Economics of a Hydrogen Bus Transportation System: Case Study using an

After Tax Analysis (ATA) Model

Oscar Bonilla*, Donald N. Merino

School of Systems and Enterprises (SSE), Stevens Institute of Technology, Castle Point on Hudson, Hoboken NJ
07030-5991 USA. obonilla@stevens.edu.
School of Systems and Enterprises (SSE), Stevens Institute of Technology, Castle Point on Hudson, Hoboken NJ
07030-5991 USA. dmerino@stevens.edu.
* Corresponding author. Tel.: 201-826-3703; Castle Point on Hudson, Hoboken - NJ 07030-5991 USA. Stevens
Institute of Technology. School of Systems and Enterprises (SSE). Babbio Building, 5th floor. E-mail address:
dmerino@stevens.edu

Abstract

Because of global warming governments world-wide are taking actions to reduce Green House
Gases (GHGs) in transportation systems such as bus fleets. All involved aspire to make these
changes in an economically efficient manner. This paper provides an after tax economic model
to help determine pricing (fares), the level of subsidies, the impact of carbon credits and financial
leverage options.
Most approaches to compare new technologies use before tax analyses like Societal Life Cycle
Costs (SLCC). Most industry analyses use an After Tax Analysis (ATA) approach. This paper
describes and compares both techniques. To illustrate the proposed ATA transportation model a
carbon free bus system fueled by Hydrogen is used with data extracted from published sources.
Major conclusions are that a carbon credit (from Cap & Trade or carbon tax) provides some
economic gain, but did not meet the economic criteria established. Borrowing funds (e.g. using
financial leverage) for the capital costs significantly increases the rate of return and could attract
investors. However, increased borrowing increases the financial risk and this risk needs to be
moderated via risk mitigation strategies (default insurance, etc.). Other financing options need to
be explored.

Keywords: Societal Lifecycle Costs (SLCC), After Tax Analysis (ATA), Hydrogen Bus
Economics.

1. Introduction

The transportation sector was chosen for this paper because it accounts for approximately
14% of GHG emissions (Bernstein et al., 2007). “Nearly 70% of the 21 million barrels of oil the
United States consumes every day goes for transportation, with the bulk of that burned by
individual drivers, according to the National Commission on Energy Policy, a bipartisan research
group that advises Congress” (Schwartz, 2008).
Another reason to focus on the transportation sector is that there are large numbers of
existing and emerging technologies to choose from. The automotive industry is one of the largest
in the world and includes major companies who have large financial resources. These resources
allow automotive companies to conduct very large research and development efforts devoted to
new technologies. In addition, there is a large government sector providing bus and other
transportation needs for their citizens. Thus, there are many technologies to choose from and
capable industry and government organizations to implement these changes.

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2. Review of global warming – Reduction of gas emissions

Global warming has been discussed for almost a decade with scientific and political opinions
varying widely, particularly in the US. However, with the publications of the Intergovernmental
Panel on Climate Change (IPCC) “Climate Change 2007: Synthesis Report” (Bernstein et al.,
2007), a consensus has emerged in the United States that global warming is indeed a serious
problem and that government and industry must find solutions.
Governments worldwide are developing legislation to combat global warming. Legislation
proposed includes limiting Green House Gas (GHG) emissions and/or assessing some form of
carbon tax. Governments have sponsored studies and demonstration projects to help decide the
most economically attractive alternatives.

3. Review Societal Lifecycle Cost (SLCC) and After Tax Analysis (ATA) approaches

3.1. Choosing among alternatives using Societal Life Cycle Costs (SLCC)

An extensive literature search of transportation studies that reported on new technologies

which reduced carbon emissions indicates that Societal Life Cycle Costs (SLCC) was used to
evaluate and choose among competing alternatives. For example, Ogden and Williams used
SLCC to evaluate alternative fuels/engines (Ogden et al., 2004); Cockroft and Owen used SLCC
to examine the economics of hydrogen fuel cell buses (Cockroft and Owen, 2007); Goedecke,
Therdthianwong and Gheewala used SLCC to evaluate alternative vehicles in Thailand
(Goedecke et al., 2007).
In all of these cases the SLCC was a before tax analysis to select among competing technologies.
No consideration was given to how the capital is financed or whether the capital meets the hurdle
rate of return used by companies (e.g. a 10% minimum attractive rate of return or MARR).
The Societal Life Cycle Cost as defined by Ogden, Williams, et al. (2004) to assess the Life
Cycle Cost of cars with alternative fuels and engines is a before tax analysis approach and is
determined by the following expression (Ogden et al., 2004):

