The electric vehicle (EV) market has matured significantly over the past decade. While it once could have been dismissed as being built on hype rather than substance, that is no longer the case. Last year, EV sales totalled 6.6 million worldwide, according to the International Energy Agency, more than tripling in market share compared with two years previously. Even amid the disruption of the covid-19 pandemic, electric car registrations rose in major markets during 2020.

As promising as these figures are, there is a danger of consumers, businesses and investors getting carried away with the EV market’s recent growth. The majority of vehicles on the road remain powered by internal combustion engines and the rapid expansion in EV sales appears to have slowed, if not stalled, in some markets. Charging infrastructure is, at least partly, to blame.

“The vast majority of EV charging stations are unprofitable today, partly due to the fact that they are not located where drivers need them most. Start-ups using spatial data analytics, in partnership with local authorities, can help charge point operators and site hosts to enhance the deployment of EV charging stations,” says Louis Fearn, investment associate at InMotion Ventures, a venture capital firm focusing on high-growth companies in the mobility and smart transportation sector.

“Investing in the right locations mitigates the risks of low EV adoption and stranded assets, helping infrastructure investors optimise revenues.”

The ubiquity of EVs may seem inevitable but investment funds and individuals must choose the right moment to back a particular venture. Public and private sector support is gradually making the sector more attractive, but it is understandable if infrastructure investors are not yet fully convinced that the time is right to risk their capital by backing the technology.

The charging bottleneck

One of the major challenges holding back EV growth is a lack of charging infrastructure. “In order to meet demand, we need to build more underlying charging infrastructure – this is currently a major bottleneck for scaling the rollout of EVs across Europe,” says Andreas Schwarzenbrunner, a partner with Speedinvest’s industrial tech investment team. “We also have to factor in the differences between fast and slow charging, as well the various locations where charging will take place. All these contexts require different types of charging infrastructure.”

Europe alone will require nine million public EV chargers by 2035, according to data from EY – up from just under 400,000 today. As Schwarzenbrunner says, the charging infrastructure will come in various forms.

“The most profitable businesses will be in software-driven solutions”
Andreas Schwarzenbrunner
Speedinvest

Smart charging, which includes bi-directional and vehicle-to-grid charging, could provide an opportunity for investors, which circumvents some of the problems around low margins seen elsewhere in the EV market. Software that enables smart charging is often cheaper, offering dynamic load management. Software providers harvesting data from these solutions can then help infrastructure investors find the most profitable charging locations.

Many companies, from large players such as ABB to younger firms like Tritium Charging, are working on new charging technologies and hardware for different charging contexts. To achieve the mass installation of this charging infrastructure, asset owners (often real estate developers) need to be brought on-side along with the public. This means cultivating friendly planning environments and removing local bottlenecks.

There is some indication that investors are already responding to these movements. In 2021, bp ventures announced it was leading a $13.2 million investment round in smart EV charging firm IoTecha, while this April, UK start-up Electric Miles confirmed it had exceeded its latest seed funding target of almost £800,000 ($1 million; €957,000).

Working together, there is an opportunity for governments and private companies to encourage investment in the EV market – particularly around charging infrastructure. EVs are still heavily reliant on subsidies from the EU and its member states, for example. In Belgium, companies investing in charging infrastructure can benefit from a 13.5 percent reduction in corporation tax, while Germany, France, Denmark and other countries offer similar incentives.

Public and private investment

In the EV space, there is likely to be a variety of business models developing around the charge point: from owning the asset to operating it, to offering mobility services. The profitability of these business models may ultimately depend on both public and private investment.

One of the most innovative EV charging firms is Nuvve Holding Corp, which has received both a $7.9 million grant from the California Energy Commission and, more recently, $750 million from private equity firm Stonepeak to form a new venture that enables EV fleet owners to sell power to utility providers.

“More and more funds are investing in a variety of areas across the EV space,” Schwarzenbrunner notes. “However, many investors are still shying away from infrastructure if they can’t see a recurring revenue component. Therefore, lots of infrastructure funding is still done by large-scale public investors.”

Searching for returns

Although the potential for the EV market is sizeable, so too are the challenges – including rising commodity prices, a lack of skilled workers to install infrastructure at scale and high battery costs that ensure EVs remain unaffordable for many.

For infrastructural investors, these challenges are necessitating a shift in focus. Charging infrastructure can certainly deliver worthwhile returns, but it increasingly looks as though these can be acquired by backing charging software, rather than hardware with its larger upfront capital requirements.

“We believe the most profitable businesses will be in software-driven solutions,” Schwarzenbrunner says. “This is the main reason Tesla wants to become a software company and tap into energy management via its cars.”

Fearn agrees. “The most exciting investment opportunities lie in the ‘enabling software’ layer,” he says. “Companies in this space are building asset-light, highly scalable platforms that do not require high capital investment. We see smart charging technologies as a core function within the EV charging value chain, helping drivers to reduce their charging costs and even providing them with a source of income through V2G (vehicle-to-grid) services.”

Even considering the huge strides that the EV market has made over the last 10 years or so, there remains some uncertainty around whether adoption has reached the critical mass needed to guarantee returns. Currently, where infrastructure investors are willing to fund new EV ventures, it seems to be software-based solutions that are attracting more attention.