Shifting Gears Of Electric Vehicles Economics
Vehicle electrification has been gaining momentum over the last decade. In a post-COVID world, there is increasing impetus by many nations and Governments to move to net zero carbon emissions, driven by the demands of customers, corporations, citizens, and shareholders alike. Furthermore, improving electric vehicle technology and significantly fluctuating & rising fuel costs, support an increasingly attractive business case to embrace green mobility.
India’s transportation sector is the country's largest source of carbon emissions today, accounting for 13.5 per cent of India’s energy-related CO2 emissions, with road transportation being responsible for 90 per cent of these emissions. Therefore, decarbonizing transport is central to achieving India’s net zero emissions target. We need to make rapid progress toward electrifying light-commercial vehicles, and heavy-duty vehicles like trucks and buses.
The adoption of electric vehicles is fairly visible in many emerging economies. However, it is imperative to understand the underlying vehicle economics to democratise electric vehicles. An accurate assessment of the economic efficiency of electric vehicles vis-a-vis ICE vehicles is the ‘total cost of ownership (TCO) which is the sum of all costs involved in purchasing, operating and maintaining a given asset during its lifetime.
A major roadblock to EV adoption, particularly in India and other price-sensitive automobile markets, is the perceived notion of high capital costs. However, several policy initiatives, subsidies, advances in battery and component technologies, and growing economies of scale have pushed EV prices down substantially. Automakers are now offering more affordable options for consumers, and despite the upfront cost of an electric vehicle being slightly higher than an ICE one, the total cost of ownership (TCO) is significantly lower.
Calculating the TCO of operating a commercial vehicle requires the consideration of multiple key factors beyond the upfront price and encompass the mileage driven, ownership period, maintenance and running costs, fixed payload, variable payload, the residual value of batteries, the residual value of vehicles, Government incentives and taxes.
Let us take the example of electric buses. The cost of the acquisition of an electric bus has decreased from about Rs. 2-2.5 crore in 2017 to Rs. 80 lakh-1.1 crore (approximately a 60-68 per cent decrease in the vehicle cost). While the diesel and CNG buses might be cheaper to buy at approximately Rs. 35 lakh and Rs. 38-40 lakh respectively, their insurance and RTO tax over the course of 15 years go up to approximately 24-25 lakhs (for 32-seaters Diesel or CNG bus), and approximately Rs. 66 thousand for an electric bus. Add to this the financial incentive, negligible maintenance, and running cost, the overall cost of operation for electric buses is 23 per cent lower than CNG buses and 27 per cent lower than diesel buses.
Studies have shown that electric buses are more economical than diesel buses for operations of more than 200 km per day and if operated for at least six years. With the reduction in battery costs and the higher utilisation of vehicles, the TCO of ebuses works out to be lower than that of diesel buses. As per a recent study by WRI India, for 200 km per day travel, the TCO per km of an E-bus with a 320 kWh battery is less than a high-end Diesel Bus and an E-bus with a 125 kWh battery is less than a Low-end Diesel Bus. Additionally, with the FAME-II subsidy, the TCO per km of an electric bus becomes even more economical. For a 12-meter electric bus, the TCO ranges between Rs 53.77 per km and Rs 77.75 per km, depending on the battery size. According to government data, the TCO of battery-run buses in India is even lower than the global average and ranges between Rs 39.21 per km to Rs 47.49 per km.
A recent report by the Lawrence Berkeley National Laboratory and the Institute of Environment and Sustainability, University of California Los Angeles analysis the potential for truck electrification to reduce India’s emissions and fuel imports. It finds that, as a result of the reduction in international battery prices, battery electric trucks (BETs), once mature, will have a lower total cost of ownership than diesel trucks across multiple weight classes. They can also be expected to emit 9-35 per cent less GHG emissions per km compared to diesel, which could become entirely carbon-free once charging is powered through renewable sources.
For the Total Cost of Ownership (TCO) analysis for the SCV segment, the TCO per kilometre of e-SCV is lower than that of petrol and diesel four-wheeler internal combustion engines but higher than that of CNG variants. With the FAME-II subsidy of INR 2,40,000, the TCO per kilometre of e-LCV decreases to Rs 12.43, which is comparable to the CNG variant.
With increasing vehicle utilisation, the economic viability of e-SCV significantly improves compared to ICE variants. At a daily travel distance above 100 kilometres, the TCO per kilometre of e-SCV with FAME-II subsidy becomes less than even CNG vehicles. With an average daily use of 100 kilometres, the TCO per kilometre of an e-SCV achieves break-even with diesel SCV by the fourth year, even without FAME subsidies. This leads to significant savings by the end of ten years which is the usual holding period of an SCV, as per the WRI India report.
The more an electric commercial vehicle is driven, the greater the decline in TCO per kilometre. Due to the lower running and maintenance costs, the TCO of an electric commercial vehicle will drop faster than the TCO of a conventional ICE vehicle. Cost curves will continue to decline for EVs given the new-age OEMs and startups are now entering the space with innovative products and introducing new models yielding a higher range, dispelling the range anxiety.
As sales of battery electric vehicles increase, OEMs need to focus on R&D excellence, flexible manufacturing, and value-chain integration to improve profitability. Electric buses, which cover long mileage and high occupancy, and electric two- and three-wheeled vehicles, which provide last-mile connectivity, can be cost-effective starting points that also bring development benefits.
We are at the cusp of a significant transition in the mobility sector, with electrification, supplemented by creating an enabling policy and regulatory environment for its adoption, unlocking sizeable economic, and environmental benefits, and helping in accelerating the decarbonization of the transport sector. To drive this once-in-a-century transformation toward faster adoption, OEMs and the Government need to collaboratively work toward integrated policy, foster lucrative EV finance options, infrastructure development, Total cost of ownership (TCO) parity, create a conducive ecosystem, and fast-track the shift to electric, especially in the commercial automotive sector.
