Should we be worried about the end of EV purchase grants?

 In Electric Cars, EV Industry

The upfront cost of electric vehicles (EVs) is considered the main obstacle to potential consumers. As a counter, many governments have introduced purchase incentive programs which reduce the purchase price and thought to be the most effective tool to increase EV growth.

However, purchase incentives cannot last forever. The UK has been one of the first to reduce the cash value of their EV inventive. The question is whether will other governments follow suit? And, will the reduction or abolishment of EV incentives matter at all?

EVs suffer from high upfront costs

The current generation of EVs has relatively high upfront costs in comparison to its internal combustion engine (ICE) counterparts. The main contributing factor is the production of the battery pack. However, this cost is declining. In 2010, the price per kilowatt-hour (kWh) was more than $1,000. In today’s market, the same per kWh is reported to cost around $200.

Source: Union of Concerned Scientists

The price per kWh is expected to continue to fall. First, because of technological improvements, there has been considerable performance improvements in Lithium-ion batteries, adding capacity while reducing costs. And second, as mainstream OEMs ramp up battery production, the industry will begin to benefit from economies of scale. Experts predict they will need to reach below the $125-$175 per kWh to be price competitive with ICE vehicles. But, given the pace of technology, this could occur much sooner than many expect.

Why purchase incentives are important

Purchase incentives, i.e., a grant or tax credit to reduce the upfront cost of a vehicle is deemed the most effective policy in encouraging EV uptake.

For example, the U.S federal government offer an incentive of up to US$7,500. States also provide incentives, in California residents can get up to US$7,000 off the EV purchase price. In Canada, incentives are currently only available at a provincial level in British Columbia and Quebec.

Source: FleetCarma

Interestingly, Ontario recently abolished an incentive of up to C$14,000, and with strong growth in the region, it will be interesting to observe the impact of removing the incentive on future EV sales.

Notably, Norway is the market leader of EVs, arguably as a result of generous incentives. For example, EVs are exempt from VAT which accounts for 25% of the total cost. Therefore, it is no surprise that this incentive along with others has led to a 39 percent market share.

The tax exemption in Norway is expected to end in 2020. A replacement is likely, but whether the full exemption will remain is still unknown. Notably, Norway has tightened its belt with other incentives. For instance, the company tax reduction went from 50 to 40 percent. Until recently, Battery-electric vehicles (BEVs) were exempt from Ferries; a 50% reduction is now in place.

The UK reduces the EV grant

The UK has recently reduced the available EV purchase grant from £4,500 to £3,500. Furthermore, the subsidy for plug-in hybrids is no longer available. In a recent press release the UK government claim that the hybrid market has become more established, and now the focus is on pure electric and hydrogen fuel cell vehicles, in support of the Road to Zero Strategy.

Many criticize the move. Research tells us that purchase subsidies are amongst the most effective incentive in EV adoption. And, while it’s understandable that public spending pressures exist, a reduction or total abolishment of the UK grant could slow or even stall EV demand in the future.

Other countries or regions may follow, like the case of Ontario, Canada. But, there is a time and a place. In the coming years, EVs will reduce in price, mainly as a result of cost efficiencies with battery packs. Tesla’s Model 3 is one of the first game changes regarding price point coming in at US$41,700 pre-incentive. Notably, sales have been impressive over the first eight months of 2018. Signaling price consumers are willing to pay.

Nonetheless, it emphasizes the likely trajectory of incentives. The value of incentives will fall. However, as EV prices fall, a smooth transition without affecting EV demand is possible. The critical question, when is the right time to make incentive adjustments?

EV upfront cost anxiety

A competitive price point is essential. But, operators overweigh the purchase costs. EVs offer various benefits in operation over its lifetime. EVs are cheaper to run. Equally, it is likely they will be easier to maintain given the much-reduced number of moving parts.

Technologies such as vehicle-to-grid (V2G) offers operators a potential stream of revenue. Further to this, the industry is beginning to understand the value of used batteries outside of the vehicle. Notably, current uses include stand-alone units for storage and deployment, and repackaging for further vehicle use. Therefore, a longer-term view will help highlight the true costs of EV ownership.

Why Telematics help save on operational costs

Telematics is a must-have for vehicle fleets. It provides operators with the tools to fully engage with the operational side of fleet management, thus become more efficient and help reduce costs.

For instance, Telefonica, the mobiles and telecommunication company claimed that Telematics saved fuel consumption by 10%, reducing costs and carbon emissions. Moreover, Toromot CAT, a heavy equipment dealership, said that improving the route planning allowed the firm to increase fleet size by 18%, while at the same time reducing overall fuel costs by 4%.

In sum, EV purchase incentives are a temporary measure to reduce the relatively high upfront costs in comparison to its ICE counterpart. As prices fall, incentives will gradually faze out. In the case of the UK, reducing incentive amounts is a counter-productive move, especially when purchase incentives are known to be the most effective in promoting EV growth.

Nonetheless, the current frustrations of cost price, should not be overshadowed by the long list of operational and afterlife benefits which can help increase life-cycle efficiencies, and reduce overall costs.

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