LCC ($/vehicle) =
+ vehicle first cost
+ the present value of lifetime costs for:
(fuel + non-fuel operation and maintenance)
+ full fuel cycle air-pollutant damages
+ full fuel cycle GHG emission damages
+ oil supply insecurity). (ref Ogden)

The Ph.D thesis written by Nicolas Ahouissoussi (1995) does not specifically mention
Societal Lifecycle Cost, but he used a before tax analysis approach to compare and analyze the
cost for biodiesel, compressed natural gas, methanol, and diesel fuels for transit bus systems,
(Ahouissoussi, 1995).
Cockroft and Owen (2007) also use a Societal Life Cycle Cost approach to determine the
economics of hydrogen fuel cell buses (Cockroft and Owen, 2007); again it is a before tax
analysis approach.

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3.2. Choosing among alternatives using After Tax Analysis (ATA)

The most prevalent industry approach to choose among competing alternatives is the After
Tax Analysis (ATA) (Lang and Merino, 1993). Figure 1 describes a typical ATA decision
process followed by a written description of each of the steps within the process.
Why is After Tax Analysis the standard methodology for industry? ATA is necessary
because the government is a “partner” in every capital decision. Depreciation rates, tax rates,
investment tax credits and capital gains taxes greatly influence the attractiveness of capital
expenditures.
In addition, ATA is used to determine the impact of borrowing on the project’s profitability.
Borrowing at after tax interest rates that are below the project’s Internal Rate of Return (IRR)
will increase the overall Rate of Return (RoR). Note that the opposite is true. These borrowing
options are called Financial Leverage.
Companies first look at a project’s RoR assumptions with full equity (100% of company’s
cash with 0% of loans) to determine if the investment should be included in the capital
expenditure budget. Financial leverage is considered for some subset of projects. Those projects
tend to be ones that are required by law and are mandatory and not optional or elective. Also
financial leverage is considered when there is a readily available pool of funds and/or lease
options. 1

3.2.1. ATA Process Flow Chart

Fig. 1. General decision model to determine economic feasibility.

1
A lease could be considered the same as a loan in certain circumstances.

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3.2.2. Description of Typical ATA Decision Process

Figure 1 illustrates a typical decision process used to choose among competing alternatives.

Step 1 develops feasible alternatives that are mutually exclusive. In this case alternatives are
various bus fleet sizes. In addition to alternatives, scenarios can be constructed which could
combine alternatives along with other factors such as potential breakdowns or disaster scenarios.
Step 2 estimates the capital and operating costs. Appendix I explains the estimates for the
case under consideration.
Step 3 is the most critical step because of the need to estimate the benefits. Benefits can be
savings in operating cost compared to a base case. This could be caused by a more fuel efficient
design than the base case.
Step 4 is the economic analysis. The first part is to establish economic criteria like Minimum
Attractive Rate of Return or MARR. The MARR reflects the opportunity cost for the investor’s
capital. Risk plays a role because some investments may be more risky than others.
The time horizon needs to be determined. The owners need to decide to use full equity or
loans, or some sort of financial leverage (10 to 90% of loans generally, most companies conduct
the economic analysis using full equity and then, after choosing the most economical alternative,
look at financing options. Because this is an after tax analysis an applicable tax rate needs to be
estimated for the chosen time horizon.
The last criteria are the Figure of Merit (FoMs). Given that the ATA model is run on an excel
spreadsheet it is relatively easy to report on more than one FoM. FoMs include the Net Present
Value (NPV) and the Equivalent Uniform Annual Cost or EUAC. EUAC is the Life Cycle Costs
(LCC).
Step 5 involves evaluation of the intangibles and non-economic factors impacting the
decision. There are a number of multi-attribute tools which can be used. Analytical Hierarchy
Process (AHP) and Utility Analysis are two common techniques.
Step 6 involves the decision process. Sensitivity analysis should be employed to determine
the most sensitive attributes impacting the decision. This helps to separate the “vital few” from
the “trivial many”. It is an aid in decision making because it focuses the effort on the most
important variables. Next, a decision needs to be made whether an economic or non-economic
analysis is to be employed. If all the attributes can be monetized and converted into dollars then
the standard ATA with a FoM such as NPV or EUAC can be used to either maximize benefits or
minimize costs. However, if the downtime cannot be monetized then some form of non-
economic analysis must be employed. There are at least three different process flows depending
upon the downtime values and costs. This will be discussed in the next section.
Step 7 involves the decision whether the analysis yields an alternative which meets the
economic and/or not-economic criteria. If it does than a decision is made. If it does not, the
process needs to be repeated starting with step number 1. This process needs to continue until a
mutually exclusive feasible solution is reached.
Step 8 is the final decision. If all the economic and non-economic criteria are met then a
decision can be made to accept the alternative under review.

