Clean Road Vehicles: The introduction of lifetime costs in public purchasing

United Kingdom

The rise in national and international law directed at “cleaning” road vehicles is hard to miss.  In this article we look at the European Commission’s proposal for a Directive on the Promotion of Clean and Energy Efficient Road Transport Vehicles. Originally launched in draft form in December 2007 and subsequently revised, the draft Directive is presently under review by the European Parliament.  It aims to combat emissions from road transport and promote a market for “clean vehicles”.

The European Commission’s proposal

The extent of the application of the draft Directive has recently changed, as explained further below, but its initial scope was broad in that it would introduce (after a defined period) operational lifetime costs of (1) energy consumption; (2) CO2 emissions; and (3) pollutant emissions, as mandatory award criteria in the:-

  • procurement of road transport vehicles: 
    • by public authorities;
    • by operators providing services under a contract with a public authority; and
  • purchase of road transport vehicles for the provision of public passenger transport services under licence, permit or authorisation granted by public authorities.     

The European Parliament rejected a previous European Commission proposal in 2005 which stipulated that 25% of public transport heavy duty vehicles should comply with the existing Enhanced Environmentally friendly Vehicle (“EEV”) standard on pollutant emissions. The European Parliament felt that this proposal lacked ambition that the range of vehicles and the objectives needed to be wider.

EU wide incentives required

According to the European Commission, the road transport sector in the EU is responsible for 26% of EU final energy consumption and 24% of EU CO2 emissions. Total annual vehicle procurement by public authorities in EU-25 is estimated to be around 110,000 passenger cars, 110,000 light commercial vehicles, 35,000 lorries and 17,000 buses.  This is said to equate to 1%, 6% (for vans and lorries) and 33% of EU market share respectively. The European Commission has identified that action at community level is needed in order to establish legal certainty; encourage investment in the manufacture of clean and energy efficient vehicles and thereby contribute to energy saving (and security of energy supply); climate protection and improvements in air quality; supporting the competitive position of the EU automotive industry amidst concerns about advances by Japanese auto manufacturers in developing environmentally friendly technologies. 

The European Commission considers that local or national incentives will not be sufficient to encourage auto manufacturers to produce less polluting vehicles and may risk fragmentation of the internal market. The intent is that the resulting increased demand triggered by the proposed Directive shall create assurance for the future of clean and energy efficient vehicles and thereby generate sufficiently sized markets, critical mass and the necessary economics of scale to broaden industrial production to a wider audience.

Capex and opex: “sustainable economics”

By shifting the emphasis to the cost of carbon and pollution it is intended that market transparency on the operational and societal costs of road transport vehicles will increase. In turn it is thought that including the effect of transport activities as part of the decision making process will filter into the private sector via fleet managers, business and private customers with ramifications for the leasing and asset financing of vehicles. 

Progress of the revised proposal

A draft opinion of the European Parliament published on 6 May 2008 supported the draft Directive subject to amendments including a requirement to disseminate information about the forthcoming green criteria to the entities affected; publication of green public procurements and funding proposals; the encouragement of competitive pricing between traditional and energy efficient vehicles; the establishment of a common European website/database and a common European label for green vehicle procurement.
   
Main amendments

The European Commission’s original proposal required lifetime costs to be calculated according to an express method which set out monetary figures for CO2, other pollutants, and fuel costs on procurement. Following further review this has been changed so that when purchasing road transport vehicles the relevant entities have to take lifetime costs of energy and environment impacts into account, including at least energy consumption, CO2 and other pollutants including NOx, NMHC and particulate matter but they can fulfil this requirement in one of two ways:-

  • by setting technical specifications for energy and environment performance in the documentation for the purchase of road transport vehicles; or
  • by including energy and environment impacts in the purchasing decision whereby:
    • the impacts will be applied as awards criteria where a procurement procedure is applied; and
    • where impacts are monetised for inclusion in the purchasing decision, a harmonised methodology for costing will be applied (see further below).

Other environment impacts may be included on an optional basis.

The proposed Directive shall apply to contracts for the purchase of road transport vehicles (excluding emergency service and infrastructure vehicles) by (a) contracting authorities and entities in so far as they are under an obligation to apply the procurement procedures set out in Directives 2004/17/EC and 2004/18/EC and (b) operators for the discharge of public service obligations under a public service contract for the management and operation of public passenger services in excess of a threshold which shall be defined by Member States not exceeding the threshold values set out in Directives 2004/17/EC (EUR 499,000 excl VAT) and 2004/18/EC (EUR 162,000, or 249,000 respectively).

Quantifying the lifetime costs of vehicle operation

“Lifetime cost” is defined as the sum of all the yearly costs related to the operation of a vehicle (but taxes and charges are disregarded).  Data for the calculation of external lifetime costs is set out in the Annex to the draft Directive. Lifetime costs requires an anticipated lifetime mileage. Total lifetime mileage of a vehicle is to be based on the technical specifications used in the procurement or as specified in the Annex.

Proposals for calculating the lifetime cost of:-

Energy consumption:

  • The fuel consumption per kilometre shall be converted into energy consumption per kilometre using specified conversation factors for the energy content of different fuels;
  • A single monetary value per unit of energy (unspecified) shall be used which will be lower than the cost per unit of energy of petrol or diesel before tax when used as a transport fuel;
  • The lifetime cost of energy consumption for the operation of a vehicle shall be calculated by multiplying the lifetime mileage by the energy consumption per kilometre by the cost per unit of energy.]

CO2 emissions:

  • The lifetime mileage is to be multiplied by the CO2 emissions in kilograms per kilometre and by the cost per kilogram of the CO2 emissions. Such cost is set out in the draft Directive. A higher cost may be applied provided that it does not exceed the value in Table 2 to the Annex by a factor of 2.

Pollutant emissions:

  • The lifetime costs for emissions of oxides of nitrogen, non-methane hydrocarbons and particulate matter are to be calculated by multiplying the lifetime mileage by the emissions in grams per kilometre (expressly set out in the Directive) and by the cost per gram of the particular pollutant (again expressly set out in the Directive). A higher cost may be applied provided that it does not exceed the value in Table 2 to the Annex by a factor of 2.

The level of fuel consumption, CO2 emissions and pollutant emissions per kilometre for vehicle operation will be based on standardised EU test procedures.  Where vehicles are not covered by standardised procedures, comparability will be ensured by using either widely recognised test procedures or the results of tests for the contracting authority or information from the manufacturer. 

The express costs for emissions set out in the Directive were assessed at the time the draft Directive was proposed at 2007 prices and based on information provided to the European Commission by several studies.  Any changes in inflation and the data for the calculations of the operational lifetime costs will be reviewed and adjustments proposed as appropriate after 2 years. 

Present status of the draft Directive

On 13 June 2008 the Council of Europe reached a general approach on the draft Directive as revised although France and the UK have parliamentary scrutiny reservations. The European Parliament is expected to adopt its first reading opinion in July 2008.  As presently drafted, the Directive must be implemented into national law within 2 years of becoming law. 

Whilst the final form of the Directive may very well differ from the present proposal, it is clear that there is a political appetite to promote awareness of sustainability and lifetime costing in the financial modelling of road transport. This is but one of a number of legislative and policy tools aimed at increasing the greening of purchasing and promoting cleantech markets.

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