Rome wasn’t built in a day, but someone had to pick up a shovel and start digging, Tammy Samuel Michael Berryman look at the future of rolling stock 

 

Decarbonisation of the UK railway by 2050 as part of the UK economy’s wider ‘net zero’ carbon target also needs to start somewhere, and the removal of diesel trains from the UK rail network by 2040, can only be achieved by deploying multiple strategies.

The Rail Industry Decarbonisation Task Force (the ‘Decarbonisation Task Force’) believes that the most cost effective way of achieving the ‘net zero’ carbon target will be to adopt a ‘top-down, bottom-up’ approach, with progressive electrification programmes being developed and implemented from the top, supported by the development and use of alternative traction modes other than diesel (such as batteries or hydrogen fuel cells) from the bottom to fill in the gaps.

These approaches will require a degree of government support and industry wide co-ordination to go alongside private sector initiatives, all of which will be vital in ensuring the rail industry plays its part in moving the UK towards a clean and green economy. This article looks at what the different technologies are and how, from a legal perspective, the industry might seek to achieve and/or incentivise some of these innovations.

 

Can’t we just electrify the whole UK rail network?

A large part of the GB rail industry meeting the ‘net zero’ carbon target will be the imperative to move away from using diesel traction.

Electric traction, which requires electrified lines, is thought to provide the lowest whole life carbon impact and is, perhaps, the best technological solution on intensively used lines. However, it is only as carbon neutral as the energy used to construct the electrified lines and produce the electric current required (the coal vs nuclear vs wind debate is another hot topic, but beyond the scope of this article).

For high-speed rail, the energy efficiency of using electric traction coupled with the amount of power it generates means that it is seen by many as the only game in town. While electrification is necessary to achieve the ‘net zero’ carbon target, it is not sufficient and comes with several downsides, including:

  • Cost – According to the Decarbonisation Task Force, in order for the railway to meet the ‘net zero’ carbon target, there will need to be significant investment in electrification of the network by the government and, ultimately, by the fare payer and taxpayer. On routes where the railway is not used intensively, electrification may not be a cost effective option, and even on routes which are intensively used, engineering works and associated disruption means that rolling out electrification programmes comes at a significant economic and political cost.
  • Time – Electrification programmes also take time to plan, prepare and implement.

 

There does, therefore, appear to be a need to have different solutions based around the rolling stock used on routes – and part of these solutions will be to modify existing rolling stock using the latest technologies. In relation to such modification programmes it is worth noting:

  • Shovel Ready – Alternative technologies may be reaching a tipping point where the technology is almost mature enough to be rolled out. It has been reported that Chiltern Railways’ plans to convert Angel Trains’ Class 165 fleet from diesel to retrofitted electric hybrids will improve efficiency and cut pollution and fuel use by around 25 per cent. Similarly, Porterbrook and University of Birmingham’s HydroFLEX train (Britain’s first hydrogen powered train) has started operational trials on the mainline railway, so these projects are already starting to show what they can do.
  • Low(er)-investment – While the investment case will vary from fleet to fleet, investment in new rolling stock technologies may not be a bad investment in its own right. Investing in retrofitting existing rolling stock with new technology may also extend the asset life of diesel rolling stock fleets that would otherwise be scrapped, and the opportunity for the ROSCOs and other asset owners to rentalise the investment in new technologies means there are potentially inbuilt financing options.

 

What technologies are currently out there?

Sadly for some of us (and gladly for others), lawyers are not scientists or engineers and so the purpose of this article is not to go into depth about the prospective new rolling stock technologies or to pick winners. However, in summary, some of the potential alternative traction technologies that are on the table include:

  • Battery – Developments in battery storage capability have improved exponentially in recent years and so are probably the most ready to go and cost effective technology solution. The operating range of battery powered rolling stock is limited and so they are generally seen as a hybrid solution, to be used in conjunction with traditional electric and diesel traction modes. Battery and hydrogen have relatively poor energy density and are therefore probably not feasible solutions for freight or long-distance high speed operations.
  • Hydrogen – Whilst traction generated by hydrogen fuel cells has been thought by some to have a greater potential operating range than current battery technology, hydrogen requires new storage and re-fuelling infrastructure to be developed for routes where hydrogen traction is used.
  • Bio-fuel – Natural products, such as ethanol, mixed with diesel fuels in order to reduce emissions have been around for years, yet the adoption of bio-fuels has been limited due to the increased wear and tear on engines caused, in part, by the higher burning point of bio-fuels and sustainability concerns around the products used to produce bio-fuel, such as deforestation caused by palm oil production.
  • Diesel filters – Whilst this may not be the most headline grabbing or politically popular option for many, diesel technology has become cleaner in recent years and improving existing diesel engine technology may be a viable option for cutting fuel consumption and reducing CO2 emissions in the short term.