3.3. Comparison of SLCC and ATA

Obviously the major difference between SLCC and ATA is the tax considerations. Another
difference is that the SLCC is normally used for various technologies applied across industry and

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the economy while ATA is generally employed on an individual company basis. Determining the
economic benefits of financial leveraging is also a major difference. A case study will be
presented which highlights the use of ATA for a specific application. Table 1 shows the main
decision attributes for both of the approaches.

Table 1
Comparison of differences for SLCC and ATA

Decision Attribute SLCC ATA

Life Cycle Costs Yes (before tax) Yes (after tax)
Includes Tax Factorsa No Yes
Scope of Study By technologies By Project
a
Includes Deprecation, Income Taxes Investment Tax Credits, etc.

4. After Tax Analysis (ATA) models

4.1. ATA Bus Transportation Model – Reduce Carbon

Most bus systems are owned and operated by government units (states, localities, etc.) or by
regional authorities. Generally these systems are subsidized by the taxpayer or via cross
subsidies in the case of regional authorities who own and operate more than one mode of
transportation. A study developed by a Canadian consultant firm (MARCON-DDM HIT, 2005)
indicated that subsidies were about 1/3 of the operating costs (excluding capital). NYC Transit
(MTA) indicated an overall operating subsidy of about 41% (MTA New York City Transit,
2004) .
The recent increase in diesel fuel prices has caused many bus systems to increase fares. This
was necessary in spite of the increase in bus rider ship. Increased fares tend to correlate
negatively with increased rider ship over the long run. This problem coupled with mandates
(enacted or proposed) to decrease Carbon Dioxide (CO2) emissions has caused a reexamination
of bus system economics and methods of ownership and financing.
One advantage of developing an ATA model is that it could be used to attract private
investment. Bus systems require large capital investments for buses, garages, etc. All of the
proposals to reduce carbon emissions in transportation require large capital investments in
research and development, vehicle manufacture and infrastructure. Finding a way to fund the
capital required involves some combination of bus revenue, subsidies, taxation, bonding and/or
private capital investment.
Figure 2 outlines how an ATA model could be used by industry and government to make
economic decisions as to investment in free carbon alternatives such as the hydrogen bus fleet.
This model could determine the:

• Level of revenues/fares required to meet predetermined economic criteria (steps 1 – 3).

• Level of subsidy required to offset operating expenses (steps 1 – 3).
• Impact of carbon credits on revenue/fares (step 2).
• Impact of financial leverage on revenue/fares/subsidies (step 3).
• Most sensitive attributes impacting the after tax economics.

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 The model has three phases as shown in Figure 2. The first step provides the base case
economics of the bus system. The second step evaluates the impact of carbon credits and the
third step the impact of financial leverage. In all three cases the owner/operator needs to judge
the level of revenue/fares and subsidies required to meet the economic criteria they established.
There is precedent for using ATA for public entities to raise capital and/or operating funds.
Private ownership of transit cars and sell-lease back of public utilities (water systems, buildings,
etc.) are some examples.

Fig. 2. Low carbon transportation model.

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4.2. Process to Use the Low Carbon Transportation Model

Step 1: The purpose of this step is to establish a base case economics. In this case a low
carbon hydrogen bus system was chosen. To conduct the ATA assumptions and estimates need
to be provided. Refer to Appendix I for assumptions. The Life Cycle Cost (LCC) or Equivalent
Uniform Annual Cost (EUAC) is calculated with and without revenues. Revenues include all
fares and subsidies.
Do these revenues meet the economic criteria (MARR) established for this system?
If they do then the owner/operator has the right level of fares and subsidies. If they do not then
other sources of revenue and/or financing should be investigated (Steps 2 & 3).
Step 2: The purpose of this step is to determine the economic value of a carbon credits.
Do these revenues with carbon credits meet the economic criteria (MARR) established for this
system? If they do then the owner/operator has the right level of fares and subsidies.
If they do not then other sources of revenue and/or financing should be investigated (Step 3).
Step 3: The purpose of this step is to determine the economic value of financing a portion of
the capital required for this bus system.
Do the revenues with financing meet the economic criteria (MARR) established for this system?
If they do then the owner/operator has the right level of fares and subsidies.
If they do not then other sources of revenues/subsidies should be investigated (Step 1).
Feedback Loops: Note that this model is iterative. That is, if Step 1 is not ok go to Step 2. If
Step 2 is not ok go to Step 3. If Steps 2 and 3 are not ok go back to step 1. Also Steps 2 and 3 can
be done sequentially or individually.

