Powering the electric vehicle market

By 2030, electric vehicle (EV) sales globally will hit 31.1 million, according to a forecast by Deloitte. The firm predicts a compound annual growth rate of 29% for EV sales worldwide over the next 10 years, so that electric-powered cars and vans will account for roughly a third of all vehicle sales. Total EV sales were 2.5 million in 2020.

Further analysis by Deloitte suggests that up to £18bn of investment will be required to support new EV infrastructure and build a public charging network. It is estimated that by 2030, the UK will need 400,000 charge points for EVs. With 40,000 stations currently in operation and another 10,000 being built annually, you don’t need a maths degree to spot the problem.

“We need to be installing 40,000 charging points per year,” warns Stephen Campbell, investment partner at private equity house Panoramic Growth Equity. “We’re so far behind, the gap is astronomical. And the problem is going to get worse as more and more electric vehicles get on the road.” The UK crisis over fuel deliveries, which started at the end of September 2021, may well have increased interest in EVs.

There’s no lack of action in the market. Energy companies are all in EV infrastructure assets. Last year, EDF Energy and Legal & General Capital acquired UK charging company Pod Point from Panoramic and Draper Esprit. This October, Pod Point announced that it’s planning to float in London – advised by Barclays, Bank of America and Numis. Oil companies are diversifying from fossil fuels. Shell acquired Ubitricity in January this year and has pledged to install 50,000 charge points by 2025.

Automakers’ investment in EVs is stretching into the tens of billions of dollars. In September, Polestar, a Gothenburg-based EV company backed by Volvo Cars and Chinese carmaker Geely, announced plans to go public via a special purpose acquisition company (SPAC) backed by billionaire investor Alec Gores and Guggenheim Capital. It would make Polestar one of the most valuable EV companies in the world, with a $20bn valuation mooted.

Chicken and egg

In October, Ford announced that its Halewood factory in Merseyside would be its first in-house EV component assembly site in Europe. The switch away from gas-guzzlers as countries worldwide aim for net-zero targets is an obvious game-changer for the car industry, but the associated infrastructure – especially in the UK, where new petrol and diesel car sales will be banned from 2030 – will also see huge challenges, changes and opportunities.

Carmakers acknowledge the need to build considerably more infrastructure, not only on a practical level but also to ease ‘range anxiety’ and other barriers to consumers trading in their old cars for electric. Paradoxically, the infrastructure companies know they rely on the sales and use of new cars to prove themselves investible businesses.

“It’s a chicken-and-egg situation, where a lot of these companies are not profitable at the moment,” says Campbell. “The government knows that if it’s going to drive people towards electric vehicles, it has to create infrastructure, and infrastructure is still not there. If you don’t work on infrastructure, people are just going to say they don’t want an electric vehicle because they can’t get it charged.”

He adds: “It’s a very capital-intensive sector. If you’re putting in your own chargers, particularly the ultra-rapid ones, they’re very expensive bits of kit, so there is a need for capital. These companies aren’t going to be able to do it just from their own cash flow, they’re going to need private equity.”

Credit challenge

As with any new industry, many of the metrics that could project future income and value are impossible to accurately predict. Consequently, most deals in the sector so far have involved equity rather than debt.

Phil Adam, partner and head of infrastructure debt advisory at Deloitte says: “We’re seeing people put cash into this market from an equity perspective, recognising it as a significant growth play. In the debt world, the demand case for EV-charging businesses is difficult at the moment. Until people have got comfortable with the demand for charging points, how do you prove to your credit committees that there’s a bankable level of demand for charging units? That’s a bit of a challenge for the industry.”

But as Kay Hobbs, clean energy corporate partner at TLT, says: “There’s the old adage that debt follows equity, and as soon as the equity market gets confident with the risk appetite, then the debt market will follow suit.”

She adds: “There is a lot of liquidity in the market at the moment and that increased competition is driving funds to new technologies. We saw it with energy storage and we’ll see it with EV.”

