The Importance of Subscription to Energy Efficiency Equipment

How can electric school buses be made accessible and cost-effective? In this episode, Highland Electric Fleets CEO Duncan McIntyre makes the case for why school districts should overcome the challenges to bus electrification, and the ways his company’s subscription model helps them do so.

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David Roberts

One of my very favorite things in the world to talk about — second perhaps only to electric postal vehicles — is electric school buses. It's difficult to think of a more righteous cause than reducing air and noise pollution in direct proximity to the country's most sensitive lungs and ears.

Currently, however, electric school buses still cost two to three times what their diesel competitors cost, which can be daunting for school districts with tight budgets. Electric buses pay themselves off over time through dramatically lower fuel and maintenance costs, but the upfront costs of the transition are steep enough to scare away many administrators.

My guest today runs a company called Highland Electric Fleets that is attempting to overcome that challenge by offering a new business model. Rather than purchase and maintain the buses themselves, school districts pay Highland a subscription fee, locked in for a 15-year contract, which covers the buses, a depot, charging infrastructure, scheduling, training, and ongoing maintenance and replacement of buses when required.

In addition to a saving most school districts money immediately, the subscription contract derisks the transition to electric buses. That is about the best thing I can think of that someone could be doing these days, so I was eager to talk to Highland CEO Duncan McIntyre about the advantages of electric buses, the challenges school districts face, and the problems solved by the subscription model.

Alright, with no further ado, Duncan McIntyre, welcome to Volts. Thank you for coming.

Duncan McIntyre

David, thanks for having me.

David Roberts

This is awesome. Volts listeners are so interested in electric school buses, so I just have a gazillion questions, so let's jump right into it. Tell us, what are the advantages or benefits of an electric school bus over the current line of school buses, which as I understand it, are mostly diesel?

Duncan McIntyre

That's right, they're mostly diesel. A little over 80% today. But your question is about the advantages of electric. I think the list is long, but I would highlight a few of the big ones. There's a clear benefit in emissions profile just in the health of everyone who's operating or riding a bus. There's no tailpipe at all, and as a result, they're very clean. Another big advantage is they just operate much cheaper. The fuel is a lot less expensive, there are very few moving parts compared to a diesel bus, and as a result, there's no oil changes, there's no exhaust filters. There's lots of things that just aren't on electric buses, and so operating is much less expensive.

David Roberts

And I don't want to get caught up in the whole thing too early, but I'm trying to sort of conceive of the sort of magnitude of the pollution reductions here. Like, have there been measurements or studies about the difference when an electric school bus replaces a diesel bus? Or are we too early to know for sure about that kind of stuff?

Duncan McIntyre

I think there have been plenty of studies about the health impacts of a diesel bus. And the comparison is simply the health impacts of not having a diesel bus since the electric format has literally no tailpipe and no emissions profile at all. But the health studies have been done by groups like American Lung Association, groups like that, and there's quite a few data points that look at reduction in NOx and particulate matter, specifically on things like pediatric asthma. I would say that's one of the main studies that has taken place, but also tying the emissions associated with the diesel tailpipe to just other general health key indicators.

David Roberts

Yeah, one thing I would toss out too, because people always forget about this, but is noise pollution, which is the research on noise pollution is wild. I don't think people appreciate the effect that has. And all these kids are effectively sitting right next to a jet engine, more or less. It's extremely loud. But the first question that comes up for everybody is they cost more. So what is the current cost differential between an electric school bus and a diesel school bus?

Duncan McIntyre

The electric school bus ranges from $275,000 to $375,000, really, depending on the state you're in. And your question is about the differential. It's about $200,000 of differential on average. So it's a $200,000 premium to buy an electric.

David Roberts

That's not small. That's two or three x the cost.

Duncan McIntyre

That's exactly right. It's not small.

David Roberts

Let's also talk about some of the other barriers other than cost for a school district looking... if I'm in a school district, I have this wild idea I want to replace all our diesel buses with electric buses. The cost of the buses themselves is not the only barrier or challenge I face. What are the other extra challenges that have to be overcome?

Duncan McIntyre

There's a few other buckets. One would be charging infrastructure. You need to establish your depot wherever you operate your buses today as an electrified depot. And that involves installing a whole bunch of new equipment, running an interconnection to bring new power, new electrical service into that depot. I'd say that's one big bucket of sort of a project that's required to get up and running. There's another piece that's all about training. Your workforce needs to be trained. Mechanics need to figure out how to work on these vehicles. Your drivers need to know how to operate them and how to not just operate them, but how to be really comfortable with running them.

And then there's an operating cadence of charging them. The fueling activity is a little bit different. And unlike diesel fuel, with electricity, you really want to pick and choose when you charge and how quickly you charge, as it can result in lower or higher costs and more reliability if done right.

David Roberts

And so that'll get into logistics, right? Like routes and the timing of routes and these kind of things?

Duncan McIntyre

Absolutely, that's right.

David Roberts

And so these are all fairly substantial challenges. So what is the current market penetration here? What is the base we're starting from? Are electric school buses anywhere, or is it still an extremely marginal sort of market?

Duncan McIntyre

We're at an inflection point right now, David. If you'd asked me the question a year ago, I might have said electric buses made up 2% of the new school buses purchased in 2022. But in 2023, our perspective is it'll be closer to 10% of the new school buses purchased, and in 2024 will be 20% to 40% of the new school buses purchased. So it's changing very quickly right now.

