The ongoing shift to zero-emission mobility is disrupting the entire transportation industry, a dynamic that creates both opportunities and challenges for companies across the ecosystem. Regulatory interventions, especially in Europe and North America, are pushing industry players to decarbonize their supply chains through 2030 and beyond. Specifically, Europe has one of the most ambitious targets, calling for as much as a 43 percent reduction in emissions for new vehicle sales in 2030 and 90 percent by 2040.1
However, this transition to zero emissions faces substantial financial barriers. Despite the potential long-term savings from the transition, the deployment of private capital remains hindered by the fact that early-stage decarbonization projects have insufficient scale. Once projects attain scale, derisking mechanisms are not in place.
To discuss solutions on mobility transition finance, with a focus on trucks, buses, and infrastructure more broadly, McKinsey’s Tobias Schneiderbauer and Max Grossmann spoke with two experts. Uday Khemka is an investor, entrepreneur, and philanthropist focusing on climate change. He serves as the vice chairman of SUN Group after previously leading Morgan Stanley’s activities in India. Christoph Wolff is CEO of Smart Freight Centre, an international nonprofit focused on emissions accounting and reduction in freight. Prior to his current role, he was the global head of mobility and a member of the executive committee at the World Economic Forum. Both shared insights on the hurdles that must be overcome to draw capital to the mobility transition.
McKinsey: Why are there so few large-scale projects in zero-emission mobility that can attract private capital at scale?
Uday Khemka: The existing system built around fossil fuels has been in place for more than 100 years. In response to climate imperatives, we need to implement a new system in ten years. This is extremely complex and challenging. Investors like simple routes to creating multiples and investment returns, and there is a fundamental contradiction between the interdependent complexity of a system in the midst of change and the simplicity required to derisk investment returns.
The capital has to flow from the private sector because the existing owners of transportation services, states, and federal governments just do not have that kind of capital. This is true in not only emerging markets, which require at least a trillion dollars of extra capital from developed countries every single year for decades, but also in Europe and the United States, where fiscal situations at the country level are not necessarily strong. The only way to replace an entire category of infrastructure is to move from an ownership model to a service procurement model.
That means somebody else has to own those assets—both transportation and charging infrastructure. So far, these assets have been funded in a very limited way, either by OEMs themselves or by high-risk private equity investors. It’s a question of the scale of capital as well as the cost of capital. If the cost of capital does not decline to a point where it more closely resembles infrastructure, it won’t solve the third problem, which is total cost of ownership [TCO] and up-front costs.
Governments play a critical role in providing the right regulatory framework, incentives, and coordination functions to drive derisking and ensure attractive TCO levels for an increasing share of use cases.
We currently have bottlenecks, where we don’t have enough deals, the right economics, or strong demand signals. So it requires an intervention to accelerate what would occur naturally over decades to happen through structured interventions over a short period of time.
The only way to replace an entire category of infrastructure is to move from an ownership model to a service procurement model.
McKinsey: When it comes to convening large-scale private capital deployments in the transportation sector’s mobility transition, who are the main stakeholders that need to be involved in developing a compelling value proposition for investors?
Christoph Wolff: It takes an entire village to move the needle, and the village consists of the following parties. On the supply side, manufacturers are currently producing diesel trucks. To transition resources and production systems, OEMs need to be convinced about the ramp-up and the scale of demand. So it’s a chicken-and-egg challenge.
On the demand side, the carrier space is more or less fragmented. In North America, a significant share of the overall demand is handled by big carriers with thousands of trucks. In Europe, the share of those fleets is lower. Emerging markets have few fleets with more than a hundred trucks. In a market as big as India, you can count them on two hands.
The carriers act on behalf of shippers. Over the past ten years, shippers have increasingly outsourced their fleets to third parties. They’re interested in reducing Scope 3 emissions, but at the end of the day, they know they have to bring their contractors on board in a competitive market.
The mobility transition requires a systemic shift: not just replacing fuels but moving to a different power base, which is electricity. Charging stations are the gas stations for electricity. That’s a business model in its own right.
Grid operators are also part of the ecosystem. A charging station capable of accommodating 50 trucks at the same time is a massive factory. So you need to have the right power supply and the grid reinforcements in the right places.
All of these elements need financing. But for the finance sector, this is a new asset class. Investors don’t quite understand it. They will look at the risk and say, “If things go wrong, we don’t want to be at the end of the chain.”
The policy makers are also a stakeholder because they need to put the pressure on everybody to move to a different system. All need to work together to make this complete shift happen over the next 15 to 20 years.
McKinsey: Which mechanisms have proved to be effective in attracting finance to large-scale mobility transition projects and making them viable in the long run?
Uday Khemka: We see at least three key elements: the private sector, from OEMs to operators; government; and investors. These three groups have to coordinate deliberate, time-bound derisking efforts to accelerate this revolution.
I’d argue there are five stages in the derisking process. The first is for government to create extremely clear and consistent regulatory or fiscal signals. We’ve seen various governments change their targets.
