Co-authors: Gijs Hoogeveen, Erwin de Kok
Decarbonizing Public Road Transport
The entire European economy has reached an existential crossroads. The phaseout of the supply of Russian oil and gas has resulted in historically high prices threating the competitiveness of energy-intensive industries. Decarbonization seems, more than ever, the only way forward for all economic sectors and, of course, for the climate.
Decarbonization of the transport sector started speeding up well before Russia’s invasion of Ukraine and the subsequent energy crisis. Since the launch of the European Green Deal in 2019, the EU has deployed an extensive battery of political measures. These political frameworks are driving the decarbonization trend in passenger cars full throttle.Public transport is far from lagging behind. On the contrary, the city bus transition is accelerating, fueled by the mobility policies of big cities (see Figure 1). Across the EU this year, the sales of electric city buses should overtake those of vehicles running on diesel, and the yearly market for new city buses is on track to become fully electric by 2030.
Figure 1: City Buses in the EU: Electricity Is Overtaking Diesel
Tipping Point for the City Buses
The whole EU bus fleet consists of around 750,000 vehicles. They mainly fall within EU vehicle categories M2 and M3, depending on whether they are below or above 5 metric tons. According to the type of duty, they can be divided into city buses (those typically seen in regular public transport lines in urban environments or between neighbouring cities); minibuses (close to van-sized vehicles used to transport passengers); coaches (generally bigger buses driving longer distances between cities, both for public and private uses); and trolleybuses (the tram-like buses powered by overhead wires often seen in eastern European countries). Coaches are often used in the private sector, and the rest in public services. But the public versus private classification varies across EU countries. European Automobile Manufacturers’ Association (ACEA) figures highlight the role of the whole fleet: EU buses represent 55.7% of public transport journeys in Europe and 9% of total passenger transport. This sector sustains a market of close to 30,000 new vehicles per year, supplied by 66 bus assembly plants across Europe.
The size and national distribution of the European fleet remains very stable (see Figure 2). Poland has the largest bus fleet in the EU (almost 125,000 buses representing 17% of the total). Poland, Italy, France, Germany, Spain, and Romania combined are home to more than 80% of the EU’s 750,000-vehicle fleet. The Netherlands, in comparison, operates 8,500 buses or just above 1% of the total.
Figure 2: The EU’s bus fleet evolution by country, 2015-2021
Buses running on alternative fuels are steadily growing within the EU fleet (see Figure 3). Since 2016, battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) have been gaining market share, leading compressed natural gas (CNG) bus sales to stall in 2021 for the first time.
Figure 3: Vehicles running on alternative fuels in the EU’s bus fleet, 2015-2021
According to ACEA, electric buses (BEVs and PHEVs combined) added up to 20.8% of new units on the road in the EU in 2022, mostly concentrated in orders for city buses. Such orders are often shaped by tenders demanding a share or a specific number of BEVs or PHEVs for urban mobility services. Out of the 750,000 vehicles in the EU fleet, it is estimated that 214,000 of them were city buses in 2022, close to 30% of the total. Figure 4 illustrates the electrification of city buses in 2022 across the EU.
Figure 4: Electrification of city buses across Europe, 2022
It is not surprising that several of the leading countries in the electrification of the passenger car fleet also come out on top for city buses. Luxembourg is the clear front-runner, with more than 40% of its relatively small fleet electrified. It is followed by the Netherlands, with an electrification rate of more than 25%, and the Nordic countries with a 10%-to-24% electrification rate for their fleets. Measured by the total number of electrified city buses in the fleet, the largest offtakers are France, Germany, and the Netherlands.
The recent market evolution of city bus sales across the EU shows a very interesting trend (see Figure 5). Since 2016, there is a clear and steady decrease in the number of new city buses fueled by diesel. They are increasingly being replaced by electric vehicles, in particular since 2018, which marked a sharp uptick in sales. If this trend continues, we can indeed expect that sometime this year, EU sales for electric city buses will surpass those of diesel-fueled ones for the first time ever. Although it is pure extrapolation, should the current trend persist, we could expect to stop seeing sales of diesel city buses from 2027 onward. However, a total collapse of the market for diesel buses is unlikely. This is due to, for example, the need for such buses in rural areas and areas with less sophisticated infrastructure, or local authorities’ lack of ambition to enforce the shift toward electrification. It is also interesting to note how fully electric buses (BEVs) have become the main choice for electrification, overtaking hybrid sales (PHEV). CNG bus sales seem also to have peaked in 2021.