David Roberts

You think we're on the upswing of that s-curve in adoption?

Duncan McIntyre

We are. There's lots of reasons behind that. The federal government, as well as many states have launched programs that are putting a lot of fresh grant capital as well as tax credits.

David Roberts

If I'm a school district now, what is the total kind of pool of assistance available to me? I think there's some stuff in IRA. I think there was some stuff in the infrastructure bill. I know there's state stuff. What is the sort of menu of assistance I can find?

Duncan McIntyre

Yeah, it's a tidal wave of assistance, David. It takes a full-time person just to navigate it all. But I would put it into a handful of big categories. One is the Clean School Bus Act, which is part of the infrastructure bill, and that's $5 billion that will roll out over five years.

David Roberts

And are those just grants to buy school buses?

Duncan McIntyre

Essentially just grants to assist in buying electric school buses. I think the second big category is tax credits in the IRA. And the tax credit is not as big on an individual vehicle basis, but importantly, it can be bundled with other grants and so it provides support. And then many states have their own programs. California has had a program for years that's robust, really a grant program. Colorado has a new grant program. There are funding mechanisms everywhere from New York to Maryland to Virginia. And in many states, the totality of bundling a state program with a federal grant program and a tax credit actually make an electric school bus much less expensive than buying a new diesel, so there's a real cost advantage in some parts of the US today.

David Roberts

Got it. So we're not just talking assistance. We're talking sufficient assistance at this point.

Duncan McIntyre

More than sufficient assistance, we would argue.

David Roberts

Right. Okay, so we've got a school district that has a dream of switching out fleets, but it is daunted by the individual cost differential of the buses. It is daunted by this notion of infrastructure and how to build it and where to build it and how to run it. It's daunted by, basically, being busy and not knowing... not having time to study how to switch sort of the logistics of the fleet and the dispatching everything. So into this environment comes Highland. What is your business model? How are you trying to address those barriers?

Duncan McIntyre

You've laid out the barriers quite well. The Highland business model is the finance engine behind driving the electric school bus movement. What we found is that while capital, upfront capital is a huge barrier, accessing the grants can help bridge that gap. But it's complex. And on top of that, if you've got the grant money, it's still very difficult to figure out how to design the equipment, build it on time, build it reliably, and then ensure that you can operate, reliably and within your budget. And so, our business model is truly the finance engine. We pay for everything that's not grant-funded from vehicles to equipment, and then we commit to operate that equipment and really support our customers—support the schools—by promising their fleet of electric buses will be fully fueled every morning for 15 years.

David Roberts

15 years. So just to make sure I have this right, the school district pays basically a subscription fee to you, to Highland, and Highland buys the buses, builds the chargers, builds the depot and trains staff, and then maintains, but does everything else, maintains the vehicles, repairs the vehicles if they needed or replaces them. Everything else, Highland does. So the only thing that the school district is on the hook for is a subscription fee, is that right?

Duncan McIntyre

From a financial standpoint, that is exactly right. And from a practical standpoint, you're spot on. The only nuance would be vehicles are often maintained by the district's mechanics. So we will train them and then we will pay for the maintenance. So the staff that's on the ground today is typically very well-suited to actually do the repair work, and they're eager to get the training and be part of this new industry.

David Roberts

So financially, the school district can be confident that the subscription payment is the totality. There's not other things that they haven't thought of. They're going to come and post costs on them.

Duncan McIntyre

That's exactly right, yeah. The school district knows it's predictable and reliable that our subscription fee is on par or less than what they spend to put a diesel fleet on the road.

David Roberts

I'd like to get into a little bit of detail about that. So it seems like just financially, just comparing the cost is complicated. So I assume you've done this math and you've worked through this with some school districts. So what is the kind of cost of a subscription? And how does that compare to... if I'm a school district with a fleet of diesel school buses, the cost of switching the buses, building the infrastructure, training, maintenance, et cetera, et cetera, how does the total cost shake out?

Duncan McIntyre

Yeah, that really is one of the key drivers behind this industry.

David Roberts

I'm sure it's everyone's first question when you approach them.

Duncan McIntyre

Totally. And in terms of your listeners, David, I would imagine solar is a good analogy. The reasons why companies like Sunrun have done so well is because the average homeowner doesn't necessarily know that if they spend $25,000 on solar equipment, they don't know what they're going to get in return. And so a developer can take on the risks, place the capital, build the equipment and promise that the equipment will work. And the result is the homeowner pays ten cents a kilowatt hour and they know that's cheaper than the utility. We sort of do the same thing. We know what the capital costs are going to stack up to be on any given project. And they differ depending on the state that we're in. Illinois is different from Maryland.

David Roberts

Well, size of the school district, too. I mean, presumably these bus fleets range quite widely in size and scope, like geographical scope.

Duncan McIntyre

Absolutely, that's right. But we know what the cost is to build and then we have our own perspective on what the ongoing operating costs will be. Electricity to fill the buses every night, the software we need to run it, all the costs. And then the third big piece is we know what the grants look like and we need to organize our deployments so that upfront costs and downstream costs match up and that can result in a very affordable rate that the school district can pay us under our subscription. But embedded in that is the risk that the equipment will perform and the risk of commodity prices.

David Roberts

Right.

