The Perplexing Profit Potential of EV Charging

Utilities muddle fuel retailers’ business case for charging stations
Photograph: Shutterstock

CHICAGO — The business case for electric vehicle (EV) charging is challenging for many liquid-fuel retailers. One primary element holding retailers back is the still-developing demand: EVs are projected to make up only 2% of new vehicle sales in the U.S. in 2020, according to London-based IHS Markit. But even retailers with patience and a long-term vision are grappling with a new rulebook in selling EV charging, one that is still in the process of being written.

As the former executive vice president of the Society of Independent Gasoline Marketers of America (SIGMA), Ken Doyle can appreciate fuel retailers’ challenge. For more than 30 years, he helped gasoline marketers work through challenges large and small. Having left SIGMA in 2014, he is now the chief operating officer of Smart Electric Power Alliance (SEPA), a Washington, D.C.-based group that helps utilities implement clean energy and grid modernization, as well as EV charging infrastructure development. Doyle said the dynamics of reselling electricity are much different from liquid fuels and, in some ways, more constraining.

“Most motor fuel retailers … have multiple suppliers they can deal with; they can play one off the other, try to figure out how to get the best deal,” he said. “In the utility business, that may not be the case. There may be one supplier, and it’s probably going to be a regulated entity, so they’re not going to have a lot of flexibility.”

Fuel retailers also cannot apply their experiences as buyers of electricity in how they approach reselling it. “If you are going to resell it, it will be a different product, and pricing may be different than they are used to,” Doyle said. “Both c-stores and utilities will figure it out once they find a model that works.”

Revisiting the Demand Charge

Perhaps the biggest stumbling block to making the EV charging math work is the demand charge, an additional fee that utilities levy during periods of peak demand. Most vehicle charging at public stations happens during the afternoon, a period of peak demand, and these additional charges can destroy the profitability of reselling that electricity.

“Demand charges were really designed to absorb the distribution capacity that is required by commercial customers. It pays for a lot of assets in the ground—substations and transformers—that are necessary to supply electricity when needed,” said Erika Myers, principal of transportation electrification for SEPA.

“The idea of demand rates is essentially individuals are paying for fair share of capacity,” Myers said. “On its face it makes a lot of sense; however, when you look at the economics and utilization rates of chargers, they aren’t using the same amount of capacity on an hour-by-hour, day-by-day basis as their commercial peers.”

SEPA has proposed that utilities offer a utilization discount for charging stations until they are being used at higher rates, “to help make the economics work better for charging stations that are necessary to encourage people to buy EVs, and to have mass adoption so that site becomes profitable,” Myers said.

Rocky Mountain Institute (RMI), Basalt, Colo., has analyzed demand charges and their effect on charging station profitability. Chris Nelder, a manager in the mobility group for RMI, said the key is the utilization rate.

“Once you get up to 30% demand utilization, you can afford a demand rate. But until then, you need some sort of demand charge relief,” Nelder said. The debate over rate design and demand charges will not be resolved anytime soon.

“It will take a while, especially because we do utility regulation at the state level,” he said.

(Un)competitive Markets

Utilities are also carving out a role in public EV charging development, one that is increasingly putting them at odds with the private sector.

While some businesses install, own and operate their own public EV charging stations, most are owned or operated by third parties—think EV manufacturers such as Tesla or Electrify America, or networks such as ChargePoint or EVgo. The reason is economics: A DC fast-charging station, which can charge an EV battery to about 80% capacity in about 30 minutes, can cost more than $50,000 to install. It’s an expensive investment for a nascent consumer base.

In some cases, utilities have been installing public EV charging stations. On its face, this seems like a natural extension of their business. But utilities have also been pushing for the same state and federal grants as private EV charging station developers, and even requesting the ability to rate-base their investment—that is, raise electricity rates on all customers to help recover the cost of charging station development. Regulators in states such as Washington have approved rate-basing, while others such as Missouri and Kansas have turned down local utilities’ requests. This is a major sticking point for groups representing fuel retailers.

“Are you going to have an open and competitive market for people wanting to recharge EVs at retail? If you let utilities rate-base charging stations, you’ve already answered that question in the negative,” said Tim Columbus, a lawyer with Steptoe & Johnson LLP, Washington, D.C., which represents industry groups such as NACS, NATSO and SIGMA.

“If you don’t have a competitive market, you won’t get private investment and we will never have anything even closely approximating the infrastructure we have for motor vehicle fueling on gasoline and diesel,” said Douglas Kantor, a partner with Steptoe & Johnson. “You need that if you actually want the EV market to take off.”

From his perspective at SEPA, Doyle does not see public utilities gaining a huge competitive advantage from rate-basing EV charging station development.

“If you are a franchisee of Exxon, you’re going to be competing with Exxon at the same time you are buying from them. This is not dissimilar to that,” said Doyle. “C-store retailers are certainly very adept at competition, and they are working with utilities that are regulated monopolies, so competition is not their forte. So I don’t understand why they would be afraid of that.”

Stumbling Blocks

Nelder of RMI agrees that allowing only public utilities to build, own and operate charging stations would be unfair. But the cost for infrastructure to support high-speed charging stations can be millions of dollars per site.

RMI’s position is to let utilities invest in the “make-ready”—essentially any infrastructure needed to provide power up to the meter—and rate-base that cost.

“Owning and operating charging stations, providing retail services to drivers—let that be done by the private sector,” Nelder said. Public utilities could have a role in owning and operating charging stations in rural, low-income or other areas where demand is expected to be low, he suggests.

“If the private sector isn’t interested, I don’t have a problem letting a utility do it,” he said.

Columbus and Kantor say regulators should remove barriers to entry for the private sector to ramp up development of public charging stations.

“The best way to move quickly is to stop doing what we’ve started doing in a number of states, which is undercutting the private market and not allowing it to develop in the way we need it to develop,” said Kantor. In nearly half of states, he said, one cannot sell electricity without becoming a regulated utility.

“If you took these stumbling blocks away, there’s huge pent-up demand to invest and move fast,” he said. “If you just add stumbling blocks, we’re never going to get there.”

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