A new UK government strategy and GBP 400m fund are set to drive investors into electric vehicle (EV) charging infrastructure. But they must first navigate through revenue uncertainty to find opportunities in retail services and arbitrage, as Nick Roumpis reports
It’s no secret that electric vehicles (EV) are expected to dominate the automotive market worldwide in the next decades. Under its government’s Road to Zero Strategy, launched in July, the UK has set the bar high. It wants at least 50% of new cars ultra-low emission by 2030 and all new cars and vans effectively zero emission by 2040.
This has thrown EV charging infrastructure into the spotlight, given the huge investment required for the roll-out of this revolutionary development. And, already, there have been big deals involving infrastructure funds or major corporates acquiring key players in the EV charging infrastructure space.
In May, Meridiam broke into the European EV sector with the acquisition of Allego, a Dutch EV charging infrastructure developer, from electricity utility Alliander. Mirova told Inframation it has recently started investing in EV charging infrastructure while infra fund-owned Welcome Break claims to be “pioneering” the installation of EV superchargers.
Oil and gas majors have also been quick off-the-mark. In September, Total acquired G2mobility, a French provider of EV charging solutions. Last year, BP bought Chargemaster, one of the UK’s biggest EV charging companies, and prior to that Shell acquired Dutch-based EV charging point manager NewMotion.
Now the UK government is joining investors. It is seeking a manager for its Charging Infrastructure Investment Fund (CIIF) – a GBP 400m investment vehicle expected to be ready to invest by early next year. Private investors will contribute at least GBP 200m, with the government providing the remainder.
All roads lead to EV
As of 31 December 2017 there were 16,500 charging points across the UK for the 135,000 EVs on British roads, according to research by Emu Analytics. All new homes built in the UK will soon be required to have charging points while new street lighting columns will need to have charging points in areas with on-street parking, according to the Road to Zero Strategy. Highways England wants a charge point every 20 miles along the strategic road network.
In the meantime, the government’s CIIF will focus on financing elements of EV charging infrastructure away from the vehicles themselves – including physical charging points, the software and platforms required to run charging infrastructure, and grid connections to the existing electricity distribution networks.
Timotej Gavrilovic, an independent researcher at advisory firm GTM Research, said GBP 400m is “a good starting point, not too small but not too big either, good for giving the initial push to the market.”
Yet, quite obviously, GBP 400m alone will not be enough to meet demand for EV charging points under the government’s ambitious strategy.
Quantifying the investment required in such a nascent market can be quite challenging, but PwC has tried.
It estimated that the UK will need two to 11m charging points across the country, translating into a total investment requirement of up to GBP 15bn. This figure will be met by additional funds, similar to CIIF, private EV owners paying for chargers near their home and further government initiatives, according to Janine Freeman, director at PwC.
But in addition to fundraising, CIIF faces another challenge. The manager will have to choose between a number of different business models currently in the market, including energy sales, related retail revenues or vehicle-to-grid revenues.
In the case of energy sale, the charge point operator pays for the power and the price charged to the EV owner is higher than the electricity paid for by the operator. An infrastructure investor in this example could take part of the profit from this price difference. The profit margin would depend on a number of factors including the speed of the charger.
Another revenue stream, according to Freeman, could be the rent paid by a supermarket to a charge point operator for installing the charging point in their car park, for example. “This would be part of the revenue stream that can be used to justify investment in the asset by investors,” Freeman said.
CIIF could also target companies building charging points near the homes of EV buyers under arrangements with certain EV manufacturers, noted Alex Harrison, partner at Hogan Lovells. These businesses would make a profit out of these charging points, which would be returned to shareholders.
Investment in EV charging infrastructure also presents interesting retail revenue opportunities, according to Harrison.
Charging point developers are expected to create greenfield stations with services such as coffee shops and mini-markets, which would allow infrastructure investors to benefit from additional retail revenues. Using charging stations for advertising purposes as another way of generating additional revenues, said Lada Strelnikova, lead fund manager of the European Energy Efficiency Fund.
While businesses will sell electricity to EV-owners, chargers themselves may be able to sell excess energy back to the grid themselves, particularly during peak times. In this vision, people can use their cars to power their houses, while at a larger scale, cars parked in airports for weeks could be used to power the airport, providing another market opportunity for CIIF investors.
The peak time for power demand is in the early evening when office lights are still being used and people are arriving home from work putting on lights, heating and TVs. If at this time more and more people also start charging their EVs, this adds to the peak power demand.
Therefore, a lot of companies could look to arbitrage the difference between low and high power prices and gain earnings out of it. For example, they could encourage EV owners to plug their cars in when they get home, but the charging would not actually start until midnight, and they would have a deal with their energy supplier to pay less for their power.
Both Freeman and Harrison agreed that the fund will invest in a combination of the above models and revenue streams.
The government has a role to play during the early days of EVs, said Luca Grassadonia, senior investment analyst at Kreston Italy Consulting. The only way for the scheme to succeed, is a government subsidy for the electricity price “at the pump”, he said, hoping that commercial operators will form a stampede into building the network, a system similar to feed-in tariffs for the PV solar industry.
Initial market feedback has indicated that opportunities for commercial investment are likely to require some form of underwritten revenues, according to the government. The UK government has already offered a range of grants, including the Office for Low Emission Vehicles that is investing nearly GBP 1.5bn including grants to reduce the upfront cost of new ultra-low emission vehicles and encouraging UK business to seize opportunities in the sector between April 2015 and March 2021.
People spoken to for this article warned that the EV charging infrastructure industry is not yet a well-established standalone market. This creates risks for investors, especially given the absence of a specific pipeline of EV charging projects.
Investors should be prepared even for negative returns in the first one to two years, that would later stabilise, Gavrilovic said.
Exposure to customer demand is one of the main risks in terms of revenue certainty. “It’s a very interesting market in the medium to long term but there is potentially greater risk and opportunity in the short term,” said Harrison, “because of the uncertainties around EV range, uptake, charging speeds and technology obsolescence.” Any potential investor or fund manager would need much more clarity about the business model and the fund’s investment targets, the same people agreed.
The speed of charging is one of the most important factors that investors should consider.
“It cannot be said that the pricing of energy should be strictly in line with the charging speed,” said Grassadonia. “But until the pricing of an EV charge is not allowed to account for the time component, no EV project will ever be economically viable by itself alone and so attractive to a private investor.”
The returns for equity invested in CIIF will be between 8% to 12%, according to at least two people spoken to for this article. Investors with a low risk appetite could find the market more challenging. “Venture private equity firms will find CIIF more exciting,” one person with knowledge of the fund said, but indeed they may expect higher returns.
CIIF will be managed and invested on a commercial basis driven by independent decisions made by the fund manager, according to government. Interest from fund managers for the newly launched fund has been satisfactory so far, Inframation understands, but more steps may be needed before infrastructure investors and fund managers can grab the opportunity ahead.