John Steinbeck in his Pulitzer Prize-winning novel The Grapes of Wrath dubbed Route 66 the Mother Road. Snaking across deserts, mountains and flat prairie grasslands from Lake Michigan to the Pacific West Coast, the tarmacked highway slowly seeped into the collective consciousness and fed into the creation of a nation of motorheads.
This love for the internal combustion engine is no mere romantic myth, either. The US Environmental Protection Agency estimates that the share of greenhouse gas emissions pumped out by the US transport sector is almost double the global average: 27 percent for the US against 14 percent globally.
“If you look at the data around greenhouse gas emissions, US transportation is a huge contributor,” says Ed Diffendal, managing director, co-head of private infrastructure Americas at Partners Group. “Finding ways that can reduce emissions is absolutely critical. We will not reach Paris Accord goals solely through that, but it is a very important input for achieving those goals.”
Today, light-duty vehicles make up the bulk of transportation emissions and surging fuel prices this year have compounded the cost-of-living crunch. President Joe Biden has repeatedly urged domestic refiners to lift output and ease the crisis, but utilisation has been running at near maximum capacity for months and, at least in the short term, there is little that the downstream can do.
This dependence on motor gasoline and diesel is something that the government is clearly aware needs overhauling, especially if net-zero goals are going to be achieved. In November 2021, the Infrastructure Investment and Jobs Act included $2.5 billion in federal funding to help accelerate the expansion of electric vehicle charging, something that the White House says will help catalyse investment from the private sector.
This was followed by the Inflation Reduction Act, the latest climate-focused infrastructure legislation passed by the Biden administration. Among many low-carbon items, the bill adds new tax credits for the sale of used electric cars and expanded tax credits for purchasers of new EVs.
“You need something that will jumpstart things and then let the private sector step in and take over from there,” says Himanshu Saxena, CEO at Starwood Energy. “The amount of money that is needed to convert the entirety of the country to EVs is massive and the bill is not going to come close to the amount needed, but it will get things rolling.”
EV uptake was growing sharply even before the recent Inflation Reduction Act signing. The US Department of Energy estimates that domestic sales of light-duty plug-in EVs nearly doubled last year to 608,000, making up roughly 4.5 percent of total vehicles on the market today, according to the International Energy Agency.
But the US still lags behind Europe and China, and by some distance. Last year, more EVs were sold in the Asian economic juggernaut than had been sold in the rest of the world combined in 2020, while in December the share of EVs in the Chinese market reached 20 percent, the official target set for 2025. European monthly EV sales in December also topped diesel vehicles for the first time with a 21 percent market share.
Plugging the gap
The reality is that wider adoption of EVs in the US has been slowed by lack of charging infrastructure and customer range anxiety, particularly in rural areas, something that the new legislation hopes to change. “The risk is that people are going to run out of juice in the middle of the road,” says Saxena. “Unless that problem is solved through rapid charging or many more charging stations, the wholesale adoption of EVs is going to remain constrained.”
In urban centres, the problem is less urgent and EV pricing has been in freefall in recent years. “The total cost of an EV has come to the point where it is comparable enough with a traditional internal combustion engine that the second order impacts like ‘do I feel comfortable with the battery range?’ are more likely to drive decisions today,” adds Diffendal.
But private investment, as well as federal spending, will have to scale charging across the entire nation if EVs are going to markedly replace combustion engine vehicles. And for investors, accessing power for fast charging and snapping up the best real estate locations are obvious next steps to accelerate user appetite and confidence in the infrastructure.
Diverse expertise and the ability to build relationships with key stakeholders will also be crucial for those new to the sector and keen to participate. “If a utility is collaborative, you are going to have a much higher chance of success,” explains Marco Gatti, managing director at ArcLight Capital Partners. “Having a deep expertise in the power sector is critical for scoping out the grid and finding land that has the best logistics and power interconnection.”
Bridging the divide
Equally, electrifying US transport is just one of several solutions to the country’s sky-high emissions. Medium and heavy-duty trucks constitute more than a quarter of US transport greenhouse gas emissions, according to the EPA, and shifting to a variety of renewable fuels is among the most cost-effective ways of lowering the industry’s carbon footprint, especially in the immediate term.