Figure 5: Yearly sales of city buses in the EU by type of alternative drive, 2015-2025
Big Cities Are Leading the Way
As shown in our previous article about the passenger electric vehicle market, the electrification of passenger cars across the EU is strongly related to GDP per capita. While electric vehicles may offer a similar or even lower total cost of ownership, they require a higher initial investment than vehicles that run on fossil fuels. Such an investment becomes progressively more acceptable and interesting to buyers in line with a rising GDP per capita. Political support through subsidies and other incentives does not explain the electrification speed as well as the GDP per capita metric does.
When it comes to city buses (see Figure 4), electrification progresses across the EU in a similar way to passenger cars – an expected outcome since wealthier citizens tend to live in wealthier cities. Still, there are very strong differentiating factors between the markets for private passenger cars and city buses.
To start, from an investment point of view, decisions made by public transport operators (PTOs) are driven by the expected return on the investment and are based on public tenders. Therefore, the price per vehicle is not as relevant as it is for passenger car drivers. As a result, city bus fleets are easier to electrify than passenger cars. From a demand point of view, public city bus lines are normally tendered by local authorities, who increasingly include environmental considerations in their tenders for managed services, in addition to factors like price and various service level requirements. Such tenders have a direct effect on corresponding investment decisions. What’s more, from a technical point of view, and since city buses are typically used along fixed routes within commuting distances, the duty of city buses is a good fit for electrified vehicles. Finally, from the user’s point of view, both diesel and electric city buses provide an equivalent service. All of these factors shape a market strongly driven by political targets.
Thus, there are strong structural reasons explaining how transport policies are shaping the evolution of the city bus market. As early as 2009, the European Directive 2009/33/EC, which concerned the promotion of clean road transport vehicles in support of low-emission mobility, established the need for “contracting authorities, contracting entities as well as certain operators to take into account lifetime energy and environmental impacts, including energy consumption and emissions of CO2 and of certain pollutants, when purchasing road transport vehicles with the objectives of promoting and stimulating the market for clean and energy-efficient vehicles.” At the time, this target triggered a significant switch to CNG. The European Directive was updated in 2019 to establish “minimum procurement targets for the share of clean light-duty vehicles.”
Since the launch of the European Green Deal in 2019, extensive legislation has been developed to decarbonize the EU transport sector, as summarized in our article about the EU’s path to net-zero mobility. The Sustainable and Smart Mobility Strategy gathers many of the initiatives launched to achieve this target. And recently, in its revision of the CO2 emission standards for heavy-duty vehicles, the European Commission proposed making 100% of all new city buses zero emission by 2030.
Included in the Sustainable and Smart Mobility Strategy is the EU mission to reach “100 climate-neutral and smart cities by 2030,” acknowledging the key role cities play in triggering the desired regional technology shift. As a sign of local authorities’ commitment to climate targets, the mission received 362 applications. Of these, 100 pilot cities were selected. In the Netherlands, Amsterdam, Eindhoven and Helmond, Groningen, Rotterdam, The Hague, and Utrecht were selected.
Figure 6 shows the role capital cities play in the electrification of the city buses. In the majority of the cases, the capital shows an electrification share significantly higher than the national average. Some exceptions to the rule are: Amsterdam (only temporarily behind the national average since it has 300 electric buses in the pipeline), Stockholm (with a heavy bet on CNG), and Lisbon (one of the few capitals lagging behind the national average, for no particular reasons). This trend needs consideration: Since bigger cities have more access to the resources and knowledge required for the electrification of their fleet, special attention should be given to smaller regions and cities that may face relatively bigger challenges. The Clean Bus Europe Platform aims to help narrow this gap by connecting leading cities with those not yet on track.
Figure 6 Share of CO2-free city buses in key countries and their corresponding capital cities, 2022
Are There Enough E-buses in Cities To Get Us to 2030?
If we take into account the recently proposed EU target for 100% of all city buses to be zero emission by 2030, some interesting observations can be made. From 2020 to 2022, despite being influenced by the Covid-19 crisis, the market averaged 34% annual growth (see Figure 7). A 100% net-zero city bus fleet by 2030 may seem very ambitious, but it turns out that just sustaining 18% annual market growth for electric city buses in the next seven years could get us there. Compared to the recent years’ 35% market growth, the required 18% growth suggests that a fully electric market by 2030 could be feasible.
