Will electrified fleets break the grid?
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Built throughout the 20th century, and as early as 1935 in the UK, European power grids were not developed to support the ongoing electrification of everything from heating to transport, explains Francesco Nobili of Charles River Associate.
For context, in 2021 electric fleet vehicles made up 25% of total vehicles on European roads, but the shift to electric by 2030 is expected to double their electricity consumption compared to private vehicles. Internal combustion engine (ICE) fleets are responsible for 50% of road transport emissions, making their electrification vital for climate targets, especially when powered by renewables. Driven by competitive Total Cost of Ownership (TCO), policies, ESG awareness, and technology advancements, commercial EV fleets are projected to reach 18% market penetration by 2030, up from the current 1.4%.
The transition to electric fleets will have disruptive effects, increasing grid capacity and generation needs while creating potential bottlenecks at the distribution level. If well optimised, fleet electrification could boost system flexibility while offering new revenue sources for both existing and new players. We explore the challenges at each level.
Impact on Distribution System Operators (DSOs)
The Distribution System Operator (DSO) is responsible for managing and maintaining the local electricity distribution infrastructure. Therefore, the impact of increasing fleet electrifications on DSOs is significant.
It is estimated that around €1 trillion ($1.1 trillion) of investment in charging infrastructure, grid upgrades and additional renewable energy generation will be required to facilitate the electrification of all road transport in Europe by 2050. Commercial fleets account for a significant part of that, with their electricity demand expected to grow from 1.5TWh in 2021 to 65TWh by 2030.
That growth in power demand translates to around €20 billion ($21.9 billion) in grid upgrade investments by 2030 to support fleet electrification and grid operators will need to deploy the necessary capital to support the grid capacity expansion. However, given the regulated nature of grid businesses, new grid capacity would fall within the Regulated Asset Base (RAB) of transmission system operators (TSOs) and DSOs, compensating them for their investments with limiting incentives for operators to act preemptively. If rightly exploited though, fleet electrification could improve system efficiency, increasing grid operators’ margins.
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Accordingly, early cooperation between grid and fleet operators is necessary to ensure enough capacity is in place to support the full electrification of commercial fleets. The need for cooperation is exacerbated by the simultaneous electrification of other industries, which increases the competition for grid connections and upgrades. Coordination with grid operators is even more urgent at the distribution system level, as the nature of fleets could result in thousands of vehicles charging at the same time through a single grid connection which may strain the grid or lead to localised brownouts.
Despite the challenges, fleet electrification could reduce grid upgrade needs and benefit the wider electricity system. Early coordination in the planning phase can identify the most suitable locations for electric fleet depots. Depots could be positioned outside high-congestion grid areas or alternatively, depots’ electricity demand could be clustered with other electricity-intensive facilities to streamline the provision of grid connections and increase site fuse limits.
Furthermore, when coupled with smart charging and vehicle-to-grid (V2G) solutions, electric fleets offer considerable opportunities for peak shaving and for the provision of grid services, enhancing system flexibility and substantially reducing grid investment needs. In the UK for instance, smart charging could reduce annual grid investment needs from £600 million ($760 million) to £100 million ($127 million), while V2G would save almost £900 million ($1.1 billion) a year in grid investments if implemented for both private and commercial vehicles.
Impact on suppliers
For energy suppliers, fleet electrification represents both a risk and an opportunity. As fleets electrify, the level of competition in this space is growing with both utilities and new entrants coming to market, often with products that cover multiple needs such as both the supply of electricity to depots and charging point installation and operation.
At the same time, utilities face fierce competition to capture the revenues from charging, which in the ICE era were a prerogative of oil & gas companies operating fuel retail stations. In this context, suppliers must ensure that they do not lose existing customers to new entrants and other incumbents. Utilities can do so by offering tailored fleet products, to expand into this growing segment while gaining access to additional revenue streams. New B2B tariffs could be developed to target fleet operators; given how sizeable fleet electricity demand can be, these industrial & commercial (I&C) tariffs must enhance dynamic pricing to ensure operators can capture lower off-peak prices.
When it comes to fleet charging, smart charging and V2G will also play a key role for suppliers. As energy management becomes increasingly important for fleet charging, utilities will need to develop software capabilities, representing an additional administrative and operative burden. At the same time though, integrating V2G to an I&C tariff for depot charging will allow suppliers to optimise the flow of electricity back into the grid and maximise their margins.
Lastly, there is a growing market for as-a-service products (aaS) for fleet electrification. These solutions vary in coverage but allow operators to reduce their exposure to multiple risks. Utilities could benefit from an operator’s appetite for aaS products by bundling electricity tariffs with charging services and even vehicle leasing. In the U.S. for instance, several utilities offer financing solutions and/or incentives to support fleet electrification, underlying the potential value suppliers could capture from this transition.
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Impact on generators
Fleet electrification represents an opportunity for power generators too. In Europe alone, €25 billion of investment will be needed for additional renewable energy capacity to meet fleets’ growing electricity demand, with generators set to benefit from this growing segment.
As they electrify, commercial fleets are increasingly looking for solutions to hedge against volatile electricity prices. In this context, Power Purchase Agreements (PPA) are chosen by many fleet operators as an optimal solution to guarantee long-term price stability while ensuring their vehicles are powered by sustainable energy. Besides that, coordination between generators and large fleet operators can ensure depots are located closer to electricity plants, reducing the strain on the grid.
Furthermore, in areas with limited available grid capacity, on-site generation could be a viable solution for operators to save on grid connection fees while reducing exposure to electricity price volatility. On-site generation, and especially a renewable energy one, can be also coupled with battery storage to optimise energy consumption and capture off-peak prices.
Fleet electrification is possible in the near future
Whilst the measures we have discussed consider the replacement of the ICE fleet with an equivalent electric fleet, fleet electrification is a unique opportunity for grid operators, utilities and generators to capture additional revenues while enhancing the flexibility of our electricity systems.
The necessary grid and generation investments may vary substantially depending on how fleet electrification takes place but in the near to mid-term the electrification of fleets across the UK and Europe will play a significant role in meeting net zero ambitious, while offering long-term improvements to grid infrastructure and renewable generation across the continent.
About the author:
Francesco Nobili is a consultant at Charles River Associate (CRA) Energy practice. He has an extensive experience advising clients on eMobility and Energy topics. He provides strategy and transaction support on matters such as fleet electrification, EV charging, battery second life, V2G and energy management.
