development of the electric battery sector is multiplying supply considerably to be able to match the significant increase in demand. This project is currently materialising through the creation of a sustainable and competitive battery manufacturing and recycling industry in Europe.
In parallel, battery technologies are improving, with batteries gaining in autonomy and specific capacity. Recycling methods are also the subject of critical technical innovation, which should lead to a significant reduction in total production costs by 2030.
However, constraints remain significant for electric mobility players: the amount of capital expenditure, the control of battery performance and the complexity of decisions to be made when their efficiency starts to deteriorate are all parameters that have favoured the emergence of new economic models of battery use, such as the BaaS model, as well as other modes of clean mobility that should be closely monitored, such as the hydrogen bus.
These developments, in economic model and technology, should lead historical players and new entrants in the zero-emission transport sector to change their strategy and investment policies.
In this phase of significant transformations for the whole sector, Accuracy has developed a strategic support framework in order to help these players to identify and seize the truly sustainable and profitable opportunities in the value chain.