5. Case Study: Hydrogen Busses

5.1. Carbon Free Case Study – Hydrogen Buses Overview

To illustrate how ATA results influence bus system economics in a carbon free case a hydrogen
bus fleet was selected. Figure 3 below presents the various technologies considered to obtain a
low /free carbon footprint for this application.

Note: Bolded Technologies could all be involved in a H2 Bus Fleet.

Fig. 3. A low carbon footprint model for the transportation sector.

Note that there are numerous technologies involved in providing low or free carbon
footprints for a bus system. Obviously, the owner/operator would want to examine the

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economics of all the combinations before choosing the most economic alternative. That set of
studies was beyond the scope of this paper.

This paper concentrates on a Hydrogen fueled bus fleet example to illustrate how the ATA
model works and could be used to provide economic direction to the bus owner/operator.

5.2. Carbon Free Case Study – Hydrogen Buses Cost / Benefit Analysis

Published studies were used to generate the data for the case. Since no study was available
which contained all the data for an ATA analysis a number of studies were used. Table 2 shows
the list of study cases used to collect data.
Studies used as a basis for the ATA

1. Transforming the future: moving toward fuel cell-powered fleets in Canadian urban
transit systems by the consultant group MARCON-DDM HIT (MARCON-DDM HIT,
2005).
2. Summary of Electrolytic Hydrogen Production by Johanna Ivy (Ivy, 2004).
3. CU, RTD and the cost of a Hydrogen bus fleet by Erik Phillips (Phillips, 2006).

Table 2
Sources for case study data

Source Electrical H2 Prod. H2 Stor. Bus Bus

Rates Cap/Oper. Cap/Oper. Cap/Oper. Fares
1 Xa O O X Nd
2 Ob Zc O O N
3 O O Z O N
a
X = Source used as is.
b
Z = Source used but modified.
c
O = Source not used.
d
N = Source not provided. Total revenues were not included but some information on subsidies was included.

The overall objective was to develop a reasonable set of estimates within a + or – 10% range
that could be used in an ATA. The purpose of the case study is to demonstrate how ATA
analysis could be used to help make economic decisions such as the level of revenue/subsidies,
the impact of carbon credits and financial leverage opportunities.
Obviously, with so many sources with different dates, different currencies and other
differences it was a formidable task to construct a reasonable set of numbers. Fortunately there
are a number of different studies which could be consulted to establish a range and verify the
numbers used. The estimates were also reviewed by industry experts to determine whether or not
they were reasonable. Appendix I provides a summary of the estimates used.
For this case the revenue was estimated to be the same as the operating expenses in Step 1.
This figure was also used to calculate the impact of financing leveraging. The operating cost per
mile for the case was close to published studies adjusting for the time frame (2015 versus 2007),
the cost of fuel and other variables. Thus, verified the revenue assumption.

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5.3. Step 1 - After Tax Analysis Results

The first step is to establish a base case for the bus system economics. An initial set of
estimates and assumptions was entered into the ATA model in order to determine the total
annual cost of the alternative without revenues. See Appendix I.
Next, the revenue/fares and subsidies were added. Revenue/subsidies are usually calculated
via models developed by the transportation agency. Establishing the Cost of Capital (CoC) /
Minimum Attractive Rate of Return is critical to this analysis. Every entity whether it be public
non-profit or private for-profit has a cost of capital. Interest rates for government borrowing have
varied from 5% to 12%, usually with tax exempt privileges. The United States Office of
Management and Budget established an MARR of 10% (Lang and Merino, 1993). For the
private sector, MARR vary between 12 – 15% depending upon a number of factors. The
determination of MARRs is a complex topic and beyond the scope of this paper. A conservative
10% CoC/MARR was used for this case.
The life of this case/project was determined to be 18 years according to the Canadian study
(MARCON-DDM HIT, 2005), due to the average useful life for a conventional diesel bus and
the assumption that the hydrogen buses will have the same usability. The results are presented in
Table 6.
As noted previously, revenue/fare/subsidy level where chosen assuming that the revenues
/fares/subsidies equaled the operating expenses. In other words, no profit at all. This assumption
was based on the observation that most public transportation systems are subsidized by the
government and/or by a cross subsidy of other modes of transportation. The equivalent number
of passengers per year was estimated in order to verify the revenue/fare assumptions. For this
case the fare price was calculated at $2/passenger and the number of passengers per bus per hour
was calculated to be 8 in an 18 hours per day basis. This was close to the study results and
verified these assumptions.
Did the Internal Rate of Return (IRR) and other FoMs meet the 10% MARR? In this case it
did not – see Table 6. This means that the revenues/fares, subsidies and capital involved do not
meet the economic criteria established.
Given that the revenue/fare/subsidies are not sufficient what can the transportation
owner/operator do? Obviously one answer is to raise fares and to receive increased subsidies.
Given the current economic conditions neither option is attractive.
Another option would be to try and obtain some form of carbon credit (step 2) and/or some
level of loans to offset the capital (step 3) Note Step 1 has to be done every time a change on
revenue / subsidy estimates occur.
If the criteria were met it means that the revenue/subsidy levels meet the economic criteria.
However, Step 2 and/or 3 can still be undertaken as a means of decreasing the fares/subsidies.

