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Building Back Better: An opportunity to be ‘Fleet’ of foot

The investment opportunity in the fleet electric vehicle market

Fleet vehicles will soon be converting to electric at scale, presenting a new and growing area for real assets investment. Jonathan Massam, Gareth Lewis and Robert Senger explore the opportunities.

Electric vehicles (EVs) are gaining traction in the UK – by 2026, they’re expected to account for a fifth of vehicle sales.

To date, investment activity has been focused on the consumer side and public charging networks. Before COVID-19 hit, the big energy companies had been busy - with BP buying Chargemaster, EDF buying Podpoint and Shell buying Dutch firm NewMotion. Financial investors have also been active in the market, initially with private equity investors, such as Zouk choosing to invest in Instavolt in 2016. And more recently, infrastructure investors have joined the fray, such as Infracapital’s April 2020 acquisition of a stake in Fortum ReCharge.

Whilst this section of the market has been typically characterised as having high growth potential and positive ESG sentiment, it does require substantial short-term investment as sites must be acquired and networks developed. Investors are therefore exposed to unpredictable consumer demand and usage while the EV rollout progresses. So while likely to be a great investment in the longer term, it is clear investors do require a degree of risk tolerance and patience.

Fleet opportunities

There is, however, another opportunity for investors. The EV fleet market has so far seen few transactions, despite UK businesses already having spent £8.2bn on EV adoption in the two years following the Government’s announcement in 2017 to ban the sale of conventional petrol and diesel cars from 2040, with a further £12bn expected in the following two years. In fact, Fleet vehicles accounted for more than half of UK car sales in 2019. Sales of other fleet vehicles such as delivery vans, taxis and buses add further to the figure, highlighting the potential growth and scale of the sector as well as the opportunity.

Total car sales: 2,311,140
Source: Society for Motor Manufacturers and Traders, Cornwall Insight, PwC Strategy& research

Indeed, as we “Build Back Better”, the motivation for fleet operators to electrify is increasing both from an environmental and political perspective. Electric vehicles are already exempt from London’s congestion charge and in 2020, the Government brought forward a ban on the sale of new petrol and diesel cars and vans to 2035 and, subsequently, to 2030 for most of these vehicles. In July 2021, the UK Government announced its intention to also ban the sale of all new petrol and diesel trucks by 2040 as part of its “transport decarbonisation plan”, adding to the urgency of converting commercial fleets to zero emission vehicles. As part of the announcement, the Government also brought forward its target for converting its own fleet of around 40,000 cars and vans to zero emission vehicles from 2030 to 2027.

For our cities and towns, the benefits are obvious – clean air is a huge public health concern with all its related healthcare costs, especially following COVID-19, and a big factor in quality of life.

Large capital requirements

There is a clear role for investors in this part of the market. At the moment, electric vehicles typically cost more to buy but are less costly to operate than diesel. Fleet owners therefore often face substantial upfront costs. For example, at more than 40,000 buses, we expect the UK bus fleet alone will cost more than £15bn to fully electrify (including costs of converting depots and installing the charging infrastructure). Depending on existing grid connections, this can extend to the installation of batteries necessary to power a large number of vehicles simultaneously.

Different payment structures could help tackle high initial costs

This dynamic offers a genuine and significant role for investors, who could finance the upfront capital required, allowing fleet operators to focus on their core operations whilst speeding up the transition to decarbonise our roads.

There is an opportunity here to find different payment structures that balance both parties’ needs and appetite for risk.

Whether it’s payments per mile or per day, this turns the outlay into operational rather than capital cost and makes the sums more manageable for the fleet operator. Leasing vehicles and charging infrastructure from investors is also an option, as is procuring batteries as serviced assets.

Investors themselves should be encouraged by the predictable use of these vehicles – buses for instance, travel the same route every day – and large, credit-worthy counterparties such as bus operators, delivery and logistics businesses, supermarkets, etc. can be contracted for the long term on a profitable basis.

Indeed, COVID-19 has only served to emphasise the importance of these sectors, and while many traditional real asset businesses could consider these types of activities as outside their comfort zone, fleet electrification may offer an advantageous opportunity to play a more active and influential role in the value chain.

The investment market

The market opportunity has the potential to appeal to a broad range of strategic and financial investors.

Oil and gas majors and utilities will naturally look to defend themselves against (or seize the opportunity) presented by the strategic threat of EVs. For infrastructure investors looking to find an entry point to the market, B2B fleet investment is an attractive opportunity: public networks face key risks in the short to medium term including the rate of uptake, charging patterns, site selection and price competition across networks. The fleet part of the market will be immune to many of these and remains an opportunity still to be tapped.

It is also worth considering that building this extensive infrastructure doesn’t have to rely on entirely new sites: existing real assets can be upgraded or repurposed.

The value of sites with good charging infrastructure or enabling infrastructure (such as grid connections) could grow quickly as the demand for EV charging increases. It could also open up possibilities for other improvements to the site, such as the addition of stationary batteries behind the meter or solar panels.

The stress currently being experienced in retail and other sectors may present good opportunities for real asset investors to identify and/or acquire sites (such as out-of-town retail or car show rooms) which could have higher value when adapted to incorporate EV fleet infrastructure - either in whole or alongside other uses.

Window of opportunity

Investors need to be aware that this is a sector with an exciting outlook. It ticks a lot of boxes – tremendous growth potential, investment opportunities with strong contractual cash flows and support for the transition to clean energy. The opportunity is substantial and recent government announcements add further momentum to it but at the moment, relatively few players offer EV fleet solutions. Our advice is to pursue the investment opportunities while they still remain. Those who are ‘fleet of foot’ will benefit the most from the growth phase of this new market.

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Contact us

Jonathan Massam

Jonathan Massam

Director, Corporate Finance, PwC United Kingdom

Tel: +44 (0)7595 610244

Gareth Lewis

Gareth Lewis

Real Estate Director, PwC United Kingdom

Tel: +44 (0)7932 970728

Robert Senger

Robert Senger

Assistant Director, Corporate Finance, PwC United Kingdom

Tel: +44 (0)7753 812335

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