It’s not just cars driving the EV revolution in emerging markets
We think green, shared mobility - from electric buses to electric rickshaws - will power radical changes to transport in emerging markets. And bring investment opportunities.
Decarbonising the transport sector is widely understood to be essential to lowering greenhouse gas emissions and meeting net zero targets. Road transportation - of people alone - accounts for 70% of global transport emissions, according the IEA.
Electrification of vehicles will play a vital role in the race to net zero, but to date much of the focus has been on developed markets and personal electric cars.
The e-mobility transition is not limited to single-user vehicles, and individual electric vehicle (EV) purchases. It’s certainly not limited to developed markets. Some of the largest cities of the emerging world – like New Delhi and Jakarta – have pollutant concentrations more than 15 times higher than levels recommended by the World Health Organization. Emerging markets are also predicted to grow by more than 10% between 2020 and 2030. Sub-Saharan Africa’s population is projected to double by 2050.
In emerging markets, electrified private EVs may only be the tip of the iceberg and their potential from an investment perspective is limited by a number of factors.
Development of clean public transportation or mobility sharing infrastructure is a different story, and we think investors should pay close attention. It will require billions of dollars in private investment to deliver charging infrastructure, improved grids, and scaled and geographically-diversified battery manufacture. And the path to investment returns is far clearer.
Speed bumps in charging infrastructure
EV sales growth depends on the availability of adequate charging points. The lack of available public charging infrastructure is consistently quoted as a primary barrier to EV adoption.
There are only limited options available to any user to charge an electric vehicle. The first is private charging, at home or at locations made available by an employer. Home chargers are often provided by the EV manufacturer, but require users to live in a single-occupancy house and have sufficient space.
The only alternative to private charging is public chargers spread across a city. The typical city charger has limited charging capacity. A customer may expect to leave their car for a few hours to achieve full charge.
Public charger density also varies greatly across different regions of the world. China is a front runner for EV adoption and currently accounts for close to half of the global electric vehicle stock. China also has the densest network of public charging points, with one public charger for every 7 EVs in circulation. The US and Europe are still lagging, at average densities of 18 and 16 EVs per charging station respectively.
The sector is nascent in emerging markets, with charging point densities of 25 EVs per public charging station in India in 2021, or 28 in Brazil, according to the IEA. Given the relative lower prevalence of home charging, the deployment of public chargers is a key enabler to the transition to electric vehicles in emerging markets.
Source: IEA, Schroders
It is estimated that more than 13 million public chargers would need to be deployed by 2030 to support the forecasted EV growth, from a current base of about 3.5 million charging points, the majority of which are located in China. Based on current average costs of EV chargers, the target addition of public charging infrastructure would represent capital investments in the range of $150-200 billion until 2030 (cumulative), with about 10% of the investments to be deployed in emerging markets, according to the IEA.
Arguably the main speed bump though, is in charger revenue models. Public charging assets typically follow a business-to-customer model (“B2C model”). This means revenue is generated from the sale of electricity to individual users. These businesses are therefore highly dependent on how many users charge vehicles and how much electricity they use when they do. Stable cashflows are only generated once a certain scale is achieved. The model is unsuitable for most financial investors or debt providers before that point.
Until now the deployment of chargers has been limited to the strategic interests of automobile manufacturers, or oil & gas companies in their hope to encourage EV up-take and solve the scale equation. But the scale required for the electric transition means the investor universe needs to be considerably broadened. If it were, financial investors and debt providers could create the virtuous circle of available infrastructure and EV adoption.
In emerging markets, attracting private capital is an even greater challenge. Mass adoption of EVs remains a few years behind developed markets. Fewer models are available, and government support is weak for retail customers. EVs are only affordable to the most affluent portions of the population, who are likelier to use private charging. They are out of reach for the rising middle class.
Emerging market investors may need to look away from single-user EVs and B2C models to find opportunities to invest in EV infrastructure.
Opportunity one: buses
Development of clean public transport or mobility sharing infrastructure has become a priority for some of the world’s largest cities, home to millions and centres of economic growth in emerging markets.
Electric buses in particular are efficient for tackling air pollution, can cut traffic congestion and can benefit from strong government incentives. City buses typically follow predictive routes and make regular trips to depots, where they can recharge.
India has, for example, accelerated its support for electric buses, providing price reduction incentives and promoting the use of electric buses for public transportation. It has launched state government tender processes to convert fleets of municipal buses to electric, targeting 50,000 electric buses in the country over the next five years.
Globally, we can expect the electric bus market to grow from less than 700,000 vehicles in 2021 to over 3 million by 2030. That would still only represent 11% of all buses in circulation, according to the IEA.
Fleets of electric buses also present opportunities for private capital investments. Bus operators usually benefit from long-term concession contracts with a municipality or a public body, providing them visibility on routes and bus utilisations. This creates an opportunity for a business-to-business (B2B) models. Under a B2B model, bus operators can offer long-term “off-take” (energy use) contracts for the charging stations to their energy service providers. This allows for the stable cashflow outlook necessary to raise debt financing.