Duncan McIntyre

And the risk of keeping the fleet maintained and running. And so it lends itself very well to a business like Highland where we have the scale to bring specialized teams to do all those things really well and deliver it as a bundle.

David Roberts

Right. So presumably the total cost of owning and maintaining the fleet for you is going to be somewhat lower than it would be for the school district just because you have the procedures and the staff and the expertise and the relationships with vendors, et cetera, et cetera.

Duncan McIntyre

That's exactly right. There's economies of scale around every corner, and we're the largest buyer of electric school buses in the country today. We've got more of them on the road than anyone else. And as a result, we have scale in our operations that others don't have.

David Roberts

And so this subscription fee is locked in place for 15 years?

Duncan McIntyre

That's correct.

David Roberts

That's part of the guarantee. Like, you will pay X amount each year for 15 years no matter what happens to the cost of electricity or more supply chain problems or whatever else.

Duncan McIntyre

That's exactly right. And it's more like per mile, $2.50 a mile might be a contract we would sign, and we know they're going to be driving that bus about 10,000 miles a year, but it could be a little more. It could be a little less.

David Roberts

Right. So a lot of risk you're taking on a lot of risk cost. So can you guarantee—I'm sure you don't want to guarantee because there are lots of different kinds of fleets and a lot of different kinds of places. But, can you come close to guaranteeing a given school district that the subscription fee they would pay you is lower total cost than going electric on their own? Is that something you can sort of set in stone?

Duncan McIntyre

Well, the school would have to go through the details and come to the conclusion on their own. But in almost every case, we found that we are cheaper than them doing this on their own. And I would highlight a couple of reasons why. One is simply we're a larger buyer than they are individually and that gives us access to better pricing from all the equipment providers. A second reason is we have invested in all of the technology needed. That creates interoperability between the charging stations, the vehicles, the utility, and the software management tools. And so we can roll that out very inexpensively at scale.

And a third reason is there's a tax credit out there that has a lot more value in it for a private tax-paying entity that's structured in a way to monetize it. It's the same reason why most solar is privately owned as opposed to publicly owned. It's because there's tax credits that are tricky to monetize otherwise. And so there's a chunk of cash that we take off the top just for the tax credits that schools aren't aren't able to sort out very easily.

David Roberts

So that's one financial question: is it cheaper than doing this ourselves? But maybe the more difficult financial question is: could you go to a school district and say over the course of the 15 years of the contract, this will be cheaper than continuing to maintain your existing diesel fleet? Can you promise that?

Duncan McIntyre

I can't promise that because we don't know what diesel fuel prices will be two years from now. But we can make a very strong case that we will indeed be cheaper by quite a bit. It requires everyone to agree on some assumptions around diesel fuel pricing. But we have one other benefit, which is: not only are we typically cheaper when you model it out, but we have no fluctuating costs to the school.

David Roberts

Yes.

Duncan McIntyre

And so that's a benefit. It's a big benefit.

David Roberts

Yeah, this is such a big benefit of renewable energy that I feel like manifests in a lot of different areas that gets overlooked a lot of the time. Just risk of commodity price fluctuations is such a huge factor in these financial transactions, such a huge factor in national inflation risk. It's like a huge factor in everything.

Duncan McIntyre

I totally agree. And the reality, David, is we can lock in electricity prices for many years into the future by going into the competitive electricity markets. And that's a lot more difficult to do with diesel fuel, unless you want to pay a big risk premium. And so not only is are the kilowatt hours much cheaper, which just makes the totality of fueling costs lower, but electricity has more management tools for companies like ours to go into the markets and really lock in those prices. So we aren't taking twelve years of completely naked risk either. We're just bringing a set of strategies to bear to offer that to our customers.

David Roberts

So you can make a strong case that it will be cheaper over the 15 years. What about though, like, next year? If I'm a school district and I have sort of a set school bus budget, can I save money on the first year? Because it's always these upfront—as I'm sure you will know, it's always these upfront costs that are daunting to people and keep people away from these things—is there immediate savings or is it comparable immediately?

Duncan McIntyre

Yeah, there's immediate savings, especially in the environment we live in today, where there are some grants available to support project costs. And so year one, year two, year three, there's immediate savings and there's also just a huge savings in the first year because you avoid buying a new diesel bus. So you might avoid spending $140,000 for a capital purchase. And you've gone to a world where Highland gets paid $30,000 a year, which includes a vehicle, it includes all the fuel, it includes repair costs, it includes software and training. So there's cost savings day one and there's a very strong case that there will always be cost savings.

David Roberts

So this is a naive question, but you're coming to school districts and saying, "Hey, a. you're going to save money on day one, b. you're going to improve the health of your kids and your drivers, c. you're going to improve general sort of satisfaction and performance." Who says no to this? And why? Does anyone say no to this?

Duncan McIntyre

I ask myself the same question occasionally. It's almost too good to be true. We're at a moment in time where the technology is ready for the task and there's a combination of available services and capital and those are coming together in a really nice way. But what we're doing, David, is still asking municipalities to buy transportation in a different way. They're accustomed to a capital budget to buy vehicles and an operating budget to run them, and we're asking them to blend them into a subscription. So there is a little bit of a new dynamic, a new purchasing dynamic, and then I would say there's always concern about new technology and we're still in the early innings of the electric school bus movement.

