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Climate and EVs Have the Bay Area Buzzing

By Anthony Sassine, CFA

My biggest takeaway from the Bloomberg New Energy Finance (BNEF) San Francisco Summit was that your average Bay Area venture capitalist is no longer looking for the next Facebook or Amazon. Rather, the whole area is buzzing about climate, and actively seeking the next big idea in the electrification space.

My colleague Bill Fagan, Director of sales on the West Coast, and I attended the BNEF Summit which focused on electric vehicles (EV). KraneShares, BNEF, and Bloomberg Intelligence (BI)** are partners on the KraneShares Electric Vehicle and Future mobility ETF (KARS), which tracks the Bloomberg Electric Vehicle index. The conference was an excellent opportunity to escape Zoomville and interact directly with BNEF analysts, regulators, industry participants, and company representatives across the EV ecosystem.

I hadn’t been to San Francisco in a long time. A beautiful city buzzing with venture capitalists and techies make it the ideal place to discuss the energy transition and its progress. As the electric vehicles industry matures, EV charging, green hydrogen, fuel cells, aviation, and other disruptive industries are attractive investments for early-stage and growth equity venture capitalists.

OPENING REMARKS

BNEF CEO Jon Moore’s opening comments focused on the road ahead. According to him, it is crooked, just like the streets of San Francisco. He pointed out that inflation is at the highest level we have seen in many years and that energy and vehicle-related costs were significant contributors to the recent increase in inflation (see chart below).

Source: BNEF data as of February 2022

Production lead times are the highest they have ever been across multiple industries, including semiconductors and production materials. This has led the global levelized cost of electricity (LCOE) to tick up this year for the first time in a decade. The road is crooked indeed. While the current bottlenecks are not expected to derail the long-term story, they may force industry participants to reconsider their strategies. Nonetheless, the strength of the transition to EVs was evidenced by the strong demand for EVs and batteries seen in 2021, and by the substantial investments going into the electrified transport sector.

Source: BNEF data as of February 2022

One of the important points that Jon Moore made during his presentation was pure EV companies’ market cap is catching up with traditional automakers. He went on to ask if this is a bubble or the market is betting that pure EVs will win the race? No matter on which side of the argument you fall, we believe owning the full EV ecosystem rather than a couple of companies or industries can help mitigate risks and potentially provide a more diversified* portfolio and balanced alpha.

Source: Bloomberg Opinion, Liam Denning. Data as of 12/31/2021

FUNDING THE REVOLUTION

Jumping to the second day, BNEF invited KraneShares to participate in the “Funding the Revolution” session alongside seasoned executives covering venture capital and equity research. We discussed how ETFs are helping fund the electric vehicles industry and other revolutions, especially through targeted and thoughtfully constructed thematic ETFs. We continued to stress the importance of achieving a comprehensive, balanced, and pure exposure to the EV ecosystem. The KARS ETF provides diversified* exposure to electric vehicles, battery makers, mining companies, EV components, hydrogen, and other industry participants.

Source: FactSet and KraneShares data as of 11/11/2021

We also discussed special purpose acquisition companies (SPACs) and their impact on the electric vehicle industry. While SPACs could be positive for high-quality EV companies, providing them with much-needed liquidity at higher multiples, SPACs have left a sour taste in the mouths of many investors. Most of the SPACs launched recently across many industries are now trading below the standard IPO price of $10. The consensus view from the panel was that more regulations are needed. Luckily, ETFs have guardrails that usually either screen out small deals or delay the inclusion of larger SPACs.

The good news is that EV-related companies raised a total of $29 billion1 in 2021 with EV manufacturing and distribution receiving the most investment (i.e. Rivian, Lucid), Batteries coming second, and EV charging companies coming third, raising $2.6 billion1. SPACs accounted for 50%1 of the funds raised by EV companies in 2021 (see chart below).