 

One point worth noting is that the rail industry has a small supply chain compared to the automotive industry and so alternative traction technologies used by rail may need to follow those used by road freight in pursuit of economies of scale in order to make the funding of these technologies viable for commercial use.

 

Funding: The elephant in the room

Predicting which, if any, of the alternative rolling stock technologies is the right horse to back is difficult, not least because the cost of these traction solutions remains relatively high due to a lack of economies of scale in the supply chain. This issue will, to some extent, be less of an issue as the technology becomes more widespread. However, the government and industry groups will need to lead the way, working closely with the private sector.

In the short to medium term, the planned introduction of the National Rail Concessions (NRCs) between the Secretary of State for Transport (SoS) and Train Operating Companies (TOCs) to replace the old franchising system may provide an opportunity to set the agenda. The new contracts are set to give the SoS a degree of flexibility and provide a solid framework in which the SoS can provide TOCs with direct funding to pursue the development and implementation of new rolling stock technologies, with appropriate performance benchmarks and accountability mechanisms to ensure that TOCs deploy the funds wisely and in line with government policy.

Track access charges, currently levied by Network Rail under Track Access Contracts it has in place with TOCs, could also be changed to provide incentives for rolling stock which uses alternative or greener traction technologies, or to make traditional diesel rolling stock less attractive by increasing access charges depending on future emissions.

However, changing the industry’s contractual framework(s) alone may not be enough of a carrot to drive the move towards alternative traction technologies in the short term, and more decisive, mandated actions may be required.

 

Legislation/regulation

As the industry’s recent Air Quality Strategic Framework document noted, there are various legislative and regulatory frameworks in place relating to air quality in support of the UK’s Clean Air Strategy. The report estimates that approximately 40 per cent of all diesel engines used for traction on the GB railway are not certified to any emissions standard.

The introduction of legislative proposals which restrict the use of diesel trains in urban areas, or which require rolling stock to meet certain emissions targets, may help to drive the implementation of new alternative and ‘greener’ traction technologies, although any legislative/regulatory changes will need to be carefully considered by the relevant stakeholders.

There are emissions regulations for diesel locomotive engines in the UK, however, emissions standards for new diesel rail vehicles appear to lag behind the emissions standards set for equipment such as heavy duty trucks and buses, so there may be more to come in this area.

 

Clean energy tax breaks

Offering appropriate tax incentives to the private sector to finance the rollout of alternative traction options may help drive investment, for example beneficial capital allowance treatment for capital expenditure on green rolling stock.

 

Return of Section 54 Undertakings

A useful tool following privatisation, so-called Section 54 Undertakings provided a statutory mechanism for the UK government to support and encourage up-front investment in rolling stock. They fell out of favour as the new build rolling stock market became more competitive and rolling stock owners took on more residual value risk.

Now, in a post-Covid world, a cash-strapped UK government may call upon rolling stock owners to drive investment in new traction options, and solutions that require entire fleets to be retro-fitted with new technology may require significant capital investment up front. Such investment may lead to a request for assurances from the rolling stock owner regarding the future use of their rolling stock fleets, especially in a climate where passenger demand, and the associated need for rolling stock, is far less certain than it was in the pre-Covid era.

 

Debt/equity finance/asset finance

It remains to be seen whether the adoption of new traction technologies in relation to existing rolling stock fleets will lead to the introduction of new financing structures. At present, the most straightforward method for securing private sector involvement in funding the push towards adoption of new traction technologies would be through tried and tested means, i.e. a combination of debt and equity investment in the supply base, coupled with indirect financing via rolling stock owners.

While new structures may yet emerge, from a financier’s perspective, modifying existing rolling stock to incorporate low carbon technologies would appear to fit within business as usual for rolling stock owners and traditional industry players, although private equity and other financiers may be attracted to companies and industry participants with the right expertise. Particularly important in this respect is the move toward more green financing and a focus on ESG (Environmental, Social and Governance) initiatives – requiring that funders and financiers (be that debt or equity) are focussing more on the sustainability of their investments. Low carbon energy for intensively used public transport would seem to fit the bill.

 

Conclusion

While the British rail industry waits for the Williams Review to be published and to see what the future of the industry holds, what is clear is that in order for rail to hold up its end of the bargain in meeting the ‘net zero’ carbon target great challenges lie ahead. Long term decisions need to be taken sooner rather than later, as legislative frameworks, engineering standards and operational standards take time to be developed.

While achieving decarbonisation of the railway will require significant network and infrastructure upgrades in the longer term, in the short to medium term it is clear that new alternative and greener traction options for rolling stock will be needed to plug the gap. It remains to be seen which of these options will be the winning horse against the backdrop of Covid passenger demand recovery, modal shifts from road to rail and the availability of public and private finance, but the future is here and the time for action is now.

 

Tammy Samuel is a partner and Michael Berryman is an associate in the Rail Team at Stephenson Harwood LLP