And so there's, I think, a healthy element of skepticism around, "Will they be reliable?" And so, those are some of the obstacles that we run into. But I would say we very rarely get a flat out no. It's more... we just get folks who need to come up to speed. They're on their own educational journey and they need to kick the tires. And so we host a school district almost daily at one of our sites, whether it's Maryland or Colorado or Massachusetts, we're hosting a lot of visitors expressing interest, and they're in various places on their buying journey.

David Roberts

What about, god forbid, the risk that Highland goes out of business at some point in the next 15 years? What happens then to these contracts?

Duncan McIntyre

It's a good question. The vehicles are still there and the vehicles will still be operated and the contracts stand independently. We set every contract up in its own entity and we fund each individual entity in a way that's appropriate to capitalize the project. If you think about a project, the risk that we go under is really only for the couple of months at the very beginning when we're building and delivering. Once we've installed all of our equipment at a customer site and we've delivered all the vehicles, the project entity that we own, but the project entity that serves the customer, is simply basically producing profit that goes to pay back the investment. But if Highland were to go under, that project entity will still stand and serve the contract until the end of the contract.

David Roberts

Got it. So the the maintenance and operations side of things is locked in for the 15-year contract, regardless of Highland's fate.

Duncan McIntyre

That's a good way to think about it. That's exactly right. And so there's a lot of details behind how that works, but every one of our customers asks the same question you ask, and they get very comfortable because of that dynamic.

David Roberts

Right. So as I'm envisioning the country's school districts, the first thing that comes to mind is just wild variety of size, of financial wherewithal, the number of buses, the geographical scope of the buses, the weather conditions in which buses operate. So how standardized can you get this? It seems like there's this element that's bespoke to every school district that's sort of unavoidable. How similar is what you do from district to district and how much is it kind of customized?

Duncan McIntyre

There's a few things to unpack there. There's a component around the environment that the project is asked to operate in. So whether it be the average temperature by week per year, the topography, are they going up steep hills and down, or is it flat? How many stops? All that stuff gets, gets boiled down to the sort of the operating plans and we build our charging infrastructure and size the batteries. And every aspect of a project design depends on those key assumptions. But we have done this everywhere from scrubbing data from a project in Tok, Alaska, which is arguably the coldest electric school bus in operation.

David Roberts

Yeah, I was going to ask, I mean, everybody, as you can imagine, everybody on Twitter everywhere else, one of their first questions is, "What about cold weather? What about when it's freezing? Blah, blah, blah. What about... don't EVs lose range? How do you keep the buses heated when you pick up your first kid?" All these questions about cold weather. So you've dealt with those.

Duncan McIntyre

Yeah, the answer is, it's actually not that complicated. It's just about planning. I'm sitting here in Beverly, Massachusetts, at our headquarters. I'm looking out the window, and we're getting dumped on by snow right now, and the buses are out picking kids up. And it's fine. You do lose a little range. It's better to precondition the batteries and the cabins of the vehicles with some heat before you unplug them. So the vehicles go out pre-warmed with a full tank of gas, so to speak. But that's sort of a segment of your question.

The broader question is, can you standardize a product offering here? And the answer is, absolutely. That's what we've been working on for the better part of five years. Every project has expertise needed in designing and building a depot. And so you've got parameters that you need to solve for that include topography, temperature, range. You've got people who need to be trained. You have investments that need to be made, and you have a utility that you have to interact with, and you have to put all those things through a standardized process so that you deliver reliable, affordable transportation at the end of the day.

David Roberts

You've not run across a school bus route that is too long or too far to do with electric like...?

Duncan McIntyre

We have. We've run into a few, but they're very rare. We serve both very rural and very urban customers. In Illinois, we have a contract that's in a very rural part of the state, and the routes are over 100 miles. That's entirely doable, as long as you plan your charging equipment appropriately. But occasionally we see 150, 160, 170-mile day, and the driver doesn't have the time to circle back. And so those are some of the routes that are less appropriate for electric today, but it's less than 5% of the routes.

David Roberts

What is the range of an electric school bus?

Duncan McIntyre

With the products that are available today, between 100 and 160 miles. Most of the buses we have on the road today have 140 miles of range.

David Roberts

And should we assume that that's being steadily improved like everything else? I was going to ask about this later, but let's get into it now. Just about the sort of manufacturing of the buses themselves. I'm presuming that among all the many other things you're doing, you're not manufacturing school buses. Where are you getting them and are you ordering? I mean, is there like a standard offering that you're just buying in bulk from some manufacturer, or is it possible to customize them? And if so, how much? Like, in terms of the physical buses and how you procure them, how does that work?

Duncan McIntyre

We do not manufacture buses. You are correct. We buy them from the top tier manufacturers that have electric products available. Thomas Built Buses. We buy from Bluebird, we buy from IC, all of the major US-domestic manufacturers that have electric product available. We essentially buy one of two or three formats. There's a type C, there's a type D, which is a little bigger but a shorter wheelbase, and a type A, which is a smaller bus. And while there's lots of bells and whistles, you can add safety features, those can all be specced by each individual school.

It is fundamentally the same foundational vehicle, just with more cameras or seatbelts or whatever someone might add on. So we do buy, in bulk, for a couple of those categories as part of our procurement strategy. And so we end up working really closely with the manufacturers, not only in terms of the features we need to operate the vehicles efficiently, but also the feedback loop. What are the things we found that are tricky for drivers? Little quirks?

David Roberts

Yeah, I'm very curious about those people who have road tested these things now and there's... driving school bus routes every single day is a real stress test.

