Electric vehicles ready for prime time
Are subsidies for EVs value for money?
Governments have brought in subsidies to boost the sales of electric vehicles. But are they really justified?
Subsidies are always contentious. Demanded by manufacturers and consumers, they are handed out somewhat grudgingly by governments. The purpose of subsidies is not always transparent, frequently serving several policy goals, often well devolved from the apparent market.
The subsidy granted to purchasers of electric vehicles (EVs) is currently £5,000 in the UK and £5,000 in France. But is this handout justified? And how does it serve policy targets of reducing oil dependence, greenhouse gas emissions and air pollution?
A recent paper from the International Transport Forum at the Organisation for Economic Cooperation and Development (OECD) looked at the French EV market to answer just those questions. Whilst its conclusions came as no surprise, they offer a vital benchmark for future policy decisions.
"There is always a question when it comes to industry-based subsidies as to whether they represent good value for money and what it is that requires the state to inject money into a sector that does not usually require state aid," report author Philippe Crist says.
The report found that the more miles driven in an EV directly equates to better value. The basic cost of an EV to a consumer is £4k to £5k more to its owner than an equivalent fossil-fuel car over the vehicle's lifetime, but because of greater travel distances, an electric delivery van costs '4k less than a fossil-fuel van over its lifetime.
Electric vehicles have gathered renewed interest in recent years as concerns about energy security, climate change and air pollution have motivated governments and manufacturers to consider alternative transport energy pathways. Recent estimates put the global electric vehicle fleet at over 120 million units, primarily electric bicycles and scooters in China, with the most popular electric car models achieving global sales of approximately 44,000 units in 2011. These numbers are likely to pick up as more electric cars become available commercially but questions remain regarding consumers' ultimate uptake of battery electric cars.
The current generation of electric cars represents a significant improvement over previous ones. Nonetheless, electric vehicles remain more expensive, and may need state assistance to trigger widespread uptake.
The study focused on France and three twins of EV and petrol-driven vehicles. "The reason we looked at France was purely that we had commercially-available vehicles that were almost identical between the internal combustion platform and the electric platform," Crist explains. "The Kangoo and the Fluence both have combustion engine counterparts, while the Zoe has no perfect match, but based on the weight and characteristics we matched it to another vehicle in the company's range."
As with the country choice there was no other reason to select all the vehicles from Renault other than a perfect vehicle fit for the study. Although cars such as Mitsubishi i-MiEV and Nissan Leaf are commercially available they do not have a petrol equivalent for comparison. "It was interesting to use these vehicles as we know the commercial parameters, which are readily available, so we knew what the prices faced by consumers were as well as the tax and fiscal situation."
Crist admits the findings were not radically new or different from what many commentators have been saying. "Because these are early products in the market the learning cost curve hasn't come down yet so you have not benefited from economies of scale: you have high cost for the platform and high cost for the battery, which is balanced against lower running costs. We wanted to see how far it got you with regards to the lifecycle costs for the consumer.
"Then we looked at what a societal cost might be with regards to taxation - although it must be remembered that some of these costs are simply transfers."
As Crist admitted, the outcomes were somewhat expected; the key technology is the battery, and getting the cost down is essential. The sensitivity of costs to daily travel distance underscores a clear tension in electric car markets. The further an EV travels every day, the more attractively it compares to a similar fossil-fuel model. Yet most electric cars are currently constrained by their travel range - significantly so in adverse climatic and traffic conditions. Increasing range requires increasing battery capacity (or swapping the battery) which increases costs and thus erodes the attractiveness of EVs over fossil-fuel cars.
With the current market conditions there is already a reasonable value proposition for electric vehicles if they do enough mileage. "The lower amount of money that you pay for every kilometre travelled in terms of energy costs for the EV at some stage overcomes the additional cost that you had to pay up front for that vehicle and its battery," Crist says. "If you are driving 90km a day, five or six days a week, whether it's in a van operation or car there is already a market case for that.
"There is a secondary questionwhat is your back-up to taxes? It is not as clear there, but there is certainly a consumer case for high-travel electric vehicles. The question that can reasonably be asked then is that, if this is the case, what is the rationale for the state paying to incentivise people to buy those cars? It is not because they want to incentivise those people to buy the cars, but they want to incentivise people who travel less and for whom it may be less of an obvious choice right now. The reason they want to do that is to give an additional boost to the early market; that is not unique to the transport sector or even the automotive sector but the rationale needs explaining."
