The Charging Challenge: Investing in the Decarbonization of Transportation
The future of transportation seems to belong to electric vehicles and hybrids. Electrified transport has overtaken renewable energy to become the largest sector for global energy transition spending at $634 billion in 2023, up 36% over the previous year, according to Bloomberg NEF. That number will only continue to grow. Over the rest of this decade, electrified transport is set to account for the largest share of energy transition spending, at $1.81 trillion per year.1 The rapid growth of the segment has been driven by net zero targets set by corporations and governments, government incentives to build out the industry, changes in consumer preferences, and advances in battery technology.
A less settled question is: What is the right way to invest in this megatrend?
Every significant societal shift has a gold rush moment. Given the flurry of technological and regulatory change associated with electric vehicles (EVs), as well as the competition within the market, we think it pays to look for the “picks and shovels”—the tools, equipment, and services that are essential to the industry—rather than direct investments into auto manufacturers.
Across our Infrastructure strategies, we tend to deploy capital in protected markets where we have reason to believe there is stable end-user demand. In this regard, electric vehicles and the charging infrastructure that powers them face a chicken-and-egg problem, particularly in the United States. Many individual owners don’t want to invest in an EV until they know there is adequate charging infrastructure, and “if you build it, they will come” is a risky business model for companies with charging solutions.
However, there are many different business models in the EV and EV-charging universe, and individuals are not the only potential buyers of EVs. Many governments, companies, and other organizations have set emissions targets and will need to decarbonize fleets of vehicles in order to meet those targets. We think EV-related investments that serve these groups can offer relative stability and potential returns. The business models we prefer in this category also eliminate the need to pick winners and losers either in technology or vehicle manufacturers.
The Charging Value Chain
Electrification of the physical economy is key to meeting the ambitious net zero targets that companies, governments, and other organizations across the world have set to reduce carbon emissions. The shift to electric power will impact a multitude of industries, with transportation chief among them. The sector accounts for 14% of global carbon emissions2 and 29% of U.S. emissions, the highest across sectors.3
Electric vehicle production has taken off in the last several years (Exhibit 1), and supportive government policies in China, Europe, and the United States are designed to encourage further growth (Exhibit 2). The sustainability of the growth trend is driving increased focus on this sector from an investment perspective.
EXHIBIT 1: Global Electric Vehicle Stock by Region
EXHIBIT 2: More Growth Expected for EVs
Investing in vehicle manufacturers, many of which are publicly traded, is one option to gain exposure to EVs. Investing in charging is another option, more aligned to the “picks-and-shovels” approach we discussed earlier. Charging investments can take several forms, including providing energy to charging systems, producing the charging equipment, or operating the software that powers the charging infrastructure, to name just a few. Investments related to the batteries that power EVs is yet another way to capture the trend.
Charging Challenges
The number of ways to invest is not the only complex thing about charging. Though EV sales have soared over the past few years, they remain a small part of the global automobile market (14% of new cars sold globally in 20224) and demand can be volatile. Last year, for example, sales plateaued for several automakers.
Survey data suggests that cost is the foremost deterrent for individual buyers, followed closely by a lack of charging infrastructure. Some 44% of respondents in a global survey of individual drivers5 cited the availability of charging stations as a deterrent to considering an EV purchase and a similar number said charging time was a key concern.
An equipment manufacturer with a plan to solve this dilemma by becoming the dominant force in long-distance charging infrastructure faces many challenges. A charging station’s profitability depends on local adoption of EVs, the volume of users within that specific area, and how much charging time customers need in transit, as opposed to on home chargers. On top of that, those who install public charging infrastructure are essentially in the business of reselling electricity, the price of which they cannot control.
Access to power presents another challenge for building public charging networks. Charging stations represent a potential source of significant burden on the electrical grid, which in turn poses a challenge for utility operators. Permitting approvals for new electrical distribution points and transformers can be time-consuming and difficult to obtain. Physically hooking a charging station up to the grid often involves digging to reach the grid infrastructure and re-enforcement of the grid connection point, a process that is expensive, time-consuming, and also often requires regulatory approvals. These considerations open up substantial risk that businesses cannot control.
What Does Good Charging Look Like?
In our view, the key to derisking EV and charging investments is to remove volumetric risk, both with respect to demand and price of electricity. Mitigating these two major risks helps insulate an investment even if consumer demand for EVs falters or electricity rates experience volatility. In other words, it helps to have a captive audience and some means of hedging price changes.
One way to accomplish this is by focusing on fleets. Providing access to EVs, charging services, or both to buses or trucks with defined, steady routes and stable corporate or government customers mitigates the chicken-and-egg problem. Public transit companies are under pressure from multiple stakeholders to decarbonize operations, and once they invest in electric buses or trucks, the demand for charging is present, predictable, and steady. Long-term offtake contracts can help reduce volume and price risks even further.
Another viable option is to help businesses offer charging stations to customers or potential customers in the same way they may offer pharmacy services. Investing in a company that installs charging stations at supermarkets that prepay for a certain amount of use is one example of how this could work.
Good Charging in Action: Zenobe
In 2023, we announced an investment in Zenobe, a British electrification-as-a-service business that focuses on leasing electric buses to organizations and providing them with charging services, as well as battery energy storage systems.
Zenobe is a market leader in fleet electrification, with experience and expertise in helping fleet owners buy electric vehicles and install, operate, and maintain charging infrastructure. Between now and 2050, the fleet electrification space will require substantial investment as consumers continue to shift from traditional modes of transportation to battery-powered electric vehicles. By 2030, we expect that more than 80% of new bus sales and 48% of light commercial vehicle sales will be electric.
The Zenobe investment is an example of the infrastructure mindset we have applied to climate investing. The company has an established business model with a significant opportunity for growth, virtually no technology risk, and long-term contracts in place with bus operators. These characteristics reduce the risk of the investment while capitalizing on the major trend of electrifying commercial fleets.
Conclusion
Investing in fleet-charging or charging-as-a-service for a larger retail or consumer business offers access to a huge growth trend and, if contracts have the appropriate terms in place, a guaranteed demand for charging over a certain period of time. No one can predict the exact speed with which electric vehicles will come to dominate the vehicle mix, what a broad public charging infrastructure will ultimately look like, or what other interesting business models that touch the EV universe may yet emerge. From where we sit right now, however, we think there are several ways to invest in the trend without taking big bets on any one technology or demand curve.
1. BloombergNEF, Energy Transition Investment Trends 2024 as of January 30, 2024.
2. Net0, Top 5 Carbon Emitters by Country” as of May 2022.
3. U.S. Environmental Protection Agency, “Fast Facts on Transportation Greenhouse Gas Emissions” as of June 2023. https://www.epa.gov/greenvehicles/fast-facts-transportation-greenhouse-gas-emissions
4. Source: International Energy Agency, “Global EV Outlook,” April 2023. https://www.iea.org/reports/global-ev-outlook-2023/executive-summary
5. https://press.spglobal.com/2023-11-08-S-P-Global-Mobility-Survey-Finds-EV-Affordability-tops-Charging-and-Range-Concerns-in-Slowing-EV-Demand#:~:text=Almost%20half%20(48%25)%20of,analyst%20at%20S%26P%20Global%20Mobility.
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