Duncan McIntyre

It really is.

David Roberts

What do they find in terms not just of like, drivetrain or whatever, but sort of those bells and whistles? What do they and do they not want in those terms?

Duncan McIntyre

Well, first, I would say the drivers, almost universally, absolutely love them.

David Roberts

This is for the same reason that everyone loves it when they switch to an EV, presumably?

Duncan McIntyre

It's a lot of the same reasons, right? The vehicles have better torque. They're completely silent. The braking is a real pleasure. You really just take your foot off the accelerator and a regenerative braking system slows the vehicle down at an even pace. It's a very calming experience, and it puts more power back in the batteries while it does that. And so it takes a little bit of training and a little bit of practice to get the hang of it. But the drivers love it and it eliminates the wear and tear on the brakes. But I would say, David, the biggest highlight I would throw out there is because the vehicle is so quiet, no engine rumbling, the kids in the back don't have to yell over the engine rumbling to talk to each other, and so it's just a quieter drive to school, the whole experience.

David Roberts

Yes. My memories of school buses in my youth definitely involve a lot of noise, a lot of screaming.

Duncan McIntyre

Absolutely. And I would throw out one other just anecdote, which is while the drivers absolutely love the vehicles, there's lots of little quirks that we found, especially in the first couple of years of operating— fewer and fewer today—but little software quirks where if your bus is Idling for more than a minute, it will shut off in the early iterations. So you have to flip the switch and turn it back on. And since there's no engine rumbling, you don't know that it's shut off. And so that was a little inconvenience that had to be sorted out with the manufacturers. But little things like that are pieces of feedback that were, I would say, weekly, monthly for the first year and a half, and now it's more like quarterly.

David Roberts

Also in terms of the physical buses... in the EV space, there's this sort of division between sort of legacy manufacturers that are trying to move to EVs. And the thought is among, some people I think probably fewer people these days than before, but the thought is among some people that a company like Tesla, which is just starting on EVs from the beginning and designing an EV from the ground up rather than trying to sort of adapt old existing chassis and things like that, is going to produce, ultimately a better vehicle that in the long term will be cheaper. Is there a Tesla of school buses or of buses generally, or are these all legacy manufacturers?

Duncan McIntyre

Lion Electric is a Canadian company that's the closest to what you described in this sector, and they were the first manufacturer to put an electric school bus on the road a number of years ago. They've had a lot of success in California, and they've got the lion's share of the market in Canada. And they're focused on other areas too, other categories of medium and heavy duty, municipal and other transportation, trucking and busing. And they are very... Lion is a very formidable competitor for the incumbent OEMs. I think one of the areas that is really unique to school busing is there's a very tight relationships with the regional dealers, not only on buying the vehicles, but just the ongoing support that's needed to keep them on the road. And, I think it's an area that is harder to break through that network without your own. Whereas Tesla had the benefit of consumers not having quite as tight of a relationship with their dealers.

David Roberts

Even loathing their dealers.

Duncan McIntyre

Yeah, that's right. In many cases, I think that's right.

David Roberts

Final hardware question: what kind of batteries do these buses use? Are they all using LFP batteries?

Duncan McIntyre

There's a few technologies, but they're for the most part lithium-ion batteries.

David Roberts

And this is not like do you not get parents or school administrators worrying about battery fires? I mean, I know they're rare, but obviously—in this setting—you wouldn't want to take any chances.

Duncan McIntyre

I agree. That has not been a key area of concern for parents or school administrators. We do get the question occasionally, but it hasn't been a key area of concern. We own a lot of Thomas Joulies, which is the Thomas-built electric school bus, and they are powered by a powertrain built by Proterra. Proterra is a domestic manufacturer. They make batteries specifically engineered for the medium- and heavy-duty transportation sector. And the safety requirements and standards in that category of vehicle are such that Proterra had to do a tremendous amount of safety work. And they are one provider. Cummins has a platform as well.

There are others, but our opinion is the industry has done a pretty good job of designing, you know, the right safety precautions and designing their equipment in the right way just to make them really safe.

David Roberts

Yeah. Okay, there's a whole set of questions I want to ask about utilities and your interaction with them.

Duncan McIntyre

Sure.

David Roberts

Putting aside for now, fancy talking to the grid and all this kind of stuff just in terms of going into a utility area and installing what amounts to really substantial new load and not only substantial new load, but load that when it's running full out, is a really high level of power involved. I just am assuming that you have to tell utilities, ask utilities, interact with utilities in some way just if you're going to show up and do this. Is that accurate?

Duncan McIntyre

Yes, that's accurate. David, I would say it's somewhere in between ask and tell because the reality is the utilities, distribution utilities have a mission which is to serve the public with electrical service wherever needed. You don't build a new hospital and the utility doesn't say, "Sorry, you can't do it", right? It just comes down to timeline and cost. And so, we do need a ton of power. We have five sites right around Washington DC and Maryland. And each site has a five megawatt interconnection foot charge, electric school buses, so do 25 megawatts in a very small geographic footprint.

David Roberts

I mean, so that that's like grids are going to have to plan around that. I'm like, I'm curious if you've ever gone to an area where the utility says, like, "We would love to help you with this, but right now we just don't have the infrastructure, we don't have the lines, we don't have the ability to accommodate this much new power." Have you ever run into that?

