The Department for Transport has initiated a new ZEBRA funding round

With some key differences to the eligibility criteria from the previous round, local authorities and bus operators will want to understand how the Department for Transport (DfT) expects to see this further opportunity to invest in zero emission buses work in practice.

As before, the process involves a funding competition – with preference given to authorities that were not included in the first round of funding. Final decisions, following evaluation, will rest with the department’s ministerial team. £129 million is to be made available for bid covering financial years 2023/24 and 2024/25.

Key differences in this round

• Emphasis upon securing benefits for rural areas - a minimum of 25% of the funding is reserved for projects that will take zero emission buses into serving rural areas.
• Perhaps linked to the previous point, small (mini) buses can be an aspect of a bid.
• Projects can be associated with infrastructure only i.e., the charging apparatus for electric or refuelling infrastructure for hydrogen fuel cell (HFC) buses.

What timeline applies to this round?

As with the previous bidding process local authorities will only be required to make one substantial submission (no initial draft required). But they will be expected to follow a process that will require:

• Indicating an intention to bid by 20th October 2023
• Taking advantage of a clarification process which begins on that date and ends on 15th December 2023
• Engaging with DfT in the period 15th January 2023 to 22nd January 2024 as DfT starts the evaluation process
• Full reviews of bids received then take place with decisions expected in March 2024

How should authorities react to the opportunity?

Local authorities with transport functions have the opportunity to engage with operators providing local and demand responsive services within their area. A number of authorities missed out on funding last time round and for these authorities this is an opportunity to dust off the bid previously submitted and update to reflect changes in circumstances.

With emphasis on local services in rural areas, shire counties will want to give particular attention to the opportunity offered.

It’s interesting that infrastructure can be grant funded independently of vehicles in this next round – presumably, in recognition of the fact that operators can build a sound business case for zero emission bus procurement without heavy reliance upon this initiative. Notable within the bidding guidance is mention of the department’s view that there exists commercial maturity and, with that, a risk that, on evaluation, proposals to fund electric vehicle procurements through ZEBRA may fail on value for money grounds.ZEBRA 2 comes at a time when a growing number of Combined Authorities are progressing bus franchising assessments. A key part of an assessment will be considering the extent to which an authority should become responsible for provision of bus depots.

We believe that local authorities considering submitting a statement of intent will want to engage immediately with their bus operators to determine the appetite amongst operators to support a bid and to understand the reality of what exactly operators can and will be willing to deliver with the benefit of a grant funded incentive.

Notable is encouragement given within the DfT guidance to the prospect of local authorities engaging  with the asset financing market. There is reference to the UK Infrastructure Bank and to the enabling role played by the Green Finance Institute facilitating funds to be raised by local authorities to support decarbonisation projects.

It seems clear that local authorities are being encouraged to evaluate the option of vehicle and possibly also infrastructure ownership being with the authority. Leases of the vehicles and potentially also the charging apparatus will then be offered to local service operators. This approach has already been adopted in areas such as Greater Manchester.

How should bus operators prepare for this opportunity?

An important objective of DfT in its ZEBRA programme is to recognise the intention to set an end date for the sale of traditional ICE buses. It follows that the future of local bus services will be heavily dependant upon the momentum that can be created to drive upwards acceptance in the bus sector of zero emission buses as the only option when new vehicle procurements are contemplated.

With the introduction of a willingness to fund mini-buses, DfT is doing some scene setting to prepare the way for a broader base of operators who can benefit from ZEBRA and which should take zero emission bus use into rural areas.

Smaller operators will be less able to manage commercial risks around emerging technologies and most likely will opt for electric as opposed to HFC vehicles. Where this is the case, the capacity of the local electricity network becomes a vital first factor to recognise when considering feasibility of an investment of this kind (particularly as many networks around GB are desperately struggling from import and export capacity constraints, leading to lengthy connection timetables). In the first round of bidding, the door was quickly shut on operators who could not give an assurance that their depot could meet the capacity requirements for the necessary power supply.

Local authorities may want to support smaller operators in their assessment of feasibility

As part of any examination of feasibility, any operator considering participating in ZEBRA will want to consider whether any risks arise around investment in current depots that are used by the operator. If leased, what is the unexpired period of the lease? Long enough to justify investment? Is the electricity supply shared with other users? What upgrading of the import connection is required and how much (in both time and cost) is required to facilitate the upgrade?

Local authorities may want to consider appointing consultants to facilitate the evaluation by operators of the feasibility of joining into a ZEBRA bid.

There are also important considerations around contracted services such as those for home to school provision and services where the local authority has stepped in with financial support. Given the regular retendering of those services, should it, in practice, be the responsibility of the local authority to take responsibility for procurement?

Once again, the funding rules will limit grant funding to 75% of the incremental increase in the cost of a zero-emission vehicle over its diesel equivalent and 75% of the cost of charging infrastructure. How should the operator look to fund its contribution if the procurement responsibility is to lie with the operator?