5.4. Step 2 – Economic Impact of Carbon Credits

The purpose of Step 2 is to determine the economic value of a carbon credit. Carbon credits
can exist in addition to the base case revenues/subsidies or substitute for them, depending upon
the magnitude of the credit and the economic criteria chosen.
Determining the carbon credit is complex and somewhat uncertain as laws are passed (e.g.
Cap and Trade). The Chicago Climate Exchange (CCX) operates the main carbon trading
platform in the United States and the European Carbon Exchange. Carbon credits are traded in
the form of Carbon Finance Instruments (CFI) units (Davis and Hale, 2007).

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 Credits, such us carbon credits, are estimated based on the market price per metric ton of
carbon (metric tC). The process to calculate the carbon credits is depicted in five steps as follow
(Davis and Hale, 2007):

Step 1: CO2 emissions from personal vehicle travel to substitute for transit travel.
Step 2: CO2 emissions from transit travel.
Step 3: CO2 emissions savings from transit travel instead of personal vehicle travel.
Step 4: CO2 emissions savings from fuel savings due to transit caused congestion
reduction.
Step 5: Total CO2 emissions savings from transit in 2005.

In this case the hydrogen buses are carbon free which means that all the CO2 generated by
the base case can be counted as carbon credits benefits. The credit carbon price is established by
the international capital market and therefore is subject to volatility.
The carbon credit value used for this study is $41/tC (metric tonne of Carbon). This value is
the current market price at which the credits are traded by the time this paper was written
(Mouawad, 2008). The carbon credits estimates are presented in table 3.

Table 3
Carbon credit estimation

Parameters Amount Units

External Carbon Credit 41 $/ metric tC
metric tonne of
CO2 emissions (base case – diesel bus) 22,449
CO2/Yr
metric tonne of
CO2 emissions (H2 Bus) 0
CO2/Yr
Total Carbon credit 30,000,000 $/Year

Some standard assumptions on the distance driven per year and the fuel efficiency per bus
were made in order to calculate the total amount of CO2 generated by the base case. The average
driven mileage per bus was 60,000 Km/Yr and the bus fuel efficiency was 0.558 Liters of diesel
per kilometer according to the Canadian study (MARCON-DDM HIT, 2005).
The estimated carbon credit for this alternative is around $30M. This value was calculated by
extrapolating information from the Bus Rapid Transit (BRT) system in Bogotá , Colombia
(Transmilenio), which sells a total of $100 to $300 million worth of carbon credits for a 500 to
600 diesel bus fleet (Rosenthal, 2009).
Did the Internal Rate of Return (IRR) and other FoMs meet the 10% MARR? In this case it
did not –see Table 6. This means that the revenues/fares, subsidies and capital involved do not
meet the economic criteria established. The NPV and EUAC are still negative and the IRR is still
lower than the MARR.
Given that the carbon credit combined with the revenue/fare/subsidies are not sufficient what
can the transportation owner/operator do? Obviously one answer is to try and increase the
amount of carbon credits. Strategies may involve obsolescing older buses as was done in Bogotá,
Colombia. Another would be to decrease auto usage by alternating via banning traffic on certain
days (e.g. Bogotá - Colombia, New York City – U.S.A, San Paulo - Brazil, etc).

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 Another option would be to try and obtain a level of loans to offset the capital (step 3) Note
Step 1 has to be completed every time a change of revenue / subsidy estimates are made.

If the criteria were met it means that the revenue/subsidy levels plus the carbon credits meet the
economic criteria. However, Step 3 can still be undertaken as a means of decreasing the
fares/subsidies.