Duncan McIntyre

We have. And a couple of quick thoughts. The first is: it's always possible it just comes down to timeline and cost. And so it's an exercise in doing our homework, right? So we do all the work. I would advise anyone before you talk to your utility, you do your homework. What does the distribution feeder have available on it? Like what's the amount of power you can draw today? This is available information that can be looked up. Then it's about figuring out how difficult it would be to upgrade the service if it truly needed to be upgraded, how many miles of three phase have to be run from the nearest point of connection.

And then, it's looking at the landscape, and that is everything from the existing rate tariffs to the Public Utility Commission to the politicians. And there's more and more support in more places for electrifying fleets, electrifying everything from passenger cars to garbage trucks, right? And so the political will is there to support investment, rate-baseable investment, in EV infrastructure. And it's about threading the needle between all those dynamics and coming up with a plan. There are places where we want three megawatts of power, but we'll settle for 1.5, because we can get 1.5 in a year, and we can work on the next 1.5 over the next four years, and plug the gap with some stationary storage or some other form of a charging strategy.

And so, I would argue it's really about interacting with the right people at the utility to come up with a plan that leverages the utility's assets and capabilities with the needs of the fleet, and it gets married up by the equipment that's available to sit in the middle.

David Roberts

Yeah. Have you run into a situation yet where you had to wait? Where you had like, people ready to sign contracts, but you had to wait for years, two years, three years, four years, whatever, to let the utility prepare?

Duncan McIntyre

We signed our contract with Montgomery County Public Schools in February of 2021, and we promised to have the first depot up and running in August that summer, which is lightning fast, but we promised to have three more depots up and running 18 months later because we knew they were going to be slower. And then we didn't promise to have the fifth depot up and running until the summer of 2024. So we knew that one would take three years and it will take us three years. We're in the middle of it now. And that was exactly a function of those local dynamics, how to get the power, how to get it efficiently, how to get it affordably, and how to work with the utility to do that.

David Roberts

Yeah, I don't know that I would want to be in a business where I'm waiting on utilities to do anything as a general matter.

Duncan McIntyre

It's an inevitability here. But once you're up and running... first of all, for the most part, utilities have been pretty darn good partners. Everyone has this in their roadmap, and so more often than not, they're kind of excited when someone comes and says, "Hey, we've got a real project, let's work on it together."

David Roberts

Beyond just the basics. Once you have a fleet of electric school buses, you have a distributed set of very large batteries which are sitting unused most hours of the day. So I guess two questions. One is about grid to vehicle communication, i.e. do you time the charging of these vehicles in coordination with the utility in some way?

Duncan McIntyre

So I heard two things there.

David Roberts

Well, the first is time-to-charging, which I think of as sort of grid communicating with vehicles. And then the second is vehicle-to-grid, which is vehicles occasionally discharging electricity into the grid when the grid needs it. My sense from talking to people in this space is that just timing you're charging is relatively easy. First step in that vehicle to grid communication is a little bit more complicated and is not all utilities are ready for it but just sort of tell me like to what extent are you getting into grid services?

Duncan McIntyre

We are absolutely doing both and you're correct that simply timing your charging we view as table stakes. You sort of need to be doing that to run an efficient operation. I would say that we coordinate that with the utilities a little bit. But the utilities don't get deeply involved in interacting with customers on topics like that today. What they do is they push out programs. They say, "We have a time-use rate tariff." You, customer, choose if you want to change your charging schedule based on the rate tariff and so we are doing that very actively.

The equipment that's available today it doesn't come fully ready to allow customer choice around charging times. You really have to do it in more of a manual way. We've had to build a software stack with all these controls to do it in a reliable format but I do think that's an area where the tech is getting better and better and if you do it right you will save 75% on your power costs.

David Roberts

No joke. That's a lot.

Duncan McIntyre

If you look in places like San Diego, if you charge at the wrong times, you'll trip demand charges. And without getting into all the details, your bill can skyrocket. And so charging is really important to get right because it just comes down to dollars and cents.

David Roberts

And so at this point, you have got software integrated into the buses such that the driver can just plug in whenever without worrying about it and the software does the timing?

Duncan McIntyre

That's exactly right. The software allows us to control our charging times and our charging rates from our remote operating center. And the software creates that connective tissue between us and our equipment in the field and helps us to scale and helps us to assess fault codes earlier vehicle health, look at trends, collect data, but ultimately control charging in a very dynamic way.

David Roberts

And you feel like that's... you've got that relatively down?

Duncan McIntyre

We've got that fully down. We do have a partner, it's a company called Synop, software company, and we've done a deeply integrated commercial partnership with them that's many, many, many years long and then on top of them we have our own systems and processes that effectively ensure that all the hardware speaks and allows the software to do its job. So it's a full tech stack of software and hardware and it's all got to be stitched together in the right ways to work smoothly.

David Roberts

Interesting. And so what about then vehicle-to-grid? I am assuming that that's rarer that there are only some utilities that can accommodate that. Are there any yet? Is that a real thing yet or is that still like a gleam in people's eye?

Duncan McIntyre

It's a real thing but today it is binary in that either the utility has something you can do or it doesn't. And we have vehicle-to-grid up and running on about a third of our projects today. And in most of those cases, the vehicle-to-grid activity is in its simplest form, we're charging the buses full during the overnight hours in the summer, July and August, and we charge overnight because there's lots of power available. It's very inexpensive, and the grid has it available. And then late in the afternoons, the next day, from 3:00 to 6:00, 4:00 to 7:00, we will actually export all the power in the batteries from the buses back to the grid. And it's because the grid needs the power and they're willing to pay for it. And it's very lucrative and so helps drive down our cost to serve school districts.

