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When Do EVs Become Competitive? Answers From Norway

Highlights

  • Norway offers the perfect environment for EV deployment.
  • Large tax breaks, expensive gasoline and several additional perks have allowed EVs to capture more than 10% of the market.
  • Debate about this highly favourable policy environment is heating up and presents an interesting test case to follow over coming years. 

Introduction

Norway is EV heaven. It has the highest gasoline prices in the world, is blessed with an abundance of cheap and clean hydroelectricity, boasts a rich and fairly environmentally conscious population, and has a landscape that strongly encourages flying over driving for medium-distance travelling.  All of these factors combine to make Norway arguably the single best place on Earth to deploy EVs.

And it shows. Norway now has four EVs in the top 20 sales list for 2014 to date (underlined in red below). The new e-golf is also just hitting the market and is expected to be a huge success. Overall, zero-emission vehicles captured 11.2% of the market in September.

EV sales Norway Sep 2014

So, what does it take to get numbers like the ones above? This article will take a closer look.

Very large tax breaks

The first and most obvious requirement of high EV market penetration is very large reductions in the purchase price. Norway imposes very large taxes on new cars and EVs are exempt from essentially all of these taxes. In addition, EVs receive very large CO2 reduction tax breaks (equivalent to about $1000/ton). The sum total of this is that EV prices in Norway are roughly 45-65% of what they would have been without tax breaks, allowing them to reach sales prices that are similar or lower than that of comparative gasoline-powered vehicles.

Tesla has been a particularly large beneficiary of this system because Norwegian taxes on heavy and powerful cars really do get quite enormous. For example, the Tesla P85 goes for about 600000 kroner ($94000) and avoids taxes of about 740000 kroner ($116000). This 55% discount has allowed Tesla to burst on to the scene, even beating the Nissan Leaf up to August this year. Tesla sales are losing steam as the fairly small target market is getting saturated, however, and have just been overtaken by Nissan.

Very large fuel price differences

Norway has the most expensive gasoline on the planet, topping the list at $9.79/gal. Current international oil prices result in gas prices of about $2.50/gal, implying that Norwegian taxes almost quadruple the gas price.

In addition, Norway can easily produce all the oil it needs for a fraction of the international oil price. Although oil production in Norway has entered a seemingly terminal decline, the country still produces 8 times that which is needed for domestic consumption (BP Statistical Review).

On the electricity side, Norway’s hydropower blessing results in some of the lowest electricity prices within the developed world (see below).

OECD household electricity prices

Furthermore, EVs can charge for free at any of the numerous charging stations which have been built in Norwegian cities. Assuming that the average EV gets half of its electricity from these free stations, EV fuel costs would be about 10 times cheaper than that of a conventional car.

Of course, if free charging was removed and EV electricity was taxed similarly to gasoline, this cost difference would be almost eliminated. And if gasoline were priced locally like electricity (priced according to the actual cost of production), gas-powered cars would actually be cheaper to fuel than EVs.

Very attractive additional perks

EVs enjoy many advantages in Norway. They can drive in the bus lanes which makes rush hour commuting a breeze, they are exempt from tolls, ferry costs and parking fees (which is quite a big deal in Norway), and they are almost exempt from the annual vehicle duty (another tax). Access to bus lanes is the first perk that will soon have to go as EVs are now starting to impede bus traffic transit during rush hour.

The true cost of owning an EV in Norway

With EV sales prices now on par with those of regular vehicles in Norway, it is somewhat surprising that they are not significantly outperforming regular vehicles in terms of sales. After all, fuel costs are a lot less and various additional perks bring further savings and conveniences.

However, aside from the short range and long charging times still hampering EVs, there are also serious questions about depreciation. This article calculates that, for a given sales price, the cost of owning an EV would be similar to that of owning a regular vehicle if the EV loses its value over 5 years. This could conceivably happen if the battery shows significant degradation and some of the EV perks mentioned above fall away during this time.

Is Norway doing the right thing?

There is no doubt that the very large government incentives are effectively putting a large number of EVs on Norwegian roads. Are these large incentives a good investment?

Personally, I am quite torn on this issue. On the one hand, EVs running on hydropower are substantially more environmentally friendly than regular vehicles. Electrification of the Norwegian vehicle fleet would also secure Norway’s energy future when the oil finally runs out and slightly reduce international oil demand.

On the other hand, there are many more cost-effective ways in which Norway can use its enormous oil-derived wealth to benefit the environment. Norway will also produce enormous oil & gas surpluses for many decades into the future, implying that energy security is not really a priority. Reductions in Norwegian oil demand will also have an essentially negligible effect on global oil prices.

Another argument is that Norway might be (to a limited extent) doing for EVs what Germany did for solar panels – help to drive down costs. However, solar PV is currently demonstrating the global and local dangers of such a scenario. Solar optimism is diverting a disproportionate amount of investment capital away from more effective solutions and the German solar PV industry is contracting rapidly as unsustainable policies are revised. EVs can have similar unintended consequences (e.g. EVs would result in more CO2 emissions than efficient ICE vehicles in the largest global car markets as shown below).

EVmpgequivalent

As more EVs hit the road, this debate is heating up in the Norwegian media. What is your opinion?