5.5. Step 3 – Economic Impact of Financing Options

The purpose of Step 3 is to determine the economic value of financing a portion of the capital
required for this bus system.
Given that the carbon credit did not add sufficient revenue, the transportation model (Figure 2 –
Step 2) suggests examining finance alternatives. Different debt-equity ratios were evaluated to
determine whether or not the alternative will be economically feasible.
The U.S. Department of Transportation’s Federal Transit Administration (FTA) can fund up
to 80% of the capital cost of transit buses (U.S. Federal Transit Administration, 2003). For this
reason the model was conducted using different debt-equity ratios from 10% up to 80% debt.
Those values were entered in the model and a new outcome was calculated. The revenue for this
assessment had the carbon credit included.
For an 80% debt ratio the NPV and EUAC become positive and the IRR is much higher than
the MARR, reaching a value of 19.65%. The results indicate that the economic criteria have been
met and the decision to proceed with the alternative can be made. The results are presented in
Table 6.
Five cases were considered as indicated in Table 6. The first two cases (no loan and 10%
loan) would apply to any alternative. The third and forth case (60% and 80% loan) are supported
by the Department of Transportation’s Federal Transit Administration (FTA) because they can
fund up to 80% of the capital cost of transit buses (U.S. Federal Transit Administration, 2003).
The fifth case (90% loan) would require some extra level of loan guarantee.

Table 4
Low carbon transportation model – Financial leverage

Loan (%) Equity (%) Revenue = Oper. Exp. + Carbon credits

NPV (k$) IRR (%/yr) EUAC (k$)
Base case 0 100 -35,937 8.08 -4,382
10 90 -26,029 8.47 -3,174
60 40 23,512 12.86 2,867
80 20 43,328 19.65 5,283
90 10 53,236 31.65 6,491

As indicated in Table 4, the FoMs increase significantly as the amount of loans increase.
Since financial leverage (using loans instead of equity) is commonly used to finance large public
transportation projects, it has the effect of improving the project’s rate of return. This is caused
by substituting relatively cheaper loan dollars for more expense equity dollars.
However, increasing the percentage of loans increases the financial risk of default. If the
project is not successful (technology does not work, demand for service declines, etc.), the

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financial losses could be substantial and the probability of default increases. There are a number
of strategies to offset this risk including purchasing insurance to guarantee the loan. While this is
expensive, the additional economic return from the investment is more than adequate to cover
insurance costs.
Figure 4 illustrates how increasing the loan percentage increases the project’s rate of return
(IRR).

Fig. 4. Financial leverage results

The results are as expected. When after tax loan monies are substituted into a project (loans)
at lower rates (7% before tax and 4.6% after tax compared to 8.08% after tax the project earns)
the IRR increases. The greater the loan amount the greater the increase in IRR 2 . This is an
example of financial leveraging.
Did the Internal Rate of Return (IRR) and other FoMs meet the 10% MARR? In this case it did
–see Table 6. This means that the revenues/fares, subsidies, capital involved and carbon credits
together with loans meet the economic criteria established.
How difficult would it be to secure private investments? That would depend upon an
adequate rate of return (e.g. 10% IRR) and moderate levels of risk. Given that bus systems are a
mature industry and that almost all systems are dedicated (e.g. no direct competition) it is likely
that loans to fund the capital from 60 to 90% could be available. If the government unit provides
some guarantees this would be helpful. The promise of reducing Green House Gases (GHGs)
will also aids in the fund raising effort.
Any financial leverage option should include a thorough risk assessment. This should include
the financial as well as the operating risks. As noted above there are risk mitigating strategies
that should be evaluated along with the loans (e.g. insurance policies to protect against default,
etc).

2
The opposite is also true. That is, substituting loans at higher after tax rate into a project with lower ROR will
lower the IRR.

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 Another benefit for financial leverage is that fares and/or subsidies could be reduced. For
instance Table 5 illustrates the impact of financial leverage on the operating revenue. Reducing
the IRR to a 12% DCF RoR could result in a reduction of 28.4% in operating revenue. This is a
substantial reduction which could be used to reduce fares and/or subsidies and make the H2 bus
alternative in this paper economically attractive.

Table 5
Financial Leveraging Scenarios Impact on Revenues

Equity (%) Loan (%) IRR (%) Operating Difference (%)

Revenue (%)
100 0 8.08 100.0 0
10 90 12.00 71.6 -28.4

5.6. Step 1 - 3 – Summary of Economics

The table 6 below summarizes the major FoMs for the three steps in the model.

Table 6
After Tax Analysis model results.

