Flexible credit

The journey to net zero carbon emissions will be expensive and potentially triple the credit needed in the haulage sector – so where will the financial flexibility come from?

The high capital cost of electric vehicles –likely to remain double that of internal combustion engines according to the most generous forecasts – will require much higher levels of debt in the road transport industry. Yet it’s not at all clear how feasible this will be for many operators, whose credit is already stretched wire thin.

The Opus Business Group report on the sector in April 2021 said the road transport sector had “average net gearing of 98%,” which is “still unsustainably high”. It says most of this £14bn of debt (against a net worth of £14bn) existed pre-pandemic.

The asset finance sector therefore has a dual challenge – to continue supporting a sector which underwriters and most of the wider finance community have never been enamoured of, and to find innovative products that help to make the decarbonised assets affordable and the debt therefore repayable.

Put simply, the finance sector will have to support much higher levels of debt with far less security, and higher risk.

Neil Galloway, sales director for Renault Truck Financial Services, says: “It’s something we are well aware of, that we’ll need larger [credit] lines across the board over time,” with each customer being judged on merit.

Captive houses exist to fund the assets, and generally self insure, and so their tolerance for risk will presum-

Electric trucks carry a much higher price tag than their diesel counterparts. Louise Cole explores how traditional financing models are evolving to support the uptake of these decarbonised vehicles ably be greater. However, the amount of debt they will potentially underwrite doesn’t mean it will be plain sailing. Given that haulage is a low margin, capital intensive business that already struggles to negotiate significant price increases, and the total cost of ownership, residual values and genuine return on investment which EVs will achieve are currently all in the ‘unknown’ column, new finance products will have to emerge.

Truck-as-service

Some of the disruptors to the EV market, such as Volta Trucks and Tevva, are already starting to change the game with their competitive pricing and truck-as-service models. Volta Trucks, which has 7.5-tonne and 12-tonne versions scheduled for 2024 and a 16-tonne in design, reportedly has an order book bulging with 6,500 bookings already. It also rolls all the truck’s costs, from Distribution Network Operator upgrade and charging infrastructure to repair and maintenance, into a single monthly fee. One press interview suggests this could work out at £4,000 a month on a larger model.

The lease agreement itself doesn’t seem that innovative, however – Volta absorbs the risk of the residual value and the payments are structured to give the same or better TCO as a diesel over eight years. The customer also pays a deposit upfront.

Usage models may prove interesting. Iveco’s Green & Advanced Transport Ecosystem (GATE) is a long-term, all-inclusive rental model for electric trucks and vans. The expected operational launch date is mid-2023, when GATE, as a fully digitalised business, will pilot in Italy with a view to rolling out across Europe.

GATE will have an independent business structure with net-zero-specialist employees serving both the Iveco and Nikola brands. Iveco says it will offer “a comprehensive service based on a pay-per-use formula … on a variety of zero-emission vehicles, from last-mile delivery to long haul.”

The GATE cost will include repair and maintenance, connectivity and telematics, financing, insurance, energy, and additional ancillary services.

In this sense, pay-per-use seems to expand to include all costs but still be priced against the time the asset is kept. Other models might price by charging cycle or mileage.

Tevva, which recently received type approval for its 7.5 tonner and expects to sell 1,000 trucks in 2023, offers a pay-per-use model based purely on mileage. Its spokesperson emphasises that Tevva’s model will always allow for greater flexibility than fixed-term contracts, and ensure that charging follows the real-world productivity of the vehicle. There is no time element – the operator can keep the truck for as long as they want it.

Pay-per-use could solve one of the toughest challenges for the industry, which is that most pricing so far has tried to knit a coherent business case from the holey crochet of TCO variables. Even before an energy crisis ruined any meaningful fuel price comparison, TCO calculations tottered on top of current and future regulation and taxation systems. Clean air zones may well be replaced by road pricing as soon as zero emissions cars, buses and taxis reach a critical mass, which is likely to be long before HGV sales deadlines for ICEs are reached.

The reduced repair and maintenance costs may be achievable by the larger dealer sites but the industry at large will struggle with the costs of dedicated EV bays and an acute shortage of qualified technicians.

Residual values are also problematic, with too little certainty about the functionality or value of vehicles after the first five years. Close Brothers suggests that ‘enhanced residuals’, based on more knowledge and potential manufacturer backing, could solve this.

Currently, however, the residual values on electric

USAGE MODEL: Iveco’s all-inclusive Green & Advanced Transport Ecosystem (GATE) rental plan, which will also serve the Nikola brand, is due to launch later this year trucks are not close to the 20% to 30% ICEs would be expected to command, according to Galloway.