Additionally, minimum financing sizes are required to attract investor attention in any private transaction, which also aligns better with buses than private vehicle use chargers. Electric buses require fast chargers, with capacity in excess of 150kW. This compares with an average of 6kW for home or city chargers. The bus chargers are more capital intensive and may fall within the financing mandates of financial institutions.
The model can also be easily replicated for other cities, based on similar contracts, improving the potential scale element. Chargers can be deployed at bus depots, with sufficient space readily available, and therefore do not face the intense location-related competition that traditional city chargers may be exposed to.
Charging as a service can also work for any fleet of commercial vehicles, from heavy trucks to two or three-wheelers, expanding the addressable market to the high growth logistics and distribution sectors.
Opportunity two: two & three-wheelers
As EV charging operators successfully raise private debt to finance their B2B projects, more equity capital may be released towards dual strategies, combining a stable base of contracted cashflows from B2B and B2C charging. However, high volumes and utilisation levels are still needed. EV charging operators may not look to the individual car segment, but instead towards the promising market of two and three-wheeler vehicles.
Two-wheelers are a favoured mode of private transportation in emerging markets. Three-wheelers, or auto-rickshaws, a common mean of shared mobility in large cities across emerging markets. They are typically light vehicles, used for small commute distances and at low speed. Their typical use and size makes for easy conversion to small-sized electric motors and batteries, which can be charged or switched in a matter of minutes.
Smaller battery-powered engines are usually cheaper to produce than ICE counterparts, and with lower operating costs as well as reduced exposure to oil prices. The drivers are also protected from the wear and tear of the battery as under-performing batteries are gradually recycled out of the network and replaced. Drivers of these vehicles are often taxi or delivery drivers.
Reduced operating costs, or their waiting times, increase their availability and therefore potential revenue. It is not a surprise that the uptake of electric two and three-wheelers is happening at a large scale in countries like India or Vietnam. Hundreds of thousands of electric vehicles were sold in 2021, accounting for over 20% of two and three-wheeler sales. In the current outlook, EVs should account for over half of two and three-wheelers sales globally by 2030, according to the IEA.
Battery swap stations can capture the growing demand that arises from the market and further facilitate this transition and encourage volumes. Structurally a user-oriented model, the location and breadth of the swap stations network is key to generate sufficient volumes and achieve profitability.
The combination of battery swap business with B2B contracted cashflows remains an attractive way for an operator to stabilise its returns while building its competitive presence and scale in the retail public charging segment, until volumes in the market are sufficient to ensure visibility.
Opportunity three: investing in the grid
While EVs have a direct positive impact on tailpipe emissions, they are only as green as the electricity grid that they are using for charging, which in many emerging markets remains heavily fossil fuel based. EV charging is also energy intensive and can increase pressure on weak grids already facing capacity constraints.
The growth of the e-mobility sector will require significant investments to upgrade electricity grids, and increase renewable energy generation. Many countries in emerging markets are already engaged in ways to cater for growing electricity demand from a growing and more affluent population and favour renewable energy.
In coordination with the roll-out of more renewable energy sources in the market, e-mobility can contribute to lower fuel dependency and energy autonomy. It can play a very positive role in the stabilisation of the national grid, or even of mini-grids.
Intermittency from solar or wind technologies can put creating voltage and frequency variations. Batteries can charge and discharge to stabilise the grid in such instances. The batteries of electric vehicles, e-buses or electric two-wheelers, while connected to the grid, could therefore play a role in protecting a grid’s stability.
Grid services from EV charging remain marginal at this stage, but the technology required – bi-directional charging - is already in place in most of the newest electric vehicle models. Formalising how to monetise ancillary services provided by EV batteries connected to charging points could be key to creating stable cashflows. This may improve the revenue models of EVs, and therefore their bankability.
Beyond grid stabilisation benefits, smart charging of EVs, using differentiated electricity tariffs in off-peak hours, may also mitigate the pressure on electricity demand. That’s because vehicles can be charged during the day, when demand is lower and renewables generation is available.
The importance of developing battery materials and manufacture
The Covid-19 crisis and the war in Ukraine have highlighted bottlenecks and weaknesses in the energy transition supply chain. Battery metal extraction is highly concentrated geographically in Australia, the Demographic Republic of Congo, Russia and Indonesia. Surging demand and tightening supply caused metal prices to rise sharply in 2022. There is, however, significant unrealised potential for extraction globally, which can contribute to diversification in the long term.
Battery cell manufacturing is also highly centralised. China supplies close to 80% of the world’s batteries. As global battery manufacturing capacity is set to increase there are strong opportunities for other geographies to play a role in EV supply chains.
Many countries, such as Indonesia, India or Thailand, have recently announced ambitious industrial strategies to integrate battery supply chains locally, and reduce their vulnerability to Chinese exports. This diversification will be key to strengthening global supply chains and supporting the e-mobility transition.