High-Power Charging for Electric Fleets (Part 1)
Introduction
Lack of charging infrastructure continues to be a major barrier to fleet electrification. So, how do we get more infrastructure in the ground? We make it good business. In this multi-part series, we evaluate the key metrics behind the development, construction, and operation of successful high-power electric vehicle (EV) charging sites for fleets.
The economics of building, owning, and operating a charging station are relatively well understood: an initial investment is made to develop and construct an EV charging site and then, if all goes to plan, the charging site generates positive cash flow each year to provide a return on the initial investment.
When making investment decisions infrastructure investors generally have a required minimum rate of return for their investments, also known as a hurdle rate. All things equal, if an EV charging project meets an investor’s risk-adjusted hurdle rate, then the investment will be made. After individual site economics are figured out, it is simple multiplication to reach the portfolio scale many investors seek.
In this article, we take on the hypothetical role of a project developer who has a financial partner that will fund any site that meets a 10% Internal Rate of Return (IRR) hurdle rate. How do we evaluate a site? What are the key metrics? Where is the risk? Let’s get started.
Initial Investment
The initial investment for an EV charging site consists of the time, labor, and materials needed to bring a site from an abstract idea to a fully operational “steel in the ground” EV charging site. This investment can be generalized into two categories: site development and site construction.
Site development typically consists of customer identification, site feasibility analysis, site design, construction cost estimating, engineering, permitting, utility service agreements, land-use agreements, financing agreements, and offtake agreements.
Site construction typically consists of equipment procurement and all of the on-site work required to provide power to and install the charging stations. Construction may also include site improvements, parking lot striping (often to meet ADA regulations), access controls, and site security upgrades.
Project costs can vary significantly based on site conditions, required utility service upgrades, and specific scopes of work. However, let’s assume that we’ve developed a charging site with ten (10) 150kW DC fast chargers in an urban parking lot and know that we can complete the design, permitting, construction, and commissioning of the site for $1,250,000. This is our initial investment.
Ongoing Fixed Site Costs
Even after the site is built, there will be ongoing costs related to owning, operating, and maintaining the charging site. Ongoing site costs can include rent, O&M services, data subscriptions, site upkeep, cleaning, insurance, and repairs. Like development and construction costs, ongoing site costs, especially rent, can vary based on each specific site.
While these costs should generally be the same each year, hence the “fixed cost” designation, we should recognize that EV charging technology is still maturing and does come with some performance risk. As hardware and software providers improve, these risks trend down, but extended warranties, uptime guarantees, and O&M contingencies should be considered to manage risk.
For our hypothetical site, let’s assume that fixed site costs will be $80,000 per year and the site will have a useful life of ten years.
Cash Flow from Charging Operations
To meet the target investor hurdle rate, the site needs to generate enough cash flow to not only cover the annual site costs, but also to recover the initial investment and produce an adequate return for the investor. Over the ten-year project life, we can calculate that we need to generate $283,450 per year from charging operations to reach the 10% IRR target. The following table shows the expected financial performance of the site (excluding any year-to-year cost escalations):
So, how do we generate $283,450 per year from our ten 150kW DC fast chargers? In simple terms, we can generate this cash flow by getting enough vehicles to charge at the site at a price that includes a modest markup on the cost of energy from the utility. Cash flows are sensitive to site usage patterns, utility rate structures, and the price of charging but can be secured with appropriate fleet off-take agreements that guarantee a minimum level of site use.
Conclusion
We can use a ten year financial pro forma to better understand the key metrics behind high-power fleet charging sites. The key metrics are the initial investment amount, annual fixed site costs, cash flow from operations, and investor hurdle rates. Of course, there are many more considerations but these numbers provide a high-level model for expected site performance.
In Part 2, we will expand on this model to explore the relationship between cash flows, site use, utility rate tariffs, and charging costs to gain a better understanding of how a high-power fleet charging commitment might be structured to produce a win-win for both the fleet and the infrastructure investor. Stay tuned!
Did you find this useful? Do you have any questions or comments? Please let us know, as we’d love to hear from you.
This article was written by Eric Soenksen at Stable Auto.
