Is it a positive future for EV charging ?
Energy Blog, 27 October 2023
This is a blog about EV chargers in the UK. It’s also about the difficulty of sizing markets, the curious phenomena of kinked demand curves for semi-skimmed milk and how many EV chargers I think will actually be installed by 2035 (spoiler alert, it’s a lot less than you may think).
Looking at the big picture, the UK electric vehicle (EV) market looks like a member of a 1990s boy band: simple, but, to some, very attractive. There are 37 m cars on UK roads. All major political parties agree they should be all Electric Vehicles (EVs) by 2035 and this means the UK has to install 300,000+ EV chargers. This investment will be undertaken by Charge Point Operators (CPOs) who find a site near a busy road, install a clever bit of kit, buy electricity, add a little margin, and sell the electricity to the driver. It’s not rocket science and there are now more than 20 CPOs in the UK installing, on average, 1,600 charge points per month, bringing us to 50,000 installed charge points out of the 300,000+ required, so evidence suggests it can be done…
So far so good but the question for this blog is in the long term how much electricity can the CPOs expect to sell and at what margin long term? There’s a bit of math to wade through but bear with me on this as it is the key to the whole issue. Those 37 m cars currently on UK roads travel, on average, average car travel about 7,500 miles per year. A typical EV does about 3 miles per KWh of electricity so to travel 7,500 miles the driver needs to buy 2,500 KWh of electricity. Multiply this by 37 m and a fully electrified UK car fleet needs to buy 92.5 b KWh of electricity each year! Assuming a conservative margin of 10p per KWh, then the potential gross profit for the whole market is an astonishing GBP 9.2 b per year just from buying and selling electricity. You will be pleased to know that the tricky math bit is over.
The barriers to entry to this market are pretty low which is why lots of solar and wind developers have had a ‘Road to Damascus conversion’ and are now nascent CPOs albeit quite a few are still at the heady ‘team with a dream stage’.
But and it’s a big but, things might not be that rosy long-term. As I see it, there are three major points to consider: the impact of home charging, efficiency and the strange economic phenomena of kinked demand curves. Let’s start with home charging. Of the 37 m cars on the road in the UK, about 75% have access to a driveway or garage so could easily install a home EV charger. Unlike petrol, the EV driver can buy his fuel at a trickle rate at home overnight when prices are low so they are unlikely to pay a premium to use a charge point. Imagine the impact on the petrol forecourt market if you could buy petrol overnight at home at a tenth of the retail price and you see my point. Furthermore the UK is a pretty small place and EV ranges go up all the time so unless you are doing a round trip in excess of 300 miles you can nearly always get home to recharge. Personally I have owned an EV for four years and have charged it away from home less than a dozen times. So increasing ranges and the potential for home charging reduces the addressable market for CPOs by at least 70% from 37 m drivers buying 92.5 b KWh of electricity to maybe 11.1 m drivers buying 27.7b KWh/yr. This reduces the potential profit from GBP 9.2 b to GBP 2.7 b overnight. Still not shabby but not quite a big a number as previously thought.
Secondly we need to consider the long term impact of efficiency gains. As any classic car enthusiast like myself will ruefully testify, older petrol cars are both as unreliable and as thirsty as a grumpy elephant on a scorching hot day. Typical miles per gallon from something interesting built in the 1970s was 10 – 15 mpg but nobody cared back then because petrol was cheap and cars were a novelty for most people. As Governments started to tax petrol more, European manufacturers built less interesting but more efficient cars and a boring but reliable modern car will cheerfully deliver 35 – 40 mpg , an efficiency gain of +400%. EVs are still in the early stage of development and have plenty of potential left in the tank. For our illustration, 3 mi/KWh is a realistic assumption. However the new Tesla 3 does 5 mi/KWh. and we can safely assume that the coming generations of EVs will be more efficient by as much as 5% each year. However drivers only drive a finite number of miles per annum so every percentage gain in efficiency reduces the driver’s demand for electricity by the same amount. Assuming a 50% increase in EV efficiency within the next ten years, EVs will deliver 6 mi/KWh which doesn’t seem so ambitious considering that Tesla are up to 5 already. This reduction reduces our addressable market to from 27.7 b KWh/yr in 2024 to 13.b KWh/yr in 2035 and our potential profit goes down again from GBP 2.7 b to GBP 1.4 b.