With the arrival of zero emission vehicle solutions, has come the emergence of service providers who can effectively “wrap” the entire procurement process – including providing finance, supporting the provision of batteries and dealing with the detail of infrastructure procurement, installation and operation. This approach will be particularly attractive to smaller operators. This approach adds a layer of complexity that authorities need to take into account in the grant documentation but this has not proved an obstacle to achieving a successful framework of relationships involving the grant funding authority. Bus operator and service provider/financier with a fair and realistic allocation of risk and responsibility.

Will hydrogen play a significant part in ZEBRA funding outcomes?

Whilst the focus of ZEBRA 2 is dominated by electric vehicles, there is recognition that HFC buses could also be eligible for funding. HFC buses for widespread commercial use are in their relative infancy in the UK, but there have already been some success stories (see West Midlands Combined Authority which was successfully awarded funding for hydrogen buses under ZEBRA 1, Liverpool City Region, and Surrey, all of which have successfully launched hydrogen buses on routes in the last 18 months).

Clearly, the success of West Midlands Combined Authority during the previous ZEBRA funding round has persuaded DfT that HFC buses have a role in the procurement of zero-emissions buses. However, there are a number of issues that need to be overcome before they will form a significant part of the ZEBRA funding outcomes:

• Value-for-money: DfT recognises that most hydrogen schemes will struggle to meet the criteria for a low value-for-money threshold. So, it will consider funding schemes that reflect a poor value-for-money assessment. This is designed to encourage investment and proliferation of HFC buses, so that future funding rounds can target better value-for-money propositions. HFC buses have not yet reached cost parity with their diesel or electric counterparts; if DfT were to wait to fund medium or high value-for-money propositions, HFC buses may never become widely available, particularly in areas where HFC buses are the only viable zero-emissions alternative to traditional ICE buses (e.g., long rural routes where electric buses would require charging between stops).
• Availability of low carbon hydrogen: qualifying hydrogen schemes must demonstrate that the proposed HFC buses will use hydrogen approved under the Renewable Transport Fuels Obligation (RTFO), or which complies with the UK’s draft Low Carbon Hydrogen Standard (LCHS) by March 2025, and the local authority must submit a form of provisional contract with the relevant fuel supplier. Whilst the UK hydrogen market is likely to grow, the industry is not expecting to reach commercial scale across the transport and manufacturing sectors until the early 2030s. There are hydrogen production projects already in development, but these are not yet at the scale required to support significant swathes of local authorities procuring HFC buses. The likelihood is that for ZEBRA 2, a small handful of local authorities could benefit from funding, but until hydrogen production and refuelling infrastructure (see below) reach scale in multiple counties, there’s unlikely to be significant uptake over electric alternatives.
• Infrastructure availability: part of the “chicken and egg” issue that plagues deployment of hydrogen vehicles is the lack of refuelling infrastructure. There’s a resistance to putting in the relevant infrastructure until there is increased demand, but there’s huge concern about building that demand if the infrastructure is not there as well. ZEBRA 2 funding is clearly designed to help deal with this, and there are additional “innovation” criteria being used to assess potential hydrogen schemes. Whilst most HFC buses are currently used in urban areas with refuelling infrastructure in-depot, for rural communities there are a number of issues to overcome where the refuelling is not done in-depot or cannot be done without significant investment. Coupled with the higher cost of hydrogen against diesel, the additional time and cost implications with refuelling out of depot (e.g., additional time for drivers), and potential impact on route times, the lack of in-depot hydrogen refuelling infrastructure can have a serious knock-on effect on the operational logistics of a bus route. The fact that DfT want to use ZEBRA 2 funding for innovative solutions to these issues is useful, and will help build the business case for the future, until those initial steps are taken and there is proof of concept, the overall landscape for HCF schemes under ZEBRA 2 is likely to be optimistic rather than significant.

Conclusion

DfT have set challenging timelines for the development of proposals and then, for those that are successful, for the period through to completion of procurements funded through ZEBRA. The guidance issued by DfT for ZEBRA 2 does not make clear how the first phase of investment has gone – we believe there are a number of procurements that have been unable to cross the finishing line within the department’s desired timescale enabling reference back to decision makers at the department with requests for extensions.

The significance of this initiative cannot be underestimated. It comes at a time when big questions are being posed over how exactly local bus services should be provided to best serve communities, employers and provide access to vital public services whilst at the same time holding a key that can play an important role in unlocking the net zero ambitions that the UK is formally committed to on the global stage.

Would you like to learn more about ZEBRA?

Our Local Transport Team comprising of local transport, clean energy and transport asset finance lawyers have been supporting ZEBRA projects in several local authority areas. We are partnering with Professional Services Consultancy WSP to present a webinar on 31 October at 11.30am. An expert panel of speakers will be sharing their experience as to what makes a good business case. For authorities expressing interest to DfT and for Operators responding to the opportunity this will be an excellent opportunity to learn more about delivering zero emission bus projects and the challenges involved with opportunities to ask your own questions of the experts. More information will be provided shortly.

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If you would like to ask an expert about ZEBRA please feel free to contact Frank Suttie, Tom Johnson or Liam O'Flynn.