- December 1, 2021: Vol. 14, Number 11

Staying in the driver’s seat: Investors buckle up for the transport transition

by Kali Persall

While much attention has been paid to the “energy transition,” other sectors, such as transportation, are experiencing their own transformation. With the recent passage of the historic $1 trillion infrastructure bill, which dedicates billions of dollars to roads and bridges, public transit, electric vehicles (EVs), and airports, now on its way to the desk of President Biden, the sector appears to have the ammunition it needs to make long-awaited strides, bringing about new opportunities for infrastructure investors.

The transportation sector, which consists of highways, transit, railroads, ports and airports, can be counted as a key part of the larger energy-transition story. After all, transportation is the largest source of climate-disrupting pollution in the United States. The Energy Transitions Commission notes that mobility alone represents roughly a quarter of global carbon-dioxide emissions from energy, 60 percent of which come from heavy-duty transport, such as trucking, shipping and aviation. But with an increasing awareness of climate considerations, along with new innovations, the sector has the power to help turn this around. According to Nick Cleary, partner at Vantage Infrastructure, the transport sector has the potential to add at least 25 percent to global electricity demand by 2050 under the current trajectory, and up to 40 percent if net-zero emissions can be achieved. This means the transport sector’s role as a source of demand, along with its ability to store electricity, tie it closely to the energy transition in the power sector.

Market-shaping breakthroughs

Researchers say the transport industry will be shaped by three “revolutions”: vehicle electrification, driverless cars and ride sharing. It is possible we may even see a combination of those, given carbon-reduction targets.

Cleary says the shift to new developments such as EVs and associated charging infrastructure can be compared to the adoption of renewable energies a decade ago.

“EVs are evolving much like renewables did in 2000–2010, and that has led to renewables in the 2020s being competitive with fossil fuel alternatives and the preferred choice for new investment,” says Cleary. “What I mean is that the combination of technology, costs to users, subsidy support and consumer demand has now established EVs’ role in transport that, over time, will result in a transition away from internal combustion engines and their need for oil.”

With the transport evolution still in its early stages, Cleary believes, much like renewables, it will likely take another decade before new technology is sufficiently integrated into the market, and costs are reduced enough to enable EVs to shift from a luxury item to a widespread transport solution. Still, he says it is simply a question of when, not if, EVs become the dominant transport mechanism.

“What’s changed from previous years is our greater confidence that a meaningful transition will occur in the foreseeable future,” he adds. “That means we need to consider it in a wide range of investment decisions, not only in transport, but across midstream, fossil-fuel generation, renewables and utilities.”

In Europe, the shift to electric mobility is particularly robust. As part of the country’s goal of achieving climate neutrality by 2050, the European Union is aiming to slash carbon-dioxide emissions 100 percent by 2035, effectively ending sales of gas- and diesel-powered engines and even hybrids.

Brice Masselot, an investment director at Cube Infrastructure Managers, describes the shift to EVs as “quite massive.” In 2019, just before the COVID-19 pandemic, 1,700 electric buses were introduced in the firm’s European markets, more than during the whole period of 2012–2018. The pandemic did not stop this adoption — on the contrary, 2,000 electric buses were newly registered in Europe that year.

The second “revolution” pertains to self-driving cars, which are bucking stereotypes of high-energy guzzlers. It was previously suggested that the increased power needs of autonomous cars would make it impossible for them to be electric. However, a paper published by Carnegie Mellon University researchers in July 2020 determined that electric power can supply enough energy for an autonomous vehicle without a significant decrease in range.

Rideshare services such as Uber and Lyft are also undergoing their own green transformation. Transportation network companies (TNCs), which operate these rideshare services, represent the fastest-growing sector relative to other categories of commercial passenger vehicle fleets regulated by the California Public Utilities Commission. They also stand to have a noticeable impact on emissions. A recent study by the California Air Resources Board found that the potential emission reductions from these fleets are approximately three times higher for electric vehicles in ride-hailing fleets compared with a conventional vehicle in California.

The California Air Resources Board’s report stated that TNCs are “well-positioned to help state and local agencies meet air quality and climate goals through electrification.” Uber and Lyft have already been at the forefront of this. Lyft implemented successful EV rental pilots in Seattle and Atlanta in 2019 and announced a target of 100 percent electric vehicles in their fleet by 2030. Uber followed suit with a similar goal in September.

