Expert Speak Terra Nova
Published on Jun 18, 2024

Electrification of private buses is imperative for effective sector-wide decarbonisation.

Private bus operators: Drivers of India’s E-bus adoption

India’s urbanisation is poised to accelerate at an unprecedented pace over the next two decades. By 2050, 60 percent of Indians will be urban residents. This demographic shift brings forth many challenges, including the scarcity of affordable housing and essential services, the proliferation of private vehicle ownership, and increased stress on natural resources.

Transportation: A status update

India’s urban transportation reveals a surge in registered motor vehicles, leading to transportation externalities, including congestion, air pollution, and inadequate parking facilities. From around 300,000 in 1951 to 326.3 million in 2020, registered vehicles increased a compound annual growth rate (CAGR) of 9.83 percent during 2010-20. This growth, primarily in private vehicles, has led to severe road congestion in all Indian cities. Conversely, the proportion of buses has declined over the years. In 1951, buses constituted 11.1 percent of total registered vehicles, dwindling to 0.07 percent by 2020. Although the national benchmark stipulates 30-60 buses per lakh population for metropolitan areas, the actual number, except Bengaluru, is between 4-31. In this scenario, prioritising public transportation, which currently contributes to merely 7 percent of total trips, offers a sustainable solution. 

Energy transition and urban transport

Predominantly powered by fossil fuels, road transportation is a major contributor to Carbon Dioxide (CO2) emissions. In 2023, the sector accounted for 12 percent of India's energy-related CO2 emissions. An unabated increase in private vehicles could double CO2 emissions from road transport by 2050. This scenario calls for an urgent transition to cleaner and sustainable fuel alternatives. Electric vehicles (EVs), with zero tailpipe emissions, can significantly aid in decarbonising the road transportation sector, essential to achieving India’s net-zero targets by 2070.

EV policies in India

The inception of the National Mission on Electric Mobility (2011) underlined India’s policy focus on electric vehicles, followed by the National Electric Mobility Mission Plan (NEMMP)-2020 (2013). In 2015, the launch of the Faster Adoption and Manufacturing of Hybrid & Electric Vehicles (FAME-I) and FAME-II in 2019 initiative lent further momentum to EVs. 

The focus on electric buses

FAME-I (2015-2019), rolled out by the Department of Heavy Industry (DHI), aimed to “encourage the progressive induction of reliable, affordable, and efficient electric and hybrid vehicles” and mitigate tailpipe CO2 emissions. It extended incentives to 278,000 electric vehicles and 465 buses. 

FAME-II (2019 to July 2024) expanded the scheme’s strategic adjustments with an outlay of INR100 billion (increased to INR115 billion earlier this year). Of this, nearly one-third (INR32.09 billion) is allocated to e-buses. Supporting 7,000 buses and other vehicles, FAME-II emphasised public transport, introduced an aggregation model for electric bus tendering, and sanctioned 2,357 more charging stations than FAME-I. Additionally, 33 states and Union Territories have notified or drafted their EV policies, offering fiscal and non-fiscal incentives from road tax exemptions to initiatives for skill development. The FAME-II policy targets vehicles used for public transport or those registered for commercial purposes, incentivising buses with INR20,000 per kWh, with a maximum incentive covering 40 percent of the vehicle cost. FAME-II’s gross cost contracting (GCC) primarily aims to tackle the financial and capacity challenges confronting bus transport in India. 

The GCC model allows bus manufacturers or operators to manage the operation and maintenance of the buses, with STUs paying a per-kilometre cost, effectively addressing the capacity concerns of the manufacturers/operators. It requires the operator to procure the e-buses and build the charging infrastructure, saving cash-starved STUs from making the initial investments against a per-kilometre cost paid by the STU. 

The GCC model allows bus manufacturers or operators to manage the operation and maintenance of the buses, with STUs paying a per-kilometre cost, effectively addressing the capacity concerns of the manufacturers/operators.

FAME-II awarded gross cost contracting (GCC) to 18 cities for procuring 2,965 e-buses. It also involved Convergence Energy Services Ltd (CESL), owned by Energy Efficiency Service Limited (EESL, a Ministry of Power joint venture with reputed public-sector undertakings), to reduce the per kilometre cost. CESL used GCC’s demand aggregation model to float a combined tender for nine eligible cities. It involved the transport authority contracting a private operator, often the bus manufacturer or Original Equipment Manufacturer (OEM), to operate the e-buses and handle maintenance, charging, and staffing over a set period. CESL’s tender for 5,450 e-buses, which concluded in April 2022, represents the largest e-bus tender in India to date. CESL also standardised contract conditions and consolidated the requirements of five out of the nine cities eligible for government incentives through the Grand Challenge-I

Recently, CESL’s National Electric Bus Program (NEBP), which aims to deploy 50,000 e-buses by 2027 with an investment of INR820 billion, has used this aggregate model to float a tender for 6,465 e-buses in September 2022. In February 2023, it called for proposals from State Transport Undertakings (STUs) for an aggregate tendering of 5,000 buses.

