Why electric buses make so much sense in East Africa
Nairobi is a hotbed of innovation in Africa, making it a very exciting place to start a business but also susceptible to hype. The business model for the electric bus sector, however, is especially suited to Kenya and the East African region. As a result, Nairobi is unsurprisingly the home of numerous electric bus start-ups. BasiGo, an electric bus full-service leasing company, is one such company in my angel investing portfolio.
This week, the Kenyan government announced a new tax on batteries for electric vehicles. This is a blow to the electric vehicle sector, and no doubt many companies will be lobbying the government to have this reversed
However, I think the conditions for success of electric transportation in Kenya are still compelling.
This is my investment thesis for why I think electric buses make so much sense in Kenya, from my perspective as an infrastructure investor in Europe and Africa. My analysis focuses mostly on Kenya given the availability of data and the focus of BasiGo, but generally applies to other countries in East Africa with similar power grids and non-government transport systems, like Rwanda, Ethiopia and Uganda.
1. Buses can be powered by cheap electricity when no one else is using it
Cost to produce power by producer, Kenyan Shillings per kWh, 2023
X-Axis is scaled by total consumption in 2023
Source: Data from KPLC Annual Filing, 2023; Cost analysis by me
Electric buses typically have higher capital cost than a fossil-fuel bus, but if electricity costs are low enough, customers typically save money by switching.
The Kenyan power grid is predominantly renewable, primarily through geothermal and hydroelectric generation. The cheapest provider of power in Kenya is Kengen, a state-owned enterprise that provides over 60% of the country’s electricity. Kengen’s blended cost of electricity billed to Kenya’s utility, KPLC, is less than KSH 7 per kWh, or $0.048. Private sector projects like Kipeto Wind and OrPower are twice as expensive. Thermal energy for peak demand is 4-18x more expensive, delivering only 7% of total system’s energy need.
Geothermal and hydroelectric electricity are ‘baseload’ sources of energy, meaning they are available all day and night. The problem is that Kengen and KPLC do not have enough demand for this power in the evening, when business stops for the day. The capacity factor for Kengen’s assets, a measure of the utilisation of the plant, is 77% for geothermal and 35% for hydro. Even allowing for maintenance downtime, this leaves a large portion of potential energy production on the table.
What’s so great about electric buses is that they primarily charge at night. This is a win for both the bus operators and the utility. Electric buses can take advantage of cheaper baseload power in the evenings, and the utility can grow demand at a time when no one else would be using power.
2. Limited behaviour change is needed
BasiGo’s primary business model is around leasing electric buses as a service (though they are also branching out into manufacturing). High capital costs and limited cost predictability for a new type ‘fuel’ can deter adoption of electric vehicles. BasiGo, like other companies such as Zenobe in the UK or Blue Bird in the US, offers a financing, ongoing maintenance and charging package for companies, so that they can predict their ongoing expenses and manage upfront costs.
For some bus systems, this is an unusual way of dealing with a bus supplier. They might be used to purchasing the bus outright, then managing their own fueling costs and processes themselves, without any financing at all.
In Nairobi, though, the bus companies already take out credit to finance their buses, and thus are used to ongoing payments and dealing with banks. They also have a credit profile based on their ability to manage prior, similar payments.
Kenyan buses are typically fuelled when they are parked in a depot near a petrol station at night, ready for the day ahead. Instead, these buses can be parked at new electric charging depots, or chargers can be installed in existing carparks. BasiGo ran tests prior to launch that showed the bus range on a single charge could manage most of the mutatu routes for the day, and they also offer the option to charge buses during the day if needed.
Bus network operators thus do not have to deal with as much inconvenience from behavioural change when switching to electric vehicles. BasiGo’s sell becomes one of cost, predictability and quality instead.
3. Privatised, numerous counterparties to diversify risk
One risk with infrastructure investing in Africa is that you only have one customer: the government. While governments can be great counterparties, with predictable needs and higher investment grades than businesses, this can be a major risk for a company. There are no other customers that can absorb your services if the government decides not to pay, or to vigorously renegotiate terms.
The benefit of launching an electric bus company in Kenya is the magic of mutatus, the vibrantly colourful buses that are the lifeblood of the city. These are owned by private operators, typically large savings and credit cooperatives (SACCOs). There are many of these companies, of various sizes. Selling or leasing buses to a larger number of customers diversifies the risk from customers defaulting, and means that a company can be selective about who it negotiates contracts with.
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Of course, almost no investment is without risk, and there are many in this case. Despite Kenya’s usually supportive business environment, the risk of government intervention in the infrastructure sector is always present, for example in raising electricity prices or import tariffs. Given the value that electric vehicles provide to the government and its state-owned enterprises, this risk is partially, but not fully, mitigated, as illustrated by this week’s news.
Another issue is working with a relatively new technology in a higher risk market, especially with limited servicing capabilities and lower quality roads. During BasiGo’s testing, the buses held up well, even driving over Nairobi potholes. Being vertically integrated and offering value-added services also helps to build a competitive moat around their offering, making it more likely that they will generate repeat business and maintain contracts with customers. This will help them as they look to raise further capital, as their business will be more appealing to infrastructure investors, who have a lower cost of capital.
Despite these risks, I’m still bullish on Kenya’s electric vehicle potential, at least in the public transport sector. Even after today’s news, I think the fundamental conditions exist for this to become a dominant low-carbon transport technology in Nairobi and perhaps the entire East African region.