Want to make EVs cheaper? Figure out what their used batteries are worth.

Diesel-fueled trucks and buses account for an outsized share of carbon emissions and air pollution. Converting those fleets to battery-electric vehicles could go a long way toward decarbonizing the transportation sector.

The upfront price of electric vehicles is one of the biggest barriers to overcome. Though electric buses and trucks cost less to fuel and maintain over their lifetimes, they are still two to three times more expensive to buy than their diesel-fueled counterparts.

But there’s another related barrier that’s making matters worse: U.S. fleet operators can’t access the financing and leasing they need to be able to purchase these fleets. That’s because nobody has figured out how to assign a monetary value to the most expensive, yet potentially most valuable, component of every electric truck or bus — its battery.

Commonly accepted expectations of a vehicle’s ​“residual value” — what it’s worth in resale markets — determine the terms of a lease or loan. But electric vehicles are too new, and the worth of their partly depleted but still useful batteries too uncertain, for most leasing companies or lenders to know how to price those values today.

Luckily, some businesses and organizations are working on proving the value of those used EVs and batteries. A number of startups and major truck manufacturers alike are pursuing second-life battery business cases — repurposing batteries too worn out to operate in vehicles, but with plenty of oomph left in them to store energy on the grid, supply backup power for buildings, and perform other such tasks.

For now, these companies are taking on the responsibility of owning, tracking, and reusing these EV batteries themselves, since few energy-storage developers are willing to take the risk of deploying used batteries. But if they can prove that second-life batteries can make money, that could provide finance and leasing companies the data they need to start pricing that residual battery value for new EVs — a feedback loop that could significantly expand the market for electric trucks and buses.

Zeroing in on what a new EV’s battery will eventually be worth

That’s how Steven Meersman, founder and director of Zenobē, foresees the business of second-life batteries taking shape.

The U.K.-based company has raised more than $2 billion to date, manages about 120 fleet EV depots, and has 2,080 electric buses on the road or on order for customers in the U.K. and Europe. It has expanded into electric buses and trucks in Australia, and is planning to move into U.S. markets, starting with electric school buses.

Zenobē actually got its start building utility-scale battery systems before branching into supplying batteries to back up charging depots for U.K. electric transit-bus fleets. From there, the company transitioned into owning and leasing the batteries within the electric buses themselves.

“Everyone asks, ​‘What’s the value of a battery?’ The answer is always ​‘It depends’ — and that’s not just a cute answer,” said Meersman. Owning those batteries entails ​“both risks and potential upsides,” he explained.

“As a fleet operator, you might want some of that benefit — but you also want to protect yourself from that risk,” he said. As a battery-project developer with about 1,600 megawatts of systems deployed and another 900 megawatts planned in the next 10 months, Zenobē has ​“a place for these batteries to go.”

To be clear, Zenobē isn’t putting its partly depleted bus batteries into grid-scale storage quite yet. Its second-life battery business has started with used batteries from older electric buses that it has repackaged to back up its own EV charging depots, as well as portable batteries for music festivals, film shoots, and construction sites. One reason the startup isn’t using its own batteries yet? Its buses haven’t been on the road long enough to need to replace them.

Beyond that, however, mainstream battery developers and their financing partners don’t yet trust used batteries, he said. In other words, the same lack of data and experience that makes it hard to secure financing for electric trucks and buses makes it hard to finance second-life batteries for mainstream uses.

But ​“as more and more volume comes in, we’ve got more and more data, and you can start to refine, refine, refine, to squeeze out the last bit of value,” he said. That, in turn, ​“improves the value for the first life, because you can underwrite that value.”

How establishing second-life battery values could unlock new EV financing

The faster that can happen, the better it will be for fleet electrification. Right now, it’s an open question whether depleted EV batteries are going to make money or cost money for vehicle owners.

Batteries degrade more quickly than the rest of an electric vehicle and often must be replaced after about five to seven years. Owners need clear pathways to be able to recycle or reuse those batteries to avoid being stuck with the cost of disposing of them.

Just because an EV battery has gotten too old to reliably move a heavy vehicle doesn’t mean it can’t still be put to use in less power-intensive applications for many more years. That should make electric trucks and buses a lot more valuable than the diesel-fueled vehicles they’re replacing.

So says clean-transportation nonprofit Calstart, which works with government agencies and clean-transportation companies ranging from major truck manufacturers to startups like Zenobē. In a September report, Calstart found that battery-electric trucks in their later years of life can potentially be worth at least as much, if not more, than their diesel-fueled counterparts, due to the residual value of their components — particularly their batteries.

Unfortunately, ​“most major U.S. commercial banks and equipment financing companies rarely finance battery-electric truck fleets, citing residual value risk as one of the biggest barriers,” the report found. Even those that do offer financing typically forecast very low residual values for electric trucks and other fleet vehicles, which drives up monthly financing or lease payments compared with diesel-fueled vehicles, which have decades of data to show what they’re worth on secondary markets. 

Similar problems exist for the used car industry, which is trying to figure out how to evaluate the remaining battery life in used passenger EVs. But it’s an even bigger and more expensive problem for medium- and heavy-duty commercial vehicles, as residual value is critical to business plans.

In fact, this financing gap has largely limited early adopters of electric trucks to deep-pocketed companies that can take on the upfront costs of purchasing them without the benefit of financing or leasing, said Kabir Nadkarni, Calstart EV-industry assessment specialist and author of the report.