Figure 7: EU 2030 target for city bus market vs. the 2020-2022 market trend
If the yearly market for new city buses becomes fully net zero by 2030, the replacement rate of buses in the fleet will lead to it being fully decarbonized by 2038 (assuming that the fleet size remains at its historical number of 215,000 vehicles).
Figures 8 and 9 provide some insights and historical perspective on industry dynamics. It can be said that the electric city bus market began in 2015. But it was only in 2018 and 2019 that it really took off. The pandemic years and the resulting global supply chain bottlenecks tempered its growth, which has nevertheless remained double digit since 2020.
Figure 8: EU electric city bus annual units sold per OEM, 2015-2022
Figure 9 shows how the early years were dominated by BYD, Solaris, and VDL. Combined, these manufacturers supplied more than 60% of the EU market by 2015. After 2018, their joint share dropped below 50% due to the significant market entrance of traditional car and truck OEMs like Mercedes, Volvo, and Iveco. Today, the share of the three early entrants is reduced to 36% (including BYD + ADL joint units), highlighting the dynamics of a very active and growing market.
Figure 9: Market share of European electric city bus OEMs, 2015-2022
To Drive or To Be Driven
As discussed, the market for the electrification of city buses is very active, set to triple its current size by 2030. The often-cited average CAPEX of EUR 500,000 per unit puts the current market size at over EUR 12bn. The growth is the result of a combination of EU policy targets and the new growth in demand. With the late arrival of relevant players to such attractive growth, we can expect more changes in the market shares in the years to come.
Relevant OEMs and PTOs have to weigh in carefully on the role they want to play in this market, since both leading and lagging strategies come with their own advantages and risks, especially in high-paced markets driven by technological developments. The Clean Bus Europe Platform, which monitors the market and publishes many of the EU city bus tenders, shows how active the market is. Table 1 summarizes the typical advantages and risks involved with adopting nascent technology trends, including some specific considerations for the city bus market.
Table 1: Key implications behind strategic position choices for city bus OEMs
Making things even more dynamic, the structure of the electric city bus value chain is not entirely consolidated. Given the technological uncertainties, new operational requirements, and the significant CAPEX in need of financing, new players and new configurations are being introduced to the market. For example, players such as Volvo Energy are considering offering capacity on an energy-used (kWh) or kilometer-driven basis, effectively in a pay-per-use model. In this way, these OEMs can establish themselves as both asset manufactures and asset owners, offering their assets to PTOs in technology-risk-free arrangements. By doing so, they may also capture a bigger share of market value. Change will also affect long-term maintenance models, since electric buses require way lower maintenance than fossil-fuel driven buses. On the other hand, bus batteries offer additional options after the end of their mobility technical life, as they may still be suitable for use in less demanding applications.
An Electric Ride to the City Centre
The electrification of transport in Europe is finding an optimally paved path in the city bus sector. With a relatively small fleet, Luxembourg leads the race in electrifying the city bus fleet by far, followed by the Netherlands and the Nordic countries. In terms of actual size, France, and Germany are the largest EU markets, with further large growth potential.
Supported by the European Green Deal’s mobility policy, the electric mobility movement is leading the market to take off, to the point that we expect electric bus sales to overtake those of diesel this year.
Public tendering that incorporates cities’ climate and air quality targets is an essential and powerful tool to support the business case required for a swift deployment of net-zero buses. In addition, optimal financing structures and sufficient market depth are prerequisites to fund the enormous level of CAPEX required by PTOs through 2030 in their quest to meet the sector’s ambitious net-zero transition goals. While EU policies and climate targets have sparked action in major cities and capitals, less prominent cities may require additional support, infrastructure, and incentives to join the trend.
The European Commission has proposed a fully electrified city bus market by 2030. Reaching that target would require sustaining – at least partially – the significant annual growth seen in the new electric city bus market over the past three years. Such growth expectations will require great activity from OEMs. The three early entrants captured more than 60% of the starting market in 2015. But the reaction of other players brought their piece of the growing cake down to 36% last year. Market latecomers could easily miss the (electric) bus.
For OEMs and PTOs alike, it is essential to understand the forces behind this dynamic market. When choosing a strategy, they must carefully weigh the pros and cons of leading in electric city bus adoption, or waiting. Nevertheless, the great momentum of the electric city bus market – in which assets have a lifespan of between 10 and 15 years – also calls for agile decision-making. Road transport is going to look completely different in the coming decade.