Despite this, Tevva has confidence that the residual values of EVs will match those of ICEs, making the capital outlay greater for lenders but not the risk. A spokesperson says they are working to achieve TCO parity over an eight-year lifespan as quickly as possible, and while this does depend upon local market costs, the company is confident that electric vehicles will soon offer a better business case than diesel ones.

Vertellus, the collaborative venture by regional Renault Trucks dealerships to offer a national service, is currently welcoming the first of its 30 demonstrator EVs. These will be available on three-month contracts so that major customers can try them out in a real-world setting. “There will be a cost to this but it is an opportunity for customers to do their own R&D,” says Nigel Baxter, Vertellus MD. The appeal of three-month rental contracts may not be limited to demonstration projects. At last year’s Freight Carbon Zero summit, Dawsongroup truck and trailer MD John Fletcher said that TCO calculations didn’t work for many of their customers because they take vehicles on, or in support of, relatively short-term contracts.

This all adds up to asset providers taking far more of the risk of vehicle provision in order to mitigate the otherwise unfeasibly high costs faced by operators.

Although overall operators won’t pay less, allencompassing fees will potentially facilitate a much clearer conversation with customers about the true cost of the work being done.

Circular economy

Of course, the flip side of the pay-as-you-go model is the much longer lease. Volta Trucks’ battery technology is said to manage 4,000 charging cycles over 10 years with no degradation. If that’s true then for some operators running assets for a much longer lifespan than the usual three to five years becomes feasible and attractive.

UK buses (and US trucks) are typically run for more than 20 years, undergoing at least one full refurb through their lifespan. The working life of a regional bus isn’t that different to a collection and delivery vehicle: they typically do circa 60,000 miles a year, have an 18-tonne GVW and take all the knocks of urban traffic. However, because ICE buses – like refuse lorries – cost in the region of £350,000, they have traditionally been written down over much longer periods.

The UK truck industry has never followed this pattern, mainly because with only 40,000 units registered each year, truck manufacturers want to maximise new sales and so encourage the belief that costs would escalate after the first few years. However, when the financial crash hit in 2008, many fleets ran vehicles on beyond their initial life without incurring undue repair costs.

Baxter says Vertellus is well aware of the need for a more circular economy. And, whether as an operator or a leasing dealer, an asset that gives income over a much longer term is an attractive prospect.

“We used to do refurbs, and we offered trailers on 10-year plans with a refurb halfway through,” he says. “Our [current] business model is based on new sales and repair and maintenance, but both of those are likely to be lower [with decarbonised vehicles] so we might need to reinvent ourselves as the people who refurbish the assets mid-life.”

However, as Simon Matthews, sales director coach and bus rental at Close Brothers Vehicle Hire, points out, the typical lifecycle “for electric buses isn’t as clear at this point”.

Government help

One issue for haulage is that the government has not directed much in the way of specific funds to help hauliers buy battery EVs. The government has conducted relatively small demonstrator trials (the vehicles going into public fleets) and last summer it announced £200m for a three-year demonstrator trial of various zero-carbon freight vehicles.

There is also a grant available to sellers to enable discounts at the point of sale, with a maximum of £16,000 for small trucks and £25,000 for large trucks (circa 8% of a £300,000 asset.)

In contrast, the German government provides 80% of the price differential between an ICE and a BEV or hydrogen vehicle.

Compare the paltry UK subsidies to the £270m the government has so far put into decarbonising bus fleets, match funding spend on electric infrastructure and

ON THE UP: Having received type approval for its 7.5-tonne BEV, Tevva can start mass production at its London facility service assets for those with local authority contracts outside London. So far that £270m has helped to purchase 1,278 buses. First Bus, part of the privately held First Group, invested £43m into 193 new electric buses in 2022 and was match funded by DfT to the tune of £38m.

This is despite buses contributing 2% to the UK’s global greenhouse gas emissions compared to freight transport’s 19%. Bus pollutants arguably have a higher potential impact at the kerbside but nonetheless, freight accounts for 30% to 50% of nitrogen oxide and fine particulates.

Changing market profile

The decarbonisation journey may well continue the shift in ownership models that has been developing in the haulage market over the past seven years. In 2016, 42% of O-licences and 9% of vehicles were owned by owner drivers – circa 31,000 trucks. This proportion of the marketplace has been shrinking and is likely to continue to do so if credit for new vehicles is out of reach, particularly as it tends to value ownership over leasing.

The current market for electric vehicles, says Baxter, is the own-account sector, where companies are driven by customer and board values. Restricted licences account for slightly over half the total O-licences but only one-third of the vehicles (92,000). However, it is likely this group will blaze a trail for hauliers, for whom the business case and associated lending negotiations will remain much more complicated for some time.

■ For all the latest news and information dedicated to the decarbonisation of the commercial vehicle and road freight sector, check out our sister website FreightCarbonZero.com