Here’s a quick summary of what you’ll find in this article:
- We look at battery electric vehicle (BEV) sales and incentive data from the US and Norway for 2019.
- The value of incentives is subtracted from actual battery costs (170 $/kWh) to calculate the effective battery cost experienced by consumers.
- In the US, market share is 1.4% with an effective battery cost of essentially zero (consumers get batteries for free).
- Norway achieved a very impressive 42% market share, but this was made possible by effective battery costs of negative 385 $/kWh (huge incentives for driving electric).
- This data suggests that continued electric car growth will need perpetual subsidies.
Introduction
There are many smart folks out there who think the internal combustion engine will soon go the way of the prehistoric organisms that power it (e.g. FT, Forbes, Economist). In addition, several countries have put in place plans to ban cars with engines in the medium-term future.
Possibly the best example of the love for electric drive is the valuation of Tesla that is currently almost twice that of GM and Ford combined. This despite 10 consecutive years of losses 15x lower sales volumes than GM and Ford.
In my view, there is no doubt that BEVs will grow to take a sizable chunk of the car market. But an iPhone-vs-Nokia-like transition? Unlikely.
Today’s article further underscores this viewpoint using recent sales and incentive data from the US and Norway.
The case of the US
Sales overview
In the US, Tesla is the only BEV game in town. In the chart below, Tesla sales account for almost the entire gap between the red and blue lines.
It also illustrates how the BEV incentive push has subsidized many luxury vehicles into the hands of the rich. This is to be expected because BEVs are best suited to the luxury/performance segment where the cost of a large battery pack is moderate relative to the price of the whole car, and the quiet performance of electric drive is highly valued.
The Model 3 sold very well since the second half of 2018, but its sales growth quickly stalled as subsidies declined and pent-up demand was satisfied, even as more affordable model versions were gradually introduced.
It is also informative to look at Tesla’s progress against luxury rivals. As shown below, Tesla is yet to have a material effect on the German fossil-powered competition. The next couple of years will be very interesting as Tesla adds a more affordable SUV and a pickup to its line-up, while incentives continue to decline.
Incentives
The big feature of 2020 in the US BEV market was the wind-down of the Federal Tax Credit for Tesla and GM. When adjusting for this wind-down, the average Federal Tax Credit per BEV in 2019 was $3240. But there are still several incentives remaining as outlined below.
State rebates vary considerably, but most BEVs are obviously sold in states with good incentives. Most vehicles are sold in California, so we used a $2500 credit based on a standard $2000 state rebate rising to $4500 for low- or middle-income families. Regulatory credits are estimated from Tesla’s financial statements by dividing disclosed credit sales by US sales, yielding $3100 per vehicle.
The fact that BEVs do not pay fuel taxes (about $0.5/gal) is another important incentive. For the rather woeful average US fuel economy of 25 MPG with 15000 miles per year, this amounts to $300 per year. However, we also include the externalized cost of CO2 emissions at $50/ton both for gasoline and electric cars, reducing this value to $114/year. To calculate the net present value of $921, a lifetime of 10 years with a 5% discount rate was assumed.
BEVs also get access to other incentives like unlimited access to HOV lanes and some free charging, but these are relatively small and too hard to quantify accurately.
In summary, the US market demands 1.4% BEVs if effective battery costs are essentially zero. There are good reasons to believe that this will increase in the future as more SUVs are brought to market and charging infrastructure continues to improve. However, BEV dominance looks highly unlikely without perpetual subsidization on the scale seen in Norway.
The case of Norway
Sales overview
After years of very large incentives, BEVs are now a mainstay in Norway. As shown below, BEVs capture over 40% of the new car market, although a large chunk of that is subsidizing wealthy people to buy Teslas, Audis and Jaguars.
The luxury BEV breakdown for Norway over the past two years is shown below. Up until the end of 2018, Tesla’s Models S and X were the only players in the market. Then competition arrived, largely in the form of Tesla’s own Model 3, but also from the Jaguar I-PACE and the Audi e-tron.
Since then, Model S/X sales have dwindled into insignificance. The Model 3 had a very impressive ramp as years of pent-up demand was met, but sales have recently been in a steep decline. The Model Y only comes to Norway next year, by which time we can expect another similar ramp.
Incentives
As shown below, the enormity of Norwegian electric car incentives makes purchase of a BEV a total no-brainer for any new car buyer who can adopt the electric car lifestyle.
The first incentive is the VAT exemption for BEVs in Norway. This exemption, equal to 25% of the vehicle purchase price, is valid until at least the end of next year. It was calculated on a relatively low before-VAT car price of $30000.
Next, Norway imposes a large additional purchase tax on cars based on weight and CO2 emissions from which BEVs are also exempt. This tax was calculated for a 100 kg lighter version of the electric Hyundai Kona (assuming future battery improvements) using this calculator, yielding $10470.
BEVs also save big on tolls and parking fees, although fairly small fees are gradually being phased in by various municipalities. Toll savings are large, but very hard to estimate. This Norwegian article gives some examples of annual toll expenses in Oslo, showing that electric cars can save their owners well over 10000 kr per year. We took 8000 kr in this calculation. According to this article, a BEV can also save about 3000 kr in parking fees. Then there is also an annual insurance-related charge of 2910 kr from which BEVs are exempt.
Furthermore, BEVs can drive in bus lanes, which can save drivers lots of time in rush hour. If we assume 15 minutes saving per workday and a value of time of $10/hour (about half the Norwegian minimum wage), this amounts to $500/year.
Adding the previously mentioned incentives amounts to $2081 per year using the average 2019 exchange rate. Since these incentives are slowly being phased out, a 20% discount rate is used to determine the net present value over a 10-year lifetime, yielding a total incentive of $9125.
Finally, BEVs also save on the huge Norwegian gasoline and diesel taxes. All taxes together amount to 8.8 kr/l ($3.78/gal). A $50/ton CO2 tax is subtracted from this incentive, assuming that Norwegian electricity is 100% clean (when in fact Norway has sold much of its clean power credentials, making its power 58% fossil after some complicated accounting). This brings the tax saving down to $3.28/gal. When assuming an average efficiency of 40 MPG and 15000 km of driving per year over a 10-year lifetime, the net present value of this incentive is $6185 (using a 5% discount rate).
Another important BEV incentive in Europe is the strict CO2 emissions standards being enforced. This forces manufacturers to sell more BEVs, which are erroneously counted as having no CO2 emissions. It is doubtful that manufacturers are selling these BEVs profitably, but even selling at a loss is more economical than paying the fines associated with not making your quota. This incentive is likely quite large, but too hard to quantify for inclusion in this analysis.
Some more data to the trend
After four years of doing this exercise, the following trend is emerging. It looks at least somewhat consistent, but we will need to wait a few more years for further subsidy wind-downs and more BEV models before drawing any firm conclusions.
However, one thing appears to be clear: for broad consumer adoption, the effective battery pack cost must be far below that which is physically achievable, implying that BEV growth will require perpetual policy support. Internal combustion engine drivetrains continue to improve, especially with respect to hybridization. To illustrate this, the sales performance of non-subsidized hybrids (HEV) and heavily subsidized BEVs in Europe over the past three years is shown below.
Hence, as more data becomes available, the great BEV disruption that so many pundits are predicting is looking increasingly unlikely.