Source: BNEF data as of February 2022

ELECTRIC VEHICLE CHARGING AND INFRASTRUCTURE POLICY

EV charging, especially fleet charging, was perhaps the most discussed topic during the conference. You could tell that building infrastructure is the focus now. The first infrastructure bill (The Infrastructure Investment & Jobs Act) included $7.5 billion1 for EV chargers and another $8 billion1 in potential aids for the transition. However, most participants stressed that more needs to be done when it comes to infrastructure. While the Build Back Better Act (BBBA) faces roadblocks from what some conference-goers referred to as “Manchination”, the bill is expected to include a much-needed $300 billion1 of investments in renewable infrastructure and R&D.

Source: EPA, EIA , Joint Committee on Taxation, BNEF. Note: Not comprehensive.

The topic of infrastructure garnered considerable attention and was the subject of multiple main-stage and side-talk sessions. Utility companies, regulators, charging companies, and venture capitalists all participated in the conversation. We heard from Southern California Edison (SCE), one of the nation’s largest electric utilities in California, about the challenges they are facing in keeping up with the adoption of electric vehicles. They want to encourage drivers to charge at home or their place of work during the day to benefit from the energy harnessed from sunlight. Also, they discussed plans to integrate the grid efficiently and equitably in both well-off and underserved neighborhoods, and the importance of integrating charging locations into maps and fleet car software.

EV charging companies were also well represented at the conference. We heard from public companies including ChargePoint, EVGo, and Volta Charging, and from startups with new ideas to revolutionize the charging process by using less real estate. They mentioned that consumer “range anxiety” is real and could be a barrier to increased adoption in the short term. ChargePoint expects fast chargers to be strategically placed on highways for extended travel, while L2 chargers will be available in cities for day-to-day use. As charging availability represents one of the major bottlenecks to continued EV adoption, all companies are serious about making chargers available. EVGo announced that 80% of Californians and 140 million Americans are within a 10-mile range from an EVGo charging station. We also met the Public Policy Manager at Rivian, whose primary responsibility is to facilitate the construction of EV charging stations in State Parks and adventure areas.

Source: EVGo data as of February 2022

Startups like Hypervolt, Resilient Power, eLeapPower, Hevo, and others are working on innovative ideas like wireless charging and internal converters that could harness the motor’s power to charge the battery of an EV. Wireless charging is an exciting potential solution, especially for fleets. Ideonomics, through its subsidiary Wave, and Hevo’s approach was interesting as well using mats to charge EV and electric buses wirelessly and effortlessly. They were all busy discussing their big ideas with VCs. Bill and I had a great chat with Alf Poor, the CEO of Ideonomics, and his crew during happy hour. Alf believes there is a huge opportunity in fast charging for consumers and businesses. EV chargers can get consumers to spend time and money at the stores while they charge their cars.

Source: Ideaonomics data as of February 2022

According to one of the VCs, $1.4 billion1 in venture capital has been deployed for new charging tech as of the end of 2021. After several early-stage charging network providers achieved successful exits, there is more interest in the space. Other ideas for improving charging infrastructure included using chargers where service and Wi-Fi are not accessible such as in garages or underground areas. Innovation with utility companies to improve User Interface and customer satisfaction is also an area of interest.

BATTERIES AND METALS

High metal prices and their impact on the EV transition was another topic that was addressed during the Conference. The sharp rise in the prices of certain essential metals such as Lithium up 230%1 and Cobalt up ~100%1 in 2021 led to a rise in the levelized cost of electricity (LCOE) for the first time in many years. According to BNEF, battery prices are expected to increase to $135 per kWh from $132 kWh in 2022 for the first time in many years. However, battery makers and miners announced record capacity in 2020 and 2021. This dynamic led BNEF’s head of metal and mining analysts to ask: what is the sweet spot in metals prices? According to Kwasi Ampofo, the head of metals and mining at BNEF, the cure for high prices is even higher prices. However, there is a sweet spot that gives miners and battery makers the incentive to increase production and investments without significantly hindering the EV transition. The price, according to Kwasi, is in the range of 35K per metric ton for Lithium Carbonate, 18K per metric ton for Nickel, and 42K per metric ton of Cobalt. The good news is that Lithium and Nickel are expected to be below this level up until 2030. However, Cobalt is expected to be higher than BNEF’s sweet spot, leaving the door open for innovation to solve the problem.

