How will the delay on the ban on ICE manufacture affect the UK fleet industry?

Summary

Background to the move from ICE to BEV

The average retail price of a battery electric vehicle (EV) in Europe far exceeds (75%) the cost of buying an EV in China, with prices in the first half of 2022 costing €32,000 in China compared to €56,000 in Europe, increasing substantially to €67,000 a year later, while prices in China went down to €31,000.

The cost of buying an EV in Europe is 146% more expensive than buying the cheapest combustion vehicle in Europe, whilst in China the cheapest electric vehicle is 8% cheaper than the cheapest ICE car.

As we can see from these figures, the big overriding issue with BEVs in the UK is the price, both to buy a new EV and run them.

In the UK, the EV market is further distorted by subsidies, unfair competition from China, and through ill-thought regulation and personal tax policies, for example, Benefit-in-Kind (BiK).

Many in the UK would argue that there has been a rush to ban petrol and diesel cars. This was first scheduled for 2040, before being brought forward to 2035 in February 2020. Later in 2020, the then Prime Minister Boris Johnson announced that the UK would stop the sale of new ICE models from 2030 and that only zero-emission cars could be sold as new from 2035. In 2023, the current Prime Minister Rishi Sunak pushed the date back to 2035 for the ban on new ICE vehicles.

And with a general election on the horizon and the possibility of a new government before too long, there is so much confusion surrounding the move to zero emission vehicles.

In our recent Asset Finance Connect webcast, sponsored by Bynx, AFC head of content, David Betteley, spoke to a panel of auto experts to find out how the UK fleet industry is coping with the constant political changes.

UK fleet industry

DriveElectric’s CEO Mike Potter noted that corporates are driving sales of EVs through leasing, while the affordability issue of EVs has hit private sales and micro-business leasing.

New car registration figures for November 2023 from the Society of Motor Manufacturers and Traders (SMMT) highlighted the overwhelming dependency on fleet registrations for growth in the new EV market. Of the 24,359 new BEVs reaching the road in November, 77.4% were taken on by fleets and businesses.

Andrew Jago, General Manager of Fleet and Business at JLR UK agreed that currently three in every five BEVs is sold to a fleet end user, highlighting that less than one in five BEVs are sold to the private segment.

Looking at tax benefits, it is evident where the market pull is. While there is not much certainty in the auto industry at present, fleets are looking to the BiK outlook, confirmed until the 2027-28 tax year, to give the industry a degree of certainty in terms of being able to plan forward and enable fleets to make those changes towards net zero.

Increasing acceptance and adoption of BEVs can be seen in the figures above with fleets moving in this direction, as seen in everyday use cases with increasingly higher mileage in EVs.

The government’s announcement to delay the deadline to ban the manufacture and sale of ICE vehicles to 2035 has not had much impact on people’s decision to go electric.

From a retail perspective, Ian Plummer, Commercial Director at Auto Trader has seen no negative impact on the sale of EVs after the September 2023 announcement. However, a recent Auto Trader survey did highlight that 70% of people are confused about the ban, thinking that the ban on ICE vehicles covers both new and used cars, while 37% are taking on the negativity around electric vehicles and uncertainty over the ban and have decided that they are never going to buy electric.

From a fleet perspective, the Prime Minister’s announcement has had little effect on companies’ decisions to make the move to zero emission vehicles. The fleet sector is currently gearing up for the introduction of the ZEV mandate in 2024 which is driving the market for OEMs and fleets.

Toby Poston, Director of Corporate Affairs at the British Vehicle Rental & Leasing Association (BVRLA) sees an imbalance in the fleet market with two differing sides: one portion of fleet who are holding more BEVs than they can handle, alongside fleets who can’t really make a use case for transitioning to BEVs, particularly relating to electric vans, and are, in turn, worried about the ZEV mandate focusing on BEVs.

ZEV mandate

Owen Edwards, Head of Downstream Automotive at Grant Thornton UK LLP pointed out that there is only a handful of car manufacturers that will need to comply directly with the ZEV mandate, which will see manufacturers having to sell 22% of EVs in 2024, 28% in 2025, rising to 80% by 2030. This raises the issue that by the time you get to 2030 (80% EVs), there will only be 20% (approx. 450,000 units) of new vehicles that are hybrid or ICE, which will then be more costly to produce, raising a big question over economies of scale in the manufacturing process.

Whilst plug-in hybrid vehicles (PHEVs) are not a total leap forward like full electric, they are still a positive step, according to Plummer. The challenge that Plummer sees is that hybrids are not sufficient on their own as they only drive in EV mode for a limited amount of time and therefore still produce CO2 emissions: “hybrids are good but not good enough.”

JLR’s Jago sees plug-in hybrids as a “useful bridging strategy on the road towards full zero emissions vehicles.

Used BEV market

One area where retail sentiment is moving into the fleet sector, according to the BVRLA’s Poston, is in the used BEV market: “No one knows what the long-term prognosis of the used market is, whether it’s going to be a market failure or whether there will be a soft landing.”

Fleets are worried about the health of the used BEV market and concerned about the retail view of BEVs as they will have a number of vehicles coming into the used car environment in 2024.

There is a lot of confusion in the current auto market, with the biggest issue being whether the used car market is sufficiently capable of absorbing the volume of BEVs coming through.

