I was searching for precedent and I have no doubt we’ve seen this story before. How did Gas Stations come up in the 1920s when the first model T combustion engines were hitting the road? Who were the brave souls that invested millions (equivalent to billions) into the first pieces of land with a pump that dispensed slick fueling solutions? How did the mobile telecom systems and telecom networks fund their capital expenses when only a few privileged people had cell phones? In both cases, they had to build the infrastructure BEFORE mass adoption would take off. This is the story of infrastructure and the maturation of any new market, this is the story line of Electric Vehicles.
On December 1st 1913 Gulf Refining Company opened the world's first drive-in gas station in Pittsburgh, Pennsylvania. Until then, drivers got their gas at general stores, hardware shops, even soon-to-be-obsolete blacksmiths. The early adopters didn’t care because to them the luxury was worth the inconvenience of finding fuel and filling their own tank. The newly founded gas stations however offered free air, water, crankcase service, and tire and tube installation. Essentially, the station had to be more compelling than the do-it-yourself at home method. As more people drove internal combustion engine cars, the economically minded business type realized that if you could make conveniently located gas stations and offer additional services or goods, you could attract customers. The money was in the candy bars and soda cans but the draw was the necessity.
Economics always wins at scale and people don’t adopt new things because it’s ‘socially responsible.’ While early adopters may act irrationally or outside of core economic principles, mass adoption tends to sift through these four questions:
Does it make my life easier?
Does it save me money?
Does it make me money?
Does it improve my sense of self-worth?
While early adopters of electric vehicles might have been planet saving enthusiasts and happy to bear the burden of inconvenience, the 95% mass adopters need rational market forces to tip them over the edge. Often they need “YES” to be the answer to more than just one of the four questions. As more EVs hit the road and models are unveiled, the question that remains hardest to answer is “Does it make my life easier?” While we undoubtedly know that EV’s can be more affordable, have lower carrying costs and make you look more eco-conscious or sexy, if your life is made more difficult by driving electric, you simply won’t convert. This is what leads you to the infrastructure question and the dynamics of any Two Sided Marketplace. I feel like Sarah Jessica Parker asking this at the beginning of a Sex in the City Episode but, “If the Electric Vehicle infrastructure was in place and convenient for your lifestyle would you go 100% electric?” To 95% of people, that answer tends to be a resolute “Yes.”
When capital markets fail to solve market dynamics, governments step in to nudge behavior. Once markets start to mature, capital market forces will take over as return on investment starts to outpace cost of capital. This is finance 101 and capital allocation. In the early days of Electric Vehicle charging the ROI had to be in the candy bars and soda as utilization wasn’t high enough to generate a direct ROI on the infrastructure. For retailers, that ROI is justifiable with "more daily visitors and larger “basket spend.” For apartment buildings, that ROI is attracting higher rents and capturing residents who currently or wish to drive electric. For office buildings, that ROI is justifiable through higher rents and retention. In other words, the ROI is not directly correlated to the cash flows of the infrastructure itself. That’s normal and expected but as the market is maturing and more people are driving electric, private capital seeking an ROI is starting to emerge and they do expect a direct ROI.
Infrastructure asset investors generally make money by writing large capital investments on Day 0 and then capturing consistent income streams throughout the depreciable life of that asset. These investors take on the risk of utilization and in the case of consumer electric vehicle infrastructure, they are betting on consistent and profitable usage. There are certain markets like California that are more obvious and favorable to this bet and then there are others that make less sense (like North Dakota). While government rebates also impact the math equation for private infrastructure investors, the maturation of adoption in the market is the big driver of positive pro-forma’s. As we enter 2023 we are welcoming the maturation of non-EVSE infrastructure investors into our industry.
Whereas before you had mainly network providers like Xeal and Chargepoint (EVSE providers) selling hardware and software to landlords to run their own charging experience (generally for the indirect ROI - a la candy bars and soda analogy), now you have private network operators who want to take on the direct income risk by financing the purchase of the infrastructure and equipment on behalf of a landlord and in turn keep the upside of the utilization. Amperage Capital for example is one group that will build, own and manage the charging stations at multi-family communities - providing a capital market solution to an otherwise unwilling market participant. So while many landlords see the direct value of owning the charging experience on behalf of their residents, some may opt to welcome a private infrastructure investor onto their property.
This space is changing rapidly and we’re seeing white-label private entrepreneurs spring up, electrical contractors and installers dabbling their feet into owning stations, cities and utilities attempting to run their own networks and even telecom providers starting to think through their role in this market of computer-on-wheels. At the end of the day, all of these market participants see the long term viability and upside in this market and feel strongly about the reward in the risk. The earlier you are in a market, the more patient your capital needs to be and I’m thrilled to see the private equity and family office capital placing these bets and owning the infrastructure. Fortunes will be made by those that own the assets.
Like all two sided marketplaces, the infrastructure (supply) needs to be built ahead of the demand but somewhat in lockstep to succeed. Those that make that bet at scale, at the right time, will be the ‘Rockefellers’ of the market. As we hit 7% of all new car sales going electric, (10% globally) and growing quickly, these new infrastructure investors are willing the market into existence.