With COP28 underway, all eyes are on Dubai and whether world leaders can agree on a way forward to achieving our climate goals. While these discussions often happen at the highest levels, to mobilise the finance required, we need to take a sector-by-sector approach. In doing so, we can identify the distinct challenges that each sector faces, and work backwards from there to identify how to mobilise capital into decarbonisation.
One sector that does not receive enough attention as an investment opportunity is the heavy goods vehicle (HGV) industry. HGVs are among the UK’s most polluting vehicles, and despite making up just 1% of transport on the road, they account for around 20% of emissions — equivalent to the carbon footprint of domestic and international air travel, buses and domestic shipping combined. Electrifying the country’s half a million HGVs comes with an investment opportunity worth £100bn.
Decarbonising the entire fleet of UK HGVs would be the equivalent of removing 12 million cars from the roads — a staggering 18.6 million tonnes of carbon dioxide. The benefits of electrification of HGVs in the EU are even greater. With 6.2 million HGVs on the road in Europe, an estimated 230 million tonnes of CO2 could be saved by converting them to electric trucks.
The adoption rate of zero-emission trucks in the UK is roughly on par with the EU average; however the UK lags behind countries such as Germany, Sweden and the Netherlands — in part because of the relatively lower grant funding in the UK compared to EU countries. We may see the EU pull further ahead in the coming years, given its infrastructure deployment targets and more ambitious targets on zero-emission truck sales.
But at the moment there simply aren’t enough financing options available to help HGV operators buy electric trucks, or for landowners and businesses to install the charging points needed. There is often a significant upfront financial investment, particularly for small businesses who between them own half of the HGVs in the UK. As a result, this multi-billion-pound opportunity for investors is not being leveraged at the pace and scale the science demands.
Creative financing to unlock HGV investment
That is why the financial community, policy-makers and industry have come together with the Green Finance Institute to identify innovative financing solutions that reduce the risks for both borrowers and lenders and make finance easier to access, allowing investors to make the most of this untapped potential, and borrowers to help decarbonise UK roads.
Among these solutions is Utilisation Linked Financing (ULF). One of the most significant challenges facing financiers and operators alike is the chicken-and-egg scenario around charging infrastructure. Charging points can’t be installed unless there are electric trucks on the road to use them. But operators won’t make the switch to electric trucks if the charge points aren’t there.
The upfront costs of EV charging points can be high — depending on the depot upgrades required, how much power the charger needs, and the costs of connecting to the power grid, which vary enormously. The costs for installing charging infrastructure at depots ranges anywhere from around £26,000 to £54,000 per truck.
Operators making decisions around charge-point investment will consider the total cost of owning the truck over its lifetime. This means taking into account the fact that electric trucks can be as much as 21% less expensive than heavier trucks over their lifetime, given their lower running costs, with the latter typically driven further and kept for up to 10 years longer. Electric trucks are forecast to be less expensive than their diesel equivalent by 2030, due largely to the declining cost of batteries.
Taking out a standard loan to install charge points can be risky without knowing if utilisation will increase, given the upfront investment costs involved. What if a depot installs a charge point that’s hardly used and they then struggle to meet the monthly repayments?
ULF reduces this financing risk. The finance is linked to the charge point’s use, so it’s only repaid once the charge point starts generating revenue — de-risking the investment and making it a much more attractive opportunity.
Another tool being advocated is shared charging infrastructure agreements. These can be delivered through a joint venture or a special purpose vehicle with debt and equity leveraged by potential partners, or through a contractual agreement to provide a share of near-term costs and future profits.
These agreements would allow HGV fleet operators to pool resources so they can buy or invest in electric charging infrastructure at HGV depots together, for example. This reduces the capital investment required by each group and allows them to share the infrastructure maintenance costs. Again, this reduces the risk and encourages investment.
Investors could also offer up a residual value (RV) guarantee. RV-based finance models are often used by HGV operators to cover the cost of buying zero-emission trucks, which are three times the price of a diesel truck.
But given the limited data for zero-emission trucks and uncertainty over the pace of change with the technology, lenders are setting very low RVs, which is increasing the cost of leases and putting off operators. Allowing a third party like governments or insurance providers to give a RV guarantee would help reduce RV risk for lenders like banks, and provide a more favourable leasing cost.
There is no doubt that transitioning to an electric fleet will incur some additional costs. However, innovative financial mechanisms, coupled with lower running costs, can help reduce risk and costs for fleet owners and operators.
HGVs’ impact on emissions
These financial solutions won’t just unlock an opportunity for investors. Expanding our electric HGV fleet will also have a huge impact on reducing UK emissions, which has never been more important.
So far only a fraction of HGV operators have made the switch to zero-emission trucks. But electric trucks are part of the UK’s greener future: the government has already said all new trucks must be zero emission by 2040.
We are working towards a greener future made possible by finance. We know what financing solutions are needed, we know the disproportionate impact that freight decarbonisation will have on reducing emissions, and we have a government target to incentivise electric truck roll-out in the long term. Together we are moving in the right direction, though there’s still a long road ahead — but we can navigate it through financial innovation.
Lauren Pamma is a director at the Green Finance Institute.