David Roberts

Yeah, when you say lucrative, I mean, compared to saving 75% on your charging costs, is it that lucrative? Like, where is it relative to just sort of timed-charging? Are you, are you making comparable money offering these grid services?

Duncan McIntyre

It's more lucrative than simply saving. Just to put, you know, some round numbers around it, if you charge at the wrong time in San Diego, you could get a $5,000 utility bill for the month for one bus. If you charge in a smart way, that might be $1,000, right? A lot less expensive. Our vehicle-to-grid income on a per bus basis in parts of New England is $12,000 a year.

David Roberts

No s**t.

Duncan McIntyre

Yes.

David Roberts

That's a lot!

Duncan McIntyre

Now, you have some equipment that you have to invest in to do it. So it's not all profit, but what it does is we pass dollar for dollar, we pass that money on to the school district, we underwrite to it as we invest in equipment to serve them, and then we operate the vehicle-to-grid program so that we can make it more affordable for schools. And I'm convinced that we're in the very early days, but in five years this will be happening in more places than it's not and will be a meaningful contributor to eating away at that $200,000 vehicle premium I described in your opening questions.

David Roberts

Well, also presumably, do you use that to lower I mean, is your subscription fee standard everywhere, or is it lower in some places than others based on grid circumstances?

Duncan McIntyre

Yeah, our subscription fee is different for every opportunity. Each customer account might have different costs and different expenses, but we use that income to lower the subscription fee to the customer. And there are cases where the customer is saving 20-25% compared to their diesel fleet operation and the vehicle-to-grid is that extra savings.

David Roberts

Interesting. Vehicles-to-grid is one thing. There's also, of course, if you have this huge set of batteries, what about using them during blackouts for backup power for schools or community centers or things like that? Is that on your radar?

Duncan McIntyre

Absolutely. As more and more electric school buses come online, they are increasingly becoming a source of resiliency for local communities. We call this vehicle-to-community. Very much describes the activity taking place. The buses have very energy-dense batteries, and they happen to be energy-dense batteries sitting on wheels. If you've got a community that has lost power, you may need to keep cold storage going at a local high school. You may need to give people the ability to charge cell phones. You may need to set up air conditioners...

David Roberts

Hospitals

Duncan McIntyre

Absolutely. Hospitals. Absolutely. These vehicles can be anywhere in a community in a short amount of time, and they can deliver power into buildings if they've been set up with the right equipment.

We're building out these capabilities for a number of our customers, and I actually think it's maybe one of the most exciting, most promising dynamics that is very much an untold story to date, but it's just really exciting to make an electrified fleet that much more of an asset to its community.

David Roberts

Yeah, huge resiliency advantage there. Because people say that the new Ford F-150. People will tell you that can power a medium-sized suburban house fully for like three days on that battery. I don't think people appreciate how big these batteries are. And that's just one truck. I assume the battery on a bus is much bigger. So, this is not a small amount of dispatchable power you've got in your hands in the case of a blackout.

Duncan McIntyre

That's exactly right. Our electrified site in Bethesda, Maryland, when it's fully operational, which is a couple more years, there'll be more vehicles arriving. But that site will be able to deliver five megawatts of power in a resiliency format for a period of a little more than 3 hours, or it can deliver half a megawatt for many, many days. That's a large hospital right there.

David Roberts

Yeah. Wild. One other thing about utilities, before I forget, I was reading there was a battle in Virginia, I think, recently. I think it was Dominion. The utility wanted to get into owning electric school buses. Owning and operating. I think maybe more or less along the lines of what you guys are trying to do. Does that make any sense to you?

Duncan McIntyre

It does. That's well-described and it's pretty accurate. Dominion launched a program a couple of years ago where they proposed owning electric school buses and the charging equipment and basically providing them to schools, public schools in Virginia. And they proposed rate-basing all of those investments so paid for on your electricity bill if you're a resident in the state of Virginia. And the case they made was that this is part of the electricity ecosystem, and with the batteries and the buses, we can deliver reliability services. There are varying formats of that being proposed at utilities all across the country.

David Roberts

Interesting.

Duncan McIntyre

But in very, very few cases does the utility propose to actually rate base the bus. And so Dominion was challenged by policymakers in Virginia, and the policymakers ended up saying, "You cannot do this in any sort of longer term programmatic format." It may be that they're going to try again.

David Roberts

Was it just sort of like generalized hostility towards utilities? Or was there some specific reason why they thought it couldn't work?

Duncan McIntyre

I don't think so. I think the case was made that the vehicle itself is not something that the average electricity purchaser, the average homeowner should be paying for. That's not a fair expense to pass on to the ratepayer. It's something that should be passed on to the schools. Now, if the batteries have value and you can isolate the value to help balancing the system, then maybe that's an acceptable investment. But, I think Dominion was early on in this movement and I would expect comeback with a modified version of their plan that probably has a higher likelihood of success.

David Roberts

And that would be competition to you, would it not? Some of the same services?

Duncan McIntyre

It is and it isn't. They would be providing equipment and agreeing to pay for some of that equipment, but that's not much different than a grant which just pays for some of the equipment. Dominion does not come with a suite of services to basically ensure the fleet gets built on time and operates reliably.