The second stage is working with the private sector—transportation OEMs and fleet operators as well as investors. Take bus transportation: a public entity procuring long-term bus services is analogous to procuring power from an independent producer. Just as the independent-power-producer revolution was premised upon power purchase agreements based on pay-per-use models, mobility purchase agreements could be set up similarly. This could be facilitated by the creation of standardized instruments to diminish and quantify the risk in long-term procurement contracts.
The coordination of OEMs, operators, governments, and investors is necessary for actual deployment. For example, by bringing together power producers and distributors with transportation service providers, individual routes can be mapped. A freight transportation service provider using electric trucks knows there will be power on that route, and the infrastructure company investing in the route knows there will be demand for electricity. This coordination requires convening around individual large-scale project corridors down to the local level. Of course, government has a huge role to play by providing infrastructure, financial incentives, and permitting.
The third stage is demand pipeline development. Operating players may not have the capabilities to build investment cases that are aggregated at sufficient scale in order to reduce their cost of capital. Assistance with pipeline development can be extremely important.
The next stage is blended finance, which can best be done when stages one, two, and three are in effect. The fifth stage is the syndication of the deal flow to project investors, corporate investors, programmatic investors, and investors in developed and emerging markets. No function currently exists to do this appropriately. All five of these stages could be complemented with a sixth stage focused on lowering the gap between real and perceived risk, which is particularly relevant for developing countries.
In Scotland, a relatively small market, the government convened all sectors to coordinate policy for electric buses. Similarly, India brought together large-scale demand aggregation plus regulation for electric buses. Most important, it was done in consultation with the private sector, finance, and government at various levels. Such projects require an infrastructure mindset and a high degree of coordination to deliberately derisk. And they need to be done at a much greater scale and with a greater degree of ferocity.
We need teams with a focus on transport electrification that understand the risk and see the opportunity. We can then move toward a core offering from the finance sector
McKinsey: In your time at the Smart Freight Centre, have you come across successful examples of convening mobility transition finance projects?
Christoph Wolff: We are trying to get to a level of projects with 100 trucks, 500 trucks, or 1,000 trucks. In India, for example, there was a joint announcement across 28 shippers and carriers to deploy roughly 10,000 e-trucks over the next five years. This agreement is divided into tranches of 500 to 1,000 trucks at a time. They collaborate with, among others, finance-as-a-service providers, truck-as-a-service providers, battery-swapping companies, and battery-as-a-service providers, to address financial and technology risks. These arrangements have the potential to unlock this opportunity and mitigate asset risks for private companies.
In Europe and the United States, we have increased collaboration on more-sophisticated use cases. We are working with the Port of Rotterdam and some of the shipping lines on electrifying port drayage for transport between ports and nearby distribution warehouses. This requires large depots where trucks return at night. It is actually a lot simpler than open-loop and corridor-based use cases.
The United States DOE [Department of Energy] supports the development of a network of heavy-duty-truck corridors, some of them with 10,000 trucks a day in both directions. The Smart Freight Center is working with progressive shippers on selected e-truck corridor pilots, especially in the form of long-haul round trips with the aim of achieving TCO parity with combustion-engine trucks. TCO is largely dependent on the circulation patterns, not only on the up-front capital. The aggregation of volumes to more than 1,000 trucks creates sufficient scale to attract asset owners and investors, which could offer e-truck fleets to shippers in the form of a truck-as-a-service model.
Any remaining risk should be covered by first-loss guarantees from specialized lenders or insurance companies. Overall, it’s less a technology challenge than an economic and coordination challenge.
McKinsey: What are three wishes you have for scaling promising use cases?
Uday Khemka: Well, my most important wish is a global multilateral institution around systemic derisking. It would be a global body with branches in individual countries that are trying to derisk in emerging countries.
For instance, a Senegalese sustainable transport derisking center would report to the office of the prime minister of the president because it would need to coordinate across ministries of transportation and power and many others. These institutions would then be sponsored at the highest level by all governments that are committed to this journey. Government’s function would be to coordinate these multistakeholder action-oriented dialogues to create the right regulations, financial support, coordination of route sectors, projects, and aggregation of demand.
Other wishes are then to figure out the kind of support required from the global community to provide financing for southern derisking efforts. Northern government support is very important if emerging countries, where the bulk of the world’s population and infrastructure will be in the next 30 years, are to catch up. I’m going to limit my wishes to these two big ones.
Christoph Wolff: My first wish is for the finance sector to be more engaged. Transport contributes 25 percent of global CO2 emissions, and heavy transport is around a third of that—about as much as the steel or chemical industry. We need teams with a focus on transport electrification that understand the risk and see the opportunity. We can then move toward a core offering from the finance sector.
The second wish involves the policy makers. In the European Union and United States, it’s important for policy makers to stay on course and serve as an example for other leaders in huge countries.
The third wish is for the supply and demand sides to work together on concrete projects. When that happens, shippers could see the necessary policy, finance, and technology are all there. Once we figure out where we have critical mass, we could then actually work together on pilots and then use cases of scale. That could break the chicken-and-egg dilemma.
