EV charger

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Electric vehicle charging infrastructure will require huge investment over the coming decades, but powering up this asset class will be far more complex than flicking a switch. Marie Kemplay reports.

The days of the internal combustion engine are numbered, it seems, as a growing number of jurisdictions introduce measures to phase them out. The EU, for instance, has voted to ban new petrol and diesel powered car and van sales from 2035, similar targets are also in place in multiple other countries, including Canada, China and the UK (although there are variations with some continuing to allow hybrid vehicles after this date).

And in August, California became the first US state to commit to phasing out internal combustion engine vehicle sales by 2035 — a move that will likely be followed by multiple other states that typically fall in line with Californian auto emissions standards.

Infrastructure gap

Yet, considering how close 2035 is, and given the scale of change needed, it is striking how relatively little infrastructure has been installed to support the switchover to electric vehicles (EVs). Although it has increased in recent years, the gap remains stark. By one estimate, in Europe alone there will need to be 65 million chargers by 2035, requiring $134bn in investment, according to a report published earlier this year by EY and European electricity association, Eurelectric. This is a huge jump from the 400,000 chargers that exist today.

Similarly in the US, McKinsey research suggests 1.2 million public EV chargers and 28 million private EV chargers will be needed by 2030, “almost 20 times more chargers than it has now”, it notes. In November 2021, the US federal government pledged to provide $7.5bn funding for EV charging infrastructure under its infrastructure bill, but it is clear this is not enough.

Despite the patent and massive need for investment, the reality of financing this area is surprisingly complex. “There’s not really any question about whether [EV adoption] is a trend or not,” says Laurent Chabot, head of infrastructure finance at Société Générale. “The question is how to fund the infrastructure that goes with it.”

Mike Joyce, partner, energy transactions and projects at law firm Vinson & Elkins, agrees. “This is an area that my clients and I are excited about financing, but once you start to look at the details it becomes clear how complex it is,” he says.

Demand uncertainty

The biggest challenge is that as EV use is still relatively new and exists on a limited scale, there is a lack of historical data about typical charging behaviour. There is also uncertainty about how quickly adoption will take place, particularly given the economic backdrop.

“Demand risk is the biggest concern,” says Alex Harrison, energy partner and head of energy, renewables and transition at law firm Akin Gump. “We can see that adoption is happening and we know that the phase-out is coming, but we don’t really know how quickly people are going to buy these vehicles and what the exact needs are going to be at any given time during the adoption phase. Trying to size and grow a charging ecosystem around that is challenging.

“Another big variable is we don’t yet know what a typical charging pattern is going to look like, particularly for those without the ability to park and charge a vehicle directly outside their home.”

if Tesla created a charge point around the corner, I’ve lost Tesla users in my investment thesis

Mike Joyce

This also creates challenges for deciding the right charging set-up for a given location — where will drivers want to charge and where would they be willing to pay extra for rapid charging facilities that are also more expensive to install? And where will slower, alternating current, chargers be acceptable? Although common sense may apply in some scenarios, it is less clear in others.

Competition between operators in busy locations could also undermine assumptions about how well-utilised a charge point will be. Mr Joyce gives the example of a busy department store or shopping centre, with high local population density and the right socio-economic profile; however, such demand could easily be consumed by another charging provider. “For example, if Tesla [who provides free charge point usage to some of its customers] created a charge point around the corner, I’ve lost Tesla users in my investment thesis. So, it can be quite difficult to get comfortable around the expected volumes.”

Payment pains

Similarly, coming up with the optimal payment model is tricky for a service where the consumer sees one charger to be as good as any other.

“A lot of operators are trying subscription models to build a sense of loyalty and increase their volumes,” Mr Harrison says. The problem with this is that, realistically, there are few, if any, networks that can currently guarantee always having a charger available near the customer when they need one. Having to sign up to a subscription, or at the very least provide personal details, before being able to start charging also clashes with customer preferences for the ability to simply pay and start charging immediately. There is a risk the effort will put customers off from bothering at all.

This puts operators in a bind, as being able to monitor how customers are using their chargers will be crucial in establishing a track record that will make them investible in the longer term. “Data on historical charging patterns is going to be really valuable because it will enable the operator to say we know how our chargers get used, by who and when, which will support a greater degree of confidence about what the right the business models are,” says Mr Harrison. This will include informing decisions on what wraparound services they can offer to customers, such as retail or data connectivity services — or, as Mr Harrison puts it, “how they can monetise the dwell time”.

Emerging investment models

However, despite the complexities, EV charging infrastructure remains an area of significant opportunity that investors are increasingly looking at. Sucharita Dasa, a managing director on Citi’s clean energy transition team, suggests that there are two overarching investment models emerging: asset-light and asset-heavy.

there is the potential for high returns and this model can be appealing for established infrastructure investors

Sucharita Dasa

With the asset-light approach, the business model is providing the “charging network and software, and servicing and maintenance of that network,” she says. “And, because [investors] don’t own the underlying real estate or power assets, they are far less exposed to the utilisation risk.” In this set-up, investors often partner with a business, such as a restaurant or retailer, to provide charging infrastructure in their car parks.

The asset-heavy model, she says, “can require significant capital expenditure upfront, but then provides the opportunity to sell electricity. So, there is the potential for high returns and this model can be appealing for established infrastructure investors, particularly in power generation, because they understand the ownership models. But the utilisation risk issue is significant and, until there is mass-scale usage of EVs, identifying the right location is really important.”