“Net-zero emission goals and other environmental considerations are having a vast effect on the transportation system,” says Rick Geddes, a professor in the department of policy analysis and management at Cornell University. “There is a groundswell movement to encourage adoption of electric vehicles, with a focus on encouraging the installation of charging stations. There are also policy initiatives to encourage increased fuel efficiency for gas engines.

“Taking a fresh look at how U.S. transportation infrastructure is operated and maintained, with an open mind, will make this sector much more environmentally friendly.”

Drivers of the transit transition

Proving the viability of these technologies is one thing, but challenges persist, such as the actual adoption of new technologies, as they may not perform as expected. Part of the onus will rest on transport operators driving this evolution.

“Transport operators, which are responsible for sourcing and operating these electric fleets, will have to adapt to new technologies and deal with different suppliers than in the past,” Masselot points out. “They will have to be able to finance higher capital expenditures, while explaining to their public clients how their offer is going to work throughout the contract period. Only a few players are actually able to manage this operational complexity of large city tenders, and this means that the competition in public transport tender tends to be more limited than in the past.”

Lowering costs for consumers and sourcing funding for the construction of such technologies is another challange. Traditional forms of funding, such as taxes on gas and diesel fuel, are declining due to the transition away from fossil fuels, causing operating deficits to increase. Thus, the transport sector is adding new sources of revenues to leverage funding and improve project feasibility and cost effectiveness, such as public-private partnerships (P3s), or participation from private operators.

“There are literally trillions of dollars of institutional investment waiting on the sidelines to invest in U.S. infrastructure,” says Geddes. “There is also a colossal need for dollars to be invested in U.S. transportation infrastructure systems. The key is to develop improved policies and regulations that will facilitate the flow of funds into the facilities where it is most needed.”

In the case of EVs, Geddes believes that until the industry can reduce the costs to be competitive, the key driver will be government policy. Cleary agrees that the electrification of transport still requires significant government funding for subsidies or incentives along with private sector investment to make it a viable alternative. He notes that this has become more challenging, as government balance sheets are constrained and stretched across a multitude of important societal needs.

“The impact of P3 financing solutions is not having a material impact right now; perhaps later,” says Cleary. “When you look at the broader picture outside of infrastructure where P3s are an established financing tool, it’s all about financing the consumer to buy EVs to achieve scale.”

Cleary adds that, when it comes to alternative financing sources, special-purpose acquisition companies (SPACs) — companies that have no commercial operations and are formed strictly to raise capital through IPOs — can be another effective option. However, private and corporate sector investors are open to transformative investments where it satisfies their customers’ expectations, but they have little appetite to do so where it is unprofitable, notes Cleary. In addition, traditional bank or capital markets funding is often unavailable due to risk appetite, a lack of understanding, unwillingness to upskill or inability to adapt established financing structures from traditional energy or transport assets.

“The ability of these structures to raise capital is playing a meaningful role in financing the EV sector,” says Cleary. “However, this financing option may come with some risks for the industry if investors’ expectations are not met because poor past experiences can delay institutional investors’ willingness to provide capital when the main event arrives.”

An evolution of pandemic proportions

Although the transportation sector was under pressure well before COVID-19, the pandemic exposed long-standing challenges, such as customer expectations for speed, service, and the implications for localized distribution; inefficiencies and congestion from inflexible networks and evolving trade patterns; fragmentation of supply in a sector that has rarely consolidated; and lack of investment in new technologies, according to a recent report from Deloitte.

Nevertheless, the transport sector has proven itself as one of the more resilient markets, even amidst a global pandemic. Perhaps by exposing the sector’s vulnerabilities, investors have a better opportunity to evaluate where the strengths and weaknesses lie and strategize on how to improve these. Overall, most industry professionals remain optimistic about the sector and the transition that lies ahead.

“We have observed that while transport activities related to tourism were significantly impacted during the pandemic, many public transport systems benefited from public transport authorities, as it was important to maintain adequate transport capacity despite the decrease in ridership,” says Masselot. “The resilience demonstrated by public transport operators during a crisis of such magnitude is a clear confirmation that those public transport operations are fully relevant in an infrastructure investment portfolio.”

Kali Persall is a reporter with Institutional Real Estate, Inc.


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