Can Oil Majors Make Electric Vehicle Charging Pay?
(Bloomberg Opinion) -- One of the more surprising implications of the energy transition is energy companies actually trying to sell you energy. For example, today you buy gasoline, sure, but no one sells it to you. You show up randomly and pump the gas yourself. Possibly you’re influenced by saving a cent per gallon versus some other place nearby. But you buy gas because you have to.
This is why the oil business is mostly geared toward finding barrels; demand takes care of itself. Now electric vehicles are messing with that. The latest peak demand call comes from Goldman Sachs, which now expects road fuel consumption to top out in five years. One way to deal with this is to swap out pumps for plugs. Making a go of that, however, means really selling those electrons.
The primary difference between charging up an EV versus filling up a regular car is that the former can often be done at home or the workplace, and these account for the vast majority of connectors and likely will continue to do so. They tend to charge slowly, however; fine if you’re sleeping or working in the meantime but not if you’re on the go. This also doesn’t work so well if you live in an apartment without a garage.
So to really speed EV adoption, you need public chargers, especially high-power ones delivering a full charge in 30 minutes or less. BloombergNEF estimates that while these might represent less than 1% of chargers by 2040, they will dispense almost a quarter of the power going into vehicles worldwide.
Public fast-charging is most akin to the existing gas-station business, and some oil majors are active already. BP Plc, for example, has about 10,000 chargers installed today and aims for 70,000 by the end of the decade. This represents a major investment, as fast chargers cost upward of $50,000 apiece and can also require chipping in for local grid upgrades. Making this pay means one thing: getting as many people into those charging stations as possible.
Current utilization rates of 10-20% generate a return on invested capital of only 7-9%, according to a recent report from Bernstein Research analyst Oswald Clint. At utilization rates above 30% — meaning about 7 hours out of every 24 — that modeled return jumps above 30%, more like what’s needed to convince oil investors that going green pays. That utilization threshold comports with work done by Chris Nelder at the Rocky Mountain Institute on vehicle-charging economics, as well as projections from Fastned BV, an independent fast-charging network based in the Netherlands.
Moreover, as Nelder’s work emphasizes, demand charges from utilities — imposed on industrial and commercial customers based on their peak power usage — can significantly raise the cost of the power supplied. Add these in, along with operating expenses, and a fast charger being used 20% of the time might need almost 50 cents a kilowatt-hour — equivalent to $4 a gallon — just to cover its costs, before any profit margin . Bump utilization to 35%, though, and that equivalent cost drops to less than $2.90.
Bernstein’s Clint calculates fuel retailing in the U.S. and Europe generates about $125 billion of gross margin today. He estimates on-the-go charging might generate $35 billion by 2040, rising to $56 billion by 2050. In taking a share of that, oil majors will have to layer on as many associated cash streams as possible, both to expand the pool of profits and keep customers engaged. Pumping gas is something you actually do; EV charging is something that happens while you do something else: sleep, work, pick up groceries or whatever.
Convenience retail is an obvious, and familiar, add-on that already provides the majority of gross margin at U.S. stations and could be both upgraded and expanded into newer services like e-commerce pickup. The vast majority of existing gas stations, however, likely aren’t suitable for keeping drivers occupied (and spending) while vehicles are plugged in. Most are best thought of as revenue to milk for as long as possible while building up new charging infrastructure at dedicated facilities or co-located at places where the humans while away their lives, like malls or parks.
The holy grail is tying in customers. The oil majors have long had fleet-fueling businesses: Bernstein’s Clint estimates this already generates $1 billion a year of steady gross margin for Royal Dutch Shell Plc. This could be extended to commercial and municipal customers — a fifth of projected demand in 2040 — seeking a trusted energy supplier for electrified fleets. Depot-sized charging facilities based around an anchor client, including ride-sharing fleets, offer both scale and dependable utilization.
Regular EV drivers, meanwhile, could be tied in via service plans. In deregulated power markets in Europe and parts of the U.S., for example, the likes of Shell could potentially provide retail power to a homeowner, including for their EV. Given average driving patterns, where the vast majority of trips are short, the all-in cost of electrified driving could compete with gasoline, even with a premium for on-the-go fast-charging.
More importantly, this might offer drivers something they don’t get with gasoline: stable fuel bills. In theory, EV power could be priced like cellphone plans, with a fixed charge covering regular driving patterns with top-ups for long road trips (climate-friendly energy consumption still requires a price signal). The best customer relationships are the ones where the customer forgets they’re paying you.
None of this would be easy; power is a very different beast from oil and has its own incumbents, utilities, as well as new entrants surfing a green financing wave. There are additional wildcards, not least autonomous vehicles potentially redrawing the charging map with the ink barely dry. As the RMI’s Nelder puts it, “there's no way we're going to avoid building tomorrow's stranded assets today.”
Minimizing that means future-proofing the electric future even before it’s arrived. The oil majors have formidable strengths to deploy, not least their sheer scale. Success, however, will hinge on something unfamiliar in this business: turning a monopoly commodity into a competitive consumer service.
"Chicken or Egg…Is electric vehicle charging investible?", Bernstein Research, April 9, 2021.
This assumes the electric vehicle gets 3.5 miles per kilowatt-hour and compares it to a gasoline-fueled vehicle averaging 30 miles per gallon.
This assumes a 150 kilowatt charger with 15 cents per kilowatt-hour regular electricity cost and a $17 per kilowatt demand charge. Also assumes 20% utilization serving vehicles with an average battery size of 50 kilowatt-hours. Also assumes $2 of operating expensesper charging session at 100% utilization, as per Bernstein Research estimates.
Assume a driver charging 70% at home and 30% on-the-go. The supplier provides power at home at standard prices, say 16 cents per kilowatt-hour, and on-the-go power at premium pricing of 60 cents. For a driver with a 50 kWh battery driving 13,000 miles a year, the all-in cost would be about 29 cents per kWh or, based on a regular vehicle getting 30 miles per gallon, equivalent to $2.50 a gallon.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
©2021 Bloomberg L.P.