But even with the asset-light model, Ms Dasa highlights that “investors will still want to see clear recurring revenues”.

Beyond equity financing

Significant players in the sector include oil and gas and utility companies able to invest directly from their own balance sheets, and major infrastructure investors. At the other end of the scale, Mr Chabot suggests there is a range of younger start-up companies that have primarily relied on equity financing to support their growth, but going forward will need other forms of capital to support large-scale infrastructure rollout and management. “These are not typical start-up businesses,” he says, “as it is infrastructure, they are very capital intensive.”

Project finance-type funding structures are beginning to emerge. Ms Dasa says it is becoming more common for investors to create “a special purpose vehicle (SPV) comprised around several charging sites. The investor will partner with the site owners and be the financing partner for the chargers. They will get paid from the cash flows that come from the utilisation, maintenance and network fees.”

She adds that “debt financing will remain challenging until we start to see consistent earnings before interest, taxes, depreciation, and amortisation (EBITDA) [from these businesses], but that’s an area that is in early discussions”. Mr Joyce also agrees that there is some early interest in debt deals in this space, but it remains challenging, particularly given the current market conditions.

Mr Chabot says the over the past three years, Société Générale has been exploring how it can “bring these companies to the debt markets and create a new asset class to support that longer-term financing”.

For instance, the bank led on the first syndicated loan financing for a charging point operator with a €150m facility for European charge point operator Allego in 2019. Describing the transaction, “this was a corporate transaction with strong infrastructure finance features, so something of a hybrid,” says Mr Chabot. “The concept being to fund the growth of a company establishing its footprint in the public EV charging market, with infrastructure-like debt. This was a bold transaction because at the time the company did have a negative EBITDA, but several lenders came on board and it demonstrated this kind of finance is possible.”

At this stage it remains a novel type of transaction in the market.

Mr Chabot also believes the project finance model has significant scope for growth. “Another area where we think there is significant potential for development is non-recourse financing for project finance SPVs … the idea is that like other infrastructure asset classes, it has the right characteristics suited to this kind of financing. For instance, long concession-like terms and a source of steady cash flows after a ramp up period,” he says. As of the risks, “infrastructure lenders can work with traffic risk if there is an appropriate structure”, he adds.

Fleet opportunity

One area of the market perceived to be lower risk, and therefore attracting significant investor interest, is charging infrastructure for fleet vehicles. The demand for fleet charging provision is perceived to be more definable and dependable. 

“Fleet is, in some ways, the best of both worlds,” says Ms Dasa, in that it has characteristics of both the asset-heavy and asset-light models. “But it does have complexities, for instance around grid management and ensuring that there is the right capacity, as well as the need to provide logistical support around battery management. But this complexity also provides opportunities to create different types of contracts based on energy use, the number of charges or battery management, so it can be a model with more value-add potential.”

Macquarie Asset Management, a longstanding and significant investor in infrastructure, is one such player looking to get involved in this area in a big way via its Green Investment Group business, and recently launched Fleete — a new EV infrastructure business to support operators of electric commercial vehicles.

Dan Bentham, Fleete CEO, says: “The majority of charging events for passenger vehicles will actually take place at home or at the workplace. So, the infrastructure requirements for that part of the market, although important, are relatively small in scale compared to what’s going to be required for fleets.” The business will support a range of fleet operators, including heavier fleet vehicles, such as heavy goods vehicles, buses and refuse vehicles via a subscription model.

Mr Bentham outlines how he believes investment in this area is a win–win for investors and fleet operators alike. “We have an opportunity to provide the funding, build and operate the infrastructure that fleets need to go electric. Not only is it expensive, but it’s also very complex — these are very large-scale construction projects in order to provide the right level of charging capacity.”

He adds that the service will address key “pain points” for fleet operators, such as the intense upfront capital requirements, planning around the transition, design and delivery of the construction and risk assurance about the functioning of the equipment. The offering can be tailored, including to create charging depots for one client or shared hub charging facilities.

Obsolescence risk

With any technology investment comes obsolescence risk. However, although practitioners accept that the technology will continue to develop, they do not see this as a major obstacle to investment.

Mr Chabot suggests that “as of today, we are involved in financing transactions for charging equipment able to supply up to 350 kilowatts. Most cars today can only receive power output that is a fraction of this level. So, this infrastructure will be future-proofed for a certain period of time, in that respect.”

He also adds that, in relation to the idea that hydrogen fuel cells will ultimately replace electric batteries as the technology of choice for powering vehicles, “there’s a general consensus that for light vehicles, electric batteries is probably the most efficient way of achieving the energy transition in a reasonable timeframe, and is likely to remain the most relevant technology in the medium term”.

Mr Joyce also suggests that while it is likely infrastructure will need to be upgraded every five years or so, he believes it should be possible for investors to recoup their initial capital investment within that cycle.

Nascent asset class

Despite its complexities, EV charging is expected to become a mainstream infrastructure asset class for investment. “To some extent, the situation is comparable to that with fibre optic cabling seven or eight years ago”, says Mr Chabot.

“We knew massive investment would be needed, but there was a question about whether it was fit for project finance. Contrast that with today, and there has been €50bn of financing raised and it is a vanilla and core infrastructure asset class. It is the same with EV charging infrastructure. It is a nascent market now, but it is coming.” 


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