Written evidence from Zouk Capital LLP (ELV0044)
About the respondent
Zouk Capital LLP (Zouk) is a UK based investment manager which has focused on clean energy throughout its 20+ year history. Since 2018 we have been in charge of the UK Treasury's Charging Infrastructure Investment Fund (CIIF) which is a £420m fund investing in EV charging infrastructure in the UK. The fund is almost fully deployed or committed across 4 portfolio companies, with a 5th in the pipeline for 2023. In total, after including other funds managed by Zouk, we have invested in 8 portfolio companies in the EV sector, the vast majority of which are charge point operators (CPOs) running networks of publicly available EV chargers. This makes us perhaps the most experienced investor in the space with a wealth of knowledge, data and understanding of the EV ecosystem as a whole. We welcome the chance to respond on this vitally important government initiative as according to provisional figures published in Mar-23[1] transport accounted for 34% of all territorial carbon dioxide emissions, with the large majority from road transport. Therefore, this is not an issue which can be ignored or watered-down on the UK’s journey to net zero.
Question responses
We have focused on questions which relate to our experience as investors or those EV portfolio companies in which we are invested. Question numbers are related to those published online at the original call for evidence.
(Q1) Despite the negative sentiment seemingly arising every day in the press, the transition is progressing in the right direction and we firmly believe it will continue to do so as long as there are no major backward shifts in public policy. Investors prefer consistency and so any u-turns now on the transition to EVs (or Net Zero more broadly) could have immeasurable consequences across the entire supply chain of EVs, from battery manufacturing facilities all the way to the EV charger manufacturers and CPOs. According to SSMT data last month[2] 16% of all cars registered in July were BEV (that means fully electric with no engine whatsoever as opposed to PHEV which are essentially normal ICE vehicles with a small battery of <20 miles range which can be charged externally via a plug and MHEV which do not have a plug at all and the most widely seen example is the Toyota Prius). The same SSMT data shows that in 2020 the number of BEV car registrations (in July) was 6.6% and in 2019 just 1.6%. So, the fact is that consumers want to own EVs as the numbers speak for themselves. The emissions reductions from switching to EVs is massive: 55 million tonnes of CO2 per annum by the time the full switchover has occurred (see Q6). There are 5 obstacles worth noting that we provide recommendations for in this call for evidence: general education/information for the public, addressing the upfront cost of EVs for lower income drivers, electricity grid capacity, addressing the lack of on-street EV infrastructure for household without driveways and local government procurement of EV charging infrastructure. Overcoming these obstacles is eminently achievable and so on that basis we strongly believe that the phase out dates are also achievable and realistic.
(Q2) In short, yes the 2030 and 2035 targets serve their purpose. They give plenty of time to transition and we have seen incredible progress in the UK to date for the largest fleets, car salary sacrifice and taxi fleets moving across. It is to be expected that those industries which would rather not see the change should push back and groan, but from our experience in the market we believe them to be a minority and the progress for the many cannot be held up by a vested few. It is vital that these targets are not moved in the face of opposition from a minority few. If the UK truly wants to embrace the idea of being an international leader in the manufacture of EVs and batteries, then more needs to be done to support this as the upfront cost of EV supply chains relative to the demand today for EVs is a hard business case to stack up. Subsidies and tax breaks for new facilities are perhaps the best routes forward as this would help with (amongst other aspects) construction costs, re-training and supply chain. Just this week the Government has done just this with BMW in relation to the Oxford plant with £75m of support, but more is needed.
(Q3) Like anything new in life: a carrot-and-stick approach is the right one. The benefit in kind tax breaks for salary sacrifice schemes for zero emission vehicles is a very powerful tool which is working well. Announcements by the market leaders in this space such as Tusker, Octopus Electric Vehicles and Leaseplan speak to the success of this measure and the customers they work with. The ultra-low emission zone (ULEZ) in London which has recently expanded has also been very powerful and Sadiq Khan should be commended for sticking to his plan despite ferocious opposition. The Government should support more local and transport authorities with ULEZs outside of London with funding for skills and scrappage schemes to get the most polluting vehicles off UK roads whilst also supporting those who cannot afford the upfront cost of EVs (see Q7 and Q13 for more on cost and the second-hand market).
