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.
There is however, another opportunity for investors. The EV fleet market has so far seen few transactions, despite UK businesses spending £8.2bn on EV adoption in the last two years and a further £12bn expected in the next two. 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 earlier this year the government brought forward a ban on the sale of new petrol and diesel vehicles to 2035.
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.
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.
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 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.
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 cashflows and support for the transition to clean energy. The opportunity is substantial 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.