David Roberts

Right. They're not going to build a depot or repair school buses.

Duncan McIntyre

That's right. And if your charging station doesn't work, are you going to call Dominion? You're not going to call Dominion. So I think businesses like ours have a natural ability to partner with utilities in any format that the utility shows up in. We can plug the gap with additional capital and with services that ultimately benefit reliability and cost certainty to schools.

David Roberts

Okay, so then let's wrap up maybe with a final kind of question or set of questions. So we've got the business model here available. It's advantageous for most school districts just on a pure cost basis, to say nothing of not pumping diesel fumes directly into kids lungs and deafening them with jet engines as they get to and from school. And I'm a parent in a school district and I am taken by this and want to advocate for it. Where do I go? To whom do I direct my strongly-worded email? What's the best way for people to try to organize and advocate for those?

Duncan McIntyre

I would send your email to three recipients and put them all on the same email. The first recipient is a board member, a member of the school board who is an advocate for this type of activity. The second individual would be a Chief Business Officer or an Assistant Superintendent, someone who's typically tasked with the operating side of the house and ultimately responsible for finance and contracts. And then the third would be the Transportation Director, whoever's running the current fleet. And what you do there is you get everyone on the same page. They all hear your message. A board member can be an advocate and push that message down, which often creates more willingness to take a deeper look faster. A business officer can get comfortable with the risk and the cost, and a transportation director can ground it all in the reality of: Will this work to pick kids up and drop them off back at home? And so that would be my advice, David.

David Roberts

This seems like a great and very obvious step for school districts to take. Like, everybody, we needed to decarbonize, regardless. Kids' health is particularly important. This model overcomes the upfront cost barrier. But what if you receive pushback along the lines of the following: we're still early days in both electric school buses and in models like this, business models like this. And it's very likely that a few years of experience are going to scale a lot of things up, bring a lot of costs down, and that the subscription fee will likely be lower in three to five years than it is today. Why shouldn't we just wait until the market is more fully-baked?

Duncan McIntyre

There's a decision that has to happen every single year to buy vehicles, to replace the oldest vehicles that effectively need to go to the scrapyard. If a school district has to buy ten new vehicles, they have an inflection point that is immediate.

David Roberts

Right.

Duncan McIntyre

They can buy diesels or they can go electric, either on their own or with a model like Highland's model. And so it's less about "will the cost come down." Sure, the cost might come down for the ten we need to buy next year and the ten we need to buy the year after that and the year after that. But that doesn't change the fact that we have to buy ten vehicles right now.

David Roberts

Right.

Duncan McIntyre

And if it's cheaper, arguably cheaper, with a very, very strong argument to be made that it will always be cheaper, and it's definitively cheaper for the next five to seven years, then that tends to win the day with a business officer. And you really just have to get comfortable that the technology is ready to meet the routes and the reliability standards of your district. And there's enough projects out there at scale that we think prove that in a very strong way. But the last thing I would say is that's why Highland exists, because you don't own the vehicles. You, as the school district, are in a performance-based contract. And so Highland only gets paid if the vehicle operates by the mile. If the vehicle stops operating, there's an inconvenience, but the school is not out any capital or any additional money. And so we are truly incentivized as their partner to keep the fleet operating smoothly, fully fueled every day for a pretty long time.

David Roberts

Right. And it's in your financial interest to maximize performance with the lowest possible budget.

Duncan McIntyre

That's right.

David Roberts

All that sort of constant effort of looking for economies and looking for improvements and everything else, that's such a mental time load that is being offloaded.

Duncan McIntyre

We agree. And David, it's not that the model is new to schools. It's new for school buses. But, schools have been buying energy efficiency equipment under energy savings contracts for decades. They're very accustomed to that business model within the operations of their plant, their facilities, and this is no different.

David Roberts

One thing I always say about this model of subscription, rather than buying, and this is true across product categories is if you're just subscribing to your equipment. If a new, cooler, better school bus comes into the world, it's to Highland's advantage to buy it and switch it out. Unlike if you buy a diesel bus, you're just sort of stuck with the diesel bus for whatever it is, 10, 20, 30 years. You can see continuous improvements when you're on a subscription model. You don't have to buy every new model of bus. Someone else is going to do that for you. So you will likely see improvements in hardware and service over the course of the subscription.

Duncan McIntyre

That's exactly right. And I would also say that our customers, if you speak with any of our customers, they would say that this whole experience is an upgrade. We give them better insights into their fleet. We provide a technology platform that is state-of-the-art and robust. They have better information than they've ever had on where the buses are located, state of charge, the health of the vehicle, lots of analytics and other tools. And when something goes wrong, we have people there and we're on the phone, and we're opening up power cabinets and solving problems very quickly. And the whole experience is, as you described, an upgrade.

David Roberts

Well, this is awesome. Volts listeners know that I have enormous enthusiasm for electrified postal vehicles and electrified school buses. Those are my two favorite things in the entire world to talk about. So I'm so thrilled, a. that you're out there doing what you're doing, and b. that you came on and took all this time with us. So thanks very much.

Duncan McIntyre

Yeah, David, I love your podcast. I love what you're doing, and I was very glad that you're interested in hearing more from Highland about our experiences and what we're seeing in the market. So really appreciate you having us on and look forward to hearing it live. Thanks.

David Roberts

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