The EV ETA: Taking a More Realistic View

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The EV ETA: Taking a More Realistic View

By Richard Amador, Capital One - 05/05/2020

The dilemma for convenience and gas (C&G) operators is straightforward: At some point in the future, the shift to electric vehicles (EVs) in the United States will begin to accelerate, impacting the business model of those who use gas to attract customers, and cutting into their bottom line. The challenge is to identify this tipping point. If operators act prematurely, it may be years before they see a return on their investment. If they hold off too long, they risk losing an important set of customers.

Savvy C&G operators are paying close attention to recent announcements by automakers declaring their increased emphasis on EVs. According to AlixPartners, automakers are investing $225 billion to develop EVs through 2023. Volkswagen, for example, has committed $34 billion to make an electric or hybrid version of every vehicle in its lineup by 2023, and plans to launch 70 new electric models by 2028.

Whether automakers will be able to deliver on their commitment is another matter, underscored by the widely varying estimates of EV penetration from industry and government sources. The Bloomberg New Energy Finance 2019 outlook report sees global EV stock soaring to 548 million by 2040, or about 32 percent of the world’s passenger vehicles. ExxonMobil, not surprisingly, takes a more conservative position: it estimates global EV stock will reach just 162 million in 2040.

Muddying the situation even further for U.S. observers is the fact that global estimates of EV share are skewed by high adoption rates in China and Europe. According to the U.S Energy Information Agency’s (EIA) 2019 Annual Energy Outlook, EV share of light-duty vehicle stock by 2040 will reach only 7 percent — with heavier concentrations in states like California. This projection should also be taken with a grain of salt, as the EIA has historically underestimated EV penetration.

The Stars Will Take Time to Align

The cause of the discrepancy among these estimates is straightforward: There are numerous complex and often interrelated variables that must be considered when making these projections. The sheer number of variables in itself argues that an EV onslaught is not imminent. Simply put, the number of stars that have to be aligned for EVs to become a factor in the C&G marketplace are considerable.

While federal and state regulation will surely have a significant impact on EV adoption, technological and economic factors will also determine how quickly EVs will scale: 

  • Technology: Today, Tesla is the only company that offers cars with a range of more than 300 miles. To ensure widespread adoption, automakers must extend EV range by at least 100 miles, making them roughly comparable to gasoline- and diesel-powered vehicles. Charging time also must be reduced. The most advanced fast chargers can add 200 miles to a battery in 15 to 25 minutes, but they are expensive. With each port costing between $10,000 and $40,000, the total cost for equipment and installation can reach $600,000 or more, according to the Fuels Institute.
  • Infrastructure development: To accommodate even small increases in the number of EVs, the electric power industry will have to increase generating capacity substantially, while making significant improvements to the grid. At the same time, there will have to be a nationwide rollout of chargers, an effort complicated by the lack of a single standard for DC fast chargers.
  • Engine efficiency: It is uncertain whether automakers focusing on fuel efficiency standards will place all their chips on EVs at the expense of the internal combustion engine (ICE). Over the last decade, they have successfully increased ICE miles-per-gallon performance by approximately 20 percent and reduced carbon dioxide emissions, according to the Environmental Protection Agency. Even more efficient engines are under development.
  • Price: Currently, EVs sell at a premium to ICE-powered vehicles. The pace at which EVs achieve price parity — and therefore more widespread adoption — is dependent on government incentives, which can reach $7,500 for all-electric and plug-in hybrids. If these are withdrawn, the time to price parity will be extended. The price of oil is another variable. Fuels Institute data shows that over the past decade, hybrid sales track the price at the pump. Gasoline prices, however, reflect a variety of externalities — from macroeconomic and political forces to refinery output — that are difficult to predict.

Focusing on the Present While Preparing for the Future 

In the face of these unknowns, there is one certainty for C&G operators: A meaningful transition to EVs is not likely to happen anytime soon. Currently, less than 1 percent of the total stock on the road is composed of EVs, and half of them are delivered to California, according to the Fuels Institute.

Furthermore, the sheer size of the light-duty vehicle market — estimated at 257 million vehicles — and the rate of turnover means that it will take at least 15 years in the best of circumstances for every existing car on the market to be replaced with a new one. During 2019, 16.8 million new ICE vehicles replaced the 15.4 million light-duty vehicles taken out of service. Only 325,000 battery electric vehicles and plug-in hybrids entered the U.S. fleet. Even with an optimistic EV growth curve, the Fuels Institute estimates that in the U.S., only 10 percent of the vehicles in 2035 will be electric.

Given that timetable, it is far too early for the C&G operator to make changes that focus on the EV customer alone. Although a smattering of stores are investing in affordable DC fast chargers, it is unlikely that consumers will use them except in emergencies because they are so slow. Today, most EV drivers charge their vehicles at their destinations — at work, at the mall, at the light rail station, or at home — where they can leave them for hours at a time.

With these circumstances, many C&G operators are introducing changes that reach more customers today and better position themselves to withstand EV emergence in the future. They are introducing loyalty programs, hosting Amazon lockers, embracing new store formats, introducing private label products, and emphasizing fresh offerings and other products that appeal to millennial and Generation Z customers. These initiatives share the goals of increasing customer traffic and boosting sales of higher-margin products.

Consolidation is another dual-purpose strategy that many operators are adopting. Currently, consolidation is being driven by factors including record valuations of properties, the availability of low-cost capital, generational succession issues, and interest by private equity. Companies are assembling the critical mass required to drive harder bargains with suppliers, achieve higher margins, and attract the capital needed to attract new customers.

All of these efforts will enhance C&G operators’ ability to adjust to EV presence. Ultimately, C&G operators must focus on all of their customers’ needs, preferences and pain points — especially in regions where EV adoption is high — and adapt their offerings, services and structure to better meet those needs.

Dedicated C&G Lenders Are Critical

With the segment in flux, and EVs looming somewhere in the future, many operators have realized the value of partnering with an experienced C&G lender, one with a proven track record of serving the business.

Dedicated C&G lenders do much more than provide funds for reinvestment or acquisition. In effect, these lenders serve as a sounding board. Thanks to their broad network of industry contacts, they bring to the table best practices gleaned from tracking other C&G operators, as well as insights from regular interactions with industry experts. Equally important, having weathered cycles of economic and technological change, they bring a long-term perspective and creative solutions that can help C&G operators put current challenges in perspective.

At the same time, specialized C&G lenders have the ability to view a prospective borrower’s business plan and financials through the lens of their industry experience. This enables them to perceive opportunities and challenges that other, more generalized lenders might miss and structure their financing to best fit each client’s strategy, capital structure, and growth objectives.

Whether C&G operators seek funding for capital investment, M&A, or debt consolidation and refinancing, it is more critical than ever that they partner with an expert lender who will commit to their future — and have a realistic picture of what that future might bring.

Richard Amador is the head of Convenience and Gas Banking at Capital One. With 30-plus years of experience in commercial banking, he oversees a team providing lending and banking services to the fuel and convenience store industry.

Editor’s note: The opinions expressed in this column are the author’s and do not necessarily reflect the views of Convenience Store News.