“I think the renewable fuels market can be a really attractive place for private capital,” emphasises Diffendal. “Compressed natural gas vehicles, particularly heavy-duty, can complement EVs in terms of expanding our ability to meet the goals of the Paris Agreement.”
“We see renewable natural gas as the Swiss army knife for decarbonisation today”
Fugitive methane emissions from landfills, dairies and wastewater plants are already being captured in the waste sector, with the decomposing organic waste converted to renewable natural gas. This process is often carbon negative, too, because of the methane removed from the atmosphere. Although the gas has a short lifetime, methane is among the worst culprits for climate change because of its intense heat trapping properties.
“The primary use case is heavy-duty transport because that is the hardest to electrify,” explains Gatti. “It is weight limited which means if you start adding batteries or other equipment you start impairing the ability to operate, which is a trade-off most operators are not willing to make.”
Renewable natural gas, by contrast, allows heavy-duty vehicles to operate as normal and can compete with regular diesel engines, albeit with a much lower carbon footprint. “We see renewable natural gas as the Swiss army knife for decarbonisation today,” says Gatti.
Cleaning the supply
The recent legislation also underlines the role of renewable fuels in the government’s decarbonisation shift. Beyond just incentivising EV uptake, the bill includes a sustainable aviation fuel tax credit and extends tax incentives for biofuels, including biodiesel and renewable diesel.
“The push for low-carbon transportation fuels is all significantly boosted by this desire to decarbonise and during a bull commodity price environment, too,” says Saxena, adding that there is immense demand for clean fuels, particularly in the aviation sector.
Since the pandemic, the writing has been on the wall for much of the refining sector and the shift to renewable fuels is being accelerated by the Biden administration’s emphasis on low-carbon supply. Covid-19 triggered permanent shutdowns because of demand destruction and around one-third of recent production capacity losses can be attributed to operators switching to renewable fuel production.
One refiner spending big on the switch is Phillips 66. The firm’s $850 million conversion project at the Rodeo Refinery in California will make it one of the world’s largest producers of renewable fuels, the equivalent carbon reducing capacity of taking 1.4 million cars off the streets every year.
Another crucial piece of the jigsaw is decarbonising feedstocks, particularly cement used in roads. Reducing emissions from the electrical grid is relatively easy because in essence all you are doing is cleaning the source of electrons. However, heavy industries are harder to abate because they require intense high-temperature heat, which has historically been fed by burning coal or natural gas.
Consultancy McKinsey estimates that roughly 45 percent of direct and indirect CO2 emissions produced from heavy industries are derived from the processing of feedstocks and another 35 percent from the high-temperature heat needed. Replacing furnaces with industrial-scale electric furnaces requires a huge amount of capital and alternative fuels like hydrogen pose both technical challenges and high cost. “A steel mill in Sault Sainte Marie, Ontario, that used to burn coal is now electrifying, but the amount of investment needed for just that one steel mill is several hundred million dollars,” says Saxena. “It is an important part of the decarbonisation story and will need a combination of electrification and a lot of capex.”
Steel and cement manufacturing will at least benefit from the growth of carbon capture and government support. The Inflation Reduction Act includes an improved carbon sequestration tax credit, increasing the maximum available credit for operators from $50 per tonne to $85 per tonne.
Even before the tax credit increase there was notable activity from private equity investors. Swiss carbon capture technology firm Climeworks raised $650 million from the likes of Partners Group and Singaporean sovereign wealth fund GIC, while New York-based Warburg Pincus joined Heritage Group in a $50 million funding round for ClimeCo, a US carbon abatement company. Norwegian-headquartered private equity firm Verdane also invested in carbon capture technology company Heirloom’s $53 million Series A funding round.
“What these credits have done for carbon capture is caused a stampede of interest,” says Keith Martin, co-head of US projects at global law firm Norton Rose Fulbright. “People are finding that the economics work best for ethanol, fertiliser plants and cement but less so for power plants. Compressing less pure CO2 streams to move long distances takes a lot of electricity and that just kills the economics.”
Overhauling the entire transport value chain will no doubt require an immense amount of capital and private investment will have to play an outsized role if irreversible climate change is going to be prevented. Gone are the days when the problem could be wilfully kicked further down the road.