Government’s EV incentives undermine market

The government’s approach to encouraging wider take-up of EVs is failing in its objective of stimulating consumer demand, according to politicians, senior industry executives and analysts, amid warnings that if current policies are not revised, there is a risk they will “kill” the domestic automotive industry by distorting the market.

In February, the House of Lords published its report ‘EV strategy: rapid recharge needed’. Pointing out that EVs currently make up only 3% of all cars on the roads, peers called for the government to tackle the disparity in upfront costs between electric and petrol and diesel cars, by introducing targeted grants to support consumers buying affordable models.

The committee also wanted to see “turbo-charged” efforts to increase the charging infrastructure and said the government should equalise VAT rates for domestic and public charging.

In its response, published in late April, the government maintained that incentivising the purchase of EVs did not represent value for money, despite its recent extension of the benefit in kind rules for company car fleets.

The government also rejected the committee’s proposal to equalise the VAT differential between public and domestic charging by reducing the 20% VAT rate applied to public charging to 5% in line with domestic electricity, claiming this would put additional pressure on the public finances.

The House of Lords report was critical of the government’s messaging around EV adoption which, along with concerns around the charging infrastructure, it identified as a key reason that individual car buyers are reluctant to make the switch.

ZEV mandate

A key plank of that strategy is the UK’s zero emission vehicle (ZEV) mandate. This came into force on 1 January and requires 80% of new cars and 70% of new vans sold in Great Britain to be zero emission by 2030, rising to 100% by 2035. It stipulates EV sales targets which increase each year, starting at 22%, and rising to 28% next year.

This approach has come under fire from Stellantis CEO Carlos Tavares (pictured) in a recent visit to the UK. Tavares said the regime was set at “double the natural demand of the market”, forcing manufacturers to push cars into the market, meaning they would end up selling vehicles below cost in order to avoid fines. “To survive, companies have to stay in the black. I will not sell cars at a loss,” he stated.

While he accepted the ramping up concept, Tavares branded the regime as designed as “a terrible thing for the UK. The problem is the magnitude. You have a mandate that is going to kill your industry.”

As alternatives, Tavares suggested either combining the passenger car ZEV mandate with light commercial vehicles, which would give manufacturers more flexibility about how they met the necessary targets, or allowing them to include UK-models made locally in their ZEV sales.

Drop in volume

Meanwhile Cox Automotive’s Q1 report shows the UK car market got off to a strong start in 2014, with registrations up by 10.4% year-on-year, but cautions that “ questions remain about the ZEV mandate’s effect on the sector.”

Its research underlines the fact that “steadfast support from fleet operators has played a crucial role in driving the transition to an electrified market and the recovery of sales volumes. These advancements would undoubtedly be less substantial without their continued backing.”

Private registrations are 8% lower than the figure year-on-year, which Cox Automotive attributes to consumer doubts about the transition to electric, perhaps fuelled by EV affordability and infrastructure fears.

And one big unknown is the impact of the ZEV mandate. While manufacturers can avoid the hefty per-car fines in a few ways, including borrowing a limited number of ZEV “allowances” until 2026, that borrowing is capped and comes with a considerable 3.5% annual interest fee to motivate compliance.

However, Cox Automotive is warning that one way to achieve the 22% figure is to simply reduce volume in the UK market.

Philip Nothard, insight director at Cox Automotive said: “With the UK’s ICE ban deadline U-turn, a palpable lack of help for the sector in the most recent budget, such as the Government addressing the VAT discrepancy between domestic and public charging, it may well be that an unintended consequence of the ZEV mandate could be a drop in the supply of new vehicles.

“Manufacturers looking at the UK market may change tack and opt to put their cars into less stringent markets in other parts of the world,” he argued.

David Betteley, Asset Finance Connect’s (AFC) head of content, said: “The government is proving deaf to expert advice on the critical challenge of encouraging EV take-up. We have already seen a similar pattern with regulators ignoring how markets operate, most notably the FCA’s intervention with its review of discretionary commission arrangement in the motor finance sector. While the intention was to minimise the impact of any compensation claims, the result has been high street name lenders forced to set aside millions of pounds in contingency.

“And while the government continues to incentivise fleets to adopt EVs, its attempts to support private buyers to do the same are set to disrupt the market as manufacturers simply make fewer vehicles available in order to avoid punitive measures.”

Government policy, EVs and regulatory developments are among the topics under discussion at the AFC UK Conference Summer 2024 which takes place at etc.venues, County Hall in London on the 6th June 2024.

Visit the AFC UK Conference Summer 2024 website at https://afcconferenceuk.com/assetfinanceconnect2024/en/page/home for more details and to book your tickets.