The transport sector is one of several significant contributors to greenhouse gas emissions. There are, however, already areas in this sector where the investment in “green technology” has the potential for a positive payback. Hopefully this will accelerate the uptake of green solutions, much as it has done in the electricity sector, with the potential of affecting nearly half the transport carbon footprint.
It is a law of nature that it is easier to make water flow downhill than uphill. Similarly in finance, projects with a positive return, for obvious reasons, are easier to promote. Indeed, a positive return on investment results in a surplus, which in turn provides the funding for further investment and creates a virtuous cycle. A positive payback accelerates investment, generates economies of scale and stimulates innovations for related opportunities.
In the transport sector, we expect such a momentum build-up. This would be similar, in our view, to the renewable energy sector for electricity generation.
In South Africa, we saw significant investment in renewable energy by both industry and private households, once the cost of renewable energy became lower than that of Eskom. Indeed, from a county perspective, this has been even more favourable as the new energy is still replacing the marginal use of diesel, which is of course much more expensive than coal.
Yes, it is true that this does not get us to net zero in the electricity sector. The last 20% will require solutions around storage and base load. Some of these will rely on improving global technologies, others will require clever, hands-on local know-how. We are, though, a long, long way before those issues — the famous “last mile” — start to bite.
In the meantime in the energy sector, local and international investors are seeing the arbitrage and providing the funding for pay-as-you-go solutions. In other words, since there is a positive return on investment and a lower total cost of ownership, they are providing the upfront capital.
They then sell back the electricity, to industry or homeowners, at a favourable rate. For local users this appears as free money; in principle a very easy choice.
Lower total cost of ownership
The key driver is the lower total cost of ownership. Total cost of ownership looks at the upfront cost, the running cost and the maintenance cost over the lifetime of an installation.
In the case of electricity, this is compared to the expected cost of electricity, which from Eskom is the cost of coal power plant plus transmission. The difference is what traders call an arbitrage, the surplus that makes such an investment work.
From an economics perspective, this uptake creates a learning curve, economies of scale, increased efficiency in installation, more certainty in decision making, and the readiness to resolve the next level of problems. Solar panels, as an example, have dropped in price by about 20% every time global capacity doubled; they are much cheaper than they were 10 years ago.
Which leads us to the transport sector. In terms of greenhouse gases, carbon emission and the need for green technology, we often think of Eskom and electricity. However, internationally electricity is responsible for only 27% of greenhouse emissions. In order to achieve the zero emission targets, the other 73% also needs to be addressed.
The transport sector contributes about 16% of greenhouse gas emissions worldwide. In South Africa, more than 90% of our transport emissions are from road transport, and over half of this comes from the commercial sector. Although this is not how the statistics are collected, this can be split into local, regional and long-distance trips. Most of the trips are still local or regional, despite the unfortunate shift in South Africa from rail to road.
In his very readable, well researched 2021 book, How to Avoid a Climate Disaster, Bill Gates, referring to transport, provides us with a starting point: “use electricity to run all the vehicles, we can and get cheap alternative fuels for the rest”.
There is a reason for the electricity preference. Battery electric vehicles (often referred to as BEVs) are nearly four times as efficient as internal combustion engines.
The battery electric vehicle has an efficiency close to 85%; that is 85% of the energy goes into propelling the vehicle. For the internal combustion engine. the efficiency is closer to 20%. In addition, the battery can store energy from braking and re-use it to accelerate.
The two drawbacks that need to be factored in are the limited range of the battery vehicle and, as with renewables, the higher upfront cost. In plain speak, the vehicle needs to cover a minimum number of kilometres per year, but with trips that are limited to local and regional transport.
It turns out that probably half of the commercial vehicles in the country do indeed fall into this window. This would include municipal vehicles, light delivery vehicles, local and regional delivery vehicles, buses, e-hailing services and taxis.
Exacerbated by punitive import tariffs
Of course the calculations are very country dependent. They depend on interest rates, fuel cost and electricity. In South Africa this is exacerbated by punitive import tariffs (there is talk of amending them) and regulations have not been adapted (there is talk of adapting them in line with our trading partners).
We have seen some excellent, recent studies by GreenCape, an environmental consultancy and advocacy non-profit, which for the parameters that they use show there is a benefit to total cost of ownership that is significant for many categories of vehicle used commercially: buses (23%), minibuses (18%), heavy duty trucks (20%) and even motorcycles (37%).
Moving to a green solution has the potential to reduce the total cost of ownership of transport by 20 to 40% for nearly half the sector. As with renewables, this becomes self-funding for a significant segment of a sector with a major carbon footprint.
Of course, everyone needs to do their own calculation as the benefit is critically dependent on annual mileage, replacement cycles, vehicle logistics and capital availability. Most businesses have more investment opportunities than capital. The good news is that battery electric vehicles are simple to maintain and last a lot longer than fossil-fuel driven vehicles.
There are arguments that without green electricity, battery electric vehicles are meaningless. This is misleading for two reasons. Firstly, the much greater efficiency of a battery vehicle means that it uses less energy; even with “dirty electricity” the carbon footprint reduces by nearly three quarters.
Knockout argument
However, the knockout argument is that, irrespective of the trajectory, the uptake of renewable energy will always be quicker than the uptake in the transport sector. Every year green electricity is being added to the grid and at a much quicker rate than the greening of the transport sector. By the time green transport is adopted, we will have made even more progress greening our electricity.
When looking at a new technology, the question investors ask is “What is the killer app?” What will drive the initial uptake on which future uptake can build?
The largest fraction of our transport emissions come from the commercial sector. Most of these vehicles do enough mileage for the investment to work. Most of them do trips well within the current battery range. Commercial vehicles are much less dependent on charge points; they return to home base and have well defined loading and unloading points.
This all points to a window of significant uptake and a chance to meet many of our carbon commitments, while making investments with a significant payback and a positive return. DM