Bus fleet decarbonization under macroeconomic and technological uncertainties: A real options approach to support decision-making

• Real option framework to support bus fleet owners in fleet replacement decisions. • Real option flexibility in fleet management translates into cost savings. • Different bus power technologies have different uncertainties. • Electric battery buses represent the winning technology in the long term. • Congested urban routes are the most suitable for electric battery buses. Fleet owners deal with various and critical uncertainties while planning bus fleet replacement, encompassing macroeconomic and technological factors, such as fuel and electricity prices, energy consumption, purchasing costs of electric batteries and powertrains, and bus salvage value upon resale. This paper proposes a Real Option-based framework to evaluate investment choices in different bus technologies over time (diesel, hybrid electric, compressed natural gas, and full-electric), where the proposed options usually involve replacing existing diesel fleets with alternatively powered buses. In particular, we provide a multi-option least squares Monte Carlo simulation to help fleet owners in making cost-effective investment decisions, resulting in potential cost savings of up to 10% of the annual total cost of ownership. By applying the proposed approach to different bus route types (inner-city, urban, suburban, commuter), the results show how the optimal investment choices for fleet replacement change over time. Initially, diesel buses or, at most, compressed natural gas buses are more cost-effective compared to electric technology. However, as electric technology becomes increasingly competitive, internal combustion buses are phased out. Inner-city and urban routes are better suited for the electric transition, whereas the transition may progress more slowly on other route types. Finally, we show that, under technological and macroeconomic uncertainties, the duration of contracts can strongly affect the investment decisions, in absence of specific guarantees on the new fleet.