The increasing adoption of electric vehicles to replace larger, fuel-powered vehicles is providing an important accelerant in the push to achieve net-zero carbon emissions by 2050 – and is generating a diverse range of infrastructure investment opportunities in the process.
Since Tesla’s launch in 2003, EV development and growth has focused largely on light-duty vehicles, which account for 58 percent of road-generated emissions. Growth has been slow and steady, but sales have surged in recent years and demand going forward is strong.
Through Q3 2023, EV’s made up 16 percent of all light-duty vehicles on US roads and accounted for 8 percent of total auto sales, up considerably from just 0.2 percent in 2011. While the light-duty class has led the charge, progress in adoption for medium and heavy duty (MHD) vehicles, massive contributors to emissions, has been slower to gain traction – until now.
The Next Frontier for EVs
EVs continue to gain market share on the back of several powerful tailwinds, including lower prices, more competition, more scalable technologies and enticing government incentives. These dynamics, in turn, are boosting adoption activity across the medium and heavy-duty (MHD) classes by making it more feasible for large fleet owners to go electric, at least partially at first.
Decarbonising this class would have immensely positive implications all around. While heavy-duty vehicles such as garbage trucks and tractor trailers make up only 10 percent of all vehicles on the road, they create nearly one-third (28 percent) of the automotive sector’s GHG emissions. The ratio is similar in Europe. According to the International Council of Clean Transportation, switching to hybrid/electric trucks could save close to two-thirds (63 percent) more emissions than diesel, hydrogen, or other alternatives over the vehicle’s life.
Signs of Momentum for MHDs
There are several catalysts in motion supporting a sustainable EV expansion across the MHD vehicle classes, on a quicker timetable than originally anticipated. Public and private investment into the production and development of EVs, and into the needed infrastructure, is rising. Government incentives are proving to be highly effective. We are seeing strong progress with municipal and private buses making the switch. And some well-known first movers, including Hertz (Tesla), Amazon (Rivian), and Walmart and FedEx (GM) have shown confidence by continuing to integrate more EVs into their larger fleets.
But the most important needle mover by far has been a sustained decline in pricing across the board. The upfront cost of transitioning to electric, particularly for heavy-duty vehicles, has been a tough hurdle for many fleet owners. But advanced technologies continue to drive costs down significantly on core components such as EV inverters, motors and especially lithium/ion battery packs, which have traditionally represented a large portion of the overall expense. These battery packs have plummeted from an average of $1,200 per kWh in 2010 to $132 by the end of 2021, a decline of 89 percent.
Commercial electrification is a win-win on many dimensions and can help both public and private stakeholders make strides in their sustainability efforts. By 2040, it is anticipated that more than 15 million EVs will be part of US corporate fleets. It looks like clear roads ahead for fleets, but as we all know there will be hazards.
Challenges to Meet
We know that if we build them, they will come, but is there enough manufacturing capacity and expertise in place to meet the unique needs of the many vehicles across the MHD segment? While the number of EV manufacturing operations has increased – there were more than 200 at the end of 2022 – there is still a strong need for more mass production facilities, particularly to accommodate these larger EV vehicles.
Fleet owners also have “range anxiety” – both in terms of battery life and ensuring sufficient charging infrastructure is in place. Medium-duty trucks and some heavy-duty trucks are used mostly for short-range transporting, but long-haul trucks will need reliable public charging networks and longer-range battery solutions. As the EV industry prepares for the coming wave of heavy-duty EVs, there is an urgent and growing need to develop a network of ultra-fast chargers as well as to establish charging standards.
Another key concern is whether there will be enough clean electricity to support this shift. National electric grid capacity must grow by 60 percent by 2030 to meet these needs, at the same time the industry is slowly making the transition to clean, renewable energy. More rapid development of renewable energy sources is critical to success.
Investment opportunities
Of course, the electrification needs for school buses or garbage trucks are more complex than those for personal, light-duty vehicles. In addition to electrifying fleets, depots need to be entirely refitted and charging stations need to be more ubiquitous. As this shift plays out, it will generate significant value creation opportunities as developers scramble to address the challenges that the light-duty class has experienced, including battery costs and lives, more charging solutions, maximum range, torque and performance.
Some key investment areas to watch going forward:
- Battery innovation and production
Continuous advancements in battery technology are essential for addressing range anxiety and reducing costs. Companies at the forefront in researching and developing high-performance, cost-effective batteries – including those working on next-generation batteries with improved energy density and faster charging capabilities – should present compelling opportunities. It’s all about lighter, faster and cheaper. - Public and private charging infrastructure
There is a massive amount of work to be done to build the infrastructure needed to support this shift to electric vehicles. Providing sufficient charging within urban areas will be challenging, and the strategic placement of new infrastructure will be paramount. For private fleets, the transition to electric will likely mean facility upgrades that will require careful planning, new technologies and fleet management solutions that can help optimise routes, monitor vehicle condition and manage charging schedules. Either way, significant further buildout will be required, and companies engaged in helping to build the network stand to prosper. - EV manufacturing
The Inflation Reduction Act calls for half of all new vehicles sold in the US to be hybrid or electric by 2030, and the big automakers are committed, investing billions into developing scalable technologies, increasing production to meet the growing demand and adding new jobs in design, manufacturing and servicing. Investing in the companies making these specialised trucks for commercial use is shaping up to be a sound long-term strategy. - Alternative power sources
We know that the national grid alone cannot handle what’s coming – making the need for more renewable energy infrastructure such as solar and wind projects that much more acute.
The stakes are high
The EV industry is at a very important inflection point. Costs that had been seen as too exorbitant to make real, scalable changes, have fallen to the point where EVs are now a necessary and smart investment for the future of any business – and the electrification of fleets has become a much more realistic strategy.
As the US works to halve its GHG emissions by 2030 and stay on track to reach its longer-term goals, the decarbonisation of both public and private fleets is providing an accelerant to progress and creating a new set of promising investment opportunities.
The author is Lisa Bacon, managing principal and infrastructure programme lead, Meketa Investment Group.
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