Setting residual values on EV fleet contracts is difficult and a top concern for BVRLA members, according to Poston, as there is not the decade’s worth of data that is available for ICE vehicles. Many fleets are making losses on their EV portfolios, with a 20% year-on-year decline in used values of BEVs. The market has stabilised now due to parity with ICE equivalents, which has been assisted by some recent higher values on ICE vehicles.

However, looking to the future, it is still difficult to set residual values on EV fleets as continued turbulence on the downside will result in more conservative residual values leading to increases in lease rates making EVs even less competitive.

With the BEV market, higher initial costs and lower used car prices leads to a difficulty that the industry will have to contend with.

EV charging

Charging anxiety still exists in the UK, fuelled by negative media coverage. However, the AFC webcast panel are positive about EV charging with increasingly available charging infrastructure that is nowhere near as bad as depicted by the media.

According to Auto Trader research, many retail customers are happy with their charging experience both at home and public, with 8 out of 10 retail customers saying that they are EV ready.

While most people driving BEVs have confidence in charging at home and/or at work, JLR’s Jago believes that the challenge will be to make sure that there is sufficient charging capacity and availability to end users who don’t have access to off-street parking.

There has been large investments for funding charging infrastructure, with the UK government’s £950 million rapid charging fund helping motorways and major A road service area operators prepare the network for 100% zero emissions vehicles. This includes plans to ensure at least six rapid charge points at every motorway service station in England by 2023. The £450 million Local Electric Vehicle Infrastructure (LEVI) fund is also aiding projects such as EV hubs and on-street charging solutions, to alleviate regional disparities in charge point availability, while a £20 million pilot scheme will see 1,000 new charge points installed in areas where infrastructure is lacking the most.

The government has indicated that there needs to be another 300,000 new chargers for people who can’t charge at home, but there is concern that this target will bring in substandard, poor quality chargers and equipment. There also needs to be a focus on the right infrastructure in areas where it is needed the most. To ensure that any lingering charging anxiety goes away sooner rather than later, Edwards believes that a coherent strategy where public and private come together with sufficient funding from government and local authorities is needed.

There is also a differentiation in price between chargers, with a difference across networks which needs to be resolved and clarified. Public charger costs are significantly more than charging at home, while rapid charging prices can sometimes be the same or more than filling up with petrol or diesel. Currently if you must rely on public charging, the total running cost of a BEV is more than an ICE vehicle.

The BVRLA are currently lobbying on the use of the renewable transport fuel obligation, used in Europe, which is a credit that energy companies get for putting biofuels (includes electricity) into their system. The UK government is looking into it as a way of getting more infrastructure installed.

BVRLA’s Poston raised charging issues for fleet van users with accessibility problems leading to productivity issues: “As we move to a mass market environment, we are getting issues with depot bandwidths, connectivity and energy capacity in warehouses, issue that network operators and fleets will need to deal with.”

As mentioned in the BVRLA Future of Fleets Manifesto, there is a growing need for charging infrastructure for large vehicle fleets. More collaborative charging is needed with shared infrastructure by large EV fleets. The BVRLA are campaigning for government, local authorities and network operators to bring large fleets together for shared charging use.

Charging for fleets

Managing the cost of charging for a fleet with the different charging options that are available at home, work, and public is becoming easier with telematics and an increasing number of smart solutions now available, including the recently launched Rightcharge electric fuel card for seamless EV charging for fleets at home, work and at public chargers.

Plummer noted that increased investment along with more entrepreneurs coming into this area at the start of the journey, will lead to an increase in smart solutions.

Telematics and data

While telematics and data that are being produced by EVs can help with smart solutions to monitor the cost of charging for fleets, they also enable options for the measurement of Scope 3 emissions.

The fleet industry is slowly starting to trial fintech solutions to measure Scope 3 emissions, with the BVRLA piloting an ESG data reporting platform for the last year with Omnevue.

The partnership has helped prepare a growing group of forward-thinking BVRLA members for the disclosure regulations that are coming their way, specifically around CO2e emissions. Some of the data suggests that 99% of greenhouse gas emissions (CO2 particularly) in the leasing and rental market is Scope 3, from a combination of 20-25% that is embedded in the manufacture; 55% is the lifetime emissions of the vehicle once it has been de-fleeted/sold; and the remaining 20% is in life with the customer who is renting or leasing the vehicle. Fleets need to report on all three levels: embedded (before you own it), lifetime (after you sold it), and in use (while you own it).

The closer we get to monitoring Scope 3 emissions becoming law, the regulators will get increasingly involved setting more benchmarks. However, with increasing amounts of data and successful reporting platforms, monitoring Scope 3 emissions should become easier for fleets.

How will the government recover funds from lost fuel duty as the move to electricity gather pace?

The AFC webcast panel unanimously agreed that road pricing will not appear in the main political parties’ manifestos in the upcoming general election, as it is not a poll winner.

Auto Trader’s Plummer believes that, if the ZEV mandate works, there will be 6-7 million EVs on the road by 2030, but that still leaves 27 million ICE vehicles on the road who will still pay tax and fill up in petrol and diesel at the pumps, so the government will continue to raise funds from ICE vehicles in the future.

In the accompanying webcast poll, delegates identified road use pricing (39%) followed by the amendment of BiK rules (33%) as the most likely methods for the government to recover lost fuel duty and VAT.