This is part two of our Energy Transition Series, in which we offer our insights on new technologies and their role in driving the energy transition. Part one, 'Five Things to Know about Oil & Gas Electrification', is available here and Part three, 'Five Things to Know about Hydrogen', will be published this summer.
With the adoption of electric vehicles ("EVs") accelerating, investors are increasingly looking at opportunities within the EV infrastructure sector. The transition to EVs necessitates a fundamental change to the driving habits of millions of people and so it is still uncertain what will become the new normal and which business model will ultimately offer the best returns for investors.
EV infrastructure is a fast-growing sector in which a large number of players are racing to expand their charging networks or partner with commercial fleet owners, and substantial short-term investment is required to fund this rapid expansion. Here are five things to know.
In previous years, utilities and energy companies have made strategic moves to buy up some of the larger UK charge point operators ("CPOs") as bolt-on acquisitions to incorporate into their existing businesses (see for example BP's acquisition of Chargemaster (now BP Pulse), EDF's acquisition of Pod Point and Shell's acquisition of Ubitricity).
Given the need for large initial outlays coupled with longer investment cycles and uncertainties about returns, the EV infrastructure sector has not yet attracted pure private equity players but a number of venture capital and infrastructure funds have entered the market. For example, BlackRock Global Renewables Power recently agreed a €700 million investment into IONTIY, an EV infrastructure joint venture between five car manufacturers, Antin Infrastructure Partners acquired a majority stake in SNRG, an owner-operator of fully integrated smart grid systems including community EV charging, and Infracapital completed its investment into Zenobe, a UK-based battery and EV charging developer. We would expect this trend to continue in the next few years as the sector develops and matures. The UK CPO market remains highly fragmented and ripe for consolidation.
Certain EV infrastructure businesses are looking beyond the provision of electricity to charge EVs or the supply of EV infrastructure in order to open up multiple revenue streams.
For Volta Inc, which has recently expanded into European markets, a vital additional source of revenue is advertising. Volta typically locates its charging stations in high traffic public locations such as near the entrances of shopping centres and other commercial destinations and sells media display time on its charging stations to enable businesses to advertise to consumers.
Other EV infrastructure companies, such as IONITY, plan to acquire their own sites that will include cafes, restaurants and shops as well as charging points. The aim is to make a virtue (or more specifically a revenue stream) of the time it takes to charge an EV and earn revenue from either direct sales or by leasing out space to third party retailers. This model has already been implemented successfully at conventional fuel stations.
The deployment of public EV charging infrastructure carries with it some inherent risks as it is still not certain how consumer habits will develop and how and when public charging infrastructure will be utilised. Unpredictable utilisation and revenues have also limited the ability of EV infrastructure companies to access debt finance to date because lenders require revenue certainty in order to get comfortable that their debt will be serviced and repaid.
The larger, incumbent CPOs are at a significant advantage in respect of rolling out new public charging infrastructure as they are able to leverage their existing data on consumer charging behaviours to predict where new sites will be most utilised and profitable and thereby mitigate this unpredictability to an extent. In addition, such data may contain valuable IP that can be licensed or further commercially exploited within the EV ecosystem.
As CPOs need to ensure high levels of utilisation at public charging points to maximise any potential return on investment, commercial partnerships and technical integration agreements with EV manufacturers and e-mobility service providers (i.e. the providers of charging point aggregation services and customer-facing interfaces) are key. Such agreements are mutually beneficial to CPOs and consumers as, by offering consumers a more seamless charging experience (for example, through in-car or in-app integrations), CPOs can improve customer loyalty and utilisation of charging infrastructure.
Fleet electrification, on the other hand, has the potential to offer new investors a clearer and more reliable return on an investment. This is because a fleet of vehicles doing a large number of miles provides guaranteed levels of utilisation and predictable demand and fleet electrification companies will typically enter into long term contracts with large corporates and fleet owners. For example, EO Charging has entered into an agreement with Amazon where it provides charging hardware, software and operational support at Amazon's logistics sites in the UK and also software and maintenance services for Amazon's electric fleet in Europe. Fleet electrification contracts can also enable EV infrastructure companies to raise leverage because of the length of the term and because they may incorporate portions of fixed or floor pricing.
In its electric vehicle infrastructure strategy (the "Strategy") published in March 2022, the UK Government estimates that 300,000 public charging points will be required as a minimum by 2030 (coinciding with the ban on the sale on new petrol or diesel cars), representing a tenfold increase in the number of EV charging points available in the UK today, and which will likely result in a significant increase in power demand. The rollout of public chargers is also complex and time consuming. For each new site, CPOs need to navigate and contract for a range of planning, real estate, construction, grid connection and/or 'backend' IT infrastructure issues (depending on the particular business model employed).
The UK in principle has enough generation capacity to cope with the increased power demand from expected rapid EV take up between now and 2030. However, the key issue is one of network capacity – how can the UK manage the dynamics of this demand profile effectively, in particular the peak attributable to residential / overnight charging, while also ensuring local access to charge points to facilitate wider uptake of EVs beyond towns and cities in the face of the as yet uncertain pace of EV adoption by drivers.
In addition to proposed grid updates and reinforcements to ensure network capacity, the government is banking on the roll out of an integrated energy system, including (i) 'smart' charging points, which would allow EVs to be charged only when it is most efficient for the balance of supply and demand across the network (e.g. overnight), and (ii) programmable vehicle-to-grid and vehicle-to-everything technologies, offering consumers flexibility and the ability to charge at lower peak times thereby reducing costs, to sell power back to the grid or to use it for other means (for example, in the home).
The role of governments is crucial to providing the incentives to support and accelerate the transition to electric vehicles. In the UK, the government has committed £1.6 billion to support the roll-out of EV charging infrastructure as well as other initiatives and schemes for workplaces, homes and on-street charging.
However, the UK Government has made it clear that it expects the private sector to deliver charging stations where they are commercially viable and that it will only intervene where there is a clear market failure. For example, the recently announced £950 million Rapid Charging Fund will fund all or a portion of the cost of upgrading the electricity grid (including, for example, grid reinforcements and new grid connections) at strategic locations along major roads to meet future demand for high powered charging stations, where it is currently prohibitive, expensive and uncommercial to do so. The government is expected to consult on the specifics of the Rapid Charging Fund between Q4 2022 and Q1 2023.The focus of the UK Government's regulatory intervention has so far been consumer-focused, for example on the standardisation and interoperability of charging points and connections. We expect further consumer-friendly regulation to be introduced in future, focusing on consumer fairness, pricing and universal access. The perceived complexity of EV charging and the widespread use of paid-for subscription models (and higher prices for non-subscribers) used by many CPOs is widely considered to be a deterrent to the uptake of EVs by many consumers. Notably, Tesla has recently taken pre-emptive action in Europe to allow non-Tesla drivers access to its 'Supercharger' network. However, we expect governments to take further regulatory action to address this issue.