Rise of alternative fuel vehicles rewrites the rules of auto finance

Growing demand for alternatively-fuelled cars, particularly hybrids and electric vehicles, is reshaping the traditional vehicle depreciation curve that has underpinned asset valuations for decades.

In the UK, industry experts say the changing vehicle mix will alter assumptions about how vehicles are valued now and into the future, which may require changes to financing models, particularly in sectors such as leasing.

Growing demand for the limited supply of used electric vehicles that are currently available is pushing up prices, so that cars are appreciating in value instead of depreciating.

Post-automotive battery values

Even when vehicles reach the end of their useable life, the valuation of assets is changing.

Andrew Mee, senior forecasting editor at cap hpi, told the recent International Auto Finance Network conference that the traditional vehicle lifecycle, in which a car eventually depreciates to the point it has little value, will no longer be relevant for zero-emission capable vehicles.

He said: “The potential is there for a change in the way we value vehicles. A battery-electric vehicle contains a significant value element, the battery itself, which will have a life beyond that of the vehicle.

“Consequently, the value methodology will need to change. We will need to value the vehicle and the battery and forecast the future value of both.”

The battery will retain its value because of potential post-automotive uses, such as the home and commercial battery sector. This will expand rapidly as the available volume of used batteries increases and new applications are developed.

However, just as with a traditional car, service history will be important, as the way a battery has been treated can impact on its future performance.

This will require a history of its in-vehicle lifecycle, such as any very low voltage incidents, overcharging or being subjected to extremes of temperature.

A record of battery use will support a new valuation methodology for vehicle assets, which includes the value of the post-life batteries.

With future technologies, such as hydrogen-powered fuel cell vehicles, there will be further changes required when valuing used vehicles.

Jon Hunt, manager, Toyota and Lexus fleet marketing, told a meeting of the Vehicle Remarketing Association recently that hydrogen-powered cars provide an example of how the vehicle valuation model might have to change.

He said: “In the case of a hydrogen fuel cell vehicle, the traditional residual value model no longer applies as, unlike combustion engine or battery power trains, the fuel cell does not wear out, extending the life and value of a vehicle with relatively low-cost cosmetic refurbishment.

“As the vehicle also has all the advantages of quick refuelling and zero emissions, it is the most convenient and future proof technology available.”

Drivers of demand

According to automotive technology company Sophus3, positive factors that are encouraging people to start driving EVs include battery and range improvements, a greater choice of vehicles on offer, and a convergence of the total cost of ownership for an EV with that for a conventional internal combustion-engined car.

However, the EV customer’s buying journey shows a greater hunger for information, via online research, and practical experience obtained through test drives.

Tax and cost considerations are high on their priorities, so the retention of government grants and incentives is key to maintaining market demand in both the new and used sectors.

Scott Gairns, Sophus3 managing director, said: “2018 will see a fundamental shift in attitudes towards electric vehicles, from politicians, manufacturers and consumers.

“Understanding behavioural attitudes as consumers research, and increasingly buy, online will be key to leveraging all opportunities.”