Future demand for both electric vehicles (EVs) and the associated electric vehicle supply equipment (EVSE) will, of course, be driven by the increased adoption of electric vehicles by individuals and commercial fleets. This ARC Strategy Report will explore why the economics of EVs prove particularly favorable for fleet operations, focusing on full-battery, as opposed to plug-in, hybrid electric vehicles (BEVs vs. PHEVs).
Many of the advantages that BEVs bring apply to private as well as commercial use cases. However, low annual mileage and the time-value of money mean that, without subsidies, BEVs don’t currently make economic sense for all individual consumers.
Though the prospects of private BEV use are improving rapidly, those for commercial operations are already favorable. Electrification announcements from UPS, Uber, and Alphabet’s Waymo have made headlines, and ARC Advisory Group believes that the strong economic case will continue to drive this transformation. EVSE suppliers have an opportunity to position themselves at the crest of this wave — becoming valued partners for the new electrified fleets.
Summary of key findings:
- Electric vehicle technology has made significant progress; EVs provide certain operating advantages over fossil fuel vehicles.
- Considering vehicle use patterns, fleets can benefit most from electrifcation.
- Firms are beginning to electrify their fleets and both environmental regulations and increasing consumer awareness will continue to drive the trend.
- A shift toward shared forms of transport and greater urbanization mean fleets in general are set to expand.
- Automakers are developing new EV programs and investing in continual improvements.
- Electric fleets require different charging equipment/services. Makers of EVSE should pay attention and get ahead of this trend.
Electric Vehicles vs. Internal Combustion
For the past decade or so, battery electric vehicles could mainly be found in the garages of technophiles and gearheads. Though offering obvious environmental benefits over vehicles powered by internal combustion engines (ICEVs) as well as plug-in hybrids, BEVs were low-range, more expensive, and not quite ready for practical use. The relative scarcity of charging infra-structure did not help their case either.
As of this writing, however, BEVs are elbowing their way into the main-stream. There are a few reasons for this.
Full Electric Range
Low range has long remained a red mark against BEVs, making these vehicles impractical for many private commuters and fleet operators alike. However, due to relentless R&D, the price of lithium-ion batteries fell by nearly an order of magnitude between 2010 and 2018 (see figure). New battery technology allows today’s high-range BEVs to travel several hundred miles on a single charge.
Going forward, battery suppliers have announced massive expenditure to build out capacity and invest in further cell improvement. The industry is racing to increase energy density, lower costs, and improve thermal stability. Another priority is reducing reliance on cobalt, a serious ethics and supply chain liability; with Panasonic claiming to be developing a cell completely free of the problematic metal.
Lower Energy Costs
Electric powertrains have lower energy costs on a per-mile basis than internal combustion engines. They tend to convert energy into motion more efficiently, with today’s BEVs attaining the miles per gallon equivalent (MPGe) of around three times the MPG of their traditional counterparts. Electricity and gasoline prices vary significantly by region, with some countries imposing heavy taxes on transport fuel. The figure below draws a comparison between both powertrains’ per-mile energy costs using standard efficiencies and energy prices from cities in three major EV markets.
Beyond enjoying lower energy costs, BEVs have fewer moving parts than fossil-fuel powered ones and forgo liquid fuels entirely. BEV owners do not need to replace or worry about:
- Oil changes, oil filters
- Spark plugs, wiring, ignition coils
- Muffler, timing belt, catalytic converter, air intake filters
- Fuel filters, fuel injector cleaning
- Engine sludge
- Emissions checks
Furthermore, BEVs make use of regenerative braking when possible, so their friction brakes tend to wear out half as fast as those of ICEVs.
But Won’t My Battery Give Out?
A BEV owner does need to be mindful of his or her lithium-ion battery. Over time, these lose charging capacity and need to be replaced — potentially costing thousands of dollars.
Fortunately, data from drivers of Toyota PHEVs as well as Tesla and Chevy BEVs point to significant battery resilience, with Tesla Model S drivers reporting capacity degradation of just 10 percent after 100,000 miles (see figure on following page). Going forward, improvements in battery design and the adoption of good charging practices will further help mitigate this issue.
BEVs are expected to last a long time thanks to their simplicity and lower number of moving parts. For this reason, an owner may find that when a battery does eventually wear out, it may make sense to replace it instead of buying a new vehicle. Furthermore, since grid/building operators are making use of Li-ion batteries to improve power quality and better integrate renewables, the residual value of a lower capacity BEV battery is expected to be far larger than the scrap value of an entire ICEV. Of course, private owners tend not to keep their vehicles long enough to benefit from this, but in high-usage fleets, full vehicle life can be reached within just a few years.
Are They Worth the Price?
Despite constant improvement, BEVs remain more expensive to purchase than their ICEV counterparts. This higher upfront cost, however, can be outweighed by lower operating costs (fuel, maintenance) throughout the life of the vehicle. In addition to lowering operating costs, the higher efficiency of BEVs means less emission of greenhouse gases. As more governments introduce carbon taxes, BEVs will become still more competitive. Furthermore, as a region’s electric fuel mix becomes cleaner, BEVs advantages here will amplify. These operating efficiencies, augmented by a variety of government subsidies/perks available in different regions, mean that BEVs now make sense for many consumers.
Electric Fleets to Benefit Most
Since the main financial benefits of EVs come in the form of lower operating costs, it follows that higher-mileage fleet applications will benefit more than personal use.
Comparing Cost of Ownership
When making procurement decisions, it is useful to compare differences in total cost of ownership (TCO), which is driven by acquisition and operating expenses as well as salvage price, all discounted appropriately for the entity’s opportunity cost of capital or discount rate.
The calculus of TCO suggests that an electric vehicle’s advantage in operating costs can be easily offset over time by a higher purchase price, even if this initial advantage is rather sizeable. It follows that EV users with high utilization rates offer the strongest business case for adoption.
Fleet usage, with much higher utilization rates than the typical private vehicle owner’s, makes fleet acquisition financially a much more compelling solution – even with the added acquisition cost of an EV over an ICEV. Private EV owners would take decades to fully utilize their vehicle, (and would likely want a replacement long before that anyway), meaning their TCO would skyrocket over the years. Ride-hailing, car-sharing, delivery, and city bus fleets can make the most of their vehicles’ lifespans and amplify the EV operating cost advantage, thus recouping their large capital in-vestment quickly.
The two figures on the following page compare how the present cost of ownership changes throughout the life of both a high-use and low-use vehicle in both an electric and traditional fleet. Immediately following procurement, the ICEV cost is lower for the high-use vehicle, but as higher operating costs accumulate, the BEV becomes more economical. In the case of low-use private vehicles, the smaller annual operating cost advantage of BEVs may not prove sufficient to overcome their opportunity cost of capital, and certainly not until the very end of a vehicle’s life.
- Executive Overview
- Electric Vehicles vs. Internal Combustion
- Electric Fleets to Benefit Most
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