Many of these initiatives could, however, suffer from hurdles as debt-riddled STUs, which operate at significant losses, would find it difficult to make the initial capital investment for e-buses. Despite the lower lifetime costs of e-buses due to reduced fuel and maintenance expenses, the larger upfront investment required is a major barrier, explaining why many smaller cities continue to rely on traditional diesel buses. On the other hand, many STUs lack the technical knowledge required to procure, deploy, and manage their e-bus fleets optimally. 

Additionally, potential payment defaults by STUs could disrupt the operator cash flow required to maintain and operate the e-bus fleets. Billing uncertainties from delayed payments could further exacerbate the financial instability for bus manufacturers, limiting their capital availability for participation in government e-bus tenders. Banks, too, are reluctant to provide funding for e-buses due to the sector’s higher risk-return profiles, primarily because of the poor financial health of STUs, further limiting the capacity of e-bus manufacturers to bag government contracts.

To address these constraints, the Ministry of Housing and Urban Affairs launched the PM-eBus Seva Scheme (eBS) in December 2023 with a central assistance of INR200 billion. The scheme uses the Partnership Payment Security Mechanism (PSM), a dedicated Payment Security Fund (PSF), to protect manufacturers’ interests in case of bill payment defaults by STUs. By reducing financial risks and assuring payments, PSM thus gives banks the confidence to lend money to manufacturers while improving the credit ratings of manufacturers and operators to secure financing at lower interest rates. 

To address these constraints, the Ministry of Housing and Urban Affairs launched the PM-eBus Seva Scheme (eBS) in December 2023 with a central assistance of INR 200 Billion.

The eBS also seeks to enhance bus operations in cities that lack organised bus services using a public-private partnership model. It aims to deploy 10,000 buses under its ‘Augmentation of City Bus Services and Associated Infrastructure’ segment. CESL has already tendered 3,132 buses under this segment. Another segment, the ‘Green Urban Mobility Initiatives’ (GUMI), supports projects that complement bus services and demonstrate reductions in greenhouse gas (GHG) emissions in urban areas, including the development of bus-priority infrastructure.

Scraping the tip of the iceberg?

While the policy focus on electrification of STU bus fleets is a welcome step, it is insufficient to push for a countrywide decarbonisation of buses. According to official data, approximately 2.19 million buses were registered as of 2020. Of this, only around 150,000 buses, or about 7 percent, were owned and operated directly by STUs. Of the 2.04 million privately owned buses, about 8.33 lakh carry passengers. This scenario indicates that incentives under FAME and other schemes do not focus on 93 percent of India’s total bus fleet, which is privately owned. 

The other challenges are the lack of sufficient charging infrastructure, inadequate budget allocations for bus-based transport, and bus manufacturers’ reluctance to manage operations or their capacity to operate the buses running out. This is particularly relevant in the GCC model, where OEMs sometimes manage bus operations.

Towards holistic decarbonisation

Approximately 2.04 million buses in India are privately owned. Electrification of these buses is imperative for effective sector-wide decarbonisation. To facilitate e-transition, the government must consider incentives similar to those provided to STUs. Financing institutions, banks (including multilateral banks), and non-banking finance corporations should offer loans to private bus operators on favourable terms through green finance mechanisms to encourage the adoption of e-buses.

Approximately 2.04 million buses in India are privately owned. Electrification of these buses is imperative for effective sector-wide decarbonisation.

Since private operators typically run buses on longer inter-state/city routes, the state power distribution companies or an autonomous Special-Purpose Vehicle must collaborate with charging point operators to establish high-capacity rapid charging stations at terminals and on-route stops. 

Incentives, such as subsidies for land leases, charging equipment, and charger utilisation-based viability gap funding, could attract private investment. Additionally, the legalisation of permits by states to facilitate lease models to separate ownership and operations will allow financial institutions, bus manufacturers, or rolling stock companies to lease buses to operators, where the lessor handles the maintenance and the lessee tends to the staffing, permits, and energy costs associated with e-bus operations. This approach will enable private operators to access the necessary capital with flexible operational arrangements.


Firsat Fasih Mulla is a Research Intern at the Observer Research Foundation.

Nandan H Dawda is a Fellow with the Urban Studies programme at the Observer Research Foundation.

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Authors

Nandan Dawda

Nandan Dawda

Dr Nandan H Dawda is a Fellow with the Urban Studies programme at the Observer Research Foundation. He has a bachelor's degree in Civil Engineering and ...

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Firsat Fasih Mulla

Firsat Fasih Mulla

Firsat Fasih Mulla is a Research Intern at the Observer Research Foundation. ...

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