A green bond for the finance of low-carbon bus operations

The research will deliver a green bond designed to finance low-carbon bus operations, using National Express as a case study. A supporting document will provide asset specifications (e.g., face value, issue price, interest rate, and an expected credit rating), a sector/business breakdown (e.g., profitability, liquidity, solvency, legislation, and identified risks), and evidence of alignment to the ICMA green bond principles and UK taxonomy.

This topic is important because most UK bus operators cannot afford to decarbonise their fleets, especially post-Brexit due to the absence of the EIB lending facility. The UK government's recent strategy has revolved around centralised public procurement; however, this is both insufficient and unsustainable. It follows that the market needs a green financial instrument to raise private investment for low-carbon bus operations.

The green bonds that exist today enable firms to finance their green projects and operations at a lower cost of borrowing than if they had issued a conventional bond. However, many of the more radical investments required by the UK's net-zero transition cannot be funded by green bonds because their simplistic structure would result in a sub-investment grade credit rating. The problem for issuers such as National Express is that there does not exist a green financial asset which is designed to overcome the additional risk of default associated with novel technologies or material changes to business operations due to a sector's decarbonisation.

The research will be split into three publications followed by a final deliverable - the example green bond using National Express as a case study. The first paper will look at the impact of weather and route characteristics on the service feasibility of battery electric buses and/or hydrogen fuel-cell buses. The second paper will use primary data from an industrial partner to calculate the total cost of ownership (TCO), net present value (NPV), internal rate of return (IRR), and payback period (PB) of decarbonised fleets currently in operation. The purpose of the first two papers is to establish the relative profitability and service feasibility of low-carbon bus operations relative to conventional diesel fleets. The final paper will develop a probability of default (PD) model built around the industrial partner case study which incorporates the value of their "real options". The structure of the green bond will be designed to combat the major risks identified by the third paper's PD model.

The research will deliver an example green bond which provides comprehensive guidance to potential issuers on how they can finance the mass rollover of their fleets towards low-carbon propulsion technologies. This would result in a faster, more efficient, transition to net-zero which reduces government expenditure. Secondly, the research will help ratings agencies provide accurate credit ratings for sectors undergoing transition given that historical data is inadequate. If implemented, the financial sector would become more effective and efficient at directing financial capital towards radical socially desirable investments.

Impact Summary

This proposal has been developed from the ground up to guarantee the highest level of impact. The two principal routes towards impact are via the graduates that we train and by the embedding of the research that is undertaken into commercial activity. The impact will have a significant commercial value through addressing skills requirements and providing technical solutions for the automotive industry - a key sector for the UK economy.

The graduates that emerge from our CDT (at least 84 people) will be transformative in two distinct ways. The first is a technical route and the second is cultural.

In a technical role, their deep subject matter expertise across all of the key topics needed as the industry transitions to a more sustainable future. This expertise is made much more accessible and applicable by their broad understanding of the engineering and commercial context in which they work. They will have all of the right competencies to ensure that they can achieve a very significant contribution to technologies and processes within the sector from the start of their careers, an impact that will grow over time. Importantly, this CDT is producing graduates in a highly skilled sector of the economy, leading to jobs that are £50,000 more productive per employee than average (i.e. more GVA). These graduates are in demand, as there are a lack of highly skilled engineers to undertake specialist automotive propulsion research and fill the estimated 5,000 job vacancies in the UK due to these skills shortages. Ultimately, the CDT will create a highly specialised and productive talent pipeline for the UK economy.

The route to impact through cultural change is perhaps of even more significance in the long term. Our cohort will be highly diverse, an outcome driven by our wide catchment in terms of academic background, giving them a 'diversity edge'. The cultural change that is enabled by this powerful cohort will have a profound impact, facilitating a move away from 'business as usual'.

The research outputs of the CDT will have impact in two important fields - the products produced and processes used within the indsutry. The academic team leading and operating this CDT have a long track record of generating impact through the application of their research outputs to industrially relevant problems. This understanding is embodied in the design of our CDT and has already begun in the definition of the training programmes and research themes that will meet the future needs of our industry and international partners. Exchange of people is the surest way to achieve lasting and deep exchange of expertise and ideas. The students will undertake placements at the collaborating companies and will lead to employment of the graduates in partner companies.

The CDT is an integral part of the IAAPS initiative. The IAAPS Business Case highlights the need to develop and train suitably skilled and qualified engineers in order to achieve, over the first five years of IAAPS' operations, an additional £70 million research and innovation expenditure, creating an additional turnover of £800 million for the automotive sector, £221 million in GVA and 1,900 new highly productive jobs.

The CDT is designed to deliver transformational impact for our industrial partners and the automotive sector in general. The impact is wider than this, since the products and services that our partners produce have a fundamental part to play in the way we organise our lives in a modern society. The impact on the developing world is even more profound. The rush to mobility across the developing world, the increasing spending power of a growing global middle class, the move to more urban living and the increasingly urgent threat of climate change combine to make the impact of the work we do directly relevant to more people than ever before. This CDT can help change the world by effecting the change that needs to happen in our industry.