​“For the mass-market adoption of these vehicles, we really need to look at what will make the leasing and financing of these vehicles affordable,” he said. According to Calstart’s estimates, figuring that out could unlock a $200 billion-plus market opportunity in the U.S. from 2027 to 2032, as the relatively small share of self-financed zero-emissions trucks (ZETs) is outpaced by leased and externally financed vehicles.

That’s why Calstart worked with truck manufacturers, second-life battery companies, government agencies, and research institutions to set parameters for how used electric trucks and their batteries could be valued, he said. ​“We wanted to work around that barrier of data, and say [that] we can still inherently evaluate the worth of its components — especially the battery,” which makes up 50 to 60 percent of the initial purchase price. 

Calstart used some relatively conservative assumptions to inform these values. For second-life battery pricing, the report assigned a 30 percent discount to the price of an equivalent-capacity battery fresh from the factory.

Closing the gap between hypothetical and real-world value

It’s far from clear if second-life batteries can rely on assumptions like these to gain ground against new batteries. The problem, again, is a lack of data to prove their reliability to project developers and their financial backers.

Most second-life battery projects don’t actually use batteries from EVs, said Robert Long, Zenobē’s second-life business development manager. Instead, they use new batteries that ​“have not quite passed the quality test to go into an EV.”

That’s partly because there aren’t many used EV batteries available, he said. But it’s also because batteries that have spent years powering an EV come with a lot of unknowns — and unknowns are poison to project developers and financiers.

Long highlighted Zenobē’s direct experience with this as a utility-scale battery developer. Projects that cost tens or hundreds of millions of dollars and that have to guarantee performance and payback within a roughly 10-year period ​“require deep planning with warranties and risks to get big banks to finance them,” he said.

That’s why Zenobē plans to build its second-life battery business on batteries that it has owned and tracked from the start, he said. ​“We have high volumes of homogeneous batteries, and the data on them to prove their capability in second life.”

Zenobē also breaks down and rebuilds its own used EV batteries, which allows it to differentiate between individual battery cells within battery packs that can vary greatly in capacity and degradation. The best-performing batteries go into second-life systems, and the more degraded ones go to recycling.

Nadkarni highlighted a number of steps that policymakers could take to strengthen the business case for second-life batteries and feed that back into boosting options for financing EV trucks and buses.

That includes incentives aimed at cushioning risk for EV loans and leases, such as California’s Zero-Emission Truck Loan Pilot Project. The goal is to find ways for ​“a small amount of credit enhancement or funding to catalyze a lot more private capital to enter this space,” he said.

Lenders and leasing companies could also require companies to collect data on EVs and batteries to feed into assessing second-life battery health, he said. Lease and financing terms that ​“limit what vehicles can and cannot do,” which are relatively common for fossil-fueled vehicles today, would be helpful as well.

Government mandates on managing batteries pulled out of EVs is also critical, he said. The European Union is well ahead of the U.S. on this front, with battery-recycling laws and forthcoming ​“Battery Passport” requirements to track the performance and durability of EV batteries.

The U.S. has yet to pass such laws at the federal level. California has taken some early steps on battery recycling, but due to concerns about lack of controls over recycling methods, Governor Gavin Newsom (D) vetoed a bill that would have mandated it in the state.

“Having a streamlined process in one of the biggest markets like California would go really far to prop up the second-life battery industry,” Nadkarni said. ​“We think this sort of regulation will see the light of day in the next year or so.”

A snapshot of a key market: electric school buses

Progress on all these fronts could help lower costs for early adopters of heavy-duty electric vehicles. This includes U.S. school districts, which are deploying electric school buses backed by billions of dollars of federal grants and state-level incentives. That’s a lot of money, but not enough to electrify the roughly 500,000 school buses on the road today.

Electric school buses cost two to three times more than their diesel-fueled counterparts. But they can also be cheaper to fuel and maintain, reducing their total cost of ownership (TCO) compared with their dirty predecessors.

One way to help bridge that TCO gap, beyond other incentives and tax credits, would be for districts to turn their depleted batteries from a net cost to a net benefit, said Vishant Kothari, senior manager for school-bus electrification and battery circularity at the nonprofit World Resources Institute. But right now, that’s hard to do, ​“largely because of unstandardized residual value assessment,” he added.

According to research from WRI’s Electric School Bus Initiative, the cost of removing, disassembling, and safely disposing of those batteries can add up to about $3,000 per bus, he said. Being able to sell those partly depleted batteries for second-life purposes, by contrast, could yield one to more than six times that cost in revenue per bus — and make about 2.82 gigawatt-hours of second-life battery capacity available to U.S. energy storage markets after 2030, based on the current pace of U.S. electric-school-bus adoption.

Kothari points to utility programs that are funding electric school buses with the intention to own the batteries and repurpose them for stationary storage, such as those now being proposed by Dominion Energy in Virginia and DTE in Michigan, which could help establish methods and measures for second-life battery markets. Third-party companies that work with school districts to finance and deploy electric school buses could also play an important role, he said.

That would really help school districts build the second-life battery value into ​“the point when they’re procuring these school buses” today, Kothari said. ​“It becomes a bonus, in essence — something they may get at the end of life. But they’re not planning for it, and that’s something we’d like to see.”