Bloomberg New Energy Finance predicts that 57% of passenger vehicle sales, and more than 30% of the global passenger vehicle fleet, will be electric by 2040.

More than two million electric vehicles were sold globally in 2018. BNEF predicts that annual passenger electric vehicle sales will hit 10 million globally in 2025, 28 million in 2030 and 56 million by 2040.

These electric vehicles will need places to charge and will collectively have an impact on the electric grid.

The promise of electric vehicle dominance is calling attention to ownership business models and strategies for financing charging infrastructure.

Utilities, oil and gas companies, automakers and charge-point operators are all active in this space. A number of oil and gas companies and auto manufacturers have recently acquired EV charging infrastructure developers and charge-point operators or formed joint ventures with them. Traditional project finance banks, infrastructure investors, private equity firms and others are showing interest in providing financing and investing in this new asset class.

The electric vehicle sector is nascent, but there is a consensus among industry executives and analysts that a tipping point is approaching where mass adoption will become unavoidable because of falling battery costs, pressure from regulators and government subsidies.

Charging Infrastructure

At the end of 2018, there were approximately 630,000 public charging points installed globally and 61,000 in the US. To achieve scale, developers and financiers need a common understanding of the development process and where the pressure points might be.

The first step in development of EV charging infrastructure is securing land and permits.

Because of the public or semi-public nature of where chargers are sited, sorting through easement and other real estate issues may be burdensome. Developers sometimes approach their utilities with several sites in mind to get one or a few sites approved, ultimately because of permitting and real estate hurdles. Utilities often charge assessment fees on a site-by-site basis.

If the charging infrastructure is far away from the nearest electric distribution line, then new or additional lines will need to be installed, and this could require securing rights of way and easements to cross property owned by others. This process is similar to the land rights acquisition process that wind and solar project developers face when siting new interconnecting power lines— called “gen-tie lines”— for generation projects. A large number of easements can complicate financing the project later because lenders will often require estoppel certificates from each easement provider confirming that there are no defaults under the easement before they fund the loan.

Step two for a developer is to arrange for interconnection to the grid and adequate electric service from the local utility or community choice aggregator to support planned vehicle charging activities.

Costs will vary depending on whether the site already has a grid connection or a new connection needs to be established. Depending on the size and number of chargers sited in one location, the charging station’s load has the potential to be equivalent to a small building. Equipping the site with adequate electric service to serve the new load could entail costly upgrades to distribution-level infrastructure such as distribution wires, conduits, substations and transformers, as well as involve trenching through dense urban areas.

Because the infrastructure upgrades will end up serving several businesses or homes, utilities are often mandated by state regulators to cover a portion of the capital cost. Often the utility will require the developer to pay the full costs of the capital outlay upfront and be refunded a portion later through a credit on the developer’s electricity bill after the EV chargers become operational. The developer should consider engaging counsel to assist with utility negotiations and with documenting the terms and conditions relating to cost allocation and refunds.

There are predictions that installed EV charging capacity can grow to 250% of peak demand. According to BNEF, EVs will add 6.8% to total global energy consumption in 2040 and 11% in the US.

Step three for the developer is to install the charging 
station itself.

Charging infrastructure includes the charging unit and the make-ready equipment, meaning the electrical, wiring and mounting equipment that exists outside of the charger. Costs will vary based on voltage. Most chargers in retail or public spaces are level 2 (1.5 to 19.2 kilowatts) or DC fast chargers (fastest type of charging, currently delivering between 50 to 350 kilowatts of DC power).

Level 2 charging can take anywhere from 30 minutes to three hours. Because level 2 charging takes longer, the charger cannot accommodate as large a volume of customers per day as DC fast charging.

In terms of cost, deployment of one 75-kilowatt DC fast charger could range between $100,000 and $150,000. These figures are split relatively evenly between the charger itself and the make-ready equipment. Deploying one Level 2 charger costs between $2,000 and $10,000.

Public subsidies and rebates may be available to offset the costs of eligible charging equipment. Eligibility may be conditioned on using equipment from pre-approved vendors, so developers should pay attention to the terms and conditions of the rebates and incentive programs to make sure they qualify.

Throughout the development process, the EV charging station owner will often work with the local utility in determining a rate design. There are two transactions occurring if the charging station owner is not generating its own power: one between the utility and the charger for the supply of power and another between the charger and the end-use EV customer. Utilities have been willing to engage with the EV charging infrastructure community as they view EVs as a new area for load growth and one that could potentially provide ancillary grid benefits. Special EV rates are being designed to encourage off-peak charging and help grid stability.

Demand-charge management is consistently highlighted as a major challenge for EV charging station owners. Demand charges are utility fees charged to commercial and industrial customers based on the highest amount of power drawn during a defined time interval within a billing period.

Demand charges are not tied to the total volume of customers that visit a charging station or to the total amount of electricity consumed by an EV charger. This means that demand charges could be fatal to an EV charging station owner’s economics if the owner does not earn enough revenue from charging services. Siting battery storage alongside chargers is one way to mitigate high demand charges.

Financing

The scale and timeline over which EV charging stations will be installed is not clear.

At a recent EV charging infrastructure conference in New York, many attendees recognized that there needs to be a large roll-out of EV charging infrastructure soon in order to mitigate the effects of climate change since the transportation sector accounts for a significant share of greenhouse gas emissions.

Some developers are currently using debt to finance their charging stations. However, it is not clear whether this is corporate-level debt or debt at the level of a special-purpose entity that owns the charging units.

Developers like project financing because lenders look only to the future earnings and assets of the project as the source of funds for repayment and security for the loan, with limited or no recourse to owners of the project.

Project financing for charging station development may be possible if developers can prove the revenue stream and customer volume are relatively predictable.