Her TLT colleague Matt Grimwood, clean energy real estate partner, sees EV-charging infrastructure as “a really diverse sector, with lots of different pockets and angles to the market”.

Going forward, he thinks: “It’s not just about somebody coming in with the money to build the infrastructure, it’s about those partnerships with local authorities, the energy networks and so on, and the need to understand where the demand is coming from and the scaling of the infrastructure.

“In the short term, we are likely to see the most activity in those multi-tech projects where you’re combining the EV with a more established technology such as solar or battery.”

Globally, the EV sector has seen $18bn of venture capital investments and 409 M&A transactions since 2010, according to research from Wood Mackenzie. In EV-charging infrastructure, $2.7bn has been raised, with 35 completed M&A deals. Carmakers have led the herd of strategic investors, bolting charging infrastructure on to their multi-billion R&D programmes for new vehicles.

Infrastructure building

Meanwhile, at least 33 EV-charging infrastructure companies have gone public through SPACs since the beginning of 2020.

Louise Shaw, EY’s energy and infrastructure partner says: “There are a lot of companies looking to capitalise on the opportunities of charging. Increased M&A activities and appetite from SPACs means that there are a lot of developers running around building charging infrastructure.

“However, for the capital to be there to fund it, it’s a slightly circular argument because you need the cars to be there and charging patterns to be understood,” she adds.

“Viewing it through an infrastructure lens, you’re always trying to look at well-understood cash flows, which enable you to bring down the cost of capital. At the moment, you obviously don’t have much of a track record around what those cash flows look like in this sector. Turning a profit and generating positive cash yields are big challenges to bring in infrastructure finance,” she says.

Growing pains

“A lot of businesses have emerged, all with slightly different models, trying to capture the opportunities of charging infrastructure,” she continues. “There are some that are focusing on the residential, some that are focusing on local authorities, some on fleet opportunities, and they’ve all got slightly different requirements from a business model perspective.”

Deloitte’s Adam points out that the bulk of dedicated market capital sits in infrastructure funds, looking for long-term stable yield. With the exception of those companies with long-term fleet contracts, “there is relative uncertainty as to where the income comes from”.

That catch-22 is the industry’s growing pain: companies are only able to afford to build capital-intensive charging points when the customers are already there. However, customers only buy cars when they know that the charging infrastructure is in place.

The next pressure point will no doubt be when EV take-up increases and the charging problem becomes more difficult, with demand on the electric grid, which Grimwood regards as “a perennial challenge”.

“In order for an EV to be truly green, you have to then source your energy from a green supplier,” says Hobbs, while Campbell points out that “the electricity use of a vehicle charge equals 30 full kettles being boiled”. This in turn is leading to new technologies (and businesses) based around vehicle-to-grid energy transfer.

“Technologies will continue to evolve as the science behind batteries develops,” says Grimwood. “It’s such a fast, dynamic sector that it will probably be completely different in five to 10 years’ time. The sector’s ability to diversify, evolve and think in an agile way shouldn’t be underestimated.”

As well as technology, revenue models can also be diversified, says Adam. “We’re working with companies that are looking to tie up elements of the energy transition space. Whether that’s commercial real-estate players using solar panels to create charging points as a ‘revenue kicker’, or multi-billion-dollar strategic buyers from the energy, oil and gas or auto sectors, it gives hope that EV infrastructure will find a way to grow.

“The potential for M&A over the next few years is enormous,” he says. “We’ve seen some of that coming through the renewable energy space, where people would build up a portfolio of, for example, solar projects, which are then acquired by bigger entities as people want to scale up and achieve greater market share through acquisition. People want to be seen putting money to work in demonstrably green projects. EVs could be another great example of that.”

About the article

Read the full article in the Corporate Financier November 2021 edition. Access this magazine as well as our extensive archive brought to you by the ICAEW Corporate Finance Faculty