Will Big Utilities Snap Up EV Charging Minnows?

Includes: CCGI, ECTYQ, EV, NRG
by: Louis Dematteis

When the state of California agreed in November to set up a network of 200 charging stations for electric vehicles (EV), the initiative was hailed as one of the biggest state-backed US projects for establishing infrastructure to promote the adoption of plug-in cars.

Under the agreement, NRG Energy (NYSE:NRG), the giant utilities company, will start installing charging stations across the state through its subsidiary eVgo in early 2013. The deal also spotlights NRG's efforts to become a major player in the EV charging industry-in contrast to most of its peers in the utilities industry who have remained on the sidelines for now.

According to a Deloitte survey published in November 2011, many utilities weren't really eager to dive into the EV charging industry during its early stages. "Utilities are not certain whether they will play a major role in residential charging equipment installation, as installations are being managed largely by auto manufacturers and electric vehicle supply equipment (EVSE) companies," said the report. "One sphere in which utilities might benefit from playing a greater role is the build-out of the public infrastructure-an area where respondents reported that utilities are currently involved only tangentially."

As the EV market develops, utilities may be compelled to snap up small players as a quick route into an industry segment plagued by uncertainty. Utilities planning to enter the market have many things to consider including regulation, business strategy, partnerships, technical assessments and public education.

Much is hazy on the regulation front. There is a possibility that states, in order to protect their local utilities may stipulate that utilities seeking to secure a foothold in the EV charging infrastructure would be subject to regulation if they are regulated in another state.

The situation is fluid and varies from state to state. For example, Oregon's public utilities commission (PUC) spent nearly three years deciding what role utilities should play in the EV charging market. EV charging station companies, including ECOtality (ECTY), had objected, saying giant utilities would have an unfair advantage. In March 2012, the PUC ruled that utilities could enter the market for EV charging infrastructure. Still, Pacific Power and Portland General Electric said they had no concrete plans for entering the market anyway.

Just a couple of years ago, utilities were concerned that a growing number of EVs might overload power networks and trigger blackouts. According to the Deloitte survey, most utilities now say that their infrastructures are capable of handling the potential penetration of EVs a rate of 1% of the total U.S. passenger fleet.

It's also possible that utilities are playing it safe because it isn't yet clear how to deploy EV charging stations profitably. "The EVSE industry is still trying to determine the best way to create a viable return on investment (ROI) on EVSE station deployments for site hosts," according to Pike Research. "This issue is going to become front and center as the publicly funded EVSE deployments wind down."

Some utilities might instead let smaller companies get their hands dirty navigating the early market uncertainties-and then look for takeover opportunities.

Car Charging Group Inc., (OTCPK:CCGI) could offer a utility easy access to the public charging market. The Miami-based company has secured relationships with 40 partners, giving it access to 6.4 million parking spots across the US. Building such relationships is not so easy for a large, lumbering utility group to do, so by buying Car Charging Group, a big company could potentially gain an edge in an unfamiliar market segment.

The micro-cap stock traded at a market cap of $75 million on January 7, when its stock closed at $1.45-43% below its 52-week high. While CCGI is a risky and volatile micro-cap stock, it's one of only a few publicly traded EVSE companies. So for investors, CCGI provides access to an industry with huge growth potential as well as the possibility of a takeover that could boost returns dramatically.

Last July, CCGI itself initiated a takeover of a rival EV charging company, 350Green, in an effort to create one of the largest public charging networks in the U.S. Some industry observers said that deal might be an example of future consolidation in an industry that's still struggling with a lack of a unified rules or fee systems.

"The silver lining for the public charging industry is that despite somewhat disappointing sales so far this year, the plug-in vehicle market is almost certain to grow for the foreseeable future," wrote Zach McDonald in plugincars.com. "That growth will bring a slow and steady stream of new drivers-an expanding market of customers wanting more and better public charging opportunities. These circumstances may require a shift, from a relatively large field of struggling companies trying to find a workable business model, to a shorter list of companies who have the scale and resources to make it easy and cheap for EV drivers to charge in public."

If consolidation gains momentum, another potential target is ECOtality, which operates the Blink network of EV charging units for residential and commercial use. The Nasdaq-listed company hasn't made many friends in the utilities industry, after battling the big boys in Oregon and California, where it filed a lawsuit aimed at thwarting NRG's plans. Perhaps after the lawsuit was thrown out, ECOtality might see the benefits of cooperating with a utility instead.

Alternatively, a public utility eying the EV charging market might see ECOtality as a buying opportunity. The company's shares closed on Nasdaq at $0.45 on July 7. At a market cap of $10.71 million, it wouldn't cost much for a big utility to buy a stake. And for investors in ECOtality, a potential takeover is a scenario that could bring upside to the stock, which trades toward the low end of a 52-week range of $0.26-$0.132.

With ECOtality, a utility could get a company that has strong partnerships including with ABB, the Swiss industrial giant, and with the U.S. Department of Energy's EV project. Still, the company is only generating revenue of about $10,000 a week, which means there is enormous growth potential as more EVs take to the road, along with a huge risk that it could take a while to reach profitability.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.