Schalk Cloete's picture

Thank Schalk for the Post!

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Discussions

Jeffrey Miller's picture
Jeffrey Miller on Oct 14, 2014 5:18 pm GMT

Good article. A few comments:

If we want to rapidly decarbonize our energy systems, we need to rapidly and completely decarbonize transport. The most straightforward and energy efficient way to do that (as far as I can tell) is to electrify transport while simultaneously decarbonizing the grid, primarily with nuclear power. The Prius (great car that it is) uses half the gas of an average new car, but that is still a lot of gas and a lot of carbon (.18 kg of CO2 per mile). 

It’s true that a Prius emits somewhat less carbon than a Tesla on the average US grid, but most people in the US are not driving Priuses. They are buying (as of 2014) light vehicles that get slightly less than 25 mpg. EVs emit far less CO2 than a 25 mpg car on the average US grid. 

Also, as you note, there are many places right now where either because of nuclear or hydro resources, EV emissions are far lower than the best hybrid. 

I’m not persuaded that the subsides for EVs are distortionary in the same way that they are for wind and solar. Wind and solar face structural hurdles which become larger and larger as their penetration increases. These subsidies incentivize society to make investments which are highly inefficient once integration costs are factored in – they make us want to push a boulder up a hill that gets steeper and steeper as you go. While subsidies should always be treated with caution because of their unintended side effects, I don’t see anything equivalent to the large and monotonically increasing hurdles faced by renewables in the case of EVs. If anything, EVs seem to allow for the prospect of easing some of the problems faced by renewables by allowing more flexibility on the demand side. But you are right – EVs are not a panacea – they are just part of a potential solution which also requires carbon free electrical generation.

Ed Dodge's picture
Ed Dodge on Oct 14, 2014 5:49 pm GMT

Schalk,

Norway is doing the world a favor by taking a lead and helping to subsidize early EV deployments. There are many reasons why governments should consider subsidizing EV’s, primarily the public health benefits of zero emissions vehicles, particularly in cities where vehicle exhaust is major cause of illness. Secondly, breaking the grip of petroleum on transportation is a worthy energy security goal. Third, EV’s are a technology whose time has come, they are the digitilization of the auto and offer so much more performance in a simpler, more efficient, and ultimately cheaper package that they will leave gasoline vehicles in the past. Charging infrastrcuture is straightforward to build out, and it is really just the cost of batteries and their life cycle business models that need to mature. 

Schalk Cloete's picture
Schalk Cloete on Oct 14, 2014 7:57 pm GMT

Local air pollution reduction is certainly a valid argument for EVs. However, I wonder how significant this still is with cars being sold today after truly enormous reductions in harmful emissions over the past two decades. Do you have any good recent sources on this matter?

About energy security, I think efficiency and unconventional oil offer the best solution in the medium term, while synfuel and advanced biofuels offer the best solution in the long term. EVs will certainly contribute as small city cars for those who can fit them into their lifestyles, but I doubt whether we will ditch liquid fuels in the light transport sector this century. Their high energy density and excellent transportability are just too handy. 

What do you mean by digitization of the auto? Sounds cool, but I’m a bit unclear about how it applies exclusively to EVs. 

Dan Mantena's picture
Dan Mantena on Oct 16, 2014 2:50 am GMT

Great post as usual Schalk!

Schalk Cloete's picture
Schalk Cloete on Oct 16, 2014 11:49 am GMT

EV subsidies can of course be justified in numerous other ways than CO2 emission reductions. (In fact, in most countries other than Norway, the climate advantage is neutral to negative). 

The most important advantages are clean air in the cities and energy security (reduced oil dependence). For Norway, these are not highly topical because the Norwegian car fleet is already very clean and Norway will produce much more oil than it consumes for decades to come. For many other countries, however, these points are much more relevant. 

Schalk Cloete's picture
Schalk Cloete on Oct 16, 2014 12:28 pm GMT

Light duty vehicles are a significant source of CO2, but perhaps not as large as most people think – about 12% of energy-related emissions. Roughly another 12% is in heavy duty transport and aviation which are less suited to electrification due to long distance travelling. I therefore think light duty vehicles is not the top priority for decarbonization and that efficiency offers much lower hanging fruits (and better economic value) anyway. 

I also wonder about the consumer choices for buying EVs. Wealthy people might buy a Tesla just because it is an awesome car, but for other EVs which have very limited range and less impressive performance, buyers are probably motivated by things such as the environment and fuel costs. This implies that these people would probably buy efficient ICE vehicles if EVs were not subsidized. I’ve also heard some theories that many people buying small limited range EVs for city use are actually displacing the use of public transportation which would be a negative development.  

The point about EVs not facing as stong structural hurdles with increasing penetration as PV is a good one. The load shifting potential can also create additional value. However, I’m a bit concerned about all of the public charging infrastructure that will be required with increasing EV penetration (basically a charging station on every public parking spot and many supercharging stations outside of town).

Of course another real problem can emerge when reduced oil demand negates the need for unconventional oil and the price falls back down to $30/barrel. This could potentially be achieved by efficiency alone although the rebound effect would probably be large in this case (albeit with substantial economic benifits). 

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