Lessons can be learned from toll road and telecommunications infrastructure projects, which have been successfully project financed despite the same inherent use and volume risk that EV charging infrastructure faces. Banks and other financiers require some minimum level of capital expenditure in order to justify a foray into the space. It is not clear whether individual developers are at a point where they can scale development and reach an amount of capital costs to match the level of expenditures that at least the large commercial banks would want to see.

One way to increase capital costs is for developers to site renewables and battery storage alongside EV chargers. Not only could this open a door to more creative financing, but it could also help charging operators manage their own power prices and mitigate the demand-charge concerns described earlier.

Automakers have become partners in joint ventures to develop EV charging stations. They may be willing to finance charging infrastructure on balance sheet in an effort to promote EV sales.

However, there is no consensus yet among automakers about whether EVs will have a positive impact on their business models; some have pledged to phase out the manufacturing of vehicles with internal combustion engines in the coming decade while others have recently joined the federal government in litigating against California, which is attempting to maintain its federal waiver that allows it to set its own auto emission standards. How automakers engage with the electric vehicle charging sector could have dramatic impacts on EV charging infrastructure financing given how deep their pockets run.

Depot Model

One model that could lend itself to project financing is the "depot model.”

Large corporates with fleets of vehicles (for example, Federal Express) tend to have dedicated parking lots where their fleets park when the vehicles are not in use. These lots could be quality areas to site EV charging stations for four reasons.

First, there is a high degree of certainty in terms of offtake volume since the number of vehicles parked is relatively stable on a day-to-day basis. These chargers can be separately metered and data can be easily collected.

Second, there could be predictable charging times if routes are standardized, which can provide comfort to utilities in terms of rate design and how a developer prices its charging services to offtakers.

Third, the creditworthiness of the offtaker will be known. Instead of relying on individual EV drivers at retail or public charging locations as customers, EV charging owners can rely on a single known entity supported by strong financial data. Merchant risk is an issue that financiers are already familiar with in project financing of energy projects, and so the mitigants to merchant risk in the depot model could help with project financing.

Fourth, the lots are usually on private property, which can help in navigating real estate and permitting issues, and these lots may have space available to make co-siting of renewables and battery storage feasible.

Free Service Model

Among developers, the Volta Charging business model is unique because of its free service offerings.

Volta sites its chargers at retail locations, offering free charging to EV customers and free maintenance for its site hosts. Typically, charge point owner revenue streams are based on the sale of electricity from the charger to the EV customer, either on a $/kW or $/minute basis. Volta’s revenue comes solely from advertising that runs along the physical charging asset. A digital platform allows for the advertisements to be changed frequently and remotely, helping Volta attract multiple advertisers and streamline its operations.

Volta targets premium parking spaces at its locations that are close in proximity to retail locations. These premium spaces justify the costs charged to Volta’s advertisers. The idea is that the EV customers, along with all other retail customers passing by the chargers, are exposed to the advertising.

To date, Volta primarily installs level 2 chargers. This is because the time profiles of how long EV customers spend at the Volta charging sites (movie theaters, restaurants, etc.) matches the length of time level 2 charging typically takes. For example, a full level 2 charge may take two hours, but an EV customer may not care if he or she is charging a vehicle while attending a movie. (For more information on private EV charging business models, see “Opportunity: Electric Vehicle Charging Infrastructure” in the August 2018 NewsWire.)

Electric Buses

Another noteworthy sub-sector is electric buses.

Because of the size of EV bus batteries, developers and EV bus manufacturers are hopeful that there will be a market for vehicle-to-grid applications, discussed under the next subheading.

In early 2019, Proterra, an EV bus manufacturer, partnered with Mitsui by entering into a $200 million credit facility to support Proterra’s battery lease program. By decoupling the batteries from the sale of the rest of the bus, Proterra can sell more buses. This is because the upfront cost of the entire bus, including the battery, which currently has a price tag of about $750,000, is higher than an internal combustion engine bus, which runs for roughly $500,000. There are significant operational cost savings on electric charging versus fueling a bus with diesel gasoline.

As part of the program, Proterra sells the bus and leases the battery over a 12-year life. Customers are able to use the operational savings to pay for the battery lease over time while also taking financial comfort in making the upfront purchase of the bus.

Over the life of the lease, Proterra owns and guarantees the performance of the batteries.

Lithium-ion battery pack prices have fallen significantly over the past decade, and EVs may soon reach cost parity with vehicles with internal combustion engines. According to BNEF, battery prices were just below $1,200 a kilowatt hour in 2010 and have recently dropped below the $100 a kilowatt hour. Further price decreases are expected. If battery prices drop enough, then the need for similar programs may not be warranted.

Municipal transit agencies tend to phase their bus purchases over relatively long time schedules, and there is a general consensus that EV bus adoption will happen over time unless municipalities receive more federal financial support.

The depot model described earlier could be used for municipal bus fleets.

Vehicle-To-Grid

The average personal vehicle is not used to drive more than 10% of the day.

EVs charge between 5% and 20% of the day, depending on the charger’s voltage level. This means that EVs are idle about 70% of the time.

Companies across the EV value chain are actively exploring vehicle-to-grid— called V2G — technology to make EV batteries useful while the vehicles are idle by looking at the EV battery as a built-in energy storage system.

V2G benefits include ancillary grid services such as voltage and frequency regulation, spinning reserves, reactive power support, peak shaving and energy balance, akin to an energy storage system. These benefits could create new income streams for energy aggregators, fleet operators and EV drivers. As EVs and EV chargers proliferate, this intersection of EVs and energy markets could garner 
significant attention.

For more discussion about the consequences for the US power sector of electrification of the transportation sector, see “The Shift to Electric Vehicles” in the August 2019 NewsWire.