Finally the phenomena of kinked demand curves and why suicidal price wars between CPOs are almost inevitable The theory is as follows; electricity is a homogenous product so when choosing between CPOs the EV driver’s only two deciding factors are price and availability. If there are two competing CPOs side by side on a service station forecourt, he/she will go for the cheapest available one. As more CPOs are installed and ranges improve, the level of availability increases so price per KWh increasingly becomes the dominant determining factor. The homogeneous nature of electricity also means that the demand curves for price increases are very inelastic, if a CPO puts their price per KWh up above the market rate, their customers will migrate to a cheaper CPO and the original price increase will lose revenue.
However and here’s the nub, as we discussed above, the total demand by EV drivers for electricity is finite and constrained by the capacity of their car battery. If a given CPO reduces his prices, then his customer buys exactly the same amount of electricity as before but now for a lower price. The sneaky price cutting CPO may poach a few customers from nearby rival CPO for a few days at most but once his rivals spot what is happening they invariably follow suit and the whole market contracts. The EV driver won’t suddenly drive many more miles as result of cheaper prices, so price wars in markets for products with finite demand are great for buyers and are disastrous for sellers. We already see this phenomena with other homogenous products like semi skimmed milk where consumption is pretty finite so no reason to believe it won’t happen with electricity. Our CPO operator is now stuck facing a kinked demand curve. If he increase prices, his disloyal customers migrate to a rival and the CPO loses revenue. If they reduce prices, his rival follows suit, the market contracts and every CPO loses revenue, either way he loses so he has to price his electricity at the point of the kink in the demand curve.
However the low barriers to entry mean that the risk to incumbent CPOs is new hungrier entrants coming into the market with cheaper hardware or funding and they will invariably bring down industry’s the margin per kWh. Although it is clearly not in the interest of any CPO to engage in price wars, try telling that to an aggressive new “disruptor” startup launched by fresh faced MBA graduates with a wacky name, colorful cheap kit with a big sunflower logo and a 2% vendor finance deal from a friendly Chinese bank. Good news for the EV driver but awful for established CPOs with older more expensive kit and investors wanting infrastructure type return requirements. If we assume that because of the suicidal behavior of new entrants, margins per KWh drop by 5% every year in real terms, within 10 years our addressable market is now still at 13.87 b KWh, gross profit has dropped again by another 50% to GBP 693m/yr.
To pull all this together, we started with a theoretical market of 37 m drivers each buying 2,500 KWh/yr of electricity at a margin of 10p/KWh. This suggests a potential GBP 250 gross profit per driver per annum and a total addressable market of GBP 9.25 b in the UK. These facts no doubt appeared in a lot of CPO business cases.
However we think there will be 3 factors that will reduce this GBP 9.25 b to a much smaller market of less than GBP 700 m; far fewer drivers each buying less electricity and all at a much reduced margin. The impact of increasing range and home charging reduces the number of potential customers in the UK by 75% to circa 9.25 m drivers. Secondly inevitable efficiency gains in miles per KWh over the next ten years reduce the amount of electricity these remaining customers buy from 2.500 KWh/yr to 1,250 KWh/yr.
Price wars predicted by the kinked demand curve reduce the value of that electricity to the CPO by another 50%. We end up in 2035 with a much smaller number of drivers buying less electricity at ½ the current margin per KWh per year and if this plays out as expected we could see achievable profits per driver go down to GBP 62 per year or GBP 1.20 per week. At that point the business case for new investment in EV chargers becomes much more difficult and you are probably going to make more money selling the same drivers screen wash, “powered by fairy dust” stickers for their car’s rear window and those little green air fresheners shaped like Christmas trees.
However it’s not all doom and gloom and we think the market outlook for the high quality existing CPOs with a portfolio of sites is much better. To date, this market has been a land grab of the best sites and the 50,000 installed chargers have mostly been installed on good sites with decent traffic flows. Inevitably there will be some consolidation between CPOs whilst EV sales continue to grow and utilization rates from existing chargers go up so existing portfolios will continue to be very valuable.
My prediction is that the installed charger base for cars will follow a classic bell shaped curve, 3 – 5 years of rapid growth of maybe 20,000 installs from existing and new CPOs until we get to maybe 150,000 installed chargers followed by a gradual drop off of install rates for a few years then probably a decline in the overall installed charger base as the pain of EV efficiency gains and suicidal price wars really kicks in and CPOs reluctantly abandon their under performing sites. The value of the market will decline to a potential profit of circa GBP 700m which is still not shabby though at that point the cake may be shared by as many as 100 CPOs depending on the degree of consolidation. Nobody really know how many on street chargers the UK will have by 2035 but we confidently predict it is a number more than 50,000 and less than 300,000. My guess is 200,000 but the key word here is guess.