(Q4) There needs to be a step change in the communications from Government as well as better policing by Government on the misinformation which is being allowed to freely circulate without fact checking. These myths are wide ranging and baseless in the extreme (see Q5 below for more on this). Aside from the beneficial drop in carbon emissions from EVs, air quality is also improved with zero tailpipe emissions which is often not explained fully to the public. The Office for Zero Emission Vehicles (OZEV) have a leaflet entitled “Common Misconceptions About Electric Vehicles” dated July 2022 on their website, but this is neither prominent enough nor up to date in the myths which it needs to bust.
Recommendation: the Government (perhaps via OZEV still) should consider launching a broader reaching, dedicated myth busting website for EVs, circulating written materials in papers and TV adverts to ensure that messages and benefits are reaching potential EV drivers. This would benefit from independent scientific input and data to add weight. The website could cover FAQs, provide information on EV availability, EV case studies from members of the public and polling data.
(Q5) Information in the press is generally very misleading. Many UK publications run fear inducing articles which pitch worst case figures and isolated incidents along with muddled half-truths and baseless facts to create attention grabbing headlines. Headlines range from suspect to ludicrous including; tyres wearing out all the time on EVs because they weighing so much more, EV emissions are higher than diesel, EVs are prone to hacking, EVs catch on fire, EV batteries don’t last and are thrown away all the way to simply stating in one recent article “Nobody wants an electric car”. Freedom of press has been a long-running issue in the UK which we will not solve through the lens of EVs alone, but as mentioned before in response to Q4, having publicly available truths should go some way to counteracting misinformation being pushed out to members of the public as well as better educated journalists. But perhaps most important of all, it is vital that policy makers see through these sensationalist headlines to the data, expertise and scientific truth that does not come from vested interests.
(Q6) Other respondents will no doubt be better placed to specify the exact environmental benefits, however, from a whole system perspective the benefits are wide ranging. At a high level a litre of petrol/diesel produces 2.4kg of CO2 [3]and according to National Grid the UK average carbon intensity for 2022 was 182 gCO2/kWh.[4] On the basis of 301.5 billion miles being travelled on UK roads in 2022 by cars, taxis and light commercial vehicles[5] 55 million tonnes of CO2 could be saved every year in the switch to EVs by replacing the 70.6 million tonnes per annum of CO2 produced by ICEs at 38.8 miles per gallon[6] compared with 15.7 million tonnes of CO2 per annum for EV at a typical efficiency of 3.5 miles per kWh. This beneficial number is based on the carbon intensity in 2022 of 182 gCO2/kWh but this will reduce with more renewable energy generation being added to the grid every year. For example, on 26th December 2022 the intensity according to the same data from National Grid was only 39 gCO2/kWh. At that level the saving jumps from 55 million tonnes of CO2 to 67 million tonnes of CO2 which is a reduction of >95% compared to a ICE fleet. Beyond this, EVs have large batteries and when they are plugged in at home or on-street overnight for long durations they have a significant amount of capacity which can be used to support the grid more broadly. Algorithms already exist in smart EV chargers / their software platforms for environmentally conscious consumers to choose that charging should only occur when carbon intensity is low. With vehicle-to-grid (V2G) capability in the not-too-distant future (where the battery discharges back to the grid) this could easily be used to reduce peak demand which is typically when short notice gas power plants are fired up as quick responders to keep the lights on along with the obvious negative consequences for CO2 emissions. We talk more about the value these batteries play even at the end of life below in response to Q26, Q27 and Q28.