Parameters Units Without Revenue = Revenue = Oper. Exp. 80% Debt

Revenue Oper. Exp. + carbon credits ratio

ATA Step >> 1 2 3

Internal Rate of Return % 0 -5.40 8.08 19.65
Net Present Value k$ -360,219 -214,343 -35,937 43,328

5.7. Sensitivity Analysis

Sensitivity analysis is employed to determine the most sensitive attributes impacting the
decision. This helps in separating the “vital few” from the “trivial many”. This is an aid in
decision making because it focuses the effort on the most important variables. Table 7 shows the
sensitivity analysis results while Figure 5 is a spider plot of the sensitivity data.

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Table 7
Sensitivity analysis results

Attribute Used in the ATA Model Spread Hydrogen Bus Fleet

Sen. Ratioa Rankb
Total capital cost +/- 20% 6.00 1
MARR – Cost of Capital - 20% 5.24 2
Carbon Credit +/- 20% 4.96 3
MARR – Cost of Capital + 20% 4.21 4
Revenue only / Operating Costs +/- 20% 4.06 5

a
The ratio provided by the change in parameter with respect to its initial value (Base case).
b
Rank is given by considering the most sensitive variable as number 1 and the less sensitive as number 5.

Fig. 5. Spider plots for sensitivity analysis results.

Total Capital Costs and the Cost of Capital (Minimum Attractive Rate of Return – MARR)
and Carbon credits are the most sensitive economic factors in this case. The “spider plot” (See
Figure 5) graphically illustrates the sensitivity analysis. Operating costs/revenue were somewhat
less sensitive.
The total capital cost and the Cost of Capital (CoC)/(MARR) have the steepest slopes
although in opposite directions. That is, for a given change of the parameter (capital or
MARR/CoC) there is a relatively large change in the Figure of Merit (NPV or IRR or EUAC).
The implication of this is that the economic feasibility of this case is highly dependent upon the
capital cost and CoC which is a function of the technology and how it is financed. This is true
not only for this case but for almost all new technologies used to reduce GHGs. Technological
change requires large expenditures in research and development which is reflected in the capital
cost.
What this case shows is that if the owner operators used their own equity/capital the
economic returns do not meet the criteria established. However, with loans (financial leverage)

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the economic feasibility became acceptable. Again this is not a surprising result. Virtually all
new technologies require financing to succeed. Why?, because new technologies require large
amounts of research and development, which makes the price for this technology expensive.
Hydrogen busses are just one of many examples. Equity financing is too expensive while debt
financing is more affordable.

6. Conclusions

The ATA Transportation model was useful in determining the level of revenues/fares and
subsidies for the hydrogen bus example in this paper.
This case illustrates that the carbon credit (from Cap & Trade or carbon tax), while economical
attractive, did not meet the assumed MARR/CoC in this study. Ways to increase the carbon
credit and/or the revenues/fares and subsidies were needed to meet the relatively conservative
10% MARR/CoC.
This study indicated that obtaining loans (financial leverage) was financially very attractive
depending upon the level of debt to equity ratio used (See Figure 4). Financial leverage could
help in reducing revenues/fares, subsidies and even accepting lower carbon credits, The use of
financial leveraging could provide an opportunity for private investors to make a reasonable
return on their investment and at the same time provide the capital investment required for new
buses, Hydrogen infrastructure, garages and parking.
This study reinforces other economic studies completed by the authors (Bonilla et al., 2009)
and others as to the importance of financing in adopting new technologies. While this study is a
specific micro-economic example it has macro-economic implications. Adapting new
technologies to reduce GHGs has major economic impacts on electricity generation,
weatherization, insurance and other areas. While some of these impacts may be captured in the
Carbon Tax and/or Cap and Trade benefits, many impacts will not be captured.
A question arises as to how this specific case could be used in general. Given that the data
came from published sources and was verified by cross checking these various studies and by
expert opinion, this would suggest that the ATA model has general applicability.
Another verification of this model is the conclusions it generated. As noted previously it is
not surprising that financial leverage would help make this case economically attractive. While
this is generally known there are not many specific case studies in the literature that validate this
conclusion. In fact, most of the new technology comparisons use the Societal Life Cycle Cost
(SLCC). The SLCC approach which is a before tax analysis methodology does not show the
impact of financial leverage.

7. Future Research

A specific example needs to be developed that provides the data for a more specific bus case.
This should include local conditions which are an important aspect of this problem. Prevailing
fare structure, levels of subsidies, capital costs for buses, Hydrogen production, diesel costs,
GHG Cap and Trade subsidies, and other key factor (e.g. cost of electricity for Hydrogen
production) need to be identified. The ATA transportation model in this paper should be used in
this case. This would help validate this approach with specific data from other sources. The
transportation model could be extended to include the impact of traffic regulations like banning
cars on certain days.