The 'early-shift' rationale stresses that not only is government intervention in EV markets necessary, on a sometimes large scale, but that society benefits due to a reduction of the oil import bill (with knock-on productivity effects throughout the economy). An alternative storyline might highlight the elevated up-front opportunity costs of reducing energy dependency and greenhouse-gas emissions via electric cars as opposed to advanced internal combustion-engine vehicles and hybrids.
Comparison of fossil-fuelled vehicles and electric cars is not always easy, as conventional cars rarely have equivalent electric counterparts. Several models marketed in France do however exist in both fossil-fuel and electric versions, built on essentially the same body and offering similar comfort levels. Because of the small set of vehicle pairs studied, the OECD's findings can only really be taken as an indicative snapshot of the relative costs of electric cars, though many of the lessons derived from the analysis should be applicable elsewhere.
Each electric car costs society £7,000 to £12,000 more than its fossil-fuelled equivalent over its lifetime. The report ignores taxes on fuel and energy security benefits, but includes subsidies and accounts for air-pollution. This additional cost represents what society is willing to pay in order to promote electromobility - putatively to reduce the carbon intensity of transport.
So what are the CO2 reduction benefits of purchasing and operating an electric car instead of a conventional car? Research has shown that electric passenger cars under typical use scenarios emit about 20 tonnes less CO2 than their closest fossil-fuelled equivalents which translates into a societal cost of around £500 to £700 per tonne of CO2 avoided. This is somewhat higher than many other measures to reduce CO2 emissions, even within the transport sector.
Electric vehicles already promise financial savings for certain operators without subsidies. These includefleet vehicles that have predictable daily travel patterns and can be charged on-site at night; shared-car systems where daily travel distances and recharging frequencies are elevated; urban delivery vehicles; and taxis (if range allows).
If there is one characteristic of current electric car markets, it is uncertainty. "Overcoming this uncertainty is the rationale for government intervention," Crist says. "Some commentators argue that the costs of intervention will be more than compensated by future savings (on reduced oil imports and avoided environmental costs). Others suggest that high levels of government support for electric cars diverts attention from other, possibly more cost-effective investments. Are direct purchase subsidies for electric cars a good bet for society?
"Our analysis does not conclusively answer that question but cautions that in those cases where electric cars already compare favourably to fossil-fuelled vehicles, subsidies may be superfluous and that where they do not compare favourably, the onus is on demonstrating that subsidies represent value for money."
Comparison: How different governments subsidise EV uptake
Austria: £800 (around $1,120) in annual bonuses. Exempt from the fuel consumption tax, levied upon the first registration, and from the monthly vehicle tax.
Belgium: Personal income tax deduction of 30 per cent of the purchase price including VAT of a new electric vehicle, up to '9,190. Tax deduction up to 40 per cent for investments in external recharging stations publicly accessible, to a maximum of '250.
Czech Republic: Business-use EVs and hybrid exempt from the road tax.
France: A premium of up to £5,000 for the purchase of new cars, hybrid and EV.
Germany: Electric vehicles and plug-ins are exempt from the annual circulation tax for a period of five years from the date of their first registration.
Greece: Electric and hybrid vehicles are exempt from the registration tax.
Ireland: £5,000 discount of electric cars.
Italy: Electric vehicles are exempt from the annual circulation tax or ownership tax for five years from the date of their first registration.
Norway: Exempt from all non-recurring vehicle fees, including sales tax. Electric vehicles are also exempt from the annual road tax, all public parking fees, and toll payments.
Monaco: Buyers of EVs and Hybrids receive up to $12,000.
Romania: Government grant of up to 25 per cent or £5,000 for scrappage scheme.
Spain: 25 per cent of the purchase price, before tax, to a maximum of £6,000 per vehicle.
India: provides a subsidy of 20 per cent on the ex-factory price or Rs100,000, whichever is less.
US: The tax credit for new plug-in electric vehicles is worth $2,500 plus $417 for each kilowatt-hour of battery capacity over 4kwh, and the portion of the credit determined by battery capacity cannot exceed $5,000. Therefore, the total amount of the credit allowed for a new PEV is $7,500.
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