(Q7) Defining “cost” in this instance is important, because the cost of a car is the upfront cost (new or second-hand) and the running costs. In a pure upfront cost run-off, EVs remain more expensive than their exact comparators. The margin is always shrinking, and they will be at parity within a few years (between 2025 and 2028 according to BloombergNEF [7](well ahead of the 2030 and 2035 dates). A more appropriate (but admittedly harder to immediately grasp) concept is the total cost of ownership over a typical 5 year period. In this regard, EVs win hands down once tax, refuelling and maintenance costs are taken into account. Refuelling or more specifically for an EV, recharging, is a much discussed topic. The table below shows the cost of EV charging vs. petrol for a typical 8,000 mile driver of both vehicles. Because a gallon of petrol is not the same as a kWh of electricity we have converted it back to pence per mile basis for comparison using efficiencies of 36 miles per gallon and 3.5 miles per kWh already sourced in Q6 above. Negative numbers mean that EV charging is more expensive and positive numbers that EV charging is cheaper at those relative p/litre and p/kWh figures in the table. The figures of 7p/kWh and 25p/kWh are defined as “home” which is a typical range of figures from suppliers such as Octopus, EDF and EON. “Public – slow” are 7-22kw chargers found on-street and at long duration stops i.e. train stations, supermarkets and shopping centres, whilst “public – rapid” are 50kw+ EV chargers typically found on busy A-roads, drive-thru coffee shops and motorway services areas. At the time of writing according to the Governments own data shows petrol is currently almost 152p/litre and hit a high last summer of over 190p/litre. [8]
At present there is an unfortunate VAT divide of 5% for homeowners on their electricity tariff if they benefit from a driveway and yet 20% VAT is charged on public EV charging. This would improve the picture above further and further boost the cost savings of EV ownership, especially for lower income households which typically do not have driveways.
Recommendation: the Government might wish to consider some kind of means tested subsidy for lower income drivers as a way of supporting them with the upfront cost divide which might remain for a few years, but this should be more focused than the previous grants so that the money can go much further.
Recommendation: the Government should introduce a new 5% VAT rate on public EV charging to align with the 5% VAT rate for homeowners to remove this inequality.
(Q13) The second-hand car market is by definition a delayed function of the new car market and as such will take time to develop with little that can be done to help it. One area of concern for consumers is the health and capacity of a battery in a second-hand EV as shown by a recent survey by the Green Finance Institute (GFI) of 2,000 drivers[9]. The recommendations by the GFI to introduce battery health certificates and battery passports are sensible solutions which we suggest the Government backs and considers regulations to enforce these. We anticipate that the RAC, AA and others which offer a reasonably priced vehicle inspection for second hand cars will develop a method for assessing the battery health in time which consumers can rely on. We discuss second life batteries below in Q26 and this would also be an area to address as part of the vital need for more information resources as we outlined in Q4.
(Q22) The current 8kw limit below which contactless terminals are not required is an essential cut off point that should not be amended. Contactless terminals have an upfront cost and a software running cost from the provider which does not vary based on the value or size of the EV charger. Therefore, the cost can be and is readily available on many rapid EV chargers (50kw+ which are typically £40,000 or more). By contrast <=7kw EV chargers i.e. those on lampposts on the pavement, may only cost £1,000-2,500. Burdening these much lower value EV chargers with the same costs of a contactless terminal will lead to either (a) less chargers being provided for the same capital budget or (b) increased costs to consumers to recoup the extra capital cost. On-street EV charging (which is an area which needs more attention from Government as we outline below in Q32 and Q33) are typically located on terraced housing streets and as such they are normally only a few metres from the front door of the EV driver. They function as a “near-home” EV charger for the driver and as such will be used very regularly. The issue for EV drivers of having too many memberships, cards etc. for EV chargers is a real issue but does not apply to those who use a charger regularly in the same way as a rapid charger used for a long distance journey once or twice a year. Therefore those EV drivers would much rather have an APP on their phone for their regular EV charging solution at home than paying more so they can use a contactless card. In the long run (as already demonstrated by Tesla and IONITY) so called plug-and-charge (or ISO 15118) will become the prevalent payment method where the EV itself has stored payment information and when it is connected to the EV charger it automatically authenticates. It does not make sense to install thousands of contactless terminals where they are not needed, for them to then become obsolete in the not too distant future.
(Q23) The data requirements outlined in Part 4 of the Public Charge Point Regulations 2023 are sensible and sufficient. It allows EV drivers to have important information on the price, connectors, live status, location and availability of the EV chargers. Beyond this data should be considered commercially sensitive. For example, there is no benefit to the consumer to know how much that charger has been used over the past year but in the hands of a competitor this could be unfairly used.
