Financing the Energy Transition – Electric vehicle infrastructure

A significant part of achieving net zero and energy security involves a move from petrol and diesel engines to electric vehicles (EVs). However, in the UK the path to the replacement of petrol and diesel vehicles with EVs has not been a smooth one so far with increasing electricity costs and consumer concerns about the driving range of EVs and the reliability of the technology used. We look at some of the key considerations for lenders financing EV charging infrastructure in this article.

General considerations for EV charging infrastructure projects

• Real estate and planning: The development of EV charging stations will require planning consents and appropriate property rights to be dealt with where there are multiple parties involved – for example, where the owner of the land is not the developer of the charging station. There may also be highway issues involving road improvements.
• Distribution/grid connection: EV charging points will generally need to be connected to the distribution grid. The charge point operator (CPO) of an EV charging facility will need to cooperate with the relevant local (independent) distribution network operator (DNO) in order to obtain a grid connection. DNOs may pass on any costs associated with the additional grid works required at the local distribution grid to the entities installing the EV charging infrastructure.
• These costs will depend on:
  
  - the type of charging point being installed (fast, ultra-rapid, rapid or slow charge); and
  - the existing connection capacity (if any) at the site in question.
  
  Costs are likely to arise in connection with street works, the securing of appropriate property rights such as easements and wayleaves, obtaining planning permission, and construction of a sub-station. Key issues in relation to grid connections will be the necessary lead times and grid capacity at any given location. Also, consideration will need to be given to the recently announced "First Ready, First Connected" reforms and proposals from the National Grid Electricity System Operator.
   
• Power demand and grid stability: While the impact on the grid of any increase in demand for electricity can be mitigated to an extent if consumers avoid charging their vehicles at peak times, it is likely that there will still be additional demands on the grid caused by the increased use of EVs. This is likely to mean that significant additional generation (and storage, see our article on financing battery storage projects here) capacity is required.
  
  Conversely, EV batteries may be used to balance supply and demand by acting in a similar way to a battery energy storage unit and releasing power when electricity supply is low and demand is high. This is known as V2G, vehicle-to-grid, or V2X, vehicle-to-a-battery/building/the grid. The EV owner would in such a scenario be paid for the supply of this electricity.
  
  The location of charging points (whether individually or in a cluster, whether close to a connection to the electricity grid that has sufficient capacity or to a site of electricity generation or storage) will also be important, practically and logistically. 

• Regulatory change: The Public Charge Point Regulations 2023 (PCPR) came into force on 24 November 2023, which aim to ensure that consumers can easily locate the right public charge point to fit their needs; ease payment across public charge points; give confidence to consumers that public charge points will be in good working order; and ensure that consumers are able to compare prices across multiple public charge point networks.
  
  It is likely that further changes to the regulatory framework will occur, for example in relation to:
   
  • interoperability between public charging point connectors on EVs or to introduce minimum standards for availability, maintenance and performance of such charge points
  • accessibility standards: the relevant regulations could provide that public charging points have to be available at specific times and must be supported by specified services or facilities; and
  • consistency of the content of publicly available information on public charging points (in addition to pricing and the Open Charging Point Interface protocol).   Future regulations could require additional information (for example, real-time availability data for EV charging stations similar to the availability function in public bicycle schemes) to be made publicly available in an open and transparent format in order to provide consumer certainty.
     
• Manufacture and supply chain: The rapid evolution of EV charging manufacture, the move to rapid and ultra-rapid chargers on a commercial scale, the growing obsolescence of slow chargers and the requirement to comply with the various product safety requirements for EV chargers imposes strain on the manufacture and supply chain of EV chargers.
• Technology and data: Consideration will need to be given to the technology overlay of the EV charge points and their interface with EVs and the consumer portal (apps, websites, head-up displays) including in relation to ownership, licensing, use and compliance.
• Corporate structure: EV infrastructure owner/CPO arrangements can be complex and joint venture arrangements reflecting these arrangements may be required. There will be concomitant tax considerations, for example, in relation to any real estate taxes, alongside EV operator regulatory considerations. For example, the PCPR applies to the CPO and the corporate structure will determine which party is the CPO (whether that is the JV or one of the parties to that JV). The CPO will need to ensure that their public EV charger estates are compliant as there are sizeable penalties for infringement. The EV charging sector also provides opportunities for different types of participants to become joint venture partners where there is a common interest in rolling out EV charging points / hubs to scale – eg. OEMs, energy companies, local authorities, private equity (including ESG focused) funds, retail amenity providers etc.

Predictable revenue streams are a key concern for lenders

The revenue model and technology for EV charging and batteries has historically been less understood by the more conservative debt market. As such the revenue model is key to unlocking financing and lenders will want to see predictable long-term revenue streams to service the debt.  This can be tricky in the rapidly evolving world of EV charging infrastructure but there may be options to assist. 

Corporate level debt facilities may be used to finance capital expenditure in relation to developing EV charging infrastructure.

Project financing may be available if the revenue stream is sufficiently large and predictable. For example, if a business with a fleet of EVs or e-buses required a number of charging stations, there would be a greater degree of certainty as to the number of vehicles and the time at which each would need to be charged (if, for instance, a delivery business had predictable routes) enabling a debt service coverage ratio style financing. The creditworthiness and strength of the offtaker business would also be relevant in the lenders' analysis of such financing. The charging stations might be located on property owned or leased by the offtaker business, which could ease the development process. However, such financings are usually not very highly levered and a significant equity investment would still be required.

Additionally, having access to a 'land-bank' of potential sites and understanding the charging model will be key for the lenders. Any arrangements with offtakers that include minimum pricing will greatly assist the financing case. Any future government support mechanisms for EV charging projects might also need to be taken into account.  

One established model for EV charging stations works on the basis of fleet-charging finance, which relies on a subscription-based contract in association with a creditworthy customer with a large fleet of EVs.

An innovative loan product known as an ARR (annual recurring revenue) financing is used in the leveraged finance market. An ARR financing allows companies which are not yet generating significant profits but which have strong revenues and are growing quickly to access debt funding.  A similar concept could be used to finance a subscription-based model of EV charging stations. The main metric for monitoring performance in the first few years of an ARR financing is annual recurring revenue, which is tested against debt in place of the more usual EBITDA-based leverage covenant. Exactly what the ARR comprises will vary from deal to deal but typically lenders will be more concerned with the granular detail of the source of the revenue that counts towards the leverage covenant than they would be in a typical leveraged financing. To date, ARR financings have been used most commonly by businesses which derive most of their income from regular payments such as subscription fees so it is possible to see how this concept could be used for companies with strong income streams from EV charging points. Testing performance on the basis of the annual recurring revenue allows investment to be made in growing the business, through marketing or sales, without affecting the company's ability to meet its leverage covenant. The ARR is typically an annualised figure based on the most recent quarter and seasonal variations may need to be taken into account. For more detail on ARR Financings, please see our article here.

Any financing would require significant protections for lenders, such as an adequate security package, regular and detailed reporting and wide-ranging contractual protections. 

The future

In summary, charging EVs at scale will require substantial infrastructure to be built and is also likely to lead to an increase in demand for electricity which will need to be catered for. Charging points may be centralised, for example at workplaces, service stations or fleet depots, where they can be located close to major grid connection points with high capacity or near sources of renewable energy or battery energy storage sources. Separate issues will also be raised by charging points located at residential premises. Financing EV charging infrastructure is not always straightforward, and the structure used may need to be carefully considered against the evolving regulatory background.

If you would like to discuss any of this in more detail, please contact one of our team below.