Investing in clean energy’s next frontier with AMP

E-mobility represents the next frontier of the clean energy revolution, writes Anthony Hadley, head of clean energy for the Americas at AMP Capital.

Anthony Hadley

This article is sponsored by AMP Capital

E-mobility is moving into the mainstream. The term refers to the electrification of transportation, and includes all types of vehicles, ranging from cars, buses and trucks to high-speed trains. It is not limited to the physical vehicles, but encompasses the entire value chain that supports electrification, including energy supply, charging and traffic

The future of transportation – both public and private – is rapidly evolving. The market is shifting toward electrification as a result of two key factors: a steep decrease in battery-cell costs, which have fallen by around 90 percent over the past 10 years; and significant progress in electric-vehicle technology.

These dynamics have created strong interest from municipalities and governments, as vehicle electrification is crucial to reducing carbon emissions and brings a range of new possibilities for urban development and connected cities. Even the pandemic is providing tailwinds, as some municipalities are accelerating electric bus deployment given that covid-19 is thought to potentially spread more rapidly in regions suffering from poor air quality. Countries are increasingly adopting policy commitments and providing regulatory support for bus transit electrification. As a result, Bloomberg is forecasting that 60 percent of new bus sales will be electric by 2025.

These trends are only set to continue, and in many instances, accelerate. Infrastructure investors and financiers are starting to take notice, particularly in the area of electric public bus transportation, an asset class which offers exceptional ESG credentials. AMP Capital’s recent investment in this space represents one of the first project financed e-mobility deals of scale in the market.

The road ahead

The market opportunity for investing in electric public bus transportation is significant across the Americas, particularly in Latin America, which has two unique characteristics that create a strong investment proposition. First, countries there have the highest per capita usage of bus services globally and second, many large cities in South America have some of the worst air quality in the western hemisphere. As a result, there are significant policy developments from governments throughout the region that are creating favourable conditions for the sector.

For example, the Chilean government has pledged that electric vehicles will account for 100 percent of public transit by 2040, and there are around 7,000 diesel buses in the Santiago public transportation system which consequently must be replaced in the coming years. In 2018, meanwhile, the municipality of Sao Paulo in Brazil set emissions limits for the city’s public buses, which decrease gradually to zero over the next 20 years. A significant portion of its bus fleet will need to be electric to meet those emissions requirements, and the transit agency in Sao Paulo is planning to deploy up to 10,000 electric buses over the next 10 years.

North America is a longer-term proposition with the US being in the early stages of embracing electrification. One notable example is California, which recently mandated that all commercial trucks and vans sold in the state by 2045 must be zero-emission vehicles. North America represents an opportunity of significant scale for the e-mobility industry in the long term.

AMP Capital’s e-mobility investments

Fleet: 433 operating electric buses and associated charging infrastructure

Location: Santiago, Chile

Entered service: November 2018-June 2020

Transportation system: RED Metropolitan Mobility Network

Charging fuel source: 100 percent green energy

Contract structure: Long-term lease agreements with a premier bus operating company in Santiago

Financing: Non-recourse project finance

Platform growth opportunities: Electric public transportation procurements in major cities across the Americas

An evolving market

Interest in the electric public transportation sector among the investment community will continue to grow, particularly as the scale of the market develops over time. We see e-mobility as the next frontier in the clean energy revolution, following the dramatic shift toward low-emission sources of power generation seen over the past decade.

As part of that shift, there has been a significant compression in investment yields for technologies such as wind and solar as those markets have matured, with early investors in them being the largest beneficiaries. With around 15 percent of the world’s greenhouse gas emissions produced from transportation, the need to decarbonise this segment of the economy is critical if we are to meet our medium- to
long-term climate goals.

The issue is even more acute in the US, where nearly 30 percent of the nation’s greenhouse gas emissions come from the transportation sector. These dynamics will attract significant capital to the asset class, which should drive a similar compression in yields over time.

A further clue as to how the market may evolve can be seen in rolling-stock leasing, which AMP Capital has deep history in, including through our portfolio investment in Angel Trains in the UK. Angel and its peers used to be viewed by the investment community as a discrete set of assets and, hence, valued on a run-off basis.

In recent years, once the market recognised the robust and long-term nature of their underlying demand drivers and value of the diversified platform, we have seen these companies valued as going-concern businesses, resulting in a significant re-rating from a valuation standpoint. There are several parallels between AMP’s rolling-stock leasing investments and our investments in electric public transportation, and we believe there’s real potential for a similar evolution in how investors view this asset class over time.

Electric bus transportation is an asset class that boasts exceptional ESG
credentials, including:

Improving air quality

Electric buses are a ‘zero emissions’ mode of transportation. Traditional diesel buses emit a host of particulates that are key contributors to poor air quality that can lead to undesirable health impacts for local communities. The displacement of diesel buses with electric ones dramatically reduces air pollution and oil dependence, thus reducing the impact of poor air quality on the environment and local communities in which they operate. This is driving strong growth in electric public bus transportation in many large cities with poor air quality.

Reducing our carbon footprint

Electric buses charged with 100 percent green energy will help to reduce greenhouse emissions and their users’ carbon footprint. A typical diesel bus emits more than nine tons of greenhouse gases a month, so the adoption of electric buses is an important step towards decarbonisation. This factor alone has created strong interest in electric mobility from municipalities and governments across many jurisdictions, as vehicle electrification is crucial to reducing CO2 emissions and meeting the goals of the Paris Climate Agreement.

Positive social impact

Investments in electric public bus transportation drive positive social outcomes within their respective markets through a better public transportation ‘product’ and improved user experience for passengers. New electric buses are typically replacing much older diesel bus units and come with technological upgrades such as Wi-Fi and air conditioning as well as more comfortable seats. Studies indicate that passengers are often willing to wait longer for an electric bus than a traditional diesel bus, given the range of benefits they offer to the user and the environment.