(Q26) End of life management of batteries is already heavily regulated and controlled in favour of consumers i.e. the obligations (or more accurately the value as you’ll see from our subsequent responses) remains with the manufacturer of the EV. All the major brands selling cars in the UK have strategies for this: Nissan has launched XStorage and Renault has Powerfault (both are home battery storage solutions already available in the UK). Tesla will recycle the batteries for free and just last month Jaguar Land Rover announced an initiative for second life Jaguar i-pace batteries where 30 vehicle batteries will be repurposed into a 2.5 MWh system which can power 250 homes in the UK for a day.[10] Why are they doing this? Because they’re highly confident in the value / usage of these batteries at their end of life. For example, VW guarantee that even after 100,000 miles (which is >12 years for an average 8,000 miles driver in the UK) that battery will still have 80% of its capacity[11] and that is a hugely valuable asset.
(Q27) We believe this question misses the key third option we have already outlined extensively above: re-use. Like any item, batteries should be considered against the long-established Waste Hierarchy[12] at the end of its purpose and in this case re-use is always preferable to recycle or disposal. The waste hierarchy ranks options from most favourable to least favourable as (1) prevention i.e. don’t use in the first place (2) re-use i.e. come up with another purpose (3) recycling i.e. extract raw materials to make products from recycled rather than virgin raw materials (4) other recovery i.e. if recycling is not practicable then recover some energy i.e. incineration or anaerobic digestion (5) disposal i.e. landfill. There is such a clear use case for re-use that we do not anticipate EV batteries ever ending up in landfill as the car manufacturers would be throwing billions of pounds away in a full EV economy.
(Q28) In addition to the reasons and logic presented in response to Q26 and Q27, we do not believe there is any risk in relation to this whatsoever for the simple reason that a car manufacturer will take the EV off the consumer at the end of life for £0 (then either recycling or re-using the battery for a second life at their cost), so the consumer makes £0. However, an EV with 100,000 miles on the clock with at least 80% of the battery still usable will certainly be worth >£0 to someone to drive.
(Q29) Grid capacity is a challenge which the UK faces and more needs to be done here. This is irrespective of EVs however (and if the UK foolishly follows a hydrogen economy for anything other than replacement of hydrogen already utilised for fertilizer and heavy industry then problem would be 3x worse due to the inherent inefficiencies of end-to-end hydrogen production, storage and transportation even from renewables). The £950m Rapid Charging Fund which Zouk participated in the scoping of back in 2020/21 has so far failed to materialise yet this is a key pot of capital for CPOs operating on motorway services areas to unlock expensive connections with long lead times. In 2020 Zouk participated in the Competition and Markets Authority study into EV charging and one of their key conclusions in their final report published on 23rd July 2021 was the proper allocation of this RCF capital to enhance competition on motorways rather than further entrenching commercial agreements precluding greater competition.
Recommendation: accelerate the delivery of the Rapid Charging Fund which has stalled and delayed for too long now in releasing funds for motorway service areas.
(Q32) Many of our portfolio companies are addressing the issue of on-street EV charging for drivers and we believe this is an area which presents a great challenge to sub-urban EV drivers who do not have access to off-street parking. We believe that aside from motorway services areas needing assistance with grid connections as outlined in Q29 above, the rapid charging market is developing well in the UK through commercial partnerships between private companies and CPOs. This is not the case with local authorities that control the streets and pavements in the UK’s towns and cities where underfunding and under-resourcing leads to very long procurement cycles delaying the roll-out of critically needed EV charging infrastructure in the UK’s towns and cities. We discuss this challenge more in Q33 below where you have asked what the role of local authorities should be.
(Q33) The Local Electric Vehicle Infrastructure (LEVI) fund is dedicated to helping local authorities to plan and deliver charging infrastructure for residents without off-street parking. This is a welcome move as it tries to standardise the contractual terms on which EV charging procurements are made, which enable faster competitions with fair scoring and therefore open up more competition amongst. This means more EV chargers being deployed with higher quality CPOs that is good news for EV drivers and the transition. To date, many local authorities have focussed too much on the profit share they can make from letting contracts rather than delivering the right solution for their residents. We understand from conversations with local authorities that the process for applying for LEVI funding is hard to understand and time consuming.
Recommendation: accelerate the delivery of LEVI, provide more funding for resources within local authorities to gain the expertise needed to deliver these procurement exercises and simplify the application process to ensure that more EV chargers can be delivered more efficiently.
Thank you for reading our evidence and we would be happy to speak further on any subjects contained in this paper.