Source: Bloomberg data as of February 2022

Range anxiety was also cited during multiple sessions as a real concern for EV consumers. Battery makers have a significant role to play through exploring new chemistries such as Sodium-Ion or solid-state to ultimately increase the battery density. In other words, pack more power without increasing the size of the battery. EV charging companies will also play a role in solving range issues by making charging ever faster, available, and not damaging to batteries. Battery swapping which was discussed briefly during the conference has the ability to reduce replacing a battery to a few minutes. However, swapping stations need space and are limited in the number of swaps they can do per day. The utilization rate needs to be in the range of 40-50%1 before the price of kWh can be competitive with traditional EV chargers.

OTHER ELECTRIFICATION-RELATED TOPICS

Consumer lending, green Hydrogen, and aviation were also among the topics discussed during the Conference. Bank of America’s head of consumer lending indicated that auto financing is changing due to the change in the dynamics of the sales process from dealership-driven to the online reservation approach initiated by Tesla. Bank of America’s head of sustainable financing indicated strong interest from banks in sustainable investing. The equity story for the last year has been strong. However, more investments in equity and credit are needed to take the industry to the next level. Investors are looking at the theme as a long-term investment. Banks are confident in the long-term story of electrifications despite the short-term challenges.

Source: BNEF. Note COE2 emission data are based on BNEF’s Economic Transition Scenario.

Aviation contributes to 13%1 of total transport emissions, a figure that is projected to double by 20501. A solution is certainly required for this industry, but progress remains in nascent stages. The rise in carbon credit price is adding to the cost of carbon emission-intensive industries such as aviation. Carbon offsets, Sustainable Aviation Fuel, and zero-emission flights through electric or Hydrogen planes were discussed as potential solutions. Most aviation companies are now heavily investing in carbon offsets as this is one of the few short-term solutions for the industry.

Source: ICE, BNEF

Some aviation companies are working on innovative ideas such as hydrogen planes that emit zero carbon and revolutionary planes with abilities to do vertical landings and takeoffs. Selfishly, I immediately thought vertical takeoff and landing planes would be a great solution for moving products into Manhattan. Much of the delays in my morning commute are due to big trucks hauling products through the bridges leading to Manhattan.

Hydrogen has also recently garnered adequate attention from governments, analysts, venture capitalists, and companies alike. It is, in my opinion, the next frontier for innovation and growth with applications in many industries. Hydrogen requires massive infrastructure investment and time in order to become a significant contributor to the total energy mix. This major topic could take many pages, but we will focus in this paper on electrification solutions with the potential of immediate impact.

CONCLUSION

It was refreshing to be back to in-person conferences after a couple of years of hiatus. BNEF’s stellar industry reputation tends to attract the industries’ crème de la crème to their conferences. At the conference, the excitement around the space and its future was palpable, especially after a strong year in terms of EV sales – 6.5 million1 EVs were sold in 2021, up from 3.21 million EVs in 2020.

We expect this momentum to continue for the foreseeable future. However, it also became clear that companies, regulators, investors, and innovators have their work cut out for them to ensure a safe climate future. While climate risk undoubtedly poses a downside risk for investors due to climate change’s impact on businesses and revenues, it also presents an upside risk or the risk of missing out on such a massive investment opportunity.

* Diversification does not ensure a profit or guarantee against a loss.

** BNEF and BI are not affiliated with SIDCO


Citations

  1. Bloomberg New Energy Finance BNEF

Index Definitions

Bloomberg Electric Vehicles: designed to track the performance of companies engaged in the production of electric vehicles and/or their components, or engaged in other initiatives that may change the future of mobility.

For KARS standard performance and top 10 holdings please click here.

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