The race toward a cleaner, more sustainable future continues, and California leads the electric vehicle revolution. For commercial fleets navigating the complexities of electrification, progress has proven to be challenging.
The adoption of electric vehicles (EV) in California has been steadily increasing in recent years across passenger and commercial segments. This has been driven by a combination of state policies such as Advanced Clean Cars II and Advanced Clean Trucks, as well as federal and state incentives like Alternative Fuel Vehicle Refueling Property Credit, Commercial Clean Vehicle Credit, National Electric Vehicle Infrastructure, Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project — paired with increased availability of EV models and consumer demand. Following California’s lead are several other states including Colorado, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New Jersey, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia and Washington, which have adopted ambitious transportation electrification policies and incentives.
Commercial fleets in particular face significant financial challenges in electrification, including high initial costs for vehicles and infrastructure, sizing and futureproofing charging processes and infrastructure, unpredictable total cost of ownership due to variable maintenance and depreciation rates, and fluctuating electricity rates that can increase operational expenses. Additionally, substantial investments in facility upgrades are often required to support EV charging needs. Several new companies have been established in the past few years to address these challenges, by devising financing models such as electric fleet as a service, charging as a service, battery as a service and charging hubs to reduce the technical, financial and operational burden on organizations electrifying their fleets.
While companies offering these new business models present an exciting opportunity for utilities and the investor community, there are underlying complexities and risks that are not immediately apparent. For example, companies specializing in EV charging infrastructure deployment have become an area of significant interest and opportunity for investors, encompassing asset-based investments that fall into two broad categories:
Asset light models. These involve minimal ownership of physical assets, focusing instead on software solutions, management services and partnerships. While they offer scalability and lower upfront costs, the risks include dependency on third-party hardware and potential technological obsolescence.
Asset heavy models. These involve significant investment in physical infrastructure, such as charging stations and related hardware. While they provide control and long-term revenue streams, the risks include high capital expenditure, maintenance costs and regulatory compliance.
Making capital investments in a dynamic space like the EV sector requires careful technical due diligence to mitigate risks and maximize returns. The following are technical due diligence tactics for utilities and others that could make a difference in a potential investment or target.
Market analysis: Creating detailed market analysis, identifying trends, growth drivers and potential risks in the EV sector are crucial steps before beginning a potential investment. This helps investors understand the broader market dynamics affecting their investment decisions.
Financial viability and technology assessment: Technical due diligence includes assessing the target's business model, cost estimates, revenue streams and financial projections to see that the investment is financially sound and sustainable. This helps investors understand the financial health and long-term viability of the investment.
Infrastructure evaluation: Assessing the existing and planned infrastructure is essential to understanding the scalability and reliability of the target’s services.
Constructability review: Large-scale design and construction projects for charging infrastructure can be complex and expensive. In the case where a target is operating an asset heavy model, reviewing electrical, civil and structural designs, environmental permits, operations and maintenance plan, procurement strategy and training and safety protocols is critical.
Operational capabilities and audits: This involves analyzing the target’s maintenance protocols, uptime guarantees, customer service and the robustness of its monitoring and management systems. Additionally, this is comprised of conducting operational audits to assess the efficiency and reliability of the target’s operations. This includes site visits, interviews with key personnel, and analysis of maintenance and customer service processes.
Utility coordination: The power demand for EV charging can be substantial, often leading to long delays in securing an adequate power supply. Leading discussions with utilities to understand and help mitigate potential risks that may impact the target’s implementation timeline is crucial to securing power.
Regulatory and compliance assessment: This includes analyzing and seeing that targets comply with all relevant federal, state, and local regulations and standards, as well as adhering to relevant safety standards, data protection laws and environmental regulations.
Risk mitigation: This involves identifying potential risks, such as competitive threats, technological obsolescence, execution feasibility, and regulatory changes, and providing actionable recommendations to mitigate them.
While some of the complexities associated with electrification can be value-add opportunities, technical and infrastructure complexities can lead to unviable business models or projects. Whether you’re a private equity firm, a venture capital investor or a strategic investor, making an informed decision to conduct a thorough due diligence of the technological, operational and financial aspects can greatly benefit your potential investment.
Now more than ever is the perfect time to invest in EV spaces due to incentives, but doing so with the right steps is crucial for a successful project.
