Electric city buses: Trade and technological dynamics shape the sector

Europe ended 2023 with higher sales of electric city buses than diesel city buses. However, when we look at how those buses are distributed across Europe, some clear leaders emerge – mainly the smaller and wealthier countries. As shown in figure 1, countries with smaller total fleets lead in terms of electrification. Denmark, Luxemburg and the Netherlands have maintained the lead observed in 2022. In addition, these three countries are in the top-five richest countries in terms of GDP per capita in the EU. Moreover, their citizens consider climate change as one of the top 3 issues, which also supports the transition to electrified transport. Policies, like the establishment of zero emission zones in 30 cities by 2025 in the Netherlands, have a big impact as they incentivize public transport operators to switch to zero emission vehicles. The size of the fleet matters too; Luxemburg with less than 2,000 vehicles, gains 2%-5% market penetration with each 50-100 new vehicles, to make similar progress Germany would need 725-1,750 new vehicles. With a price tag of EUR 0.5m per battery electric city bus, having deep pockets accelerates the transition.

If we look from the perspective of the total fleet size, Germany, France and the Netherlands are in the lead, with 3,000, 2,500 and 1,500 electric city buses in operation, respectively. The Netherlands thus appears as the front runner in terms of both market penetration and total fleet size.

With countries looking to decarbonize their public transport fleets, the European Commission has eyed original equipment manufacturers (OEMs) to speed up the transition. The recently revised rules on emission standards for heavy duty vehicles now require city bus OEMs to meet a sales target of 90% zero emission buses[1] in 2030 and 100% in 2035, compared to 2020[2]. If manufacturers fail to meet the target they will have to pay a penalty of EUR 4,250 per gCO2/tkm, just above the average marginal cost of investing in reaching the target. The new regulation aims to create a strong signal for OEMs to switch their production from internal combustion city buses towards zero emission buses. If successful it could create the economies of scale necessary to bring costs down for the whole sector[3]. In addition, the regulation includes a credit and debt system, in which OEMs can earn emission credits if they transition faster and use these credits later to pay for debt incurred if they don’t meet the targets. This mechanism benefits OEMs by allowing them to choose their transition speed.

[1] Zero emission vehicles are those that emit less than 1 gCO2/pkm.

[2] Inter-urban buses adhere to emission targets, not sales targets.

[3] The EC expects this measures to reduce the costs of purchasing a heavy duty vehicle by EUR 9,000 in 2030 and EUR 41,000 in 2040. City buses are considered as heavy duty vehicles.

Figure 2 shows a continuation in the trend of consolidation from traditional car and truck OEMs such as Iveco, Volvo, Mercedes, and MAN. In 2015, three brands had more than 60% of the market, Solaris, VDL, and BYD (which alone made up for 30% of the market). This is a continuation of the trend observed in 2022. Looking at specific OEMs misses the bigger picture.

The bigger picture in the EU market is one of a slow but continuous decline in market share of OEMs since 2017. From 2015 to 2017, we see a catch up phase where EU manufacturers gained market share. The developing market attracted firms such as VDL, which took advantage of moving early, see figure 2. After 2017, market share of EU manufacturers declined from 74% to 54% in 2023. In the same period, Chinese manufacturers have increased their market share from 13% to 24% in the European market. Again we see the entrance of strong Chinese players such as BYD and Yutong taking hold of the market. Finally, Turkish OEMs, the recent newcomers in the European market, have acquired 6% of the market since 2022.

Despite the Turkish debut, it's the Chinese brands that could potentially surge in market share. The current overcapacity in the Chinese electric passenger vehicle (EV) sector, has led to aggressive pricing strategies. If they extend to the heavy-duty vehicle segment, we could see a rise in the number of Chinese buses. Additionally, the Chinese yuan renminbi has depreciated by 12% with respect to the EUR since 2022, incentivizing European customers to buy the now relatively cheaper Chinese city buses. On top of the change in terms of trade, Chinese brands enjoy the biggest domestic electric city bus market, as 85% of electric city buses in operation today are in China. With a bigger home market, Chinese OEMs can expand production with confidence and achieve higher economies of scale.

The EC probe into possible subsidies going from the Chinese government into the battery electric vehicle sector could stop the trend by imposing tariffs. Waiting for the member states vote, the EC commission has proposed a tariff to meet the current subsidies received by OEMs from the government. Ranging from 17% to 38% on top of the existing 10%. Focusing mainly on vehicles transporting nine or less persons, such a measure could trigger retaliatory measures that have an effect on the supply chain for city buses. For example the recent export controls of graphite, a key component of batteries. Cutting the supply chain entirely could put a stop to European ambitions for clean mobility.

Looking upstream in the value chain, batteries play a determining role in the transition. Lower battery pack prices allow for increased range (adding more battery packs) without increasing costs. At the same time, the increasing the energy density from batteries increases the power available without increasing the weight (weight has a negative effect on range). Air conditioning consumes a considerable amount of energy, especially when heating. Buses equipped with a 476 kWh battery pack could in theory travel 595km at a comfortable 20°C outside temperature, but this range drops dramatically, to 190 km, in colder conditions of -10°C[4]. Given the drastic reduction in range in low temperatures, increasing the battery pack size or using battery packs with higher density can be determining for the further uptake of electric city buses in countries with high air conditioning needs (cooling or heating).

[4] This data uses an average 12-meter electric city bus, a skilled driver and electric heating in 2023.

Figure 4 illustrates the decrease in battery pack prices in the last 13 years, averaging 16%[5]. The year 2022 was an outlier with prices rising due to the pandemic-induced spike in commodity prices. The battery market is heavily dominated by China, which produces more than 54% of global supply of batteries packs, 80% of cells, 84% of cathodes, and 95% of anodes, according to BloombergNEF. Given the dominance of China in the supply chain, the future price of battery packs is still going to be highly impacted by the Chinese market. Given continuous investments in R&D and the overcapacity in China’s battery sector, prices are likely to continue their downwards trend.

[5] The learning rate is the rate at which prices fall every time cumulative demand doubles.

In parallel with the decrease in price, energy density has also been steadily increasing in the last decade. The higher the weight of any vehicle, the more energy it requires, and this is especially important for heavy-duty vehicles such as city buses. As shown in figure 4, the watthour per kilogram of battery packs has seen a sustained increase of 6% per year on average, in the last 14 years. In 2010, an average battery pack offered an energy density of 87 Wh/Kg, in 2023 this was 188 Wh/Kg, an increase of 116%. The increase in energy density has been led by innovation in battery structures such as blade batteries from BYD, which promise an energy density of 190 Wh/Kg. As the competition for the market intensifies, manufacturers will invest in research and development to gain market share, which will have a positive effect on energy density.

Although, in Europe, the smaller and wealthier nations are currently leading in market penetration, the transition will continue in larger markets, necessitating OEMs to shift their production capabilities from internal combustion engine vehicles to EVs. The transition to EVs presents a new set of challenges to OEMs, and the assumption that European cities will continue to use European buses is not certain. With 85% of the world's electric buses operating in China, the sheer size of the Chinese market, combined with overcapacity and a depreciating renminbi, poses significant competition for European manufacturers. On the technology side, the trend indicates lower prices for batteries and a higher density – good news for consumers as they can expect better and cleaner buses running in European cities.