Electric vehicles and the charging infrastructure: a new mindset?

EV charging: A primer

EV chargers are defined by the amount of energy delivered to the vehicle’s battery per unit of time. There are four “levels,” with with Level 4 being the fastest. As the table below shows, different levels of chargers have very different power ratings and charge times for typical EVs.

^{Note 1: Typical EV fuel economy runs around 200 KWH per tonne-mile, so a typical 2.5 tonne vehicle requires about 50 KWH for a 100-mile run. EV manufacturers typically optimize vehicles to achieve the best possible fuel economy within other constraints (number of seats, performance, etc.)}

^{Note 2: At very high powers, the limitation on charging rate may become the vehicle’s battery management system rather than the charger’s capacity.}

Not surprisingly, the capital and operating costs of higher-capacity chargers (excluding the electrical power delivered) is higher than those of lower-capacity chargers. Level 1 chargers—like a residential 110-volt outlet—are nearly free to operate. Level 3 and 4 chargers, however, are more expensive and complex.

So how should we think about charging costs, and what are the implications of these costs? In particular, will consumers be willing to pay a premium for faster, high-level chargers? To examine this, let’s look at the costs of building and operating charging networks.

Capital costs

Capex for a charger consists of the charging equipment itself (similar to a gas pump) plus any required upgrades to the local electricity grid, land, civil works, etc. Most capital cost comprises the charging hardware itself. There are some economies of scale, but these peak as the station reaches four to six chargers, with capital cost per charger declining slowly as the overall size and capacity of the station increases. While Level 2 chargers are relatively less costly to build (with only a 5 KW capacity) on a per-KW basis, they’re actually more expensive than Level 3 and 4 chargers.

Operating costs

Labor costs for charging stations are quite low. They’re typically unattended, self-service and require less maintenance than gas pumps. However, charging locations connected to a local electricity grid are subject to “capacity charges” used to offset the costs of utility upgrades needed to accommodate them. Capacity charges are linked to the highest expected load a given charging station may require. In principle, then, a Level 4 station could have twice the peak load of a Level 2 station—and a higher capacity charge. This capacity charge is fixed and recurring (typically monthly), regardless of whether or not the peak load is reached in any given month.

How will the “on the go” market develop? 

Most EV owners are expected to do up to 80 or 90% of their charging overnight at home or during the day at work, estimates the US Department of Energy. In these use cases, Level 2 chargers will likely be used, given that longer charging times don’t matter. Some EV charging providers have experimented with Level 2 chargers at local destinations such as supermarkets, shopping malls and movie theaters, but these charge points may not capture loyal users. EV owners making short trips locally will rarely need to top up and, even if they did, slower Level 2 charging wouldn’t be of much help for anyone in a hurry. In contrast, “out-of-towners” on longer trips would need to charge—and would likely be willing to pay more for fast-charging (Level 3 or 4) to save time. One exception might be at hotels, where guests could charge their cars overnight. For out-of-towners, then, charging becomes a destination in itself, and these consumers would likely seek a combination of convenience, speed and competitive pricing—much as current consumers in today’s gas and diesel market.

It might follow, then, that locations for EV stations will mirror those of today’s gas stations—that is, quick and easy to find. But, with fast-charging so costly, this isn’t likely to be the case. The capital and capacity charges for Level 4 are approximately twice that of Level 3. In fact, to achieve the same profitability, a Level 4 station would need to charge a premium of at least 10 cents/KWH over the price of a competing Level 3 station. On a 50 KWH (about 100 miles) charge, a consumer would pay a premium of about $5 to save around 15 to 20 minutes. This trade-off suggests that, over time, the market will segment with different providers targeting different consumer needs and preferences—much as occurs in the gas and diesel market today.

In the long run, we expect the EV charging market to settle into segments (like the retail gasoline market) driven by four factors: convenience, price, loyalty, and quality.

In the emerging EV charging market, time-starved consumers will likely value their time highly enough to pay a premium for speed. They’ll look for convenient locations with the fastest charging times, and they’ll be disinclined to use reservations apps. Providers targeting these consumers will build extra capacity to maximize availability and offer the fastest chargers. They’ll also demand a significant premium over Level 3 stations seeking to capture value over and above the increased costs they incur.

The price segment consumer will likely go to Level 3 stations with higher utilization and, perhaps, in less convenient locations. Price-sensitive consumers may be willing to wait in line, shop around and reserve a charger via mobile apps. Out-of-town consumers in this segment use chargers near aggregations of restaurants (or retail or amusement destinations), where they could occupy themselves while their car is charging.

In recent years, loyalty programs have become a critical competitive lever in the gas and diesel market. The loyalty segment in EV charging may not develop to the same extent, since a household’s total expenditure on away-from-home charging will be quite modest, representing only 10 to 20% of their total consumption. For a vehicle averaging 10,000 miles per year, away-from-home charging will likely amount to roughly $300 per year, compared to at least $1,500 spent at the gas pump today.³

Nevertheless, we may see the emergence of bundles and other offerings, in which service providers and retailers offer charging as an incentive to drive subscriptions, traffic or other transactions and interactions.

A quality-conscious consumer will likely prioritize trusted EV-charging brands they perceive as high-quality, in the same way some drivers trust particular brands of gasoline. Differentiating the EV charging products themselves (ie., electrons) could be challenging so providers may seek to differentiate and even brand the source of their power. For example, providers may promote green power from renewable sources such as solar, wind or geothermal—and charge a premium for it. Further, charging companies could brand power provenances. Imagine, for example, Texas Wind or Arizona Solar. Or, for some consumers, even Wyoming Coal?

Market sizing

As we have seen, most third-party charging capacity will likely be Level 3 and Level 4. The market size will then depend on EV penetration into the vehicle fleet parc (i.e., vehicles in operation, as distinct from new car registrations) and the prevalence of on-the-go charging.

The table below illustrates the potential EV charger market size based on a mix of Level 3 and Level 4 chargers at different utilization levels.

The current fast-charger network (47,000 chargers at a 5% utilization and a 0.5% fleet penetration) has been built ahead of demand and remains poorly utilized. We expect, however, that utilization will grow as the market and investor expectations mature. But utilization may well lag profitable levels for some time, as providers expand their networks in expectation of steadily increasing demand.

Given a central estimate of 5% penetration of EV total vehicle parc by 2030, the market could require about 120,000 to 235,000 fast-charge points or about 30,000 to 60,000 charging locations. Interestingly, smaller locations will probably drive adoption, as they’ll be more numerous and hence more convenient for consumers. Taking these considerations into account, we estimate the total fast-charging network in 2030 to be close to 60,000 locations with at least some of these—perhaps most—at existing gas stations.

While EV charging remains in its nascency, we believe that the build-out of a national network of chargers that satisfies customer demand and preferences will do much to support greater adoption of EVs. Exactly how quickly this charging infrastructure will be developed—and precisely what it will look like—is not altogether certain.

Still, the underlying economics and analogous consumer behaviors should result in a network of convenient, fast-charging stations that compete to provide consumers with the electrons they need at competitive prices.

^{Note 3: The lower cost here is not due to lower cost per mile of an EV overall, but rather due to the fact that 80% of charging is done at home. In fact, the cost per mile for away-from-home charging for an EV is likely similar to or higher than a gas or diesel car today. In the gas or diesel market, consumers have no “at home” option, so the aggregate away-from-home spend is much higher.}