How Investors (Should) Think about the Electric Vehicle Sector

It is easy to relegate a discussion about electric vehicles to Tesla toys for the affluent.

But that would not be the whole truth.

As an illustration, I recently served on the Advisory Board for Vulcan in its Smart City Challenge partnership with the U.S. Department of Transportation, which jointly awarded US$50M to a single U.S. city to support transportation innovation, including electrification.

​In all, 78 cities competed. The enthusiastic response, impressive potential for scale, and wide-ranging innovation were a pleasant surprise.

Although there are only about two million electric vehicles on the road globally today, that estimate is expected to grow to roughly 100x if the Paris Climate Accord has its targeted impact (International Energy Agency, 2016).

Electric Vehicle Projections, 2010-2030   

(Source: International Energy Agency, 2016)

Although these vehicles are often deemed to be “too expensive,” many electric vehicles actually offer a lower total cost of ownership than conventional vehicles when assess over their entire lifecycle.

Moreover, by 2022, the average first cost of electric vehicles is projected to be the same as the average first cost for conventional cars.

​With cost concerns removed, plus the other benefits of less noise, no gasoline smell, fewer moving parts, and the “cool factor,” this market is expected to grow quickly from this point forward (BNEF, 2016).

In fact, the growth of electric vehicles is expected to be so meaningful that Fitch Ratings recently stated that the sector’s rise presents potential for “investor death spiral” negatively impacting the oil sector (Financial Times, 2016).

And at the Oil & Money Conference last month, Statoil’s CEO noted that electric vehicles could catalyze oil’s peak sales within five years, with a steady decline thereafter (Climate Home, 2016).

Considerations for infrastructure investors:

• Today vs. tomorrow — Most capital flowing into this sector is relegated to angel and venture capital investments, which have seen investments across the entire transportation sector increase by 200 percent since 2010 (i3, 2016). Accordingly, large asset finance opportunities are limited for now, but early investors may be rewarded with larger share of the electric vehicle market in the years ahead.

• Chicken vs. egg — Larger investment opportunities may be possible by answering the “which comes first debate” — more vehicles or more charging stations — and investing in both at the same time within the same boundary (e.g., campus, headquarters, town).

• Opportunity to rebuild the global gasoline station network? — This grandiose investment potential is unlikely to be realized in its entirety due to increasing battery ranges and the expanded vehicle charging at homes or work locations. Consider that recent surveys suggest new car battery ranges can meet 98 percent of typical driving needs before recharging (Carbon Brief, 2016). However, it is fair to say that private capital will be needed to fund some fraction of this new public charging infrastructure. And as the saying goes, “A small percentage of a large number is also a large number.”

• Third-party ownership of the vehicle batteries — This could provide two benefits. First, the barrier of higher first costs would be removed, thereby facilitating more rapid market uptake of electric vehicles. Second, batteries could be treated as assets to the broader grid, which could result in additional revenue streams from utilities (e.g., frequency regulation) and building owners (e.g., resilience during power outages).