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 There should be a thorough risk assessment made for any case under consideration. This
should include both the financial as well as the operating risks. Risk mitigating strategies should
be evaluated along with the loans (e.g. insurance policies to protect against default, etc).
Another area for research is to focus on how “Green Banks” and other financing schemes
would impact the adoption of new technologies – such as Hydrogen busses. Included is the
impact of even lower cost loans (less than 7%) and higher leverage (above 80%). These options
would require even greater risk mitigations.

Appendix I – Summary of Estimates / Assumptions

Basis: 250 Bus Fleet; 2015US$; 18 yr. project life;

Table 8
Summary of estimates

Cost Element Amount (k$) Sourcesa

Depreciable Capital - Buses 250,250 1
Depreciable Capital – H2 Production and Storage 15,518 2,3
Depreciable Capital - Garage and Parking 6,229 1
Non Depreciable Land for 1, 2, 3 above 14.06 2
Working Capital for 1, 2, 3 above 5,496 1,2,3
Operating Costs – Electricity for H2 6,561 2,3
Operating and fixed Costs for H2 – excluding electricity 1,611 2
Operating and fixed Costs for Busses 24,601 1
Operating and fixed Costs for Garage and Parking 202 1
a
See table 1 for references

Table 9
Summary of assumptions

Assumptions Units Value

Tax Rate – Operating %/year 40
Tax Rate - Capital %/year 20
Loan Rate %/year 7
Inflation Rate %/year 3
Minimum Attractive Rate of Return (MARR) Cost of Capital %/year 10
Salvage Rate: Equipment – yr. 18 %r 20
Salvage Rate: Land and Building – yr. 18 % 100

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References

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methanol, and diesel fuels for transit bus systems. University of Georgia, Athens,
Georgia.
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Intergovernmental Panel on Climate Change (IPCC), Valencia, Spain, p. 22.
<http://www.bvsde.paho.org/bvsacd/cd68/synthesum.pdf>
Bonilla, O., et al., 2009. Commercializing A New Technology: Using After Tax Analysis (ATA)
to Assess a Wave Energy Farm System. Renewable Energy, under review.
Cockroft, C.J., Owen, A.D., 2007. The Economics of Hydrogen Fuel Cell Buses. Economic
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Wiley and Sons, New York.
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<http://www.calstart.org/programs/FuelCell/Hydrogen_Bus_Source_Issue_1_August_20
05.pdf>
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Business 2.
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Policy 32, 7-27.
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Author Biography

Oscar Bonilla, Ph.D Student

Oscar Bonilla is PhD student of Engineering Management at Stevens Institute of Technology.
He obtained his bachelor degree in Automation Engineering from La Salle University in Colombia as well as his
master’s degree in Industrial Process Automation from Los Andes University. As a six sigma certified professional
who has years of professional experience within the industry in different areas such as project management,
maintenance and support and six sigma projects, as well as serving as researching and teaching assistant currently at
Stevens Institute of Technology.

Donald N. Merino, Ph.D., P.E.

Alexander Crombie Humphreys Professor of Economics of Engineering
Donald N. Merino is a tenured full professor and the Alexander Crombie Humphreys Chaired Professor of
Economics of Engineering at Stevens Institute of Technology. He teaches Engineering Economy, Decision
Analysis, Total Quality Management, and Strategic Planning. He is Founder Emeritus of the undergraduate
Bachelor of Engineering in Engineering Management (BEEM) and the Executive Master in Technology
Management (EMTM) Program at Stevens.
He won the Morton Distinguished Teaching Award for full professors at Stevens. John Wiley published his book,
“The Selection Process for Capital Projects”. Dr. Merino received two Centennial certificates from the ASEE in
Engineering Economics and Engineering Management. He is past Chair of the Engineering Management Division
and Engineering Economy Division of ASEE. Dr. Merino was awarded the ASEM and ASEE Bernard Sarchet
Award. He is an ASEM and ASEE Fellow and past president of ASEM.
Dr. Merino has 25 years of industrial experience in positions of increasing managerial / executive responsibilities.
He worked 10 years for Mobil and 10 years for Celanese. His initial assignment at Celanese was Director of
Hydrocarbon Planning where he was responsible for forecasting energy prices.
Since joining academe 24 years ago, he has published 42 refereed journal articles and conference papers and over
50 research reports.

Address:
c/o School of Systems and Enterprise
Stevens Institute of Technology, Hoboken, New Jersey, 07030
Work telephone: 201-216-5504; E-mail: dmerino@ stevens.edu

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